A Reasonable Ad Hoc Disallowance of 20% Is Justified for Partly Unsubstantiated Construction and Travel Expenses

Issue

Whether the Assessing Officer (AO) was justified in disallowing the entire portion of unsubstantiated construction and travel expenses, or if a partial disallowance is more appropriate when some justification exists on both sides.

Facts

Expenses Claimed: The assessee claimed deductions for construction materials and traveling expenses for the Assessment Year 2014-15.
Documentation Gap: The assessee provided sample vouchers for only a portion of the material costs and failed to provide primary details for the traveling expenses.
AO’s Action: The AO allowed the portion supported by vouchers but disallowed the entire remaining unsubstantiated balance.
Conflict: The assessee could not fully prove the expenses, but the AO’s total disallowance was viewed as overly harsh given the nature of the business.

Decision

Balanced Approach: The Tribunal found that neither the assessee’s claim nor the AO’s total disallowance could be completely validated.
Interest of Justice: To strike a balance between the lack of evidence and the reality of business operations, the Tribunal restricted the disallowance to 20% of the unsubstantiated expenses.
Outcome: Partly in favour of the assessee.

II. Unsecured Loans Supported by Direct Evidence Cannot Be Taxed for Failure to Prove ‘Source of Source’ Prior to Law Change

Issue

Whether an addition under Section 68 can be sustained for failing to prove the “source of source” for unsecured loans during an assessment year when such a requirement was not legally mandated.

Facts

The Transaction: The assessee took unsecured loans from five different parties during A.Y. 2014-15.
Evidence Provided: The assessee submitted comprehensive documents for all lenders, including:
- ITR copies and Computations of Income.
- Balance Sheets and Bank Statements.
- Formal Confirmations.
Verification: The lenders confirmed the transactions in response to notices under Section 133(6). The AO found no cash involved, as all transactions were via banking channels.
AO’s Basis for Addition: The AO made additions under Section 68 solely because the assessee did not prove the “source of the source” (where the lenders got their money).

Decision

Statutory Limitation: The Tribunal held that the legal requirement to explain the “source of the source” was not applicable to the impugned assessment year (A.Y. 2014-15).
Three Pillars Satisfied: Since the assessee successfully proved the identity, creditworthiness, and genuineness of the immediate lenders, and the AO found no discrepancies in their bank statements, the burden of proof was discharged.
Conclusion: The addition was uncalled for and ordered to be deleted.
Outcome: In favour of the assessee.

Key Takeaways

Documentation is Non-Negotiable: For Section 37(1), “sample vouchers” are rarely enough to protect the full claim; keeping 100% of primary receipts is the only way to avoid ad hoc disallowances.
Section 68 Compliance: If a loan is through banking channels and the lender is an ITR filer who confirms the debt, the AO cannot demand a “source of source” explanation for older assessment years.
Partial Relief: In tax litigation, when evidence is missing but the expense is clearly necessary for business, courts often opt for a percentage-based disallowance rather than a total rejection.

IN THE ITAT DELHI BENCH ‘F’

Singla Realters Ltd.

Income-tax Officer^*

YOGESH KUMAR US, Judicial Member
and Naveen Chandra, Accountant Member

IT APPEAL No.1583 (DELHI) OF 2020
[Assessment year 2014-15]

FEBRUARY 11, 2026

Pranshu SInghal, CA and Ashu Jain, Adv for the Appellant. Ms. Harpreet Kaur Hansra, Sr. DR for the Respondent.

ORDER

Naveen Chandra, Accountant Member.- Thisappealby the assessee is preferred against the order of theCIT(A)- 8, Delhi dated 14.01.2020 pertaining to A.Y 2014-15.

2. The grievances of the assessee read as under:

“On the facts and in the circumstances of the case and in law the CIT(A) was incorrect and unjustified:

(i) In confirming the disallowance of Rs 16,66,640/- on account of expenses u/s 37.

(ii) In confirming the addition of Rs 16,66,640/- on account of bogus purchases whereas the assessing officer had disallowed the amount u/s 37.

(iii) In confirming the addition of Rs 92,72,000/-incorrectly and unjustifiably made by the assessing officer u/s 68 of the IT Act in the account of Shiv Shakti Realtors Pvt Ltd and the CIT(A) also further erred in confirming such addition without finding the confirmations incorrect.

(iv) In confirming the addition of Rs 20,00,000/- in the account of Naveen Agarwal/Archita incorrectly and unjustifiably made by the assessing officer u/s 68.

(v) In confirming the addition of Rs 28,00,000/- u/s 68 in the account of Mrs Poonam Chawla on the basis of suspicion and also ignoring the evidences filed in support of the genuineness of the credit.

(vi) In confirming the addition of Rs 20,00,000/- u/s 68 in the account of Sheetal Gupta on the basis of suspicion and also without finding the evidences filed as incorrect and wrong.

(vii) In confirming the addition of Rs 1,00,000/- made by the assessing officer u/s 68 in the account of Mrs T. Poonam.

(viii) In confirming the disallowance of expenses of Rs 1,93,690/- u/s 37 without any reason, basis or evidences and also further erred in confirming this disallowance on adhoc basis.”

3. Ground Nos. 1 and 2 pertain to the addition on account of expenses of Rs. 16,66,640/-.

4. Brief facts are that during the year under consideration, the assessee was engaged in the business of real estate and construction. The company engages security guards on salary basis for the purpose of maintaining and safeguarding its properties.

5. The assessee claimed and expense of Rs 20,07,400/- towards purchase of construction material. During the course of assessment proceedings, the assessee had submitted sample vouchers of Rs. 3,40,760/- only which was allowed by the Assessing Officer and remaining expenses was disallowed.Further the assessee claimed expense of Rs 6,45,632/- towards travelling out of which the AO disallowed Rs 1,93,690/- in absence of primary details. Aggrieved, the assessee went in appeal before the ld. CIT(A) who disallowed the same u/s 37 of the Act.

6. Now the assessee is in appeal before us.

7. Before us, the ld. counsel for the assessee vehemently stated that the company had purchased construction materialfor which material purchase details were submitted before the Assessing Officer as well as before the CIT(A), including vendor names, addresses, voucher numbers, dates, and amounting to Rs. 20,07,400/-. The Assessing Officer did not raise any further queries nor conducted any verification with the creditors, which clearly establishes the acceptability of the expenses incurred.The said expenses are wholly and exclusively incurred for the purpose of business and are necessary to maintain the properties in proper and usable condition. The Assessing Officer has not even doubted or rejected the books of accounts. Accordingly, the ld. counsel for the assessee requested to restrict the disallowance at an adhoc rate of 20%.

8. Per contra, the ld. DR relied on the orders of the authorities below.

9. We have heard the rival submissions and have perused the relevant material on record. We find that the assesseedid not submit the complete details of purchaseof construction materials or travelling expense. On the other hand, the AO did not completely believe the explanation of the assessee and disallowed the entire expenses. We find that neither the assessee’s nor the AO explanation can be completely invalidated and there is some element of justification on each side. In the interest of justice therefore, we are of the considered view that 20% of the balance unsubstantiated expense claimed on account of building materials and 20% of the travelling expense be disallowed. The groundsi), (ii) and (viii) are partly allowed.

10. Grounds Nos (iii) to (vii) taken together pertain to the addition on account of unsecured loans of Rs. 1,61,72,000/-.Brief facts related to this issue are that the assessee had taken unsecured loans from 5 parties. After conducting an independent enquiries, the Assessing Officer made addition of Rs. 1,69,72,000/- in respect of all five parties doubting the source of source of loan transactions.Aggrieved, the assessee went in appeal before the ld. CIT(A) who confirmedthe addition of Rs 1,62,72,000/- out of Rs. 1,69,72,000/-.

11. Aggrieved, the assessee is in appeal before us.

12. Before us, the ld. counsel for the assessee vehemently stated that the Assessing Officer observed that the assessee had taken unsecured loans from 5 parties for which various documentary evidences were submitted establishing the three parameters under section 68 of the Act i.e. the identity and creditworthiness of the lenders and genuineness of the loan transactions. Further the said parties have confirmed the loan transaction by filing replies u/s 133(6) of the Act and this fact has been duly accepted by the Assessing Officer in the assessment order. Furthermore, the loans were repaid either in the year itself or in the subsequent years.

13. It is the say of the ld AR that even after conducting an independent enquiry, the Assessing Officer made addition in respect of all five parties doubting the source of source of loan transactions, despite the fact that the requirement of explaining the source of source was applicable from A.Y 2023-24 and onwards.

14. Per contra, the ld. DR relied on the orders of the authorities below.

15. We have heard the rival submissions and have perused the relevant material on record. We find that the assessee had taken loan from the following parties:-

(a) M/s Shiv Shakti Realtors Pvt. Ltd.	92,72,000/-
(b) Mr. Naveen Aggarwal/Archita	20,00,000/-
(c) Ms. Poonam Chawla	28,00,000/-
(d) Ms. Sheetal Gupta	28,00,000/-
(e) Mr. T. Parveen	1,00,000/-
Total	1,69,72,000/-

16. The AO has added the same u/s 68 of the Act mainly on the ground that source of source is not proved.We find that the assessee has submitted documentary evidences to support the identity, creditworthiness and genuineness of the loan from the said parties such as Copy of ITR; Copy of computation of income; Copy of balance sheet;Copy of confirmation;Copy of bank statement of each lender which have not been questioned by the AO. We find that the AO has examined the bank statements of each lender and found that the loans are extended through banking channels and no cash is involved. Further, the lenders have also confirmed the loan transaction by filing reply to notice u/s 133(6) of the Act and the AO has not pointed out any discrepancy in the same. Though repayment of loans is not conclusive evidence of genuineness of loans, all the said lenders have repaid the loans in subsequent years. In one case of loan from T Praveen, the said loan was offered for taxation in subsequent year due to death of T Praveen. We are also in agreement with the assessee that the law of explaining the source of source was not available during the impugned AY 2014-15. In view of the discussion above, we are of the considered view that the additions made u/s 68 is uncalled for and the same is therefore directed to be deleted. Ground Nos. (iii) to (vii) are accordingly allowed.

17. In the result, appeal of the assessee in ITA No. 1583/DEL/2020is partly allowed.