2016 (4) TMI 661 - AT - Income Tax

Disallowance of labour charges - Held that - Considering particularly the claim that labour charges for more than 8 months are outstanding at the year end and the payment already made in the present year is by way of cash, we feel that some disallowance out of labour charges is justified. We feel that if the preceding year is considered as a guiding factor, the labour charges should be 22.69% of Receipts of ₹ 90.35 Lacs as in that year and as a result, the labour charges for the present year comes to ₹ 20.50 as against claimed by the assessee of ₹ 23.82 Lacs. We have already noted that since this is not a case of the assessee that any assessment of such preceding or succeeding year was completed u/s 143 (3) and in the absence of that, such preceding or succeeding year cannot be a guiding factor. Considering te facts in totality, we feel that in the facts of the present case, disallowance of ₹ 5.95 lacs being 25% out of labour charges will meet the ends of justice. Addition of sundry creditors - Held that - Confirmation is available of only 5 parties having outstanding of ₹ 3,70,20/- and about the remaining parties, it is stated by the assessee that it is not possible for the assessee to trace these creditors since period of nine years has elapsed and many of them have closed their business and others have disposed of their records. But the assessee has not brought even this evidence on record that when and how the amount was paid by the assessee to these creditors as per the records of the assessee and what is the last available address of these creditors along with PAN so that the department could have located these creditors. Regarding the five parties for whom confirmation have been submitted by the assessee also, the Ld. CIT(A) has noted that creditworthiness of these creditors was not established. Still, the CIT (A) has made an addition of only ₹ 15 Lacs and not of the entire amount of Creditors. No infirmity in the order of Ld. CIT(A) on this issue

Summary

Issues Involved:
1. Validity of the enhancement of assessed income by the CIT (A).
2. Justification for the enhancement of assessed income.
3. Validity of the disallowance of 50% of labor expenses.
4. Validity of the addition of Rs. 15 lakh towards sundry creditors.
5. Consideration of Gross Profit Rate in relation to disallowance of labor expenses.

Detailed Analysis:

1. Validity of the Enhancement of Assessed Income by the CIT (A):
The primary issue raised by the assessee was the validity of the enhancement of the assessed income by the CIT (A). The assessee contended that the enhancement was made without jurisdiction and was time-barred. The Tribunal referred to the judgment of the Hon'ble Allahabad High Court in the case of CIT Vs. Kashi Nath Candiwala, which held that the power of the appellate Assistant Commissioner is coterminous with that of the Income Tax Officer. The Tribunal concluded that the enhancement made by the CIT (A) was proper and valid in the eyes of the law, following the jurisdictional High Court's ruling.

2. Justification for the Enhancement of Assessed Income:
The CIT (A) enhanced the income of the assessee by Rs. 11.50 lakhs for labor expenses and Rs. 15 lakhs for sundry creditors. The Tribunal reviewed the CIT (A)'s findings and noted that the assessee failed to substantiate the labor expenses and sundry creditors with adequate evidence. The CIT (A) found discrepancies in the labor charges and noted that the assessee did not provide sufficient proof for the identity and genuineness of the creditors. The Tribunal upheld the CIT (A)'s decision, finding no merit in the assessee's contentions.

3. Validity of the Disallowance of 50% of Labor Expenses:
The CIT (A) disallowed 50% of the labor expenses amounting to Rs. 11.50 lakhs, citing the assessee's failure to justify the increase in labor charges and provide evidence of payment. The Tribunal noted that the labor charges had increased despite a decrease in job work receipts and that a significant portion of labor charges was outstanding at the year-end. The Tribunal found the disallowance reasonable but modified it to Rs. 5.95 lakhs, considering it more appropriate based on the facts.

4. Validity of the Addition of Rs. 15 Lakh Towards Sundry Creditors:
The CIT (A) added Rs. 15 lakhs towards sundry creditors due to the assessee's inability to substantiate the identity, capacity, and genuineness of the creditors. The Tribunal noted that the assessee provided confirmations for only five out of 34 creditors and failed to prove the creditworthiness of even these five. The Tribunal upheld the CIT (A)'s addition, finding no infirmity in the decision.

5. Consideration of Gross Profit Rate in Relation to Disallowance of Labor Expenses:
The assessee argued that the disallowance of labor expenses was unjustified as the Gross Profit (G.P.) rate was better compared to the previous year. The Tribunal dismissed this argument, noting that the G.P. rate of the preceding or succeeding year cannot be a guiding factor in the absence of assessments completed under section 143(3). The Tribunal found that the labor charges claimed were not fully substantiated and upheld the disallowance, albeit at a reduced amount.

Conclusion:
The Tribunal partly allowed the appeal, reducing the disallowance of labor expenses to Rs. 5.95 lakhs while upholding the addition of Rs. 15 lakhs towards sundry creditors. The enhancement of assessed income by the CIT (A) was deemed valid and justified based on the evidence and legal precedents.