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Facts
The assessee filed its return of income for AY 2018-19. The Assessing Officer (AO) initiated proceedings under Section 147, suspecting that the assessee had availed input tax credit without corresponding goods or services. The AO passed a reassessment order without additions. The Principal Commissioner of Income Tax (PCIT) revised this order under Section 263, directing a fresh assessment.
Held
The Tribunal held that the AO's reassessment order was passed without conducting necessary inquiries or verification regarding the assessee's claim of sub-contracting expenses, which constituted 99% of the contract receipts. This omission rendered the order erroneous and prejudicial to the interest of revenue.
Key Issues
Whether the PCIT was justified in invoking Section 263 to set aside the AO's reassessment order for lack of proper inquiry and verification of sub-contract expenses.
Sections Cited
147, 148, 143(2), 263, 144B, 119
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Income Tax Appellate Tribunal, Hyderabad ‘A’ Bench, Hyderabad
Before: SHRI RAVISH SOOD & SHRI MADHUSUDAN SAWDIA
(निर्धारण वर्ा/Assessment Year:2018-19) M/s. Nagabhushanam & Co., Income Tax Officer, Vs. Ward-6(1), Hyderabad. Hyderabad. PAN:AADFN6796P (Appellant) (Respondent) निर्धाररती द्वधरध/Assessee by: Shri R. Mohan Kumar, Advocate रधजस् व द्वधरध/Revenue by: Ms. U. Mini Chandran, CIT-DR सुिवधई की तधरीख/Date of hearing: 01/09/2025 घोर्णध की तधरीख/Pronouncement: 10/09/2025 आदेश/ORDER PER MADHUSUDAN SAWDIA, A.M.: This appeal is filed by M/s. Nagabhushanam & Co. (“the assessee”), feeling aggrieved by the order passed by the Learned Principal Commissioner of Income Tax, Hyderabad-1 (“Ld. PCIT”), dated 04.03.2025 for the A.Y. 2018-19.
The assessee has raised the following grounds of appeal :
3. The brief facts of the case are that, the assessee filed its original return of income for the assessment year 2018–19 on 30.10.2018 declaring total income of Rs.3,94,16,810/-. Based on information flagged under the risk management strategy, it was noticed by the Learned Assessing Officer (“Ld. AO”) that the assessee had availed input tax credit of Rs.1.12 crores on the strength of invoices issued by M/s GJS Infratech Pvt. Ltd., M/s Sri Laxmi Constructions and M/s Roll-on Projects (“sub-contractors”) without receipt of corresponding goods or services, for a contract value of Rs.9,38,41,678/-. Accordingly, proceedings under section 147 of the Income Tax Act, 1961 (“the Act”) were initiated by the Ld. AO. The assessee did not file any return in response to the notice issued under section 148 of the Act. After considering the submissions of the assessee, the Ld. AO passed the reassessment order under section 147 r.w.s. 144B on 15.02.2023, without making any addition. Subsequently, the Ld. PCIT initiated proceedings under section 263 of the Act and passed an order dated 04.03.2025, setting aside the reassessment order with a direction to the Ld. AO to frame a fresh assessment as per law.
4. Aggrieved by the order of Ld. PCIT, the assessee is in appeal before the Tribunal. The Learned Authorised Representative (“Ld. AR”) submitted that the assessee had obtained a works contract from M/s Reddy Veeranna Constructions Pvt. Ltd. (“RVCPL”) for Rs.9,47,89,574/-, and sub-contracted the work to sub-contractors for Rs.9,38,41,678/-, retaining a margin of 1% of the contract value. The Ld. AR pointed out that the Ld. AO had issued notice under section 143(2) on 29.09.2022 calling for several details. In response, the assessee furnished replies on 25.10.2022 along with supporting documents. He submitted that acknowledgments of filing replies were placed at page nos. 57 & 58 of the paper book, and the detailed submissions with enclosures were placed at page nos. 59 to 200 of the paper book. After considering these submissions, the Ld. AO passed the reassessment order. It was contended that there was no error in the order of the Ld. AO. The Ld. AR relied upon the judgment of the Hon’ble Supreme Court in Malabar Industrial Co. Ltd. vs. CIT (243 ITR 83) to submit that two conditions must be satisfied before invoking section 263 i.e. (i) the order of the AO must be erroneous and (ii) it must be prejudicial to the interest of the revenue. He argued that in the present case, these twin conditions are not satisfied. Therefore, the invocation of section 263 is bad in law and the order passed by the Ld. PCIT deserves to be quashed.
Per contra, the Learned Departmental Representative (“Ld. DR”) invited our attention to para no. 3 at page nos. 2 & 3 of the order of Ld. AO and submitted that there are no findings recorded by the Ld. AO regarding the enquiries or verification undertaken in respect of the assessee’s claim. She pointed out that though the assessee had received contract receipts of Rs.9,47,89,574/-, it claimed expenditure of Rs.9,38,41,678/- on account of payments to sub- contractors, constituting nearly 99% of receipts. The Ld. DR contended that the Ld. AO did not verify the basis of such a huge claim of expenditure. In particular, the Ld. AO failed to verify (i) the contract agreement between RVCPL and the assessee and (ii) the agreements between the assessee and the sub-contractors. These were crucial documents which should have been examined.
The Ld. DR further invited our attention to para nos. 2 to 4 of the order of the Ld. PCIT, where the reasons for invoking section 263 have been detailed. She submitted that the failure to make necessary enquiries squarely attracts provisions of section 263 of the Act. Therefore, the order of the Ld. PCIT was in accordance with law.
We have considered the rival submissions and perused the material available on record. We have gone through para no.3 of page nos. 2 & 3 of the order of Ld. AO which is to the following effect :
On perusal of above, we find that the order of Ld. AO is non- speaking. The Ld. AO has given no findings regarding the enquiries or verification undertaken in respect of the assessee’s claim and he has not stated any reason for making no addition in the hands of the assessee. We have also gone through the para nos. 2 to 4 of page no.2 of the order of Ld. PCIT, which is to the following effect :
“ 2. Subsequently, on verification of electronic assessment record as available in the ITBA portal, it was found that the assessee has taken up work contract from M/s. Reddy Veeranna Consturctions Pvt.Ltd. (RVCPL) for an amount of Rs.9,47,89,574/-, which was sub-contracted to M/s. GJS Infratech Pvt.Ltd., M/s. Sri Laxmi Constructions, M/s. Roll-on Projects for an amount of Rs.9,38,41,678/- after retaining margin of 1%. Further, as per the information uploaded on Insight Portal by the DDIT(Inv), the Managing Partner of the assessee-firm stated in his statement given to the GST authorities that he does not know the subcontractor and he has never monitored the subcontract work and that no inward supplies were received and the ITC claimed are irregular. On perusal of records, it is found that the assessee has not filed copy of work order received from M/s. RVCP and copy of work order awarded to sub-contractors during the assessment proceedings and there is no indication regarding payments of Rs.9,38,41,679/- to the sub-contracts. In view of the above facts, it is found that the sub-contracts payments claimed to have been paid to M/s. GJS Infratech Pvt.Ltd., M/s. Sri Laxmi Constructions, M/s. Roll-on Projects which are not substantiated with confirmations or supporting documents are found to be not genuine.
However, the AO has allowed the above expenditure of Rs.9,38,41,679/- and completed the assessment, accepting the returned income and an amount of Rs.9,38,41,679/- has not been brought to tax as per the provisions of the Income Tax Act, 1961.
The above omission by the Assessing Officer in passing the order without making enquiries or verification which should have been made and allowing relief without enquiring into the aspect of above expenditure of payments made by subcontract rendered the subject assessment order passed u/s. Order u/s. 147 rws 144B of the Income Tax Act vide DIN and Order No. ITBA/AST/S/147/2022- 23/1049777169 (1) dated 15.02.2023 as erroneous in so far as prejudicial to the interest of revenue.”
On perusal of above, we find that the Ld. PCIT has stated that the assessee has not filed copy of work order received from M/s. RVCPL and copy of order awarded to sub-contractors during the assesment proceedings. The Ld. PCIT has also stated that, the order passed by Ld. AO without making such enquiries or verification render the assesment order erroneous in so far as prejudicial to the interest of revenue. We also find that, the Hon’ble Supreme Court in Malabar Industrial Co. Ltd. vs. CIT (supra) has laid down that both the conditions i.e., that the order must be erroneous and that it must be prejudicial to the interest of the revenue, must be satisfied before exercise of jurisdiction under section 263 of the Act. We have also gone through Explanation 2 to section 263 of the Act, inserted by the Finance Act, 2015 w.e.f. 01.06.2015, which is to the following effect :
“ Section 263 …… Explanation 1 …… Explanation 2.—For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer or the Transfer Pricing Officer, as the case may be, shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner,— (a) the order is passed without making inquiries or verification which should have been made;
(b) the order is passed allowing any relief without inquiring into the claim; (c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or (d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.”
On perusal of above, we find that Explanation 2 (a) of section 263 of the Act specifically provides that an order passed without making inquiries or verification which should have been made shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue. Therefore, any order passed by the Ld. AO without making any enquiry or verification which should have been made, will make the order erroneous in so far as it is prejudicial to the interests of the revenue. In the present case, there is no dispute that the Ld. AO neither called for nor verified the work order received from RVCPL, the work orders awarded to the sub-contractors, the agreements between RVCPL and the assessee and between the assessee and the sub-contractors. In our view, these documents were crucial in light of the fact that nearly 99% of contract receipts were claimed as subcontracting expenses. The failure of the Ld. AO to verify such fundamental evidence clearly renders the order erroneous and prejudicial to the interests of the revenue within the meaning of section 263, read with Explanation 2. Therefore, in our opinion, both the twin conditions laid down in Malabar Industrial Co. Ltd. vs. CIT (supra) stand satisfied in this case. The Ld. PCIT was fully justified in invoking section 263 and setting aside the assessment order. Therefore, we find no infirmity in the order of the Ld. PCIT passed under section 263 of the Act. Accordingly, the appeal of the assessee is dismissed.
In the result, the appeal of the assessee is dismissed.