2017 (10) TMI 622 - AT - Income Tax

Disallowance of wages paid at various sites - nature of expenditure - Held that - We find that the assessee is a contractor and developing/working on various sites for which labourers were employed and supervised by Shri Dada Kadam and he used to disburse the salaries in cash at the sites by taking the same on the basis of requisition from Mr. Dinesh Ojha who was cashier of the assessee. During the course of hearing before us, the assessee produced the some sample receipts taken from the laborers which proved that the assessee has maintained books and other records of the payments to the laborers. It is customary in the business of construction to pay wages through the Supervisor/munshis and therefore, we are in agreement with the conclusion drawn by the ld.CIT(A) that all these payments were not genuine. However some reasonable disallowance should meet the ends of justice as the assessee has failed to furnish the necessary documentary evidences before the lower authorities. Accordingly we direct the AO to restrict disallowance on account various deficiencies and non vouched cash payments at ₹ 20,00,000/-. This ground is partly allowed. Addition being estimated profit on work-in-progress as appeared in profit and loss account - Held that - We find that the assessee has been regularly showing the WIP in its accounts which represents the unbilled work done on behalf of the various clients. The nature of business of the assessee is such that materials are normally delivered at the sites of the customers/ contractor s and necessary modifications and fittings are done at the site of the project. At the yearend incomplete work is shown as WIP. This is a regular feature in business of the assessee. The WIP is automatically accounted for in the next year and also billed accordingly depending upon the completion of work and profit on the said amount is offered to tax accordingly. We find merit in the submissions of the ld.AR and has gone through the previous years in which the ld.CIT(A) has deleted the similar additions made by the department. The department has not further appealed before the higher forum. In view of all the order of CIT(A) is not correct in upholding the additions and therefore we reverse the same and direct the direct the AO to delete the addition. - Decided in favour of assessee. Disallowance being 10% of the cash expenses incurred - addition as unproved and unsubstanted cash expenses u/s 40(A)(3) - Held that - As clear from the above provision of section 40A(3) of the Act that the expenses exceeding ₹ 20,000/- incurred in cash would be disallowed u/s section 40A(3) of the Act. But in the instant case the AO has made estimation which has been confirmed by the ld.CIT(A). Therefore, we are inclined to set aside the order of the ld.CIT(A) on this issue for the reasons that no disallowance is possible u/s 40A(3) of the Act on estimation and adhoc basis and direct he AO to delete the addition. - Decided in favour of assessee.

Summary

Issues Involved:
1. Disallowance of wages paid at various sites.
2. Addition of estimated profit on work-in-progress.
3. Disallowance of 10% of cash expenses incurred.

Issue-Wise Detailed Analysis:

1. Disallowance of Wages Paid at Various Sites:
The assessee contested the disallowance of ?30,09,259/- made by the Assessing Officer (AO) and upheld by the Commissioner of Income Tax (Appeals) [CIT(A)] on account of wages paid at various sites. The AO found that payments made through two employees, Shri Dinesh Ojha and Shri Dagdu Kadam, were not supported by documentary evidence and were made through bearer cheques. Despite the assessee's submission that these payments were for labor disbursement, the AO noted inconsistencies and lack of proper accounting, leading to the disallowance. The CIT(A) concurred, emphasizing the lack of proper records and evidence of genuine expenditure. The Tribunal, however, acknowledged the customary practice in the construction business of paying wages through supervisors and directed a reasonable disallowance of ?20,00,000/- due to deficiencies in documentation.

2. Addition of Estimated Profit on Work-in-Progress:
The AO added ?63,80,442/- as estimated profit on work-in-progress (WIP) shown in the profit and loss account amounting to ?2,76,83,279/-. The AO argued that unbilled sales should be taxed as they represented goods physically delivered to clients. The CIT(A) upheld this addition, stating that delivered goods should be accounted as sales according to Accounting Standards. The assessee argued that WIP was a routine part of their business, representing unbilled work that would be accounted for in the next year upon completion. The Tribunal found merit in the assessee's argument, noting that the WIP was a regular feature and had been accepted in previous years without further appeal by the department. Consequently, the Tribunal reversed the CIT(A)'s order and directed the AO to delete the addition.

3. Disallowance of 10% of Cash Expenses Incurred:
The AO disallowed 10% of cash expenses amounting to ?15,70,393/- due to incomplete documentation and vouchers, invoking Section 40A(3) of the Income Tax Act. The CIT(A) sustained this disallowance, citing the lack of proof for the cash expenses and referencing relevant case law. The Tribunal, however, highlighted that Section 40A(3) pertains to disallowance of expenses exceeding ?20,000/- made in cash, and the AO's estimation was not in accordance with this provision. Therefore, the Tribunal set aside the CIT(A)'s order and directed the AO to delete the addition, as the disallowance was made on an incorrect basis.

Conclusion:
The Tribunal allowed the appeal of the assessee, directing the AO to restrict the disallowance of wages to ?20,00,000/-, delete the addition of estimated profit on WIP, and remove the disallowance of 10% of cash expenses.