2018 (10) TMI 791 - AT - Income Tax

TDS u/s 194C - disallowance of labour charges and earth work charges for non deduction of tds - addition u/s 40a(ia) - Held that - It is not in dispute that the assessee is engaged in road contract works in the remote parts of various villages. Obviously, for this purpose the assessee had to engage labourers from the nearby villages in view of the fact that there was no proper path way for rural work site. What assessee has actually done in the instant case is engaging various labourers for work at its site and for which payments are made to one labourer (labour heads) with a clear direction to distribute the same to various labourers either on daily or weekly basis , as the case may be. The assessee in the instant case had not engaged any labour contractor or any sub-contractor for making payment of labour charges and earth work charges. In this scenario, the provisions of section 194C cannot be made applicable in the facts and circumstances of the case. Accordingly, the ld. CIT(A) had rightly deleted the disallowance u/s 40a(ia) - Decided in favour of assessee. Disallowance u/s 40A(3) - payments made in cash - proof of business expediency/ business compulsions - Held that - There is no dispute that the banking facilities are not available in some parts of these villages. The assessee had stated that the raw materials supplier insisted for making payments in cash in view of the fact that their residence are situated in the remotest villages where there are no banking facilities. Hence the assessee had to necessarily make payments only in cash out of business expediency/ business compulsions so as to ensure smooth supply of raw materials from the said supplier for the purpose of its road contract works in order to avoid any delay in execution of the said work allotted to the assessee by the Government and local authorities. There is no dispute that the payments were made on Sundays, public holidays etc by the assessee. None of the aforesaid findings given by CIT(A) have been controverted by the revenue before us. Hence we do not find any infirmity in the order of the Ld. CIT(A) by granting relief to the assessee - Decided in favour of assessee. Ad hoc addition towards work-in-progress - Held that - The entire books of accounts together with requisite details with supporting evidences were duly submitted by the assessee before the ld. AO which is not disputed by the ld. AO. We find that no defects were pointed out by the ld. AO in the said accounts or in the vouchers and evidences submitted by the assessee. Without rejecting the books of accounts, the ld. AO cannot resort to make any addition on an estimated basis. We find that the assessee has not been showing opening stock of work-in-progress and closing stock of work-in-progress in its books of accounts for the past many years and this system of accounting has been accepted in the past by the revenue. In any case, the addition was made only on an estimation which cannot survive - Decided in favour of assessee.

Issues Involved:
1. Deletion of disallowance of labor charges and earth work charges under Section 40a(ia) of the Income Tax Act.
2. Deletion of disallowance under Section 40A(3) of the Income Tax Act.
3. Deletion of ad hoc addition towards work-in-progress.

Issue-wise Detailed Analysis:

1. Deletion of Disallowance of Labor Charges and Earth Work Charges under Section 40a(ia):

The primary issue was whether the CIT(A) was justified in deleting the disallowance of ?1,20,54,550/- made under Section 40a(ia) of the Income Tax Act. The assessee, a partnership firm engaged in road construction, claimed labor and earth work charges without deducting tax at source. The AO disallowed these expenses, arguing that payments were made to labor contractors, necessitating TDS under Section 194C.

The CIT(A) found that the assessee paid wages directly to laborers through labor heads for convenience, not to any contractor. The CIT(A) relied on a judgment from the Calcutta High Court (385 ITR 394) which supported the assessee's claim that payments to laborers do not constitute subcontracting. The Tribunal upheld this view, noting that the payments were supported by wage sheets and a Chartered Accountant's certificate, confirming no engagement of labor contractors. Thus, the provisions of Section 194C were deemed inapplicable, and the disallowance was rightly deleted.

2. Deletion of Disallowance under Section 40A(3):

The second issue involved the deletion of ?2,13,37,312/- disallowance under Section 40A(3) for cash payments exceeding ?20,000/-. The AO contended that these payments violated the provisions of Section 40A(3). The assessee argued that payments were made in cash on public holidays and in remote areas without banking facilities, thus falling under the exceptions of Rule 6DD.

The CIT(A) accepted the assessee's explanation, noting that payments were made in remote villages without banking facilities and on Sundays for business expediency. The Tribunal upheld this view, emphasizing that the payments were genuine, supported by the suppliers' confirmations, and necessary for the timely execution of road construction projects. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the revenue's ground.

3. Deletion of Ad Hoc Addition towards Work-in-Progress:

The final issue was the deletion of an ad hoc addition of ?20,00,000/- towards work-in-progress. The AO estimated this addition without rejecting the assessee's books of accounts. The assessee argued that it consistently followed a system of accounting without showing opening or closing work-in-progress, which had been accepted in previous years.

The CIT(A) observed that the AO made the addition without any basis or reference to records and without rejecting the books of accounts. The Tribunal agreed, noting that the AO did not point out any defects in the books or supporting vouchers. The Tribunal held that an estimated addition without rejecting the books of accounts was unjustified and upheld the CIT(A)'s deletion of the addition.

Conclusion:

The Tribunal dismissed the revenue's appeal, upholding the CIT(A)'s deletion of disallowances and additions on all three issues. The Tribunal found that the CIT(A) correctly appreciated the facts and circumstances, and the revenue's grounds lacked merit. The order was pronounced on 05.10.2018.

← Previous Next →