BHANSALI & CO., MUMBAI V. ADDL CIT 16(3), MUMBAI

ITA 2282/MUM/2010

• Counselvise Citation: [2012] 119 COUNSELVISE.COM (IT) 9217 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 8 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-12-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: G
• Next Hearing Date: 11-12-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 22-03-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH G, MUMBAI BEFORE SHRI RAJENDRA SINGH , ACCOUNTANT MEMBER AND SHRI VIVEK VARMA, JUDICIAL MEMBER ITA NO. 2282/MUM/2010 (ASSESSMENT YEAR: 2005-06) M/S. BHANSALI & CO., 640/646 PANCHRATNA, MAMA PARMANAND MARG, MUMBAI-400 004 PAN: AACFB 8643 C VS ADDL. COMMISSIONER OF INCOME-TAX RANGE-16(3), MATRU MANDIR, TARDEO ROAD, MUMBAI -400 034 (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI APURVA SHAH RESPONDENT BY : SHRI MOHIT JAIN DATE OF HEARING :11-12-2012 DATE OF PRONOUNCEMENT :19-12-2012 O R D E R PER VIVEK VARMA, JM: THE APPEAL IS FILED BY THE ASSESSEE ARISES FROM THE ORDER OF CIT(A) 27, MUMBAI, DATED 27.01.2010, WHEREIN, THE ASSESSEE HA S RAISED THE FOLLOWING GROUNDS: THE COMMISSIONER OF INCOME-TAX (APPEALS) 27, MUMBA I, HAS ERRED- 1. IN CONFIRMING THE DISALLOWANCE UNDER SECTION 40A (2)(B) IN RESPECT OF LABOUR CHARGES PAID TO AKASH DIAMONDS WITHOUT APPRE CIATING THE RELEVANT FACTS OF THE CASE AND ON THE BASIS OF VARI OUS PRESUMPTIONS AND SURMISES 2. IN NOT APPRECIATING THAT THE SAID DISALLOWANCE W AS MADE WITHOUT ANY ADEQUATE BASIS AND WITHOUT ANY EXTERNAL COMPARABLES . 3. IN HOLDING THAT THE APPELLANT HAD ADMITTED TO A PORTION OF THE EVIDENCE. 4. IN NOT APPRECIATING THE APPELLANTS SUBMISSIONS THAT REASONABLENESS OR OTHERWISE HAD TO BE VIEWED BY CONSIDERING THE EXPEN SES ACTUALLY INCURRED BY AKASH DIAMONDS AND THAT HENCE THE COMPA RISON OF RATES IN SURAT AND DEESA AND OTHER SUCH QUERIES WERE ACTUALL Y IRRELEVANT IN THE MATTER. 5. WITHOUT PREJUDICE, THE SAID DISALLOWANCE IS EXCE SSIVE AND NEEDS TO BE SUBSTANTIALLY REDUCED. 2. THE SOLITARY ISSUE INVOLVED IS WITH REGARD TO THE DISALLOW ANCE UNDER SECTION 40A(2)(B) IN RESPECT TO LABOUR CHARGES PAID B Y THE ASSESSEE TO ITS VENDOR AT DEESA. M/S. BHANSALI & CO. ITA NO. 2282/MUM/2010 2 3. THE FACTS ARE THAT THE ASSESSEE IS IN THE BUSINESS O F MANUFACTURING AND TREADING OF CUT AND POLISHED DIAMONDS. TH E ASSESSEE HAS ENGAGED AAKASH DIAMONDS, THE ONLY VENDOR FOR DOING ITS CUTTING AND POLISHING OF DIAMONDS. 4. AAKASH DIAMONDS OPERATES ITS FACILITIES AT SURAT AND DE ESA. IN THE YEAR UNDER CONSIDERATION, THE ASSESSEE PAID JOB CH ARGES TO AAKASH WHICH AMOUNTED TO RS. 9,14,75,525/-, WHO WAS DOING THE JOB WORK ONLY FOR THE ASSESSEE. 5. IN THE ASSESSMENT PROCEEDINGS, THE AO NOTICED THAT THE ASSESSEE AND AAKASH WERE RELATED PARTIES AND THUS THE PROVISIONS OF SECTION 40A(2)(B) WOULD GET ATTRACTED AND THE OTHER THING HE NOT ICED WAS THAT THE AVERAGE LABOUR CHARGES OF RS. 523/- PER CARAT IN TH E LAST YEAR HAD INCREASED TO RS. 636/- PER CARAT IN THE CURRENT YEAR. E VEN IN THE INTERSE COMPARISON, THERE WAS A HUGE FLUCTUATION OF LABOUR CHARGES PAID, I.E. FROM RS. 525/- PER CARAT TO RS. 800/- PER CARAT . THIS FLUCTUATION, ACCORDING TO THE AO, HAD NOT BE SUBSTANTIATED BY THE ASSESSEE, AS NO DISTINCTION HAS BEEN DRAWN WITH REGARD T O CUT, COLOUR, SIZE AND CLARITY OF DIAMONDS. THE AO ALSO NOTED THAT THE LABOUR CHARGES PAID AT SURAT AND AT DEESA WERE ALSO AT VARIAN CE. ACCORDING TO THE OBSERVATIONS OF THE AO, THE AVERAGE RATE PAID FOR JO B WORK AT SURAT WAS COMING AT RS. 588.21, WHEREAS AT DEESA, IT WAS COMING AT RS. 666.38. THE AO, THEREFORE, ACCEPTED THE LABOUR CHARGES P AID BY THE ASSESSEE AT SURAT, BUT, ESTIMATED THE LABOUR CHARGES A T DEESA AT RS. 600/- PER CARAT AND ADDED THE BALANCE OF RS. 66.38 PER CARAT, WHICH CAME AT RS. 43,97,624 TO THE INCOME OF THE ASSESSEE. 6. THE ASSESSEE APPROACHED THE CIT(A), WHO AFTER CONSIDE RING THE DETAILED SUBMISSIONS MADE BEFORE HIM AND THE AO, REJECTED THE APPEAL OF THE ASSESSEE ON THIS ISSUE. THE CIT(A) POINTED OUT THAT, M/S. BHANSALI & CO. ITA NO. 2282/MUM/2010 3 THIS IS JUST AN ARRANGEMENT MADE BETWEEN THE 2 FIR MS TO DECREASE THE LIABILITY OF TAXATION OF THE 2 FIRMS AND INFLATE TH E EXPENSES. NO EXPLANATION HAS BEEN GIVEN AS TO WHY THE LABOUR COS T WAS MUCH MORE AT DESSA THAN AT SURAT AND SUBSEQUENTLY AN EXPLANAT ION WAS OFFERED WHICH WAS CONTRADICTORY IN NATURE THAT THE LABOUR C OST AT SURAT WAS HIGHER THAN THAT AT DESSA. THEY HAVE GIVEN NO ANALY SIS OF LABOUR, WAGES, ETC. PAID AND COST OF CUTTING AND POLISHING OF DIAMONDS. IF THE LABOUR CHARGES AT SURAT WERE MUCH HIGHER THEN WHY W AS THE WORK NOT DONE AT DESSA. WHY DID THE APPELLANT GIVE HIGHER CH ARGES AT THE DESSA BRANCH WHEN THE SAME COULD HAVE GOT IS DONE AT A LO WER COST AT SURAT BRANCH? THEY HAVE NOT GIVEN ANY DETAILS OF LABOUR C HARGES PAID TO OUTSIDE PARTIES AND WHAT IS THE COST OF LABOUR FROM THE LAST TO THIS YEAR. THIS AGREEMENT BETWEEN THE 2 PARTIES AS STATED EARL IER WAS JUST TO BENEFIT EACH OTHER AS IT BELONGED TO THE SAME PEOPL E AND THE 2 FIRMS HAD BEEN CREATED SO THAT LABOUR CHARGES COULD BE INFLAT ED IN THE OTHER FIRM AND AS ADMITTED BY THE APPELLANT HIMSELF, THE LABOU R EXPENSES WERE EXCESSIVE, I FIND THAT THE AO HAS MADE A VERY REASO NABLE DISALLOWANCE OF RS. 43,97,624/- CONSIDERING THE TURNOVER OF RS. 189,85,83,474/- OF THE APPELLANT AND RS. 9,14,75,525/- PAID TO M/S AKA SH DIAMONDS, THE ADDITION IS TOTALLY JUSTIFIED AND IN ABSENCE OF ANY PROPER REPLY AND JUSTIFICATION OF THE APPELLANT, THE SAME IS CONFIRM ED. 7. THE CIT(A), THEREFORE, CONFIRMED THE ADDITION. 8. AGGRIEVED, THE ASSESSEE IS NOW BEFORE THE ITAT. 9. BEFORE US, THE AR SUBMITTED THAT THE ASSESSEE HAD E NGAGED AAKASH DIAMONDS AS ITS ONLY SOURCE FOR CUTTING AND POLISH ING OF DIAMONDS AND WHICH HAD ITS FACILITIES AT TWO PLACES, I.E. AT SU RAT & DEESA AND THE AR FURTHER STATES/REITERATES THE ASSESS EE WAS FULLY JUSTIFIED TO HAVE PAID THE REGULAR LABOUR CHARGES TO AAKA SH, WHICH WERE PREVAILING AT THOSE PLACES. HE FURTHER SUBMITTED THA T HAD THE ASSESSEE NOT APPOINTED AAKASH AS ITS MANUFACTURING VEND OR, THE ASSESSEE WOULD HAVE HAD TO SET UP ITS OWN FACILITY(S), WHICH IT HAD OUTSOURCED COMPLETELY. THE AR SUBMITTED THAT WHATEVER EXPENSES HAD BEEN INCURRED BY AAKASH WOULD HAVE HAD TO BE BORNE BY THE ASSESSEE, HAD THE MANUFACTURING WERE NOT OUTSOURCED. HE FURTHER SUBMITTED THAT IN ANY CASE, THE JOB WORK CHARGES PAID TO AAKASH WAS FULLY JUSTIFIED. 10. THE DR ON THE OTHER HAND SUPPORTED THE ACTION OF THE REVENUE AUTHORITIES. M/S. BHANSALI & CO. ITA NO. 2282/MUM/2010 4 11. WE HAVE HEARD THE ARGUMENTS IN DETAIL AND WE FIND TH AT MR. MAHESH BHASALI, PARTNER OF THE ASSESSEE FIRM IS ALSO A PART NER IN 75% RATIO IN AAKASH, HENCE, THE ASSESSEE AND THE VENDOR, I.E. AAKASH ARE ASSOCIATES AND PROVISIONS OF SECTION 40A(2)(B) ARE ATTRACTED . ON THE ISSUE OF JUSTIFICATION OF ADDITION MADE BY THE AO AND SUSTAIN ED BY THE CIT(A), WE FIND FROM THE IMPUGNED ORDER THAT THE ASSESSEE HAD, IN FACT, ACCEPTED THAT SOME ADDITION COULD BE JUSTIFIED, THE QUESTIO N IS HOW MUCH, I.E. RS 5,64,000 AS ADMITTED BY THE ASSESSEE OR RS. 4 3,97,629/- AS COMPUTED BY THE AO. SINCE THE ASSESSEE HAS ACCEPTE D TO SOME ADDITION, IN THE SUBMISSIONS MADE BEFORE THE CIT(A), WE CANNO T NOW, ACCEPT THAT THERE CANNOT BE ANY ADDITION. THIS OBSERVAT ION GATHERS STRENGTH FROM THE ORDER OF THE CIT(A), WHEREIN HE OBSERVE S, THEY HAVE GIVEN NO ANALYSIS OF LABOUR, WAGES, ETC. PAID AND COST OF CUTTING AND POLISHING OF DIAMONDS.. . 12. IN OUR OPINION, NEITHER THE ASSESSEE HAS PROVIDED AN Y COMPARABLE RATES TO THE REVENUE AUTHORITIES NOR THE RE VENUE AUTHORITIES HAVE MADE ANY ATTEMPT EITHER BY ASKING THE ASSESSEE TO PROVIDE FOR THE COMPARABLE NOR THEY SUO MOTO COLLECTED ANY DATA FROM THE MARKET. WHAT THE REVENUE AUTHORITIES HAVE DONE IS THAT THEY HAVE RELIED ON THE INTERNAL COMPARABLE ONLY TO ARRIVE AT A FIGUR E OF ESTIMATED CHARGES PER CARAT. IN FACT, THE AO SHOULD HAVE COLLECTE D INDEPENDENT DATA OR HAVE ASKED THE ASSESSEE TO PROVIDE COMPARABLE PERIODIC RATES PREVAILING IN THE MARKET AT DEESA TO SET THE BENCH MARK . THIS EXERCISE HAS NOT BEEN DONE BY THE AO OR BY THE CIT(A), WHICH ACC ORDING TO US, THE REVENUE AUTHORITIES SHOULD HAVE DONE TO ARRIVE AT S OME DEFINITE ESTIMATE. 13. IN THESE CIRCUMSTANCES, WE ARE OF THE OPINION THAT IN THE INTEREST OF JUSTICE TO BOTH THE SIDES, THE AO MUST MAKE ENQUIRIES AND EXAMINE THE COMPARABLE RATES FROM THE THIRD PARTIES AT DEESA AN D THEN M/S. BHANSALI & CO. ITA NO. 2282/MUM/2010 5 BENCHMARK THE AVERAGE JOB WORK RATE FOR THE FINANCIAL YE AR IN QUESTION AND COMPUTE THE JOB WORK CHARGES. 14. WE, THEREFORE, SET ASIDE THE ORDER OF THE CIT(A) ON TH E ISSUE OF ADDITION OF RS. 43,97,624/- WITH THE ABOVE DIRECTION TO THE AO, WHO SHALL AFFORD ADEQUATE AND REASONABLE OPPORTUNITY TO THE A SSESSEE TO PRESENT ITS CASE. 15. IN THE RESULT, THE APPEAL IS TREATED AS ALLOWED FOR S TATISTICAL PURPOSES. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH DECEMBER, 2012. SD/- SD/- (RAJENDRA SINGH) (VIVEK VARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI : 19 TH DECEMBER, 2012 COPY TO: 1) THE APPELLANT 2) THE RESPONDENT 3) THE CIT (A)-13, MUMBAI. 4) THE CIT 7, MUMBAI 5) THE DR, G BENCH MUMBAI BY ORDER / / TRUE COPY / / ASST. REGISTRAR, ITAT, MUMBAI *CHAVAN