ASSISTANT COMMISSIONER OF INCOME TAX-4(1), INDORE, INDORE vs. SUSHIL DUTT PANDEY, KHARGONE

आदेश/ O R D E R

Per B.M. Biyani, A.M.:

Feeling aggrieved by order of first appeal dated 22.01.2024 passed by learned Commissioner of Income-Tax (Appeals), NFAC, Delhi [“CIT(A)”] which in turn arises out of assessment-order dated 27.12.2019 passed by learned DCIT/ACIT, Khandwa [“AO”] u/s 143(3) of Income-tax Act, 1961 [“the Act”] for Assessment-Year [“AY”] 2017-18, the revenue has filed this appeal.

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Sushil Dutt Pandey ITA No. 232/Ind/2024 – AY 2017-18 31.10.2017 declaring a total income of Rs. 31,46,860/-. The case of

assessee was selected for scrutiny under CASS and the AO issued notices

u/s 143(2)/142(1) which were complied by assessee. Ultimately, the AO

passed assessment-order after making an addition of Rs. 2,72,50,857/- on

account of disallowance of deduction of payments to sub-contractors

claimed by assessed. Aggrieved, the assessee carried matter in first-appeal

whereupon the CIT(A) restricted/reduced disallowance to 5% of Rs.

2,72,50,857/-. Now, the revenue being aggrieved by order of CIT(A), has

come in this appeal.

“1. Whether on the facts and in the circumstances of the case, Ld. CIT(A) was justified to ignore the merits of the case and the fact that the contract payment to subcontractors as non-genuine in this case. 2. Whether on the facts and in the circumstances of the case, the Ld. CIT(A) was justified in deleting the addition made by A.O., The AO treated the contract payment of Rs. 2,72,50,857/- paid to sub-contractors as non- genuine.” 4. We have heard learned Representatives of both sides at length and

carefully perused the case record including the orders of lower-authorities.

passed by AO:

“4. In the contract account assessee has claimed Rs. 4,39,05,176/- on account of sub-contractor. The assessee was asked to submit the details of works done by sub-contractor and furnish the details TDS done and deposited in the Central Govt. a/c, regarding this assessee filed his submission and file a chart of sub-contractor's details. Perusal of the submission it is shown that the details of following subcontractor are seems to be bogus as under:-

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Sushil Dutt Pandey ITA No. 232/Ind/2024 – AY 2017-18

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Sushil Dutt Pandey ITA No. 232/Ind/2024 – AY 2017-18 5. Further the assessee was specifically asked by questionnaire dated 14.12.2019 to the details of sub contract with name & postal address, amount of sub contract given to them, details of work done by sub- contractors, copy of contract agreement with both side of stamp paper, with date of purchase and purpose of purchase of stamp paper, ledger copy of sub-contractors and copy of bank statement of sub-contractors in which bank account of subcontractor, payment of subcontract received in F.Y. 2016-17, but assessee has not field these details. Therefore, the contract payment debited in their name is not genuine. The assessee has failed to substantiate the aforesaid sub-contract expenses. Therefore, the same are held to be non- genuine. However, the genuineness of sub-contract expenses is not proved. Accordingly, the sub-contract work expenses in respect of aforesaid persons amounting to Rs. 2,72,50,857/- is disallowed and added to the total income of the assessee. Penalty proceedings u/s 270A is hereby initiated for under reporting income. (Addition Rs. 2,72,50,857/-)” 6. Now, we re-produce the relevant portion of impugned order of first-

appeal passed by CIT(A):

“7.7 On perusal of the submissions made by the appellant, it is observed that for the purpose of carrying out the construction works, the appellant has engaged several sub-contractors. It is not a matter of dispute that the income earned from such activities has been subject to tax in the hands of the appellant. It is noted from the appellant's Contract Account and P&L Account, that the appellant has declared a Contract receipt of Rs. 8.31 Crores and claimed Sub-contractor expenses of Rs. 4.39 Crores and declared gross profit of Rs. 54,32,445/- and offered Rs. 32,92,030/- as net profit from the head "Profits/Gains from business. Also, it is observed that the AO in the assessment order did not dispute the appellant's business but only the sub- contractor expenses. Therefore, it clearly demonstrates that there were construction works executed by the appellant during the year under consideration. Furthermore, the appellant also had furnished the details of impugned sub-contractor's expenditure incurred for AY 2016-17 & 2017-18. It is noted that the some of the impugned sub-contractors were already working with the appellant and executed the sub-contract works in the previous AYs also. The copy of impugned sub-contractor's expenditure incurred for AY 2016-17 & 2017-18 is extracted below for ready reference. Copy of Sub-Contractors Chart for AY 2016-17 & 2017-18:

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Sushil Dutt Pandey ITA No. 232/Ind/2024 – AY 2017-18

7.8 Further, the audit reports & ITRs filed by the appellant were examined and it was noted that the appellant has incurred Sub-contractor expenses during the course of business. In this regard, the appellant has submitted 5 year comparative chart of sub-contractor expenses incurred by him in the course of business and its ratio to the total turnover. The same is extracted below for ready reference. Ratio of Sub-contractor expenses to total turnover for the previous 5 years:

7.9 Moreover, when the details of the sub-contractors like PAN, address etc. are already available on record, the AO ought to have conducted further enquiries to verify the genuineness of the sub-contractor expenses claimed by the appellant. However, the AO did not issue any notices u/s.133(6) of the

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Sushil Dutt Pandey ITA No. 232/Ind/2024 – AY 2017-18 Act to the parties, instead the AO chose to disallow the whole of sub- contractor expenses claimed by the appellant. 7.10 Be that as it may, even if we go by the reasoning of the AO that the subcontractors are non-genuine, the fact remains that in respect of such expenditure, TDS was affected. By no stretch of imagination could it be said that no construction work was done to earn the income. Natural inference is that for earning such expenditure by constructions works, inevitably the appellant must have incurred some sub-contractor expenses. Further, it was also not possible for the appellant to carry out such contract works without engaging sub-contractors to carry out the same and thus, the expenditure cannot be denied in toto. 7.11 Moreover, during the year under consideration, the appellant had calculated net profit at 3.96 per cent of the total contract receipts received. Further, in case all the sub-contracting expenses were held to be non-genuine i.e., if the addition made by the AO is sustained, the GP rate of the appellant would inflate to 39.3%, which is quite abnormal, considering the appellant's past history and also the line of business the appellant is engaged in. 7.12 While the fact regarding revenue being declared from the work carried out through the engagement of sub-contractors is a strong factor which proves the genuineness of the expenditure, if the disallowance of huge expenditure towards such sub-contract payment is made, the same will result into distorted picture of Gross and net profit which is unrealistic and impossible in the line of the business of construction works in which the appellant is engaged in. And in any case, the AO has erred in disallowing the entire sub-contractors' expenses without which the work could not have been completed and income could not have been earned. 7.13 At the same time, it is to be noted that even during the course of appellate proceedings the appellant could only furnish partial information/documentary evidences of what is sought i.e., the details of sub- contracts with name & postal address, amount of sub-contract given to them, details of work done by sub-contractors, copy of contract agreement, ledger copy of sub-contractors and copy of bank statement of sub-contractors etc. 7.14 Under the circumstances, the only question that could have legitimately been raised by the AO should have been about the quantum of such expenditure but not doubting the entire expenditure, so as to disallow the same. Moreover, it would not be justifiable to disallow the entire sub- contracting expenses when the corresponding income has been subject to tax in the hands of the appellant. 7.15 In this respect, it would be useful & relevant to glance through the assessment orders of previous AYs 2012-13, 2013-14, 2014-15 passed by the department in the case of the appellant to understand the nature of work and expenses involved in the course of business the appellant is engaged in. The comparative details of additions made by the Assessing Officers in the respective AYs are tabulated below for ready reference.

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7.16 Furthermore, the appellant has also submitted a 5 year comparative chart of the details of gross profit ratio and net profit ratio declared by him. The same is extracted below ready reference. Copy of GP & NP in previous five years:

7.17 On perusal of the above facts and circumstances, I find force in the contentions of the appellant and it is pertinent to note that there can be no sales or revenue from the work unless there is engagement of labour for such work and in the instant case, the income from the appellant's business itself has not been doubted, then the entire sub-contracting expenses cannot be disallowed for the simple reason that it would not have been possible for the appellant to carry out the work in absence of the necessary work being sub- contracted, which facilitated the earning of income. 7.18 Therefore, considering the observations made by the AO in assessment order regarding the nature of sub-contracting expenses and considering the totality of the facts and legal position emerging from the judicial pronouncement cited by the appellant and as discussed above, I see no

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Sushil Dutt Pandey ITA No. 232/Ind/2024 – AY 2017-18 justification on the part of the AO to make disallowance of Rs. 2,72,50,857/- being expenses in respect of payment to sub-contractors. Accordingly. keeping into consideration the profit offered to tax by the appellant, previous assessment orders & having regard to nature of expenditure and line of business of the appellant and to avoid any possibility of revenue leakage, I am of the considered opinion that it is reasonable to estimate the disallowance at 5 per cent of above alleged bogus sub-contracting expenses of Rs. 2,72,50,857/-. The AO is directed to recompute the total income accordingly. Hence, the grounds of appeal no. 1, 2 & 3 are partly allowed.” 7. On perusal of above orders of lower-authorities, we find that the AO

has, vide Para No. 5 of assessment-order, made 100% disallowance of

expenditure treating the same as “non-genuine” because the assessee did

not file the details/documents required by AO such as name & postal

address of sub-contractors, details of work done by them, copies of

contracts/agreements, ledgers a/cs of sub-contractors, bank statements,

etc. to substantiate the genuineness of expenditure. The CIT(A) has also

noted in Para 7.13 of impugned order that during appellate proceeding the

assessee could only furnish partial information/documentary evidences of

what was sought. Thereafter, in next Para 7.14, the CIT(A) has observed

thus:

7.14 Under the circumstances, the only question that could have legitimately been raised by the AO should have been about the quantum of such expenditure but not doubting the entire expenditure, so as to disallow the same. Moreover, it would not be justifiable to disallow the entire sub- contracting expenses when the corresponding income has been subject to tax in the hands of the appellant. [emphasis supplied] And thereafter, in subsequent Paras 7.15 onwards, the CIT(A) has taken into

account past assessments of assessee and preceding five years’ comparison

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Sushil Dutt Pandey ITA No. 232/Ind/2024 – AY 2017-18 of gross profit and net profit declared by assessee. Ultimately, the CIT(A) has

concluded that the asesseee could not generate revenue from contractorship

work without engagement of labour/sub-contractors and therefore the

expenditure on sub-contractorship cannot be disallowed in entirety. Finally,

the CIT(A) has restricted/reduced disallowance from 100% to 5%.

by both sides whereupon two vital infirmities have emerged in the

adjudication made by CIT(A):

(i) Ld. AR has filed two Paper-Books. Paper-Book-1 consists of 194 pages

(with revised index filed subsequently at the instruction of Bench) and

Paper-Book-2 consists of 99 pages. All 194 pages placed in Paper-

Book-1 are claimed to have been filed before CIT(A). Further, the

pages 82 to 93 of Paper-Book-2 are also claimed to have been filed

before CIT(A). Ld. AR referred some of these pages to demonstrate that

these papers are contemporary documents related to the payments

made to sub-contractors. These documents are in the form of Ledger

A/cs, Photocopies of cheques through which payments were made,

Work-Orders (i.e. contracts/agreements) entered with sub-contractors,

Bills of sub-contractors, etc. Ld. AR also referred the replies filed by

assessee to CIT(A), copies at Pages 44-65, through which these

documents are claimed to have been filed before CIT(A). Hence, the

adverse finding made by CIT(A) in Para 7.13 that the assessee

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Sushil Dutt Pandey ITA No. 232/Ind/2024 – AY 2017-18 furnished partial information/documentary evidences is, Ld. AR

submitted, not correct. When it is so, the entire adjudication made by

CIT(A) in subsequent paras, which hinges on the basis that the

assessee has not filed complete documents, is also not proper.

(ii) Ultimately, the CIT(A) has concluded to restrict/reduce disallowance

to a nominal 5% of the entire amount. However, in his order, the

CIT(A) has not mentioned any rationale whatsoever for adopting the

quantum of “5%”.

we are inclined to remand this matter back to the file of CIT(A) for

adjudication afresh. Needless to mention that the CIT(A) shall give necessary

opportunities to assessee and pass an appropriate order after considering

the details/documents already submitted by assessee as well as any other

detail/document as the assessee may choose to file. In doing so, the CIT(A)

may also seek remand-report from AO as he may think fit in accordance

with law.

order afresh without being influenced by his earlier order in any manner

and the outcome of such fresh adjudication may lead anywhere, be it

deleting the disallowance partly or fully.

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Sushil Dutt Pandey ITA No. 232/Ind/2024 – AY 2017-18 11. Resultantly, this appeal is allowed for statistical purpose.

Order pronounced in open court on 21/07/2025

Sd/- Sd/-

(PARESH M. JOSHI) (B.M. BIYANI) JUDICIAL MEMBER ACCOUNTANT MEMBER

Indore

िदनांक/Dated : 21/07/2025

Patel/Sr. PS Copies to: (1) The appellant (2) The respondent (3) CIT (4) CIT(A) (5) Departmental Representative (6) Guard File By order E COPYSr. Private Secretary Income Tax Appellate Tribunal Indore Bench, Indore

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