2014 (7) TMI 636 - AT - Income Tax

Development contract expenses Payment made to subcontractors - Expenses claimed for non-existing company Genuineness of contract allocation not made by CIT(A) Held that - payment itself established and, secondly it is not the case of the assessing authority that the particulars of the persons to whom the amounts were paid could not be furnished - The claim of payment of subcontract is not disqualified for deduction under the Act - the expenditure is not a capital expenditure since the assessee did not acquire any capital asset - this is not the payment relating to personal benefit of any employees or directors of assessee-company, it is not personal expenditure. Whether the expenditure is incurred wholly and exclusively for the purpose of business Held that - The decision in Sassoon J. David & Co. Ltd. Vs. CIT 1979 (5) TMI 3 - SUPREME Court followed - the expression wholly and exclusively used in s. 10(2)(xv) does not mean necessarily - it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business - Such expenditure may be incurred voluntarily without any necessity and it is incurred for promoting the business and to earn profits, the assessee can claim deduction even though there was no compelling necessity to incur such expenditure - The fact somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 10(2)(xv), if it satisfies otherwise the tests laid down by the law the entire payment of subcontract cannot be disallowed as there is evidence for payment. Whether the assessee has established the payment of subcontract by producing the necessary evidence - Held that - At that time the sub-contractors might have changed their place of business and non-tracing by the AO cannot be a reason to find fault with the assessee and to disallow the expenditure incurred by the assessee - the payment details had been produced by the assessee-company before the AO - The payment details contained full details of the nature of transaction - the details of all transactions in respect of which the subcontract payment had been paid by the assessee-company are duly recorded in the payment vouchers and other evidence. Assessee submitted that the details furnished before the AO contain the nature of works carried on by the subcontractors - genuineness of the payments was established by the assessee - initial onus and burden of proof was on the assessee - such initial onus and burden of proof has been duly discharged by the Assessee Company by producing its audited books of accounts, payment vouchers and other documents giving full details as to the nature of transactions, which necessitated the payment of such subcontract works and that this was an accepted norm and established in this line of business and that without such payment, it was not possible to survive in this line of business, as well as the prevalent trade practice in the line of business carried on by the Assessee Company all along Decided against Revenue.

Summary

Issues Involved:
1. Erroneous order of the CIT(A).
2. Genuineness of the expenditure claimed by the assessee company.
3. Allocation of contract to a non-existent company.
4. Disallowance of development contract expenditure.

Issue-wise Detailed Analysis:

1. Erroneous Order of the CIT(A):
The Revenue contended that the CIT(A)'s order was erroneous in law and on the facts of the case. The CIT(A) had observed that the assessee company had provided sufficient evidence to support the genuineness of the transactions, including agreements, bills, TDS certificates, bank statements, and assessment orders of the subcontractors. The CIT(A) concluded that the Assessing Officer (AO) had not brought any substantial documentary evidence to disprove the genuineness of the claims.

2. Genuineness of the Expenditure Claimed by the Assessee Company:
The primary issue was the disallowance of development contract expenditure amounting to Rs. 17,05,38,557. The AO disallowed this expenditure on the grounds that M/s. Advik, a subcontractor, was a non-existent company and had not proved the genuineness of its claims. The CIT(A) found that the assessee company had provided all necessary documents and evidence to prove the genuineness of the transactions. The CIT(A) also noted that M/s. GKC, the main subcontractor, had declared the contract receipts in their income return, and the assessment was completed under section 143(3) of the Income-tax Act, 1961.

3. Allocation of Contract to a Non-Existent Company:
The AO argued that the contract was allocated to a non-existent company, M/s. Advik. However, the CIT(A) found that M/s. Advik was assessed with the DCIT, Circle-1(1), Hyderabad, and had offered Rs. 5.95 crores as disallowance in respect of work done for M/s. GKC. The CIT(A) concluded that the disallowances were made due to the non-production of vouchers, and the same expenditure could not be disallowed in the case of the assessee company. The CIT(A) emphasized that any action should be taken against M/s. GKC, not the assessee company.

4. Disallowance of Development Contract Expenditure:
The AO disallowed the expenditure claimed by the assessee company, arguing that M/s. Advik was a non-existent company. The CIT(A) observed that the AO had not conducted further investigations or recorded statements from other subcontractors. The CIT(A) concluded that the assessee had discharged its onus by providing all necessary evidence, and the AO had not brought any material on record to show that the evidences filed by the assessee were unsatisfactory. The CIT(A) directed the AO to delete the addition of Rs. 17,05,38,557.

Conclusion:
The Tribunal upheld the findings of the CIT(A) and dismissed the appeal of the Revenue, concluding that the assessee had provided sufficient evidence to prove the genuineness of the expenditure and that the AO had not conducted adequate investigations to disprove the claims. The Tribunal emphasized that the disallowance of the expenditure was not justified, and the assessee had discharged its burden of proof. The appeal of the Revenue was dismissed, and the order was pronounced in open court on 23rd May, 2014.