2015 (1) TMI 524 - HC - Income Tax

Labour charges paid to the female relatives of the directors disallowed u/s 40A(2)(b) - the appellant had already shown corresponding receipts as and by way of job charges for polishing the same diamonds and therefore it cannot be presumed that those diamonds got polished without incurring any labour charges at all? - Held that - Factual scenario permits us to held that provisions of Section 40A(2)(b) will permit the assessee allowance of labour charges paid to the female relatives of the Director of the assessee- Company as the interpretation of Section 40A(2)(b) would not permit disallowance when there was no finding the effect that the labour charges paid were in excess of the fair market charges and that the authorities below disallowed the labour charges without ascertaining the fair market value of the same. As the Tribunal did not appreciate corresponding receipts were already shown, and therefore, same is also answered in favour of the assessee - Decided in favour of assessee.

Summary

Issues involved:
1. Disallowance of labour charges paid to female relatives of directors under Section 40A(2)(b) of the Income Tax Act.
2. Disallowance of entire labour charges without considering corresponding receipts.

Detailed Analysis:

Issue 1: Disallowance of labour charges paid to female relatives of directors under Section 40A(2)(b) of the Income Tax Act.
The appellant-assessee challenged the order of the ITAT which dismissed the appeal filed by the assessee regarding the disallowance of labour charges. The Court framed the question of law whether the ITAT was right in upholding the action of the assessing officer in disallowing the entire amount of labour charges paid to female relatives of the directors under Section 40A(2)(b) of the Act. The Court referred to previous judgments where it was held that disallowance under Section 40A(2) can only be made if the payment is excessive or unreasonable compared to fair market value. The Court found that the authorities below disallowed the labour charges without ascertaining the fair market value, leading to the disallowance being unjustified. The Court held in favor of the assessee on this issue.

Issue 2: Disallowance of entire labour charges without considering corresponding receipts.
The Court noted that the Tribunal did not appreciate that corresponding receipts were already shown, indicating that the diamonds were polished incurring labour charges. The Court found that the disallowance of the entire amount of labour charges without considering the corresponding receipts was incorrect. Therefore, the Court answered this issue in favor of the appellant-assessee.

In conclusion, the Court allowed the appeal, holding that the Tribunal was not justified in upholding the disallowance of labour charges under Section 40A(2)(b) and that the entire amount of labour charges paid could not have been disallowed without considering the corresponding receipts. The questions raised in the appeal were answered in favor of the appellant-assessee against the respondent-Revenue.