ACIT, CENTRAL CIRCLE-1(2), HYDERABAD vs. R R EDIFICE PRIVATE LIMITED, HYDERABAD

आयकर अपीलीय अधिकरण, हैदराबाद पीठ
IN THE INCOME TAX APPELLATE TRIBUNAL
Hyderabad ‘A’ Bench, Hyderabad

Before Shri Vijay Pal Rao, Vice President and Shri Manjunatha G., Accountant Member

आ.अपी.सं /ITA No.416/Hyd/2025
(निर्धारण वर्ा/Assessment Year: 2017-18)

ACIT
Central Circle-1(2)
[PAN :AASFR2521L]
(Appellant)

(Respondent)
आ.अपी.सं /ITA No.439/Hyd/2025
(निर्धारण वर्ा/Assessment Year: 2017-18)

RR Edifice Pvt.Ltd.
Hyderabad
[PAN :AASFR2521L]
Vs. ACIT
Circle-1(2)
Hyderabad

(Appellant)

(Respondent)
निर्धाररती द्वधरध/Assessee by: Shri P.Murali Mohan Rao,
AR
रधजस् व द्वधरध/Revenue by: Ms.U Mini Chandran,CIT-DR

सुिवधई की तधरीख/Date of Hearing: 29/07/2025
घोर्णध की तधरीख/Date of Pronouncement:
08/08/2025

आदेश / ORDER
PER. MANJUNATHA G., A.M:

These cross appeals filed by the Revenue and assessee are directed against the order dated 15.01.2025 of the learned
RR Edifice Pvt.Ltd.

Commissioner of Income Tax (Appeals) [Ld.CIT(A)], Hyderabad-
11, pertaining to A.Y.2017-18. 2. The revenue has raised the following grounds of appeal :
(i)
Whether on the facts and circumstances of the case and in law, the CIT(A) was erred in allowing part relief when it was accepted that the sub-contracts are not genuine

(ii)
Whether on the facts and circumstances of the case and in law, the CIT(A) was erred in allowing part relief without verifying the creditworthiness of the sub- contractors to undertake the works with their own funds

(iii)
The appellant craves to leave to amend, modify or alter any ground or grounds of appeal whenever necessary.
3. The assessee has raised the following grounds of appeal :
(i)
The order of the CIT(A) passed u/s 250 of the Act dated 15.01.2025 is erroneous both on facts and in law to the extent the order is prejudice to the interests of the appellant.

(ii)
The Ld.CIT(A) erred in partly allowing the appeal.

(iii)
The Ld.CIT(A) erred in directing the AO to add
Rs.75,54,050/- being
10%
of the sub-contract expenditure of Rs.7,25,40,500/-.
(iv)
The Ld.CIT(A) ought to have deleted the entire sub-contract expenditure of Rs.7,25,40,500/- without estimating 10% of the subcontract expenditure.
(v)
The Ld.CIT(A) ought to have appreciated that the assessee firm has submitted all the requisite
RR Edifice Pvt.Ltd.

information, like work orders, ledgers, RA bills, Form
16A, confirmation letters, TDS returns and income tax returns of sub-contractors etc.
(vi)
The Ld.CIT(A) ought to have appreciated the fact that the subcontractors to whom the payment have been made are assessed to income tax.
(vii)
The Ld.CIT(A) ought to have considered that the Ld.AO accepted the liability shown in the books of accounts of subcontractor payments in subsequent years and denying the related expenses in current year is bad in law.
(viii) The Ld.CIT(A) ought to have considered that the interest on late payment of TDS of Rs.87,694/- is an allowable expenditure u/s 37(1) of IT Act.
(ix)
The Ld.CIT(A) erred in not considering the fact that the interest expenses on late payment of TDS are compensatory in nature and not in nature of penalty.
(x)
The Ld.CIT(A) ought to have considered that the assessee has disclosed the amount of Rs.27,83,20,263/- in profit & loss account which is more than the amount reflected in Form 26AS of the assessee and hence making an addition of Rs.62,791/- on the same income that has been already offered to tax amount to double taxation.
(xi)
Appellant may add or alter or amend or modify or substitute or delete and / or rescind all or any of the grounds of appeal at any time before or at the time of hearing of the appeal.

18 on 11.10.2017, admitting total income of Rs.1,58,14,220/-.
The case was selected for scrutiny under CASS for the reason
“Large payments made under section 194C to persons who have not filed return of income”. During the course of assessment proceedings, the AO noticed that the assessee is a contractor doing civil contracts and earth canal works admitted a total contract receipts of Rs.27,83,30,282/-. The assessee is executing certain contract works on its own and also awarding certain works to sub-contractors. During the year under consideration, the assessee has awarded sub-contract works to the tune of Rs.11,93,61,000/- to eleven contractors, out of which, six contractors have filed the return of income and the remaining five contractors have not filed the return of income.
Therefore, the AO called upon the assessee to file relevant evidences, including sub-contract agreements with the contractors, nature of work executed by the contractors, relevant bills submitted for the work, payment made to the contractors, TDS deducted on said contracts etc. In response, the assessee submitted sub-contract agreement with M/s
Rithwik Projects Pvt. Ltd. and also a brief note on the sub- contract works awarded to eleven contractors. The AO after considering the submissions of the assessee, noted that the assessee has failed to file proper bills raised by sub-contractors along with the nature of work carried out by them. Therefore, the AO called upon the assessee to file relevant evidences, including RA bills submitted by the parties, payment made to RR Edifice Pvt.Ltd.

them and TDS deducted on said contracts etc. In response, the assessee submitted the payments made to sub-contractors along with TDS deducted on said payment and also filed self- made vouchers for sub-contract work given to the contractors.
The AO after considering the submissions of the assessee, observed that the assessee has deducted TDS, but has not paid any amount to the sub-contractors. Inspite of making payment, the amount due to the contracts has been treated as quasi equity. Therefore, the AO observed that the assessee has made a book adjustment / book entries in the form of awarding sub- contracts to various persons and the entire episode is circuitous transactions and no sub-contract work took place. The AO further noted that although the assessee firm has submitted relevant bank account statements, but there are no transactions in respect of sub-contract works given to above parties. Therefore, observed that out of eleven sub-contractors, only in respect of four contractors, the assessee has filed relevant evidences and therefore, the AO observed that the sub- contract work given to four parties alone is genuine and in so far as remaining seven parties, the claim of the assessee that sub-contract has been given is only an accommodation entry, without there being any actual work. Thus, rejected the arguments of the assessee and made addition of Rs.7,25,40,500/- towards sub-contract awarded to seven persons. The AO also made addition of Rs.87,964/- towards interest on late payment of TDS on the ground that it is penal in RR Edifice Pvt.Ltd.

nature and cannot be allowed. Similarly, the AO made addition of Rs.62,791/- towards difference in TDS amount as per Form
26AS and TDS amount admitted in the books of accounts.
5. Aggrieved by the assessment order, the assessee preferred an appeal before the CIT(A). Before the Ld.CIT(A), the assessee challenged the additions made towards sub-contract payment to the tune of Rs.7,25,40,500/-, in light of certain evidences, including sub-contract agreement between the assessee and the main contractor, M/s Rithwik Projects Pvt Ltd., RA bills submitted by the sub-contractors, TDS deducted on sub- contract and also conversion of amount due to the sub- contractors as quasi equity and payment in the subsequent financial years. The assessee had also filed relevant income tax returns filed by seven subcontractors and argued that the AO made disallowance towards sub-contract work awarded to above seven parties, only on the ground that there is no sub-contract agreement, but the fact remains that the assessee has explained the nature of contract work awarded to seven sub-contractors and also filed relevant agreement between the assessee and main contractor, M/s Rithwik Projects Pvt.Ltd. Although the AO accepted the fact that the assessee has filed relevant evidences, but made additions only on the ground that five sub-contractors have filed the return of income on one day and further, except payment of TDS, the assessee has not made payment due to the sub-contractors. Therefore, he submitted that the additions made by the AO should be deleted.
RR Edifice Pvt.Ltd.

profit may be estimated and in this regard, he has referred to certain judicial precedents, including the decision of ITAT
Hyderabad in the case of Srinivasa Lakshmi Constructions Vs.
DCIT in ITA No.1347/Hyd/2010. More importantly, the assessee had relied upon the decision of ITAT Hyderabad in the case of DCIT
Vs.
Lanco
Infratech
Limited in ITA
No.450/Hyd/2016, where, it has been held that since the assessee has received the corresponding amount from main contractor and offered the same for taxation, the sub-contractor payments made by the assessee shall be accepted, if the nexus between the assessee and the sub-contractors are established.
In case, if the nexus is not established, the AO is directed to disallow certain amount of sub-contract payments. The assessee had also submitted consequential orders passed by the AO in favour of the assessee, where the AO has estimated profit on sub-contract payments. Further various courts have held that, in case of genuineness of sub-contract payment or purchases are not proved, then only certain portion of expenditure can be disallowed in the hands of the sub- contractor, but not the entire expenditure. Therefore, taking note of relevant facts and also arguments of the assessee and by following certain judicial precedents, including the decision of Hyderabad in the case of DCIT Vs. Lanco Infratech Limited
(supra), estimated 10% disallowance on sub-contract expenses of Rs.7,25,40,500/-, which works out to Rs.75,54,050/-. Thus directed the AO to delete the addition of Rs.7,25,40,500/- and RR Edifice Pvt.Ltd.

made addition of Rs.75,54,050/- to the total income. Relevant findings of the Ld.CIT(A) are as under :
RR Edifice Pvt.Ltd.
RR Edifice Pvt.Ltd.
RR Edifice Pvt.Ltd.

project. The assessee had entered into agreement with M/s Rithwik Projects Pvt.Ltd., covering the nature of works to be executed. The assessee company had executed certain works on its own and the balance amount of work has been sub- contracted to various persons and filed all evidences. The AO never disputed the evidences submitted by the assessee, however, made additions only on the ground that there is no agreement between the assessee and the sub-contractors, but the fact remains that, once work order has been issued to the sub-contractor, the agreement is not mandatory. Further, the AO disbelieved the arguments of the assessee on the ground that the assessee company has not paid the amount to the sub- contractors, but treated it as loan or quasi equity. However, the fact remains that only in two cases, the assessee had converted the amount due to sub-contractors as equity or loan, but in majority of the cases, payment has been made in the subsequent financial years, for which relevant ledger accounts were submitted before the Ld.CIT(A). The Ld.CIT(A), without appreciating the relevant facts, simply upheld the reasons given by the AO to allege that the sub-contract payments are accommodation entries.
10. The Ld.Counsel for the assessee, further made an alternative submission, in light of judicial precedents, including the decision of ITAT Hyderabad in the case of DCIT Vs. Lanco
Infratech Limited (supra) that in case the nexus between the main contract work and sub-contract work is established, then
RR Edifice Pvt.Ltd.

there is no question of making additions, because the main contractor has accounted the amount received towards work contract and offered to tax. In the present case, the assessee has established the nexus between sub-contract work received from M/s Rithwik Projects Pvt.Ltd. and the sub-contract work given to various persons, therefore, once again making additions by estimating adhoc 10% disallowance is incorrect. In this regard he relied upon the decision of Hon’ble Supreme Court in the case of PCIT Vs.Zahira R.Khatun [2025] 172 taxmann.com
473 (SC). The assessee had also relied upon the decision of ITAT
Hyderabad in the case of DCIT Vs.MAA Highways, Khammam in ITA No.139/Hyd/2015 dated 10.11.2017. 11. The Ld.Counsel for the Revenue, Ms.U.Mini Chandran,
Ld.CIT supporting the order of the AO submitted that, the Ld.CIT(A) erred in allowing part relief to the assessee, by estimating 10% disallowance on sub-contract payments, without appreciating the fact that the assessee failed to prove the genuineness of transactions by filing relevant evidences. The Ld.CIT-DR, further submitted that the AO has brought out various facts and proved that the so called sub-contract work given to seven parties is accommodation entries in the nature of circuitous transactions, which is evident from the modus operandi employed by the assessee. Although the AO has brought out various reasons for making additions towards sub- contracts, but the Ld.CIT(A), without assigning any reasons has estimated 10% profit on total sub-contract payments by RR Edifice Pvt.Ltd.

following certain judicial precedents, even though the facts of those cases are entirely different from the present case. Further, the question of estimation of profit from the sub-contract work arises only in cases, where genuineness of transactions has been proved beyond doubt. However, in cases where the transaction is treated as accommodation entries, then the question of estimation of profit does not arise. The Ld.CIT(A), without appreciating relevant facts, simply estimated the profit at 10% and directed the AO to delete the balance additions made towards sub-contract payments. Therefore, she submitted that the order of the Ld.CIT(A) should be set aside and additions made by the AO should be sustained.

work carried out by the sub-contractors. The AO had brought out various facts and given reasons for disbelieving the documents submitted by the assessee in support of its contentions and according to the AO, although the assessee has furnished certain evidences, including the work orders, ledger extracts of sub-contractors, RA Bills, Form 16A and payment details, but upon verification of relevant details, it was noticed that in majority of cases, except deducting TDS, amount due to sub-contractors has not been paid. Further, the assessee has treated the amount due to the sub-contractors as loan or quasi equity. Therefore, the AO came to the conclusion that the assessee has adopted the modus operandi and awarded sub- contract to various persons without making any payment.
Therefore, made addition of Rs.7,25,40,500/- towards sub- contract awarded to seven parties.

awarded sub-contract work to the above parties. In the present case, the AO never disputed the fact that the assessee had furnished all evidences including the work orders issued to the sub-contractors. The assessee had also furnished RA bills submitted by the contractors, TDS deducted on said bills and payment made to certain parties in the subsequent financial years. Although in two cases, the amount due to the sub- contractors has been treated as either loan or quasi equity, but in our considered view, that reason alone is not sufficient to hold that the sub-contract work given to the above parties is not genuine. Further, the AO had also noted that in five cases, sub- contractors have filed the return of income, after issue of notices u/s 143(2) of the Act. We once again do not agree with the AO for the simple reason that, filing or non-filing of return of income by the sub-contractors is not in the control of the assessee. If the sub-contractors are not filing the return of income, it is for the department to look into the issue in accordance with law. But for non-filing of return of income, genuineness of transactions between the parties cannot be questioned. In the present case, there is no dispute with regard to the fact that the assessee had furnished relevant Form 16A for deducting TDS in respect of contract payment and also in few cases, the payment has been made in the subsequent financial years. Therefore, we are of the considered view that the AO is erred in making additions towards sub-contract payments to seven parties amounting to Rs.7,25,40,500/- as not genuine.
RR Edifice Pvt.Ltd.

The Ld.CIT(A) without considering relevant facts, simply upheld the reasons given by the AO to treat the sub-contract payment to seven parties as non-genuine. Thus, we set aside the order of the Ld.CIT(A) and direct the AO to delete the additions made towards sub-contract payment to above seven parties amounting to Rs.7,25,40,500/-.

Copy to:

S.No Addresses
1
M/s RR Edifice Private Limited, C/o P.Murali & Co.,
Chartered
Accountants,
6-3-655/2/3,
Somajiguda,
Hyderabad
2
The ACIT, Circle-1(2), Hyderabad
3
The Pr.CIT, Hyderabad
4
The DR, ITAT Hyderabad Benches
5
Guard FileSENIOR PRIVATE SECRETARY
ITAT, HYDERABAD