2018 (6) TMI 886 - AT - Income Tax

Disallowance of labour charges - assessee violated the relevant statutory provision relating to PF & ESI Scheme in respect of the said workers - Held that - Assessee is a partnership firm, which is deriving income from execution of labour contract job - thus the major expenditure required to be incurred by the assessee to earn the said income was on account of labour charges - the major expenditure required to be incurred by the assessee to earn the said income was on account of labour charges - hence claim of wages of the assessee amounting to ₹ 38,68,613/- was not entirely bogus - therefore we are of the view that it would be fair and reasonable to disallow the wages of ₹ 38,68,613/- in question to the extent of 25%. The net profit of the assessee s business after such disallowance would be little more than 10%, which in our opinion, is fair and proper - restrict the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) out of labour charges to 25% - Appeal of the assessee is partly allowed.

Issues: Disallowance of labor charges claimed by the assessee.

Analysis:
1. The appeal was against the disallowance of labor charges amounting to ?38,68,613 made by the Assessing Officer and confirmed by the CIT(Appeals). The assessee, a partnership firm deriving income from labor contract jobs, filed its return declaring total income of ?9,11,548, with contract receipts from two parties totaling ?1,76,08,511 and labor charges claimed at ?1,25,40,767. The Assessing Officer disallowed the labor charges based on separate wage registers maintained by the assessee for unskilled laborers not subject to PF & ESI deductions, considering them as bogus charges.

2. The CIT(Appeals upheld the disallowance, citing reasons such as the nature of job works, method of employment, and identity cards of laborers. The appellant submitted identity cards of some laborers, but the CIT(Appeals) found discrepancies in the number of cards issued and the inability to verify all laborers' identities. The CIT(Appeals) concluded that the assessee failed to provide credible evidence, did not deduct PF, and made payments in cash, upholding the disallowance of labor charges.

3. The Tribunal considered the major expenditure incurred by the assessee on labor charges to earn income from labor contracts. The claim for labor charges was supported by party-wise wage registers, but the Assessing Officer and CIT(Appeals) doubted the genuineness due to non-deduction of PF & ESI contributions. Despite explanations by the assessee, the authorities treated the wages as bogus. The Tribunal noted the net profit of the business after disallowance exceeded normal rates, indicating the wages were not entirely bogus. Consequently, the Tribunal modified the disallowance to 25% of the claimed labor charges, resulting in a fair and proper net profit margin.

4. The Tribunal partially allowed the appeal, reducing the disallowance of labor charges to 25% of the claimed amount, emphasizing the need for a reasonable and fair assessment of the labor expenses incurred by the assessee in executing labor contract jobs.

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