Rejection of expense merely based on narration of bill unsustainable

Road Builders (M) SDN BHD Vs DCIT (ITAT Delhi)

The narration of the professional fee bill by the payee is not at all material in rejecting the professional fee bill.

Facts-

The assessee company is incorporated under the laws of Malaysia which is engaged in the business of road construction. However, during the year under assessment, the assessee has not engaged in any project work except the winding up activities of project work. The AO has noted that the assessee company has no business activities and only an income of Rs.1,92,514/- has been shown under the head Other Income comprised of interest on FDR Rs.1,33,963/- and revenue from sale of scrap Rs, 53,451/-. However, as per computation the assessee has further shown an amount of Rs.4,09,707/- as interest on FDR and Rs.1,41,917/- as interest earned on Income Tax Refund, After considering the above receipts, the assessee company has calculated a loss of Rs, 1,01,57,304/-. The AO asked the assessee to file the details of expenses incurred during the year and tax deducted at sources. In reply, the assessee company has admitted that out of expenses under the head hire charges of Rs.2,35,603/-, the tax could not be deducted at source inadvertently on amount of Rs.31,376/-. Hence, the Assessing Officer disallowed the same by invoking the provisions of section 40(a)(ia) of the Act.
Further, the AO noted that the assessee company incurred an amount of Rs.64,12,272/- under the head legal, professional and consultancy. He noted that the assessee has explained that out of above Rs.5,15,000/- were paid to arbitrator as fee and clerical expenses and has explained that the tax is not deducted at source as per the provisions of explanation (a) to section 194J of the Act. Further, the AO noted that in the TDS reconciliation filed, the assessee itself has deducted the tax on part of the arbitrator fee. Hence, the AO noted that the assessee company failed to deduct the TDS of Rs.5,15,000/- and hence he disallowed the same.

Conclusion-

A sum of Rs.5,15,000/- was disallowed for lack of deduction of TDS. These sums were paid to arbitrator as fee and clerical expenses and no reasonable explanation was given as to why TDS was not deducted thereupon. The assessee’s plea that provisions of section 194J are not attracted has rightly been rejected by the Revenue authorities. Moreover, as noted by the Revenue authorities, the assessee itself in its ledger entry has mentioned that the payment is net of TDS to the arbitrator. Hence, assessee is aware that TDS was to be deducted failure to do so would certainly result in disallowance. Hence, we do not find any infirmity in the addition of Rs.5,15,000/-.

The Revenue authorities have taken a plea that this expenditure of Rs.35,05,892/- paid to Pramodh Engineers was without any justification. Held that the assessee was pursuing before the Arbitral Tribunal and in fact on 04.07.2013, a further award in favour of the assessee of Rs.15.84 Crores was awarded. It is another matter that the assessee has not taken any cognizance of the same in the accounts and no adverse inference by the authorities below is also there. Hence, the plea of professional charges paid Pramodh Engineers for pursuing and following of proceedings at Arbitral Tribunal, without any justification is not at all justified.
Another plea of which the Ld. CIT(A) has sustained the addition is absence of documentary evidence. In this regard, we note that the assessee has not produced any bills etc before the Assessing Officer. However, before the Ld. CIT(A), three bills were produced, the total of which came to Rs.25,78,263/-. We note that the Ld. CIT(A) has rejected the bills on the ground that they are identically worded and they mentioned the travelling, food, accommodation and incidental charges for visiting arbitrators and that no further vouchers are there in this regard. We note that the Ld. CIT(A) examined the bills of professional charges to Pramodh Engineers. There is no dispute that the TDS on the same has been deducted. As held by us above, the same is for the purpose of business wherein the said firm was pursuing arbitration proceedings which as mentioned in the note of account has resulted in Rs.15.84 crores being awarded in favour of assessee. The narration of the professional fee bill by the payee is not at all material in rejecting the professional fee bill.

FULL TEXT OF THE ORDER OF ITAT DELHI

This appeal by the assessee against the order of the Assessing Officer dated 15.11.2017 pertaining to Assessment Year 2013-14.

2. Grounds of appeal reads as under:-

1 That the learned Commissioner of Income Tax (Appeals) 23, New Delhi has erred both in law and on facts in upholding disallowance of sum of Rs. 5,15,000/- on account of expenditure claimed for arbitration work u/s 40(a)(ia) of the Act on account of alleged non deduction of TDS u/s 194J of the Act.

2  That the learned Commissioner of Income Tax (Appeals) 23, New Delhi has further erred both in law and on facts in upholding disallowance of sum of Rs. 35,05,892/-representing expenditure incurred on consultancy charges and claimed by the appellant company by invoking Explanation 1 to section 37(1) of the Act.

2.1 That the learned Commissioner of Income Tax (Appeals) has overlooked relevant evidence placed on record and, drawn factually incorrect and legally unsustainable inferences based on irrelevant and extraneous consideration and thus, disallowance upheld d is wholly unwarranted and not in accordance with law.

3 That various adverse findings recorded by the learned Commissioner of Income Tax (Appeals) and learned Assessing Officer are contrary to record and law and thus unsustainable.

3. Brief facts of the case as culled out from the draft assessment order are that the assessee company is incorporated under the laws of Malaysia which is engaged in the business of road construction. Only a maiden contract was awarded to the company by Public Works Department (PWD), Kerala State Transport Project (KSTP), Govt, of Kerala towards upgrading the sections of highway, namely Palakkad – Shornur (Km 0+000 – Km 45+300) and Thirssur – Kuttipuram (Km19+600 – Km 52+680) in the state of Kerala vide Contract Agreement No. Nil dated 07.11.2002. However, during the year under assessment, the assessee has not engaged in any project work except the winding up activities of project work. The Assessing Officer has noted that the perusal of profit and loss a/c shows that the assessee company has no business activities and only an income of Rs.1,92,514/- has been shown under the head Other Income comprised of interest on FDR Rs.1,33,963/- and revenue from sale of scrap Rs, 53,451/-. However, as per computation the assessee has further shown an amount of Rs.4,09,707/- as interest on FDR and Rs.1,41,917/- as interest earned on Income Tax Refund, After considering the above receipts, the assessee company has calculated a loss of Rs, 1,01,57,304/-. The Assessing Officer asked the assessee to file the details of expenses incurred during the year and tax deducted at sources. In reply, the assessee company has admitted that out of expenses under the head hire charges of Rs.2,35,603/-, the tax could not be deducted at source inadvertently on amount of Rs.31,376/-. Hence, the Assessing Officer disallowed the same by invoking the provisions of section 40(a)(ia) of the Act.

4. Further, the Assessing Officer noted that the assessee company incurred an amount of Rs.64,12,272/- under the head legal, professional and consultancy. He noted that the assessee has explained that out of above Rs.5,15,000/- were paid to arbitrator as fee and clerical expenses and has explained that the tax is not deducted at source as per the provisions of explanation (a) to section 194J of the Act. Further, the Assessing Officer noted that in the TDS reconciliation filed, the assessee itself has deducted the tax on part of the arbitrator fee. Hence, the Assessing Officer noted that the assessee company failed to deduct the TDS of Rs.5,15,000/- and hence he disallowed the same.

5. Further, the Assessing Officer was not satisfied with the justification of the payment of Rs.35,05,892/- to Mr. Pramodh Engineers. the Assessing Officer disallowed the same by observing that a perusal of the same shows that the invoices are raised against the travelling, food, accommodation and other incidental charges for visiting arbitrator’s place on various dates. The invoices are not supported with any primary vouchers of the expenses incurred. It shows that the invoices of huge amount were raised without any specific services rendered on specific dates/period. All the invoices having the same narration. From the above, as opined that the expenses have been shown to be incurred without any professional or technical services received as there was no business activity during the year under consideration. Hence, the Assessing Officer disallowed the said expenditure u/s 37(1) of the Act.

6. Against the above order, the assessee appealed before the Ld. CIT(A). As regards the issue of disallowance of Rs.5,15,000/- as arbitrator fee for lack of deduction of TDS, the Ld. CIT(A) confirmed the same by observing as under:-

“6.3 The appellant also filed copy of the ledger account. On perusal of this ledger account it is seen that expenses of Rs. 20,000/- paid for getting legal opinion and all other expenses are either for secretarial and clerical expenses in connection with arbitration expenses, or arbitration expenses for sitting on a particular date which are paid to Sh. Kurien Methew or Sh. Roy J Vellanikkarn or Sh. Addul Kharder. As mentioned by the AO, the appellant has submitted a chart of details of IDS deducted and re-conciliation. As per the said chart the appellant has itself described payments made to S/Sh. Kurien Methew and Roy J Vellanikkarn and Addul Kharder as, “legal, professional and consultancy”. The details of TDS deducted and TDS deposited have been mentioned against these charges. Therefore, the plea of appellant does not have any legs to stand. Copy of said chart of details of TDS deducted and reconciliation is enclosed as Annexure-1 to this order. Also, copy of the ledger account submitted by the appellant is enclosed as Annexure-2.

7. As regards the Assessing Officer’s disallowance of Rs.35,05,892/-, the same was confirmed by the Ld. CIT(A) by observing that the Assessing Officer observed that the there was no business activity during the year. The invoices are not supported by the bills and vouchers of the parties where expenditure has been made. Before the Ld. CIT(A), copies of three invoices were submitted, however, the Ld. CIT(A) was not convinced and confirmed the same by observing as under:-

7.3. It is noted that total of the above said three bills comes to Rs. 25,78,263/- which means that all the expenditure is not fully supported by the bills. It is also noted that the description of all three bills is identically worded. It is giving general description that it is for visiting Arbitrators place. There is no specific date as to when the said expenses were made. It is also noted that neither during assessment proceedings nor during present appellate proceedings, the appellant filed any supporting bills.”

8. Accordingly, the Ld. CIT(A) dismissed the assessee’s appeal in this regard.

9. Against the above order, the assessee is in appeal before us.

10. We have heard both the counsel and perused the records. We find that the disallowance in these facts has been done out of legal and professional expenses booked by the assessee. The total expenditure booked were Rs.64,12,272/-. A sum of Rs.5,15,000/- was disallowed for lack of deduction of TDS. These sums were paid to arbitrator as fee and clerical expenses and no reasonable explanation was given as to why TDS was not deducted thereupon. The assessee’s plea that provisions of section 194J are not attracted has rightly been rejected by the Revenue authorities. Moreover, as noted by the Revenue authorities, the assessee itself in its ledger entry has mentioned that the payment is net of TDS to the arbitrator. Hence, assessee is aware that TDS was to be deducted failure to do so would certainly result in disallowance. Hence, we do not find any infirmity in the addition of Rs.5,15,000/-.

11. Another addition is regarding payment of Rs. 35,05,892/-paid as professional fee to Pramodh Engineers. As noted above, the assessee in this case is a company incorporated under the laws of Malaysia which is engaged in the business of road construction. During the year, the assessee has been following arbitration proceedings and no project work was engaged. The Revenue authorities have taken a plea that this expenditure of Rs.35,05,892/- paid to Pramodh Engineers was without any justification. As emanating from the facts narrated above the above payment made to Pramodh Engineers was booked under professional expenditure. It is not the case that there was any deficiency of deduction of any TDS. The Assessing Officer rejection was that expenditure was that not justified u/s 37(1) and the assessee has not conducted any business and no vouchers bills in this regard was produced.

12. As regards the plea of absence of business and justification is concerned, it is noted that as per the financial accounts submitted by the assessee, it is clearly mentioned that during the year, the assessee was following the arbitration proceedings and was engaged in upgradation of State Highways under Public Works Department, Govt. of Kerala. In the various claims before the Arbitral Tribunal PWD, the financial noted of account no.18 report as under:-

“18. The project office, due to continued failure on the part of the customer, PWD, Govt. Of Kerala, to make payment in accordance with the terms and conditions of the contract, had discontinued work at the site and had finally served a notice on 22.11.2006 for termination of “employment” in accordance with sub-clause 69.1 of the contract. As per the notice, the termination took effect on 6^th December, 2006.

Bills have been accepted by PWD upto IPC 28 and payments have also been made there against by the customer. However, various deductions are not yet reconciled. Bills relating to IPC 29 to 33 amounting to Rs.7.74 crores have also been submitted but not yet accepted by the customer. Such bills were submitted after certification by the customer appointed Consulting Engineer. Further, for work relating to IPC 34 the extent of the work has also been certified by the engineer but the work values are yet to be confirmed by them. Revenue has been recognised upto IPC 33 and additional claims. The Project Office has made various claims before the Hon’ble Arbitral Tribunal. PWD has raised counter claim which has been defended by the Project Office.

The Hon’ble Arbitral Tribunal has given two awards as follows:

Vide order dated 22.08.2011, the Hon’ble Tribunal has given award for payment of Rs.13.92 cores in favour of the Project Office. PWD, Govt. Of Kerala, has filed an appeal before the Hon’ble District Court, Trivandrum against his order, which is yet to be settled. In view of this appeal, cognizance of the award has not been taken in the accounts.

Vide order dated 4.7.2013, the Hon’ble Tribunal has given further award in favour of the Project Office of Rs.15.84 Crores. The cognizance of this award has not been taken in the accounts.

The following balances receivable from the customer (PWD, Govt. of Kerala) are subjected to reconciliation and adjustments, if any, will be given effect after final settlement of the claims:

13. From the above, it is noted that the assessee was pursuing before the Arbitral Tribunal and in fact on 04.07.2013, a further award in favour of the assessee of Rs.15.84 Crores was awarded. It is another matter that the assessee has not taken any cognizance of the same in the accounts and no adverse inference by the authorities below is also there. Hence, the plea of professional charges paid Pramodh Engineers for pursuing and following of proceedings at Arbitral Tribunal, without any justification is not at all justified. Hence the reasoning of Revenue Authorities that the same is not for the purpose of business is liable to be rejected.

14. Another plea of which the Ld. CIT(A) has sustained the addition is absence of documentary evidence. In this regard, we note that the assessee has not produced any bills etc before the Assessing Officer. However, before the Ld. CIT(A), three bills were produced, the total of which came to Rs.25,78,263/-. We note that the Ld. CIT(A) has rejected the bills on the ground that they are identically worded and they mentioned the travelling, food, accommodation and incidental charges for visiting arbitrators and that no further vouchers are there in this regard. We note that the Ld. CIT(A) examined the bills of professional charges to Pramodh Engineers. There is no dispute that the TDS on the same has been deducted. As held by us above, the same is for the purpose of business wherein the said firm was pursuing arbitration proceedings which as mentioned in the note of account has resulted in Rs.15.84 crores being awarded in favour of assessee. The narration of the professional fee bill by the payee is not at all material in rejecting the professional fee bill. A professional fee bill is based upon understanding between the assessee and professional service provider. It is assessee who is to be satisfied by the professional services and not the Assessing Officer. It is not the case that the Assessing Officer is sitting into the computation of income of Pramodh Engineers. How Pramodh Engineers narrates and adjusts as professional fee receipt against what expenses is the look out of the Assessing Officer of Prmoadh Engineers. The

Assessing Officer in the present case or the Ld. CIT(A) for that matter cannot ask the assessee for further evidence of the professional fee bill raised. In this view of the matter, in our considered opinion, the rejection of the three bills of M/s Pramodh Engineers of Rs.25,78,263/- is not at all justified. Hence, we delete the same as the expenditure is for business purpose; no case is made out for lack of deduction of TDS or the expenditure being bogus.

15. The rest disallowance (Rs.35,05,892-25,78,263) is to be upheld because no bills of Pramodh Engineers have been submitted. We do not find any infirmity in this regard as the assessee cannot claim any expenditure without furnishing the necessary bills. Accordingly, we partly uphold the order of the ld. CIT(A) as above.

16. In the result, the appeal of the assessee is partly allowed.

Order pronounced in the open court on 27.05.2022.