2014 (4) TMI 1292 - AT - Income Tax

Addition of Annual Maintenance Contract expense made by the AO without rejecting the books of accounts u/s.145(3) - adhoc disallowance of 15% of the total expenditure claimed without any basis and the same should be extracted to a reasonable disallowance - HELD THAT - Having heard the submissions of both the sides we are of the view that although the assessee has placed on record the income tax returns of those parties barring few the details of the payment details of tax deducted at source which was duly supported by their respective statements recorded by the AO but still the learned CIT(A) thought it proper to adopt a reasonable percentage of disallowance. As far as the documents are concerned a voluminous compilation is placed before us pertained to ledger account; invoices and bank statements. Additionally it has also been argued before us that none of the parties were related to the assessee and there was no allegation of the Revenue that the payment was made to the connected parties. In support of this contention that in a situation when the payment has been made to unconnected parties and TDS was deducted then the disallowance of expenditure was not justified a case law of ITAT D Bench Ahmedabad pronounced in the case of BMS Projects Pvt. Ltd. 2013 (1) TMI 1044 - ITAT AHMEDABAD has also been cited. Considering all we have noted that one of the party was suffering from cancer out of the five parties who have not been produced therefore further relief can be granted to the assessee. However to cover up any leakage and also considering the fact that rest of the four parties could not be produced we hereby restrict the disallowance to a round figure of Rs.20 lacs which according to us is a fair and reasonable estimate. Ground of the Revenue stands dismissed.

Summary

Issues:
1. Disallowance of annual maintenance contract expenses
2. Genuineness of expenses claimed
3. Production of parties for verification

Issue 1: Disallowance of annual maintenance contract expenses
The case involved cross-appeals challenging the addition of Rs.1,56,22,300 made by the Assessing Officer for disallowance of bogus expenses of annual maintenance contracts. The Revenue contended that the assessee failed to establish the nature of services provided and the business connection of the claimed expenditure. The CIT(A) confirmed 15% of the addition, amounting to Rs.23,43,345, which the Revenue sought to increase. The AO doubted the genuineness of the expenses and issued notices to verify them. The assessee explained engaging 24 persons for cable laying work, but the AO remained unconvinced. During remand proceedings, some parties were produced, confirming services rendered, but no written agreements were found. The CIT(A) noted that the AO failed to prove the expenses were not genuine, and the assessee failed to produce all parties, leading to a 15% disallowance.

Issue 2: Genuineness of expenses claimed
The AO questioned the authenticity of the expenses claimed under the annual maintenance contract, alleging they were accommodative entries to reduce tax burden. The CIT(A) observed that the parties providing services were income tax assesses and registered with the service tax department. Documentary evidence like bills, vouchers, and bank statements were furnished to prove the expenses' genuineness. The CIT(A) found the AO's allegations unsubstantiated and held that the appellant had established the genuineness of payments and services rendered. The CIT(A) concluded that while some doubt existed, a partial disallowance of 15% was justified, allowing the remaining amount as a business expenditure under section 37(1) of the IT Act.

Issue 3: Production of parties for verification
The parties engaged for cable laying work were required to be produced for verification. The AO doubted the authenticity of the expenses due to the absence of written agreements between the assessee and the parties. During remand proceedings, some parties were produced, confirming services provided, but the lack of written agreements raised doubts. The CIT(A) considered the absence of all parties and restricted the disallowance to Rs.20 lakhs, granting partial relief to the assessee due to the inability to produce all parties for verification.

In conclusion, the appellate tribunal partially allowed the assessee's appeal and dismissed the Revenue's appeal, maintaining a 15% disallowance of the annual maintenance contract expenses while granting some relief to the assessee due to the inability to produce all parties for verification.