2016 (5) TMI 152 - AT - Income Tax

Disallowance of prior period expenses - Held that - According to the assessee it has recognized the contract receipts in the F.Y.2005-06 but could not realize the total receipts and therefore in the Asstt.Year 2008-09 i.e. F.Y.2007-08 he has reduced the sales. Had he claimed bad debts there could not be any problem to the AO. In our opinion instead of strictly going by the accounting treatment given by the assessee in the books the ld.AO ought to have visualized the transaction itself and if a sale was recognized by the assessee and accounted in the books on the basis of which the total income was computed but actually he failed to realize those sales then the unrealized amounts will be bad debt to the assessee or a business loss. That could be claimed by the assessee in subsequent period. The ld.AO has construed the transaction in different manner as if assessee has claimed deduction of expenditure. In that context he made reference to the confirmation from ESSAR. He ought to have reconciled the contract receipt accounted by assessee on accrual basis and ultimately realized. It account has The ld.CIT(A) has considered this issue with this angle and deleted the disallowance. We do not find any error in the order of the ld.CIT(A) - Decided against revenue Disallowance of labour expenses - CIT(A) restricted it to 2% instead of 10% made by the AO - Held that - has nowhere alleged the specific information which has disabled him to deduce the true income from the contract receipts of the assessee. What was the angle he wanted to inquire from the labourers ? The assessee has alleged that name date of payment site designation of the workers i.e. carpenters plumber electrician etc. were disclosed to the AO. In spite of that the AO simply disallowed 10% of the expenditure by observing that details were not submitted. The challenge of the assessee is which detail was not submitted to the AO. Before the ld.CIT(A) he had reiterated his contentions in the written submission. The ld.CIT(A) though concurred with the AO with regard to the submissions of the details but scaled down the disallowance to 2% on adhoc basis. He made reference to his order in the Asstt.Year 2007-08 also. No doubt in the Asstt.Year 2007-08 the Tribunal has restored this disallowance to 10% but reasons for such restoration was that no details were submitted by the assessee. It was an ex parte order. Had the assessee challenged the order of the ld.CIT(A) probably this 2% would have not remained there in this assessment year because in our understanding the AO has not made a case for adhoc disallowance at 10%. In view of the above discussion we do not find any merit in these grounds of appeal.- Decided against revenue Non payment of employees contribution to the PF account within the time stipulated under the PF Act - AO has disallowed the claim - CIT(A) has deleted the disallowance - Held that - This issue is squarely covered against the assessee by the decision of the Hon ble Gujarat High Court in the case of CIT Vs. Gujarat State Road Transport Corporation Ltd. 2014 (1) TMI 502 - GUJARAT HIGH COURT - Decided in favour of revenue

Summary

Issues Involved:
1. Deletion of addition of ?59,39,127/- related to prior period expenses.
2. Restriction of disallowance of labour expenses at 2% instead of 10%.
3. Disallowance of employees' contribution to the PF account due to delayed payment.

Issue-wise Detailed Analysis:

1. Deletion of addition of ?59,39,127/- related to prior period expenses:

The Revenue's grievance was that the CIT(A) erred in deleting the addition of ?59,39,127/- made by the AO by disallowing prior period expenses. The assessee, running a proprietorship concern, filed a return declaring total income of ?45,88,990/-. During scrutiny, it was found that the assessee debited ?59,39,127/- related to construction work for M/s. Essar Construction (India) Ltd. The assessee raised bills totaling ?2,76,46,141/- but only ?2,17,07,014/- was sanctioned, resulting in a difference of ?59,39,127/-. The assessee claimed this amount as irrecoverable and wrote it off, reducing sales instead of claiming it as bad debts. The AO disallowed this claim, stating the expenses pertained to FY 2005-06 and could not be claimed in FY 2007-08.

The CIT(A) accepted the assessee's contention, noting the recurring nature of transactions and the practice of crediting contract receipts at the time of billing. The CIT(A) observed that the assessee recognized the contract receipts in FY 2005-06 but failed to realize the total amount, thus reducing sales in FY 2007-08. The Tribunal found no error in the CIT(A)'s order, stating that the AO should have visualized the transaction as a business loss or bad debt, which could be claimed in subsequent periods. Hence, the Tribunal rejected the Revenue's grounds.

2. Restriction of disallowance of labour expenses at 2% instead of 10%:

The Revenue contended that the CIT(A) erred in restricting the disallowance of labour expenses to 2% instead of the 10% made by the AO. The assessee claimed labour expenses of ?2,62,38,677/-, with ?2,27,16,989/- incurred in cash. The AO disallowed 10% of this expenditure due to the absence of PAN and full addresses of the laborers, resulting in an addition of ?22,71,698/-.

The CIT(A) noted that the assessee produced a full set of labour registers, showing names, work done, wages paid, and signatures. The CIT(A) observed that the AO had no contention on contractual labour but disallowed 10% for own labour due to incomplete details. The CIT(A) found that the assessee maintained separate labour registers for different sites and had shown an increased gross profit ratio. The CIT(A) restricted the disallowance to 2%, considering the inherent defects in the labour register.

The Tribunal noted that the AO did not point out specific defects in the details maintained by the assessee. The AO's disallowance was based on the absence of PAN and addresses, which the assessee argued was impractical for uneducated laborers. The Tribunal found that the AO's disallowance lacked specific information and upheld the CIT(A)'s decision to restrict the disallowance to 2%.

3. Disallowance of employees' contribution to the PF account due to delayed payment:

The issue was that the assessee could not make the payment of employees' contribution to the PF account within the time stipulated under the PF Act. The AO disallowed the claim, but the CIT(A) deleted the disallowance. The Tribunal noted that this issue was covered against the assessee by the decision of the Hon’ble Gujarat High Court in the case of CIT Vs. Gujarat State Road Transport Corporation Ltd., 366 ITR 170. Following the High Court's decision, the Tribunal set aside the CIT(A)'s order on this issue and restored the AO's order.

Conclusion:

The appeal of the Revenue was partly allowed. The Tribunal upheld the CIT(A)'s deletion of the addition related to prior period expenses and the restriction of labour expenses disallowance to 2%. However, the Tribunal set aside the CIT(A)'s order on the disallowance of employees' contribution to the PF account and restored the AO's order.