2023 (9) TMI 847 - HC - Income Tax

Disallowance of 10% of expenses claimed under facility management - ITAT held in favour of the assessee by observing that in the case of companies which are having large volume of transactions, it would be practically difficult to bring all evidences to substantiate the expenses in one go and the ledger account that was furnished was sufficient and verifying the ledger account on test check basis was enough - HELD THAT - The party-wise details provided by assessee amounted to approximately Rs. 55 Crores against the total expenditure of Rs. 62,84,30,804/- claimed, i.e., 89% of the total expenditure. The assessee also submitted the ledger accounts and even copies of sample invoices during the course of DRP proceedings. ITAT took a considered view that when assessee has, in compliance with the directions of the AO, placed on record substantial material that is complete party-wise details of purchases and labour expenses exceeding Rs. 10 Lakhs amounting to a total of Rs. 55 Crores approximately, which worked out to about 89% of the total expenses and also furnished copies of invoices of Rs. 82,22,049/- for verification on sample basis, the AO was not correct in disallowing an ad hoc 10% of the expenses.ITAT held that the assessee having substantiated almost 89% of the expenses claimed, in view of the large transactions involved, the AO was not justified in making a disallowance. There is also nothing to indicate in the assessment order that the AO also made any efforts to investigate the matter further if he had certain doubts or reservations as regard genuineness of the expenditure. The least the AO should have done is to verify those expenses on his own after clearly recording his reasons for so doing. No infirmities in the order passed by the ITAT

Summary

Issues Involved:
The judgment involves the appeal against an order by the Income Tax Appellate Tribunal regarding the disallowance of expenses claimed by the assessee for the Assessment Year 2008-09.

Assessment Year 2008-09:
The assessee, engaged in contracting and facility management business, claimed expenses of Rs. 62,84,30,804/- for the AY 2008-09. The Assessing Officer (AO) disallowed 10% of the expenses on an ad hoc basis due to non-response from some parties issued notices under Section 133(6) of the Income Tax Act, 1961. The ITAT partly allowed the assessee's appeal, stating that the ledger account provided by the assessee was sufficient to substantiate the expenses.

Questions of Law Proposed:
The Revenue appealed the ITAT decision, proposing three questions of law:
1. Whether the ITAT was justified in deleting the addition of Rs. 6,28,43,080/- for disallowance of expenses in relation to facilities management.
2. Whether the ITAT was justified in deleting the addition, considering a similar issue in a previous assessment year.
3. Whether the ITAT was justified in stating that the Revenue can check expenses on a test check basis due to the size of the assessee's business.

Judgment:
The High Court found no substantial question of law arising from the appeal. It noted that the assessee had provided substantial material, including party-wise details of expenses and sample invoices, amounting to about 89% of the total expenses claimed. The ITAT held that the AO was not justified in making an ad hoc disallowance of 10% of the expenses, especially when the assessee had substantiated a significant portion of the claimed expenses. The Court criticized the AO for not making further efforts to investigate the genuineness of the expenses before making the disallowance. Consequently, the Court upheld the ITAT's decision and dismissed the appeal.