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Income Tax Appellate Tribunal, KOLKATA ‘A” BENCH, KOLKATA
Before: SRI RAJPAL YADAV & DR. MANISH BORAD
order
: March 28th, 2023 ORDER
Per Manish Borad, Accountant Member:
This appeal filed by the assessee pertaining to the Assessment Year (in short “AY”) 2011-2012 is directed against the order passed u/s 250 of the Income Tax Act, 1961 (in short the “Act”) by ld. Commissioner of Income Tax (Appeal), NFAC, Delhi [in I.T.A. No.: 492/KOL/2022 Assessment Year: 2011-2012 Amit Chakraborty. short “ld. CIT(A)”] dated 28.12.2021 arising out of the Assessment Order framed u/s 143(3) of the Act dated 26.03.2014.
The assessee is in appeal before the Tribunal raising the following grounds: “
1. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in passing the order sustaining the addition on account of Sundry Creditors amounted to Rs.41,06,820/-without considering the facts of the case in the light of the decision of Hon’ble ITAT in the case reported in [2016] 76 taxmann.com 109 as referred by the appellant in appeal proceeding.
2. That on the facts and in the circumstances of the case, the Ld. CIT(A) erred in sustaining the addition of Rs.70,57,542/-on account of Labour Charges without considering the facts and appreciating the manner and genuineness of payment by the appellant.
3. That the appellant craves leave to urge such other ground or grounds before or at the time of hearing of appeal.”
3. Brief facts of the case as culled out from the records are that the assessee is an individual and is a civil contractor and during the year has received the Government contract for carrying out civil work. Income of Rs. 27,45,890/- declared in the e-return filed on 28.09.2011 for AY 2011-12. Case selected for scrutiny through CASS followed by serving of notices u/s 143(2) & 142(1) of the Act. During the course of assessment proceedings ld. AO noticed that there are sundry creditors amounting to Rs. 1,02,55,330/-. Letters were issued u/s 133(6) of the Act. However, notices returned unserved in the case of sundry creditors amounting to Rs. 41,06,820/- and in view of ld. AO since they are not verifiable, the assessee failed to establish the identity and accordingly added it to the income of the assessee. Ld. AO also noticed that the assessee has claimed labour charges of Rs. 3,52,87,710/-. For lack of I.T.A. No.: 492/KOL/2022 Assessment Year: 2011-2012 Amit Chakraborty. verification of the identity of the persons to whom the cash payments were made, ld. AO made disallowance of 20% and added Rs. 70,57,542/- to the income of the assessee. Income assessed at Rs. 1,39,10,252/-.
4. Aggrieved, the assessee preferred appeal before ld. CIT(A) but failed to succeed.
5. Aggrieved, the assessee is now in appeal before this Tribunal. Ld. Counsel for the assessee referring to the Audit Report containing 29 pages and written submissions stated that ld. AO has not doubted the purchases. Sundry creditors normally remained outstanding for the work carried out during the year and as and when the payment is released the sundry creditors are paid and it is regular feature. He also submitted that most of the sundry creditors have replied. Reliance placed on the decision of this Tribunal in the case of ITO vs. Standard Leather (P.) Ltd. reported in [2016] 76 taxmann.com 109. Further, with regard to the disallowance of labour charges it was submitted that ld. AO has made ad-hoc disallowance without making any specific observation about the documents and bills of labour charges filed by the assessee. Reliance placed on the decision of this Tribunal in the case of Animesh Sadhu vs. ACIT in order dated 12.11.2014 and in the case of DCIT vs. M/s. Lexicon Auto Ltd. in ITA No. 1354/Kol/2016 order dated 19.02.2018.
6. On the other hand, ld. D/R vehemently argued supporting of the orders of both the lower authorities stating that the onus lies on the assessee to prove the genuineness of the sundry creditors I.T.A. No.: 492/KOL/2022 Assessment Year: 2011-2012 Amit Chakraborty. which it failed to do. Also it was submitted that the assessee has claimed labour charges of which mostly have been paid in cash and ld. AO was justified in not disallowing the total expenses and only confined it to 20% disallowance.
We have heard rival contentions and perused the records placed before us. The first issue for our consideration is addition for unexplained sundry creditors of Rs. 41,06,820/-. We notice that the assessee is a civil contractor and executes contracts for various Government departments. Sales/contracts receipts during the year are not in dispute and no other source of revenue has been found by the Revenue authorities. Similarly, purchases have also not been in doubt. All the purchase bills were filed before ld. AO, books of accounts are regularly audited and tax audit report stands filed. In the preceding year i.e. AY 2010-11 also similar type of purchases have been made. Books of accounts have not been rejected by ld. AO. The net profit shown by the assessee is approximately 5% and in the preceding year the assessee has declared around 6% net profit and sales during the year under appeal has increased.
Under these given facts and circumstances of the case where purchases are not in doubt, there remains no justification to question the genuineness of the sundry creditors and since the sundry creditors are live and have been regularly paid, provisions of Section 41(1) of the Act relating to cessation and remission of liability cannot come into play. We, thus, do not find any merit in the addition made by ld. AO for unexplained sundry creditors. Our I.T.A. No.: 492/KOL/2022 Assessment Year: 2011-2012 Amit Chakraborty. view is further supported by this Tribunal in the case of Standard Leather (P.) Ltd. (supra) which reads as follows: “The addition was confirmed by the AO on account of non-service of notice issued under section 133(6) for the purpose of the confirmation of sundry creditors. However, it is found that the Assessing Officer has confirmed the addition of the sundry creditors without disallowing the corresponding purchases. From the above it is clear that the purchases in the instant case have been admitted but the corresponding sundry creditors have been added as total income of the assessee. The action of the Assessing Officer for making the addition of the sundry creditors without disallowing the purchases is based on wrong interpretation of Income Tax Laws. The sundry creditors can be added as income under section 41(1) once it is written off in the books of accounts. In the instant case the same has not been written off and very much reflecting in the books of the assessee. Therefore, the sundry creditors reflecting in the books of accounts cannot be disallowed and added to the total income of the assessee……………………..”
We accordingly set aside the finding of ld. CIT(A) and delete the addition for unexplained sundry creditors of Rs. 41,06,820/-.
As regards the second issue for disallowance of labour charges of Rs. 70,57,542/-, we notice that the labour charges are part of the contract work shown in the trading account. In the instant case where the gross receipts from contract work and purchase of material has not been doubted by the Revenue authorities, labour charges are must to carry out the civil construction work. If the action of ld. AO is applied then the net profit rate will rise to almost 25% which will give a distorted picture of the financial transactions carried out by the assessee as a civil contractor. Looking to the consistent nature of business carried out, books of accounts regularly maintained, no specific error pointed out in the details filed by the assessee and books of I.T.A. No.: 492/KOL/2022 Assessment Year: 2011-2012 Amit Chakraborty. accounts not rejected then such ad-hoc disallowances cannot stand and thus, deserves to be deleted. We find support from the decision of this Tribunal in the case of Animesh Sadhu (supra) wherein this Tribunal held as follows: “8. We have considered the rival submissions. A perusal of the assessment order shows that the Assessing Officer has disallowed 20% of the expenses on estimate basis on the ground that no independent verification to be made to find out the authenticity of the expenses. Ld. CIT(Appeals) has reduced the same on the same ground. However, we are of the view that no estimated disallowance can be made for inability to make independent verification. If any specific expenditure is unverifiable or is un-vouched, then such specific expenditure is disallowable. Here no such specific identification has been done. In these circumstances, we are of the view that the estimated disallowance as confirmed by the ld. CIT(Appeals) is unsustainable. Consequently the same stands deleted. In the result, Grounds No. 2 & 3 of the assessee’s appeal stand allowed.”
Similar view was also taken by this Tribunal in the case of M/s. Lexicon Auto Ltd. (supra) holding that ad-hoc disallowances are not permissible under the provisions of the Act and if ld. AO is not satisfied with the submissions of the assessee then he has to make the disallowance after making specific references to such documents/vouchers.
We, therefore, under the given facts and circumstances of the case and respectfully following the decisions referred herein above are of the considered view that ad-hoc disallowance of labour charges is uncalled for. Finding of ld. CIT(A) is set aside and disallowance made by ld. AO for labour charges at Rs. 70,57,542/- is deleted.