M/s Foot on Shoes, Agra V. Dy. C.I.T., Circle-4(1), Agra

ITA 196/AGR/2011

• Counselvise Citation: [2019] 117 COUNSELVISE.COM (IT) 0400 (ITAT-AGRA)
• Duration Of Justice: 8 year(s) 6 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 16-05-2019
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 08-05-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 10-05-2011
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: E PASS ROAD AGRA PANAAAFFG
• Keywords: Business expenditure; Principle of natural justice; Commercial expediency; Capital expenditure; Set aside
• Section: 143(3); 40(a)(ia); 37(1); 194C; 143(1); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AGRA BENCH, AGRA BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI A.L. GEHLOT, ACCOUNTANT MEMBER ITA NO.196/AGRA/2011 ASSESSMENT YEAR: 2007-08 M/S. FOOT ON SHOES, VS. DY. COMMISSIONER OF INCO ME TAX, 7 TH KM. STONE, CIRCLE 4(1), AGRA. DELHI BYE PASS ROAD, AGRA. (PAN : AAAFF 3067 G). (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SAHIB P. SATSANGEE, C.A. RESPONDENT BY : SHRI WASEEM ARSHAD, SR. D.R. DATE OF HEARING : 08.05.2013 DATE OF PRONOUNCEMENT : 17.05.2013 ORDER PER A.L. GEHLOT, ACCOUNTANT MEMBER: THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER DATED 01.03.2011 PASSED BY THE LD. CIT(A)-II, AGRA FOR THE ASSESSMEN T YEAR 2007-08. 2. THE CONCISE GROUNDS OF APPEAL ARE REPRODUCED AS UNDER :- 2 ITA NO.196/AGRA/2011 A.Y. 2007-08 1. THAT THE LEARNED CIT(APPEAL)-II (HEREINAFTER RE FERRED TO AS CIT(A) FOR SHORT) HAS ERRED IN LAW AND ON FACTS I N CONFIRMING THE ASSESSMENT MADE BY THE AO (DCIT4(1) AGRA) ON AN INC OME OF RS.2,02,69,288/- AS AGAINST THE RETURNED INCOME OF RS.64,24,200 WITHOUT APPLICATION OF MIND TO THE FAUCAL AND LEGAL ISSUES INVOLVED MERELY ON THE BASIS OF WHAT THE AO HAS SAID THUS NE GATING THE UNDERLYING IDEA OF APPEAL BEFORE HIM WHICH REQUIRE THAT THE GROUNDS TAKEN BY THE APPELLANT BE DEALT WITH FAIRLY AND IN ACCORDANCE WITH THE PRINCIPLE OF NATURAL JUSTICE. 2. THAT THE AO HAS WRONGLY AND ILLEGALLY MADE THE A SSESSMENT U/S 143(3) OF THE INCOME TAX ACT, 1961 (ACT FOR SHORT ) AFTER INVOKING THE PROVISIONS OF SECTION 145(3) OF THE ACT AND HENCE T HE ASSESSMENT MADE IS BAD IN LAW. 3. THAT THE CIT(A) HAS SUMMARILY REJECTED THE PLEA RELATING TO THE JURISDICTION WHICH GOES TO THE ROOT OF THE ASSESSME NT MADE. THE ASSESSMENT ORDER PASSED WITHOUT JURISDICTION IS A N ULLITY AND SHOULD HAVE BEEN ANNULLED INSTEAD OF BEING CONFIRMED. AN ILLEGALITY CANNOT BE CURED BY CONSENT OR ON THE GROUND THAT THE SAME HAS NOT BEEN INITIALLY CHALLENGED. 4. THAT THE FOLLOWING ADDITIONS MADE TO THE RETURNE D INCOME BY THE AO AND CONFIRMED BY THE CIT(A) ARE BASED ON WRO NG FACTS, CONTRARY TO LAW AND ARBITRARILY MADE WITHOUT TAKING INTO ACCOUNT THE EXPLANATIONS GIVEN BY THE APPELLANT AND NEED TO BE DELETED. THE ADDITIONS MADE ARE :_ (I) ADDITIONS ON ACCOUNT OF NON-INCLUSION: RS.56,58 ,200/- OF GOODS IN TRANSIT IN THE CLOSING STOCK (II) ADDITION ON ACCOUNT OF EXPENSE HELD RS.17,8 5,900/- TO BE NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE BUSINESS PURPOSE OF THE ASSESSEE. (III) ADDITION ON ACCOUNTS OF PAYMENTS MADE RS.61,5 1,766/- WITHOUT DEDUCTION OF TAX AT SOURCE IN 3 ITA NO.196/AGRA/2011 A.Y. 2007-08 VIEW OF PROVISIONS OF SECTION 40(A)(IA) OF THE INCOME TAX ACT, 1961 (IV) ADDITION ON ACCOUNT OF ALLEGED FALSE RS.1,8 7,000/- CREDIT IN THE NAMES OF 11 PERSONS IN THE ACCOUNT BOOKS (V) ADDITION ON THE GROUND THAT VOUCHERS RS.35,2 02/- SHOWING PAYMENTS OF RS.35,202/- ARE NOT SUPPORTED BY PRIMARY CASH MEMOS/BILLS. TOTAL ADDITIONS MADE RS.1,38,45,068/- 4.2 THAT WITHOUT PREJUDICE TO THE ADDITION MADE ON ACCOUNT OF NON- INCLUSION OF GOODS IN TRANSIT IN THE CLOSING STOCK AT RS.56,58,200/- THE LEARNED CIT(A) AHS BEEN WRONG AND ILLEGAL IN NOT AD JUDICATING THE GROUND THAT THE CLOSING STOCK OF A YEAR IS THE OPEN ING STOCK OF SUCCEEDING YEAR, THEREBY WHILE SUSTAINING THE ADDIT ION IN ASSESSMENT YEAR 2007-2008, HE SHOULD HAVE DIRECTED TO REDUCE T HE INCOME OF THE ASSESSMENT YEAR 2008-2009 BY THE LIKE AMOUNT. 4.3 THAT THE ARBITRARINESS OF THE AOS ACTION IS AP PARENT FROM THE FACT THAT DISALLOWANCE OF RS.79,37,666/- (RS.17,85, 900 + RS.61,51,766) HAS BEEN MADE OUT OF WAGES PAID TO KA RIGARS WHEN ONLY A SUM OF RS.78,57,596/- HAS BEEN PAID TO THEM. 4.4 THAT THE AUTHORITIES BELOW HAVE ERRED ON FACTS AND IN LAW IN HOLDING THAT THE WAGES OF RS.61,51,766/- ARE PAID T O THE CONTRACTORS INSTEAD OF BEING PAID TO THE INDIVIDUAL WORKERS WIT HOUT THERE BEING ANY CONTRACT WITH THE CONTRACTORS AND HAVING NOTHIN G FOUND AS PAID TO ANY CONTRACTORS. THE INVOCATION OF THE PROVISIONS OF SECTION 40(A)(IA) READ WITH SECTION 194C ARE TOTALLY WRONG AND ILLEGA L AND CONTRARY TO FINDING RECORDED IN RESPECT OF ADDITION OF RS.17,85 ,900/- MADE AS EXCESS PAYMENT WAGES. 5. THAT THE AUTHORITIES BELOW HAVE ERRED ON FACTS A ND IN LAW IN NOT APPRECIATING THE VARIOUS SUBMISSIONS MADE DURING TH E COURSE OF ASSESSMENT PROCEEDINGS AND THE APPELLATE PROCEEDING S. 4 ITA NO.196/AGRA/2011 A.Y. 2007-08 6. THAT THE ORDER PASSED BY THE CIT(A) IS WRONG IN LAW AND ON FACTS AND NEEDS TO BE SET ASIDE AND THE APPELLANTS APPEAL MAY KINDLY BE ACCEPTED. 7. THAT THE APPELLANT CRAVES LEAVE TO ADD OR ALTER OR DELETE ANY OR MORE GROUND OR GROUNDS AS MAY BE CONSIDERED NECESSA RY AT THE TIME OF HEARING. 3. GROUND NOS.1 & 3 ARE NOT PRESSED, GROUND NOS.5, 6 & 7 ARE GENERAL IN NATURE, AND THEREFORE, THESE GROUNDS ARE DISMISSED AS NOT P RESSED AND GENERAL IN NATURE WHICH REQUIRES NO SPECIFIC FINDING. 4. THE EFFECTIVE GROUND IS ONLY ONE GROUND WHEREIN THE ASSESSEE CHALLENGES VARIOUS ADDITIONS. THE FIRST ADDITION IS ON ACCOUN T OF NON-INCLUSION OF GOODS IN TRANSIT IN THE CLOSING STOCK OF RS.56,58,200/-. DU RING THE ASSESSMENT PROCEEDINGS THE A.O. NOTICED THAT THE ASSESSES HAS SHOWN ONLY 1 542 PAIRS OF SHOES AS FINISHED GOODS AS ON 31.03.2002 AND THE SAME WAS TAKEN AS OP ENING STOCK AS ON 01.04.2008. HOWEVER, BEFORE THE A.O. THE ASSESSEE SUBMITTED THA T THE COMPLETE DETAILS OF CLOSING STOCK AGGREGATING TO RS.1,51,07,652/- IS IN CLUSIVE OF THE VALUE OF 8394 PAIRS OF SHOES TAKEN OUT OF STOCK BUT WERE NEITHER IN THE FACTORY PREMISES BEING DISPATCHED BUT NOT CLEARED FROM THE CUSTOM. THE A. O. AFTER CONSIDERING THE ASSESSEES SUBMISSION FOUND THAT THE ASSESSEE DID N OT SHOW THE COST OF GOODS IN TRANSIT IN THE CLOSING STOCK AS ON 31.03.2007. THE A.O. AFTER EXAMINING THE 5 ITA NO.196/AGRA/2011 A.Y. 2007-08 ACCOUNTS HELD THAT COST OF 8394 PAIRS OF SHOES WERE NOT INCLUDED IN THE COST OF RAW MATERIAL AS SHOWN AS IN RETURN OF INCOME DULY VERIF IED AND SIGNED BY THE ASSESSEE. ON BEING ASKED ABOUT THE INCLUSION OF GOODS IN TRAN SIT IN CLOSING STOCK, THE ASSESSEE CAME WITH THE EXPLANATIONS FOR SUBSTANTIATING ITS W RONG CONTENTION TO ESCAPE THE INCIDENCE OF TAX LIABILITY. THE A.O. ACCORDINGLY H ELD THAT THE ASSESSEE HAS NOT INCLUDED THE COST OF 8394 PAIRS OF SHOES AMOUNTING TO RS.56,58,200/- AND THE SAME WAS ADDED TO THE TOTAL INCOME OF THE ASSESSEE. THE CIT(A) CONFIRMED THE ADDITION. 5. THE LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT THE REVENUE AUTHORITIES DID NOT APPRECIATE THE FACTS OF THE ISSUE. THE LD. AUTHORISED REPRESENTATIVE DREW OUR ATTENTION TO PAGE NO.275 WHERE COPY OF BALANCE SHEET HAS BEEN PLACED. LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT CLOSING ST OCK UNDER THE HEAD CURRENT ASSETS, LOANS AND ADVANCES AS ON 31.03.2007 WAS RS. 1,51,07,652/-. LD. AUTHORISED REPRESENTATIVE DREW OUR ATTENTION TO PAGE NO.303 PA GE WHEREIN BALANCE SHEET FOR THE YEAR ENDED 31.03.2008 HAS BEEN PLACED. LD. AUT HORISED REPRESENTATIVE SUBMITTED THAT OPENING STOCK TAKEN WAS RS.1,51,07,6 52/-. SIMILARLY, THE LD. AUTHORISED REPRESENTATIVE REFERRED PAGE NO.272 OF T HE PAPER BOOK WHERE A COPY OF P&L ACCOUNT FOR THE YEAR ENDED 31.03.2007 HAS BEEN PLACED WHEREIN CLOSING STOCK SHOWN IS RS.1,51,07,652/-. LD. AUTHORISED REPRESEN TATIVE SUBMITTED THAT THE ASSESSEE HAS FILED RECONCILIATION AS WELL AS EXPLAN ATION REGARDING CLOSING STOCK 6 ITA NO.196/AGRA/2011 A.Y. 2007-08 THROUGH A LETTER DATED 07.12.2009 OF WHICH COPY HAS BEEN PLACED AT PAGE NO.243 & 244 OF THE ASSESSEES PAPER BOOK. LD. AUTHORISED R EPRESENTATIVE SUBMITTED THAT THE COMPLETE DETAILS OF CLOSING STOCK AGGREGATING T O RS.1,51,07,652/- WAS FILED BEFORE THE A.O. THE VALUE OF CLOSING STOCK SHOWN A T RS.1,51,07,652/- IS INCLUSIVE OF THE VALUE OF 8394 PAIRS OF SHOES TAKEN OUT OF ST OCK REGISTER BUT WERE NEITHER IN CLOSING STOCK NOR IN THE FACTORY PREMISES, BEING DI SPATCHED BUT NOT CLEARED FROM CUSTOMS. LD. AUTHORISED REPRESENTATIVE SUBMITTED T HAT IT WAS EXPLAINED BEFORE THE A.O. THAT THE ASSESSEE HAS FOLLOWED THE CONSISTENT PRACTICE NOT TO INCLUDE THE LIKE GOODS IN SALE BEING NOT CLEARED FROM THE CUSTOMS WH ICH ORDINARILY TAKES 10 TO 15 DAYS. LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT THE VALUE OF SAID GOODS OF 8394 PAIRS OF SHOES WAS DULY INCLUDED IN THE OVERAL L STOCK OF RS.1,51,07,652/-. THE VALUE OF 8394 PAIRS OF SHOES WAS TAKEN AT COST OF RS.56,58,200/-. IN SUPPORT OF THE CONTENTION THE ASSESSEE SUBMITTED CERTIFICATE F ROM THE AUDITOR. THE RELEVANT CERTIFICATE IS APPEARING AT PAGE NO.249 OF THE ASSE SSEES PAPER BOOK AND SAME IS REPRODUCED AS UNDER:- DECEMBER 7, 2009 TO, THE PARTNER, FOOT ON SHOES, AGRA. DEAR SIR, 7 ITA NO.196/AGRA/2011 A.Y. 2007-08 WITH REGARD TO THE QUERY DURING THE COURSE OF INCOM E TAX PROCEEDINGS FOR THE FINANCIAL YEAR 2006-2007, IN RE SPECT OF THE STOCK OF FINISHED GOODS AS ON 31.03.2007, WE WOULD CONFIR M THAT WE HAVE AUDITED THE ACCOUNTS OF YOUR FIRM FOOT ON SHOES, AG RA FOR THE YEAR ENDED 31.03.2007 AND CLARIFY THE QUERY AS FOLLOWS : - 1. THE CLOSING STOCK OF FINISHED GOODS AS ON 31.03. 2007, AS PER STOCK REGISTER, WAS 1542 PAIRS OF FOOTWEAR. THIS Q UANTITY DID NOT INCLUDE STOCK OF 8394 PAIRS OF FOOTWEAR WHICH W ERE IN TRANSIT AND IN THE COURSE OF SALE PENDING EXPORT. 2. THE STOCK IN TRANSIT OF 8394 PAIRS OF FOOTWEAR V ALUED AT RS.56,58,200/- IS DULY INCLUDED IN THE TOTAL STOCK FOR RS.1,51,07,652 AS ON 31.03.2007, REFLECTED IN THE P ROFIT & LOSS ACCOUNT AND BALANCE SHEET OF THE FIRM AS AT 31.03.2 007. 3. THE STOCK IN TRANSIT OF 8394 PAIRS OF SHOES WERE EXPORTED IN HE SUBSEQUENT YEAR 2007-2008 AND IS DULY REFLECTED IN THE EXPORT SALES OF THE SUBSEQUENT YEAR. THANKING YOU, YOURS FAITHFULLY, FOR RALLAN & CO. CHARTERED ACCOUNTANTS SD/- ARVIND RALLAN PROPRIETOR 6. THE LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT THE A.O. HAS WITHOUT APPRECIATING THE FACTS TAKEN THE QUANTITY FIGURE OF CLOSING STOCK FROM ANNEXURE-8 WHERE ONLY QUANTITY DETAILS OF FINISHED GOODS WERE REQUIRED TO BE GIVEN AND NOT THE 8 ITA NO.196/AGRA/2011 A.Y. 2007-08 ENTIRE VALUE OF THE CLOSING STOCK. THE RELEVANT AN NEXURE HAS BEEN PLACED AT PAGE NO.296 OF THE ASSESSEES PAPER BOOK AND THE SAME IS REPRODUCED AS UNDER :- ANNEXURE-8 FINISHED GOODS FOOTWEAR/ BELTS FOOTWEAR UPPERS (I) OPENING STOCK 8,382 1,476 (II) PURCHASES DURING THE YEAR 35,214 0 (III) QUANTITY MANUFACTURED DURING THE YR 91,438 0 (IV) SALES DURING THE YEAR 133,492 0 (V) CLOSING STOCK 1,542 1,476 (VI) SHORTAGE/EXCESS, IF ANY NOTE: SALES DOES NOT INCLUDE SAMPLES ISSUED. 7. THE LD. AUTHORISED REPRESENTATIVE HAS ALSO DRAWN OUR ATTENTION ON ANNEXURE-9 WHICH IS TAX AUDIT REPORT WHEREIN THE AU DITOR HAS GIVEN ACCOUNTING RATIO AND WHILE CALCULATING ACCOUNTING RATIO THE AU DITOR HAS INCLUDED CLOSING STOCK OF RS.1,51,07,652/- AND CLOSING STOCK OF FINISHED G OODS RS.6,05,600/-. THE RELEVANT ANNEXURE-9 IS REPRODUCED UNDER :- ANNEXURE 9 ACCOUNTING RATIO 1. GROSS PROFIT AS PER PROFIT & LOSS ACCOUNT RS.2 5,805,399 2. TURNOVER (SALES) AS PER PROFIT & LOSS ACCOUNT R S.84,979,723 3. NET PROFIT AS PER PROFIT & LOSS ACCOUNT RS. 6 ,458,022 4. STOCK IN TRADE (CLOSING STOCK) RS.15,107,652 (A) GROSS PROFIT/TURNOVER 30.37 (B) NET PROFIT/TURNOVER 7.60 9 ITA NO.196/AGRA/2011 A.Y. 2007-08 (C) STOCK-IN-TRADE/TURNOVER 17.7 8 (D) MATERIAL CONSUMED/FINISHED GOODS PRODUCED 1. MATERIAL CONSUMED OPENING STOCK OF RAW MATERIALS & GOODS IN RS.7,33 8,211 PROCESS ADD: PURCHASE OF RAW MATERIALS RS.47,104,598 RS.54,442,809 LESS: CLOSING STOCK OF RAW MATERIAL & GOODS IN PROCESS RS.14,502,052 MATERIAL CONSUMED RS.39,940,757 2. FINISHED GOODS PRODUCED CLOSING STOCK OF FINISHED GOODS RS. 605,600 ADD: SALES RS.84,979,723 RS.85,585,323 LESS: GROSS PROFIT 25,805,399 OPENING STOCK OF FINISHED GOODS 3,866,620 29 ,672,019 FINISHED GOODS PRODUCED RS.55,913,304 MATERIAL CONSUMED/FINISHED GOODS PRODUCED = 7 1.43 8. THE LD. DEPARTMENTAL REPRESENTATIVE, ON THE OTHE R HAND, RELIED UPON THE ORDER OF REVENUE AUTHORITIES. 9. WE HAVE HEARD THE LD. REPRESENTATIVES OF THE PAR TIES AND RECORDS PERUSED. WE NOTICE THAT THE A.O. HAS MADE ADDITION WITHOUT A PPRECIATING THE FACTS. HE HAS TAKEN BASIS OF CLOSING STOCK OF 1542 FOOTWEAR FROM ANNEXURE-8 OF FINANCIAL 10 ITA NO.196/AGRA/2011 A.Y. 2007-08 STATEMENT WHERE ONLY QUANTITY DETAILS OF OPENING ST OCK, PURCHASES DURING THE YEAR, QUANTITY MANUFACTURED DURING THE YEAR, SALES DURING THE YEAR AND CLOSING STOCK HAD BEEN MENTIONED. IN FACT, THIS CLOSING STOCK OF FIN ISHED GOODS IN QUANTITY 1542 WAS IN ACCORDANCE WITH RG-1 OF WHICH VALUE COMES TO RS. 6,05,600/-. RS.1,51,07,652/- INCLUDES THE OTHER STOCK ALSO INCLUDING FINISHED GO ODS IN TRANSIT OF 8394 IN QUANTITY OF WHICH VALUE COMES TO RS.56,58,200/-. THE ASSESS EE HAS FURNISHED THE REASONS AND EXPLANATION BEFORE THE A.O. AND THE RECONCILIAT ION AND SUMMARY OF CLOSING STOCK OF THE ASSESSEE WHICH IS REPRODUCED AS UNDER :- (PAGE 244 PB) SUMMARY OF CLOSING STOCK AS ON 31.03.2007 S.NO. PARTICULARS QUANTITY AMOUNT 1. FINISHED (RG-1) 1,542 605,600 2. FINISHED (GOODS IN TRANSIT) 8,394 5,658,200 3. WORK IN PROCESS 1,520 706,990 4. LEATHER 1,272,868 6,692,908 5. SOLES & SOLES SHEET 623,087 6. OTHER RAW MATERIALS 794,299 7. BELT 1,476 26,568 TOTAL 15,107,652 10. WE NOTICE THAT THE REVENUE AUTHORITIES, WITHOUT CONSIDERING THE RECONCILIATION, MADE THE ADDITION WHEREAS THE ASSES SEE HAS EXPLAINED THE POSITION BY RECONCILING THE CLOSING STOCK OF RS.1,51,07,652/ - WHICH INCLUDES GOODS IN TRANSIT OF 8394 IN QUANTITY OF RS.56,58,200/- IN VA LUE AND SAME HAS BEEN SHOWN IN REGULAR BOOKS OF ACCOUNTS MAINTAINED BY THE ASSESSE E. THUS, THE ASSESSEE HAS 11 ITA NO.196/AGRA/2011 A.Y. 2007-08 ALREADY INCORPORATED THE VALUE OF GOODS IN TRANSIT RS.56,58,200/- OF 8394 PAIRS OF FOOTWEAR IN THE CLOSING STOCK. IF THIS ADDITION IS SUSTAINED, THAT WILL AMOUNT TO DOUBLE ADDITION AS THE ASSESSEE HAS ALREADY SHOWN T HIS GOODS IN CLOSING STOCK. 11. IF WE EXAMINE THE ISSUE FROM ANOTHER ANGLE I.E. ON THE BASIS OF G.P. RATE, WE NOTICE THE FOLLOWING POSITION FROM THE TABLE OF COM PARATIVE G.P. RATE FURNISHED BY THE LD. AUTHORISED REPRESENTATIVE WHICH IS REPRODUC ED AS UNDER :- COMPARATIVE POSITION OF TRADING RESULTS PARTICULARS AY 04-05 AY 05-06 AY 06-07 AY 07-08 AY 08-09 AY 09-10 AY 10-11 SALES 7,98,41,663 8,33,30,968 9,72,12,021 8,49,79,7 23 *9,24,55,313 9,41,70,532/- 11,99,11,585 G.P. 2,50,85,916 2,56,66,940 2,75,92,734 2,58,05,39 9 2,53,11,264 2,75,25,329 3,70,19,098 G.P. RATE 31.42% 30.80% 28.38% 30.37% 27.38% 29.23 30.87 COMPLETED 143(3) 143(1) 143(1) 143(3) 143(1) 143(1) 143(3) 12. FROM THE ABOVE TABLE, WE NOTICE THAT THE ASSESS EE HAS SHOWN G.P. OF RS.2,58,05,399/- AND G.P. RATE COMES TO 30.37%. IF WE ACCEPT THE ADDITION MADE BY THE A.O, CALCULATION OF G.P. WILL COME TO RS.3,1 4,63,599/- (2,58,05,399 + 56,58,200) OF WHICH CALCULATION IN PERCENTAGE COMES TO 37.02% AND SUCH RATE OF PROFIT WERE NEVER FOUND IN ANY OTHER YEARS. THUS, ADDITION MADE BY THE A.O. ON PRESUMPTION BASIS WITHOUT CONSIDERING AND WITHOUT A PPRECIATING THE CORRECT FACTS OF THE CASE. HE HAS TAKEN UP THE FIGURE OF CLOSING ST OCK FROM QUANTITY DETAILS WHICH ARE FURNISHED BY THE AUDITOR FOR SPECIFIC PURPOSE. THE A.O. MADE ADDITION WITHOUT CONSIDERING THE ENTIRE STOCK SHOWN BY THE ASSESSEE. AS PER THE RECONCILIATION 12 ITA NO.196/AGRA/2011 A.Y. 2007-08 SUBMITTED BY THE ASSESSEE, IT IS CLEARLY FOUND THAT THE GOODS IN TRANSIT IS 8394 IN QUANTITY OF WHICH VALUE IS RS.56,58,200/- AS SHOWN BY THE ASSESSEE AS CLOSING STOCK WHICH INCLUDES IN RS.1,51,07,652/-. 13. ANOTHER ASPECT WHICH WILL COME OUT ON ACCEPTANC E OF THE A.O.S VIEW IS THAT IF THE CLOSING STOCK IN QUANTITY IS 1542 PAIRS OF S HOES OF WHICH VALUE IS RS.1,51,07,652/-, THEN CALCULATION OF VALUE OF PER PAIR OF SHOES COMES TO RS.9,797/- WHICH IS BEYOND IMAGINATION, THEREFORE, THE VIEW OF THE A.O. CANNOT BE ACCEPTED. 14. IN THE LIGHT OF THIS CLEAR FACT, THE ADDITION M ADE BY THE A.O. IS NOT SUSTAINABLE. IT IS ALSO RELEVANT TO STATE THAT THE REVENUE HAS FAILED TO POINT OUT THAT THE SAID REASONS AND EXPLANATIONS FURNISHED BY THE ASSESSEE ARE INCORRECT. THUS, WE FIND THAT THE ASSESSEE HAS ALREADY INCLUDED GOODS I N TRANSIT IN CLOSING STOCK. IN THE LIGHT OF THE FACT, ADDITION IS NOT WARRANTED. WE, THEREFORE, DELETE THE ADDITION OF RS.56,58,200/-. 15. GROUND NO.4(II) PERTAINS TO THE ADDITION OF RS. 17,85,900/-. DURING THE ASSESSMENT PROCEEDINGS, THE A.O. NOTICED THAT THE A SSESSEE HAS CLAIMED EXCESS LABOUR EXPENSES. THE A.O. ON THE BASIS OF STATEME NT OF SHRI PURSHOTTAM AGARWAL RECORDED ON 19 TH NOVEMBER, 2009 NOTICED THAT FOR MAKING A PAIR OF S HOES 6 TO 7 13 ITA NO.196/AGRA/2011 A.Y. 2007-08 DAYS ARE REQUIRED AND AS SUPPORTED BY THE FACT THAT WEEKLY PAYMENT WAS BEING MADE BY THE ASSESSEE. THE A.O. NOTICED EXCESS PAYM ENT OF RS.36,800/- FOR THE MONTH OF JULY 2006, RS.7,14,010/- FOR THE MONTH OF AUGUST 2006, RS.6,05,150/- FOR THE MONTH OF SEPTEMBER 2006 AND RS.3,50,260/- FOR T HE MONTH OF OCTOBER, 2006. THE A.O., AFTER CONSIDERING THE ASSESSEES SUBMISSI ONS AND RG-1 ALONG WITH CLOSING BALANCE OF FOOTWEAR, FINALLY FOUND THAT THE FOLLOWING LABOUR EXPENSES WERE NOT INCLUDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ASSESSEES BUSINESS.:- (PAGE NO.11) EXCESS PAYMENT OF WAGES SHOWN IN JULY 2006 1,16,1 00/- EXCESS PAYMENT OF WAGES SHOWN IN AUG 2006 7,14,010 /- EXCESS PAYMENT OF WAGES SHOWN IN SEPT 2006 6,05,15 0/- EXCESS PAYMENT OF WAGES SHOWN IN OCT 2006 3,50,64 0/- ------------- 17,85,900/- ------------- 16. THE CIT(A) CONFIRMED THE ORDER OF THE A.O. 17. WE HAVE HEARD THE LD. REPRESENTATIVES OF THE PARTIE S AND RECORDS PERUSED. WE NOTICE THAT THE A.O. HAS TRIED TO CO-RELATE THE MONTHLY PAYMENT OF WAGES WITH THE PRODUCTION. THE A.O. HAS CALCULATED THE EXCESS PAYMENT OF WAGES BY HIS OWN METHOD OF FORMULA WITHOUT CONSIDERING THE ASSESSEE S SUBMISSION THAT THE LABOUR CHARGES INCLUDING EMBROIDERY CHARGES AND OTHERS WER E ACCOUNTED FOR ON THE BASIS OF ACCOUNTING PRINCIPLE. IT IS RELEVANT TO NOTE TH AT THE A.O. CONSIDERED EXCESS 14 ITA NO.196/AGRA/2011 A.Y. 2007-08 PAYMENT FOR CERTAIN MONTHS WITHOUT DISTURBING THE G .P. RATE DECLARED BY THE ASSESSEE. THE A.O. DID NOT GIVE ANY REASON HOW THE EXPENDITURE CLAIMED FOR OTHER MONTHS WERE GENUINE. BUSINESS EXPENDITURES INCURRE D FOR THE PURPOSE OF BUSINESS ARE ALLOWABLE UNDER SECTION 37 OF THE ACT. THE SAI D SECTION 37 READS AS UNDER:- GENERAL. 37. (1) ANY EXPENDITURE1 (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 [***] AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE15 OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY15 FOR THE PURPOSES OF THE BUSINESS15 OR PROFESSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER TH E HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. [EXPLANATION.FOR THE REMOVAL OF DOUBTS, IT IS HER EBY DECLARED THAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO H AVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE.] (2) 17[* * *] (2B) NOTWITHSTANDING ANYTHING CONTAINED IN SUB-SECTION (1), NO ALLOWANCE SHALL BE MADE IN RESPECT OF EXPENDITURE INCURRED BY AN AS SESSEE ON ADVERTISEMENT IN ANY SOUVENIR, BROCHURE, TRACT, PAMPHLET OR THE L IKE PUBLISHED BY A POLITICAL PARTY.] 17.1 TO APPRECIATE THE SCHEME OF THE ACT IN RESPECT OF ALLOWABLY OF EXPENDITURES, WE WOULD LIKE TO REFER CERTAIN JUDGMENTS WHEREIN CE RTAIN PRINCIPLES HAVE BEEN DECIDED IN THIS REGARD. THESE JUDGMENTS ARE AS UND ER :- CIT VS. TRANSPORT CORPORATION OF INDIA LIMITED, 256 ITR 701 (AP) -- 15 ITA NO.196/AGRA/2011 A.Y. 2007-08 (PAGE 705, 706 AND 707 )'37. GENERAL.--(1) ANY EXPENDITURE (NOT BEING EXPENDITURE OF THE NATURE DESCRIBED IN SECTIONS 30 TO 36 AND NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES OF THE ASSESSEE), LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFITS AND GAINS OF BUSINESS OR PROFESSION'. EXPLANATION.--FOR THE REMOVAL OF DOUBTS, IT IS HERE BY DECLARED THAT ANY EXPENDITURE INCURRED BY AN ASSESSEE FOR ANY PURPOSE WHICH IS AN OFFENCE OR WHICH IS PROHIBITED BY LAW SHALL NOT BE DEEMED TO H AVE BEEN INCURRED FOR THE PURPOSE OF BUSINESS OR PROFESSION AND NO DEDUCTION OR ALLOWANCE SHALL BE MADE IN RESPECT OF SUCH EXPENDITURE.' IN ORDER TO CLAIM DEDUCTION OF EXPENDITURE UNDER SE CTION 37(1) OF THE ACT, AT THE RELEVANT POINT OF TIME AND IN THE LIGHT OF THE JUDGMENTS IN INDIAN MOLASSES CO. P. LTD. V. CIT [1959] 37 ITR 66 (SC); CIT V. INDIAN MOLASSES CO. (P) LTD. [1970] 78 ITR 474 (SC); SASSOON J. DAV ID AND CO. P. LTD. V. CIT [1979] 118 ITR 261 (SC); MADHAV PRASAD JATIA V. CIT [1979] 118 ITR 200 (SC); CIT V. BALLARPUR INDUSTRIES LTD. [1976] 1 19 ITR 817 (BOM); CIT V. NAVSARI COTTON AND SILK MILLS LTD. [1982] 135 IT R 546 (GUJ) AND CHENAB FOREST CO. V. CIT [1974] 96 ITR 568 (J&K), THE FOLL OWING CONDITIONS SHOULD BE SATISFIED: (I)THE EXPENDITURE IN QUESTION SHOULD NOT BE OF THE NATURE DESCRIBED UNDER THE SPECIFIC PROVISIONS OF SECTIONS 30 TO 36 AND 80VV (SECTION 80VV WAS OMITTED WITH EFFECT FROM APRIL 1, 1986); (II)THE EXPENDITURE SHOULD NOT BE OF THE NATURE OF CAPITAL EXPENDITURE; (III)IT SHOULD NOT BE A PERSONAL EXPENDITURE; AND (IV) THE EXPENDI TURE SHOULD HAVE BEEN LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION. IT IS THUS CLEAR THAT CONDITIONS AT (I), (II) AND (III) ABOVE ARE NEGATIVE CONDITIONS WHEREAS THE CONDITION AT (IV) A BOVE IS A POSITIVE CONDITION. IF THE EXPENDITURE SATISFIES THE NEGATIV E CONDITIONS, IT HAS TO SATISFY THE POSITIVE CONDITION IN ORDER TO BE ELIGIBLE FOR DEDUCTION UNDER SECTION 37(1) OF THE ACT. THUS, SECTION 37(1) ALLOWS DEDUCT ION OF ANY 'EXPENDITURE' SUBJECT TO CONDITIONS NOTICED ABOVE. IN INDIAN MOLA SSES CO.'S CASE [1959] 37 ITR 66, THE SUPREME COURT POINTED OUT THAT THE WORD 'EXPENDITURE' IS EQUAL TO 'EXPENSE' AND 'EXPENSE' IS MONEY LAID OUT BY CAL CULATION AND INTENTION. BUT THE IDEA OF 'SPENDING' IN THE SENSE OF 'PAYING OUT OR AWAY' MONEY IS THE PRIMARY MEANING AND IT IS WITH THIS MEANING THAT ON E IS CONCERNED. 'EXPENDITURE' IS THUS WHAT IS 'PAID OUT OR AWAY' AN D IS SOMETHING WHICH IS GONE IRRETRIEVABLY. THE APEX COURT IN CIT V. NAINIT AL BANK LTD. [1966] 62 ITR 638 HELD THAT IN ITS NORMAL MEANING, THE EXPRES SION 'EXPENDITURE' 16 ITA NO.196/AGRA/2011 A.Y. 2007-08 DENOTES 'SPENDING' OR 'PAYING OUT OR AWAY', I.E., S OMETHING THAT GOES OUT OF THE COFFERS OF THE ASSESSEE. A MERE LIABILITY TO SA TISFY AN OBLIGATION BY AN ASSESSEE IS UNDOUBTEDLY NOT 'EXPENDITURE'; IT IS ON LY WHEN HE SATISFIES THE OBLIGATION BY DELIVERY OF CASH OR PROPERTY OR BY TH E SETTLEMENT OF ACCOUNTS, THAT THERE IS EXPENDITURE. THE BURDEN OF PROVING THAT A PARTICULAR EXPENDITURE HAS BEEN LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS SO THAT THE ASSESSEE MAY BE ENTITLED TO CLAIM DEDUCTION IS ON T HE ASSESSEE. THIS POSITION IS WELL SETTLED BY THE JUDGMENTS OF THE APEX COURT IN CIT V. CALCUTTA AGENCY LTD. [1951] 19 ITR 191 AND CIT V. IMPERIAL CHEMICAL INDUSTRIES (INDIA) (P.) LTD. [1969] 74 ITR 17. THE MERE OBJECT OF INCURRING EXPENDITURE IS NOT DECISIVE WHETHER IT IS OF A CAPITAL NATURE OR REVEN UE NATURE. THEREFORE, THE ONUS IS ON THE ASSESSEE TO PROVE, INTER ALIA, THAT THE ITEM OF EXPENDITURE IN QUESTION FOR ADMISSIBILITY TO DEDUCTION IS NOT IN T HE NATURE OF CAPITAL EXPENDITURE. FURTHER, MERE PAYMENT BY ITSELF WOULD NOT ENTITLE THE ASSESSEE TO DEDUCTION OF THE SAID EXPENDITURE UNLESS THE SAM E WAS PROVED TO BE PAID FOR COMMERCIAL CONSIDERATIONS. THE ONUS OF PROOF IS ALWAYS UPON THE ASSESSEE. IT CANNOT BE SAID THAT EVEN IF THE TAXPAY ER DOES NOT PRODUCE ANY EVIDENCE IN SUPPORT OF THE CLAIM FOR DEDUCTION, THE ASSESSING OFFICER HIMSELF INDEPENDENTLY IS TO COLLECT EVIDENCE AND DECIDE THA T THE DEDUCTION CLAIMED IS BASELESS HAVING REGARD TO THE LEGITIMATE BUSINESS N EEDS OF THE ASSESSEE, AS THE TRIBUNAL SEEMS TO THINK IN THE PRESENT CASE. IT IS FOR THE TAXPAYER TO ESTABLISH BY EVIDENCE THAT A PARTICULAR ALLOWANCE I S JUSTIFIED. BUT, AS HELD BY THE SUPREME COURT IN CIT V. C. PARAKH AND CO. (INDI A) LTD. [1956] 29 ITR 661 WHETHER AN ASSESSEE IS ENTITLED TO A PARTICULAR DEDUCTION OR NOT WILL DEPEND ON THE PROVISION OF LAW RELATING THERETO, AN D NOT ON THE VIEW WHICH HE MIGHT TAKE OF HIS RIGHTS. AT THE SAME TIME, THE ONUS IS ON THE ASSESSEE TO ESTABLISH THAT THERE ARE FACTS IN EXISTENCE WHICH E NTITLE IT TO A DEDUCTION AND IT IS FOR THE ASSESSEE TO ADDUCE NECESSARY EVIDENCE IN THIS REGARD. THEREFORE, IF THE ASSESSEE FAILS TO PLACE SUFFICIENT MATERIAL, HE IS NOT ENTITLED TO CLAIM THIS ALLOWANCE UNDER SECTION 37(1) OF THE ACT. IN C IT V. CHANDRAVILAS HOTEL [1987] 164 ITR 102 (GUJ), IT IS HELD THAT IF THE EX PENDITURE IS DOUBTED BY THE ASSESSING AUTHORITY, IT IS THE DUTY OF THE ASSESSEE TO PROVE BY LEADING EVIDENCE THAT THE EXPENDITURE WAS IN FACT, INCURRED . NEWTONE STUDIOS LTD. VS. COMMISSIONER OF INCOME-TAX [1955] 28 ITR 378 (MAD.). 17 ITA NO.196/AGRA/2011 A.Y. 2007-08 THE FACTS OF THE CASE ARE THAT THE ASSESSEE WAS A P RIVATE LIMITED COMPANY OWNING A STUDIO AND ENGAGED IN THE PRODUCTI ON OF MOTION PICTURES. THERE WERE SIX SHAREHOLDERS. THE MANAGING DIRECTOR AND THE THREE TECHNICIANS WERE REMUNERATED BY PAYMENTS OF WHAT WE RE CALLED HONORARIA, WHICH REALLY MEANT SALARIES AND ALSO BY PAYMENTS OF COMMISSION ON A FIXED PERCENTAGE BASIS. IN ADDITION EACH OF THEM GOT A CA R ALLOWANCE, AND WHEN THE PROFITS JUSTIFIED IT PAYMENT OF A MONTH'S SALARY AS BONUS. IN 1944 AND 1945 WHAT WAS PAID AS HONORARIA, THAT WAS, SALARY, TO TH OSE FOUR AMOUNTED TO RS. 18,000 A YEAR. THEIR SCALE OF SALARIES WAS REVISED FOR 1946 BY A RESOLUTION PASSED BY THE SHAREHOLDERS ON 30-03-1946, AND THE T OTAL CAME TO RS. 59,100 FOR 1946. THE GENUINENESS OF THE PAYMENT OF THAT AM OUNT OF RS. 59,100 WAS NEVER IN DISPUTE. THE ASSESSEE CLAIMED THAT PAYMENT AS A DEDUCTION UNDER SECTION 10(2)(XV) OF THE 1922 ACT. THE ITO LIMITED THE ADMISSIBLE DEDUCTION TO AN AMOUNT NOT EXCEEDING TWICE THE AMOUNT ALLOWED IN EACH OF THE PRECEDING YEARS AND DISALLOWED THE BALANCE. THE DIS ALLOWANCE WAS UPHELD BY THE AAC AS WELL AS THE TRIBUNAL. THE MADRAS HIGH COURT WHILE DECIDING THE MATTER 'WHETHER ON THE FACTS AND IN THE CIRCUMS TANCES OF THE CASE THE DISALLOWANCE OF A SUM OF RS. 23,100 OUT OF THE EXPE NSES INCURRED BY THE ASSESSEE FOR PAYMENT OF REMUNERATION TO THE MANAGIN G DIRECTOR AND THE OTHER TECHNICIAN DIRECTORS IS PERMISSIBLE UNDER THE PROVI SIONS OF SECTION 10(2)(XV) 18 ITA NO.196/AGRA/2011 A.Y. 2007-08 OF THE INCOME-TAX ACT. THE COURT REFERRED CERTAIN EARLIER JUDGMENTS WHICH ARE AS UNDER :- IN EASTERN INVESTMENTS LTD. V. COMMISSIONER OF INC OME-TAX, WEST BENGAL [1951] 20 ITR 1, THE SUPREME COURT REFERRED TO SECT ION 12(2) OF THE ACT, WHICH PROVIDES FOR THE DEDUCTION OF AN EXPENDITURE INCURRED 'SOLELY FOR THE PURPOSE OF MAKING OR EARNING SUCH INCOME, PROFITS O R GAINS' AND SUMMARISED THE PRINCIPLES TO BE KEPT IN VIEW : (1)THOUGH THE QUESTION MUST BE DECIDED ON THE FACTS OF EACH CASE, THE FINAL CONCLUSION IS ONE OF LAW. (2)IT IS NOT NECESSARY TO SHOW THAT THE EXPENDITUR E WAS A PROFITABLE ONE OR THAT IN FACT ANY PROFIT WAS EARNED. (3)IT IS ENOUGH TO SHOW THAT THE MONEY WAS EXPENDED NOT OF NECESSITY AND WITH A VIEW TO DIRECT AND IMMEDIATE BENEFIT TO THE TRADE, BUT VOLUNTARILY AND ON THE GROUND OF COMMERCIAL EXPEDIENCY, AND IN ORDE R INDIRECTLY TO FACILITATE THE CARRYING ON OF THE BUSINESS. (4)BEYOND THAT, NO HARD AND FAST RULE CAN BE LAID D OWN TO EXPLAIN WHAT IS MEANT BY THE WORD 'SOLELY.' IN RAYALOO IYER AND SONS V. COMMISSIONER OF INCOME- TAX, MADRAS [1954] 26 ITR 265, A BENCH OF THIS COURT HELD THAT THE PRINCI PLES LAID DOWN BY THE SUPREME COURT WITH REFERENCE TO SECTION 12(2) OF TH E ACT SHOULD ALSO BE APPLIED IN DECIDING UNDER SECTION 10(2)(XV) WHETHER THE EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS OF THE ASSESSEE AND THE COURT POINTED OUT THAT THE TEST PR ESCRIBED BY SECTION 10(2)(XV) OF THE ACT INCLUDED THAT OF COMMERCIAL EX PEDIENCY. AT PAGE 292 THE LEARNED JUDGES POINTED OUT: 'IN APPLYING THE TEST OF COMMERCIAL EXPEDIENCY TO D ETERMINE WHETHER THE EXPENDITURE IS WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF THE BUSINESS, THE REASONABLENESS OF THE EXPENDITURE SHOULD BE CONSIDERED FROM THE POINT OF VIEW OF THE BUSINESSMA N AND NOT FROM THE POINT OF VIEW OF OUTSIDERS INCLUDING THE INCOME-TAX OFFICER.' 19 ITA NO.196/AGRA/2011 A.Y. 2007-08 IT WAS THE SAME PRINCIPLE TO WHICH LORD WRIGHT REFE RRED IN CRADDOCK V. ZEVO FINANCE COMPANY LTD. [1946] 27 TC 267 AT 29 0: 'THE TRANSACTION HERE BEING A PERFECTLY STRAIGHTFOR WARD AND HONEST BARGAIN BETWEEN THE TWO COMPANIES, IT SEEMS TO ME T HAT, IF THE PRESENT CLAIM WERE UPHELD, IT WOULD AMOUNT TO A PRECEDENT E NABLING THE REVENUE TO REVISE EVERY SUCH BARGAIN AND TO DEFEAT WHAT THE PARTIES HAD AGREED ON. THE REVENUE IN A CASE UNDER SCHEDULE D HAS NO POWER TO EXAMINE WHAT THEY THINK WAS REASONABLE OR TO SAY WHAT EXPENDITURE WAS NECESSARY.' THE COURT HELD AS UNDER:- UNDER OUR TAXING SYSTEM, IT IS FOR THE ASSESSEE TO CONDUCT HIS BUSINESS, AND IN HIS WISDOM OR OTHERWISE TO FIX THE REMUNERATION TO HIS STAFF. THE INCOME-TAX ACT DOES NOT CLOTHE THE T AXING AUTHORITY WITH ANY POWER OR JURISDICTION TO DETERMINE THE REASONAB LENESS OF THE AMOUNT SO FIXED AND PAID BY THE ASSESSEE. THE ONLY TEST FOR THE DEDUCTIBILITY OF SUCH REMUNERATION IS WHETHER THE E XPENDITURE HAS BEEN INCURRED SOLELY AND EXCLUSIVELY FOR THE PURPOS E OF THE BUSINESS. IF THE REALITY OF THE PAYMENT IS CHALLENGED OR IS IN D ISPUTE DIFFERENT CONSIDERATIONS ARISE : SO ALSO IN CASES WHERE THE T AX AUTHORITIES ARE ABLE TO POINT TO SOME CONSIDERATION OTHER THAN THE PURPOSE OF THE BUSINESS AS ACCOUNTING FOR ANY PORTION OF THE PAYME NT MADE. IN SUCH CASES, OF COURSE, SUCH PORTION OF THE AMOUNT CLAIME D, WHICH IS EITHER NOT HELD TO HAVE BEEN PAID OR IS HELD TO HAVE BEEN PAID FOR REASONS OTHER THAN BUSINESS EXPEDIENCY, COULD AND SHOULD BE DISALLOWED ; BUT THE REASON FOR THE DISALLOWANCE IS BECAUSE EITHER T HE PORTION DISALLOWED IS NOT PAID, OR BECAUSE THE EXPENDITURE IS NOT SOLELY AND EXCLUSIVELY FOR THE BUSINESS, AND NOT ON THE GROUND THAT IN THE OPINION OF THE INCOME-TAX OFFICER OR OTHER TAXING AUTHORITY THE REMUNERATION IS 'UNREASONABLY' HIGHEITHER BECAUSE THE EMPLOYEE DOES NOT, IN THE AUTHORITY'S OPINION, DESERVE SO MUCH, OR BECAUSE TH E ASSESSEE COULD HAVE SECURED OTHER EMPLOYEES ON MORE FAVOURABLE TER MS. THE ASSESSEE CERTAINLY SATISFIED THE THIRD OF THE T ESTS POSTULATED BY THEIR LORDSHIPS IN THE EASTERN INVESTMENT'S CASE (S UPRA), THAT THE MONEY WAS EXPENDED 'NOT OF NECESSITY AND WITH A VIE W TO DIRECT AND IMMEDIATE BENEFIT TO THE TRADE BUT VOLUNTARILY AND ON THE GROUND OF COMMERCIAL EXPEDIENCY, AND IN ORDER TO FACILITATE T HE CARRYING ON OF 20 ITA NO.196/AGRA/2011 A.Y. 2007-08 THE BUSINESS.' EVEN NECESSITY FOR THE EXPENDITURE D OES NOT ENTER THIS TEST. THE QUESTION REFERRED TO US IS ANSWERED IN THE NEGA TIVE AND IN FAVOUR OF THE ASSESSEE 18. IN THE LIGHT OF THE ABOVE DISCUSSION AND IN THE PREMISE OF ABOVE NOTICED WELL ESTABLISHED PRINCIPLE, LET US PROCEED TO EXAMINE TH E FACTS OF THE CASE UNDER CONSIDERATION WHETHER THE NECESSARY CONDITION EXIST ED TO PAY THIS LABOUR EXPENSES UNDER SECTION 37(1) OF THE ACT AND WHETHER THE ASSE SS HAS DISCHARGED THE BURDEN CAST ON IT. AS STATED ABOVE THAT THE A.O. DID NOT COMMENT ON THE G.P. DECLARED BY THE ASSESSEE WHEREAS CONSIDERING THE NATURE OF BUSI NESS OF THE ASSESSEE THE LABOUR EXPENDITURE IS DIRECTLY RELATED TO THE ISSUE. FURT HER THE A.O. HAS SELECTED ONLY FEW MONTHS WHERE ACCORDING TO THE A.O. THE ASSESSEE HAS CLAIMED EXPENDITURE WHEREAS THE ASSESSEE MAINTAINED REGULAR BOOKS OF ACCOUNT AN D THE LABOUR PAYMENTS WERE ACCOUNTED FOR ON THE BASIS OF ACCRUAL FOLLOWING MER CANTILE SYSTEM OF ACCOUNTING. THEREFORE, MERELY CONSIDERING LABOUR PAYMENT FOR ON E MONTH AND COMING TO THE CONCLUSION THAT THE ASSESSEE HAS CLAIMED EXCESS EXP ENDITURE; SUCH CONCLUSION IS AN ERRONEOUS ONE BECAUSE IN MERCANTILE/ACCRUAL SYSTEM OF ACCOUNTING, THE EXPENDITURES ARE REQUIRED TO BE ACCOUNTED FOR ON AC CRUAL BASIS. IN OTHER WORDS, SOME TIME PRODUCTION MAY BE LESSER OR SOME TIME IT IS NOT USED FULLY COMPARED TO PRODUCTION AND LABOUR PAYMENT PERIODICALLY BECAUSE THE LABOUR EXPENSES ARE 21 ITA NO.196/AGRA/2011 A.Y. 2007-08 ACCOUNTED FOR ON THE BASIS OF ITS ACCRUAL WHICH MAY NOT BE NECESSARY THAT IT IS ACCOUNTED SIMULTANEOUSLY WITH THE PRODUCTION. FOR EXAMPLE, IF THERE IS A DISPUTE ABOUT LABOUR PAYMENT, IT MAY BE ACCOUNTED FOR LATER ON WHEN THE DISPUTE IS SETTLED. THE ASSESSEE HAS FURNISHED THE DETAILED SUBMISSIONS BEFORE THE A.O. VIDE THEIR REPLY DATED 30 TH NOVEMBER 2009. THE SAID REPLY HAS BEEN REPRODUCED BY THE CIT(A) IN HIS ORDER FROM PAGE NOS.38 TO 41. THE AS SESSEE HAS FURNISHED THE DETAILED CHART SHOWING MONTH-WISE DETAILS. IT WAS SUBMITTED BY THE ASSESSEE THAT IN THE MONTH OF OCTOBER ENTIRE AMOUNT OF RS.4,24,160/- RELATES TO EMBROIDERY CHARGES. THE NORMAL WAGES OF OCTOBER 2006 IS PAID IN THE MON TH OF NOVEMBER, 2006. IT WAS ALSO SUBMITTED BY THE ASSESSEE THAT THE ASSESSE E WAS MANUFACTURING AND EXPORTING FIRST 3 TYPES OF LADIES SHOES AND BOOTS A ND CERTAIN ITEMS WERE PURCHASED AND SOLD BUT NOT MANUFACTURED. IT WAS ALSO EXPLAIN ED THAT THE ASSESSEE INCURRED ADDITIONAL WAGES EXPENSES ON MANUFACTURING OF EMBRO IDERY SANDALS. THE ASSESSEE FURNISHED DETAILS IN THIS REGARD OF TOTAL NUMBER OF PAIRS AND AVERAGE COST PER PAIR. THE ASSESSEE SUBMITTED THAT STATEMENT OF SHRI PURSH OTTAM AGARWAL, WORK SUPERVISOR HAS NO RELEVANCE IN SO FAR AS DURING THE PROCEEDINGS FOR THE YEAR UNDER ASSESSMENT, IT WAS SUBMITTED THAT HE WAS NOT WORK S UPERVISOR IN A.Y. 2007-08. PURCHASE AND SALES BILLS ARE FULLY VERIFIED. ACCOU NTS ARE DULY AUDITED BY THE CHARTERED ACCOUNTANT. SALES AS WELL AS G.P. RATES ARE BETTER THAN THE PRECEDING YEAR. THE APEX COURT IN THE CASE OF CIT VS. DHANRA JGIRJI RAJA NARASINGIRJI, 91 ITR 22 ITA NO.196/AGRA/2011 A.Y. 2007-08 544 (SC) HELD THAT IT IS NOT OPEN TO THE DEPARTMEN T TO PRESCRIBE WHAT EXPENDITURE AN ASSESSEE SHOULD INCUR AND IN WHAT CIRCUMSTANCES HE SHOULD INCUR THAT EXPENDITURE. EVERY BUSINESSMAN KNOWS HIS INTEREST B EST. IN THE CASE UNDER CONSIDERATION, THE ASSESSEE HAS DISCHARGED THE BURD EN BY SUBMITTING VARIOUS EXPLANATIONS WITH THE DOCUMENT THAT THE EXPENDITURE S WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. SINCE THE RE IS NO CONTRARY MATERIAL ON RECORD, IN THE LIGHT OF THE FACTS, WE DELETE THE AD DITION OF RS.17,85,900/- MADE BY THE A.O. AND SUSTAINED BY THE CIT(A). 19. GROUND NO.4(III) PERTAINS TO THE ADDITION OF RS .61,51,766/- OUT OF WAGES EXPENSES INVOKING SECTION 40(A)(IA) OF THE ACT. DU RING THE ASSESSMENT PROCEEDINGS, THE A.O. NOTICED THAT THE ASSESSEE MAD E PAYMENT OF RS.61,51,766/- (78,57,596 17,06,220) WITHOUT DEDUCTION OF TAX. THE A.O. WAS OF THE VIEW THAT SECTION 194C IS APPLICABLE AND SINCE THE ASSESSEE D ID NOT DEDUCT TAX AT SOURCE, THEREFORE, SECTION 40(A)(IA) OF THE ACT IS APPLICAB LE. THE A.O. HAS REDUCED THE AMOUNT TO RS.17,06,220/- AS THIS ADDITION HAS ALREA DY BEEN MADE WHILE MAKING BOGUS LABOUR EXPENSES WHICH COVERED IN THE ADDITION OF RS.17,85,900/-. THE A.O. WAS OF THE VIEW THAT THE SAID PAYMENT WAS MADE TO T HE SUB-CONTRACTOR. THE CIT(A) CONFIRMED THE ADDITION MADE BY THE A.O. 23 ITA NO.196/AGRA/2011 A.Y. 2007-08 20. THE LD. AUTHORISED REPRESENTATIVE SUBMITTED THA T THE ASSESSEE HAS PAID WAGS AGGREGATING TO RS.78,57,596/- WHEREAS THE A.O. HAS MADE ADDITION OF RS.81,17,666/- AS UNDER :- (PAGE NO.42 CIT(A)) (I) DISALLOWANCE OF WAGES BEING NOT INCURRED WHOLL Y AND RS.17,85,900/- EXCLUSIVELY FOR BUSINESS PURPOSES (II) ADDITION OF WAGES BY INVOKING THE PROVISIONS O F RS.61,51,766/- SECTION 40(IA) OF THE INCOME TAX ACT READ WITH SECTION 194-C OF THE IT ACT. (III) ADVANCE TO WORKERS & EMPLOYEES NOT FOR BUSINE SS RS.1,80,000/- PURPOSES ----------------- RS.81,17,666/- ----------------- 21. THE LD. AUTHORISED REPRESENTATIVE SUBMITTED THA T THE A.O. APPEARS TO BE PRE- DETERMINED TO ACHIEVE A TARGET FIXED IN MIND WITHOU T CONSIDERING THE FACTS OF THE CASE. THE LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT THE WAGES WERE PAID TO THE WORKERS, THEREFORE, THE PAYMENTS WERE NOT SUBJECT T O PROVISION OF SECTION 194C OF THE ACT. THE LD. AUTHORISED REPRESENTATIVE SUBMITT ED THAT THE REVENUE AUTHORITIES WITHOUT APPRECIATING THE FACTS MADE THE ADDITION. THE LD. AUTHORISED REPRESENTATIVE REFERRING VARIOUS PAGES OF PAPER BOO K DEMONSTRATED THAT INDIVIDUAL PAYMENTS TO LABOURERS WERE MADE AND SUMS OF TOTAL O F WEEKLY PAYMENT IS POSTED IN CASH BOOK FOR THE DAY. THE LD. AUTHORISED REPRESEN TATIVE SUBMITTED THAT THE A.O. RELIED UPON THE STATEMENT OF SHRI PURSHOTTAM AGARWA L WHO WAS APPOINTED AS 24 ITA NO.196/AGRA/2011 A.Y. 2007-08 PRODUCTION SUPERVISOR DURING THE A.Y. 2010-11. ASS ESSEE PRODUCED THE VOUCHERS FOR PAYMENT OF WAGES AND BOOKS OF ACCOUNT. THE LD. AUTHORISED REPRESENTATIVE SUBMITTED THAT THE ASSESSEE HAS FURNISHED COMPLETE DETAILS VIDE ASSESSEES SUBMISSION DATED 9 TH SEPTEMBER, 2009 WHEREIN THE ASSESSEE FILED DETAILS OF PAYMENT OF WAGES. THE LD. AUTHORISED REPRESENTATIV E SUBMITTED THAT THE ASSESSEE DID NOT MAKE PAYMENT TO THE CONTRACTOR. THE A.O. M ADE THE ADDITION WITHOUT APPRECIATING THE FACTS THAT THE LABOURERS WERE ARRA NGED BY THE CONTRACTORS, AND THE WAGES WERE PAID TO INDIVIDUAL KARIGARS IN THE PRESE NCE OF THE CONTRACTOR WHO SETTLES THE ACCOUNT WITH EACH LABOURER DIRECTLY. THE ASSES SEE HAS MAINTAINED RELEVANT COMPLETE RECORDS AND THE SAME WERE PRODUCED BEFORE THE A.O. 22. THE LD. DEPARTMENTAL REPRESENTATIVE, ON THE OTH ER HAND, RELIED UPON THE ORDERS OF THE REVENUE AUTHORITIES. 23. WE HAVE HEARD THE LD. REPRESENTATIVES OF THE PA RTIES AND RECORDS PERUSED. IN THE LIGHT OF DETAILED DISCUSSIONS MADE IN PARAGRAPH NOS.17 & 18 OF THIS ORDER, WE NOTICE THAT THE ASSESSEE HAS DISCHARGED THE BURDEN IN THIS REGARD BY FURNISHING DETAILS OF BOOKS OF ACCOUNT AND OTHERS THAT THE PAY MENTS WERE MADE TO THE INDIVIDUAL LABOURERS AND NOT TO THE CONTRACTOR. TH E PAYMENT OF WAGES OF INDIVIDUAL LABOURER IS SUPPORTED BY BOOKS OF ACCOUNT REGULARLY MAINTAINED BY THE ASSESSEE. 25 ITA NO.196/AGRA/2011 A.Y. 2007-08 LD. AUTHORISED REPRESENTATIVE REFERRED PAGE NOS.213 TO 220 WHEREIN DATE-WISE DETAILS OF LABOURER PAYMENTS WERE FILED AND THE SAM E HAS BEEN PLACED ON RECORD IN THE PAPER BOOK. ON A PERUSAL OF DETAILS OF THE WAG ES, WE NOTICE THAT THE DETAILS CONTAINED DATE, NAME OF LABOUR & AMOUNT PAID. IT A PPEARS FROM THE DETAILS THAT PAYMENTS WERE MADE TO THE INDIVIDUAL LABOURERS. WH EN THE ASSESSEE MADE PAYMENT TO INDIVIDUAL LABOURER, SECTION 194C IS NOT APPLICABLE. THE CASE OF THE A.O. IS ON PRESUMPTION BASIS. SINCE THE LABOURERS HAVE BEEN ARRANGED THROUGH CONTRACTOR, THEREFORE, PAYMENT WAS MADE TO THE CONT RACTOR. THE ASSESSEE HAS DEMONSTRATED THAT THE LABOUR PAYMENTS WERE MADE TO INDIVIDUAL LABOURER. IN THE LIGHT OF THE FACT, WE ARE OF THE CONSIDERED VIEW TH AT SECTION 194C OF THE ACT IS NOT APPLICABLE. SINCE 194C OF THE ACT IS NOT APPLICABL E, THEREFORE, THERE IS NO QUESTION OF DISALLOWING THESE EXPENSES UNDER SECTION 40(A)(I A) OF THE ACT. WE, THEREFORE, DELETE THE ADDITION OF RS.61,51,766/-. 24. GROUND NO.4(IV) PERTAINS TO THE ADDITION OF RS. 1,87,000/-. DURING THE ASSESSMENT PROCEEDINGS, THE A.O. NOTICED THAT THE A SSESSEE HAS GIVEN ADVANCE TO 11 PERSONS WHICH HAVE BEEN SHOWN IN THE CASH BOOK. TH E A.O. NOTICED THAT THE ASSESSEE DID NOT REFLECT THEIR NAMES IN THE BALANCE SHEET. THEREFORE, THIS INDICATES THAT NO SUCH ADVANCES HAVE BEEN GIVEN TO THESE PERS ONS. THE ASSESSEE HAS FAILED TO PRODUCE THOSE PARTIES FOR EXAMINATION. THEREFORE, THE A.O. WAS OF THE VIEW THAT 26 ITA NO.196/AGRA/2011 A.Y. 2007-08 THE ASSESSEE HAS FALSELY CREDITED THE AMOUNT OF RS. 1,87,000/- IN CASH BOOK. ADDITION MADE BY THE A.O. HAS BEEN CONFIRMED BY THE CIT(A). 25. THE LD. AUTHORISED REPRESENTATIVE SUBMITTED THA T THE ASSESSEE HAS FURNISHED DETAILS BY REPLY DATED 30 TH NOVEMBER, 2009. BEFORE THE A.O. IT WAS EXPLAINED THAT THESE ADVANCES STAND REFLECTED IN THE BALANCE SHEET UNDER THE HEAD SUNDRY CREDITORS RECOVERABLE. LD. AUTHORISED REPRESENTATI VE SUBMITTED THAT IT WAS ALSO SUBMITTED BEFORE THE A.O. THAT THESE ADVANCES HAVE NOT BEEN DEBITED TO THE TRADING AND P&L ACCOUNT AND NOT CLAIMED AS DEDUCTION. THES E ARE THE ADVANCES IN ACCORDANCE WITH COMMERCIAL EXPEDIENCY AND THE SAME WERE ADJUSTED IN NEXT YEAR. 26. THE LD. DEPARTMENTAL REPRESENTATIVE, ON THE OTH ER HAND, RELIED UPON THE ORDERS OF REVENUE AUTHORITIES. 27. WE HAVE HEARD THE LD. REPRESENTATIVES OF THE PA RTIES AND RECORDS PERUSED. THE ADMITTED FACTS OF THE CASE ARE THAT THE ADVANCE S WERE SHOWN BY THE ASSESSEE AND THE SAME WERE ADJUSTED IN THE SUBSEQUENT YEAR. THE A.O HAS DRAWN INFERENCE MERELY ON THE GROUND THAT THE ASSESSEE HAS FAILED T O PRODUCE THOSE 11 PARTIES. IN THIS REGARD, IT IS TO STATE THAT IT IS NOT NECESSAR Y TO PRODUCE ALL THE LABOURERS WHICH MAY BE THOUSANDS IN NUMBER CONSIDERING THE NATURE O F BUSINESS OF THE ASSESSEE. 27 ITA NO.196/AGRA/2011 A.Y. 2007-08 THE ASSESSEE HAS ACCOUNTED FOR SUCH ADVANCES ON DAY -TO-DAY BASIS IN THE REGULAR BOOKS OF ACCOUNTS MAINTAINED ON ACCEPTED ACCOUNTING PRINCIPLE. THE A.O. DID NOT POINT OUT THAT WHICH ENTRIES WERE INCORRECT OR NOT IN ACCORDANCE WITH ACCOUNTING PRINCIPLE, RATHER THE A.O. HAS ACCEPTED THAT THESE ADVANCES HAVE BEEN SHOWN IN THE CASH BOOK. WHEN THE ASSESSEE HAS GIVEN ADVANCES, W E ARE OF THE VIEW THAT SUCH ADDITION IS NOT WARRANTED ON THE BASIS OF PRESUMPTI ON. WE, THEREFORE, DELETE THE ADDITION OF RS.1,87,000/-. 28. GROUND NO.4(V) PERTAINS TO THE ADDITION OF RS.3 5,202/-. THE A.O. MADE THE ADDITION OF RS.35,202/- BEING 25% OUT OF EXPENSES U NDER THE HEAD CONSUMABLE TOOLS AND SAMPLE DEVELOPMENT EXPENSES ON THE GROUND THAT THE ASSESSEE DID NOT PRODUCE THE SUPPORTING BILLS AND VOUCHERS. THE ADD ITION MADE BY THE A.O. HAS BEEN CONFIRMED BY THE CIT(A). 29. WE HAVE HEARD THE LD. REPRESENTATIVES OF THE PA RTIES AND RECORDS PERUSED. THE LD. AUTHORISED REPRESENTATIVE DID NOT ARGUE MUC H ON THE ISSUE. HE SIMPLY SUBMITTED THAT THIS IS ADHOC DISALLOWANCE. 30. AFTER HEARING THE LD. DEPARTMENTAL REPRESENTATI VE, WE NOTICE THAT THE ASSESSEE HAS FAILED TO FURNISH SUPPORTING PRIMARY E VIDENCES I.E. CASH MEMOS AND 28 ITA NO.196/AGRA/2011 A.Y. 2007-08 BILLS RELATING TO THE EXPENSES UNDER THE HEAD CONSU MABLE TOOLS AND SAMPLE DEVELOPMENT EXPENSES. IN ADDITION TO THAT, WE FIND THAT THIS ADDITION IS JUSTIFIABLE IN THE LIGHT OF THE FACT THAT THE ASSESSEE DID NOT FURNISH THE PRIMARY EVIDENCE AND TO COVER UP THE PETTY DEFECTS THE ADDITION OF RS.35,20 2/- IS CONFIRMED AND ACCORDINGLY ORDER OF THE CIT(A) ON THE ISSUE IS CONFIRMED. 31. AS REGARDS GROUND NO.2, INVOKING SECTION 145(3) OF THE ACT THE LD. AUTHORISED REPRESENTATIVE DID NOT ARGUE MUCH ON THE ISSUE. 32. AFTER HEARING THE LD. DEPARTMENTAL REPRESENTATI VE AND AFTER CONSIDERING TOTALITY OF THE FACTS AND IN VIEW OF THE DISCUSSION S MADE WHILE DEALING ADDITIONS OUT OF EXPENSE AND CLOSING SOCK, WE CONFIRM THE ORDER O F CIT(A) ON THE ISSUE. ACCORDINGLY, THIS GROUND OF THE APPEAL OF THE ASSES SEE IS DISMISSED. 33. IN THE RESULT, APPEAL OF THE ASSESSEE IS PARTLY ALLOWED. (ORDER PRONOUNCED IN THE OPEN COURT) SD/- SD/- (BHAVNESH SAINI) (A.L. GEHLOT) JUDICIAL MEMBER ACCOUNTANT MEMBER PBN/* 29 ITA NO.196/AGRA/2011 A.Y. 2007-08 COPY OF THE ORDER FORWARDED TO: 1. APPELLANT 2. RESPONDENT 3. CIT (APPEALS) CONCERNED 4. CIT CONCERNED 5. D.R., ITAT, AGRA BENCH, AGRA 6. GUARD FILE. BY ORDER SR. PRIVATE SECRETARY INCOME-TAX APPELLATE TRIBUNAL, AGRA TRUE COPY