Onus lies on assessee to prove amount received from clients towards expenses were actually expended for the purpose intended.
In a recent judgment, the ITAT Delhi has upheld that for amount received from clients towards expenses reimbursement, onus lies on assessee to prove that the expenses were wholly and exclusively expended for the purpose of the business.
ABCAUS Case Law Citation:
4576 (2025) (05) abcaus.in ITAT
In the instant case, the assessee had challenged the order passed by the CIT(A) in confirming disallowance u/s 37(1) towards business expenditure.
The appellant assessee was engaged in the business of Custom House Agent (CHA). His job was to provide various services to its client in respect of import and export of the goods by them. Against the services rendered, the assessee received ‘service charges’ and the same was credited to profit and loss account. Apart from that, a very substantial amount was received from the clients under the head ‘custom reimbursement’.
Out of the said receipts of “custom reimbursement’, various expenses were incurred by the appellant on behalf of the clients who are its principals. The amount for different expenses to be incurred for the clients was received by the appellant. Out of the said amount received, the appellant incurred different expenses which were required for clearing of goods of its clients.
The invoice raised by the appellant was for the ‘gross amount’ which included ‘service charges’ as well as expenses under different heads which were clubbed as ‘custom reimbursement expenses in the books of account of the appellant.
The assessee filed return of income. The case of the assessee was selected for ‘Limited Scrutiny’. Assessment proceedings were initiated against the assessee and assessment order came to be passed u/s 143(3) of the Income Tax Act, 1961 (the Act) by disallowing claimed of miscellaneous expenses and also business expenses.
Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A) who by the impugned order dismissed the appeal filed by the assessee.
The revenue submitted that the assessee had not produced any material either before the AO or before the CIT(A) to substantiate its claim by producing bills and vouchers in respect of alleged expenses. Therefore, the lower authorities had rightly rejected the claim of the assessee.
The ITAT observed that during the assessment proceedings, the AO made disallowance on the ground that the assessee had not produced any cogent evidence in support of the expenses to prove the same were fully and exclusively incurred for the purpose of business of the assessee firm. Even during the first appellate proceedings, the assessee except filing written submissions not produced any documents to substantiate its claim.
The ITAT further observed that before the CIT(A), the contention of the appellant was that custom reimbursement expenses were neutral in the sense that the said expenses were incurred on behalf of its principals and there was no surplus accruing to the appellant out of the said expenses and therefore, there cannot be any taxability as regards custom reimbursement expenses.
The Tribunal further noted that the CIT(A) had stated that there may be an agreement/understanding between the appellant and its client in respect of total amount, which included services charges and other expenses which were shown as custom reimbursement expenses, in respect of clearing of an import/export consignment and based on the said understanding, total amount was paid by the client to the appellant. Based on the clearing and forwarding invoice raised by the appellant, the concerned importer/exporter claims the expenses under the head clearing and forwarding charges.
The CIT(A) had further stated that the AO of the concerned importer/exporter only examines the veracity of the bill raised by the appellant in respect of total amount of clearing forwarding charges in their P&L account. Therefore, the AO of the CHA can only examine as to whether the custom reimbursement expenses claimed were correct and genuine. Once the amount is received by the appellant from its clients in the course of business, onus always lies on the appellant to prove that the expenses were wholly and exclusively expended for the purpose of the business out of the amount received from its clients In case there is a surplus out of the gross amount received from the clients, the said surplus will be the income of the appellant which will be subject to tax.
The CIT(A) had stated that merely stating that the receipts were revenue neutral does not explain the case of the appellant. The onus was on the appellant to prove before the AO that the expenses the expenses claimed out of custom reimbursement (received) were expended wholly and exclusively for the purpose of business. The appellant had not produced the details of reimbursement expenses claimed before the AO and also the supporting bills and vouchers were not produced in respect of the aforesaid expenses claimed.
The CIT(A) had given the finding that only few of the invoices and relating documents were produced before the AO and the AO had given the finding in the assessment order that a major portion of such expenses was found to be incurred in cash and on the basis of self made vouchers.
The Tribunal opined that considering the fact that the assessee had failed to substantiate its claim either before the lower authorities or before the Bench, there was no merits in the grounds of appeal.
Accordingly, the appeal of the assessee was dismissed.
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