2020 (12) TMI 522 - AT - Income Tax

Hawala purchases - Addition on the basis of alleged statement given to sales tax department - non-response by the concerned suppliers to the notice of the AO - HELD THAT - The assessee has duly submitted the purchase invoices and payments were also done through banking channel. It also noted that the assessee has done contract work and as per the contract specification assessee was required to provide materials and labour. No discussion whatsoever is there in the orders of the authorities below regarding the disallowance of the contact work executed by the assessee. In this view of the matter ratio from Hon'ble Bombay High Court in the case of Nikunj Eximp Enterprises P. Ltd. 2013 (1) TMI 88 - BOMBAY HIGH COURT and several other case laws are applicable, that 100% disallowance in such cases is not permissible. Accordingly, assessee has done purchases from grey market. In our considered opinion 12.5% disallowance in this case would meet the end of justice. We direct accordingly. On similar reasoning we disallow 12.5% of the labour expenditure in this regard. Disallowance under section 40(a)(ia) - HELD THAT - We note that this issue was also remanded by the learned CIT(A) to the AO, but we note that the Assessing Officer has not properly examined the issue. Accordingly, we remit this issue to the file of the Assessing Officer. The Assessing Officer is directed to consider the issue afresh after giving the assessee proper opportunity of being heard.

Summary

Issues:
1. Addition of alleged hawala purchases without opportunity for cross-examination.
2. Disallowance of purchases and labour charges.
3. Disallowance of wages under section 40(a)(ia).

Issue 1: Addition of Alleged Hawala Purchases
The appeal contested the addition of ?56,17,397 as alleged hawala purchases without the opportunity for cross-examination, citing legal precedents. The AO issued notices under section 133(6) to sellers listed as hawala dealers by the Sales Tax Department, but they were unserved. The AO found lack of evidence for purchases from certain parties, with depositions indicating no genuine transactions. The AO concluded the purchases were bogus, adding them to the taxable income. The CIT(A) upheld the 100% disallowance despite no doubts on sales or consumption. The ITAT found no discussion on the contract work executed by the assessee and applied precedents to allow a 12.5% disallowance, considering purchases from the grey market.

Issue 2: Disallowance of Purchases and Labour Charges
The AO disallowed purchases of ?21,19,723 from M/s Asian Steel and labour charges paid to M/s Siddharth Constructions due to lack of evidence and non-compliance by suppliers. The ITAT noted the absence of discussion on the contract work done by the assessee and applied legal principles to allow a 12.5% disallowance, finding the assessee had done purchases from the grey market.

Issue 3: Disallowance of Wages under Section 40(a)(ia)
The AO disallowed wages paid of ?1,10,44,091 under section 40(a)(ia) for non-deduction of TDS. The assessee contended that the labour force was not contractual, but the AO found no employer-employee relationship. The ITAT remitted this issue to the AO for proper examination and to provide the assessee with a fair hearing. The appeal was partly allowed, directing the AO to reconsider the issue after giving the assessee an opportunity to be heard.

This judgment highlights the importance of providing opportunities for cross-examination, the need for proper evidence to support expenses, and the application of legal precedents in determining the validity of purchases and expenses in tax assessments.