Non-payment no ground for disallowing claim of sub-contract expenses – ITAT

Non-payment cannot be a ground for disallowing the claim of sub-contract expenses – ITAT

In a recent judgment, the ITAT Indore has held that non-payment cannot be a ground for disallowing the claim of expenses accrued as sub-contractor was to be paid after realization of performance guarantee.

ABCAUS Case Law Citation:
ABCAUS 4102 (2024) (06) ITAT

Important Case Laws relied upon:
Bengal Peerless Housing Devat. Co. Ltd v. Deputy Commissioner of Income 103 Taxmann 298 (Kolkata Trib)
AL AS Real Estate and Developers Pvt. Ltd. vs. Pr. CIT
Bharat Earth Movers v. Commissioner of Income Tax (2000) 112 Taxmann 61 (SC)
Commissioner of Income Tax v. Alembic Glass Industries
Maa Narmada Agrotech and Infrastructures ltd. vs. PCIT

In the instant case, the assessee had challenged the order passed u/s 263 by the Pr. Commissioner of Income Tax on the issue of expenses claimed with respect to road construction sub-contract expenses.

The assessee company was engaged in the business of construction/contractor of PWD for construction of Road etc. The case was selected for limited scrutiny assessment under e-assessment Scheme of 2019 on the issue of “Verification of Genuineness of Expenses”. The assessment was completed u/s 143(3) r.w. section 143(3A) & 143(3B) of the Act at total income by accepting the return income of the assesse.

Thereafter, the Pr. CIT while examining assessment record found that the order passed by the Assessing Officer (AO) was erroneous in so far as it was prejudicial to the interest of revenue as the AO did not examine certain aspect of the case properly.

The Pr. CIT accordingly issued show cause notice u/s 263. The Pr. CIT did not accept reply filed by the assessee and held that the expenditure claimed by the assessee on account of payment to sub-contractors cannot be treated as genuine and therefore, the AO failed to verify the genuineness of the expenses for which the case was selected for scrutiny by conducting a proper inquiry on the said issue.

The Pr. CIT accordingly set aside the assessment order with directions that the AO should pass assessment order de novo.

The Tribunal observed that during the limited scrutiny notice u/s 142(1) was issued by the AO asking the assessee to furnish various details and documents in respect of payment which were subjected to TDS u/s 194C of the Act. In response to the said query the assessee filed reply and gave details of the persons to whom payments were made or payments were outstanding towards the expenses booked during the year which were subjected to TDS.

The Tribunal further observed that the assesse produced the PAN of all these sub-contractors in whose names payments were made and expenditure was booked on account of sub-contract/ labour work. The assessee also produced ledger account of all sub-contractors. Therefore, it was clear from the assessment order as well as notice issued u/s 142(1) and reply filed by the assessee along with supporting documents that the AO had conducted an inquiry on the solitary issue of verification of

genuineness of expenses selected for limited scrutiny. Therefore, it is not a case of lack of enquiry on the part of the AO however, it may be a case of inadequate inquiry.

The Tribunal noted that the finding of the PCIT that the assessee did not furnish name, PAN address, E-mail ID of three sub-contractors however, this was in contradiction of the statement of the AO that assessee filed details and documents electronically which are considered.

The Tribunal noted the one of the observations of the Pr. CIT was that the AO issued letter/notice u/s 133(6) to these three sub-contractors for providing details such as nature of service, PAN, copy of ITR etc. however, no compliance was made by any of the sub-contractor. This fact of issuing notice u/s 133(6) itself proved that the AO had conducted the inquiry on this issue and therefore, outcome of the inquiry conducted by the AO was available on record.

The Tribunal further observed that one objection of the Pr. CIT was regarding the non-payment of the amounts to sub-contractors during the year as well as during the next financial year. The assessee had submitted that as per terms of agreement between the PWD and the assessee performance based security deposit which were taken at the time of Bid will only be realized after five years of completion of work. As sub-contractors were part of the project and realization of performance security which depends upon quality of work completed by them the assessee incorporated condition in the work order issued to sub-contractor for payment of the contract work after realization of performance guarantee. However, PCIT had rejected above contention of the assessee on the ground that no supporting evidence has been produced by the assessee.

The Tribunal opined that the work order itself is an agreement between the parties which is duly signed by both the parties and it is a tangible supporting evidences on the point that the parties have agreed to the payments conditions. Even otherwise deferment of the payment cannot be a ground for disallowing the claim of expenses accrued during the year.

The Tribunal observed that the Bench had considered an identical issue and held that once the assessee has deducted substantial amount of TDS from the payments made to the parties and remitted to proceeds of TDS to Income Tax Department which also contains PAN of the parties then no response on the part of the parties to the notice issued u/s 133(6) cannot be attributed to the assessee for making the disallowance of claim or doubt the claim.

The Tribunal observed that the Hon’ble High Court has held that in cases where the order of the AO is erroneous because the order passed is not sustainable in law and the said finding must be recorded by Commissioner to establish and show the error or mistake made by the AO making order unsustainable in law such finding must be clear, unambiguous and not debatable in such cases if matter is remanded to the AO it would imply and mean the Commissioner has not examined and decided whether or not the order is erroneous but direct the AO to decide the issue.

The Tribunal stated that once the AO has conducted an inquiry which may be inadequate inquiry in that case it cannot said that the order passed by the AO is erroneous only due to complete lack of inquiry. Once the AO has conducted an inquiry and taken a possible view which is not found to be impermissible under the law or perverse to the fact then the commissioner is not permitted to invoke provisions of section 263 of the Act merely, because he does not agree with the view of the AO. Accordingly, the Tribunal held that once the AO has conducted an inquiry and taken a possible view then the Pr. CIT while passing the revision order cannot remand the matter back to the AO for passing fresh order simply because he himself was not sure about correctness of claim of the assessee.

Hence the impugned order of the Pr. CIT passed u/s 263 was set aside as not sustainable in law. 

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