2025 (5) TMI 430 - AT - Income Tax

Tribunal allows additional evidence under Rule 29, vacates addition for outstanding liability but upholds sub-contract payment disallowance

S. Lalaiah & Co Versus The Deputy Commissioner of Income Tax, Circle -3 (1), Hyderabad

S. Lalaiah & Co Versus The Deputy Commissioner of Income Tax, Circle -3 (1), Hyderabad - TMI The core legal questions considered in this appeal revolve around two principal issues arising under the Income-tax Act, 1961: (i) the validity of the addition of Rs. 38,14,269/- as an outstanding liability towards IOC Limited as on 31/03/2004; and (ii) the correctness of the disallowance of Rs. 45,36,282/- claimed as expenditure for payments made to a sub-contractor, Sri Krishna Kumar Raju, purportedly for earthwork executed during the relevant assessment year. Ancillary issues include the procedural propriety of admitting additional evidence and the assessment of documentary proof submitted by the assessee.The first issue concerns the addition of an alleged outstanding liability towards IOC Limited. The relevant legal framework includes the provisions of the Income-tax Act relating to assessment and reassessment under Sections 143(3), 254, and 263, and the principles governing the verification of liabilities and expenses claimed in the books of account. Precedents emphasize the need for proper enquiry and substantiation of claimed liabilities, especially where the assessing officer doubts their genuineness.The Court noted that the Assessing Officer (A.O.) had repeatedly sought confirmation from IOC Limited regarding the outstanding balance as on 31/03/2004. IOC Limited initially reported multiple customer codes for the assessee and expressed inability to provide ledger details due to migration to SAP software. Subsequently, IOC Limited informed the A.O. that no amount was outstanding as on the relevant date, leading to the addition of Rs. 38,14,269/- as unexplained liability. The Commissioner of Income Tax (Appeals) (CIT(A)) upheld this addition, emphasizing the absence of documentary evidence from the assessee during the appellate proceedings.However, the assessee produced a letter dated 23/12/2024 from IOC Limited, received after the CIT(A) order, confirming the outstanding liability of Rs. 38,14,269/- as on 31/03/2004, along with a ledger account extract corroborating this figure. The Court admitted this letter as additional evidence under Rule 29 of the Appellate Tribunal Rules, 1963, recognizing the justifiable delay due to the letter's belated receipt and the prior difficulties in obtaining ledger details from IOC Limited. The Court found the confirmation and ledger extract persuasive and vacated the addition made by the A.O. and sustained by the CIT(A). Thus, the addition of Rs. 38,14,269/- was disallowed in favor of the assessee.The second issue pertains to the disallowance of Rs. 45,36,282/- claimed as sub-contract payments to Sri Krishna Kumar Raju. The legal principles require that claimed expenditure must be substantiated with evidence demonstrating the genuineness of the transaction and the actual execution of work corresponding to the payments. The Tribunal had earlier remitted the matter to the A.O. to verify whether the sub-contractor had executed the work during the assessment year.The A.O., after repeated opportunities, found that the assessee failed to produce any documentary proof such as work completion certificates, confirmation from the sub-contractor, or evidence of deduction of tax at source on the payments made. The sub-contract agreement dated 20/01/2003 and payment vouchers were on record, but these did not conclusively prove that the payments were against executed work rather than advances. The A.O. treated the payments as advances, which cannot be claimed as expenditure in the Profit and Loss account.The CIT(A) concurred with the A.O.'s findings, and the Court, after considering the submissions and record, upheld the disallowance. The Court emphasized that despite ample opportunities and directions, the assessee failed to produce irrefutable evidence that the payments were for work executed during the year. Consequently, the disallowance of Rs. 45,36,282/- was sustained.Regarding procedural aspects, the Court admitted the letter from IOC Limited dated 23/12/2024 as additional evidence, recognizing the reasonableness of the delay and its material bearing on the case. However, the assessee's failure to produce any new documentary evidence in support of the sub-contract payments during appellate proceedings was noted as a significant factor in upholding the disallowance.In conclusion, the Court allowed the appeal partly by vacating the addition of Rs. 38,14,269/- relating to the outstanding liability towards IOC Limited, relying on the newly admitted confirmation and ledger evidence. Conversely, the Court dismissed the appeal against the disallowance of sub-contract payments of Rs. 45,36,282/- due to lack of sufficient proof of actual work executed and proper substantiation of the expenditure claimed.Significant holdings include the principle that where fresh and credible documentary evidence is produced post the lower appellate order, it can be admitted under Rule 29, provided there is a justifiable cause for delay. The Court also reaffirmed that mere existence of a contract and payment vouchers is insufficient to claim expenditure unless supported by evidence of actual work performed and corroborative third-party confirmations or statutory compliances such as tax deduction at source.Verbatim, the Court observed: 'We, thus, in terms of our aforesaid deliberations vacate the addition of Rs. 38,14,269/- (supra) that was made by the A.O, which, thereafter, was sustained by the CIT(A).' Conversely, '...the assessee firm despite having been afforded sufficient opportunities, had in the course of the set-aside proceedings failed to lead any evidence which would irrefutably evidence that the payments made to Sri Krishna Kumar Raju (supra) were towards the sub-contract work that was executed by him and were not in the nature of an advance, therefore, no infirmity arises from the orders of the lower authorities who have rightly disallowed its said claim for expenditure.'The final determinations are: (1) The addition of Rs. 38,14,269/- as outstanding liability to IOC Limited is not sustainable and is deleted; (2) The disallowance of Rs. 45,36,282/- claimed as sub-contract payments is upheld; (3) General grounds of appeal were dismissed as not pressed.