2017 (12) TMI 1780 - AT - Income Tax

Disallowance of Labour Charges - AO found certain discrepancies in the vouchers so maintained and as the assessee had failed to substantiate expenses made under the head site expenses and also not maintained any muster roll or control register to monitor the said expenses and disallowed 5% of expenses - HELD THAT - The assessee had incurred labour expenses at various sites totaling ₹ 5.02 crores. Revenue has not controverted the findings of CIT(A) in this regard. Now, the question which arises in the present appeal is disallowance made out of said labour charges by the authorities below. The reason for disallowance is discrepancies noted in the vouchers maintained, wherein writing on the vouchers appeared to be the same person. Assessee had failed to maintain any muster roll or wage register. Also, no amount was deducted on account of Provident Fund and ESIC. The payees were also not verifiable. The case of assessee was that majorly payment was made through cheque. Merit in the aforesaid disallowance made by the authorities below. However, we restrict the same to 3% of labour charges. The grounds of appeal raised by the assessee are thus, partly allowed.

Summary

Issues: Adhoc disallowance of labour charges based on discrepancies in vouchers and lack of proper records.

Analysis:

Issue 1: Adhoc Disallowance of Labour Charges
The appellant contested the disallowance of labour charges made by the Assessing Officer, which was based on an adhoc/estimated basis of 5% of total labour charges. The appellant argued that the project works were carried out in remote locations with limited resources, making it challenging to maintain proper records. The Assessing Officer found discrepancies in the labour vouchers produced by the appellant, such as self-made vouchers, lack of recipient signatures, and potential fabrication of vouchers. The CIT(A) upheld the disallowance but restricted it to 5% of labour expenses only, acknowledging that site expenses included various other costs. The Tribunal agreed with the CIT(A)'s decision but further reduced the disallowance to 3% of the labour charges, considering the lack of proper records and discrepancies in vouchers.

Issue 2: Lack of Proper Records
The Assessing Officer highlighted that the appellant failed to maintain essential records required under the Minimum Wages Act, such as wage registers and attendance records for casual labour. The absence of these records raised concerns about the authenticity of the labour expenses claimed. The appellant's reliance on self-prepared vouchers without proper verification added to the doubts regarding the accuracy of the expenses incurred. The authorities emphasized the importance of maintaining accurate records to substantiate expenses claimed, especially in cases involving significant labour costs.

Issue 3: Verification of Labour Expenses
The Assessing Officer scrutinized the labour vouchers provided by the appellant and identified several discrepancies, including similarities in handwriting, lack of recipient details, and potential fabrication indicated by new revenue stamps. These discrepancies raised doubts about the genuineness of the expenses claimed under the 'site expenses' head. The failure to reflect certain wage payments in the ledger further undermined the credibility of the claimed expenses. The authorities emphasized the need for verifiable and accurate documentation to support expenditure claims, particularly in cases where substantial amounts are involved.

In conclusion, the Tribunal partially allowed the appeals, reducing the adhoc disallowance of labour charges to 3% of the total labour expenses. The judgment underscored the significance of maintaining proper records and documentation to substantiate expenses claimed, particularly in cases involving substantial labour costs.