9911796707
TMI Blog2024 (12) TMI 898X X X X Extracts X X X X X X X X Extracts X X X X ..... rve as indicators of the business's nature, scope, and the substantive responsibilities borne by the assessee, which collectively affirm that the assessee s activities qualify under the broader framework of infrastructure development as envisaged u/s 80IA. This analysis will provide the foundation for determining eligibility and distinguishing the assessee's role in alignment with legislative intent, statutory provisions, and relevant judicial precedents, ultimately supporting the assessee's position for developer status. The assessee s case here mirrors Montecarlo Ltd [ 2024 (1) TMI 383 - GUJARAT HIGH COURT] wherein upheld deductions for infrastructure developers who mobilized resources, bore risks, and undertook comprehensive development duties. Given the binding nature of this jurisdictional precedent, concurring with the CIT(A) that the assessee qualifies as a developer entitled to deductions under Section 80IA(4) of the Act. We find that the CIT(A) rightly allowed the assessee s claim under Section 80IA(4) based on its function as a developer in infrastructure projects. CIT(A) s reliance on statutory interpretation, judicial precedents, and CBDT guidance provides a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Section 153A in the absence of new, substantive evidence discovered during the search. In this case, the remand report from the AO confirmed that the additions were based on post-search analysis rather than on any incriminating material found during the search. We hold that the AO s additions in these unabated assessment years are legally unsustainable. We uphold the CIT(A) s deletion of these additions, as they lack a legal basis. We note that selective acceptance and rejection of evidence for vendors without valid justification is arbitrary and lacks a consistent approach, especially when the nature of evidence provided was identical across vendors. In this case, the AO did not present any such incriminating material to substantiate the disallowance of expenses for these 7 vendors. The AO s findings were instead based on a general suspicion that the vendors were non-genuine. The rejection of the expenses related to these 7 vendors was based on assumptions rather than concrete evidence of inflated or fictitious expenses. Judicial precedents emphasize that additions based on GP estimation or disallowance of expenses require clear defects or discrepancies in the books, which were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and the nature of the business, qualify as deductible liabilities u/s 37 and confirmed that such provisions, being tied to contractual obligations and industry practices, cannot be classified as merely contingent, given the contractual retention requirements and the historical necessity of rectifying defects post-project completion. The High Court dismissed the Revenue s contention, underscoring that the absence of tax motivation further justified the assessee s approach. Thus on the scientific basis and established practice adopted by the assessee, and the accepted commercial principles underpinning the defect liability provision, we hold that the Revenue s appeal lacks substantive grounds. Therefore, the appeals on this ground are dismissed, affirming the position that the provision for defect liability is a legitimate deduction under the Act. Disallowance of Leave Encashment - Assessee argued that it is a legitimate and ascertained liability associated with employee benefits, accrued based on employee service and thus should be allowable as an expense - HELD THAT:- As in Exide Industries Ltd.[ 2020 (4) TMI 792 - SUPREME COURT] upheld the constitutional validity of Section 43B(f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. Given the substantial increase in the claimed expenses compared to previous years and the assessee s inability to furnish complete evidence, we find no reason to interfere with the CIT(A) s decision. Addition u/s 40(a)(ia) for Import of Materials - HELD THAT:- As it is observed that the assessee raised an additional ground challenging the validity of the assessment u/s 153A of the Act, contending that no incriminating material was found during the search to justify such an assessment. We have already adjudicated upon this additional ground in favour of the assessee, holding that in the absence of incriminating material, the assessment u/s 153A of the Act was invalid. Consequently, without delving into the merits of the disallowance under section 40(a)(i) the appeal on this ground is allowed on the legal ground of invalid assessment. Penalty u/s 271(1)(c) - disallowance of claims for leave encashment, disallowance u/s 14A and disallowance due to TDS default - HELD THAT:- AO s basis for the penalty under Section 271(1)(c) of the Act rests on the assumption of inaccurate particulars or concealment. However, the records reflect that the assessee consistently disclosed its claims ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 144 r.w.s. 153A(1)(b) 27-12-2010, 29-03-2014 07/07/2011 2009-10 29/09/2009 28/09/2010 143(3) r.w.s. 153A(1)(b) 28/03/2014 16/05/2016 2010-11 09/10/2010 28/09/2011 143(3) r.w.s. 153A(1)(b) 28/03/2014 17/05/2016 2011-12 29/09/2011 26/11/2012 143(3) r.w.s. 153A(1)(b) 28/03/2014 18/05/2016 2012-13 29/09/2012 24/11/2012 143(3) r.w.s. 153B(1)(b) 28/03/2014 19/05/2016 2013-14 29/11/2013 NA 143(3) 23/03/2016 17/01/2018 2014-15 29/11/2014 NA 143(3) 20/05/2016 17/01/2018 2015-16 25/11/2015 NA 143(3) 19/04/2017 29/03/2018 3.1. The assessee filed its return of income in response to Notice u/s. 153A of the Act for the A.Y. 2009-10, A.Y. 2010-11 and A.Y. 2011-12 on 07-11-2012 declaring the same income as per original or revised return of income for the respective assessment years. In case of A.Y.2007-08 and A.Y. 2008-09 assessment u/s. 143(3) was completed before the date of search making some additions by the AO. The AO also made various disallowances and additions during the course of proceedings 153A of the Act for the respective assessment years. 4. The assessee filed appeals before the CIT(A), who gave part or full relief in case of some additions/disallowance and in some cases, they were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion on certain payments. The CIT(A) upheld the disallowance for payments where TDS was not deducted as per the provision. U/S 14A for Expenses related to Exempt Income The AO disallowed expenses that were related to income exempt from tax under Section 14A. The CIT(A) deleted the disallowance for certain years, finding insufficient grounds for the AO s action in those cases. 5. Aggrieved by the orders of the CIT(A), both the assessee and revenue are in appeals before us with respective grounds, which are tabulated as below for the sake of convenience consolidating the common grounds: Common Issue/Disallowance A.Y. ITA No. Amount (Rs.) Type of Appeal Ground No. Deduction u/s 80IA 2007-08 ITA 3269/Ahd/2011 43,35,594 Revenue 2 2009-10 ITA 246/Ahd/2016 2,09,00,080 Revenue 3 2010-11 ITA 247/Ahd/2016 72,94,641 Revenue 3 2011-12 ITA 248/Ahd/2016 14,44,88,979 Revenue 3 2012-13 ITA 249/Ahd/2016 9,26,51,229 Revenue 3 2013-14 ITA 796/Ahd/2018 14,46,99,134 Revenue 1 2014-15 ITA 797/Ahd/2018 8,32,03,602 Revenue 1 2015-16 ITA 1528/Ahd/2018 8,92,09,090 Revenue 1 Gross Profit Addition related to Vendor/Subcontractor Transactions 2008-09 ITA 245/Ahd/2016 24,43,00,129 Revenue 4 5 2009-10 ITA 246/Ahd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch individual common ground of respective appeals, we first deal with this additional legal ground of appeals in case of A.Y. 2009-10 and A.Y. 2010-11. 8. During the course of hearing before us, the Ld.Sr.Advocate for the assessee (Authorised Representative - AR), stated that the search u/s 132 of the Act was conducted on 17-11-2012 and therefore the A.Y. 2008-09, A.Y. 2009-10 and A.Y. 2010-11 are unabated years. The AR presented a chart showing date of filing return of income and last date of issuing notice u/s 143(2) of the Act details of which are: ITA No(s). Assessment Year ROI filed on Last date of issuing notice u/s 143(2) 245/Ahd/2016 2008-09 27-09-2008 30-09-2009 246/Ahd/2016 2009-10 29-09-2009 30-09-2010 247/Ahd/2016 2010-11 09-10-2010 30-09-2011 8.1. The AR further stated that during the course of search proceedings, no incriminating material was found. The AR also stated that in the order of AO there is no reference of any material or statement recorded during the course of search proceedings is made. The AR further stated that the remand report called for by the CIT(A) is also not having mention of any statement or material found during the course of search. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the decision of Co-ordinate Bench in case of Vijaykumar D. Agarwal Vs. Dy.CIT, Central Circle -1(3), Ahmedabad (ITA No. 153,154,155 156/Ahd/2012 dated 29-04-2016). 10. We have heard the rival contentions and perused the material on records. The additional ground raised by the assessee for A.Y. 2009-10 and A.Y. 2010-11 challenges the validity of assessments framed under section 143(3) read with section 153A of the Act, in the absence of incriminating material for unabated years. The essence of the dispute is whether, in cases where no incriminating material was discovered during a search, completed or unabated assessments can be reopened or whether such assessments should remain undisturbed. This position has been addressed and upheld in a number of judicial precedents. 10.1. In the case of Friends Salt Works (supra) , the Hon ble Gujarat High Court held that for an assessment to be disturbed under section 153A of the Act in an unabated year, there must be incriminating material found during the course of a search. The court observed that the purpose of section 153A of the Act is to facilitate assessments based on new findings or incriminating material uncovered during a search, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents were discovered, which were already disclosed in the returns filed by the assessee. The ITAT ruled that such documents do not qualify as incriminating material, as they do not indicate any undisclosed income or irregularities that warrant reassessment. The case of Vijaykumar D. Agarwal(supra) is especially pertinent here, as it involved a similar scenario where no new incriminating evidence was found during the search. In the present case, the AR demonstrated that the purchases and vendors in question were part of the regular accounting, and no list of unverified or bogus vendors was discovered during the search. Following the Vijaykumar D. Agarwal(supra) decision, the lack of such incriminating evidence strengthens the case for allowing additional ground. 10.4. In the case of Saumya Construction (387 ITR 529) , the Hon ble Gujarat High Court examined the jurisdiction under section 153A of the Act and reiterated that for reassessment in unabated years, additions must be based on specific incriminating material found during the search. The court held that in the absence of such evidence, additions to income disclosed in the regular books cannot be made. The court emphasized tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mained silent on whether any seized material substantiated the addition. The CIT(A), relying on the principles established by the jurisdictional ITAT and High Court, held that the AO s action was not justified, allowing the appeal accordingly. Consequently, since the addition was not grounded in seized incriminating material, the CIT(A) deemed it unnecessary to address the merits of the addition, maintaining that the assessed income would remain unaltered post the CIT(A) s order. 11.3. Based on the detailed analysis in preceding paras, we uphold the CIT(A) s decision. Section 153A of the Act assessments for non-abated years are limited to additions based on seized incriminating material. As no such material was cited to justify the additions, the CIT(A) acted within legal boundaries by allowing the assessee s appeal. Accordingly, the revenue s consolidated legal ground lacks merit and is dismissed. 12. Now we deal with each common ground of appeals of both revenue and assessee. Grounds relating to deduction u/s 80IA of the Act 12.1. Following is the tabulated deduction u/s 80IA as a ground of appeal under respective appeals: Assessment Year Amount Disallowed (Rs.) by AO and allowed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o classify the assessee as ineligible, while the assessee counters that its activities qualify under the broader definition of development for infrastructure projects. 13. During the course of hearing before us, the Departmental Representative (DR) reiterated that the assessee is a contractor and not a developer and section 80-IA(4) of the Act was intended to benefit only developers who assume full responsibility, risk, and reward of infrastructure development. The DR stated that the work executed by the assessee is not a Build-Operate-Transfer (BOT) project and it was purely execution of contract against the running bills raised by the assessee. The DR further stated that the assessee company is not planning the project but is carrying out part of activities and raising the detailed RA bills to the developer and getting the payment for the same on supervision and certification by the developer. The DR relied on the order of the AO and pointed out following points from the order of AO The AO established the basic structure of the agreement between the assessee and Madhya Pradesh State Highway (MPSH). The AO stated that the assessee merely executed work under contract and was not th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... directly from the development, operation, and maintenance of infrastructure projects. The AO noted that the assessee did not make any significant financial investment in the project, as shown by the RA bills and TDS certificates. The lack of financial risk or investment suggested that the assessee did not assume the typical risks associated with a developer's role. The AO observed that payments received by the assessee were subject to tax deduction under section 194C of the Act, which applies to payments to contractors which further indicated that the assessee was operating as a contractor, not as a developer. The AO referred to a contractual clause specifying that the assessee was responsible only for rectifying defective work at its own cost. This limited liability indicated that the assessee did not bear the full risk of project development, as would be expected of a developer. The AO cited the Finance Act of 2007, which retrospectively amended section 80-IA(13) of the Act to clarify that persons executing works contracts do not qualify for section 80-IA benefits. The amendment made it explicit that only developers, not contractors, are eligible. The AO referenced the Finan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hority for flyover at Bhiwandi 9 2015-16 - Flyover at Jalgaon - Spine Road at Pimpri Chhindwad New Town Authority - Mumbai Metropolitan Region Development Authority for flyover at Bhiwandi 13.3. The AR pointed out that some of the projects executed by the assessee were executed under JnNURM Programme and as a condition of tender the assessee was required to pay Security Deposit. To support the AR pointed out the copy of Letter Of Intent (LOI) from Ahmedabad Municipal Corporation requiring the assessee to give security deposit of Rs. 1,67,29,120/-, (being 5% of contract value) in the form of Unequivocal Bank Guarantee issued by approved banker. The AR further pointed out that the LOI also specified 2% retention money. The AR placed on record various letters of intent /allotment of projects relating to the above tabulated projects along with the agreements. The AR pointed out that the Bank Guarantee issued by the assessee itself is investment in the project assuming the risk for the reward, therefore the AO s contention that the assessee has not assumed any risk is not correct. The AR relied on the order of CIT(A) and pointed out that the CIT(A) in his order has dealt with various po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee did) constitutes a new infrastructure facility under Section 80IA. The CIT(A) addressed amendments introduced in 2009, specifically Explanation 13, which excluded entities executing works contracts from Section 80IA deductions. The CIT(A) noted assessee s contention that the retrospective application of this amendment unfairly revokes a right they previously relied on, breaching the principle of promissory estoppel. The CIT(A) acknowledged this argument, noting that legislative amendments should not unfairly penalize taxpayers who have already acted based on the prior interpretation of the law. 13.4. The AR referred the decision of Rajkot Bench in case of M/s. Tarmat Bel (JV) vs. ITO (ITA 1111/RJT/2010 dated 23-09-2010) which the CIT(A) acknowledged along with other judicial precedents. These decisions collectively emphasized that the taxpayer, who is actively engaged in development work through mobilizing resources and taking on construction responsibilities, qualified as a developer. 13.5. The AR also referred to the written submission made by the assessee wherein the assessee explained its role, responsibility and assumed risk in executing the projects with reference to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion (Clause 13.1(a) in Katira ): According to Katira , a developer must assume comprehensive responsibility for the project, encompassing all stages from inception through completion. In Montecarlo Ltd. , the Co-ordinate Bench and the Hon ble Gujarat High Court emphasized that the developer s role includes end-to-end responsibility, requiring the entity to manage and execute work beyond construction. Here, the assessee s responsibilities in the MPSH project extended to all aspects of project design, execution, and handover, mirroring the obligations seen in Montecarlo Ltd. , where the court upheld that an entity with such overarching responsibilities qualifies as a developer. 14.3. Operational Autonomy and Approval Requirements (Clause 13.1(a) in Katira ): Katira states that developers may require limited government approvals without negating their status as developers. In Montecarlo Ltd. , the Hon ble Gujarat High Court reinforced this, noting that operational autonomy within government contracts does not disqualify an entity from developer status. The assessee here maintained autonomy, bearing control over all phases of execution, despite needing certain government approvals. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uality materials independently, without reliance on government supply. The assessee complied with quality standards under Clause 36.1 of the Scope of Work , sourcing materials and overseeing quality control, much like the operations in Montecarlo Ltd. , where the Co-ordinate bench observed material procurement as an indicator of developer status. 14.9. Provision and Use of Machinery (Clause 13.1(g) in Katira ): Katira and Montecarlo Ltd. require developers to supply necessary equipment. The assessee in this case used its machinery, including specialized equipment, fulfilling the developer s responsibility of machinery provision. This approach resonates with Montecarlo Ltd. , where similar machinery use supported the court s conclusion in favour of developer status. 14.10. Insurance and Comprehensive Risk Coverage (Clause 13.1(h) in Katira ): The Katira guidelines mandate insurance and risk management, as supported by Montecarlo Ltd. , where the court noted that developers must bear all project risks. The assessee s insurance coverage throughout the project meets this requirement, reinforcing its role as a developer. 14.11. Liability for Quality and Defects (Clause 13.1(i) in Katira ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntrast, the present assessee bears substantial entrepreneurial and financial risks, including performance guarantees, liquidated damages, and retention money, assuming the obligations and risks typically associated with a developer. The decisions in M.S. Khurana Engineering Ltd. and NEC NCC Maytas JV are not applicable in this case due to their factual and procedural distinctions, as well as the jurisdictional clarification in Montecarlo Ltd. that supports a broader interpretation of developer status under Section 80IA(4) of the Act. The present assessee s comprehensive control, significant financial risk, and managerial responsibilities align with the characteristics of a developer as outlined in Montecarlo Ltd. , rendering the DR s reliance on these cases misplaced. 16. We have perused the order of CIT(A) in detail. The CIT(A) s order provides an in-depth examination of the eligibility criteria for deductions under Section 80IA(4) of the Act, specifically analyzing whether the assessee qualifies as a developer rather than merely a contractor. The CIT(A) applied several interpretative principles, statutory provisions, and relevant judicial precedents to arrive at its decision. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee s developer status. 16.1. After perusing the CIT(A) s comprehensive analysis, we find that the CIT(A) rightly interpreted the assessee s role as a developer under Section 80IA(4) of the Act. The CIT(A) s reliance on Circular No. 4/2010, along with precedents from rulings of various Benches of the Tribunal and Hon ble Supreme Court guidance, provides a robust legal basis to affirm the developer status of the assessee. 16.2 The financial statements of the assessee, spanning Assessment Years (AYs) 2007-08 to 2015-16, provide a comprehensive view of the business's financial and operational profile, reflecting the nature, scope, and risk involved in its activities. The financial parameters across these years serve as indicators of the business's state of affairs, highlighting the responsibilities, risk assumptions, and commitments undertaken by the assessee in infrastructure projects. Analyzing these parameters aids in understanding the overall risk profile of the assessee and substantively differentiating a developer from a contractor. The following tabulated financial parameters across AYs 2007-08 to 2011-12 (to the extent comparable data is available in the pape ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the cyclical nature of project payments, reflecting the working capital constraints associated with extended project timelines and staggered cash flows. The rising receivables turnover time, declining cash balances, and high current liabilities also indicate reliance on project completions and customer payments, a common characteristic of developers with substantial liquidity requirements. Market and Profitability Risk : The company s primary income is derived from contract receipts i.e the projects, which are contingent on project completion and client certification. This dependency exposes the company to market and client-related risks, such as changes in demand, government policies, and competitive pressures in the infrastructure sector. Low profitability margins further suggest sensitivity to cost fluctuations and competitive pricing pressures, which is common among developers in a highly competitive sector. 16.4. We have also noted the off-balance sheet items of liabilities i.e. Contingent liabilities and observe that there's a significant increase in contingent liabilities, especially in guarantees for joint ventures and disputed tax and royalty demands, which indica ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... med that an entity operating under a government contract does not lose developer status if it assumes the independent roles and responsibilities associated with developing infrastructure. The assessee s case here mirrors Montecarlo Ltd. , where the Hon ble Gujarat High Court upheld deductions for infrastructure developers who mobilized resources, bore risks, and undertook comprehensive development duties. Given the binding nature of this jurisdictional precedent, we respectfully follow Montecarlo Ltd. , concurring with the CIT(A) that the assessee qualifies as a developer entitled to deductions under Section 80IA(4) of the Act. 16.9. In view of the above, we find that the CIT(A) rightly allowed the assessee s claim under Section 80IA(4) of the Act based on its function as a developer in infrastructure projects. The CIT(A) s reliance on statutory interpretation, judicial precedents, and CBDT guidance provides a sound basis for affirming the assessee s eligibility for the deduction. 16.10. Accordingly, the Revenue s appeals on the s relating to deduction u/s. 80IA of the Act are dismissed, and the orders of the CIT(A) granting the assessee deductions under Section 80IA(4) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ately reflects the undertaking's profits, consistent with statutory provisions and judicial interpretations. 17. The assessee s respective grounds in ITA No.1749/Ahd/2016 for AY 2012-13 are allowed. Grounds Relating to Addition on the basis of Gross Profit Margin due to rejection of books of accounts 18. The grounds are summarized in the following table:- Common Issue /Disallowance A.Y. ITA No. Amount (Rs.) Type of Appeal Ground No. Gross Profit Addition related to Vendor/Subcontractor Transactions 2008-09 ITA 245/Ahd/2016 24,43,00,129 Revenue 4 5 2009-10 ITA 246/Ahd/2016 24,00,14,120 Revenue 1 2 2009-10 IT(SS) A 1746/Ahd/2016 Confirmation of addition on account of 7 parties Assessee 1 2 2010-11 ITA 247/Ahd/2016 10,57,78,781 Revenue 1 2 2010-11 IT(SS) A 1747/Ahd/2016 Confirmation of addition on account of 7 parties Assessee 1 2 2011-12 ITA 248/Ahd/2016 84,23,956 Revenue 1 2 2011-12 IT(SS) A 1748/Ahd/2016 Confirmation of addition on account of 7 parties Assessee 1 2 2012-13 ITA 249/Ahd/2016 42,91,02,036 Revenue 1 2 2012-13 IT(SS) A 1749/Ahd/2016 Confirmation of addition on account of 7 parties Assessee 1 2 18.1. Several appeals across AYs 2009-10, 2010-11, 2011-12, and 2012-13 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al subcontracting costs amounting to Rs. 20.69 crores. Non-filers and PAN Issues : Of 411 vendors, 92 failed to file income tax returns or present PAN details, accounting for another Rs. 36.08 crores in expenses (Annexure D-1). Non-responsive to Summons : Another set of vendors, including those in Annexure F-1, were either non-responsive to summons or claimed to have no dealings with the assessee. Notable subcontractors explicitly denied doing any work for the assessee, casting further doubt on the authenticity of transactions amounting to Rs. 11.87 crores. Specific Cases of False Claims : Notably, vendors like M/s Top Bricks and Sand Suppliers were implicated in a separate investigation by the Mumbai Sales Tax Department, where the vendor admitted to providing only accommodation entries rather than actual material supplies. This added to suspicions of bogus purchases, totalling to Rs. 17.78 lakhs. 18.3. The assessee submitted bills, TDS details, and some vendor confirmations. They argued that the listed vendors were authentic and had received payments for legitimate subcontracting work. For some vendors, discrepancies were attributed to identical vendor names or errors in record-k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng material found during search and seizure operations. The CIT(A) observed that in this case, the assessment year in question was not abated (pending) at the time of search, meaning that any additions made must have been based solely on incriminating evidence found during the search. After reviewing the AO s records, the CIT(A) found no reference to any incriminating material obtained during the search that could substantiate the addition. Without such material, the CIT(A) concluded that the AO lacked a legal basis for revising the income under Section 153A of the Act. The CIT(A) supported its conclusions by citing various judgments, including Kabul Chawla and Saumya Construction P. Ltd. , which underscore that completed assessments cannot be disturbed under Section 153A of the Act unless supported by incriminating evidence unearthed during a search. The CIT(A) obtained a remand report from the AO to verify whether the assessment was based on any seized material. The AO s report did not indicate any reliance on seized or incriminating material, leading the CIT(A) to affirm that the assessment revisions were speculative and unsupported. The CIT(A) ultimately concluded that the AO s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ried out by the AO. The DR also submitted that no proof of services offered by these vendors was provided by the assessee to the AO. The DR also submitted that the CIT(A) has misinterpreted the remand report of AO and concluded that the transactions are genuine. The AR, on the other hand, relied on the order of CIT(A) and stated that the addition was not made on the basis of any incriminating material found during the search proceedings and AO has relied on the post-search analysis. The AR further stated that the remand report is also silent on any list founds during the course of search proceedings. The AR relied on various judicial precedents which are discussed in detail while dealing with additional grounds of appeal of the assessee. 20. The AR stated that at various stage of the assessment proceedings the assessee submitted various details like bill copies, vouchers giving nature of services provided, ledger copy, confirmation of accounts along with the detailed list of parties including names, addresses, PANs, amount of transaction, mobile No., etc. The AR also stated that the list of vendors who are regularly submitting return of income was submitted to the AO and refunds ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd that the AO s rejection was based primarily on suspicion rather than identified defects in the accounting records. There are many Judicial precedents which clearly mandate that books of accounts cannot be rejected solely on suspicion; specific and concrete accounting defects must be demonstrated. The CIT(A) appropriately deleted the additions, noting that the AO s approach lacked consistency, as he accepted similar evidence for some vendors while rejecting identical evidence for others without clear justification. 21.2. For Assessment Years 2008-09, 2009-10 and 2010-11, which were unabated at the time of the search, additions under Section 153A of the Act are permitted only if they are based on incriminating material found during the search operation. Judicial precedents establish that completed assessments cannot be reopened or disturbed under Section 153A of the Act in the absence of new, substantive evidence discovered during the search. In this case, the remand report from the AO confirmed that the additions were based on post-search analysis rather than on any incriminating material found during the search. We hold that the AO s additions in these unabated assessment years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions, sufficiently established the genuineness of the transactions with the 7 vendors. We conclude that the CIT(A) erred in confirming the AO s addition, as the evidence provided by the assessee met the threshold for substantiating these expenses. We, thereby, delete the additions confirmed by the CIT(A) for these 7 vendors and fully allows the assessee s grounds on this issue, dismissing the Revenue s contentions. Disallowance of Purchases / Expenses considering non-genuine amounting to Rs. 2,25,05,524/- for the A.Y. 2013-14 (Revenue s Ground No. 2 in ITA No. 796/Ahd/2018) 22. This ground deal with the disallowance made by the AO amounting to Rs. 2,25,05,524/-, which was added back to the income of the assessee. The disallowance was on account of payments made to four contractors/vendors, namely:- 1. Vishala Glazers - Rs. 95,261/- 2. Vishala Glazers Pvt. Ltd. - Rs. 12,85,383/- 3. Balaji Construction (Hathras) - Rs. 46,77,783/- 4. AMG Infrastructure Pvt. Ltd. - Rs. 1,64,37,097/- 22.1. The AO stated that the assessee failed to provide adequate documentary evidence to prove that these transactions were genuine. The AO questioned the credibility of the transactions due to the absence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ents made via account payee cheques . Work orders, agreements, refund status, bank details and ledger copies from the books of the assessee. Details of the vendors from the Registrar of Companies (ROC). 23.1. The CIT(A) highlighted that the above evidence was enough to discharge the initial burden of proving the genuineness of the transactions. The CIT(A) referenced various judicial precedents, including decisions from the Gujarat High Court, which held that payments made through account payee cheques and supported by documentation should not be doubted solely due to suspicion. Cases cited by the CIT(A), such as, CIT v. M.K. Brothers [1987] 163 ITR 249 (Guj. HC) and CIT v. Adinath Industries [2001] 252 ITR 476 (Guj. HC) emphasized that without concrete evidence of cash withdrawals or circular transactions, the genuineness of payments made by cheque cannot be disputed. The CIT(A) pointed out that there is no statutory requirement for the assessee to provide confirmations from third-party vendors as per Section 37(1) of the Act. The assessee s responsibility is limited to substantiating expenses incurred with adequate documentation, which the CIT(A) believed had been satisfied. The C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that payments made via account payee cheques and substantiated by proper documentation cannot be disallowed merely based on suspicion or absence of confirmations from third parties. In the case of CIT v. M.K. Brothers (supra), it was held that such payments, without specific evidence to the contrary, should be accepted as genuine. The AO s reliance on presumptive grounds, without any independent corroborative evidence, is contrary to these principles. It is also noted that the AO, despite having the opportunity, did not conduct any further inquiry or verification with the banks or other independent agencies. The AO s reliance solely on unserved notices without further efforts undermines the principle of natural justice, as the assessee was not given a fair opportunity to substantiate its case in the face of doubts raised by the AO. 24.1. In light of the above, we find that the AO s disallowance was based on assumptions and lacks any substantive evidence to prove that the payments to the four vendors were non-genuine. The CIT(A) has rightly observed that the documentation provided by the assessee is adequate to substantiate the genuineness of these transactions. Therefore, we find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding remedies for poor workmanship at its own cost. The contracts mandate a Performance Bank Guarantee and retention of 5%-10% of the contract value by the client until the defect liability obligations are satisfied. Given the ongoing nature of rectification work during the defect liability period and the history of incurred expenses, the assessee has consistently made provisions in the accounts to cover such future expenses. This approach is supported by accounting standards and the mercantile accounting system, which requires recognition of known liabilities based on past trends and reasonable estimates, even if the exact expense is indeterminate at year-end. Unutilized provisions are credited to the Profit Loss account post the defect liability period, subject to conditions such as final bill certification, completion of defect liability period, release of performance guarantees, and return of withheld receivables by clients. 26.1. The AO concluded that the assessee s provision for defect liability expenses does not qualify as an allowable deduction. The AO found the provision to be contingent, unascertained, and lacking a present obligation, as its realization depends on uncert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 29. Based on the factual matrix and judicial principles affirmed by higher courts, including the Hon ble Gujarat High Court in the case of Principal Commissioner of Income Tax v. JMC Projects India Ltd. (Tax Appeal No. 194 of 2017) , we find no merit in the Revenue s appeals regarding the disallowance of the defect liability provision. The crux of the Revenue's argument centres on the assertion that the provision represents a contingent liability, lacking crystallization and therefore ineligible for deduction. However, both the CIT(A) and the Tribunal have repeatedly upheld the provision as an allowable business expense, finding it to be based on a scientific estimation reflective of foreseeable obligations under defect liability clauses within the assessee's construction contracts. The Co-ordinate Bench s reliance on Rotork Controls India Pvt. Ltd. v. CIT (314 ITR 62) is well-founded, as it establishes that warranty-related provisions, when estimated based on past experience and the nature of the business, qualify as deductible liabilities under Section 37 of the Act. Moreover, the Hon ble Gujarat High Court in the aforementioned case confirmed that such provisions, being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ollow an actual payment criterion, dismissing any reliance on judicial pronouncements that favour an accrual basis, as they cannot override the specific legislative intent of Section 43B. The AO concluded that by merely provisioning for leave encashment without actual payment, the assessee s claim for deduction is not allowable under the Act. Accordingly, the AO disallowed the amounts for respective years and added it back to the total income, asserting that this treatment aligns with the statute s aim of ensuring compliance through actual payment. 31. In the appellate order, the CIT(A) addressed the assessee's claim for deduction regarding leave encashment provisions under Section 43B of the Act, with specific reference to the judicial decision and the assessee's arguments. The assessee argued, before CIT(A), that the provision for leave encashment should be allowed as a deduction based on the Hon ble Calcutta High Court's judgement in the case of Exide Industries Ltd. vs. Union of India (292 ITR 470)[Cal.] . In that case, the Hon ble High Court held Section 43B(f) of the Act as ultra vires, declaring it unconstitutional. The assessee further asserted that, in the abse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act mandates actual payment for allowance, which the assessee has not met. Grounds relating to Disallowance u/s 14A 33. These grounds highlight the main points of contention on Section 14A of the Act disallowance, focusing on the assessee s arguments for reasoned allocation of expenses and Revenue s stance on mandatory application of Rule 8D of Income Tax Rules, 1962 ( the Rules ) for calculating disallowances. Following is the tabulated summary of the grounds:- Common Issue/Disallowance A.Y. ITA No. Amount (Rs.) Type of Appeal Ground No. Disallowance under Section 14A 2008-09 ITA 2036/Ahd/2011 2,07,727 Assessee 1 2011-12 ITA 248/Ahd/2016 82,86,127 Revenue 4 33.1 The assessee disputed the AO s computation under Rule 8D of the IT Rules, contending that the formulaic disallowance led to an excessive and arbitrary allocation of expenses to exempt income. The assessee argued that it had submitted reasonable explanations and evidence regarding its expenses, which the AO did not consider. They argued that only specific expenses directly linked to exempt income, if any, should be disallowed, rather than an arbitrary proportion as calculated by Rule 8D of the Rules. In case of A.Y. 2011-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upported the AO s view that borrowed funds may have been partially used for investments leading to exempt income. The CIT(A) also found that maintenance and management of these investments involve administrative expenses and therefore, the disallowance under Section 14A of the Act is justified based on the need for such indirect expenses. The CIT(A) supports the AO s application of Rule 8D by referencing the decisions of Cheminvest Ltd. vs. ITO (ITA No.87/Del/2008) and Daga Capital Management Pvt. Ltd. (ITA No. 8057/Mum/03) , which confirmed that a Section 14A of the Act disallowance is warranted even if no direct income is earned from the investments. 37. In case of A.Y. 2011-12, however, the CIT(A) allowed the assessee s appeal. The CIT(A) found that the AO was not justified in applying Section 14A of the Act, as the assessee s investments were made in subsidiaries for business purposes rather than for generating exempt income. The CIT(A) held that the assessee s investments did not attract Section 14A of the Act disallowance, as no proximate cause was established between the expenditure and the exempt income. 38. During the course of hearing before us, the AR stated that the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s with NHAI, without an intent to earn exempt income. Applying the same principle to A.Y. 2008-09, we find no proximate cause connecting any interest expense or administrative cost to the exempt income. Both the purpose and the availability of own funds indicate that the AO s blanket application of Rule 8D was unjustified in A.Y. 2008-09 as well. The Hon ble Jurisdictional High Court in PCIT vs. Shreno Ltd. and the Hon ble Supreme Court in Maxopp Investment Ltd. vs. CIT (402 ITR 640) have emphasized that Rule 8D should not be applied automatically and without examining the actual nature and purpose of investments. Since the assessee demonstrated substantial own funds and justified the business necessity behind the investments, we hold that the CIT(A) s reliance on blanket application of Rule 8D in A.Y. 2008-09 was misplaced. 39.3. In light of the above findings, we conclude as follows:- A.Y. 2008-09 (ITA No. 2036/Ahd/2011) : The appeal of the assessee is allowed . We delete the disallowance of Rs. 2,07,727/- under Section 14A of the IT Act, as the application of Rule 8D of the IT Rules was not justified given the availability of substantial own funds and the absence of proximate ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Rs. 1,50,000/- out of total expenses under this head of Rs. 7,05,818/-. 42.1. Considering the facts that total expenses in A.Y. 2007-08 increased to Rs. 16,32,610/- the CIT(A) allowed Rs. 300,000/-. 43. During the course of hearing before us, the AR stated that the CIT(A) has deleted total disallowance in A.Y. 2005-06 and the facts and circumstances are identical therefore total disallowance should be deleted. The DR on the other hand stated that the CIT(A) has already given relief and restricted disallowance to Rs. 300,000/-. 44. After considering the submissions of both sides and examining the facts of the case, we observe that the CIT(A) has taken a consistent and judicious approach by referencing the past assessment years while also taking into account the increase in the amount claimed in the current year. The CIT(A) s disallowance of Rs. 3,00,000 out of Rs. 16,32,609 for A.Y. 2007-08 appears to strike a reasonable balance, granting the assessee partial relief while also recognizing the AO s concerns regarding insufficient documentation. Given the substantial increase in the claimed expenses compared to previous years and the assessee s inability to furnish complete evidenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his created a tax liability for the non-resident company under Indian tax laws, thereby triggering the assessee's obligation to withhold tax under Section 195 of the Act. In the absence of TDS compliance by the assessee, the CIT(A) upheld the disallowance made by the AO under Section 40(a)(i) of the Act, concluding that the payment made to Bemo Project Engineering LLC attracted TDS under Section 195. Therefore, the CIT(A) dismissed the appeal filed by the assessee on this ground. 47. Considering the facts on record and the legal submissions made, it is observed that the assessee raised an additional ground challenging the validity of the assessment under section 153A of the Act, contending that no incriminating material was found during the search to justify such an assessment. We have already adjudicated upon this additional ground in favour of the assessee, holding that in the absence of incriminating material, the assessment under section 153A of the Act was invalid. Consequently, without delving into the merits of the disallowance under section 40(a)(i) of the Act amounting to Rs. 1,26,97,906/, the appeal on this ground is allowed on the legal ground of invalid assessment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l liability, meaning that mens rea (intent to evade tax) need not be proven for its imposition. The CIT(A) applied this interpretation, indicating that since the assessee did not make accurate disclosures, penalty under section 271(1)(c) of the Act is justified. 51. The assessee had relied on the Hon ble Delhi High Court's judgment in Nalwa Sons Investments Ltd. , which held that penalty is not leviable when book profits are assessed under section 115JB of the Act. However, CIT(A) dismissed this argument based on the ITAT Chennai Bench's decision in the case of Sri Gokulam Hotels India Pvt Ltd. , which upheld the penalty under section 271(1)(c) of the Act despite the Nalwa Sons decision. 52. In case of A.Y. 2008-09, while confirming the penalty the CIT(A) reiterated that since the penalty is civil in nature, it does not require mens rea. Penalty is attracted based on the presence of inaccurate particulars or concealment. The CIT(A) found that the assessee had not made full disclosure, especially concerning leave encashment provisions, despite knowing they lacked merit. This omission, along with the inaccurate particulars regarding Section 14A of the Act disallowance, justif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. CIT vs. Nalwa Sons Investments Ltd. : The Hon ble Supreme Court held that where tax is paid under Minimum Alternate Tax (MAT) provisions (Section 115JB of the Act), penalty under Section 271(1)(c) of the Actmay not apply, as adjustments under MAT do not involve concealment or furnishing of inaccurate particulars. CIT vs. Reliance Petro Products Ltd. : The Hon ble Supreme Court ruled that mere disallowance of a claim does not constitute furnishing of inaccurate particulars of income. 54. The assessee argues that the CIT(A) failed to follow these judgments, disregarding settled legal principles. The AR placed reliance on the judgement of Hon ble Delhi High Court in the case of CIT Vs. Nalwa Sons Investment Ltd. [2010] 194 taxmann.com 387 . The AR also placed on record the decision of Hon ble Supreme Court which dismissed the petition against this judgement of Delhi High Court in the case of Nalwa Sons Investment Ltd. [2012] 21 taxmann.com 184 (SC). The AR also placed reliance on the circular issued by the CBDT having No.25/2015 dated 31-12-2015 which clarified that penalty u/s 271(1)(c) cannot be imposed with reference to additions / disallowances made under normal provisions of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecedent set by Nalwa Sons. The assessee s reliance on CBDT Circular No. 25/2015 dated 31-12-2015, which clarifies that penalty under Section 271(1)(c) of the Act should not be imposed with reference to disallowances made under normal provisions when income is assessed under MAT, is valid and directly applicable. This circular supports the assessee s argument that the penalty is not warranted under the circumstances of the case, as the tax liability is ultimately governed by the MAT provisions. 57.1. While the CIT(A) has emphasized that Section 271(1)(c) of the Act imposes a civil liability without the need to establish mens rea , it is important to note that the imposition of penalty requires the presence of inaccurate particulars or concealment of income. In the present case, the disallowances for leave encashment, Section 14A of the Act, and TDS were not due to any concealment or furnishing of inaccurate particulars but rather due to differing interpretations of law. The Hon ble Supreme Court in the case of Reliance Petro Products Ltd. has clarified that mere rejection of a legal claim does not constitute inaccurate particulars. Thus, the civil nature of the penalty does not auto ..... X X X X Extracts X X X X X X X X Extracts X X X X
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