DCIT 2(3)(1), MUMBAI vs. VAZIR SURFACE PROTECTION P.LTD, MUMBAI

During the course of scrutiny assessment, AO disallowed labour payment by observing that cash vouchers are drawn in the name of one person but the signature for having received the amount are of different persons the identity of which was not provided by the assessee. As per AO, the person receiving the payment is not the daily wages/ labourer employed by the assessee and that the person receiving is not an employee of the company.

By the impugned order, CIT(A) deleted the disallowance of labour payment after recording the following observation:- 4.5 I have considered the submissions of the appellant as well as the vouchers of cash payments of wages to the labourers along with the supportings enclosed therein. It is seen that under the head "wages and labour charges", the appellant has incurred wages of Rs.1,98,64,644/- (this is as per schedule 11 of the balance sheet but actual amount acclaimed is Rs.1,99,74,544/; as per reconciliation submitted to the AO, which is being discussed in para 4.8 below) and for this purpose cash vouchers along with supporting documents are on record. The methodology followed by the appellant is that a voucher is prepared in the name of the concerned Mokadam (supervisor), who is also a labourer but supervises the work of other labourers. Such person prepares the summary list of amounts periodically in respect of the labourers (including himself at times) on the basis of daily sheet of such labourers, which indicate their presence and work on the site on each day. Thereafter, such summary list is sent to the head office, on the basis of which, a cash voucher is prepared in his name indicating the amount of cash to be released. The cash is then delivered to either the concerned Mokadam (supervisor) or any other labourer who goes to the head office alongwith the summary list and such person signs on the cash voucher on a stamp. Thereafter the cash is accordingly distributed among the labourers. For example, the appellant has furnished copy of voucher No. 233 dated 28.04.2010 amounting to gross amount of Rs.27,062/- (which includes wages Rs.25,912/-, conveyance Rs.800/- and mobile expenses Rs.350/-) in the name of Hasib (Mokadam) and the payment M/s. Vazir Surface Protection Pvt. Ltd., has been received on the same date by Razzak. Razzak's name appears on the summary sheet in respect of project 'PUSHPAK' for June 2010. It means that the labourer Razzak went to the head office on 28.04.2010 along with the summary sheet of Rs.27,062/- prepared by Hasib (Mokadam) and the said voucher was accordingly prepared and the cash was handed over to labourer Razzak, who distributed/handed over the same to the concerned persons i.e. Hasib (Mokadam) (Rs.17,340/-) and the other labourer Nabin (Rs.9,722/-). It may also be noted that the summary sheet prepared is supported by the daily sheet of Hasib (Mokadam) and labourer Nabin. And Thus, I find nothing wrong in the contention of the appellant that the wages spent in cash have been distributed to individual labourers/ Mokadams. 4.6 Yet another sample voucher No. 706 dated 21.06.2010 is of the gross amount of wages of Rs.93,056/- (net amount of cash given is Rs.61,0567- after adjusting the advance wages already paid of Rs.32,000/-), which is as per the summary list prepared for the project 'Maison Belvedere' for the month of May, 2010. This voucher is prepared in the name of Ajay (Mokadam), who has prepared the summary list. The payment in this regard has been received from the head office by another labourer who must have gone to the head office on that day and later the cash has been distributed to 14 labourers as per the list. Yet another voucher No. 833 dated 6.07.2010 is of the gross amount of Rs.21,074/- (net amount Rs.16,574/-, after adjusting the advances given of Rs.4,500) prepared in the name of Satya (apparently a Mokadam) and it consists of the payment of wages to Sattar, Aziz and Shafikul, whose daily attendance sheets and individual payments due, are also enclosed along with the voucher. The net amount of cash has been delivered to some labourer or another Mokadam, who must have gone to the head office with the summary sheet of individual payments due, to above three persons. Another example is the cash voucher No. 941 dated 20.07.2010 for an amount of (gross) Rs.1,62,740/- in the name of Rajendra (Mokadam). The net amount after reducing advance wages given of Rs.52,000/- and loan to Rajendra of Rs.4,000/- is Rs.1,06,740/-, which is as per the summary list enclosed therewith. The net amount of Rs.1,06,740/- has been received by labourer Razzak, whose name also appears in the summary list. Another cash voucher is voucher No. 1764 dated 03.11.2010 for a gross amount of Rs.46,051/- in respect of 6 labourers and the net amount after reducing advance wages of Rs.23,000 is Rs.23,051/-. This voucher is also accompanied with the summary list as well as the daily attendance sheet of these 6 labourers. Cash voucher No. 1799 dated 03.11.2010 is for gross amount of Rs.21,562/- and the net amount after reducing the advance wages given of Rs.7,000/- is Rs.14,562/-. Same is in respect of 3 labourers (which includes Samnur, a Mokadam / mistry). The voucher is accompanied M/s. Vazir Surface Protection Pvt. Ltd., with daily sheets of the 3 labourers and on these daily sheets itself, their dues have been worked out. 4.7 Similarly, all the other cash vouchers are supported by the logical documents/lists of computation of individual payments to be made to the individual labourers. In view of above, it is evident that the payments aggregating to Rs.1,98,64,644/- are payments pertaining to individual labourers / daily wage workers and hence no tax deduction at source was liable to be made. Further, the provisions of section 40A(3) are also not attached as the payments have been made to the labourers. Provisions of section 40(a)(ia) would not apply as no third party or any Mokadam has charged any markup on these payments and the payment made is not to any contractor/sub-contractor. It appears that the AO has not applied his mind to these documents, which make it quite evident that the payments are in respect of wages to individual labourers and all the vouchers are supported by logical documents containing list/summary sheet/daily sheet of the concerned labourers/ Mokadams. In my view therefore, the disallowance of Rs.1,72,00,660/- (out of Rs.1,98,64,644/-) was not at all called for as neither the provisions of section 40(a)(ia), nor section 40A(3) of the Act are attracted. Therefore the AO is directed to delete the disallowance of Rs,1,72,00,660/-.

AO has also disallowed purchases of Rs.22,85,925/- on the plea that same is not proved.

By the impugned order, CIT(A) deleted the addition so made after observing as under:- 5.5 I have considered the over all facts of the case, the submissions of the appellant as well as the remand report received from the AO. It is seen from the remand report that the AO has not objected to the admission of additional evidence and has stated that "the additional evidences submitted by the assessee may be allowed to be admitted for consideration and adjudication". Hence, the additional evidences are hereby admitted for consideration. It is seen that the appellant has furnished a confirmation in respect of purchases made from M/s Buildwel Bricks & Sand Suppliers along with copy of its own bank account indicating the payments made, copies of all the bills raised by the said party along with supporting delivery challans which also contain the truck numbers and such truck numbers mentioned in delivery challans also match with the truck numbers stated in the concerned bills issued by M/s Buildwel Bricks & Sand Suppliers. Hence, in my view the genuineness of purchases cannot be doubted. The AO, in the remand report has however raised few other issues i) the address of the party mentioned in the bills and delivery challans is not specific, ii) almost all the bills are for the month of February and March, M/s. Vazir Surface Protection Pvt. Ltd., 2011, iii) the PAN number AVRPP 3299 G in respect of the said party is registered in the name of Lukman Mohamed Ibrahim Patel and not M/s Buildwel Bricks & Sand Suppliers and ii) M/s Buildwel Bricks & Sand Suppliers have closed down their business at the address mentioned in the bills and vouchers and have shifted out of the given address. 5.6 In respect of the above issues raised by the AO, the Ld. AR has clarified that M/s Buildwel Bricks & Sand Suppliers is the proprietary concern of Shri Lukman Mohamed Ibrahim Patel. Other aspects of the remand report of the AO have also been addressed by the appellant in its reply to the remand report (as outlined in paragraph 5.4 above) Hence, in the background of these clarifications, in my view, he disallowance of Rs.22,85,925/- made by the AO is not sustainable. Same is therefore directed to be deleted. 8. Against the above order of CIT(A), revenue is in further appeal before us. 9. We have considered rival contentions and carefully gone through the orders of the authorities below and found that as per its balance sheet, the assessee has incurred wages and labour charges at Rs.2,51,71,674/-, whose bifurcation as per schedule 11 is as under: Particulars Amount (in Rs.) Wages 1,98,64,644/- Labour welfare 29,302/- Lunch/Tea allowance 47,494/- Labour charges 18,54,681/- Site expenses 22,24,723/- Maharashtra Labour welfare fund 5,424/- Guniting work 8,26,5967- Electric consumption at site 3,18,810/- Total 2,51,71,674/-

The AO considered the claim of above expenses and from the details submitted in this regard, noted that from the sample copies of cash M/s. Vazir Surface Protection Pvt. Ltd., vouchers drawn for making payment of wages, it was evident that no TDS had been deducted in respect of the amount of Rs.2,19,35,882/- and the TDS was deducted only in respect of the amount of Rs.32,35,792/-, The assessee explained that out of Rs.2,19,35,882/- an amount of Rs.19,61,338/- was towards petty expenses at the site of construction and the balance of Rs.1,99,74,544/- was the wage payment at the construction site, on which TDS was not deductible. On consideration of the above contention of the assessee, the AO found that the wages were not paid directly to the labourers but to a third party. The cash vouchers were drawn in the name of one person but the signatures for having received the amount were of different person, the identity of whom was not provided by the assessee. Further, the person receiving the payment was not the daily wager/labourer employed by the assessee. Hence, after examining all the details submitted by the assessee in this regard, the AO reached to the conclusion that the amount of Rs.1,99,74,544/-, consisted of two elements:- first Rs.1,98,64,644/-, which were payment of wages and the other amount of Rs.1,09,900/- was labour charges, which were included in "Labour charges" of Rs.18,54,681/-. After examining these details, the AO reached the conclusion that out of the amount of Rs.1,98,64,644/-, an amount of Rs.1,72,00,660/- was the amount where payments exceeded Rs. 20,000/- and hence the same was liable to be disallowed u/s 40(a)(ia) read with section 40A(3) and the amount of Rs.1,09,900/- was also unexplained. Hence, he disallowed Rs.1,72,00,660/- u/s 40(a)(ia) read with section 40A(3) and M/s. Vazir Surface Protection Pvt. Ltd., Rs.1,09,900/- was also unexplained. Hence, he disallowed Rs.1,72,00,660/- u/s.40(a)(ia) read with section 40A(3) and Rs.1,09,900/- as unexplained expenditure.

From the record we found that the assessee is engaged in the business of civil construction, to carry on the construction activity in addition to other activities one such activity is to engage various labourers and to manage the labourers. Assessee is required has to avail the services of supervisors/Mukadam. Without the services of labourers construction activities cannot have been carried on. Therefore during the normal course of business assessee engaged various categories of labourers and paid wages/salary to them. During the year under consideration, assessee had paid and debited labour charges/wages expenses to P&L A/c of Rs.1,99,74,544/-. During the course of assessment proceedings the Ld AO asked for the details of labour charges debited to P&L A/c. The assessee submitted all the details alongwith copies of necessary vouchers to the Ld AO. It was further explained to him that some of these workers are temporary workers & are paid wages on daily basis whereas some are paid on periodical basis based on the requirement at project site. Since these workers are not permanent they are paid their wages based on the no of days they have worked. We found that none of the payments made to a single labourer in a day exceeded Rs. 20,000/-. Since the provisions of deduction of tax are not applicable no tax has been deducted on the payments made to these casual and temporary labourers. Moreover these labourers are from unorganized sector who do not have either PAN No. or M/s. Vazir Surface Protection Pvt. Ltd., Bank A/cs. To control the activity of these labourers and to avail maximum utilization of these labourers assessee has appointed Mukadam or supervisors. Whose duty is to record the attendance of these labourers and get the work done from them. Based on the same the Mukadam used to send to the assessee detailed sheet comprising of name of labour or no. of days worked, wages per day, advances if any paid and also payment voucher. After verifying the details at office by concerned officials, then by the account personnel, these bills are sent to the cashier for payment. Even the payment was made by assessee only after following the due procedure. After receipt of the payment by Mukadam, he distributes the same to various labourers at site.

We found that detailed finding has been recorded by CIT(A) after verifying all the details viz job card, detailed sheet of wages working, vouchers etc asked for by Ld AO and which were duly submitted to the Ld AO for his verification and consideration. The detailed finding so recorded by CIT(A) at para 4.5 have not been controverted by learned DR by bringing any positive material on record. Accordingly, we do not find any reason to interfere in the finding so recorded by CIT(A) resulting into deletion of addition made on account of labour payment.

The AO has also made an addition on account of purchases made from M/s. Buildwel Bricks & Sand Suppliers amounting to Rs.22,85,925/-. The CIT(A) has given a finding to the effect that assessee has furnished confirmation in respect to the purchase made from Buildwel Bricks & Sand Suppliers alongwith a copy of its own bank account indicating the