2012 (10) TMI 174 - AT - Income Tax

Disallowance u/s. 40(a)(ia) - violation of provisions of Sec. 194 - Held that - Perusal of the assessment order show that the AO has made the additions on presumption that all the payments are made to sub-contractors without seeking any information/explanation/verification from the assessee and also the CIT(A) fell into the same error while disposing of the grievance of the assessee. This issue needs further verification at the assessment stage therefore deem it fit to restore this issue to the file of the AO - in favour of assessee by way of remand. Disallowance of labour charges - Held that - On perusal of the assessment order of CIT(A) it is noted that the assessee has not substantiated claim of payment of labour charges - against assessee. Disallowance of expenses - expenses incurred in cash with self made vouchers - Held that - The AO has made additions on adhoc basis under the account, thus find no reason to interfere with the findings of the CIT(A) who has restricted the total disallowance of 5% of the expenses. Disallowance of depreciation - Held that - Disallowance of depreciation on vehicle is claimed on block of assets and with effect from 1.4.1989, the depreciation is claimed/allowed on block of assets and not on individual assets. Therefore, while confirming the findings of CIT(A) finding so far as depreciation on vehicle claimed is concerned, the AO is directed to delete the addition of Rs. 92,000/- from the total income - in favour of assessee. Liability of sundry creditors ceased to exist - addition u/s. 41(1) - Held that - The assessee herself has admitted that the bills of KLB Fabricators and S.D.S Fabricators are over invoiced which itself prove that the assessee is not going to pay this amount. So far as liability of P&R Industries and PMB Engineering are concerned, the assessee has categorically stated that the companies have closed. Just because the assessee has given an assurance that these liabilities will be written back in A.Y. 2009-2010 will not exonerate the assessee as if liability has ceased to exist in the year under consideration, then it has to be added back in the year under consideration and not as per the assurance given by the assessee that it will be written back in A.Y. 2009-2010. No merit and logic in the submission of the assessee - against assessee. Rectification order u/s 154 of CIT(A) - additions made u/s. 41(1) allowed - Held that - CIT(A) while adjudicating on the application made u/s. 154 was carried away by the submissions of the assessee without appreciating the fact that what assessee has stated during the course of the appellate proceedings was only a promise to consider the write back of liabilities in A.Y. 2009-2010 - the future promise made cannot become a reason for rectification of error apparent from record. The CIT(A) has grossly erred in rectifying the appellate order dt. 18.2.2010 - in favour of revenue.

Summary

Issues:
1. Disallowance of sum under section 40(a)(ia) of the Act
2. Disallowance of labor charges
3. Disallowance of expenses under various heads
4. Addition under section 41(1) of the Act
5. Rectification order under section 154 of the Act

Issue 1: Disallowance under section 40(a)(ia) of the Act
The Assessing Officer disallowed a sum under section 40(a)(ia) as the assessee failed to deduct tax on payments made for contract works. The CIT(A) upheld the disallowance, but the ITAT found that the AO and CIT(A) presumed all payments were to subcontractors without verifying. The ITAT directed the AO to verify the nature of payments to determine if they were to subcontractors. The ITAT allowed this ground for statistical purposes.

Issue 2: Disallowance of labor charges
The AO disallowed a portion of labor charges due to lack of details on the recipients of the payments. The CIT(A) confirmed the disallowance as the assessee failed to provide primary documentary evidence. The ITAT upheld the CIT(A)'s decision, stating that the assessee did not substantiate the claim of payment of labor charges.

Issue 3: Disallowance of expenses under various heads
The AO made ad hoc disallowances under various expense heads. The CIT(A) restricted the disallowance to 5% of the expenses claimed. The ITAT upheld the CIT(A)'s decision but directed the AO to delete the disallowance of depreciation on the vehicle as it is claimed on a block of assets.

Issue 4: Addition under section 41(1) of the Act
The AO added liabilities that ceased to exist under section 41(1) of the Act. The CIT(A) confirmed the addition, stating that the liabilities had been allowed as deductions in earlier years. The ITAT upheld the CIT(A)'s decision, noting that the liabilities were not required to be paid in the current year, leading to a remission of liability.

Issue 5: Rectification order under section 154 of the Act
The Revenue appealed against the rectification order passed by the CIT(A) under section 154 of the Act. The ITAT found that the future promise made by the assessee to write back liabilities in the next assessment year could not be a basis for rectification. The ITAT canceled the order passed by the CIT(A) under section 154, allowing the Revenue's appeal.

In conclusion, the ITAT partly allowed the assessee's appeal while allowing the Revenue's appeal regarding the rectification order. The judgment provides detailed analysis and reasoning for each issue raised during the assessment year 2006-07.