2025 (6) TMI 1859 - AT - Income Tax

Disallowance of miscellaneous expenses and business expenses of the assessee - Disallowance on the ground that the assessee has not produced any cogent evidence in support of the expenses to prove the same were fully and exclusively incurred for the purpose of business of the assessee firm - Even during the first appellate proceedings the assessee except filing written submissions not produced any documents to substantiate its claim HELD THAT - Considering the fact that the assessee has failed to substantiate its claim either before the lower authorities or before this Tribunal finding no merits in the grounds of appeal we dismiss the grounds of appeal of the assessee.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this appeal are:

• Whether the assessee was justified in claiming miscellaneous and business expenses, specifically custom reimbursement expenses, without producing adequate evidence such as bills and vouchers to substantiate these claims.
• Whether the disallowance made by the Assessing Officer (AO) of a substantial portion of the claimed expenses was appropriate and in accordance with the provisions of the Income Tax Act, 1961.
• Whether the nature of custom reimbursement expenses, which are claimed to be revenue neutral and incurred on behalf of clients, exempts them from scrutiny or disallowance under the Income Tax Act.
• The onus and standard of proof required from the assessee to establish that expenses claimed were wholly and exclusively incurred for the purpose of business.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Justification and substantiation of claimed miscellaneous and business expenses

Relevant legal framework and precedents: Under the Income Tax Act, 1961, expenses claimed as deductions must be substantiated by proper evidence to establish that they were incurred wholly and exclusively for the purpose of business (Section 37(1)). The AO is empowered to disallow expenses which are not supported by adequate documentation or are found to be fictitious or not genuine.

Court's interpretation and reasoning: The Tribunal noted that the assessee failed to produce any cogent evidence such as bills, vouchers, or supporting documents either before the AO or the CIT(A) to substantiate the claimed expenses. The AO's disallowance was based on the absence of such evidence and the presence of self-made vouchers and cash payments, which raised doubts about the genuineness of the expenses.

Key evidence and findings: The AO found that only a few invoices and related documents were produced, and a major portion of the expenses was incurred in cash and supported by self-made vouchers. The CIT(A) relied on these findings and also referred to a precedent appellate order for the preceding assessment year where similar issues were considered.

Application of law to facts: Given the lack of documentary evidence, the AO and CIT(A) were justified in disallowing the claimed expenses. The Tribunal upheld this view, emphasizing the necessity of documentary proof to claim business expenses.

Treatment of competing arguments: The assessee contended that the expenses were incurred on behalf of clients and thus were revenue neutral, implying no taxable income arises from such reimbursements. However, the Tribunal rejected this argument on the ground that the onus was on the assessee to prove the expenses were wholly and exclusively for business purposes, which was not discharged.

Conclusions: The disallowance of Rs. 4,27,835/- as miscellaneous expenses and Rs. 8,95,58,070/- as business expenses was upheld due to failure to substantiate the claims.

Issue 2: Nature and tax treatment of custom reimbursement expenses

Relevant legal framework and precedents: Custom House Agents (CHA) receive service charges and custom reimbursement amounts from clients. The reimbursement amounts are considered neutral if they are merely pass-through amounts incurred on behalf of clients. However, any surplus amount retained by the CHA is taxable income.

Court's interpretation and reasoning: The CIT(A) explained that the custom reimbursement expenses are incurred on behalf of clients and the gross amount invoiced includes both service charges and reimbursement expenses. The AO's role is to verify the genuineness of the reimbursement expenses claimed. The Tribunal reiterated that the mere assertion of revenue neutrality does not absolve the assessee from proving the expenses were genuinely incurred.

Key evidence and findings: The assessee failed to produce detailed bills and vouchers for the custom reimbursement expenses. The AO found substantial portions of these expenses were not supported by credible evidence.

Application of law to facts: Since the assessee did not prove that the custom reimbursement expenses were wholly and exclusively incurred for business purposes, the AO's disallowance of 10% of the total expenses (amounting to Rs. 89,55,807/-) was deemed reasonable and justified.

Treatment of competing arguments: The assessee argued that the expenses were neutral and did not result in taxable income. The Tribunal rejected this, emphasizing the onus on the assessee to prove the expenses' genuineness and exclusivity for business.

Conclusions: The Tribunal confirmed the disallowance of 10% of the custom reimbursement expenses as reasonable and justified.

3. SIGNIFICANT HOLDINGS

The Tribunal articulated the principle that "the onus always lies on the appellant to prove that the expenses were wholly and exclusively expended for the purpose of the business." It emphasized that "merely stating that the receipts were revenue neutral does not explain the case of the appellant."

The Tribunal held that where the assessee fails to produce supporting bills and vouchers, and a major portion of expenses is incurred in cash and supported by self-made vouchers, the AO is justified in making disallowances.

In respect of custom reimbursement expenses, the Tribunal confirmed that the AO's disallowance of 10% of the total expenses was "very reasonable and justified."

Accordingly, the Tribunal dismissed the appeal, affirming the orders of the AO and CIT(A) and confirming the disallowance of the claimed expenses for the Assessment Year 2014-15.