The Pune Bench of the Income Tax Appellate Tribunal ( ITAT ) deleted an addition of Rs. 21,28,710 made by the Assessing Officer due to the taxpayer’s mistakenly misclassification of construction expenses as commission expenses while filing the income tax return.
Badshah Abdul Patel, the assessee, is a contractor and builder engaged in material and labor contracts. The assessee filed his income tax return on 29.08.2018 for the Assessment Year 2018-19 and revised it to declare a total income of Rs. 2,98,410.
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The Income Tax return was selected for complete scrutiny due to large commission expenses and a low net profit. The authorities issued statutory notices under Sections 143(2) and 142(1) of the Income Tax Act, 1961.
During the assessment, the assessing officer observed that the profit and loss account showed Rs. 21,28,710 as commission expenses. The assessee failed to provide sufficient details to prove the claim. So, the amount was added back as unexplained expenditure under Section 37(1) of the Act.
The assessee argued before the National Faceless Appeal Centre (NFAC) that the classification of expenses as “commission” was an inadvertent error. The assessee clarified actual expenses related to construction-related costs such as materials and labor. The NFAC rejected the assessee’s argument and upheld the addition made by the Assessing Officer.
Comprehensive Guide of Law and Procedure for Filing of Income Tax Appeals, Click Here
On appeal before the ITAT, the assessee’s counsel argued that he is a small contractor regularly filing returns, with gross receipts for the year amounting to Rs. 30,12,600. The assessee’s counsel explained that the major expenses of Rs. 21,28,710 were construction-related.
The assessee’s counsel also observed that he falls under the presumptive taxation scheme under Section 44AD where income is estimated at 8% of gross receipts resulting in Rs. 2,41,008. The assessee had declared a higher amount of Rs. 2,98,410. Evidence, including ledger accounts and an affidavit was submitted to support these claims.
The single-member bench comprising Dr. Manish Borad (Accountant Member) reviewed the evidence and observed that the error in classification was unintentional. The tribunal observed the assessee’s submissions and held that the expenses were indeed related to construction. The tribunal deleted the addition of Rs. 21,28,710 and allowed the appeal.
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