CREATIVE LABELS P.LTD, MUMBAI V. DCIT 4(1)(2), MUMBAI

ITA 5777/MUM/2016

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 7805 (ITAT-MUMBAI)
• Duration Of Justice: 5 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-03-2017
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: I
• Assessment Year: 2013-2014
• Appeal Filed On: 26-09-2016
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Rejection of books of accounts; Business expenditure; Commercial expediency
• Section: 143(3); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, BENCH I,MUM BAI BEFORE SHRI D.KARUNAKARA RAO, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA NO.5777/MUM/2016 (ASSESSMENT YEAR- 2013-14) CREATIVE LABELS PVT. LTD. ROOM NO. 305, SHARAF MANSION, 3 RD FLOOR, PRINCESS STREET, KALBADEVI, MUMBAI-400002. PAN: AACCC6150G VS. DCIT, 4(1)(2), ROOM NO. 640, 6 TH FLOOR, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI-400020. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI PANKAJ R. TOPRANI (AR) REVENUE BY : SHRI SAURABH KUMAR R AI (DR) DATE OF HEARING : 22.02.2017 DATE OF PRONOUNCEMENT : 15.03.2017 ORDER UNDER SECTION 254(1) OF INCOME TAX ACT PER PAWAN SINGH, JM: 1. THIS APPEAL BY ASSESSEE U/S 253 OF THE INCOME-TAX A CT (THE ACT) IS DIRECTED AGAINST THE ORDER OF LD. COMMISSIONER OF INCOME TAX (APPEAL S) [FOR SHORT THE CIT(A)] 9, MUMBAI DATED 19.08.2016 FOR ASSESSMENT YEAR (AY) 20 13-14. THE ASSESSEE HAS RAISED THE FOLLOWING GROUNDS OF APPEAL: 1. THE LEARNED CIT(APPEALS) HAS ERRED IN LAW AND ON THE FACTS OF THE CASE IN DISALLOWING CHARGES RS. 14,76,363/-. 2. THE LEARNED CIT(APPEALS) HAS ERRED IN LAW AND ON THE FACTS OF THE CASE IN IGNORING THE DECISION OF THE SUPREME COURT IN THE C ASE OF CIT VS. DHANRAJGIRIJI REPORTED IN 91 ITR 544 WHEREIN THE HONBLE SUPREME COURT HAD LAID DOWN THE LAW OF THE LAND THAT EVERY BUSINESSMAN KNOWS HIS IN TEREST BEST AND IT IS NOT OPEN TO THE DEPARTMENT TO PRESCRIBE WHAT EXPENDITURE AN ASSESSEE SHOULD INCUR AND IN WHAT CIRCUMSTANCES HE SHOULD INCUR THAT EXPENDITURE . 3. THE LEARNED CIT(APPEALS) HAS ERRED IN LAW AND ON THE FACTS OF THE CASE IN SUSTAINING THE ORDER OF THE ASSESSING OFFICER MAKIN G AN ADDITION OF RS. 13,92,822/- ON ACCOUNT OF REJECTION OF MATERIALS. T HE LEARNED CIT (APPEALS) FAILS TO APPRECIATE THAT THE ASSESSING OFFICER HAD NOT RE JECTED THE BOOKS OF ACCOUNT U/S. 145(3) OF THE INCOME TAX ACT AND HENCE THE WASTAGE DECLARED BY THE ASSESSEE HAD TO BE ACCEPTED. 2 ITA NO. 5777/M/2016 CREATIVE LABELS PVT. LTD. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE FILED RETURN OF INCOME FOR RELEVANT AY ON 29.09.2013 DECLARING INCOME OF RS. 1,32,85,180/-. T HE ASSESSMENT WAS COMPLETED U/S 143(3) OF THE ACT ON 29.01.2016. THE ASSESSING OFFI CER (AO) WHILE PASSING THE ASSESSMENT ORDER DISALLOWED THE TRANSPORT EXPENSES OF RS. 14,76,363/- AND RS. 13,92,822/- ON ACCOUNT OF REJECTION OF MATERIAL. ON APPEAL BEFORE THE LD. CIT(A) BOTH THE DISALLOWANCE WAS SUSTAINED. FURTHER AGGRIEVED B Y THE ORDER OF LD CIT(A), THE ASSESSEE HAS FILED THE PRESENT APPEAL BEFORE US. 3. WE HAVE HEARD THE LD. AUTHORIZED REPRESENTATIVE (AR ) OF THE ASSESSEE AND LD. DEPARTMENTAL REPRESENTATIVE (DR) FOR THE REVENUE AN D PERUSED THE MATERIAL AVAILABLE ON RECORD. FIRST GROUND OF APPEAL RELATES TO DISALL OWANCE OF TRANSPORTATION CHARGES. THE LD. AR OF THE ASSESSEE ARGUED THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF SELF- ADHESIVE LABELS. THE ASSESSEE DEBITED RS. 14,76,363 /- ON ACCOUNT OF TRANSPORTATION CHARGES. DURING THE YEAR UNDER CONSIDERATION, THE A SSESSEE INCURRED TRANSPORTATION CHARGES OF RS. 36,16,807/- AND HAD RECOVERED RS. 21 ,40,444/- FROM ITS CUSTOMER AS PER TERMS AND CONDITION OF SALES. THE ASSESSEE HAS AGREEMENT WITH UNILEVER GROUP OF COMPANIES, AS PER AGREEMENT THE TRANSPORTATION CHAR GES INCURRED BY ASSESSEE WERE REIMBURSED BY THEM. THE ASSESSEE HAS SHOWN REIMBURS EMENT OF TRANSPORTATION CHARGES OF RS. 21,40,444/- THAT WAS 60% OF THE TRAN SPORTATION CHARGES. AS PER AGREEMENT, THE ASSESSEE HAS DELIVERED THE MATERIAL AT THEIR SITE AND HAD TO INCUR THE TRANSPORTATION CHARGES. THE AO DISALLOWED THE TRANS PORTATION CHARGES WITHOUT ANY REASONABLE BASIS HOLDING THAT ASSESSEE HAS NOT PROD UCED EVIDENCE TO SHOW THAT ASSESSEE WANTED TO RECOVER THE EXPENSES. IT WAS FUR THER ARGUED THAT REVENUE CANNOT BE ALLOWED TO DECIDE THAT AS TO WHAT KIND OF EXPENDITU RE, BUSINESSMEN HAS TO INCUR, AND UNDER WHICH CIRCUMSTANCES. THE COMMERCIAL EXPEDIENC Y IS THE SOLE DISCRETION OF BUSINESSMEN TO SAFEGUARD HIS INTEREST. IN SUPPORT O F HIS CONTENTION, THE LD. AR OF THE ASSESSEE RELIED UPON THE DECISION OF CIT VS. PANIPA T WOOLLEN & GENERAL MILLS CO. LTD. (1976) (103 ITR 66), CIT VS. DHANRAJGIRIJI (19 73) (91 ITR 544) AND THE DECISION OF S.A. BUILDERS LTD. VS. CIT (2007) (288 ITR 1). O N THE OTHER HAND, THE LD. DR FOR THE REVENUE SUPPORTED THE ORDER OF AUTHORITIES BELO W. 4. WE HAVE CONSIDERED THE RIVAL CONTENTION OF THE PART IES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. THE AO WHILE FRAMING ASSESSMEN T ORDER OBSERVED THAT ASSESSEE WAS INCURRED EXPENSES OUTWARD AND LETTER RECEIVING THE REIMBURSEMENT OF SUCH 3 ITA NO. 5777/M/2016 CREATIVE LABELS PVT. LTD. EXPENSES FROM THE BUYING PARTIES. THE ASSESSEE WAS ASKED TO EXPLAIN THAT AS TO WHY THE TRANSPORT OUTWARD EXPENSES CLAIMED IN THE PROFI T & LOSS ACCOUNT BE NOT DISALLOWED AS THESE EXPENSES ARE RELATING TO THE OT HER PARTIES AND THE BUYERS COST NOT RELATED TO THE SALE OF ASSESSEE. THE ASSESSEE FILED ITS REPLY AND CONTENDED THAT THE ASSESSEE HAS INCURRED TRANSPORTATION CHARGES OF RS. 36,16,807/- AND RECEIVED RS. 21,40,444/- AND NET AMOUNT OF RS. 14,16,363/- HAS B EEN DEBITED TO THE PROFIT & LOSS ACCOUNT. THE ASSESSEE FURTHER CONTENDED THAT MAJOR SALES OF ASSESSEE ARE WITH UNILEVER GROUP OF COMPANIES, WHICH REIMBURSED THE A SSESSEE TOWARDS THE TRANSPORTATION CHARGES AS THE SELLING PRICES CONSIS T OF THE TRANSPORTATION CHARGES. THE CONTENTION OF ASSESSEE WAS NOT ACCEPTED BY AO H OLDING THAT ASSESSEE FAILED TO PRODUCE THE EVIDENCE THAT ASSESSEE WANTED TO RECOVE R THE EXPENSES AND THAT ASSESSEE HAS VOLUNTARY CHOSEN NOT TO AFFECT THE RECOVERY OF THESE EXPENSES. THE AO FURTHER CONCLUDED THAT THERE IS NO RESTRICTION TO BEAR THE EXPENSES ON ACCOUNT OF OTHER PARTIES AND EVEN NON-BUSINESS EXPENSES. THE LD. CIT(A) WHIL E CONSIDERING THE GROUND OF APPEAL CONFIRMED THE DISALLOWANCE HOLDING THAT THE EXPENDITURE WAS NOT WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE HONBL E APEX COURT IN S.A. BUILDERS (SUPRA) WHILE DEALING WITH THE COMMERCIAL EXPEDIEN CY RELATING TO SECTION 37 HELD THAT DECISION RELATING TO SECTION 37 WILL ALSO BE A PPLICABLE TO SECTION 36(1)(III) BECAUSE IN SECTION 37 THE EXPRESSION USED IS FOR THE PURPO SE OF BUSINESS. IT WAS FURTHER HELD THAT CONSISTENTLY IT HAS BEEN HELD IN DECISION RELA TING TO SECTION 37 THAT EXPRESSION FOR THE PURPOSE OF BUSINESS INCLUDES EXPENDITURE VOLUN TARILY INCURRED FOR COMMERCIAL EXPEDIENCY, AND IT IS IMMATERIAL, IF A 3 RD PARTY ALSO BENEFITS THEREBY. THE EXPRESSION COMMERCIAL EXPEDIENCY IS AN EXPRESSION OF WIDE IM PORT AND INCLUDES SUCH EXPENDITURE AS A PRUDENT BUSINESSMAN INCURS FOR THE PURPOSE OF BUSINESS. THE EXPENDITURE MAY HAVE BEEN INCURRED UNDER ANY LEGAL OBLIGATION, BUT YET IT IS ALLOWABLE AS BUSINESS EXPENDITURE, IF IT WAS INCURRED UNDER C OMMERCIAL EXPEDIENCY. IN OUR OPINION THE TRANSPORT EXPENSES WERE INCURRED BY THE ASSESSEE UNDER BUSINESS EXPEDIENCY. THUS, IN VIEW OF THE ABOVE DISCUSSION T HE DISALLOWANCE OF TRANSPORTATION CHARGES OF RS. 14,76,363/- CLAIMED AS EXPENSES ON A CCOUNT OF TRANSPORT OUTWARD CLAIM WERE ALLOWABLE EXPENSES, WHICH WE DELETE. 5. GROUND NO.2 OF APPEAL IS ARGUMENTATIVE AND REFERENC E OF HONBLE SUPREME COURT DECISION WHICH DOES NOT REQUIRE ANY ADJUDICATION. 4 ITA NO. 5777/M/2016 CREATIVE LABELS PVT. LTD. 6. GROUND NO.3 OF APPEAL RELATES TO DISALLOWANCE OF RS . 13,92,822/- ON ACCOUNT OF REJECTION OF MATERIAL. THE LD. AR OF THE ASSESSEE A RGUED WITH THE PHARMA COMPANIES, THE ASSESSEE HAS TO BEAR THE COST OF REJECTED FINIS HED GOODS I.E. SELF-ADHESIVE LABEL DUE TO QUALITY ISSUE IN THE PAPER AS LABEL DO NOT STICK TO BOTTLE AND ALSO PRINTING ISSUE. THE REJECTED LABELS ARE DESTROYED BY THE PHARMA COMPANI ES TO AVOID ANY MISUSE BY OTHER MANUFACTURE IN THIS LINE THEREAFTER CUSTOMER SEND T HEIR DEBIT NOTES TO THE ASSESSEE FOR REJECTED MATERIAL. THE TOTAL TURNOVER OF ASSESSEE D URING THE YEAR IS RS. 12.29 CRORE AND REJECTION WERE TO THE TUNE OF RS. 13,92 LAKHS O NLY. THE REJECTION IS AROUND 1.25% OF THE TURNOVER OF THE ASSESSEE-COMPANY. SUCH REJEC TIONS WERE ACCEPTED IN THE PAST. THE REJECTED MATERIAL WAS WRITTEN OFF ONLY PROFIT & LOSS ACCOUNT BY REDUCING THE AMOUNT OF REJECTED MATERIAL FROM THE REVENUE. THE A O DISALLOWED THE COST OF REJECTED MATERIAL HOLDING THAT ASSESSEE HAS NOT BEE N ABLE TO PROVE AS TO HOW QUALITY ISSUE LED TO REJECTION OF MATERIAL AND NO CONFIRMED OF BUYER IS FILED. THE AO IGNORED THE EVIDENCE IN THE FORM OF DEBIT NOTES RECEIVED FR OM THE CUSTOMERS. THE AO HAS NOT REJECTED THE BOOKS OF ACCOUNTS. ON THE OTHER HAND, LD. DR FOR THE REVENUE SUPPORTED THE ORDER OF AUTHORITIES BELOW AND WOULD ARGUE THAT ASSESSEE HAS NOT PLACED ON RECORD THE COPY OF LABELS OR SAMPLE LABEL WHICH WAS ALLEGE DLY REJECTED ON THE DISPUTE RELATED WITH THE QUALITY. THE ASSESSEE HAS NOT BROUGHT ON R ECORD ANY EVIDENCE TO SUBSTANTIATE HIS CLAIM. 7. WE HAVE CONSIDERED THE RIVAL CONTENTION OF THE PART IES AND GONE THROUGH THE ORDER OF AUTHORITIES BELOW. THE AO DURING THE ASSESSMENT PRO CEEDINGS NOTICED THAT ASSESSEE HAS CLAIMED DEDUCTION OF RS.13,92,822/- ON ACCOUNT OF REJECTION OF GOODS. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY SUCH DEDUCT ION SHOULD BE ALLOWED. THE ASSESSEE FILED ITS REPLY DATED 28.12.2015. IN THE R EPLY THE ASSESSEE CONTENDED THAT THE ASSESSEE IS IN THE BUSINESS OF MANUFACTURING OF LA BELS OF SELF ADHESIVE FOR MULTINATIONALS COMPANIES (MNCS) . SUCH ADHESIVE LA BELS HAS TO BE PASTED ON THE BOTTLES AND SOMETIMES DUE TO THE QUALITY AND PRINTI NG ISSUE IN THE PAPER THE MATERIAL IS REJECTED AS THE MNC MAINTAINS STRICT QUALITY CON TROL. THE REJECTED MATERIAL IS DESTROYED BY THE MNC TO AVOID THE MISUSE. THEREAFT ER THE CUSTOMER SENDS THEIR DEBIT NOTES FOR REJECTED MATERIAL. THE CONTENTION OF THE ASSESSEE WAS NOT ACCEPTED BY THE AO HOLDING THAT THE ASSESSEE FAILED TO FILE SUFFICI ENT EVIDENCE IN SUPPORT OF THEIR CLAIM THAT THE GOODS WERE MANUFACTURED, DELIVERED TO THE BUYERS AND WERE DESTROYED AFTER 5 ITA NO. 5777/M/2016 CREATIVE LABELS PVT. LTD. REJECTION. THE LD CIT(A) ALSO CONCLUDED THAT THE AS SESSEE FAILED TO SUBSTANTIATE AS TO HOW THE QUALITY AND PRINTING ISSUE LEAD TO REJECTIO N OF THE GOODS. THE ASSESSEE HAS NOT FILED ANY CONFIRMATION FROM SUCH CLIENT TO SUPPORT THEIR CONTENTION AND CONFIRMED THE DISALLOWANCE. WE HAVE NOTICED THAT THE LOWER AUTHOR ITIES HAVE NOT REJECTED THE BOOKS OF ACCOUNTS. NO FINDINGS WERE GIVEN ON THE DEBIT NO TES FILED BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW. CONSIDERING THE SUBMISSION OF TH E LD AR FOR THE ASSESSEE THAT SIMILAR DISALLOWANCE WAS CLAIMED IN THE PRECEDING Y EARS AND WAS ALLOWED TO THE ASSESSEE, WE DEEM IT APPROPRIATE TO RESTORE THIS GR OUND OF APPEAL TO THE FILE OF AO TO CONSIDER IT AFRESH AND PASS ORDER IN ACCORDANCE WIT H LAW. THE AO IS DIRECTED TO EXAMINE THE DELIVERY CHALLANS OF GOODS SUPPLIED AND THE DEBIT NOTE ISSUED THEREAFTER FOR REJECTED GOODS. NEEDLESS TO SAY THE AO WILL PRO VIDE OPPORTUNITY OF HEARING TO THE ASSESSEE. THUS, THIS GROUND OF APPEAL IS ALLOWED FO R STATISTICAL PURPOSE. 8. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 1 5 TH MARCH, 2017. SD/- SD/- (D.KARUNAKARA RAO) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI; DATED 15/03/2017 S.K.PS COPY OF THE ORDER FORWARDED TO : BY ORDER, (ASSTT.REGISTRAR) ITAT, MUMBAI 1. THE APPELLANT 2. THE RESPONDENT. 3. THE CIT(A), MUMBAI. 4. CIT 5. DR, ITAT, MUMBAI 6. GUARD FILE. //TRUE COPY/