2018 (2) TMI 962 - AT - Income Tax

Disallowance @ 10% of Labor Charges - Non deduction of tds - non-availability of supporting evidence - Held that - AO has not brought on record any cogent reasons for making the disallowance of the above stated amount. It is not the case that the expenses were considered to be bogus or unreasonable. The allegation of the AO is that the vouchers were handmade. There are certain situations and circumstances where the external documents in support of the expenses are not available. One of such expense appears to be labour charges in he facts and circumstances of the given case. It is because the assessee is a Government Contractor which is labour intensive activity. Therefore the AO needs to refer to the earlier year financial statement to ensure unreasonable expenses has been claimed by the assessee. But no such exercise was carried out by the AO. - Decided against revenue. Addition on account of unverifiable sundry creditors - trade creditors could not respond to the notice issued u/s 133(6) - Held that - It is undisputed fact that all the trade creditors appearing in the balance-sheet are arising out of the expense of material purchased by the assessee. Thus all the purchases have been duly accepted by the AO and same was not disputed. However, the trade creditors which are emanating from the purchases have been disallowed merely on the ground of non-response of notice issued to them u/s 133(6) of the Act. In our considered view, the trade creditors cannot be disturbed without disallowing the corresponding purchase. - Decided against revenue. Addition made being 5% of material purchase on the ground that assessee failed to produce supporting evidence - Held that - Once the AO has reached to a conclusion that assessee has failed to produce the books of account and no supporting evidence has been filed then he should have disallowed entire amount of expense or he should have rejected the books of account and should have framed the assessment u/s. 144. We also observed in the absence of any documentary evidence the AO should have referred to the historical data of the assessee for making the disallowance in scientific manner but in the instant case, AO has made the disallowance based on his surmise and conjecture. AO arbitrarily has disallowed @ 5% of material purchase and had accepted 95% of the expense which is contrary to the finding of AO. It is also important to note that the assessee has declared net profit @ 6.5% which is quite reasonable in the line of government contractor business.- Decided against revenue.

Summary

Issues Involved:
1. Deletion of addition on account of disallowance of labor charges.
2. Deletion of addition on account of unverifiable sundry creditors.
3. Deletion of addition on account of materials purchased.

Issue-Wise Detailed Analysis:

1. Deletion of Addition on Account of Disallowance of Labor Charges:
Facts:
The assessee, a government contractor, claimed labor charges of ?8,30,52,972/- in the profit and loss account. Out of this, ?2,30,26,215/- had TDS deducted, while ?6,00,26,712/- was incurred without TDS and supported by self-made vouchers. The Assessing Officer (AO) disallowed 10% of the labor charges amounting to ?60,02,671/- due to lack of supporting evidence.

Assessee's Argument:
- The laborers were unskilled, illiterate, and from remote areas without banking facilities, necessitating cash payments.
- Complete records including vouchers and wage distribution registers were produced.
- The AO did not point out specific instances of unsupported expenses.
- The AO accepted the reasonableness of the expenses and did not reject the books of account.

CIT(A)'s Observation:
- The AO did not dispute the maintenance of records or the necessity of cash payments.
- No specific instances of unverifiable expenses were pointed out by the AO.
- The AO's disallowance was based on generalized observations and lacked specific evidence.
- The AO's act of disallowing 10% despite admitting 95% of expenses as genuine showed non-application of mind.

Tribunal's Decision:
- The AO should have rejected the books of account under section 145(3) if not satisfied with their correctness.
- The AO did not initiate penalties for non-maintenance of books or non-appearance.
- The profit declared by the assessee at 6.5% was reasonable for government contracts.
- The AO's disallowance was arbitrary, without pointing out specific defects.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the disallowance of ?60,02,671/-.

2. Deletion of Addition on Account of Unverifiable Sundry Creditors:
Facts:
The AO added ?1,14,49,545/- on account of sundry creditors after notices issued under section 133(6) were unserved or unanswered.

Assessee's Argument:
- The AO did not specify the provision under which the addition was made.
- Necessary details of creditors were provided, and transactions were regular.
- The opening balance of ?45,90,956/- could not be added under section 68.
- No new sum was received; the transactions were part of regular business.

CIT(A)'s Observation:
- The AO did not specify the enabling provision for the addition.
- Out of 12 parties, 8 responded to notices confirming transactions.
- The AO accepted the genuineness of labor charges and materials supplied.
- The transactions were trading in nature, not loans.

Tribunal's Decision:
- The AO accepted the purchases but disallowed corresponding creditors, which was inconsistent.
- Trade creditors cannot be disturbed without disallowing corresponding purchases.
- The Tribunal upheld the CIT(A)'s decision to delete the addition of ?1,14,49,545/-.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the addition related to unverifiable sundry creditors.

3. Deletion of Addition on Account of Materials Purchased:
Facts:
The AO disallowed 5% of materials purchased amounting to ?21,53,716/- due to non-production of supporting evidence.

Assessee's Argument:
- All necessary details and books of account were produced.
- The AO should have disallowed the entire amount or rejected the books of account if not satisfied.
- The disallowance was arbitrary and not based on specific defects.

CIT(A)'s Observation:
- The AO did not reject the books of account or invoke section 145(3).
- The AO allowed 95% of the expenses, indicating satisfaction with their genuineness.
- The disallowance was arbitrary without pointing out specific infirmities.

Tribunal's Decision:
- The AO's disallowance was contrary to his findings.
- The AO should have referred to historical data for a scientific disallowance.
- The disallowance was based on conjecture and not specific evidence.

Conclusion:
The Tribunal upheld the CIT(A)'s decision to delete the disallowance of ?21,53,716/-.

Final Order:
The Tribunal dismissed the Revenue's appeal, upholding the CIT(A)'s decisions on all issues.