SLR INFRASTRUCTURE PRIVATE LIMITED,HYDERABAD vs. DCIT., CIRCLE-3(1), HYDERABAD

The case has been, subsequently taken up for revision proceedings. A Show-Cause Notice under Section 263 of the Act, dated 21-04-2024 was issued and served on the assessee. The Ld. Pr. CIT in the said show-cause notice called upon the assessee to explain as to why the assessment order passed by the A.O. under Section 143(3) read with Section 143(3A) and 143(3B) on 09-04-2021 shall not be revised in terms of Section 263 of the Act, because the assessment order passed by the A.O. is erroneous in so far as it is prejudicial to the interest of the revenue on the issue of genuineness of expenditure incurred by the assessee. In the said show-cause notice, the Ld. Pr. CIT observed that, although the case was selected for scrutiny to verify genuineness of expenditure, but the A.O. completed the assessment without carrying out required enquiries, he ought to have been carried out in light of provisions of Section 263 of the Act, in respect of sub-contract expenditure paid to Malreddy Dharma Reddy and Venkat Rami Reddy Nimmanpalli, which is evident from the material available on record where it is clearly established that although the above two parties have not filed return of income to prove the genuineness of the payment made by the assessee, but the A.O. has allowed deduction towards sub-contract payment made to the above parties. Therefore, opined that, the assessment order passed by the A.O. is erroneous insofar as it is prejudicial to the interest of the revenue.

In response to the show-cause notice issued by the Ld. Pr. CIT, the assessee submitted that the assessment order passed by the A.O. is neither erroneous nor prejudicial to the interest of revenue because, the A.O. has verified the issue of sub-contract payments made to the above two parties by issuing a specific show cause notice under Section 142(1), dated 09-01-2020, where the A.O. has called for specific details of sub-contract payments made by the assessee and consequent TDS deduction under Section 194C of the Act. The assessee, in response to the notice issued by the A.O., has furnished all the details, including bills and vouchers submitted by the sub-contractors, payments made to them through banking channels, and TDS deducted on the said payments. The A.O., after considering relevant facts, has rightly accepted the genuineness of the payments made by the assessee and completed the assessment. Therefore, it cannot be said that the assessment order passed by the A.O. on this issue is erroneous insofar as it is prejudicial to the interest of the revenue.

The Ld. Pr. CIT, after considering relevant submissions of the assessee and also taking note of the relevant facts, has observed that, on perusal of the material/information furnished by the assessee, it is evident that, although the assessee has filed certain evidences to prove the genuineness of the payments to the above two parties namely Malreddy Dharma Reddy and Venkat Rami Reddy Nimmanpalli, including details of payment made through banking channels and TDS deducted on said payment, but failed to furnish formal agreement with the sub-contractors, which is clearly shows the non-genuineness of the payments made by the assessee. Further, the assessee confirmed that it has supplied material like steel, cement, gravel, etc., and also expenses like Diesel, Transportation, etc., were also stated to have been borne by the assessee. Since majority of the expenses has been incurred by the assessee, the payment made to the above two parties need to be examined in light of relevant agreement between the parties and bills submitted for carrying out works. Since the assessee could not furnish relevant bills in support of works carried out by the sub-contractors, the genuineness of the payment made to the above two parties is not established. Although the assessee could not establish the genuineness of the expenditure, but the A.O. simply allowed the payment made to the above two parties, which renders the assessment order passed by the A.O. erroneous in so far as it is prejudicial to the interest of the Revenue. Therefore, rejected the explanation of the assessee and set aside the assessment order passed by the A.O. under Section 143(3) r.w.s.143(3A) & 143(3B) of the Income Tax Act, 1961 on 09-04-2021 and directed the A.O. to pass suitable order after examining the link between the payments made and actual work carried out by these sub-contractors.

Aggrieved by the order of Ld. Pr. CIT, the assessee is now, in appeal before the Tribunal.

The Learned Counsel for the assessee Shri A. Srinivas, Advocate, submitted that the Ld. Pr. CIT erred in invoking his powers of revision under Section 263 of the Act, even though the assessment order passed by the A.O. is neither erroneous nor prejudicial to the interest of the revenue on the issue of sub-contractors' expenses paid to Malreddy Dharma Reddy and Venkat Rami Reddy Nimmanpalli. The learned counsel for the assessee, referring to the assessment order passed by the A.O. under Section 143(3) read with Section 143(3A) and 143(3B) on 09-04-2021, and relevant notices issued under Section 142(1) of the Act on various dates, submitted that the case was selected for scrutiny to verify the genuineness of the expenditure which covers sub-contract expenditure incurred in the name of the above two persons. The A.O. issued a specific notice under Section 142(1), dated 09-01-2020, and called for various details about sub-contract expenses incurred by the assessee. The assessee has furnished all the details, including relevant bills submitted by the sub-contractors, payments made through banking channels, and TDS deducted on payments made to sub-contractors. The assessee has also furnished relevant income tax returns filed by the sub-contractors, wherever the parties have filed the return of income. In the case of Malla Reddy Dharma Reddy and Venkata Rami Reddy NimmaPalli, the assessee could not furnish relevant income tax returns filed by them because, Malla Reddy Dharma Reddy was expired during COVID period without filing return of income. In respect of the other party, the role of the assessee is to deduct TDS on the payments made to the sub-contractors, but filing return of income by the sub-contractors is not in the control of the assessee. Therefore, merely for the reason of non-filing of return by sub-contractors, the genuineness of the payments made to the above two parties cannot be doubted, more particularly when the assessee has furnished all the details. Although these evidences have been submitted to the Ld. Pr. CIT, but the Ld. Pr. CIT, without appreciating the relevant facts, simply set aside the assessment order passed by the A.O. under Section 143(3) r.w.s.143(3A) & 143(3B) of the Income Tax Act, 1961, dated 09-04-2021 in terms of Section 263 of the Act. Therefore, it is submitted that the order passed by the Ld. Pr. CIT should be quashed.

The Ld. CIT-DR Ms. U. Mini Chandra, on the other hand, supporting the order of the Ld. Pr. CIT, submitted that there is no dispute with regard to the fact that the assessee could not file relevant income tax returns filed by the above two sub-contractors. Further, the assessee could not file relevant bills furnished by the sub-contractors along with agreements, if any, between the assessee and the sub-contractors. Mere making payment through banking channels and deducting TDS on sub-contractors' payments does not prove the genuineness of the payments. The A.O., without appreciating the relevant facts, simply accepted the return filed by the assessee, without carrying out the required enquiries he ought to have been carried out in light of the provisions of Section 263 of the Act. The Ld. Pr. CIT, after considering the relevant facts, has rightly held that the assessment order passed by the A.O. is erroneous insofar as it is prejudicial to the interest of the revenue. Therefore, she submitted that the order of the Ld. Pr. CIT should be upheld.

We have heard both parties, perused the material available on record, and had gone through the orders of the authorities below. There is no dispute with regard to the fact that the assessee's case was subjected to regular assessment under Section 143(3) of the Act, where the assessment was taken up for the purpose of verification of the genuineness of expenses, which covers sub-contract expenses incurred by the assessee. It is also not disputed that the A.O. completed the assessment proceedings under Section 143(3) r.w.s.143(3A) & 143(3B) of the Income Tax Act, 1961 on 09-04-2021 without making any additions towards sub-contract expenses incurred by the assessee, including payments made to the above two parties, even though the A.O. had caused the required enquiries by issuing notices under Section 142(1) of the Act, dated 09-01-2020, 15-12-2020, and 17-02.2021. The A.O. had called for specific details about sub-contract expenses incurred by the assessee and relevant TDS deducted under Section 194C of the Act, which is evident from annexure forming part of notices issued under Section 142(1), where the A.O. had specifically called for return of income filed by the sub-contractors for the relevant assessment years. In response to notices under Section 142(1) of the Act, the assessee has furnished relevant details, including bills submitted by the sub-contractors, payment made to them through banking channels and TDS deducted on sub-contract payments. The A.O. after considering relevant submissions, has accepted the return of income without making any additions.

The provisions of section 263 of the Act deal with revisionary powers of the Principal Commissioner or Commissioner. As per section 263 of the Act, the Ld.PCIT may conduct enquiry or call for relevant information and after giving opportunity of being heard to the assessee, pass order enhancing or modifying the assessment or cancelling the assessment and directing a fresh assessment, if the said assessment is prejudicial to the interest of the Revenue. Explanation 2 to section 263 defines the circumstances, under which the assessment order can be treated as erroneous and as per the said explanation, the order passed by the Assessing Officer shall be deemed to be erroneous, in so far as it is prejudicial to the interest of the Revenue, if in the opinion of the Principal Commissioner, the order passed is without making enquiries or verification, which should have been made and so on. From the plain reading of the said provisions, it is abundantly clear that in order to invoke juri iction u/s 263 of the Act, the twin conditions embedded there in must be satisfied, i.e. firstly, the order is erroneous and secondly, the same is also prejudicial to the interest of the Revenue. Whether a particular assessment order passed by the Assessing Officer is erroneous or not, depends upon the subjective satisfaction of the Ld.PCIT. Before assuming juri iction, the PCIT should satisfy with valid reasons that the assessment order passed by the Assessing Officer on particular issue is erroneous, which caused prejudice to the interest of the Revenue. Unless the PCIT brings out the reason and explain how the assessment order passed by the Assessing Officer is erroneous then, in our considered view, simply for the purpose of further verification, the assessment order cannot be set aside, in terms of section 263 of the Act and this legal principle is supported by plethora of judicial precedents including the decision of Hon'ble Supreme Court in the case of PCIT Vs Cartier Leaflin Private Ltd. (2023) 146 taxmann.com 281 (SC), wherein, Hon'ble Supreme Court dismissed the SLP filed by the department against Hon'ble High Court order and accepted the fact that, where due enquiry was made by the Assessing Officer during the assessment proceedings by applying his mind and accepted the claim of operating loss, which was a possible view, there was no basis to invoke revisionary proceedings on the ground that the books of accounts and transactions of share trading activity carried out by the assessee vis-à-vis the D-mat accounts of the assessee have not been examined by the Assessing Officer during the assessment proceedings. This principle, further supported by the decision of Hon'ble Supreme Court in the case of Malabar Industries Co.Ltd (2000) 243 ITR 83 (SC), wherein, it is clearly held that in order to invoke juri iction u/s 263, the order of the ITO in question, must not only be erroneous but also the error in the order of the ITO must be of such a kind, that it can be said that it is prejudicial to the interest of the Revenue. In other words, merely, because, the Assessing Officer's order is erroneous, the PCIT cannot interfere. Again, merely because, the order of the Assessing Officer is prejudicial to the interest of the Revenue then, again that is not enough to confer juri iction on the PCIT to interfere in revision. The sum and substance of the ratios laid down by various courts including the Hon'ble Supreme Court is that before invoking juri iction u/s 263, the PCIT must give reasons to come to a conclusion that the issues in question were not examined by the Assessing Officer, in light of relevant provisions of the Act and evidences placed on record.

In this legal background, if we examine the facts of the present case, it is undisputedly clear that during the course of assessment proceedings, the A.O. raised queries by issuing notices under Section 142(1) of the Act, on the issue of sub-contract payments made by the assessee, including sub-contract payments made to the above two parties. In response, the assessee has submitted all the details and also explained explanation as to why the above two sub-contractors have not furnished the return of income. In our considered view, once the issue on which the Ld. Pr. CIT assumed his juri iction was subject matter of verification from the A.O. during the course of assessment proceedings, then it cannot be said that the A.O. did not carry out the required enquiries, he ought to have carried out in light of Explanation 2 to Section 263 of the Act. This is because, unless the Ld. Pr. CIT makes out a case that, it is a case of lack of enquiry, then there is no scope for the Ld. Pr. CIT to invoke juri iction under Section 263 of the Act. The law is very clear insofar as assumption of juri iction by the Ld. Pr. CIT that the twin conditions provided therein that (i) the order passed by the A.O. is erroneous and (ii) it is prejudicial to the interest of the revenue should be satisfied. In the present case, going by the reasons given by the Ld. Pr. CIT in his order passed under Section 263 of the Act, there is no dispute with regard to the observation of the Ld. Pr. CIT that the assessee has furnished all details, including relevant bills submitted by the sub-contractors and TDS deducted on the payment made to them. However, the Ld. Pr. CIT doubted the genuineness of the payments only on the ground that there is no formal agreement between the assessee and the sub-contractors, and further, the sub-contractors have not furnished return of income. In our considered view, absence of a formal agreement between the parties is not a ground for doubting the genuineness of the payments made by the assessee, more so, when other evidences furnished by the assessee proves that the transactions between the assessee and sub-contractors are genuine, which were incurred in the normal course of business of the assessee.

Insofar as the observation of the Ld. Pr. CIT with regard to non-furnishing of return of income by the sub-contractors, in our considered view, the obligation of the assessee is to deduct TDS on payments made to sub-contractors in terms of Section 194C of the Act. Filing of return of income by the sub-contractors is not within the domain of the assessee and beyond the control of the assessee. Therefore, non-furnishing of return of income by the sub-contractors is not a ground for disbelieving or doubting the genuineness of the payments made by the assessee. Since the assessee has furnished all the relevant evidences, including relevant bills submitted by the sub-contractors and also proved the nature of work executed by them, in our considered view, the reasons given by the Ld. Pr. CIT to set aside the assessment order passed by the A.O. on the issue of sub-contract payment made to the above two parties is devoid of merit and cannot be accepted.

Coming back to the case laws relied upon by the learned Counsel for the assessee. The learned counsel for the assessee relied upon the decision of Hon'ble ITAT, Hyderabad Benches in the case of N.A.M. Expressway Ltd. Vs. ACIT in ITA No. 580/Hyd/2024 dated 28.01.2025. We find that, the Coordinate Bench of ITAT had considered an identical issue of 263 order passed by the Ld. Pr. CIT and, after considering relevant facts, held as under:

The learned counsel for the assessee had also relied upon the decision of ITAT, Chennai Benches in the case of M/s. Good Earth Fertilizers Co.P. Ltd. Vs. ITO in ITA No. 424/Chny/2022 dated 24.02.2023. We find that the ITAT, Chennai Benches, had considered an identical issue of the order passed by the Ld. Pr. CIT under Section 263 and, by following the decision of Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. Vs. CIT reported in (2000) 243 ITR 83 (SC) held as under:

We have heard both the parties, perused the materials available on record and gone through orders of the authorities below. The provisions of Sec.263 of the Act, conferred suo-moto revisional powers to the PCIT, if the PCIT satisfies that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue. In order to assume juri iction u/s.263 of the Act, twin conditions must be satisfied viz., (i) the order of the AO must be erroneous and (ii) further, it should be prejudicial to the interest of the Revenue. Unless, twin conditions embedded therein, are satisfied, the PCIT cannot revise the assessment order u/s.263 of the Act. In this case, the PCIT has revised the assessment order on the issue of bill discounting charges debited to P & L A/c and also loans & advances given to various companies including investments in subsidiary companies. According to the PCIT, although, the AO seems to have been called for necessary details with regard to two issues in the assessment proceedings, but not examined the issue of applicability of provisions of Sec.14A of the Act, and Sec.36(1)(iii) of the Act, with reference to bill discounting charges debited to P & L A/c and corresponding investments with subsidiary companies. The PCIT further was of the opinion that the AO has not examined the fact that when the company is not carrying on any business operations, where was the question of bills being existence for its bill discounted, in respect of a specific query, the assessee could not respond to the issue of period for which the amount was borrowed. Therefore, the PCIT opined that the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue and thus, set aside the assessment order and direct the Assessing Officer to redo the assessment after giving reasonable opportunity of hearing to the assessee.

In light of above factual and legal back ground, if you examine the fact of the present case, we find that the assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the Revenue, for the simple reason that the issue questioned by the PCIT in 263 proceedings has been thoroughly examined by the AO in assessment proceedings. In fact, the sole purpose for taking up for scrutiny assessment is to verify expenses incurred for earning exempt income and investments / advances appeared in the balance sheet. The assessee has filed its financial statement, as per which, the only expenses debited into P & L A/c was finance cost of Rs.38,20,324/- and said finance cost represents bill discounting charges of Rs.38,20,324/-. The financial statement of the assessee was made available to the AO. Further, the AO has raised a specific query on the issue. From the above, it appears that the issue was subject matter of discussion by the AO during the course of assessment proceedings, although, there is no specific discussion in the assessment order. Therefore, we are of the considered view that the revision order passed by the AO on this issue in light of provisions of Sec.14A of the Act seems to be incorrect, because, for application of provisions of Sec.14A of the Act, there should be an exempt income and in this case, exempt income is absent. Therefore, the question of application of provisions of Sec. 14A does not arise.

In so far as the second observation of the PCIT with regard to application of provisions of Sec. 36(1)(iii) of the Act, and disallowance of proportionate interest which is paid towards borrowed capital and not used for business purpose, we find that sole basis for the PCIT to come to conclusion that the assessee has paid interest on loans and diverted interest-bearing funds to sister concerns for non-business purpose. We find that once gain the observation of the PCIT is devoid of merits. The assessee has discounted bills receivables with M/s.VCF and source of said income is out of the proceeds from bill discounting activity and not out of borrowing on which interest has been paid by the assessee. Therefore, the question of application of provisions of Sec.36(1)(iii) of the Act, and consequent disallowance of interest towards funds given to subsidiary companies does not arise. Even assuming for a moment said bill discounting charges are in the nature of interest, but fact remains that the main object of the assessee is to receive money and advance loans and said objects are in the nature of Investment Company, and activity carried out by the assessee in the normal course of its business cannot be considered as separate activity, because the object of the company is also investment activity. Therefore, amount of bill discounting charges paid as per object of the company cannot be considered for disallowance u/s 36(1)(iii) of the Act, because, one of the objects of the assessee company is to make investment in subsidiary companies. In our considered view, on this aspect also assumption of juri iction by the PCIT fails.

It is a well settled principle of law by various decisions of courts including the decision of the Hon'ble Supreme Court in the case of in the case of Malabar Industrial Co. Ltd. v. CIT reported in [2000] 243 ITR 83 (SC), that failure on the part of the AO to apply his mind during the course of assessment proceedings, is sufficient ground for invoking Section 263 of the Act, and the order in such case is erroneous in so far as it is prejudicial to the interest of the Revenue. In our considered view, the PCIT is grossly erred in setting aside the assessment order with one-line cryptic observation that the AO has not applied his mind on two issues without bringing on record, how the Revenue is prejudiced from those issues. Further, in the show cause notice also the PCIT has failed to give any plausible reasons 'as to how' the assessment order passed by the AO is erroneous in so far as it is prejudicial to the interest of the Revenue. From the above, it is clear that the PCIT has simply assumed juri iction and set aside the assessment order without satisfying himself about erroneous order passed by the AO, which caused prejudice to the interest of the Revenue on both issues.

At this stage, it is pertinent to refer to the decision of ITAT Chennai in the case of M/s.S.R. Trust v. ITO in ITA No.213/Chny/2012 where the Tribunal had considered an identical issue of 263 order passed by the PCIT and after considering relevant facts held as under:

It is a well settled principle of law by the decision of the Hon'ble Supreme Court in the case of Malabar Industrial Co. Ltd. (supra), where it has been held that the phrase 'prejudicial to the interest of the Revenue u/s.263 of the Act', has to be read in conjunction with the expression erroneous order of the AO. Further the Courts observed that every loss of Revenue as a consequent of an order of the AO, cannot be treated as prejudicial to the interest of the Revenue. At this juncture, it is relevant to discuss various case laws relied upon by the Ld.Counsel for the assessee, on provisions of Sec.263 of the Act:

The Hon'ble Apex Court in the case of CIT Vs. Max India Ltd. (295 ITR 282) has held that when an ITO adopted one of the courses permissible in law and it has resulted in loss of revenue or where two views are possible and the ITO has taken one view with which the CIT did not agree, it cannot be treated as an erroneous order prejudicial to the interest of revenue. The Madras High Court followed the above decision of the Supreme Court in the case of CIT Vs. Tamilnadu Warehousing Corpn. (292 ITR 310).

In this view of the matter and considering the facts and circumstances of the case and also by following the ratios laid down in above case laws considered herein above, we are of the considered view that the assessment order passed by the AO is neither erroneous nor prejudicial to the interest of the Revenue. Further, if you go by the observation of the PCIT which is abundantly pleaded that the PCIT has set aside the assessment order for further verification which in our considered view is not permissible u/s.263 of the Act, even after insertion of Explanation (2) to Section 263 of the Act, and thus, we quashed the order passed by the PCIT u/s.263 of the Act.

In this view of the matter, considering the facts and circumstances of the case, and also by following the decisions relied upon by the learned counsel for the assessee as discussed herein above, we are of the considered view that, the assessment order passed by the A.O. is neither erroneous nor prejudicial to the interest of the revenue. The Ld. Pr. CIT, without appreciating the relevant facts, simply set aside the assessment order passed by the A.O. under Section 143(3) r.w.s.143(3A) & 143(3B) of the Income Tax Act, 1961, dated 09-04-2021. Thus, we quashed the order passed by the Ld. Pr. CIT under Section 263 of the Income Tax Act, 1961. 17. In the result, the appeal filed by the assessee is allowed.