IT: Where Assessing Officer disallowed 20 per cent of labour charges for want of any vouchers, in view of fact that assessee was engaged in civil construction activities which was labour intensive and fact that labour in such areas was unorganised, disallowance was to be reduced to 10 per cent
IT: Where payment in cash to supervisor on account of labour charges was not supported by vouchers, disallowance of such expenditure under section 40A(3) was justified
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[2013] 36 taxmann.com 549 (Chennai - Trib.)
IN THE ITAT CHENNAI BENCH 'A'
Metalcity Constructions Kovai (P.) Ltd.
v.
Income-tax Officer*
DR.O.K. NARAYANAN, VICE-PRESIDENT
AND VIKAS AWASTHY, JUDICIAL MEMBER
AND VIKAS AWASTHY, JUDICIAL MEMBER
IT APPEAL NO. 697 (MDS.) OF 2012
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
MARCH 11, 2013
I. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Labour expenses] - Assessment year 2008-09 - Assessee, engaged in business of civil contract, claimed expenditure towards labour charges of Rs. 8.12 crore - Since assessee could not produce its books of account to verify genuineness of transaction nor assessee could produce confirmation letters from any labour, Assessing Officer disallowed 20 per cent of expenditure towards labour charges - Whether in view of fact that assessee was engaged in civil construction activities which was labour intensive and fact that labour in such areas was unorganised, disallowance was to be reduced to 10 per cent - Held, yes [Partly in favour of assessee]
II. Section 40A(3) of the Income-tax Act, 1961 - Business disallowance - Cash payment exceeding prescribed limit [Labour charges] - Assessment year 2008-09 - Assessing Officer disallowed labour charges paid to supervisor in excess of Rs. 20,000 in cash - Whether since payment to supervisor had not been supported by vouchers and assessee had not been able to show veracity of said payments made to labourers, disallowance under section 40A(3) was justified - Held, yes [Para 9] [In favour of revenue]
Pawan Kumar Chakrapani for the Appellant. Shaji P. Jacob for the Respondent.
ORDER
Vikas Awasthy, Judicial Member - The appeal has been filed by the assessee impugning the order of the Commissioner of Income-tax (Appeals)-I, Coimbatore dated January 24, 2012.
2. The brief facts of the case are that the assessee is a company engaged in the business of civil contract and land development. Substantial amount of expenditure of the assessee is towards payment of labour. The assessee filed its return of income for the assessment year 2008-09 on September 29, 2008 admitting total income of Rs. 9,080 only. The case of the assessee was selected for scrutiny and notice under section 143(2) was issued to the assessee on September 8, 2009. During the period relevant to the assessment year 2008-09 the assessee had undertaken the work for development of land owned by M/s. PACL India Ltd. for a total consideration of Rs. 8,13,50,911. The assessee claimed expenditure towards labour charges amounting to Rs. 8.12 crores. The Assessing Officer sought details of the labour charges. The assessee in order to substantiate its claim produced muster roll which is alleged to be signed by the labourers engaged by the assessee.
3. The Assessing Officer further observed that an amount of Rs. 40,000 on twelve occasions were paid to the supervisor for which no vouchers were produced. The said payments were made in cash in contravention of the provisions of section 40A(3). The Assessing Officer observed that names mentioned in the muster roll could not be verified as complete addresses of the labourers were not mentioned therein. No confirmation letters from any of the labourers were produced before the Assessing Officer. The assessee could not produce books of account as the same were alleged to be sent to Surat for audit and were not traceable. The Assessing Officer disallowed 20 per cent of the expenditure incurred towards labour charges on estimate basis. Vide assessment order dated December 27, 2010 made additions on account of payments made to supervisor as well.
4. Aggrieved against the assessment order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) after perusing the documents on record and taking into consideration the submissions made by the assessee dismissed the appeal of the assessee vide order dated January 24, 2012. Now, the assessee has come in the second appeal before the Tribunal assailing the order of the Commissioner of Income-tax (Appeals).
5. Shri P. K. Chakrapani, appearing on behalf of the assessee, submitted that the assessee had maintained vouchers and had produced muster roll before the Assessing Officer and no adverse comments were passed by the Assessing Officer thereon. The only objection raised by the Assessing Officer was non-production of labourers, which is, an impossible task considering the huge number of labourers engaged by the assessee. The Assessing Officer without rejecting the books of account has disallowed 20 per cent of the expenses incurred towards land development expenses in an arbitrary and unjustified manner.
6. On the other hand, Shri Shaji P. Jacob appearing on behalf of the Revenue submitted that the assessee could not produce any document to show genuineness of the labourers. No confirmation letters from any of the labourers engaged by the assessee were placed on record. The assessee could not produce books of account as the same were alleged to have been lost/not traceable. The Departmental representative strongly supported the order of the Commissioner of Income-tax (Appeals).
7. We have heard the submissions of both parties and have gone through the orders of the authorities below. It is not in dispute that the labour industry is an unorganised sector. However, when the assessee is undertaking labour intensive work of such a huge extent, a duty is cast upon the assessee to maintain muster roll with particulars of labourers with full details and particulars of the labourers engaged by it. A perusal of the order of the Commissioner of Income-tax (Appeals) shows that the assessee company was awarded a contract of levelling land measuring 1162 acres at Rs. 70,000 per acre for levelling, ramming, watering, fencing, etc. The assessee had engaged labourers from neighbourhood villages for execution of work and has utilised the services of nearly 1800 labourers for completion of the work. It is difficult to imagine that when the assessee has engaged such a large number of labourers from the neighbouring villages the assessee could not produce confirmation letters from any of them in support of its claim and when the assessee has undertaken work of such large magnitude, it had earned income of Rs. 9,080 only. Admittedly, the assessee could not produce its books of account before the Assessing Officer to verify the genuineness of the transactions. The only document which the assessee has produced before the Assessing Officer was muster roll. The Assessing Officer on the basis of estimation has disallowed 20 per cent of the expenditure incurred towards labour charges. However, in view of the fact that the assessee is engaged in civil construction activities which is labour intensive and the fact that the labour in such areas is unorganised, we therefore, in the interest of justice deem it appropriate to reduce the disallowance to 10 per cent.
8. As far as disallowance of expenditure under section 40A(3) is concerned, we find that the provisions of section 40A(3) specifically bars the allowability of the expenditure made in cash over and above Rs. 20,000. The relevant extract of section 40A(3) is reproduced hereinbelow :
"40A. Expenses or payments not deductible in certain circumstances.—(3) Where the assessee incurs any expenditure in respect of which a payment or aggregate of payments made to a person in a day, otherwise than by an account payee cheque drawn on a bank or account payee bank draft, exceeds twenty thousand rupees, no deduction shall be allowed in respect of such expenditure."
9. The authorised representative could not substantiate its arguments against the disallowance of expenditure under the provisions of section 40A(3) of the Act except that payment was made to the supervisor, who was heading the group of labourers for the disbursement of payment to them. The payment to the supervisor has not been supported by vouchers. The assessee has not been able to show the veracity of the said payments made to labourers. In view of the settled law and in the absence of any evidence in support of the claim of the assessee, this ground of appeal is dismissed.
10. In the result, the appeal of the assessee is partly allowed in the aforesaid terms.
USPRegards
Prarthana Jalan
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