ITAT confirms Disallowance in respect of Payment to Services rendered by Paper Companies [Read Order]

Paper Companies

In the case, Sun Steel Industries (P) Ltd vs Deputy Commissioner of Income Tax (DCIT), Kolkata bench of Income Tax Appellate Tribunal (ITAT) confirmed the disallowance made by the Assessing Officer on account of payment to services rendered by paper companies.

Assessee Company in the instant case engaged in the business of fabrication and galvanizing of steel structures and erection of transmission towers has filed its return of income for the relevant assessment year and declared total income at Rs. 69,22,768 under the normal provision of the Income Tax Act 1961 and book loss of Rs. 72,68,669 under Section 115JB of the Income Tax Act.

During the assessment proceedings, the Assessing Officer (AO) noticed that the Assessee Company made payments to various subcontractors as foundation expenses. On verification, the companies were found to be non-existing in their address. On further analysis the AO has found that the companies were not doing any similar business relating to the business of the Assessee Company, all those companies are declaring negligible income in their returns and the tax deducted by the assessee company is claimed as the refund by the respective companies.

 The AO further observed that even though the payments were made to those parties by the assessee by way of account payee cheques and even though they had disclosed the contractor’s income in their respective returns, still the genuinity of the transactions were not proved by the assessee. Accordingly, the AO confirmed that the said companies are merely paper companies operated by the entry operator for the purpose of providing accommodation entries. Therefore the AO disallowed the same as bogus expenditure in the assessment.

On the other hand, the Assessee contended that all the payments towards sub-contract charges were paid by the assessee through account payee cheques after due deduction of tax at source and that those companies, in turn, had disclosed the receipts from the assessee as their income in their respective income tax returns.

After considering the rival submissions of both parties, the Tribunal bench comprising of Judicial Member A.T. Varkey and Accountant Member M.Balaganesh observed that “the Assessee was not able to prove with cognent material as to whether those companies possess necessary expertise and infrastructure to render the foundation services to the Assessee. all the six companies had similar types of expenses reflected in their profit and loss account and none of the companies has sufficient fixed assets to prove the existence of necessary infrastructure for rendering such technical services”.

The division bench also observed that “while considering the facts and circumstances it can be concluded that parties had merely acted as a conduit to reduce the profits of the Assessee Company and show meagre income in their returns and claim the refund of TDS. The bench confirmed that those companies are merely paper companies and not possessing the necessary expertise to render technical services to the Assessee”.