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

The brief facts of the case are that the assessee, M/s RR Edifice Private Limited is, engaged in the business of executing civil contract works, filed its return of income for the A.Y.2017- and 439/Hyd/2025 RR Edifice Pvt.Ltd.

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. and 439/Hyd/2025 RR Edifice Pvt.Ltd.

The Ld.CIT(A) after considering the relevant submissions of the assessee and also taken note of various facts, including sub-contract agreement between the assessee and M/s Rithwik Projects Pvt.Ltd., the work orders issued to sub-contractors, observed that going by the modus operandi employed by the assessee, it appears that so called sub-contract work given to the above seven persons are not supported by relevant evidences. The assessee although awarded sub-contract to various persons, but has not made any payment to above persons, except deducting TDS and remitting to government account. Further, in many cases, the payment due to the sub- contractors has been converted into loan. In few cases, the amount has been treated as quasi equity. Therefore, he observed that the arguments of the assessee that it made payments to the sub-contractors to certain portion and certain amount were kept as payables, which in turn has been converted as equity is not acceptable. Therefore, the Ld.CIT(A) observed that the issues raised by the AO in the assessment order were unanswered by the assessee to prove the genuineness of sub-contract payment. Therefore, rejected the arguments of the assessee and upheld the reasons given by the AO to make additions towards sub-contract work awarded to seven persons.

The Ld.CIT(A) further observed that the assessee has made alternative argument that, if at all disallowance is required to be made for sub-contract works, then a reasonable amount of and 439/Hyd/2025 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 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 and 439/Hyd/2025 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 : and 439/Hyd/2025 RR Edifice Pvt.Ltd. and 439/Hyd/2025 RR Edifice Pvt.Ltd. and 439/Hyd/2025 RR Edifice Pvt.Ltd.

Aggrieved by the order of the Ld.CIT(A), the assessee as well as the Revenue are in appeal before the Tribunal.

The Ld.Counsel for the assessee, Shri P.Murali Mohan Rao, CA submitted that the Ld.CIT(A) erred in directing the AO to sustain the addition of Rs.75,54,050/-, being 10% of the sub contract expenditure, without appreciating the fact that the entire sub-contract expenditure is supported by necessary evidences, including work orders, ledger account, RA bills, Form 16A, confirmation letters from the parties, TDS returns, income tax returns of sub-contractors etc. The Ld.Counsel for the assessee, further referring to the orders of the Ld.CIT(A) submitted that the assessee has furnished all possible evidences to prove the genuineness of the sub-contract payment made by the assessee company. The assessee company has taken sub- contract work from M/s Rithwik Projects Pvt.Ltd. for construction of CM & CD Works on HNSS Main Canal in the reach from km 340.000 to km 342.750 under HNSS Phase-II and 439/Hyd/2025 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.

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 and 439/Hyd/2025 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 dated 10.11.2017.

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 and 439/Hyd/2025 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.

We have heard both the parties, perused the material on record and gone through the orders of the authorities below. We have also carefully considered the relevant reasons given by the Ld.CIT(A) to make 10% estimation of income on total sub- contract payments. Admittedly, the assessee has awarded sub- contract work to eleven persons towards execution of work in relation to CM and CD Works on HNSS Main Canal in the reach from km 340.000 to km 342.750 under HNSS Phase-II project. The assessee company has received the said work on sub- contract from M/s Rithwik Projects Pvt. Ltd. The assessee company has awarded the sub-contract to various persons. The AO made additions towards sub-contract work given to seven persons on the ground that it is only accommodation entry in the nature of circuitous transaction, but in reality, there is no and 439/Hyd/2025 RR Edifice Pvt.Ltd. 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.

We have given due consideration to the reasons given by the AO and the Ld.CIT(A) to treat the sub-contract works given to various parties as accommodation entries, in light of various evidences filed by the assessee and we ourselves do not fully subscribe to the reasons given by the AO and the Ld.CIT(A) for the simple reason that, merely because of non-submission of sub-contract agreements, genuineness of payment made by the assessee to various persons for executing civil contract work cannot be doubted, more particularly, when other evidences furnished by the assessee goes to prove that the assessee has and 439/Hyd/2025 RR Edifice Pvt.Ltd. 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. and 439/Hyd/2025 RR Edifice Pvt.Ltd.

Coming back to ground No.8 to 10 of assessee’s appeal. The assessee has challenged the additions made by the AO towards disallowance of interest on late payment of TDS of Rs.87,964/- and addition of Rs.62,791/- in respect of difference in turnover as per Form 26AS and Profit & Loss account. We find that the above two issues have not been challenged before the Ld.CIT(A), which is evident from grounds of appeal raised before the Ld.CIT(A) in Form No.35. Since the assessee has not challenged the above two additions before the Ld.CIT(A), in our view, the assessee cannot raise any ground, challenging the findings of the Ld.CIT(A) on these two additions. Thus, in our considered view, the grounds of appeal filed by the assessee, challenging the additions towards interest on late payment of TDS and additions towards difference in turnover are infructuous and hence, ground Nos.8 to 10 are dismissed as infructuous. and 439/Hyd/2025 RR Edifice Pvt.Ltd.

In the result, appeal filed by the assessee is partly allowed and the appeal filed by the Revenue is dismissed.