2025 (2) TMI 921 - AT - Income Tax

Tribunal Upholds 20% Disallowance of Sub-Contract Expenses for Assessment Year 2017-18, Supports Profit-Based Taxation

Deputy Commissioner of Income Tax Central Circle-1 (3), Ahmedabad Versus Sadbhav Infrastructure Project Ltd.

The Tribunal dismissed the Revenue's appeal and upheld the decision of the Commissioner of Income Tax (Appeals) to restrict the disallowance to 20% of the ... Addition of bogus expense - CIT(A) confirmed the addition @ 20% of the bogus expense - contention of the assessee that identical addition in respect of sister concern of the assessee was restricted to the extent of 12.5% only - HELD THAT:- We are of the considered opinion that the Ld. CIT(A) had correctly appreciated the facts of the case and restricted the addition to the extent of 20% of the subcontract amount which was reasonable considering the fact that documentary evidence for a return of sub-contract amount in cash to the extent of 4.21 Crores only was found in this case. Accordingly, the order of the Ld. CIT(A) is upheld. The grounds taken by the Revenue are dismissed. The appeal in this case was filed by the Revenue against the order of the Commissioner of Income Tax (Appeals)-11, Ahmedabad, for the Assessment Year 2017-18. The key issue revolved around the disallowance of a significant amount claimed as sub-contract expenses by the assessee, which were deemed to be bogus. The primary legal question was whether the entire sub-contract expense should be disallowed or only a portion representing the profit element.The Revenue contended that the entire sub-contract expense of Rs.22,83,64,319/- should be disallowed as it was considered accommodation entry. The Revenue emphasized that the partner of the subcontractor had admitted to issuing fake bills and receiving a commission on such bills. The Revenue argued that the Commissioner of Income Tax (Appeals) erred in restricting the disallowance to only 20% of the claimed expense.On the other hand, the assessee argued that only the profit element embedded in the sub-contract amount should be subjected to tax, not the entire amount. The assessee pointed out that the project work related to the sub-contract was completed, and therefore, the entire amount should not be considered as income. The assessee also cited a precedent where a similar addition was restricted to 12.5% in a related case.The Appellate Tribunal considered the arguments presented by both parties. The Tribunal noted that the turnover cannot be entirely subjected to tax, only the profit element. It was acknowledged that the project work was completed, and the fact that a significant portion of the sub-contract amount was returned in cash was found in the impounded documents. Based on these findings, the Tribunal upheld the decision of the Commissioner of Income Tax (Appeals) to restrict the addition to 20% of the sub-contract amount, amounting to Rs.4,56,72,864/-.In conclusion, the Tribunal dismissed the appeal filed by the Revenue, affirming the decision of the Commissioner of Income Tax (Appeals) to limit the disallowance to 20% of the sub-contract amount. The Tribunal found this restriction reasonable given the evidence of cash returns related to the sub-contract amount. The judgment was pronounced on 20/02/2025.