2016 (5) TMI 152 - AT - Income Tax

Tribunal Partially Upholds Revenue's Appeal on Expenses Disallowance

ACIT, Cir. 8, Surat Versus M/s. Maruti Constructions

ACIT, Cir. 8, Surat Versus M/s. Maruti Constructions - TMI Issues Involved:1. Deletion of addition of Rs. 59,39,127/- related to prior period expenses.2. Restriction of disallowance of labour expenses at 2% instead of 10%.3. Disallowance of employees' contribution to the PF account due to delayed payment.Issue-wise Detailed Analysis:1. Deletion of addition of Rs. 59,39,127/- related to prior period expenses:The Revenue's grievance was that the CIT(A) erred in deleting the addition of Rs. 59,39,127/- made by the AO by disallowing prior period expenses. The assessee, running a proprietorship concern, filed a return declaring total income of Rs. 45,88,990/-. During scrutiny, it was found that the assessee debited Rs. 59,39,127/- related to construction work for M/s. Essar Construction (India) Ltd. The assessee raised bills totaling Rs. 2,76,46,141/- but only Rs. 2,17,07,014/- was sanctioned, resulting in a difference of Rs. 59,39,127/-. The assessee claimed this amount as irrecoverable and wrote it off, reducing sales instead of claiming it as bad debts. The AO disallowed this claim, stating the expenses pertained to FY 2005-06 and could not be claimed in FY 2007-08.The CIT(A) accepted the assessee's contention, noting the recurring nature of transactions and the practice of crediting contract receipts at the time of billing. The CIT(A) observed that the assessee recognized the contract receipts in FY 2005-06 but failed to realize the total amount, thus reducing sales in FY 2007-08. The Tribunal found no error in the CIT(A)'s order, stating that the AO should have visualized the transaction as a business loss or bad debt, which could be claimed in subsequent periods. Hence, the Tribunal rejected the Revenue's grounds.2. Restriction of disallowance of labour expenses at 2% instead of 10%:The Revenue contended that the CIT(A) erred in restricting the disallowance of labour expenses to 2% instead of the 10% made by the AO. The assessee claimed labour expenses of Rs. 2,62,38,677/-, with Rs. 2,27,16,989/- incurred in cash. The AO disallowed 10% of this expenditure due to the absence of PAN and full addresses of the laborers, resulting in an addition of Rs. 22,71,698/-.The CIT(A) noted that the assessee produced a full set of labour registers, showing names, work done, wages paid, and signatures. The CIT(A) observed that the AO had no contention on contractual labour but disallowed 10% for own labour due to incomplete details. The CIT(A) found that the assessee maintained separate labour registers for different sites and had shown an increased gross profit ratio. The CIT(A) restricted the disallowance to 2%, considering the inherent defects in the labour register.The Tribunal noted that the AO did not point out specific defects in the details maintained by the assessee. The AO's disallowance was based on the absence of PAN and addresses, which the assessee argued was impractical for uneducated laborers. The Tribunal found that the AO's disallowance lacked specific information and upheld the CIT(A)'s decision to restrict the disallowance to 2%.3. Disallowance of employees' contribution to the PF account due to delayed payment:The issue was that the assessee could not make the payment of employees' contribution to the PF account within the time stipulated under the PF Act. The AO disallowed the claim, but the CIT(A) deleted the disallowance. The Tribunal noted that this issue was covered against the assessee by the decision of the Hon’ble Gujarat High Court in the case of CIT Vs. Gujarat State Road Transport Corporation Ltd., 366 ITR 170. Following the High Court's decision, the Tribunal set aside the CIT(A)'s order on this issue and restored the AO's order.Conclusion:The appeal of the Revenue was partly allowed. The Tribunal upheld the CIT(A)'s deletion of the addition related to prior period expenses and the restriction of labour expenses disallowance to 2%. However, the Tribunal set aside the CIT(A)'s order on the disallowance of employees' contribution to the PF account and restored the AO's order.