2024 (10) TMI 1562 - AT - Income Tax

Disallowance of contingency expenses - AO rubbished the contention of the assessee that the entire contingency expenditure is accounted in the books of accounts, though the AO categorically admitted that the total cost figure in the CTC report matches the total cost figure in the books of accounts, the cost booked under each head is different in the CTC report and the books of accounts - HELD THAT - As it happens in this line of business, the business-man makes a budgeted figure of project cost and after few months of execution of the work, the budgeted figures are revised. As it always happens, the actual expenditure is always higher than the budgeted figure and the actual expenditure is recorded in the books of accounts. There is no dispute that the total expenditure recorded in the CTC is reported as accounted expenditure. The entire addition revolves around the contingency expenditure recorded in the CTC report. As mentioned above, the contingency expenditure is mentioned at the time of preparation of the budget but when the actual figures are known, the same are recorded in the books of accounts. Therefore, it cannot be said that that the contingency figure are not recorded in the books of accounts. In fact, the AO himself admitted this fact at para 4 of his order where he has categorically accepted that the total cost figure in the CTC report matches the total cost figure of the books of accounts. Since the figure of contingency has been recorded against the figure of total expenditure incurred, it is illogical to assume that the assessee has booked bogus expenditure and generated cash outflow from it. The impounded material shows the expenditure on mercantile basis and no cash expenditure, therefore, the presumption of the AO that the assessee has generated cash out of bogus expenditure, is without any basis. Thus, the presumption is only in search cases where it is presumed that the contents of such books of account and other documents are true whereas, the appeals under consideration are cases of survey operations where there is no such scope of presumption. This means that in the cases of survey operations, the onus is on the revenue to bring the cogent material evidence on record to show that the assessee has incurred expenditure which are not recorded in the books of accounts. As mentioned elsewhere, in the appeals under consideration, all the expenditure has been found to be recorded in the books of accounts and no error or infirmity has been pointed out by the AO nor by the ld. CIT(A). Even the books of accounts have been accepted and no defect has been pointed out. The allegation that the assessee has not followed the Standard Operating Procedure (SOP) is not relevant as long as the impugned expenditure are found recorded in the regular books of account maintained by the assessee. Though the ld. First Appellate Authority has admitted that the entire expenses cannot be disallowed yet, he himself went on to estimate the disallowance which is again not a proper procedure. Once the expenses have been found to be fully recorded in the books of accounts, the same cannot be disallowed only on the whims and surmises of the revenue authorities. Considering in totality the facts of the case in hand in light of the documentary evidence referred during the course of proceedings, we do not find any merit in the impugned additions. We direct the AO to delete the additions from the captioned appeals.

Summary

Issues:
Appeals against disallowance of contingency expenses and additions made by AO based on survey operation findings.

Analysis:
The Appellate Tribunal ITAT Mumbai heard four separate appeals by the assessee against the orders of the Commissioner of Income Tax (Appeals) for different assessment years. Common issues were addressed together for convenience. The case involved a joint venture engaged in infrastructure development projects. The AO alleged that the assessee recorded unaccounted cash expenses as contingency expenses and generated cash flow through bogus expenditures. The AO disallowed the contingency expenses due to lack of supporting documentation and initiated penalty proceedings. The CIT(A) partly upheld the AO's decision but reduced the disallowance percentage. The Tribunal noted that the total expenditure matched in CTC reports and books of accounts, indicating genuine recording of expenses. The AO's presumption of generating cash from bogus expenditures was deemed baseless. The Tribunal highlighted the onus on revenue to prove unrecorded expenses in survey cases and emphasized that all expenses were duly recorded. Disallowance based on SOP non-compliance was deemed irrelevant if expenses were recorded. The Tribunal disagreed with the CIT(A)'s estimation of disallowance and directed the AO to delete the additions. Other issues not pressed were dismissed. The appeals were partly allowed on 22nd October 2024 in Mumbai.