M/S DEV ENGINEERS , MUMBAI V. DCIT CC 2 (1) , MUMBAI

ITA 508/MUM/2020

• Counselvise Citation: [2022] 106 COUNSELVISE.COM (IT) 3961 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 8 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-09-2022
• Appeal Filed By: Assessee
• Order Result: PartlyAllowed
• Bench Allotted: D
• Assessment Year: 2017-2018
• Appeal Filed On: 20-01-2020
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Principle of natural justice; Validity of assessment; Accommodation entries; Set aside
• Section: 132; 271(1)(c); 69C; 143(3); 133(6); 13; 153C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, ‘D‘ BENCH MUMBAI BEFORE: SHRI AMIT SHUKLA, JUDICIAL MEMBER & SHRI M.BALAGANESH, ACCOUNTANT MEMBER ITA No.664/Mum/2020 (Assessment Year :2016-17) Asst. Commissioner of Income Tax Central Circle-2(1), Old CGO Building, 8 th Floor M.K.Road Mumbai – 400 020 Vs. M/s. Dev Engineers 307, Jalaram Business Center, Ganjawala Lane, Nr. Chamunda Circle, Borivali West Mumbai – 400 092 PAN/GIR No.AAKFD8486D (Appellant) .. (Respondent) ITA No.506/Mum/2020 to 508/Mum/2020 (Assessment Year :2015-16 to 2017-18) M/s. Dev Engineers 307, Jalaram Business Center, Ganjawala Lane, Nr. Chamunda Circle, Borivali West Mumbai – 400 092 Vs. Asst. Commissioner of Income Tax Central Circle-2(1), Old CGO Building, 8 th Floor M.K.Road Mumbai – 400 020 PAN/GIR No.AAKFD8486D (Appellant) .. (Respondent) Assessee by Shri Shashi Tulsiyan Revenue by Shri T. Shankar Date of Hearing 24/08/2022 Date of Pronouncement 23/09/2022 ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 2 आदेश / O R D E R PER BENCH: ITA No.664/Mum/2020 (Assessment Year :2016-17) This appeal in ITA No.664/Mum/2020 for A.Y. 2016-17 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-48, Mumbai in appeal No.CIT(A)-48/I.T.656 & 657/DCCC-2(1)/2018-19 dated 31/10/2019 (ld. CIT(A) in short) against the order of assessment passed u/s.153C r.w.s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 27/12/2018 by the ld. Dy. Commissioner of Income Tax- CC-2(1), Mumbai (hereinafter referred to as ld. AO). ITA No.506/Mum/2020 to 508/Mum/2020 (Assessment Year :2015-16 to 2017-18 These appeal in ITA No. 506/Mum/2020 to 508/Mum/2020 for A.Ys.2015-2016 to 2017-18 arises out of the order by the ld. Commissioner of Income Tax (Appeals)-48, Mumbai in appeal No.CIT(A)- 48/I.T.656 & 657/DCCC-2(1)/2018-19 dated 31/10/2019 (ld. CIT(A) in short) against the order of assessment passed u/s. 153C r.w.s. 143(3) & 143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dated 27/12/2018 by the ld. Dy. Commissioner of Income Tax-CC-2(1), Mumbai (hereinafter referred to as ld. AO). Identical issues are involved in all these appeals and hence they are taken up together and disposed of by this common order for the sake of convenience. ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 3 2. The assessee has raised the following grounds before us for A.Y.2015-16 to 2017-18. "2015-16 1. On the facts and in the circumstances of the case and in law the Hon'ble CIT(A) erred in directing the Ld AO to treat a sum of Rs. 1,83,380/- being 35% of the site and conveyance as unexplained expenses w/s. 69C of the IT Act 1961 and the reason assigned for doing so are wrong and contrary to the provision of Income Tax Act and rules made there under. 2. On the facts and in the circumstances of the case and in law the Hon'ble CIT(A) erred in directing the Ld AO to treat a sum of Rs. 58,59,297/- being 2% of the purchases made as unexplained purchases us. 69C without appreciating that all the purchases are genuine and have been used for execution of BMC contract of the IT Act 1961 and the reason assigned for doing so are wrong and contrary to the provision of Income Tax Act and rules made there under 3. On the facts and in the circumstances of the case and in law the Hon'ble CIT(A) erred in directing the Lid AO to treat a sum of Rs. 1,67,32,303/- being 29% of the labour payments as unexplained expenditure and the reason assigned for doing so are wrong and contrary to the provision of Income Tax Act and rules made there under. 2016-17 1. On the facts and in the circumstances of the case and in law the Hon'ble CIT(A) erred in directing the Ld 40 to treat a sum of Rx. 12,80,372/- being 35% of the site and conveyance of Rr as unexplained expenses w/s. 69C of the IT Act 1961 and the reason assigned for doing so are wrong and contrary to the provision of Income Tax Act and rules made there under. 2. On the facts and in the circumstances of the case and in law the Hon'ble CIT(A) erred in directing the Ld AO to treat a sum of Rs. 2,08.46, 124/- being 2% of the purchases made as unexplained purchases u/s 69C without appreciating that all the purchases are genuine and have been used for execution of BMC contract of the IT Act 1961 and the reason assigned for doing so are wrong and contrary to the provision of Income Tax Act and rules made there under 3. On the facts and in the circumstances of the case and in law the Hon'ble CIT(A) erred in directing the Ld AO to treat a sum of Rs. 5,49.12.418/- being 50% of the labour payments as unexplained expenditure and the ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 4 reason assigned for doing so are wrong and contrary to the provision of Income Tax Act and rules made there under. 4. On the facts and in the circumstances of the case and in law the Hon'ble CIT(A) erred in upholding the penalty wx. 271(1)(c) levied by the Ld AO and the reasons assigned for doing so are wrong and contrary to the provision of the Income Tax Act and rudes made there under. 2017-18 1. On the facts and in the circumstances of the case and in law the Hon'ble CIT(A) erred in directing the Ed AO to treat Rs. 1,79,673/- being 35% of the site and conveyance as unexplained expenses us. 69C of the IT Act 1961 and the reason assigned for doing so are wrong and contrary to the provision of Income Tax Act and rules made there under. 2. On the facts and in the circumstances of the case and in law the Hon'ble CIT(A) erred in directing the Ld AO to treat a sum of Rs. 1,39,92.166/- being 2% of the purchases made as unexplained purchases us 69C without appreciating that all the purchases are genuine and have been used for execution of BMC contract of the IT Act 1961 and the reason assigned for doing so are wrong and contrary to the provision of Income Tax Act and rules made there under 3. On the facts and in the circumstances of the care and in law the Hon'ble CIT(A) erred in upholding the addition made by Ld 40 to treat a sum of Rs. 88,53,162/- being 3% of the labour payments as unexplained expenditure and the reason assigned for doing so are wrong and contrary to the provision of Income Tax Act and rules made there under." 2.1. The department has raised the following grounds before us for A.Y.2016-17. "1. Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) was justified in disallowing the site and conveyance expense at 35% Instead of 30% which already the Ld 40 had done in the principle of natural justice even-though the cumulative expenses were done in cash without any documentary records? 2. Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) was justified in disallowing the material purchase expenses at 2% instead of 3% even though opportunity of proving the genuineness ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 5 of the purchases from the parties were provided to the assessee which he failed to do so? 3. Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) was justified in disallowing the material purchase expenses at 2% instead of 3% by relying upon the decision of Hon'ble ITAT Bench in assessee's own case for AY 2011-12, without appreciating the fact that the Revenue has not accepted the said decision on merit and filed further appeal before Hon'ble High Court and the same is pending for adjudication? 4. Whether on the facts and in the circumstances of the case and in law, the Ld CIT(A) was justified in disallowing the unverifiable labour contracts to 50% instead of 100% even-though site and conveyance expense at 35% instead of 50% which already the Ld AO had done in the principle of natural justice even-though opportunity of proving the genuineness were provided to the assessee which he failed to do 5. The Appellant craves leave to add, to amend and/or to alter any of the grounds of appeal, if need be. 6. The Appellant, therefore, prays that on the grounds stated above, the order of the CIT(A)-48 may be set aside and that of the Assessing officer restored." 3. We have heard rival submissions and perused the materials available on record. We find that assessee is a partnership firm constituted on 20/12/2014. It is a fact on record that prior to 20/12/2014, it was a proprietorship concern of Shri Pratap Purohit in the name and style of M/s. Dev Engineers. The said name continued even after becoming a partnership firm. The firm is a civil engineering and construction contractor and engaged in the business of carrying out work for Government and semi-Government organizations. The firm also engages sub-contractor for completion of certain contracts. 3.1. A search and seizure action was conducted u/s. 132 of the Income-tax Act, 1961 (hereinafter referred to as 'the Act') on Mr. Pratap Uttam Purohit on 16.02.2017, partner of the assessee firm at ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 6 307, Jalaram Shopping Centre, Ganjawala Lane, Borivali (West), Mumbai. During the course of search, certain documents and loose papers were seized. Further, various statements were recorded during the course of search, inter-alia, of Mr. Pratap Purohit and one Mr. Sandeep Jain who was his accountant. 3.2. Pursuant to this search, the case of the assessee was centralized with the present Assessing Officer by the ld. PCIT-32, Mumbai vide order dated 01/11/2017. Thereafter, the ld. AO recorded satisfaction note in the case of the assessee and issued notice u/s.153C of the Act dated 14/09/2018 for A.Yrs. 2015-16 and 2016-17. On receipt of notice u/s.153C of the Act, the assessee filed return for A.Y.2015-16 and 2016-17 on 04/10/2018. Further, notice u/s.143(2) of the Act dated 27/07/2018 was issued by the ld. AO for A.Y.2017-18 i.e. the year of search. In the search assessment for A.Y.2015-16 and 2016-17 u/s.153C of the Act and in the regular assessment u/s.143(3) of the Act for A.Y.2017-18, the following additions / disallowances were made by the ld. AO which are tabulated hereunder:- ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 7 Particulars A. Y. 2015-16 Amount (Rs.) A. Y. 2016-17 Amount (Rs.) A. Y. 2017-18 Amount (Rs.) Disallowed 50% of Total Cash Expenses Incurred Rs. 1,83,380 Rs. 12,80,372 Rs. 2,56,676 Purchases u/s 69C of the Act - 100% Disallowance in relation to 6 parties Rs. 2,07,738 Rs. 5,05,824 Rs. 2,54,617 Purchases u/s 69C of the Act - 3% Ad-hoc Disallowance of Balance Material Purchased Rs. 56,51,559 Rs. 2,03,40,300 Rs. 2,09,88249 Labour Expenses u/s 69C of the Act - 100 % Disallowance in relation to 9 parties Rs. 1,26,36,860 Rs. 8,51,550 Rs. 1,49,250 Labour Expenses u/s 69C of the Act - 100 % Disallowance in relation to 14 Labour Sansthas Rs. 10,98,24,837 Labour Expenses u/s 69C of the Act - 3% Ad-hoc Disallowance of Balance Labour Expenses Rs. 40,95,443 Rs. 69,00,877 Rs. 87,03,912 Total (Rs.) Rs. 2,27,74,980 Rs. 13,97,03,760 Rs. 3,03,52,704 3.3. Aggrieved by the aforesaid orders, the assessee preferred the appeals before the ld. CIT(A) who granted partial relief to the assessee, against which the assessee had preferred the appeals for A.Yrs. 2015-16, 2016-17 and 2017-18 and Revenue had preferred appeal only for A.Y.2016-17 before us. ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 8 3.4. Cash Expenses incurred by the assessee The ld. AO observed that during the course of search proceedings and post search verification, the books of Shri Pratap Purohit and M/s. Dev Engineers (firm) were examined wherein it was found that assessee was incurring cash expenses on certain heads which had typically amount ranging from Rs.10,000 to less than Rs.20,000 in a single day to a particular party. Such expenses were debited as site expenses and conveyance expenses. Shri Sandeep Jain who works as an Accounts Assistant with Shri Pratap Purohit was confronted with the above cash expenses in his statement recorded on 17/02/2017 on oath vide question Nos. 9-13 thereon. Shri Sandeep Jain stated that the head “site expenses” are for miscellaneous expenses incurred at the various sites where contracts works were executed. The ld. AO observed that assessee was asked to produce all the supporting documents such as bill, invoice, cash memo, details of personnel, who incurred such expenses alongwith details of the site. The ld. AO observed that assessee could not produce any supporting proof for such expenses. Similarly, Shri Sandeep Jain was asked to verify the head “conveyance expenses” vide question No.11 of the statement recorded on 17/02/2017 on oath. Same details that were called for site expenses above were called by the ld. AO and the ld. AO observed that assessee could not produce any such proof for such expenses. In respect of site expenses and conveyance expenses, the ld. AO showcaused the assessee as to why the entire expenses should not be subject matter of disallowance. In response, the assessee submitted that these are regular expenses incurred in cash so as to complete the project awarded to it smoothly because at site they cannot wait for ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 9 cheques to be cleared which takes normally more than 3-4 days. Moreover, these expenses are miscellaneous in nature and had to be necessarily incurred only in cash. With regard to submission of vouchers / bills, assessee submitted that they being voluminious and were lying in godown and hence, it could not be submitted immediately when the Investigation wing directed the assessee to submit the same. However, the assessee submitted the sample copies of the vouchers and its evidences before the ld. AO during the course of assessment proceedings. It was reiterated that all the expenses incurred in cash towards site and conveyance were normally business expenses and had to be incurred only in cash. The ld. AO observed that the cash expenses incurred by the assessee were not supported by corroborative documentary evidences and since the assessee is engaged in the business of executing Civil contracts, naturally certain cash expenses are bound to be incurred and accordingly, disallowed 50% of the site and conveyance expenses as not meant for the purpose of business u/s.37(1) of the Act and allowed for remaining 50%. This 50% disallowance was reduced to 35% by the ld. CIT(A) on first appeal. The assessee is aggrieved against the same before us. 3.5. It is not in dispute that these expenses are incurred by the assessee at the respective sites where civil contracts were executed by the assessee firm. It is natural and a routine practice that assessee had to incur certain cash expenses at the sites and cannot wait for the cheque payments which would take a span of 3-4 days to get cleared. To this extent the contention of the assessee is accepted. However, in the same time, the assessee is duty bound to maintain the relevant vouchers duly signed by the payees together with the supporting evidences duly narrating the purpose of payment. The expenses ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 10 incurred towards site and conveyance expenses in cash for the purpose of business of the assessee are not doubted by the Revenue before us. The assessee furnished the following documents before the lower authorities for the A.Y.2015-16 to 2017-18. (i) Site expense bills vide page No.25-42 of the paper book-I (ii) Site expense ledger vide page Nos.43-53 of the paper book-I (iii) Conveyance expense bills vide pages 54-61 of the paper book-I (iv) Conveyance expense ledger vide pages 62-69 of the paper book- I 3.6. The only grievance of the Revenue is that they are not backed by supporting documentary evidences. It is a fact on record that assessee firm is maintaining vouchers which are lying in godown which are voluminous in nature. However, considering the deficiencies in the said vouchers not being backed with supporting documents thereon for all the cases, the ld. AO had proceeded to estimate the disallowance of expenses thereon @50% which was reduced to 35% by the ld. CIT(A). We find that ultimately entire disallowance of expenses were made only to offset the deficiencies in maintaining of records by the assessee and also by placing reliance on the statement recorded on oath at the time of search from Mr. Pratap Purohit, partner of the assessee. We hold that a fair estimation of disallowance of cash expenses needs to be done in this case. Accordingly, we hold that disallowance of expenses @20% in respect of site and conveyance expenses would meet the ends of justice in the instant case for A.Yrs.2015-16, 2016-17 and 2017-18. Accordingly, the grounds raised by the assessee for A.Yrs.2015-16 to 2017-18 and ground raised by the Revenue for A.Y.2016-17 are disposed of in the aforesaid manner. ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 11 4. The next issue to be decided in this appeal is with regard to disallowance made on account of unverifiable purchases. 4.1. We have heard rival submissions and perused the materials available on record. We find that assessee is in the business of executing work contracts for Municipal Corporation of Greater Mumbai (MCGM) for which purpose it had regularly purchased iron, steel pipes, cement, building material supplies etc., from various parties. The ld. AO observed that during the course of search proceedings, the purchase bills from various parties were verified and it was found that in some cases, the purchase bills primafacie appeared suspicious. For the purpose of verifying the authenticity of such bills, the assessee was asked during the search proceedings to explain the standard operating procedure adopted in making purchases and explained it with the help of purchase bills from a primafacie genuine supplier. The assessee produced the bill of M/s. Saket Infra Projects Ltd. The ld. AO observed that on examination of the bills of M/s. Saket Infra Projects Ltd., proper procedure has been followed by the assessee at the time of entering the original vouchers / bills. According to the ld. AO, the seized bills did not follow the standard operating procedure adopted by the assessee for all the bills in as much as for certain bills inward register entries were absent, certification stamp from inspection department was missing, there was no signature of store in-charge etc and lack of proper delivery challans. Accordingly, the ld. AO sought to verify the genuineness of transactions made by the assessee with various purchase parties for which purpose 19 parties were identified by the ld. AO and notices u/s.133(6) of the Act were issued to them. Out of 19 parties, replies were received by the ld. AO directly from 13 ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 12 parties confirming the entire transactions with the assessee. However, replies were not received from 6 parties. It was also pointed out by the assessee before the ld. AO that out of 19 parties selected by the ld. AO, there were no transactions carried out by the assessee with 2 parties. 4.2. In respect of replies not received from six parties, the ld. AO proceeded to make addition u/s.69C in respect of purchases made from those parties totaling to Rs.2,07,738/- for A.Y.2015-16 Rs.5,05,824/- for A.Y.2016-17 and Rs.2,54,617/- for A.Y.2017-18. This addition for each year is categorized as Specific Purchase disallowance. However, in respect of remaining total purchases which also includes 13 parties who had responded to notice u/s.133(6) of the Act, the ld. AO proceeded to make adhoc disallowances of 3% of the value thereon which was reduced to 2% by the ld. CIT(A) in first appeal. In respect of specific purchase disallowances made from six parties where 133(6) notice were not complied by them, the ld. CIT(A) upheld the action of the ld. AO. The various additions made by the ld. AO which were further reduced by the ld. CIT(A) are tabulated hereunder for A.Yrs.2015-16 to 2017-18:- AY Total Purchase Specific Purchase /Disallowance 133(6) not replied Balance Total Purchase As per AO @ 3 % As per CIT(A) Order @2% 2015-16 18,81,77,586.00 2,07,738.00 18,79,69,848.00 56,39,095.44 37,59,396.96 2016-17 67,85,15,762.00 5,05,824.00 67,80,09,938.00 2,03,40,298.14 1,35,60,198.76 2017-18 69,98,62,912.00 2,54,517.00 69,96,08,295.00 2,09,88,248.85 1,39,92,165.90 TOTAL 156,65,56,260.00 9,68,179.00 156,55,88,081.00 4,69,67,642.43 3,13,11,761.62 ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 13 4.3. Before us, the ld. AR vehemently pleaded that assessee firm is engaged in the business of executing works contracts for MCGM and for the purposes of the same, regularly makes purchase of materials from various parties. The supplies made those parties are proved by their consumption and satisfactory execution of the job work. Only after due satisfaction of execution of the job work, payments were released to the assessee by MCGM. The ld. AR also vehemently argued that none of the parties to whom notice u/s.133(6) of the Act were identified and issued by the ld. AO were reflected to be tainted dealers in the website of Sales Tax department of Government of Maharashtra. The ld. AR argued that assessee had furnished ITR return acknowledgement, VAT return acknowledgement with Annexure „J‟, ledger confirmation, ledger account, bank statements reflecting the payments made, purchase invoice in respect of these disputed parties vide page Nos. 85-116 of the paper book I. Further, the assessee had also furnished vide letter dated 19/11/2018 ledger accounts of all the 19 parties alongwith their PAN and valid VAT-TIN details. The assessee had submitted the tender documents in respect of projects awarded to the assessee by MCGM alongwith bill of quantities and various purchase bills in relation thereto. These documents are enclosed in pages 273-646 of the paper book II. The aforesaid documentary evidences go to prove that the items for which purchase claims had been made by the assessee have been duly consumed and utilized by the assessee in the execution of the project. There is no dispute that these parties have been made payments by the assessee by account payee cheques. In this regard, the contention of the ld. AR requires to be accepted that MCGM payment certificates provided complete details of the payments made and also the jobs for which the payments have ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 14 been made together with the details of quantity of materials utilized in terms of meters or sq. meters and the consumption details thereon. While this is so, we are unable to persuade ourselves to accept the action of the lower authorities in disbelieving the purchases made by the assessee especially in respect of those suppliers, who had duly responded before the ld AO. Hence, we categorically hold that in respect of 13 parties who had been identified by the ld. AO on his own volition to whom 133(6) notice had been issued and served, those parties had duly responded before the ld. AO by furnishing requisite details. Hence, we categorically hold that there cannot be any disallowance of purchases in respect of those suppliers. However, in respect of parties wherein notice u/s.133(6) had not been complied with six parties, we find that assessee had furnished all the requisite documents with regard to those six parties also before the ld. AO. Merely because the parties had not responded there cannot be any adverse action on the assessee by disallowing 100% of the value of purchases. In this regard, it would be pertinent to mention that the ld. AO had resorted to make verification by way of issue of notices u/s 133(6) of the Act for the three years under consideration as under:- Asst Year 2015-16 – 21.87% of value of total purchases Asst Year 2016-17 – 31.74% of value of total purchases Asst Year 2017-18 – 9.46% of value of total purchases 4.4. We find that the Revenue had vehemently pleaded that in the case of Mr. Pratap Purohit (partner of assessee firm herein) for A.Y.2011-12 in ITA Nos.5193 and 1021/Mum/2014 dated 04/11/2016 had confirmed the disallowance @2% of value of disputed purchases. ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 15 We have gone through the said order which is enclosed in pages 989 to 994 of the paper book III. In the said order, additions were made with respect to 71 parties for which it was admitted by the assessee that only accommodation entries have been taken for these parties to show inflated purchases and cash was received back to be ploughed back into the business. In the said order, information was received from Sales Tax department that ten parties from whom the assessee had made purchases of Rs.92,40,232/- wherein it was held that those ten parties had indulged in providing accommodation entries and moreover notices u/s.133(6) of the Act could not be served on those parties. In these facts and circumstances, the ld. CIT(A) upheld the addition of profit element of 15% on the value of such disputed purchases which was brought down to 2% by this Tribunal. As said earlier, the assessee had not made any purchases from the suppliers whose names were reflected as tainted dealers in the website of Sales Tax department, Government of Maharashtra during the years under consideration. Hence, in our considered opinion, the decision rendered by this Tribunal for A.Y.2011-12 is factually distinguishable and need not be relied upon for the years under consideration. However, during the course of search, certain deficiencies were indeed found in the documentation maintained by the assessee, considering this fact, we hold that disallowance of 2% of the value of purchases made from those six parties alone is required to be disallowed. This in our considered opinion, would meet the ends of justice. In other words, the disallowances to be confirmed on account of unverifiable purchases are as under:- ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 16 A.Y. Specific Disallowance purchases where 133(6) not responded Disallowance confirmed by ITAT @2% 2015-16 2,07,738 4,155 2016-17 5,05,824 10,116 2017-18 2,54,617 5,092 4.5. The other disallowances made by the ld. AO on account of bogus purchases are hereby directed to be deleted for all the three years. The disallowance of unverifiable purchases in the aforesaid manner, in our considered opinion, would meet the ends of justice in the facts and circumstances of the instant case, as against the various disallowances made by the ld. AO in this regard. Accordingly, the grounds raised by the assessee for A.Yrs 2015-16 to 2017-18 and grounds raised by the Revenue for A.Y.2016-17 are disposed of in the aforesaid manner. 5. The next issue to be decided in these appeals of the assessee are with regard to disallowance of labour contract payments. 5.1. We have heard rival submissions and perused the materials available on record. The ld. AO observed that during the course of search proceedings, labour contract bills from various parties were verified and it was apparently noticed that in some cases, the bills primafacie appeared suspicious. For the purpose of verifying the authenticity of such bills, the assessee was asked during the search proceedings to explain standard operating procedure adopted by it with respect of labour contract which was explained by Shri Sandeep Jain, Accounts Assistant of Shri Pratap Purohit. The assessee was also asked to produce sample labour contract bill raised and explain the ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 17 same with respect to standard operating procedure mentioned by it. Shri Sandeep Jain presented four bills raised from different sub- contractors and explained them in the context of standard operating procedure mentioned by him. In respect of those four bills, the ld. AO observed that proper procedures were followed by the assessee. However, in respect of certain bills, there were certain discrepancies observed which are detailed in page 13 of the assessment order. During the course of assessment proceedings, in order to verify the transactions of the assessee with the parties to whom the assessee has awarded labour contracts/sub-contracts, notices u/s.133(6) of the Act were issued to 19 parties which were identified by the ld. AO. In respect of 10 parties, notice was returned unserved. The ld. AO show- caused the assessee that only 3 out of 19 parties had replied to the notice issued u/s.133(6) of the Act and accordingly, show-caused as to why the remaining parties should not be treated as bogus and payments made to them disallowed in the hands of the assessee. 5.2. The assessee submitted that it is engaged in the business of civil engineering and construction and carrying out work of Government and Semi-Government organization and that during the course of such execution of contracts, the same are executed through sub-contractor. The payment of labour charges are made to labourers who are migrants and belong to unorganized sector. Payments are made to them at regular intervals without which there could not be any continuous supply of labour. Accordingly, it was pointed out that it is very difficult to maintain entire records of such labourers. Sometimes, the payment is made to contractor or Mukadam appointed at the site who inturn disburses the wages to these labourers. Since, it is difficult to get large number of workers at a time, the assessee had appointed ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 18 contractor / Mukadam who brings the required number of migrant workers. The said contractor prepares the bill and places before the assessee for payment. The payments were made by cheque after due deduction of tax at source to the contractor or sub-contractor. Thereafter, these contractors or sub-contractors make the payments to the labourers. It was submitted that the Mukadam / Manager / Contractor are all uneducated belonging to unorganized sector and accordingly, some of the contractors or Managers who had issued the bills to the assessee could not be found at the available address when notices u/s.133(6) of the Act were sent by the ld. AO. The assessee pleaded that the purpose of smooth completion of the project, it had to necessarily take the help of these Mukadams/ Contractors / Sub- contractors irrespective of the fact whether those parties are regular income tax payers and filing their income tax returns or not. But since the payments are received from MCGM, Government and other semi- Government organizations by the assessee, those payments were released only after satisfying and ensuring that due work has been executed and finished by the assessee. As stated earlier, these contracts could not be completed without the assistance of the labour force either sourced locally by the assessee or through the assistance of Mukadam / Sub-contractor / Labour /Contractor. Accordingly, it was pleaded that merely because the Mukadam / Contractors were not available at the address mentioned in their invoices, no adverse inference could be drawn on the assessee. However, the assessee thereafter through its efforts was able to obtain replies from five more parties in response to 133(6) of the Act. Hence, out of 19 parties, 8 parties had responded to the notice u/s.133(6) of the Act. The ld. AO observed that assessee had not made any payment to two parties during the years under consideration towards labour contracts. Hence, ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 19 those parties were also ignored by the ld. AO. In respect of remaining 9 parties from whom no response were received by the ld. AO in response to notice u/s.133(6) of the Act, and in view of the discrepancies found during the course of search proceedings on certain bills appearing suspicious, the ld. AO proceeded to treat the payments made to these labour contractors as „bogus‟ and made an addition u/s.69C of the Act in the following manner for A.Y.2015-16, 2016-17 and 2017-18:- Particulars A. Y. 2015-16 A. Y. 2016-17 A. Y. 2017-18 R. R. Enterprises 17,91,759/- - - Bajarang Construction 18,02,769/- - - Kanak Enterprises 18,27,944/- - - Malik Construction 18,08,594/- - - Kunal Enterprises 18,20,207/- - - T V Construction 17,92,541/- - - S. S. Enterprises 17,93,046/- - - Bismillah Khan - 8,51,500/- 1,49,250/- Total disallowance u/s. 69C Rs. 1,26,36,860/- 8,51,500/- 1,49,250/- 5.3. The ld. AO observed that assessee had incurred total labour charges of Rs.14,91,51,621/- for A.Y.2015-16; Rs.34,07,05,568/- for A.Y.2016-17 and Rs.28,99,81,146/- for A.Y.2017-18. Out of the above, for A.Y.2016-17, the ld. AO observed that during the post search proceedings, enquiries were conducted by DDIT (Investigation) Unit 3(2), Mumbai to verify the genuineness of certain labour contracts. He stated that these were labour contractors to whom payments were ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 20 largely delayed. The ld. AO observed that assessee could not identify for which project was the labour deployed and accordingly, the labour charges are not justified. The ld. AO further observed that the labour contractors had not filed any return of income or even in the cases where returns were filed, income declared thereon were not commensurate with the labour contracts bagged by them. Accordingly, the ld. AO identified 14 labour sansthas falling in this category to whom payments were made by the assessee to the tune of Rs.10,98,24,837/-. The list of these labour sansthas are listed in page no.18 of the assessment order together with their PAN. The ld. AO issued notice u/s.133(6) of the Act for all the 14 parties. Out of these notices issued to 13 parties were returned unserved and remaining one party responded to notice on 25/10/2018 by furnishing requisite details. When this was confronted to the assessee by the ld. AO, the reply from other 13 parties were received by the ld. AO on 31/10/2018. Later summons u/s.131 of the Act were issued on 01/11/2018 to all the 14 parties by the ld. AO requiring the physical attendance of all those parties on 15/11/2018. The summons also returned unserved from 13 parties and served only on one party. The summons remained unreplied and uncomplied by all the 14 parties till the completion of the assessment proceedings. The ld. AO after going through the replies furnished in respect of those parties on 25 th & 31 st October 2018 observed that the replies were constructed in the same fashion and on similar letterheads and hence, could not be relied upon and accordingly, proceeded to treat the said payments made to 14 labour sansthas as bogus and made an addition u/s.69C of the Act in the sum of Rs.10,98,24,837/- for A.Y.2016-17. Hence, in respect of labour contract payments to whom notice u/s.133(6) of the Act were identified and issued by the ld. AO, the ld. AO proceeded to disallow ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 21 the entire value of labour contract payments made to those parties who did not respond to notice u/s.133(6) of the Act. While doing this, the ld. AO also added 100% of payments made to 14 labour sansthas in the sum of Rs.10,98,24,837/- for A.Y.2016-17, even though 133(6) had been complied by them. These disallowances were reduced by the ld. AO from the total labour charges incurred by the assessee for all the three years under consideration and for the remaining portion, the ld. AO proceeded to make adhoc disallowance @3% of the values thereon to take care of various deficiencies found in the bills. In other words, the disallowance ultimately made by the ld. AO on account of labour contract payments are as under:- 5.4. The ld. CIT(A) gave a categorical finding stating that there is reasonable force in the argument of the assessee that labour remains mobile and it is likely that the notices of ld. AO or Investigation Wing could not reach the respective labour parties. Having appreciated the entire contentions of the assessee, in order to plug the Revenue leakage, the ld. CIT(A) restricted the disallowance to 50% of the value in respect of parties who did not respond to the notices u/s.133(6) of A.Y. (A) Total Labour Charges (B) Specific Labour Disallowanc e by the AO (C) Balance Total Labour Charges (D) Disallowance by AO @3% (E) E= 3% of (D) Total Disallowance of AO (F) F=C+E 2015-16 149151621 12636860 136514761 4095443 16732303 2016-17 340705568 110676337 (851500+ 109824837) 230029231 6900877 117577214 2017-18 289981146 149250 289831896 8694957 8844207 ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 22 the Act i.e.50% of specific labour charges disallowance made mentioned in the aforesaid table and upheld the action of the ld. AO in disallowing 3% of the remaining labour charges as tabulated supra for all the years under consideration. 5.5. At the outset, we find that the entire deficiencies pointed out by the ld. AO with regard to deficiencies in labour bills and blank letterheads of certain labour contractors found at the head office at the time of search etc., the assessee had given point wise reply before the ld. CIT(A) which are tabulated in para 5.3.2 of the order of the ld. CIT(A). For the sake of brevity, the same are not reiterated herein. However, in respect of labour charges who had not responded to notice u/s.133(6) of the Act, the assessee vide letter dated 20/12/2018 had submitted before the ld. AO itself the following details, ledger account, Form 16, bills and bank statements reflecting the payments made. These documents are enclosed in pages 650 to 722 of the paper book-II filed before us. It is a fact on record that out of 19 parties selected by the ld. AO in respect of specific labour charges disallowance as mentioned in the aforesaid table, 10 parties had duly responded to the notice u/s.133(6) of the Act. 5.6. It is pertinent to note that the parties who had not responded to notices issued u/s.133(6) of the Act in respect of specific labour contract payments and disallowances were made by the ld. AO for the years under consideration i.e. A.Yrs.2015-16, 2016-17 and 2017-18, we find that none of these parties were reflected as tainted dealers in the website of Sales Tax department of Government of Maharashtra. It is a fact that assessee had furnished all the requisite documents that are available with it in respect of these parties. It is also a fact that the ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 23 details of quantity of materials utilized and consumed in the contract activity carried out by the assessee is not in dispute. Without the assistance of the labour force, the contracts executed by the assessee could not be completed smoothly. The materials consumed in the execution of the contract, labour force deployed thereon and the total cost incurred by the assessee had been duly taken into account by MCGM and other Government organizations while releasing payments to the assessee for execution of the contract. While this so, we are unable to persuade ourselves to accept the action of the lower authorities in disbelieving the labour contract payments incurred by the assessee especially in respect of those contractors, who had duly responded before the ld. AO for notice u/s.133(6) of the Act. In this regard, it would be pertinent to mention that the ld. AO had resorted to make verification by way of issue of notices u/s 133(6) of the Act for the three years under consideration as under:- Asst Year 2015-16 – 47.45% of value of total labour contract charges Asst Year 2016-17 – 63.59% of value of total labour contract charges Including labour sansthas payments Asst Year 2017-18 – 36.17% of value of total labour contract charges 5.7. Hence, we categorically hold that in respect of parties who had been identified by the ld. AO on his own volition to whom 133(6) notice had been issued and served and those parties had duly responded before the ld. AO by furnishing the requisite details, we categorically hold that there cannot be any disallowance of labour contract charges in respect of those parties. However, in respect of parties where notice u/s.133(6) of the Act had not been complied with, we find that assessee had furnished all the requisite documents before ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 24 the ld. AO. Considering the fact that the labour contractors / Mukadam / labourers would be mobile and would be migrating from one location to another location for the purpose of their work and also considering the fact that during the course of search, certain deficiencies were indeed found in the documentation maintained by the assessee, we hold that disallowance of 2% of specific labour contract disallowances made by the ld AO needs to be sustained, just to take care of the deficiencies. This, in our considered opinion, would meet the ends of justice. In other words, the disallowances to be confirmed on account of labour contract payments are as under:- A.Y. Total Labour Charges Specific Labour Payments Disallowed where 133(6) have not been responded Disallowance confirmed by ITAT @5% 2015-16 149151621 12636860 631843 2016-17 340705568 851500 42575 2017-18 289981146 149250 7463 5.8. The other disallowances made by the ld. AO on account of labour contract payments are hereby directed to be deleted for all the three years. 5.9. In respect of payments made to labour sansthas, the ld. AO had identified 14 parties there and issued notices u/s.133(6) of the Act. One party responded before the ld. AO by furnishing requisite details. In respect of remaining 13 parties, the assessee furnished all the ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 25 requisite details that were called for notices u/s.133(6) of the Act even though the said notices were not served on those parties. Hence, the details were called for by the ld. AO were before him either directly received from the parties or received from the assessee, as the case may be. Merely because, the summons issued by the ld. AO to 13 parties thereon were returned unserved, no adverse inference could be drawn on the assessee. Obviously, the summons were issued after 2-3 years from the date of payment of labour charges to those labour sansthas and assessee cannot be expected to have control over all those labour sansthas once the contract work is executed at the relevant site. In any case, nothing defective is found in the details submitted by the assessee in response to notice u/s 133(6) of the Act by the revenue. Hence, in our considered opinion, no adverse inference could be drawn on the assessee in respect of payments made to 14 labour sansthas. Accordingly, we specifically direct the ld. AO to delete the addition made u/s.69C of the Act in the sum of Rs.10,98,24,837/- for A.Y.2016-17. 5.10. The decision rendered hereinabove in respect of disallowances of labour contract payments, in the aforesaid manner, in our considered opinion, would meet the ends of justice in the facts and circumstances of the instant case, as against the various disallowance made by the ld. AO in this regard. Accordingly, the grounds raised by the assessee for A.Yrs.2015-16 to 2017-18 and grounds raised by the Revenue for A.Y.2016-17 are disposed of in the aforesaid manner. 6. We find that assessed had raised an additional ground challenging the validity of assessment framed u/s.153C of the Act for A.Yrs.2015- 16 and 2016-17. The ld. AR before us made elaborate arguments on ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 26 the invalid assumption of jurisdiction of the ld. AO u/s.153C of the Act by raising various legal issues and by placing reliance on various case laws both orally as well as in the form of written submissions. This was also defended by the ld. DR during the course of arguments and also by way of filing separate written submissions. Considering the said arguments, we hold that the additional ground raised by the assessee for A.Yrs.2015-16 and 2016-17, being a legal issue, deserve to be admitted. However, in view of the aforesaid elaborate discussions and decision on merits of the additions, we hold that adjudication of the additional ground raised by the assessee for A.Y.2015-16 and 2016-17 would be academic in nature. No opinion is rendered thereon and they are left open. 7. The other grounds raised by the assessee for all the years under consideration are either premature for adjudication or otherwise general in nature and does not require any specific adjudication for all the years under consideration. 8. In the result, appeals of the assessee for A.Yrs. 2015-16 to 2017-18 are partly allowed and appeal of the Revenue for A.Y.206-17 is partly allowed. Order pronounced on 23/09/2022 by way of proper mentioning in the notice board. Sd/- (AMIT SHUKLA) Sd/- (M.BALAGANESH) JUDICIAL MEMBER ACCOUNTANT MEMBER Mumbai; Dated 23/09/2022 KARUNA, sr.ps ITA No.664/Mum/2020 and other appeals M/s. Dev Engineers 27 Copy of the Order forwarded to : BY ORDER, (Sr. Private Secretary / Asstt. Registrar) ITAT, Mumbai 1. The Appellant 2. The Respondent. 3. The CIT(A), Mumbai. 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. //True Copy//