2023 (1) TMI 267 - AT - Income Tax

Disallowance of towards claim of job work expenses - contractors did not respond to the notice issued in respect of job work transactions - AO draw adverse inference on the genuineness of expenses and disallowed job work expenses - As per DR mere production of documentary evidences in itself is not sufficient to exonerate the assessee of its burden of proof - HELD THAT - The assessee has successfully demonstrated the incurring of job work expenses on the basis of clinching evidences, both direct and circumstantial. No adverse materials to controvert these tell-tale evidences are on record at present. Shorn off the non-compliance of summons served under Section 131 - Assessee has filed formidable evidences to identify the contractors as well as the factum of incurring job work expenses as demonstrated by the income tax returns of the service providers. TDS has been deducted on such expenses and reflected in the return of income of the contractors. The increase in turnover, addition of new line of business, i.e., processing of rice and substantial increase in the fixed asset are vital indicators of plausibility of the explanation offered by the assessee in this regard. In this factual matrix, in the absence of any culpable evidence in possession of revenue, the job work expenses deserves to allowed, on a standalone basis, as incurred in the ordinary course of business. Non-compliance of summons - Admittedly, the summons under Section 131 were duly served on the contractors but had remained unresponded. In this backdrop, the observations in S. Hastimal vs. CIT 1962 (12) TMI 60 - MADRAS HIGH COURT are worth noting wherein an impetus was given on the difficulty on the part of any assessee to explain a transaction after a decade. Similar view has been recently expressed by the Hon ble Supreme Court in CITI Bank case 2022 (8) TMI 1107 - SUPREME COURT This apart, we are alive to the concern of the assessee that owing to closure of business and in the absence of any support service available at the end of the assessee, it is not positioned to defend its stand on outcome of such inquiries after such a long gap and will cause onerous burden on the assessee if such inquiries are continued even after a decade. Having regard to these ground realities read with overwhelming tangible documents suggesting the state of affairs to true, we are not inclined to engage the department in futile exercise by second round of proceedings and rake up a stale cause. Needless to say, the assessee is not required to demonstrate the bona fides to the hilt and no infallible proof is required to be furnished to the satisfaction of the Revenue in every case. In the totality of circumstances so weighed cumulatively, the plea of the Assessee deserves to be accepted in the peculiar facts of the case. The action of the CIT(A) is thus set aside and the addition/ disallowance on account job-work charges are reversed and cancelled - Appeal of the Assessee is allowed.

Summary

Issues Involved:
1. Disallowance of job work expenses amounting to Rs.3,02,39,330/-.
2. Non-compliance of summons under Section 131 of the Income Tax Act by the contractors.

Issue-wise Detailed Analysis:

1. Disallowance of Job Work Expenses:
The assessee, a private limited company engaged in the business of trading rice and other agro products, claimed job work expenses amounting to Rs.3,02,39,330/- for the Assessment Year 2014-15. The Assessing Officer (AO) disallowed these expenses due to non-response from contractors to verification notices issued under Section 133(6). The CIT(A) upheld this disallowance, emphasizing the non-compliance of summons under Section 131 by the contractors.

The assessee argued that:
- The job work expenses were necessary due to a 16% increase in turnover and the addition of new machinery worth Rs.15.29 crore, indicating a shift to processing activities.
- Payments to contractors were made through banking channels and were subject to TDS, with corresponding income reflected in the contractors' income tax returns.
- The non-compliance of summons was due to the significant distance (1200 kms) between the contractors' location in Gujarat and the AO's office in Delhi. The correct procedure would have been issuing commissions to local AOs for verification, as per the Civil Procedure Code (CPC).

The Tribunal observed that:
- The assessee provided substantial documentary evidence, including PAN details, addresses, bank statements, and income tax returns of the contractors, demonstrating the genuineness of the job work expenses.
- The AO's issuance of summons for personal attendance in Delhi was deemed unjustified and outside the authority of law under Section 131 of the Act.
- The business operations of the assessee had ceased, and its assets were taken over by the lender bank under the SARFAESI Act, 2002. Hence, a fresh round of inquiry would be futile and burdensome.

2. Non-compliance of Summons:
The Tribunal acknowledged that the summons issued under Section 131 were duly served but remained unresponded. However, it emphasized that:
- The assessee had discharged its primary onus by providing overwhelming documentary evidence.
- The non-compliance of summons by third parties, especially when located far away, should not adversely affect the assessee.
- The closure of the assessee's business and the lapse of considerable time made it impractical to conduct further inquiries.

The Tribunal cited relevant judgments, including the Hon'ble Supreme Court's decision in Union of India vs. CITI Bank N.A. (2022), which highlighted the difficulty in explaining transactions after a long period.

Conclusion:
The Tribunal set aside the CIT(A)'s order and reversed the disallowance of job work expenses, allowing the appeal of the assessee. It concluded that the assessee had successfully demonstrated the incurrence of job work expenses through substantial evidence, and the non-compliance of summons should not vitiate the bona fides of the claim. The Tribunal emphasized the need to avoid futile exercises and undue burdens on the assessee, especially given the closure of its business and the passage of time.