2023 (5) TMI 536 - AT - Income Tax

Revision u/s 263 - non-deduction of the tax at source in respect of finance charges or interest paid by the assessee to finance companies warranting, thus, disallowance u/s. 40(a)(ia) - non-verification of the assessee s claim of wages, on which no provident fund stands contributed, including with the EPFO, so that the claim was apparently incorrect. HELD THAT - The assessee has before the revisionary authority claimed to have engaged workers on daily wage basis. Apart from the fact that the same is only a manner of remuneration, the same amounts to contractual labour, on which, again, both ESI EPF are applicable.The matter, as it appears, is no longer res integra, and the assessee s argument, in law, inapplicable. As already noted a complete absence of verification by the AO of the assessee s claims, i.e., even as to there being no continuous employment for 60 days, which is stated for the provisions of the EPF Act to be applicable. Why, there is even no confirmation by him of the said provisions. Even if the labour is contractual, hired direct or through the contractors, the same, as afore-noted, may attract EPF ESI Acts, besides such payment being subject to tax deduction at source u/ss. 194C/194J, and which has a bearing on the deductibility of the expenditure through sec. 40(a)(ia). We are conscious and, accordingly, clarify that the ground of non-payment of EPF (or even ESI) on wages is relevant only insofar as, and to the extent, it is indicative of the said expenditure being not genuine, or incurred wholly and exclusively for business purposes. This is as it could well be that the assessee having incurred the said expenditure, has though violated the provisions of the ESI and/or EPF Act on either the whole or a part of the labour expenditure, in which either case, no part of the said expenditure, claimed u/s. 37(1), where genuine, could be disallowed. Nonverification apart, the assessee s reply, ostensibly based on facts , that no part of the expenditure attracts EPF as it has engaged only casual labour on daily wage basis, reinforces the doubts about the genuineness of the expenditure, providing further relevance, as it were, thereto. This is also apart from the relevance of the said ground being, as afore-noted, not in dispute inasmuch as the same formed the basis of reassessment, which proceedings have since attained finality. The absence of any verification and, concomitant finding, i.e., qua genuineness of the (entire) expenditure, incurred in cash, by the assessing authority lends further relevance to the said ground, and which is also the reason for our having discussed the matter in some detail. Reference be drawn to the decision in Gee Vee Enterprises 1974 (10) TMI 29 - DELHI HIGH COURT . We may therefore not be construed as having issued any finding/s, much less determined the matter, but only that, on the face of it, the claim of expenditure by the assessee cannot be accepted, while the same has been so without conducting even a preliminary verification, as with reference to the labour details and the applicable provisions of the EPF Act. That is, our purview and finding is that the matter requires proper verification, justifying the revision on the lines made. Nothing more and, nothing less. The matter shall be examined by the AO in its entirety, including the conduct of business in the past, as well as with reference to the specific issues, if any, facing construction industry, and for which reference could also be made by him to the enterprises in the organised sector; construction, it may be noted, has since been granted the status of an Industry. The onus to establish it s claims, needless to add, is on the assessee. Assessee s appeal is dismissed.

Summary

Issues Involved:
1. Non-deduction of tax at source on finance charges.
2. Non-verification of wages, specifically regarding non-contribution to the provident fund.

Issue-wise Detailed Analysis:

1. Non-deduction of Tax at Source on Finance Charges:

The assessee, a construction company, faced a notice under section 148 of the Income Tax Act, 1961, for non-deduction of tax at source on finance charges amounting to Rs. 15,84,011. The assessee responded by submitting certificates from a Chartered Accountant (CA) indicating that the payee companies had discharged their tax liability on these sums. However, the Assessing Officer (AO) added a discrepancy of Rs. 33,317 to the total income, as the certificates accounted for only Rs. 15,50,694.

In the revision proceedings under section 263, the Principal Commissioner of Income Tax (Pr. CIT) found that the AO had not made proper inquiries and had failed to apply his mind, thus deeming the order erroneous and prejudicial to the interests of the Revenue. The Tribunal upheld this revision, noting that the AO's acceptance of the CA certificates without stating reasons for applying the law retrospectively (which came into force later) rendered the order non-speaking and invalid. The Tribunal emphasized that proper verification and a reasoned order are preconditions for a valid judicial order.

2. Non-verification of Wages and Non-contribution to Provident Fund:

The second issue pertained to the non-verification of wages amounting to Rs. 518.27 lacs, where the assessee claimed these payments were made to casual labor, thus not attracting provident fund provisions. The AO accepted this claim without any verification, which led to the initiation of revision proceedings under section 263.

The Tribunal observed that the AO had not conducted any verification or made any findings regarding the genuineness of the wage expenditure. The assessee's claim of engaging only casual labor was found to be technically and operationally unfeasible for a construction company of its scale. The Tribunal highlighted the need for proper verification, including checking labor details and applicable provisions of the EPF Act.

The Tribunal noted that the AO's failure to verify the claims and the absence of any findings rendered the assessment order erroneous and prejudicial to the interests of the Revenue. The Tribunal emphasized that the matter required a thorough examination by the AO, including the conduct of business in the past and specific issues facing the construction industry.

Conclusion:

The Tribunal upheld the revision order under section 263, finding that the AO had failed to make proper inquiries and apply his mind in both issues related to non-deduction of tax at source on finance charges and non-verification of wage expenditure. The assessee's appeal was dismissed, and the Tribunal directed the AO to conduct a proper verification and issue definite findings in accordance with the law.