Subcontract expenses are allowable even if subcontractors are denoted as shell entities, provided legitimate business agreements and taxes have been remitted.

ORDER

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

This appeal by assessee is directed against order of NFAC for the assessment year 2015-16 passed u/s 250 of the Income Tax Act, 1961 (in short “the Act”). The assessee raised following grounds:

1. “The learned Commissioner of Income Tax (Appeals), NFAC, Delhi has erred in confirming the assessment order passed by the Assessing officer. The order passed by CIT(A), confirming the assessment order being bad in law is required to be quashed.

2.1 In any case, the Learned CIT(A) has erred in confirming the disallowance made by the Assessing officer amounting to Rs. 96,90,000/- u/s 37(1) of the Act by treating the sub contracting entities as Shell companies and holding that they did not do any work. On proper appreciation of facts and the law applicable, the sub contract expenses incurred for carrying on the business and therefore the provisions of section 37(1) are not applicable to the facts of the case. The conclusion drawn as being wholly erroneous both on facts and law is to be disregarded.

2.2 The authorities below have erred in not appreciating the fact that i) the sub contract expenditure debited were legitimate business expenses incurred for completion of the projects ii) The payments were made. through banking channel after deducting tax at source.

The lower authorities have erred in disallowing the expenditure debited on the ground that the sub-contractors were shell entities. The action of authorities below being contrary to facts and law applicable is to be negated and the disallowance of expenses as made is to be deleted.

2.3 In any case, the disallowance as made and confirmed is erroneous—and excessive.

3.1 The learned CIT(A) has also erred in confirming the addition made by the Assessing officer by treating the balances due to two sub-contractors as cessation of trading liability on the ground that subcontractors were shell entities. The conclusion drawn is wholly erroneous both on facts and law applicable and is be rejected and the addition made is to be deleted.

3.2 In any case, the action of Assessing Officer, in making the addition in the last para of the order, on the basis of cessation of liabilities, makes it clear that liability did exist and was genuine and therefore on this ground also the addition as made becomes erroneous and is to be deleted.

3.3 In any case and without prejudice, the outstanding balance having arisen from the transaction for which there was debit to profit and loss account and which has been disallowed, e addition of outstanding balance amount to double addition and therefore has to be deleted.

4. In any case, the Assessing Officer has erred in holding the issue against the appellant n the grounds that:

a) the sub-contractors were shell entities;

b) the Sub contractor entities were deregistered under VAT Act, 2005:

c) the sub-contractors had not filed the VAT returns;

These conclusions are without basis and not in accordance with actual facts of the case, The appellant had actually given sub-contract and therefore these conclusions are to be ignored and sub-contract expenses are to be allowed as deduction;

5. The appellant denies the liability pay interest u/s 234B of the Act. The interest having been levied erroneously is to be deleted.

6. In view of the above and on other grounds to be adduced at the time of hearing, it is requested that the impugned orders to the extent confirmed be quashed or at least the disallowances as made and confirmed be deleted and interest levied be also deleted.”

2. Ground No.1 is general in nature, which do not require any adjudication.

3. Ground Nos.2.1 to 2.3 are with regard to disallowance of Rs.96.90 lakhs u/s 37(1) of the Act. Treating the sub-contracts as bogus payment.

4. Facts of the case and the submission of the ld. A.R. are