2012 (7) TMI 479 - AT - Income Tax

Disallowance of 50% of packing charges and labour charges - CIT(A) deleted the additions - Held that - The assessee s claim is cogent one that persons engaged in the packing are not skilled labourers and are paid cash as they are not having any bank account. Thus, there is no necessity to maintain detailed records of temporary workers who finished the work assigned to them in a short span of time and that as assessee has paid piece rate charges in these circumstances, the quantum of expenditure can be compared to production done by the labour - This shows that the percentage of labour charges and packing charges to the turnover compares favorably with the percentages of expenses claimed in the earlier and subsequent years. AO has made adhoc disallowance of 50% of packing charges and labour charges without pointing out the specific expenditure under those heads - in favour of assessee. Deletion of addition made on account of shortage in production by CIT(A) - Held that - CIT(A) has given a finding that assessee is maintaining the complete details / particulars of opening stock, purchases, consumption, production and sales which were verified by the AO and accepted without pointing out any deficiency or defect in them. Thus in these circumstances provision of section 145(3) have been incorrectly resorted to by the AO. Furthermore, AO has partly rejected the books of account, which is not tenable - in favour of assessee. Addition on account of disallowance u/s 40(a)(ia) - Held that - The assessee has made payments to the three transporters mentioned in the assessment order for each order of transport executed by them. As the assessee has no contract for transport with any transporter, thus each GR Note becomes a separate contract and since the value of such contract does not exceed Rs. 20,000/- the assessee was not required to deduct tax at source from the said payments - the Board Circular No. 715 dated 8.8.1995 comes to the rescue of the assessee - the AO has not brought on record any document to show that the assessee had contract with any transporter and thus just because the payments exceeded Rs. 50,000/- there was no implicit reason to hold that the payments were made in pursuance to a contract - in favour of assessee. Disallowance of commission paid to foreign agents - Held that - As assessee has made the payment of commission to non-resident agents for business procured abroad. Thus, the nonresident agents operated outside the country, no part of their income arises in India. Further, since the payment was remitted directly abroad it cannot be held to have been received by or on behalf of the agent in India - Board Circular No. 786 dated 7.2.2000 & CBDT Circular No. 23 dated 23rd July, 1969 is relevant for this case - CIT(A) has given a finding that in earlier years such expenditure have been allowed in the scrutiny assessment u/s. 143(3) - in favour of assessee. Disallowance of vehicle expenses and telephone expenses - CIT restricted the diss allowance to to 1/ 10th instead of 1/5th & 1/3rd respectively by AO - Held that - 1/10th disallowance against the impugned expenses is reasonable and has been also so held by the tribunal in assessee s own case in earlier year assessment year 2001-02 no point of rejecting the order of the Ld. CIT(A) - in favour of assessee. Deletion of addition on account of household expenses by CIT(A) - Held that - Addition in this case has been made by the AO, in a purely arbitrary manner and without any basis and documentary evidence, thus deletion is warranted - in favour of assessee.

Summary

Issues Involved:
1. Deletion of addition on account of labour charges.
2. Deletion of addition on account of shortage in production.
3. Disallowance under section 40(a)(ia) for non-deduction of TDS.
4. Disallowance of commission paid to foreign agents.
5. Disallowance of vehicle and telephone expenses.
6. Addition on account of household expenses.

Detailed Analysis:

1. Deletion of Addition on Account of Labour Charges:
The Assessing Officer (AO) disallowed labour charges by questioning the genuineness of the payments, citing non-verifiable addresses of labourers and comparison with other businesses. The Commissioner of Income Tax (Appeals) [CIT(A)] found the AO's disallowance arbitrary, noting the assessee's explanation that labourers were casual workers paid on a piece-rate basis, and historical data supported the claimed expenses. The Income Tax Appellate Tribunal (ITAT) upheld the CIT(A)'s decision, emphasizing the practical business scenario and previous tribunal rulings in favor of the assessee.

2. Deletion of Addition on Account of Shortage in Production:
The AO restricted the shortage in production based on comparisons with another business and rejected the trading results. The CIT(A) found the AO's approach speculative and unsupported by documentary evidence, noting the assessee maintained complete records. The ITAT supported the CIT(A), highlighting that the AO's partial rejection of books was untenable and previous tribunal decisions favored the assessee.

3. Disallowance Under Section 40(a)(ia) for Non-Deduction of TDS:
The AO disallowed payments to transporters due to non-deduction of TDS, despite the assessee providing Form No. 15-I. The CIT(A) ruled in favor of the assessee, referencing a Board Circular that each Goods Receipt (GR) can be treated as a separate contract if not exceeding Rs. 20,000, thus not requiring TDS. The ITAT upheld this view, finding the AO's disallowance premature and unsupported by solid evidence.

4. Disallowance of Commission Paid to Foreign Agents:
The AO disallowed commission payments to foreign agents for non-compliance with Section 195. The CIT(A) observed that the commission was for services rendered abroad, supported by historical acceptance of such expenses by the department. The ITAT referred to Board Circular No. 786, which clarifies no TDS is required for foreign agents operating outside India, and upheld the CIT(A)'s decision.

5. Disallowance of Vehicle and Telephone Expenses:
The AO disallowed a portion of vehicle and telephone expenses for personal use. The CIT(A) reduced the disallowance to 1/10th, aligning with previous tribunal decisions. The ITAT found this reasonable and upheld the CIT(A)'s order, noting the AO's arbitrary approach lacked practical consideration.

6. Addition on Account of Household Expenses:
The AO added estimated household expenses to the partners' income, comparing it with electrical and educational expenses. The CIT(A) found the addition baseless, lacking documentary evidence, and not justified under Section 69C. The ITAT agreed, deeming the AO's estimation arbitrary and unsupported, thus upholding the CIT(A)'s deletion of the addition.

Conclusion:
The ITAT dismissed all three appeals filed by the Revenue, affirming the CIT(A)'s decisions on all issues. The tribunal emphasized the necessity of documentary evidence and practical considerations in business scenarios, aligning with historical data and previous rulings favoring the assessee.