2023 (7) TMI 896 - AT - Income Tax

Tribunal allows appeals on disallowed expenses for assessment years 2015-16 & 2016-17

The Tribunal allowed the appeals against the NFAC order for the assessment years 2015-16 & 2016-17. It held that the disallowance of expenses on wages ... Disallowance of Payment Labour Charges - pay certain extra amounts to port labourers as speed money for promptly and speedily carrying out the labour work of handling cargo beyond working hours - addition made as payment is supported by self-made vouchers and have no signature of recipients - HELD THAT:- As decided in own case[2022 (9) TMI 1480 - ITAT BANGALORE] in the absence of any challenge to the entries made in the books of accounts by the authorities, in our opinion, the finding recorded by the Assessing Officer as well as the Tribunal that it denied the claim of the assessee for expenditure to the extent of 10% on account of payment of speed money, is perverse as the same is duly supported by the documentary evidence - Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether an Assessing Officer may make an adhoc disallowance (fixed percentage of cash wages/speed money) merely because payments are supported by self-made vouchers bearing no recipient signatures, without first rejecting the books of account or conducting specific verification. 2. Whether the disallowance of a specified percentage (6% in the present assessments) of wages/speed money is sustainable where the assessee maintains and produces books of account audited without adverse comments and explains the nature of payments as normal trade practice. 3. Whether an earlier Tribunal decision in the assessee's own case and relevant High Court authority dealing with similar payments (speed money/port/port-related labour payments) bind the Tribunal to delete the addition in the present years. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Legality of adhoc percentage disallowance based on self-made vouchers without rejecting books of account Legal framework: The Assessing Officer framed assessments after issuing statutory notices and having the assessee furnish records; adjustments to returned figures were made in the assessment order. The assessment practice requires that, before estimating or disallowing entries in books, the AO should determine the reliability of the books of account and, if necessary, reject them for being unreliable. Precedent Treatment: The Tribunal relied on its prior decision in the assessee's own case (detailed in the judgment) and on a Karnataka High Court decision which held that where books of account are accepted and not specifically rejected, adhoc disallowances based solely on self-made cash vouchers are not legally sustainable. Interpretation and reasoning: The Tribunal found the AO's disallowance was founded on conjecture and surmise - the AO accepted the books of account but nevertheless made percentage disallowances without (a) rejecting the audited books, (b) specifying entries as bogus, or (c) conducting targeted verifications (for example, calling recipient witnesses or drawing sample vouchers). The AO's initial assertion of incriminating material suggested predecided suspicion, but no concrete infirmity in the books was shown. The Tribunal emphasized that if any voucher's genuineness was in doubt the AO should draw samples and require the assessee to produce recipients; wholesale percentage reductions absent such steps lack legal basis. Ratio vs. Obiter: Ratio - An AO cannot sustain an adhoc disallowance on percentage basis for wage/speed-money payments when books of account are accepted and no specific entries are shown to be bogus; specific verification or rejection of books is necessary before estimating disallowances. Obiter - Observations about the AO's alleged preconceived mind and manner of opening the file are explanatory but not necessary to the legal holding. Conclusion: The adhoc 6% disallowance (and similar percentage disallowances) made by the AO without rejecting the books or undertaking targeted verification is unsustainable and must be deleted. Issue 2 - Sustainability of disallowance where payments are ordinary trade practice, supported by in-house vouchers and audited books Legal framework: Expenditure wholly and exclusively incurred for business is allowable unless shown to be fictitious or not incurred. The nature of the trade and customary industry practices are relevant in assessing reasonableness of payments; evidentiary burden rests on revenue to show entries are not genuine. Precedent Treatment: Tribunal relied on its prior order in the assessee's own case where similar payments related to iron-ore handling were held to be commensurate with business scale and not suddenly inflated; reliance also placed on High Court authority recognizing payment of extra amounts (speed money) as trade practice in similar contexts and disallowing percentage reductions where books were not challenged. Interpretation and reasoning: The Tribunal accepted the assessee's explanation that payments were to numerous, often illiterate, casual labourers and that obtaining signatures was impracticable; thus in-house prepared vouchers having a common format is explicable and not proof of falsity. The audited books carried no adverse comments. The Tribunal observed no sudden or disproportionate escalation of such payments year-on-year, undermining an inference of fabrication. Given this, a blanket percentage disallowance (or its affirmation by the appellate authority) lacked rational basis and did not comply with legal requirements for disallowing business expenditure. Ratio vs. Obiter: Ratio - Where payments arise from an established trade practice and are recorded in audited books without adverse findings, the revenue must produce specific evidence to displace the presumption of genuineness; general suspicion based on self-made or similar vouchers is insufficient for disallowance. Obiter - Practical observations on illiteracy of recipients and administrative difficulties in securing signatures are contextual but supportive. Conclusion: The claimed wage/speed-money expenditures are allowable; the percentage disallowance is not justified on the record and is to be deleted. Issue 3 - Precedential effect of the Tribunal's earlier order and relevant High Court authority in determining present appeals Legal framework: Decisions of the Tribunal in the assessee's own earlier years and binding High Court precedents on similar issues are material in resolving subsequent assessment years where facts and legal issues are substantially identical. Precedent Treatment: The Tribunal expressly applied its prior order in the assessee's own case (ITA No.1358-1363) which had analyzed year-wise disallowances, rejected the AO's methodology, and deleted additions. The Tribunal also relied on a Karnataka High Court judgment addressing speed-money disallowances where books were not rejected; that judgment favored the assessee and held percentage disallowance unsupported. Interpretation and reasoning: Given the identity of issue, similarity of facts (nature of payments, voucher format, audited books) and the Tribunal's earlier detailed findings, consistency required deletion of the addition in the present assessment years. The Tribunal treated the earlier findings as directly applicable and controlling, noting lack of any new material to distinguish the present assessments from the earlier adjudicated years. Ratio vs. Obiter: Ratio - Where an identical issue was previously decided in favour of the assessee on substantially similar facts, the Tribunal will apply that decision in later assessment years absent distinguishing material. Obiter - Reference to specific percentages applied in earlier years (10% or 2.5% in certain years) functions as factual history rather than a binding formula for other years. Conclusion: The Tribunal followed its prior decision and the relevant High Court authority and deleted the disallowances in the present years, allowing the appeals. Final Disposition (as derived from reasoning above) The Court/Tribunal deleted the adhoc percentage disallowance of cash wages/speed money (6% in these assessments), holding such disallowances unsustainable where books of account were accepted, payments were explained as normal trade practice, no targeted verification or rejection of books was conducted, and prior Tribunal and High Court authorities on identical facts favoured deletion; the appeals were allowed.