2022 (4) TMI 610 - AT - Income Tax

Disallowance of payment of labour charges made to various labour contractors - AO observed that the assessee-company has not made payments to some of the labour contractors, because there was no verifiable evidence to support the claim of the assessee - CIT-A restricted addition to 10% - assessee company is engaged in executing contracts and subcontracts - HELD THAT - AO without considering vital aspects has rejected claim of the assessee in a very brief and summary manner. Ld. CIT(A) while granting substantial relief to the assessee, has recorded a finding that assessee-company carried out contract works at various remote locations across the country; that gross profit during the year was higher at 26.42% as against the GP admitted in the preceding two assessment years 2008-09 and 2009- 10 at 24.17% and 17.40% respectively; that all these details were also submitted to the AO during the assessment proceedings. No such disallownaces were made in the earlier year or in the subsequent years on account of low GP rate. TDS was deducted on all payments made to contractors and their PAN were furnished except four parties; substantial payments have been made through account payee cheques. AO has not pointed out any defects in the books of accounts nor doubted nature of the work carried out by the assessee. All these vital aspects about the genuineness of the payment were not considered by the AO while making outright rejection. Therefore, considering the nature of business of the assessee, higher GP rate declared during the year, and the fact that the AO has not pointed out any discrepancies in the books of accounts maintained by the AO, the ld.CIT(A) has justified in restricting the addition to 10% of the impugned addition. - Decided against revenue. Disallowance of interest expenditure - HELD THAT - We find that the ld.AO has made the impugned addition on some presumption and assumption that the assessee-company would have diverted interest bearing funds to non-business purpose. Such observation was not based on some material evidence. Though the assessee has furnished sufficient details to prove the case that it has sufficient interest free funds to make such investment and advances, and made for the business purpose, but the AO has not appreciated the same in right perspective. Therefore, we are in agreement with the reasoned finding of the ld.CIT(A), which is based on the appreciation of facts and figures provided by the assessee during the assessment proceedings as well as appellate proceedings. Thus, we are not inclined to disturb his order on this issue. We uphold the same. This ground is rejected. Disallowance under section 14A of the Act r.w Rule 8D - HELD THAT - As pointed out by the assessee, when similar claim of the assessee for assessment year 2013-14 was agitated by the Revenue before the Tribunal, the Tribunal restricted the disallowance to the extent of exempt income. This decision is based on various judicial decisions, more particularly, the decision in the case of Chudgar Ranchodlal Jethalal 2015 (4) TMI 437 - ITAT AHMEDABAD uphold the claim of the assessee by holding that disallowance under section 14A cannot be in excess of exempt income. DR has not disputed the same, nor pointed out any disparity of the facts or non-applicability of ratio of that decision in the instant case. Therefore, applying principle of consistency on the similar set of facts and circumstances, we are not inclined to deviate from the view taken by the ld.CIT(A) on this issue. Accordingly, we uphold order of the ld.CIT(A), and reject this ground of Revenue.

Summary

Issues Involved:
1. Restriction of disallowance of payment of labour charges.
2. Deletion of addition made on account of disallowance of interest expenditure.
3. Deletion of disallowance under section 14A of the Income Tax Act read with Rule 8D of the IT Rules 1963.

Detailed Analysis:

Issue 1: Restriction of Disallowance of Payment of Labour Charges
The Revenue appealed against the CIT(A)'s decision to restrict the disallowance of labour charges to ?19,66,655 as opposed to the claimed ?1,96,66,556. The assessee, engaged in civil contract works and trading in machinery, had its case selected for scrutiny. During assessment, the AO observed a lack of verifiable evidence for payments to some labour contractors, leading to the disallowance of the entire claimed amount. The CIT(A), however, found that the assessee had maintained regular and audited books of accounts, deducted TDS, and made substantial payments through banking channels. The CIT(A) noted that the gross profit rate for the year was higher than in previous years and that no defects were pointed out in the books of accounts. Consequently, the CIT(A) restricted the disallowance to 10% of the disputed expenditure. The Tribunal upheld this decision, noting that the AO had not considered vital aspects and had summarily rejected the claim.

Issue 2: Deletion of Addition Made on Account of Disallowance of Interest Expenditure
The Revenue contested the CIT(A)'s deletion of ?1,47,12,505 from the disallowed interest expenditure. The AO had disallowed the interest expenditure, assuming that the assessee diverted interest-bearing funds for non-business purposes, specifically investments in shares and advances to sister concerns. The CIT(A) found that the assessee had sufficient interest-free funds and that the investments were made for business purposes. The CIT(A) restricted the disallowance to ?17,72,381 on a pro-rata basis, considering the interest-free funds available and the business relationship with the sister concerns. The Tribunal upheld this decision, agreeing that the AO's assumptions were not based on material evidence and that the CIT(A)'s findings were well-reasoned and supported by judicial precedents.

Issue 3: Deletion of Disallowance under Section 14A of the Income Tax Act
The Revenue also challenged the CIT(A)'s deletion of ?65,54,398 disallowed under section 14A read with Rule 8D. The AO had disallowed this amount, suspecting that the assessee incurred expenditure to earn exempt income (dividends). The CIT(A), however, held that disallowance under section 14A cannot exceed the exempt income earned, which was ?29,90,000 in this case. The Tribunal upheld the CIT(A)'s decision, citing consistency with previous Tribunal decisions and judicial precedents that support the principle that disallowance under section 14A should not exceed the exempt income.

Conclusion:
The Tribunal dismissed both appeals of the Revenue, upholding the CIT(A)'s decisions on all three issues. The Tribunal found no infirmity in the CIT(A)'s orders, which were based on a thorough examination of facts, proper appreciation of evidence, and adherence to judicial principles.