The officer disallowed all my sub-contract payments because the sub-contractors did not turn up to summons. Can the whole payment be added back when the work was plainly done?
No. The Madras High Court held that where the contractor's books are not accepted, profit is to be estimated on the history of the gross and net profit rates of the assessee or of comparable contractors, and once that comparison is made, additions for non-production of sub-contractors are totally irrelevant and cannot be made. Here the sub-contractors had confirmed the transactions, payments were by cheque and subject to tax deducted at source, and measurement books signed by them recorded the work. The Commissioner (Appeals) had restricted the disallowance to 10 per cent, on the assessee's own offer, which produced a better result than earlier years. The Revenue's appeal was dismissed with a strong deprecation of routine appeals against findings of fact.
Decided by the High Court (High Court of Judicature at Madras; Dr Vineet Kothari J and Krishnan Ramasamy J) on 2020-08-07, reported as T.C.A. No. 766 of 2017, Madras High Court. It bears on section 260A, section 41(1), section 143(3) of the Income Tax Act 1961, in Assessment & Scrutiny and Appeals matters.
Bogus sub-contractor additions are among the commonest large additions on contractors, and the officer's standard justification is that the parties did not appear on summons. This judgment supplies the principled answer, which is that in a business where the work demonstrably got done the question is not whether each payee appeared but what profit the business made, and the yardstick is the assessee's own history. It states the rule in unusually blunt terms, that once profit rates are compared, additions for non-confirmation or non-production of sub-contractors are irrelevant. It is equally useful on section 41(1): an amount outstanding beyond three years does not become a cessation of liability, the officer must make enquiry and bring material on record rather than presume, and acknowledgement of the liability in the balance sheet extends limitation under section 18 of the Limitation Act. And it is worth citing on the scope of section 260A itself, and on the practice of the Revenue appealing pure findings of fact, which the Court deprecated strongly enough to direct that a copy go to the Chairman of the Board.
Binding within that High Court's jurisdiction. Persuasive elsewhere.
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For assessment year 2010-11 the assessee, a contractor, carried out road laying work at the JSW Energy thermal power plant at Ratnagiri, Maharashtra, as a sub-contract from EDAC Engineering Ltd, to the tune of about Rs 3,300 lakhs. It in turn assigned work to 14 sub-contractors. The Assessing Officer summoned them; they did not appear, and he disbelieved their existence and the work, disallowing the entire payments of Rs 4,41,08,210 and adding them back. He also added Rs 18,16,728 under section 41(1) on the footing that creditors outstanding for more than three years were not recoverable in law under the Limitation Act. Before the Commissioner (Appeals) it emerged that all 14 had furnished confirmations, some had sent copies of their income-tax returns and bank accounts, 11 had sent details from far-off places by courier, one, Sakthi Kanna Constructions Pvt Ltd, had appeared and been accepted, and only two had not complied; that several kept no invoice copies but only measurement books, retained by the assessee, recording work done and measurements with the supervisor's signature; that payments were by cheque and subject to tax deducted at source; and that most of the labour contractors were relatives or acquaintances of the assessee. The turnover was Rs 3,334.16 lakhs with gross profit of 14.21 per cent and net profit of 3.83 per cent, against net profit rates in earlier years of 4.20, 3.94, 2.79, 2.01 and 2.92 per cent. The assessee offered 10 per cent of the disallowance, Rs 44,10,821, and the Commissioner (Appeals) restricted the addition to that and deleted the section 41(1) addition. The Tribunal dismissed the Revenue's appeal on 14 January 2016, and the Revenue appealed under section 260A.
The appeal was dismissed, no question of law, much less a substantial question of law, being found to arise, and no costs were awarded. On the sub-contract payments, the Court held that the estimation of profit by the appellate authorities, even on the Assessing Officer's own premise that some sub-contractors could not be produced, involved no perversity: the declared gross profit of 14.21 per cent and net profit of 3.83 per cent, with the agreed 10 per cent addition, produced a much better result than in earlier years, in three of which the net profit rate was below 3 per cent. The Court observed that on those figures no disallowance was called for at all, and that the assessee appeared to have agreed to the addition under compulsion of circumstances to avoid litigation and buy peace. On section 41(1) it upheld the concurrent findings that the amount did not become bad merely on the expiry of three years of limitation and that there was no cessation of liability. The Court held that findings of fact by the authorities below bind the High Court under section 260A unless glaring perversity is pointed out and established, and strongly deprecated the Revenue's practice of filing appeals against pure findings of fact in a reckless manner without application of mind by the sanctioning authorities. It refrained from imposing exemplary costs but issued a clear warning, and directed the Registry to send a copy of the order to the Chairman of the Central Board of Direct Taxes, to the Secretary, Ministry of Finance, and to the President of the Income Tax Appellate Tribunal.
On the main issue the Court took its stand on the nature of the business. Road laying could not have been done without labour, there was no evidence that the work at Ratnagiri had not been executed, and the measurement books, countersigned by the sub-contractors, recorded what was done and when. The only real discrepancy was that the payments were not supported by bills raised by the parties but by self-made vouchers, and that most of the parties did not attend on summons; but they had confirmed the transactions, the payments were by cheque and had suffered tax deducted at source, and the amounts tallied with the credit claimed. When the Court asked Revenue counsel how the work could have been carried out in the absence of the sub-contractors, and why the appellate authorities' estimate of profit could not be made, no satisfactory answer was given. From there the Court stated the governing principle: where the department does not accept a contractor's books, profit may be estimated on the history of the assessee's own gross and net profit rates or on comparable contractors' cases, and once such rates are compared, additions for non-confirmation or non-production of sub-contractors are totally irrelevant and cannot be made. Measured against the table of six years' results, the year in question was the best on gross profit and better than three of the five earlier years on net profit even before the agreed 10 per cent addition, so there was no perversity to correct. On section 41(1) the Court adopted the Tribunal's reasoning: the officer had issued no notice to the creditors to find out whether they had given up their dues, the assessee had not written the amounts back, and beyond the mere fact that they were outstanding there was no material of remission or cessation. It is not open to an officer to presume cessation, and where a company acknowledges the liability in its balance sheet year after year, that acknowledgement extends limitation under section 18 of the Limitation Act, so the debts subsist. Finally the Court addressed the appeal itself, holding that in the hierarchy of fact-finding bodies the Assessing Officer's findings are superseded by those of the appellate authorities, and that under section 260A there is nothing for the High Court to do unless perversity is clearly visible, established and proved.
Once such profit rates are compared, the additions on account of non confirmation or non production of the sub contractors, etc. is totally irrelevant and cannot be made.
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Handle my notice → Ask a CA on WhatsAppNo. The Madras High Court held that where the contractor's books are not accepted, profit is to be estimated on the history of the gross and net profit rates of the assessee or of comparable contractors, and once that comparison is made, additions for non-production of sub-contractors are totally irrelevant and cannot be made. Here the sub-contractors had confirmed the transactions, payments were by cheque and subject to tax deducted at source, and measurement books signed by them recorded the work. The Commissioner (Appeals) had restricted the disallowance to 10 per cent, on the assessee's own offer, which produced a better result than earlier years. The Revenue's appeal was dismissed with a strong deprecation of routine appeals against findings of fact. This was decided by the High Court (High Court of Judicature at Madras; Dr Vineet Kothari J and Krishnan Ramasamy J) and bears on section 260A, section 41(1), section 143(3) of the Income Tax Act 1961. It is reported as T.C.A. No. 766 of 2017, Madras High Court. Bogus sub-contractor additions are among the commonest large additions on contractors, and the officer's standard justification is that the parties did not appear on summons. This judgment supplies the principled answer, which is that in a business where the work demonstrably got done the question is not whether each payee appeared but what profit the business made, and the yardstick is the assessee's own history. It states the rule in unusually blunt terms, that once profit rates are compared, additions for non-confirmation or non-production of sub-contractors are irrelevant. It is equally useful on section 41(1): an amount outstanding beyond three years does not become a cessation of liability, the officer must make enquiry and bring material on record rather than presume, and acknowledgement of the liability in the balance sheet extends limitation under section 18 of the Limitation Act. And it is worth citing on the scope of section 260A itself, and on the practice of the Revenue appealing pure findings of fact, which the Court deprecated strongly enough to direct that a copy go to the Chairman of the Board. If it applies to you, the first step is this: Put the profit comparison on record early: a table of turnover, gross profit and net profit for the current and earlier years, and show that the year in question compares well.
For assessment year 2010-11 the assessee, a contractor, carried out road laying work at the JSW Energy thermal power plant at Ratnagiri, Maharashtra, as a sub-contract from EDAC Engineering Ltd, to the tune of about Rs 3,300 lakhs. It in turn assigned work to 14 sub-contractors. The Assessing Officer summoned them; they did not appear, and he disbelieved their existence and the work, disallowing the entire payments of Rs 4,41,08,210 and adding them back. He also added Rs 18,16,728 under section 41(1) on the footing that creditors outstanding for more than three years were not recoverable in law under the Limitation Act. Before the Commissioner (Appeals) it emerged that all 14 had furnished confirmations, some had sent copies of their income-tax returns and bank accounts, 11 had sent details from far-off places by courier, one, Sakthi Kanna Constructions Pvt Ltd, had appeared and been accepted, and only two had not complied; that several kept no invoice copies but only measurement books, retained by the assessee, recording work done and measurements with the supervisor's signature; that payments were by cheque and subject to tax deducted at source; and that most of the labour contractors were relatives or acquaintances of the assessee. The turnover was Rs 3,334.16 lakhs with gross profit of 14.21 per cent and net profit of 3.83 per cent, against net profit rates in earlier years of 4.20, 3.94, 2.79, 2.01 and 2.92 per cent. The assessee offered 10 per cent of the disallowance, Rs 44,10,821, and the Commissioner (Appeals) restricted the addition to that and deleted the section 41(1) addition. The Tribunal dismissed the Revenue's appeal on 14 January 2016, and the Revenue appealed under section 260A. The matter was decided on 2020-08-07 by the High Court (High Court of Judicature at Madras; Dr Vineet Kothari J and Krishnan Ramasamy J). On those facts the High Court held as follows. The appeal was dismissed, no question of law, much less a substantial question of law, being found to arise, and no costs were awarded. On the sub-contract payments, the Court held that the estimation of profit by the appellate authorities, even on the Assessing Officer's own premise that some sub-contractors could not be produced, involved no perversity: the declared gross profit of 14.21 per cent and net profit of 3.83 per cent, with the agreed 10 per cent addition, produced a much better result than in earlier years, in three of which the net profit rate was below 3 per cent. The Court observed that on those figures no disallowance was called for at all, and that the assessee appeared to have agreed to the addition under compulsion of circumstances to avoid litigation and buy peace. On section 41(1) it upheld the concurrent findings that the amount did not become bad merely on the expiry of three years of limitation and that there was no cessation of liability. The Court held that findings of fact by the authorities below bind the High Court under section 260A unless glaring perversity is pointed out and established, and strongly deprecated the Revenue's practice of filing appeals against pure findings of fact in a reckless manner without application of mind by the sanctioning authorities. It refrained from imposing exemplary costs but issued a clear warning, and directed the Registry to send a copy of the order to the Chairman of the Central Board of Direct Taxes, to the Secretary, Ministry of Finance, and to the President of the Income Tax Appellate Tribunal.
On the main issue the Court took its stand on the nature of the business. Road laying could not have been done without labour, there was no evidence that the work at Ratnagiri had not been executed, and the measurement books, countersigned by the sub-contractors, recorded what was done and when. The only real discrepancy was that the payments were not supported by bills raised by the parties but by self-made vouchers, and that most of the parties did not attend on summons; but they had confirmed the transactions, the payments were by cheque and had suffered tax deducted at source, and the amounts tallied with the credit claimed. When the Court asked Revenue counsel how the work could have been carried out in the absence of the sub-contractors, and why the appellate authorities' estimate of profit could not be made, no satisfactory answer was given. From there the Court stated the governing principle: where the department does not accept a contractor's books, profit may be estimated on the history of the assessee's own gross and net profit rates or on comparable contractors' cases, and once such rates are compared, additions for non-confirmation or non-production of sub-contractors are totally irrelevant and cannot be made. Measured against the table of six years' results, the year in question was the best on gross profit and better than three of the five earlier years on net profit even before the agreed 10 per cent addition, so there was no perversity to correct. On section 41(1) the Court adopted the Tribunal's reasoning: the officer had issued no notice to the creditors to find out whether they had given up their dues, the assessee had not written the amounts back, and beyond the mere fact that they were outstanding there was no material of remission or cessation. It is not open to an officer to presume cessation, and where a company acknowledges the liability in its balance sheet year after year, that acknowledgement extends limitation under section 18 of the Limitation Act, so the debts subsist. Finally the Court addressed the appeal itself, holding that in the hierarchy of fact-finding bodies the Assessing Officer's findings are superseded by those of the appellate authorities, and that under section 260A there is nothing for the High Court to do unless perversity is clearly visible, established and proved. In the words reproduced by the source cited on this page: "Once such profit rates are compared, the additions on account of non confirmation or non production of the sub contractors, etc. is totally irrelevant and cannot be made."
It was decided by the High Court on 2020-08-07 and is reported as T.C.A. No. 766 of 2017, Madras High Court. Binding within that High Court's jurisdiction. Persuasive elsewhere. A High Court decision binds the assessing officer, the Commissioner (Appeals) and the Income Tax Appellate Tribunal within that state, and is persuasive elsewhere. If your assessment is in a different jurisdiction, check whether your own High Court has taken the same view before relying on it. On section 260A, section 41(1), section 143(3), the practical question is whether the facts of your own notice match the facts of this case closely enough for the same rule to apply.
It helps the taxpayer. The appeal was dismissed, no question of law, much less a substantial question of law, being found to arise, and no costs were awarded. On the sub-contract payments, the Court held that the estimation of profit by the appellate authorities, even on the Assessing Officer's own premise that some sub-contractors could not be produced, involved no perversity: the declared gross profit of 14.21 per cent and net profit of 3.83 per cent, with the agreed 10 per cent addition, produced a much better result than in earlier years, in three of which the net profit rate was below 3 per cent. The Court observed that on those figures no disallowance was called for at all, and that the assessee appeared to have agreed to the addition under compulsion of circumstances to avoid litigation and buy peace. On section 41(1) it upheld the concurrent findings that the amount did not become bad merely on the expiry of three years of limitation and that there was no cessation of liability. The Court held that findings of fact by the authorities below bind the High Court under section 260A unless glaring perversity is pointed out and established, and strongly deprecated the Revenue's practice of filing appeals against pure findings of fact in a reckless manner without application of mind by the sanctioning authorities. It refrained from imposing exemplary costs but issued a clear warning, and directed the Registry to send a copy of the order to the Chairman of the Central Board of Direct Taxes, to the Secretary, Ministry of Finance, and to the President of the Income Tax Appellate Tribunal. It arises in Assessment & Scrutiny and Appeals matters, on section 260A, section 41(1), section 143(3) of the Income Tax Act 1961, and was decided by High Court of Judicature at Madras; Dr Vineet Kothari J and Krishnan Ramasamy J. Before relying on it, read the source linked on this page and check whether it has since been distinguished, overruled or overtaken by an amendment to the Income Tax Act. In practice the steps that follow from it are these. Assemble what proves the work rather than the payee: measurement books signed by the supervisor and the sub-contractor, the main contract, tax deducted at source and payments by cheque, and confirmations. Where production of a party is impossible, offer the officer the confirmation, return and bank statement, and press for an estimate instead of a full disallowance, citing the profit history. Against a section 41(1) addition for old creditors, show the balances carried in the balance sheet year after year and never written back, and demand that the officer produce material of remission or cessation rather than relying on the three-year limitation period.
Still good law. A Division Bench judgment of 7 August 2020 dismissing the Revenue's appeal on the footing that no substantial question of law arose. The source page records that it has been cited in 18 later matters, though those citing decisions were not read in this session, so what they take from it is not known. Whether it has been carried to the Supreme Court was also not checked. No source could be cited for that finding. Checking whether an authority still stands matters as much as knowing what it held: a decision may be overruled on one point and survive on another, or the provision it interprets may have been amended since. Read the source and the editor's note on this page before relying on it in a reply to an Assessing Officer or in an appeal.
The Court's statement that once profit rates are compared, additions for non-production of sub-contractors are irrelevant is made in the context of a business where the work was demonstrably executed and where confirmations, cheque payments and tax deducted at source were on record; it should not be read as covering a case where the department has positive material that the payees are entry providers. The 10 per cent addition was made on the assessee's own offer to buy peace, and the Court observed that on the figures no disallowance was called for, but it did not delete the addition, so the order is not authority for reversing an agreed disallowance. The judgment does not record how the main contract sum of about Rs 3,300 lakhs relates to the turnover of Rs 3,334.16 lakhs, nor which sub-contractors were the two who did not comply. The comparative table as harvested is misaligned in the columns for the year ended 31 March 2009 and 31 March 2010, though the Court's own narration of the rates in paragraph 16 is clear. The batch line gave the sections as 260A, 143(3) and 41(1), which matches. The orders of the Commissioner (Appeals) and the Tribunal beyond the passages extracted, and the decisions in EDAC Engineering Ltd v ACIT, CIT v Hotline Electronics Ltd and CIT v GP International Ltd relied on by the Tribunal, were not read in this session. This library shows the verification state of every entry openly. This entry has not yet been read in full by a chartered accountant. The summary reflects the sources listed on this page. Read the source before you rely on it in a reply to an Assessing Officer or in an appeal before the Commissioner (Appeals) or the Income Tax Appellate Tribunal.
The appeal was dismissed, no question of law, much less a substantial question of law, being found to arise, and no costs were awarded. On the sub-contract payments, the Court held that the estimation of profit by the appellate authorities, even on the Assessing Officer's own premise that some sub-contractors could not be produced, involved no perversity: the declared gross profit of 14.21 per cent and net profit of 3.83 per cent, with the agreed 10 per cent addition, produced a much better result than in earlier years, in three of which the net profit rate was below 3 per cent. The Court observed that on those figures no disallowance was called for at all, and that the assessee appeared to have agreed to the addition under compulsion of circumstances to avoid litigation and buy peace. On section 41(1) it upheld the concurrent findings that the amount did not become bad merely on the expiry of three years of limitation and that there was no cessation of liability. The Court held that findings of fact by the authorities below bind the High Court under section 260A unless glaring perversity is pointed out and established, and strongly deprecated the Revenue's practice of filing appeals against pure findings of fact in a reckless manner without application of mind by the sanctioning authorities. It refrained from imposing exemplary costs but issued a clear warning, and directed the Registry to send a copy of the order to the Chairman of the Central Board of Direct Taxes, to the Secretary, Ministry of Finance, and to the President of the Income Tax Appellate Tribunal.
TaxSphere, “Commissioner of Income Tax v SPL Infrastructure Pvt Ltd”, https://taxnotice.vittsphere.com/caselaw/case/cit-v-spl-infrastructure-subcontractor-profit-estimation/ (validity last checked 2026-08-29)
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