Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, B BENCH, BANGALORE
Before: SHRI WASEEM AHMED & SHRI KESHAV DUBEY
PER WASEEM AHMED, ACCOUNTANT MEMBER:
These cross appeals filed by the assessee as well as the revenue are against the order passed by the ld. CIT-A dated 31-03-2024 for the assessment year 2020-21 and the assessee also filed cross objection. an appeal by the assessee for A.Y. 2020-21.
The assessee has raised extensive grounds of appeal running into several pages. The issues raised by the assessee through ground Nos. 1 to 3 of its appeal are general in nature and therefore the same do not requiring any separate adjudication. Hence, the same are hereby dismissed as infructuous.
4. The issue raised by the assessee through ground No. 4 of its appeal is that the Ld. CIT-A erred in confirming the disallowance of labour expenses amounting to Rs. 16,57,35,000/- made by the AO relying on the statement recorded during the search.
The relevant facts are that the assessee is a private limited company and engaged in the construction business through engagement of direct labour and subcontractors. The assessee company was subject to search proceedings under section 132 of the Act dated 07-10-2021 to 11-10-2021 which covers the business premises as well as residential premises related to its Managing Director (MD), namely Shri Pichakal .
, 1190 & CO No.24/Bang/2024 Page 3 of 68 Venkateshwar Roa (in short Shri PV Rao). The search and survey in relation to impugned search was also extended to the other related person of the assessee such as sub-contractors, Internal Auditor etc.
During the course of search proceedings, certain documents were found and seized which were marked as annexure A/ACPL/01. The pages 37 and 38 of said annexure contain certain cash transactions. A question in this regard was asked to the treasure of the assessee company, namely Smt. Mamtha CK while recording her statement under section 132(4) of the Act dated 9th October 2021. In response, she explained that the cash amounting to Rs. 25 lakh and Rs. 75 lakh was withdrawn and handed over to the MD Shri PV Rao or at his residence as on 3rd and 4th August 2021. On further question, she explained that on the instruction of MD Shri PV Rao cash were withdrawn from the bank and handed over to him. She further explained that impugned cash withdrawn were accounted in books as various site expenditure. Further she provided the details of such cash withdrawal, and the details of such cash handed over to Shri PV Rao from the tally for the period starting from 2016-17 to the search team. Impugned details provided by Smt. Mamtha KC were seized by the search team and marked as A/ACPL/01 pages 178 to 189.
The above stated statement of Smt. Mamtha KC and material was confronted to the MD Shri PV Rao while recording his statement under section 132(4) of the Act as on 07 to 11-10-2021 and further confronted as on 9-12-2021 (i.e. final PO operation or day on which Panchama drawn) while recording his statement under section 132(4) of the Act. The assessee on both occasions confirmed the statement of Smt.
, 1190 & CO No.24/Bang/2024 Page 4 of 68 Mamtha K and admitted that cash was used by him for business purpose as well as for personal expenditure over the years. As he was unable to quantify the amount used for business purposes and personal uses, he voluntarily agreed to offer the cash withdrawal of Rs. 12,46,84,243/- made during the year as additional income.
However, the assessee the failed to offer the admitted additional income discussed above, therefore the AO issued show cause notice purposing to make the addition of Rs. 12,46,84,243/- to the income of the assessee.
In response to the show cause notice, the assessee submitted that it is engaged in the execution of various irrigation projects at different sites located at remote places throughout the state of Karnataka. The cash withdrawals during the A.Y. 2019-20 to 2021-22 were made for genuine business purposes, particularly for making payments to labourers engaged at various remote project sites where banking facilities are not readily available. These cash withdrawals were necessary to ensure smooth execution of works. As many labourers did not possess the bank accounts and were needed to be paid in cash. Additionally, cash was utilized for local petty purchases and weekly wage payments at the sites, while the cash withdrawal at the head office was minimal and confined to petty expenses and office maintenance. It is important to note that the percentage of cash withdrawals to turnover was very minimal, ranging from only 0.37% to 1.11%, indicating that cash usage was exceptionally low relative to the size of operations, and well within reasonable limits for the construction industry. Furthermore, detailed records of cash payments were maintained, and the majority of .
, 1190 & CO No.24/Bang/2024 Page 5 of 68 labour expenditures were made through cheques while cash payments forming only 1.13% to 3.08% of total labour expenses during the relevant years.
It was further submitted that books of accounts were duly audited under section 44AB of the Act, and no discrepancy or adverse comment regarding cash withdrawals was noted by the statutory auditors. During the course of the search operation, due to severe stress, personal bereavement caused by the death of the assessee’s elder brother just a week before the search i.e. as on 30th September 2021 and his 11th day death ceremony pooja on 10th October 2021 falling during the search (7th to 11th October 2021), and due to coercion by the investigating officers, a forced disclosure was made for entire cash withdrawal, which the assessee now seeks to withdraw as it was not made voluntarily. The assessee also submits that the statements of employee Smt. Mamatha KC, who was not involved in the company’s day-to-day financial operations, but her statement was wrongly relied upon by the department. Her lack of knowledge regarding the utilization of cash renders her statements factually incorrect and irrelevant, especially when the audited books clearly support the assessee’s claim.
Additionally, it is submitted that the directors and family members have sufficient personal drawings and declared incomes in their personal returns, demonstrating that there was no diversion of company’s funds for personal use. In view of the low ratio of cash withdrawals to turnover, proper maintenance of records, absence of any adverse audit findings, and the genuine business need for cash payments in remote areas, the assessee vehemently submits that the proposed addition of .
, 1190 & CO No.24/Bang/2024 Page 6 of 68 Rs. 12,46,84,243/- in respect of cash withdrawals be dropped in the interest of justice.
However, the AO disregarded the contention of the assessee. The AO finds that the statement of the assessee was recorded on multiple occasions over a period of 6 months under section 132(4) and 131(1) of the Act. The statement recorded at the time of search was stressed over 07-10-2021 to 11-10-2021 and in between sufficient time was given which is evident from the extract of the statement itself. The AO found that the assessee has nowhere mentioned any undue pressure of forced statement in those 6-months period where statement was recorded on multiple time. Therefore, the retraction filed by the assessee dated 23- 09-2022 at the fag-end of assessment proceedings alleging forced statement is not acceptable.
12.1 Furthermore, the AO from the search materials note that the assessee has been regularly receiving cash back from the various sub- contractor/cement, steel vendors etc. after making payment to them through banking channel. The cash back received was utilized for making illegal payment to the various officials. In this regard, the AO referred to the loose sheets found from the possession of the CA Shri Lakhmikantha and residential premises of the MD.
12.2 The AO also noted that the residential premises of Mr. Subhash, one of the subcontractors and key persons of the assessee company, were also covered under the search where signed cheque books of the subcontractors of assessee company were found and the statement u/s 132(4) of sub-contractor was also recorded. Shri Subhash admitted that .
, 1190 & CO No.24/Bang/2024 Page 7 of 68 the cheque books were kept on the direction of MD of the assessee company Shri PV Rao and after encashing the cheque, the cash was handed over to the messenger of Shri PV Rao. The statement of sub- contractors Shri Subhas, when confronted to Shri PV Rao, he admitted that the cash was generated through these types of transactions in order to meet the cash requirement to obtain the government contracts and to clear the bills for early payments. Identical material of over invoicing and cash paid back was also found from one of the subcontractors namely Shri Umashankar and the same was accepted by MD Shri PV Rao. Similarly, during the course of search proceedings of the residential premises of Mr. CH Ravi (close associate of MD Mr. PV Rao), several loose sheets specifically pages 1 to 8 and 14 to 18 were found and seized from a folder marked with annexure A/CHR/01 which contains the transactions of the assessee company with various individuals and entities. The same was confronted to MD Mr. PV Rao who acknowledges that transactions recorded in the loose sheet are unaccounted cash receipts and such cash was used for incidental business expenses.
12.3 The AO also referred the statement of Shri Mallikaarjuna, accountant of assessee company, internal CA Shri Lakshimikantha, senior accountant of assessee company namely Shri Balasubramanian confirming the fact that the unaccounted cash was generated through recording the bogus expenditure which was utilized for making illegal payment and personal expenditure.
12.4 The AO further noted that the documents seized from the premises of Shri PV Rao marked as loose sheet No. 201 of the folder A/PVR/132/01 and loose sheet Nos. 291 to 296 of the folder .
, 1190 & CO No.24/Bang/2024 Page 8 of 68 A/PVR/132/01 reveals that MD Shri PV Rao has purchased the gold of Rs. 4,85,000/- from the company accounts and also given gift to the various persons and payment of the same made from company’s account.
12.5 The AO also found infirmity in the labour register and voucher furnished by the assessee on a sample basis. It was noted that signatures on these documents were made by only 1 or two persons, and the same person signature was made sometime in Hindi or sometime in English. In majority of vouchers, there were thumb impressions, and the same thumb impression was used for multiple labourers. Further, the projects carried out by the assessee are an irrigation project located in a remote area close to rivers and soil. However, the vouchers furnished for claiming expenditures at various sites are fresh without any dirt despite these vouchers dating back 3-4 years. In view of the above, the AO inferred that the assessee has generated cash through recording bogus expenditure under the site expenses, labor payment etc. and then such cash was used for making illegal payment and personal use of directors. The AO noted that during the search loose sheet marked as page 302 to 306 of annexure A/ACPL/2 found from assessee’s corporate office contain the information about cash receipt against the name of various parties and HO (head office). The cash withdrawn by the assessee were matching with the cash receipts noted against the HO in the impugned loose sheet. On analysis of seized materials, the AO found entry in the same was against the HO which was recorded till 11-10-2019 for an amount aggregating to Rs. 15,10,85,000/- only. However, the assessee also withdrawn cash of Rs. 1,46,50,000/- after 11th October 2019. Hence the AO quantified the .
, 1190 & CO No.24/Bang/2024
Page 9 of 68 cash amount paid for illegal purpose and personal expenditure at Rs. 16,57,35,000/- (15,10,85,000 + 1,46,50,000). Accordingly, the AO disallowed the said amount under section 37 of the Act and added to the total income of the assessee.
The aggrieved assessee preferred an appeal before the learned CIT(A) who confirmed the addition made by the AO by observing as under: 5.4 The facts of the case as enumerated above, the appellant’s written submission, the assessment order and material available on record have been carefully perused. The appellant’s major contention seems to be that statements were forcefully recorded and that the admission given by the MD PV Rao has been retracted and no inferences have been drawn from certain loose sheets which form part of the seized material. 5.5 Not only with respect to these grounds of appeal, but in general for all the grounds, the appellant insists that the statements were forcefully taken and therefore, they cannot be made a basis for additions. It would be of note to mention that in the case on hand none of the statements have been taken as confessions without the backing of any incriminating material or discrepancy. With respect to this particular addition, it is apparent that, first the authorized officer finds incriminating material in the form of loose sheets (in this instance of cash receipts by MD). The source for this cash receipts is looked into and it is found that these are from cash withdrawals on various dates from the Bank account maintained at Canara Bank, Sanjay Nagar Branch. Then the accounting treatment of these cash withdrawals are probed into. It is found that these cash withdrawals are booked under the head labour expenses / site expenses. This aspect is then enquired into and has been established clearly in the assessment order that no such expenses were made. In the foregoing enumeration of facts, it would be seen that there were no sites in Bangalore and that no cash having been sent to various sites have been produced. Further the AO has pointed out various discrepancies in the self made labour vouchers / bills produced during the course of assessment proceedings. It has also been brought on record that these bills and vouchers were not found during the course of search nor were they put under any prohibitory order. Therefore, in this instance, it is very clearly established without the aid of any of the statements recorded, just based on the facts unearthed during the course of search and assessment proceedings that the cash withdrawals from Sanjay Nagar Branch were not used for business purposes. The appellant has not demonstrated clearly that this portion of cash withdrawn has been made for business purposes. 5.6 Therefore, this addition of the AO is confirmed and the grounds of appeal is dismissed.
, 1190 & CO No.24/Bang/2024 Page 10 of 68
Being aggrieved by the order of the learned CIT(A) the assessee is in appeal before us.
The learned AR before us filed written submission running from pages 1 to 40, case law compilation of 57 pages and a paper book running from pages set of 4 paper books running into various pages and submitted that the disallowance upheld by the learned CIT(A) is arbitrary and lacks independent reasoning, as it merely reiterates the assessment order without addressing the detailed submissions made by the appellant. The learned CIT(A) concluded that cash withdrawals were booked as bogus labour expenses without specifying how such a conclusion was derived. Contrary to this assertion, the appellant provided a detailed tabular statement before the learned CIT(A) (refer to page no. 133 of PB-III), showing site-wise cash withdrawals and expenses, including for project sites in and around Bangalore. It is unjust to demand further proof of cash transfers to sites when the disbursement was made directly by the Managing Director (MD), Shri P.V. Rao.
15.1 Furthermore, the leaned AR emphasized that the non-availability of bills and vouchers during the search cannot be a basis for drawing adverse inference, as the relevant labour registers were already audited, examined, and no adverse remarks were made. The learned AR also claimed that these registers were not specifically requested during the search and at that they were available at the appellant's offices and project sites.
, 1190 & CO No.24/Bang/2024 Page 11 of 68 15.2 Regarding the statement of Smt. Mamatha, the learned AR contended that her admission lacks evidentiary value as she was neither shown any books nor confronted with any evidence of bogus labour expenditure. Her limited role was confined to payment control, and she had no access to or knowledge of other departments. Similarly, statements from independent subcontractors such as Shri Subhash and Sri Umashankar used against the assessee to infer illegal cash generation are baseless, as their conduct pertains to their own businesses and not the appellant’s activities.
15.3 The learned AR also challenges the reliance placed on certain seized papers and scribblings. It was argued that the documents seized from Shri C.H. Ravi, a subcontractor and competitor, cannot be attributed to the appellant, especially since the papers lacked any transactional context and were not found at the appellant’s premises. Scribblings in Annexure/PVR/132/01 were misinterpreted by the AO as they contain no names, dates, or context and are not in the handwriting of any company’s employee. Moreover, Mr. PV Rao, under mental duress during the search, made general statements that were later retracted through an affidavit, which should have been considered by the AO before making the disallowance.
15.4 Additionally, the learned AR draws our attention to the settled legal principles that statements recorded during search cannot form the basis for additions unless supported by credible evidence, as clarified by CBDT Circular No. 286/2/2003-IT (Inv) dated 10.03.2003 and various Hon’ble High Court judgments.
, 1190 & CO No.24/Bang/2024 Page 12 of 68 15.5 The learned AR stresses that the cash withdrawn was used solely for labour payments at project sites in and outside Bangalore and was accounted for under the proper accounting heads. Disallowance based merely on suspicion, especially when registers were verified by auditors without objections, is unjustified.
15.6 Furthermore, the learned AR submitted that the addition in hand was made on the amount of cash withdrawn from the bank which is duly recorded in the books. The cash withdrawn from the bank itself cannot be the income of the assessee. It is clear from the assessment order that addition to total income was made on account of cash withdrawn from the bank, not against any specific claim of expenditure debited in the profit and loss account. Therefore, disallowances made under section 37 of the Act without any corresponding debit of the expenditure in the profit and loss account is not sustainable. It was also contended that the AO has not found any specific exact amount paid to the official which is prohibited nor verified the same from any government official by issuing notices. Yet the AO made blanket allegations. Likewise, the AO also did not find the quantum of personal expenditure except for Rs. 4.85 lakh against the gold purchases. Therefore, in the absence of any finding, the inference drawn by the AO that labour expenses incurred in cash are of personal nature or payment to government official is unjustified.
On the other hand, the learned DR filed the written submission supported by the report of the AO. The learned DR before us contended that there were found incriminating materials suggesting the cash received by the assessee against the expenses and accordingly such expenses cannot be relied upon. Similarly, the MD of the company and .
, 1190 & CO No.24/Bang/2024 Page 13 of 68 the other employees of the company in their respective statement have accepted the modus operandi for booking the bogus expenses so as to make the payment for illegal activities. Thus, such expenses cannot be allowed as business expenses. The learned DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. The main issue before us is whether the disallowance of ₹16,57,35,000/- made by the AO, confirmed by the ld. CIT(A), is justified in the given facts and circumstances. In this regard, we note that the disallowance was made on the ground that cash withdrawn from the bank was not used for business but for personal and illegal purposes. The AO relied heavily on statements of the MD, Shri PV Rao, employees, subcontractors, and loose sheets found during the search. The MD initially admitted that cash was used for both business and personal purposes and offered ₹12.46 crore as additional income. Later, he retracted the statement, saying that it was made under pressure due to emotional stress. However, we are conscious to the fact that this retraction came almost a year later and was not raised during repeated questioning while recording the statement over a period of six months. Therefore, in our considered opinion, the retraction loses credibility.
17.1 We also note that the AO found documents and statements suggesting the cheque/ cash withdrawals were routed back in cash from subcontractors and used for illegal payments. Statements from individuals like Shri Subhash and Shri Umashankar supported this. They admitted that after receiving cheque payments, they returned cash to .
, 1190 & CO No.24/Bang/2024 Page 14 of 68 the company. Similar statements were also given by the internal accountant and staff. Further, some vouchers submitted by the assessee had suspicious entries. Many of them had repeated thumb impressions and looked too clean for documents from remote, muddy work sites. This casts serious doubt on the authenticity of the labour expenses.
17.2 However, at the same time, we cannot ignore the fact that the assessee is a large construction company. It has declared a turnover of ₹1009.04 crores for the year under dispute. On this turnover, it has shown a gross profit of 14.08% and a net profit of 6.42% of the turnover. These are not low profit margins and indicate reasonable income reporting. The lower authorities also not raised any question regarding the profit ratio of the assessee or brought any comparative case.
17.3 We are also conscious about the books of account of the assessee which were duly audited, and no discrepancy was pointed out by the statutory auditors. The percentage of cash payments to total labour expenses was low between 1.13% and 3.08%. The assessee also submitted that many project sites were in remote locations where cash payments were unavoidable.
17.4 We also note that the AO and learned CIT(A) have relied mostly on loose sheets and oral statements. In our considered opinion these alone, without clear and direct evidence, are not conclusive proof that the entire cash withdrawal was used for personal or illegal purposes. It is also important to note that the seized papers were not always found from the assessee’s premises. As such some were found from the .
, 1190 & CO No.24/Bang/2024 Page 15 of 68 premises of subcontractors or associates. These facts also reduce the evidentiary value of such materials.
17.5 Be that as may be, it is true that there are some gaps and suspicious patterns regarding the working of the assessee and genuineness of the expenses. But there is no conclusive proof that the full amount withdrawn was misused. It would therefore not be fair to treat the entire amount of ₹16.57 crore as non-business in nature. Therefore, to balance the interests of justice, we are of considered view that disallowances of certain percentage of alleged bogus expenses will serve justice to both the assessee and the revenue. Accordingly, we hold that some portions of the cash withdrawals were not properly explained. At the same time, the entire withdrawal and the alleged expenses cannot be disallowed. Therefore, to cover any possible leakage or irregularity, we restrict the disallowance to 10% of the total cash withdrawals, on an ad hoc basis. Accordingly, disallowance is restricted to ₹1,67,35,000 (10% of ₹16,57,35,000) and the renaming amount of addition is deleted. Hence the ground of appeal of the assessee is hereby partly allowed.
18. The next issue raised by the assessee through ground Nos. 5 to 5.6 in the appeal memo is that the Ld. CIT-A erred in confirming the disallowance of expenditure on subcontractor M/s Avexa Corp Private Limited of Rs. 80,14,67,379/- only.
The necessary facts are that there was survey proceedings carried out by DGIT(Inv.) Hyderabad as on 7th January 2021 (i.e. almost 9 .
, 1190 & CO No.24/Bang/2024 Page 16 of 68 months before the search carried out on the appellant assessee) in the case of M/s Avexa Corporation Pvt Ltd (hereafter M/s Avexa) a company based in Hyderabad. During the course of the survey, the statement of managing director of M/s Avexa namely Shri Jogeswar Rao Kurra was recorded under section 133A of the Act. The survey team on perusal of Form-26AS of M/s Avexa for F.Y. 2017-18 observed that an amount of Rs. 72,86,06,706/- was paid or credited by the assessee (M/s Amrutha Construction Pvt Ltd- ACPL) to it (M/s Avexa). Accordingly, vide question No. 23 of the statement, Shri Jogeswar Rao was asked to explain the nature of the transactions. In reply, he stated that the impugned amount was received on account of the work contract and after receiving the amount, the same was promptly transferred to the sub-contractors, namely: i. M/s Haigreeva Infratech Project Ltd, ii. Manikanta Enterprise & iii. Tanisha Infrazone Pvt Ltd. 19.1 As per Shri Jogeswar Rao, it was done so on the instruction of M/s ACPL (appellant assessee). He further explained that the above- mentioned subcontractors have not executed any work. As such the amount was received for the purpose of accommodation entry.
19.2 Thereafter, during the search proceeding at the residence of Shri CH Ravi, relative of the MD of assessee company (same search i.e. search in case of assessee), found certain loose sheets marked as annexure A & B to which Shri CH Ravi stated that the loose sheets and transaction recorded therein belong to the assessee company (ACPL). Further, the same documents were also found from the corporate office of the assessee (ACPL) marked as annexure A/ACPL/02 pages 302 to .
, 1190 & CO No.24/Bang/2024 Page 17 of 68
The impugned sheet contains 4 columns being Date, Receipt, amount and Cumulative amount which shows that the amount on certain date was received from certain parties whose names were written therein in the receipt column. These pages were confronted to internal Chartered Accountant of the assessee company namely Shri Lakshmikanta R to which, he identified that parties whose name appeared therein, the assessee has been carrying on transactions with these parties. The impugned sheet also contains the name of M/s Avexa (interpreted as M/s Avexa) demonstrating an amount of Rs. 17.50 crore received on different dates between 25th March 2019 to 18th October 2019. In other words, receipts of Rs. 6 crores pertain to F.Y. 2018-19 and the remaining amount of Rs. 11.5 crores pertain to F.Y. 2019-20 i.e. year under consideration.
19.3 The impugned sheet, statement of Shri CH Ravi, Shri Lakshmikant R and finding of survey carried out at M/s Avexa along relevant statement of its MD Shri Jogeswar Rao was confronted to the MD of the assessee company namely Shri PV Rao as on 9th December 2021 while recording his statement during the PO search proceeding. Shri PV Rao in his reply stated that M/s Avexa has executed certain work contract for the projects of assessee company directly or through various sub- contractors for which assessee company has paid contract fee after deducting relevant TDS. However, he refuses having received any amount as noted in the loose sheet found. He also stated that he doesn’t know the parties namely M/s Haigreeva Infratech Project Ltd, Manikanta Enterprise & Tanisha Infrazone Pvt Ltd as stated by Shri Jogeswar Rao and refuses to be engaged in transactions with the said parties. He asserted that the contract worked given to M/s Avexa was a genuine .
, 1190 & CO No.24/Bang/2024
Page 18 of 68 work contract in relation to various projects of the assessee company. However, the AO during the assessment proceeding found that: i. The MD of M/s Avexa in the statement recorded under section 133A of the Act has categorically stated that it received the subcontract amount from ACPL in the F.Y. 2018-19 and 2019-20 and transferred such amount further to M/s Haigreeva Infratech Projects Limited, M/s Manikanta Enterprises, and M/s Tanisha Infrazone Private Limited on the direction of the company i.e. M/s ACPL. ii. Mr. Jogeshwar Rao Kurra further stated that the subcontractors to whom the payment was transferred had never executed the work and such subcontractors are only engaged in the accommodation provider. iii. The company M/s Avexa was also subject to search proceedings as on 06-02-2020 wherein various incriminating materials/documents were found suggesting that the company was engaged in diverting the funds through infrastructure projects like raising fake invoices, issuing fake work orders, and utilizing and transferring the fake GST inputs. iv. Based on incriminating materials it was admitted by the company that it is engaged in providing the accommodation entries to various companies and also explained the modus operandi of providing those accommodation entries. v. The AO further noted that the company M/s Avexa has also faced litigation from GST department with respect to generating fake invoices and passing out the bogus ITC.
19.4 Furthermore, the AO noted that the notices u/s 133(6) of the Act were issued to the companies namely M/s Avexa Corp Private Limited, M/s Haigreeva Infratech Projects Limited, M/s Manikanta Enterprises, and M/s Tanisha Infrazone Private Limited to clarify the transactions with the assessee company. However, no response was received. It also .
, 1190 & CO No.24/Bang/2024 Page 19 of 68 noted that the company M/s Tanisha Infrazone Private Limited has not filed its return for the year under consideration and it has reported the Nil revenue and Nil fixed assets in its income tax return filed for the A.Y. 2018-19. Thus, the AO in view of the above issued the show cause notice proposing to disallow the sum of Rs. 80,14,67,379/- being subcontract expenses paid during the year to M/s Avexa under section 37 of the Act.
19.5 In response to the show cause notice, it was submitted that the seized material was found from the possession of Shri CH Ravi who used to work in association with the appellant company but due to the difference, he was terminated and at the time of search he was working independently as a competitor. Later on, Shri CH Ravi has also filed affidavit with DDIT(Inv) intimating the facts that the alleged documents do not belong to the assessee company. Further, the assessee contended that the payment made to M/s Avexa was for the subcontract work carried out by it and in accordance with the invoice raised. The assessee in support furnished the copy of work order, the copies of invoices raised and the ledger copy. The assessee further claimed that it neither entered into any transaction, agreement or understanding whatsoever with the parties namely M/s Haigreeva Infratech Projects Limited, M/s Manikanta Enterprises, and M/s Tanisha Infrazone Private Limited nor instructed M/s Avexa regarding the transfer of funds. The allegation was made merely relying on the statement of MD of M/s Avexa recorded during the survey which is not supported by any corroborating material and without providing opportunity to cross examination. Hence, the addition proposed is bad in law.
, 1190 & CO No.24/Bang/2024 Page 20 of 68 19.6 The assessee also claimed that there were two work orders allocated to M/s Avexa Corporation Private Limited for a consideration of Rs. 115.36 crores against which the company has raised and submitted the invoices for the sum of Rs. 88.72 crores. However, the work carried out by the said subcontractor was not of good quality therefore, some part of the payment has been withheld. The said details are confirmed by the director of the company Mr. Jogeshwar Rao under the affidavit which was also filed before the investigation team/ officer.
However, the AO in view of the above observation as discussed in the preceding paragraphs, disregarded the claim of the assessee by holding that the affidavit furnished by the assessee does not substantiate that the transaction with subcontractor as genuine. The AO also rejected the demand of cross examination of by observing that the assessee has not raised this before the investigating officer as well as in response to the 1st notice but only raised this issue at the fag-end of the assessment. Hence, the AO disallowed the sum of Rs. 80,14,67,379/- u/s 37 of the Act and added to the total income of the assessee.
The aggrieved assessee preferred an appeal before the learned CIT(A).
The assessee before the ld. CIT-A contended that the seized documents being page Nos. 302 to 306 of Annexure A/ACPL/02 cannot be considered as evidence and noting on the same cannot be construed as cash receipts. It was also contended that the AO relied on the statement of the Director of M/s Avexa but not considered the affidavit .
, 1190 & CO No.24/Bang/2024 Page 21 of 68 of the same person furnished subsequently and rejected demand of cross examination which is not justified.
The assessee further contended that subcontract to M/s Avexa was awarded in relation to the Government work contract which would not have been completed without the subcontract being executed by the said party. The party M/s Avexa has declared turnover of Rs. 128 crores which included Rs. 80.14 crores received from the assessee company and on the turnover of Rs. 128 crore declared profit of Rs. 7.3 Crore which is 5.8% of the Turnover. Accordingly, the assessee claimed that if the party M/s Avexa only provided accommodation entry then such a profit ratio of 5.8% would not be possible. Further, the assessee again reiterated the submission made during the assessment proceeding. The assessee in support of its claim furnished the copy of affidavit of the MD of M/s Avexa, copy of assessment order of M/s Avexa for A.Y. 2020-21, Financial statement of M/s -Avexa for A.Y. 2020-21, Form 26AS of the M/s Tanisha Infrazone Pvt Ltd and m/s Haigreeva Projects ltd for A.Y, 2020-21 showing no entry from M/s Avexa and the copy of Government Form 27 being lumpsum contract running account for work -commenced on 07-09-2017 along-with the copy of work completed certificate up to 15-04-2022 for a value of Rs. 525.22 Crores.
The argument of the assessee and the document furnished were forwarded to the AO for remand report. The AO in the remand report submitted that during the search proceedings at the premises of the assessee, it revealed various incriminating documents that the assessee through over billing and bogus invoicing has generated cash to meet the inadmissible expenses required in the field of contract business. The MD .
, 1190 & CO No.24/Bang/2024 Page 22 of 68 of the assessee company Shri PV Rao also admitted the same. Therefore, merely furnishing copy of work order, RA bill and work complete certificate cannot prove the genuineness of all the subcontractors and the fact of over invoicing/bogus billing cannot be ruled out. Similarly, the financial statement of subcontractor M/s Avexa also cannot establish the genuineness of the payment made specifically in the circumstances where through the search and survey proceeding it is established that M/s Avexa was indulged in accommodation entry. The AO further found that para 5.2 of the assessment order, in the case of M/s Avexa clearly mentioned that no work has been done against the amount received from the assessee company. Against the said finding, no controverting evidence was brought by the assessee. The assessee failed to file the details and evidence of the expenditure incurred by M/s Avexa for carrying out the subcontract work. Furthermore, the AO submitted merely the fact that Form -26 of the two parties were not reflecting credit from M/s Avexa does not establish the genuineness of the payment made to M/s Avexa by the assessee company.
The assessee in the rejoinder reiterated that the payment made to M/s Avexa for subcontract work is genuine and in support furnished google map photos of the project site and photos of work site.
The Learned CIT (A) after considering the facts in totality dismissed the claim of the assessee and confirmed the addition made by the AO. The finding of the learned CIT(A) is summarized as below: - The addition not only based on the seized material but made after making various enquiries and appraisal of various evidence.
, 1190 & CO No.24/Bang/2024
- That the AO after furnishing the copy of affidavit of MD of M/s Avexa by the assessee has issued notice u/s 133(6) of the Act to him (MD of Avexa) but he neither responded nor appeared before the AO. - The cross examination would not have brought any new facts other than what is available on record. - The claim of the assessee that M/s Avexa carried subcontract work but no documents showing the nature and detail of expenditure incurred for carrying out such subcontract has been provided. - The MD of M/s Avexa has categorically accepted that the funds received from the assessee were immediately transferred to the three 3 entities who in turn give back the cash. Notices under section 133(6) of the Act issued to those entities but no reply received. Therefore, the AO has no option but to presume those entities as bogus. - The fact that Form 26 of Avexa does not reflect the entries in the name of the said parties which strengthens the view that those entities are entry providers only. - It is not the case that the assessee has not carried out the work contract for the Government. The addition has been made for the claim of bogus expenditure based on the material found showing the cash received back.
Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
The learned AR before us respectfully submitted that the AO wrongly treated the sub-contracts awarded by the assessee to M/s Avexa Corporation Pvt. Ltd. as bogus. Such finding of the AO is based on some loose sheets (pages 302–306 of Annexure A/ACPL/02) and the .
, 1190 & CO No.24/Bang/2024 Page 24 of 68 statement of Avexa’s Managing Director (Mr. Jogeshwara Rao Kurra, or JRK), who claimed the sub-contracts were merely accommodation entries and that payments were routed through other parties. However, the AR pointed out that Loose sheet page 302 to 306 of A/ACPL/02 were not seized from the assessee’s premises but from the residence of a third party, and they do not contain any reference to specific transactions or the nature of payments. Furthermore, Shri JRK later retracted his statement through a sworn affidavit dated 24.11.2021, which was submitted to both the AO and to the learned CIT(A). Despite this, the authorities failed to consider the retraction or allow the assessee an opportunity to cross-examine Shri JRK, which was specifically requested.
28.1 The learned AR further stated that the assessee had produced all necessary documentation to support the genuineness of the sub- contracts. These included valid work orders issued to M/s Avexa, tax invoices, ledger accounts, a project completion certificate from the Government of Telangana, and Google photos of the project sites. These projects were public infrastructure works awarded by Government bodies, which strictly monitored execution before certifying and releasing payments. Therefore, there could be no question of the works being fictitious.
28.2 It was also submitted that the AO disallowed the full amount of ₹ 80.14 crores without distinguishing between alleged cash returned and actual contractual payments. The disallowance even included GST, which is not part of the assessee’s income. The AR pointed out that the actual expenditure booked in the Profit & Loss account was ₹76.86 crores.
, 1190 & CO No.24/Bang/2024 Page 25 of 68 Moreover, the Department itself accepted M/s Avexa’s turnover and profit in its assessment under section 143(3) of the Act, which included the contract receipts from the assessee, thereby acknowledging the transaction as genuine.
28.3 Regarding the three other parties namely M/s Haigreeve Infratech Projects Ltd, M/s Manikanta Enterprises, and M/s Tanisha Infrazone Pvt Ltd. The learned AR submitted that the AO relied on their non-response to notices as a reason to question the transaction. The AR argued that these parties were never known to the assessee, and there was no evidence of any money trail connecting them to the assessee. Additionally, the Form 26AS of these parties showed no payments received from M/s Avexa, disproving the AO’s theory that money was routed through them and returned to the assessee.
28.4 The learned AR emphasized that the learned CIT(A) also failed to apply independent reasoning. The learned CIT(A) merely echoed the AO’s findings without examining the voluminous documentary evidence submitted by the assessee. The observation that the assessee failed to submit ledgers or bank proofs was incorrect, as those documents were already on record. The claim that absence of 26AS entries proves bogus transactions was also misguided, especially when M/s Avexa’s own filings and departmental assessments support the genuineness of the work.
28.5 Finally, the learned AR submitted that the entire basis for the addition was a single retracted statement and unrelated loose papers. No direct evidence was found or presented to show that the sub- contracts were not executed. The learned AR reiterated that all required .
, 1190 & CO No.24/Bang/2024 Page 26 of 68 documents were submitted, the payments were made through banking channels, the projects were completed, and that the income was duly recorded and taxed in the hands of Avexa. Therefore, the learned AR respectfully prayed that the disallowance made by the AO and confirmed by the learned CIT(A) be deleted in full, and justice be done to the assessee.
On the other hand, the learned DR submitted that the payment made by the assessee to M/s Avexa represents the bogus0 expenses. Therefore, the same cannot be allowed as deduction to the assessee. The learned DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the material available on record. The issue under dispute is the disallowance of Rs. 80.14 crore paid by the assessee to M/s Avexa Corp Pvt. Ltd. as subcontract expense. The Revenue has alleged that this payment was not genuine and was routed back to the assessee through the bogus subcontractors.
30.1 In this regard, we note that the thrust of the Revenue’s case is the statement of Shri Jogeshwar Rao Kurra, the Managing Director of M/s Avexa, recorded during a survey conducted on 7 January 2021. It is important to note that this survey took place several months before the search action at the assessee’s premises. It is settled position of law that a statement recorded during a survey under section 133A of the Act does not carry the same evidentiary value as one recorded under oath during a search under section 132(4) of the Act or recorded under .
, 1190 & CO No.24/Bang/2024 Page 27 of 68 section 131(1) of the Act. Such statements, especially when retracted later or unsupported by independent evidence, cannot be made the basis for making addition.
30.2 In the present case, the statement of Shri Kurra was made in a survey, not in a search. There is no record that any incriminating documents were found during that survey to support his oral statement. He had merely stated that amounts received from the assessee were transferred to certain other entities on the instruction of the assessee. Later, he submitted an affidavit where he stated that work was genuinely carried out for the assessee. The Revenue has not brought any tangible material to discredit this affidavit. In fact, the affidavit was dismissed without proper reasoning.
30.3 Additionally, we note that the assessee has demanded cross- examination of Shri Jogeswar Rao Kurra, whose statement was materially relied upon by the revenue authority. However, the request of the assessee was denied by the AO and the learned CIT(A) which in our considered opinion constitutes violation of principle of natural justice. The right to cross-examination is a fundamental facet of natural justice. We note that the AO held that the assessee raised this issue belatedly, but the fact remains that the learned CIT(A) also proceeded without affording that opportunity. In our considered view, while the absence of cross-examination may not render the entire assessment void, it does weaken the case of the revenue to use the same against the assessee.
30.4 Thus, relying on a survey statement made in the absence of any incriminating document and without cross-examination is not legally .
, 1190 & CO No.24/Bang/2024 Page 28 of 68 sustainable. The statement cannot, on its own, be treated as conclusive evidence of bogus transactions.
30.5 Further, the Revenue has placed heavy reliance on certain loose sheets (pages 303 to 306 of Annexure A/ACPL/02), which allegedly record cash receipts from various parties, including M/s Avexa. However, we find that these loose sheets mention several parties, yet action has been selectively taken only against a few. For instance, name such as ‘Venkatakrishna, ‘Venkata (Chintu), ‘Prasad Reddy’, ‘Vasudev Rao’, ‘Somanna’ ‘Ranjith’, ‘Aditya Construction, also appearing in the said loose sheets, however it appears that no action taken against such parties. This selective and inconsistent application of evidence undermines the reliability of the Revenue’s approach.
30.6 It is also relevant to note that these loose sheets were not found in the regular books of the assessee. One copy was found at the residence of a former associate, Mr. CH Ravi, who was no longer with the company and was working independently at the time of search. The assessee denies ownership or authorship of these documents, and Shri CH Ravi, subsequently in an affidavit, confirmed that they did not belong to the assessee. Admittedly, copy of the same was also found at the corporate office, but in our considered opinion this alone is not sufficient to establish the truth of the entries, especially without independent corroboration.
30.7 We note that the assessee, on the other hand, submitted multiple pieces of evidence to prove the genuineness of the subcontract such as .
, 1190 & CO No.24/Bang/2024 Page 29 of 68 work orders, invoices, ledger accounts, photographs of the project site, and even government-issued work completion certificates. Further M/s Avexa also have declared taxable profits and turnover in its returns, which includes majority of the amount received from the assessee. Therefore, in our considered view the existence of genuine work and profits earned weakens the argument of the revenue that M/s Avexa was merely a conduit for bogus billing.
30.8 At this juncture and without prejudice to the above, it is also pertinent to highlight that the loose sheets, even if assumed to be related to the assessee, reflect at most Rs. 11.5 crore in alleged cash receipts for the relevant year. Therefore, treating the full amount of Rs. 80.14 crore as bogus on the basis of such noting amounts to making a finding based on presumption rather than on conclusive evidence. This overreach by the AO undermines the credibility of the addition made.
30.9 Therefore, considering all the above, we conclude that the disallowance of Rs. 80.14 crore is not supported by legally acceptable evidence. The survey statement of Shri Jogeshwar Rao, in the absence of incriminating material and without opportunity for cross-examination, cannot be the basis of addition. The loose sheets relied upon are of doubtful evidentiary value and were used selectively. On the other hand, the assessee has provided documentary proof of the subcontract and its execution.
30.10 We, therefore, hold that the addition of Rs. 80.14 crore is not justified, and we accordingly set aside the finding of the learned CIT(A)
, 1190 & CO No.24/Bang/2024 Page 30 of 68 and direct the AO the delete the addition made by him. Hence the ground of appeal of the assessee is hereby allowed.
31. The next issue raised by the assessee through ground Nos. 6.1 to 6.4 of the appeal pertains to the disallowance of purchases from M/s Triveni Enterprises to the extent of Rs. 17,84,58,955/- only.
The relevant facts are that during the course of search (dated 7 October 2021), certain loose sheets, found from the corporate office of the assessee company, marked as page 302 to 306 of annexure A/ACPL/02, were containing details, suggesting receipts from various parties on different dates. One of the parties appearing in the impugned sheet was M/s Triveni Enterprises (a partnership firm), which supplied steel to the assessee company. As per the impugned sheet, a total of Rs. 25,27,00,000/- was received from M/s Triveni Enterprises between 22nd March 2019 to 19th October 2019. In other words, the amount of Rs. 4,43,00,000/- pertains to F.Y. 2018-19 and the remaining amount of Rs. 20,84,00,000/- pertains to F.Y. 2019-20, the year under consideration. In consequence to the above observation, a search under section 132 of the Act was carried out at the residence of managing partner of M/s Triveni Enterprises namely Shri Ashirwad Agarwal and survey under section 133A of the Act carried out at the corporate office and godown of M/s Triveni Enterprises as on 10th November 2021. During the search and survey proceedings at M/s Triveni Enterprises, statement of various key persons such as managing partner, CEO- Shri Prem Prakash Gupta, weigh bridge operator -Shri Amit Kumar Dubey, inventory in charge Shri Saddam Pasha were recorded. From the statement of these persons, it was found that the modus operandi of M/s Triveni Enterprise in relation .
, 1190 & CO No.24/Bang/2024 Page 31 of 68 to the supply of steel or steel coil is that the customer, based on negotiation raises purchase order (PO) and based on PO a delivery order is prepared by the corporate office and sent to the godown. Thereafter, the goods are weighed at weigh bridge installed at godown and a computerized weigh sleep is generated. Based on weigh sleep, an invoice is generated at the godown. The vehicle for outward supply only allowed to leave the godown after verification of weigh slip by the security. However, on verification of supply made to the assessee company, it was found that the sale made to the assessee for Rs. 24,42,88,714/- out of total supply of Rs. 98,76,60,614/- were not supported by the weigh slip, LR detail, delivery receipt and entry in outward register etc.
32.1 The above findings during the search at the assessee and search and survey at M/s Triveni Enterprises were confronted to the MD of the assessee company namely Shri PV Rao who agreed to offer additional income of Rs. 20,84,00,000/- only. However, the assessee failed to offer the impugned amount to tax in the return of income.
32.2 The AO during the assessment proceedings further observed that the close associate and one of the key persons of the assessee company namely Shri Umashankar in his sworn statement has admitted about the over invoicing in the purchase of steel in order to generate cash. Further, the MD Shri PV Rao confirmed the statement of Shri Umashankar and stated about the cash generated through the said modus operandi to give to others for smooth functioning of the project. Therefore, the AO, in view of the above discussion disallowed the .
, 1190 & CO No.24/Bang/2024 Page 32 of 68 purchases of steel from M/s Triveni Enterprises for Rs. 20,84,00,000/- and added to the total income of the assessee.
The aggrieved assessee preferred an appeal before the learned CIT(A).
33.1 The assessee before the learned CIT(A) reiterated that the seized materials marked as 302 to 306 cannot be relied upon as the same does not constitute evidence. The assessee also contended that there was no one-to-one correlation between payment made to M/s Triveni Enterprise and the amount recorded in the seized materials. The assessee further submitted weigh slip is not a statutory obligation, therefore the absence of same cannot make the purchase as not genuine. The assessee claimed sales made by the M/s Triveni Enterprises have been accepted in the assessment order passed in its case. Accordingly, the assessee prayed that the addition made by the AO is not justified and required to be deleted.
33.2 The assessee further submitted that delivery of purchases for an amount of Rs. 6,58,29,759/- was not made from the M/s Triveni Enterprise godown but the same was sent direct supply from the manufacturer. In such a case the question of availability of weigh slip, LR copy and entry in outward register etc. with M/s Triveni Enterprise does not arise.
33.3 The learned CIT(A) rejected the contention of the assessee by holding that the addition was not only based on the seized materials found during the course of the search at the premises of the assessee .
, 1190 & CO No.24/Bang/2024 Page 33 of 68 but also the addition was made based on seized materials as well as finding of detailed enquiry which revealed that the purchases to the said extent was not supported by the supporting documentary evidence such LR Receipt, weigh slip, absence of entry in/ out register etc. The learned CIT(A) found total payments made by the assessee for purchases at Rs. 98,76,60,614/- out of which only an amount of Rs. 20,84,00,000/- was considered as bogus. Therefore, there cannot be any one-to-one correlation between the payment made by the assessee and the cash received back. The learned CIT(A) found that the M/s Triveni Enterprises offered 1% of total turnover as additional income to cover discrepancies in sales. Hence, the claim of the assessee that the turnover declared by M/s Triveni accepted as genuine is not true.
33.4 However, the learned CIT(A), accepted the contention of the assessee that out of alleged purchase of Rs. 24,42,88,714/- for which supporting documents were not available, an amount of Rs. 6,58,29,759/- was direct supply where the question of weigh slip, LR slip, entry in godown out register does not arises. Accordingly, the learned CIT(A) held that the addition to that extent cannot be made for in the absence of alleged supporting documents. Hence the learned CIT(A) confirmed the addition for the remaining amount of 17,84,58,955/- (Rs. 24,42,88,714 - 6,58,29,759) being the purchases for which supporting document were not available. Thus, the learned CIT(A) changed the basis of addition. As such the AO made the addition on account of alleged cash receipt of Rs. Rs. 20,84,00,000/- during the year against the alleged bogus purchases whereas the learned CIT(A) sustained the addition of Rs. 17,84,58,955/- for absence of supporting documents.
, 1190 & CO No.24/Bang/2024
Being aggrieved by the order of the learned CIT(A), both the assessee and the revenue are in appeal before us. The assessee is in appeal against the confirmation of addition for Rs. 17,84,58,955/- whereas the revenue is in appeal against the deletion of part of the addition. The relevant ground of appeal of the revenue in reads as under:
“3. Whether on the facts & circumstances of the case, the Id. CIT (A) was correct to restrict the addition to Rs.17,84,58,955/- made on account of non- genuine purchase from M/s Triveni Enterprises”
The learned AR before us respectfully contended that the disallowance of purchases amounting to Rs. 17,84,58,955/- from Triveni Enterprises by the AO and upheld by the learned CIT(A) was unjustified. The primary ground for disallowance was the alleged non-availability of LR/Weighment slips, entry in/out register. However, the ld. AR pointed out that weighment slips are not mandatory documents to establish the genuineness of purchases, and they merely serve as a corroborative measure to confirm the quantity dispatched. The absence of such documents, particularly after a delay of 18 months from the relevant financial year, cannot be the sole basis for treating genuine transactions as bogus.
35.1 The learned AR emphasized that the supplier, M/s Triveni Enterprises, had provided detailed reasons for the non-availability of certain documents and had confirmed the genuineness of the transactions. Statements from the partner Sri. Ashirwad Agarwal and CEO Shri Prem Prakash Gupta supported the claim that legitimate sales .
, 1190 & CO No.24/Bang/2024 Page 35 of 68 were made to the assessee. Additionally, no transaction from Triveni Enterprises was considered bogus in their own assessments.
35.2 Further, the assessee had furnished comprehensive documentary evidence such as invoices, e-way bills, and ledger account confirmations to support the authenticity of the purchases. These documents were available during the search, and no adverse finding was recorded against them by the investigation wing.
35.3 The learned AR also challenged the reliance placed by the AO on certain seized loose sheets (pages 302 to 306 of Annx/ACPL/02), arguing that these documents were not recovered from the assessee’s premises but from the residence of one Mr. C.H. Ravi, a sub-contractor. These papers did not indicate any specific transactions with the assessee, and even Mr. Ravi denied that those loose sheet belong to the assessee. The MD of the assessee company, Mr. P.V. Rao, also confirmed that these papers had no connection with the appellant’s business during post- search proceedings. Accordingly, the learned AR urged the Tribunal to recognize that the disallowance was based on presumptions, without proper verification or substantiation, and prayed for deletion of the disallowance of Rs. 17,84,58,955/- by the AO which was upheld by the learned CIT(A).
On the other hand, learned DR before us argued that the learned CIT(A) made a mistake in law and in facts by giving partial relief to the assessee. The ld. CIT(A) allowed a portion of the sales amounting to Rs. 6,58,29,759/- without proper verification. This was incorrect because there were no supporting documents for these sales. The learned DR .
, 1190 & CO No.24/Bang/2024 Page 36 of 68 submitted that during the search operation, evidence was found that showed several problems in the records of M/s Triveni Enterprises, the vendor. Even though the vendor had a weighbridge at their godown, they did not provide weighment slips, lorry receipts, out register entries, or any other documents for a large portion of the sales made to ACPL. It was argued that the total sales made by the vendor to ACPL in FY 2019– 20 were Rs. 98,76,60,614/-. Out of this, sales without any supporting documents amounted to Rs. 24,42,88,714/-. This included Rs. 6,58,29,759/- for bill-to-bill sales without acknowledgment slips and Rs. 17,84,58,955/- for godown sales without any documents. However, the learned CIT(A) only disallowed Rs. 17,84,58,955 and gave relief for the rest. This was wrong because even the bill-to-bill sales had no supporting proof.
36.1 Further, the documents given by the assessee were not enough to prove that the purchases were real. A few affidavits and some weight slip only covered a very small part of the total amount. The assessee could not prove its case even after being given several chances during the assessment and post-search investigation.
36.2 The learned DR further said that the entire amount of Rs. 20,84,00,000 should have been disallowed. There was no valid reason to allow the sum of Rs. 6,58,29,759 separately. Since, the documents were missing for all types of sales, it was not right to treat one part differently. The search on M/s Triveni Enterprises clearly showed that all genuine sales had to have proper documents like weighment slips, lorry receipts, and acknowledgment slips. The assessee failed to prove that .
, 1190 & CO No.24/Bang/2024 Page 37 of 68 these were genuine transactions. Hence, the CIT(A)'s decision to give partial relief is both legally and factually wrong.
Both the ld. AR and the DR before us vehemently supported the order of authorities below to the extent favourable to them.
We have heard the rival contentions of both the parties and perused the materials available on record. The disallowance of Rs. 17.84 crore relating to purchases from M/s Triveni Enterprises is primarily based on the alleged loose sheet suggesting cash receipt and absence of certain supporting documents like weighment slips, lorry receipts, and outward register entries. The AO made the addition of Rs. 20.84 crore based on seized loose sheets, alleging that cash was received against these purchases. These loose sheets (pages 302–306 of Annexure/ACPL/02) were found during the search proceedings and were used as a foundation for the disallowance.
38.1 We note that the approach of the Revenue in dealing with these loose sheets is inconsistent. While the AO relied heavily on them to allege cash transactions with the supplier M/s Triveni Enterprises. It is also important to highlight that the loose sheets contain names of several other parties, yet adverse inference has only been drawn against the assessee and a few others. There is no explanation on record as to why similar action was not taken against all listed parties. Such a selective and incomplete application of evidence lacks fairness and consistency.
, 1190 & CO No.24/Bang/2024 Page 38 of 68 38.2 Furthermore, though the Revenue has pointed out that one copy of the said loose sheet was also found at the corporate office of the assessee, but the assessee has consistently denied its authorship or accuracy. The Managing Director of the assessee, during post-search enquiries, clarified that the loose sheets had no link with the business affairs of the company. Additionally, Shri C.H. Ravi, from whose residence the original set of documents was seized, also denied that the documents belonged to the assessee. The presence of a copy alone at the assessee premises, without supporting context or corroboration, cannot be treated as conclusive proof against the assessee.
38.3 We also note with concern that there has been a change in the basis of the addition between the AO and the ld. CIT(A). The basis for the addition of the AO was based on the alleged cash receipts as per loose sheets. However, the ld. CIT(A), while partly allowing the appeal, modified the basis of addition to lack of documentary support for physical movement of goods. This shift in reasoning without giving the assessee a fair opportunity to respond to the new basis is procedurally unjust and reflects inconsistent application of law by the authorities below.
38.4 The assessee has produced substantial evidence in support of the purchases, including tax invoices, e-way bills, ledger accounts, and confirmations. The supplier, M/s Triveni Enterprises, has admitted to the sales and explained the missing documents. The missing weighment slips and delivery records are operational documents, and not statutory requirements. Given the passage of time, the absence of such documents cannot be used to discredit the entire transaction. The ld. .
, 1190 & CO No.24/Bang/2024 Page 39 of 68 CIT(A) himself has accepted that supplies amounting to Rs. 6.58 crore were directly sent from the manufacturer, and hence those documents were understandably not available at the godown. The same logic should apply to the balance amount as well, particularly in the absence of any finding that goods were never received or that payment was returned in cash.
38.5 We also note that there is no concrete evidence on record to show that the purchases were bogus. The revenue has not demonstrated any inflation in pricing, alternate source of procurement, or contradictions in stock records. The case rests purely on presumptions and incomplete analysis. In view of the above, we find that the disallowance of Rs. 17.84 crore lacks legal and factual merit. The actions of the Revenue authorities suffer from inconsistency in approach, selective application of seized evidence, and shifting grounds of assessment without proper justification. Accordingly, the disallowance of Rs. 17.84 crore is deleted. Hence the ground of appeal filed by the assessee is allowed whereas the ground of appeal filed by the Revenue is dismissed.
39. The next issue raised by the assessee through ground Nos. 7.1 to 7.4 of its appeal pertains to the disallowances of purchases from M/s Ratan Trading Co. to the extent of Rs. 9,17,41,460/- only.
39.1 The necessary facts are that subsequent to search proceedings at the premises of the assessee on 7th October 2021, a survey proceeding under section 133A of the Act at the steel supplier of the assessee company namely M/s Ratan Trading Co. a proprietary concern of Shri .
, 1190 & CO No.24/Bang/2024 Page 40 of 68 Lakshmipath Surana as on 10th November 2021 was conducted. During the survey while recording the statement of Shri Lakhmipath explained the standard operating procedure according to which he did not maintain any stock as there was no godown facility available. As such, on receiving a purchase order from the customer he used to forward the details to his supplier. After loading the vehicle, his supplier informs him along with invoice copy. Thereafter, he issues an invoice to the customer then the vehicle leaves the main supplier godown to deliver the goods to his customer directly. Once the goods are delivered to the customer, get the goods receipt copy, LR receipt containing the details of vehicle number, date of delivery, quantity/weight of material along with detail of any difference in quantity or weight due to any reason in the transportation process.
39.2 Accordingly, Shri Lakshmipath Surana was asked to provide details of sales made to the assessee company along with supporting documents such as goods receipt, LR receipt etc. As per the details provided by M/s Ratan Trading Co., the sales of Rs. 17,10,76,549/- was made during the year under consideration to the assessee. However, it was noted that out of total sale no supporting documents such as LR, Freight voucher, weigh slip etc. were provided for sale value of Rs. 16,25,03,876/- only. This fact was confronted to Shri Lakshmipath Surana to which he stated there is some discrepancies regarding the supporting document, but the sales made to the ACPL (assessee company) were genuine and agreed to provide the necessary supporting document later on.
, 1190 & CO No.24/Bang/2024 Page 41 of 68 39.3 Thereafter, summons issued to the MD of the assessee company Shri PV Rao and findings from survey at M/s Ratan Trading Co was confronted to him to which he stated to provide details to substantiate the genuineness of the transaction in due course of time.
However, the AO during the assessment proceeding found that neither the assessee nor M/s Ratan Trading Co. has provided the supporting documents to substantiate the genuineness of the sale/purchases. The AO further found that the assessee in response to show cause notice has submitted few invoices along with LR & weigh slip but the same are not sufficient enough to establish the genuineness of purchases of Rs. 16,25,03,876/- only. Hence, the AO disallowed the purchases to the said extent and added to the total income of the assessee.
The aggrieved assessee preferred an appeal before the learned CIT(A).
The assessee, before the learned CIT(A) submitted that there was no material found during the search, suggesting the purchases from M/s Ratan Trading Co. as bogus. Similarly, no person in the statement stated anything about the impugned purchases. The proprietor of M/s Ratan Trading Co. in his statement only stated that supporting documents are not available for some of the invoices but he affirms that transactions are genuine. There was no finding that any cash had been received back. The assessee further claimed that purchase made from M/s Ratan Trading Co. in subsequent year has been accepted by the AO as .
, 1190 & CO No.24/Bang/2024
Page 42 of 68 genuine. The assessee accordingly contended that the addition made by the AO is required to be deleted.
42.1 However, the learned CIT(A) found that the submission of the assessee is not sufficient to explain the entire purchases from M/s Ratan Trading Co. as genuine. It was further noted by the learned CIT(A) that AO in his assessment order mentioned that the assessee has furnished some invoices with lorry receipts and freight vouchers therefore the entire amount of Rs. 16,25,03,876/- cannot be disallowed in the given facts and circumstances. Accordingly, the learned CIT(A) restricted the disallowance to the extent of Rs. 9,17,41,460/- for which no lorry receipts and freight vouchers were available.
42.2 Being aggrieved by the order of the learned CIT(A), both the assessee and the revenue are in appeal before us. The assessee is in appeal against the confirmation of addition of Rs. 9,17,41,460/- whereas the revenue is in appeal against the deletion of the addition of the amount of Rs. 7,07,62,416/- by the learned CIT(A). The relevant ground of appeal of the revenue in reads as under:
4. Whether on face circumstances of the case, the ld. CIT(A) was correct to restrict the addition to Rs. 9,17,41,460 - made on account of purchases of Rs. 16,25,03,876 from Ratan Trading?”
The learned AR before us contended that the AO erred in disallowing the purchases made from M/s Sri Ratan Trading Company by treating them as bogus, solely on the grounds that no lorry receipts (LRs) or freight details were made available during a survey at the supplier's premises. The learned AR emphasized that no evidence was found during the survey at the appellant’s premises to suggest bogus .
, 1190 & CO No.24/Bang/2024 Page 43 of 68 purchases, and none of the recorded statements indicated any such purchases from the said party. The disallowance was made merely in the absence of LRs, which does not hold any evidentiary value, especially when corroborative documents such as invoices, e-way bills, and ledger confirmations were provided. Further, the ld. AR pointed out that the materials purchased were utilized in Government infrastructure projects like the BDA, NPKL Project and VJNL Canal work, supporting the genuineness of the transactions. It was also submitted that for the subsequent assessment year 2021–22, no disallowance was made by the same AO under similar circumstances, indicating an inconsistent approach. Further the learned AR asserted that despite all relevant documents being submitted, the learned CIT(A) confirmed the disallowance without properly verifying the evidence, which is unjust and legally unsustainable.
On the other hand, the learned DR before us contended that M/s Sri Ratan Trading Co., one of the suppliers of the assessee (ACPL) made total sales of ₹17,10,76,549/- only. However, no supporting documentation was furnished by either ACPL or M/s Sri Ratan Trading Co. to substantiate the genuineness of purchases for ₹16,25,03,876/- only. Given this failure to produce any documentary evidence to support the transactions, the learned DR argued that the total expenditure claimed amounting to ₹16,25,03,876/- should be disallowed under section 37 of the Act. The learned DR argued that the onus lies on the assessee to substantiate the purchases with proper evidence, and in the absence of such documentation, the AO rightly disallowed the entire claim. Hence, the learned DR urged that the order of the ld. CIT(A), .
, 1190 & CO No.24/Bang/2024 Page 44 of 68 which restricted the disallowance to ₹9,17,41,460/-, be set aside and the full disallowance as per the original assessment be restored.
44.1 Both the ld. AR and the DR before us vehemently supported the order of authorities below to the extent favourable to them.
We have heard rival contentions of both the parties and perused the materials available on record. From the preceding discussion, we note that the matter before us concerns the disallowance of purchases amounting to ₹ ₹16,25,03,876/- made by the assessee from M/s Ratan Trading Co., a proprietary concern of Shri Lakshmipath Surana. The basis of this disallowance is due to the absence of complete supporting transport documents for the said purchases.
45.1 Firstly, we note that that during the search at the premises of the assessee and the subsequent survey at the premises of M/s Ratan Trading Co., no incriminating material was found suggesting that the purchases made by the assessee were not genuine. There is also no evidence indicating that these transactions were bogus or involved any exchange of cash, which could imply an unaccounted transaction or accommodation entry.
45.2 Secondly, we note that Shri Lakshmipath Surana, proprietor of Ratan Trading Co., clearly explained his standard business procedure in his statement obtained during the survey under section 133A of the Act. He stated that his business does not maintain stock due to the absence of godown facilities and operates by directly supplying goods from the main supplier to the customer based on orders. This explanation .
, 1190 & CO No.24/Bang/2024 Page 45 of 68 reasonably accounts for the absence of some delivery related documents, as the goods are not stored but directly routed. It is also important to note that Shri. Lakshmipath Surana affirmed the genuineness of the transactions, both orally during the survey and later through a sworn affidavit during the assessment proceedings.
45.3 We further note that the assessee has submitted certain invoices along with LR copies and weigh slips in support of the purchases, even though all the documents may not have been available. In our considered opinion, the lack of complete paperwork is a procedural deficiency, but it cannot alone be construed as evidence of bogus purchases, specially in the absence of any incriminating material found or brought on record suggesting false purchases. It is also significant to note that in the subsequent assessment year, purchases from the same supplier have been accepted as genuine by the Department, which supports the continuity and authenticity of the business relationship. Therefore, considering all the above, we hold there is no concrete material establishing that the impugned purchases were not genuine or that any unaccounted transactions took place. The consistent stand of both the assessee and the supplier, absence of contrary evidence, and the acceptance of similar transactions in later years collectively support the assessee's position. Accordingly, we find that the disallowance sustained by the ld. CIT(A) to the extent of ₹ 9,17,41,460/- is not warranted. Thus, we hereby set aside the finding of learned CIT(A) to the extent of confirmation of addition of Rs. ₹ 9,17,41,460/- and direct the AO to delete the addition in full. Hence, the ground of appeal of the assessee is hereby allowed whereas the ground of appeal of the Revenue is hereby dismissed.
, 1190 & CO No.24/Bang/2024 Page 46 of 68
The next issue raised by the assessee through ground Nos. 8.1 to 8.2 and 9.1 to 9.2 in the appeal memo is that the Ld. CIT-A erred in confirming the disallowance of purchases from M/s AA Golewala and from Pari Technobuild to the extent of Rs. 95,00,000/- and Rs. 20,00,000/- respectively.
The necessary facts are that during the search at the residence of CH Ravi certain loose sheet were found and marked as annexure “A” & “B”. The seized annexure “A” representing cash receipt and annexure B is expenditure sheet. The Copy of annexure “A” also found from the corporate office of the assessee and marked as page 303 to 306 of annexure A/ACPL/02. In the said annexure “A’ receipt of Rs. 65 lakh and Rs. 30 lakhs, as on 07th & 9th August 2018 was noted against the name of a party namely A A Golewala and a receipt of Rs. 20 Lakh as on 19th October 2019 noted against the name of party namely Pari Technobuild. Similarly, in the expenditure sheet i.e. annexure “B” it was noted the commission of Rs. 1.25 lakh and 3.27 lakh paid to A A Golewala on 28th May 2019.
47.1 Accordingly, the accounts of the assessee were verified, and it was found that both parties are shown as steel/ cement suppliers. On the perusal of their ledger account in the books of assessee, it was observed that an amount of Rs. 110.27 lakh and Rs. 20 Lakh was paid through banking channel to A A Golewala and Pari Technobuild respectively against the purchases.
, 1190 & CO No.24/Bang/2024 Page 47 of 68 47.2 The seized material being annexure- A & B was confronted to the Managing director of the assessee company to which he admitted that the cash was generated through different means such as over invoicing, self-made voucher and payment to non-existing contractors etc. However, he denied having received any cash from the party namely A A Golewala and Pari Technobuild.
47.3 The explanation given by the MD in the statement was not accepted by the AO for the reason that the assessee has not provided the entire bills and other documentary evidence. Hence, the AO disallowed the purchases to the extent of receipt entry in annexure-A recorded against the name of A A Golewala and Pari Technobuild. i.e. Rs. 95 lakh and Rs. 20 lakhs respectively and added to the total income of the assessee.
The aggrieved assessee preferred an appeal before the learned CIT(A) and submitted the comparative details of dates mentioned in the ledger account for payments and entries recorded in the loose sheet and contended that there is no correlation between the date of payments and date of receipt mentioned in the loose sheets. The assessee also submits that the Shri PV Rao in his statement has never stated that the purchases from AA Golewala and Pari technobuild are not genuine. The assessee further submitted that the AO has not made enquiries from AA Golewala and Pari Technobuild despite having power to issue notice u/s 133(6)/131 to make enquiries.
The learned CIT(A) founds that the dates of payments made to the impugned parties through banking channel and date of receipt .
, 1190 & CO No.24/Bang/2024 Page 48 of 68 entries recorded in seized material against AA Golewala are matching. However, the date of payment of commission in loose sheet being expenditure sheet though much before the dates of aforesaid transaction, but mere such gap in the date of transaction payment of commission cannot validate the entire transactions.
49.1 The learned CIT(A) further observes that the assessee has also not furnished supporting documents other than purchase invoices, confirmation letter from the parties and also not explained the utilization of purchase of materials. Hence, the learned CIT(A) in view of the above confirmed the addition made by the AO.
Being aggrieved by the order of the learned CIT(A), the assessee is in appeal before us.
The learned AR before us argued that the AO erroneously disallowed purchases worth ₹95,00,000 from M/s AA Golewala and ₹20,00,000 from M/s Pari Technobuild on the basis of unverified and improperly interpreted seized documents (Pages 302 to 306 of Annx A/ACPL/02).
51.1 Before the CIT(A), the appellant contended that the seized papers relied upon by the AO did not originate from the appellant's premises and hence could not be relied upon. Furthermore, the alleged cash transactions did not align with the actual cheque payments made (as evidenced by records), and the timeline of the payments disproved the AO's assumption of commission payment. Specifically, it was noted that the commission allegedly paid on 28.05.2019 which could not relate to .
, 1190 & CO No.24/Bang/2024 Page 49 of 68 cheque payments made on 06.08.2019, thereby rendering the AO’s conclusion factually incorrect.
51.2 The learned AR highlighted that the AO and the learned CIT(A) failed to undertake any enquiry to verify the genuineness of the purchases from Shri AA Golewala and from M/s Pari Technobuild or provide the appellant an opportunity to cross-examine the concerned party. On the contrary, the appellant had submitted comprehensive documentation including invoice copies, ledger account confirmations, and details of project-wise materials utilization (PB-II Pages 321 to 322 and PB-III Page 126). The learned CIT(A) merely stated that the appellant should have explained the nature of the payments and submitted confirmations to prove genuineness. The learned AR claimed that sufficient proof had indeed been submitted, which the ld. CIT(A) ignored especially the regular business dealings with Shri AA Golewala and M/s Pari Technobuild, with whom a running ledger account was filed. The learned AR therefore prayed, considering the lack of substantive enquiry by the AO, the misinterpretation of dates and transactions, and the submission of adequate supporting documentation by the appellant, to delete the disallowances made for both the parties.
On the other hand, the learned DR vehemently supported the findings of the lower authorities.
We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, we note the key issue before us is whether the AO and the learned CIT(A) were right in disallowing the assessee’s purchases from .
, 1190 & CO No.24/Bang/2024 Page 50 of 68 M/s A.A. Golewala and M/s Pari Technobuild on the basis of entries found in loose sheets marked as Annexure A and B during a search.
53.1 We first note that although the assessee claimed that these loose sheets were not recovered from its own premises but from the residence of a third party (Shri CH Ravi), this claim loses strength because copies of the same loose sheets were also recovered from the corporate office of the assessee and marked as pages 302 to 306 of annexure A/ACPL/2. Therefore, the argument that the documents have no connection with the assessee is not fully reliable or substantiated.
53.2 It is also important to note that AO relied on handwritten entries in the seized Annexure A and B, which mentioned cash receipts of ₹65 lakh and ₹30 lakh against A.A. Golewala, and ₹20 lakh against Pari Technobuild. Annexure B also mentioned commission payments to A.A. Golewala. Based on this, the AO concluded that purchases from these parties were not genuine and disallowed the same.
53.3 However, the assessee has submitted purchase invoices, bank payment details, ledger accounts, and confirmations from the suppliers. This shows that payments to both parties were made via banking channels and that regular business transactions took place.
53.4 The ld. CIT(A) observed that the dates of bank payments and the dates in the loose sheets seemed to match. But the ld. CIT(A) did not consider whether such loose sheets, without signatures or supporting documentation, were strong enough evidence to discredit the recorded transactions backed by proper documentations.
, 1190 & CO No.24/Bang/2024 Page 51 of 68 53.5 Moreover, we also note that no inquiry was made by the AO or learned CIT(A) from the parties involved (A.A. Golewala or Pari Technobuild) despite having the legal authority to do so under section 133(6) or 131 of the Act.
53.6 Furthermore, the argument that the commission was paid on a date preceding the recorded payment by cheque also undermines the AO’s logic. If the commission was paid before the supposed deal, it raises doubt on the link between the seized document and the actual transactions. Considering all these facts including the availability of banking records, regularity in business dealings, documentary evidence of purchases, and the lack of further investigation by the revenue authorities, we find that the disallowance made by the AO and upheld by the ld. CIT(A) is not sustainable in law. Therefore, we hereby set aside the finding of the learned CIT(A) and direct the AO to delete the addition of ₹95,00,000 in the name of M/s A.A. Golewala and ₹20,00,000 in the name of M/s Pari Technobuild. Hence the ground of appeal of the assessee is hereby allowed.
It is also relevant to note that the assessee has raised various additional grounds of appeal challenging the validity of the search and consequent assessment framed under section 153A of the Act. However, at the time of hearing, the learned counsel for the assessee did not advance any argument with respect to the additional grounds of appeal raised by the assessee. Besides, the assessee gets substantial relief on merit of the case. For this reason, too, we hold that the technical ground .
, 1190 & CO No.24/Bang/2024
Page 52 of 68 raised by the assessee do not require any independent adjudication. Accordingly, we dismiss the same as infructuous.
54.1 In the result, the appeal of the assessee is hereby partly allowed.
The Revenue has raised the following grounds of appeal:
“1._ Based on the facts and circumstances of the case. whether ld. CIT(A) was correct in deleting the additions made by the AO.
Whether on facts & circumstances of the case the ld. CIT(A) was correct in deleting the addition made an account of bogus sub-contractors amounting to Rs. 1,34,13,000/-? 3. Whether on the facts & circumstances of the case, the Id. CIT (A) was correct to restrict the addition to Rs.17,84,58,955/- made on account of non- genuine purchase from M/s Triveni Enterprises' 4. Whether on face circumstances of the case, the ld. CIT(A) was correct to restrict the addition to Rs. 9,17,41,460 - made on account of purchases of Rs. 16,25.03.876.1 from Ratan Trading?”
The issue raised by the Revenue through ground No. 1 of its appeal is general in nature and the same does not require any separate adjudication. Hence, we dismissed the same as infructuous.
The second issue raised by the Revenue is that the learned CIT(A) erred in deleting the addition of ₹1,34,13,000/- made by the AO on account of payments made to bogus sub-contractors at Manvi and Sindhanur.
The relevant facts are as follows: During the search, it was found that the assessee had claimed substantial expenses in the name of sub- .
, 1190 & CO No.24/Bang/2024 Page 53 of 68 contractors. Upon verification, it was discovered that many of these sub- contractors had not filed their income tax returns. For instance, there were 27 sub-contractors to whom payments aggregating to ₹2,50,41,332/- were made, but they had not filed their returns of income.
58.1 Further analysis revealed that as many as 68 sub-contractors (including females) based in Manvi (Raichur District) received payments through banking channels from the assessee’s account in Bangalore. The bank accounts of these sub-contractors were opened with Canara Bank and SUCO Bank (Sindhanur) on adjacent days, and their account numbers were in consecutive order. The credited amounts were immediately withdrawn by the account holders. Additionally, the income tax returns (ITRs) of all these sub-contractors were filed by a single Income Tax Practitioner (ITP), namely Mohammed Salim from Manvi. All of them declared income under section 44AD of the Act, offering income at 8% of the gross receipts.
58.2 A statement of Mohammed Salim was recorded under section 133A of the Act, wherein he stated that the list of these individuals, along with their Form 26AS, was provided to him by Shri Subhas B, a key subcontractor, former long-term employee of the assessee, and central figure in the operation to facilitate the filing of their returns of income. He further admitted that many of these so-called sub- contractors were his relatives, friends, or neighbors. When questioned about their ability to execute sub-contract work, he confirmed that they were not genuine sub-contractors and did not have any business addresses.
, 1190 & CO No.24/Bang/2024 Page 54 of 68 58.3 Thereafter, 28 out of the 68 sub-contractors were summoned, and their statements were recorded. All of them, in their sworn statements, admitted that they had not carried out any sub-contract work for the assessee company. When asked why their bank accounts were opened in Sindhanur despite residing and conducting their activities in Manvi, they stated that the accounts were opened on the advice of Shri Subhas B. Regarding their professional background, some individuals identified themselves as farmers, while others stated they were teachers, lecturers, involved in wedding-related work, or employed as salesmen or accountants.
58.4 Further, during the search at the residence of Shri Subhas B, several signed blank cheque books belonging to the assessee’s sub- contractors were found. When questioned, Shri Subhas B stated that these cheque books were kept at his residence on the instructions of the Managing Director of the assessee company, Shri P.V. Rao.
58.5 The statements of Shri Saleem, Shri Subhas B, and the sub- contractors were confronted to Shri P.V. Rao during the recording of his statement on 09-12-2021. He was asked to provide supporting documents such as work orders, copies of contracts signed with the sub- contractors, or any other evidence to substantiate the genuineness of these sub-contractors. In response, he stated that he did not have any such documents or details of the work allegedly done by them. When asked to explain why these sub-contractors should not be treated as bogus, he reiterated that he could not produce the necessary documents but maintained that not all of them were bogus. However, in the .
, 1190 & CO No.24/Bang/2024 Page 55 of 68 absence of any supporting documentation, he voluntarily agreed to offer an amount of ₹1,34,13,000/- only to his total income.
58.6 Despite this, the Assessing Officer (AO) found that the assessee had not offered the above amount in its return of income. Consequently, the AO issued a show cause notice proposing to make the addition for the aforesaid sum.
58.7 In response to the show cause notice, the assessee submitted that it has engaged small subcontractors from remote villages to carry out labor work related to various projects. These subcontractors predominantly consist of individuals from small, middle, and lower- middle-class backgrounds who worked under the main contractor. As a matter of policy, the company encourages individuals from rural and economically modest backgrounds to undertake subcontract work in order to foster entrepreneurship. Shri B. Subhash, one such subcontractor, also helped in facilitating labor contracts to others from rural areas. He is known to Shri Mohammed Saleem, a tax practitioner who may have assisted these subcontractors in filing their income tax returns.
58.8 The assessee argued that there was no illegality in having the returns filed by one consultant who was known to Shri Subhash. All subcontractors filed their income tax returns under section 44AD of the Act, declaring income at 8%, which is a permissible and lawful method of income declaration.
, 1190 & CO No.24/Bang/2024 Page 56 of 68 58.9 The assessee further contends that it is not the responsibility of the main contractor to ensure whether the subcontractors filed their income tax returns. The contractor’s responsibility is to verify the completion of work by subcontractors, ensuring proper bills were submitted, and deducting tax at source (TDS) in compliance with the Act. The assessee claimed that all payments to subcontractors were made through banking channels, and the payments were duly supported by bills. The allegation that subcontractors withdrew cash within two days of fund transfer is not the contractor's concern. The subcontractors were engaged in labor-intensive work, mainly involving earthworks in remote areas, and payments made to laborers in cash were practical due to the nature and location of the work. The assessee submitted that the allegation that the payments made to subcontractors were bogus based solely on the statements of Shri Saleem and a few subcontractors. However, the assessee pointed out contradictions in the statements made by Shri Mohammed Saleem, the tax practitioner who filed returns for many subcontractors. His inconsistent statements regarding his knowledge and role in filing the returns, and his acknowledgment that some returns were filed without the physical presence of clients or without knowing their actual business activities, undermine the credibility of his statement. Furthermore, the assessee highlighted that the list of subcontractors was only shared by Shri Mohammed Saleem on 09.10.2021, yet statements from them were allegedly obtained from 07.10.2021, indicating manipulation. Accordingly, the assessee argued that the statements of illiterate subcontractors were obtained under pressure, recorded in advance with pre-filled templates, and signatures taken without full understanding. The assessee in support of its contention also furnished the affidavits from 28 subcontractors .
, 1190 & CO No.24/Bang/2024 Page 57 of 68 confirming the execution of work and receipt of payment. The assessee argues that denial of genuine expenses based solely on questionable statements without proper verification is unjustified.
58.10 However, the AO dismissed the explanation provided by the assessee. The AO noted that the assessee had furnished certain affidavits from labor sub-contractors stating that they had executed work for the assessee. However, these affidavits were not notarized and were submitted at the fag-end of the assessment proceedings, leaving no scope for further verification or inquiry. The AO also discovered, during the search, WhatsApp conversations between Shri Subhas B and Shri Lakshmikanta R (an internal Chartered Accountant). In these conversations, Shri Subhas had shared a list of individuals along with details of their bank accounts opened at SUCO Bank, Sindhanur. Shri Lakshmikanta admitted that these individuals were bogus sub- contractors and that their ledgers were maintained separately under the head “Sundry Creditors for Contractor Group” in the Telangana Tally account. He explained that the purpose of maintaining a separate ledger was to facilitate accounting for the cash generated for various reasons. He further stated that payments to these bogus labor sub-contractors were routed through banking channels, after which Shri Subhas, in coordination with these individuals, withdrew the cash from their respective accounts and handed it over to Shri P.V. Rao. In the light of the above findings, the AO disallowed an amount of ₹1,34,13,000/–, as admitted by the Managing Director of the assessee, on account of bogus labor sub-contractors at Manvi and Sindhanur and added to the total income of the assessee.
, 1190 & CO No.24/Bang/2024 Page 58 of 68
Being aggrieved, the assessee preferred an appeal before the learned CIT(A).
Before the learned CIT(A), the assessee submitted that during the search proceedings, the statement of Shri Mohammed Saleem and others was confronted to Shri P.V. Rao. In response, Shri Rao stated that all the sub-contractors could not be considered bogus. Subsequently, the search team quantified the amount deemed to be bogus, which included payments made to the following parties: 1. Rama Chandra Murthy Rs. 95,75,000/- 2. Ramakrishna V Poline Rs. 38,38,000/- Total Rs. 1,34,13,000/- 60.1 The assessee submitted before the learned CIT(A) that the Managing Director, Shri P.V. Rao, due to stress, illness, and the pressure exerted during the search proceedings, admitted the aforementioned amount as income on account of bogus labor contracts. The assessee contended that no payment for labor sub-contract was made to Shri Rama Chandra Murthy. Rather, said individual was an unsecured loan creditor from whom the assessee had received a loan. However, based on mere surmise and conjecture, the search team included his name in the list of labour contractors. Under pressure and not being in a proper state of mind, Shri P.V. Rao accepted the same as income on account of bogus expenses without verification. In support of this claim, the assessee submitted a copy of the ledger account and a confirmation letter from Shri Rama Chandra Murthy.
60.2 With respect to the payment of ₹38,38,000/- to Shri Ramakrishna V. Poline, the assessee clarified that he was an employee of Shri P.V.
, 1190 & CO No.24/Bang/2024
Page 59 of 68 Rao in his personal capacity. Owing to his knowledge and experience in the assessee's line of business, he was offered a sub-contract in addition to his employment. The payments made to him were in accordance with the sub-contract work executed, through proper banking channels, and after deduction of tax at source. The assessee stated that it was not aware of the reason why Shri Ramakrishna had not filed his return of income.
60.3 The assessee further argued that the AO’s reliance on the statements of 28 individuals recorded under section 131(1) of the Act, as well as on the statement of Shri Mohammed Saleem, for making the addition of ₹1,34,13,000/–, was unjustified. Moreover, the statement of Shri Lakshmikanta R. should also not be relied upon, as the transactions referenced in his statement pertain to earlier years and not to the assessment year under consideration. Accordingly, the assessee prayed before the learned CIT(A) to delete the addition made by the AO. The learned CIT(A) after considering the submission of the assessee deleted the addition made by the AO by observing as under: (6) The appellant in his written submissions states that addition under this head of Rs. 1,34,13,000/- is not applicable for this AY. He states that this amount represents unsecured loans taken from two individuals namely, Ramachandra Murthy and Ramakrishna V. Polin. With respect to the evidences in the form of Whatsapp Chat and sundry creditor ledger, the appellant admits that they pertain to AY 2016-17 / 2017-18 and also AY 2019-20. 6.2 Since, the appellant has not made any solid rebuttal on the case and has only disputed addition in this particular AY, addition under this head is deleted only based on the facts and circumstances for this AY.
Being aggrieved by the order of the learned CIT(A), both the Revenue and the assessee are in appeal before us. The revenue is in appeal against the deletion addition of Rs.1,34,13,000/- whereas the .
, 1190 & CO No.24/Bang/2024
Page 60 of 68 assessee is cross objection. The ground of cross objection of the assessee in CO No./ 24/Bang/2018 reads as under:
“c) The lower authorities failed to take cognizance of the fact that the amount of Rs. 95,75,000/-, being part of disallowance of sub-contractors expenses of Rs. 1,34,13,000/-, is not an expenditure claimed in the books. On the other hand, it is the amount borrowed from Sri. Ramachandra murthy and the respondent assessee company has even filed ledger account of Sri.Ramachandra Murthy in its books for A.Y 2020-21 along with his confirmation of ledger account. d) The lower authorities failed to appreciate that amount of Rs. 38,38,000/- being part of disallowance of sub-contractors expenses of Rs. 1,34,13,000/-, is the amount paid towards contract work done by Sri. Ramakrishna V Poline at sindhanur site for which his Affidavit confirming the service rendered, bank statement & Invoice copies along with details of TDS have been submitted before these authorities.”
The Learned DR before us vehemently opposed the deletion of the disallowance of Rs. 1,34,13,000/- made by the AO. The learned DR submitted that a detailed investigation into the financial records of the assessee revealed a clear pattern of inflating expenses through bogus subcontractors. A significant number of these subcontractors had not filed income tax returns despite receiving substantial contract payments from ACPL. These payments were routed through banking channels, and the funds were withdrawn in cash within a day or two, primarily from accounts held in Sindhanur and Manvi. It was further brought to light that 68 income tax returns were filed by a single individual, Mr. Mohammed Saleem of Manvi, who admitted under oath that the details were based on 26AS information provided by one Shri Subhash B. He also confessed that many of the supposed subcontractors were his friends and relatives, many of whom were women with no actual business activity.
, 1190 & CO No.24/Bang/2024 Page 61 of 68 62.1 The learned DR further contended that 28 individuals summoned during survey proceedings categorically denied performing any subcontracting work for ACPL. Their only role was to sign cheque books and hand them over to Shri Subhash B., and several bank accounts were opened on consecutive days with sequential numbers, clearly indicating a lack of genuine business activity. Furthermore, during the search, ACPL’s own Managing Director, Shri Pichakal Venkateshwar Rao, admitted to the lack of supporting documents such as work orders or agreements and accepted the proposal to treat Rs. 1,34,13,000/- as additional income. This was corroborated by the statement of the company’s Chartered Accountant, Shri Lakshmikantha R., who admitted that many of the subcontractors were bogus and used to generate cash for illegal payments.
62.2 In response to a show-cause notice during assessment proceedings, the assessee submitted affidavits from a few subcontractors claiming to have executed work. However, these affidavits were not notarized, submitted very late, and directly contradicted the evidence already on record, making them unreliable. The learned DR argued that during the assessment proceeding it was nowhere mentioned that the disallowances was made in relation 2 parties namely Rama Chandra Murthy and Ramakrishna V Poline as claimed by the assessee before the learned CIT(A). As such the disallowances was made on account of assessee’s failure to provide work order, contract copy, and any other supporting documents against the payment made to subcontractors. The ld. DR also highlighted that the AO had allowed the majority of the subcontract expenses amounting to over Rs. 142 crores and only disallowed the specific amount of Rs. .
, 1190 & CO No.24/Bang/2024 Page 62 of 68 1,34,13,000/- for which no substantiation was provided. Thus, the disallowance was selective, judicious, and well-reasoned. It was also noted that during the assessment, it became evident that many of the subcontractors had not filed returns of income despite receiving large sums, and failed to produce work orders or signed agreements, further confirming the bogus nature of these claims.
62.3 However, the learned CIT(A) accepted the assessee’s claim made first time during the appellate proceeding that amount of disallowances pertain to those 2 parties and one of them is loan creditor. The learned DR argued that as per Rule 46A of IT Rule, the assessee was not entitled to submit new evidence at the appellate stage that was not produced during the original proceedings. Accordingly, the learned DR contended that the ld. CIT(A) erred in deleting the disallowance without proper justification, especially when the assessee had failed to furnish any credible evidence or rebuttal before the AO. In light of the above, the learned DR prayed that the Hon’ble Tribunal restore the disallowance of Rs. 1,34,13,000/- and set aside the CIT(A)’s order in the interest of justice and revenue protection.
On the other hand, the learned AR submitted that the addition made by the AO on the basis of a third-party statement, particularly that of an unknown person, is erroneous in law and facts. It was argued that the expenditure in question, paid to sub-contractors, cannot be disallowed on the grounds of non-genuineness merely due to the third- party claim. The AR contended that such disallowance results in double taxation, as the said income has already been disclosed by the sub- contractors under Section 44AD of the Act and offered to tax at the .
, 1190 & CO No.24/Bang/2024 Page 63 of 68 presumptive rate of 8%. The returns of the sub-contractors were duly submitted to the AO, thereby establishing the genuineness of the transactions. Moreover, the AO failed to offer any opportunity for cross- examination of the person whose statement was relied upon, violating principles of natural justice. Specifically, the learned AR pointed out that the addition of Rs. 1,34,13,000/- was made without confronting the appellant with proper evidence or providing fair hearing.
63.1 It was further argued that the statement of Shri Mohammed Saleem, based on which the entire addition is sought to be justified, lacks credibility and legal sanctity. Shri Saleem's statement, recorded during the survey on 09/10/2021, was not corroborated with independent verification and was obtained even before the actual survey date, indicating procedural lapses. The Managing Director had also denied the allegations and clarified the company's position in the reply to the show cause notice. The learned AR maintained that relying on such contradictory and unverified statements without allowing cross- examination renders the addition unjustified and unsustainable in law.
We have heard the rival contentions of both the parties and perused the materials available on record. From the preceding discussion, we note that the central issue before us is the disallowance of ₹1,34,13,000/- by the AO on account of payments alleged to be made to bogus sub-contractors. We note that during the course of assessment, the AO made two distinct observations. Firstly, the AO observed that 27 sub-contractors to whom a total of ₹2,50,41,332/-, was paid but none of them had filed their income tax returns. However, no specific disallowance appears to have been made in relation to these 27 cases.
, 1190 & CO No.24/Bang/2024 Page 64 of 68 Secondly, the AO referred to another set of 68 sub-contractors whose returns were filed by Shri Mohammed Saleem, all declaring income under section 44AD of the Act. The AO in this regard noted suspicious features such as their bank accounts were opened on consecutive days, cash was withdrawn immediately after credit, and many had no real business activity. However, we note that the AO did not quantify how much amount was paid to these 68 individuals/parties/subcontractors. This in our considered opinion raises a serious concern. Further despite these detailed observations, the AO did not clearly explain how the specific amount of ₹1,34,13,000/- was arrived at, nor did he identify the sub-contractors to whom this sum was paid. Further, during the search proceedings, the Managing Director, Shri P.V. Rao, admitted that he could not provide work orders, contracts, or supporting documents for these expenses. Under pressure, he voluntarily agreed to offer ₹1,34,13,000/- as additional income. However, this amount was never specifically linked to any particular group of sub-contractors in the AO's order. The AO merely accepted the figure without detailing/ pointing out its basis. This undermines the reliability of the addition.
64.1 Be that as maybe, we note that in the appellate proceedings, the assessee offered a new explanation that the disallowed amount pertained to two parties only and one of them is unsecured loan creditor namely Shri Rama Chandra Murthy. This explanation was not given at the time of assessment, and no such claim was made during the search or in response to the show-cause notice. The ld CIT(A) accepted this claim without proper verification and without calling for remand or explanation from the AO.
, 1190 & CO No.24/Bang/2024 Page 65 of 68 64.2 We are also conscious to the fact that the assessee's own arguments are inconsistent. On one hand, they claim all sub-contractors were genuine and work was executed. On the other, they claim the disputed amount was actually a loan. This contradiction weakens the credibility of their defense also. Further the affidavits submitted in support were not notarized and produced at very end of the assessment proceeding. The affidavits were directly obtained from the same individuals who denied doing any work, therefore the affidavit required inquiry by the AO but not due to time constraint, it did not happen.
64.3 Furthermore, the assessee's claim that payments were made through banking channels and TDS was deducted does not alone prove the genuineness of work done, especially when the recipients deny rendering services. Despite the AO’s investigation pointing out to a widespread pattern of accommodation entries and bogus subcontracting, the lack of clarity on how the specific disallowance of ₹1,34,13,000/- was calculated for the sub-contractors, is a material gap in the assessment order also. As such, the AO relied heavily on general observations and statements but did not directly tie the disallowed amount to identified parties. Therefore, considering the inconsistencies in the AO’s approach, the lack of specificity in quantifying the disallowance, and the contradictions in the assessee’s stand, we are of the view that a full disallowance cannot be sustained. However, given over all materials on record and absence of work documentation the possibility of manipulation, use of accommodation entries cannot be ruled out. Therefore, we deem it appropriate to uphold a 10% ad hoc disallowance out of the total disallowances made by the AO in order to give render justice and serve to plug the loopholes if any and at the .
, 1190 & CO No.24/Bang/2024 Page 66 of 68 same time providing reasonable relief to the assessee. Accordingly, the Revenue’s appeal is partly allowed as well as the assessee’s ground of CO is also partly allowed.
The next issue raised by the revenue is that the learned CIT(A) erred in addition to the extent of Rs. 17,84,58,955/- against the non- genuine purchases from M/s Triveni Enterprises.
At the outset, we note that the issue raised by the revenue in captioned ground of appeal has been adjudicated along with the assessee’s ground of appeal in ITA No. 978/Bang/2024. The assessee ground of appeal has been decided by vide paragraph No. 38 of this order wherein we have decided the issue in the favor of the assessee and against the revenue. For detailed discussion, please refer to the aforesaid paragraph. Hence the ground of appeal of the revenue is hereby dismissed.
67. The next issue raised by the revenue is that the learned CIT(A) erred in deleting the addition to the extent of Rs. 9,17,41,460/- against the non-genuine purchases from M/s Ratan Trading Co.
At the outset, we note that the issue raised by the revenue in captioned ground of appeal has been adjudicated along with the assessee’s ground of appeal in ITA No. 978/Bang/2024. The assessee ground of appeal has been decided by vide paragraph No. 45 of this order wherein we have decided the issue in the favor of the assessee and against the revenue. For detailed discussion, please refer to the .
, 1190 & CO No.24/Bang/2024 Page 67 of 68 aforesaid paragraph. Hence, the ground of appeal of the revenue is hereby dismissed.
In the result appeal of the Revenue is partly allowed.
The issue raised by the assessee in ground (a), (b) & (g) of its CO is general in nature and therefore the same does not require any separate adjudication. Hence, we dismiss the same as infructuous.
The issue raised by the assessee in ground Nos. (c) & (d) of the CO pertain to disallowance of bogus subcontract expenses of Rs. 1,34,13,000/- only.
At the outset, we note that the issue raised by the assessee in captioned ground of CO has been adjudicated along with the Revenue’s ground of appeal in . The revenue’s ground of appeal has been decided by vide paragraph No. 64 of this order wherein we have decided the issue partly in favour of Revenue. For detailed discussion, please refer to the aforesaid paragraph. Hence, the ground of cross objection is hereby dismissed.
73. The issue raised by the assessee in ground Nos. (e) & (f) of the CO are supporting the finding of learned CIT(A), hence the same does not require any separate adjudication. Hence the same is hereby dismissed as infructuous.
, 1190 & CO No.24/Bang/2024 Page 68 of 68
In the result, the CO of the assessee is partly allowed.
In the combined result, the appeal of the assessee is hereby partly allowed, the appeal of the revenue and the cross objection filed by the assessee are also partly allowed.