2017 (6) TMI 639 - AT - Income Tax

Disallowance of labour charges - payments as made in cash - Held that - The total payment has been made to 68 persons, the aggregate payment was ₹ 4,90,26,955/- which comprised of cash payment of ₹ 13,03,219/-. It is thus seen that the cash payment constituted around 3% of the total payments, the maximum and minimum cash payment to an individual person was ₹ 1,03,400/- and ₹ 400/- respectively. We find that assessee had furnished the PAN numbers of all these 68 persons to the AO but however AO did not make any inquiry about the receipt of payments by them from assessee. Further Revenue has not placed any material to demonstrate that the payment of expenses as claimed by the assessee is bogus. In such circumstances considering the totality of the aforesaid facts and the nature of business activities of assessee, we are of the view that the disallowance of expenses of ₹ 2,99,682/- (where PAN is not available) and of ₹ 13,03,219/- (where PAN is available) is not called for and therefore we direct its deletion. As far as payment stated to have been made to departmental labour and from the details of various projects, where it has been incurred it is seen that the expenses have been incurred for 15 projects at various sites. The assessee has also placed sample copies of the vouchers in the paper book. We find that Ld. CIT(A) has noted that despite various opportunities granted to assessee, assessee has not placed necessary details to justify the payment. Considering the nature of work and the fact that the increasing of expenditure is not doubted by Revenue ends of justice shall be met if the disallowance is restricted to ₹ 20 lacs as against ₹ 47,22,572/- confirmed by Ld. CIT(A).Grounds of assessee partly allowed.

Summary

Issues:
Disallowance of labour charges due to lack of evidence and justification.

Analysis:
1. The appellant, a partnership firm engaged as a Civil Contractor, filed its return for A.Y. 2009-10, declaring total income of ?2,82,03,520. The assessment framed by the AO resulted in a total income of ?8,23,93,910, leading to an appeal before the Ld. CIT(A) who partially granted relief to the assessee. The primary issue raised in the appeal before ITAT was the disallowance of ?63,25,473 on account of labour charges by the AO due to lack of evidence to justify the increase in expenses.

2. During the assessment proceedings, the AO observed a substantial increase in the ratio of direct expenses to gross sales, indicating a possible inflation of expenses. The AO disallowed 10% of total purchases and 20% of labour charges due to lack of confirmation and justification. The Ld. CIT(A) upheld the disallowance of ?63,25,473 concerning labour charges, emphasizing the failure to provide addresses of labour contractors for independent verification.

3. The appellant contended that the disallowed labour charges comprised expenses on departmental labour, payments with available PAN numbers, and payments without PAN numbers, all made in cash. The appellant argued that necessary details were provided during the appellate proceedings, justifying the cash payments and PAN submissions. The ITAT examined the details of cash payments and found that the appellant had discharged the onus of proof regarding cash payments to a significant extent.

4. The ITAT concluded that the disallowance of ?63,25,473 was not warranted for payments without PAN numbers and payments with PAN numbers, as the appellant had provided details and PAN submissions. However, for payments to departmental labour, the disallowance was reduced to ?20 lakhs from the initial ?47,22,572 confirmed by the Ld. CIT(A). The ITAT's decision was based on the nature of work, lack of necessary details, and the unchallenged increase in expenditure.

5. In summary, the ITAT partly allowed the appeal, directing the deletion of the disallowance of ?2,99,682 and ?13,03,219 for payments without and with PAN numbers, respectively. The disallowance for departmental labour charges was reduced to ?20 lakhs. The ITAT's decision was based on the appellant's justification of cash payments and submissions of PAN details, ensuring justice in light of the business activities and expenditure increase.