2010 (1) TMI 881 - AT - Income Tax

Tribunal dismisses labor charges, undervaluation appeals; remands electricity expense issue for further verification.

The Tribunal upheld the deletion of labor charges and undervaluation of closing stock additions, dismissing Revenue's appeals. However, the issue of ... Disallowance of labour charges - genuineness of the transactions were not proved - assessee during the course of assessment proceedings has filed the confirmations of all the 5 recipients to whom labour charges were paid - merely because PA Nos. were not mentioned, the Assessing Officer disallowed the labour charges doubting the creditworthiness of the karigars and the genuineness of the transactions – bills relate to premises not occupied by the assessee and there is no such agreement between the assessee company and the brother of one of the directors for use of the laser machine - certificate filed before the CIT(A) was neither filed before the Assessing Officer nor confronted by the CIT(A) to the Assessing Officer – Held that:- matter remanded back to the Assessing Officer with a direction to give another opportunity to the assessee to substantiate with evidence to the satisfaction regarding the genuineness of such electricity expenses,ground by the Revenue is accordingly allowed for statistical purposesUndervaluation of closing stock - value determined by adopting the average manufactured cost method - assessee has not reasonably maintained the stock to arrive at a fair valuation of the closing stock - if the average cost method is adopted then in the A.Y. 2006-07 the income of the assessee will diminish by an amount of Rs.20,00,00,255. Thus according to the Assessing Officer himself this method is not to be adopted for the A.Y. 2006-07. - ground raised by the Revenue dismissed.Disallowance of electricity charges - held that:- CIT(A) deleted the addition on the ground that because of the use of the laser machine, the labour charges in respect of laser treatment have gone down by Rs.26 lakhs and therefore, it is a sufficient evidence to establish that the laser treatment has been done in-house. This theory of learned CIT(A), in our opinion, is merely on presumption basis. It is the settled proposition of law that for any claim of expenditure, the onus is always on the assessee to substantiate with documentary evidence to the satisfaction of the Assessing Officer that the expenditure so claimed is wholly and exclusively for the purpose of business. - Matter remanded back to AO. Issues Involved:1. Disallowance of labor charges2. Undervaluation of closing stock3. Disallowance of electricity expensesIssue 1: Disallowance of Labor ChargesThe Revenue challenged the deletion of an addition made by the Assessing Officer (AO) on account of disallowance of labor charges amounting to Rs. 27,39,191/-. The AO had disallowed these charges due to the absence of PAN numbers and returned notices from the postal authorities for certain karigars (laborers). The CIT(A) deleted the addition, reasoning that the genuineness of the transactions was confirmed by the recipients, and the absence of PAN numbers alone was insufficient to deem the transactions non-genuine.Upon review, it was found that the assessee had provided confirmations from all the recipients of the labor charges. The Tribunal agreed with the CIT(A) that the non-furnishing of PAN numbers did not justify the AO's disallowance, as the transactions were confirmed by the recipients. Thus, the Tribunal upheld the CIT(A)'s order and dismissed the Revenue's ground.Issue 2: Undervaluation of Closing StockThe Revenue contested the deletion of an addition of Rs. 6,99,24,518/- made by the AO due to alleged undervaluation of closing stock. The AO had adopted an average manufacturing cost method, which the assessee argued was inappropriate due to the variable quality, size, and color of the diamonds. The CIT(A) accepted the assessee's contention, noting that the average cost method was not suitable given the nature of the business and the wide variation in diamond quality.The Tribunal found that the Revenue had accepted the assessee's method of stock valuation in previous years and had not rejected the books of account. Additionally, the business had shut down by 31st March 2007, and the AO's method would result in an unrealistic valuation of closing stock. The Tribunal agreed with the CIT(A) that the AO's method lacked a sound basis and upheld the deletion of the addition.Issue 3: Disallowance of Electricity ExpensesThe Revenue appealed against the deletion of an addition made by the AO for disallowance of electricity expenses amounting to Rs. 13,06,607/-. The AO had disallowed these expenses because the bills were not in the assessee's name and there was no supporting evidence of the premises being used by the assessee. The CIT(A) deleted the disallowance, reasoning that the reduction in labor charges indicated in-house laser treatment, justifying the electricity expenses.The Tribunal found that the CIT(A)'s decision was based on presumptions without sufficient documentary evidence. It emphasized that the onus was on the assessee to substantiate the claim with evidence. Since this onus was not discharged, the Tribunal remanded the matter back to the AO for re-examination, directing the assessee to provide satisfactory evidence of the genuineness of the electricity expenses.Conclusion:The Tribunal dismissed the Revenue's appeals regarding the disallowance of labor charges and undervaluation of closing stock. However, it remanded the issue of disallowance of electricity expenses back to the AO for further verification.