ASST CIT 19(1), MUMBAI V. A LALLUBHAI & BROTHERS, MUMBAI

ITA 4626/MUM/2015

• Counselvise Citation: [2017] 126 COUNSELVISE.COM (IT) 9285 (ITAT-MUMBAI)
• Duration Of Justice: 2 year(s) 1 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-09-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: Not Allotted
• Next Hearing Date: 06-09-2017
• Assessment Year: 2011-2012
• Appeal Filed On: 07-08-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SAURABH DESHPANDE
• Section: 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCHES A , MUMBAI BEFORE S HRI G.S. PANNU (AM) AND SHRI RAM LAL NEGI (JM) ITA NO. 4626 /MUM/20 1 5 ASSESSMENT YEAR: 2011 - 12 THE ACIT - 19(1), 2 ND FLOOR, MATRU MANDIR, TARDEO ROAD, MUMBAI - 400007 VS. M/S A LALLUBHAI & BROTHER, 2 - 48, BAHARI BUILDING, T.J. ROAD, COTTON GREEN, MUMBAI 400015 PAN: AAAFA2061P (APPELLANT) (RESPONDENT) REVENUE BY : SHRI SAURABH DESHPANDE (DR) ASSESSEE BY : SHRI RAHUL SARDA (A R) DATE OF HEARI NG: 06/09 /201 7 DATE OF PRONOUNCEMENT: 20 / 0 9 /201 7 O R D E R PER RAM LAL NEGI, JM THIS APPEAL HAS BEEN FILED BY THE REVENUE AGAINST ORDER DATED 13 /05/2015 PASSED BY THE LD. COMMISSIONER OF INCOME TAX (APPEALS) - 32 , MUMBAI , FOR THE A S S ESSMENT YEAR 2011 - 12 , WHEREBY THE LD. CIT (A) HAS ALLOWED THE APPEAL FILED THE BY T H E ASSESSEE AGAINST ASSESSMENT ORDER PASSED U /S 143 (3) OF THE INCOME TAX ACT, 1961 (FOR SHORT THE A CT). 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE A PAR TNERSHIP FIRM HAVING INCOME FROM BUSINESS AND PROFESSION FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR 2011 - 12 DECLARING THE TOTAL INCOME OF RS. 1,37,56,110/ - . THE SAME WAS PROCESSED U/S 143 (1) OF THE ACT. THE CASE WAS SELECTED FOR SCRUTINY AND NOTIC E U/S 143 (2) 142 (1) OF THE ACT WERE SERVED UPON THE ASSESSEE. IN RESPONSE THEREOF THE AUTHORIZED REPRESENTATIVE FILED THE REQUISITE DETAILS AND 2 ITA NO. 4626 /MUM/2015 ASSESSMENT YEAR: 2011 - 1 2 MADE SUBMISSIONS. IT WAS NOTICED THAT FALL IN PROFIT WAS ON ACCOUNT OF SUBSTANTIAL AMOUNT OF GRADING AND CERTI FICATION EXPENSES. THE ASSESSEE WAS ACCORDINGLY ASKED TO EXPLAIN THE CO - RELATION BETWEEN GRADING AND CERTIFICATION EXPENSES AND SALE AND CLOSING STOCK . THE ASSESSEE CLAIMED THE EXPENSES GENUINE. IT WAS NOTICED THAT ASSESSEE IS SHOWING POSITIVE PERCENTAGE OF NET PROFIT ON THE BASIS OF EXCHANGE GAIN ONLY WHILE ASSESSEE IS INCURRING LOSS WITHOUT EXCHANGE GAIN ON ACCOUNT OF HIGHER PERCENTAGE OF GRADING AND CERTIFICATION EXPENSES. ACCORDINGLY , THE AO DISALLOWED 30% OF THE GRADING EXPENSES AMOUNTING TO RS. 51,8 3,550/ - AND 30% CERTIFICATION CHARGES AMOUNTING TO RS. 28,44,359/ - ( TOTAL RS.80,27,909/ - ) AND ADDED BACK THE SAID AMOUNT TO THE INCOME OF THE ASSESSEE. IN APPEAL, THE LD. CIT (A) DELETED THE ADDITION HELD BY THE AO. 3 . AGGRIEVED BY THE ORDER OF LD. CIT (APPEAL S ), THE REVENUE PREFERRED THIS APPEAL BEFORE THE TRIBUNAL ON THE FOLLOWING EFFECTIVE GROUNDS: - 1. WHETHER, ON THE FACTS AND IN THE CIRCUMSTANCE OF THE CASE, THE LD. CIT (A) HAS ERRED IN HOLDING THAT THE EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVEL Y FOR THE PURPOSE OF BUSINESS WITHOUT APPRECIATING THE ABSENCE OF CORRELATION OF THE EXPENDITURE ON GRADATION & CERTIFICATION OF DIAMONDS WITH THE SALE AND STOCK OF DIAMONDS. 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT (A) HAS E RRED IN DELETING THE DISALLOWANCE MADE BY THE AO WITH RESPECT TO THE CLAIM OF EXPENDITURE ON GRADATION & CERTIFICATION OF DIAMONDS WITHOUT APPRECIATING THE ABSENCE OF CO - RELATION OF THE EXPENDITURE WITH THE SALE AND STOCK OF DIAMONDS. 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE, THE LD. CIT (A) HAS ERRED IN RESTRICTING THE DISALLOWANCE OF SUCH EXPENDITURE TO 30% THEREOF WITHOUT APPRECIATING THE ABSENCE OF CO - RELATION OF THE EXPENDITURE WITH THE SALE AND STOCK OF DIAMONDS. 3 ITA NO. 4626 /MUM/2015 ASSESSMENT YEAR: 2011 - 1 2 4. WE NOTICE THAT THE REVENUE HAS INADVERTENTLY MENTIONED IN GROUND NO 3 OF THE APPEAL THAT THE LD. CIT(A) HAS WRONGLY RESTRICTED THE DISALLOWANCE OF EXPENDITURE TO 30% CONTRARY TO THE FACT THAT THE CIT(A) HAS DELETED THE ENTIRE AMOUNT OF ADDITION MADE BY THE AO. THE LD. D EPARTMENTAL REPRESENTATIVE RELYING ON THE FINDINGS OF THE AO, SUBMITTED BEFORE US THAT THE LD. CIT(A) HAS ERRED IN HOLDING THAT THE EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS . THE LD. CIT(A) HAS WRONGLY DELETED THE ADDITION WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAS FAILED TO PROVE CO - RELATION OF THE EXPENDITURE WITH THE SALE AND STOCK OF DIAMONDS. THE LD. DR FURTHER SUBMITTED THE IMPUGNED ORDER MAY BE SET ASIDE AND THE ASSESSMENT ORDER MAY BE RESTORED. 5. ON THE OTHER HAND, THE LD. COUNSEL FOR THE ASSESSEE RELYING ON THE ORDER PASSED BY THE LD. CIT(A) SUBMITTED THAT THERE IS NO INFIRMITY IN THE ORDER TO INTERFERE WITH THE SAME. THE AO HAS DISALLOWED 30% OF THE EXPENDITURE CLAIMED BY THE ASSESSEE WITHOUT ANY BAS I S. GRADING EXPENSES ARE FULLY ALLOWABLE EXPENDITURE UNDER SECTION 37 OF THE ACT, IF THE SAME HAVE BEEN LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. MOREOVER THE PERCENTAGE OF GRADING AND CERTIFICATION CHARGES TAKEN BY THE AO I S ARBITRARY. HENCE, THE LD. COUNSEL SUBMITTED THAT THERE IS NO MERIT IN THE REVENUES APPEAL AND THE SAME IS LIABLE TO BE DISMISSED. 6. WE HAVE HEARD THE RIVAL SUBMISSIONS AND ALSO GONE THROUGH THE MATERIAL ON RECORD. THE ONLY GRIEVANCE OF REVENUE IS THAT THE LD. CIT(A) HAS WRONGLY DELETED THE ADDITION MADE BY AO BY MAKING DISALLOWANCE OF 30% OF THE TOTAL EXPENDITURE MADE BY THE ASSESSEE ON GRADING AND CERTIFICATION OF DIAMOND. THE LD. CIT(A) HAS DELETED THE ADDITION AFTER HEARING THE SUBMISSIONS OF THE ASS ESSEE. THE RELEVANT PORTION OF THE ORDER UNDER CHALLENGE READS AS UNDER : 4 ITA NO. 4626 /MUM/2015 ASSESSMENT YEAR: 2011 - 1 2 2.3 I HAVE PERUSED THE FACTS OF THE CASE AND APPELLANTS SUBMISSIONS CAREFULLY. THE APPELLANT HAS GIVEN THE PARTY WISE DETAILS OF GRADING & CERTIFICATION CHARGES WITH THEIR RESPE CTIVE LEDGER STATEMENTS. THE GRADING CHARGES OF RS. 1,72,78,499/ - ARE PAID TO THREE PARTIES, I.E. (I) RAPAPORT RS. 1,59,934/ - , (II) GIA RS. 1,51,04,499/ - AND (III) IGA AT RS. 20,14,468/ - . THE CERTIFICATION CHARGE OF RS. 94,81,195/ - IS PAID TO ONLY ONE PART Y ONLY IE. RAPAPORT. THESE APPEAR TO BE RENOWNED LABORATORIES, AND THE PAYMENTS HAVE BEEN MADE BY CHEQUES AFTER DEDUCTING TDS. AS SUCH THE APPELLANT, BEING ENGAGED IN DIAMOND MANUFACTURING AND TRADING, IS NOT PRECLUDED FROM GETTING THE DIAMONDS GRADED AND CERTIFIED, WHICH IN FACT IS AN ESSENTIAL PART OF ITS BUSINESS. MANY A TIME THE CUSTOMERS ARE ATTRACTED SIMPLY BECAUSE A JEWELER IS SELLING THE DIAMONDS GRADED AND CERTIFIED FROM REPUTED LABORATORIES. THE DECISION AS TO HOW MUCH TO SPEND ON A PARTICULAR ITE M RESTS ENTIRELY UPON THE ASSESSEE, WHICH CANNOT BE QUESTIONED SIMPLY BECAUSE THE ASSESSEE MIGHT HAVE MADE LOSSES CONSEQUENT TO SUCH EXPENDITURE. IT IS NOT UNCOMMON FOR A BUSINESSMAN TO MAKE EXCESSIVE EXPENDITURE ON A PARTICULAR ITEM KEEPING IN VIEW THE CU STOMERS SATISFACTION LEADING TO LONG TERM BENEFITS IN HIS BUSINESS, WHICH HOWEVER IS ENTIRELY A BUSINESS DECISION ON CASE TO CASE BASIS. MOREOVER, THE AOS CONCLUSION THAT THE INDUSTRY AVERAGE OF SUCH EXPENDITURE IS JUST 1% IS NOT SUPPORTED BY COMPARATIVE FACTS, NEITHER THE SAME CAN BE APPLIED UNIFORMLY TO EVERY ASSESSEE. IN THESE CIRCUMSTANCES, THE AD - HOC DISALLOWANCE MADE AT 30% OF THE EXPENDITURE, I.E. AT RS. 80,27,909/ - IS NOT ON SOUND FOOTING, HENCE DELETED. THEREFORE, THE GROUND NO. 1 OF APPEAL IS ALL OWED. 7. AS POINTED OUT BY THE LD. CIT(A) THE ASSESSEE HAS PRODUCED THE PARTY WISE DETAILS OF GRADING AND CERTIFICATION CHARGES ALONG WITH LEDGER STATEMENTS. THE PAYMENTS WERE MADE AFTER DEDUCTING TAX AT SOURCE. THE LD. CIT(A) HAS RIGHTLY POINTED O UT THAT GRADING AND CERTIFICATION ARE THE ESSENTIAL PART OF BUSINESS AND HOW MUCH EXPENDITURE WAS REQUIRED TO BE MADE ON CERTIFICATION AND GRADING WAS TO BE DECIDED BY THE ASSESSEE. WE FURTHER NOTICE THAT THE AO HAS NOT MADE ANY COMPARISON TO FALSIFY THE C LAIM OF THE ASSESSEE. SINCE, PAYMENTS TO THE PARTIES ARE NOT IN DISPUTE, AD HOC ADDITION CANNOT BE MADE WITHOUT ESTABLISHING THAT EITHER THE TRANSACTION 5 ITA NO. 4626 /MUM/2015 ASSESSMENT YEAR: 2011 - 1 2 WAS SHAM OR THE EXPENDITURE WAS MADE FOR THE PURPOSES OTHER THAN THE BUSINESS OF THE ASSESSEE. HENCE, W E DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER PASSED BY THE LD. CIT(A). THE ORDER PASSED BY THE LD. CIT(A) IS UPHELD AND ALL THE GROUNDS OF APPEAL OF THE REVENUE ARE DISMISSED. IN THE RESULT, APPEAL FILED BY THE REVENUE FOR A SSESSMENT YEAR 2011 - 20 1 2 IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 20 TH . SEPTEMBER , 2017 . SD/ - SD/ - ( G.S. PANNU ) ( RAM LAL NEGI ) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI ; DATED: 20 / 0 9 / 2017 ALINDRA, PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A) - 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. / GUARD FILE . / BY ORDER, //TRUE COPY// / (DY./ASSTT. REGISTRAR) , / ITAT, MUMBAI