2016 (11) TMI 888 - AT - Income Tax

Disallowance of Labour Charges - Held that - we concur with and uphold the finding of the learned CIT(A) that in the absence of any material evidence being brought on record by the AO to prove that the payments made to these three related parties as bogus, the said payment of labour charges to him cannot be termed as bogus and the action of the so to discover the entire payment of labour expenditure, since they were incurred through related parties, is unjustified and unsustainable in the facts and circumstances of the case. - Decided in favour of assessee Adhoc disallowance of 25% of the expenditure incurred on labour charges paid to the three related parties - Held that - Learned CIT(A) has failed to point out any particular expenditure in respect of labour charges which according to him is excessive or unreasonable but has proceeded to uphold an adhoc disallowance of 25% thereof, which is, in our view, unsustainable. In this view of the matter, we are of the opinion that the adhoc disallowance of 25% of expenditure incurred on labour charges paid to related parties under section 40A(2) of the Act was not warranted in the facts and circumstances of the case on hand as discussed above and therefore direct the AO to delete the same.- Decided against revenue Bogus purchases under section 69C - Held that - Without causing any enquiries to be made to establish his suspicions, the AO cannot make the addition under section 69C of the Act by merely relying on information obtained from the Sales Tax Department. In the case on hand, the AO failed to make any enquiry to establish his suspicions. Further, the corresponding sales have not been questioned. We find that the assessee has brought on record documentary evidences to establish the genuineness of the purchase transactions, the action of the AO in ignoring these evidences cannot be accepted. When the copies of purchase bills of these parties, delivery challans, proof of payment through banking channels, etc., and there is no evidence brought on record by the AO to establish that the said payments were routed back to the assessee, the addition made by the AO under section 69C of the Act is unsustainable - Decided against revenue Disallowance of Motor car expenses - Held that - In the order of assessment, the AO has made an adhoc disallowance of 20% of motor car expenses and depreciation thereof (i.e. ₹ 79,063/-). On appeal, the learned CIT(A) sustained this disallowance to the extent of 5%. Before us, except for raising this ground, Revenue has not brought on record any material evidence to controvert the finding of the learned CIT(A) and warrant our interference therein on this issue. In this view of the matter, we uphold the order of the learned CIT(A) on this issue - Decided against revenue Disallowance of Telephone Expenses - Held that - AO has made an adhoc disallowance of ₹ 36,663/-; being 15% of telephone expenses amounting to ₹ 2,44,423/-. On appeal, the learned CIT(A) has sustained the disallowance to the extent of 5%. Except for raising the ground before us, Revenue has not brought on record any material evidence to controvert the impugned order of the CIT(A) and warrant our interference therein on this issue. In this view of the matter, we uphold the order of the learned CIT(A) on this issue. - Decided against revenue

Summary

Issues Involved:

1. Disallowance of Labour Charges
2. Bogus Purchases under Section 69C
3. Disallowance of Motor Car Expenses
4. Disallowance of Telephone Expenses

Detailed Analysis:

1. Disallowance of Labour Charges:

The assessee, a civil contractor, claimed labour charges paid to related parties amounting to ?1,05,58,905/-. The Assessing Officer (AO) disallowed the entire amount, citing the lack of evidence that the related parties performed any subcontract work. The CIT(A) observed that the assessee had undertaken significant civil contract works for reputable organizations, which would not have made payments without actual work being done. The CIT(A) found no independent enquiry by the AO to prove the transactions were bogus and thus ruled out the possibility of the entire expenditure being disallowed. However, the CIT(A) sustained a 25% disallowance under Section 40A(2)(b), amounting to ?26,39,726/-, due to the lack of comparative evidence showing that payments to related parties were at par with other concerns.

The Tribunal concurred with the CIT(A) that the AO failed to provide evidence proving the transactions were bogus. The Tribunal found the adhoc disallowance of 25% under Section 40A(2)(b) unsustainable, as no specific expenditure was shown to be excessive or unreasonable. Consequently, the Tribunal directed the AO to delete the 25% disallowance, allowing the assessee’s appeal on this ground.

2. Bogus Purchases under Section 69C:

The AO disallowed ?33,09,526/- as bogus purchases based on information from Sales Tax Authorities that certain parties had issued bogus bills. The assessee provided purchase bills, delivery challans, and proof of payment through banking channels but failed to produce the parties for verification. The CIT(A) held that only the profit element embedded in such purchases should be disallowed and directed the AO to assess the gross profit (GP) on these purchases at 12.64%.

The Tribunal noted that the AO relied solely on information from the Sales Tax Department without conducting independent enquiries to prove the purchases were bogus. The Tribunal found that the assessee had provided sufficient documentary evidence to establish the genuineness of the purchases. Since the AO did not question the corresponding sales, the Tribunal concluded that the purchases could not be deemed bogus. The Tribunal held the addition under Section 69C unsustainable and deleted the adhoc addition of 12.64% profit on alleged bogus purchases, allowing the assessee’s appeal on this ground.

3. Disallowance of Motor Car Expenses:

The AO made an adhoc disallowance of 20% of motor car expenses, amounting to ?79,063/-, due to the lack of a logbook and the possibility of personal use. The CIT(A) reduced the disallowance to 5%. The Tribunal upheld the CIT(A)’s decision, noting that the Revenue did not provide any material evidence to warrant interference. Consequently, the Tribunal dismissed the Revenue’s appeal on this issue.

4. Disallowance of Telephone Expenses:

The AO made an adhoc disallowance of 15% of telephone expenses, amounting to ?36,663/-, due to the possibility of personal use. The CIT(A) reduced the disallowance to 5%. The Tribunal upheld the CIT(A)’s decision, noting that the Revenue did not provide any material evidence to warrant interference. Consequently, the Tribunal dismissed the Revenue’s appeal on this issue.

Conclusion:

The Tribunal dismissed the Revenue’s appeal and allowed the assessee’s appeal, directing the deletion of the adhoc disallowance of 25% of labour charges and the 12.64% profit on alleged bogus purchases. The Tribunal upheld the CIT(A)’s reduction of disallowances for motor car and telephone expenses to 5%.