2025 (7) TMI 1560 - AT - Income Tax

Expenditure claimed as business expenditure towards payments made to a sister concern for executing sub-contract - As per DR Assessee has not provided adequate and proper documents to substantiate the genuineness of the expenditure claimed and therefore the disallowance u/s 37 is liable to be upheld HELD THAT - We are in concurrence with the specific observation of the AO that contract agreement is a crucial document as in such contract huge risks and liabilities involved are narrated. Assessee though has relied on work order however the said work order does not provide details regarding actual execution of work and expenditures incurred on execution of such work. Though the Assessee has made the claim that M/s. MBPCL after getting subcontract from the Assessee gave sub-contract of the same work to other party and consequently payment due on account of execution of sub-contract was directly adjusted however the Assessee did not submit any detail of sub contractors to carry out third party verification as well as did not provide any documentary evidence to substantiate its claim of adjustment of payments. We are also in agreement with the observation/reasoning of the authorities below that simply deducing the TDS and charging the GST are not sufficient for claiming the huge business expenditure without establishing its origin/genesis of the same. We are also in concurrence with the reasoning given by the AO in rejecting the claim of the Assessee specific to the effect that on perusal of ITR of the relevant year of M/s. MBPCL it is not possible to ascertain the receiving of such contract receipt from the Assessee as M/s. MBPCL was involved in multiple projects and has received multiple receipts during the year under consideration. Admittedly the expenditure claimed by the Assessee is a significant amount i.e. 86.60% of total revenue from operations of the Assessee during the AY under consideration which could be a large extent responsible for low profit. Admittedly the Assessee failed to establish the key terms of sub contract scope of work payment schedule work completion time limit and liability clauses legally enforceable as a contract. The designation position and complete signatures of signatories are not appearing which lacks the sanctity of work order. Further the work order does not indicate that Assessee or M/s. MBPCL was acting assub contractor on behalf of M/s. PCISL despite the latter being the main-contractor and sister concern of the Assessee. Further there is a discrepancy in the claimed amounts as the work order specifies an amount while the claimed sub-contract amount in the Assessee s ledger Assessee has not submitted reconciliation of final bills raised and a mere narration in the ledger account does not adequately support the authenticity of the transaction. Payments receipts from M/s. PCISL to the Assessee and corresponding payment made from Assessee to M/s. MBPCL have also not been provided. The Assessee s financials as on 31.03.2018 reveals that sub-contract expenses as claimed by the Assessee constitute 93.96% of total expenses and account for 89.49% of the Revenue and therefore in the absence of substantial documentations in such a critical area raises significant concerns regarding the genuineness of the transactions. Both the authorities below have correctly passed the respective orders and therefore in the orders passed by the authorities below specifically the impugned order which is under challenge before us there is no infirmity impropriety and/or illegality and thus the impugned order is liable to be affirmed by dismissing the appeal of the Assessee. Thus the appeal of the Assessee is dismissed.

Summary

ISSUES:

Whether the expenditure of Rs. 60,41,53,300/- claimed as business expenditure towards payments made to a sister concern for executing sub-contract is allowable under section 37 of the Income Tax Act, 1961.Whether the failure to produce contract agreements, bank statements, and other documentary evidence substantiating the claimed expenditure justifies disallowance under section 37.Whether reliance on work orders and TDS/GST compliance alone suffices to establish genuineness of large subcontract payments.Whether the burden of proof regarding existence and genuineness of the contractual transactions lies on the claimant of the expenditure.Whether adverse inference can be drawn for non-compliance with directions to produce relevant documents during assessment and appellate proceedings.

RULINGS / HOLDINGS:

On the issue of allowability of expenditure under section 37, the Court held that the claim of Rs. 60,41,53,300/- as business expenditure is not tenable and liable to be disallowed under section 37 due to failure to substantiate the claim with essential documents.The Court affirmed that the Assessee's failure to produce contract agreements, bank statements highlighting payments, and confirmation of payments despite repeated requests amounts to failure to discharge the prima-facie onus, justifying disallowance.Reliance solely on work orders, TDS deduction, and GST compliance does not establish the genuineness of the expenditure, especially when the work order lacks crucial contractual terms and the payments are substantial.The burden of proof as mandated by sections 104, 105, and 109 of The Bharatiya Sakshya Adhiniyam, 2023 lies on the Assessee to prove existence of facts on which legal rights or liabilities depend; failure to do so attracts adverse presumption.Non-compliance with repeated directions to produce relevant contracts and payment details during assessment and appellate proceedings justified the Court proceeding ex-parte and drawing adverse inferences against the Assessee.

RATIONALE:

The Court applied the provisions of section 37 of the Income Tax Act, 1961, which allows deduction of business expenditure only if it is "wholly and exclusively" for business purposes and is substantiated by credible evidence.The Court relied on The Bharatiya Sakshya Adhiniyam, 2023, particularly sections 104, 105, and 109, to emphasize the burden of proof resting on the party asserting the existence of facts, and the consequences of failure to discharge this burden.The Court noted the importance of contract agreements as crucial documents narrating risks and liabilities in contracts involving large sums, and that work orders lacking essential terms cannot substitute for legally enforceable contracts.The Court observed that the large quantum of expenditure (86.60% of total revenue) claimed without adequate documentary support raised serious doubts about its genuineness and that mere compliance with TDS and GST provisions is insufficient to establish the claim.The Court highlighted the procedural history of repeated opportunities granted to the Assessee to produce documents, non-compliance with directions, and the consequent justification for ex-parte proceedings and adverse inference under relevant legal provisions.