2017 (6) TMI 1187 - AT - Income Tax

Disallowance of sub-contract expenses - whether action of disallowance of sub-contract expenses without bringing on record any cogent material by the lower authorities is bad in law and same deserves to be struck down? - Held that - There is no dispute on the fact that the payments are made by the assessee to the sub-contractors after making TDS as per the provisions of section 194C of the Act. There is no evidence to demonstrate that the payments made to the sub-contractors are returned to the assessee in any form. In this regard, no incriminating material is brought to the records on this by the AO. All the 4 sub-contractors are assessed to tax and filed the returns of income in accordance with law. Nothing is brought on records to suggest that any disallowance is made in the hands of the sub-contractors and the assessments are complete wherein all sub-contracts are done as per the said contract agreements. Work contracts given to sub-contractors are complete in all respects and there is no compliant of any kind from the Municipal Corporations of Nashik and Tiruvananthaopuram. There is recording of statements u/s.131 of the Act by the AO and providing of cross examination of the parties involved. In all these proceedings, all the 4 sub-contractors confirmed rendering of services/execution of work contracts to the assessee and the same goes in faovur of the assessee s claim - Decided in favour of assessee

Summary

Issues:
1. Disallowance of sub-contract expenses by AO.
2. Confirmation of disallowance by CIT(A).
3. Appeal against the order of CIT(A).

Issue 1: Disallowance of sub-contract expenses by AO:
The assessee, a civil contractor firm, declared a total income of &8377; 79,23,710/- for the Assessment Year 2010-11. However, during assessment, the AO observed sub-contract expenses amounting to &8377; 4,17,19,272/- paid to various parties, including Shri Sriniwas Muthe, D.P. Bhansali, M/s. Pushkar Buildcon, and M/s. R.C. Enterprises. The AO, after invoking sections 133(6) and 131 of the Act, concluded that the sub-contract expenses were bogus as the work claimed to be done by the sub-contractors was not actually carried out, leading to an addition of &8377; 1,50,57,130/- to the total income of the assessee.

Issue 2: Confirmation of disallowance by CIT(A):
In the First Appellate proceedings, the CIT(A) affirmed the AO's findings, stating that the sub-contractors failed to produce the evidence demanded by the AO, thereby confirming the addition of &8377; 1,50,57,130/- to the total income of the assessee. The CIT(A) held that the claim of sub-contract expenses was unsubstantiated due to the lack of evidence provided by the sub-contractors.

Issue 3: Appeal against the order of CIT(A):
The assessee appealed the CIT(A)'s decision before the Appellate Tribunal, arguing that the AO's addition of &8377; 1,50,57,130/- was based on suspicion and doubt. The Tribunal analyzed the facts and noted that the payments to sub-contractors were made through banking channels, TDS was deducted, and the sub-contractors had filed their tax returns. Additionally, there was no evidence to suggest that the payments made to the sub-contractors were returned to the assessee. The Tribunal found that the denial of deduction of &8377; 1,50,57,130/- was not sustainable in law and allowed the appeal, thereby setting aside the disallowance of sub-contract expenses.

In conclusion, the Appellate Tribunal ruled in favor of the assessee, allowing the appeal and overturning the disallowance of sub-contract expenses made by the AO and confirmed by the CIT(A) for the Assessment Year 2010-11.