2014 (6) TMI 1056 - AT - Income Tax

Disallowance on account of extraction/rescreening charges - AO found that the explanation offered by the assessee in respect of substantially higher extraction/rescreening charges claimed during the year under consideration was not reliable - there was a substantial difference between the sales and purchases declared by the assessee for the year under consideration showing higher gross profit (GP) rate as compared to the GP rate declared by the assessee in the immediately preceding year - HELD THAT - Extraction/rescreening charges were paid by the assessee @ ₹ 38 and ₹ 55 per m.t. in the A.Ys. 2008-09 2010-11 respectively and the AO already having allowed the claim of the assessee for such charges @ ₹ 200 per m.t. during the year under consideration, we are of the view that even if the various reasons advanced by the assessee in support of its claim for higher extraction/rescreening charges are assumed to be correct, the same are already covered and taken care of by the fact that the higher extraction/rescreening charges @ ₹ 200 per m.t. are allowed by the AO himself, as compared to ₹ 38 as claimed by the assessee himself in the immediately preceding year. Most of the adverse findings recorded by the AO while disallowing the claim of the assessee on account of extraction/rescreening charges to the extent of about ₹ 45 lakhs were found to be correct by the ld. CIT(A), but she still restricted the disallowance made by the AO on this issue to ₹ 23 lakhs, giving a relief of about ₹ 22 lakhs to the assessee on this issue, without giving any cogent or convincing reasons and without appreciating the fact that the claim of the assessee for higher extraction/rescreening charges was allowed by the AO by adopting the rate of ₹ 200 per m.t., as compared to the rate of ₹ 38 per m.t. claimed by the assessee in the immediately preceding year. We are of the view that the disallowance made by the AO on account of extraction/rescreening charges was fair and reasonable and the ld. CIT(Appeals) was not justified in restricting the same to ₹ 23 lakhs. We, therefore, modify the impugned order of the ld. CIT(Appeals) on this issue and confirm the disallowance of ₹ 45,05,867 made by the AO on account of extraction/rescreening charges. - Decided in favour of revenue. Disallowance u/s 40(a)(ia) - labour charges paid by the assessee to at least 17 persons were exceeding ₹ 50,000 - HELD THAT - As out of the total expenses of ₹ 1.09 crores claimed by the assessee on account of extraction charges, expenses to the extent of ₹ 45.05 lakhs are already disallowed and it is not possible to ascertain precisely as to whether the expenses of ₹ 9,76,185, which were again disallowed by the AO u/s. 40(a)(ia) of the Act, are forming part of the expenses allowed or disallowed. We are of the view that the benefit of doubt should go to the assessee and since substantial portion of the expenses claimed by the assessee on extraction charges are already disallowed, it would not be fair and proper to make a disallowance on account of extraction charges again u/s. 40(a)(ia), which may result into double disallowance of the same expenses. We, therefore, uphold the impugned order of the ld. CIT(A), deleting the disallowance made by the AO on account of extraction charges by invoking the provisions of section 40(a)(ia) and dismiss grounds of the revenue s appeal.

Summary

Issues Involved:
1. Disallowance of Rs. 45,05,867 on account of extraction/rescreening charges.
2. Deletion of disallowance of Rs. 9,76,185 made by the AO under section 40(a)(ia) of the Act.

Issue-wise Detailed Analysis:

1. Disallowance of Rs. 45,05,867 on Account of Extraction/Rescreening Charges:

The assessee, engaged in the business of trading iron ore through his proprietary concern, M/s. Vinayaka Minerals, claimed Rs. 1,09,35,867 as extraction expenses in the profit & loss account for the assessment year 2009-10. The Assessing Officer (AO) found these expenses substantially higher than the previous year and questioned the assessee. The AO, based on the assessee's statement that the average screening cost was around Rs. 150 to Rs. 200 per metric ton (m.t.) and considering the total quantity of iron ore purchased (32,150 m.t.), calculated that the extraction charges should be around Rs. 64.30 lakhs. The AO disallowed the balance amount of Rs. 45,05,867, suspecting the expenses were inflated to reduce the net profit.

Upon appeal, the CIT(A) considered the assessee's explanation regarding higher rescreening costs due to lower quality material and other factors like payments on rainy days and to batch-heads. However, the CIT(A) found the claim of purchasing poor quality ore unconvincing as the cost per metric ton was higher in the year under consideration compared to the previous year. The CIT(A) partially agreed with the AO but allowed a relief of Rs. 22,05,867, restricting the disallowance to Rs. 23 lakhs.

Both the revenue and the assessee appealed to the Tribunal. The Tribunal noted that the extraction/rescreening charges claimed by the assessee during the year were substantially higher than those in the previous and subsequent years. The Tribunal found the AO's allowance of Rs. 200 per m.t. reasonable and justified, considering the assessee's failure to substantiate the higher expenses with verifiable evidence. Consequently, the Tribunal upheld the AO's disallowance of Rs. 45,05,867 and modified the CIT(A)'s order.

2. Deletion of Disallowance of Rs. 9,76,185 under Section 40(a)(ia):

The AO noticed that the assessee paid labor charges exceeding Rs. 50,000 to at least 17 persons without deducting tax at source, aggregating to Rs. 9,76,185. The AO disallowed this amount under section 40(a)(ia) of the Act. The assessee contended that these payments were made to batch-heads who distributed the amounts among various laborers, none of whom individually received more than Rs. 50,000, thus not requiring TDS.

The CIT(A) accepted the assessee's explanation and noted that the disallowance of Rs. 23 lakhs on account of unsubstantiated labor payments for rescreening charges already covered the issue. Therefore, the CIT(A) deleted the disallowance of Rs. 9,76,185, considering it telescoped into the Rs. 23 lakhs disallowance.

The Tribunal agreed with the CIT(A), noting that a substantial portion of the extraction charges had already been disallowed, and further disallowance under section 40(a)(ia) could result in double disallowance. Thus, the Tribunal upheld the CIT(A)'s deletion of the Rs. 9,76,185 disallowance.

Conclusion:

The Tribunal dismissed the assessee's appeal, confirming the disallowance of Rs. 45,05,867 made by the AO on account of extraction/rescreening charges. The Tribunal partly allowed the revenue's appeal by upholding the AO's disallowance but dismissed the grounds related to the disallowance under section 40(a)(ia), agreeing with the CIT(A)'s reasoning.