Facts of the Case

The assessee, a civil contractor operating through proprietary concerns M/s M J A Enterprises and M/s Janta Constructions, filed the return of income declaring total income of ₹10,34,580 for Assessment Year 2014-15.

During scrutiny assessment under Section 143(3), the Assessing Officer issued notices under Section 142(1) seeking details and supporting evidence regarding expenses and sundry creditors. The assessee did not respond to these notices.

  • Disallowed 10% of expenses on an ad-hoc basis
  • Added 50% of sundry creditors as unexplained
  • Initiated penalty proceedings under Section 271(1)(c)

Issues Involved

  1. Whether ad-hoc disallowance of expenses at 10% without detailed examination was justified.
  2. Whether addition of 50% of sundry creditors on an estimated basis was sustainable.
  3. Whether the lower authorities erred in not verifying books of account and supporting evidence.
  4. Whether the matter required fresh adjudication.

 Petitioner’s (Assessee’s) Arguments

  • The assessee maintained regular books of account duly reflecting business transactions.
  • Purchases and sales were not disputed by the Assessing Officer.
  • Ad-hoc disallowance of expenses was arbitrary and unjustified.
  • Sundry creditors represented genuine business liabilities for materials, labour, rent, and consumables.
  • The additions were made without proper verification of facts and records. 

 Respondent’s (Revenue’s) Arguments

  • The Assessing Officer had issued detailed questionnaires and show-cause notices.
  • The assessee failed to furnish required details and supporting evidence.
  • Identity, creditworthiness, and genuineness of sundry creditors were not established.
  • Therefore, the additions and disallowances were justified. 

Court Order / Findings (ITAT)

  • Additions and disallowances were made due to non-submission of details by the assessee.
  • The appellate authority confirmed the additions without proper verification of records.
  • Relevant evidence, including books of account, was not examined by the lower authorities.

Important Clarification by the Tribunal

  • Ad-hoc additions and disallowances cannot be sustained without proper verification.
  • Authorities must examine books of account and evidence before confirming additions.
  • Fair opportunity must be granted to the assessee to substantiate claims.
  • Matters involving factual verification should be remanded rather than decided on estimates alone.

Link to download the order - https://itat.gov.in/public/files/upload/1670398726-ITA%20No.%2023%20Alld%202021%20Kasim%20Hussain.pdf

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