ITAT Sustains 50% Disallowance as Taxpayer Failed to Prove Business Utility of Consultancy Fees

Enquest Petro Solutions Private Limited Vs Assessing Officer (ITAT Delhi)

The Income Tax Appellate Tribunal (ITAT), Delhi, considered the assessee’s appeal against the order of the Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre dated 28.07.2025 for Assessment Year 2018-19. The appeal involved issues relating to addition on account of mismatch between income declared in the return and Form 26AS, allowability of expenses connected with sale of property, and disallowance of professional fees claimed as business expenditure.

The assessee, a private limited company engaged in providing higher-end consultancy and other services to the petroleum and oil exploration sector, had filed its return declaring total income of Rs.7,44,85,320/-. During scrutiny assessment, the Assessing Officer (AO) noticed a variation between consultancy income disclosed in the return and income reflected in Form 26AS. The assessee submitted a reconciliation explaining that certain consultancy income relating to Bharat Petro Resources Ltd. had already been recognized in the earlier year in accordance with Accounting Standard-9, as the services had been rendered during that period, although invoices were raised later and corresponding tax deduction at source appeared in Form 26AS of the subsequent year. The assessee also explained a minor difference in income reported by another client.

The AO rejected the explanation on the ground that the assessee had not furnished proof establishing that the income had been offered to tax in the earlier assessment year. Since tax had been deducted under section 194J during the year under consideration, the AO held that the corresponding income should have been offered to tax in the same year. Consequently, an addition of Rs.35,00,665/- was made as income from undisclosed sources.

The AO further examined certain expenses claimed by the assessee, including transfer charges and processing fees paid to the Noida Authority amounting to Rs.8,38,500/-, commission of Rs.6,87,422/- relating to sale of property, valuation charges of Rs.1,50,000/-, and loss on investment/assets. The AO held that these expenses were related to a property transaction and not to the assessee’s consultancy business. Since the assessee was not engaged in the business of dealing in property, these amounts were disallowed as business expenditure. The professional fees of Rs.5,17,500/- claimed to have been incurred for fund-raising purposes were also disallowed, as the assessee had not explained whether any funds had actually been raised or how such funds had been utilized.

The Commissioner (Appeals) upheld the additions and disallowances. Aggrieved, the assessee approached the Tribunal.

The Tribunal observed that the reconciliation statements for Assessment Years 2017-18 and 2018-19 demonstrated that the assessee had recognized income based on completion of consultancy services and invoices raised, whereas entries in Form 26AS depended on the timing of tax deduction and deposit by the payer. It noted that four invoices had already been recognized as income in the earlier financial year and, therefore, the same amount could not be taxed again in the subsequent year merely because the corresponding tax deduction appeared later in Form 26AS. Accordingly, the Tribunal held that the addition of Rs.35,00,665/- was not justified and allowed the relevant grounds of appeal.

With regard to transfer expenses and commission paid in connection with sale of property, the Tribunal noted that the AO had disallowed these expenses under the head “business income.” Since these expenses were related to transfer of property and were otherwise allowable, the Tribunal directed that they should be allowed while computing income under the head “capital gains.” It observed that the matter was revenue neutral in the computation of total income for the relevant year.

Regarding professional fees of Rs.5,17,500/-, the Tribunal noted that the assessee had produced an invoice from the consultancy service provider in relation to availing a working capital loan. However, the assessee could not substantiate how the expenditure was useful for its business. In the interest of justice, the Tribunal sustained disallowance to the extent of 50% of the expenditure claimed and allowed the balance. Consequently, the ground relating to professional fees was partly allowed.

As Ground No.6 concerning valuation fees was not pressed by the assessee during the hearing, it was dismissed. In the result, the Tribunal partly allowed the appeal filed by the assessee.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal is filed by the assessee against the order of the Ld. Commissioner of Income-tax (Appeals)/National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as ‘ld. CIT(A)] dated 28.07.2025 for the Assessment Year 2018-19 raising following grounds of appeal :-

“1. The learned CIT(Appeals) has erred in law and on facts in confirming an addition of Rs.35,00,665/- on the basis of mismatch in the gross receipts declared in Income-tax Return and Form 26AS ignoring that (a) the assessee has declared income on accrual basis in the preceding year as per Accounting Standard -9 issued by ICAI on Revenue Recognition though TDS thereon was deducted in this year by the client (b) since the income has already been offered for taxation in the earlier years, it cannot be added again in this year because same income cannot be taxed twice (c) the reconciliation of income and other documents and submissions filed by the assessee. Thus, the addition so made should be deleted.

2. Without prejudice to the above ground, if it is held that the income of Rs.35,00,665/- was required to be offered in the year under consideration on the basis of Form 26AS, then directions should be issued to exclude the same from the income of the earlier year as the same income cannot be taxed twice i.e. once in the year of accrual and second in the year when it is reflected in Form 26AS. Necessary directions in this regard may be issued.

3. The learned CIT(Appeals) has erred in law and on facts in confirming the disallowance of transfer expenses of Rs. 8,38,500/-paid to Noida authority for sale of property out of business income but not issuing directions to allow these expenses while computing capital gain though the CIT(A) gave a finding that these expenses incurred on sale of asset are eligible for such deduction. Thus, necessary directions should be issued to allow these expenses as deduction while computing the capital gain on sale of property.

4. The learned CIT(Appeals) has erred in law and on facts in confirming the disallowance of commission of Rs.6,87,422/- paid for sale of property out of business income but not issuing directions to allow these expenses while computing capital gain though the CIT(A) gave a finding that these expenses incurred on sale of asset are eligible for such deduction. Thus, necessary directions should be issued to allow these expenses as deduction while computing the capital gain on sale of property.

5. The learned CIT(Appeals) has erred in law and on facts in confirming the disallowance of professional fees of Rs.5,17,500/- by holding the same as capital expenditure ignoring that the fees was paid to the consultant for raising working capital funds for the company and thus, the said expenditure was revenue in nature and was fully allowable as business expenses. Thus, the disallowance should be deleted

6.The learned CIT(Appeals) has erred in law and on facts in confirming the disallowance of fees of Rs. 1.50,000/- paid to the valuer for valuation of properties by holding the same as expense incurred towards sale of property ignoring that the properties were got valued for the purpose of raising working capital limits for business of the assessee and not for the purpose of sale of property. Thus, the disallowance so made should be deleted.”

2. At the time of hearing, ld. AR of the assessee did not press Ground No.6, hence the same is dismissed as not pressed.

3. Brief facts of the case are, assessee filed its return of income for Assessment Year 2018-19 on 15.10.2018 declaring total income of Rs.7,44,85,320/-. The return of the assessee was selected for scrutiny under CASS and accordingly, notices under section 143(2) and 142(1) of the Income-tax Act, 1961 (for short ‘the Act’) were issued and served on the assessee. Subsequently, the case was transferred to Faceless Assessment Scheme, 2019.

4. Assessee is a private limited company engaged in the business of providing Higher-end Consultancy and other services to the Petroleum and Oil Exploration. It specializes in providing consultancy as to where and when It specializes in providing consultancy as to where and when oil wells need to be drilled for exploration for oil and gas on project basis. In response to notices u/s 142(1), assessee filed its submissions online. Further assessee requested for hearing through video conferencing which was granted.

5. During assessment proceedings, the AO observed that there is a substantial variation in income offered to tax in ITR in comparison to income as per Form 26AS. A separate notice u/s 142(1) was issued to the assessee to submit a comprehensive reconciliation statement with respect to variations. In response, assessee submitted a reconciliation statement. For the sake of brevity, the same is reproduced below :-

“Details of the Consultancy Income as in the Balance sheet are Rs.3,24,14,785.20/- and the details are enclosed herewith. Reconciliation of difference in Consultancy Income of GAIL & BPRL with 26AS, copy of ledger of BPRL Consultancy Income of the month of March 2017- March 2018 is attached as per Annexure-1. There is no difference in consultancy income as in Balance Sheet.

BPRL Consultancy Income Reconciliation

BPRL Consultahcy Income FY17-18 : Rs.51,44,000.00

Add: Consultancy Income-BPRL considered as Work In Progress Income during the FY 2016-17a s shown below:-

The above 4 invoices are considered by the Assessee as Consultancy Income in the month of March 2017 as per the Accounting Standard-9. The services were rendered by the assessee in the month of March. However, the same was invoiced by the assessee in the month of April and thus appearing in 26AS in FY 2017-18. The consultancy income was offered for taxation in FY 2016-17. Thus, there is no undisclosed income on part of the assessee.

The difference of Rs 11,200/- is a minor difference which could be due to reasons such as clerical errors, expenses reimbursed, or which could have been adjusted in other bills etc.”

6. After considering the above, the AO rejected the same and observed that assessee has offered income of Rs.3,24,14,758/- during AY 2018-19 and it has stated that Rs.66,36,000/- which was received from Bharat Petro Resources Ltd. of Rs.1,17,80,000/- was offered during AY 2017-18. He observed that assessee has not submitted any proof/evidence that it has offered the same in AY 2017-18, since Bharat Petro Resources Ltd. has deducted TDS u/s 194J in AY 2018-19 then assessee should have offered the same in AY 2018-19. He further observed that if the assessee had claimed of TDS for income from Bharat Petro Resources Ltd. as per Form 26AS in AY 2018-19 then he should have been offered to income as per Form 26AS. Since assessee failed to explain the difference of Rs.35,00,665/- (Rs.3,59,15,450/- – Rs.3,24,14,785/-) and the same was added to the total income of the assessee as undisclosed sources.

7. Further the AO on verification of the other expenses of Schedule 2.7.4 of the Profit & Loss account which includes loss on investment/asset, selling expenses, commission and brokerage and valuation charge to the extent of Rs.60,21,047/- and this should have been added back in the computation of income. When the same was asked assessee to clarify, in this regard assessee has submitted that loss on investment was already added back to the head ‘income from business’ in the computation of income as under :-

8. With regard to selling expenses of Rs.8,35,800/- and commission and brokerage of Rs.6,87,422/-, they are claimed as business expenditure and valuation charges of Rs.1,50,000/- also part of business expenditure. After considering the submissions of the assessee, AO rejected the same with the following observations :-

“4.4 The above contentions of the assessee are carefully considered. They do not stand any merit because of the following reasons:

1. In reply assessee has stated about the nature of business i.e. “business of providing higher end technical consultancy and other services to the petroleum and oil exploration.” The assessee was not dealing in business of property. The above expenses and loss are related to property Advant Niwas. The said expenditure are not allowable expenses as per business expenditure.

2. From the record, it is noticed that a sum of Rs. 43,45,125/- on Loss on Investment/Asset, Rs. 8,38,500/- as selling expenses is paid to Noida Authority for transfer charge & processing fee for selling property Advant, Rs. 6,87,422/- is paid as in connection with sale of property at Advant Niwas and Rs. 1,50,000/-debited towards valuation charges is paid to Knight Frank India Pvt Ltd in connection with the property valuation. Expenditure at serial number 2 to 4 are related to property and therefore, these are not part of business of the assessee and therefore, not allowable as business expenses. Further, loss on investment/ assets is also capital loss which is not allowable as revenue expenditure and therefore same is not allowable. Thus, assessee has to add all these four expenses at the time of computation of income. Whereas the same should have been added back in the computation of income, which the assessee company has failed to do so. Therefore, a sum of Rs. 60,21,047/- is added back to the income of the Assessee.”

9. Further on verification of consultant expenses of Rs.5,17,500/- incurred towards providing of consultancy services for fund raising matters. After considering the submission of the assessee for incurring of consultancy expenses for the purpose of raising funds for working capital limits, the AO rejected the same with the observation that assessee has not explained whether any new fund was raised or not and if it was raised how the same was utilized by the assessee. Accordingly, he disallowed the same.

10. Aggrieved with the above order, assessee preferred an appeal before the NFAC, Delhi and filed detailed submissions which are reproduced at pages 3 to 22 of the appellate order. After considering the same, ld. CIT (A) dismissed the respective additions made by the AO against which assessee is in appeal before us.

11. At the time of hearing, with regard to grounds no.1 and 2, ld. AR of the assessee brought to our notice pages 17 and 18 of the paper book wherein assessee has reconciled the consultancy income declared by the assessee in return of income versus income declared in Form 26AS. He brought to our notice that the issue raised by the AO of the income which assessee has failed to bring on record with the relevant documents. He submitted that assessee regularly declares income in its return of income and based on the work performed by it and the invoices raised to the parties, there are certain invoices for which the customers are recording the sale in the subsequent year and accordingly they deducted the TDS. The same amount which was declared in the previous assessment year was not declared in the present assessment year and he prayed that the addition made by the AO is double addition and prayed for deletion of the same.

12. With regard to grounds no.3 and 4, ld. AR submitted that these expenses are relating to transfer expenses relating to sale of property. He prayed that since these expenses are relating to transfer of property, the AO has disallowed the same under the head business income, however the same should be allowed while computing the income under the head capital gains. He further submitted that ld. CIT(A) also confirmed the findings that these expenses are incurred by the assessee and the same should be allowed as expenditure while computing the income under the head capital gains. He submitted the documentary evidences in this regard.

13. With regard to ground no.5, he submitted that the assessee has paid professional fees of Rs.5,17,500/- for the purposes of raising working capital funds and the same expenditure is revenue in nature and the same should be allowed as business expenditure. In this regard, he brought to our notice page 107 which is the invoice raised by the consultancy CFO Bridge. He prayed that the same is incurred for raising the working capital loan.

14. On the other hand, ld. DR of the Revenue brought to our notice detailed findings of the lower authorities and heavily relied on them.

15. Considered the rival submissions and material placed on record. With regard to grounds no.1 and 2 raised by the assessee, we observed that the AO noticed variation in income declared by the assessee and the income declared in Form 6AS. Before us, ld. AR brought to our notice reconciliation statement for AYs 2017-18 and 2018-19. For the sake of brevity, the same are reproduced below :-

–

16. We observed from t e above reconciliation of two years that the assessee records the income o n the basis of completion of the consultancy and based on the invoices raised. The income declared in the 26AS are based on the tax deduction and co responding deposit of the same by the epositor. The income cannot be the same. The assessee had declared the income in the FY 2016-17 and the tax credit was made in the FY 2017-18 . The above reconciliation clearly shows that 4 invoices which are declared by the assessee in FY 2016-17, accordingly the assessee cannot be expected to declare the same again in the FY 2017-18. Therefore, the addition made by the Assessing Officer is not justified. In the result, grounds no.1 and 2 raised by the assessee are allowed.

17. With regard to grounds no.3 & 4, we observed that the expenses relate to transfer of property and the Assessing Officer had disallowed under the head income from business. Since it is allowable expenses, the expenses should be allowed under the head capital gains. It is revenue neutral as far as computation of total income for the year under consideration. Therefore, grounds no.3 and 4 raised by the assessee are accordingly allowed.

18. With regard to ground no.5, the assessee filed copy of the invoice from the consultancy service on availing working capital loan. The assessee could not substantiate the same and how it is useful in the business. For the sake of justice, we are inclined to disallow 50% of the expenses claimed by the assessee. Accordingly, ground no.5 raised by the assessee is partly allowed.

19. In the result, the appeal filed by the assessee is partly allowed.

Order pronounced in the open court on this 5^th day of June, 2026.