Shri Prakashbhai Prahladbhai Gami, V. The ACIT.,Circle-6, Surat

ITA 3305/AHD/2008

• Counselvise Citation: 330520514 RSA 2008
• Duration Of Justice: 3 year(s) 3 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-01-2012
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Next Hearing Date: 25-01-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 03-10-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAMIR TEKRIWAL SRDR
• Assessee Lawyers: MUNISH J SHAH
• Keywords: Principle of natural justice

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD AHMEDABAD B BENCH BEFORE SHRI MUKUL KUMAR SHRAWAT, JUDICIAL MEMBER AND SHRI B.P. JAIN, ACCOUNTANT MEMBER ITA NO.3305/AHD/2008 ASSESSMENT YEAR:2005-06 SHRI PRAKASHBHAI PRAHLADBHAI GAMI, GANGAKRUPA BUILDING, PUNA VILLAGE, DIST. SURAT PAN NO.ADSPP6520F / V/S . ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-6, SURAT / APPELLANT .. / RESPONDENT / BY APPELLANT SHRI MUNISH J SHAH, AR / BY RESPONDENT SHRI SAMIR TEKRIWAL, SR-DR / DATE OF HEARING 25-01-2012 / DATE OF PRONOUNCEMENT 31-01-2012 !' !' !' !' / // / ORDER PER B.P. JAIN, ACCOUNTANT MEMBER:- THIS APPEAL OF THE ASSESSEE ARISES FROM THE ORDER O F LD. COMMISSIONER OF INC-TAX (APPEALS)-IV, SURAT DATED 16-07-2008 FOR THE ASSESSMENT YEAR 2005-06. THE ASSESSEE HAS RAISED THE FOLLOWING GROU ND OF APPEAL:- 1. THE C.I.T.(APPEALS) ERRED IN UPHOLDING THE ADDI TION OF RS.27,60,383/- UNDER SEC.40A(2)(B) BEING THE SO-CALLED EXCESS PAYM ENT TO THE SISTER CONCERNS. 2. THE C.I.T.(APPEALS) FAILED TO TAKE INTO CONSIDER ATION THE OVERALL FACTS AND EVIDENCES BEFORE CONFIRMING THE ABOVE MENTIONED ADDITION. 2. THE BRIEF FACTS ARE THAT ASSESSEE HAD SHOWN GROS S PROFIT @ 2% COMPARED 2.53% LAST YEAR WHEREAS THE OTHER PARTIES ENGAGED IN THE SIMILAR ITA NO.3305/AHD/2008 A.Y. 2005-06 SH. PRAKASHBHAI P GAMI V. ACIT CIR-6,. SRT PAGE 2 LINE OF BUSINESS WERE SHOWING GROSS PROFIT RANGING FROM 5.51% TO 12.5% AS PER CHART REPRODUCED FROM PAGE-3 AND 4 OF THE ASSES SMENT ORDER. WHEN REQUIRED TO JUSTIFY THE LOWER GP, THE ASSESSEE SATE D THAT IT WAS A SMALL SCALE INDUSTRY AND NATURE OF INCOME WAS DIAMOND JOB-WORK COMMISSION WHERE ROUGH DIAMONDS RECEIVED FROM THE SUPPLIER WERE GIVE N TO SUB-CONTRACTORS FROM MANUFACTURING AND THE ASSESSEE WOULD PAY LABOUR CHA RGES TO THEM. IT WAS STATED THAT INCREASE OF 2.40% IN LABOUR COST WAS JU ST MARGINAL AND WAS THE RESULT OF MARKET CONDITIONS AND QUALITY OF DIAMONDS . THE ASSESSING OFFICER DID NOT ACCEPT THE EXPLANATION HOLDING THAT THE SAME WA S NOT BASED ON ANY BUSINESS PATTERN. THE AO FURTHER HELD THAT ONE OF T HE MAJOR FACTORS FOR DECREASE IN THE GP WAS LABOUR EXPENSES MOST OF WHIC H WERE PAID TO THE PARTIES COVERED U/S.40A(2)(B) OF THE INCOME-TAX ACT . THE AO ANALYZED THE PAYMENTS MADE TO THE SISTER CONCERNS ON PAGE-10 OF HER ASSESSMENT ORDER AND CONCLUDED THAT PER PIECE COST FOR SISTER CONCER N WORKED OUT TO RS.40 WHEREAS THE SAME WAS AT RS.21.50 PER PIECE IN RESPE CT OF OUTSIDE PARTIES AND THEREFORE THE PAYMENT MADE TO THE SISTER CONCERN WA S NOT AT THE MARKET RATE. THE AO THEREFORE HELD THAT REASONABLENESS OF LABOUR PAYMENT TO SISTER CONCERNS WAS UNVERIFIABLE AND THEREFORE CALLED FOR REJECTION OF BOOK RESULTS. AFTER INVOKING THE PROVISIONS OF SECTION 145(3) OF THE ACT THE AO ESTIMATED GP AT 6% AND MADE A ADDITION OF RS.30,89,816/-. 3. THE LD. CIT(A) FOR THE REASONS MENTIONED IN HIS ORDER HELD THAT THE JOB CHARGES HAVE BEEN PAID AT A LOWER RATE TO THE OUTSI DE PARTIES AND IT WOULD BE FAIR AND REASONABLE IF 10% OF THE EXCESS PAYMENTS M ADE TO THE SISTER CONCERN IS DISALLOWED U/S.40A(2)(B) OF THE ACT. THEREFORE, THE LD. CIT(A) RESTRICTED ADDITION AT RS.27,60,383/-. 4. LEARNED COUNSEL FOR THE ASSESSEE, MR. MANISH J S HAH, ADVOCATE INVITED OUR ATTENTION AT PAGE-9 PARA-8.3 OF ASSESSING OFFIC ERS ORDER WHICH SPECIFIC ITA NO.3305/AHD/2008 A.Y. 2005-06 SH. PRAKASHBHAI P GAMI V. ACIT CIR-6,. SRT PAGE 3 REFERENCE AT PAG-10 AND 11 OF THE AO'S ORDER, WHERE THE AO HAD COMMITTED GLARING MISTAKE IN NOTING DOWN THE FIGURES FOR PAYM ENT ETC. AT PAGE-10 OF AO'S ORDER, THE PAYMENT TO THE PERSONS U/S.40A(2)(B) OF THE ACT HAS BEEN SHOWN BY THE AO AT RS.5,96,30,298/-, WHEREAS THE SAME SHOULD HAVE BEEN AT RS.4,49,53,842/-. SIMILARLY, AT PAGE-11, THE FIGURE HAS BEEN SHOWN BY THE AO AT RS.5,96,30,298/-, WHEREAS IT SHOULD HAVE BEEN RS .6,62,27,891/-. THE FIGURE SHOWN BY THE AO AT RS.1,14,92,099/- SHOULD HAVE BEE N RS.17,92,821/-. THE FIGURE SHOWN AT RS.14,92,099/- SHOULD HAVE BEEN RS. 12,53,440/- AND FINALLY THE FIGURE AT RS.5,96,30,298/- SHOULD HAVE BEEN AT RS.4,49,53,842/-. ALL THE ACCURATE FIGURES WERE AVAILABLE BEFORE THE ASSESSIN G OFFICER. OUR ATTENTION WAS INVITED AT PAGES-7, 18 & 19 OF THE PAPER BOOK O F THE ASSESSEE. AT THE SAID PAGES, THE ASSESSEE HAD SUBMITTED THAT PAYMENTS MAD E TO SISTER CONCERN PER PIECE IS RS.35.86 ON THE AVERAGE WHICH IS LESS THAN PAYMENT MADE TO OUTSIDERS AT RS.39.23 PER PIECE. THEREFORE, THE COM PLETE THEORY OF EXCESS PAYMENTS TO SISTER CONCERN FAILS ON MERIT AND THE O RDER OF THE AO IS LIABLE TO BE QUASHED. 5. ON THE OTHER HAND, LD. SR-DR SHRI SAMIR TEKRIWAL ARGUED AND POINTED OUT THAT INDIVIDUALLY IN FEW CASES, THE ASSESSEE HA S PAID EXCESS RATE PER PIECE TO SISTER CONCERN AS COMPARED TO THE OUTSIDE PARTIE S. THEREFORE, HE SUPPORTED THE ORDERS OF BOTH THE AUTHORITIES BELOW. 6. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE FACTS OF THE CASE. IN THE PRESENT CASE, THE ISSUE BEFORE US IS REJECTI ON OF BOOKS OF ACCOUNT U/S.145(3) OF THE ACT, WHICH AS A MATTER OF FACT, T HE ASSESSING OFFICER APPLIED BECAUSE SHE WAS OF THE VIEW THAT THERE WAS EXCESS P AYMENTS TO THE SISTER CONCERN U/S.40A(2)(B) OF THE ACT AMOUNTING TO RS.2, 76,03,831/-. SINCE THE SAID DISALLOWANCE COULD HAVE LED TO ENHANCEMENT OF PROFIT AT 37.73%, THEREFORE, THE AO BY APPLYING PROVISIONS OF SECTION 145(3) OF THE ACT RESTRICTED ITA NO.3305/AHD/2008 A.Y. 2005-06 SH. PRAKASHBHAI P GAMI V. ACIT CIR-6,. SRT PAGE 4 THE ADDITION BY APPLYING A GP RATE OF 6% ON THE TUR NOVER DECLARED BY THE ASSESSEE INSTEAD OF 2% GP DECLARED ON THE DECLARED TURNOVER BY THE ASSESSEE AND MADE AN ADDITION OF RS.30,89,816/-. TH E LD. CIT(A) ON THE OTHER HAND RESTRICTED THE ADDITION ON A DIFFERENT P REMISE BY DISALLOWING THE PAYMENT AT 10% OF EXCESS PAYMENTS MADE TO SISTER CO NCERN WHICH WAS WORKED OUT AT RS.27,60,383/-. 7. THERE IS NO DISPUTE TO THE FACT THAT AS POINTED OUT BY MR. TIKRIWAL APPEARING FOR THE REVENUE THAT INDIVIDUALLY IN A FE W CASES, THE ASSESSEE HAD MADE EXCESS PAYMENTS PER PIECE TO THE SISTER CONCER N AS COMPARED TO THE OUTSIDER. AT THE SAME TIME, THE ASSESSING OFFICER H AS NOT TAKEN INTO CONSIDERATION THE REPLY OF THE ASSESSEE AT PAGE-10 OF ASSESSMENT ORDER, WHICH WAS GIVEN IS IN RESPONSE TO SHOW-CAUSE GIVEN BY THE AO. IN THE SAID REPLY TO THE SHOW-CAUSE OF THE AO, THE ASSESSEE HAD SUBMITTED AS UNDER:- ASSESSEE IS AN ISO 9001 : 2000 CERTIFIED CONCERN. ASSESSEE MANAGES A SMALL SCALE INDUSTRY AND HIS NATURE OF INCOME IS DIAMOND JOB WORK COMMISSION. IN THIS BUSINESS ASSESSEE RECEIVES ROUG H DIAMONDS FROM THE SUPPLIER. AFTER ASSORTING THE ROUGH DIAMONDS AC CORDING TO DIFFERENT SIZE, SHAPE AND SHED IT GIVES IT TO SUBCONTRACTOR A CCORDING TO THEIR MANUFACTURING CAPACITY AND QUALITY CONSCIOUSNESS. AS PER DETAILS ON YOUR RECORDS IT APPEARS THAT PER PIECE LABAOUR PAYMENT TO SISTER CONCERNS IS MORE THAN LABOUR PAYM ENT TO OUTSIDERS BUT WE WOULD LIKE TO DRAW YOUR KIND ATTENTION TO TH E FACT THAT ON RECEIPT OF ROUGH DIAMONDS WE UNDERTAKE ASSORTMENT WORK AND OUR ASSORTMENT DEPARTMENT ASSORTS THE DIAMONDS ACCORDING TO DIFFER ENT SIZE, SHAPE, PURITY, SHADE AND CHARNI AND ALLOTS THEM DIFFERENT ASSORT NUMBER (AS PER ANANEXDURE-1). ASSORT NUMBER SFD, OPC, J01, N01 ARE MUCH CLEAR AND PRECIOUS THAN OTHERS. ASSESSEE HAS TO TAKE SPECIAL CARE AND USE S PECIALIZED SKILL ON THESE DIAMONDS TO MAINTAIN THEIR MARKET VALUE. ASSE SSEES SUCH CARE AND ITS OUTCOME IN THE SHAPE OF FINAL PRODUCT HELPS THEM TO MAINTAIN THEIR CUSTOMERS, REPUTATION AND CONTINUOUS FLOW OF ROUGH DIAMONDS FOR MANUFACTURE. THEREFORE ASSESSEE HAVE TO ARRANGE THE PROCESSING TO ITA NO.3305/AHD/2008 A.Y. 2005-06 SH. PRAKASHBHAI P GAMI V. ACIT CIR-6,. SRT PAGE 5 SUCH HIGH QUALITY DIAMONDS UNDER SUPERVISION OF TRU STED AND REPUTED CONCERNS AND ASSESSEE HAS SUCH SISTER CONCERNS ON W HOM THEY CAN RELY FOR PERFORMANCE OF SPECIAL SKILLS, QUALITY ASS URANCE AND COMPLETION OF WORK WITHIN GIVEN TIME AS PER INSTRUCTIONS OF TH E CUSTOMERS. IT IS OBVIOUS THAT FOR SPECIAL CARE TO THE PRODUCT AND AP PLICATION OF HIGH SKILLED LABOUR ASSESSEE HAVE TO PAY HIGHER LABOUR C HARGES TO THEM FOR THIS TYPE OF DIAMONDS (AS PER ANNEXURE -2). OTHER TYPE OF ASSORTMENT NUMBERS REQUIRES LOWER GRA DE OF LABOUR AND SKILL THAN EARLIER AND HENCE THEY RECEIVES LOWER RA TE OF LABOUR CHARGES. YOU MAY APPRECIATE THAT AS PER COMMON PRACTICE IN D IAMOND INDUSTRIES YOU WILL FIND DIFFERENTIAL RATE OF LABOUR EVERY WHE RE. THE LABOUR CHARGES ARE ACTUALLY PAID BY THE ASSESSEE AND RECIPIENTS HA VE SHOWN THE SAME IN THEIR FINANCIAL STATEMENTS AS INCOME. BOTH THE C ONCERN PARTIES HAVE CONFIRMED THE FIGURES AND LABOUR CHARGES ARE AS PER PREVAILING PRACTICE IN THE INDUSTRY AND CERTAINTY NOT EXCESSIVE, THE LA BOUR COST MAY BE FULLY ALLOWED. I TRUST THE SAME TO MEET YOUR VALUED SATIS FACTION. BEFORE WE CONCLUDE, WE REMAIN WITH A REQUEST THAT BE THERE AN Y MATERIAL WHICH, IN YOUR OPINION, REQUIRES ANY EXPLANATION FROM OUR SID E, KINDLY POINT OUT AND CONFRONT US PRECISELY WITH THE SAME FOR OUR REB UTTAL TO SERVE THE ENDS OF NATURAL JUSTICE. 8. FROM THE SAID REPLY IT IS EVIDENT THAT THE ASSES SEE HAD ASSORTED THE ROUGH DIAMOND AND ACCORDING TO THE SPECIALIZED SKIL L, WHICH WAS AVAILABLE ONLY WITH THE SISTER CONCERN, THE ASSESSEE HAD GIVEN SUC H DIAMOND TO THE SISTER CONCERNS. OTHER TYPE OF ASSORTED ROUGH WHICH REQUIR ED LOWER GRADE OF LABOUR AND SKILL WERE GIVEN TO THE OUTSIDERS. THIS EXPLANA TION OF THE ASSESSEE WAS NOT TAKEN INTO CONSIDERATION BY THE ASSESSING OFFICER O R THE LD. CIT(A). IT IS ALSO NOT A DISPUTED FACT WHICH WAS AVAILABLE BEFORE THE LD. CIT(A) THAT SISTER CONCERNS HAVE BEEN PAID RS.35.86 PER PIECE ON THE A VERAGE AS COMPARED TO RS.39.27 TO THE OUTSIDERS. THEREFORE IN THE CIRCUMS TANCES AND FACTS OF THE CASE, THE EXCESS PAYMENTS TO THE SISTER CONCERN IS WITHOUT ANY EVIDENCE AND HAS NOT BEEN PROVED BY ANY OF THE AUTHORITIES BELOW . SINCE THE AO HAS INVOKED APPLICATION OF SECTION 145(3) OF THE ACT BE CAUSE OF THE APPLICATION OF U/S.40A(2)(B) OF THE ACT AND THE EXCESS PAYMENTS RE MAINING TO BE PROVED IN THE ABSENCE OF ANY EVIDENCE AGAINST THE ASSESSEE, T HE AO IS NOT JUSTIFIED IN ITA NO.3305/AHD/2008 A.Y. 2005-06 SH. PRAKASHBHAI P GAMI V. ACIT CIR-6,. SRT PAGE 6 APPLYING THE PROVISIONS OF SECTION 145(3) OF THE AC T. THEREFORE, IN THE CIRCUMSTANCES AND FACTS OF THE CASE THE ORDER OF TH E LD. CIT(A) IS REVERSED. THUS THE GROUND OF THE ASSESSEE IS ALLOWED. 9. IN THE RESULT, ASSESSEES APPEAL IS ALLOWED. # !' $!%& 31 / 01 /201 2 * + , - THIS ORDER PRONOUNCED IN OPEN COURT ON 31/01/ 201 2. SD/- SD/- ( MUKUL KUMAR SHRAWAT ) ( B.P. JAIN ) (JUDICIAL MEMBER) (ACCOUNTANT MEMBER) $!%&- 31/01/2012 /!! - DKP* !' !' !' !' 001 001 001 001 21 21 21 21 / COPY OF ORDER FORWARDED TO:- 1. / APPELLANT 2. / RESPONDENT 3. %%05 6 / CONCERNED CIT 4. 6- / CIT (A) 5. 19, 0005, 05, /!! / DR, ITAT, AHMEDABAD 6. ,<= ># / GUARD FILE. BY ORDER/ !' , /TRUE COPY/ ?// %@ 05, /!! -