Commissioner Of Income Tax Chennai v. M/S. Sve Engineers P. Ltd

IN THE HIGH COURT OF JUDICATURE AT MADRAS Dated: 07.09.2016 Coram: The Hon'ble Mr.Justice NOOTY. RAMAMOHANA RAOANDThe Hon'ble DR. Justice P.DEVADASS TAX CASE APPEAL No.350 of 2016 Commissioner of Income TaxChennai...Appellant/AppellantVersus M/s. SVE Engineers P. Ltd.,12/1, Soundaryam Enclave, United India Colony, 4th Cross Road, Kodambakkam, Chennai 600 024...Respondent/Respondent Appeal under Section 260A of the Income Tax Act, 1961,against the order of the Income Tax Appellate Tribunal, Madras'D' Bench dated 28.08.2015 in ITA No.2038/Mds/2014 against theorder of commissioner of Income Tax (Appeals)-VI, CHennai, dated30/04/2014 in I.T.A.No.1449/13-14/A-VI against the Assessmentorder of Deputy Commissioner of Income Tax, Company Circle VI(1), Chennai, dated 26/3/2013 in GIR/PAN No. for theassessment year 2010-2011. -----For Appellant ..Mr.J.Narayanasamy, Senior Standing Counselfor Income TaxFor Respondent..Mr.M.P.Senthilkulmar----- JUDGMENT This Tax Case Appeal is preferred by the Revenue underSection 260A of the Income Tax Act, calling in question thecorrectness of the order passed by the Income Tax AppellateTribunal, 'D' Bench, Chennai, dated 28.08.2015 in ITANo.2038/Mds/2014. The Substantial Question of Law raised in thisTax Case Appeal is as follows:- https://hcservices.ecourts.gov.in/hcservices/ "Whether on the facts and in the circumstances ofthe case the tribunal was right in holding that theexpenditure of Rs.2.381 Crores claimed by theassessee as payment made towards sub-contractorscan be allowed as deduction, even though theassessee had not filed any supporting bills or anyother evidence for the expenses debited in theassessees books of accounts." 2. The Assessee is engaged in manufacturing/trading of'material handling equipment' like belt conveyors, screwconveyors, elevators, pipe conveyors and other similar products.The Assessee has claimed certain expenditure incurred by it byway of payments made to M/s. Erection India and M/s. TeknoConveyor, with whom a sub-contracting arrangement has beenalready, worked out. The Assessing Officer has come to theconclusion that the payments made to the above two sub-contractors are not genuine transactions but they are mereaccommodation entries made on paper and the same was indulged inwith a view to return reduced quantum of profits and hence itwas evident that these entries were made in the books of accounttowards the end of the Financial Year as Convenient/Adjustmententries which are normally resorted to for reporting lessquantum of profit arising out of business/ trading activityundertaken by the Assessee. On the above basis, the AssessingOfficer has disallowed the amount of little more than 2.38Crores. 3. The Assessee preferred an appeal to the Commissionerof Income Tax (Appeals). During the course of consideration ofthe appeal, the Assessee has presented certain additionalevidence in support of his claim that there is nothing tosuspect with regard to the payments made to the two sub-contracting agencies by it. Taking into account and consideringthe additional material supplied by the Assessee, the AppellateAuthority has called for a fresh finding of fact and theAssessing Officer submitted his remand report on 20.12.2013,lending legitimacy to the claim of the Assessee, a copy of whichwas made available to the Assessee to offer his commentsthereon. It is thereafter, the Appellate Authority has held thatthe material additionally produced by the Assessee is acceptableas the Assessee has produced the proprietaries of both the sub-contracting agencies namely M/s. Erections India and M/s. TeknoConveyor for examination, who have confirmed that they havecarried on sub-contract work for the Assessee in the projectentrusted by the principal to the Assessee. In the face of suchmaterial and also in view of the fact that the TDS deducted bythe Assessee while making payments to the subcontractors hasmatched and the account of payments made to the respective sub-contracting agencies being accurate, when viewed from theperspective of the books of account of the sub-contractors, accepted the plea of the Assessee and allowed the appeal. It isagainst the said order in appeal passed by the Commissioner ofIncome Tax (Appeals), the Revenue has approached the Income TaxAppellate Tribunal. 4. The fact which is required to be noticed at the veryoutset is that during the course of execution of the project,the two sub-contracting agencies have intimated, from time totime the running work progress details to the Assessee whichcontained the details of quantity of structural steels of theexecuted work, for the verification and approval of theAssessee. Any such arrangement pre-supposes the existence of asub-contracting agency as otherwise there was no necessity forthe so called sub-contractors to make available the data of theworks executed by them, to the Assessee. It is not the case ofthe Revenue that the execution of work by the Assesseeincidentally involves supervision or coordination of work of thesubcontractors. In the event the sub-contract and execution ofwork by the so called sub-contractors has no proximity to thework required to be executed by the Assessee vis-a-vis itsprincipal, calling for running work progress details by theAssessee from some other third parties would not have arisen atall. In the instant case, the principal of the Assessee namelyM/s. Vedanta have issued Mechanical Completion and CommissioningCompletion certificate to the Assessee in respect of BauxiteGrinding and Modification conveyors work, a part of the saidwork is what turned out to have been subcontracted by theAssessee. Some of the payments made by the Assessee are foundthrough the banking channels and hence the Tribunal accepted thesame as payments made to a subcontractor. 5. Sri.J.Narayanasamy, learned Senior Standing Counselfor the Revenue would strenuously urge before us that thereasoning which weighed with the Tribunal that since paymentsmade to the sub-contractors have 'passed through bank channels'they need not be doubted, is not a sound proposition nor cansuch a process be a tilting or deciding factor. He would add onfurther that an accommodating party can also extend necessaryhelp by way of receiving payments through a banking channel andhence such a process of payments is not a substitute method forproving the same as genuine payment, which is required to beestablished. Though we see considerable force behind thesubmission of Sri.J.Narayanasamy, the payments made throughbanking channel are not a substitute method for establishing thegenuineness of the payment so made, but, however, the same is astrong indicating circumstance of the existence of an obligationto make payment at the first instance. In the instant case, theobligation that arose on the part of the Assessee to make suchpayment can be easily gathered from the fact that it kept onreceiving, from time to time, the running progress schedule oferection work by the sub-contractors. As was already noticed by us, if there is no proximate relationship between the work to beexecuted by the Assessee and the sub-contractors executed work,which the Assesssee was required to execute towards itsprincipal, the question of taking note of the progress ofrunning work by the Assessee from a third party would not havearisen. So long as the said running work details are notdiscredited as totally unconnected to the work which theAssessee was required to execute towards its principal, thetheory of subcontracting that part of the work, set up by theAssessee gains credibility. Though for all practical purposesand intent, it is safe to make payment through banking channel,for the sake of accounting convenience, but any such paymentwould pass muster as a genuine payment, if the obligation tomake such payment springs out of subcontracting a part of thework, undertaken by the Assessee for execution. In the instantcase, the work said to have been executed by the subcontractorsis not found as unconcerned or unconnected to the workundertaken by the Assessee and hence the claim of payment madefor such work by the subcontractors deserves to be accepted as agenuine expenditure incurred by the Assessee. 6. We are also conscious that all payments made throughbanking channel need not be treated as genuine automatically ortheir face value. Each such transaction ought to beindependently examined and considered and no formal conclusioncan be drawn about the genuineness regarding the obligation toeffect the said payment merely because the payment was effectedthrough a banking channel. In the instant case, we are satisfiedthat the Assessee has produced necessary material before theCommissioner of Income Tax (Appeals), during the course ofhearing of the appeal against the order of the AssessingOfficer, relating to subcontracting a part of his work. Thereis nothing to doubt, in such circumstances, regarding thegenuineness of payments effected through banking channels infavour of the two sub-contracting agencies. 7. In such view of the matter, we find no merit in theappeal. The conclusion drawn both by the Commissioner of IncomeTax (Appeals) and the Income Tax Appellate Tribunal aresustained, though for different reasons assigned by us today.Hence, the appeal fails and accordingly is dismissed. Costs madeeasy. -s/d- Assistant Registrar True Copy Sub-Assistant Registrar To 1.The Income Tax Appellate Tribunal D Bench Chennai 2.The Commissioner of Income Tax Appeals-VI 121 Mahatma Gandhi Road, Chennai-34 3.The Deputy commissioner of Income TaxCompany Circle VI(1)Aayakar Bhavan, New Block 7th floor121 Nungambakkam High Road, Chennai-34 7. In such view of the matter, we find no merit in theappeal. The conclusion drawn both by the Commissioner of IncomeTax (Appeals) and the Income Tax Appellate Tribunal aresustained, though for different reasons assigned by us today.Hence, the appeal fails and accordingly is dismissed. Costs madeeasy. -s/d- Assistant Registrar True Copy Sub-Assistant Registrar To 1.The Income Tax Appellate Tribunal D Bench Chennai 2.The Commissioner of Income Tax Appeals-VI 121 Mahatma Gandhi Road, Chennai-34 3.The Deputy commissioner of Income TaxCompany Circle VI(1)Aayakar Bhavan, New Block 7th floor121 Nungambakkam High Road, Chennai-34 +1 cc to Mr.J.Narayanaswamy Advocate vide sr 50752+1 cc to Mr.Philip George Advocate sr 50923 T.C.A.No.350 of 2016aa17/10/2016