Non-jurisdictional assessment order valid when assessee participates without challenging jurisdiction, bogus expenses disallowance reduced to Rs. 20 lakhs

ITAT Pune held that assessment order passed by non-jurisdictional AO was valid since assessee participated in proceedings without challenging jurisdiction, following SC precedent in Kalinga Institute case. Regarding bogus expenses, ITAT found assessee provided insufficient details and wrong information about parties, with incomplete addresses preventing verification. However, ITAT reduced disallowance from 25% profit estimation to lump sum Rs. 20 lakhs, considering assessee's declared 9% profit rate was reasonable while acknowledging revenue leakage due to similar PAN numbers for different vendors.

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Issues Involved:

1. Validity of the assessment order due to jurisdictional issues concerning the issuance of notice under Section 143(2) of the Income Tax Act.
2. Disallowance of 25% of contract expenses as bogus expenses by the Assessing Officer.
3. Sufficiency of evidence provided by the assessee to substantiate the genuineness of the claimed expenses.
4. Applicability of the decision in Vijay Proteins Ltd. to the present case.
5. Estimation of profit and reasonableness of the net profit declared by the assessee.

Issue-wise Analysis:

1. Validity of the Assessment Order:

The primary legal contention raised was the validity of the assessment order due to jurisdictional issues. The assessee argued that the notice under Section 143(2) was issued by the Income Tax Officer, Ward-2, Panvel, who did not have jurisdiction over the assessee. However, the Tribunal noted that the assessee participated in the assessment proceedings without challenging the jurisdiction at any stage before the Assessing Officer or the CIT(A)/NFAC. Referring to the provisions under Section 124(3) of the Income Tax Act and the Supreme Court's decision in DCIT vs. Kalinga Institute of Industrial Technology, the Tribunal held that since the assessee did not question the jurisdiction within the stipulated time frame, the assessment order dated 16.12.2019 was valid.

2. Disallowance of 25% of Contract Expenses:

The Assessing Officer disallowed 25% of the expenses claimed by the assessee as bogus, citing insufficient details to verify the genuineness of the expenses. The discrepancies noted included incomplete addresses for third-party verification, identical PAN numbers for different vendors, and unsubstantiated photographs of paintwork. The CIT(A)/NFAC, however, deleted this disallowance, reasoning that the assessee had provided necessary documentation like invoices and bank payments, and the profit declared was reasonable. The Tribunal agreed with the CIT(A)/NFAC that the estimation of profit at 25% was uncalled for, as the assessee had declared a reasonable profit rate of 9%.

3. Sufficiency of Evidence Provided by the Assessee:

The Tribunal examined the evidence provided by the assessee, including invoices, bank payment details, and descriptions of the work done. The CIT(A)/NFAC found that the assessee had discharged its onus of substantiating the expenses claimed. The Tribunal noted that while the payments were made through proper banking channels, the assessee had not provided complete details, such as full addresses of the vendors, which led to some suspicion. However, the Tribunal concluded that a disallowance of Rs. 20 lakhs, instead of the Rs. 2,05,45,539/- initially disallowed by the Assessing Officer, would be just.

4. Applicability of Vijay Proteins Ltd. Decision:

The Assessing Officer relied on the Supreme Court's decision in Vijay Proteins Ltd. to justify the disallowance. However, the Tribunal found this reliance misplaced, as the case pertained to bogus purchases and hawala transactions, which were not directly applicable to the facts of the present case. The Tribunal emphasized that the nature of the assessee's business, involving sub-contracting in remote areas, justified the expenses claimed to a significant extent.

5. Estimation of Profit and Reasonableness of Net Profit:

The Tribunal considered the net profit of approximately 9% declared by the assessee on its gross turnover as reasonable. It noted that the Assessing Officer had not pointed out any defects in the books of accounts maintained by the assessee. The Tribunal, therefore, found no basis for the 25% disallowance and instead directed a lump sum disallowance of Rs. 20 lakhs to address any potential revenue leakage.

Conclusion:

The Tribunal partly allowed the Revenue's appeal by modifying the CIT(A)/NFAC's order, directing a reduced disallowance of Rs. 20 lakhs. The judgment emphasized the importance of substantiating expenses with adequate documentation while also acknowledging practical business constraints in certain industries.

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