Introduction: The Pawan Aggarwal vs. DCIT (ITAT Chandigarh) case sheds light on a dispute regarding the disallowance of expenses without appropriate reasoning. With the verdict finally out, it’s crucial to understand the key points of contention and the court’s reasoning behind its decision.
Background and Grounds of Appeal: Pawan Aggarwal, the assessee, presented his appeal against the decision made by the ld. CIT(A)-3, Ludhiana on 01.03.2019. The primary grounds of appeal were:
1. Disregard of the improvement made in building worth Rs. 2504534/-.
2. Disallowance of Rs. 100000/- out of total office expenses without proper justification.
3. Reservation to alter grounds of appeal if needed.
Analysis of the Dispute:
Conclusion: The ITAT Chandigarh’s decision highlights the importance of evidence and a reasoned approach when dealing with disallowances. It stresses the significance of documentary evidence, like Valuation Reports, especially in cases where direct evidence is lacking. The case underlines the fact that mere assumptions without backing are inadequate for financial adjustments.
FULL TEXT OF THE ORDER OF ITAT CHANDIGARH
This is an appeal filed by the assessee against the order of the ld. CIT(A)-3, Ludhiana dated 01.03.2019 wherein the assessee has taken the following grounds of appeal:-
1. The Ld assessing officer has erred in law and facts of the case while not considering the improvement made in building amounting to Rs. 2504534/-.
2. The Ld assessing officer has erred in law and facts of the case while disallowing expenses amounting to Rs. 100000/-(Rs 1 lac) out of expenses of the office total expenses while specifying any amount and assigning any reason.
3. That the appellant craves leave to add, amend or delete any of the grounds of appeal at the time of hearing of appeal or before the appeal is being heard.
2. None has appeared on behalf of the assessee nor any adjournment application has been filed. On perusal of records, it is noted that the appeal was filed way back in the year 2019 and the matter has been adjourned from time to time on account of various reasons. It was, accordingly, decided that no useful purpose would be served in adjourning the matter any further and based the material available on record and after hearing the ld. DR, the matter is being disposed off.
3. In ground No.1, the assessee has challenged the action of the ld. CIT(A) in not allowing the cost of improvement of the building amounting to Rs.25,04,534/-.
4. In this regard, briefly the facts of the case are that the assessee has sold a property located at New Partap Nagar, Ambala City for a consideration of Rs.1.44 Cr vide Registration Deed dated 21.12.2012 and while working out the Long Term Capital Gains has claimed Indexed cost of construction/improvement amounting to Rs.77,94,336/-. During the course of assessment proceedings, necessary information was called for and matter was examined by the AO. It was submitted by the assessee that he has invested a sum of Rs.31,06,000/- during the Financial Year 2010-11 and a sum of Rs.22 lacs during the Financial Year 2011-12 and the amount has been withdrawn from the capital account of M/s Yashik Finance Company and a copy of the capital account and the withdrawals so made were submitted before the AO. Thereafter, the assessee was asked to produce bills and vouchers in support of the investments so made by the assessee and in response, it was submitted that no such bills and vouchers have been maintained. Thereafter, based on the examination of the capital account and the withdrawals which have been mostly made in cash, the AO observed that some of the amounts carry the narration stating the amount has been withdrawn for building construction whereas there is no narration vis-à-vis the other withdrawals made from time to time and therefore, where all the narrations were provided corresponding to the withdrawals relating to construction, the same were allowed by the AO and the remaining withdrawals were held to be not sufficiently explained in absence of any nexus so established by the assessee in terms of the amount so withdrawn and the investments made in the construction of the building. Accordingly, out of Rs.31,06,000/-, cash withdrawals of Rs.11,50,000/- and whole of the amount of Rs.22 lacs withdrawn during the Financial Year 2011-12 were not considered eligible as cost of construction/improvement while working out the Long Term Capital Gain and an addition of Rs.25,04,534/- was made under the head Long Term Capital Gains.
5. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) and it was submitted that at the time of sale, the property was a three storey building fully constructed. That it was having a covered area of 24000 sq. ft. which is clearly mentioned in the Sale Deed as submitted during assessment proceedings. However, the AO has considered the cost of construction at mere Rs.19,50,000/- and under no circumstances, three storey constructed building with covered area of 24000 sq. ft. can be constructed under the average cost of Rs.8 1.25 per ft. which has been adopted by the AO. It was submitted that the total expenditure of constructing the building as declared by the assessee was Rs.53,06,000/- which is reasonable amount to construct a basic unfurnished three storey building and sources of such payments were duly submitted by the assessee as withdrawals made from the bank account from time to time. It was, accordingly, submitted that the additions so made by the AO be directed to be deleted.
6. The submissions so filed by the assessee were considered but not found acceptable to the ld. CIT(A). As per ld. CIT(A), during the assessment proceedings, the assessee was given ample opportunities to explain his position by way of producing relevant bills and details of withdrawals that the assessee claimed in respect of construction of the building. However, the assessee has not filed any documentary evidence in support of his contentions. It was further held by the ld. CIT(A) that where all the narrations towards the cash withdrawals were sufficiently mentioned, the AO has duly given benefit to the assessee, however, where there was no clarity regarding purpose of the withdrawal, the AO has rightly restricted the benefit to the assessee. It was, accordingly, held that the assessee has failed to produce conclusive documentary evidence which could link the withdrawals made for investment in construction/improvement of the building. It was further held by the ld. CIT(A) that the assessee could have given Valuation Report by any approved Valuer in support of his contention of cost of construction and cost of improvement. However, the assessee has not filed any such necessary documents or evidence and accordingly, it was held that no interference is called for in the findings of the AO and accordingly, the addition so made by the AO was confirmed.
7. Against said findings and directions of the ld. CIT(A), the assessee is in appeal before us.
8. During the course of hearing, ld. DR taken us through findings of the AO as well as the ld. CIT(A) and submitted that there is no infirminity in the findings of the ld CIT(A) where in absence of any documentary evidence, the cost of improvement has been rightly denied.
9. Heard the ld DR and purused the material available on record. We find that though there is no appearance on the part of the ld AR nor any submissions have been filed, however, we find that the assessee has filed a copy of the Valuation Report wherein the value of the construction of the property has been determined at Rs.64,35,472/- wherein the value of the land has been taken at Rs.10,35,472/- and value of the 24000 sq.ft. built up area has been taken @ Rs.225/- per sq. ft. amounting to Rs.54 lacs. In view of the fact that the ld CIT(A) has mentioned about the documentary evidence in form of valuation report which could have been filed by the assessee in support of his contentions and the fact that the assessee has since filed a copy of the valuation report, we believe that in the facts and circumstances of the present case, where there are withdrawals from the assessee’s account, however, in absence of any bills/vouchers supporting the construction activities, the valuation report would be germane and relevant to determine the appropriate cost of construction which can be allowed to the assessee, we admit the same and deem it appropriate to set aside the matter to the file of the AO to examine the Valuation Report and decide the matter afresh after providing reasonable opportunity to the assessee. In the result, the ground of appeal is allowed for statistical purposes.
10. In ground No.2, the assessee has challenged the sustenance of disallowance of Rs.1 lakh out of various expenses claimed by the assessee.
11. In this regard, briefly the facts of the case are that in the course of assessment proceedings, the AO observed that the assessee has declared sales of Rs.27,01,627/- in respect of his hotel business run in the name and style of M/s A.P. Residency and net profit has been declared at Rs.1,48,549/- which appears to be on the lower side. Further, it was observed that out of total expenditure under the head ‘Administration & Other Expenses’, the assessee has claimed ‘Diesel & Petrol Expenses’ in the Profit & Loss Account and at the same time, an amount of Rs.4,91,041/- has been debited in the trading account on account of LPG and the matter was confronted to the assessee and in response, it was submitted that the expenses have been duly incurred in the assessee’s line of business and it cannot be specifically earmarked as to why same have been debited to the trading account or the Profit & Loss Account and taking same into consideration, the AO went ahead and made a disallowance of Rs.1 lac out of total expenses so claimed by the assessee.
12. During the appellate proceedings, it was submitted that the assessee is in the business of hotel and restaurant and the LPG, a major consumable material is required to be used in restaurant/kitchen whereas diesel is used in gensets and used only for hotel purposes and it was, accordingly, submitted that the LPG expenditure has been shown under the Trading Account whereas the Diesel expenditure has been shown under the head ‘Profit & Loss Account’. It was submitted that there is no dispute that the expenditure has been incurred by the assessee and therefore, the addition so made by the AO deserve to be deleted.
13. The ld. CIT(A) confirmed the addition holding that no satisfactory explanation has been submitted by the assessee and accordingly, the disallowance of Rs.1 lac under different heads of expenditure was confirmed. Against said findings and directions of the ld. CIT(A), the assessee is in appeal before us.
14. During the course of hearing, ld. DR is heard who has relied on the order of the lower authorities.
15. On perusal of the orders of both the parties, we find that this is clearly a case of adhoc disallowance which has no rationale and sound basis as no finding has been recorded by the AO that the assessee has claimed any bogus LPG/Diesel expenditure or the expenditure has not been incurred for the purposes of the assessee’s business. In the light of same, the addition so made is hereby directed to be deleted. In the result, the ground of appeal is allowed.
16. In the result, appeal of the assessee is partly allowed for statistical purposes.
Order pronounced in the open Court on 10th July, 2023.