2025 (6) TMI 1472 - AT - Income Tax

Disallowance of expenditure u/s. 37(1) - addition made holding the expenditure to be non genuine - HELD THAT - AO during assessment proceedings had issued notices to all the six creditors u/s. 133(6) - All the aforesaid six creditors replied to said notice the assessee furnished reconciliation statements showing outstanding at the end of the year as per the show cause notice issued by AO viz a viz the amount actually shown outstanding in the books. It is an admitted position that all the six parties have shown income received from the assessee in their respective return of income filed u/s. 44AD. On field enquiries by the Inspector though the premises of these parties were found to be in existence but there was no sign board on the premises to establish commercial activity. This fact raised suspicion in the mind of AO regarding the genuineness of the transaction. It is also an undisputed fact that the assessee had deducted tax at source on the payments made to be aforesaid parties. The assessee had also furnished copies of bills invoices raised by these parties. Apart from suspicion there was no material before the AO to reject assessee s contention. We find that the reasoning given by the AO for making disallowance u/s. 37(1) of the Act is identical in the impugned assessment year even some of the creditors in the impugned assessment year are common to AY 2018-19 2025 (2) TMI 1199 - ITAT DELHI .Thus we find no merit in appeal by the Department. Hence impugned order is upheld and appeal of the Revenue is dismissed being devoid of any merit. Assessee appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal issue considered in these appeals by the Revenue across assessment years 2014-15, 2015-16, and 2016-17 is whether the Assessing Officer (AO) was justified in disallowing expenditure under section 37(1) of the Income Tax Act, 1961, on the ground that the creditors to whom payments were made were bogus and the related expenses were not genuine. Specifically, the question is whether sufficient evidence exists to establish that the creditors were not genuine and colluded with the assessee to inflate expenses, thereby warranting addition to income by disallowance of such expenditure.

2. ISSUE-WISE DETAILED ANALYSIS

Issue: Validity of disallowance of expenditure under section 37(1) on account of alleged bogus creditors

Relevant legal framework and precedents: Section 37(1) of the Income Tax Act allows deduction of any expenditure incurred wholly and exclusively for the purpose of business unless specifically disallowed. The burden lies on the Revenue to prove that the expenditure is not genuine or is incurred for an illegal or personal purpose. Precedents emphasize that mere suspicion or absence of signboards at premises does not suffice to disallow expenditure; corroborative evidence is required to establish that creditors are bogus or transactions are sham.

Court's interpretation and reasoning: The Tribunal examined the facts that the AO issued notices under section 133(6) to all six creditors to verify genuineness. All creditors responded, confirming transactions and stating that services were rendered. The creditors also declared the income received from the assessee in their respective income tax returns filed under presumptive taxation scheme u/s 44AD. The assessee had deducted tax at source (TDS) on payments made to these creditors and produced invoices and bills raised by them. Although field enquiries by the Inspector revealed that the premises of these creditors existed but lacked signboards, which raised suspicion, no concrete material or inconsistencies were found to discredit the genuineness of transactions or services rendered.

Key evidence and findings: The key evidence included: (i) confirmations and replies from creditors under section 133(6), (ii) reconciliation statements submitted by the assessee, (iii) tax returns filed by creditors showing income from the assessee, (iv) TDS deducted by the assessee, and (v) bills/invoices raised by the creditors. The AO did not point out any discrepancies in these documents. The only adverse fact was absence of signboards at creditor premises, which was held insufficient to disallow expenditure.

Application of law to facts: The Tribunal applied the principle that disallowance under section 37(1) requires concrete evidence of bogus transactions. The mere suspicion raised by absence of signboards or premises not appearing commercially active was not adequate. Since all creditors admitted the transactions and offered income to tax, and the assessee complied with statutory requirements such as TDS deduction, the expenditure was held to be genuine.

Treatment of competing arguments: The Revenue argued that the creditors were not genuine and colluded with the assessee to inflate expenses, relying on field enquiries and the AO's assessment. The assessee countered with documentary evidence and confirmations. The Tribunal found the assessee's evidence more persuasive and noted the absence of any adverse findings or inconsistencies pointed out by the AO in the creditors' confirmations or reconciliation statements. The Tribunal also relied on a Coordinate Bench decision for AY 2018-19 involving identical facts and parties, which upheld the genuineness of such creditors and rejected Revenue's appeal.

Conclusions: The Tribunal concluded that the AO's disallowance was not sustainable in absence of credible evidence. The CIT(A) rightly deleted the addition, and the Tribunal upheld the CIT(A)'s order. The appeals by the Revenue were dismissed for all three assessment years on identical grounds and facts.

3. SIGNIFICANT HOLDINGS

"The CIT(A) in the impugned order has recorded a finding of fact that the aforesaid parties had offered receipts from assessee to tax in their respective return of income, TDS was deducted by the assessee on the payments made to the parties. These facts have not been refuted by the Assessing Officer. Further, in response to the show cause notice dated 18.03.2024 the assessee had furnished reconciliation, no adverse findings have been given by the AO on the reconciliation. The nature of business carried out by the assessee is highly specialized and so are the services provided by the aforesaid parties. In given facts of the case, the CIT(A) concluded that genuineness of the services rendered by these parties were proved and the AO could not point out any inconstancy in the bills raised by the parties. Hence, no case of addition on account of bogus credits or disallowance u/s. 37(1) of the Act is made out. The Revenue could not controvert findings of the CIT(A), ergo, impugned order is upheld and appeal of the Revenue is dismissed."

Core principles established include:

• Disallowance under section 37(1) requires clear and cogent evidence that expenditure is not genuine.
• Issuance of notices to creditors and their confirmations, coupled with tax compliance such as filing of returns and TDS deduction, strongly support genuineness of expenditure.
• Suspicion arising from absence of signboards or premises appearance without further adverse material is insufficient to disallow expenditure.
• Reconciliation statements accepted without adverse findings strengthen the assessee's case.
• Findings of fact by CIT(A) on genuineness of expenditure, if unchallenged by Revenue with concrete evidence, are binding on the Tribunal.

Final determinations on each issue:

• The disallowance of Rs. 3,32,86,216/- under section 37(1) on account of alleged bogus creditors for AY 2014-15 was rightly deleted by CIT(A) and upheld by the Tribunal.
• The identical disallowances for AY 2015-16 and 2016-17 involving the same creditors and facts were also dismissed for lack of merit.
• The delay in filing appeals for AY 2014-15 and 2015-16 was condoned as unintentional and bona fide.
• The appeals by the Revenue for all three years were dismissed.