2018 (11) TMI 993 - AT - Income Tax

Disallowance of of labour expenditure - labour contractors were not having complete knowledge of the contract - circumstantial evidence produced to indicate that it has incurred these expenditure for completing the work - Held that - The only circumstances with the AO is that proprietorship concern of the labour contractors were in the names of ladies and actual work were being looked after by their husbands, hence, they are not having knowledge of their business. To our mind these circumstances, ought not to be looked into in isolation for disbelieving the claim of the assessee. Receipts have already suffered tax in the hands of the recipients. Work has been done. There are no doubt with regard to the contracts obtained from AUDA or AMC and completion of work. Thus, actual expenditure must have been incurred on such work. Can the claim of the assessee be belied simply for the reasons that some of the labour contractors were not having complete knowledge of the contract which is being looked after by their husband ? To our mind, the Revenue authorities have failed to appreciate actual circumstances of the dispute. Considering the above details, we allow this ground of appeal and delete the impugned disallowance. - Decided in favour of assessee. Disallowance of depreciation - whether depreciation is to be granted at the rate of 15% or 40%? - Revenue authorities have disallowed the claim by holding that the assessee has been claiming additional depreciation which is available to an assessee engaged in the manufacturing activity - Held that - Case of the assessee is, whether depreciation on the vehicles and instruments used for construction business will be allowed at 40% or 15%, whereas the Revenue authorities have considered this issue, whether the assessee is entitled for additional depreciation or not. Considering the above facts, we deem it appropriate to set aside this issue to the file of the AO for examination. AO shall consider the claim of the assessee, whether it is entitled for higher rate of deprecation or not. AO shall look into the order of the ITAT in the case of Rakesh Jain (supra) . This ground of appeal is allowed for statistical purpose.

Summary

Issues:
1. Disallowance of labor expenditure
2. Disallowance of depreciation amount

Disallowance of labor expenditure:
The assessee appealed against the disallowance of labor expenditure by the AO, which was confirmed by the ld.CIT(A). The AO disallowed amounts payable to labor contractors based on suspicions of inflated expenditure. The ld.Counsel for the assessee argued that there was a direct link between work obtained from government instrumentalities and the labor contractors, supported by ledger details and bank statements. The assessee demonstrated that payments were made through banking channels and the contractors had included the receipts in their tax returns. The comparative analysis of gross profit (GP) and net profit (NP) showed that the disallowance would significantly impact the profits. The Tribunal noted that the expenditure was incurred for business purposes, and the doubts raised by the revenue authorities were not substantial. The Tribunal allowed the appeal, deleting the disallowance.

Disallowance of depreciation amount:
The assessee claimed depreciation on plant & machinery used for road construction. The AO disallowed additional depreciation, stating it was not permissible as the assessee was not engaged in manufacturing activity. The ld.CIT(A) upheld the disallowance, citing that construction work did not qualify as manufacturing activity. The ld.Counsel for the assessee argued that the dispute was about the rate of depreciation, not additional depreciation. The assessee claimed depreciation at a higher rate for vehicles used in construction. The Tribunal observed that the controversy was misunderstood by the revenue authorities, who focused on additional depreciation eligibility. The Tribunal directed the AO to reconsider the claim for higher depreciation rate, setting aside the issue for examination. The appeal was partly allowed for statistical purposes.

In conclusion, the Tribunal ruled in favor of the assessee regarding the disallowance of labor expenditure and directed a reevaluation of the depreciation claim, emphasizing the correct rate of depreciation for vehicles used in construction.