2013 (8) TMI 177 - AT - Income Tax

Disallowance of Wages - whether disallowance of 10% of the expenditure under wages is not excessive - survey in the premises of the assessee proposing to assess the assessee company at 4% of net work completed - Held that - Rule 3(2)(m) of Karnataka Value Added Tax Rules permits allowance of 30% towards labour and like charges in case of Works Contract as permissible deduction even in a case where books of accounts are not maintained or not reliable in arriving the taxable turnover under the said Act. In the instant case, the total expenditure claimed towards labour/wages is Rs.4,27,42,817/- on a gross contract turnover of Rs.19,00,15,348/-, which is below 30% of the labour and like charges permitted as allowable in absence of books of accounts and supporting documents. The assessee s books of account were audited u/s 44AB. The estimation of 10% for the purposes of disallowance is not made on any materials or comparative cases or there is any evidence that expenditure is not genuine, on the other hand, disallowance is made on adhoc basis. Thus AO is not justified in disallowing on an adhoc basis 10% of the total wages and the CIT(A) in sustaining the same. Therefore reversing the orders of the Income Tax authorities and direct that disallowance of 10% of total wages is uncalled for. In favour of assessee.

Summary

Issues:
- Disallowance of Rs.25,37,001 under 'Wages' head without material on record
- Failure to consider details filed during assessment and appeal proceedings
- Excessive disallowance of expenditure
- Disallowance of 10% of expenditure under wages
- Allegation of wages payment not genuine despite supporting vouchers
- Applicability of Karnataka Value Added Tax Rules for deductions in Works Contract

Analysis:

Issue 1: Disallowance of Rs.25,37,001 under 'Wages' head
The appeal challenged the disallowance of Rs.25,37,001 under the 'Wages' head by the Assessing Authority and confirmed by the CIT(A). The appellant argued that the disallowance lacked material on record and was based on surmises and guesswork. However, the CIT(A) upheld the disallowance citing the appellant's failure to produce evidence despite multiple opportunities provided by the Assessing Officer. The CIT(A) found the disallowance of 10% reasonable and not excessive, considering the circumstances. The appellant's claim of shortage of time for evidence production was contradicted by their acceptance of some disallowance. The tribunal noted the absence of credible evidence and upheld the disallowance.

Issue 2: Failure to consider details filed
The appellant contended that the CIT(A) failed to consider the details submitted during assessment and appeal proceedings. However, the tribunal found that the appellant did not produce sufficient evidence before the Assessing Officer despite multiple opportunities. The tribunal upheld the CIT(A)'s decision based on the lack of credible evidence supporting the appellant's claims.

Issue 3: Excessive disallowance of expenditure
The appellant raised concerns about the excessive disallowance of expenditure under the 'Wages' head. The tribunal reviewed the appellant's arguments regarding the net profit disclosed and the applicability of rules under the Karnataka Value Added Tax Rules for deductions in Works Contract. The tribunal found that the disallowance of 10% of total wages was unjustified and reversed the decision of the Income Tax authorities, directing that the disallowance was uncalled for.

Issue 4: Applicability of Karnataka Value Added Tax Rules
The tribunal considered the provisions of Rule 3(2)(m) of the Karnataka Value Added Tax Rules, which allow for deductions towards labour charges in Works Contracts even in cases where books of accounts are not maintained or reliable. The tribunal analyzed the total expenditure claimed towards labour/wages and the gross contract turnover to determine the applicability of the rule. Based on the assessment, the tribunal concluded that the disallowance of 10% of total wages was not justified under the circumstances.

In conclusion, the tribunal allowed the appeal of the assessee, reversing the disallowance of 10% of total wages and emphasizing the importance of credible evidence in such matters.