Tribunal remands disallowance for verification, upholds ad hoc addition for unrecorded purchases

The Tribunal partly allowed the appeal, remanding the disallowance under Section 40(a)(ia) for verification. It upheld the ad hoc addition for unrecorded purchases, emphasizing the entire sum should be taxed due to the lack of explanation on the source of funds. The Tribunal's decision was pronounced on 6.4.2016.

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Issues Involved:
1. Disallowance under Section 40(a)(ia) for non-deduction of TDS on labor charges.
2. Ad hoc addition for unrecorded purchases.

Issue-wise Detailed Analysis:

1. Disallowance under Section 40(a)(ia) for Non-Deduction of TDS on Labor Charges:

The Assessee, a partnership firm engaged in civil contracting, appealed against the disallowance of Rs. 1,27,44,615/- under Section 40(a)(ia) of the Income Tax Act, 1961. The Assessing Officer (AO) found that the Assessee did not deduct tax at source on labor charges, which warranted disallowance under Section 40(a)(ia). The CIT(A) upheld the AO's decision.

The Assessee's counsel requested a direction to the AO to verify if the payees had declared the receipts in their returns of income. If they had, the addition under Section 40(a)(ia) should be deleted. This submission was based on the amendment introduced by the Finance Act, 2012, effective from 01.04.2013, which inserted a second proviso in sub-clause (ia) of clause (a) of Section 40. This proviso states that if an assessee fails to deduct tax but the payee has declared the income and paid the tax, it shall be deemed that the assessee has deducted and paid the tax on the date of furnishing the return of income by the payee.

The Tribunal observed that the amendment aimed to remove hardship and should be applied retrospectively from 1st April 2005, the date when Section 40(a)(ia) was introduced. The Tribunal cited the Supreme Court's decision in CIT Vs. Alom Extrusions Ltd., which held that amendments intended to remove hardship should be applied retrospectively. The Tribunal also referred to the Delhi High Court's decision in CIT Vs. Ansal Land Mark Township (I) Pvt. Ltd., which supported the retrospective application of the amendment to Section 40(a)(ia).

Consequently, the Tribunal accepted the Assessee's alternative prayer to remand the issue to the AO for verification of whether the payees included the receipts in their returns of income. The relevant grounds were treated as allowed for statistical purposes.

2. Ad Hoc Addition for Unrecorded Purchases:

The AO noticed discrepancies in the purchases shown by the Assessee and the corresponding sales shown by the suppliers, leading to an ad hoc addition of Rs. 5,97,436/- as income from undisclosed sources. The AO found that the Assessee had not included certain purchases in its books of accounts and added the sum to the total income.

On appeal, the CIT(A) confirmed the AO's order, rejecting the Assessee's argument that only the profit element in these purchases should be taxed. The CIT(A) held that the entire sum was liable to be taxed as the Assessee failed to explain the source of funds for these purchases.

Before the Tribunal, the Assessee reiterated the arguments made before the CIT(A). The Tribunal upheld the CIT(A)'s conclusion, stating that in the absence of any explanation regarding the source of purchases, the entire sum had to be taxed as unexplained expenditure. Thus, the Tribunal dismissed ground no.6 raised by the Assessee.

Conclusion:

The appeal was partly allowed for statistical purposes, with the Tribunal remanding the issue of disallowance under Section 40(a)(ia) for verification and upholding the ad hoc addition for unrecorded purchases. The order was pronounced on 6.4.2016.

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