Income Tax Officer-Ward-30(1), Kolkata, Kolkata V. M/s Leather Point, Kolkata

ITA 2855/KOL/2013

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 1763 (ITAT-KOLKATA)
• Duration Of Justice: 3 year(s) 7 month(s) 17 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 11-08-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 15-06-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 24-12-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income
• Section: 69C; 40A(3); 143(3); 142(1); 194C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH : KOLKATA [BEFORE HONBLE SHRI ABY. T. VARKEY, JM & SHRI M. BALAGANESH, AM ] I.T.A NO. 2855/KOL/20 13 ASSESSMENT YEAR : 2009-1 0 I.T.O. WARD-30(1), KOLKATA -VS- M/S LEATHER POINT . [PAN: AABFL1459P] (APPELLANT) (RESPONDENT) FOR THE APPELLANT : SHRI SAURABH KUMAR , ADDL. CIT DR FOR THE RESPONDENT : SHRI SOUMITRA CHOUDHURY , ADVOCATE DATE OF HEARING : 26.07.2017 DATE OF PRONOUNCEMENT : 11.08.2017 ORDER PER M.BALAGANESH, AM 1. THIS APPEAL BY THE REVENUE ARISES OUT OF THE ORD ER OF THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) -XIV, KOLKATA [ IN SHORT THE L D CITA] IN APPEAL NO. 895/CIT(A)-XIV/KOL/11-12 DATED 27.09.2013 AGAINST THE ORDERS PASSED BY THE I.T.O. WARD-30(1), KOLKATA [ IN SHORT THE LD AO] UNDER SE CTION 143(3) OF THE INCOME TAX ACT, 1961 (IN SHORT THE ACT) DATED 26.12.2011 FOR THE ASSESSMENT YEAR 2009-10. 2. THE FIRST ISSUE TO BE DECIDED IN THIS APPEAL IS AS TO WHETHER THE LD CITA WAS JUSTIFIED IN RESTRICTING THE DISALLOWANCE OF CUTTING AND STIT CHING CHARGES @ 5% OF EXPENDITURE AS AGAINST 100% DISALLOWED BY THE LD AO, IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 2.1. THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASSE SSEE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSINESS OF MANUFACTURING AND SELLING OF TANNED LEA THER AND LEATHER GOODS. THE LD AO OBSERVED THAT THE ASSESSEE APPEARED ON DIFFERENT OC CASIONS TO EXPLAIN THE RETURN AND FILED VARIOUS DETAILS AND DOCUMENTS IN SUPPORT THER EOF WHICH WERE TEST CHECKED DURING 2 ITA NO.2855/KOL/2013 M/S LEATHER POINT. A.YR.2009-10 2 THE COURSE OF ASSESSMENT PROCEEDINGS. THE LD AO O BSERVED THAT ASSESSMENT HAS BEEN FRAMED AFTER EXAMINATION OF THE RETURN, AUDITED ACC OUNTS, SUPPORTING DETAILS / DOCUMENTS AND WRITTEN SUBMISSIONS FILED IN COURSE OF ASSESSME NT PROCEEDINGS ON THE POINTS WHICH EMERGED FOR SPECIFIC DISCUSSION. THE LD AO OBSER VED THAT THE MODUS OPERANDI OF THE ASSESSEE WAS TO PURCHASE RAW HIDES FROM DIFFERENT P ARTS OF THE COUNTRY AND GET THE SAME PROCESSED IN VARIOUS TANNERIES SO AS TO GET TANNED LEATHER AND SELL THE SAID TANNED LEATHER TO LEATHER MANUFACTURING EXPORTERS. THE AUDITED PR OFIT AND LOSS ACCOUNT OF THE ASSESSEE FOR THE YEAR ENDED ON 31.03.2009 WAS CREDITED WITH THE FOLLOWING: (A) SALES : RS. 2,69,35,288.75 (B) CLOSING STOCK : RS. 73,22,171.00 FINISHED LEATHER : RS. 43,25,298/- RAW HIDE : RS. 29,96,873/- TOTAL : RS. 3,42,57,459.75 4.02. AGAINST THE ABOVE, THE ASSESSEE CLAIMED PURCH ASE OF RAW HIDES TO THE TUNE OF RS. 1,49,46,679/- AND CHEMICALS AMOUNTING TO RS. 37,03, 484/-. SINCE COL. NO. 28(B) AND (B) OF THE TAX AUDIT REPORT IN FORM NO. 3CD (QUANTITATI VE DETAILS OF FINISHED PRODUCTS/ BY PRODUCTS) DID NOT MENTION ANYTHING AT COL. NO. 28(B ) AND (B) ABOUT THE FINISHED PRODUCTS AND BY-PRODUCTS, THE REQUISITE DETAILS OF RAW MATER IALS AND FINISHED PRODUCTS WERE CALLED FOR VIDE NOTICE U/S 142(1) OF THE ACT DATED 11.07.2 011. AFTER ANALYZING THE ACCOUNTS AND DETAILS/DOCUMENTS FURNISHED BY THE ASSESSEE, THREE MAJOR ISSUES, INTER ALIA, WERE OBSERVED, NAMELY, (I) THE COST OF PRODUCTION OF FINISHED LEATHER PER SQ. FT INCREASED FROM RS. 39.22 FOR THE FINANCIAL YEAR 2007-08 TO RS. 51.23 IN THE FINANCIAL YEAR 2008-09, THUS, INDICATING A MORE THAN 30% INCREASE OVER THAT OF TH E IMMEDIATELY PRECEDING PREVIOUS YEAR (THE WORKING OF THE COST PRODUCTION IS GIVEN I N THE SHOW CAUSE LETTER REPRODUCED BELOW). 3 ITA NO.2855/KOL/2013 M/S LEATHER POINT. A.YR.2009-10 3 (II) EXPENSE UNDER THE HEAD CUTTING & STITCHING C HARGES INCREASED DISPROPORTIONATELY OVER THOSE OF THE PRECEDING PREV IOUS YEAR. (III) THE ASSESSEE DECLARED DISPROPORTIONATELY HUG E SUNDRY CREDITORS IN THE BALANCE SHEET AS AT 31.03.2009. 2.2. THE LD AO ISSUED A SHOW CAUSE NOTICE TO THE AS SESSEE BY REFERRING TO QUANTITATIVE DETAILS AND VALUE OF RAW MATERIALS AND FINISHED GOO DS AND ARRIVED AT THE COST OF PRODUCTION PER SQUARE FEET OF FINISHED GOODS. HE C OMPARED THE SAME WITH THAT OF THE PREVIOUS YEAR AND FOUND THAT THE COST OF PRODUCTION PER SQUARE FEET OF FINISHED GOODS HAD INCREASED FROM RS 39.22 TO RS 51.23 (REGISTERIN G AN INCREASE OF 30% ) WHICH APPEARS TO BE ABNORMAL. HE FOUND THAT THE ASSESSEE HAD DEBITED HUGE AMOUNT TOWARDS CUTTING AND STITCHING CHARGES IN THE SUM OF RS 47,2 1,760/- WHEN COMPARED TO THAT OF EARLIER YEAR AND SUBSEQUENT YEAR, WHICH IN HIS OPIN ION, HAD CONTRIBUTED TO THE INCREASE IN COST OF PRODUCTION. ACCORDINGLY THE ASSESSEE WAS ASKED TO JUSTIFY THE INCURRENCE OF CUTTING AND STITCHING CHARGES DURING THE YEAR UNDER APPEAL. THE ASSESSEE EXPLAINED THAT DURING THE YEAR UNDER APPEAL, THE ASSESSEE WAS ALSO ENGAGED IN THE SALES OF LEATHER AND LEATHER GOODS FOR WHICH THE CUTTING AND STITCHING C HARGES HAD TO BE PAID TO THE FABRICATORS. THIS BUSINESS WAS ADMITTEDLY NOT THER E IN EARLIER YEAR AS WELL AS IN SUBSEQUENT YEAR. DUE TO GLOBAL RECESSION, THE FUNDS OF THE ASSESSEE GOT BLOCKED IN THE EXPORT MARKET AND IN VIEW OF UNTIMELY REALIZATION O F THE SAME AND HUGE EXCHANGE LOSS, THE ASSESSEE CHOSE TO STOP THE EXPORT OF LEATHER AN D LEATHER GOODS FROM SUBSEQUENT YEAR. IN OTHER WORDS, IT WAS SUBMITTED THAT THE EXPORT OF LEATHER AND LEATHER GOODS WAS DONE ONLY IN THE YEAR UNDER APPEAL WHICH HAD CONTRIBUTED TO INCREASED EXPENDITURE TOWARDS CUTTING AND STITCHING CHARGES WHICH IN TURN HAD CON TRIBUTED TO THE INCREASE IN COST OF PRODUCTION PER SQUARE FEET OF FINISHED GOODS. IT WA S ALSO EXPLAINED THAT THE CUTTING AND STITCHING CHARGES WERE PAID TO INDIVIDUALS / CASUAL WORKERS WHO ARE INVOLVED IN SUCH TYPE OF WORKS AND WHO COME FROM REMOTE CORNERS OF T HE STATE. THEY ARE BASICALLY DAILY 4 ITA NO.2855/KOL/2013 M/S LEATHER POINT. A.YR.2009-10 4 LABOURS / FABRICATORS AND ARE PAID ON PIECE RATE BA SIS AFTER OBTAINING SIGNATURES IN THE VOUCHERS. 2.3. THE LD AO OBSERVED THAT THE ASSESSEE WAS ENGAG ED IN MANUFACTURE AND SALE OF TANNED LEATHER FROM RAW HIDES BY APPLYING CHEMICALS ; AND THAT THE SELLING OF TANNED LEATHER CANNOT, BY ANY STRETCH OF IMAGINATION, MEAN SELLING OF LEATHER GOODS LIKE WALLETS, LEATHER BAGS, PURSES ETC AS CLAIMED BY THE ASSESSEE ON 22.11.2011. NO QUANTITATIVE DETAILS OF THIS LEATHER GOODS WERE FURNISHED BY THE ASSESSEE AND THERE WAS NO OPENING OR CLOSING STOCK IN THIS REGARD IN THE DETAILS FURNISH ED BY THE ASSESSEE. ACCORDINGLY HE DISBELIEVED THE VERSION OF THE ASSESSEE AND SOUGHT TO EXAMINE THE FABRICATORS TO WHOM THE CUTTING AND STITCHING CHARGES WERE PAID BY THE ASSESSEE DURING THE YEAR UNDER APPEAL. 2.4. THE ASSESSEE REPLIED BEFORE THE LD AO THAT THE SALES MADE ON ACCOUNT OF LEATHER GOODS SUCH AS WALLETS, LADIES BAGS ETC WERE DULY RE FLECTED IN THE TOTAL SALES DISCLOSED ALREADY AND THE SAME HAD ALSO BEEN DULY DISCLOSED I N THE VAT RETURNS FILED BY THE ASSESSEE. THE ASSESSEE ALSO DISPUTED THE METHOD OF ARRIVING AT THE COST OF PRODUCTION PER SQUARE FEET OF FINISHED GOODS AS WORKED OUT BY THE LD AO BY POINTING OUT THE MISTAKES IN THE SAID WORKINGS. IT WAS POINTED OUT THAT THE LD AO HAD APPLIED THE COMBINED COST I.E COST FOR PROCESSING OF LEATHER AND COST FOR MAK ING LEATHER GOODS TO FIND OUT THE COST OF FINISHED LEATHER CONJOINTLY. IT WAS ALSO POINT ED OUT THAT THE LD AO HAD CONSIDERED THE NUMBER OF PIECES OF RAW HIDES IN FINANCIAL YEAR 200 7-08 UNIFORMLY AS FULL SIZE OF COW HIDES, WHEREAS FROM THE WAY BILLS AND SUPPLIERS INV OICES FILED ALREADY, IT COULD BE SEEN THAT A PORTION OF THE MATERIALS COMPRISED HIDES OF COW HEAD CUTTINGS (1/10 OF FULL SIZE) AND HIDES OF COW HALF & BUFFALO CALF (NORMALLY OF FULL SIZE). IN THE FINANCIAL YEAR 2008-09, ALL THE MATERIALS WERE FULL SIZE. ACCORDI NGLY, THE ASSESSEE FURNISHED THE COST STATEMENT OF FINISHED LEATHER FOR FINANCIAL YEARS 2 007-08 AND 2008-09 IN A TABULAR FORM AS UNDER:- 5 ITA NO.2855/KOL/2013 M/S LEATHER POINT. A.YR.2009-10 5 B: COST STATEMENT OF FINISHED LEATHER RAW HIDES F.Y. 2007-08 F.Y. 2008-09 PCS AMOUNT PCS AMOUNT OP. STOCK - R/HIDES .. .. .. .. PURCHASE R/H (EQV. FULL SIZE) 20050 12249710 24941 1494679 LESS: CLOSING STOCK .. .. 5645 2996873 CONSUMPTION OF R/HIDES 20050 12249710 19296 1195280 6 PURCHASE OF CHEMICALS .. 3989030 .. 3703485 CARRIAGE INWARD .. 83743 .. 74823 PROCESSING CHARGES .. 1363120 .. 1254240 PRODUCTION PCS/ TOTAL COST 2050 17685603 19296 16985 354 COST PER PCS 882.07 880.25 COST PER SQ. FT. (1PC=22SQ.FT) 40.09 40.00 ACCORDINGLY IT WAS SUBMITTED THAT THERE WERE NO MAT ERIAL VARIATION IN THE COST PER SQ.FT OF FINISHED LEATHER IN THE YEAR UNDER APPEAL WHEN C OMPARED TO THE EARLIER YEAR. (I) IT WAS ALSO POINTED OUT THAT WHILE DETERMINING THE TOTAL COST OF CHEMICALS AND OTHER MATERIALS AMOUNTING TO RS 40,35,624/- FOR THE YEAR UNDER APPEAL, THE LD AO HAD INCLUDED THE SUMS OF RS 3,06,440/- AND RS 25,700/- INCURRED FOR PURCHASE OF CLOTH LINING AND MATERIALS RESPECTIVELY WHICH CONSTITUTED THE CO ST FOR MAKING LEATHER GOODS. (II) SIMILARLY FROM THE DETERMINATION OF OTHER EXPE NSES FORMING COST OF MATERIALS AMOUNTING TO RS 61,39,573/- BY THE LD AO, THE DELIV ERY CHARGES OF RS 28,750/- , CUTTING & STITCHING CHARGES OF RS 47,21,760/- AND RENT & EL ECTRIC (FACTORY) RS 60,000/- SHOULD HAVE BEEN CONSIDERED SEPARATELY IN ASCERTAINING COS T PER SQ.FT OF FINISHED LEATHER. WHILE DELIVERY CHARGES IS PART OF SELLING AND DISTRIBUTIO N EXPENSES AND DOES NOT FORM PART OF COST OF PRODUCTION , CUTTING & STITCHING CHARGES AN D RENT & ELECTRIC EXPENSES CONSTITUTE COST FOR MAKING LEATHER GOODS TO WHICH THEY RELATE, BUT NOT IN THE COST OF FINISHED LEATHER. (III) IT WAS ALSO POINTED OUT THAT IN THE TAX AUDIT REPORT, THE NATURE OF BUSINESS WAS DULY MENTIONED AS MANUFACTURING & PROCESSING OF LEATHER & LEATHER GOODS. IT WAS SUBMITTED THAT THE SALES REFLECTED IN THE PROFIT AN D LOSS ACCOUNT INCLUDES SALE OF LEATHER GOODS ALSO. 6 ITA NO.2855/KOL/2013 M/S LEATHER POINT. A.YR.2009-10 6 2.5. THE LD AO HOWEVER DISBELIEVED THE FACT OF ASSE SSEE INVOLVED IN THE SALE OF LEATHER GOODS IN THE YEAR UNDER APPEAL. HE OBSERVED THAT T HE ASSESSEE FAILED TO FURNISH THE DETAILS OF PERSONS / PARTIES INCLUDING THEIR NAMES AND ADDRESSES TO WHOM CUTTING AND STITCHING CHARGES WERE PAID BY THE ASSESSEE . HE O BSERVED THAT THE PAYMENTS WERE MADE TO THEM ONLY IN CASH AND IT IS THE DUTY OF THE ASSE SSEE TO PROVE THE GENUINENESS OF THE SAME WITH SUPPORTING DOCUMENTS, WHICH THE ASSESSEE FAILED AND ACCORDINGLY DISALLOWANCE TO THAT EFFECT IS WARRANTED. HE ALSO O BSERVED THAT FOR MANUFACTURING AND SALE OF TANNED LEATHER, NO EXPENDITURE NEED TO BE I NCURRED TOWARDS FABRICATION WORK ON FINISHED LEATHER. THE LD AO ALSO BROUGHT SOME COMPA RABLE INSTANCES ENGAGED IN THE SIMILAR LINE OF BUSINESS AND OBSERVED THAT THE RATI O OF DIRECT EXPENSES TO THE TOTAL COST OF MANUFACTURING INCURRED BY THE ASSESSEE WAS 22.19% W HEREAS THE COMPARABLE CASES WERE IN THE RANGE OF 5% TO 10% AND CONCLUDED THAT IT IS VERY REASONABLE TO INFER THEREFROM THAT THE FICTITIOUS CLAIM OF CUTTING & STITCHING CH ARGES HAD CONTRIBUTED LARGELY TO THIS ABNORMALLY HIGH RATIO OF DIRECT EXPENSES IN THE CAS E OF THE ASSESSEE. MOREOVER, THE IDENTITY OF THE PARTIES TO WHOM THE SAID CHARGES WE RE PAID WERE NOT PROVED BY THE ASSESSEE. ACCORDINGLY HE DISALLOWED A SUM OF RS 47 ,21,760/- REPRESENTING ENTIRE CUTTING & STITCHING CHARGES IN THE ASSESSMENT. 2.6. THE LD CITA APPRECIATED THE CONTENTIONS OF THE ASSESSEE BUT RESTRICTED THE DISALLOWANCE TO 5% OF TOTAL CUTTING & STITCHING CHA RGES. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUND:- 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN NOT CONSIDERING THE FACT THAT THE ASSESSEE FAILED TO DI SCHARGE HIS ONUS BY NOT SUPPLYING PARTY DETAILS OF CUTTING AND STITCHING CH ARGES PAYMENT AND HENCE A.O. WAS JUSTIFIED IN TREATING THE SAME AS BOGUS EXPENDI TURE. 2.7. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THE ASSESSEE HAD DULY COUNTERED THE CO NTENTIONS OF THE LD AO BY MAKING 7 ITA NO.2855/KOL/2013 M/S LEATHER POINT. A.YR.2009-10 7 DETAILED WRITTEN SUBMISSIONS BEFORE THE LD CITA. WE FIND FROM THE TAX AUDIT REPORT IN RESPONSE TO QUESTION NO. 8A) IN FORM 3CD WITH RE GARD TO NATURE OF BUSINESS , IT IS DULY MENTIONED BY THE TAX AUDITOR AS MFG. & PROCES SING OF LEATHER & LEATHER GOODS. IT IS NOT IN DISPUTE THAT THE ASSESSMENT HAS BEEN FRAMED U/S 143(3) OF THE ACT AFTER EXAMINING THE BOOKS OF ACCOUNTS AND VARIOUS D ETAILS FILED BEFORE THE LD AO WHICH IS ALSO ACKNOWLEDGED BY THE LD AO. THE LOGICAL INF ERENCE WOULD BE THAT THE BOOKS OF ACCOUNTS ALONG WITH SALES BILLS WHICH WERE PRODUCED BY THE ASSESSEE BEFORE THE LD AO WERE EXAMINED BY THE LD AO. THE SALES BILLS WOULD SHOW THAT THE ASSESSEE HAD INDEED MADE SALE OF LEATHER GOODS SUCH AS WALLETS, LADIES BAGS ETC . IT IS NOT IN DISPUTE THAT THE ASSESSEE HAD MADE SALES IN THE YEAR UNDER APPEAL AS UNDER:- SALES OF LEATHER - RS 85,64,599/- SALES OF LEATHER GOODS - RS 1,83,70,690/- WE FIND THAT THE ASSESSEE HAD ENGAGED IN SALE OF LE ATHER GOODS ONLY DURING THE YEAR UNDER APPEAL WHICH IS MORE THAN THE SALES OF LEATHE R AND THAT ITSELF WOULD JUSTIFY THE INCREASE IN CUTTING & STITCHING CHARGES DURING THE YEAR UNDER APPEAL. IT IS NOT IN DISPUTE THAT THE CUTTING & STITCHING CHARGES WERE INDEED IN CURRED BY THE ASSESSEE IN THE EARLIER AS WELL AS IN SUBSEQUENT YEAR. HENCE THERE IS NO CASE FOR DISALLOWANCE OF 100% OF CUTTING & STITCHING CHARGES BY THE LD AO. WE FIND THAT TH E ASSESSEE HAD DULY DEMONSTRATED THE COST OF PRODUCTION PER SQUARE FEET OF FINISHED GOOD S FOR THE YEAR UNDER APPEAL WHICH IS ALMOST SIMILAR TO THAT OF THE PREVIOUS YEAR. IT I S ALSO NOT IN DISPUTE THAT THE QUANTITATIVE DETAILS WERE FURNISHED BEFORE THE LD AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS. THE LD CITA HAD OBSERVED THAT IT IS NOT THE CASE OF THE LD AO THAT THE ASSESSEE IS INDEED WARRANTED TO DEDUCT TAX AT SOURCE IN TERMS OF SECTI ON 194C OF THE ACT AS THERE IS NO FINDING IN THE ASSESSMENT ORDER TO THE EFFECT THAT THE ASSESSEE HAD MADE SINGLE PAYMENT EXCEEDING RS 20,000/- AND AGGREGATE PAYMENTS IN A Y EAR EXCEEDING RS 50,000/- TO A SINGLE PARTY. HOWEVER, IT CANNOT BE RULED OUT THA T CERTAIN CUTTING & STITCHING CHARGES COULD BE ACCOUNTED IN EXCESS AS ADMITTEDLY NO EVIDE NCE HAS BEEN PRODUCED BY THE 8 ITA NO.2855/KOL/2013 M/S LEATHER POINT. A.YR.2009-10 8 ASSESSEE BEFORE THE LD AO TO JUSTIFY THE CLAIM OF E XPENSES. HENCE THERE IS NOTHING WRONG IN THE ACTION OF THE LD CITA CONFIRMING THE D ISALLOWANCE THEREON @ 5% OF TOTAL CUTTING & STITCHING CHARGES. GIVEN THE FACT THAT T HE COST OF PRODUCTION PER SQUARE FEET OF FINISHED GOODS REMAINING MORE OR LESS SIMILAR TO TH AT OF EARLIER YEAR AND GIVEN THE FACT THAT THE ASSESSEE HAD MADE PAYMENTS IN CASH TO VARI OUS FABRICATORS BUT HAD NOT PROVIDED THE DETAILS OF THE PARTIES BEFORE THE LD AO AND MOR E IMPORTANTLY GIVEN THE FACT THAT THE BOOKS OF ACCOUNTS FILED BY THE ASSESSEE WERE NOT RE JECTED BY THE LD AO, WE FIND THAT THE DISALLOWANCE @ 5% OF TOTAL CUTTING & STITCHING CHAR GES HAD BEEN RIGHTLY MADE IN THE INSTANT CASE AND HENCE THE ORDER OF THE LD CITA DOE S NOT REQUIRE ANY INTERFERENCE. ACCORDINGLY, THE GROUND NO. 1 RAISED BY THE REVENUE IS DISMISSED. 3. THE NEXT ISSUE TO BE DECIDED IN THIS APPEAL IS A S TO WHETHER THE LD CITA WAS JUSTIFIED IN DELETING THE DISALLOWANCE OF RS 12,54,240/- U/S 40A(3) OF THE ACT TOWARDS PROCESSING CHARGES IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 3.1. THE BRIEF FACTS OF THIS ISSUE IS THAT THE ASSE SSEE PAID PROCESSING CHARGES OF RS 12,54,240/- TO 34 PERSONS. THE NAMES AND ADDRESSES OF ALL SUCH PERSONS WERE FURNISHED BY THE ASSESSEE AT THE TIME OF ASSESSMENT PROCEEDIN GS. THE LD AO SOUGHT TO VERIFY THE SAID PARTIES AND OBSERVED THAT THE IDENTITY OF THE PERSONS WAS NOT ESTABLISHED BY THE ASSESSEE IN AS MUCH AS NO SUCH PERSONS WERE FOUND I N THE GIVEN ADDRESS. MOREOVER, THE ASSESSEE HAD FAILED TO PRODUCE EVEN ONE OUT OF 34 P ERSONS FOR EXAMINATION. SECONDLY, SINCE THE PAYMENTS WERE ADMITTEDLY MADE IN CASH, NO CREDIBLE DOCUMENTARY EVIDENCE COULD BE ADDUCED BY THE ASSESSEE TO PROVE THE GENUI NENESS OF TRANSACTIONS. THE LD AO FINALLY CONCLUDED THAT THE ASSESSEE HAD VIOLATED TH E PROVISIONS OF SECTION 40A(3) OF THE ACT BY MAKING CASH PAYMENTS TO TANNERS / TANNERIES AND ACCORDINGLY DISALLOWED A SUM OF RS 12,54,240/- IN THE ASSESSMENT. THE LD AO ALS O OBSERVED THAT TAX WAS NOT DEDUCTED AT SOURCE IN RESPECT OF SAID PAYMENTS AND IN ANY CA SE, THE EXPENDITURE IS REQUIRED TO BE DISALLOWED U/S 40(A)(IA) OF THE ACT. 9 ITA NO.2855/KOL/2013 M/S LEATHER POINT. A.YR.2009-10 9 3.2. THE ASSESSEE SUBMITTED THAT THERE IS NO DISPUT E THAT THE ASSESSEE IS IN THE LEATHER TRADE. THERE IS ALSO NO DISPUTE THAT IN THE LEATHE R TRADE, ONE HAS TO PURCHASE RAW HIDES, WHICH ARE REQUIRED TO BE TREATED / PROCESSED IN THE TANNERIES, FOR WHICH PROCESSING CHARGES HAVE TO BE PAID. THE ASSESSEE SUBMITTED T HE DETAILS OF THE PERSONS WHO WERE PAID PROCESSING CHARGES ALONG WITH COPY OF THEIR LE DGER ACCOUNTS BEFORE THE LD CITA (WHICH WERE ALREADY FILED BEFORE THE LD AO). IT WAS SUBMITTED THAT IT IS WELL KNOWN FACT THAT THE LEATHER TRADE OPERATES IN AN UNORGANI ZED SECTOR AND THE PAYMENTS ARE ALSO REQUIRED TO BE PAID IN CASH AS PER THE NORMS OF THE TRADE. INFACT PURCHASE OF RAW HIDES IN CASH FALLS UNDER THE EXCEPTION PROVIDED IN RULE 6DD OF THE RULES. IT WAS SUBMITTED THAT THE ASSESSEE MADE PAYMENTS TOWARDS PROCESSING CHARGES WERE MADE IN CASH BUT WITHIN THE PERMISSIBLE LIMITS U/S 40A(3) OF THE ACT . IT WAS SUBMITTED THAT THE ASSESSEE HAD BROUGHT TO THE NOTICE OF THE LD AO VIDE LETTER DATED 3.8.2011 , THAT THE ASSESSEE PURCHASED RAW HIDES FROM DIFFERENT PARTS OF COUNTRY AGAINST WAYBILLS ISSUED BY THE WEST BENGAL COMMERICAL TAXES AUTHORITIES. THE RAW HIDES ALONG WITH LEATHER CHEMICALS PURCHASED FROM REGISTERED DEALERS, WHOSE GENUINITY HAS NOT BEEN DISPUTED, WERE DELIVERED TO SMALL TANNERIES WHO PROCESSED THE SAME AGAINST CHEAP RATES. THE PAYMENTS TO THEM WERE MADE THROUGH VOUCHERS, WHICH WERE SUBM ITTED BEFORE THE LD AO. THE OWNERS OF THE SMALL TANNERIES ARE ILLITERATE AND ME N OF MEAGER MEANS AND HAVE VERY MEAGER INCOME. THEY ARE MOSTLY NOT ASSESSED TO TA X AND ARE RELUCTANT TO APPEAR BEFORE THE TAX AUTHORITIES. HENCE THE ASSESSEE WAS NOT ABL E TO PRODUCE THEM BEFORE THE LD AO. IT WAS SUBMITTED THAT THE LD AO HAD NOT DISALLOWED THE PROCESSING CHARGES ON ACCOUNT OF GENUINITY AND REASONABLENESS IN AS MUCH AS THERE IS NO WHISPER IN THE ASSESSMENT ORDER THAT HE DID NOT FIND ANY ELEMENT OF UNREASONABLENES S IN THE AMOUNT SPENT TOWARDS THE SAME. THE ONLY GRIEVANCE OF THE LD AO IS PAYMENTS WERE MADE IN CASH IN VIOLATION OF SECTION 40A(3) OF THE ACT WITHOUT DEDUCTION OF TAX AT SOURCE. 10 ITA NO.2855/KOL/2013 M/S LEATHER POINT. A.YR.2009-10 10 3.3. THE LD CITA OBSERVED THAT FROM THE PERUSAL OF THE LEDGER ACCOUNTS OF EACH PARTY, THE PAYMENTS TOWARDS PROCESSING CHARGES WERE MADE W ITHIN THE PERMISSIBLE LIMITS I.E BELOW RS 20,000/- AND HENCE THE SAME ARE DIRECTLY O UTSIDE THE SCOPE OF PROVISIONS OF SECTION 40A(3) OF THE ACT. HE OBSERVED THAT THE LD AO PRESUMED THAT IN ORDER TO AVOID THE RIGOUR OF TAX DEDUCTION AT SOURCE, THE ASSESSEE HAD BIFURCATED THE EXPENSES INTO DIFFERENT PERSONS. THIS ALLEGATION MADE IS WITHOUT ANY BASIS AND THERE IS NO SCOPE FOR MAKING DISALLOWANCE U/S 40(A)(IA) OF THE ACT. HENC E THE LD CITA BASED ON THE VERIFICATION OF THE LEDGER ACCOUNTS OBSERVED THAT T HERE IS NO SCOPE FOR MAKING ANY DISALLOWANCE EITHER U/S 40A(3) OR U/S 40(A)(IA) OF THE ACT TOWARDS PROCESSING CHARGES IN THE FACTS AND CIRCUMSTANCES OF THE CASE AND ACCORDI NGLY DELETED THE SAME. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUND:- 2. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN NOT CONSIDERING THE FACT THAT THE ASSESSEE FAILED TO DI SCHARGE HIS ONUS BY NOT PRODUCING PARTY DETAILS OF PROCESSING CHARGES AND A LSO PAYMENT EVIDENCES OF THESE EXPENDITURE AND HENCE A.O. WAS RIGHT IN INVOK ING PROVISION OF SECTION 40A(3) OF THE I.T. ACT. 3.4. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS AVAILABLE ON RECORD. WE FIND THAT THE LD DR FAIRLY AGREED TO THE CONTEN TIONS OF THE LD AR BY PLACING RELIANCE ON THE ORDER OF THE LD CITA. WE FIND THAT THE LD C ITA HAD GRANTED RELIEF TO THE ASSESSEE AFTER DUE EXAMINATION OF EVIDENCES AVAILABLE ON REC ORD. HENCE WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LD CITA IN THIS REGAR D. ACCORDINGLY, THE GROUND NO. 2 RAISED BY THE REVENUE IS DISMISSED. 4. THE LAST ISSUE TO BE DECIDED IN THIS APPEAL IS A S TO WHETHER THE LD CITA WAS JUSTIFIED IN DELETING THE ADDITION MADE IN THE SUM OF RS 2,70 ,21,589/- TOWARDS SUNDRY CREDITORS IN THE FACTS AND CIRCUMSTANCES OF THE CASE. 4.1. THE BRIEF FACTS OF THIS ISSUE IS THAT THE LD A O OBSERVED THAT THE SUNDRY CREDITORS IN RESPECT OF RAW HIDES WERE ASTRONOMICALLY HIGH ; TH AT THE ASSESSEE IN THE SUBSEQUENT YEAR, 11 ITA NO.2855/KOL/2013 M/S LEATHER POINT. A.YR.2009-10 11 DID NOT MAKE ANY PURCHASE OF RAW HIDES FROM THE PER SONS STANDING AS SUNDRY CREDITORS IN THE YEAR UNDER APPEAL ; THAT THE SUNDRY CREDITORS STANDING IN THE BALANCE SHEET WERE FICTITIOUS AS THE ASSESSEE NEITHER FURNISHED CONFIR MATIONS FROM THE PARTIES NOR PRODUCED THE PARTIES AND THAT THE PAYMENTS MADE TO THE SUNDR Y CREDITORS IN THE SUBSEQUENT YEAR WERE BOGUS SINCE THE CREDITORS DID NOT ISSUE ANY RE CEIPTS. 4.2. THE ASSESSEE SUBMITTED THAT THE LD AO DISBELIE VED THE EXISTENCE OF SUNDRY CREDITORS MAINLY ON THE GROUND THAT THE SAME ARE ABNORMALLY H IGH. IN THIS REGARD, THE ASSESSEE SUBMITTED THAT DURING THE YEAR , THERE WERE SUNDRY DEBTORS OF RS 2,00,85,091/- AS AGAINST THE SUNDRY CREDITORS OF RS 2,72,89,282/- . IT WAS EXPLAINED THAT DUE TO DELAYED RECOVERY OF DUES FROM THE SUNDRY DEBTORS (OVERSEAS DEBTORS) DUE TO GLOBAL MELTDOWN OF ECONOMY AND RECESSION SET THEREON, THE SUNDRY CREDITORS COU LD NOT BE SETTLED IN TIME BY THE ASSESSEE. HENCE BOTH SUNDRY CREDITORS AND SUNDRY DE BTORS WERE REMAINING OUTSTANDING IN THE BALANCE SHEET AT THE END OF THE YEAR. SINCE THE ASSESSEE HAD DEFERRED THE PAYMENT TO THESE SUNDRY CREDITORS, THEY CHOSE NOT TO SUPPLY GO ODS TO THE ASSESSEE ON CREDIT IN THE SUBSEQUENT YEAR. HENCE THE ASSESSEE HAD NO CHOICE BUT TO KEEP SUCH ABNORMALLY HIGH SUNDRY CREDITORS AT THE END OF THE YEAR. 4.2.1. WITH REGARD TO THE LD AOS GRIEVANCE AS TO N ON-FURNISHING OF THE CONFIRMATIONS OR NON-PRODUCTION OF THE PARTIES, IT WAS SUBMITTED BY THE ASSESSEE THAT THE ASSESSEE IS OPERATING IN AN UNORGANIZED SECTOR AND AS PER THE N ORMS OF THE TRADE, THEIR REPRESENTATIVE USED TO VISIT KOLKATA TO COLLECT CASH PAYMENTS. SI NCE THE ASSESSEE DELAYED THE PAYMENTS OF THESE PARTIES FOR A LONG PERIOD, THEIR CO-OPERAT ION WAS NOT FORTHCOMING. HENCE THE SAID PARTIES COULD NEITHER FURNISH CONFIRMATIONS FR OM THESE PARTIES OR PRODUCE THEM BEFORE THE LD AO. HOWEVER, THE COPIES OF PURCHASE BILLS ALONG WITH THE WAY BILLS WERE DULY FURNISHED BEFORE THE LD AO WHICH WERE DULY SUB JECTED TO EXAMINATION BY THE LD AO AND WHICH FACT IS ALSO ACKNOWLEDGED BY HIM IN THE A SSESSMENT ORDER. IT WAS ARGUED THAT 12 ITA NO.2855/KOL/2013 M/S LEATHER POINT. A.YR.2009-10 12 THE LD AO DID NOT FIND ANY DEFECTS IN THE SAID DOCU MENTS AND IT IS NOT THE CASE OF THE LD AO THAT THE PURCHASES ARE INGENUINE. 4.2.2. WITH REGARD TO THE PAYMENTS MADE TO THESE PA RTIES IN CASH IN SUBSEQUENT YEARS, THE ASSESSEE SUBMITTED THE EVIDENCES TOGETHER WITH THE BOOKS OF ACCOUNTS OF THOSE RELEVANT YEARS. THE ASSESSEE ALSO PRODUCED A CHART SHOWING HOW THE PAYMENTS WERE MADE IN THE SUBSEQUENT YEARS LIQUIDATING THE OUTSTANDING AMOUNT S. THE LD CITA OBSERVED THAT THE LD AO DID NOT HAVE ANY MATERIAL TO COME TO THE CONC LUSION THAT THE ENTIRE PAYMENTS WERE MADE BY THE ASSESSEE IN THE INSTANT CASE OUT OF ITS UNDISCLOSED INCOME. 4.2.3. THE LD CITA ALSO EXAMINED THE APPLICABILITY OF PROVISIONS OF SECTION 69C OF THE ACT WITH REGARD TO THE PURCHASES. IT WAS OBSERVED THAT SECTION 69C OF THE ACT COULD BE INVOKED ONLY WHERE EXPENDITURE HAS BEEN INCURRED AN D NO SATISFACTORY EXPLANATION ABOUT ITS SOURCE IS OFFERED BY THE ASSESSEE. HE OBSERVE D THAT THE ASSESSEE HAS SUBMITTED EVIDENCE BEFORE THE LD AO TO PROVE THE GENUINITY OF PURCHASES, WHICH HAS NOT BEEN DISPUTED BY THE LD AO. THE LD CITA OBSERVED THAT T HE LD AO HIMSELF HAD GIVEN A FINDING THAT NO FURTHER PURCHASES WERE MADE FROM TH E SAID SUNDRY CREDITORS IN SUBSEQUENT YEARS AND IN THIS REGARD, HE AGREED TO T HE CONTENTIONS OF THE ASSESSEE THAT A CREDITOR WOULD NORMALLY REFRAIN FROM DEALING WITH T HE PARTY WHO DELAYS THE PAYMENTS. 4.2.4. WITH REGARD TO THE APPLICABILITY OF PROVISIO NS OF SECTION 40A(3) OF THE ACT, THE LD CITA APPRECIATED THE DECISION RELIED UPON BY THE AS SESSEE BEFORE HIM ON THE DECISION OF HONBLE CALCUTTA HIGH COURT IN THE CASE OF CIT VS C PL TANNERY REPORTED IN 318 ITR 179 (CAL) WHEREIN IT WAS HELD THAT THE SUPPLIERS OF SKINS AND HIDES ARE THEMSELVES THE PRODUCERS OF SKINS AND HIDES AND THEREFORE SECTION 40A(3) OF THE ACT CANNOT BE APPLIED. 13 ITA NO.2855/KOL/2013 M/S LEATHER POINT. A.YR.2009-10 13 4.2.5. BASED ON THESE OBSERVATIONS, THE LD CITA DEL ETED THE ADDITION MADE TOWARDS SUNDRY CREDITORS IN THE SUM OF RS 2,70,21,589/-. AGGRIEVED, THE REVENUE IS IN APPEAL BEFORE US ON THE FOLLOWING GROUND:- 3. ON THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) ERRED IN DELETING THE ADDITION OF RS. 2,70,21,589/-. 4.3. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE MATERIALS AVAILABLE ON RECORD. THE LD DR VEHEMENTLY RELIED ON THE ORDER OF THE LD AO. AT THE OUTSET, WE FIND THAT THERE IS ABSOLUTELY NO BASIS FOR THE LD AO TO COME TO A C ONCLUSION THAT THE PAYMENTS TO THE SUPPLIERS OF MATERIALS WERE MADE IN CASH BY THE ASS ESSEE OUT OF UNEXPLAINED SOURCES DURING THE YEAR ITSELF. THE ENTIRE BOOKS OF ACCOUN TS WERE PRODUCED BEFORE THE LD AO TOGETHER WITH THE REQUISITE DETAILS CALLED FOR AND THE SAME WERE ALSO DULY EXAMINED. THE BOOKS OF ACCOUNTS WERE NOT REJECTED BY THE LD AO. WHILE THIS IS SO, THERE IS ABSOLUTELY NO BASIS FOR THE LD AO TO COME TO A CONCLUSION THAT PAYMENTS WERE SETTLED BY THE ASSESSEE OUT OF UNEXPLAINED SOURCES IN CASH TO THES E SUNDRY CREDITORS THEREBY MAKING THEM FICTITIOUS. IT IS NOT IN DISPUTE THAT THE ASS ESSEE HAD CORRESPONDINGLY HUGE PILING OF SUNDRY DEBTORS IN ITS BALANCE SHEET. THIS HAS BEEN DULY EXPLAINED BY THE ASSESSEE THAT DUE TO GLOBAL RECESSION, THE SALE PROCEEDS COULD NO T BE RECOVERED IN TIME FROM THE EXPORT MARKET AND WHICH IN TURN HAD CONTRIBUTED TO THE DEL AYED PAYMENT TO SUNDRY CREDITORS BY THE ASSESSEE. IT IS IN UNIVERSAL KNOWLEDGE THAT DU RING THE RELEVANT YEAR, THERE WAS GLOBAL RECESSION WHICH HAD A SEVERE IMPACT ON THE WORLD MA RKET AND INDIA WAS ALSO ONE OF THE COUNTRY WHICH GOT AFFECTED BY IT. INFACT THE ASSES SEE HAD EVEN GIVEN DETAILS BEFORE THE AUTHORITIES BELOW THAT ITS FUNDS HAD BEEN BLOCKED S UBSTANTIALLY WITH TWO PERSONS:- (I) FARINNI LEATHER (P) LTD RS 22,19,511/- (II) ACME TANNING INDUSTRIES RS 1,51,74,690/- THE LD AR ARGUED THAT THE ASSESSEE WAS IN A HELPLES S SITUATION THAT THERE WAS NO OPTION BEFORE IT BUT TO DEFER THE PAYMENTS DUE TO THE SUND RY CREDITORS PARTICULARLY WHEN THE BANK FINANCE WAS ALSO NOT FORTHCOMING DUE TO LOW MA RGIN IN THE ASSESSEES TRADE , 14 ITA NO.2855/KOL/2013 M/S LEATHER POINT. A.YR.2009-10 14 NEGATIVE INDUSTRY PROFILE AND POOR WORKING CAPITAL RATIO. IT IS QUITE COMMON THAT THE PARTIES TO WHOM PAYMENTS WERE NOT MADE WOULD NOT CO ME FORWARD TO SUPPLY GOODS SUBSEQUENTLY ON CREDIT TO THE VERY SAME DEFAULTER I N THEIR OWN BUSINESS INTERESTS. THESE FACTS HAVE BEEN DULY APPRECIATED BY THE LD C ITA. WE FIND THAT THE COPIES OF PURCHASE BILLS ALONG WITH THE WAY BILLS WERE DULY F URNISHED BEFORE THE LD AO WHICH WERE DULY SUBJECTED TO EXAMINATION BY THE LD AO . W E FIND THAT THE LD AO DID NOT FIND ANY DEFECTS IN THE SAID DOCUMENTS AND IT IS NOT THE CASE OF THE LD AO THAT THE PURCHASES ARE INGENUINE. THE WAYBILLS WERE ISSUED BY THE SA LES TAX AUTHORITIES AND INVOICES BEARING THE STAMP OF THE CHECK POST EVIDENCING THE ENTRY OF OF MATERIALS IN THE STATE OF WEST BENGAL PROVED BEYOND DOUBT THE GENUINITY OF PU RCHASES. IT IS ALSO NOT THE CASE OF THE LD AO THAT PROVISIONS OF SECTION 41(1) OF THE A CT ARE APPLICABLE TO THE INSTANT CASE IN AS MUCH AS THE SAID PROVISION APPLIES TO THE CESSAT ION OF LIABILITY. ADMITTEDLY, THE ASSESSEE HAD DULY REFLECTED THE SAID PARTIES AS SUN DRY CREDITORS IN ITS BALANCE SHEET AND HAD ALSO DISCHARGED THE SAME IN THE SUBSEQUENT YEAR S. THE LD CITA HAD DULY DEALT WITH THE APPLICABILITY OF PROVISIONS OF SECTION 69C OF T HE ACT AND HELD THAT THE SAME COULD NOT BE INVOKED IN THE INSTANT CASE. WE DO NOT FIND ANY INFIRMITY IN THE SAME. WE HAVE ALSO VERIFIED THE DETAILS OF PAYMENTS MADE TO THE S UNDRY CREDITORS IN THE SUBSEQUENT YEARS WHICH ARE ENCLOSED IN PAGES 80 & 81 OF THE PA PER BOOK, WHEREIN, WE FIND OUT OF SUNDRY CREDITORS AS ON 31.3.2009 IN RESPECT OF THE 19 PARTIES AMOUNTING TO RS 2,70,21,589/-, THE ASSESSEE HAD PAID A SUM OF RS 2, 53,10,389/- IN ASST YEAR 2010-11 AND REMAINING SUM OF RS 17,11,200/- IN ASST YEAR 20 11-12. IN THESE CIRCUMSTANCES, WE FIND THAT THE LD CITA HAD RIGHTLY DELETED THE AD DITION MADE ON ACCOUNT OF SUNDRY CREDITORS IN THE SUM OF RS 2,70,21,589/- AND HENCE WE DO NOT FIND ANY JUSTIFIABLE REASON TO INTERFERE WITH THE SAME. ACCORDINGLY, THE GROUND NO. 3 RAISED BY THE REVENUE IS DISMISSED. 5. THE GROUND NO. 4 RAISED BY THE REVENUE IS GENERA L IN NATURE AND DOES NOT REQUIRE ANY SPECIFIC ADJUDICATION. 15 ITA NO.2855/KOL/2013 M/S LEATHER POINT. A.YR.2009-10 15 6. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. ORDER PRONOUNCED IN THE COURT ON 11.08.2017 SD/- SD/- [ABY. T. VARKEY] [ M.BALAGANESH ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 11.08.2017 SB, SR. PS COPY OF THE ORDER FORWARDED TO: 1. I.T.O. WARD, 30(1), KOLKATA, AAYAKAR BHAVAN DAKH SIN, 2, GARIAHUT ROAD (SOUTH), 5 TH FLOOR, KOLKATA-700068 2. M/S LEATHER POINT, 11, TARAK DUTTA ROAD, KOLKATA -700019 3..C.I.T.(A)-XIV, KOLKATA 4. C.I.T.- KOLKATA. 5. CIT(DR), KOLKATA BENCHES, KOLKATA. TRUE COPY BY ORDER SENIOR PRIVAT E SECRETARY HEAD OF OFFICE/D.D.O., ITAT, KOLKATA BENCHE S