INCOME TAX ACT, 1961

Section 37(1)

Business expenditure - Direct expenses on materials purchase and contract charges incurred by real estate developer - Disallowance on the ground of purchase of material from associate concern and no development carried out on concerned land as per - Photographs taken at site and images downloaded from Google MAP

Assessee engaged in Real Estate development claimed to have incurred expenditure in relation to development of land at Nagpur. Direct expenses on materials purchase and contract charges, etc., AO disallowed direct expenses on materials purchases on three grounds, viz, (i) Said expenditure was not incurred wholly and exclusively for the purpose of business within meaning of section 37(1). (ii) The said expenditure was excessive and unreasonable having regard to nature and extent of land development within meaning of section 40A(2). (iii)AO questioned prudence of incurring such expenditure for development of land. Also, AO disallowed contract charges on the ground that no work has been undertaken at Nagpur land which was evident from photographs taken at site and images downloaded from Google MAP. Held: Assessee had furnished complete details with regard to direct expenses materials, including bills from suppliers. AO made disallowance only the ground that major purchases was from sister concern and one of the supplier was in the list of hawala dealers as prepared by Sales Tax Department. The fact that major purchases have been made from associate concern does not alter situation and it did not give power to AO to disallow whole expenditure on that ground alone. Further, the fact that one of the supplier was in the list of entry provider as prepared by Sales Tax Department was also not sufficient to infer that purchases from said party was non-genuine. Disallowance was made by AO on a purely estimate and ad hoc basis and there is no reference whatsoever to the basis of disallowances arm's length price for impugned purchases there is no bar under any law for purchases from associate/sister concern and as such, AO could not disallow entire expenditure for the simple reason that material had been purchased from associate concern. Also, there was iota of evidences with AO to prove his allegation that no work has been carried out at concerned land. The evidences relied upon by AO, including purported photographs and Google images were not shared with assessee for its comments. Unless evidences were confronted to other side, the veracity of the same could not be relied upon. The confirmations of vendor of land and purchaser of land undoubtedly proved that the assessee had undertaken land development work. Therefore, AO was completely erred in disallowing contract charges paid for development of land at Nagpur. Accordingly, disallownaces made by AO were deleted.

REFERRED :

FAVOUR : In assessee's favour.

A.Y. :

INCOME TAX ACT, 1961

Section 37(1)

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