2023 (10) TMI 1428 - AT - Income Tax

Expenditure claimed as overburdened charges - Addition made on the grounds that no agreements available for the sub-contracts; that no PAN or bank details available of persons to whom subcontract was awarded by the employees - even though res judicata is not applicable, burden is on the assessee to prove the work done by subcontractors and prove their identity and genuineness - CIT(A) deleted the said addition observing that, the assessing officer, while making the addition in the current year, relied upon the fact that the assessee company had voluntarily offered amounts for disallowances of the overburdened charges claimed as expenditure in the previous years - HELD THAT - As there is no dispute that the assessee has been in the mining contracts, and in mining contracts, for extracting the required ore or minerals the overburden has to be removed involving expenditure, which goes on decreasing year after the year. Generally, in the initial years it would be high and thereafter such an expenditure may get reduced substantially. Such a fact is evident in the case of the assessee company also. Expenditure on overburden removal has been made on a turnover demonstrating that such an expenditure incurred for overburden removal, was high in the earlier years and lowest in the year under consideration. Assessee s declaration of income of Rs. 2.76 crores and Revenue accepting the same during the year clearly shows that there were business operations in mining by the assessee during the year. When the income is accepted, the expenditure cannot be denied in toto. Even if we go by the reasoning of the AO that the subcontractors are un- known, the fact remains that in respect of such an expenditure, TDS was affected. By no stretch of imagination could it be said that no mining work was done to earn the income. Natural inference is that for earning such expenditure by mining operations, inevitably the assessee must have incurred some overhead removal expenditure. Thus, as no written agreements for subcontract and sub- subcontract and also fact that the subcontractor as well as the sub- subcontractor, sub-sub-unknown contractors are all related parties and the payments and withdrawals do not inspire any confidence, we are of the considered opinion that disallowance of a portion of this overhead removal charges would meet the ends of justice. Having regard to nature of expenditure and line of business of the assessee, we deem it reasonable to estimate the disallowance at 25% of such expenditure. Balance 75% is accordingly directed to be deleted. Appeal of Revenue is partly allowed.

Summary

Issues:
1. Disallowance of overburden charges claimed by the assessee company.
2. Dispute regarding the genuineness and reasonableness of expenses claimed.
3. Assessment of overhead removal charges incurred by the assessee.

Analysis:
1. The assessing officer disallowed the overburden charges claimed by the assessee due to lack of agreements for sub-contracts, missing PAN or bank details of subcontractors, and the burden of proof on the assessee to establish subcontractor work. The CIT(A) deleted the addition citing lower expenditure in the current year compared to previous years and lack of concrete evidence to justify disallowance, ultimately allowing the appeal.

2. The Revenue challenged the deletion of the addition, arguing that the subcontract expenses were transferred to employees who then paid unknown subcontractors without proper documentation. The Revenue contended that the burden of proof lies with the assessee to substantiate expenses, especially when payments were made to related parties falling under section 40A(2)(b) of the Act.

3. The tribunal considered the credibility of the overhead removal charges, noting discrepancies in subcontract agreements and payments to unknown subcontractors. Despite acknowledging the mining nature of the business and TDS deductions, doubts were raised regarding the legitimacy of the expenses. The tribunal decided to partially disallow 25% of the overhead removal charges, emphasizing the lack of written agreements and related party transactions, directing the assessing officer to make necessary computations.

This judgment highlights the importance of substantiating expenses, especially in related party transactions, and the need for proper documentation to support claimed expenditures. The tribunal's decision to partially disallow the expenses underscores the significance of maintaining transparency and credibility in financial transactions to avoid disputes and ensure compliance with tax laws.