2020 (12) TMI 437 - AT - Income Tax

Bogus labour expenses - Profit estimation - HELD THAT - AO has not held that labour expenses so claimed by the assessee were not incurred by the assessee for the purpose of business. Apart from this, we note that assessee is engaged in labor oriented industry and ld. Counsel submitted before us labour expenses ratio to justify the assessee s claim, therefore considering the nature of assessee s business, we find some merit in the contentions of the ld. Counsel. While the case of the assessee merits some relief, at the same time entire relief cannot be permitted to the assessee. In our opinion the end of justice would be met if the estimated profit rate of 10% instead of 12% taken by ld. CIT(A) is adopted since the same would take care of the bogus labour expenses and other discrepancies. Disallowance of expenditure u/s 40(a)(ia) - non-deduction of TDS - Assessee has shown expenditure to Shri Ghanshyambhai Vekariya under the head account charges which was subsequently paid on 01.01.2011 - assessee stated that the expense was in the nature of accounting salary - HELD THAT - Counsel has failed to demonstrate the relationship between payer and payee as a master and servant. The ld. Counsel did not file any document/evidence, before the Bench which can show that said payment is on account of accountant s salary. We find merit in the submissions of Ms. Anupama Singla, ld. DR for the Revenue, as she pointed out before the Bench that in order to constitute salary expense, the ld. Counsel should. demonstrate master and servant relationship between payer (assessee) and payee. Considering this factual position, we confirm the addition sustained by the ld. CIT(A) - Decided against assessee.

Summary

Issues Involved:
1. Disallowance of labour expenses.
2. Rejection of book results and estimation of Gross Profit (G.P) at 12%.
3. Disallowance of interest expense (not pressed by the assessee).
4. Disallowance of expenditure under section 40(a)(ia) due to non-deduction of TDS.

Detailed Analysis:

1. Disallowance of Labour Expenses:
The assessee challenged the partial confirmation by the Commissioner of Income Tax (Appeals) [CIT(A)] of the disallowance of labour expenses, which was reduced from ?66,01,113 to ?35,65,140. The Assessing Officer (AO) had noted a significant increase in labour charges in March 2010 compared to previous months and found a substantial amount of unpaid labour charges carried forward. The AO suspected the genuineness of these expenses due to the abnormal pattern of payments and lack of supporting vouchers. Consequently, the AO restricted the claim of labour expenses for March to the average of January and February, disallowing the excess amount.

On appeal, the CIT(A) reduced the disallowance, estimating the Gross Profit (G.P) at 12%, which the assessee argued was arbitrary. The Tribunal found that the CIT(A)'s estimation was based on the assessee's books and previous years' ratios. However, considering the nature of the business and the assessee's failure to provide detailed evidence, the Tribunal directed the AO to apply a G.P rate of 10%, resulting in a reduced addition of ?16,89,018.

2. Rejection of Book Results and Estimation of G.P at 12%:
The CIT(A) observed that the AO's disallowance pushed the G.P ratio to an unrealistic 15.2%, hence estimated a more reasonable G.P rate of 12%. The assessee contended that this estimation was arbitrary and not based on the books. The Tribunal, however, upheld that the CIT(A)'s estimation was reasonable and based on the books, but adjusted the G.P rate to 10% to account for the nature of the business and discrepancies in labour expenses, leading to a revised addition.

3. Disallowance of Interest Expense:
The assessee did not press this ground, and it was dismissed as not pressed.

4. Disallowance of Expenditure under Section 40(a)(ia):
The AO disallowed ?1,00,000 paid to an accountant without deducting TDS, which the assessee claimed was salary. The CIT(A) confirmed this disallowance. The Tribunal noted the lack of evidence to establish an employer-employee relationship and upheld the disallowance, agreeing with the Revenue that the payment did not constitute salary.

Conclusion:
The appeal was partly allowed. The Tribunal directed the AO to apply a G.P rate of 10%, reducing the addition to ?16,89,018. The disallowance under section 40(a)(ia) was upheld due to insufficient evidence of a salary payment. The interest expense disallowance was dismissed as not pressed by the assessee.