Disallowance of finance charges and labour expenses turns on verification of evidence and absence of adverse material.

Disallowance under section 40(a)(ia) for alleged non-deduction of tax on finance charges paid to NBFCs was sent back for factual verification because the assessee relied on Chartered Accountant certificates and related evidence that required examination at the assessment stage. The ad hoc disallowance of labour payment expenses was deleted because the payments were supported by thumb impressions and the Revenue produced no specific adverse material or enquiry to show that the expenditure was not genuine. The matter thus resulted in partial relief, with one issue remanded and the labour expense disallowance rejected.

---

---

Issues: (i) Whether the disallowance under section 40(a)(ia) of the Income-tax Act, 1961, for non-deduction of tax on finance charges paid to NBFCs was sustainable when the assessee relied on Chartered Accountant certificates and related evidences; (ii) Whether the ad hoc disallowance out of labour payment expenses was justified in the absence of specific adverse material or enquiry.

Issue (i): Whether the disallowance under section 40(a)(ia) of the Income-tax Act, 1961, for non-deduction of tax on finance charges paid to NBFCs was sustainable when the assessee relied on Chartered Accountant certificates and related evidences.

Analysis: The evidences produced by the assessee were not accepted at the first appellate stage on the ground of incompleteness, and the assessee sought verification of those certificates by the Assessing Officer. Following the coordinate bench view on the same type of claim, the matter required factual verification at the assessment stage before a final view on the disallowance could be taken.

Conclusion: The issue was remanded to the Assessing Officer for verification, and the assessee succeeded for statistical purposes.

Issue (ii): Whether the ad hoc disallowance out of labour payment expenses was justified in the absence of specific adverse material or enquiry.

Analysis: The labour payments were supported by thumb impressions, which by themselves did not establish falsity in the context of labour disbursements. No specific enquiry or cogent material was brought on record by the Revenue to show that the expenditure was not genuine. In the absence of positive evidence, a lump-sum disallowance could not be sustained.

Conclusion: The ad hoc disallowance of labour expenses was deleted and the assessee succeeded on this issue.

Final Conclusion: The appeal was allowed in part, with one issue sent back for verification and the other decided in favour of the assessee.

Ratio Decidendi: An ad hoc disallowance of expenditure cannot be sustained without cogent adverse material, and disputed evidence supporting a deduction claim may be remanded for verification where factual examination is incomplete.

---