2018 (3) TMI 37 - AT - Income Tax

Disallowance on account of expenses incurred through sub-contractors - bogus expenditure - proof of actual rendering of services by these parties to the assessee - Held that - The assessee had not proved the actual rendering of services by these parties to the assessee by way of rendering the foundation services. Admittedly, all these six alleged sub-contractors were only trading in shares and investment companies. The assessee was not able to prove with cogent material as to whether these companies possess necessary expertise and infrastructure to render the foundation services to the assessee. More importantly these services were alleged to have been rendered in Shillong whereas, these parties are located in Kolkata. From the perusal of their balance sheet, it is evident that they do not have any branch in Shillong or any other infrastructure to render foundation services/specialized services to the assessee. All the six companies had similar types of income and similarly types of expenses reflected in their profit and loss account. None of the companies have sufficient fixed assets to prove the existence of necessary infrastructure for rendering such technical services. From the aforesaid facts, it is made very clear that these parties had merely acted as a conduit to reduce the profits of the assessee company and show meager income in their returns and claim refund of TDS. We are satisfied in the instant case, that these companies are merely paper companies, having complied with proper paper work, but not possessing necessary expertise to render technical services to the assessee - Decided against assessee.

Summary

Issues:
Whether the disallowance of expenses claimed by the assessee on account of payments to sub-contractors was justified.

Analysis:
The appeal arose from the order of the Commissioner of Income Tax (Appeals) concerning the disallowance of ?37 lakhs claimed by the assessee for expenses incurred through sub-contractors. The primary issue was whether the disallowance was justified given the circumstances. The assessee, engaged in steel fabrication and tower erection, made payments to six sub-contractors for foundation expenses. However, these sub-contractors were found to be non-existent at their registered addresses, leading to suspicions of bogus transactions. The Assessing Officer (AO) found discrepancies in the companies' activities and concluded that they were paper companies facilitating accommodation entries. The AO disallowed the expenses as bogus. The assessee contended that payments were made through account payee cheques, with tax deductions, and were declared as income by the sub-contractors. The assessee provided various documents to prove the genuineness of the transactions. However, the Commissioner upheld the disallowance, noting the lack of evidence of actual services rendered by the sub-contractors, especially in a specialized field like steel fabrication. The Commissioner found the companies lacked the infrastructure for such services and upheld the disallowance.

The assessee's arguments on the payments being subject to TDS and duly declared by the sub-contractors were countered by the lack of evidence of actual services rendered. The Appellate Tribunal noted that while the existence of the companies was proven, the assessee failed to demonstrate the sub-contractors' capability to provide the specialized services claimed. The Tribunal found discrepancies in the companies' profit and loss accounts, indicating minimal expenses and lack of necessary infrastructure. It concluded that the sub-contractors merely acted as conduits to reduce the assessee's profits and claim refunds. The Tribunal held that the services rendered were not proven, supporting the disallowance made by the revenue authorities. Consequently, the Tribunal dismissed the appeal, affirming the disallowance of the expenses claimed by the assessee.

In summary, the Tribunal's decision focused on the lack of evidence regarding the actual services rendered by the sub-contractors, leading to the disallowance of the claimed expenses. Despite the payments being made through legitimate channels, the Tribunal found the sub-contractors to be paper companies without the necessary expertise to provide the specialized services, ultimately upholding the disallowance.