ECI Engineering & Construction Company Ltd, Hyderabad V. DCIT, Hyderabad

ITA 1279/HYD/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 3368 (ITAT-HYDERABAD)
• Duration Of Justice: 6 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-04-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: B
• Assessment Year: 1998-1999
• Appeal Filed On: 06-10-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A BHASKAR REDDY
• Assessee Lawyers: G SARANGAN; C N PRASAD
• Keywords: Additional evidence; Capital expenditure
• Section: 44AD; 143(3); 133(6); 12

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B', HYDERABAD BEFORE SHRI G.C. GUPTA, VP & SHRI CHANDRA POOJARI, AM I.T.A. NO. 1279/HYD/2010 (ASSESSMENT YEAR 1998-99) M/S. ECI ENGINEERING & CONSTRUCTION CO. LTD. HYDERABAD PAN: AAACE4411G VS. DCIT-2(2), HYDERABAD APPELLANT RESPONDENT APPELLANT BY: S/SHRI G. SARANGAN & C.N. PRASAD RESPONDENT BY: SHRI A. BHASKAR REDDY O R D E R PER CHANDRA POOJARI, AM: THIS APPEAL OF THE ASSESSEE IS DIRECTED AGAINST TH E ORDER OF THE CIT(A)-III, HYDERABAD DATED 29.07.2010 FOR THE ASSESSMENT YEAR 1998-99. 2. IN THIS CASE, THE ASSESSEE COMPANY WHICH WAS ENGAGED IN EXECUTION OF CONTRACT WORKS HAS FILED TH E RETURN OF INCOME FOR THE ASSESSMENT YEAR 1998-99 ON 24.11.1998 SHOWING INCOME OF RS. 1,53,68,452. DURI NG THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTICED THAT THE ASSESSEE HAS NOT CORRECTLY SHOWN THE VALUE OF CLOSING WORK-IN-PROGRESS IN THE PROFIT AND LOSS A/C. THE ASSESSING OFFICER NOTICED THAT TH E I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 2 UNCERTIFIED WORK-IN-PROGRESS AS ON 31.3.1998 AMOUNT S TO RS. 49,21,063 WHICH WAS SCALED DOWN BY THE ASSESSEE BY 20% FOR ARRIVING AT A FIGURE OF RS. 38,64,239 TOWARDS THE VALUE OF WORK-IN-PROGRESS PERTAINING TO THE WORK OF MANMAD SITE OF BPCL. HOWEVER, SINCE THE ASSESSEE COULD NOT EXPLAIN THE REASONS FOR SUCH SCALING DOWN AT A HIGHER PERCENTAG E AND SINCE THE RETENTION MONEY, ON ACCOUNT OF WHICH THE ASSESSEE SCALED DOWN SUCH VALUE WHICH WAS NOT MORE THAN 10%, THE ASSESSING OFFICER RECOMPUTED THE VALU E OF THE CLOSING WORK-IN-PROGRESS BY SCALING DOWN SUC H FIGURE OF RS. 49,21,063 BY 10%. ACCORDINGLY THE ASSESSEE HAS ADDED A SUM OF RS. 5,64,717 TOWARDS DIFFERENCE IN VALUE OF CLOSING WORK-IN-PROGRESS TO THE RETURNED INCOME OF THE ASSESSEE. 3. IN THE PROFIT AND LOSS A/C. THE ASSESSEE HAS CLAIMED AN AMOUNT OF RS. 9.5 CRORES TOWARDS SUB- CONTRACT EXPENSES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER HAD ASKED THE ASSESSEE TO FURNISH COPIES OF BILLS RAISED BY THE S UB- CONTRACTORS, FULL PARTICULARS OF PAYMENTS MADE TO T HOSE PARTIES, STATING THE NATURE OF INSTRUMENT, NAME OF THE BANK/BRANCH AND DATE OF PAYMENT ETC. HOWEVER, THE I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 3 ASSESSEE COULD NOT FURNISH SUCH DOCUMENTS AND INFORMATION. DURING THE ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER WRITTEN LETTERS TO 12 OF THOSE SU B- CONTRACTORS AT THE ADDRESSED GIVEN BY THE ASSESSEE CALLING FOR INFORMATION U/S. 133(6) OF THE ACT. EX CEPT 5 PARTIES, MENTIONED AT SL. NOS. 2, 3, 5, 6 & 12, THE LETTERS IN RESPECT OF 7 PARTIES WERE RETURNED UNSERVED. IN REPLY FROM THE PARTY MENTIONED AT SR. NO. 12, THE SAME WA S INCOMPLETE WHICH DOES NOT CONTAIN PARTICULARS OF PAYMENT RECEIVED FROM THE ASSESSEE AND WORK EXECUTE D BY THEM. IN THE ABSENCE OF FULL DETAILS WITH REGAR D TO PAYMENTS RECEIVED, WORKS EXECUTED AND OTHER DETAILS , THE ASSESSING OFFICER DISALLOWED EXPENDITURE AMOUN TING TO RS. 2,29,72,845 AND COMPLETED THE ASSESSMENT ON A TOTAL INCOME OF RS. 3,89,06,010. 4. AGGRIEVED BY THE ABOVE ORDER OF THE ASSESSING OFFICER, THE ASSESSEE COMPANY WENT IN APPEAL BEFORE THE CIT(A)-II, HYDERABAD, WHO DELETED THE ABOVE TWO ADDITIONS BY RELYING ON THE ADDITIONAL EVIDENCES FI LED BY THE ASSESSEE BEFORE HIM. AGAINST SUCH ORDER THE REVENUE WENT IN APPEAL BEFORE THIS TRIBUNAL AND TH E TRIBUNAL AFTER CONSIDERING THE SUBMISSIONS AND CIRCUMSTANCES OF THE CASE, VIDE ITS ORDER DATED 7.1 .2005 I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 4 IN ITA NO. 74/HYD/2002 HAD SET ASIDE THE ORDER AND RESTORED THE MATTER TO THE FILE OF THE CIT(A) FOR F RESH CONSIDERATION OF THE ISSUE AFTER GIVING AN OPPORTUN ITY OF BEING HEARD TO THE ASSESSEE AND TO THE ASSESSING OFFICER. 5. DURING THE SECOND APPELLATE PROCEEDINGS THE LEARNED COUNSEL FOR THE ASSESSEE HAD FILED A PAPER BOOK CONTAINING ADDITIONAL EVIDENCES FILED BEFORE CIT(A) -II, HYDERABAD DURING THE FIRST APPELLATE PROCEEDINGS. A COPY OF THE SAME WAS SENT TO THE ASSESSING OFFICER REQUESTING FOR A REPORT/COMMENTS IN THE MATTER. TH E ASSESSING OFFICER FURNISHED A REMAND REPORT WHEREIN THE ASSESSING OFFICER EXPRESSED DOUBT ABOUT THE GENUINENESS OF THE CONFIRMATION LETTERS FILED BY TH E ASSESSEE. THE ASSESSING OFFICER REQUESTED FOR SOME MORE TIME TO SUBMIT FURTHER REPORT AFTER RECEIPT OF THE CONFIRMATIONS, IF ANY. IT WAS ALSO SUBMITTED BY TH E ASSESSING OFFICER IN THE REMAND REPORT THAT UNLESS THERE IS SOME MORE CORROBORATIVE INFORMATION SUCH A S IT RETURN OR BANK ACCOUNT OF SUB-CONTRACTORS IT IS NOT POSSIBLE TO PROVE THE GENUINENESS OF THE PAYMENT AN D EXISTENCE OF THE SUB-CONTRACTORS. HE FURTHER SUBMI TTED THAT WITH REGARD TO THE CLOSING STOCK THE ASSESSEE I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 5 FURNISHED AN EXPLANATION ONLY WHICH DOES NOT MEET A LL THE ISSUES RAISED AS NO ADDITIONAL EVIDENCE WAS FURNISHED. HE DID NOT OFFER ANY COMMENTS ON THIS I SSUE AND LEFT THE MATTER TO THE CIT(A) TO DECIDE. 6. THE CIT(A) CONFRONTED THE REMAND REPORT TO THE ASSESSEE COMPANY VIDE LETTER DATED 9.6.2009 FOR COMMENTS. HOWEVER, THERE WAS NO COMPLIANCE BY THE ASSESSEE. LATER A LETTER WAS FILED BY THE AR OF THE ASSESSEE WHEREIN IT WAS STATED THAT AFTER THE ORDER OF THE HONBLE ITAT, HYDERABAD IN ITA NO. 547/HYD/04, DT. 07.02.2008, DELETING THE ADDITION MADE BY THE ASSESSING OFFICER, NO ISSUE WAS PENDING WITH THE DEPARTMENT. THE CIT(A) HELD THAT VIDE THE SAID OR DER THE TRIBUNAL DELETED THE ADDITION TO THE EXTENT OF RS. 84,31,000 MADE IN THE ASSESSMENT ORDER DATED 31.3.2003 PASSED U/S. 143(3) R.W.S. 147 OF THE ACT FOR THE SAID ASSESSMENT YEAR. HOWEVER, THE PRESENT APP EAL HAD ARISEN FROM THE EARLIER ORDER OF THE TRIBUNAL I N ITA NO. 74/HYD/2002 DT. 7.10.2005 WHEREIN THE TRIBUNAL SET ASIDE THE MATTER TO THE FILE OF THE CIT(A). THE AS SESSEE HAD MISSED ATTENTION THE ABOVE ORDER DATED 7.10.200 5 OF THE TRIBUNAL PASSED IN THEIR CASE. SINCE THE AS SESSEE COULD NOT FURNISH ANY INFORMATION ON THE REMAND REP ORT I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 6 OF THE ASSESSING OFFICER, THE CIT(A) PROCEEDED TO DECIDED THE CASE ON MERIT. 7. WITH REGARD TO THE FIRST ISSUE I.E., ADDITION OF RS . 5,64,717 THE CIT(A) OPINED THAT THE ASSESSEE COULD VALUE CORRECTLY THE UNCERTIFIED WORK-IN-PROGRESS AS ON 31.03.1998. AS PER THE BOOKS OF ACCOUNT OF THE ASSESSEE THE FIGURE OF SUCH WORK-IN-PROGRESS WAS RS . 49,21,063. THE ASSESSEE HAD SHOWN SUCH FIGURE BY SCALING DOWN 20% BUT AS PER THE ASSESSING OFFICER T HE FIGURE SHOULD BE AFTER SCALING DOWN THE AMOUNT BY 1 0%. THE CIT(A) OBSERVED THAT THE ASSESSING OFFICER WAS RIGHT IN ADDING THE AMOUNT OF RS. 5,64,717 IN THE ASSESSMENT TOWARDS THE VALUATION OF CLOSING WORK-IN - PROGRESS AS THE AR OF THE ASSESSEE, DURING THE APPE LLATE PROCEEDINGS ADMITTED THAT IN RESPECT OF PROGRESSIVE BILLS WHICH ARE UNCERTIFIED BY THE EMPLOYER, ONLY 85% TO 90% OF THE VALUE OF THE PROGRESSIVE BILLS SHALL BE CONSIDERED AS WORK-IN-PROGRESS. ACCORDINGLY THE CI T(A) UPHELD THE ADDITION OF RS. 5,64,717 MADE BY THE ASSESSING OFFICER. 8. REGARDING THE SECOND ADDITION OF RS. 2,29,72,845 TOWARDS SUB-CONTRACT EXPENSES, THE CIT(A) OBSERVED I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 7 THAT THE ASSESSING OFFICER ALSO WRITTEN LETTERS TO ALL THE 12 PARTIES ON 8.5.2009 REQUESTING TO FURNISH THEIR LEDGER ACCOUNT IN RESPECT OF THE ASSESSEE COMPANY FOR F.Y. 1997-98 RELEVANT TO A.Y. 1998-99. IN THE SAID LET TER IT WAS ALSO REQUIRED TO FURNISH THE DETAILS OF AMOUNTS RECEIVED TOWARDS SUB-CONTRACT WORKS, IF ANY, EXECUT ED BY THEM FOR THE ASSESSEE COMPANY, PAN AND COPY OF I.T. RETURN FOR THE CURRENT YEAR. HOWEVER, THE LET TERS ISSUED TO FOUR PERSONS, VIZ., M. SIDDESWARA, B.V.S. PRAKASH RAO, M/S. SUDHA ENTERPRISES AND P.S.R. PRAS AD WERE RETURNED UNSERVED. FROM THE 5 PERSONS ON WHOM THE LETTERS WERE SERVED THERE WERE NO REPLIES. EVEN THE REMAINING THREE PERSONS ALSO DID NOT RESPOND TO THE SAID LETTERS. THE CIT(A) FURTHER HELD THAT UNDER THESE CIRCUMSTANCES, IT IS DIFFICULT TO BELIEVE THAT THE SAID PARTIES HAD ACTUALLY UNDERTAKEN THE SUB-CONTRACT WO RKS FOR THE ASSESSEE AT DIFFERENT PLACES, FOR WHICH VAR IOUS AMOUNTS HAD BEEN CLAIMED AGAINST THEM. IN SPITE O F SEVERAL OPPORTUNITIES THE ASSESSEE COMPANY DID NOT COMPLY WITH THE ADVERSE REMAND REPORT. THE CIT(A) ACCORDINGLY UPHELD THE ORDER OF THE ASSESSING OFFIC ER AND CONFIRMED THE DISALLOWANCE OF RS. 2,29,72,845 W ITH REGARD TO SUB-CONTRACT EXPENSES. AGGRIEVED, THE I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 8 ASSESSEE COMPANY IS IN APPEAL BEFORE THIS TRIBUNAL WITH THE FOLLOWING GROUNDS OF APPEAL: 1. THE ORDER OF THE LEARNED CIT(A)-III IS ERRONEOUS AND BAD BOTH IN LAW AND ALSO ON FACTS, AS IT IS PASSED WITHOUT AFFORDING THE APPELLANT AN OPPORTUNITY TO SUBMIT ITS OBJECTIONS / COMMENTS ON THE REMAND REPORT DT. 11.05.2009 FURNISHED BY THE DCIT, CIRCLE-2(2), HYDERABAD. 1. THE CIT(A)-III IS NOT JUSTIFIED IN UPHOLDING THE ADDITION OF RS. 2,35,37,562/- MADE BY THE AO TO THE INCOME RETURNED BY THE APPELLANT WITHOUT PROPER APPRAISAL OF THE FACTS AND ISSUES OF THE CASE. 2. THE CIT(A)-III HAS INTENTIONALLY NOT GIVEN THE APPELLANT AN OPPORTUNITY IN SPITE OF THE FACT THAT THE APPELLANT COMPANYS REPRESENTATIVE WAS NOT FULLY AWARE OF THE FACTS OF THE CASE AND DENIED TO GIVE ANY INFORMATION OR TIME TO SUBMIT FURTHER INFORMATION IN THE COURSE OF HEARING. 3. THE CIT(A)-III HAS NOT CONSIDERED THE FACT THAT THE SUBSEQUENT ORDER PASSED BY THE DCIT, CIRCLE-1(3) ON 31-03-2003 U/S. 143(3) R.W.S. 147 OF THE I.T. ACT HAS NOWHERE MENTIONED THE PENDENCY OF THE FIRST ORDER PASSED BY THE JCIT, SPL. RANGE-6, HYDERABAD. 4. THE CIT(A)-III HAS IGNORED THE FACT THAT EVEN THE SEPARATE ADDITIONS MADE BY THE AO ON SIMILAR FACTS AND ISSUES VIDE HIS ORDER DATED 31-03-2003 U/S. 143(3) R.W.S. 147 OF THE I.T. ACT WERE DELETED BY THE HONBLE TRIBUNAL VIDE ITS ORDER DT. 07- 02-2008 IN ITA NO. 547/HYD/04. 5. THE REMAND REPORT DT. 11-05-2009 GIVEN BY THE DCIT, CIRCLE-2(2) IS WITHOUT PROPER ENQUIRY IN TO THE FACTS AND ALSO AFTER LOT I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 9 OF TIME GAP OF MORE THAN A DECADE AFTER THE BUSINESS TRANSACTIONS THAT HAVE TAKEN PLACE, WHICH HAVE LEAD TO THOSE DECISIONS. 9. REGARDING THE DISALLOWANCE OF RS. 2,29,72,845, THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT MOST OF THE PAYMENTS TO SUB-CONTRACTORS HAVE BEEN PAID BY THE ASSESSEE BY ACCOUNT PAYEE CHEQUES AND T HE AMOUNT WAS SUBJECTED TO TDS. THE ASSESSEE ALSO FIL ED CONFIRMATION LETTERS FROM THE RECIPIENTS AND IF THE ENQUIRY WAS REQUIRED TO BE CARRIED ON IT IS THE DUT Y OF THE ASSESSING OFFICER TO MAKE SUCH ENQUIRY. THE SU B- CONTRACTORS HAVE SPREAD ALL OVER INDIA AND THEY ARE SUBJECT TO MOBILE AND NOT STATIONED AT A PARTICULAR PLACE. AS THE CONTRACT WORK WAS CARRIED OUT OUTSID E THE HEADQUARTERS OF THE ASSESSEE, THE ASSESSEE IS NOT HAVING CONTROL OVER THE SUB-CONTRACTORS. ONCE THE ASSESSEE GOT DONE THE SUB-CONTRACT WORK AND PAID TH E CHARGES TO THEM, THE ASSESSEE CANNOT HAVE CONTROL O VER THEM. THE ASSESSEE HAS DONE ITS PART OF DUTY. THEREAFTER IF THEY DO NOT RESPOND TO THE ASSESSING OFFICERS REQUEST TO PRESENT BEFORE HIM, IT CANNOT BE ATTRIBUTABLE TO THE ASSESSEE. MERE NON RECEIPT OF ANY INFORMATION FROM THE SUB-CONTRACTORS CANNOT BE A REASON FOR ADDITION. HE SUBMITTED THAT FOR THE VER Y I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 10 SAME ASSESSMENT YEAR, ASSESSMENT WAS REOPENED TO CONSIDER THE PAYMENT TO SUB-CONTRACTORS VIZ., M/S. RAKESH CONSTRUCTIONS OF RS. 84,31,000 AND THE TRIBU NAL HELD THAT THIS PAYMENT OF RS. 84,31,000 IS GENUINE. THE TRIBUNAL IN ITS ORDER IN I.T.A. NO. 767/HYD/2003 DA TED 7 TH FEBRUARY, 2008 HAS HELD AS UNDER: 10. WE HAVE HEARD THE LEARNED REPRESENTATIVES FOR THE PARTIES AND RECORDS PERUSED. WE FIND THAT THE ASSESSEE DID NOT PRODUCE RELEVANT MATERIAL AND EVIDENCE BEFORE THE ASSESSING OFFICER. HOWEVER, THE SAME WERE FILED BEFORE THE CIT(A) WITH A REQUEST TO ADMIT THE SAME AS ADDITIONAL EVIDENCE. THE CIT(A) HAS DULY ADMITTED THE SAME, AND EVEN OBTAINED A REMAND REPORT FROM THE ASSESSING OFFICER THEREUPON. THE ASSESSEES CLAIM IS THAT SOME WORK WAS GOT DONE THROUGH SUBCONTRACTOR AND AN AMOUNT OF RS. 84,31,000 WAS PAID TO SUB SUBCONTRACTOR, VIZ., GS, PROPRIETOR OF RC. THE PAYMENT WAS MADE THROUGH BANKING CHANNELS. THE ASSESSEE HAS FILED FINANCIAL STATEMENTS OF SUBCONTRACTOR, GS, PROPRIETOR OF RC ALONG WITH TAX AUDIT REPORT IN FORM 3CB AND 3CD UNDER S. 44AB. THE ASSESSEE HAS ALSO FILED COPIES OF ACKNOWLEDGEMENT IN RESPECT OF RETURN OF INCOME FILED BY THE SAID SUBCONTRACTOR GS, PROPRIETOR OF RC FOR ASSESSMENT YEAR 1998-99, APPLICATION FOR PERMANENT ACCOUNT NO., COPIES OF BANK ACCOUNT, LETTER OF CONFIRMATION, COPIES OF CONCESSIONAL ANNUAL TRAVEL PHOTO IDENTITY CARD ISSUED BY APSRTC, CASTE CERTIFICATE ISSUED BY MRO, NATIVITY CERTIFICATE ISSUED BY THE SECRETARY OF VILLAGE GRAM PANCHAYAT, MUDIGUBBA VILLAGE, ANANTPUR DIST. IT WAS ALSO REQUESTED BY THE ASSESSEE VIDE LETTER DATED 25 TH NOVEMBER, 2003 TO GET CONFIRMATION FROM THE JURISDICTIONAL ITO ABOUT THE EXECUTION OF SUBCONTRACT WORK BY I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 11 THE RC. THE ASSESSEE HAS THUS DISCHARGED ITS PRIMARY ONUS THAT THE PAYMENT WAS MADE THROUGH BANKING CHANNEL TO THE SUBCONTRACTOR. THE MAIN REASON FOR THE DISALLOWANCE OF THE SUBCONTRACT PAYMENT IS THAT THE ASSESSEE HAS FAILED TO PRODUCE THE SUBCONTRACTOR. HOWEVER, THE ASSESSEE HAS FILED SUBSTANTIAL EVIDENCE TO ESTABLISH THAT ALLEGED SUBCONTRACT WORK HAS BEEN DONE. AND ALSO FILED MATERIAL TO SHOW THAT THE SUBCONTRACTOR IS ALSO ASSESSED TO TAX AND HAS FILED AUDITED FINANCIAL STATEMENTS ALONG WITH TAX AUDIT REPORTS UNDER S. 44AB ................................... THE CIT(A) EXAMINED THESE DOCUMENTS AND NOTED CERTAIN DEFECTS THEREIN. FOR THE DEFECTS IN THOSE STATEMENTS NOTED BY THE CIT(A), ASSESSEE CANNOT BE PENALISED AND THE VERY EXISTENCE OF THE SUBCONTRACT ARRANGEMENT CANNOT BE DOUBTED. AT THE MOST, SUCH DEFECTS MAY LEAD TO ADDITIONS/DISALLOWANCES IN THE ASSESSMENT OF THE SUBCONTRACTOR. WE FIND THAT THE ASSESSEE HAS ESTABLISHED THE GENUINENESS OF THE SUBCONTRACTOR BY PRODUCING THE NECESSARY EVIDENCE. IT HAS DISCHARGED THE PRIMARY BURDEN THAT LAY ON IT, AND THE REVENUE, ON ITS PART HAS NOT BROUGHT ANY MATERIAL ON RECORD TO ESTABLISH THE FALSITY OF THE ASSESSEES CLAIM. IT IS AN UNDISPUTED FACT THAT THE PAYMENT TO THE SUBCONTRACTOR IN THE PRESENT CASE HAS BEEN MADE THROUGH BANKING CHANNELS AGAINST WORK DONE AND THE REVENUE AUTHORITIES AGAIN HAVE NOT BROUGHT ON RECORD ANY MATERIAL TO INDICATE THAT SUCH PAYMENTS MADE BY THE ASSESSEE TO THE SUB-CONTRACTOR HAVE REACHED BACK THE HANDS OF THE ASSESSEE. FOR THAT MATTER, EVEN IF IT IS ASSUMED THAT THE WORK IN QUESTION WAS NOT EXECUTED BY RC, THERE IS NO MATERIAL BROUGHT ON RECORD BY THE REVENUE TO POINT OUT THAT THE WORK IN FACT WAS NOT AT ALL EXECUTED. THAT BEING SO, WHETHER THE WORK WAS ALLOTTED TO SUBCONTRACTOR OR NOT, THE PAYMENT MADE AGAINST THE WORK DONE IS AN ALLOWABLE EXPENDITURE. I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 12 10. FURTHER HE SUBMITTED THAT THE ISSUE CAN BE DECIDED BY SEEING THE PAST HISTORY OF THE ASSESSEE ALSO. HE SUBMITTED THAT THE PROFIT BEFORE TAX IS AS FOLLO WS: PROFIT BEFORE TAX RATE (%) 1995- 96 1996- 97 1997- 98 5.44 3.58 4.81 HE SUBMITTED THAT THE AVERAGE RATE OF PROFIT MAY BE CONSIDER THIS YEAR ALSO ACCORDINGLY. ACCORDING TO HIM EARLIER YEAR AVERAGE NET PROFIT COULD BE CONSIDERED AS INCOME OF THE ASSESSEE FOR THE PRESENT ASSESSMENT YEAR. FINALLY, HE RELIED ON THE ORDER OF THE TRIBU NAL IN THE CASE OF FORTE POINT CONSTRUCTIONS PVT. LTD. VS. DCIT (2011) [7 ITR (TRIB) 205] WHEREIN THE TRIBUNAL HELD AS UNDER: HELD, THAT WHETHER AN EXPLANATION OR DEFENCE OF AN ASSESSEE BASED ON NUMBER OF FACTS SUPPORTED BY EVIDENCE AND CIRCUMSTANCES IS SOUND OR NOT MUST BE DETERMINED NOT BY CONSIDERING THE WEIGHT TO BE ATTACHED TO EACH SINGLE FACT IN ISOLATION BUT BY ASSESSING THE CUMULATIVE EFFECT OF ALL THE FACTS IN THEIR SETTING AS A WHOLE. THE NATURE OF THE ASSESSEES BUSINESS INDICATED THAT IT WAS DIFFICULT TO KEEP TRACK OF SMALL SERVICE PROVIDERS, I.E., CARPENTERS, MASONS, ETC., IN ORDER TO GET CONFIRMATION FROM THEM AFTER THREE OR FOUR YEARS. ALL MAJOR PAYMENTS WERE MADE THROUGH ACCOUNT PAYEE CHEQUES AND THE BANK STATEMENT WAS SUBMITTED BEFORE THE ASSESSING OFFICER. THE I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 13 ASSESSEE HAD DISCLOSED PERMANENT ACCOUNT NUMBER IN RESPECT OF A. THE ASSESSING OFFICER DID NOT BOTHER TO MAKE INVESTIGATION IN HIS CASE. THE REASONING ASSIGNED BY THE ASSESSING OFFICER WAS NOT SUFFICIENT TO MAKE THE DISALLOWANCE. THE DISALLOWANCE HAS TO BE DELETED. 11. FURTHER HE SUBMITTED THAT FOR THE A.Y. 1999-2000 SIMILAR ADDITION WAS DELETED BY THE CIT(A) HOLDING THAT THE PAYMENT IS GENUINE. HE RELIED ON THE ORDER OF THE TRIBUNAL DATED 30 TH DECEMBER, 2005 IN I.T.A. NO. 769/HYD/2003 AS THE ASSESSING OFFICER CONFIRMED THE PAYMENT MADE TO THE SUBCONTRACTOR AND HAS NOT CITED ANY SUBSTANTIAL OBJECTION WITH MATERIAL CHALLENGING THE GENUINENESS OF THE PAYMENT. 12. ON THE OTHER HAND, THE LEARNED DR SUBMITTED THE RATIO LAID DOWN BY THE TRIBUNAL IN THE CASES CITED BY THE ASSESSEE CANNOT BE APPLIED BLINDLY. THE FACTS SHOU LD BE EXAMINED FOR EACH CASE AND THEN ONLY THE RATIO CAN BE APPLIED. HE SUBMITTED THAT THE INCOME RETURNED BY THE ASSESSEE BEING A CONTRACTOR IS LESS THAN 5%. THE ASSESSEE HAS NOT FURNISHED THE SALE TAX OR INCOME-T AX DETAILS OF THE SUBCONTRACTORS. THE TDS MADE BY THE ASSESSEE IS NOT CORRESPONDING TO THE AMOUNT DEBITED BY THE ASSESSEE IN THE BOOKS OF ACCOUNT. HE DREW OUR ATTENTION TO THE REMAND REPORT OF THE ASSESSING OFF ICER. I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 14 ACCORDING TO THE LEARNED DR, THE ASSESSEE HAS NOT PROVED THE GENUINENESS OF THE PAYMENT AS ALSO THE EXISTENCE OF SUBCONTRACTORS. FURTHER HE SUBMITTED THAT THE AMOUNT RECEIVED BY THE ALLEGED SUBCONTRACTORS W AS LESS THAN THE AMOUNT DEBITED IN THE BOOKS OF ACCOUN T AND ALSO THERE IS NO EVIDENCE OF PAYMENT OF BALANCE AMOUNT IN SUBSEQUENT YEARS. 13. REGARDING THE SECOND ISSUE I.E., VALUATION OF CLOSING WORK-IN-PROGRESS THE LEARNED COUNSEL FOR TH E ASSESSEE SUBMITTED THAT THE ASSESSEE IS CONSISTENTL Y FOLLOWING THE SAME METHOD OF VALUATION AND THE ASSESSING OFFICER SHOULD NOT DISTURB THE METHOD OF VALUATION WHICH HAS BEEN FOLLOWED BY THE ASSESSEE CONSISTENTLY FROM YEAR TO YEAR. DISTURBING THE SAM E WILL GIVE DISTORTED PICTURE OF THE ASSESSEES INCOME. O N THE OTHER HAND, THE LEARNED DR SUBMITTED THAT THE CORRE CT FIGURE OF CLOSING WORK-IN-PROGRESS AS PER THE BOOKS OF ACCOUNT OF THE ASSESSEE WAS AT RS. 49,21,063. THE ASSESSEE HAS SHOWN THE VALUE OF SUCH CLOSING WORK-I N- PROGRESS AFTER SCALING DOWN BY 20% WHICH IS EXCESSI VE. THE RETENTION WAS NOT MORE THAN 10%. AS SUCH UNCERTIFIED WORK-IN-PROGRESS SHOULD BE SCALED DOWN BY ONLY 10%. SO THE CLOSING WORK-IN-PROGRESS SHALL BE I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 15 VALUED AT 90% OF RS. 49,21,063. AS SUCH HE SUPPORT ED THE ADDITION OF RS. 5,64,717. 14. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE MATERIAL ON RECORD. REGARDING THE DISALLOWANCE OF PAYMENT TO SUBCONTRACTOR THE CLAIM SHOULD BE ALLOWE D IF THE EXPENDITURE IN QUESTION SHOULD NOT BE IN THE NA TURE OF CAPITAL EXPENDITURE, PERSONAL EXPENDITURE AND TH E EXPENDITURE SHOULD HAVE BEEN LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. TO ALLOW AN EXPENDITURE THAT EXPENDITURE NOT MERELY A LIABILITY TO AN ASSESSEE, IT SHOULD BE EXPENDED BY THE ASSESSEE FOR THE PURPOSE OF ITS BUSINESS. MERE LIA BILITY TO SATISFY AN OBLIGATION BY AN ASSESSEE IS UNDOUBTE DLY NOT EXPENDITURE, IT IS ONLY WHEN IT SATISFIES THE OBLIGATION BY DELIVERY OF CASH OR PROPERTY OR BY TH E SETTLEMENT OF ACCOUNTS AND THAT THERE IS AN EXPENDI TURE. THE BURDEN OF PROVING THAT A PARTICULAR EXPENDITURE HAS BEEN LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FO R THE PURPOSE OF BUSINESS SO THAT THE ASSESSEE MAY BE ENTITLED TO CLAIM DEDUCTION. THE MERE OBJECT OF INCURRING OF EXPENDITURE IS NOT DECISIVE WHETHER IT IS OF A CAPITAL NATURE OR REVENUE NATURE. WE TAKE SUPPORT FROM THE JUDGEMENT OF THE SUPREME COURT IN THE CASE OF C IT I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 16 VS. CALCUTTA AGENCY LTD., (1951) 19 ITR 191 AND CIT VS. IMPERIAL CHEMICAL INDUSTRIES (INDIA) PVT. LTD., 74 ITR 17. THEREFORE, THE ONUS IS ON THE ASSESSEE TO PROV E, INTER ALIA, THAT THE ITEM OF EXPENDITURE IN QUESTIO N FOR ADMISSIBILITY TO DEDUCTION IS NOT IN THE NATURE OF CAPITAL EXPENDITURE. FURTHER MERE PAYMENT BY ITSELF WOULD NOT ENTITLE THE ASSESSEE TO DEDUCTION OF THE SAID EXPEN DITURE UNLESS THE SAME WAS PROVED TO BE PAID FOR COMMERCIA L CONSIDERATION. THE ONUS OF PROVING ALWAYS IS UPON THE ASSESSEE. IT CANNOT BE SAID THAT EVEN IF TAX PAYER DOES NOT PRODUCE ANY EVIDENCE IN SUPPORT OF THIS CLAIM O F DEDUCTION, THE ASSESSING OFFICER HIMSELF INDEPENDEN TLY IS TO COLLECT EVIDENCE AND DECIDE THAT THE DEDUCTIO N CLAIM IS BASELESS HAVING REGARD TO THE LEGITIMATE BUSINESS NEEDS OF THE ASSESSEE. IT IS FOR THE TAX PAYER TO ESTABLISH BY EVIDENCE THAT A PARTICULAR ALLOWANC E IS JUSTIFIED. BUT, AS HELD BY THE SUPREME COURT IN TH E CASE OF CIT VS. C. PARAKH & CO. (I) LTD., 29 ITR 661, WHETHER AN ASSESSEE IS ENTITLED TO PARTICULAR DEDUC TION OR NOT WILL DEPEND ON THE PROVISIONS OF LAW RELATI NG THERETO, NOT ON THE VIEW WHICH HE MIGHT TAKE FOR HI S RIGHTS. AT THE SAME TIME, THE ONUS IS ON THE ASSES SEE TO ESTABLISH THAT THERE ARE FACTS IN EXISTENCE WHICH E NTITLE IT I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 17 TO A DEDUCTION AND IT IS FOR THE ASSESSEE TO ADDUCE NECESSARY EVIDENCE IN THIS REGARD. THEREFORE, IF T HE ASSESSEE FAILS TO PLACE SUFFICIENT MATERIALS, HE IS NOT ENTITLED TO CLAIM THE ALLOWANCE AS HE CLAIMED. IT IS ALSO TO BE NOTED THAT IF THE EXPENDITURE IS DOUBTED BY T HE ASSESSING OFFICER, IT IS THE DUTY OF THE ASSESSEE T O PROVE BY LEADING EVIDENCE THAT THE EXPENDITURE WAS IN FAC T INCURRED FOR THE PURPOSE OF BUSINESS. IN THE PRESE NT CASE THE ASSESSEE CLAIMED TOTAL EXPENDITURE OF RS. 9.5 CRORES TOWARDS SUBCONTRACT CHARGES. THE ASSESSEE FURNISHED CONFIRMATIONS IN RESPECT OF PAYMENTS TO SUBCONTRACTORS IN RESPECT OF 7 PARTIES AGGREGATING TO RS. 6.49 CRORES. THE ASSESSING OFFICER WRITTEN LET TERS U/S. 133(6) TO THE FOLLOWING PARTIES: SR. NO. NAME AMOUNT (RS.) 1. B.V.S. PRAKASH RAO 23,79,491 2. RAVISHANKAR NIMBALKAR 17,12,766 3. ASHOK PATIL 19,60,730 4. M/S. M.V. CONSTRUCTIONS 10,33,903 5. S.R. PATIL 12,34,848 6. VIJAYA RAJ MORABI 12,98,432 7. M/S. SUDHA ENTERPRISES 22,67,857 8. T. VENUGOPALA RAO 22,69,612 9. S.K. SWAIN 41,30,531 10. P.S.R. PRASAD 20,33,411 11. M. SIDDESHWARA 11,51,704 12. GIRISH V. KANGANA 11,51,704 TOTAL 2,29,72,845 I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 18 OUT OF THE ABOVE PARTIES LETTERS WERE SERVED ON PAR TIES AT SR. NO. 2, 3, 5, 6 AND 12. IN RESPECT OF THE RE MAINING PARTIES, THE LETTERS ARE RETURNED UN-SERVED BY POST AL AUTHORITIES. IN RESPECT OF PARTIES WHERE LETTERS W ERE SERVED, REPLIES WERE RECEIVED ONLY FROM SR. NO. 12. ACCORDING TO THE ASSESSING OFFICER, THE PARTIES ARE EITHER NOT AVAILABLE AT THE CITED ADDRESS OR CHOSEN NOT TO CONFIRM THE TRANSACTIONS AND THE ASSESSEE HAS NOT B EEN ABLE TO FURNISH FULL PARTICULARS OF THE PAYMENTS MA DE TO THESE PARTIES. SINCE THE CLAIM OF THE ASSESSEE WAS NOT VERIFIABLE, THE ASSESSING OFFICER DISALLOWED THE EN TIRE AMOUNT OF RS. 2,29,72,845. THE VIEW OF THE ASSESSI NG OFFICER WAS AFFIRMED BY THE CIT(A) ON SECOND ROUND THOUGH IT WAS DELETED BY THE CIT(A) ON EARLIER OCCA SION. IN OUR OPINION, THE ENTIRE AMOUNT OF RS. 2,29,72,84 5 CANNOT BE DISALLOWED IN VIEW OF THE FACT THAT THE ASSESSING OFFICER DID NOT CONCLUSIVELY PROVE THAT T HE PAYMENT WAS NOT MADE BY THE ASSESSEE TO THE SUBCONTRACTORS. THE ASSESSING OFFICER HAS MERELY DOUBTED THESE PAYMENTS TO SUBCONTRACTORS. AS A MAT TER OF FACT, HE HAS GIVEN A FINDING THAT THE SUBCONTRAC T PAYMENT IS NOT VERIFIABLE IN VIEW OF THE FACT THAT THE ASSESSEE FAILED TO FURNISH FULL PARTICULARS OF PAYM ENT I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 19 MADE TO THESE PARTIES. THE FINDING OF THE INCOME-T AX OFFICER COMES TO SHOW THAT THE PAYMENT PERHAPS MIGH T HAVE BEEN MADE WHICH HE IS NOT SURE ABOUT THE QUANTUM OF PAYMENT. THE ABOVE REASONING IS STRANGE . AS NOTICED EARLIER, THE BURDEN IS ON THE ASSESSEE W HO CLAIMS ALLOWANCE AND HE HAS TO PLACE MATERIALS TO ESTABLISH ITS CLAIM AND IT IS NOT FOR THE INCOME-TA X OFFICER TO INDEPENDENTLY COLLECT THE EVIDENCE AND P ROVE THAT THE DEDUCTION CLAIMED BY THE ASSESSEE IS CORRE CT. 15. THE LEARNED AR PLACED RELIANCE ON THE ORDER OF THE TRIBUNAL IN ASSESSEES OWN CASE DATED 7.2.2009 IN ITA NO.547/H/2004 FOR THE ASSESSMENT YEAR 1998-99 WHEREIN THE REASSESSMENT, THE TRIBUNAL REVERSED THE ORDER OF THE ASSESSING OFFICER DISALLOWING THE EXPENDITURE OF RS.84,31,000/- REPRESENTS SUB-CONTR ACT PAYMENTS TO SHRI G. SURYANARAYANA, PROP. OF M/S RAKESH CONSTRUCTIONS BY HOLDING AS FOLLOWS: FOR THE DEFECTS IN THOSE STATEMENTS NOTED BY THE CIT(A), ASSESSEE CANNOT BE PENALISED AND THE VERY EXISTENCE OF THE SUB CONTRACT ARRANGEMENT CANNOT BE DOUBTED., AT THE MOST, SUCH DEFECTS MAY LEAD TO ADDITIONS/DISALLOWANCES IN THE ASSESSMENT OF THE SUB I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 20 CONTRACTOR. WE FIND THAT THE ASSESSEE HAS ESTABLIS HED THE GENUINENESS OF THE SUB CONTRACTOR BY PRODUCING THE NECESSARY EVIDENCE. HE HAS DISCHARGED THE PRIMARY BURDEN THAT LAY ON IT, AND THE REVENUE, ON ITS PART HAS BROUGHT ANY MATERIAL ON RECORD TO ESTABLISH THE FAL SITY OF THE ASSESSEES CLAIM. IT IS AN UNDISPUTED FACT THA T THE PAYMENT TO THE SUB CONTRACTOR IN THE PRESENT CASE H AS BEEN THROUGH BANKING CHANNELS OF AGAINST INCOME AND THE REVENUE AUTHORITIES AGAIN HAVE NOT BROUGHT ON RECORD ANY MATERIAL TO INDICATE THAT SUCH PAYMENTS MADE BY THE ASSESSEE TO THE SUB CONTRACTOR HAVE REACHED BACK THE HANDS OF THE ASSESSEE. FOR THAT MATTER, EVEN IF IT IS ASSUMED THAT THE WORK IN QUES TION WAS NOT EXECUTED BY RC, THERE IS O MATERIAL BROUGHT ON RECORD BY THE REVENUE TO POINT OUT THAT THE WORK IN FACT WAS NOT AT ALL EXECUTED. THAT BEING SO, WHETHER TH E WORK WAS ALLOTTED TO SUB CONTRACTOR OR NOT, THE PAY MENT MADE AGAINST THE WORK DONE IS AN ALLOWABLE EXPENDITURE. 16. WE HAVE CAREFULLY GONE THROUGH THE ABOVE ORDER OF THE TRIBUNAL. IN OUR OPINION, A MERE FACT THAT ON EARLIER OCCASION SIMILAR CLAIM WAS ALLOWED BY THE C IT(A) OR THE TRIBUNAL, IT CANNOT BE A GROUND TO ALLOW THE I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 21 ALLOWANCE WITHOUT EXAMINING WHETHER NECESSARY CONDITIONS EXISTED TO ALLOW THIS ALLOWANCE AND WHET HER THE ASSESSEE HAS DISCHARGED ITS BURDEN CAST ON IT W ITH REGARD TO GENUINENESS OF THE EXPENDITURE. THEREFOR E, IT IS NOT OPEN TO ALLOW THIS ALLOWANCE SOLELY ON THE G ROUND THAT IN RESPECT OF SUCH AN EARLIER CLAIM SUCH ALLOW ANCE WAS ALLOWED AND TO ALLOW THE CLAIM, THE GENUINENESS OF PAYMENT TO BE EXAMINED WITH REFERENCE TO EACH PAYMENT. THEREFORE, THE CLAIM OF THE ASSESSEE IN ANY PARTICULAR CASE THAT IT IS ENTITLED TO DEDUCTION ON CERTAIN ITEMS OF EXPENDITURE INVOLVES THE APPLICATION OF LA W TO THE FACTS FOUND IN SETTING OF PARTICULAR CASE. THU S, IT WILL DEPEND UPON THE FACTS AND NATURE OF EACH CASE. IN THE PRESENT CASE THE ASSESSING OFFICER HAS NOT DOUBTED THE INCURRING OF EXPENDITURE THROUGH SUBCONTRACTS. HOWEVER, HE DOUBTED THE QUANTUM OF EXPENDITURE. TH E PAYMENT IS SUPPORTED BY THE ACCOUNT PAYEE CHEQUES AND IT IS ALSO SUBJECTED TO TAX DEDUCTION. IT IS THE SPECIFIC STAND OF THE ASSESSING OFFICER THAT THE AM OUNT RECEIVED BY THE ALLEGED SUBCONTRACTORS WAS LESS THA N THE AMOUNT DEBITED IN THE BOOKS OF ACCOUNT AND THER E IS NO EVIDENCE OF PAYMENT OF BALANCE AMOUNT IN SUBSEQUENT YEARS. FURTHER THERE WAS AN OBSERVATION BY I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 22 THE ASSESSING OFFICER THAT THE GROSS AMOUNT CREDITED/PAID TO THE SUBCONTRACTORS WAS LESS THAN T HE AMOUNT DEBITED TO THE PROFIT AND LOSS A/C. ACCORDI NG TO THE ASSESSING OFFICER, AS SUCH THIS PAYMENT CANNOT BE ACCEPTED AS GENUINE. HOWEVER, THE ASSESSING OFFICER NOT DOUBTED THE PAYMENT OF SUBCONTRACT CHARGES. FURTHE R, THE ASSESSEE HAS DISCLOSED THE ADDRESSES OF THE PAR TIES. THE ASSESSING OFFICER WRITTEN LETTERS TO THEM SEEKI NG THE CONFIRMATION OF THE PAYMENTS, SOME OF THE LETTERS WRITTEN BY ASSESSING OFFICER WERE RETURNED UN-SERVE D BY THE POSTAL AUTHORITIES. THEREAFTER, THE ASSESSING OFFICER DID NOT BOTHER TO MAKE FURTHER INVESTIGATIONS. HE S IMPLY CONSTRUED THAT THE CLAIM OF THE ASSESSEE AS NOT GEN UINE ON ACCOUNT OF NO RESPONSE FROM THESE PERSONS TO HIS LETTERS. IT CAN BE STRONG CIRCUMSTANCES IN A GIVE N CASE BUT IT IS ALSO IMPORTANT TO KEEP IN MIND THAT AN EXPLANATION OR DEFENCE OF AN ASSESSEE BASED ON A NUMBER OF FACTS SUPPORTED BY EVIDENCE AND CIRCUMSTANCES REQUIRED CONSIDERATION WHETHER THE EXPLANATION IS SOUND OR NOT MUST BE DETERMINED NOT BY CONSIDERING THE WEIGHT TO BE ATTACHED TO EACH SINGL E FACT IN ISOLATION BUT BY ASSESSING THE CUMULATIVE EFFECT OF ALL THE FACTS IN THEIR SETTING AS A WHOLE. THE ASSESSI NG I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 23 OFFICER COULD HAVE MADE FURTHER INVESTIGATION OF EA CH PAYMENT. THUS, THE REASONING ASSIGNED BY THE ASSESSING OFFICER IS NOT SUFFICIENT TO MAKE THE ENT IRE DISALLOWANCES. IN VIEW OF THIS MATTER THE ENTIRE SUBCONTRACT PAYMENT OF RS. 2,29,72,845 CANNOT BE DISALLOWED. FURTHER, WHEN WE LOOK THE FACTS OF THE CASE WITH THE ANGLE OF THE BUSINESSMAN IN THE LIGHT OF T RADE PRACTICE AND MARGIN OF PROFIT AVAILABLE IN THIS LIN E OF BUSINESS COUPLED WITH THE FACTS THAT PAYMENTS ARE M ADE BY CHEQUE, WE ARE OF THE VIEW THAT THE ENTIRE AMOUN T CANNOT BE DISALLOWED. THERE MAY BE INFLATING O F THIS EXPENDITURE AND THE PORTION OF INFLATED EXPENDITURE IS TO BE DECIDED AND THE SAME TO BE DISALLOWED. THERE IS NO PRECISE METHOD TO DETERMINE THE QUANTUM OF INFLATED EXPENDITURE. WE HAVE TO DISALLOW THE INFLATED EXPENDITURE ON ESTIMATED BASIS. IN THE PRESENT CAS E THE ENTIRE DISALLOWANCE MADE BY THE ASSESSING OFFICER I S BASED ON IRRELEVANT CONSIDERATION AND EVIDENCE. THE ASSESSING OFFICER NOTICED THAT AS PER CONFIRMATION LETTER THE AMOUNT RECEIVED BY THE ALLEGED SUB CONTRACTORS WAS LESS THAN THE AMOUNT DEBITED AND THERE IS NO EVIDEN CE OF PAYMENT OF BALANCE AMOUNT IN SUBSEQUENT YEARS. THIS QUESTION CANNOT BE RAISED BY THE ASSESSING OFF ICER I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 24 ON THE REASON THAT THE ASSESSEE IS FOLLOWING THE MERCANTILE SYSTEM OF ACCOUNTING AND THIS METHOD OF ACCOUNTING HAS BEEN ACCEPTED BY THE DEPARTMENT. ONCE THE DEPARTMENT ACCEPTED THE METHOD OF ACCOUNTING AS MERCANTILE THE ASSESSING OFFICER IS PRECLUDED FROM RAISING THIS QUESTION. IF THE AMOUN T WAS OUTSTANDING IN THE ASSESSMENT YEAR UNDER CONSIDERATION AND NO PAYMENT WAS MADE IN THE SUBSEQUENT YEARS, THE ASSESSING OFFICER IS AT LIBER TY TO INVOKE THE OTHER PROVISIONS OF THE ACT AS APPLICABL E. HE CANNOT PREJUDGE THE ISSUE AND TAKE A DECISION AGAIN ST THE ASSESSEE. ADVERTING TO THE FACTS OF THE CASE , THE LETTERS WRITTEN BY THE ASSESSING OFFICER WERE SERVE D TO THE FOLLOWING PARTIES: (1) RAVISHANKAR NAMBALKAR RS. 17,12,766, (2) ASHOK PATIL RS. 19,60,730, (3) S.R. PATIL RS. 12,34,848, (4) VIJAYA RAJ MORABI RS. 12,98,432 AND (5) GIRISH V. KANGANA RS. 11,51,704. 17. THUS, IT MEANS THAT THE ABOVE PARTIES WERE EXISTING AND WHO HAS RECEIVED THE NOTICE FROM THE DEPARTMENT. MORE SO, GIRISH V. KANGANA HAS CONFIRMED THE RECEIPT OF THE PAYMENT. FURTHER OUT OF I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 25 THE ABOVE, THE PAYMENTS TO RAVISHNAKAR NIMBALKAR AN D S.R. PATIL WERE SUBJECTED TO TDS IN ADDITION TO THE FOLLOWING PARTIES: 1. SHRI B.V.S. PRAKASH RAO 2. M/S M.V. CONSTRUCTIONS 3. SHRI S.K. SWAIN 4. SHRI P.S.R. PRASAD 18. IN OUR OPINION, THE PAYMENTS WHICH WERE COVERE D BY TDS ARE TO BE CONSIDERED AS GENUINE IF THE ASSES SEE PRODUCES THE PARTICULARS OF TDS. HOWEVER, THE ASSES SING OFFICER NOTICED THAT THE GROSS AMOUNT CREDITED/PAID TO THE SUB CONTRACTORS WERE LESS THAN THE AMOUNT DEBIT ED TO THE PROFIT AND LOSS ACCOUNT. IN OUR OPINION, IF THERE IS A DIFFERENCE BETWEEN THE AMOUNT DEBITED TO THE P&L ACCOUNT AND PAID TO THE PARTIES AS COMPARED TO THE TDS STATEMENT/TDS CERTIFICATE, IT IS REQUIRED TO BE RECONCILED. WITHOUT CARRYING OUT THE RECONCILIATIO N WORK, THE ASSESSING OFFICER CANNOT DISALLOW THE PAYMENT I N A SURMISE MANNER. THE PAYMENTS TO FOLLOWING CONTRACT ORS VIZ., SHRI B.V.S. PRAKASH RAO, M/S M.V. CONSTRUCTIO NS, SHRI S.K. SWAIN, SHRI P.S.R. PRASAD, SHRI RAVISHANK AR NIMBALKAR AND SHRI S.R. PATIL ARE COVERED BY TDS. I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 26 19. IN VIEW OF THIS MATTER, WE DIRECT THE ASSESSING OFFICER NOT TO CONSIDER THE PAYMENTS MADE TO THE FOLLOWING PARTIES TO THE EXTENT OF THE PAYMENTS COVERED BY THE TDS ON PRODUCTION OF DETAILS OF TDS BY THE ASSESSEE: 1. SHRI B.V.S. PRAKASH RAO 2. SHRI RAVISHANKAR NIMBALKAR 3. M/S M.V. CONSTRUCTIONS, 4. SHRI S.R. PATIL 5. SHRI S.K. SWAIN, 6. SHRI P.S.R. PRASAD 20. IN ADDITION TO THE ABOVE PAYMENTS, THE PAYM ENT TO (7) SHRI GIRISH V KANGA WHO HAS CONFIRMED THE PAYMENTS ALSO CANNOT BE CONSIDERED FOR DISALLOWANCE AS HE HAS CONFIRMED THE PAYMENT AND BY THUS THE IDENTI TY OF THE PARTY WAS PROVED. NOW WE LEFT WITH THE PAYME NTS TO THE FOLLOWING PARTIES: 8. SHRI ASHOK PATIL 9. SHRI VIJAY RAJ MORABI 10. M/S SUDHA ENTERPRISES 11. SHRI T. VENUGOPAL RAO 12. SHRI M. SIDDESSWARA I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 27 OUT OF THE ABOVE PARTIES, THE PAYMENTS TO BE CONSID ERED FOR DISALLOWANCE IS THE AMOUNT WHICH ARE NOT COVERE D BY THE CONFIRMATION LETTERS IF ANY FILED BY THE ASSESS EE FROM THE RESPECTIVE PARTIES AND THE PAYMENTS WHICH ARE N OT COVERED BY TDS IN RESPECT OF PARTIES MENTIONED IN 1 TO 6 AS ABOVE. ACCORDINGLY, WE DIRECT THE ASSESSING OFF ICER TO CONSIDER FOR DISALLOWANCE TO THE EXTENT OF 15% O F THE ABOVE UNPROVED PAYMENT MADE TO THE ABOVE 8 TO 12 PARTIES AND THE AMOUNT WHICH ARE NOT COVERED BY TD S IN RESPECT OF PARTIES IN 1 TO 6. WE ARE CONSIDERI NG THE 15% OF UNPROVED PAYMENTS FOR DISALLOWANCE ON THE REASON THAT THERE IS A CHANCE OF INFLATING EXPENDI TURE OF UNPROVED PAYMENTS. WE ARE APPLYING THE DISALLOWANC E OF 15% OF THE UNPROVED EXPENDITURE CONSIDERING THE PAST HISTORY OF THE ASSESSEE, GENERAL RATE OF INCOM E EARNED IN THIS LINE OF BUSINESS AND PRESUMPTIVE RAT E OF TAX U/S 44AD OF THE INCOME TAX ACT, 1961. TO SUM U P, THIS ISSUE IS SET ASIDE TO THE FILE OF ASSESSING OF FICER FOR THE LIMITED PURPOSE TO EXCLUDE THE PAYMENTS COVERE D BY TDS AND CONFIRMATION LETTERS OUT OF RS.2,29,72,8 45/- AND TO CONSIDER 15% OF THE BALANCE AMOUNT FOR DISALLOWANCE. I.T.A. NO. 1279/HYD/2010 M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LIMITED. ============================= 28 21. COMING TO THE SECOND GROUND REGARDING THE VALUATION OF CLOSING WORK-IN-PROGRESS, WE DIRECT TH E ASSESSING OFFICER TO VALUE THE CLOSING WORK-IN-PROG RESS IN THE SAME MANNER AS IN THE EARLIER YEAR WHICH HAS BEEN FOLLOWED BY THE ASSESSEE CONSISTENTLY. 22. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 24 TH APRIL, 2011. SD/- SD/- SD/- (G.C. GUPTA) VICE PRESIDENT SD/- (CHANDRA POOJARI) ACCOUNTANT MEMBER HYDERABAD, DATED _21 ST APRIL, 2011 TPRAO/NP COPY FORWARDED TO: 1. M/S. ECI ENGINEERING & CONSTRUCTION COMPANY LTD., PLOT NO. A-12 & A13, PANCHAVATI TOWNSHIP, MANIKONDA, HYDERABAD-500 089. 2. THE DCIT-2(2), HYDERABAD, 8 TH FLOOR, I.T. TOWERS, AC GUARDS, HYDERABAD. 3. THE CIT(A)-III, HYDERABAD. 4 THE CIT-II, HYDERABAD 5. THE DR B BENCH, ITAT, HYDERABAD