ITO-24(1)(4), MUMBAI V. HARISH KULDEEPRAL KHANNA, MUMBAI

ITA 6359/MUM/2011

• Counselvise Citation: [2013] 120 COUNSELVISE.COM (IT) 3450 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 8 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 12-06-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: H
• Next Hearing Date: 24-01-2013
• Assessment Year: 2007-2008
• Appeal Filed On: 15-09-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A K KARDA M
• Keywords: Additional evidence; Cost of acquisition

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL 'H' BENCH, MUMBAI BEFORE SHRI D. MANMOHAN, VICE PRESIDENT AND SHRI RAJENDRA, ACCOUNTANT MEMBER ITA NO. 6359/MUM/2011 (ASSESSMENT YEAR: 2007-08) INCOME TAX OFFICER - 24(1)(4) SHRI HARISH KULDEPRAI KHANNA ROOM NO. 502, C-13, PRATYAKSHA 301, RADHIKA CHS LTD ., ASHA NAGAR KAR BHAVAN, BKC, BANDRA (E) VS. KANDIVILI (E), MUMBAI 400101 MUMBAI 400051 PAN - AACPK9377N APPELLANT RESPONDENT APPELLANT BY: SHRI A.K. KARDAM RESPONDENT BY: SHRI VIJAY MEHTA & SHRI DHARMESH SHAH DATE OF HEARING: 05.06.2013 DATE OF PRONOUNCEMENT: 12.06.2013 O R D E R PER D. MANMOHAN, V.P. THIS IS AN APPEAL FILED AT THE INSTANCE OF THE REVE NUE AND IT PERTAINS TO A.Y. 2007-8. 2. THE ONLY GROUND RAISED BEFORE US READS AS UNDER: - 1) ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LEARNED CIT(A) ERRED IN DELETING THE ADDITIONS ON A CCOUNT OF LABOUR CHARGES, SALARY AND WAGES AMOUNTING TO RS.15 ,88,582/-, BEING 50% OF DIFFERENCE IN EXPENSES AS COMPARED TO PREVIOUS YEAR, WITHOUT APPRECIATING THE FACT THAT THE ASSESS EE FAILED TO FURNISH DETAILS OF EXPENSES, PROOF OF EXPENSES AND RELATION OF EXPENSES WITH BUSINESS. HE ALSO FAILED TO FILE REAS ON OF VARIATION IN EXPENSES DUE TO WHICH NET PROFIT HAS COME DOWN 5 TIMES LOWER IN COMPARISON TO PRECEDING YEAR. 3. FACTS NECESSARY FOR DISPOSAL OF THE APPEAL ARE STAT ED IN BRIEF. THE ASSESSEE IS PRIMARILY ENGAGED IN MANUFACTURE AND EX PORT OF READYMADE GARMENTS. IN RESPECT OF THE PREVIOUS YEAR RELEVANT TO A.Y. 2007-08 THE ASSESSEE DECLARED TOTAL INCOME OF ` 70,960/-. THE CASE HAVING BEEN TAKEN UP FOR SCRUTINY, THE AO CALLED FOR DETAILS OF THE EXPE NDITURE INCURRED AND ALSO ITA NO. 6359/MUM/2011 SHRI HARISH KULDEPRAI KHANNA 2 CALLED UPON THE ASSESSEE TO FURNISH COMPARATIVE STA TEMENTS OF THE PRECEDING YEAR. IN RESPONSE THERETO THE ASSESSEE, VIDE LETTER DATED 27 TH JULY, 2009, SUBMITTED THAT THE ASSESSEE WAS IN EMPLOYMENT WITH PRIVATE SECTOR IN EXPORT OF READYMADE GARMENTS FOR MANY YEARS, BEFORE HE TOO K UP EXPORT BUSINESS IN HIS INDIVIDUAL CAPACITY FROM THE YEAR 2004. IT MAY BE NOTICED THAT THE CASE OF THE AO WAS THAT IN THE IMMEDIATELY PRECEDING YEA R THE TURNOVER OF THE ASSESSEE WAS ` 432 LAKHS AND INCOME THEREON WAS ` 4.5 CRORES WHEREAS IN THE YEAR UNDER CONSIDERATION THE TURNOVER WAS ONLY ` 374 LAKHS AND THE INCOME FROM OPERATIONS WAS ONLY ` 4 CRORES. THOUGH THE GP RATE SHOWN IN THIS YEAR IS HIGHER THAN THE GP RATE SHOWN IN THE EARLIER I.E . 17.19% AS AGAINST 12.83% IN THE PRECEDING YEAR, THE NET PROFIT WAS ON LY 0.45% IN THIS YEAR AS AGAINST 2.03% SHOWN IN THE LAST YEAR. 4. IN THIS REGARD THE ASSESSEE SUBMITTED THAT THE LOWE R PROFIT WAS ON ACCOUNT OF VARIOUS REASONS SUCH AS: I. LOW SEED CAPITAL (SELF FINANCE) II. HIGH DEBT OBLIGATIONS LEADING TO HIGH INTEREST SERV ICING COST III. EXPORT ORDERS HAVE BEEN PROCURED AT VERY LOW MARGIN S IN ORDER TO ESTABLISH AN EXPORT BASE IV. SHIFTING OF BUSINESS FROM SMALL UNIT AT MALAD TO BI GGER UNIT AT VASAI, LEADING TO HIGHER OVERHEADS AFTER THE SUNSET CLAUSE 80HHC, SMALL TIME EXPORTERS HAVE GENERALLY TAKEN A HIT ON THEIR MARGINS OVER THE YEARS BECAUSE OF WHICH ENTREPRENEURS LIKE THE ASSESSEE WERE LEFT WITH TWO OPTIONS I.E., EITHER TO SCALE DOWN OPERATIONS OR CLOSE DOWN OPERATIONS BUT THE ASSESSEE, IN ORDER TO SURVIVE, HAD TO ADJUST WITH LOW MARGINS. 5. THE AO, ON THE OTHER HAND, WAS OF THE VIEW THAT THE EXPLANATION IS TOO VAGUE AND TOO GENERAL AND WHEN THE GROSS PROFIT IS HIGH THERE WAS NO REASON AS TO WHY THE NET PROFIT HAD DROPPED DOWN TO A MEAG RE 0.45%. THEREFORE, HE REJECTED ASSESSEES EXPLANATION WITH REGARD TO LOW PROFIT MARGIN. 6. HE FURTHER OBSERVED THAT THERE IS SUBSTANTIAL INCRE ASE IN LABOUR CHARGES, SALARIES AND WAGES AS COMPARED TO THE IMME DIATELY PRECEDING YEAR BUT THE ASSESSEE HAS NOT FURNISHED SUPPORTING DETAI LS AS TO WHY THERE WAS INCREASE IN THE EXPENDITURE. HE, THEREFORE, DISALLO WED THE ADDITIONAL ITA NO. 6359/MUM/2011 SHRI HARISH KULDEPRAI KHANNA 3 EXPENDITURE I.E., EXPENDITURE INCURRED IN THIS YEAR MINUS EXPENDITURE INCURRED IN THE EARLIER YEAR - 50% OF THE DIFFERENC E IN EXPENDITURE. IN A NUTSHELL, THE CASE OF THE REVENUE IS THAT THE ASSES SEE HAS NOT FURNISHED PROPER EXPLANATION WITH REGARD TO THE INCREASE IN T HE LABOUR CHARGES AS WELL AS THE EXPENDITURE INCURRED UNDER THE HEAD SALARIE S AND WAGES. 7. AGGRIEVED, ASSESSEE CONTENTED BEFORE THE CIT(A) THA T ALTHOUGH THE QUANTUM OF EXPENDITURE IS INCREASED AS COMPARED TO THE LAST YEAR, THE GROSS PROFIT OF THE ASSESSEE HAS INCREASED, WHICH IN ITSE LF SHOWS THAT THERE IS SUBSTANTIAL REDUCTION IN THE OPERATING COST. IT WAS ALSO SUBMITTED THAT LABOUR CHARGES WERE PAID TO VARIOUS PARTIES FOR CAR RYING OUT JOB WORK OPERATIONS ON BEHALF OF THE ASSESSEE. THE PAYMENTS TO THEM WERE MADE THROUGH BANKING CHANNELS AND ALMOST ALL THE PAYMENT S ARE SUBJECTED TO TDS. COPIES OF THE TDS CERTIFICATES ISSUED BY THE A SSESSEE WERE ENCLOSED TO PROVE THAT THE LABOUR CHARGES ARE GENUINE AND LEGIT IMATE. IT WAS ALSO SUBMITTED THAT INCREASE IN LABOUR CHARGES ARE DUE T O THE FACT THAT ASSESSEE DECIDED TO PURCHASE RAW CLOTHS AND GET IT STITCHED THROUGH CONTRACT LABOURERS INSTEAD OF PURCHASING SEMI-FINISHED GOODS , WHICH WAS THE PRACTICE FOLLOWED IN THE PRECEDING YEARS. IN PROOF OF THE SA ME IT WAS SHOWN THAT THE PURCHASE COST OF THE RAW CLOTHES IN THIS YEAR WAS T O THE TUNE OF ` 2,77,17,875/- WHEREAS IN THE IMMEDIATELY PRECEDING YEAR THE PURCHASE WAS TO THE TUNE OF ` 3,46,17,630/-. HE ALSO REFERRED TO THE TRADING ACCO UNT TO HIGHLIGHT THAT THE CONTRACT EXPENSES HAVE ALMOST RE MAINED THE SAME. FURTHER, WHILE MAKING THE DISALLOWANCE ON ACCOUNT O F LABOUR CHARGES, THE AO HAS NOT GIVEN ANY REASON FOR JUSTIFYING SUCH DIS ALLOWANCE PARTICULARLY WHEN THE ASSESSEE FURNISHED COMPLETE DETAILS ABOUT THE JOB WORK CHARGES. IN OTHER WORDS, WITHOUT POINTING OUT ANY DEFECT OR DEF ICIENCY IN THE DETAILS FILED, THE DISALLOWANCE IS NOT WARRANTED. SIMILARLY, IN RE SPECT OF SALARIES AND WAGES, BRAKE UP OF SALARY, OVERTIME CHARGES AND BON US PAID TO THE EMPLOYEES WERE FURNISHED TO SUBMIT THAT SALARIES HA VE INCREASED DURING THE YEAR SINCE THE ASSESSEE HAD EMPLOYED MORE WORKERS A ND EMPLOYEES TO CARRY OUT HIS OPERATIONS WITH A HOPE THAT HE WOULD OBTAIN MORE CONTRACTS IN FUTURE. IN FACT IN ANTICIPATION OF GETTING ADDITION AL CONTRACTS HE ALSO ACQUIRED ITA NO. 6359/MUM/2011 SHRI HARISH KULDEPRAI KHANNA 4 PLANT AND MACHINERY DURING THE YEAR SO AS TO ACCOMM ODATE MORE STAFF ON THE JOB. BUT THESE FACTORS WERE NOT TAKEN INTO CONS IDERATION BY THE AO. 8. THE LEARNED CIT(A) TOOK NOTE OF THE AFOREMENTIONED FACTS WHILE COMING TO THE CONCLUSION THAT THE DISALLOWANCE MADE BY THE AO WAS WITHOUT ANY BASIS. IN OTHER WORDS, DISALLOWANCE WAS MADE ON MER E SURMISES AND CONJECTURES. HE, THEREFORE, SET ASIDE THE DISALLOWA NCE OF ` 15,89,122/-. 9. AGGRIEVED, REVENUE IS IN APPEAL BEFORE US. THE LEAR NED D.R. ADVERTED OUT ATTENTION TO PAGE 2 OF THE ASSESSMENT ORDER TO SUBMIT THAT THE EXPENDITURE CLAIMED TO HAVE BEEN INCURRED BY THE AS SESSEE WAS NOT SUPPORTED BY ANY EVIDENCE AND HENCE THE AO WAS JUST IFIED IN COMPARING THE EXPENDITURE INCURRED IN THE IMMEDIATELY PRECEDING Y EAR TO MAKE REASONABLE DISALLOWANCE. HE FURTHER SUBMITTED THAT THE FIRST A PPELLATE AUTHORITY SIMPLY ACCEPTED THE CONTENTIONS OF THE ASSESSEE WITHOUT CA LLING FOR A REMAND REPORT FROM THE AO. HE, THEREFORE, CONTENDED THAT THE ORDE R PASSED BY THE LEARNED CIT(A) IS NOT IN ACCORDANCE WITH LAW. 10. ON THE OTHER HAND, THE LEARNED COUNSEL FOR THE ASSE SSEE SUBMITTED THAT THE LEARNED CIT(A) IS EXPECTED TO CALL FOR A R EMAND REPORT ONLY IN A CASE WHERE FRESH FACTS OR MATERIAL WAS BROUGHT TO HIS NO TICE WHEREAS IN THE INSTANT CASE THE ASSESSEE FURNISHED ALL THE DETAILS ALONGWITH HIS EXPLANATION DATED 27 TH JULY 2009 (PAGE 15 OF THE PAPER BOOK). HE ADVERTED OUT ATTENTION TO THE RELEVANT PAGES IN THE PAPER BOOK AND ALSO FU RNISHED A CHART SHOWING DETAILS OF SALES, GROSS PROFIT AND NUMBER OF EMPLOY EES EMPLOYED IN THIS YEAR TO HIGHLIGHT THAT THE INCREASE IN THE EXPENDITURE T OWARDS SALARIES, WAGES AND LABOUR CHARGES WAS EXPLAINED BEFORE THE AO BUT THE SAME WAS NOT PROPERLY APPRECIATED BY THE AO AND THE LEARNED CIT(A) HAVING NOTICED THE MANNER IN WHICH THE AO PROCEEDED TO MAKE ADHOC DISALLOWANCE, THE ADDITION MADE BY THE AO WAS SET ASIDE. THE LEARNED COUNSEL FOR THE A SSESSEE ALSO SUBMITTED THAT THE PERCENTAGE OF MATERIAL CONSUMED AGAINST TH E SALES WERE LESS IN THIS YEAR AS COMPARED TO THE PRECEDING YEAR ON ACCOUNT O F THE FACT THAT RAW CLOTH WAS UTILISED IN THIS YEAR AND IN FACT THE AO HAS NO T APPRECIATED THE EXPLANATION FLED BY THE ASSESSEE AND HE HAS ADMITTE D THAT THE GROSS PROFIT DECLARED BY THE ASSESSEE WAS MUCH HIGHER. HE ALSO S UBMITTED THAT AS ITA NO. 6359/MUM/2011 SHRI HARISH KULDEPRAI KHANNA 5 AGAINST 8 EMPLOYEES PER MONTH THE ASSESSEE EMPLOYED AROUND 17 EMPLOYEES IN THE YEAR UNDER CONSIDERATION WHICH RESULTED IN H IGHER PAYMENT OF SALARY. IT WAS ALSO CONTENDED THAT TAX WAS DEDUCTED AT SOUR CE AND THE PROOF THEREOF WAS FURNISHED BEFORE THE AO, WHICH WAS NOT IN DISPU TE. THEREFORE, THE ADDITION MADE BY THE AO IS WITHOUT ANY BASIS. HE MA INLY HIGHLIGHTED THAT THE REDUCTION IN NET PROFIT WAS DUE TO FINANCE COST AND ADDITIONAL WORKFORCE EMPLOYED, WHICH WAS NOT PROPERLY APPRECIATED BY THE AO. 11. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE RECORD. AS CAN BE NOTICED FROM PAGES 15 TO 55 OF TH E PAPER BOOK, THE ASSESSEE FURNISHED DETAILS OF LABOUR CHARGES AND SALARY EXPE NSES IN SUPPORT OF HIS CONTENTION THAT GENUINE EXPENDITURE CANNOT BE DOUBT ED. HE FURTHER CONTENDED THAT THE EXPENDITURE INCURRED BY THE ASSE SSEE WAS GENUINE IN THE CIRCUMSTANCES OF CASE AND IN THE ABSENCE OF CROSS V ERIFICATION OF THE GENUINENESS OF THE PAYMENT THE AO WAS NOT JUSTIFIED IN DISMISSING THE CONTENTIONS OF THE ASSESSEE. AS CAN BE NOTICED FROM FORM 16A TAX WAS DEDUCTED AT SOURCE AND ALL THESE PAPERS WERE PLACED ON RECORD BEFORE THE AO. IT THUS TRANSPIRES THAT NO ADDITIONAL EVIDENCE WAS FILED BEFORE THE CIT(A). THEREFORE, THERE WAS NO NEED FOR THE LEARNED CIT(A) TO CALL FOR A REMAND REPORT SINCE HIS DECISION IS PREDOMINANTLY BASED ON THE FA CTS AVAILABLE ON THE RECORD OF THE AO AND HE HAS CORRECTLY APPRECIATED THE EXPL ANATION OF THE ASSESSEE THAT THERE WAS INCREASE IN NUMBER OF EMPLOYEES AND ALL THE PAYMENTS WERE MADE THROUGH BANKING CHANNELS. THEREFORE, THE GENUI NENESS AND LEGITIMACY OF THE PAYMENTS CANNOT BE DISPUTED. HAVING REGARD T O THE CIRCUMSTANCES OF THE CASE WE ARE OF THE VIEW THAT THE LEARNED CIT(A) WAS JUSTIFIED IN DELETING THE ADDITIONS MADE BY THE AO. WE, THEREFORE, UPHOLD THE ORDER OF THE LEARNED CIT(A) ON THIS ISSUE AND DISMISS THE APPEAL FILED B Y THE REVENUE. ORDER PRONOUNCED IN THE OPEN COURT ON 12 TH JUNE, 2013. SD/- SD/- (RAJENDRA) (D. MANMOHAN) ACCOUNTANT MEMBER VICE PRESIDENT MUMBAI, DATED: 12 TH JUNE, 2013 ITA NO. 6359/MUM/2011 SHRI HARISH KULDEPRAI KHANNA 6 COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A) 34, MUMBAI 4. THE CIT 24, MUMBAI CITY 5. THE DR, H BENCH, ITAT, MUMBAI BY ORDER //TRUE COPY// ASSISTANT REGISTRAR ITAT, MUMBAI BENCHES, MUMBAI N.P.