2013 (10) TMI 461 - AT - Income Tax

Disallowance of part of wages claim proof of payment of wages - Held that - Ld A.R claimed that the wages are paid on the basis of quantity of cloth manufactured by the weavers, yet the fact remains that the assessee did not furnish any quantity details to substantiate the amount of wages claimed by him No fault with the tax authorities in entertaining the presumption that there may be a possibility of inflation or bogus claim. It is a well settled proposition that the responsibility to prove the reasonableness lies upon the assessee and in this case, there is a failure on the part of the assessee - AO has compared the ratio of wages claim to the value of yarn consumed in order to determine the reasonableness of the claim. However, it is not be a scientific method to ascertain the reasonableness. While the wages are normally fixed on the basis of inflation index, the rate of yarn would depend upon market forces, quality and variety of yarn etc - At the same time, the assessee has also failed to substantiate the wages claim by furnishing the quantity details - There is justification in disallowing a part of wages claim, so that such disallowance shall take care of inflation or infirmities - Uniform disallowance of 25% of the amount disallowed by the AO in both the years would meet the ends of justice, in all the Assessment years under consideration. - Decided against the assessee.

Summary

Issues: Disallowance of wages expenses in assessment years 2006-07 and 2007-08

Analysis:
1. The primary issue in the appeals before the Appellate Tribunal ITAT Cochin was the disallowance made by the Assessing Officer regarding the wages expenses claimed by the assessee in the assessment years 2006-07 and 2007-08. The Assessing Officer observed discrepancies in the wage payments and lack of supporting documentation, leading to the disallowance.

2. The Assessing Officer estimated excess wages claimed by the assessee at Rs. 30.00 lakhs for 2006-07 and Rs. 50.00 lakhs for 2007-08, based on the comparison of wage payments with the value of yarn consumed. However, the methodology used by the Assessing Officer was deemed unscientific by the Ld. CIT(A) due to variations in manufacturing processes.

3. The Ld. CIT(A) reasoned that small weavers involved in the manufacturing process were unlikely to maintain detailed accounts, and it would be unfair to penalize the assessee for this. Consequently, the Ld. CIT(A) reduced the disallowance to Rs. 15 lakhs for 2006-07 and Rs. 12.50 lakhs for 2007-08, considering it to be on the higher side.

4. The Appellate Tribunal acknowledged the lack of quantity details provided by the assessee to substantiate the wage payments claimed. While agreeing with the Ld. CIT(A) that the comparison method used by the Assessing Officer was flawed, the Tribunal upheld the concept of a partial disallowance to address potential inflation or inaccuracies in the wage claims.

5. The Appellate Tribunal modified the Ld. CIT(A)'s order for 2006-07, directing the Assessing Officer to restrict the disallowance to 25% of the amount initially disallowed, i.e., Rs. 7.50 lakhs. For 2007-08, the Tribunal upheld the Ld. CIT(A)'s decision. Ultimately, the appeal for 2006-07 was partly allowed, while the appeals for 2007-08 and the revenue's appeals were dismissed.

This detailed analysis outlines the key arguments, reasoning, and decisions made by the authorities regarding the disallowance of wages expenses in the mentioned assessment years.