2016 (1) TMI 1031 - AT - Income Tax

Disallowance of wages - CIT(A) allowed relief to assessee - Held that - The assessee has given a reasonable and plausible explanation that the assessee is a civil contractor and hires worker who are mostly illiterate and cannot sign and instead use their thumb impressions and wage register was duly audited by the auditors who have not pointed out any defect or deficiency in the wage register. The AO has also not also specified any authority of law whereby it is mandatory in India on the part of the payer to compulsorily have signatures of the payee s in the receipts/ vouchers instead of thumb impressions and taking of thumb impressions of the payee will invalidate or lead to inadmissibility/ rejection of the documents under prevailing laws in India nor the AO has brought any authority under Act that if revenue stamp is not affixed on cash payments exceeding the prescribed limit under law, will lead to disallowance of the said expenses under the Act. No doubt, this could be deficiency in the maintenance of records but that is not sufficient to disallow the claim of expenses of the assessee. Nor is the case of the revenue that these expenses are bogus or fictitious and have never been incurred or paid by the assessee. Thus, we are of considered view keeping in view the facts and circumstances of the case, that ad-hoc disallowance being 15% of the wages made by the AO cannot be sustained and we are not inclined to interfere with the orders of the CIT(A). - Decided against revenue Assessment u/s 144 - disallowance deleted by CIT(A) - Held that - AO erred in not considering the replies filed till 16-12-2011 by the assessee during the course of assessment proceedings in tapal/dak counters before the finalization of the assessment u/s 144 of the Act on 16-12-2011 while the CIT(A) has rightly considered the replies filed by the assessee in tapal/dak counters till 16-12-2011 i.e. date of finalization of the assessment u/s 144 of the Act by the AO. The CIT(A) has adjudicated the appeal of the assessee on merits after considering the replies, documents and evidences furnished by the assessee till 16-12-2011. We found no infirmity in the orders of the CIT(A) which we uphold - Decided against revenue

Summary

Issues Involved:

1. Disallowance of wages by the AO based on ad-hoc disallowance.
2. Deletion of various disallowances by the CIT(A) without proper verification.
3. Compliance with Rule 46A of Income Tax Rules, 1962.

Issue-wise Detailed Analysis:

1. Disallowance of Wages by AO Based on Ad-hoc Disallowance:

The Revenue appealed against the CIT(A)'s order granting relief to the assessee by disallowing Rs. 14,14,705/- out of total wages of Rs. 94,31,368/-. The AO observed inconsistencies in the wage register, such as thumb impressions instead of signatures and abrupt increases in wages during certain months. The AO disallowed 15% of the wages, citing a low Gross Profit ratio and lack of proper verification.

The assessee contended that the workers were illiterate, leading to thumb impressions, and the wage register was audited without objections. The CIT(A) found the AO's disallowance to be ad-hoc and without cogent reasons, noting that the accounts were audited and no defects were pointed out. The Tribunal upheld the CIT(A)'s decision, stating that the AO failed to provide specific evidence of bogus or fictitious payments and merely pointed out generalized deficiencies.

2. Deletion of Various Disallowances by CIT(A) Without Proper Verification:

For the assessment year 2009-10, the AO made several disallowances amounting to Rs. 3,27,97,131/- under various heads, including sub-contract charges, transportation charges, wages, and rent, due to lack of details provided by the assessee. The CIT(A) deleted most of these disallowances based on the assessee's submissions and documents filed before the assessment order was finalized.

- Sub-Contract Charges: The CIT(A) deleted the disallowance of Rs. 1,37,96,451/- as the assessee provided month-wise details and photocopies of bills, which were subject to TDS.
- Transportation Charges: The disallowance of Rs. 2,56,297/- was deleted as the assessee provided party-wise details and these charges were also subject to TDS.
- Wages: The disallowance of Rs. 1,53,50,684/- was deleted as the assessee provided month-wise details and maintained a wage register.
- Rent: The disallowance of Rs. 1,85,500/- was upheld as the assessee submitted documents after the completion of the assessment.
- Salary & Bonus: The disallowance of Rs. 5,84,752/- was deleted as the assessee provided employee-wise details and all payments were made by cheques.

3. Compliance with Rule 46A of Income Tax Rules, 1962:

The Revenue argued that the CIT(A) did not comply with Rule 46A by not forwarding additional evidence submitted by the assessee to the AO for a remand report. The Tribunal observed that the CIT(A) considered replies and documents filed by the assessee before the finalization of the assessment order on 16-12-2011. These were not additional evidences but replies filed during the assessment proceedings that the AO failed to consider. The Tribunal held that the CIT(A) acted within his powers and there was no violation of Rule 46A, as the evidence was not new but part of the original assessment proceedings.

Conclusion:

The Tribunal upheld the CIT(A)'s orders, dismissing the Revenue's appeals. The disallowances made by the AO were found to be ad-hoc and without substantial evidence. The CIT(A)'s decisions were based on proper verification of documents and compliance with legal procedures. The Tribunal found no breach of Rule 46A or principles of natural justice.