2022 (1) TMI 1040 - AT - Income Tax

Disallowance under the head 'Labour charges' - HELD THAT - An admitted position that the AO made a reference to 5 vouchers which have been reproduced as such in the assessment order by noting that the assessee did not maintain vouchers serially. It can be seen that these vouchers pertained to an altogether different assessee, namely, M/s. Shilpi Engineering Pvt. Ltd., who has no link with the assessee in appeal. Entire case made out by the AO for disallowing 15% of the Labour charge is ill-founded, we cannot sustain the disallowance so made by the AO. It is worth noting that the CIT(A) took note of the fact that the assessee had incurred some expenses without verifiable vouchers. Considering the entirety of the facts and circumstances of the instant case, we are of the considered opinion that it would be in the fitness of the things if the disallowance out of Labour charges is reduced to ₹ 1.00 lakh, as against sustained in the first appeal - Decided partly in favour of assessee.

Summary

Issues:
Disallowance of Labour charges under the head 'Labour charges' - Assessment year 2014-15.

Analysis:
The appeal was filed against the CIT(A)'s order confirming the disallowance of ?18,06,027 under the head 'Labour charges'. The assessee, an Engineering Contractor, had debited ?2.40 crore as Labour charges in its Profit and loss account, resulting in a lower profit percentage. The AO disallowed 15% of the total Labour payment after observing that the vouchers were self-made and not maintained serially. The assessee contended that the vouchers referred to by the AO belonged to a different party, M/s. Shilpi Engineering Pvt. Ltd. The CIT(A) acknowledged this but held that some expenses under the head were not verifiable, reducing the disallowance to 7.5%, sustaining the addition at ?18,06,027.

Upon review, the ITAT found that the vouchers referred to by the AO belonged to a different assessee, M/s. Shilpi Engineering Pvt. Ltd., with no connection to the appellant. As the basis for the disallowance was unfounded, the ITAT could not uphold the disallowance made by the AO. However, noting that some expenses lacked verifiable vouchers, the ITAT reduced the disallowance of Labour charges to ?1.00 lakh, down from the sustained amount of ?18,06,027 by the CIT(A). The appeal was partly allowed by the ITAT.

In conclusion, the ITAT set aside the CIT(A)'s decision to sustain the disallowance of Labour charges at ?18,06,027, reducing it to ?1.00 lakh based on the lack of verifiable vouchers and the erroneous reference to vouchers belonging to a different entity. The ITAT's decision was made after considering the entirety of the facts and circumstances of the case, ultimately partially allowing the appeal filed by the assessee.