2023 (4) TMI 518 - AT - Income Tax

Bogus subcontract expenses - assessee failed to prove the genuineness of the subcontract expenses with supporting material - HELD THAT - Assessment order itself shows that the assessee furnished the Information called for. AO, however, recorded that there is a gap in the confirmations given by the sub-contractors. Grievance of the assessee is that the AO is influenced by the concession made by the learned AR in causing the verification of the material and calling for further information if any, required. Having regard to the totality of facts and circumstances of the case, we are of the considered opinion that it would be in the interest of justice, to direct the AO to consider the claim of the assessee with reference to the material on record and also the material if any, filed by the assessee. Writing off of the work in progress - Assessee is now claiming the written off expenses which were already debited to the work in progress account without first offering such amount as an income and without any proof of incurring the expenses that were debited to the work in progress account in the earlier assessment years and without any proof of claim of such RA bills and the reasons for their rejection by the client. It is therefore now relevant to consider whether the expenses that were debited to the work in progress account were for the business of the assessee in executing the contract, and that the same were not passed for the reasons other than being bogus expenses. We, therefore, direct AO to examine the contract document with reference to the work in respect of which the expenses debited to the work in progress in the earlier assessment years and to examine the reasons for the client not certifying the same. If the assessee incurred the expenses for the purpose of business in executing the relevant contract and those were not certified by the client giving rise to the assessee to write it off, then the learned AO may take a view according to law. Appeal of the assessee is treated as allowed for statistical purpose

Summary

Issues:
1. Disallowance of subcontract expenses
2. Disallowance of writing off work in progress

Disallowance of Subcontract Expenses:
The case involves a joint venture engaged in contract works for the Government of Jammu and Kashmir. The Assessing Officer disallowed certain subcontract expenses due to lack of material supporting the claim. The Commissioner of Income Tax (Appeals) upheld the disallowance as the assessee failed to prove the genuineness of the expenses. The assessee argued that the subcontractors were reputable entities and provided evidence of payment, challenging the reliance on the concession made by their counsel. The ITAT directed the Assessing Officer to reconsider the claim based on the material on record and any additional evidence provided by the assessee.

Disallowance of Writing Off Work in Progress:
Regarding the writing off of work in progress, the Assessing Officer added the amount to the income of the assessee, as the claim was not substantiated. The CIT(A) confirmed the addition, stating that the work in progress was never offered as income in previous years and lacked evidence of being a legitimate business expense. The ITAT directed the Assessing Officer to examine the contract documents related to the work in progress expenses, reasons for client non-certification, and the legitimacy of the expenses incurred for business purposes. The assessee was instructed to provide all relevant material for further assessment.

In conclusion, the ITAT allowed the appeal for statistical purposes, directing a reevaluation of both the disallowed subcontract expenses and the writing off of work in progress, emphasizing the need for substantiating claims and providing necessary evidence for assessment.