DEPUTY COMMISSIONER OF INCOME TAX , CIRCLE-2, NAGPUR vs. M/S UNITED BUILDERS , BHANDARA

Date of Hearing – 08/08/2024 Date of Order – 14/08/2024

O R D E R PER K.M. ROY, A.M.

The present appeal has been filed by the Revenue challenging the impugned order dated 30/12/2019, passed by the learned Commissioner of Income Tax (Appeals)–2, Nagpur, [“learned CIT(A)”], for the assessment year 2014–15.

“Whether in facts and circumstances of the case and in law, the CIT(A)–2, Nagpur, was justified on account of disallowance of entire payment made to sub–contractors treating the same as bogus?”

M/s. United Builders ITA no.56/Nag./2020 Government and Semi Government Organisations. For the year under consideration, the assessee filed its return of income on 29/11/2014, declaring total income of ` 96,93,807. The case was selected for scrutiny and the assessment order under section 143(3) of the Income Tax Act, 1961 ("the Act") was passed in which the Assessing Officer assessed the income of the assessee at ` 6,87,51,810.

M/s. United Builders ITA no.56/Nag./2020 debited to Profit & Loss A/c on account of sub-letting the work shall not be disallowed as not a single party has submitted its confirmation. The Assessing Officer noted that when the assessee debited ` 5,35,00,000, as sub contract expenses in the month of March, is all the more necessary for the assessee to show commensurate receipt or work-in-progress on the credit side of the Trading/Profit & Loss account. The Assessing Officer further was of the view that that the assessee has completely failed to justify the expenses. He was of the opinion that any expenditure claimed should have a nexus with the income. The assessee could not prove that the subcontractors' expenses debited are represented either by way of contract receipt or by way of Work- in-progress. Since the expenditure is debited at the fag end of the year, in the absence of any nexus proved by the assessee that these expenses have resulted in any receipts or work-in-progress, which makes it clear that only debit side of the Trading account/Profit & Loss account is increased artificially in order to reduce and suppress the actual profit of the assessee. Since these expenses are bogus, the assessee was not forth coming to explain the genuineness of the expenses. Thus, the Assessing Officer held that the expenses are not proved to the genuine and the assessee also could not produce any evidence to show that there is corresponding income credited against the expenses claimed.

M/s. United Builders ITA no.56/Nag./2020 progress represented by these so called sub contract expenses. Therefore, the entire claim of sub contract expenses at ` 5,88,00,000, is bogus, non– genuine and not backed by any evidence or supported by any corresponding receipt or work-in-progress. He held that the assessee could not establish any nexus between the sub contract payments. Even the work-in-progress shown is at ` 25,65,000, only. Therefore, this entire amount of ` 5,88,00,000, was disallowed and added to the total income of assessee as undisclosed income. Penalty proceeding under section 271(1)(c) of the Act was initiated separately. The assessee being aggrieved, carried the matter before the learned CIT(A).

M/s. United Builders ITA no.56/Nag./2020

“5.1 Ground no. 1, 3, 4 & 5 are related to one another and challenge the addition of Rs.5,88,00,000/- on account of disallowance of entire payment made and claimed by the appellant contractor firm to sub contractors treating the same as bogus 5.1.1 The pointwise gist of the arguments in and facts of the case flowing from the reply given by the Ld. Counsel of the appellant firm (as reproduced, in toto, in para no. 4 supra) are as under:- “i. Appellant is a partnership firm carrying out the activity of Civil Construction. ii. During the year the appellant carried out the work of mainly Government and Semi Government Organizations. iii. This work was allotted under tendering process in the year prior to previous years which were under process and carried out by the appellant during the previous year. That for carrying out the Construction activity the appellant used to employ its own labour. It also used to sub-let the part of the work to other contractors. iv. During the year the Gross Turnover was Rs. 16,36,40,187 from all the Government and Serni Government department receipts. Profit declared amounted to Rs. 96,93,807 after deduction of partners' interest and remuneration. v. That it has been also submitted "During the year, the assessee had sub-let total work contract of Rs $$800000/- to the sub-contractors which had been done by the sub-contractors during the year. However such sub-contract expenses were recognized in the books of account at the end of the year in the month of March after getting the work certified by the Engineers of the appellant as well as the principal contractor. vi. Further also that "However the Assessing Officer has mis-interpreted the said procedure of recording the transaction in books of account and concluded that this work were executed in the month of March only and there being no corresponding work in progress as on 31st March the whole of the sub-contract work is bogus and not genuine”. vii. It has also been submitted that "the basic reason behind the increasing of sundry creditors, this year, was major outstanding from the department that was received after end of the financial year and the bills of Sub- contractor which were not received in time. Hence the provision was made in the head of creditors is increase in respect of preceding year. viii. It has been further submitted that "The appellant has also deducted TDS at the specified rates u/s 194C of all the sub-contractors. The list of subcontractors along with their address, PAN card and Bank Account details were furnished during the course of assessment proceedings. ix. It has been lastly submitted "That during the course of assessment proceedings the assessee also requested the subcontractor either to attend before the Assessing Officer or to file their confirmation along with copy of return and computation of income. All these sub-contractor have appointed the counsel Page | 5

M/s. United Builders ITA no.56/Nag./2020 of the assessee as their counsel to sign and filed confirmation and other documents on their behalf. The Counsel of assessee (Sub-contractor) signed only the written submission all confirmation and income tax returns signed by the respective assessee. However the Assessing Officer has not accepted the above confirmation being signed by the counsel of the assessee and disbelief the sub- contractor and payments made to them. x. The financials of business of the assessee for the last three years which was of similar nature were also submitted and for ready reference it is again reproduced, even at the cost of brevity as below:-

Particulars March 2014 March 2013 March 2012 16,36,40,18 4,74,43,39 Gross Contract Receipts 10,04,47,849 7 2 Wages & Sublet Work 1,54,39,85 5,92,15,779 3,60,75,654 Paid 9 Sub–Contract Work out 1,50,00,00 5,88,00,000 3,56,04,616 of above 0 Wages % 36.19% 32.52% 35.91% Sub–Contract % 35.93% 31.62% 35.44% Net Profit before interest & Salary to 1,24,48,319 59,80,728 35,42,903 Partners N.P. % 7.61% 12.61% 9.50% Net Profit after interest 96,93,807 26,60,675 67,75,568 & salary to Partners N.P. % 5.92% 5.60% 6.74% xi. Thus it can be seen that assessee had sub-let a part of contract work in all the years prior to the previous year i.e. FY 2013-14 relevant to the AY under consideration i.e. AY 2014-15. It is to be mentioned that the assessment of the appellant for the A.Y. 2013-14 was completed u/s 143 (3) of the Act and the Ld. A.O. has had accepted the sub-contract work in that year. However the Assessing Officer in the present year failed to consider the above facts and erroneously treated the sub-contract work as bogus. 5.1.2 All the above facts are duly considered. The arguments given from the side of the appellant firm have also been duly considered and it is found that there is merit in the same. On the other hand, the Ld. A.O. did not carry out the enquiries to their logical conclusion and even did not bother to see the following surrounding facts and circumstances of the transactions which were related to the payments made to the claimed sub contractors by the contractor appellant firm: A. That the sub contractors were, in fact, were working only for the appellant contractor firm B. That all the sub contractors were filing their Returns of Income. C. That all the payments were made through account payee cheques only D. That all the payments were subjected to TDS as per Income Tax provisions.

M/s. United Builders ITA no.56/Nag./2020

E. That, withdrawals from the bank accounts of the subcontractor in cash was only an application of their already taxed income as per the law of the day Those withdrawals may be related to further payments to the labour, material sellers etc. F. That, the application of income in the hands of the sub contractors cannot and should not entitle the Ld AO of the appellant firm to make such a huge amount of addition in the hands of the appellant firm treating the entire payments made and claimed by it and totaling to as much as Rs. 5.88 crores even when the similar practice has been made by the appellant firm in other succeeding years as well and even when in scrutiny assessment in immediately preceding year, no similar addition has been made, as has been submitted by the Ld. Counsel. For ready reference once again it is quoted from the reply of the Ld. Counsel as below:- "It is to be mentioned that the assessment of the assessee for the assessment year 2013-14 was completed u/s 143 (3) and the Assessing Officer has accepted the sub-contract work in that year." Though res judicata does not apply in the Income Tax proceedings but consistency also has to be respected and is one of the very strong factors which should never be forgotten in Income Tax Assessments. In this case, similar payments having been made and claimed by the appellant firm in year after year to the similar sub contractors should have been enquired into by the Ld. A.O and appropriate legal action should have been taken by the Ld. A.O. which he miserably failed to do. For ready reference, a part of the table submitted by the Ld. Counsel is once again reproduced as below:

F.Y. 2013– Particulars F.Y. 2012–13 F.Y. 2011–12 14 16,36,40,1 4,74,43,39 Gross Contract Receipts 10,04,47,849 87 2 Wages & Sublet Work 5,92,15,77 1,54,39,85 3,60,75,654 Paid 9 9 Sub–Contract Work out 5,88,00,00 1,50,00,00 3,56,04,616 of above 0 0 Wages % 36.19% 32.52% 35.91% Sub–Contract % 35.93% 31.62% 33.44%

G. From the above table it is very clear that in the immediately preceding year ie. FY 2012-13 (relevant for A.Y. 2013-14 where in the scrutiny assessment proceedings the Ld. AO accepted similar claim of payments to sub contractors) also there was similar payment to sub contractors which was almost in the same range so far as percentage of the total gross contract receipts are concerned. Last year whereas it was 32.52% of the gross receipts this year it was 35. 93%. Even in the year before last ie. F.Y. 2011-12 (relevant for A.Y. 2012-13) it was 35.91% when the total gross receipts were Rs. 10,04,47,849. H. Only a mere failure of the claimed sub contractors (and who were erroneously treated by the Ld. A.O. to be bogus) in not appearing before the Ld. A.O. in response to summons issued u/s 131 of the Act could not justify the impugned addition whereas all of those sub contractors filing their Returns of Income showing the same payments (made, subjected to TDS and claimed by the appellant firm) as their income and also filing confirmations that were submitted before the Ld. A.O. may be signed and presented by the Ld. Page | 7

M/s. United Builders ITA no.56/Nag./2020

Counsel of the appellant firm. In his words "The Counsel of assessee (Sub- contractor) signed only the written submission all confirmation and income tax returns signed by the respective assessee. However the Assessing Officer has not accepted the above confirmation being signed by the counsel of the assessee and disbelief the sub-contractor and payments made to them." I. Lastly, let us, for a moment consider a hypothetical situation of confirming impugned addition of Rs.5.88 crores. If the same amount is added back to the net profit of Rs.1.24 cr. (before giving interest and salary to partners) for this year i.e. A.Y. 2014-15 at the gross receipts of Rs.16.36 crores then net profit will rise to 43.52% which is by no stretch of imagination can be realistic in a business of civil contract work as is that of the appellant firm. However, in many cases as in this case Ld. AOs do not appreciate this aspect of the case which is too important to be over looked.” 5.1.3 Thus, the action of the Ld. A.O. in making the impugned addition is not found to be sustainable in the facts of the case and in law as it fails the test of appeal. The Ld. A.O. is therefore directed to delete the impugned addition of Rs.5,88,00,000 as the appellant is entitled to get the relief. Ground no. 1, 3, 4 & 5 are, thus, allowed.”

“3.5 Further all the sub contractors are having bank account in the same branch in which assessee is also having account. Further it is also seen that all the sub contractors belong to different Districts such as Gondia but have accounts in the same bank in which assessee also maintains its own bank account. All the so called sub contractors are working for assessee firm only. Most of the sub contractors have filed their return of Income by estimating income u/s 44AD of the I. T. Act and claiming refund of the entire TDS amount. These sub contractors have not maintained any books of account or supporting documents. This is a convenient ploy used by them to show bogus sub-contracts payments. 3.6 The fact that the sub-contractors withdrawn in cash whatever money deposited or credited by them indicates a motivated action to create a bogus proof of sub contractors. Again to verify the facts as submitted by assessee, Summons u/s 131 of the I. T. Act, 1961 were issued to the sub contractors to verify the genuineness of the transactions made between the assessee and Page | 8

M/s. United Builders ITA no.56/Nag./2020 sub-contractors. But in response to summons u/s 131 of the I. T. Act, 1961 not a single party either attended or submitted any reply. Considering all the facts, it is concluded that the assessee has shown above named bogus sub- contractors to suit his needs so that assessee can suppress his actual profit. 3.7 The fact that no sub contractor appeared in response to summons issued u/s 131 of the 1. T. Act has been narrated to the assessee and asked to explain this position. But the assessee failed to explain. The assessee was also asked to explain with the evidence the expenditure of work carried out by the sub contractor to whom payments are made. The assessee again failed to offer any explanations. 3.8 The total sub contract payment is Rs.5,88,00,000/-. From the above discussion it is clear that there is no evidence that the payments made on account of sub contract expenses is genuine. Despite several opportunities none of the sub contractors attended or produced any evidence to show that they actually did work for the assessee. The so called payments made by the assessee is not backed by any evidence showing commensurate receipt. Assessee could not produce any evidence to prove that the claim of sub contract expenses have resulted in any receipt. In fact the work-in-progress shown is only Rs.25,65,000/-. When the assessee debited Rs.5,35,00,000/- as sub contract expenses in the month of March, is all the more necessary for the assessee to show commensurate receipt or work-in-progress on the credit side of the Trading/Profit & Loss account. The assessee has completely failed to justify these expenses. Any expenditure claimed should have a nexus with the income. The assessee could not prove that the sub contractors' expenses debited is represented either by way of contract receipt or by way of Work-in- progress. Since the expenditure is debited at the fag end of the year, in the absence of any nexus proved by the assessee that these expenses have resulted in any receipts or work-in-progress, it makes it clear that only debit side of the Trading account/Profit & Loss account is increased artificially in order to reduce and suppress the actual profit of the assessee. Since these expenses are bogus, the assessee was not forth coming to explain the genuineness of the expenses. Thus, the expenses are not proved to the genuine and the assessee also could not produce any evidence to show that there is corresponding income credited against the expenses claimed. 3.9 From the above discussion it is clearly brought out that the assessee could not explain and prove the genuineness of the expenses claimed on account of sub contract expenses. The assessee has also failed to prove any nexus between the claim of these expenses and the receipt/ work-in- progress represented by these so called sub contract expenses. Therefore, the entire claim of sub contract expenses at Rs.5,88,00,000/- is bogus, non genuine and not backed by any evidence or supported by any corresponding receipt or work-in-progress. The assessee could not establish any nexus between the sub contract payment. Even the work-in-progress shown is at Rs.25,65,000/- only……”

M/s. United Builders ITA no.56/Nag./2020 glaring infirmities pointed out. Even the nature of service has not been examined on a thread bare basis. The commendable job of the Assessing Officer cannot be ignored flippantly. Consequently, the order of the Assessing Officer is upheld by confirming the disallowance of ` 5.88 crore towards subcontracting charges. Thus, the ground raised by the Revenue is allowed.