2026 (4) TMI 269 - AT - Income Tax

Ad hoc expense disallowance and TDS interest deductibility: labour expense relief granted, but delayed TDS interest remained non-deductible.

Where expenditure records are found to be defective but not wholly unreliable, an ad hoc disallowance may be sustained only to the extent reasonably ... Disallowance of direct labour and contract expenses - Deductibility of interest on delayed remittance of TDS Ad hoc disallowance - Labour expenses - Addition of ad hoc basis at the rate of 30% - HELD THAT: - The Tribunal held that, since the assessee had in fact produced labour summary sheets and site-wise labour details, the expenditure could not be rejected to the extent adopted by the lower authorities merely on a broad estimate. At the same time, as the details were found to contain deficiencies, some ad hoc disallowance was justified to cover such defects. On the facts, disallowance at 30% was considered excessive, and disallowance at 10% of labour expenses was held sufficient to meet the ends of justice, with a clarification that the determination was confined to the peculiar facts of the year. [Paras 4] The ad hoc disallowance out of labour expenses was restricted to 10%, and the ground was partly allowed. Interest on delayed payment of TDS - Allowability of deduction - interest payment made on delayed payment of TDS - HELD THAT: - The Tribunal held that interest paid for delayed remittance of TDS is not an allowable deduction. Applying the settled principle that interest takes the character of the principal amount to which it relates, the Tribunal held that, since the underlying tax payment is not deductible, the interest paid on delayed remittance thereof also cannot be allowed as a deduction. [Paras 6] The disallowance of interest paid on delayed payment of TDS was upheld and the ground was dismissed. Final Conclusion: The appeal was partly allowed. The disallowance out of labour expenses was reduced to 10%, while the disallowance of interest paid on delayed remittance of TDS was sustained. Issues: (i) Whether the ad hoc disallowance of 30% of direct labour and contract expenses was justified and, if not, what extent of disallowance would be ; (ii) Whether interest paid on delayed remittance of tax deducted at source was allowable as a deduction.Issue (i): Whether the ad hoc disallowance of 30% of direct labour and contract expenses was justified and, if not, what extent of disallowance would be appropriate.Analysis: The assessee had produced labour summaries, site-wise details, registers and payment sheets, though the records were found to contain some deficiencies. On those facts, a reasonable ad hoc disallowance was warranted to cover the deficiencies, but the rate adopted by the lower authorities was excessive in the circumstances.Conclusion: The disallowance was reduced to 10% of the labour expenses, and the issue was partly in favour of the assessee.Issue (ii): Whether interest paid on delayed remittance of tax deducted at source was allowable as a deduction.Analysis: Interest paid for belated remittance of TDS partakes of the character of tax-related liability and is not an allowable deduction. The delayed remittance had resulted in interest liability, and the expenditure was therefore not deductible.Conclusion: The disallowance of the interest expenditure was upheld, and the issue was decided against the assessee.Final Conclusion: The assessment was sustained in part, with relief granted only on the labour-expense disallowance while the disallowance of interest on delayed TDS payment was maintained.Ratio Decidendi: Where expenditure records are defective but not wholly unreliable, an ad hoc disallowance may be sustained only to the extent reasonably necessary to address the deficiencies, and interest paid for delayed remittance of TDS is not deductible.