2012 (8) TMI 676 - AT - Income Tax

Disallowance of expenditure towards labour and metal charges - CIT (A) reduced disallowance from 15% to 5% - Held that - Considering the consistent stand of the assessee that contract work executed by it for AY under dispute involved laying new roads which require more expenditure towards labour charges and metal purchases unlike he earlier assessment year where the assessee under took repairs of existing roads, thus the CIT (A) has correctly observed that it is not possible to obtain vouchers for this type of expenditure and they have to be allowed on a reasonable basis - as the assessee had declared 11.5% which appears to be reasonable considering the nature of work executed by the assessee direction of CIT (A) to restrict the disallowance at 5% on total expenditure - in favour of assessee. Disallowance of departmental recoveries - CIT (A) deleted the addition - Held that - The recoveries were made by the government departments towards quality control charges in case of every contractor and the assessee has also produced evidence before CIT (A) relating to the recoveries made by the department on consideration of which the CIT (A) has allowed deduction claimed by the assessee - No reason to interfere with the finding of the CIT (A) on this issue - in favour of assessee. Disallowed u/s 40A(3) - Held that - It is an accepted practice in such nature of contract works that payments are made either daily or weekly to the labourer s through team leader (mestri) and such payment is recorded in single entry in cash book as it is simply not possible to make entries for payment made to each labourer as they are large in number. However, in reality, the payment made is an aggregate payment made to each labourer, if considered individually will be much less than Rs.20,000/-. In the aforesaid view of the matter, no disallowance u/s 40A (3)is called for considering peculiar facts of the case - in favour of assessee.

Summary

Issues:
1. Disallowance of expenditure towards labour charges and metal purchases.
2. Disallowance of departmental recoveries.
3. Disallowance of labour payments exceeding Rs.20,000 under section 40A(3) of the Income-tax Act, 1961.

Issue 1: Disallowance of Expenditure towards Labour Charges and Metal Purchases:
The Revenue challenged the CIT (A)'s order reducing disallowance from 15% to 5% on account of labour charges and metal purchases. The assessee explained that the increased expenditure was due to construction of new roads involving more labour and metal consumption compared to the previous year's repair work on existing roads. The AO disallowed 15% of the expenditure due to lack of supporting bills and vouchers. The CIT (A) restricted the disallowance to 5% considering the nature of work and difficulty in obtaining proper vouchers. The Tribunal upheld the CIT (A)'s decision, stating that the expenditure was reasonable given the nature of work, and interference was unnecessary.

Issue 2: Disallowance of Departmental Recoveries:
The AO disallowed an amount debited by the assessee towards departmental recoveries due to lack of details regarding the nature of deductions. The CIT (A) deleted the disallowance after the assessee explained that the recoveries were quality control charges deducted by government departments from every contractor's bills. The Tribunal upheld the CIT (A)'s decision, noting that the deductions were standard and supported by evidence provided by the assessee.

Issue 3: Disallowance of Labour Payments Exceeding Rs.20,000 under Section 40A(3):
The AO disallowed 20% of labour payments exceeding Rs.20,000 made by the assessee, citing non-compliance with section 40A(3) as payments were made through vouchers exceeding the limit. The CIT (A) allowed the appeal, explaining that the payments were aggregated payments to individual labourers working under a team leader, each being less than Rs.20,000. The Tribunal upheld the CIT (A)'s decision, recognizing the practicality of recording such payments in a single entry and the individual amounts being compliant with the law.

In conclusion, the Tribunal dismissed the Revenue's appeal, upholding the CIT (A)'s decisions on all issues, emphasizing the reasonableness of expenditure, standard nature of departmental recoveries, and compliance with payment regulations.