Failure to Prove Genesis of Sub-Contract Expenditure by Not Producing Main Contract Agreement Justifies Disallowance U/S 37: ITAT Mumbai - 2025-08-29

ITAT Upholds ₹60.41 Crore Disallowance, Citing Assessee's Failure to Prove Genuineness of Sub-Contract Expenses

Mumbai, Maharashtra – The Income Tax Appellate Tribunal (ITAT), Mumbai Bench, has dismissed an appeal by M/s. Baswant Builders and Developers Private Limited, upholding a massive disallowance of ₹60,41,53,300 claimed as business expenditure. The Tribunal, comprising Judicial Member Shri Narender Kumar Choudhry and Accountant Member Smt. Renu Jauhri, ruled that the assessee failed to discharge its fundamental burden of proof by not producing crucial documents, including the main contract agreement, to substantiate the genuineness of payments made to a sister concern.

Case Background

The case pertains to the Assessment Year 2018-19, during which Baswant Builders claimed an expenditure of ₹60.41 crore for payments made to its sister concern, M/s. M.B. Patil Construction Ltd. (MBPCL), for sub-contracted road construction work. The assessee stated it had received the primary contract from another sister concern, M/s. Patil Construction and Infrastructure Ltd. (PCISL).

The Assessing Officer (AO), during scrutiny, questioned the transaction's authenticity and repeatedly requested the contract agreements, bank statements highlighting payments, and other supporting evidence. The AO noted that the claimed expenditure constituted a staggering 86.60% of the assessee's total revenue, significantly reducing its profits. The transaction was also with a related party under Section 40A(2)(b) of the Income Tax Act, 1961.

After the assessee failed to produce the contract agreements and gave inconsistent replies, the AO disallowed the entire claim under Section 37 of the Act. This decision was subsequently upheld by the Commissioner of Income Tax (Appeals), who found that the assessee had not discharged its primary onus.

Arguments Before the Tribunal

Assessee's Arguments: The appellant contended that the expenditure was genuine. They argued that a work order was issued to MBPCL, Tax Deducted at Source (TDS) of over ₹1.20 crore was duly deposited, and GST was paid. They also submitted that the income was reflected in the tax returns of MBPCL, and therefore, disallowing the same expense in their hands would amount to double taxation.

Revenue's Arguments: The Department strongly refuted the assessee’s claims, highlighting several critical deficiencies:

* Absence of Core Documents: The assessee failed to produce the main contract between the government and PCISL, the sub-contract between PCISL and the assessee, or the subsequent sub-contract with MBPCL.

* Insufficient Work Order: The work order submitted was deemed inadequate, lacking essential details like scope of work, payment schedules, liability clauses, and proper signatures.

* Financial Discrepancies: A mismatch was noted between the work order amount (₹58.01 crore) and the amount claimed in the ledger (₹60.41 crore).

* Non-Cooperation: The Department emphasized that the assessee failed to provide bank statements or any reconciliation of final bills to prove the flow of funds.

Tribunal's Pivotal Observations and Ruling

The ITAT, in its detailed order, came down heavily on the assessee's non-compliant conduct, noting that multiple opportunities were granted by the AO, the CIT(A), and the Tribunal itself, yet the essential documents were never produced. The Bench proceeded with an ex-parte order due to the assessee's repeated failure to comply with directions.

“The Assessee neither produced the main-contract awarded to M/s. PCISL which is genesis/foundation of everything in this case, nor established the terms and conditions ‘as to whether M/s. PCISL has any power/authorization to make any sub-contract...’” the Tribunal observed.

Citing provisions of the Bharatiya Sakshya Adhiniyam, 2023, the Bench reiterated that the burden of proof lies squarely on the person asserting a fact. Key findings included:

1. Genesis of Claim Unproven: The failure to produce the main government contract meant the very foundation of the assessee's claim was unverified and shrouded in doubt.

2. Contract Agreement is Crucial: The Tribunal concurred with the AO that a formal contract is a "crucial document" in high-value transactions involving significant risks and liabilities, and a simple work order is not a substitute.

3. TDS and GST Not Conclusive Proof: The Bench held that merely deducting TDS and paying GST is insufficient to prove the genuineness of a massive expenditure without establishing its origin and the actual execution of work.

4. Significant Concerns Raised: The fact that the claimed expense was nearly 94% of total expenses and 89% of revenue, combined with the lack of documentation, raised "significant concerns regarding the genuineness of the transactions."

Final Decision

Finding no infirmity, impropriety, or illegality in the orders of the lower authorities, the ITAT concluded that the assessee had "substantially failed to establish the basic foundation of its claim." The appeal was consequently dismissed, and the disallowance of ₹60,41,53,300 was confirmed. This judgment underscores the critical importance of maintaining robust documentation, especially in related-party transactions, to substantiate claims of business expenditure under the Income Tax Act.