10% Ad Hoc Disallowance of Commission Deleted as Assessee Furnished PAN, TDS, and Bank Details.

Issue

Whether the Assessing Officer (AO) can make a 10% ad hoc disallowance on commission expenses claimed by a real estate firm solely on the ground that specific sales deeds were not mapped to the commission, even when the assessee has furnished complete details of the agents, deducted TDS, and paid via banking channels.

Facts

Assessee: A partnership firm engaged in real estate development.
The Claim: The firm claimed commission expenses paid to agents for procuring business.
The Evidence: The assessee furnished detailed evidence, including:
- Names and addresses of the agents.
- PAN numbers of the agents.
- Proof that payments were made through proper banking channels.
- Proof of deduction of applicable TDS on these payments.
AO’s Action: The AO noted the details but faulted the assessee for not providing specific sales invoices or sale deeds linked to the commission. Consequently, the AO made a 10% ad hoc disallowance of the total commission expense.
Crucial Point: The AO did not reject the books of account under Section 145(3).

Decision

The Tribunal/Court ruled in favour of the assessee and deleted the disallowance.
Substantiated Claim: The authority held that the assessee had successfully substantiated the commission payments with relevant evidence (PAN, Bank, TDS).
No Ad Hoc Additions: Since the AO had not rejected the books of account or pointed out specific defects in the vouchers produced, a general or ad hoc disallowance based on estimation is not legally sustainable.

Key Takeaways

TDS Compliance is Strong Evidence: Deducting TDS and paying via bank channels strongly supports the genuineness of commission payments.
Ad Hoc Disallowance Barred: An AO cannot arbitrarily disallow a percentage of expenses. They must identify specific unverified vouchers. If the books are accepted, the expenses recorded therein cannot be estimated downwards without specific evidence.

10% Disallowance on Land Development Costs Deleted as AO Failed to Pinpoint Unsupported Vouchers.

Issue

Whether a 10% ad hoc disallowance on land development expenses is sustainable when the AO fails to identify exactly which expenses are unsupported by bills, especially when the majority of payments are to regulatory authorities or through banking channels, and the lack of vouchers pertains only to petty purchases from the unorganized sector (sand/bricks).

Facts

Activity: The assessee purchased land, plotted it into residential sites, and sold them.
The Expense: Expenses were incurred on land development, including materials like bricks, cement, sand, steel, and regulatory fees.
Verification: The assessee furnished ledger accounts and corresponding bills.
The Defect: The assessee could not furnish supporting bills/vouchers for certain purchases from the unorganized sector (e.g., bricks, sand).
AO’s Action: Without identifying which specific expenses were unverified, the AO resorted to a flat 10% ad hoc disallowance on the entire head of land development expenses.
Defense: The majority of the expenses were payments to regulatory authorities and other vendors via banking channels, which were fully documented.

Decision

The Tribunal/Court ruled in favour of the assessee and deleted the addition.
Lack of Identification: The Court held that the AO made a blanket disallowance without identifying which specific expenses were not supported by bills.
Majority Verified: Since the bulk of the expenses (regulatory payments, etc.) were verifiable and paid through banking channels, applying a flat rate of disallowance to the whole amount was unjustified.
Unorganized Sector Reality: The inability to produce vouchers for petty items like sand from the unorganized sector does not justify a sweeping disallowance when the books of account have not been rejected.

Summary of Legal Principle

“No Ad Hoc Disallowance Without Rejection of Books”: Both judgments reinforce the principle that an Assessing Officer cannot lazily apply a percentage-based disallowance (e.g., “10% of expenses”) to cover up a lack of detailed investigation. To make an addition, the AO must either:

Reject the books of account under Section 145(3) due to major defects; or
Specifically identify and isolate the exact vouchers/bills that are missing or bogus.

IN THE ITAT HYDERABAD BENCH ‘A’

Sri Tirumala Estates

Income-tax Officer^*

Ravish Sood, Judicial Member
and G. Manjunatha, Accountant Member

IT Appeal No.1086 (Hyd) of 2024
[Assessment year 2020-21]

OCTOBER 29, 2025

D. Prabhakar Reddy, Adv. for the Appellant. Gurpreet Singh, Sr.A.R. for the Respondent.

ORDER

Manjunatha G., Accountant Member.- This appeal filed by the assessee is directed against the order of the learned Commissioner of Income Tax (Appeals), National Faceless Appeal Centre [in short “NFAC”], Delhi, dated 16.08.2024 relating to the assessment year 2020-21.

2. The grounds raised by the assessee read as under :

“1.a. On the facts and in the circumstances of the case, the Lr. Commissioner of Income Tax (Appeals), NFAC, New Delhi erred in not deleting 10% of the total commission expenses on the ground that the appellant had not produced necessary documents though were produced.

1.b. That on the facts and in the circumstances of the case, the Lr. Commissioner of Income Tax (Appeals) failed to appreciate that these payments were made to Agents engaged for purchase of Land and Sale of Plots in the course of business activity of the Appellant and made through banking channels.

1.c. That on the facts and in the circumstances of the case, the Lr. Commissioner of Income Tax (Appeals), NFAC, New Delhi confirmed the addition of commission of Lr. Assessing Officer (AO) resorted without rejecting books of Accounts. Whereas these payments were genuinely incurred, and the Appellant’s activities were undertaken in remote places and faraway from Hyderabad.

2.a. On the facts and in the circumstances of the case, the Lr. Commissioner of Income Tax (Appeals), NFAC, New Delhi erred in not deleting 10% of the disallowance of Land Conversion Expenses on the ground that the appellant had not produced necessary proof though was produced.

2.b. That on the facts and in the circumstances of the case, the Lr. Commissioner of Income Tax (Appeals) failed to appreciate these Land Development Expenses were paid to The Development Authority of the state Government i.e. Yadadri Temple Development Authority, HMDA fees, Registration Department payments, Conversion charges to Bhongir Municipality and the Telangana Real Estate Regulatory

1.a. On the facts and in the circumstances of the case, the Lr. Commissioner of Income Tax (Appeals), NFAC, New Delhi erred in not deleting 10% of the total commission expenses on the ground that the appellant had not produced necessary documents though were produced.

2.c. That on the facts and in the circumstances of the case, The Lr. Commissioner of Income Tax (Appeals), NFAC, New Delhi confirmed the addition of Development expenses of Lr. AO resorted without rejecting books of Accounts. Whereas these payments were genuinely incurred to various Government bodies and the Appellant’s business these payments were mandatory and statutorily to be paid.”

3. The brief facts of the case are that, the assessee is a partnership firm engaged in the business of real estate of purchasing land, development of land and plotting of the area and sale of plots. The assessee firm filed its return of income for the A.Y. 2020-21 on 15-02-2021 admitting total income of Rs. 46,54,250/-. The case was selected for scrutiny for the reason to verify the genuineness of large commission expenses debited in the profit and loss account. The assessment was completed under Section 143(3) of the Act on 22-09-2022 and determined the total income at Rs. 1,11,81,549/-, by inter alia making an addition of Rs. 21,32,643/- towards 10% ad hoc disallowance of commission expenses and further, made addition of Rs. 43,94,659/- towards 10% ad hoc disallowance of land development expenses.

4. On appeal, the Ld. CIT(A), for the reasons stated in the appellate order dated 16.08.2024, rejected the explanation furnished by the assessee and upheld the additions made by the A.O. towards ad hoc disallowance of commission expenses and land development expenses.

5. Aggrieved by the order of the Ld. CIT(A), the assessee is now in appeal before the Tribunal.

6. The first issue that came up for our consideration from Ground Nos. 1(a) to 1(c) of the assessee’s appeal is the ad hoc disallowance of 10% of commission expenses, and making an addition of Rs. 21,32,643/-.

7. During the course of assessment proceedings, on perusal of the profit and loss account, it was seen that, the assessee has claimed Rs. 2,13,26,437/- as commission expenses. The A.O. called upon the assessee to furnish relevant evidences in support of the commission expenses. In response, the assessee submitted details of commission paid with the list of names of agents, their PAN numbers, addresses, and details of TDS deducted, etc. The A.O., after considering the relevant submissions of the assessee, observed that, although the assessee has furnished certain details, but failed to file sales invoices/sale deeds for which commission was paid and the basis for such commission. Therefore, the A.O. rejected the explanation of the assessee on the ground that, it is for the assessee to prove with the relevant evidences that, the expenditure has been incurred wholly and exclusively for the purpose of business and in the absence of relevant supporting evidence, the commission expenses claimed by the assessee cannot be allowed. Therefore, the A.O. made 10% ad hoc disallowance of commission expenses and added a sum of Rs. 21,32,643/- to the returned income.

8. The learned counsel for the assessee Shri D. Prabhakar Reddy, Advocate, submitted that, the Ld. CIT(A) erred in sustaining the addition made towards ad hoc disallowance of commission expenses without appreciating the fact that, the assessee has furnished relevant details of commission paid to various parties for procuring business to the assessee and further submitted that, the TDS required to be deducted under Section 194H has been deducted and remitted the same to the Government account. The learned counsel for the assessee, referring to the statement of commission paid to various persons, submitted that the same was available in the paper book from pages 62 to 68 of the assessee, where the details of names of agents, addresses, PAN numbers, and TDS deducted etc., has been furnished. The assessee has also furnished relevant bank statements to prove that, the commission has been paid to agents through banking channels. Although all the necessary evidence was furnished, but the A.O. and the Ld. CIT(A) only for the reason that corresponding sale deeds/sale bills were not furnished, made ad hoc disallowance of 10% even though, they have not pointed out any discrepancies in the books of account maintained by the assessee. Therefore, he submitted that the addition made by the A.O. and sustained by the Ld. CIT(A) should be deleted.

9. The Learned Senior A.R. for the Revenue Shri Gurpreet Singh, on the other hand, supporting the order of Ld. CIT(A) submitted that, going by the extent of the commission paid by the assessee and sales income realized for the year under consideration, commission paid for the year under consideration is unreasonable, which is evident from the profit and loss account furnished by the assessee. Further, the assessee could not reconcile payment of commission with reference to sales invoices and also failed to explain the basis for such payment. In the absence of relevant details, the A.O. has rightly made an ad hoc disallowance of 10% commission expenses. Therefore, he submitted that, the additions made by the A.O. should be upheld.

10. We have heard both parties, perused the material available on record and had gone through the orders of the authorities below. There is no dispute with regard to the fact that, the assessee is into the business of real estate development. The assessee has furnished return of income for the year under consideration, along with the Audit Report required to be furnished under Section 44AB of the Act, where the auditor has not pointed out any discrepancies in the books of accounts maintained by the assessee. In fact, the A.O. has also not made out any case of non-genuineness of the books of account maintained by the assessee, nor pointed out any discrepancies in the commission expenditure incurred for the year under consideration, which is evident from the assessment order passed by the A.O. where the A.O. has not rejected books of accounts. Since the A.O. has not rejected books of accounts and resorted to disallowance of expenses on ad hoc basis, in our considered view, unless the A.O. makes out a case for rejection of books of accounts, then ad hoc disallowance of expenses cannot be made. In the present case, going by the facts on record, it is undisputedly clear that, the assessee has furnished all details with regard to commission payments to agents for procuring business, and the said commission has been paid through proper banking channels after deducting the applicable TDS as per law. Further, the assessee has also filed names of the agents, their addresses, PAN numbers, and details of TDS deducted on commission payment. Upon perusal of relevant details, we find that, the assessee is able to substantiate the commission payment with relevant evidences. Therefore, in our considered view, the A.O. without giving any valid reasons, simply made ad hoc 10% disallowance of commission expenses. The Ld. CIT(A) without appreciating relevant facts, simply sustained the additions made by the A.O. Thus, we, set aside the order of the Ld. CIT(A) on this issue and direct the A.O. to delete the additions made towards ad hoc disallowance of 10% of commission expenses.

11. The next issue that came for our consideration from Ground nos. 2(a) to 2(c) of the assessee’s appeal is addition towards 10% ad hoc disallowance of land development expenses.

12. During the course of assessment proceedings, the A.O. on perusal of profit and loss account, observed that, the assessee has shown gross receipts of Rs. 6,86,89,209/- and had claimed huge land development expenses of Rs. 4,39,46,592/-. The A.O., vide notice under Section 142(1), dated 10-11-2021, called upon the assessee to substantiate the land development expenses with supporting documents. The assessee submitted the list of expenses along with supporting evidences and claimed that, the expenditure grouped under land development expenses consists of purchase of various materials for development of land, charges paid to various regulatory authorities, and also registration charges paid to a document writer for registration of the sale deeds in favour of the buyers. The A.O. after considering the relevant submissions of the assessee and also taking note of the huge amount of land development expenses, observed that, the assessee could not satisfactorily explain the land development expenses with corresponding evidences. Although the assessee claims that the expenditure has been incurred for purchase of material, carpentry work, electrical expenses, JCB hire charges, the tractor hire charges etc., but the said expenses have not been supported with relevant evidences. In respect of land conversion charges, although the assessee has claimed to have been paid certain amount to Bhongir Municipality, but corresponding evidences have not been furnished. Therefore, observed that, the assessee could not substantiate the relevant expenditure with documents and thus, rejected the explanation of the assessee and made ad hoc 10% disallowance of land development expenses and made addition of Rs. 43,94,615/-.

13. The learned counsel for the assessee submitted that, the Ld. CIT(A) erred in sustaining the additions made by the A.O. towards 10% ad hoc disallowance of land development expenses, even though, the assessee has substantiated the expenditure with relevant details. The learned counsel for the assessee, further referring to paper book filed by the assessee, submitted that, out of the total land development expenses of Rs. 4,39,46,592/-, the major part of expenses of Rs. 2,19,33,496/- pertains to payment made to various authorities for conversion of land into non-agricultural purposes, development charges paid to HMDA and Yadadri Temple Development Authority, and payment made to Telangana State Real Estate Regulation Authority. Further, the remaining expenses pertain to purchases of various materials for the purpose of development of land into residential sites, including carpentry work expenses, electrical work expenses, JCB, hire charges, and other miscellaneous expenses. The assessee has further filed relevant ledger account of expenses with corresponding evidences, however, in respect of few expenses, the receipts were not furnished. The A.O. without appreciating relevant facts, simply made ad-hoc disallowance of expenses, even without pointing out any discrepancies in expenditure claimed by the assessee. The Ld. CIT(A) without appreciating relevant facts, simply sustained the addition made by the A.O. and therefore, he submitted that, the additions made by the A.O. should be deleted.

14. The Learned Senior A.R. for the Revenue, on the other hand, supporting the order of Ld. CIT(A) submitted that, there is no dispute with regard to the fact that, the assessee could not substantiate land development expenses with supporting bills and vouchers. Although the assessee has claimed that, major part of the expenses relating to charges paid to regulatory authorities, but could not reconcile payment with corresponding receipts issued by the authorities. Further, remaining expenditure, including purchase of materials, was also not supported by the relevant evidences. In the absence of relevant evidences, the A.O. has rightly resorted to ad hoc disallowance of expenses. The Ld. CIT(A), after considering relevant evidences, has rightly sustained the addition made by the A.O. and the order of the Ld. CIT(A) should be upheld.

15. We have heard both parties, perused the material available on record and had gone through the orders of the authorities below. There is no dispute with regard to the fact that, the assessee partnership firm is in the business of real estate development has purchased land, plotted into various residential sites and sold. In the process, the assessee has incurred various expenditures towards land development, including purchase of bricks, cement, granite, pipes, sand, steel, and wood, etc. The assessee has also incurred expenditure for carpentry work, electrical work, hire charges for the tractor, JCB, etc. The major portion of land development expenses consisting of charges paid to various regulatory authorities for conversion of land and development charges. The assessee has paid a sum of Rs. 1,84,24,722/- to Yadadri Temple Development Authority through demand drafts, for which the assessee has furnished relevant bank account statements and also demand note raised by the Yadadri Temple Development Authority. The assessee has also paid a sum of Rs. 7,20,500/- to Bhongir Municipality towards land conversion charges, which is supported by necessary order issued by the authority. Similarly, the assessee paid a sum of Rs.4,00,942/- to the Telangana State Real Estate Regulatory Authority, which is once again supported by necessary evidences. Further, out of the total land development expenses of Rs. 4,39,46,592/-, a sum of Rs. 2,14,33,498/- was paid towards various authorities for development of land. The remaining part of expenses is for the purpose of purchase of various materials, including cement and steel required for development of land, carpentry work, electrical work, etc. The assessee has furnished relevant ledger accounts with corresponding bills for various expenditures, however, could not furnish supporting bills and vouchers in respect of purchases from the unorganized sectors like purchase of bricks, sand, etc. Since majority of the expenses incurred under the head ‘land development expenses’ is towards payment made to regulatory authorities and also through proper banking channels, in our considered view, the A.O. without making any observation with regard to incorrectness of expenditure in the books of accounts maintained by the assessee, had resorted to ad hoc disallowance of expenses. Therefore, we are of the considered view that, making 10% of land development expenses without pointing out any discrepancies in the books of account maintained by the assessee and also without rejection of books of accounts is incorrect. In the absence of any observations with regard to the incorrectness of expenditure by the assessee, merely for non-submission of certain bills and vouchers in respect of few expenses, the expenditure incurred by the assessee wholly and exclusively for the purpose of business cannot be disallowed, that too on ad-hoc basis. Since the A.O. has made 10% ad hoc disallowance of expenses without any identification as to which expenses is not supported by the bills and vouchers, in our considered view, ad hoc expenses made by the A.O. cannot be upheld. The Ld. CIT(A) without appreciating relevant facts, simply sustained additions made by the A.O. Thus, we set aside the order of Ld. CIT(A) and direct the A.O. to delete the additions made towards 10% ad hoc disallowance of land development expenditure.

16. In the result, the appeal filed by the assessee is allowed.