2025 (4) TMI 1264 - AT - Income Tax

Disallowance of expenses u/s 37(1) - vendors were not registered under GST was justified - discrepancy in invoice furnished by the Appellant - HELD THAT - In the present case in hand the assessee has submitted the expenses bills before the CIT(A) and AO. The expense bills payments were made through the banking channels after duly deducting the TDS. AO was not justified to disallow the expenses on the sole ground that the subcontracts were not registered under GST without considering the fact that there is no requirement under the Act that expenses must be incurred only with GST registered parties. The assessee has proved the expenses were genuine by submitting the bill invoices. The additions have been made merely on the basis that the parties were not registered under GST but at the same time it cannot be said that expenses are bogus. We therefore set aside the findings of the NFAC/CIT(A) and direct the AO to delete the addition. Appeal of the assessee is allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in the appeal are:

(a) Whether the disallowance of expenses amounting to INR 49,48,880/- under section 37(1) of the Income Tax Act, 1961, on the ground that the vendors were not registered under GST, was justified?

(b) Whether the Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] erred in disallowing expenses without any cogent reason to doubt the genuineness of the invoices and without affording an effective opportunity to the assessee, thereby violating principles of natural justice?

(c) Whether the disallowance under section 37(1) should have been restricted to the amount of alleged discrepancy rather than the entire sum?

(d) Whether the initiation of penalty proceedings under section 270A and charging of interest under the Act were justified?

2. ISSUE-WISE DETAILED ANALYSIS

Issue (a): Validity of disallowance of expenses on the ground of non-GST registration of vendors

Relevant legal framework and precedents: Section 37(1) of the Income Tax Act, 1961 permits deduction of any expenditure (not being capital expenditure or personal expenses) laid out or expended wholly and exclusively for the purposes of the business or profession. The Act does not mandate that expenses must only be incurred from GST-registered parties for being allowable. Relevant precedents cited by the assessee include:

• CIT vs. SVE Engineers (Madras High Court) - Expenses supported by genuine bills and payments through banking channels cannot be disallowed merely on technical grounds.
• CIT vs. Nangalia Fabric Private Ltd (Gujarat High Court) - Purchases supported by bills, recorded in books, and paid by cheque cannot be treated as bogus.
• CIT vs. Smt. Anju Jindal (Punjab & Haryana High Court) and Ramesh Kumar & Co. vs. ACIT - Emphasize genuineness of expenses and proper documentation.

Court's interpretation and reasoning: The Court observed that the Assessing Officer and CIT(A) disallowed the expenses solely because the vendors were not registered under GST. However, the Income Tax Act does not impose any such condition for allowability of expenses. The assessee had produced invoices matching ledger entries, payments were made through banking channels, and tax was deducted at source (TDS), all indicating genuineness of the transactions.

Key evidence and findings: The assessee submitted supporting invoices, ledger entries, bank statements showing payments, and TDS certificates. There was no finding or allegation that the expenses were fictitious or bogus. The department did not dispute the genuineness of the invoices or payments.

Application of law to facts: Since the expenses were incurred wholly and exclusively for business purposes, supported by valid invoices and banking evidence, and there was no statutory requirement for GST registration of vendors for allowability under section 37(1), the disallowance was not sustainable.

Treatment of competing arguments: The department argued that non-registration under GST was a valid ground for disallowance. The Court rejected this, holding that the Income Tax Act and the judicial precedents do not support such a disallowance merely on GST registration status.

Conclusion: The disallowance of expenses on the sole ground of non-GST registration of vendors was arbitrary, incorrect, and unsustainable in law.

Issue (b): Violation of principles of natural justice and failure to provide opportunity to rebut discrepancies

Relevant legal framework: Principles of natural justice require that an assessee be given a fair opportunity to present evidence and rebut any allegations before adverse orders are passed.

Court's interpretation and reasoning: The Court noted that the AO and CIT(A) made disallowances without affording any effective opportunity to the assessee to rebut the alleged discrepancies in the invoices. No cogent reasons were recorded to doubt the genuineness of the expenses. The disallowance appeared to be arbitrary and ad hoc.

Key evidence and findings: The assessee had submitted invoices and bank payment proofs. The department did not bring forward any concrete evidence to challenge the genuineness. The absence of any hearing or opportunity to clarify the alleged discrepancies was noted.

Application of law to facts: The failure to provide an effective opportunity to the assessee violated the principles of natural justice, rendering the disallowance unsustainable.

Treatment of competing arguments: The department did not adequately justify the denial of opportunity or the basis of disallowance.

Conclusion: The disallowance was made in violation of natural justice principles and was therefore liable to be set aside.

Issue (c): Restriction of disallowance to the amount of discrepancy

Relevant legal framework: Disallowance under section 37(1) should be commensurate with the extent of non-genuine or unsubstantiated expenses. Arbitrary or lump-sum disallowance without precise quantification is not permissible.

Court's interpretation and reasoning: The Court observed that even if any discrepancy was found, the disallowance should have been restricted to the amount of discrepancy rather than the entire sum of INR 49,48,880/-.

Key evidence and findings: The department failed to specify any particular amount of discrepancy or establish that the entire amount was not allowable.

Application of law to facts: The disallowance was excessive and not proportionate to any alleged discrepancy.

Conclusion: The disallowance, if any, should have been restricted to the amount of discrepancy, which was not done.

Issue (d): Initiation of penalty under section 270A and charging of interest

Relevant legal framework: Penalty under section 270A is leviable only if there is concealment of income or furnishing inaccurate particulars. Interest under the Act is chargeable on tax due and payable.

Court's interpretation and reasoning: Since the disallowance of expenses was not justified, the consequent initiation of penalty proceedings and charging of interest were also erroneous.

Application of law to facts: The penalty and interest were predicated on the disallowance of expenses which the Court set aside. Therefore, these consequential orders were also liable to be quashed.

Conclusion: The penalty and interest levied were not sustainable.

3. SIGNIFICANT HOLDINGS

"The assessing officer was not justified to disallow the expenses on the sole ground that the subcontracts were not registered under GST without considering the fact that there is no requirement under the Act that expenses must be incurred only with GST registered parties."

"The assessee has proved the expenses were genuine by submitting the bill invoices. The additions have been made merely on the basis that the parties were not registered under GST but at the same time it cannot be said that expenses are bogus."

"The disallowance at best could be termed as arbitrary and ad hoc in nature."

"Disallowances without affording any effective opportunity to the appellant to rebut the alleged discrepancies in the invoices violate principles of natural justice."

"The penalty under section 270A and interest charged consequent to the disallowance of expenses which is not sustainable in law are also liable to be deleted."

Core principles established include that expenses incurred wholly and exclusively for business purposes cannot be disallowed merely because the vendor is not GST-registered; genuineness of expenses is to be judged on the basis of invoices, ledger entries, banking evidence, and TDS compliance; disallowances must be proportionate and supported by cogent reasons; and principles of natural justice must be strictly followed in assessment proceedings.

Final determinations:

• The disallowance of INR 49,48,880/- under section 37(1) on the ground of non-GST registration of vendors was set aside.
• The orders of the National Faceless Appeal Centre and Assessing Officer were quashed in this respect.
• The penalty under section 270A and interest charged were also deleted.
• The appeal of the assessee was allowed in entirety.