Nagabhushanam & Co. Vs ITO (ITAT Hyderabad)
ITAT Hyderabad Upholds PCIT’s Section 263 Revision – 99% Subcontracting Expenses Not Verified by AO- GST Statement Exposed Bogus Subcontracts
Background
- Assessee filed ROI (30.10.2018) declaring ₹3.94 Cr income.
- Flagged under risk management – AO noted ITC claim of ₹1.12 Cr based on invoices from 3 subcontractors (GJS Infratech, Sri Laxmi Constructions, Roll-on Projects) without actual supply.
- AO reopened u/s 147; reassessment completed on 15.02.2023 without any addition.
- PCIT invoked s.263 (04.03.2025), holding AO failed to verify genuineness of ₹9.38 Cr subcontract expenses against receipts of ₹9.47 Cr (99% of receipts). Directed fresh assessment
Assessee’s Arguments
- Work contract from Reddy Veeranna Constructions Pvt. Ltd. (₹9.47 Cr) was subcontracted (₹9.38 Cr), retaining 1% margin.
- AO issued notice u/s 143(2), assessee filed detailed submissions with agreements & bills.
- Cited SC in Malabar Industrial Co. Ltd. (243 ITR 83) – both error & prejudice must coexist for s.263.
- Since AO took a view after submissions, revision not justified
Revenue’s Stand
- AO’s order was non-speaking; no findings recorded on verification of agreements or payments.
- Managing Partner’s statement before GST authorities admitted no actual subcontract work done & ITC was irregular.
- No work orders of RVCPL or subcontracts were examined.
- Hence, order erroneous & prejudicial, squarely covered by Explanation 2(a) to s.263
Tribunal’s Observations /Decision
- AO neither verified work orders nor subcontract agreements; failed to check evidence despite 99% receipts claimed as expenses.
- Explanation 2(a) to s.263 deems such omission as “erroneous & prejudicial.”
- Cited Malabar Industrial Co. Ltd. (SC) – twin conditions satisfied.
- PCIT rightly revised order; AO’s failure to conduct basic enquiry vitiated assessment
- PCIT’s order upheld; reassessment set aside for de novo adjudication.
- Assessee’s appeal dismissed
FULL TEXT OF THE ORDER OF ITAT HYDERABAD
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