ACIT CIR 20(1), MUMBAI V. H R.J. SURJICALS, MUMBAI

ITA 6509/MUM/2010

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 59928 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 6 month(s) 16 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-03-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: H
• Next Hearing Date: 15-03-2012
• Assessment Year: 2007-2008
• Appeal Filed On: 03-09-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: K SHIVARAM
• Assessee Lawyers: V V SHASTRI
• Keywords: Depreciation; Fair market value

Judgement Text

IN THE INCOME TAX APPELLATE TRIB UNAL MUMBAI BENCHES H, MUMBAI BEFORE SHRI R.S.SYAL, AM AND SHRI VIJAY PAL RAO, JM ITA NO.6509/MUM/2010 : ASST. YEAR 2007-2008 THE ASST.COMMISSIONER OF INCOME-TAX CIRCLE 20(1) MUMBAI. M/S.H.R.J.SURGICALS 10 SONA UDYOG, PARSI PANCHAYAT ROAD ANDHERI (EAST), MUMBAI 400 069 PAN : AAAFH0593B. (APPELLANT) VS. (RESPONDENT) APPELLANT BY : SHRI V.V.SHASTRI RESPONDENT BY : SHRI K.SHIVARAM DATE OF HEARING : 15.03.2012 DATE OF PRONOUNCEMENT : 20.03.2012 O R D E R PER R.S.SYAL, AM : THIS APPEAL BY THE REVENUE ARISES OUT OF THE ORDER PASSED BY THE COMMISSIONER OF INCOME-TAX (APPEALS) ON 07.06.2010, IN RELATION TO THE ASSESSMENT YEAR 2007-2008. 2. THE FIRST GROUND IS AGAINST THE DELETION OF ADDI TION OF ` 4,97,000 ON ACCOUNT OF TRANSPORTATION AND ESTABLISHMENT EXPENSE S MADE BY THE ASSESSING OFFICER U/S 40A(2)(B) OF THE ACT. BRIEFLY STATED TH E FACTS OF THIS GROUND ARE THAT THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACT URING AND TRADING OF PLASTIC MOULDED MEDICAL DISPOSABLE PRODUCTS. ON THE VERIFIC ATION OF THE PROFIT AND LOSS ACCOUNT, THE ASSESSING OFFICER OBSERVED THAT THE AS SESSEE HAD CLAIMED TRANSPORTATION AND ESTABLISHMENT EXPENSES OF ` 4,97,000 TOWARDS THE GOODS PURCHASED FROM ITS ASSOCIATE CONCERN M/S.GREEN CROS S HEALTHCARE LIMITED. THE A.O. OBSERVED THAT THE ASSESSEE HAD SOLD SUCH GOODS PURCHASED FROM ITS ASSOCIATE CONCERN TO M/S.CHIRON BEHRING LIMITED, AN KLESHWAR THROUGH M/S.EMMEN PLASTICS. IT WAS ALSO NOTICED THAT THE GO ODS PURCHASED FROM DISTRICT SOLAN, HIMACHAL PRADESH WERE FIRST BROUGHT TO MUMBA I AND THEREAFTER TRANSPORTED TO ANKLESHWAR AND IN THIS PROCESS THE A SSESSEE INCURRED ITA NO.6509/MUM/2010 M/S.H.R.J.SURGICALS. 2 TRANSPORTATION EXPENSES OF ` 4,97,000. THE A.O. MADE THE SAID ADDITION BY INVOKING THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT, WHICH CAME TO BE DELETED IN THE FIRST APPEAL. 3. AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD IT IS OBSERVED THAT THE SAID AMO UNT OF ` 4,97,000 HAS BEEN PAID BY THE ASSESSEE AS TRANSPORTATION CHARGES TO T HIRD PARTY AND NOT TO THE PERSONS SPECIFIED UNDER SECTION 40A(2)(B). ON THIS ACCOUNT ALONE, THE ADDITION SO MADE U/S 40A(2)(B) IS LIABLE TO BE DELETED. BE T HAT AS IT MAY IT IS OBSERVED THAT THE ASSESSEE PURCHASED GOODS FROM ITS ASSOCIAT E CONCERN, BROUGHT THEM TO MUMBAI AND THEREAFTER SENT TO THE ULTIMATE DESTINAT ION TO ANKLESHWAR. THE FACT THAT THE GOODS WERE IN FACT BROUGHT TO MUMBAI AND T HEREAFTER SENT TO ANKLESHWAR THROUGH TRANSPORT HAS NOT BEEN DISPUTED BY THE ASSESSING OFFICER. IT IS NOT THE CONCERN OF THE AO AS TO HOW THE ASSESSEE SHOULD HAVE HANDLED THE GOODS FROM ONE PLACE TO ANOTHER AND AS TO WHETHER A NY TRANSPORTATION OF GOODS WAS WARRANTED IN ROUTING THEM THROUGH MUMBAI OR DIR ECT TO THE DESTINATION. ONCE THE ASSESSEE HAS TAKEN A DECISION TO MOVE THE GOODS IN A PARTICULAR WAY AND INCURRED ANY EXPENDITURE IN THIS REGARD, THE AO HAS NO RIGHT TO ADVICE. HIS CONCERN IS TO ASCERTAIN AS TO WHETHER THE EXPENDITU RE IS GENUINELY INCURRED AND IS FOR THE PURPOSE OF BUSINESS. UNDER SUCH CIRCUMST ANCES, WE ARE OF THE CONSIDERED OPINION THAT THERE CANNOT BE ANY QUESTIO N OF MAKING ANY ADDITION ON ACCOUNT OF TRANSPORTATION CHARGES WHICH WERE GENUIN ELY PAID TO THIRD PARTY. WE, THEREFORE, UPHOLD THE IMPUGNED ORDER DELETING THE A DDITION ON THIS ISSUE. THIS GROUND IS NOT ALLOWED. 4. GROUND NO.2 IS AGAINST THE DELETION OF ADDITION U/S.40A(2)(B) ON ACCOUNT OF REMUNERATION PAID TO FAMILY MEMBERS AMOUNTING TO ` 14,04,000. BRIEFLY STATED THE FACTS OF THIS GROUND ARE THAT THE ASSESS EE CLAIMED EXPENDITURE OF ` 49.54 LAKH UNDER THE HEAD SALARIES AND WAGES. SUCH EXPENDITURE INCLUDED SALARY PAID TO FOLLOWING FAMILY MEMBERS:- ITA NO.6509/MUM/2010 M/S.H.R.J.SURGICALS. 3 (I) SHRI RAJESH SHAH SON OF THE PARTNER SHRI JASWANT M.SHAH ` 9,00,000 (II) MS. MANISHA R.SHAH WIFE OF RAJESH SHAH ` 3,00,000 (III) SMT.S.J.SHAH, MOTHER OF PARTNER SHRI JASWANT M.SHAH ` 2,04,000 5. INVOKING THE PROVISIONS OF SECTION 40A(2)(B), TH E ASSESSING OFFICER ADDED THE ENTIRE AMOUNT OF SALARY PAID TO THE ABOVE THREE PERSONS. THIS LED TO THE ADDITION OF ` 14,04,000. IN THE FIRST APPEAL, THE LEARNED CIT(A) ORDERED FOR THE DELETION OF ADDITION. 6.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. INSOFAR AS SALARY PAID TO SHRI RAJESH SHAH IS CONCERNED, IT IS OBSERVED FROM THE IMPUGNED ORDER THAT IN THE LAST YEAR HE WA S PAID SALARY OF ` 2,52,000 WHICH HAS BEEN INCREASED IN THE CURRENT YEAR TO ` 9,00,000. COPY OF THE RETURN FILED BY SHRI RAJESH SHAH FOR THE ASSESSMENT YEAR U NDER CONSIDERATION IS PLACED ON PAGE 52 OF THE PAPER BOOK, FROM WHICH IT CAN BE SEEN THAT HE RETURNED TOTAL INCOME OF ` 10,32,565. EVEN THOUGH THERE HAS BEEN INCREASE IN T HE SALARY TO SHRI RAJESH SHAH IN THE CURRENT YEAR BUT THE FACT THAT T HIS SALARY IS EXCESSIVE IN COMPARISON WITH THE SALARY PAID TO OUTSIDERS UNDER SIMILAR CIRCUMSTANCES HAS NOT BEEN BROUGHT ON RECORD. SECTION 40A(2) CONTEMPL ATES THAT WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT IS MADE TO THE RELATIVES AS PER CLAUSE (B) AND THE A.O. IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MAD E OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE B ENEFIT DERIVED BY OR ACCRUING TO HIM THEREFROM, SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE IS DISALLOWED U/S 40A(2). THIS PROVISION PRESUPPOSES EXCESSIVE OR UNREASONABLE PAYMENT HAVING REGARD TO THE FAIR MARK ET VALUE OF THE GOODS OR ITA NO.6509/MUM/2010 M/S.H.R.J.SURGICALS. 4 SERVICES ETC. FOR WHICH THE PAYMENT IS MADE. IT HAS NOT BEEN SHOWN IN ANY WAY AS TO HOW THE SALARY OF ` 9,00,000 PAID TO SHRI RAJESH SHAH IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO ITS FAIR MARKET VALUE . IT IS FURTHER IMPORTANT TO NOTE THAT SIMILAR AMOUNT OF SALARY OF ` 9,00,000 HAS PAID BY THE ASSESSEE-FIRM TO SHRI RAJESH SHAH IN THE IMMEDIATELY TWO SUCCEEDING ASSESSMENT YEARS VIZ. ASSESSMENT YEAR 2008-08 AND 2009-10. BY PLACING ON RECORD A COPY OF THE ASSESSMENT ORDER FOR THE A.Y. 2008-09, THE LEARNED AR SUBMITTED THAT THE SAID SALARY HAS BEEN ALLOWED BY THE ASSESSING OFFICER IN ASSESSMENT MADE U/S 143(3). IT WAS ALSO STATED THAT IN RESPECT OF THE O THER YEAR ALSO NO ADDITION HAS BEEN MADE THOUGH ASSESSMENT WAS FINALIZED U/S 143(1 ). IF THE SALARY OF ` 9 LAKH PAID TO SHRI RAJESH SHAH HAS BEEN ACCEPTED BY THE A SSESSING OFFICER AS REASONABLE IN THE IMMEDIATELY TWO SUCCEEDING YEARS, THERE IS NO REASON TO HOLD SUCH SALARY AS EXCESSIVE FOR THE YEAR IN QUESTION. WE, THEREFORE, UPHOLD THE DELETION OF THIS ADDITION. 6.2 AS REGARDS SALARY PAID TO MS. MANISHA RAJESH SH AH IS CONCERNED, WE FIND THAT AS AGAINST LAST YEARS SALARY OF ` 3,01,500 THE ASSESSEE PAID ONLY A SUM OF ` 3,25,000 TO HER IN THE CURRENT YEAR. BY NO STANDARD SUCH AN INCREASE CAN BE TERMED AS UNREASONABLE. 6.3 INSOFAR AS MRS.SUREKHA SHAH IS CONCERNED TO WHO M THE ASSESSEE CLAIMED TO HAVE PAID ` 2,04,000 IN THIS YEAR AS AGAINST ` 1,02,000 IN THE PRECEDING YEAR, IT IS FOUND FROM THE COPY OF HER RETURN FOR THE CURREN T YEAR THAT HER TOTAL INCOME IS ` 15.28 LAKH. IN THIS VIEW OF THE MATTER IT IS CLEAR THAT THE AMOUNT OF SALARY HAS BEEN TAXED IN HER HANDS AT THE SAME RATE OF TAX AT WHICH THE INCOME OF THE FIRM WOULD HAVE BEEN TAXED IN THE HANDS OF THE FIRM IF N O SUCH INCREASE IN THE SALARY HAD BEEN ALLOWED. THAT BEING THE POSITION, THERE CA NNOT BE ANY REASON WITH THE ASSESSEE-FIRM TO UNNECESSARILY HIKE THE SALARY IN H ER HANDS TO AVOID THE OVER ALL TAX LIABILITY. THE REASONS ADDUCED BY US WHILE DELE TING THE ADDITION IN THE CASE ITA NO.6509/MUM/2010 M/S.H.R.J.SURGICALS. 5 OF SHRI RAJESH SHAH MUTATIS MUTANDIS APPLY TO THE ADDITION IN RESPECT OF SMT. SUREKHA SHAH AS WELL. WE, THEREFORE, HOLD THAT THE LEARNED CIT(A) WAS JUSTIFIED IN DELETING THE ADDITION OF ` 2,04,000. THIS GROUND IS NOT ALLOWED. 7. GROUND NO.3 IS AGAINST THE DELETION OF LUMP SUM ADDITION OF ` 10 LAKH ON ACCOUNT OF CONSUMPTION OF RAW MATERIAL. BRIEFLY STA TED THE FACTS OF THIS GROUND ARE THAT THE ASSESSEE FURNISHED STATEMENT SHOWING P URCHASE AND PRODUCTION OF GOODS, WHICH HAS BEEN REPRODUCED BY THE A.O. IN HIS ORDER AS UNDER:- OPENING STOCK OF RAW MATERIAL ` 24,94,224 ADD : PURCHASES ` 3,51,09,506 ` 3,76,03,729 LESS : CLOSING STOCK ` 78,66,263 CONSUMPTION ` 2,97,37,466 SALES : MANUFACTURING LOCAL ` 2,84,16,023 SALES : EXPORT ` 1,70,22,590 ` 4,54,38,613 ADD : INCREASE IN STOCK OF FINISHED GOODS ` 40,31,715 ` 4,94,70,328 8. THE ASSESSING OFFICER OBSERVED THAT THE PERCENTA GE OF CONVERSION OF RAW MATERIAL TO SALES AND INCREASE IN STOCK FOR THE REL EVANT ASSESSMENT YEAR WORKED OUT TO 60.11% WHEREAS THE COST OF CONSUMPTION FOR T HE IMMEDIATELY PRECEDING ASSESSMENT YEAR WAS ONLY 49.2%. IN THE LIGHT OF THI S FACT, THE A.O. OPINED THAT THERE WAS INCREASE IN COST OF RAW MATERIAL CONSUMED BY 10.91%. IN ORDER TO NEUTRALIZE THE EFFECT OF SO CALLED EXCESSIVE CONSUM PTION OF RAW MATERIAL, THE A.O. MADE AN AD HOC ADDITION OF ` 10 LAKH. THE LEARNED CIT(A) ORDERED FOR THE DELETION OF ADDITION. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD. PAGE 90 OF THE PAPER BOOK CONTAINS THE SUMM ARY OF TRADING ACCOUNT INDICATING GROSS PROFIT FOR THE YEAR IN QUESTION AN D THE IMMEDIATELY PRECEDING ITA NO.6509/MUM/2010 M/S.H.R.J.SURGICALS. 6 YEAR. FROM THIS CHART, IT CAN BE OBSERVED THAT THE ASSESSEE DECLARED G.P. RATIO OF 28.83% IN COMPARISON WITH THE SAID RATIO OF 24.67% FOR THE PRECEDING YEAR. THE ULTIMATE EFFECT OF THE LOWER OR EXCESSIVE CONSUMPTI ON OF RAW MATERIAL IS REFLECTED ON THE G.P. RATE. THE A.O. HAS SIMPLY PRO CEEDED TO MAKE THE ADDITION BY OBSERVING THAT THE PERCENTAGE OF CONVERSION OF R AW MATERIAL TO SALES AND INCREASE IN STOCK WORKS OUT AT A PARTICULAR PERCENT AGE. THERE CAN BE SO MANY FACTORS WHICH CAN LEAD TO LOWER OR HIGHER CONSUMPTI ON. IF THE QUALITY OF RAW MATERIAL IS BETTER, NATURALLY THE CONSUMPTION OF SU CH RAW MATERIAL WILL ALSO BE LOW FOR THE REASON THAT THERE WILL BE LESS WASTAGE. FURTHER WHAT SORT OF OUTPUT IS BROUGHT OUT FROM RAW MATERIAL USED IS AGAIN AN OTHE R IMPORTANT FACTOR. ONE SINGLE FACTOR, BEING THE INCREASE IN CONSUMPTION CA NNOT IN ISOLATION BE A REASON TO MAKE ANY ADDITION IN THE MANNER IN WHICH IT HAS BEEN MADE BY THE A.O. ALL SUCH FACTORS ULTIMATELY IMPACT THE G.P. RATE. ADVER TING TO THE FACTS OF THE INSTANT CASE IT IS NOTICED THAT THE GP RATE IN THIS YEAR HA S EXCEEDED THAT FROM THE PRECEDING YEAR. WHEN THE ULTIMATE EFFECT OF THE TRA DING OPERATIONS IS THE INCREASE IN THE G.P. RATE, IN OUR CONSIDERED OPINIO N, THE LEARNED CIT(A) WAS JUSTIFIED IN ORDERING THE DELETION OF ADDITION. FUR THER THERE IS NO RATIONALE FOR MAKING ANY LUMP SUM ADDITION WITHOUT ANY CORRESPOND ING BASIS. IN VIEW OF THE FOREGOING REASONS, WE ARE OF THE CONSIDERED OPINION THAT NO INTERFERENCE IS WARRANTED IN THE IMPUGNED ORDER ON THIS ISSUE. THIS GROUND IS NOT ALLOWED. 10. THE LAST GROUND IS AGAINST GRANTING OF RELIEF O F ` 88,077 IN RESPECT OF DISALLOWANCE OUT OF MOTOR CAR EXPENSES. THE ASSESSE E DEBITED A SUM OF ` 4,40,382 TOWARDS MOTOR CAR EXPENSES AND DEPRECIATIO N WAS CLAIMED ON MOTOR CAR TO THE TUNE OF ` 2,48,324. THE ASSESSING OFFICER OBSERVED THAT THE A SSESSEE WAS NOT MAINTAINING ANY LOG BOOK TO PROVE THAT THE CAR WAS USED FOR BUSINESS PURPOSES. CONSIDERING THESE FACTS THE A.O. DISALLOW ED 20% OF THE TOTAL EXPENSES AND DEPRECIATION, WHICH RESULTED INTO AN A DDITION OF ` 1,37,741. THE LEARNED CIT(A) UPHELD THE ACTION OF THE A.O. IN MAK ING 20% DISALLOWANCE OUT ITA NO.6509/MUM/2010 M/S.H.R.J.SURGICALS. 7 OF DEPRECIATION ON MOTOR CAR AT ` 49,664. HE HOWEVER DIRECTED TO DELETE THE ADDITION IN RESPECT OF DISALLOWANCE OF MOTOR CAR EX PENSES. 11. HAVING HEARD THE RIVAL SUBMISSIONS AND PERUSED THE RELEVANT MATERIAL ON RECORD, WE FIND THAT THE LEARNED CIT(A) HAS IN PRIN CIPLE UPHELD THE USER OF MOTOR CAR BY THE PARTNERS FOR THEIR PERSONAL PURPOS ES AT 20%. THAT IS THE REASON FOR WHICH THE DISALLOWANCE OF DEPRECIATION AT THIS RATE HAS BEEN SUSTAINED AND THE ASSESSEE IS NOT IN APPEAL AGAINST SUCH DISALLOW ANCE. THAT BEING THE POSITION, WE ARE UNABLE TO APPRECIATE HIS VIEW POINT THAT THE DISALLOWANCE ON ACCOUNT OF MAINTENANCE EXPENSES OF MOTOR CAR BE NOT SUSTAINED ON THE GROUND THAT THE EXPENDITURE WAS SUBJECT TO FRINGE BENEFIT TAX. NOWH ERE UNDER THE ACT, IT HAS BEEN STIPULATED THAT IF AN EXPENDITURE HAS SUFFERED FRINGE BENEFIT TAX, NO ADDITION ON ACCOUNT OF PERSONAL USE CAN BE MADE. SECTION 38( 2) CATEGORICALLY MANDATES THE DISALLOWANCE OF EXPENSES AND DEPRECIATION IN RE SPECT OF BUILDING, MACHINERY, PLANT OR FURNITURE TO THE EXTENT THAT TH ESE ARE NOT USED FOR THE BUSINESS PURPOSES. WE, THEREFORE, RESTORE THE ADDIT ION MADE BY THE ASSESSING OFFICER ON THIS COUNT AMOUNTING TO ` 88,077. IT IS, THEREFORE, HELD THAT THE TOTAL ADDITION OF ` 1,37,741 MADE BY THE A.O. WAS JUSTIFIED. THIS GROUN D IS ALLOWED. 12. IN THE RESULT, THE APPEAL IS PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 20 TH DAY OF MARCH, 2012. SD/- SD/- (VIJAY PAL RAO) (R.S.SYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI : 20 TH MARCH, 2012. DEVDAS* ITA NO.6509/MUM/2010 M/S.H.R.J.SURGICALS. 8 COPY TO : 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT CONCERNED 4. THE CIT(A) - XXXI, MUMBAI 5. THE DR/ITAT, MUMBAI. 6. GUARD FILE. TRUE COPY. BY ORDER ASSISTANT REGISTRAR, ITAT, MUMBAI.