2018 (11) TMI 41 - AT - Income Tax

Tribunal overturns disallowance of claimed wages, emphasizing genuine business purpose and evidence. Lower authorities criticized.

The Tribunal allowed the appeal of the assessee, overturning the disallowance of Rs. 28,71,280 claimed as wages. It emphasized that the expenses were ... Addition on account of wages payment - allowable busniss deduction u/s 37 - Held that:- Through the entire material available on record and we find no justification to sustain the impugned order. It is pertinent to note that the ld. Authorities below while disallowing the impugned wages payments have nowhere observed that any of the wages expenses claimed was not incurred wholly and exclusively for the purpose of business, particularly when the said expenditure were incurred by the assessee, debited in the books of account and supported by bills and vouchers. AO has stressed on wages expenditure, which could be payable by the assessee as per his own hypothetical calculations without pointing out that any such payment on wages or any such voucher/bill was disallowable in particular or was not laid wholly or exclusively for the purpose of business, being the true intent of section 37(1). For this view, we stand fortified by catena of decision of Hon’ble Apex Court in Sasson J. David & Co. (P) Ltd. vs. CIT [1979 (5) TMI 3 - SUPREME COURT] relied by the assessee and various other decisions. As examined the trading, profit & loss account in the light of explanation given by assessee before the ld. Authorities below and we find considerable substance in the contention of the assessee that owing to constant labour supply through contractors, the contractual labour payment was increased from ₹ 16,75,000/- in A.Y. 2010-11 to ₹ 71,80,000/- in A.Y. 2011-12, i.e., the year under consideration. Since this payment of ₹ 71,80,000/- was made through banking channel, the ld. Authorities below themselves have not doubted this payment anymore nor did they drew any adverse inference on the basis of this contractual labour payment. AO has also not made any addition on this score. Therefore, in our opinion, once the main hike was in contractual labour payment and this payment was accepted by the ld. Authorities below as genuine, the working of the authorities below cannot be sustained for disallowance of wages expenses. Moreover, the ld. Authorities below appear to have not considered the explanation of the assessee in right perspective that the assessee has paid substantial amounts of ESI/PF on all the wages payments, which resulted into substantial increase in the amount spent on ESIC/PF from ₹ 25.38 lacs in preceding year to ₹ 31.33 lacs in the year under consideration. If the contractual labour payments, on genuineness of which there is no dispute, are set apart, the increase in other labour payments is of only ₹ 34,54,759/- i.e., from ₹ 1,01,59,706/- to ₹ 1,36,14,465/-, which in view of increase in production and other factors relevant to such increase as explained by the assessee, cannot be said to be unreasonable. CIT(A) appears to have sustained the action of the AO on the premise that different individuals were employed every month, which goes to belie the explanation of the assessee that trained labour is needed for the manufacture of product. The monthly change of individuals, would not suggest that the changed labour was not trained one and such extraneous facts would not be suffice to disallow the wages payments claimed by the assessee. If the ld. CIT(A) had any doubt on the genuineness of labour payments made by assessee, he could call for examination of the payees exercising his powers vested u/s. 250(4) of the IT Act, which is lacking in the instant case. Therefore, mere on suspicion and fake presumption, no disallowance can be made, as held in plenty of decisions of various higher courts. The assessee has submitted a comparative chart before us giving various factors responsible for increase in labour payments, which stands uncontroverted on behalf of the Revenue. If the factors responsible for increase in wages payments as explained by the assessee are considered in right perspective, the wages payments claimed by the assessee cannot be said to be unreasonable. In the totality of facts and circumstances and in view of our above discussion, we, find the appeal of the assessee full of merits which deserves to be allowed. - Decided in favour of assessee. Issues Involved1. Addition of Rs. 28,71,280 on account of wages claimed by the appellant.2. Justification of abnormal increase in wages payment.3. Sustenance of addition by the CIT(A) based on findings in the assessment order.4. Evaluation of the necessity and genuineness of the incurred expenditure.Issue-wise Detailed Analysis1. Addition of Rs. 28,71,280 on account of wages claimed by the appellantThe primary issue in this case revolves around the addition of Rs. 28,71,280 to the income of the appellant on account of wages claimed. The appellant contended that the Commissioner of Income Tax (Appeals) erred in upholding this addition, ignoring the submissions made during the assessment and appellate proceedings. The appellant argued that the wages were actually paid and that no prudent businessman would incur unnecessary expenditure for running their business.2. Justification of abnormal increase in wages paymentThe appellant company, engaged in manufacturing intravenous cannulae and other surgical disposables, filed its return of income declaring Rs. 33,29,730 and book profit under Section 115JB of Rs. 1,41,66,350. During the assessment, the Assessing Officer observed a decline in the Gross Profit (G.P.) rate from 42.28% in FY 2009-10 to 37.14% in FY 2010-11, with wages expenses claimed at Rs. 2,07,94,935. The Assessing Officer noted that the wages expenses were 75.71% higher compared to the previous year, while sales increased by only 29%. The appellant justified the increase in wages due to employing contractual labor, increased production, and a rise in minimum wages. However, the Assessing Officer disallowed Rs. 28,71,820, considering the increase in wages disproportionate to the increase in sales.3. Sustenance of addition by the CIT(A) based on findings in the assessment orderThe CIT(A) upheld the addition made by the Assessing Officer, relying on the assessment order's findings. The appellant argued that the CIT(A) mechanically relied on the assessment order without appreciating the detailed submissions and explanations provided. The CIT(A) sustained the disallowance on the premise that different sets of workers were employed each month, which contradicted the appellant's claim of needing trained labor for manufacturing precision products.4. Evaluation of the necessity and genuineness of the incurred expenditureThe appellant contended that the disallowance was contrary to Section 37(1) of the IT Act, which allows deductions for expenses incurred wholly and exclusively for business purposes. The appellant cited the Supreme Court's decision in Sassoon J. David & Co. (P) Ltd. v. CIT, which held that expenditure incurred voluntarily and without necessity should be allowed if it promotes business and earns profits. The appellant argued that the Assessing Officer's hypothetical calculations and percentages to compute allowable expenditure were not tenable. The appellant provided detailed explanations and evidence, including agreements with labor contractors, details of labor payments, and compliance with statutory requirements like PF and ESI contributions.The Tribunal found merit in the appellant's arguments, noting that the authorities below did not dispute that the wages expenses were incurred wholly and exclusively for business purposes. The Tribunal observed that the Assessing Officer's hypothetical calculations could not justify disallowance without specific evidence of non-business expenditure. The Tribunal also noted that the increase in contractual labor payments and statutory contributions were genuine and supported by evidence. The Tribunal concluded that the disallowance was based on suspicion and conjecture, not on concrete evidence, and allowed the appellant's appeal.ConclusionThe Tribunal allowed the appeal of the assessee, finding no justification to sustain the disallowance of Rs. 28,71,280 on account of wages claimed. The Tribunal emphasized that the expenditure was incurred wholly and exclusively for business purposes, supported by evidence, and that the authorities below relied on hypothetical calculations and suspicion without concrete evidence. The Tribunal's decision was based on a comprehensive evaluation of the appellant's explanations, evidence, and legal precedents.