2018 (6) TMI 553 - AT - Income Tax

Addition in respect to labour expenses and piece work charges - adhoc estimated addition - genuineness of labour expenses - cash payments - Held that - We note that assessee is engaging/executing government contracts It s area of work is spread far and wide. Hundred percent external watchers in case of such labour payments are not possible to be maintained. The piece rate payment are duly documented and corroborated by VAT audit report. Assessee s profits have not been rejected. The profit shown by the assessee during the current year is better than that disclosed in earlier year. There is no justification for any ad hoc disallowance in this regard. Accordingly we delete the disallowance made by the CIT (Appeals). Addition on account of VAT refund - account on case receipt basis - Held that - The approach of the authorities below in this regard is erroneous. By no stretch of imagination mercantile system of accounting mandates that contingent amounts should be accounted for. This is more apparent by the instance mentioned by the learned counsel of the assessee where in the assessment order a demand of 404.6 lakh was raised against the assessee and thereafter on appeal the assessee was granted refund. Hence the assessee s plea that the VAT refund accrues in the financial year in which the assessment attains finality is cogent. In the case of Nuchem Ltd. 2011 (2) TMI 159 - PUNJAB AND HARYANA HIGH COURT where similar claim of excise duly refund was there and the addition was deleted on the ground that the same was not to be accounted for till the matter attains finality. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of labour expenses and piece work charges
2. Addition on account of VAT refund

Disallowance of Labour Expenses and Piece Work Charges:
The assessing officer disallowed a portion of the labour expenses and piece work charges claimed by the assessee due to lack of proper vouchers and discrepancies in the VAT audit report. The Commissioner of Income Tax (Appeals) upheld a 5% disallowance despite acknowledging that the profit ratio declared by the assessee was better than the previous year. However, the Appellate Tribunal found the disallowance unjustified. They noted that the nature of the work, spread across remote areas, made it difficult to maintain complete records. The Tribunal also highlighted that the piece rate payments were properly documented and corroborated by the VAT audit report. Given that the profits were not rejected and had improved, the Tribunal concluded that there was no basis for the ad hoc disallowance and deleted the disallowance made by the Commissioner of Income Tax (Appeals).

Addition on Account of VAT Refund:
The assessing officer added the amount claimed as VAT refund by the assessee, arguing that it should be considered as income under the mercantile system of accounting. The Commissioner of Income Tax (Appeals) confirmed this addition. However, the Appellate Tribunal disagreed with this approach. They accepted the assessee's argument that the VAT refund claim was contingent until the finalization of the assessment. Citing relevant case laws, the Tribunal emphasized that mercantile accounting does not mandate accounting for contingent amounts. They pointed out a similar case where a demand was raised against the assessee but later refunded on appeal. Therefore, the Tribunal held that the VAT refund accrues only upon finalization of the assessment and overturned the decision of the authorities below, ruling in favor of the assessee.

In conclusion, the Appellate Tribunal allowed the appeal filed by the assessee, setting aside the disallowance of labour expenses and piece work charges as well as the addition on account of VAT refund.