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TMI Blog2022 (11) TMI 941X X X X Extracts X X X X X X X X Extracts X X X X ..... ubcontract expenses, when the sub-contractors failed to justify with documentary evidence that contract work was executed by them for the assessee firm. 2. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.1,86,97,354/- on account of disallowance of subcontract expenses, when the so called payments were made by the assessee firm to the sub-contractors only after presentation of bills but these sub-contractors were not having such financial capacity to make payment/advances to large number of labourers and material purchases. 3. It is, therefore, prayed that the order the Ld. CIT(A)-12, Ahmedabad may be set aside and that of the AO may be restored to the above extent. 4. The appellant craves leave to add, alter, amend and/or withdraw any ground(s) of appeal either before or during the course of hearing of the appeal." Assessment year 2010-11 "1. On the facts and in the circumstances of the case and in law, the Ld. CIT(A) has erred in deleting the addition of Rs.2,11,82,210/- on account of disallowance of subcontract expenses, when the sub-contractors failed to justify with documentary evidence that contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowance of subcontract expenses, when the so called payments were made by the assessee firm to the sub-contractors only after presentation of bills but these subcontractors were not having such financial capacity to make payment/advances to large number of labourers and material purchases. 3. It is, therefore, prayed that the order the Ld. CIT(A)-12, Ahmedabad may be set aside and that of the AO may be restored to the above extent. 4. The appellant craves leave to add, alter, amend and/or withdraw any ground(s) of appeal either before or during the course of hearing of the appeal." Assessment year 2016-17 "1. On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of Rs.1,61,75,302/- on account of disallowance of bogus payment to sub-contractors, without appreciating that the sub-contractors failed to justify with documentary evidence that contract work was executed by them for the assessee company. 2. On the facts and in the circumstances of the case and in law, the ld. CIT(A) has erred in deleting the addition of Rs. 1,61,75,302/- on account of disallowance of bogus payment to sub-contractors, without appreciating t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -10). The statement of the sub-contractors were recorded, on the basis of which the AO concluded that the sub- contractors could not provide any evidence of the contractual work done by them for the assessee firm, except copies of invoices of such work. The case of the assessee was reopened under section 148 of the Act and the objections filed by the assessee against issuance of notice under section 148 of the Act were disposed of the AO vide order dated 10-11- 2016. During the course of assessment, the AO held that a sum of Rs. 1,86,97,354/- paid to various subcontractors was made on the basis of bogus bills obtained by the assessee and no work was done by those subcontractors. While making the disallowance, the AO observed as under: (i) Majority of the sub- contractors had worked only for M/s Ultratech transmissions (ii) The sub- contractors had no record such as material purchase bills, wage registers etc. (iii) In case of majority of sub- contractors, the return of income was filed by the employees/owner of M/s Ultratech transmissions. (iv) The contractors filed income tax returns showing's income under section 44AD of the Act, though they were supposed to maintain the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l findings can be taken to their logical conclusion in the assessment order. Accordingly, the challenge to issuance of 147 notice was dismissed by Ld. CIT(Appeals) in light of the above observations. On merits of the case, Ld. CIT(Appeals) allowed the assessee's appeal and deleted the addition on account of bogus sub- contract expenses, with the following observations: "5.4 I find that the said disallowance is based mainly on the ground that from their statements and verification of their bank accounts, it was noticed that the sub-contractors had filed their returns declaring receipt for the work carried out by them for the appellant at various sites u/s 44AD of the Income tax Act. It was further found that the said sub-contractors had withdrawn cash for defraying the wages to their workers and such withdrawals was assisted by the employees of the appellant. The Assessing Officer therefore presumed that the cash so withdrawn must have come back to the appellant and consequently, the payments made to the sub-contractors were held by him to be non-genuine. As against the above action of the AO, it is the submission of the appellant that the AO has misdirected himself in concluding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstruction work is carried on. In compliance with the statutory provisions, payment to them has to be made by proper banking channel and the same is so made by the appellant after deducting TDS as per the provisions of the Income tax Act. The subcontractors have to disburse wages to their labourers in cash and if the assistance of the employees of the appellant is taken for the purpose of operating bank accounts and withdrawals of cash, it cannot be resumed that cash so withdrawn is not actually disbursed and has come back to the appellant. There is not even an iota of evidence brought on record by the AO for such a presumption. The decision of Hon'ble Ahmedabad in the case of ACIT vs Shri Ramniklal R.Gondalia ITA No: 3690/Ahd/2008 has considered this aspect. In the said case, the disallowance of payment made to sub-contractors was partly disallowed as the facts in that case were that all labour bills were prepared by the accountant of the assessee and cheques were received by them 8 to 10 days after that, they would make payments to labourers every week. The amounts were withdrawn from their bank accounts and a scrutiny of the cheques received from the bank revealed that the with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r statement where in they specifically admitted having been engaged and supplied labour for such work by the appellant. It is therefore not a correct conclusion by the AO that no work was done by the sub-contractors. It seems that the AO has proceeded on the footing that sub-contractors could not plead ignorance of law while not keeping records and maintaining accounts. The fact that these sub contractors are illiterate people is not disputed by AO. For any such fault of the sub-contractors in not maintaining records, no adverse view can be taken in the case of appellant when the revenue declared from the work and the profit margin earned from such work and the percentage of labour expenses proves it beyond doubt that it could not be possible without engagement of labour contractors. Regarding filing of income tax returns by the sub-contractors and non maintenance of accounts by them u/s 44AD of the Income tax Act, again the same does not lead to the conclusion that receipts shown by them in their returns is not actual payment made to them by the appellant for their engagement of the appellant's work. When the law itself entitles certain specified tax payers to file their incom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appellant and as discussed above, 1 see no justification on the part of the AO to make disallowance of Rs.1,86,97,354/- being expenses in respect of payment to sub-contractors. The A.O. is directed to delete the same. This ground of appeal is allowed." 6. The Revenue is in appeal before us against the aforesaid order passed by Ld. CIT(Appeals) deleting the additions made in totality on account of bogus sub-contracting expenses. In response, the counsel for the assessee has filed application under Rule 27 of the Income Tax Appellate Tribunal Rules, 1963 challenging the order of Ld. CIT(Appeals) to the extent it has confirmed the action of the AO for reopening of assessment under section 147 of the Act. We shall first discuss the Revenue's ground of appeal. 7. Before us, the Ld. DR submitted that from the instant set of facts, it is very clear that it is a case of bogus sub- contracting expenses created by the assessee. He submitted that as per the statements which were recorded for a few of the sub- contractors, they could not provide any concrete piece of evidence in support of any work done the by them. He drew our attention to page 20 of the assessment order and submitted that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stem of the assessee itself, which shows that the same are bogus in nature. 8. In response, the counsel for the assessee submitted that on perusal of page 5 of the assessment order, para 9, it is evident that the complete details of the work done is on record. He drew our attention to question number 9 at page 6 of the assessment order, question number 13 at page 7 and question number 14 at page 7 of the assessment order and submitted that the replies submitted by the sub- contractors show that they had actually done work for the assessee firm. He further drew our attention to question numbers 5 and 7 at page 9 of the assessment order and submitted that the same proves that the sub- contractor were in fact carrying out work on behalf of the assessee firm. The Ld. Counsel for the assessee submitted that though it is correct that sometimes the bank account of the sub- contractors are operated by employees of the assessee firm, however the same is on account of operational exigency since sometimes the work sites are located at far-off and remote places, where banking facilities are not there. Further, the counsel for the assessee submitted that the assessee was provided statements of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the entire sub-contracting expenses when the corresponding income has been subject to tax in the hands of the assessee. However, when on consideration of the totality of facts and circumstances, it is found that the expenses claimed are not genuine, then there is always an element of speculation on the quantum of disallowance that should be made in case expenses made which are apparently not genuine. In this respect, it would be useful to discuss some of the decisions, which throw useful light on the subject before us. 9.1 In the case of Synbiotics Ltd [2019] 106 taxmann.com 316 (Gujarat), the Gujarat High Court held that where Assessing Officer made addition on account of bogus purchase of raw material by assessee company, since Commissioner (Appeals) and Tribunal concurrently found that assessee had yielded huge profits during year from sales which would not be possible without utilising huge raw material, Tribunal was wholly justified in restricting impugned additions on account of bogus purchased to 25 per cent. However. in the case of Sanjay Oilcake Industries [2009] 316 ITR 274 (Gujarat), the Gujarat High Court held that where certain additions were made on account of infla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Fab (P.) Ltd. [2013] 40 taxmann.com 494 (Gujarat), the Gujarat High Court held that where assessee did purchase cloth and sell finished goods, but purchasers were not traceable, profit element embedded in purchases would be subjected to tax and not entire amount. In the case of Shoreline Hotel (P.) Ltd. v. CIT [2018] 98 taxmann.com 234 (Bombay), the High Court held that where on basis of information received from Sales Tax authorities, Assessing Officer found that assessee was beneficiary of bogus purchase bills and assessee could not produce any material purchased by it nor it could ensure presence of supplier, Assessing Officer was unjustified in limiting addition under section 69C on basis of GP ratio. In the case of Vijay Proteins Ltd. v. CIT[2015] 58 taxmann.com 44 (Gujarat), the at High Court held that Assessee inflated expenditure by showing higher purchase price through fictitious invoices in name of 33 fictitious parties, Tribunal was justified in disallowing 25 per cent of purchase price. In the case of Vijay Trading Co. v. ITO 2016] 76 taxmann.com 366 (Gujarat), the High Court held that In respect of bogus purchases, only profit element embedded therein would be subjecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edents highlighted above, we are of the view that in the instant set of facts, 10% of the above alleged bogus sub-contracting expenses may be disallowed and added back to the income of the assessee. 10. In the result, appeal of the Revenue is partly allowed. 11. Now we shall discuss Assessee's application under Rule 27 of the Income Tax Appellate Tribunal Rules, 1963 challenging the order of Ld. CIT(Appeals) to the extent it has confirmed the action of the AO for reopening of assessment under section 147 of the Act. We observe that the challenge to the reopening was dismissed by Ld. CIT(Appeals) with the following observations: "5.1 In the ground No. l of the appeal, the appellant has challenged validity of reassessment on the ground that there is no reason to believe and that it was initiated on the basis of suspicion. The appellant has relied on various judgments which I have carefully considered. However, these judgments were on the peculiar facts of the cases and hence cannot be applied to the instant case of the appellant. In the case of the appellant, it was prima facie belief of the AO that considering the statements of the sub-contractors of the appellant recorded and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the view / had reason to believe that the assessee has created bogus sub-contracting expenses and thus income had escaped assessment. It is a well settled principle of law that that while recording the reasons, the AO need not establish the escapement of income. The belief at that time is only primafacie and not conclusive. In the case of Raymond Woollen Mills Ltd. v. ITO [1999] 236 ITR 34 (SC), the Hon'ble Supreme Court observed that the Court has only to see whether there was prima-facie some material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. On the scope of re-opening u/s 147 of the Act observed as under: We have only to see whether there was prima-facie some material on the basis of which the Department could reopen the case. The sufficiency or correctness of the material is not a thing to be considered at this stage. We are of the view that the court cannot strike down the reopening of the case in the facts of this case. It will be open to the assessee to prove that the assumption of facts made in the notice was erroneous. The assessee may also prove that no n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lable from the information, leading the Assessing Officer to reopen the assessment. The term itself is suggestive of its prima-facie characteristics and not established or conclusive facts or information. Meaning thereby, it is the Assessing Officer's prima-facie belief, of course, derived from the some material/ information, etc. leading him to reopen the assessment. 13.4 In the case of Purviben Snehalbhai Panchhigar[2019] 101 taxmann.com 393 (Gujarat), the Gujarat High Court held that in the instant case the Assessing Officer has heard the material on record which would prima- facie suggest that the assessee had sold number of shares of a company which was found to be indulging in providing bogus claim of longterm and short-term capital gain. The company was prima-facie found to be a shell company. The assessee had claimed exemption of long-term capital gain of Rs. 1.33 crores by way of sale of share of such company. 13.5 This was again affirmed by the Gujarat High Court in the case of Sanjay Baulal Surana[2021] 129 taxmann.com 375 (Gujarat). 13.6 Accordingly, in our view, the AO had sufficient material to form a prima facie belief that the assessee has engaged in creating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expenses may be disallowed and added back to the income of the assessee. 18. Further, in light of detailed discussion for assessment year 2009-10, the Assessee's application under Rule 27 of the Income Tax Appellate Tribunal Rules, 1963 challenging the reopening of assessment under section 147 of the Act is hereby dismissed for assessment year 2010-11. 19. In the result, the appeal of the Revenue is partly allowed for assessment year 2010-11. Assessment year 2011-12 20. The brief facts for this year are that the original return of income for A.Y. 2011-12 was filed declaring total income of Rs.2,60,15,110/- and assessment u/s. 143(3) was completed determining total income at Rs.2,85,35,510/-. Pursuant to the survey U/S.133A conducted in the case of the appellant on 18.06.2015, the case was re-opened and notice u/s.148 was issued. On the facts similar to the A.Y. 2009-10, there were payments of Rs. 2,55,99,559/- to 8 sub-contractors and after discussing various facts emerging out of the investigations carried out the AO held that the expense of Rs.2,55,99,559/- was bogus and non-genuine and the impugned assessment was completed determining total income at Rs.5,22,47,350/-. 21. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er and the appellant's submissions, it is seen that the facts are similar to those for the A.Y. 2009-10 and the reasoning of the AO for making the additions and the submissions of the appellant challenging those additions are also similar. Under the circumstances, following the decision above for the A.Y. 2009- 10, Ld. CIT(A) dismissed the ground No. 1 challenging the re-opening u/s 147 of the Act and allowed the assessee's ground No. 2 related to disallowance of sub-contractor's expenses and directed the addition to be deleted. 27. Since the facts for assessment year 2012-13 are similar for assessment year 2009-10, following the detailed reasoning given above for assessment year 2009-10, and taking into consideration the observations made by the Ld. Assessing Officer in assessment order regarding the nature of subcontracting expenses and looking into the totality of facts of the instant case interpreted in light of judicial precedents highlighted above, we are of the view that in the instant set of facts, 10% of the above alleged bogus subcontracting expenses may be disallowed and added back to the income of the assessee. 28. Further, in light of detailed discussion for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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