Taxpayer wins partial relief on sub-contract charges and unsecured loan interest claims

ITAT Mumbai partially allowed the assessee's appeal regarding bogus sub-contract charges and interest on unsecured loans. For sub-contract charges, the tribunal restricted disallowance to 4.5% of sub-contract receipts, following its own precedent, rather than complete disallowance by AO. Regarding interest on unsecured loans, ITAT allowed the claim as assessee provided adequate documentation showing lenders cleared sub-contractor dues due to working capital shortage, and AO failed to controvert the evidence with relevant material.

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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The sub-contractors were either relatives or employees of the assessee, and the payments made to them were immediately withdrawn in cash.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.

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