2015 (10) TMI 531 - AT - Income Tax

Addition on account of alleged bogus labour charges - Held that - It is an undisputed fact that Assessee is engaged in the business of polishing of diamonds on job work basis and the Assessee receives the payment which is credited as its Income. It is also a fact that makes the payment for labour which is treated as an expense. In the present facts we find that though the Assessee has submitted the explanation but has also not fully proved the expenses and at the same time the Revenue has also proceeded to make the disallowance on an estimated basis. We further find that the Assessing Officer had made no enquiry in the case of 2 parties whose addresses were furnished to him. In such circumstances we are of the view that disallowance was rightly made but however considering the facts stated hereinabove we are of the view that the disallowance made by the Assessing Officer is on a higher side. Thus disallowance of ₹ 4 lacs would meet the ends of justice and therefore we accordingly direct the disallowance be restricted to ₹ 4 lacs. - Decided partly in favour of assessee.

Summary

Issues: Disallowance of labour charges as bogus expenses

Detailed Analysis:

Issue 1: Disallowance of Labour Charges
The appeal was filed against the order of CIT(A) confirming the addition of &8377; 13,18,985/- as alleged bogus labour charges for A.Y. 2006-07. The Assessee, an HUF engaged in diamond polishing, declared total income of &8377; 1,47,475/-. The AO found discrepancies in labour payments totaling &8377; 42,39,246/-, including &8377; 13,18,685/- to 10 individuals. The AO discovered that payments were transferred to third parties instead of being withdrawn in cash for labour payments. Some parties listed did not have bank accounts and cashed bearer cheques through another person's account. The AO concluded that labour payments were bogus and siphoned off by the Assessee, disallowing &8377; 13,18,685/-. The CIT(A) upheld the disallowance as the Assessee failed to produce certain parties for verification, and money was traced to unrelated individuals. The Tribunal noted that though the Assessee's explanation was submitted, full proof of expenses was lacking, and the Revenue's disallowance was estimated. However, the Tribunal found the disallowance excessive and reduced it to &8377; 4 lacs, partially allowing the Assessee's appeal.

Conclusion:
The Tribunal partially allowed the appeal, reducing the disallowance of labour charges from &8377; 13,18,985/- to &8377; 4 lacs, considering the lack of full proof of expenses and excessive estimation by the Revenue.