2013 (10) TMI 775 - AT - Income Tax

Addition made in respect of alleged inflated labour charges - Appellant had paid consolidated charges to the contractors towards Godown charges, inward transport, octroi, warpins, sizing, beam setter, dropin charges, weaving, jobber, clipping, folders, outward transport, Electricity, Mill stores spares, Lubricant and hamal charges which were claimed under the head labour charges Held that - The labour expenses in order to quality for allowance had to be incurred wholly and exclusively for the purpose of business. This is a typical case where the manufacturing was done by the concern using its own workforce but labour charges were paid to persons specified u/s 40A(2)(b) and or its employees who facilitated the assessee s design. Thus, the expenditure was done to inflate the expenses and bring down the profit margin. The net profit percentage for various assessment years varies in a narrow range of 0.5% to 2%. Thus, it is inevitable to infer that there was indeed inflation of expenses. To ascertain the quantum of such inflation, it is pertinent to take into account that actual wage rate paid to the workers and the labour charges shown in the books of accounts. It is again an admitted position that the labour charges paid per meter of grey cloth were Rs.1.5 to 2 whereas the amount debited in the books was @ Rs.6.5 - Following the earlier orders of Tribunal restore the matter of inflated labour /job work charges to the file of the AO for his fresh consideration after giving due opportunity of hearing to the assessee.

Summary

Issues Involved:
Assessment years 2003-04, 2005-06, and 2006-07 - Disputed confirmation of addition made by AO in respect of inflated labour charges.

Detailed Analysis:

Assessment Year 2003-04:
The appellant filed appeals disputing the addition made by the AO in respect of inflated labour charges. The facts and issues in all three appeals were similar, so they were heard together. The appellant contended that the labour charges were paid for various services and expenses related to the business. However, during a search, it was found that expenses were inflated by showing payments to family members who did not provide any services. The AO disallowed a significant amount of labour charges based on discrepancies found. The CIT(A) confirmed the AO's action, stating that the appellant resorted to inflating charges. The Tribunal, considering previous similar cases, restored the matter to the AO for fresh consideration.

Assessment Years 2005-06 and 2006-07:
The issues for these assessment years were identical to 2003-04, involving the confirmation of addition on account of inflated labour charges. The Tribunal set aside the orders of the authorities and restored the matters to the AO for fresh consideration after giving the appellant an opportunity to present their case. The Tribunal allowed the appeals for statistical purposes for all three assessment years.

In conclusion, the Tribunal found discrepancies in the labour charges claimed by the appellant, leading to the matter being sent back to the AO for reevaluation. The appellant's appeals for all three assessment years were allowed for statistical purposes, emphasizing the need for a thorough reconsideration of the inflated labour charges issue.