DCIT - 8(3)(1), MUMBAI V. TROPICAL CLOTHING CO. P. LTD., MUMBAI

ITA 2364/MUM/2016

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 6763 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-06-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: Not Allotted
• Assessment Year: 2006-2007
• Appeal Filed On: 29-04-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: V VIDHYADHAR
• Assessee Lawyers: SUNIL A DESAI
• Keywords: Earning of tax free income
• Section: 14A

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'G' BENCH, MUMBAI BEFORE SHRI B.R. BASKARAN, ACCOUNTANT MEMBER AND SHRI AMARJIT SINGH, JUDICIAL MEMBER ITA NO. 2364/MUM/2016 (ASSESSMENT YEAR: 2006-07) D C I T - 8(3)(1) ROOM NO. 615, 6TH FLOOR AAYAKAR BHAVAN, M.K. ROAD MUMBAI 400020 VS. M/S. TROPICAL CLOTHING CO. P. LTD. NIRMAN KENDRA, UNIT NO. 4 DR. E. MOSES ROAD, MAHALAXMI MUMBAI 400011 PAN AABCT6119R APPELLANT RESPONDENT APPELLANT BY: SHRI V. VIDHYADHAR RESPONDENT BY: SHRI SUNIL A. DESAI DATE OF HEARING: 27.06.2018 DATE OF PRONOUNCEMENT: 27.06.2018 O R D E R PER B.R. BASKARAN, AM THIS APPEAL FILED BY REVENUE IS DIRECTED AGAINST TH E ORDER DATED 29.02.2016 PASSED BY THE CIT(A)-39, MUMBAI AND IT R ELATES TO A.Y. 2006-07. 2. REVENUE IS AGGRIEVED BY THE DECISION RENDERED BY TH E CIT(A) ON THE FOLLOWING ISSUES: - (A) DISALLOWANCE MADE UNDER SECTION 40A(2)(B) OF THE IN COME TAX ACT (HEREINAFTER THE ACT). (B) DISALLOWANCE MADE UNDER SECTION 14A OF THE ACT. 3. WE HAVE HEARD THE PARTIES AND PERUSED THE RECORD. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXPORT OF GARMENTS. THE FIRST ISSUE RELATES TO DISALLOWANCE MADE BY THE AO UNDER SECTION 40A(2)(A) OF THE ACT. THE AO NOTICED THAT THE ASSESSEE HAS PA ID JOB WORK CHARGES OF ` 7.42 CRORES TO A SISTER CONCERN NAMED M/S. CEBON AP PARELS PVT. LTD. THE AO ALSO NOTICED THAT THE ASSESSEE HAS ALSO DONE JOB WORK FOR M/S. CEBON ITA NO. 2364/MUM/2016 M/S. TROPICAL CLOTHING CO. P. LTD. 2 APPARELS PVT. LTD., AND HAS RECEIVED JOB WORK CHARG ES OF ` 1,92 CRORES FROM THE SAID CONCERN. THE AO NOTICED THAT THE ASSESSEE HAS PAID STITCHING CHARGES OF ` 95/- FOR PYJAMA SETS/WRAPS/NIGHT DRESS, ` 65/- FOR TROUSERS, ` 45/- FOR NIGHT SHIRT AND `3 0/- FOR SHORTS TO M/S. CEBON APPARELS PVT. LTD. THE AO HAS ALSO NOTICED THAT THE ASSESSEE HAS COLLECTED ` 95/- FOR PYJAMA SETS, ` 75/- FOR SHORT SETS, ` 65/- FOR PYJAMA (BOTTOM) AND ` 45/- FOR PYJAMA (TOP)/NIGHT SHIRT FROM M/S. CEBON APPARELS P VT. LTD. ON COMPARISON OF RATES THE AO WAS SATISFIED THAT JOB W ORK CHARGES FOR STITCHING THE GARMENTS PAID BY THE ASSESSEE AND ALS O COLLECTED BY THE ASSESSEE WERE IDENTICAL. HOWEVER, THE AO COMPUTED T HE AVERAGE RATE OF CHARGES PAID BY THE ASSESSEE BY CONSIDERING THE TOT AL JOB WORK CHARGES AND THE TOTAL NUMBER OF PIECES STITCHED. IT SO WORKED O UT THAT THE AVERAGE JOB WORK CHARGES PAID BY THE ASSESSEE WAS ` 70.52 PER PIECE AND THE AVERAGE STITCHING CHARGE RECEIVED BY THE ASSESSEE PER PIECE WAS ` 58.78. THE AO TREATED THE DIFFERENCE AS EXCESS PAYMENT AND ACCORD INGLY DISALLOWED A SUM OF ` 123.50 LAKHS UNDER SECTION 40A(2)(A) OF THE ACT. TH E AO FURTHER NOTICED THAT THE ASSESSEE HAS STITCHED BAGS FOR THE GARMENT S, BUT DID NOT CHARGE ANYTHING FROM ITS SISTER CONCERN. THE AO TOOK THE S TITCHING CHARGES FOR BAG AT RS.30/- PER BAG AND ACCORDINGLY ADDED A SUM OF R S.3.79 LAKHS. ACCORDINGLY THE AO DISALLOWED A SUM OF RS.127.30 LA KHS U/S 40A(2)(A) OF THE ACT. THE LEARNED CIT(A) DELETED THE SAME WITH T HE FOLLOWING OBSERVATION: - 9. AS REGARDS GROUND NO.6, IT IS NOTED THAT THE AO HAS MADE THE ADDITION ON THE PREMISE THAT THE ASSESSEE SHOULD HA VE USED ITS SURPLUS CAPACITY FOR PRODUCTION PURPOSE AND SHOULD NOT HAVE USED THE PRODUCTION FACILITY OF OTHER CONCERN. OTHERWISE THE AO IS OF THE VIEW THAT BOTH THE PARTIES MANUFACTURING FOR EACH OTHER, HAS CHARGED THE SAME RATE FOR VARIOUS ITEMS. THE APPELLANT HAS MADE A DETAILED SUBMISSION WHICH IS REPRODUCED ABOVE. LOOKING INTO THE ENTIRETY OF THE FACTS, IN MY OPINION, SINCE THE RATE CHARGED IS SAME FOR SIMILAR TYPE OF PRODUCT, THEREFORE, NO ADDITION ON THIS ACC OUNT IS CALLED FOR ON THE BASIS OF AVERAGE RATE. SIMILARLY, IN RESPECT OF THE BAGS, IT HAS BEEN STATED THAT AS PART OF THE AGREEMENT. THE PAJAMA SE TS ARE TO BE PACKED IN BAGS FOR THE PURCHASER AND THE PURCHASE P RICE INCLUDES COST OF BAGS. THE AO HAS ARBITRARY TAKEN THE VALUE AT RS .30/- FOR BAGS AND MADE ADDITION ACCORDINGLY. THE APPELLANT HAS DULY S UBMITTED THAT THE PRICE OF THE BAGS IS INCLUDED IN THE COST DURING TH E ASSESSMENT ITA NO. 2364/MUM/2016 M/S. TROPICAL CLOTHING CO. P. LTD. 3 PROCEEDINGS, THEREFORE, LOOKING IN TO THE FACTS OF THE CASE, I AM OF THE OPINION THAT THIS ADDITION CANNOT BE SUSTAINED. IN THE RE-SUIT, THIS GROUND OF APPEAL IS ALLOWED. 4. THE LEARNED D.R. STRONGLY SUPPORTED THE ORDER PASS ED BY THE AO. HE SUBMITTED THAT THE LD CIT(A) HAS DELETED THE ADD ITION WITHOUT MAKING DETAILED DISCUSSIONS. 5. THE LEARNED A.R., ON THE CONTRARY, SUBMITTED THAT T HE METHODOLOGY ADOPTED BY THE AO TO WORK OUT THE EXCESS PAYMENT IS NOT CORRECT. HE SUBMITTED THAT THE AO HAS COMPUTED THE AVERAGE RATE OF STITCHING CHARGE WITHOUT CONSIDERING THE PRODUCT MIX. HE SUBMITTED T HAT THE AVERAGE RATE OF STITCHING CHARGES WOULD VARY DEPENDING UPON THE QUA NTITY OF EACH OF THE DRESS STITCHED, SINCE THE STITCHING CHARGES DIFFER ON EACH OF THE GARMENT. HE SUBMITTED THAT COMPUTATION OF SIMPLE AVERAGE RAT E WOULD GIVE MISLEADING RESULTS. THE LEARNED A.R. FURTHER SUBMIT TED THAT THE AO HAS COMPARED THE INDIVIDUAL RATE OF STITCHING CHARGES F OR EACH OF THE GARMENT AND HAS RECORDED A FINDING THAT THE INDIVIDUAL RATE S FOR EACH OF THE DRESS CHARGED BY THE ASSESSEE AS WELL AS PAID BY THE ASSE SSEE IS ONE AND THE SAME. UNDER THESE SET OF FACTS, THE LEARNED A.R. SU BMITTED THAT THERE IS NO CHANCE OF MAKING EXCESS PAYMENT AS CONCLUDED BY THE AO. ACCORDINGLY HE SUBMITTED THAT THE ORDER PASSED BY THE LEARNED CIT( A) ON THIS ISSUE DOES NOT CALL FOR ANY INTERFERENCE. WITH REGARD TO THE S TITCHING OF BAGS, THE LD A.R SUBMITTED THAT THE SAME WAS INCLUDED IN THE STI TCHING CHARGES OF GARMENTS AND HENCE THE AO WAS NOT JUSTIFIED IN SEPA RATELY ESTIMATING THE SAME. 6. HAVING HEARD THE RIVAL SUBMISSIONS WE FIND MERIT IN THE SUBMISSIONS MADE BY THE LEARNED A.R. AS SUBMITTED BY HIM, THE A VERAGE RATE OF STITCHING CHARGES PAID BY THE ASSESSEE WOULD VARY I F THERE IS CHANGE IN THE PRODUCT MIX. FOR EXAMPLE, IF MORE QUANTITY OF GARME NTS HAVING HIGHER STITCHING CHARGE IS STITCHED, THE AVERAGE RATE OF S TITCHING CHARGE WOULD GO UP. ON THE CONTRARY, IF MORE QUANTITY OF GARMENTS H AVING LOWER STITCHING CHARGE IS STITCHED, THE AVERAGE RATE OF STITCHING C HARGE WOULD GO DOWN. HENCE WHAT ARE REQUIRED TO BE COMPARED IS THE SPECI FIC STITCHING CHARGES ITA NO. 2364/MUM/2016 M/S. TROPICAL CLOTHING CO. P. LTD. 4 COLLECTED AND PAID BY THE ASSESSEE IN RESPECT OF EA CH OF THE TYPE OF GARMENTS STITCHED. IN THE INSTANT CASE, THE AO HIMS ELF HAS GIVEN A FINDING THAT INDIVIDUAL STITCHING CHARGES PAID BY THE ASSES SEE AS WELL AS COLLECTED BY THE ASSESSEE IS IDENTICAL. HENCE THERE IS MERIT IN THE CONTENTIONS OF THE ASSESSEE THAT THERE IS NO SCOPE FOR MAKING ANY DISA LLOWANCE UNDER SECTION 40A(2)(A) OF THE ACT, AS THERE IS NO CASE OF MAKIN GANY EXCESS PAYMENT. ACCORDINGLY, WE ARE OF THE VIEW THAT THE ORDER PASS ED BY THE LEARNED CIT(A) DOES NOT CALL FOR ANY INTERFERENCE. 7. THE NEXT ISSUE RELATES TO THE DISALLOWANCE MADE BY THE AO UNDER SECTION 14A OF THE ACT. THE AO NOTICED THAT THE ASS ESSEE HAS RECEIVED DIVIDEND INCOME OF ` 234.46 LAKHS AND LONG TERM CAPITAL GAIN OF ` 235.22 LAKHS AND CLAIMED BOTH THE INCOME AS EXEMPT. THE AO FURTHER NOTICED THAT THE ASSESSEE HAS DISALLOWED A SUM OF ` 3.25 LAKHS BEING LEGAL AND PROFESSIONAL CHARGES, UNDER SECTION 14A OF THE ACT. THE AO NOTICED THAT THE ASSESSEE HAS INVESTED ITS FUNDS IN UNQUOTED MUT UAL FUNDS AS WELL IN QUOTED EQUITY SHARES. THE TOTAL VALUE OF INVESTMENT AS ON 31.03.2006 STOOD AT ` 1627.30 LAKHS. ACCORDINGLY THE AO COMPUTED THE DISA LLOWANCE UNDER SECTION 14A OF THE ACT BY APPLYING RULE 8D OF I.T. RULES AND DISALLOWED A SUM OF ` 12.56 LAKHS UNDER SECTION 14A OF THE ACT. BEFORE TH E CIT(A) THE ASSESSEE SUBMITTED THAT ITS INVESTMENTS ARE BEING MANAGED BY PORTFOLIO MANAGERS AND HENCE THE ASSESSEE HAS DISAL LOWED THE PORTFOLIO MANAGEMENT CHARGES PAID BY IT. IT WAS ALSO SUBMITTE D THAT THE OWN FUNDS AVAILABLE WITH IT IS IN FAR EXCESS OF THE VALUE OF INVESTMENT AND HENCE NO DISALLOWANCE OUT OF INTEREST EXPENDITURE IS CALLED FOR. ACCORDINGLY IT WAS SUBMITTED THAT, SINCE THE INVESTMENT PORTFOLIO WAS MANAGED BY PORTFOLIO MANAGERS, NO FURTHER EXPENSES NEED TO BE DISALLOWED . IT WAS SUBMITTED THAT AN IDENTICAL ISSUE WAS CONSIDERED BY THE LEARN ED CIT(A) IN A.Y. 2008- 09 AND THE LEARNED CIT(A) HAS DELETED THE ADDITION MADE BY THE AO ON SIMILAR FACTS. THE FIRST APPELLATE AUTHORITY WAS CO NVINCED WITH THE CONTENTIONS OF THE ASSESSEE AND ACCORDINGLY DELETED THE DISALLOWANCE MADE BY THE AO. ITA NO. 2364/MUM/2016 M/S. TROPICAL CLOTHING CO. P. LTD. 5 8. THE LEARNED D.R. SUPPORTED THE ORDER PASSED BY THE AO AND THE LEARNED A.R. SUPPORTED THE ORDER PASSED BY THE LEAR NED CIT(A). 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. WE NOTICED THAT THE LEARNED CIT(A) HAS GIVEN A FINDING THAT THE OWN FUNDS AVAILABLE WITH THE ASSESSEE IS IN FAR EXCESS OF THE VALUE OF INVESTMENT AND HENCE THE DISALLOWANCE OF INTEREST EXPENDITURE IS N OT CALLED FOR AS PER THE DECISION RENDERED BY THE HON'BLE BOMBAY HIGH COURT IN THE CASE OF HDFC BANK LTD. 366 ITR 505. WITH REGARD TO OTHER EXPENS ES, EVEN THOUGH IT IS THE CONTENTION OF THE ASSESSEE THAT ITS INVESTMENTS ARE BEING MANAGED BY PORTFOLIO MANAGERS AND HENCE ONLY THE EXPENDITURE I NCURRED IN RELATION TO EXEMPT INCOME IS THE PORTFOLIO MANAGEMENT CHARGES O F ` 3,25,703/-, YET IT CANNOT BE SAID THAT THE ASSESSEE DID NOT USE ITS OT HER RESOURCES IN CONNECTION WITH MANAGEMENT OF THE INVESTMENTS. ACCO RDINGLY WE ARE OF THE VIEW THAT A PORTION OF ADMINISTRATIVE EXPENSES ALSO NEED TO BE DISALLOWED UNDER SECTION 14A OF THE ACT. THERE IS NO DISPUTE WITH REGARD TO THE FACT THAT THE PROVISIONS OF RULE 8D WILL NOT APPLY TO TH E YEAR UNDER CONSIDERATION, IN VIEW OF THE DECISION OF HONBLE B OMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MANUFACTURING CO LTD (328 IT R 81). ACCORDINGLY, WE ARE OF THE VIEW THAT THE AGGREGATE AMOUNT OF DIS ALLOWANCE UNDER SECTION 14A MAY BE ESTIMATED AT ` 5,00,000/- AND THE SAME WOULD TAKE CARE OF OTHER RESOURCES USED BY THE ASSESSEE. ACCOR DINGLY WE MODIFY THE ORDER PASSED BY THE LEARNED CIT(A) AND DIRECT THE A O TO RESTRICT THE DISALLOWANCE TO ` 5,00,000/- WHICH SHALL INCLUDE THE VOLUNTARY DISALLOWANCE OF ` 3.5 LAKHS MADE BY THE ASSESSEE. WE ORDER ACCORDINGL Y. 10. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 27 TH JUNE, 2018. SD/ - SD/ - (AMARJIT SINGH) (B.R. BASKARAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 27 TH JUNE, 2018 ITA NO. 2364/MUM/2016 M/S. TROPICAL CLOTHING CO. P. LTD. 6 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) -14, MUMBAI 4. THE CIT - 8, MUMBAI 5. THE DR, G BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.