Yarlagadda Srinivasa Rao, Hyderabad V. ITO,Ward 9(4), Hyderabad

ITA 1670/HYD/2013

• Counselvise Citation: 167022514 RSA 2013
• Duration Of Justice: 1 year(s) 1 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-01-2015
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2010-2011
• Appeal Filed On: 02-12-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D SUDHAKAR RAO
• Assessee Lawyers: S RAMA RAO
• Keywords: Assessment record
• Section: 43B; 143(3); 263

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B, HYDERABAD BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER ITA NO. 1670/HYD/2013 ASSESSMENT YEAR: 2010-11 YARLAGADDA SRINIVASA RAO, HYDERABAD PAN AAVPY1509P INCOME-TAX OFFICER, WARD 9(4), HYDERABAD. (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI S. RAMA RAO REVENUE BY SHRI D. SUDHAKAR RAO DATE OF HEARING 11-12-2014 DATE OF PRONOUNCEMENT 07/01/2015 O R D E R PER SAKTIJIT DEY, J.M.: THE AFORESAID APPEAL OF THE ASSESSEE IS DIRECTED AG AINST ORDER DATED 30/10/2013 PASSED BY LD. CIT-VI, HYDERABAD U/ S 263 OF THE ACT PERTAINING TO AY 2010-11. 2. THE EFFECTIVE GROUNDS RAISED BY ASSESSEE ARE AS UNDER: 2. THE LD. CIT ERRED IN HOLDING THAT THE AMOUNT SPE NT BY THE APPELLANT OF RS. 21,25,516 TOWARDS INCENTIVES TO TH E STAFF IS NOT AN ALLOWABLE EXPENDITURE. 3. THE LD. CIT ERRED IN HOLDING THAT THE ORDER OF T HE AO PASSED U/S 143(3) ON 15/11/2012 WAS ERRONEOUS AND PREJUDIC IAL TO THE INTEREST OF REVENUE. 4. THE LD. CIT OUGHT TO HAVE SEEN THAT THE AMOUNT P AID TOWARDS INCENTIVES IS AN ALLOWABLE EXPENDITURE AND THE AO R IGHTLY ALLOWED SUCH AMOUNT AS THE AMOUNT SPENT IS INEXTRIC ABLY CONNECTED WITH THE BUSINESS ACTIVITY OF THE APPELLA NT. 5. THE LD. CIT ERRED IN HOLDING THAT THE ORDER OF A SSESSMENT IS ERRONEOUS SO AS TO ENABLE HIM TO PASS THE ORDER U/S 263 OF THE IT ACT. 2 ITA NO. 1670/HYD/2013 YARLAGADDA SRINIVASA RAO 3. BRIEFLY THE FACTS ARE, ASSESSEE IS AN INDIVIDUAL DERIVING INCOME FROM LABOUR CONTRACTS. FOR THE AY UNDER DISPUTE, AS SESSEE FILED HIS RETURN OF INCOME ON 30/09/10 DECLARING TOTAL INCOME OF RS. 37,52,620. ASSESSMENT IN CASE OF ASSESSEE WAS COMPLETED U/S 1 43(3) OF THE ACT, VIDE ASSESSMENT ORDER DATED 15/11/2012, BY DET ERMINING TOTAL INCOME AT RS. 38,52,620. LD. CIT WHILE EXAMINING TH E ASSESSMENT RECORDS OF ASSESSEE FOR THE IMPUGNED AY, IN EXERCIS E OF POWER U/S 263, FOUND THAT OUT OF THE GROSS CONTRACT RECEIPTS OF RS. 6,20,55,686 RECEIVED FROM M/S DIVIS LABORATORIES LTD., ASSESSEE HAS CLAIMED EXPENDITURE TO THE TUNE OF RS. 6,07,63,958 INCLUDIN G WAGES TO THE TUNE OF RS. 5,32,66,679, EMPLOYERS PF CONTRIBUTION TO THE TUNE OF RS. 13,73,124, EMPLOYERS ESI CONTRIBUTION TO THE TUNE OF RS. 20,02,915, AND FDS INCENTIVES OF RS. 21,25,516. ON EXAMINING T HE RECORDS, LD. CIT PRIMA-FACIE WAS OF THE VIEW THAT AO DURING THE COURSE OF ASSESSMENT PROCEEDING DID NOT VERIFY THE GENUINENES S OF THE EXPENDITURE CLAIMED UNDER THE ABOVE HEADS AS WELL A S DETAILS OF PAYMENTS CLAIMED TO HAVE BEEN MADE TOWARDS ESI AND EPF. THEREFORE, BEING OF THE VIEW THAT THE ASSESSMENT OR DER PASSED IS ERRONEOUS AND PREJUDICIAL TO THE INTERESTS OF REVEN UE, LD. CIT ISSUED A SHOW CAUSE NOTICE U/S 263 ON 24/09/13 RAISING THE F OLLOWING ISSUES: 1. DURING THE YEAR, YOU HAVE RECEIVED GROSS CONTRAC T RECEIPTS OF RS. 6,20,55,686. AGAINST THESE RECEIPTS, YOU HAV E SHOWN EXPENDITURE TO THE TUNE OF RS. 6,07,63,958 LEAVING A NET PROFIT OF RS. 12,91,728. THE AO COMPLETED THE ASSESSMENT W ITHOUT VERIFYING THE GENUINENESS OF THE EXPENDITURE INCURR ED TOWARDS WAGES ETC. IN FACT, YOU HAVE SHOWN LOSS AGAINST CON TRACT RECEIPTS. FOR THE AY 2008-09, YOU HAVE SHOWN NET PR OFIT @ 5.6% 2. IN THE P&L ACCOUNT, YOU HAVE CREDITED AN AMOUNT OF RS. 34,72,159 TOWARDS OTHER INCOME. THE AO FAILED TO CALL FOR THE DETAILS OF OTHER INCOME ADMITTED AND THE EXPENDITUR E RELATING TO OTHER INCOME. 3. IN THE BALANCE SHEET, YOU HAVE SHOWN A SUM OF RS . 2,58,574 TOWARDS EPF PAYABLE AND RS. 2,55,079 TOWARDS ESI PA YABLE. THE AO FAILED TO VERIFY THE SAME WITH REFERENCE TO THE PROVISIONS OF SEC. 43B OF THE ACT. 3 ITA NO. 1670/HYD/2013 YARLAGADDA SRINIVASA RAO 4. IN RESPONSE TO THE SHOW CAUSE NOTICE ISSUED BY L D. CIT, ASSESSEE IN HIS REPLY DATED 08/10/13 SUBMITTED THAT AS PER THE NEW CONTRACT LABOUR AGREEMENT M/S DIVIS LABORATORIES L TD. HAS INSERTED NEW CLAUSES SUCH AS MANDATORY OBTAINING OF INSURANC E POLICY, COMPLIANCE TO BONUS ACT, GRATUITY ETC. HENCE, THE P ROFIT MARGIN DURING THE YEAR HAS COME DOWN TO 2.12% FROM 5.6%. ASSESSEE ALSO EXPLAINED IN DETAIL ON ALL THE ISSUES RAISED BY LD. CIT IN THE SHOW CAUSE NOTICE. 5. LD. CIT AFTER CONSIDERING THE SUBMISSIONS OF ASS ESSEE AND EXAMINING THE FACTS AND MATERIALS ON RECORD, NOTED THAT ASSESSEE HAS INCURRED A SUM OF RS. 21,25,516 TOWARDS FDS INCENTI VES PAID TO THE STAFF DURING THE YEAR. HE OBSERVED THAT FROM THE IN FORMATIONS SUBMITTED BY ASSESSEE, IT CAME TO LIGHT THAT ASSESS EE WAS UNDER NO OBLIGATION TO INCUR THIS EXPENDITURE IN ADDITION TO THE SALARIES STRUCTURE PAYABLE TO THE EMPLOYEES. IN HIS ROLE AS LABOUR SUP PLIER TO DIVIS LABORATORIES LTD., LD. CIT OBSERVED, IF AT ALL ASSE SSEE HAS TO INCUR THIS EXPENDITURE THE SAME HAS TO BE REIMBURSED FROM M/S DIVIS LABORATORIES LTD., WHICH HAS BEEN APPROVED AS FDA B Y THE COMPETITIVE AUTHORITY. THUS, IT WAS HELD BY LD. CIT , AS ASSESSEE HAS INCURRED THE EXPENDITURE WITHOUT ANY OBLIGATION , T HE SAME IS REQUIRED TO BE DISALLOWED. LD. CIT WAS OF THE VIEW THAT AO W HILE COMPLETING THE ASSESSMENT U/S 143(3) HAS NOT EXAMINED THIS ISS UE, WHICH HAS MADE THE ASSESSMENT ORDER ERRONEOUS AS WELL AS PREJ UDICIAL TO THE INTERESTS OF REVENUE. ACCORDINGLY, HE DECIDED TO SE T ASIDE THE ASSESSMENT ORDER PASSED BY AO AND DIRECTED HIM TO R E-DO THE SAME BY IMPLEMENTING HIS DIRECTIONS. 6. LD. AR DRAWING OUR ATTENTION TO THE CONTRACT LAB OUR AGREEMENT, SUBMITTED BEFORE US THAT AS PER THE AGREEMENT THE B ILLING FOR SUPPLY OF LABOUR WILL BE ON THE BASIS OF ACTUAL SALARY PLUS 1 6.5% SERVICE CHARGES. IT WAS SUBMITTED THAT OUT OF 16.5% SERVICE CHARGES, ASSESSEE IS INCURRING THE EXPENDITURE TOWARDS ESI A ND PF, BONUS AND 4 ITA NO. 1670/HYD/2013 YARLAGADDA SRINIVASA RAO FDA INCENTIVES, INSURANCE PREMIUM PAID TO EMPLOYEES AND ADMINISTRATIVE EXPENSES. THUS, IT WAS SUBMITTED THA T THE CONCLUSION DRAWN BY LD. CIT THAT THERE WAS NO OBLIGATION ON TH E PART OF ASSESSEE TO PAY FDA INCENTIVES IS WITHOUT ANY BASIS AND NOT BORNE OUT FROM THE RECORD. LD. AR REFERRING TO P&L ACCOUNT, SUBMITTED THAT ASSESSEE HAS ACTUALLY INCURRED THE EXPENDITURE DURING THE YEAR, HENCE, LD. CIT WAS NOT CORRECT IN DISALLOWING THE SAME. LD. AR FURTHER SUBMITTED THAT EVEN IN THE SHOW CAUSE NOTICE, THIS ISSUE WAS NEVER RAISED BY LD. CIT. THUS, IT WAS SUBMITTED THAT AS ASSESSEE HAS ACTUALL Y INCURRED EXPENDITURE IN TERMS WITH CONTRACT LABOUR AGREEMENT , LD. CIT WAS NOT JUSTIFIED IN DIRECTING AO TO DISALLOW THE SAME. 7. LD. DR, ON THE OTHER HAND, RELIED ON THE ORDER O F LD. CIT. 8. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIE S AND PERUSED THE ORDERS OF REVENUE AUTHORITIES AS WELL AS OTHER MATERIALS ON RECORD. AS CAN BE SEEN FROM THE ISSUES RAISED IN THE SHOW C AUSE NOTICE U/S 263, LD. CIT HAS BASICALLY RAISED DOUBT WITH REGARD ING TO INCURRING OF EXPENDITURE BY ASSESSEE CONSIDERING THE LOW PROFIT RETURNED DURING THE YEAR. HE HAS ALSO RAISED THE ISSUE OF NON-EXAMI NATION OF NATURE OF RECEIVABLE FROM M/S DIVIS LABORATORIES LTD. AS WELL AS THE AMOUNT SHOWN AS PAYABLE TOWARDS WAGES. HE ALSO OBSERVED TH AT AO HAS NOT VERIFIED THE CLAIM OF EPF PAYABLE AND ESI PAYABLE W ITH REFERENCE TO THE PROVISIONS OF SECTION 43B OF THE ACT. IT IS FUR THER EVIDENT FROM THE FACTS AND MATERIALS ON RECORD THAT AFTER RECEIVING ASSESSEES REPLY TO THE SHOW CAUSE NOTICE, LD. CIT DID NOT FIND ANY MAT ERIAL TO HOLD THE ASSESSMENT ORDER AS ERRONEOUS AND PREJUDICIAL TO TH E INTERESTS OF REVENUE FOR NON-CONSIDERATION OF THE AFORESAID ISSU ES. HOWEVER, LD. CIT SET ASIDE THE IMPUGNED ASSESSMENT ORDER ONLY FO R THE REASON THAT FDA INCENTIVES OF RS. 21,25,516 WAS NOT PAYABLE BY ASSESSEE, AS PER THE LABOUR SUPPLY AGREEMENT, HENCE, THERE WAS NO RE ASON TO INCUR SUCH EXPENDITURE IN ADDITION TO THE SALARY PAYABLE TO EMPLOYEES. HOWEVER, ON GOING THROUGH THE CONTRACT LABOUR AGREE MENT, A COPY OF 5 ITA NO. 1670/HYD/2013 YARLAGADDA SRINIVASA RAO WHICH IS AT PAGE 15 OF THE PAPER BOOK, IT IS SEEN T HAT IN ADDITION TO THE SALARY, ASSESSEE IS TO RECEIVE 16.5% ON WAGES TOWAR DS ADMINISTRATIVE EXPENSES. FURTHER, ON EXAMINATION OF THE BILLS RAIS ED BY ASSESSEE ON THE PRINCIPAL, IT IS EVIDENT THAT APART FROM THE CO NTRACT LABOUR CHARGES, ASSESSEE HAS RAISED 16.5% EXTRA TOWARDS ADMINISTRAT IVE CHARGES. THEREFORE, THE CLAIM OF ASSESSEE THAT IT HAS INCURR ED CERTAIN EXPENDITURE INCLUDING FDA INCENTIVE OUT OF THE AFOR ESAID ADMINISTRATIVE CHARGES @ 16.5% ON WAGES, CANNOT BE IGNORED OR DISBELIEVED UNLESS THERE IS MATERIAL ON RECORD TO P ROVE THAT ASSESSEE HAS NOT INCURRED THOSE EXPENDITURE. AS IT APPEARS F ROM THE ORDER OF LD. CIT, HE HAS COME TO HIS CONCLUSION ON INCURRING OF FDA INCENTIVES ON MERE ASSUMPTION AND SURMISES RATHER THAN ON EVIDENC E. MOREOVER, WHEN THE LD. CIT HAS NOT FOUND ANY IRREGULARITY OR DISCREPANCY IN ANY OF THE EXPENDITURES CLAIMED, HE SHOULD NOT HAVE DOU BTED THE INCURRING OF EXPENDITURE OF RS. 21,25,516 WHICH IS A VERY MEA GER AMOUNT CONSIDERING THE GROSS CONTRACT RECEIPTS DURING THE YEAR AND OVERALL EXPENDITURE INCURRED BY ASSESSEE. THEREFORE, IN OUR VIEW, LD. CIT ONLY FOR BRINGING TO TAX THE AMOUNT OF RS. 21,25,516 SHO ULD NOT HAVE CONSIDERED THE ASSESSMENT ORDER AS ERRONEOUS AND PR EJUDICIAL TO THE INTERESTS OF REVENUE IN A PROCEEDING U/S 263 OF THE ACT. IN THE AFORESAID VIEW OF THE MATTER, WE SET ASIDE THE IMPU GNED ORDER OF LD. CIT AND RESTORE THE ASSESSMENT ORDER PASSED BY AO. 9. IN THE RESULT, APPEAL OF ASSESSEE IS ALLOWED. PRONOUNCED IN THE OPEN COURT ON 07/01/2015. SD/- SD/- (B. RAMAKOTAIAH) (SAKTIJIT DEY) ACCOUNTANT MEMBER JU DICIAL MEMBER HYDERABAD, DATED: 7 TH JANUARY, 2015 KV 6 ITA NO. 1670/HYD/2013 YARLAGADDA SRINIVASA RAO COPY TO:- 1) SHRI YARLAGADDA SRINIVASA RAO, C/O SRI S. RAMA R AO, ADVOCATE, FLAT NO. 102, SHRIYAS ELEGANCE, H.NO. 3-6-643, ST. NO. 9, HIMAYATNAGAR, HYDERABAD 500 029. 2) ITO, WARD 9(4), HYDERABAD. 3) CIT-VI, HYDERABAD 4) ADDL. CIT, RANGE 9, HYDERABAD 5) THE DEPARTMENTAL REPRESENTATIVE, I.T.A.T., HYDE RABAD.