DEPUTY COMMISSIONER OF INCOME TAX,CIRCLE 1(1), JABALPUR vs. SHRI INDRABHAN SINGH RATHORE, NARSINGHPUR

This is appeal of the Revenue against the order of the learned CIT(A)-1, Jabalpur passed under section 250 of the Income Tax Act on 30.08.2018.The grounds of appeal

The Ld. CIT(A) has erred in deleting the addition of Rs. 2,25,00,519/- without appreciating the fact that the AO had issued summons during the remand proceedings to creditors and out of 10 creditors only 3 have submitted reply and hence the genuineness of the transaction has not been proved.

Any other ground that may be adduced at the time of hearing.”

The facts of the case are that the assessee, a Civil Contractor, filed a return of income of Rs.42,58,890/- on 30.09.2015. During the course of assessment proceedings under section 143(3), an addition of Rs.2,25,00,519/- was made with respect to unexplained unsecured loan. Before the learned Assessing Officer, the assessee submitted that it was the amount of SD (Security Deposit) of sub/petty contractors. The details of the said petty contractors alongwith the names and PAN numbers and the amounts deposited were submitted to the learned Assessing Officer. In order to verify the authenticity, identity and creditworthiness of the said security deposits, the assessee was asked to provide the bank statements, returns of income and other related documents in respect of the sub/petty contractors, from whom these deposits had been received. In reply the assessee submitted that the case had been selected for limited scrutiny on four accounts, including for unsecured loans, but the learned Assessing Officer was asking questions with regard to secured loans which was outside the scope of the scrutiny assessment. Without prejudice to the above, the assessee submitted that all the secured loan creditors were petty contractors and income tax payees’ and TDS had been deducted on all payments to them. A copy of the TDS returns showing the deduction while making the payments to these loan creditors were enclosed. It was further submitted that security deposits from petty contractors was shown as secured loans as per Schedule B of the copy of balance-sheet. As per agreement, the assessee was required to obtain the security amount of these petty contractors as, in case of some work not been done or there 3 Sh. Indrabhan Singh Rathor through Sh. Lal Saheb Rathore (L/H) being any loss, it could be easily be recovered from them. Therefore, in the balance- sheet, deposits received from these petty contractors had been shown as liability and against them on the assets side, the assessee had shown deposits vide Schedule H of the balance-sheet. Against the liability of Rs.2,25,00,519/-, the assessee had shown assets of Rs.28266528/-. Thus, no addition was required to be made on account of these secured loans contractors. The assessee also submitted a chart showing the provision of liability and assets in respect of the ten petty/sub- contractors seeking to demonstrate that there was no difference in the amount appearing as liability in his balance-sheet and the amount appearing as assets on their account in Schedule H. It was submitted that the assessee was a Contractor, all the ten loan creditors were petty sub-contractors and these were deposits against various works given to these petty contractors. It filed ledger accounts of all the above loan creditors and submitted that there was no ground for making the addition. However, the learned Assessing Officer concluded that the submission of the assessee that the said loan of Rs.2,25,00,519/- was a secured loan was incorrect, as in the return of income this amount had been shown as unsecured loan. Therefore, it was within the parameters of scrutiny. It was pointed out that in the return of income, the unsecured loans had been shown at Rs.2,29,88,903/-, which included the claimed loan of Rs.2,25,00,519/-. He reasoned that since the bank statements and income tax returns of eight of the said sundry creditors had not been furnished. Their loans were not verifiable and hence they were fit to be added back to the income of the assessee. In respect of two of the sundry creditors, he found that in the returns of the income, no advances had been shown in the name of the assessee or shown at all. Therefore, the learned Assessing Officer concluded that the total claim of Rs.2,25,00,519/- was fit to be added back to the income of the assessee under section 68 of the I.T. Act, 1961. He, therefore, added this amount back and initiated the proceedings under section 271(1)(c).

The Revenue is aggrieved at this relief granted by the ld. CIT(A) and has accordingly come before us. Sh. Aok Bhura, ld. Sr. DR (hereinafter referred to as the ‘ld. DR’) submitted that it was clear from the AO’s order that the creditors had not 8 Sh. Indrabhan Singh Rathor through Sh. Lal Saheb Rathore (L/H) filed returns or not included advances to the assessee in those returns that had been filed. They had also not filed copies of their bank accounts to justify the fact of credit. He also argued that even after the ld. CIT(A) had admitted the affidavits under Rule 46A, and summons were issued to the assessee’s, a large majority of them did not comply with the said summons. It was, therefore, submitted there were good and sufficient reasons to show that the identity, creditworthiness of the creditors and the genuineness of the transactions were not proved and therefore, the ld. AO was justified in adding these amounts back under section 68 of the Income Tax Act, 1961. Furthermore, it was submitted that these amounts had been reflected as unsecured loans in the income tax returns of the assessee and therefore, they were well within the scope of scrutiny.

On the other hand, Sh. Sapan Usrethe, Adv (hereinafter referred to as the ‘ld. AR’) appearing on behalf of the assessee invited our attention to Schedule B of the balance-sheet in which the amount of Rs.2,25,00,519/- was reflected against security deposit from petty contractors. He also invited our attention to Schedule H of the balance-sheet which contained details of deposits assets with the various Government departments and again reiterated the argument that this amount was essentially taken as security deposits from the petty contractors to whom the works that had been allotted to the assessee, were subsequently allotted for execution. It was submitted that all these amounts that had been received from the said petty contractors had been deposited with the various Government Department, which were reflected in Schedule H of its returns. It was, therefore, submitted that since the amounts received from the petty contractors were secured against the deposits made to the Government Department, they could not be called unsecured loans and therefore, could not be brought within the ambit of limited scrutiny as laid down by the CASS. The ld. AR further invited our attention to page 17 of his paper book, which contained the details of payments made to these very parties on account of contract work executed. It was submitted that the assessee had paid a total of 9 Sh. Indrabhan Singh Rathor through Sh. Lal Saheb Rathore (L/H) Rs.13,35,73,586/- to these parties on account of sub contract work executed by them and had deducted 1% TDS amounting to Rs.13,72,902/- on the same. It was submitted that once there was no denying the fact of execution of these contracts by the various sub-contractors and the payments to them or the fact of deposit of security amounts with the Government departments, there was no reason to disbelieve the fact that these security deposit had been sourced from the petty contractors as reflected in the agreements signed between the assessees and these petty/sub-contractors. It was further submitted that the reflection of credit balances with relation to some of these parties in the details of sundry creditors as per Schedule F, amounting to Rs.43,31,652/- would not entitle the ld. AO to go beyond the parameters of limited scrutiny and investigate the security deposit from petty contractors while investigating the unsecured loans from some of these parties. It was, therefore, submitted that the additions were fit to be deleted.

We have duly considered the facts and circumstances of the case. It is observed that the case was selected for limited scrutiny on the parameters of; i. Refund claim ii. Failure to pay TDS deducted/collected iii. Unsecured loans iv. Other expenses claimed in Profit & Loss Account 7.1 It is fairly evident from a perusal of the balance-sheet of the assessee that the issue of security deposit from sub/petty contractors, which figure as secured loans within Schedule B of the assessee’s balance-sheet was not a subject matter selected for limited scrutiny under the CASS parameters. Therefore, as per the CBDT guidelines, if the ld. AO was to enquire into the same, he was required to obtain permission from the concerned PCIT in writing before making investigations / additions in the matter. There is no indication in the assessment order that this has 10 Sh. Indrabhan Singh Rathor through Sh. Lal Saheb Rathore (L/H) been done instead the ld. AO has expanded the scope of limited scrutiny by expression of an opinion that the security deposits by the petty / sub-contractors amount to unsecured loans and therefore, could be investigated within the parameters selected under the CASS. As this is clearly outside the jurisdiction of the ld. AO, the addition made by him in this regard is unsustainable on this count. Moreover, we observe that it has been submitted by the ld. AR, that the amounts that were collected from these petty/sub-contractors were against project that were executed by them on behalf of the assessee and the fact remains that the assessee has made payments to the sub-contractors against execution of such contracts which is proved by the deduction of tax at source against such payments. Therefore, there does not appear to be any reason to doubt the receipt of this security money, which has subsequently been deposited with the Government Departments. These have also been confirmed by the depositors by way of affidavits and are backed by agreements. We also note that the unsecured loans as referred to in Schedule C of the assessee’s balance-sheet pertained to altogether different parties and the ld. AO has already satisfied himself that these were on account of opening balances, not calling for any action in this assessment year. We further observe that the unsecured loan in Schedule ‘F’ pertain to different amounts which do not seem to be the subject matter of the additions. Therefore, on the basis of the aforesaid facts, we hold that the addition made by the ld. AO of security deposits from sub/petty contractors is unsustainable, and we accordingly delete the same.

In the result, appeal filed by the Revenue is dismissed. Order pronounced in the open Court on 08.01.2025. (KUL BHARAT) Accountant Member Jabalpur, 08/01/2025 Sh (On tour)