2018 (10) TMI 1098 - AT - Income Tax

Disallowance of labour expenses - addition treating the same as bogus on the ground of inadequate financial capacity of the labour contractor - Held that - On perusal of the detail filed by the assessee regarding the labour expenses it was noted that the same were claimed in the earlier years but no disallowance of whatsoever was made by the AO in any of the year. GP ratio has been accepted by the AO during the assessment proceedings. We also find that the books of accounts were duly accepted filed by the assessee during the assessment proceedings. We also note that the payment was made through banking channel after deducting the TDS on such payment. There was no defect pointed out on the above submission of the assessee. - Decided in favour of assessee. Disallowance of Diesel Expenses - Held that - The assessee has furnished all the necessary details in support of diesel expenses and no defect of whatsoever was pointed out by any of the authority. The assessee also explained that the work was carried out at the location only after the monsoon season. The assessee also submitted that there was more work during the fag end of the previous year i.e. the month of February and March of 2010. Therefore, more diesel expenses were incurred by it. We note that the submissions made by the assessee were not doubted, disregarded by any of the authority below. Therefore, we hold that the addition was made by the AO and subsequently confirmed by the ld CIT(A) is based on surmise and conjuncture. No hesitation in reversing the order of authorities below. Hence, the ground of appeal of the assessee is allowed.

Summary

Issues Involved:
1. Disallowance of labour expenses for ?25,66,963/-
2. Disallowance of diesel expenses for ?3,61,080/-
3. Disallowance under section 40A(3) of the Income Tax Act for ?25,000/-

Issue-wise Detailed Analysis:

1. Disallowance of Labour Expenses for ?25,66,963/-:

The assessee, engaged in civil construction, claimed labour expenses totaling ?1,62,88,744/-, with ?25,66,963/- paid to M/s. Yogesh R. Shah. The AO doubted the financial capacity of Shri Yogesh R. Shah and suspected the expenses to be bogus. The assessee provided explanations, including the technical nature of the work, submission of income tax returns, and TDS deductions. Despite these, the AO disallowed the expenses, viewing Shri Yogesh R. Shah as an employee rather than a contractor.

Upon appeal, the CIT(A) upheld the AO's decision, citing the opening credit balance in Shri Yogesh R. Shah's account, insufficient bank balance, and the timing of income tax returns as reasons for suspicion. The CIT(A) concluded that Shri Yogesh R. Shah was likely an employee, not a contractor, and confirmed the disallowance.

The assessee contended that the AO did not provide an opportunity to rebut the statement of Shri Yogesh R. Shah and highlighted consistent payments in previous years without disallowance. The Tribunal noted that the AO accepted the gross profit ratio and books of accounts, and no defects were found in the payment process. Consequently, the Tribunal reversed the lower authorities' decisions, allowing the appeal regarding labour expenses.

2. Disallowance of Diesel Expenses for ?3,61,080/-:

The AO observed disproportionate diesel expenses in February and March 2010, with ?9,26,470/- claimed in March alone. The assessee explained that work intensified post-monsoon, leading to higher diesel consumption. However, the AO disallowed ?3,61,080/- of these expenses, considering them unreasonably high.

The CIT(A) upheld the AO's disallowance, questioning the plausibility of such high expenses in the last month of the accounting year and the absence of closing stock details.

The Tribunal found that the assessee provided all necessary details, and no defects were noted by the authorities. The Tribunal accepted the explanation of increased work towards the year's end and reversed the lower authorities' decisions, allowing the appeal regarding diesel expenses.

3. Disallowance under Section 40A(3) of the Act for ?25,000/-:

The assessee did not press this ground of appeal. Consequently, the Tribunal dismissed it as not pressed.

Conclusion:

The Tribunal allowed the appeal in part, reversing the disallowances of labour and diesel expenses while dismissing the appeal regarding the disallowance under Section 40A(3) as not pressed.