2012 (10) TMI 486 - AT - Income Tax

Unaccounted labour charges - CIT(A) deleted the addition - Held that - Considering the comparative position of the year under appeal and the immediately preceding year the percentage of labour charges to the export turnover has reduced to less than half of the immediately preceding year which was accepted by the Revenue. Thus even when the assessee s accounts are to be rejected and income has to be computed to the best judgment of the AO, there would not be any justification for disallowance of even part of the labour expenses. Even in a best judgment assessment there would not be any justification for making any addition, especially when the percentage of net profit is also better than the preceding year - against revenue.

Summary

Issues:
1. Disallowance of labour charges claimed by the assessee.
2. Justification of rejecting the assessee's accounts and estimating income.
3. Comparison of labour charges and turnover between the years.

Analysis:
1. The case involved an appeal by the Revenue against the order of the CIT(A) regarding the disallowance of Rs.18,65,000/- claimed as labour charges by the assessee. The Assessing Officer disallowed the entire amount as the assessee failed to produce the labour charges register during assessment proceedings.

2. The Tribunal acknowledged that technically, the Assessing Officer was justified in rejecting the assessee's accounts under Section 145(3) due to lack of evidence. However, it was noted that even after such rejection, the reasonable claim of the assessee for expenses had to be considered. The Tribunal compared the percentage of labour charges to sales between the year under appeal and the preceding year to assess the reasonableness of the claim.

3. The Tribunal highlighted that in the preceding year, labour charges were accepted by the Revenue at 1.55% of sales turnover. In contrast, for the year under consideration, despite an increase in sales turnover, the percentage of labour charges decreased to 0.6%. The Tribunal emphasized that the net profit percentage for the current year was better than the previous year, indicating the reasonableness of the expenses claimed by the assessee.

4. Considering the significant improvement in net profit percentage and the decrease in the percentage of labour charges to turnover, the Tribunal upheld the CIT(A)'s decision to allow the assessee's claim for labour charges. It was concluded that even in a best judgment assessment scenario, there was no justification for disallowing any part of the labour expenses. The appeal by the Revenue was dismissed, affirming the order of the CIT(A).

5. The Tribunal pronounced the decision on 5th October 2012, upholding the allowance of labour charges claimed by the assessee and dismissing the Revenue's appeal.