2019 (11) TMI 1114 - AT - Income Tax

Disallowance of 50% of the outstanding wages - CIT-A by rejecting the books of accounts and adopting the net profit rate of the earlier years - HELD THAT - In this case the learned CIT A did not look at the books of accounts as it were not produced before him or neither had he asked assessee to produce them. For the purpose of rejection of the books of accounts, the assessing officer/CIT A is required to show some latent, patent and glaring defects in the books of accounts. When the books of accounts produced before the learned assessing officer, even he did not mention any defects in the books of accounts and accepted the book results and made ad hoc addition of 50% of the outstanding wages, then we fail to understand that how the learned CIT A estimated the net profit of the assessee rejecting the books of accounts. Assessee has produced the complete muster roll, attendance register and the Ledger accounts before the assessing officer. AO has not seen details of discharge of the above liability on account of the outstanding labour wages in subsequent year. According to us to decide about the allowability of the outstanding the wages payable it is necessary for AO to examine whether this liability exist or not, as the learned assessing officer himself has allowed the labour expenditure debited to the profit and loss account, this option is now not available with him. Therefore, only option left with AO is to verify whether such liability has been discharged by the assessee in subsequent year or not. As AO has not given his comments on this aspect, then questioned by the bench to the learned authorised representative, he readily agreed that such an evidences can be produced before the assessing officer. DR also agreed that if such outstanding wages is paid in subsequent year, it could not be disallowed. Therefore, to determine the allowability with respect to the genuineness of the outstanding wages it is necessary to verify whether such expenditure have been paid in the subsequent month or not. We set aside the whole issue back to the file of the learned assessing officer to examine payment of such wages in the subsequent month. The assessee is directed to produce the relevant information before the learned assessing officer. AO may examine such detail and if found in accordance with the law, to delete the addition. If such payments are not made in the subsequent year, he may give an adequate opportunity to the assessee to prove its case. After that, the AO may decide in accordance with the law. Accordingly, ground number 1 3 of the appeal of the assessee is allowed for statistical purposes with above direction. Grant of credit of tax deduction at source on mobilization advances - HELD THAT - On careful consideration of the above issue it is apparent that the amount of tax deduction at source is eligible for credit to the assessee in the year in which the income pertaining to such tax deduction at source is offered for taxation. Admittedly mobilization advances not been shown by the assessee as its income therefore we do not find any infirmity in the order of the learned CIT A to that extent.

Summary

Issues Involved:
1. Rejection of books of accounts under Section 145 of the Income Tax Act.
2. Ad hoc addition of 50% of outstanding wages under Section 68 of the Income Tax Act.
3. Computation of net profit at 2.3% instead of 1.23% as declared by the assessee.
4. Disallowance of credit for TDS on mobilization advance.
5. Alleged violation of principles of natural justice.

Detailed Analysis:

1. Rejection of Books of Accounts under Section 145:
The learned Commissioner of Income Tax (Appeals) (CIT-A) rejected the books of accounts of the assessee, stating that it would be better to make a reasonable estimation of profits. The CIT-A believed there were various anomalies and deficiencies in the books and ledger vouchers produced by the appellant. The CIT-A's decision was challenged on the grounds that it was without jurisdiction, beyond the scope of the appeal, and in violation of Section 251 of the Act. The assessee argued that the books were audited and accepted by the Assessing Officer (AO) in the assessment order framed under Section 143(3) of the Act.

2. Ad Hoc Addition of 50% of Outstanding Wages:
The AO made an addition of INR 5,36,60,065, being 50% of the outstanding liability on account of wages, due to large increases in sundry creditors and reduction in business income compared to the preceding year. The AO doubted the genuineness of the muster rolls and attendance registers, noting that they were maintained in English and contained thumb impressions instead of signatures. The CIT-A upheld the AO's decision, rejecting the books of accounts and estimating the net profit at 2.3% of turnover, which was higher than the 1.23% declared by the assessee.

3. Computation of Net Profit at 2.3%:
The CIT-A directed the AO to compute the net profit at 2.3% of the turnover, based on the previous year's net profit rate, instead of the 1.23% declared by the assessee. The assessee argued that the net profit ratio for all years from 2010-11 to 2018-19 ranged from 1.14% to 1.58%, except for the assessment year 2015-16, where it was 2.13%. The assessee contended that the profits were comparable with earlier years and that the CIT-A's decision was erroneous.

4. Disallowance of Credit for TDS on Mobilization Advance:
The CIT-A disallowed the assessee's claim for credit of TDS amounting to INR 5,27,229 on the premise that the mobilization advance had not been offered for tax as income in the assessment year. The CIT-A noted that the AO had already examined the reconciliation of TDS with gross receipts and allowed the eligible credit of TDS on the income part offered by the assessee during the year.

5. Alleged Violation of Principles of Natural Justice:
The assessee argued that both the AO and CIT-A framed the impugned order without granting sufficient and proper opportunity to the appellant company, thereby violating the principles of natural justice. The assessee contended that the rejection of books of accounts and the estimation of net profit were based on assumptions and presumptions without proper appreciation of the facts and evidence on record.

Conclusion:
The Tribunal found that the assessee had a history of assessment under Section 143(3) of the Income Tax Act since 2010-11, with no previous disallowances of outstanding wages. The Tribunal noted that the AO did not find any fault with the names of the laborers, the rate of wages paid, or the advances paid. The Tribunal also found that the CIT-A rejected the books of accounts without examining them and that the AO made an ad hoc addition without verifying whether the outstanding wages were paid in the subsequent year.

The Tribunal set aside the issue of the allowability of outstanding wages back to the AO for verification of payment in the subsequent year. The Tribunal upheld the CIT-A's decision on the disallowance of TDS credit on mobilization advance, as the income was not offered for taxation in the relevant year. The appeal was partly allowed for statistical purposes, and the stay petition became infructuous.