2014 (1) TMI 592 - AT - Income Tax

Disallowance of labour expenses and cartage expenses - Books of accounts rejected Held that - What a person does in a particular month need not follow in all other months as well - Enquiries on Cartage expenses seems vague local enquiries, even if these inquiries actually took place, were neither place on record or confronted to the assessee - there is a direct confirmation from Amul which is on record and this confirmation is contrary to the local enquiries - There may not have been any cartage expenses in the last year because there may not have been any such work in the last year, but that fact alone cannot lead to the conclusion that all cartage bill are fake or highly inflated - It is unreasonable to accept the assessee to produce for verification the persons who did all this work for him - Once the books are rejected, the Assessing Officer may as well have examined the reasonableness of profits of the assessee and pointed out how the profits of the assessee are lesser than the normal profits in that line of business but that exercise has also not been carried out. On one hand, the Assessing Officer has rejected the books of account, and on the other hand, the Assessing Officer has adopted the same book results and disallowed the expenses on estimate basis from the book results the order for disallowance set aside, which are made by improperly rejecting the books of account and adopting some hypothetical computations about labour work and proceedings on the basis of surmises and conjectures decided in favour of Assessee.

Summary

Issues:
Challenge to correctness of order dated 19th October 2010 by the learned Commissioner (Appeals) regarding assessment under section 143(3) of the Income Tax Act, 1961 for the assessment year 2006-07. Grievance against rejection of books of account and disallowances from labour expenses and cartage expenses.

Analysis:
The appellant, engaged in supplying labor at a plant, contested the rejection of books of account and disallowances of expenses. The Assessing Officer raised concerns about increased carting expenses and discrepancies in the number of workers employed. The AO rejected the books of account, disallowed Rs 21,12,019 from labor and cartage expenses, based on his calculations. The CIT(A) upheld the rejection of books but reduced the disallowances. The appellant appealed to the ITAT.

Upon review, the ITAT found the AO's approach legally unsustainable and overlooking business realities. The rejection based on extrapolations for one month was deemed unjustified. The rejection of cartage expenses due to "local enquiries" lacked evidential support and contradicted a confirmation from Amul. The authorities' sweeping generalizations and reliance on surmises were criticized. The AO's failure to assess the reasonableness of profits or compare them to industry standards was noted. The ITAT concluded the disallowances were improper, based on hypothetical computations, and directed relief.

In summary, the ITAT allowed the appeal, emphasizing the deletion of disallowances made by improperly rejecting books of account and relying on conjectures. The ITAT instructed the Assessing Officer to provide relief accordingly.