2018 (4) TMI 1203 - AT - Income Tax

Addition u/s 41(1) in respect of M/s Suryalakshmi Garments - Held that - The provisions of sec. 41(1) shall apply only in case of ceased trading liability. As the assessee has demonstrated that M/s Suryalaxmi Garments is having running account and the balance outstanding in its name has been paid in the succeeding years. Hence we are of the view that the provisions of sec. 41(1) shall not apply to the facts of this issue. Accordingly we set aside the order passed by Ld CIT(A) on this issue and direct the AO to delete the addition relating to M/s Suryalaxmi Garments. Disallowance made out of labour charges - Held that - As rightly held by Ld CIT(A), it cannot be said that the assessee has conclusively proved the genuineness of labour charges. A portion of the expenditure claim may be disallowed in order to take care of revenue leakages. CIT(A) has disallowed 30% of the labour charges paid to the five parties. We notice that the AO has not shown that the labour charges were not incurred at all. It is an admitted fact that the garments cannot be manufactured without incurring labour charges. Hence, disallowance of 30% appears to be on the higher side. Accordingly we modify the order passed by Ld CIT(A) on this issue and direct the AO to restrict the disallowance to 15% of the labour charges paid to the five parties. Disallowance made of purchases made from M/s Harsh Textiles - assessee has contended that he has produced the quantity details to prove the receipt and consumption of the cloth - Held that - The notice issued to the said party has returned back and since the assessee could not produce the above said party before the AO, it cannot be said that the assessee has conclusively proved the genuineness of purchases. Disallowance of a portion of purchases is called for to take care of revenue leakages. As submitted that the cloth is rateable item under VAT tax - tax authorities have disallowed 25% of the value of purchases made from M/s Harsh Textiles, which we consider to be on the higher side when we consider the contentions of the assessee. We modify the order passed by Ld CIT(A) on this issue and direct the AO to restrict the addition to 5% of the value of purchases made from M/s Harsh textiles.- Appeal of assessee partly allowed.

Summary

Issues:
1. Addition made u/s 41(1) in respect of M/s Suryalakshmi Garments
2. Disallowance made out of labour charges
3. Disallowance made out of purchases made from M/s Harsh Textiles

Analysis:

Issue 1: Addition made u/s 41(1) in respect of M/s Suryalakshmi Garments
The appeal concerned the addition made under section 41(1) of the Income Tax Act. The Assessing Officer (AO) added outstanding balances of six creditors as the notices issued to them were returned unserved. The Commissioner of Income Tax (Appeals) [CIT(A)] deleted the addition for five creditors but upheld it for M/s Suryalakshmi Garments. The Tribunal found that M/s Suryalakshmi Garments had a running account with the assessee, and the outstanding balance was paid in subsequent years, indicating it was not a ceased liability. Consequently, the Tribunal directed the AO to delete the addition related to M/s Suryalakshmi Garments.

Issue 2: Disallowance made out of labour charges
The dispute revolved around the disallowance of labor charges by the AO, who issued notices to job workers that were returned unserved. The CIT(A) reduced the disallowance to 30%, citing lack of conclusive proof of services rendered. The Tribunal noted that while the assessee provided labor bills and payment evidence, the inability to produce job workers raised doubts. Considering that garments production necessitates labor costs, the Tribunal reduced the disallowance to 15% of labor charges paid to the five parties, deeming 30% disallowance excessive.

Issue 3: Disallowance made out of purchases made from M/s Harsh Textiles
Regarding purchases from M/s Harsh Textiles, the AO disallowed 25% of the value due to unserved notices and lack of direct party production. The Tribunal acknowledged the provided evidence but emphasized the burden of proof on the assessee. Considering the lack of direct party appearance and unserved notices, the Tribunal reduced the disallowance to 5% of the purchase value, finding the 25% disallowance excessive. The Tribunal partly allowed the appeal, modifying the CIT(A)'s orders on all three issues and providing detailed justifications for each modification.