S LALAIAH & CO,NALGONDA vs. DCIT., CIRCLE-3(1), HYDERABAD

Originally, the assessment was framed by the A.O. vide his order passed under Section 143(3) of the Act, dated 28/11/2006, determining the income of the assessee firm at Rs. 78,55,027/-.

Subsequently, the Commissioner of Income Tax-VI, Hyderabad vide his order passed under Section 263 of the Act, dated 26/06/2009, set aside the assessment order with a direction to the A.O to re-do the assessment afresh, inter alia, on two issues, viz., (i) to examine the genuineness of the liability shown by the assessee firm against purchase of bitumen, diesel and lubricants from IOC Ltd.: Rs. Rs. 38,14,269/-; and (ii) to examine the genuineness of the claim of the assessee firm for deduction of sub-contractor expenditure: Rs. 45,36,282/-.

Thereafter, the A.O reframed the assessment vide his order passed under Section 143(3) r.w.s 263 of the Act, dated 31/12/2009, wherein he after, inter alia, making certain additions/disallowances, viz. (i) addition of the outstanding liability shown by the assessee firm as payable as on 31/03/2004 to IOC Ltd.: Rs. 38,14,269/-; and (ii) disallowance of the claim of the assessee firm for expenditure towards sub-contract payments made to a sub-contractor, viz. Sri Krishna Kumar Raju; Rs. 45,36,282/-, determined its income at Rs. 2,46,33,119/-.

Aggrieved, the assessee firm assailed the order passed by the A.O. under Section 143(3) r.w.s 263 of the Act before the CIT(A). Also, the assessee firm assailed the order passed by the CIT-VI, Hyderabad under Section 263 of the Act, dated 26/06/2009 before the Tribunal. In the meantime, as the CIT(A), vide his order dated 31/03/2011 deleted all the additions made in the assessment order except for the addition made on account of sub-contract payment of Rs. 45.36 lakhs (approx.), therefore, the assessee firm assailed his order before the Tribunal. Also, the Department challenged the order passed by the CIT(A), dated 31/03/2011 before the Tribunal.

The Tribunal, clubbed all the appeals together and vide its order(s) passed in 1204/Hyd/2011 and 957/Hyd/2011, dated 22/06/2012, remitted back the issue to the file of the A.O on two aspects, viz., (i) the disallowance of the claim of the assessee firm for deduction of sub-contract payments made to Sri Krishna Kumar Raju (supra), with a direction to verify the same after making necessary inquiries; and (ii) to verify the assessee’s claim of the outstanding liability towards IOC Limited.

Thereafter, the A.O. vide his order passed under Section 143(3) r.w.s 254 of the Act, dated 19/03/2014 did not find favor with the contentions advanced by the assessee firm on both the aforesaid issues, and, thus once again made an addition of the same to its returned income, viz., (i) addition of the outstanding liability towards IOC Limited: Rs. 38,14,269/-; and (ii) disallowance of the assessee’s claim for deduction of sub-contract payments: Rs. 45,36,282/-.

Aggrieved, the assessee firm carried the matter in appeal before the CIT(A), but without success. 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 filed the present appeal before us.

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

Controversy involved in the present appeal hinges around the sustainability of the addition/disallowance made by the A.O which thereafter had been approved by the CIT(A), viz. (i) addition of the liability claimed by the assessee firm to be outstanding towards IOC Limited on 31/03/2004: Rs. 38,14,269/-; and (ii) disallowance of sub- contract payments claimed by the assessee firm to have been made to Sri Krishna Kumar Raju, i.e a sub-contractor for the construction work that was claimed to have been executed by him during the subject year: Rs. 45,36,282/-.

We shall deal with the aforesaid two issues in a chronologically, as under:

As is discernable from the assessment order, we find that the A.O in the course of the set-aside proceedings had called upon IOC Limited, Hyderabad and New Dehi to furnish a copy of the ledger account of the assessee firm as appearing in their books of account for the FY 2003- 04. In response, IOC Limited, had replied vide its letter dated 26/02/2014, that as per their records there were three different accounts in the name of the assessee firm with different customer codes, as under:

On appeal, the CIT(A) found no infirmity in the view taken by the Assessing Officer and upheld the addition made by him.

We have thoughtfully considered the contentions advanced by the Learned Authorized Representatives of both parties on the aforesaid issue.

Sri S. Rama Rao, Learned Authorized Representative (in short “ld.AR”) for the assessee firm, at the threshold of hearing of the appeal, had drawn our attention to a letter dated 23/12/2024 that was received by the assessee-firm from IOC Limited, Page 39 of the APB. The ld. AR submitted that IOC Limited vide its aforesaid letter had confirmed that an amount of Rs. 38,14,269/-(supra) was outstanding as per their records from the assessee-company on 31/03/2004. Elaborating further on his contention, the ld.AR submitted that as the aforesaid letter/confirmation of IOC Limited was received after the passing of the order of the CIT(A), therefore, there was no occasion for the assessee firm to have filed the same before the lower authorities. The ld.AR submitted that as the aforesaid letter will have a strong bearing on the adjudication of the issue in hand, therefore, the same in all fairness be admitted as additional evidence under Rule 29 of the Appellate Tribunal Rules, 1963. Also, the ld.AR had drawn our attention to the copy of the ledger account of the assessee as appearing in the books of account of IOC Limited during the period 10/06/2002 to 31/01/2004. Referring to the relevant extract of the aforesaid ledger account of the assessee firm (supra), the ld. AR submitted that the balance outstanding in its account on 31/03/2004 worked out at Rs. 38,14,269/- (Cr.).

Per contra, the Ld. DR relied on the orders of the lower authorities. It was submitted by him that it is the seventh round of litigation involved in the present appeal.

We have thoughtfully considered the contentions advanced by the Learned Authorized Representatives of both parties on the aforesaid issue. Admittedly, as it is a matter of fact borne from the record that the letter/confirmation dated 23/12/2024 of IOC Limited could be obtained by the assessee firm much after the passing of the order by the CIT(A), therefore, the same could not be filed by it in the course of the proceedings before the lower authorities. We may herein observe, that even in the course of the assessment proceedings IOC Limited had time and again expressed its inability to provide a copy of the account of the assessee firm as appearing in its books of account to the AO for the reason that it had w.e.f FY 2004-05 migrated to SAP software for maintaining its accounts. Accordingly, we are of a firm conviction that there were justifiable reasons for the assessee firm in not filing the letter/confirmation from IOC Limited in the course of the assessment proceedings or before the CIT(A). We, thus, in terms of our aforesaid deliberations admit the letter/confirmation dated 23/12/2024 (supra) alongwith the copy of the ledger account of the assessee firm (as appearing in the books of account of IOC Limited) as additional evidence under Rule 29 of the Appellate Tribunal Rules, 1963, Pages 39 to 50 of the APB.

Apropos, the merits of the claim of the ld.AR that IOC Limited, had vide its letter/confirmation dated 23/12/2024 (supra) alongwith the copy of account of the assessee firm (as appearing in its books of account) duly confirmed that an amount of Rs. 38,14,269/-(Cr.) (supra) was outstanding in the latter’s account as on 31/03/2004, we find substance in the same. We find that not only IOC Limited had vide its letter/confirmation dated 23/12/2024 confirmed that an amount of Rs. 38,14,269/- (supra) was outstanding in the account of the assessee firm as on 31/03/2004, but also the said fact can safely be gathered on a perusal of the copy of the ledger account of the assessee firm that had been enclosed along with the same, Pages 40 to 50 of the APB (relevant Pages 47 to 49). We, thus, in terms of our aforesaid deliberations vacate the addition of Rs. 38,14,269/- (supra) that was made by the A.O, which, thereafter, was sustained by the CIT(A). The Grounds of appeal No(s). 2 & 3 are allowed in terms of our aforesaid observations.

Ostensibly, the A.O had in the course of the set-aside proceedings, called upon the assessee firm to substantiate its claim that the payments made to Sri Krishna Kumar Raju, a sub-contractor, were made on account of execution of a sub-contract work that was actually undertaken by him during the subject year. As the assessee firm had failed to lead any evidence to support its aforesaid claim, therefore, the A.O was constrained to approve the view that was taken by his predecessor while framing the original assessment and, thus, had disallowed its claim for deduction of payments made towards expenditure incurred for sub-contract work amounting to Rs. 45.36 lakhs (supra).

The ld.AR at the threshold of hearing on the aforesaid issue had drawn our attention towards the copy of the sub-contract agreement dated 20/01/2003, Pages 55 to 57 of the APB along with the copies of the vouchers evidencing the payments that were made to Sri Krishna Kumar Raju, i.e the sub-contractor, aggregating to Rs. 45.36 lakhs (supra). The ld. AR submitted that as the subject payments were made to Sri Krishna Kumar Raju (supra) in lieu of the sub-contract agreement dated 20/01/2003 for the sub-contract work carried out by him i.e., earth work on Kodad Revoor Road and Mirayaaguda-Kodad Road in Nalgonda District, therefore, there was no justification for the lower authorities to have disallowed the same. The ld.AR further, to fortify his contention, had drawn our attention to the copies of the vouchers which evidenced the payment of the aforementioned amount by the assessee firm to Sri Krishna Kumar Raju (supra). It was, thus, the ld. AR’s averment that as the claim of the assessee firm for deduction of sub- contract expenditure was duly substantiated based on supporting documentary evidence, therefore, the orders of the lower authorities who had disallowed the same were liable to be set-aside.

Per contra, the Learned Departmental Representative (in short “Ld. DR”), submitted, that as the assessee firm, had despite multiple rounds of litigation, failed to substantiate that the payments to Sri Krishna Kumar Raju (supra) were for the sub-contract work that was executed by him, therefore, the A.O had rightly disallowed the same.

We have thoughtfully considered the contentions advanced by the Learned Authorized Representatives of both the parties in the backdrop of the orders of the lower authorities. As is borne from the record, the assessee firm had in its attempt to substantiate its claim for deduction of sub-contract payments of Rs. 45.36 lakhs (supra) made to Sri Krishna Kumar Raju (supra), had placed on record of the lower authorities the copy of the sub-contract agreement, dated 20/01/2003 and the copies of the payment vouchers. However, we find that the Tribunal had set-aside the matter to the file of the A.O with a direction to verify the claim of the assessee firm that the payments made to Sri Krishna Kumar Raju (supra) were made on account of sub-contract work that was executed by him. Although, the sub-contract agreement, dated 20/01/2003 evidences that the assessee firm had entered into an agreement with the aforesaid person for carrying out the earth-work at Kodad Revoor Road and Mirayaaguda-Kodad Road in Nalgonda District (supra), but the same does not evidences that the payments made during the subject year to him were for any sub-contract work executed by him and not in the nature of an advance. Also, the copies of the vouchers evidencing the payments made by the assessee firm to Sri Krishna Kumar Raju (supra) in no way dislodges or disproves the observation of the A.O that the said payments were in the nature of the advance payments made to the said sub-contractor and, thus, not allowable as an expenditure. Although, the A.O had in the course of the set-aside proceedings specifically directed the assessee firm to submit proof regarding the details of the work that was executed by Sri Krishna Kumar Raju (supra) to whom the payments were made, we find that the assessee firm had miserably failed to lead any such evidence which would irrefutably substantiate its claim to the hilt. Apart from that, we find that the assessee firm despite a specific direction of the A.O. had both failed to produce Sri Krishna Kumar Raju (supra) along with any additional proof by 07/03/2004.

We, thus, based on our aforesaid deliberations, are of a firm conviction that as the assessee, despite having been afforded sufficient opportunities, had in the course of the set-aside proceedings failed to lead any evidence which would irrefutably evidence that the payments made to Sri Krishna Kumar Raju (supra) were towards the sub-contract work that was executed by him and were not in the nature of an advance, therefore, no infirmity arises from the orders of the lower authorities who have rightly disallowed its said claim for expenditure to the said extent. We, thus, finding no infirmity in the view taken by the CIT(A) who had rightly sustained the disallowance of sub-contract expenditure of Rs. 45.36 lakhs (supra), uphold the same. The Ground of Appeal No.4 is dismissed.

Resultantly, the appeal filed by the assessee is partly allowed in terms of our aforesaid observations.