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 necessary to address the deficiencies; on the facts, the labour and contract expense disallowance was reduced from 30% to 10%. Interest paid for delayed remittance of TDS was treated as a tax-related liability and was held not deductible, so that disallowance was upheld.

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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.

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