2011 (11) TMI 739 - AT - Income Tax

Unaccounted sales - Nexus proved between the seized documents and the assessee. Section 40(a)(ia) r/w section 194H - rate of tax applicable

Summary

Issues Involved:

1. Addition on account of unaccounted sales.
2. Disallowance of inflated labor charges.
3. Telescoping of addition of inflated labor charges against excess stock found.
4. Disallowance under section 40(a)(ia) r/w section 194C.
5. Disallowance under section 40(a)(ia) r/w section 194H.

Detailed Analysis:

1. Addition on account of unaccounted sales:

The Tribunal examined whether the unaccounted sales were from trading transactions or manufacturing transactions. The material seized during the search, including the statements of Mr. Bhagwan Gada and Mr. Kalpesh Gada, indicated that the transactions were unaccounted trading transactions. The Tribunal found no evidence of suppression in production or defects in the production registers. Consequently, the unaccounted trading transactions were held to belong to Mr. Kalpesh Gada and Mr. Vipul Gada, not to Mr. Alpesh B. Gada or M/s. K.K. Tex Enterprises. The addition made on account of unaccounted sales was deleted. The Tribunal also noted that even if the transactions were considered, only the profit from the transactions could be taxed, not the entire turnover.

2. Disallowance of inflated labor charges:

The Tribunal noted that the average labor charges paid by the assessee increased over the years due to inflation. The Tribunal referred to its previous decisions, where labor charges were allowed at Rs. 3.00 per meter. Considering the evidence from the seized material, the Tribunal restored the issue to the Assessing Officer for fresh adjudication, directing the AO to consider the inflation factor and the material found during the search.

3. Telescoping of addition of inflated labor charges against excess stock found:

In the appeals for assessment years 2008-09, the assessee raised an additional ground for telescoping the addition of inflated labor charges against excess stock found. The Tribunal restored this issue to the Assessing Officer for fresh adjudication, directing the AO to grant telescoping benefits to the extent of additions sustained.

4. Disallowance under section 40(a)(ia) r/w section 194C:

The assessee did not press this ground, and consequently, it was dismissed as "not pressed."

5. Disallowance under section 40(a)(ia) r/w section 194H:

The Tribunal noted that the applicable tax rate for the relevant assessment year was 5%, and the rate of 10% came into effect from 1st June 2007. Therefore, the disallowance on the ground that TDS was deducted at a lower rate than prescribed was deleted.

Conclusion:

The appeals were partly allowed, with the Tribunal providing relief on several grounds, including the deletion of additions on account of unaccounted sales and the issue of inflated labor charges being restored to the Assessing Officer for fresh adjudication. The Tribunal also provided directions for telescoping benefits and addressed the issues related to disallowance under section 40(a)(ia) r/w sections 194C and 194H.