2021 (8) TMI 64 - AT - Income Tax

Tribunal upholds 15% limit on job work expense disallowance for AY 2011-12 & 2012-13

DCIT, Central Circle-1, Surat Versus M/s Rajiya Brothers

The Tribunal dismissed the Revenue's appeals for AY 2011-12 and AY 2012-13, upholding the CIT(A)'s decision to restrict the disallowance of job work ... Disallowance of 15% of job work charges - AO held that out of nine parties except two Himmatbhai and Dhirubhai, all expenses for remaining seven job works parties are not genuine - CIT(A) while restricting the disallowance to the extent of 15% of total disallowance observed that all the payments to labour job work was paid through cheques. The assessee deducted tax at source while making payment to the job works parties - HELD THAT:- The role of the accountant who had allegedly prepared bills of the job workers and withdrawn the amount from the accounts of the Job workers was examined. CIT(A) find that such bills are signed by the job workers without verifying the details and the payments were withdrawn from the bank by the accountant. None of the worker could produce the original of the bills. CIT(A) after considering the decision of Tribunal in Ashwin Diamonds [2012 (5) TMI 847 - ITAT AHMEDABAD] held that in the said case the Tribunal restricted the labour and other expanses to the extent of 10%. But keeping in view, the basic difference in facts of the present case that original of Jangad was not verifiable as the same were not produced and some of the payments from the bankers of the job workers were withdrawn by the accountant of the assessee and for covering such discrepancies the ld CIT(A) restricted the disallowance to the extent of 15% of the total disallowance of labour expenses to meet the end of justice. GP and NP ratio of the assessee is better comparative to other similar business houses. In AY 2012-13, the assessee has shown NP @ 4.27%, however, Thumar Gems has shown NP @ 2.12 %, Jodhani Export @ 3.46% and K.N. Diamond @ 3.22% - we are also of the view that 15% disallowance is reasonable to avoid the possibility of revenue leakage. Hence, we affirm the order of ld CIT(A). Resultantly, the grounds of grounds of appeal raised by the revenue are dismissed. Issues Involved:1. Legitimacy of job work expenses claimed by the assessee.2. Assessment of the genuineness of transactions between the job work parties and the assessee.3. Validity of the disallowance of job work expenses by the Assessing Officer.4. Appropriateness of the CIT(A)'s decision to restrict the disallowance to 15%.Detailed Analysis:1. Legitimacy of Job Work Expenses:The assessee, engaged in the diamond business, claimed substantial job work expenses for the assessment years 2011-12 and 2012-13. During a search, cash amounting to Rs. 53 lakhs was found, with Rs. 40 lakhs linked to withdrawals from job work parties' bank accounts. The Assessing Officer (AO) questioned the genuineness of these expenses, noting that most job work parties did not maintain adequate records and were related to the assessee. The AO disallowed Rs. 2.36 crore of job work expenses, considering them fictitious.2. Assessment of Genuineness of Transactions:The AO issued notices under section 131 of the Income Tax Act to verify the job work expenses. Many notices returned unserved, and the job work parties failed to provide necessary details. The AO observed that the job work parties did not maintain basic records and that the accountant of the assessee firm withdrew most of the credited amounts immediately. The AO concluded that the transactions were structured to siphon off funds and reduce tax liability.3. Validity of Disallowance by the Assessing Officer:The AO disallowed 100% of the job work expenses for seven out of nine parties, citing insufficient evidence of genuine transactions. The AO's investigation revealed that the job work parties were either employees or related to the assessee, and the payments were immediately withdrawn by the accountant. The AO's detailed examination led to the conclusion that the expenses were not genuine and thus disallowed them entirely.4. Appropriateness of CIT(A)'s Decision:The CIT(A) reviewed the AO's findings and the assessee's submissions, noting that the assessee's books of accounts were accepted in previous years without defects. The CIT(A) considered the gross profit (GP) and net profit (NP) ratios, which were higher than comparable businesses. The CIT(A) referenced the Tribunal's decision in the case of Ashwin Diamonds, where a similar disallowance was restricted to 10%. Given the discrepancies, such as the non-verifiable Jangads and the accountant's involvement, the CIT(A) deemed a 15% disallowance reasonable to address potential revenue leakage.Conclusion:The Tribunal upheld the CIT(A)'s decision to restrict the disallowance to 15%, finding it reasonable and consistent with industry norms and previous Tribunal decisions. The appeals by the Revenue for both assessment years were dismissed, affirming the CIT(A)'s order.Result:Both appeals by the Revenue for AY 2011-12 and AY 2012-13 are dismissed. The Tribunal found the 15% disallowance reasonable and upheld the CIT(A)'s order, ensuring that the potential revenue leakage was addressed while considering the assessee's higher profit margins compared to similar businesses.