AO can’t disallow cost of improvement merely relying on enquiries made with assessee’s neighbour: ITAT

Case Details: ACIT v. Sambandam Dorairaj - [2021] 133 taxmann.com 40 (Chennai - Trib.)

Judiciary and Counsel Details

• • V. Durga Rao, Judicial Member and G. Manjunatha, Accountant Member
  • K. Meenakshi Sundaram, ITP for the Appellant. 
  • G. Johnson, Addl. CIT for the Respondent.

Facts of the Case

Assessee had purchased a flat and incurred expenditure of Rs. 23 lakhs for the purpose of renovating the house. He claimed the cost of improvement as deduction under section 54. The Assessing Officer (AO) asked the assessee for bills and vouchers for the above expenditure incurred by him. The assessee did not file bills and vouchers and submitted that he had purchased an old flat and incurred expenditure on renovation of the house.
AO deputed an Inspector to make an inquiry about the house and to find out if the assessee had carried any renovation work or not. The inspector visited the house, took photographs, and made inquiries with neighbours who said that they were not aware of improvements done by the assessee. On the basis of reports submitted by the Inspector, AO concluded that the assessee had not carried out any improvement, and accordingly, he disallowed the entire amount.

On appeal, CIT(A) directed AO to allow improvement cost to the assessee. Aggrieved by order, AO filed an appeal before the Tribunal.

ITAT Held

The Chennai Tribunal held that the assessee resided at Mumbai and had purchased an old house at Chennai. He subsequently carried repairs in the house. The repairs carried by the assessee long back, five years ago; therefore, he could not produce evidence before the AO. Further, the entire repair works/improvements carried out by his relatives, and he could not collect the bills and vouchers since he is residing in Mumbai.

It was found from the Assessment Order that the inspector had enquired with the neighbours, and the neighbours had stated before him that they were not aware of the improvements carried out by the assessee. Mainly, based on the enquires made with the neighbours, AO concluded that the assessee had not carried out any improvement work and disallowed the entire expenditure claimed by the assessee

If AO wanted to know exactly about the assessee’s improvement works, he should have been enquired through a builder who constructed the building in spite of neighbour.
Therefore, the CIT(A) was justifying in deleting disallowance and directing AO to allow the cost of improvement to the assessee.