2016 (4) TMI 468 - AT - Income Tax

Addition on account of unexplained increase in the wages and salary as compared to the increase in production - CIT(A) deleted the addition - Held that - Lease rental were paid and TDS were deducted and in the ledger account, copy of lease rentals were shown under the head service charges. The copy of the account and details were also furnished. These details were sent to the Assessing Officer for his comments vide letter dated 23.03.2010 and 19.08.2010. Before the CIT(A), the assessee has also submitted that revenue stamp was affixed when payment exceeded ₹ 5,000/-, the employment of labourers was evident from the PF record as well and there was increase in production and the gross profit rate was better than the last year; and therefore, no addition was called for. Agreed with the contention of the assessee, the CIT(A) granted relief to the assessee by observing that the assessee has taken machines on lease and has been paying lease rentals after deducting TDS. Further, he observed that there was increase in production during the year under consideration and the gross profit rate was also better. The CIT(A) also held that the addition could not be made merely because of increase in wages was not proportional to increase in production. Accordingly, he rightly deleted the addition in question by observing that the Assessing Officer was not justified in disallowing the wages and making such addition in question. - Decided in favour of assessee

Summary

Issues:
1. Deletion of addition made on account of unexplained increase in wages and salary compared to production increase.

Analysis:
The case involved an appeal by the Revenue against the order of the Commissioner of Income Tax (Appeals)-II, Ahmedabad, for Assessment Year 2007-08. The primary issue was the deletion of an addition of Rs. 38,34,000 made on account of an unexplained increase in wages and salary compared to the increase in production. The Assessing Officer noted a discrepancy where the expenses for wages had increased significantly without a proportional increase in production. The Assessing Officer considered the excess claim of wages as unreasonable and made an addition of Rs. 38,34,000.

The assessee, a firm engaged in the business of art silk cloth sarees, contended before the CIT(A) that the wages were paid based on production achieved, with wages increasing when the number of machines increased. The assessee provided details of machines taken on lease, lease rental payments, and TDS deductions to support their case. The CIT(A) agreed with the assessee's contentions, noting the increase in production and better gross profit rate. The CIT(A) held that the addition could not be justified solely based on the disproportionate increase in wages compared to production. As a result, the CIT(A) deleted the addition, stating that the Assessing Officer was unjustified in disallowing the wages and making the addition. The ITAT upheld the CIT(A)'s decision, emphasizing the factual and reasoned findings provided by the CIT(A) in support of the assessee.

Ultimately, the ITAT dismissed the Revenue's appeal, affirming the deletion of the addition made on account of the unexplained increase in wages and salary. The judgment highlighted the importance of considering all relevant factors, such as lease agreements and production increases, in determining the reasonableness of expense claims. The decision underscored the need for proper justification before disallowing expenses and making additions based on mere discrepancies in financial figures.