2025 (7) TMI 1490 - AT - Income Tax

Disallowance of professional expenses u/s 37(1) - Non genuine payment - notice u/s. 133(6) to third parties was not served / complied with - HELD THAT - Assessee has discharged his onus casted upon him by following the law and placed on various evidences on record which were not controverted or proved to be wrong. Even the entity whose payment is claimed are corporate and therefore merely that notice remained unserved the payment cannot be said to be non genuine merely the notice u/s.133(6) was not served. The view which we take is supported by the decision of apex court in the case of Anis Ahmad Sons 2008 (1) TMI 11 - SUPREME COURT as held for non appearance of those traders no adverse inference ought to have been drawn by the authorities below and the appellant-assessee has led satisfactory evidence that its business is only that of the Commission Agent and not a Trader dealing in the goods. Even a similar view is taken in the case of Orrisa Corporation (P) Ltd. 1986 (3) TMI 3 - SUPREME COURT Based on these observations ground raised by the assessee are allowed.

Summary

ISSUES:

Whether the Assessing Officer (AO) and Commissioner of Income Tax (Appeals) [CIT(A)] erred in disallowing professional fees paid as business expenditure under section 37(1) of the Income Tax Act, 1961, on grounds of lack of tangible evidence and non-service of notices under section 133(6).Whether the AO and CIT(A) were justified in comparing professional fees with turnover to determine reasonableness and genuineness of the expenditure.Whether non-compliance or non-service of notices under section 133(6) to third parties can be a sole ground for disallowance of claimed expenses.Whether payments made through proper banking channels with TDS deducted and deposited substantiate genuineness of the transactions.Whether penalty proceedings under section 271(1)(c) can be sustained solely on disallowance of expenses without recorded satisfaction of concealment or false claim.Whether disallowance of expenses without rejection of books of account under section 145(3) is sustainable.

RULINGS / HOLDINGS:

Disallowance of professional fees amounting to Rs. 27,00,000/- was not justified where the assessee furnished confirmation letters on official letterheads, bank statements, ITR-Vs, audited financial statements, and statutory auditor certificates corroborating the genuineness of the transactions; mere absence of third-party verification due to non-service of notices under section 133(6) does not invalidate the claim.The AO's approach of comparing professional fees constituting approximately 20% of turnover to question the necessity and quantum of expenditure was held to be fundamentally flawed, as "consultancy fees are determined by the nature of work, expertise, and deliverables, not the turnover."Non-compliance or non-service of notices under section 133(6) by third parties cannot be the sole basis for disallowance when the assessee has discharged the onus by furnishing requisite documentary evidence; reliance on judicial precedents such as Anis Ahmad & Sons vs. CIT and CIT, Orrisa vs. Orrisa Corporation (P) Ltd supports this principle.Payments made through proper banking channels with TDS deducted and deposited are prima facie evidence of genuineness of transactions; such facts cannot be disregarded without concrete contrary evidence.Penalty proceedings under section 271(1)(c) cannot be mechanically initiated merely because an expense is disallowed; "mere disallowance of an expense does not attract penalty unless the claim was false or made with the intent to evade tax."Disallowance of expenditure without rejection of books of account under section 145(3) is not sustainable; the AO cannot make adhoc disallowances on presumptive basis without rejecting the books, as held in authoritative judgments.

RATIONALE:

The legal framework applied includes sections 37(1), 133(6), 143(2), 143(3), 142(1), 145(3), and 271(1)(c) of the Income Tax Act, 1961.The Court emphasized the settled legal principle that business expenditure must be incurred "wholly and exclusively for the purpose of business" and that the Revenue cannot "sit in judgment over the commercial wisdom of the assessee," referencing Supreme Court rulings in S.A. Builders Ltd. v. CIT and CIT v. Walchand & Co. Pvt. Ltd.It was recognized that while the AO may verify the genuineness and nature of services, the reasonableness of professional fees cannot be assessed solely by comparing it with turnover, as consultancy fees depend on service complexity and deliverables.The Court relied on judicial precedents holding that non-appearance or non-compliance by third parties to notices under section 133(6) does not ipso facto render the transaction non-genuine if the assessee has provided satisfactory evidence, shifting the burden of proof to the Revenue to rebut such evidence.Payments through banking channels with TDS compliance constitute strong evidence of genuineness, supported by case law from Gujarat High Court and ITAT decisions.The Court noted that disallowance without rejection of books of account under section 145(3) violates principles of fair assessment and transparency, as established by various High Court and ITAT judgments.Penalty under section 271(1)(c) requires recorded satisfaction of concealment or false claim, which was absent; thus, mechanical initiation of penalty proceedings was improper.