PRATHMESH CONSTRUCTION,PUNE vs. DCIT CIRCLE - 2 PUNE, PUNE

In appeal, the Ld. CIT(A), on the basis of additional evidences furnished by the assessee, called for a remand report from the Assessing Officer and after considering the remand report, sustained an amount of Rs.20,46,468/- out of total disallowance of Rs.12,20,14,586/- in respect of the following three sub-contractors by observing as under: “4.6 It is seen from the remand report that after threadbare examination of the additional evidence, the AO has given categorical findings with regard to genuineness of the parties and the work performed by them. Except for 3 parties, the AO has stated that no adverse observation can be made with regard to the work performed by other parties. The 3 parties with respect to which adverse observation has been made by the AO are as under:

The Revenue is not in appeal before the Tribunal against the deletion of Rs.11,99,68,118/-.

Aggrieved with such order of the Ld. CIT(A), the assessee is in appeal before the Tribunal by raising the following grounds:

The Ld. Counsel for the assessee at the outset drew the attention of the Bench to the contents of the remand report in respect of the above three sub- contractors where the Assessing Officer has mentioned as under: Sr. No. Name of parties Addition as per AO's Comments in the net effect in P & Remand Report L A/c (In Rs.) 6 Archana Sandi Atkare 3,43,050 This office has issued notice u/s 133(6) and called for the details. The party has submitted the details. On perusal of the additional submissions and reply of the party, it is observed that the Assessee could not substantiate its work therefore the genuineness of the party could not be accepted. 24 Sanjay Chandrika Sah 2,52,525 This is a labour supplier of the assessee. Only on the basis of ledger confirmation, the genuineness of the party cannot be verified. 28 Shri Govinda 14,50,893 This office has issued Earthmovers notice u/s 133(6) and called for the details. The party has submitted the details. On perusal of the additional submissions and reply of the party, it is observed that the party failed to submit the requisite details. This party has been found to be non-genuine subcontractor on the basis of lack of substantiating documents for A.Y. 2019-20 and 2022-23. Without prejudice to the earlier assessments, on perusal of the submissions of the assessee for the year under consideration, the genuineness could not be established with the documents on record.

The Ld. Counsel for the assessee referring to the disallowance of sub-contractor expenses of Rs.2,52,525/- paid to Sanjay Chandrika Sah drew the attention of the Bench to the remand report and submitted that the Assessing Officer has basically doubted the same on the ground that the genuineness of the party could not be verified.

Referring to the questionnaire issued along with the notice u/s 142(1) of the Act for assessment year 2020-21, copy of which is placed at pages 63 to 67 of the paper book, he submitted that an amount of Rs.4,04,040/- was paid to Sanjay Chandrika Sah during the assessment year 2020-21 and the Assessing Officer after due verification has not made any disallowance in respect of sub-contractor payment made to Sanjay Chandrika Sah. He submitted that the assessment order passed u/s 147 r.w.s. 143(3) is dated 15.03.2025 whereas the remand report is dated 29.04.2025. Therefore, once the Assessing Officer himself has accepted the genuineness of sub-contractor in the preceding assessment year he could not have doubted the genuineness of the said party after a gap of one and half months and the Ld. CIT(A) should not have made the disallowance.

So far as the other two sub-contractors are concerned, the Ld. Counsel for the assessee submitted that the basis for disallowance by the Assessing Officer is purely on account of surmises and conjectures and not based on any sound logic. He submitted that the above two sub-contractors in response to the notice issued u/s 133(6) of the Act have submitted the details. The payments have been made through proper banking channel and due TDS has been deducted, therefore, no disallowance should have been made by the Assessing Officer and sustained by the Ld. CIT(A).

The Ld. Counsel for the assessee drew the attention of the Bench to para 1 of the assessment order and submitted that the assessee has disclosed huge taxable income at Rs.17,38,96,100/- and therefore, there is no need on the part of the assessee to inflate the expenditure by making payment to the above 2 sub- contractors.

In his alternate contention, the Ld. Counsel for the assessee relying on the following decisions submitted that the addition made by the Assessing Officer should be restricted to the gross profit element embedded in such sub-contract payments: i) PCT vs. Pravin U. Parmar (Jain) vide Income Tax Appeal No.1015 of 2018, order dated 09.01.2025 (Bombay HC) ii) PCIT vs. SVD Resins & Plastics Pvt. Ltd. vide Income Tax Appeal Nos.1662 & 1664 of 2018 order dated 07.04.2024 (Bombay HC) iii) PCIT vs. Rushail Pharmadin (P.) Ltd. (2024) 163 taxmann.com 195 (Bom) iv) PCIT vs. Vishwashakti Construction (2023) 151 taxmann.com 93 (Bom) v) PCIT vs. Jagdish Thakkar (2022) 145 taxmann.com 414 (Bom) vi) PCIT vs. Ram Builders (2023) 146 taxmann.com 447 (Bom) vii) PCIT vs. Jakharia Fabric (P.) Ltd. (2020) 118 taxmann.com 406 (Bom)

The Ld. DR on the other hand heavily relied on the order of the Ld. CIT(A). He submitted that the Ld. CIT(A) has already given substantial relief to the assessee for which the Revenue is not in appeal. The assessee in respect of the above three sub- contractors could not substantiate with the documentary evidence regarding the genuineness of such sub-contract payments, therefore, the Ld. CIT(A) was fully justified in sustaining the addition made by the Assessing Officer by disallowing the sub- contractor payments.

We have heard the rival arguments made by both the sides, perused the orders of the Assessing Officer and Ld. CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find the Assessing Officer apart from other additions, made addition of Rs.12,20,14,586/- by disallowing the payments made to the sub-contractors, on the ground that the assessee could not substantiate with documentary evidence regarding the quantitative work done by the sub- contractors and one of the partners in his statement recorded u/s 132(4) of the Act during the course of search at his business premises had admitted that the firm is generating cash by inflating the expenditure through the payments to the sub-contractors. We find the assessee filed certain additional evidences before the Ld. CIT(A) based on which the Ld. CIT(A) called for a remand report from the Assessing Officer and after considering the remand report of the Assessing Officer, deleted the addition to the extent of Rs.11,99,68,118/- and sustained the disallowance of Rs.20,46,468/- in respect of three sub-contractors, the details of which have already been reproduced in the preceding paragraphs. It is the submission of the Ld. Counsel for the assessee that the Assessing Officer in the preceding assessment year has accepted the payments made to one of the sub-contractor Sanjay Chandrika Sah in the order passed u/s 143(3) of the Act and therefore, the genuineness of the said party could not have been doubted.

So far as the other two sub-contractors are concerned, it is his submission that those parties have responded to the notice issued u/s 133(6) of the Act confirming the work done by them and the payments have been made through banking channel and due TDS has been deducted and therefore, no disallowance should have been made on account of those two sub-contractors. It is his alternate contention that at best the profit element embedded in such payments to the sub-contractors can be added and not the entire amount.

We find some force in the above arguments of the Ld. Counsel for the assessee. A perusal of the questionnaire issued along with notice u/s 142(1) of the Act for assessment year 2020-21, copy of which is placed at pages 63 to 67 of the paper book shows that the assessee has made payment of Rs.4,04,040/- to Sanjay Chandrika Shah during assessment year 2020-21. We find the Assessing Officer in the order passed u/s 147 r.w.s. 143(3) of the Act for assessment year 2020-21, copy of which is placed at pages 68 to 76 of the paper book, has not made any disallowance on account of payment to the above sub- contractor meaning thereby he has accepted the genuineness of the payment to the said sub-contractor. Admittedly, the order has been passed on 15.03.2025. However, in the remand report dated 29.04.2025 the Assessing Officer doubted the genuineness of the said party under identical circumstances. We, therefore, find merit in the argument of the Ld. Counsel for the assessee that when the Assessing Officer himself has accepted the genuineness of the payment to the sub-contractor Sanjay Chandrika Shah in assessment year 2020-21, he could not have disallowed the sub-contractor payment to the said party in assessment year 2021-22 by doubting the genuineness within a gap of one and half months. We, therefore, set aside the order of the Ld. CIT(A) and direct the Assessing Officer to delete the disallowance of Rs.2,52,525/- being sub-contractor payment to Sanjay Chandrika Shah.

So far as the other two sub-contractors are concerned, it is an admitted fact that the above two parties have responded to the notice issued u/s 133(6) of the Act by submitting various details. However, it is the allegation of the Assessing Officer that they could not substantiate the work done by them for which he disallowed the payments made to them. It is the submission of the Ld. Counsel for the assessee that the assessee has declared taxable income at Rs.17,38,96,100/- and therefore, the assessee could not have claimed any bogus expenses through sub-contract payments to the above two parties for a negligible amount. It is his alternate contention that the disallowance, if any, can be restricted to the profit element embedded in the payment of such sub-contractors.

Admittedly, the assessee has declared total income at Rs.17,38,96,100/-, therefore, the assessee in our opinion could not have indulged into inflating the expenditure by making payments to non-genuine contractors. The statement so given by the partner during the course of search u/s 132(4) of the Act has admittedly been retracted by him subsequently and the Ld. CIT(A) has deleted the disallowance of Rs.11,99,68,118/- for which the Revenue is not in appeal meaning thereby they have accepted the genuineness of such payments in respect of all other parties except the 3 parties in question. We have already allowed the sub-contract payment in respect of Sanjay Chandrika Shah. Since the remaining 2 sub-contractors have responded to the notice issued u/s 133(6) by the Assessing Officer by giving various details and since the payments have been made by the assessee through proper banking channels and the sub-contract payments to the above 2 parties are not substantial, therefore, considering the totality of the facts of the case and considering the fact that the Assessing Officer in the remand proceedings has himself admitted the genuineness of the sub-contract payments in respect of other parties, therefore, we are of the considered opinion that no disallowance is called for in respect of the above 2 sub-contractors. We, therefore, set aside the order of the Ld. CIT(A) and direct the Assessing Officer to delete the disallowance. The grounds raised by the assessee are accordingly allowed.

In the result, the appeal filed by the assessee is allowed.