Recently, the Income Tax Appellate Tribunal (ITAT) of Mumbai quashed the disallowance of labor charges after determining the payments to be genuine, following a key contractor’s retraction of an earlier admission of false payments. The decision came after a thorough examination of the evidence provided by the taxpayer, which refuted claims by the Income Tax Department that the labor expenses were fictitious and inflated.
The backdrop of the case is the labor charges paid by the assessee, Classic Marble Co Pvt Ltd, for several assessment years ranging from 2013-14 to 2020-21. The taxpayer, a company engaged in the import of marble blocks and the manufacture of artificial marble, had made substantial payments to three labor contractors: Varun Enterprises, Siddi Vinayak Enterprises, and Maruti Associates. During a search and seizure operation conducted in February 2019 under Section 132 of the Income Tax Act 1961 (ITA), the department raised suspicions about the legitimacy of these payments. The central figure in this dispute was the Contractor Hitesh V. Patel, the proprietor of Varun Enterprises, who initially admitted to not supplying any labor to the company and claimed that the payments made were merely on paper, with cash being returned to the company after retaining a 5% commission.
Get a Copy of Income Tax Refunds (Law & Procedure), Click here
This initial admission formed the basis of the Assessing Officer’s (AO) decision to disallow the labor charges, alleging that the assessee had inflated expenses by using fake labor contracts. Patel’s statement also indicated that he held power of attorney over the other two labor contractors—Siddi Vinayak Enterprises and Maruti Associates—leading the AO to conclude that these entities were also involved in fabricating labor charges.
Aggrieved, the assessee appealed before the Commissioner of Income Tax (Appeals) [ CIT (A) ]
The assessee, through its legal counsel, furnished detailed records including labor contracts, attendance registers, bank statements, and provident fund contributions, all of which demonstrated that genuine labor services were rendered. Additionally, Patel retracted his statement during cross-examination. Patel claimed that his earlier admission was made under pressure and was not a true reflection of the facts. He affirmed that labor had indeed been supplied to the taxpayer and provided documentary evidence to support this claim.
Get a Copy of Income Tax Refunds (Law & Procedure), Click here
In light of this, the CIT(A) sided with the assessee. Aggrieved, the Revenue appealed against this order before the ITAT.
During the appellate proceedings, the bench of Mr BR Baskaran and Mr Sunil Kumar Singh examined the documents submitted by the assessee, along with a visit report from the Provident Fund Department, which had conducted its own inspection and confirmed that the laborers were duly registered, and the statutory requirements were fulfilled. The assessee also provided affidavits from over 500 laborers affirming their employment and wages, further corroborating the authenticity of the labor charges.
The Tribunal observed that the AO relied heavily on circumstantial evidence and had failed to properly consider the extensive documentary proof submitted by the taxpayer. The tribunal also noted that the AO did not provide the taxpayer with adequate opportunities to counter the allegations or cross-examine key witnesses during the assessment process, which violated the principles of natural justice. The tribunal stressed that the retraction of Patel’s statement, coupled with the corroborating evidence, should have been given due weight in the initial assessment.
Get a Copy of Income Tax Refunds (Law & Procedure), Click here
Moreover, the ITAT pointed out that the assessee-company’s operations, which included the import and processing of marble, required significant manpower, as evidenced by the assessee-company’s electricity consumption, workman compensation policies, and expenses related to the welfare of laborers. The tribunal found no reason to doubt the necessity of the labor charges in light of these factors.
In result, the ITAT confirmed the genuineness of the labor payments and quashed the disallowance for all the years under consideration. The tribunal criticized the department’s reliance on a retracted statement without sufficient corroboration and highlighted the importance of evaluating the full scope of evidence before making disallowances.
Subscribe Taxscan Premium to view the JudgmentSupport our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates
