M/S SUSHIL KUMAR GUPTA & COMPANY,AMBALA CITY vs. PR.CIT, PANCHKULA

That the Ld. PCIT, Panchkula has erred in assuming the juri iction u/s 263 and has also erred in setting aside the already completed assessment as framed by the Assessing Officer vide order, dated 08.02.2021. 2. That the Ld. PCIT has failed to appreciate that the case has been selected for limited scrutiny only for genuineness of expenses / unsecured loans and she has exceeded her juri iction for the purpose of setting aside the case u/s 263 on account of expenses payable / deduction of TDS u/s 194C, which is not proper.

That the Ld. PCIT has also erred in giving adverse finding with regard to deduction of TDS u/s 194C for the job charges, which issue was duly considered by the Ld. Assessing Officer during the course of assessment proceedings as is evident from page-9 of the order of Ld. PCIT u/s 263. 4. That the PCIT has failed to appreciate the judgment of juri ictional Bench of the ITAT, Chandigarh Bench in the case of Sh. Tej Pal Bhardwaj, reported in 88 ITR (Trib.) 352 for the preposition that the juri iction of Ld. PCIT cannot extend to the issues not covered in the limited scrutiny case.

Notwithstanding the above said ground of appeal, the Ld. PCIT has failed to appreciate that the issues in ‘limited scrutiny case’ have been verified by the Assessing Officer concerned after due application of mind and, thus, the order as passed by the Assessing Officer is neither erroneous and nor prejudicial to the interest of revenue and, thus, the setting aside of the order as passed by the Assessing Officer, is bad in law.

That the appellant craves leave to add or amend the grounds of appeal before the appeal is finally heard or disposed off.”

Briefly the facts of the case are that the assessee is a partnership firm engaged in the business of laying underground cables for the telephone network. For the year under consideration, the assessee had filed its return of income declaring total income of Rs. 2,03,62,240/- which was processed under section 143(1) after making an adjustment of Rs. 37,79,690/-. Thereafter, the case of the assessee was selected for limited scrutiny and notice under section 143(2) dt. 28/09/2019 was issued on the issue of verification of genuineness of expenses and unsecured loans. Thereafter, notice under section 142(1) alongwith questionnaire were issued and after taking into consideration the reply submitted by the assessee, the assessment was completed under section 143(3) r.w.s 143(3A) and 143(3B) of the Act.

Subsequently, the assessment records were called for and examined by the Ld. Pr. CIT and a show cause dt. 23/02/2023 was issued. In the show cause notice, the Ld. Pr. CIT stated that the case of the assessee was selected for limited scrutiny on the issue of genuineness of expenses and unsecured loans.

1 It was further stated by the ld PCIT that during the year, multiple contracts of laying underground cables were executed by the assessee at different locations and an amount of Rs. 23,05,91,256/- on account of work and labour

2 As per the Ld. Pr. CIT, person who earn their livelihood through labour work live from hand to mouth and such persons cannot afford to work on credit basis. And therefore the wages are normally paid either weekly or fortnightly. However in the instant case, the AO has not made proper and adequate inquiry into the genuineness of the work and labour charges debited to the P&L Account. No effort was made by the AO to examine how such huge wages and labour charges remained payable at year end and how the payments of the outstanding wages have been made in the next year.

3 In view of the above, it was held by the ld PCIT that the assessment order dt. 08/02/2021 has been passed without making the reasonable inquiries and verification on the issue for which the case was flagged for scrutiny under CASS and therefore, he proposed to held the assessment order to be erroneous in so far as prejudicial to the interest of the Revenue in terms of Clause (a) of Explanation-2 to Section 263 of the Act.

In response to the show cause, the assessee submitted that the case was selected for limited scrutiny and in response to notice under section 143(2) and 142(1), the assessee has furnished the necessary response and drawing reference to the submission made before the AO, it was submitted that all the expenses debited to trading and P&L account are genuine and are supported by vouchers and compare to net profit rate of 5.64% declared in A.Y. 2016-17 and 6.36% for A.Y. 2017-18, for the year under consideration, the assessee has declared net profit rate of 6.64% on turnover of Rs. 36,32,25,413 which is highest considering the past track record of the assessee. It was submitted that the AO has examined the financial accounts of the preceding year, current year, as well as succeeding year and found that method of booking and payment of expenses are being consistently followed and profit of the year are better and hence no prejudice is caused to the Revenue in accepting the net profit rate of 6.64% which is highest declared profit rate among the contractors carrying out work with the similar turnover. It was accordingly submitted that the presumption that the AO has duly applied his mind cannot be easily discarded.

1 It was further submitted that the Labour force is specialized and continues to work with the assessee from year to year. The percentage of expenses claimed under the head Labour and wages paid and payable during the year have been miscalculated by the AO. The comparative data of actual figures are tabulated as below:-

2 It was submitted that from the above, it is clear that the proposal put up by the AO is factually incorrect. The AO while submitting the proposal has miscalculated figures and as such it is clear that the assessee is consistently following the same practice, wherein wages remains payable in previous year are B/F, paid during the year and out of total wages and labour charges incurred during the year, part is paid during the year and part remains payable which are paid in next assessment year. The accounts are audited u/s 44AB and audit report was enclosed with return of income, however as a matter of fact, assessee has paid nearly 60.20% of total Labour/wages expenses and paid the balance in next year as was the practice consistently followed. In A.Y. 2019-20, against total expenses of Rs 22,40,76,344.75, the assessee has disbursed such payments of Rs 18,92,59,440/- and still an amount of Rs 15,63,83,904/- remained payable so this is regular phenomenon being followed by assessee from year to year wherein no loss is being caused to the Revenue.

3 It was further submitted that it was only during the year that the assessee had entered into multiple contracts of laying underground telephone cables which were executed at different locations. In earlier years, it was not the case. The bulk payments were received after the close of year which acted as handicap to disburse the outstanding wages within the year i.e. to say out of total receipts of Rs 36,32,25,413/-, payments of Rs 16,23,24,842/- remained receivable as on 31.03.2018 which constituted nearly 44.68% of the total receipts which were received in subsequent year, thus outstanding wages were disbursed in next assessment year.

4 It was further submitted that the JAO on the basis of presumptions and assumptions and on wrong calculations without looking the fact that in subsequent assessment year, the assessee has made payments under the head even more than amount debited to profit and loss a/c and net profit rate declared during the year is highest causing no loss to the Revenue.

5 It was submitted that from the above, it is absolutely clear that the order of AO is neither erroneous in as much as nor prejudicial to the interest of revenue. There is no loss of revenue. The error envisaged by the AO looks like more of possibility or guess-work as against actual error either of fact or law and mere hypothetical inferences drawn does not lead to invocation of provisions of section 263. Keeping in view the facts and circumstances of the case, judgment of ITAT Amritsar Bench and judgment of Hon'ble Supreme court mentioned above, the proceedings recommended for action u/s 263 do not qualify the twin conditions mentioned in relevant statute and the same may be dropped.

The submissions so filed by the assessee were considered but not found acceptable to the Ld. Pr. CIT. As per the Ld. Pr. CIT, an expenditure of Rs. 23,05,91,256/- was claimed under the head 'Wages & Labour Charges'. No names of persons to whom these very substantial Wages and labour charges

1 It was held by the ld PCIT that out of the Wages and Labour of Rs. 23,05,91,256/-, Rs. 12,15,67,000/- or 52.71% was shown as payable as on 31.03.2018 and only Rs. 10,90,24,561 or about 47.29% was paid during the year . The labour normally lives from hand to mouth and wages are paid to them weekly or fortnightly. It is not the case of the assessee that the Wages and labour charges were paid to any sub-contractor. In other words, the case of the assessee is that Rs. 23,05,91,256/- was paid by him directly to the labourers. The AO was required to examine/verify if and when these outstanding wages shown as payable in the balance sheet were paid in the next year. However, no such information was either called by the AO or filed by the assessee. No enquiry was made from the assessee with regard to the payment of outstanding expenses of Rs. 12,15,67,000/-shown as payable as on 31.03.2018. The Assessing Officer has thus not made proper and adequate enquiry into the genuineness of the expenditure Rs. 23,05,91,256/- claimed as Work and Labour charges.

2 It was further held by the ld PCIT that an expenditure of Rs. 5,02,01,415/- was claimed under the head ' Job charges paid to sub contractors’. As flagged on CASS, the underlying information in this case was: "Large payment made u/s 194C to persons who have not filed return of income ". The assessee has deducted tax at source of Rs. 10,04,028/- on payment to one party, namely, M/s Datum Mkt Ltd., Orissa. However, as per the assessee's submission, it received bills of Rs. 5,92,37,670/- on account of sub contract work at Uttarakhand. As per the underlying information flagged in this case, the person(s) to whom the assessee had payments were non-filers. Thus the expenditure claimed by the assessee begged to the examined and verified which was never done by the AO.

3 It was held by the ld PCIT that the assessee failed to file complete information/ documents in compliance to the statutory notice(s) and yet the AO completed the assessment proceedings without drawing any adverse inference. The purpose of scrutiny, i.e, examining "Genuineness of Expenses" was thus defeated. The issues flagged under CASS have not been examined.

4 In view of above, the assessment order dated 08.02.2021 was considered to be erroneous and prejudicial to the interest of revenue in terms of clause (a) of Explanation 2 to section 263 of the Income Tax Act, 1961, as it was made without making the requisite inquiries or verifications as were called for in the facts and circumstances of the case. The assessment order dated 08.02.2021 was set aside with the directions to the Assessing officer to pass a fresh assessment, order after making the requisite enquiries and verifications and giving due opportunity of hearing to the assessee.

Against the said findings and direction of the Ld. Pr. CIT the assessee is in appeal before us.

During the course of hearing, the Ld. AR submitted that the case of the assessee was selected for limited scrutiny on the issue of verification of genuineness of expenses/unsecured loans with specific reference to the underlying issue i.e; large payment under section 194C of the Act to the person who have not filed return of income. It was accordingly submitted that show cause under section 263 has been issued for non verification of labour charges payable as on 31/03/2018 which was clearly outside the purview of limited scrutiny and therefore the Ld. Pr. CIT has exceeded her juri iction for setting aside the assessment order which cannot be sustained in the eyes of law.

1 It was submitted that it is a settled position that no matter other than the matter specified in notice under section 143(2) could be dealt with or examined by the AO while passing the order under section 143(3) of the Act and therefore the Ld. Pr. CIT cannot direct the AO to consider the issue outside the ambit of limited scrutiny. In support the reliance was placed on the following case laws:

2 It was further submitted that assessee is engaged in the business of underlying caballing of telephone network and in the year under consideration, it had entered into multiple contract of laying underground telephone cable which were executed at different locations as compared to the earlier year wherein the assessee was engaged in one or two such contracts. For this work specialized labour is required which continues for year to year. The wages remained payable at year end are carried forward to subsequent year and paid therein and this practice is followed by the assessee on consistence basis.

3 In support of above contention, comparative data of labour and wages paid/payable in the year under consideration as well as in the previous and subsequent years was submitted and the contents thereof read as under:-

4 It was submitted that from a perusal of above, it may be noted that it is regular phenomena of business operations of the assessee that wages payable as on the close of the year are carried forward to the subsequent years and in the subsequent year, wages payable brought forward from the earlier year along with part of the wages incurred during the year are paid and balance is again carried forward to the subsequent year.

5 Further, our reference was drawn to the following table and it was submitted that as apparent from the figures, in the year under consideration, the net % of wages payable is quite high. It was due to the fact that in the year under consideration, the assessee entered into multiple contracts of laying underground telephone cable which were executed at different locations as compared to the earlier year wherein the assessee was engaged in one or two such contracts. However, as and when the business working of these new projects got streamlined, the % of wages payable also reduced to a great extent.

6 It was further submitted that the assessee is a Government Contractor and its net profits for the last three years as accepted by the income tax department are tabulated in the following table and it was submitted that from a perusal of the same, it may be noticed that without any change in the nature of business activity of the assessee, the rate of net profit of the year under consideration is highest in last 3 years. Accordingly, no prejudice is caused to the Revenue during the year under consideration and neither the order passed by the AO is erroneous.

7 Further, regarding large payment made to contractor under section 194C of the Act, our reference was drawn to the notice under section 142(1) dt. 20/01/2020 which is placed at assessee’s paper book at pages 17 to 19 and our reference was drawn to Part B of Annexure to the said notice wherein the AO has issued and sought specific information/documentation regarding the large payment made to the contractor under section 194C of the Act and relevant content of the notice read as under:

8 It was submitted that in response to the aforesaid notice, the assessee filed the details submissions which are contained at pages 22 to 27 of the paper book and the contents thereof read as under:

9 It was accordingly submitted that the matter relating to verification of genuineness of expenses with specific reference to the large payment made

10 Regarding findings of the Ld. Pr. CIT that there is a mismatch in terms of the bills raised by M/s Datum Mkt Ltd. amounting to Rs. 5,92,37,670/- and expenditure of Rs. 5,02,01,415/- claimed under the head “Job Work Charges” paid to sub contractor, it was submitted that the said difference of Rs. 90,36,255/- is on account of 18% GST which was charged as part of the invoice raised by the sub contractor. However the same was not claimed in the P&L Account and credited directly to the GST account. It was accordingly submitted that there is no mismatch between the bills submitted and the amount debited in P&L Account and in this regard, copy of the ledger account of M/s Datum Mkt Ltd. alongwith copy of the invoices raised by it have been submitted.

11 It was accordingly submitted that in light of aforesaid submissions, the order so passed by the ld PCIT be set-aside and that of the AO be sustained.

Per contra the Ld. DR submitted that it is not in dispute that the case of the assessee has been selected for limited scrutiny to examine genuineness of the claim of the expenses. However it would be incorrect to restrict the scope of examination of the genuineness of the expenses to the sub contractor charges only and not to labour and wages as both of these expenses have been debited in the profit/loss account and claimed by the assessee while filing its return of income.

1 Further on merits, it was submitted that there is a large outstanding of labour and wages payable at the year end and which raises a question mark on the genuineness of the expenses claimed by the assessee and therefore she supported the order and the findings of the Ld. Pr. CIT. Similarly, for payment made to contractor u/s 194C, she relied on the findings of the ld PCIT.

We have heard the rival contentions and purused the material available on record. It is an admitted position that the case of the assessee was selected for limited scrutiny as evident from the contents of the first notice issued u/s 143(2) dated 28/09/2019 which it is mentioned that “while acknowledging the care and diligence you may have taken in preparing the return of income, there are certain issues which need further clarification for which your return of income has been selected for limited scrutiny and such issues are (i) verification of genuineness of expenses and (ii) unsecured loan.” The same is followed by subsequent notice u/s 142(1) dated 20/01/2020 wherein detailed questionnaire were issued on each of the aforesaid two issues. On the issue of genuineness of expenses, the AO has directed his enquiry on large payment made to contractors u/s 194C and as evident from questionnaire Part B available at APB page 19, specific questions have been asked seeking information and documentation in terms of name, address and other particulars of the contractors, nature of work done by the contractors, the payments made during the year, whether TDS compliances u/s 194C made while making the payment. The AO has specifically made a mention that many of these deductees have not filed their return of income as per information available from database of the department.

The ld PCIT also in his findings at para 4 (i) of the impugned order stated that the case of the assessee was flagged under CASS for scrutiny for verification of genuineness of expenses and unsecured loans and in terms of underlying information, it was stated that large payments made u/s 194C to persons who have not filed return of income and large squared up loans during the year and from the assessment records, it is noted that the reason for which the case was selected for scrutiny was not properly examined during the assessment proceedings and thereafter, the ld PCIT has reproduced the contents of the notice u/s 142(1) dated 20/01/2020 wherein the AO has asked specific questions regarding large payment made to contractors u/s 194C as we have noted

In light of aforesaid factual position, we are of the considered view that the case of the assessee was selected for limited scrutiny to verify the genuineness of the expenditure with reference to large payment made to persons u/s 194C who have not filed return of income. In other words, to verify the expenditure of Rs. 5,02,01,415/- claimed under the head ' Job charges paid to sub contractors’. The criteria for selection of case has to be seen in context of underlying information which has been flagged on CASS and the same cannot be enlarged to include other expenditure so claimed by the assessee including that of examining the wages and labour charges of Rs 23,05,91,256/- which admittedly are not subject to provisions of section 194C as accepted by the ld PCIT as well. In view of the same, we agree with the contention advanced by the ld AR that as far as the labour and wages payable matter is concerned, the same is beyond the scope of the limited scrutiny and that the Ld. Pr.CI T cannot initiate the proceedings u/s 263 of the Act on the issue of labour and wages amounting to Rs. 23,05,91,256/- which is beyond the scope of limited scrutiny. It is now a settled position as held by the various Benches of the Tribunal including the Chandigarh Benches that the matters which are not subject matter of limited scrutiny cannot be raised in revisionary proceedings u/s 263 and thereby enlarging the scope of limited scrutiny and broadening the scope of juri iction that was originally vested with the A.O and holding the assessment order as erroneous on matter which the AO could not have examined at first place. In this regard, we refer to the decision of the Hon’ble Orissa High Court in case of PCIT vs Shark Mines and Minerals (P) Ltd (Supra) wherein similar proposition has been laid down by the Hon’ble High Court and it was held as under:

In view of the above, we need not go in the merits of the arguments so canvassed by the ld AR regarding the labour and wages amounting to Rs.23,05,91,256/- and the same are thus left open.

Regarding payment to the contractor amounting to Rs 5,92,37,670/-, we find that the matter has been duly examined by the AO and necessary documentation in terms of the particulars of the contractor, PAN and GST number, copy of invoices, copy of the ledger account, payment details and the TDS deducted on the payment so made are on record. The assessee has also explained that the invoices are inclusive of GST @ 18% and in the profit/loss account, the expenditure has been shown net of GST and thus, the expenditure and the payments are fully reconciled. No dispute has been raised regarding the nature of work and the genuineness of the expenditure so incurred by the assessee. The mere fact that the contractor has not filed the return of income cannot be a sole basis to reject the claim of the assessee and therefore the order so passed by the AO cannot be held to be erroneous in so far as prejudicial to the interest of the Revenue.

In light of the aforesaid discussions and in the entirety of facts and circumstances of the case, we are of the considered opinion that there is no justifiable basis to invoke the provisions of section 263 as the order passed by the AO cannot be held to be erroneous in so far as prejudicial to the interest of the Revenue and the order so passed by the ld PCIT is hereby set-aside and that of the AO is sustained.

In the result, the appeal of the assessee is allowed. Order pronounced in the open Court on 04/01/2024. आकाश दीप जैन िव"म "सह यादव (AAKASH DEEP JAIN) ( VIKRAM SINGH YADAV) उपा"य" / VICE PRESIDENT लेखा सद"य/ ACCOUNTANT MEMBER AG Date: 04/01/2024

""यथ"/ The Respondent 3. आयकर आयु"/ CIT 4. आयकर आयु" (अपील)/ The CIT(A) 5. िवभागीय "ितिनिध, आयकर अपीलीय आिधकरण, च"डीगढ़/ DR, ITAT, CHANDIGARH 6. गाड" फाईल/ Guard File