Tribunal limits disallowance of consumable expenses to 2%, remands weigh-bridge charges for verification.

The Tribunal partially allowed the appeal, restricting the disallowance of consumable expenses to 2% of job charges and remanding the issue of weigh-bridge charges back to the Assessing Officer for further verification. The decision was pronounced on July 6, 2018.

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Issues Involved:
1. Addition of Rs. 35,40,260/- by disallowance of 19% of job charges.
2. Addition of Rs. 1,24,850/- by disallowance of weigh-bridge charges under section 40(a)(ia) for non-deduction of tax at source.

Issue 1: Addition of Rs. 35,40,260/- by Disallowance of 19% of Job Charges

The primary issue in ground no. 1 pertains to the addition of Rs. 35,40,260/- made by the Assessing Officer (A.O.) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)] by disallowing 19% of the job charges. The assessee, a partnership firm engaged in iron galvanizing work, declared a total income of Rs. 1,26,016/- for the relevant year. During the assessment, the A.O. noted that the assessee claimed consumable expenses amounting to 71% of the total labour charges, a figure significantly higher than comparable cases in the same locality, which reported 40% and 21%.

The assessee argued that their consumption of consumables, ranging between 65% to 72%, was consistent over the years and influenced by factors such as production size, method, and type of furnace used (oil-fired vs. coal-fired). The A.O. rejected this explanation, citing that the assessee failed to provide comparable cases with similar oil-fired furnaces and that the volume of work did not justify the higher consumable rate. Additionally, the A.O. questioned the credibility of the engineer's certificate provided by the assessee, noting the engineer lacked expertise in production.

The CIT(A) upheld the A.O.'s decision, emphasizing that the assessee failed to provide technical specifications or comparable cases to substantiate the higher consumable rate. Moreover, the assessee did not produce quantitative consumption details, denying the revenue the opportunity to verify the expenses' genuineness.

Upon appeal, the Tribunal referred to a similar case from A.Y. 2010-11, where the disallowance was restricted to 2% of job charges after considering comparable cases and past results. Following this precedent, the Tribunal modified the CIT(A)'s order and restricted the disallowance to 2% of the job charges, partially allowing the assessee's appeal.

Issue 2: Addition of Rs. 1,24,850/- by Disallowance of Weigh-Bridge Charges Under Section 40(a)(ia)

The second issue involves the addition of Rs. 1,24,850/- by disallowance of weigh-bridge charges under section 40(a)(ia) for non-deduction of tax at source. The assessee paid Rs. 1,24,850/- to M/s. Murshed Weigh Bridge for weigh-bridge services. The A.O. disallowed this expense, asserting that the assessee should have deducted tax at source under section 194C of the Income Tax Act.

The assessee contended that there was no contract with M/s. Murshed Weigh Bridge, and the weigh-bridge services were used as and when required, negating the need for tax deduction at source. The Tribunal found merit in the assessee's argument but noted that this contention was raised for the first time before the Tribunal. Therefore, the Tribunal set aside the CIT(A)'s order on this issue and remanded the matter back to the A.O. for verification of the assessee's claim regarding the absence of a contract.

Conclusion

In conclusion, the Tribunal partly allowed the assessee's appeal by restricting the disallowance of consumable expenses to 2% of job charges and remanding the issue of weigh-bridge charges back to the A.O. for further verification. The order was pronounced in the open court on July 6, 2018.

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