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Facts
The assessee company, engaged in civil and road construction, claimed labour and sub-contract expenses. The Assessing Officer (AO) disallowed 50% of these expenses on an ad-hoc basis, citing lack of sufficient documentation and a premature sub-contract agreement. The Commissioner of Income Tax (Appeals) deleted these additions, leading to the revenue's appeal.
Held
The Tribunal held that the AO made disallowances on an ad-hoc basis without rejecting the assessee's books of accounts, which is not tenable. The CIT(A) had found substance in the assessee's case and rightly allowed the deletion of the additions made by the AO.
Key Issues
Whether disallowance of 50% of sub-contract and excavation/compaction expenses on an ad-hoc basis by the AO is justified without rejecting the books of accounts.
Sections Cited
143(3), 36, 37, 153A
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Income Tax Appellate Tribunal, DELHI BENCH “F ”: NEW DELHI
Before: Ms. MADHUMITA ROY & SHRI NAVEEN CHANDRA
O R D E R
PER Ms. MADHUMITA ROY, JM:
1. The instant appeal filed by the revenue is directed against the order dated 26.08.2019 passed by the Ld. CIT(A)-7, New Delhi, arising out of the assessment order passed by the ACIT, Central Circle -20(2), New Delhi dated 28.12.2018 under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) for Assessment Year 2016-17.
2 Revenue has raised the following grounds of appeal:
1. Whether the Ld. CIT(A) erred in law and on facts and in circumstances of the case, in deleting the addition of Rs. 7,69,18,8,350/- made by the Assessing officer, on account of disallowances of 50% of subs-contract work expenses.
2. Whether the Ld. CIT(A) erred in law and on facts and in circumstances of the case, in deleting the addition of Rs. 42,57,000/- made by the Assessing officer, on account of 50% disallowances on account of excavation and compaction expenses."
3. The appellant craves to be allowed to add and alter any fresh ground(s) of appeal and/or delete or amend any of the ground(s) of appeal.”
3 Brief facts leading to the case are that the assessee company is engaged in the business of civil and road construction as government contractors/sub- contractors and has furnished its original return of income for A.Y. 2016-17 on 17.10.2016 declaring an income of Rs. 1,33,91,530/-. The case was selected for scrutiny under CASS. During the year under consideration the assessee company has claimed labour expenses of Rs. 85,14,000/- under head “Excavation and Compaction”, and ld. AO having not satisfied with explanation rendered by the assessee has disallowed 50% of expenses on adhoc basis.
3.1 Apart thereof, the Ld. AO has noticed that the assessee company has also claimed expenses of Rs. 15,38,36,700/- under the head “Sub Contract Work”. Even assessee company itself is a sub-contractor and engaged in sub-contract work for original contractor M/s H G Infra Engineering Limited vide agreement dated 26.07.2014, however as details submitted before the Ld. AO, he observed that the assessee company even sub-contract the aforesaid work contract to Saran Construction Company on 24.06.2014, i.e. prior to receiving sub-contract by assessee from M/s H G Infar Engineering Limited. According to the Ld. AO, even A.Y. 2016-17 DCIT R.P. Infraventure P Ltd. the assessee could not submit document which could imply that any work is actually been done by the sub-contractors namely Saran Construction Company and R S Infra. Ld. AO having not satisfied with explanation rendered by the assessee viz-a-viz sub-contract between assessee and sub-contractors on letterheads of firms instead of notarized agreement, has disallowed 50% of sub- contract expenses i.e. Rs. 7,69,18,350/- on ad hoc basis.
4 In the appeal preferred by the assessee before First Appellate Authority, assessee succeeded. Therefore, the revenue is in appeal before us.
5 We have heard the rival submissions of the respective parties and perused the materials placed on record. The Ld. DR supported the order of the Ld. AO and Ld. AR supported the order of ld. CIT(A).
6 Learned Commissioner of Income Tax (Appeals) has allowed the grounds of appeals raised by assessee; the same is extracted hereunder:
“3. Ground No. 1, 2, 5 and 7 are general and do not require specific adjudication 3.1 Ground No. 3 relates to disallowance of 50% of sub-contract work expenses. The appellant acquired a sub-contract for construction of Road from M/s H. G. Infra Engg. Ltd. This sub-contract was further sub- contracted to various vendors. Total payment to sub-contractor was made to the tune of Rs. 15,38,36,700.04/- in the year in question A.Y. 2016-17. Such payments in the A.Y. 2015-16 were Rs. 14,33,12,243.96/- which were accepted in assessment proceedings u/s 143(3). The AO made a disallowance of 50% of the sub-contract payments which to Rs. 7,69,18,350.00. The assessee had made the following payments by way of sub-contracts in the year in question and also in the proceeding previous year – A.Y. 2016-17 DCIT R.P. Infraventure P Ltd. Α.Υ. 2016-17 Α.Υ. 2015-16 Name of Sub-Contractor RS Infra 4,79,70,976.04 3,36,11,039.96 Saran Construction Co. 7,01,91,924.00 10,97,01,204.00 Amar Construction & Supplier 97,99,400.00 Nil Ankur Indoliya 1,09,47,150.00 Nil Ashish Kumar 1,09,01,250.00 Nil Bal Mukund Sharma 15,24,600.00 Nil Mukesh Kumar Prajpati 25,01,400.00 Nil Total 15,38,36,700.04 14,33,12,243.96 Contractual Receipts 27,12,24,112.00 19,84,26,770.00 % of Sub-Contract Exp. 56.72% 72.22% 3.2 The AO made the disallowance on the basis of following observations:
1. The appellant received contract from H.G. Infra Engg. Ltd. by entering into agreement on 26.07.2014 but the work was sub- contracted to Saran Construction Co. vide agreement dated 24.06.2014.
The assessee company did not submit any documents which could imply that any work actually done by the sub-contractor M/s R. S. Infra & M/s Saran Construction Co.
3. Mere making payments through banking channel and deducting TDS on the same does not make any expense an allowable expense under section 36 & 37 of the Act. Besides the assessee is also required to establish the business purpose.
4. The work order is issued on the letter head of the company and not the stamp paper.
5. The assessee has failed to establish the genuineness of the sub- contract expenses Based on the above observations, the AO disallowed 50% of such expenses.
A.Y. 2016-17 DCIT R.P. Infraventure P Ltd. In this regard, the submissions of the appellant were as under: "The aforesaid allegations of the Ld. AO are baseless and lack merit. The point wise reply of each & every allegation is submitted hereunder-
The assessee entered into a sub-contract on 24.06.2014 with M/s Saran Construction Co. whereas the assessee itself was accorded works-order on 26.07.2014 is eventually the question which pertains to Assessment Year 2015-16. The copies of same agreements were provided to the erstwhile AO and he righty accepted the said documents because any person can understand that the large contracts like that of ours are negotiated much earlier than they are actually documented. More over in order to be sure about the rate, the contractual agreement is done earlier so that the rates become binding to control the cost overrun. This is nothing but a prudent business decision and no adverse inference can be drawn there from and that too in decision and no adverse inference can be drawn there from and that too in the subsequent assessment year.
2. The Ld. AO has questioned that no evidence could allegedly be submitted by the assessee to show that the work was actually done by the sub-contractors M/s R. S Infra and M/s Saran Construction Co. The observation of the Ld. AO implies that the afore mentioned contractors were doing business genuinely till A.Y. 2015-16 and suddenly in A.Y. 2016-17 the genuinety became questionable. Whether the work is actually done can easily be verified by the Ld. AO by making visit on the actual site. He can also call the main contractee i.e. Agra Development Authority to check whether the Road was made or otherwise. The appellant has discharged his basic onus by providing the name & address of the sub-contractors and the main contractor and the fact the payment was made by banking channel after deduction of TDS. The copies of agreement was also placed on record. Can the Ld. AO still say casually that the proof that the work is actually done is not on record? It is now the duty of Ld. AO to show that on what basis he thinks that the work is not done. Before making such a mammoth addition, the Ld. AO should have made on-the-spot
Making payment and deducting TDS is very strong evidence because it gives the entire trail as to whom the payment was made and also the TDS implies that the person receiving payments is duly filing the return of income. The PAN No. of the recipients can also enable the Assessing Officer to know their true statues. It appears that the Ld. AO is thoroughly under estimating these compliance of TDS and making payments by banking channels. It becomes the duty of L.d. AO now to show why he thinks otherwise.
Regarding the fact that the contract is made on plain paper/letter- head, the Ld. AO has failed to show as to why the contract on letter head is not acceptable or how it violates the Indian Contract Act. The assessee apart from the contract is also giving corroborative evidences to show the execution of the contract. Moreover the contracts were duly accepted in the F.Y. 2014-15 and how in this year any fact is different.
That the quantum of expenses is beyond doubt because the actual work was done for which the payment was duly received by the assessee. Based on the work done by the sub-contractors, payments were made after deduction of TDS. The Ld. AO has not made a case of any un-genuine payment surpassing the contractual commitment. The assessee has discharged the basic onus of genunity of sub-contract payments by providing all the requisite details.
3.3 Hence from the aforesaid explanation, it is clear that the AO has gone totally wrong in making 50% disallowance of the aforementioned expenditure. By making 50% disallowance of the expenditures, the Ld. AO gave an impression that he accepts that the expenditures are incurred but he feels that they are escalated by 100%. This implies that the Ld. AO as per his understanding estimates a net profit of 38.87% in the business of constructing a road that too under a sub-contract. This business understanding of the Ld. AO is illogical and cannot be considered prudent by any standards. Hence on the face of it, the entire addition made by Ld. AO is based on some pre-conceived notions having no base whatsoever. The said addition should therefore be deleted.”
4. Ground No. 4 - relates to 50% disallowance on account of excavation and compaction expenses. Incurred to the tune of Rs. 85,14,000.00, thus resulting in an overall addition of Rs. 42,57,000.00 to the disclosed income. The reason outlined by the AO as stated in the assessment order is reproduced below- "Revenue doesn't intend to delve into the question of labor law compliance on the part of assessee, but if expenses are claimed by the assessee, in the name of labor expenses, then examining the genuineness of such expenses and business purpose of the same is certainly a relevant question, and in this case assessee has failed to establish the genuineness of such expenses. Accordingly, in absence of any satisfactory explanation about the expense of Rs. 85,14,000.00/- under the head "Excavation and Compaction" during the year under consideration, the assessing officer is left with no option but to disallow 50% of these expenses to be fair to the assessee as well Revenue." The appellant in this regard has made the following submissions- "The ground taken for making the aforesaid addition is illogical and beyond the parameters of any law. The assessee in the course of assessment proceedings had furnished the following reply which was concealed by Ld. AD and only the latter part of the reply was reproduced in the assessment order. In fact the following reply answers to all the questions raised by the Ld. AO - "Your goodself has proceeded on a very wrong premise that the assessee has claimed HUGE labour expenses. Your kind attention is invited to the following facts- Α.Υ. 2015-16 A.Y. 2016-17 Amount % to Turnover Amount % to Turnover Contract Receipts 271224112 198426770 Labour Payments- Excavation & Compaction Expenses 85140000 3.14% 7013100 3.53% Structure Exp. 3209400 1.18% 3195300 1.61% Survey Safety Mining Expenses 2813100 1.04% 3007000 1.52% Total 14536500 5.36% 13215400 6.66% Assessment proceedings us 143(3) us 143(3)
A.Y. 2016-17 DCIT R.P. Infraventure P Ltd. An expenditure cannot be seen in isolation. It has to be relative and should be corroborated with the revenue. From the aforesaid figures, it is crystal clear that your presumption of huge labour expenses is without substance, in fact the labour expenses of the assessee have been substantially reduced in each segment and overall it has reduced from 6.66% to 5.36%. This comparison gains greater significance because the results of A.Y. 2015-16 have been accepted by the Department and therefore can be the benchmark for succeeding years. It may not be out of place to state that there is no change in contract and the construction of roads is a monotonous work, which is labour intensive and there can be no significant variation. However the assessee with its experience managed to cut the labour cost which should be appreciated." 4.1 Hence there is no basis to disallow any part of excavation & compaction expenses and therefore the addition made to the tune of Rs. 42,57,000.00 be therefore deleted."
4.2 The AO disallowed Rs.7,69,18,350/- @ 50% of subcontract expenses claimed in the P & L A/c and Rs 42,57,000/- @ 50% of excavation and compaction expenses. The said disallowances were made on the grounds as mentioned above. The appellant submitted that in the past similar expenses have been allowed. Also the AO has not disputed the genuineness of the parties but restricted the expenses to 50% without any basis thereby increasing the profit margin abnormally.
4.3. I have carefully considered the assessment order and the submissions made by the AR. It is noted that details in respect of these expenses were submitted before the AO by the appellant company. The AO has not pointed out any specific disallowable instance in respect of these expenses which is not speculative or is backed by any enquiry or information collected. It is also not the case of the AO that the expenses claimed is not genuine or incurred for non-business purpose. There is no ground for the ad-hoc disallowance. The Hon'ble ITAT, Delhi Bench 'C' in the case of ACIT vs. Ganapati Enterprises Ltd. in (Delhi) of 2012 Α.Υ. 2009-10 vide order dated 15.02.2013, while deleting the additions made on ad-hoc basis, has observed as under - A.Y. 2016-17 DCIT R.P. Infraventure P Ltd. "In our opinion the scheme of the Act does not authorize the Assessing Officer to make a disallowance according to his wishes, rather it provides that he should first point out the defects in the accounts of the assessee. In the finding extracted (Supra) it nowhere reveals what was the total amount of expenditure claimed by the assessee, which specific vouchers was not in accordance with low. In a just sweeping statement, the Id. AO observed on verification, some of the expenses were found to be unverifiable, but what were those expenses, he should make out in the assessment order, only then he can disallow them. …………… no interference is called for in the order of Id. CIT(A) on this issue, the first ground of appeal is rejected."
4.4. It is also noted that the appellant has been consistently allowed these expenses in earlier years. Since no cogent reason is put forth by the AO for the disallowance and the fact that the appellant has been allowed relief in earlier years, I do not see any reason to uphold the disallowance. The addition of Rs. 7,69,18,350/- and Rs 42,57,000 is ordered to be deleted. These grounds of appeal are ruled in favour of the appellant.”
7. We have perused the order of assessment and submissions made by assessee before the lower authorities and the decision of the Ld. CIT(A). Even otherwise the Ld. AR brought to the notice of the Bench that, subsequent to the decision of the Ld. CIT(A), in pursuance to search conducted on the assessee, in the order of assessment dated 29.09.2021 u/s 153A read with 143(3) of the Act, for year under consideration itself, disallowance of sub-contract expenses paid to one of sub- contract under consideration i.e. M/s Saran Construction Company amounting to Rs. 6,57,96,868/- was made, which is pending in appeal before ld. CIT(A), Central Circle Kanpur, for disposal.
8 The AO has made both the disallowance on adhoc basis at the rate of 50%, without specifying the basis for the same in any manner. The Ld. AO though in the A.Y. 2016-17 DCIT R.P. Infraventure P Ltd. order of assessment has disputed the expenses; however once he himself accepted the expenses to the tune of 50%, then we do not find any reason to interfere the decision of the Ld. CIT(A) deleting the other part of expenses which was disallowed by the Ld. AO without specifying any basis to do so. It is well settled proposition of law that disallowance of expenses on ad-hoc basis that too without rejecting the books of accounts is untenable. The Ld. CIT(A) found substance in the case made out by the assessee and allowed the disallowance made by the AO which in our considered view is just and proper so as not to warrant interference. These grounds of appeal filed by the revenue are found to be devoid of merit and hence dismissed.
In the result, the appeal of the revenue is dismissed.
Order pronounced in open court on 25.06.2025.