M/s. Shree M.D. Industries, Surat V. The Income tax Officer,OSD-4,Range-2, Surat

ITA 33/AHD/2010

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 94304 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 7 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-08-2015
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 10-08-2015
• Assessment Year: 2006-2007
• Appeal Filed On: 04-01-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: D C MISHRA
• Section: 143(3); 142(1); 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, AHMEDABAD (BEFORE SHRI RAJPAL YADAV, J.M & SHRI ANIL CHATURVE DI, A.M.) I.T. A. NO. 33/AHD/2010 (ASSESSME NT YEAR: 2006-07) SHREE M.D. INDUSTRIES D- 137, UMA INDUSTRIAL ESTATE, UDHNA UDHYOGNAGAR, SURAT V/S THE I.T.O.(OSD)-4 RANGE- 2,SURAT (APPELLANT) (RESPONDENT) PAN: AAPFS1075A APPELLANT BY : SHRI TUSHAR HEMANI RESPONDENT BY : SHRI D.C. MISHRA, SR. D.R. ( )/ ORDER DATE OF HEARING : 10-08-2015 DATE OF PRONOUNCEMENT : 28 -08-2015 PER ANIL CHATURVEDI, ACCOUNTANT MEMBER 1. THIS APPEAL FILED BY THE ASSESSEE IS AGAINST THE OR DER OF CIT(A)-II, SURAT DATED 04.09.2009 FOR A.Y. 2006-07. 2. THE RELEVANT FACTS AS CULLED OUT FROM THE MATERIAL ON RECORD ARE AS UNDER. 3. ASSESSEE IS A PARTNERSHIP FIRM STATED TO BE ENGAGED IN THE BUSINESS OF MANUFACTURING OF GREY CLOTH. ASSESSEE FILED ITS RET URN OF INCOME FOR A.Y. 2006-07 ON 29.12.2006 DECLARING TOTAL INCOME AT RS. NIL. THE CASE WAS ITA NO 33/A HD/2010 . A.Y. 2006-07 2 SELECTED FOR SCRUTINY AND THEREAFTER THE ASSESSMENT WAS FRAMED UNDER SECTION 143(3) VIDE ORDER DATED 31.12.2008 AND THE TOTAL IN COME WAS DETERMINED AT RS. 21,58,020/-. AGGRIEVED BY THE ORDER OF A.O., A SSESSEE CARRIED THE MATTER BEFORE LD. CIT(A) WHO VIDE ORDER DATED 04.09 .2009 GRANTED PARTIAL RELIEF TO THE ASSESSEE. AGGRIEVED BY THE AFORESAID ORDER OF LD. CIT(A), ASSESSEE IS NOW IN APPEAL BEFORE US AND HAS RAISED THE FOLLOWING GROUNDS:- 1. ON FACTS AND CIRCUMSTANCES OF THE CASE, THE LEAR NED CIT(A) HAS GROSSLY ERRED IN SUSTAINING THE REJECTION OF BOOK RESULTS, AS MAD E BY THE AO, BY INVOKING THE PROVISIONS OF SECTION 143(3) OF THE ACT, WHICH IS A BSOLUTELY ERRONEOUS AND NEEDS TO BE DELETED. 2. ON FACTS AND CIRCUMSTANCES OF THE CASE, THE LEAR NED CIT(A) HAS GROSSLY ERRED IN SUSTAINING THE ADDITION OF RS. 27,38,931/- AS MA DE BY THE AO, BY ALLEGING UNDERVALUATION OF CLOSING STOCK, WHICH IS ABSOLUTEL Y ERRONEOUS AND NEEDS TO BE DELETED. 3. ON FACTS AND CIRCUMSTANCES OF THE CASE, THE LEAR NED CIT(A) HAS GROSSLY ERRED IN SUSTAINING THE DISALLOWANCE OF RS. 5,47,178/-, A S MADE BY THE AO, OUT OF WEAVING MAJURI EXPENSES, BY ALLEGING IT TO BE EXCES SIVE, WHICH IS ERRONEOUS AND NEEDS TO BE DELETED. 4. ON FACTS AND CIRCUMSTANCES OF THE CASE, THE LEARNED AO HAS GROSSLY ERRED IN PARTLY SUSTAINING DISALLOWANCE TO THE TUNE OF RS. 4 ,96,381/- AS AGAINST, RS.5,11,245/-, AS MADE BY THE AO, OUT OF INTEREST E XPENSES, BY ALLEGING THAT INTEREST BEARING FUNDS HAVE BEEN ADVANCED FOR NON-B USINESS PURPOSES, WHICH IS ERRONEOUS AND NEEDS TO BE DELETED. 4. BEFORE US, LD. A.R. SUBMITTED THAT 1 ST GROUND BEING GENERAL IS NOT PRESSED AND THEREFORE THE SAME IS DISMISSED AS NOT PRESSED. 2 ND GROUND IS WITH RESPECT TO ADDITION OF RS. 27,38,93 1/- ON ACCOUNT OF UNDER VALUATION OF CLOSING STOCK 5. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, A.O NO TICED THAT DURING THE YEAR ASSESSEE HAS EARNED GROSS PROFIT OF 9.75% AS A GAINST THE GROSS PROFIT OF 16.69% IN THE IMMEDIATE PRECEDING YEAR. THE ASSESSE E WAS ASKED TO JUSTIFY THE FALL IN G.P. A.O NOTED THAT IN THE ABSENCE OF A NY SATISFACTORY EXPLANATION ITA NO 33/A HD/2010 . A.Y. 2006-07 3 AND NON PRODUCTION OF STOCK REGISTER AND THE QUANTI TATIVE DETAILS THE FALL IN G.P. WAS NOT SUPPORTED BY EVIDENCE. A.O ON PERUSIN G THE DETAILS NOTICED THAT THE AVERAGE PURCHASE RATE OF YARN WORKED OUT T O RS. 94.93 PER KG BUT HOWEVER THE AVERAGE RATE ADOPTED BY THE ASSESSEE FO R WORKING THE CLOSING STOCK AS ON 31.03.2006 WAS RS. 61.17 PER KG. A.O NO TED THAT IN THE ABSENCE OF STOCK REGISTER MADE AVAILABLE FOR VERIFICATION, THE ASSESSEE HAD NOT JUSTIFIED THE VALUATION OF CLOSING STOCK. HE WAS OF THE VIEW THAT ASSESSEE HAS UNDER VALUED THE CLOSING STOCK. HE THEREFORE REJECT ED THE BOOKS U/S. 145 (3) AND THEREAFTER ON THE BASIS OF THE AVERAGE RATE OF PURCHASES AND APPLYING TO THE QUANTITY OF STOCK, WORKED OUT THE UNDER VALUATI ON OF STOCK AT RS. 27,38,931/- AND ENHANCED THE TRADING RESULT BY RS. 27,38,931/-. AGGRIEVED BY THE ORDER OF A.O., ASSESSEE CARRIED THE MATTER B EFORE LD. CIT(A) WHO CONFIRMED THE ACTION OF A.O BY HOLDING AS UNDER:- 6.I HAVE CAREFULLY CONSIDERED THE FINDINGS AND THE OBSERVATIONS OF THE AO ON ONE HAND, AND THE WRITTEN SUBMISSION OF THE A-R ON THE OTHER. I HAVE ALSO EXAMINED THE ASST. RECORDS IN THE PRESENCE OF THE THEN AO WH O FRAMED THE ASST. ORDER. FIRSTLY, I FIND THAT THE RETURN OF INCOME AND THE A UDIT REPORT IS PLACED ON TOP OF THE FILE, WHEREAS, IT SHOULD HAVE BEEN THE FIRST DOCUME NT IN THE FILE AND HENCE, AT THE BOTTOM, ON THE BASIS OF WHICH THE ASST. PROCEEDINGS WOULD HAVE BEEN INITIATED BY THE ISSUE OF NOTICES U/S.L43(2)AND 142(1) AND THE Q UESTIONNAIRE. IT THUS APPEARS THAT THE FILE HAS BEEN TAMPERED WITH. SECONDLY, A C OPY OF THE WRITTEN SUBMISSION ALLEGEDLY FURNISHED BEFORE THE A.O WHICH HAS BEEN E NCLOSED TO THE WRITTEN SUBMISSION IN APPELLATE PROCEEDINGS IS UNDATED, WHE REAS, IN THE ASST. RECORDS IT IS SHOWN TO BE DATED 18.11.2008. THE TWO LETTERS HA VE OTHER DIFFERENCES AS WELL. THE COPY OF THE LETTER FURNISHED BY THE AR IN APPEL LATE PROCEEDINGS ON THE LEFT TOP OF THE COMER, HAS THE WORD PROPRIETOR (M.NO.72278) WRITTEN WHICH HAS BEEN STRUCK-OFF, BUT THE SAME IS WRITTEN ON THE LETTER F URNISHED TO THE A.O. FURTHER, THE CA (WHO PRESENTED THE CASE BEFORE THE AO), NO MEMBE RSHIP NUMBER OF THE CA WAS TYPED IN THE LETTER, WHILE THE LETTER SUBMITTED BEFORE ME SHOWS THE MEMBERSHIP NUMBER WRITTEN IN HAND. EVEN THE SIGNATU RE VARIES. MOST IMPORTANTLY, THE AR HAS NOW FURNISHED AT LEAST 12 PAGES OF ANNEX URES TO THE SAID LETTER, WHEREAS, THE LETTER ALLEGEDLY FURNISHED BEFORE THE AO HAD ONLY 3 PAGES AS ANNEXURES. EVEN IF IT IS TO BE ACCEPTED THAT THE PURPORTED LET TER WAS ACTUALLY FILED BEFORE THE AO, THEN ON AN EXAMINATION OF THE SAME, IT IS SEEN THAT THERE ARE GLARING DISCREPANCIES WITH THE AUDIT REPORT. THE ANNEXURE-I V TO THE AUDIT REPORT CONTAINS DETAILS OF OPENING STOCK, PURCHASES, CONSU MPTION, SALES AND CLOSING ITA NO 33/A HD/2010 . A.Y. 2006-07 4 STOCK OF RAW MATERIALS IN KGS. AS ALSO FINISHED GOO DS I.E. GREY IN KGS. THE CLOSING STOCK OF RAW MATERIAL IN THIS ANNEXURE IS SHOWN AT 82,458 KGS. IN THE TABLES FURNISHED BY THE AR IN APPELLATE PROCEEDINGS AS ALS O FROM THE TABLES FURNISHED BEFORE THE AO, THE CLOSING STOCK OF RAW MATERIALS I S SHOWN AT 57,369.865 KGS. THE AR HAS CLAIMED THAT THERE WAS A TYPOGRAPHICAL E RROR IN THE AUDIT REPORT, BUT THIS HAS NOT BEEN SUBSTANTIATED BY A CERTIFICATE FR OM THE AUDITORS AND HENCE, CANNOT BE ACCEPTED. THE TABLES FOR GREY FURNISHED B Y THE AR SHOWS THE CLOSING STOCK AT 1,13,401 KGS. THE AUDIT REPORT SHOWS 20,41 ,227 KGS. THE TABLE OF THE AR SHOWS THIS FIGURE AS THE VALUE IN RUPEE TERMS OF THE CLOSING STOCK OF GREY, IT IS ABSOLUTELY CLEAR THEREFORE, THAT EITHER THE SUBMISS IONS MADE BY THE AR AND ACCOMPANIED BY THE ANNEXURES OR THE AUDIT REPORT IT SELF WAS BOGUS. THE ONLY CONCLUSION WHICH CAN BE DRAWN IS THAT, THERE WAS AB SOLUTELY NO MERIT IN WHAT HAD BEEN STATED BEFORE THE AO, AS ALSO NOW IN APPELLATE PROCEEDINGS. FURTHER, THE ASSESSEE HAD FURNISHED ONLY A COUPLE OF LEDGER ACCO UNTS DURING THIS ASST. PROCEEDINGS, BUT HAD FAILED TO FURNISH THE RELEVANT BILLS AND VOUCHERS. THIS WAS IMPORTANT SINCE THE TABLE SHOWS, AND THIS WAS ALSO CLAIMED BEFORE THE AO, THAT THERE WAS WIDE FLUCTUATION IN THE PURCHASE PRICE OF YARN. FOR EXAMPLE, THE TABLE SHOWS THAT THE AVERAGE PRICE IN DECEMBER, 2005 WAS RS, 129.636.PER KG, WHEREAS, IN THE MONTH OF JANUARY,2006 IT WAS RS.79. 068 PER KG. IT WAS RS.L26.083 IN THE MONTH OF MAY, 2005. THEREFORE SUC H FLUCTUATIONS OUGHT TO HAVE BEEN ESTABLISHED TO BE GENUINE EITHER BY THE PURCHA SE BILLS OR BY THE STOCK REGISTER, NONE OF WHICH WERE PRODUCED BEFORE THE AO . SIMPLY FURNISHING A SERIES OF TABLES WHICH HAVE NOT BEEN CORROBORATED OR AUTHE NTICATED BY THE RELEVANT BOOKS OF ACCOUNT AND BILLS AND VOUCHERS, CANNOT BE ACCEPTED AS SUFFICIENT EVIDENCE IN SUPPORT OF THE CLAIM MADE BY THE ASSESS EE 6.2GIVEN SUCH FACTS AND CIRCUMSTANCES OF THE CASE A S DISCUSSED ABOVE IN CONSIDERABLE DETAIL, I HAVE COME TO THE INEVITABLE CONCLUSION THAT THE AO WAS FULLY JUSTIFIED IN REJECTING THE BOOK RESULTS U/S. 145(3) AND IN MAKING THE ADDITION ON ACCOUNT OF UNDERVALUATION OF CLOSING STOCK OF RS .27,38,931, WHICH IS CONFIRMED. 6. AGGRIEVED BY THE AFORESAID ORDER OF LD. CIT(A), ASS ESSEE IS NOW IN APPEAL BEFORE US. 7. BEFORE US, LD. A.R. REITERATED THE SUBMISSIONS MADE BEFORE A.O AND LD. CIT(A) AND FURTHER SUBMITTED THAT A.O HAS MISTAKEN THE NET PROFIT RATIO OF 9.75% AS THE GROSS PROFIT RATIO WHEREAS IN REALITY THE GROSS PROFIT RATIO FOR THE YEAR UNDER CONSIDERATION IS 29.84% AND IN SUPPORT O F WHICH THE POINTED TO PAGE 66 OF THE PAPER BOOK BEING THE ANNEXURE TO THE TAX AUDIT REPORT. HE THEREFORE SUBMITTED THAT A.O HAS ERRONEOUSLY COMPAR ED THE G.P RATIO OF A.Y. ITA NO 33/A HD/2010 . A.Y. 2006-07 5 05-06 OF 16.69% WITH THE NET PROFIT RATIO OF A.Y. 0 6-07 OF 9.75% AND CONCLUDED THAT THERE IS FALL IN G.P. HE THEREFORE S UBMITTED THAT THE COMPARISON OF PROFITS MADE BY THE A.O WAS WRONG AS THE GROSS PROFIT OF A YEAR CANNOT BE COMPARED WITH THE NET PROFIT OF ANOT HER YEAR AND SUBMITTED THAT IN FACT THE GROSS PROFIT RATIO IN THE YEAR HAS INCREASED IN COMPARISON TO TWO PRECEDING ASSESSMENT YEARS AND THEREFORE SUBMIT TED THAT SINCE THERE WAS NO FALL IN THE GROSS PROFIT RATE, THE BOOK RESULTS COULD NOT BE REJECTED FOR THAT REASON. WITH RESPECT TO THE WORKING OF AVERAGE PURC HASE RATE OF YARN AT RS. 94.93 PER KG CONSIDERED BY A.O, HE SUBMITTED THAT A TYPOGRAPHICAL ERROR WAS COMMITTED BY THE AUDITOR CONSEQUENT TO WHICH THE QU ANTITY OF CLOSING STOCK OF YARN WAS SHOWN 82,458 KG INSTEAD OF 57,370 KG, A S THE SALE OF 25,088 KG OF YARN WHICH WAS SOLD WAS MISSED OUT WHILE DERIVIN G THE CLOSING STOCK IN TERMS OF QUANTITY. HE THEREFORE SUBMITTED THAT SINC E THE ACTUAL CLOSING STOCK OF YARN WAS 57,370 KG AND NOT 82,458 KG THAT WAS CO NSIDERED BY THE A.O AND THEREFORE THE ADDITION ON THAT COUNT WAS ALSO N OT MADE CORRECTLY BY THE A.O. HE FURTHER SUBMITTED THAT IF THE AVERAGE RATE OF RS. 94.93 PER KG IS ADOPTED FOR VALUATION OF STOCK OF 57,370 KGS. BEING THE CORRECT QUANTITY, THE VALUATION OF STOCK WOULD BE VERY NEAR TO BE VALUE O F STOCK AS SHOWN IN THE PROFIT AND LOSS ACCOUNT. HE THEREFORE SUBMITTED THA T THE REJECTION OF BOOKS ON THE GROUND OF UNDER VALUATION OF CLOSING STOCK W AS ALSO NOT VALID. HE FURTHER SUBMITTED THAT EVERY BILL OF PURCHASE NEEDS TO BE CONSIDERED FOR VALUATION OF THE CLOSING STOCK AND THE CALCULATION OF CLOSING STOCK AS PER THE PURCHASE BILLS WERE FURNISHED BEFORE THE LOWER AUTH ORITIES BUT THE SAME WERE IGNORED. HE FURTHER SUBMITTED THAT A.O HAS NOT POIN TED OUT ANY SPECIFIC DEFECTS IN THE BOOKS OF ACCOUNTS AND THEREFORE REJE CTION OF BOOKS WAS UNJUSTIFIED AND ACCORDINGLY THE ADDITION WAS ALSO N OT CALLED FOR. LD. D.R. ON THE OTHER HAND SUPPORTED THE ORDER OF A.O AND LD. C IT(A). ITA NO 33/A HD/2010 . A.Y. 2006-07 6 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IN THE PRESENT CASE, WE FIND THAT A.O HAS REJECTED BOO KS OF ACCOUNTS MAINLY ON THREE GROUNDS NAMELY FALL IN GP RATIO, NON MAINTENA NCE OF STOCK REGISTER AND QUANTITATIVE DETAILS AND UNDER VALUATION OF CLOSING STOCK OF YARN. WE FIND THAT THE A.O IN THE ORDER HAS NOTED THAT ASSESSEE H AS EARNED A GROSS PROFIT OF 9.75% AS AGAINST THE GROSS PROFIT OF 6.69% IN THE I MMEDIATE PRECEDING YEAR. HOWEVER ON PERUSING THE PARTICULARS OF ACCOUNTING A ND THE RATIO WHICH ARE ANNEXURE TO THE TAX AUDIT REPORT AND ARE PLACED AT PAGE 66 OF THE PAPER BOOK, IT IS SEEN THAT THE AUDITOR HAD SHOWN THE NET PROFIT RATIO FOR THE YEAR UNDER CONSIDERATION AT 9.75% AND THE GROSS PROFIT R ATIO AT RS. 29.84%. WE THUS FIND THAT A.O HAS PROCEEDED ON AN INCORRECT BA SIS AS HE HAD COMPARED THE NET PROFIT OF A YEAR WITH THE GROSS PROFIT OF A NOTHER YEAR WHEREAS THE CORRECT WAY WOULD HAVE BEEN THAT HE SHOULD HAVE COM PARED THE GROSS PROFIT RATIO FOR BOTH THE YEARS. IF THE GROSS PROFIT RATI O FOR THE YEAR UNDER CONSIDERATION IS COMPARED WITH THAT OF IMMEDIATE PR ECEDING YEAR, IT APPEARS THAT THERE IS NO FALL IN THE GROSS PROFIT RATIO. AN OTHER SUBMISSION OF THE LD. A.R. THAT DUE TO TYPOGRAPHICAL ERROR THE CLOSING ST OCK IN QUANTITATIVE TERMS OF THE RAW MATERIAL HAS BEEN SHOWN AT 82,458 KG SEEMS TO BE CORRECT WHEN SEEN IN THE LIGHT OF THE SUBMISSION OF THE QUANTITATIVE DETAILS WHICH WERE SUBMITTED TO THE A.O AND WHICH IS PLACED AT PAGE 17 TO 19 OF THE PAPER BOOK. ON PERUSING THE STATEMENT AT PAGE 17 OF THE PAPER B OOK, IT IS SEEN THAT THE CLOSING STOCK OF YARN IS 57,369.865 KG WHEREAS THE CLOSING STOCK WHICH IS ERRONEOUSLY SHOWN AS 82,458 KG. THE MISTAKE IN QUAN TITATIVE TERMS HAS BEEN RECONCILED BY THE LD. A.R. BY DEMONSTRATING THAT TH E CLOSING STOCK SHOULD HAVE BEEN DERIVED AFTER CONSIDERING THE SALE OF YAR N OF 25,088 KG WHICH IS ALSO REFLECTED IN THE PROFIT AND LOSS ACCOUNT PLACE D AT PAGE 68 OF THE PAPER BOOK. BEFORE US, REVENUE HAS NOT BROUGHT ANY MATERI AL ON RECORD TO ITA NO 33/A HD/2010 . A.Y. 2006-07 7 CONTROVERT THE SUBMISSIONS OF LD. A.R. IN SUCH CIRC UMSTANCES, CONSIDERING THE FACT THAT A.O HAS COMPARED THE GROSS PROFIT WIT H THE NET PROFIT AND COMPUTING THE WORKING OF CLOSING STOCK WITH THE INC ORRECT QUANTITY AND THEREBY MAKING THE ADDITION THEREFORE IN THE PRESEN T CASE IS UNCALLED FOR AND THEREFORE WE ARE OF THE VIEW THAT NO ADDITION ON AC COUNT OF CLOSING STOCK IS CALLED FOR. WE THUS DIRECT ITS DELETION. GROUND NO. 3 IS WITH RESPECT TO DISALLOWANCE ON ACC OUNT OF WEAVING MAJURI EXPENSES 9. A.O NOTICED THAT ASSESSEE HAS DEBITED RS. 27,35, 89 3/- AS WEAVING MAJURI EXPENSES. HE ASKED THE ASSESSEE TO JUSTIFY THE RATE OF PAYMENT OF MAJURI WITH THE QUANTITY OF JOB WORK AND SALES UNDERTAKEN. HE NOTICED THAT IN THE ABSENCE OF ANY JUSTIFICATION FOR REASONABLENESS THE ENTIRE EXPENSES CANNOT BE ALLOWED AND THEREFORE DISALLOWED 20% OF THE EXPENSE S AND THUS MADE AN ADDITION OF RS. 5,47,178/-. AGGRIEVED BY THE ORDER OF A.O., ASSESSEE CARRIED THE MATTER BEFORE LD. CIT(A) WHO UPHELD THE ORDER O F A.O BY HOLDING AS UNDER:- 10.I HAVE CAREFULLY CONSIDERED BOTH THE POSITIONS. THE POINT TO NOTE IS THAT, NONE OF THE DETAILED EXPLANATION AND STATISTICS WHICH HA VE NOW BEEN FURNISHED BY THE AR WAS PRESENTED BEFORE THE AO. THE COPY OF THE ONL Y UNDATED WRITTEN SUBMISSION WHICH WAS ALLEGEDLY FILED DURING THE ASS T. PROCEEDINGS CONTAINED NO SUCH DETAILS. THE A'O THEREFORE SIMPLY HAD NO OTHER OPTION BUT TO MAKE THE DISALLOWANCE OUT OF WEAVING MAJURI EXPENSES. 10.1 COMING TO THE SUBMISSION OF THE AR IN APPELLAT E PROCEEDINGS, I FIND THAT HE HAS ONLY TRIED TO MAKE A CASE OUT OF NOTHING. HE HA S-PLACED RELIANCE ON THE DECISION OF THE AHMEDABAD BENCH IN THE CASE OF DHIR UBHAI BECHARBHAI DHAMELIA IN ITA NO.3188/AHD/2007, I HAVE GONE THROUGH THIS O RDER. THE APPELLANT WAS ENGAGED IN THE BUSINESS OF DIAMOND CUTTING AND POLI SHING ON JOB-WORK BASIS AND HAD CLAIMED LABOUR CHARGES OF RS.2.16 CRORES AGAINS T THE JOB-WORK RECEIPTS OF RS.2.29 CRORES. THE ASSESSEE HAD PRODUCED THE LABOU R PAYMENT REGISTER FROM WHERE THE AO FOUND THAT THE SIGNATURES OF PARTICULA R LABOURERS WERE ENTIRELY DIFFERENT FROM ONE MONTH TO ANOTHER. MANY ENTRIES W ERE MADE IN THE SAME ITA NO 33/A HD/2010 . A.Y. 2006-07 8 HANDWRITING, ETC, ETC. IT WAS SUBMITTED THAT THE AS SESSEE HAD NO REGULAR EMPLOYEES/LABOURERS WHO SWITCHED OVER FROM ONE EMPL OYER TO ANOTHER. THE AO HOWEVER REJECTED THE ASSESSEE'S SUBMISSION AND DISA LLOWED 10% OF THE EXPENSES, WHICFT WAS RESTRICTED BY THE CIT(A) TO 5% . THE IT AT PLACED RELIANCE ON THE EARLIER CASES OF PRAVINBHAI R. SHAH(HUF) AND BHARATKURNAR RAMNIKIAL MEHTA, AND ON THE GROUND THAT THE LABOURERS WERE IN THE UNORGANISED SECTOR, AND THE' FACT THAT THEY WERE MIGRANT LABOURERS, AND THA T THE LABOUR CHARGES WERE, DULY RECORDED, AND THAT, NO DEFECT WAS POINTED OUT IN TH E BOOKSTAND MAINLY BECAUSE THE GP RATIO WAS NOT ABNORMAL, DELETED THE ADDITION CONFIRMED BY THE CIT(A). IN THE CASE OF OUR ASSESSEE, NO REGISTER OR RECORD WAS PRODUCED BEFORE THE AO, NO EXPLANATION WAS FURNISHED IN COURSE, OF THE ASST, P ROCEEDINGS EXCEPT FOR SUBMITTING THAT THE EXPENDITURE INVOLVED PETTY AMO UNTS INCURRED ON A DAY-TO- DAY BASIS. MOREOVER, THE LABOURERS EMPLOYED BY THE ASSESSEE WERE NOT MIGRANT LABOURERS BUT WERE ON THE REGULAR EMP LOYMENT OF THE ASSESSEE. IT IS FOR THIS REASON THAT THE ASSESSEE WAS ABLE TO UNDER TAKE NOT ONLY ITS OWN MANUFACTURING ACTIVITY BUT ALSO DO JOB-WORK FOR OTH ER PARTIES. THEREFORE THERE WAS NO REASON WHY RELEVANT DETAILS AND EVIDENCES COULD NOT BE FURNISHED. 10.2 WHAT THE AR HAS ATTEMPTED TO DO IS TO EXPLAIN THE INCREASE IN THE MAJURI EXPENSES BY SHOWING THAT THERE WAS A DECLINE IN THE MANUFACTURING ACTIVITY AND AN INCREASE IN JOB-WORK AND, BECAUSE THE LABOUR COS T COMPONENT AS COMPARED TO THE JOB-WORK RECEIPT WAS HIGHER THAN MANUFACTURING AND SALES, THERE WAS AN INCREASE IN THE MAJURI EXPENSES THIS YEAR. HOWEVER, THE POINT TO NOTE IS THAT, IN THE PRECEDING YEAR THE TURNOVER OF MANUFACTURING (O F GREY) WAS RS.3.99 CRORES. DURING THE YEAR UNDER CONSIDERATION, THE TURNOVER O N MANUFACTURING, JOB-WORK AND TRADING PUT TOGETHER WORKED OUT TO RS.2.79 CROR ES. THEREFORE, EVEN THOUGH THE LABOUR COST FOR MANUFACTURING MAY HAVE DECREASE D AS ALSO MANUFACTURING OVERHEADS, IT CANNOT BE DENIED-THAT INSPITE OF THE SUBSTANTIAL FALL IN THE TURNOVER, EVEN AFTER TAKING INTO CONSIDERATION THE CHANGE IN THE COMPOSITION OF THE BUSINESS ACTIVITY OF THE ASSESSEE, THERE WAS AN INC REASE IN THE LABOUR COST. BE AS IT MAY, SIMPLE COMPARISON OF AVERAGES AND RATIOS CANNOT BE A SUFFICIENT GROUND TO EXPLAIN SUCH INCREASE, ESPECIALLY WHEN NE ITHER IN ASST. PROCEEDINGS NOR IN APPELLATE PROCEEDINGS WAS SUCH INCREASE SUPPORTE D BY ANY JUSTIFIABLE REASONING OR DOCUMENTARY EVIDENCE. THE 20% DISALLOW ANCE MADE BY THE AO OUT OF WEAVING MAJURI EXPENSES IS THEREFORE SUSTAINED, AND THE ADDITION OF RS.5,47,178 IS CONFIRMED. 10. AGGRIEVED BY THE AFORESAID ORDER OF LD. CIT(A), ASS ESSEE IS NOW IN APPEAL BEFORE US. 11. BEFORE US, LD. A.R. REITERATED THE SUBMISSIONS MADE BEFORE A.O AND LD. CIT(A) AND FURTHER SUBMITTED THAT DURING THE YEAR T HERE WAS A SIGNIFICANT CHANGE IN THE COMPONENTS OF INCOME FROM OPERATIONS AND IN SUCH A CASE, THE ITA NO 33/A HD/2010 . A.Y. 2006-07 9 COMPONENTS OF TURNOVER CANNOT BE COMPARED. HE FURTH ER SUBMITTED THAT THE RATIO OF LABOUR COST TO TOTAL COST IS HIGHER IN JOB WORK ACTIVITY AS COMPARED TO MANUFACTURING ACTIVITIES WHICH HAS RESULTED INTO IN CREASE IN PROPORTION OF LABOUR COST IN THE CURRENT YEAR. THE LD. A.R. THERE FORE SUBMITTED THAT THE ADHOC DISALLOWANCE OF 20% WAS UNWARRANTED AND AS AN ALTERNATE HE SUBMITTED THAT IF AT ALL SOME DISALLOWANCE WAS FELT NECESSARY THAN A REASONABLE DISALLOWANCE AS FELT APPROPRIATE BY THE HONBLE TRIBUNAL BE MADE. THE LD. D.R ON THE OTHER HAND SUPPORTED THE O RDER OF A.O AND LD. CIT(A). 12. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IN THE PRESENT CASE, THE A.O HAS DISALLOWED LABOUR EXP ENSES ON ADHOC BASIS. WE FURTHER FIND THAT LD. CIT(A) HAS NOTED THAT ASSESSE E DID NOT PRODUCE REGISTER OR RECORDS OF THE LABOUR CHARGES PAID BEFORE THE A. O. BEFORE US, LD. A.R. HAS SUBMITTED THAT THERE IS CHANGE IN THE CONSTITUTION OF THE INCOME AND THEREFORE THE RATIO OF LABOUR EXPENSES AS COMPARED TO EARLIER YEAR WOULD NOT BE PROPER. HE HAS ALSO SUBMITTED THAT THE DISALLOWANCE OF 20% MADE BY THE A.O IS ON A HIGHER SIDE AND A REASONABLE DISALLOWANCE MAY BE MA DE. CONSIDERING THE TOTALITY OF FACTS AND CIRCUMSTANCES WE ARE OF THE V IEW THAT IN THE ABSENCE OF ANY FINDING OF THE AUTHORITIES THAT THE EXPENSES AR E BOGUS IN NATURE, WE ARE OF THE VIEW THAT THE ENDS OF JUSTICE SHALL BE MET IF A DDITION IS RESTRICTED TO 10% OF THE EXPENSES AS AGAINST THE 20% MADE BY A.O. WE THUS DIRECT ACCORDINGLY. IN THE RESULT, THE GROUND OF ASSESSEE IS PARTLY ALLOWED. GROUND NO. 4 IS WITH RESPECT TO DISALLOWANCE OF INT EREST EXPENSES. ITA NO 33/A HD/2010 . A.Y. 2006-07 10 13. A.O NOTICED THAT ASSESSEE HAS PAID INTEREST OF RS. 19,83,875/- TO BANK. HE ALSO NOTICED THAT ASSESSEE HAS ADVANCED LOANS AGGRE GATING TO RS. 42,60,381/- ON WHICH NO INTEREST WAS CHARGED BY THE ASSESSEE, A .O IN THE ABSENCE OF ANY CONVINCING REPLY FROM ASSESSEE BY APPLYING THE RATE OF 12% BEING THE RATE PAID TO THE BANK ON THE AMOUNT ADVANCED BY ASSESSEE WORKED OUT THE INTEREST LIABILITY OF RS. 5,11,245/- WHICH ACCORDIN G TO HIM COULD NOT BE ALLOWED. AGGRIEVED BY THE ORDER OF A.O., ASSESSEE C ARRIED THE MATTER BEFORE LD. CIT(A) WHO UPHELD THE ORDER OF A.O BY HOLDING A S UNDER:- 14. I HAVE CAREFULLY CONSIDERED BOTH THE POSITIONS. FROM THE AFORESAID CHART, IT IS SEEN THAT THE ASSESSEE HAD GIVEN ADVANCES TO SHREE M.D WEAVES AND GLORY DIGITAL PHOTO STATION ON WHICH NO INTEREST WAS CHAR GED. THE ARGUMENT OF THE AR THAT THERE-WERE NO LOANS AND HENCE INTEREST WAS NOT CHARGED IS SIMPLY NOT ACCEPTABLE. EVEN ADVANCES OUGHT TO CARRY INTEREST E SPECIALLY WHEN IT IS NOT SHOWN AS TO WHAT WAS THE PURPOSE FOR WHICH INTEREST FROM ADVANCES WERE GIVEN TO THE SAID TWO ENTITIES, EVEN THOUGH IT HAS BEEN C LAIMED THAT THE ADVANCES WERE GIVEN FOR BUSINESS PURPOSES. ONCE AGAIN, IT MUST BE AN ACCEPTED THAT IN COURSE OF THE ASST. PROCEEDINGS THE ASSESSEE'S AR SIMPLY F AILED TO FURNISH EITHER ANY EXPLANATION OR DETAIL OR EVIDENCE. THE AR IN APPELL ATE PROCEEDINGS HAS REPEATEDLY ATTEMPTED TO MAKE A CASE FOR THE ASSESSE E AND TO ARGUE FOR DELETION OF THE ADDITIONS MADE. /HOWEVER, ON THIS PARTICULAR ISSUE, I FIND THAT APART FROM THE TDS RECEIVABLE OF RS. 1,23,874, INTEREST OUGHT TO HAVE BEEN CHARGED BY-THE ASSESSEE ON THE REMAINING ADVANCES OF RS.41,36,507, INTEREST @ 12% ; ON THIS SUM WAS WORKS OUT TO RS. 4,96,381/-. THE ASSESSEE W ILL THUS GET A RELIEF OF RS. 14,864. THE A.O IS DIRECTED TO TAKE ACTION ACCORDIN GLY. IN THE RESULT, THE ASSESSEES APPEAL IS PARTLY ALL OWED. 14. AGGRIEVED BY THE AFORESAID ORDER OF LD. CIT(A), ASS ESSEE IS NOW IN APPEAL BEFORE US. ITA NO 33/A HD/2010 . A.Y. 2006-07 11 15. BEFORE US, LD. A.R. REITERATED THE SUBMISSIONS MADE BEFORE A.O AND LD. CIT(A) AND FURTHER SUBMITTED THAT THE ADVANCE OF RS . 38,46,507/- WAS GIVEN AS CAPITAL ADVANCE FOR FACTORY LAND AND BUILDING AN D RS. 2,90,000/- WAS ADVANCED FOR MAKING SAMPLING BROCHURE. HE SUBMITTED THAT BOTH THE ADVANCES WERE GENUINE AND FOR THE PURPOSE OF BUSINE SS AND THE BUSINESS NEXUS HAS BEEN ESTABLISHED. HE FURTHER SUBMITTED TH AT ASSESSEE HAS OWN FUNDS WHICH IS MORE THAN 8.52 TIMES OF THE FUNDS AD VANCED BY THE ASSESSEE AND THEREFORE IN THE ABSENCE OF ANY NEXUS, THE PRES UMPTION WOULD BE THAT THE AMOUNTS HAVE BEEN ADVANCED OUT OF INTEREST FREE FUN DS. HE THEREFORE SUBMITTED THAT THE ADDITION BE DELETED. THE LD. D.R . ON THE OTHER HAND SUPPORTED THE ORDER OF A.O AND LD. CIT(A). 16. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. FROM THE DETAILS OF LOANS AND ADVANCES WHICH IS REP RODUCED BY LD. CIT(A) AT PAGE 8 OF THE PAPER BOOK, IT IS SEEN THAT THE AMOUN T (EXCLUDING THE TDS RECEIVABLE) WHICH HAS BEEN ADVANCED BY THE ASSESSEE IS RS. 41,36,507/-. BEFORE US, IT IS ASSESSEES CONTENTION THAT IT HAS SUFFICIENT OWN INTEREST FREE FUNDS. DURING THE COURSE OF HEARING A SPECIFIC QUER Y WAS PUT TO LD. A.R. AND HE WAS ASKED ABOUT THE DATE ON WHICH THE AFORESAID ADVANCES WERE ADVANCED AND ALSO THE AVAILABILITY OF OWN FUNDS IN THE YEAR IN WHICH THE AMOUNTS WERE ADVANCED TO WHICH LD. A.R. SUBMITTED THAT THE REQUI RED INFORMATION IS NOT READILY AVAILABLE AND THEREFORE COULD NOT FURNISH T HE INFORMATION ASKED FOR. IT WAS HOWEVER SUBMITTED THAT IT CAN FURNISH THE REQUI RED INFORMATION LATER ON. IN VIEW OF THESE FACTS, THE CONTENTION OF THE LD. A .R. ABOUT THE AVAILABILITY OF SUFFICIENT INTEREST FREE FUNDS COULD NOT BE VERIFIE D. HOWEVER, IN THE INTEREST OF JUSTICE, WE FEEL THAT THE CONTENTION OF ASSESSEE NEEDS RE-EXAMINATION. WE THEREFORE REMIT THE ISSUE TO THE FILE OF A.O TO VER IFY THE CONTENTION OF ITA NO 33/A HD/2010 . A.Y. 2006-07 12 ASSESSEE ABOUT THE AVAILABILITY OF INTEREST FREE FU NDS VIS--VIS THE AMOUNTS ADVANCED. IN CASE THE CONTENTION OF ASSESSEE ABOUT AVAILABILITY OF INTEREST FREE FUNDS IN EXCESS OF THE AMOUNTS ADVANCED IS FOU ND CORRECT THEN THE ADDITION MADE BY A.O BE DELETED. THE ASSESSEE IS AL SO DIRECTED TO CO- OPERATE BY FURNISHING PROMPTLY THE DETAILS CALLED F OR BY THE A.O. NEEDLESS TO STATE THAT A.O SHALL GRANTED ADEQUATE OPPORTUNITY O F HEARING TO THE ASSESSEE. IN THE RESULT, THE GROUND IS ALLOWED FOR STATISTICA L PURPOSES. 17. IN THE RESULT, THE APPEAL OF ASSESSEE IS PARTLY ALL OWED FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN OPEN COURT ON 28 - 08 - 201 5. SD/- SD/- (RAJPAL YADAV) (ANIL CHATURVEDI) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD. TRUE COPY RAJESH COPY OF THE ORDER FORWARDED TO: - 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT (APPEALS) 4. THE CIT CONCERNED. 5. THE DR., ITAT, AHMEDABAD. 6. GUARD FILE. BY ORDER DEPUTY/ASSTT.REGISTRAR ITAT,AHME DABAD