2013 (6) TMI 620 - AT - Income Tax

Labour expenses/wages disallowed in the absence of proper evidence - CIT(A) deleted the addition in part - Held that - AO had not recorded any specific finding to reach the figure of disallowance of Rs. 3 lac, which was an ad hoc addition made, ignoring the fact that the percentage of labour wages to gross turnover had come down to 13.73% for that year (Assessment Year 2008-09) as against that of 16.99% in the earlier year. CIT (A) has restricted the addition to Rs. 1 lac which, in our considered opinion is well justified. Against revenue. Unverifiable purchases - CIT(A) deleted the addition - Held that - As the assessee has shown better results during the year, over those for the earlier assessment year. The gross profit has gone up to 13.10% against 12.90% in the earlier year. In view thereof, the CIT (A) cannot be said to have erred in holding the addition made on estimate basis to be unjustified. In favour of assessee.

Summary

Issues:
1. Disallowance of labor expenses/wages
2. Disallowance of material expenses

Analysis:

1. Disallowance of labor expenses/wages:
The Department contested the deletion of an addition of Rs. 2,00,000 on account of labor expenses/wages by the Ld. CIT (A) due to lack of proper evidence. The Assessing Officer had made a disallowance of Rs. 3 lac, but the CIT (A) reduced it to Rs. 1 lac, citing authenticated muster rolls and no outstanding payments to laborers. The ITAT noted that the Assessing Officer's disallowance lacked specific findings and was ad hoc, leading to a reduction in the disallowance. The ITAT upheld the CIT (A)'s decision to restrict the addition to Rs. 1 lac, as done in a similar case for the previous assessment year.

2. Disallowance of material expenses:
Regarding the disallowance of Rs. 8,00,000 on account of unverifiable purchases, the Assessing Officer had made an ad hoc disallowance to prevent revenue loss due to lack of supporting purchase bills for small site purchases. However, the CIT (A) deleted this addition, considering the audited accounts and improved results compared to the previous year. The ITAT, consistent with the previous year's decision, upheld the CIT (A)'s action, reducing the addition from Rs. 8 lac to Rs. 90,537. The ITAT found the addition made by the Assessing Officer to be unjustified, given the improved gross profit and overall performance of the assessee.

In conclusion, the ITAT dismissed the department's appeal and allowed the cross objections filed by the assessee, affirming the CIT (A)'s orders on both issues. The ITAT emphasized the importance of proper evidence and justifications in making additions or disallowances, especially when the assessee's accounts are audited and show improved financial performance over previous years.