SRI SAI CONSTRUCTIONS,KARIMNAGAR vs. ACIT., CIRCLE-1, KARIMNAGAR

Aggrieved, the assessee firm carried the matter in appeal before the CIT(A). The CIT(A), after deliberating on the contentions advanced by the assessee firm, called for a “remand report”. In compliance, the AO filed his “remand report” dated 26.09.2022, wherein, it was stated by him that on verification of the required documents/information produced by the assessee firm, it was found that each of the voucher on its back side provided bifurcated of the details of payments, which revealed that the said payments were made to more than one labourer whose signatures were 6 Sri Sai Constructions therein found endorsed. Also, the AO in his report had observed that, as the assessee firm had engaged a large number of labourers on a temporary basis, therefore, as accounting for each entry of payment of charges to them was time consuming, therefore, the aforesaid system of recording the payments made to the labourers was accepted for a smooth functioning of the business. The AO further observed that on a perusal of the ledger copies and vouchers, it was revealed that the payments made to the labourers were found to be within the prescribed limit as envisaged in section 40A(3) of the Act. At the same time, the AO observed that some of the vouchers aggregating to Rs. 55,25,590/- though contained the names of the labourers, but, the same did not bear their signatures viz., (i) labour charges: Rs.53,33,550/-; (ii) centering charges: Rs.69,650/-; and (iii) mason charges: Rs.1,22,390/-. The CIT(A), after considering the contentions advanced by the assessee in the backdrop of the remand report filed by the AO, restricted the disallowance to an amount of Rs. 55,25,590/-. For the sake of clarity, the observations of the CIT(A) are culled out as under:

The assessee firm being aggrieved with the order of the CIT(A) has carried the matter in appeal before us.

We have heard the learned authorized representatives of both parties, perused the orders of the lower authorities, and the material available on record.

Shri T. Chaitanya Kumar, Advocate, learned authorized representative for the assessee firm (for short “Ld.AR”), at the threshold of the hearing of the appeal, submitted that the CIT(A) had grossly erred in law and facts of the case in sustaining the disallowance of Rs. 55,25,590/-. Elaborating on his contention, the Ld.AR submitted that though the genuineness of the expenses was never doubted by the AO, but the disallowances of the impugned amount of Rs. 55,25,590 (forming part of the total disallowance u/s 40A(3) of Rs. 5,29,85,599) was made by him for the reason that the said payments were made by the assessee firm in contravention of section 40A(3) of the Act. The Ld.AR submitted that now when the AO in his remand report dated 26.09.2022 had admitted that all the payments made to the labourers were found to be below the threshold limit of Rs.10,000/- each as contemplated u/s 40A(3) of the Act, therefore, there was no justification for the CIT(A) to have resorted to a cherry picking and sustain part of the disallowance of Rs.55,25,590/- u/s 40A(3) of the Act. The Ld.AR submitted that as the AO had never doubted the genuineness of the expenditure, therefore, the CIT(A) had most 10 Sri Sai Constructions arbitrarily, without recording any reason much the less giving any cogent reason summarily sustained the disallowance of Rs. 55,25,590/- (supra) on the ground that the genuineness of the expenditure to the said extent was not proved. The Ld.AR assailed the observation of the CIT(A) on two grounds., viz.(i) that the CIT(A) had without any basis doubted the genuineness of the payments of the subject expenditure of Rs.55.25 lakhs (approx.) and disallowed the same; (ii) that the CIT(A) without putting the assessee firm to notice about his purported action of drawing adverse inferences regarding its claim for deduction of the subject expenditure on the ground that the genuineness of the same was being doubted by him, had most arbitrarily and rather whimsically disallowed the same allegedly on the ground that the genuineness of the payments on the unsigned vouchers was not established.

Per contra, the learned Departmental Representative (for short, “the Ld. DR”) relied upon the order of the CIT(A).

We have thoughtfully considered the contentions advanced by the learned authorized representatives of both parties in the backdrop of the orders of the lower authorities.

Admittedly, it is a matter of fact discernible from the record that the disallowance made by the AO, vide his order u/s 143(3) r.w.s. 144B of the Act dated 23.04.2021 was thereafter dislodged by him vide his “remand report” dated 26.09.2022, wherein, he had specifically stated that on verification of the records produced by the assessee, it stood revealed that the assessee firm had made the payments to more than one labourer and on no occasion there was any such payment which exceeded the prescribed limit contemplated u/s 40A(3) of the Act. We find that the CIT(A), going by the aforesaid observation of the AO, had fully concurred with him that there was no contravention of the provisions of section 40A(3) of the Act by the assessee firm. However, on perusal of the CIT(A) order, we find that he had taken cognizance of the observation of the AO that some of the vouchers were not signed, and without putting the assessee firm to notice, had doubted the genuineness of the corresponding expenditure incurred by the assessee firm towards labour charges of Rs. 55,25,590/-. We are unable to persuade ourselves to subscribe to the disallowance made by the CIT(A) for more than one reason. As the CIT(A) while 12 Sri Sai Constructions sustaining the disallowance of Rs.55,25,590/- had not put the assessee firm to notice about his purported action, i.e. drawing of adverse inference regarding the genuineness of the expenditure, which was never the issue till date, therefore, it is a case where the assessee firm has been visited with a disallowance without being afforded any opportunity to put forth his contentions regarding the genuineness of its claim for deduction of the subject expenses. Apart from that, we find that though the AO had neither in the assessment order nor in the remand report doubted the genuineness of the expenses, but only recorded his observation in context of the disallowance that was made by his predecessor u/s 40A(3) of the Act, therefore, merely for the fact that the payment made to some of the labourers did not bear the signatures at the back side of the vouchers could not have formed a stand alone basis for the CIT(A) to have drawn adverse inferences regarding the veracity of the claim of assessee firm to the said extent. We say so, specifically for the reason that the CIT(A) had carried out the entire exercise at the back of the assessee and had never called upon him to substantiate the genuineness of the expenses with respect to 13 Sri Sai Constructions the subject payments made to the labourers. We are of the firm conviction that the unilateral shift on the part of the CIT(A), wherein he had, while dealing with the disallowance of the assessee’s claim for deduction of labour expenses u/s 40A(3) r.w.r. 6DD unilaterally disallowed the said expenses on the ground that its genuineness could not be verified without affording any opportunity to the assessee cannot be sustained and is accordingly quashed.

We thus, in terms of our aforementioned deliberations, set aside the order of the CIT(A) and vacate the disallowance of Rs. 55,25,590/- made by him u/s 40A(3) of the Act.

Resultantly, the appeal filed by the assessee firm is allowed.