2024 (7) TMI 949 - AT - Income Tax

Bogus sub-contract charges debited to the profit and loss account - AO stated that assessee has recorded the bogus expenditure in the form of sub-contract charges so as to inflate the expenditure with ultimate motive to reduce the profits and evade taxes there on - HELD THAT - As relying on own case 2023 (9) TMI 1497 - ITAT MUMBAI we direct the assessing officer to restrict the disallowance to the extent of 4.5% of sub-contract receipts for the reason as discussed in the finding of the ITAT order. Therefore, ground no. 1 of the appeal of the assessee is partly allowed. Disallowance being interest paid on unsecured loan - assesse has debited an amount under the head interest to others - HELD THAT - Assessee has executed agreement with the 4 parties to clear the dues of the sub-contractor for which the assessee has defaulted in making the payment because of shortage of working capital funds. The material placed on record substantiate that aforesaid lender parties have cleared the outstanding dues payable to the sub-contractors and the assessee company has paid interest on the amount of unsecured loan payable to these lenders as per the terms and conditions of the agreement. AO has not brought any relevant material on record to controvert and disproved the evidences and clam of interest expenditure incurred by the assesse in respect of unsecured loan amount. Therefore, we consider that decision of ld. CIT(A) in sustaining the disallowance of interest payment made by AO purely on presumption basis without disproving the relevant supporting evidences brought on record by the assessee is not justified. Therefore, this ground of appeal of the assessee is allowed.

Summary

Issues Involved:
1. Addition of Rs. 56,04,344 as alleged bogus sub-contract charges.
2. Disallowance of Rs. 1,16,82,953 as interest paid on unsecured loans.

Issue-wise Detailed Analysis:

1. Addition of Rs. 56,04,344 as Alleged Bogus Sub-Contract Charges:

The assessee filed an appeal against the order of the CIT(A) upholding the addition of Rs. 56,04,344 as bogus sub-contract charges. The Assessing Officer (AO) made this addition based on findings from a search and seizure operation under Section 132 of the Income Tax Act. The AO concluded that the assessee had recorded bogus sub-contract charges to inflate expenses and reduce profits. The sub-contractors were either relatives or employees of the assessee, and the payments made to them were immediately withdrawn in cash. The AO's findings included:

- The Measurement Book was manipulated to provide a semblance of reality to the bogus charges.
- No actual work was carried out by the bogus sub-contractors.
- The bank accounts of these sub-contractors were managed by the assessee company, and the returns of income for these sub-contractors were filed using the same IP address as the assessee company.

The CIT(A) upheld the AO's findings, leading to the appeal before the ITAT. During the appellate proceedings, the assessee's counsel referred to a similar case for the assessment years 2012-13 to 2017-18, where the ITAT restricted the disallowance to 4.5% of sub-contract receipts. The ITAT, after considering the facts and the previous decision, directed the AO to restrict the disallowance to 4.5% of sub-contract receipts, providing partial relief to the assessee.

2. Disallowance of Rs. 1,16,82,953 as Interest Paid on Unsecured Loans:

The AO disallowed Rs. 1,16,82,953 out of the total interest debited by the assessee under the head 'interest to others,' treating it as non-genuine. The AO found that the balance in respect of sundry creditors was transferred to entities like Alka Securities Ltd., Alka Commodity Ltd., AIDOS Trade Ltd., and Mahesh Kothari Share & Stock Broker Pvt. Ltd., shown as unsecured loans. These sundry creditors had not done any contractual work for the assessee and were treated as bogus. Consequently, the AO disallowed the interest paid on these unsecured loans.

The assessee filed an appeal before the CIT(A), which was dismissed. During the appellate proceedings before the ITAT, the assessee submitted evidence, including ledger accounts, bank statements, and an agreement with the lenders, demonstrating the payment of interest and loan amounts through account payee cheques. The assessee also referred to an NCLT order dated 09.07.2021, which settled the dues with one of the lenders, Alka Commodities Ltd.

The ITAT, after reviewing the evidence, found that the AO had not brought any material to disprove the assessee's claim. The ITAT concluded that the CIT(A)'s decision to sustain the disallowance was not justified, as it was based on presumption without disproving the assessee's evidence. Therefore, the ITAT allowed the assessee's appeal on this ground.

Conclusion:

The appeal was partly allowed. The ITAT directed the AO to restrict the disallowance of sub-contract charges to 4.5% of the sub-contract receipts and allowed the assessee's claim for interest paid on unsecured loans. The order was pronounced in the open court on 29.01.2024.