Learned AR contended that the assessee incurred labour cost in executing works contracts (pertaining to road strengthening and preventive maintenance and repairs) awarded by Effluent Channel Project (ECPL) for GIDC through competitive and totally transparent bidding process. These are labour oriented work. It was pointed out that similar work has been carried by the assessee from the assessment years 1999-2000 to assessment year 2004-05 and always the assessee has incurred the labour charges were never disallowed except in the impugned assessment year.
The chart showing the labour charges against the ECPL was also filed. The bills submitted by the assessee are prepared in detail and are thoroughly checked by the technical staff of ECPL and therefore, the payments is fully paid to the assessee. Since the assessee did not have sufficient fund to pay the labour charges, it took loan from Jay Panchmahal Co- operative Credit Society Ltd (JPC). This loan was repaid by the assessee subsequently, then the funds were transferred to the account of the various sub-contractors through the account of Shri Kamlesh Parmar. The assessee did not pass any entry at the time of labour expenses were incurred on the advice of the Accountant. The entries were passed by issuing the entries against the various contractors ultimately the amount has come back to the account of Shri K I Parmar. The assessee has taken the loan from Jay Panchmahal Co- operative Credit Society Ltd (JPC) is apparent from pages 127 to 132 that the funds have been utilized for the payment of loan in this bank account from Jay Panchmahal Co-operative Credit Society Ltd (JPC) is apparent from the findings of the AO given at page 13 of the assessment order totaling loan was Rs.20,85,000/-. This clearly shows that the loan was a short term loan only to bridge the gap between the incurring of the labour expenses and the receipt money from ECPL after submission of the bills. Our attention was drawn to page 13 in which the details of the payment of loan and loan taken and it was paid to the sub-contractor and again given to the assessee. The AO mistakenly taken that this fund has come to the bank account but the fact is that the funds has given to the loan account of assessee. No new assets, or investment were acquired by the assessee neither has incurred new personal expenses. The books of account of the assessee were not rejected by the AO. The AO without establishing that the assessee has incurred actual expenses towards labour payment for ECPL has disallowed whole of the expenses . He took us to page 123 of the paper book and pointed out that except this year the assessments were completed u/s 143(3) for the assessment year 2004-05 and 2005-06 and no disallowance was made. The details of all the labour expenses as well as contract from ECPL were also filed before us. It was vehemently stated since contract is labour oriented it cannot be carried without the help of labour force. If the AO is of the view that the assessee has not incurred the labour expenses, he should have also excluded labour receipt. Referring to page 123 of the paper book it was pointed out that the net profit earned in the business of the assessee in the assessment year ranging from 6% to 9% and if the disallowance is adequate to profit the revised net profit would be 23.27% which is very high and in fact unattainable, keeping in view the nature of the business of the assessee. Alternatively it was submitted that since the profit could be estimated at the 8% of the turnover according to the provisions of section 44AD of the Act. The reliance was also placed by the learned AR on the following decisions :
- Dabros Industrial Co.(P.)Ltd. V. CIT 108 ITR 424 ( Cal.)
- Gemini Pictures Circuit Ltd. V. CIT 33 ITR 547 ( Mad.).
- Badrinath Agarwal v. CIT 65 ITR 242 (All. )
- CIT v. S Sen 17 ITR 355 (Orissa)
The learned DR, on the other hand, relied on the order of the AO and submitted that the AO made detailed inquiry and noted that all the sub-contractors to whom the assessee has generally paid labour payment in his books of account were bogus and all the funds have been come to its trusted employee Shri Kamlesh Parmar and from it the same has been transferred to the account of the assessee with JPC. The details are available in the paragraph 2.7 of the order of the AO. She agreed in view of the details submitted by the assessee towards labour expenses that the contract undertaken by the assessee was labour oriented and therefore it cannot be said that the assessee has not incurred any labour expenditures. But she said only part of labour expenses should be disallowed as the contract cannot be carried without labours. On the query from the Bench whether the AO has noticed that any investment being made by the assessee or any personal expenses being incurred by the assessee. She stated that no such facts has been recorded by the AO.
We have heard both the parties, we have also perused the material on record. We have also gone through the orders of the authorities below. We have also gone through the decisions relied upon by both the parties. We find that the assessee has claimed the labour charges. The AO disallowed the same to the Extent of Rs.25,01,736/-. Out of the labour expenses claimed by the assessee in respect of contract with ECPL to carry out the road strengthening work and preventive maintenance and repairs. The case of the assessee is that the assessee has incurred the labour expenses on various dates by making cash payment to the laborers after taking the loan from JPC on different dates for which the copy of the bank account was placed before us and is forming part of this record at pages 127 to 132. It was pointed out that on the advice of the Accountant the assessee did not account for cash payment of the labour charges even though the amount was withdrawn from the loan Account as the loan was for the purposes of business. The assessee accounted for the labour payment by inducting certain labour contractors to whom the assessee has shown the payment being made through cheque ultimately the payment has come back to the account of Shri Kamlesh Parmar, the trusted employee of the assessee from there the assessee had paid the loan taken from JPC. We noticed that this fact is verifiable from the page 13 of the assessment order. We noted that the AO has also come to this conclusion that the assessee has shown the payment to the sub-contractor to the extent of Rs.22,16,296/- and ultimately out of that payment through the account of Shri K I Parmar ;the assessee had paid the loan of JPC and all the funds have gone to loan account of JPC of Rs.22,16,700/- The AO instead of pointing out that the payment has gone to the loan account has mentioned that the payment has gone to the bank account of the assessee. In fact, we noted from the copy of the bank statement that the payment has gone to the loan account of the assessee. We also noted that the assessee has withdrawn the loan from loan account amounting to Rs.20,85,000/- on the various dates from April 2001 to June 2001. The revenue has not brought any evidence on record whether this money has been spent/invested by the assessee. The assessee’s contention is that this money has been spent by the assessee for making the payment to labour and at that point of time the payment were not recorded in the books of account on the advice of the Accountant. This fact is apparent on the basis of details on record. The contracts undertaken by the assessee is labour oriented contract and the assessee has been incurring heavy labour expenses by engaging day to day labour. The assessee has also not made any investment in any asset or incurred any personal expenses out of the withdrawals from loan account of JPC. Therefore, the only inference, in our opinion, will be that the assessee had incurred the amount after withdrawing from the loan account for the purposes of making the payment of labour expenses. It is settled principle of law apparent is real onus is on the person who alleges that apparent is not real. Once the assessee has submitted the evidence by way of bank account of JPC supporting his contention that the assessee has taken loan for the payment of labour payment incurred by it. In our opinion, onus is on the revenue to prove that the assessee has not taken the loan nor he has incurred the labour expenses by taking the loan or the assessee has utilized this fund for any other purposes. But no such evidence was brought on record. The amount of Rs.22,16,700/- were utilized by the assessee for the payment of loan taken for labour charges. The assessing officer disallowed the labour expenses to the extent of Rs.25,01,731/- which were incurred by the assessee in respect of ECPL contract.
The ld. DR also agreed before us that the assessee might have incurred the labour payment for the payment of construction of the road, therefore, part of such expenses be allowed to the assessee. We are of the view that if the contention of the assessee is to be accepted then this has to be in toto as all the funds were utilized by paying the loan taken by the assessee from JPC. This fact is apparent even from page 13 of the assessment order. There is no evidence on record that the assessee has incurred the labour expenses not for the purpose of business. Even, we have noticed that no disallowance for the labour expenses has been made by AO during the years 2004-05 and 2005-06 and even though the assessee had carried our or accepted the similar contract with ECPL and the assessee has incurred expenses for the same. Under these circumstances, we set aside the order of the CIT(A) and delete the disallowance on account of labour charges of Rs.25,01,736/-. Thus, this ground is allowed.