2025 (3) TMI 1412 - AT - Income Tax

AO's assessment erroneous for failing to verify TDS compliance on Rs. 31 crore expenses under sections 194C, 194J, 192

The ITAT Surat upheld the PCIT's revision order under section 263, finding the AO's assessment order erroneous and prejudicial to revenue. The AO failed ... Revision u/s 263 - lack of proper inquiry and verification regarding the deduction of Tax Deducted at Source (TDS) and the classification of income - HELD THAT:- It is clear from the order u/s 143(3) r.w.s 144B of the Act that the AO has passed a cryptic order in a perfunctory manner. He has not passed a speaking order containing the conclusion and the reasons that have led to such conclusion; especially considering the fact that the case was selected for complete scrutiny. The assessee was engaged in the business of construction of water supply projects and underground drainage projects. The main issues of the complete scrutiny were refund claim, contract receipts or fees and income from house property. The main issues of the complete scrutiny were refund claim, contract receipts or fees and income from house property. The assessee had filed two submissions vide letters dated 03.02.2021 and 02.03.2021. The details as per reply dated 03.02.2021 include unsecured loans, sundry creditors, other liabilities, interest payments details of expenses party-wise such as sub-contractor purchases, labour charges and wages etc. In the reply dated 02.03.2021, the assessee had furnished reply in respect of unsecured loan, other liabilities, professional fees etc. It is, therefore, clear that details of TDS on various expenses, as pointed out by the PCIT in the show cause notice and the order u/s 263, have not been called for by the AO. He has not examined as to whether TDS provisions u/s 194C, 194J and 192 of the Act were duly complied with by the assessee. The AO has not even seen the audit report of the assessee, where in the Annexure to Form No.3CD, all the columns of details of deduction or collection of tax as per provisions of Chapter XVII-B or XVII-BB of the Act are blank. It is, therefore, evident that the AO has not conducted even the basic inquiry and verification before passing the assessment order. He was required to put specific query to the assessee on the issue of TDS because huge expenses of more than Rs. 31 crore has been claimed by the assessee on various expenses, which are prima facie covered under provisions of section 194C, 194J and 192 of the Act. It is well settled that the AO performs dual role, i.e., he is not only an adjudicator but also an investigator. He is supposed to carry out proper inquiry and investigation and pass the order after confronting the assessee about the result of enquiry, which emerge from the investigation and scrutiny carried out by him during the assessment proceedings. As discussed earlier, the AO has not properly inquired about the non-compliance of the assessee regarding the provisions of Chapter XVII-B and XVII-BB. He has also failed to examine the issue in terms of provisions of section 40(a)(ia) of the Act. It is also seen that the assessee has shown income from house property, which was actually required to be offered as capital gain u/s 45 of the Act. The difference between the value determined by the SVA and declared consideration which was 9.02% and was more than the tolerance limit of 5% for the subject assessment year. The assessment order and the details called for and submitted during assessment proceedings are totally silent on these issues. In view of these facts, the order of the AO was certainly erroneous in so far as it is prejudicial to the interests of revenue within the meaning of section 263 of the Act. The ld. PCIT has rightly invoked provisions of section 263 of the Act, which is upheld. Whether the direction issued by the ld. PCIT to disallow 30% of various expenses due to alleged failure of assessee to deduct TDS and addition u/s 50C is correct in the given facts and circumstances of the case? - It is not clear from the submission of the appellant that the daily wages and labour charges were for daily wage labourers or labour on contract basis. Therefore, the direction of the ld. PCIT is modified accordingly. In other words, the order of ld. PCIT to set aside the assessment order of AO is upheld but the AO is directed to verify requirement of TDS deduction on daily wage and labour charges. If there is no requirement of deduction due to the amount being less than the threshold limit of Rs. 30,000/- for single payment or Rs. 1 lakh in aggregate during the financial year, then such expenses should be allowed and only the remaining expenditure should be disallowed and added to the total income. This ground is partly allowed. Difference between the stamp duty value and sale consideration - The percentage of variation is 9.02% [(16,06,112 / 1,78,06,112) x 100]. The appellant submitted that the variation is less than 10% and hence no addition is needed. We find that during the subject AY.2018-19, the permissible limit was 5% and not 10%. The words “five per cent” were substituted by the words “ten per cent” by the Finance Act, 2020 w.e.f. 01.04.2021. Hence, it is applicable for AY.2021-22 and the subsequent assessment years. The order of ld. PCIT on this issue is accordingly upheld. This ground is dismissed. Appeal of the assessee is partly allowed. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether the Principal Commissioner of Income Tax (PCIT) was justified in initiating proceedings under section 263 of the Income Tax Act, 1961, challenging the assessment order passed by the Assessing Officer (AO).Whether the AO's assessment order was erroneous and prejudicial to the interests of the revenue due to lack of proper inquiry and verification regarding the deduction of Tax Deducted at Source (TDS) and the classification of income from the sale of property.Whether the PCIT's direction to disallow 30% of various expenses due to alleged failure to deduct TDS and to add the difference between the stamp duty value and sale consideration as income was appropriate.ISSUE-WISE DETAILED ANALYSIS1. Justification for Initiating Proceedings under Section 263Relevant Legal Framework and Precedents: Section 263 of the Income Tax Act allows the PCIT to revise an order if it is erroneous and prejudicial to the interests of the revenue. The PCIT must provide an opportunity for the assessee to be heard and conduct necessary inquiries.Court's Interpretation and Reasoning: The Tribunal found that the AO's order was cryptic and lacked detailed inquiry, especially given the case was selected for complete scrutiny. The AO failed to verify TDS compliance and the correct head of income for the sale of property.Application of Law to Facts: The Tribunal upheld the PCIT's initiation of proceedings under section 263, as the AO's order lacked proper inquiry and was prejudicial to the revenue.Treatment of Competing Arguments: The assessee argued that all necessary details were provided, and the AO's acceptance indicated no error. However, the Tribunal noted the absence of inquiry and verification by the AO.Conclusion: The Tribunal concluded that the PCIT was justified in invoking section 263.2. Error and Prejudice in AO's Assessment OrderRelevant Legal Framework and Precedents: The Tribunal referred to precedents like Malabar Industries Ltd. vs. CIT and other cases to support the requirement of proper inquiry by the AO.Key Evidence and Findings: The AO did not verify TDS compliance or the correct classification of income from property sale, despite significant expenses and discrepancies in reported income.Application of Law to Facts: The Tribunal found the AO's order erroneous due to lack of inquiry into TDS compliance and misclassification of income, which was prejudicial to the revenue.Conclusion: The Tribunal upheld the PCIT's finding that the AO's order was erroneous and prejudicial.3. Direction to Disallow 30% of Expenses and Add Income DifferenceRelevant Legal Framework and Precedents: Section 40(a)(ia) of the Act mandates disallowance of expenses if TDS is not deducted. Section 50C addresses the valuation of property for capital gains.Key Evidence and Findings: The PCIT directed disallowance of 30% of expenses due to alleged TDS non-compliance and addition of income based on stamp duty valuation.Application of Law to Facts: The Tribunal modified the PCIT's direction, allowing the AO to verify TDS compliance for daily wages and labour charges before disallowance.Conclusion: The Tribunal upheld the PCIT's direction regarding the property valuation but modified the direction on expense disallowance, requiring further verification by the AO.SIGNIFICANT HOLDINGSCore Principles Established: The AO must conduct thorough inquiries and verifications, especially in cases selected for complete scrutiny. Failure to do so can render an order erroneous and prejudicial to the revenue.Final Determinations on Each Issue: The Tribunal upheld the PCIT's invocation of section 263 and the direction to reassess the property valuation. However, it modified the direction on expense disallowance, requiring the AO to verify TDS compliance for certain expenses.The appeal was partly allowed, with the Tribunal directing further verification by the AO on specific issues.