MA KALI ENTERPRISE,BURDWAN vs. ITO, WARD - 1(4), DURGAPUR, BURDWAN

The assessee in the present case is a partnership firm, which is deriving income from execution of labour contract job. The return of income for the year under consideration was filed by it on 22.03.2012 declaring total income of Rs.9,11,548/-. In the said return, contracts Assessment year: 2011-2012 Page 2 of 7 receipts from two parties namely, Nilkanth Ferro Alloys and Cosmic Ferro Alloys aggregating to Rs.1,76,08,511/- were declared by the assessee and against the said receipts, expenditure, inter alia, on account of labour charges was claimed at Rs.1,25,40,767/-. During the course of assessment proceedings, the claim of the assessee for labour charges was examined by the Assessing Officer. In this regard, seven Wage Registers maintained party-wise were produced by the assessee in support of its claim of labour charges. As regards the separate Wage Registers maintained by the assessee relating to the wages of unskilled labours working under the same factory enjoying the same wages, it was explained by the assessee that Provident Fund and ESI contributions were not collected from the wages of certain employees and separate registers for such employees were maintained. This explanation of the assessee was not found acceptable by the Assessing Officer. He also did not accept the explanation of the assessee that such bifurcation in the labours was made at the instance of Nilkanth Ferro Alloys and Cosmic Ferro Alloys. According to him, only wages, which were subject to deduction of PF & ESI Scheme were the genuine expenditure incurred by the assessee and the separate wage registers stated to be maintained for the labours, who were not subject to PF & ESI scheme, were nothing but the clear attempt made by the assessee to claim bogus labour charges. He accordingly disallowed the labour charges claimed on the basis of such wage registers amounting to Rs.38,68,613/- by treating the same as bogus wages in the assessment completed under section 143(3) for the year under consideration dated 28.03.2014.

Against the order passed by the Assessing Officer under section 143(3), an appeal was preferred by the assessee before the ld. CIT(Appeals) disputing the disallowance made by the Assessing Officer on account of labour charges and since the submission made by the assessee in support of its case on this issue was not found acceptable by the ld. CIT(Appeals), the later confirmed the disallowance made by the Assessing Assessment year: 2011-2012 Page 3 of 7 Officer out of labour charges for the following reasons given in his impugned order:- “It is evident from the assessment order of A.O that the labour payment to the extent of Rs. 38,68,613/- was treated as bogus labour charges due to the fact that P.F/ESIC was not deducted against such payment. A.Os' contention of treating the labour charges as bogus was also considered in the premises of nature of job woks carried on by the assessee, method of employment of labourer, identity cards of labourers etc. Appellant was asked to produce the identity card of labouers. But appellant submitted some identity cards of details of labour charges before me in support of its contention that the wages paid to labourers was not bogus. On perusal of Annexure-A of assessment order shows that from March, 2010 to April, 2011 the assessee has supplied labours to M/s. Nilkanth Ferro Ltd. and M/s. Cosmic Ferro Alloys Ltd. The average number of labour deployed is above 50 and where ranging to extent of 80 persons and except May & June, 2011 labourers supplied to M/s. Nilkanth Ferrow Ltd. and M/s. Cosmic Ferrow Alloys Ltd. are 39 each. Payments are also more than 1 lakh except May & June, 2010. I have perused the identity card submitted by appellant of few labourers and these iden1i cards are issued by M/s. Cosmic Ferrow Alloys Ltd. and total number of card given by the appellant are 18 only. Similarly other identity card issued by M/s. Makali Enterprise supplied by the appellant are 17 only. The perusal of these identity cards show that the appellant had sent labours only when the labours are having valid identity card. All these identity card shows that these 18 labours issued by Makali Enterprise were deployed sometime during the year. The assessee could not produce the identity card of all the labours which should have maintained by him. In general course of his business as he cannot deploy labour to other factories without issuance of I. cards. As regard the labours I. cards supported by the appellant which relates to Cosmic Ferrow Alloys Ltd. the assessee could not substantiate whether these employees are deployed directly by M/s. Cosmic Ferrow Alloys Ltd. or by Makali Enterprise. As per business pattern the appellant normally issues I. Cards to maintain its identity for sending them to the aforesaid concerns. As these I. Cards are essential in order to verify the identity of labours before deployment therefore documents submitted by these labours should have been in the possession of the assessee had it been genuine. As the assessee failed to produce the I.D. Proof of all the labours and documents deployed by it concern and mere submission of I.D. Proof Assessment year: 2011-2012 Page 4 of 7

without back up details on which basis even there few cards are issued and calculation of days which was helping him to working out the labour charge of each person has not been supplied. Considering the facts that no P.F. was deducted, no credible evidences were submitted payments were made in cash. I do not find any scope of interference with the A.O’s order. The order of the A.O. is upheld and this ground of appeal is dismissed”.

The ld. Counsel for the assessee submitted that the business of the assessee being that of executing the jobs on labour contract basis, its major expenditure was on account of labour charges. He submitted that in support of its claim for labour charges, the assessee had maintained separate party-wise registers and even the reasons for maintaining multiple registers for one party were also explained by the assessee. He contended that some of the workers were not made subject to deduction of PF & ESI contribution at the instance of the parties and, therefore, separate registers for such workers were maintained by the assessee. He contended that the assessee no doubt had violated the relevant statutory provision relating to PF & ESI Scheme in respect of the said workers but that cannot be made the basis of disallowance of labour charges when the labour charges were wholly and exclusively incurred by the assessee for the purpose of its business. He invited our attention to the copy of relevant wage registers placed on record and submitted that all the relevant details regarding the labour charges claimed as per the said registers were available before the Assessing Officer for verification. He contended that the Assessing Officer as well as ld. CIT(Appeal), however, brushed aside this vital evidence and made a disallowance out of labour charges merely on the basis that there was no deduction made by the assessee on account of PF & ESI contribution. He contended that the net profit of the assessee from the business of execution of labour contracts after the disallowance made on account of labour charges comes to more than 27%, which by itself shows that the relevant wages were not bogus Assessment year: 2011-2012 Page 5 of 7 as alleged by the authorities below. He contended that the claim of the assessee for such labour charges, at the most, can be said to be not fully verifiable, which may warrant some disallowance, but the entire claim cannot be disallowed.

The ld. D.R., on the other hand, strongly relied on the orders of the authorities below in support of the revenue’s case. He contended that although the disallowance on account of labour charges was made by the authorities below mainly on the basis of non-deduction of PF & ESI contribution, there were also other reasons given by them to support the action of making such disallowance.

We have considered the rival submissions and also perused the relevant material available on record. It is observed that the entire income of Rs.1.76 crores was earned by the assessee during the year under consideration from execution of labour contracts for two parties and keeping in view the nature of these activities of the assessee, which generated the entire income, we find merit in the contention of the ld. Counsel for the assessee that the major expenditure required to be incurred by the assessee to earn the said income was on account of labour charges. It is also observed that the said claim of the assessee for labour charges was supported by party-wise wage registers maintained by the assessee and although the said wage registers produced in original for verification before the Assessing Officer contained all the relevant details, the genuineness of the wages claimed by the assessee on the basis of two wage registers was doubted by the Assessing Officer mainly on the ground that the wages claimed therein were not subjected to deduction on account of PF & ESI contribution. Although the reason for not deducting PF & ESI contribution from the said wages and maintaining separate registers for such wages was explained by the assessee, the Assessing Officer as well as the ld. CIT(Appeals) did not accept the explanation of the assessee and proceeded to treat the relevant wages as bogus mainly on the ground that there was no deduction made by the Assessment year: 2011-2012 Page 6 of 7 assessee on account of PF & ESI contribution. As rightly pointed out by the ld. Counsel for the assessee, the net profit of the assessee’s business after such disallowance comes to more than 27% of the labour contract receipts as against the normal rate of 8-10% prevailing in the contracting business and this fact alone is sufficient to show that the claim of wages of the assessee amounting to Rs.38,68,613/- was not entirely bogus as held by the authorities below. As rightly contended by the ld. Counsel for the assessee, the defects pointed out by the authorities below in the maintenance of wage registers and other record can justifiably warrant a conclusion that the claim of the assessee for such wages was not fully verifiable, but there is no justification in disallowing such wages entirely as made by the authorities below. Having regard to all the relevant facts of the case, we are of the view that it would be fair and reasonable to disallow the wages of Rs.38,68,613/- in question to the extent of 25%. The net profit of the assessee’s business after such disallowance would be little more than 10%, which in our opinion, is fair and proper. We accordingly modify the impugned order of the ld. CIT(Appeals) on this issue and restrict the disallowance made by the Assessing Officer and confirmed by the ld. CIT(Appeals) out of labour charges to 25%.

In the result, the appeal of the assessee is treated as partly allowed. Order pronounced in the open Court on June 13, 2018.