MI PKS (JV),VADODARA vs. THE ITO, WARD-1, MEHSANA

The present appeal preferred by the Assessee is directed against the Order, dated 29/04/2025, passed by the National Faceless Appeal Centre (NFAC), Delhi [hereinafter referred to as the ‘CIT(A)'] whereby the Learned CIT(A) had dismissed the appeal against the Assessment Order, dated 20/03/2021, passed under Section144(3) read with Sections 143(3A) and 143(3B) of the Income Tax Act, 1961 [hereinafter referred to as 'the Act'] for the Assessment Year 2018- 2019. The present appeal was initially disposed by way of Order, dated 25/11/2025. However in this MA No.06/AHD/2026 filed by the Assessee, the aforesaid order was recalled vide Order dated, 25/11/2025 and appeal was fixed for hearing. In the aforesaid facts and circumstances the present appeal had come up for hearing before this Tribunal.

The Assessee has raised following ground of appeal: “1.1 Ld. AO & Ld. CIT (A) has grossly erred in disallowance of transportation expense of Rs.41,48,000 actually incurred by the Appellant.

2 Ld. AO and Ld. CIT (A) ought to have allowed this expenditure which was incurred for the purpose of business.

3 Ld. AO and Ld. CIT (A) have grossly erred by holding that this expenditure though deducted directly from the payments received by the Appellant, should have been borne by the subcontractor.

4 Ld. AO and Ld. CIT (A) ought to have appreciated that the agreement with a subcontractor is a mutual agreement which has been altered subsequently with the oral consent of both the parties. Appellant therefore pleads that the disallowance of sublet expense of Rs.5,19,692 be deleted.”

The Assessee is a joint venture company with Miral Infrastructure (a partnership firm) and M/s. PK and Sons (a proprietorship concern) as joint venture partners. The aforesaid joint venture came into existence by way of Joint Venture Agreement, dated 17.04.2017. For the Assessment Year 2018-2019, the Assessee filed return of income return of income 08/08/2018 declaring total income of 2 INR.18,00,440/-. The case was selected for complete scrutiny under for low profit margin and high refund amount. During the assessment proceedings the Assessee explained that Assessee was awarded works contact related to earthwork, support work for bridges and construction of minor bridges by Western Railways (Tender 75 & 76) which was sub-contracted by the Assessee to M/s. PKS Technobuild Pvt. Ltd. vide Sub-Contract Agreement, dated 18.04.2017. The Assessee had received INR.13,02,06,937/- from Western Railways towards the contract work completed, out of which the Assessee had passed on INR.12,36,73,470/- to the sub-contractor. The Assessing Officer noted that in addition to claiming deduction for payments made to sub-contractor, the Assessee had also claimed deduction for direct expenses which included Transportation Expenses of INR.41,48,000/- and Sublet Expenses of INR.5,19,692/-. The Assessing Officer disallowed the deduction for the aforesaid expenses observing that the said expenses should have been borne by the sub- contractor. The Assessing Officer held that the aforesaid expenses were not admissible considering the terms and conditions of Sub- Contract Agreement, dated 18.04.2017. In appeal, the Learned CIT(A) declined to grant any relief to the Assessee and confirmed the disallowance made by the Assessing Officer. Being aggrieved the Assessee preferred the present appeal. Ground No. 1.1 to 1.4 are directed against the disallowance of Transportation Expenses while Ground No. 2.1 to 2.4 are directed against the disallowance of Sublet Expenses.

We have heard both the sides and have perused the material on record.

We would first take up Ground No.1 to 1.4 raised by the Assessee directed against the disallowance of Transportation Expenses of INR.41,48,000/-. On perusal order passed by the Assessing Officer and CIT(A) we find that is admitted position that the Assessee was awarded tender work by Western Railways which was sub-contracted to another party. The Assessee retained a margin of 2% and 3.8% on work related to Tender 75 and 76, respectively. The Assessing Officer and the CIT(A) were of the view, having retained a small margin and having subcontracted the work to third party, the Assessee could not claim further deduction Transportation Expenses of INR.41,48,000/-. We note that the Assessee had furnished before the authorities below a Memorandum of Understanding, with the sub-contractor wherein it was recorded as under: ”The agreement is hereby made and entered into this 10th day of April, 2017, by and between MI-PKS JV, hereafter called Party of First Part, and PKS Technobuild Pvt. Ltd., hereafter called Party of Second Part. The said parties, for the considerations hereinafter mentioned, hereby agree to the following:

During the course of hearing it was explained by the Learned Authorised Representative for Assessee that expenditure pertained to two contracts, dated 17.03.2017 and 28.03.2017, awarded to the Assessee covering earthwork, support work for bridges and construction of minor bridges in connection with installation of New BG line between Chhotaudepur and Dhar covering aggregate distance of 5 KM of railway line. In view of the urgency of completion of this work, railway immediately advised to make a demo of 0.5 KM trial ramp on which railway track is laid thereon subsequently. Such initial testing is mandatory to check the soil quality and the strength of the earth which can bear the weight of track and passing of passenger/goods trains. Once it is checked by the railway engineers, subsequent permission is granted to carry out the earthwork for covering the distance of 5 KM as per the contract. Therefore, the Assessee had to immediately start the work for building the 0.5 KM trial ramp, and incurred expenditure of INR.41,48,000 on purchase and unloading of the earth at the site for the sample trial ramp during the period from April, 2017 and June, 2017. Reliance was also placed on month-wise summary of the bills. Per Contra, the Learned Departmental Representative opposed the aforesaid submission and placed reliance upon the order passed by the Assessing Officer and the Learned CIT(A).

We note that the contention of the Assessee is that the Assessee had incurred expenditure of INR.41,48,000 on purchase and unloading of the earth at the site for the sample trial ramp during the period April, 2017 and June, 2017. The delivery of the earth commenced at the site from 02.04.2017 itself and the same continued upto 17.06.2017. As this was a continuing work the entire expenditure has been borne by the Assessee. The memorandum of understanding clearly recorded that the aforesaid expenses would not be borne by the sub- contractor. Per contra, the stand of the Revenue is that the Assessee has not been able to corroborate the submission as the Memorandum of Understanding is undated and therefore, cannot be relied upon.

On perusal of record we find that Memorandum of Understanding, records that an arrangement that was reached between the parties on 10/04/2017. We find that the said as per the stamp with handwritten entry on the said Memorandum of Understanding, the same was notarized on 10/05/2017. The fact that the definitive agreement, being the Sub-Contract Agreement is dated 18/04/2017 led the Assessing Officer to disbelieve the sanctity of the Memorandum of Understanding. In our view, the Memorandum of Understanding is to be read as a document clarifying the original understanding which was not captured in the Sub-Contract Agreement, dated 18/04/2017. It records the original understanding reached between the parties on 10/04/2017 before the execution of Sub-Contract Agreement which was documented subsequently on 10/05/2017. It is not even the case of the Revenue that the sub-contractor had claimed deduction for these expenses. Therefore, we delete the disallowance of INR.41,48,000/-.

Thus, Ground No. 1.1, to 1.4 raised by the Assessee are allowed.

Next, we would take up Ground No.2 to 2.4 raised by the Assessee directed against the disallowance of Sublet Expenses of INR.5,19,692/-.

We note that the Assessing Officer as well as the Learned CIT(A) had rejected the Assessee’s claim of deduction of Sublet Expenses on the premise that the same should have been incurred and borne by the sub-contractor since the Assessee had sub-contracted the work. In our view, the authorities below failed to appreciate the true nature of expenses. Sublet Expenses represented labour cess levied under The Building and other Construction Workers' Welfare Cess Act, 1996 (computed at the rate of 1%) and copy charges (computed at the rate of INR.50) which were deducted by Western Railways in respect of bills raised by the Assessee. Therefore, these expenses could not have been claimed as deduction by the sub-contractor as the same have neither been incurred nor borne by the sub-contractor. There is no dispute as to the genuineness of the expenses since the same have been deducted by the payee (ie. Western Railways) as per the terms of the tender awarded to the Assessee. Further, we find that the Assessee has filed affidavit stating that the sub-contractor has not claimed deduction in respect of aforesaid Sublet Expenses of INR.5,19,692/-. Given the aforesaid, we delete the disallowance of INR.5,19,692/- and allow Assessee’s claim for deduction for Sublet Expenses.

Thus, Ground No. 2 to 2.4 raised by the Assessee is allowed.

In result, the appeal preferred by the Assessee is partly allowed.

""यथ"/ The Respondent. 3. संबंिधतआयकरआयु"/ Concerned CIT 4. आयकरआयु"(अपील) / The CIT(A) 5. िवभागीय"ितिनिध, आयकरअपीलीयअिधकरण/ DR, ITAT, 6. गाड"फाईल /Guard file. आदेशानुसार/BY ORDER, उप/सहायकपंजीकार (Dy./Asstt.