2024 (8) TMI 1229 - AT - Income Tax

Disallowance u/s 37(1) - business expediency on account of expenditure incurred towards various heads; testing commissioning, security services, repairing, loading unloading, labour charges, installation charges, freight expenses, etc. when the Income earned from corresponding activities remain undisputed - assessee had failed to submit documentary evidences to confirm the genuineness of expenditure booked - as submitted assessee duly deducted tax at source and provided all details as were available with him to show that the payments have been made only and exclusively for the purposes of his business. HELD THAT - Income under the head business and profession would be earned by making certain relevant expenditure. While demonstrably unjustified expenditure could be disallowed, but it is also clear that there are limits to the kind of documentation and evidences that a normal business would be expected to maintain. In this case, the assessee has adequately demonstrated that he has meticulously maintained documents and even deducted tax at source on the payments made to vendors who were associating with him in executing turnkey projects. Even the CIT(A) has failed to appreciate that there are limits to the kind of evidences that any normal business entity would have with it to justify the expenditure incurred for earning business income. In this case it is felt that the assessee could not have done any better than what he has already done in terms of filing detailed documents to justify the expenditure incurred. As relying on ASHOK SURANA 2016 (6) TMI 696 - CALCUTTA HIGH COURT and M/S. PAHARPUR COOLING TOWERS LTD. 2022 (9) TMI 1608 - CALCUTTA HIGH COURT to show that the burden of proof on the assessee regarding proving expenditure u/s 37(1) has limits and cannot be mainly disallowed on the grounds adopted by the AO. Disallowance u/s 37(1) deleted - Decided in favour of assessee.

Summary

Issues:
Disallowance of expenditure under section 37(1) of the Income Tax Act, 1961 based on lack of documentary evidence and non-verification of payments made to vendors.

Detailed Analysis:

Issue 1: Disallowance of Expenditure under Section 37(1)
The appellant company, engaged in providing underground car park ventilation systems, filed a return of income declaring Rs. 49,14,056 under 'profits and gains from business or profession' and 'capital gain.' The Assessing Officer (AO) disallowed Rs. 2,59,97,824 under section 37(1) due to lack of documentary evidence confirming the genuineness of expenditure booked. The AO selected the case for scrutiny based on large payments made to vendors who had not filed income tax returns. The Commissioner of Income Tax (Appeals) found certain payments genuine and deleted them from the disallowance. However, he confirmed the remaining addition of Rs. 1,80,01,565.

Issue 2: Appeal to ITAT
The appellant appealed to the ITAT against the confirmation of the disallowance. The appellant argued that the expenditure incurred was essential for business activities, and revenue could not have been earned without it. The appellant contended that disallowance based on lack of confirmation from vendors was unwarranted.

Issue 3: Arguments Before ITAT
During the hearing, the appellant presented extensive documentation to prove the genuineness of the expenditure, including audited financials, tax audit reports, and correspondence with vendors. The appellant emphasized that the expenditure was necessary for earning business income and had maintained detailed records and deducted tax at source on payments made to vendors.

Issue 4: ITAT Decision
The ITAT considered the submissions and documents presented. It noted that while unjustified expenditure could be disallowed, there are limits to the evidence a business entity can provide. The ITAT referred to two Calcutta High Court cases emphasizing that the burden of proof on the assessee regarding expenditure under section 37(1) has limits and cannot be arbitrarily disallowed. The ITAT ruled in favor of the appellant, allowing the appeal against the disallowance of Rs. 1,80,01,565 under section 37(1) of the Income Tax Act.

This judgment highlights the importance of maintaining proper documentation to substantiate business expenses and the limitations on disallowing expenditure solely based on lack of vendor confirmation. The ITAT decision underscores the need for a balanced approach in assessing the genuineness of expenses incurred for business purposes.