INCOME TAX APPELLATE TRIBUNAL “ A ” BENCH, AHMEDABAD

I.T.A. No. 2689/Ahd/2011 Assessment Year : 2007-08
DCIT (Appellant) vs PD Construction Co. (Respondent)
Date of Order: 04/02/2016

ORDER

PER SHRI KUL BHARAT, JUDICIAL MEMBER :

The Revenue and the Assessee have challenged the order of the Ld.Commissioner of Income Tax(Appeals)-Gandhinagar ‘CIT(A)’ in short] dated 04/08/2011 by filing the appeal and Cross Objection respectively pertaining to Assessment Year (AY) 2007-08.

2. First, we take up the Revenue’s appeal in ITA No.2689/Ahd/2011 for AY 2007-08. The Revenue has raised the following grounds of appeal:

1. The Ld.CIT(A)-XX, Ahmedabad has erred in law and on facts in granting relief of Rs.56,93,429/- out of the additions made by the Assessing Officer towards payment of labour charges.

1.2. The Ld.CIT(A) has not appreciated the evidence obtained on record and the additions sustained is too meager and not acceptable.

2. It is therefore, prayed that the order of the CIT(A) be set aside and that of the Assessing Officer be restored to the above extent.

2. Briefly stated facts of the case are that the return of income for AY 2007-08 was filed on 31/10/2007 showing net taxable income at Rs.9,97,170/-. The assessment was finalized u/s.143(3) of the IT Act, 1961 on 16.12.2009 determining total income at Rs.11,99,660/-. The assessment was set aside by the CIT-VI Ahmedabad u/s.263 of the Income Tax Act,1961 (hereinafter referred to as “the Act”) vide order dated 31/03/2010. In pursuance to the order of the CIT, the Assessing Officer (AO in short) made an assessment order vide dated 23/12/2010, thereby the AO made disallowance of labour charges of Rs.57,36,154/- & also the disallowance out of labour charges of Rs.4,57,275/- and disallowance out of JCB/Tractor Rent Hire expenses of Rs.64,960/-. The total disallowance made by the AO of Rs.62,58,389/- and the same was added back to the total income of the assessee. The assessee being aggrieved by the assessment order, preferred an appeal before the ld.CIT(A), who after considering the submissions of the assessee partly allowed the appeal. While partly allowing the appeal, the ld.CIT(A) confirmed the addition of Rs.5 lacs (out of Rs.57,36,154/- + Rs.4,57,275/-). The ld.CIT(A) also confirmed the addition made on account of JCB/Tractor Rent Hire expenses of Rs.64,960/-. Against the order of the ld.CIT(A), now the Revenue and the Assessee are in appeal and cross-objection respectively before us.

3. The only effective ground in this Revenue’s appeal is against restricting the disallowance of labour charges to Rs.5 lacs and granting relief of Rs.56,93,429/-. The ld.Sr.DR Shri Dinesh Singh vehemently argued that the ld.CIT(A) was not justified in deleting the addition and he placed strong reliance on the order of the AO. He submitted that the AO has pointed out various defects into the explanation as given by the assessee. He took us through the assessment order at paras-7 to 9 to buttress the argument that the disallowance is made by the AO is justified and the ld.CIT(A) was not justified in deleting the same.

3.1. On the contrary, ld.Sr.counsel for the assessee Shri S.N.Soparkar submitted that the AO had made disallowance on the basis of conjectures and surmises without being confronting the assessee and also the AO overlooked the material evidence which were placed before him. Under these facts, the AO was not justified in making the disallowance.

4. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. The only issue to be adjudicated in the Revenue’s appeal is whether the ld.CIT(A) was justified in deleting the disallowance made on account of payment of labour charges. The AO in the assessment order observed that the assessee as on 31/03/2007 has shown ‘unpaid labour chargesBhuj’ of Rs.30,99,830/- and ‘Labour Charges Payable’ of Rs.26,36,324/- out of total ‘Labour Charges’ of Rs.1,61,80,924/-. In order to verify the same, the AO called upon the assessee to explain the same. In response thereto, the assessee placed various evidences before the AO in the form of ledger account, monthly labour-sheets, summary of unpaid labour of 2006-07 paid in 2007-08, with journal voucher. The assessee also filed a comparative chart showing percentage of labour expenses/labour payable, sub-contractor expenses and Tractor/JCB rent hire charges for AYs 2004-05, 2005-06, 2006-07, 2007-08 & 2008-09 before the AO. The ld.CIT(A) granted relief to the assessee in paras 4.3 to 4.5 of his order, by observing as under:-

“4.3. AO's observations for disallowing labour charges of Rs.57,36,1547- are as follow. It is seen from the balance sheet that labour charges at Bhuj Rs.30,99,830/- and labour charges at Bhavnagar of Rs.26,36,324/- were found outstanding out of the total labour charges claimed of Rs. 1,61,80,9247-; "labour sheets" were maintained on A4 size computer papers and not in any register; most of the thumb impressions were made by a few persons; therefore, the labour sheets produced were nothing but an afterthought to inflate the labour expenses, the outstanding wages were paid almost a year after the end of the previous year; and as most of the payments were made in cash, it is not possible to ascertain the liability to make TDS. AO came to the finding that either the appellant inflated the labour expenditure or hired the labourers through the labour contractors and failed to deduct the tax. Accordingly, she held that the impugned amount of outstanding labour charge of Rs. 57,36,154/- was either disallowable as bogus or disallowable u/s.40(a)(ia). AO disallowed further sum of Rs.4,57,275/-, being 10% of the total labour charges minus outstanding labour charges minus labour charges on which tax was deducted.

4.4 The contentions of the learned AR on the issue in brief are as follow:

The learned AO failed to appreciate the system of making payments to labourers; the labour used to receive payments on specified dates either by themselves or through their colleagues or relatives. None of the persons to whom the payments were made was examined; no further explanation was sought by the AO from the appellant before taking adverse decision; the sub-contract labour expenses and the outstanding labour expenses are comparable with the figures of the immediately preceding 3 years; in the assessment orders u/s. 143(3) for the immediately preceding assessment years 2005-06 and 2006-07, only lumpsum disallowance of Rs.50,000/- was made out of labour expenses and therefore, impugned disallowance of Rs. 57,36,1547- is unwarranted. Regarding further disallowance of Rs.4,57,275/-, he contended that it was based on mere suspicion and without any evidence.

4.5 The appellant is carrying on contract work at the sites at Bhuj and Bhavnagar. As contended by the learned AR, the amount of labour expenses and the outstanding labour expenses compare well with the preceding 3 years. In the preceding two assessment orders u/s. 143(3), it is seen that only lumpsum disallowance of Rs.50,000/- and Rs.45,000/- was made. Keeping in view the nature of expenditure being labour payment made at two different sites, I am of the view that no serious adverse inference can be drawn from the fact that some of the thumb impression tally. As contended by the learned AR, there is nothing surprising that the some labour may be receiving payment on behalf of some of his friends and relatives. The AO has not conducted any enquiries with any of the labourers to disprove the contention of the appellant. It is pertinent to note that the sample of finger-prints taken by AO is too small to make such huge disallowance and the appellant vide ground Nos. 4 & 6 pleaded for reducing the disallowances to a reasonable extent. Therefore, keeping in view the discrepancies pointed out by the AO in the labour sheets and the facts of the matter, I am of the view that the lumpsum disallowance of Rs. 5 lakhs out of the labour expenses would meet the ends of justice. Accordingly, disallowance of the said sum is upheld and the balance disallowance of Rs.56,93,429/- (Rs.57,36,154/- + Rs.4,57,275 – 5,00,000/-) is deleted. These grounds of appeal are partly allowed.”

4.1. Now the question before us to decide is whether the above observation of the ld.CIT(A) is justified and is inconsonance with the principles of law. It is well settled now that in respect of any expenditure claimed by the assessee, the AO is required to verify whether the assessee had carried out certain work or not for which such expenditure is claimed. In case, if he satisfied, that no such work was carried out, then it would give rise to suspicion about the genuineness of the claim of the assessee. Therefore, in our considered view, for verifying the veracity of claim of expenditure, the AO has to find out the activity for which expenditure was made, nature of expenditure, persons to whom the payment was made and also the mode of payment. Further, if the AO on the basis of such verification is not satisfied about the veracity of the claim of the expenditure, in that event, he is required to confront the assessee in the interest of principles of natural justice. In the case in hand, the AO did not accept the claim of the assessee on the ground that thump impression of two different persons tally exactly the same, the labourers have been paid wages ranging from Rs.500 to Rs.5000 for a single day. These payments cannot be for the daily wages of unskilled labour hired on daily basis and most of the payments were made in cash, therefore, he could not verify as to whom the payments were made. Undisputedly, the AO has not confronted with the assessee about the similarity of finger prints, etc. Moreover, it is observed that the assessee had claimed labour charges in the earlier years and subsequent years, which has been accepted by the Revenue. Under these facts, we are of the view that the AO was not justified in making the disallowance without confronting the assessee and also giving a finding on fact whether the assessee had carried out some work or not for which the expenditure had been claimed. Therefore, the ground raised by the Revenue is rejected. As a result, Revenue’s appeal is dismissed.

5. Now, we take up the Cross Objection No.271/Ahd/2011 for AY 2007-08 filed by the assessee (arising out of ITA No.2689/Ahd/2011 for AY 2007-08-Revenue’s appeal). The assessee has raised following grounds in its cross-objection:-

1. Ld.CIT(A) erred in law and on facts in confirming lumpsum disallowance of Rs.5,00,000/- out of labour charges expended as well from labour expenses made without deduction of TDS. Ld.CIT(A) despite holding the claim of the appellant to be genuine confirmed lumpsum disallowance of legitimate business expense without giving any cogent reasons. Ld.CIT(A) ought to have deleted disallowance by AO of payment of labour charges in toto.

2. Ld.CIT(A) erred in confirming adhoc disallowance of Rs.64,960/- made by AO @ 10% of total JCB hire charges without taking into consideration submissions made by the appellant. Ld.CIT(A) ought to have deleted such adhoc disallowance of legitimate business expenses.

The appellant craves leave to add, amend, edit, delete, change or modify all or any of the ground before or at the time of hearing.

5.1. Apropos to ground No.1, the ld.Sr.counsel for the assessee submitted that the ld.CIT(A) was not justified in confirming lumpsum disallowance of Rs.5,00,000/-, despite having come to the conclusion that in preceding years claim of the assessee was accepted. He submitted that the authorities below have based their finding on the mere basis of conjectures and surmises.

5.2. On the contrary, ld.Sr.DR opposed the submission of the ld.Sr.counsel for the assessee and submitted that the assessee failed to explain the discrepancies as pointed out by the AO.

6. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. The assessee has been claiming the labour expenses, adhoc disallowance of Rs.50,000/- and Rs.45,000/- was also made in the preceding year. In the year under appeal, the ld.CIT(A) has sustained the disallowance to the extent of Rs.5,00,000/- to cover up the discrepancies as pointed out in the assessment order. It is settled position of law that the assessee is required to satisfactorily explain the expenditure which is being claimed as labour expenditure. In the present case, the l.CIT(A), after considering the preceding year as well as the facts of the present case, has estimated the disallowance at Rs.5,00,000/- as there are instances when the assessee has not given any plausible explanation in respect of expenditure so claimed. Under these facts, no interference is called for from the impugned order. Accordingly, this ground of cross-objection is rejected.

7. Ground No.2 of assessee’s cross-objection relates to sustaining the expenditure of Rs.64,960/- of JCB hire charges. The ld.Sr.counsel for the assessee submitted that the authorities below were not justified in making and sustaining the disallowance. He submitted that authorities below failed to appreciate the fact that in earlier year, such expenditure was allowed. He submitted that the assessee has incurred legitimate business expenditure.

7.1. On the contrary, ld.Sr.DR opposed the submission of the ld.Sr.counsel for the assessee and submitted that the authorities below have given finding on fact that the assessee failed to given justification of expenditure with supporting evidence. The ld.Sr.DR submitted that it is incumbent upon the assessee to prove that expenditure was, in fact, incurred. In the absence of supporting evidence, the claim of the assessee has rightly been rejected.

8. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. The ld.CIT(A) has given a finding on fact in para-5.2 of his order by observing as under:-

“5.2. The AO observed that out of the total JCB hire charges of Rs.17,37,382/- a sum of Rs.6,49,602/- were paid in cash on which no tax was deducted; and the vouchers produced were self made and did not contain the details like the site, address of person etc. Therefore, AO disallowed 10% of the expenses incurred in cash which worked out to Rs.64,960/-. The contentions of the learned AR in this regard are general, vague and do not controvert the observations of the AO. The impugned disallowance is upheld. These grounds of appeal are dismissed.”

8.1. The above finding of ld.CIT(A) is not controverted by the assessee by placing any contrary material on record. Therefore, we do not see any reason to interfere with the order of the ld.CIT(A), same is hereby upheld as it was incumbent upon the assessee to prove the expenditure with supporting evidence when payment is made in cash and no tax was deducted thereon. Thus, this ground of assessee’s cross-objection is also rejected.

9. In the combined result, the appeal of the Revenue and the Cross Objection filed by the assessee both are dismissed.

Order pronounced in the Court on Thursday, the 4th day of February, 2016 at Ahmedabad

( PRAMOD KUMAR )               ( KUL BHARAT )
ACCOUNTANT MEMBER        JUDICIAL MEMBER