2022 (7) TMI 1131 - AT - Income Tax

Adhoc addition of 10% of labour charges - HELD THAT - It is a very difficult task to obtain the all the details where the labour payments are made to the persons and not to the firms and for various reasons the assessee could not produce certain details due to non collection of information and non availability of concerned persons. Therefore, the A.O has not doubted the labour charges but considering the fact that there is discrepancy in respect of the maintaining of the records and the labour charges are paid without any proper verification and made an adhoc addition @ 10%. A.O has made addition without any proper verification or enquiry. We are of the opinion that the addition @ 10% on the adhoc basis is without primary evidence and cannot be sustained but the fact remains that the assessee should fallow the minimum necessary norms and maintain such records necessary for authentication of the claims before the appropriate authorities and the assessee shall be bound to maintain the records at least in future. Accordingly, we modify the order of the CIT(A) on this disputed issue and restrict the disallowance to the extent @ 3% instead of @10% and partly allow this ground of appeal of the assessee. Unexplained purchases - addition of 30% alleged bogus purchases sustained by the CIT(A) - HELD THAT - We are of the opinion if any addition has to be made it should be based on the profit element and it was rightly pointed out by the Ld. AR that the GP worked out by the assessee is around 7.22%. Considering the factual aspects, nature of the business and the assessee could not produce the proper evidence with the records are of the considered view that the assessee has to be taxed on the profit element if the purchases are treated as a alleged bogus purchases as the assessee could not completely produce evidences of the genuineness of the transactions. We are of the view that the addition made by the CIT(A) @ 30% is on the higher side considering the GP rate @ 7.22% offered by the assessee. Accordingly, we restrict the addition of the CIT(A) to the extent @ 4%, and partly allow the ground of appeal of the assessee. Addition of outstanding current liabilities being labour charges payable in respect of two parties - addition was sustained by the CIT(A) as the parties have not complied with the notice issued u/s 133(6) - HELD THAT - We considering the facts and the information are of the opinion that the assessee is engaged in the business of subcontracts and working at various sites and has to depend on the various parties in respect of execution of works. The assessee has substantiated the closing balance of liabilities as on 31.03.2011 in respect of two parties before the appellate authorities. The A.O has not doubted the genuineness of expenses claimed in the profit and loss account filed in the course of the assessment proceedings but disbelieved the outstanding liability of labour charges payable as on 31-02-2011 reflected in the balance sheet. Accordingly, we set aside the order of the CIT(A) on this ground of appeal and direct the A.O to delete the addition and allow the ground of appeal in favour of the assessee

Issues Involved:
1. Addition of labor charges.
2. Addition of alleged bogus purchases.
3. Addition of unexplained investments.
4. Addition of unexplained cash credits.
5. Addition of outstanding current liabilities.

Detailed Analysis:

1. Addition of Labor Charges:
The primary issue was the addition of labor charges. The Assessing Officer (A.O.) observed that the assessee paid labor charges in cash and could not substantiate these payments with proper evidence. Consequently, the A.O. made an ad hoc addition of 10% of the claimed labor charges. The CIT(A) confirmed this addition, noting that the assessee operated in an unorganized sector where maintaining detailed records was challenging. However, the Tribunal modified the CIT(A)'s order, reducing the disallowance to 3% instead of 10%, recognizing the practical difficulties in maintaining records in such sectors.

2. Addition of Alleged Bogus Purchases:
The A.O. treated certain purchases as bogus due to the lack of response to notices issued under Section 133(6) and made a 100% disallowance. The CIT(A), however, restricted this disallowance to 30%, considering the profit element in such transactions and the nature of the assessee's business. The Tribunal further reduced this to 4%, acknowledging the gross profit rate offered by the assessee and the practical aspects of the business. The Tribunal highlighted that the purchases could not be entirely bogus as the projects were executed, and the profit element should be the focus.

3. Addition of Unexplained Investments:
The A.O. added Rs. 55,60,000 as unexplained investments, which included properties purchased by the assessee. The CIT(A) deleted this addition, accepting the assessee's explanations and evidence regarding the sources of funds, which were corroborated by the remand report and funds from the assessee's father and brother.

4. Addition of Unexplained Cash Credits:
The A.O. added Rs. 61,51,120 as unexplained cash credits due to the assessee's failure to establish the creditworthiness of loan creditors. The CIT(A) upheld this addition, and the Tribunal did not find any reason to interfere with this decision.

5. Addition of Outstanding Current Liabilities:
For the A.Y. 2011-12, the A.O. added Rs. 15,25,000 as bogus liabilities. The CIT(A) confirmed this addition, but the Tribunal set aside the CIT(A)'s order, directing the A.O. to delete the addition. The Tribunal found that the assessee had substantiated the outstanding liabilities with sufficient evidence, including ledger accounts, confirmations, and income tax returns of the concerned parties.

Conclusion:
The Tribunal's judgment provided a balanced approach, recognizing the practical challenges faced by the assessee in an unorganized sector while ensuring that tax liabilities were based on realistic profit elements rather than ad hoc additions. The Tribunal's modifications to the CIT(A)'s order reflect a nuanced understanding of the business operations and the evidentiary challenges in such cases.

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