Balkrishna Dyeing & Printing Mills, Surat V. The Addl.CIT.,Range-2, Surat

ITA 88/AHD/2009

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 63282 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 11 month(s) 18 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-12-2012
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 08-10-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 09-01-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A TIRKEY
• Assessee Lawyers: S N DIVATIA
• Keywords: Rejection of books of accounts; Depreciation; Revenue expenditure
• Section: 143(3); 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD D BENCH BEFORE: SHRI G.C. GUPTA, VICE PRESIDENT AND SHRI ANIL CHATURVEDI, ACCOUNTANT ME MBER I.T.A. NO.88/AHD/2009 A. Y. 2005-06 M/S BALKRISHNA DYEING & PRINTING MILLS, G-1-165, SHREE RAM INDUSTRIAL SOCIETY, UDHNA MAGDALLA ROAD, SURAT PAN-AACFB5858R APPELLANT VS. THE ADDL. COMMISSIONER OF INCOME TAX, RANGE-2, SURAT RESPONDENT DEPARTMENT BY : SHRI A. TIRKEY, SR. D.R. ASSESSEE BY : SHRI S.N. DIVATIA, A.R. DATE OF HEARING : 08.10.2012 DATE OF PRONOUNCEMENT 28.12.2012 / ORDER PER : ANIL CHATURVEDI, ACCOUNTANT MEMBER 1. THIS IS ASSESSEES APPEAL AGAINST THE ORDER OF L D. CIT(A)-II, SURAT DATED 29.10.2008. 2. THE FACTS, IN BRIEF, AS CULLED OUT FROM THE ORDE RS ARE AS UNDER:- ASSESSEE IS A PARTNERSHIP FIRM ENGAGED IN THE BUSIN ESS OF DYEING AND PRINTING OF GREY CLOTHES ON JOB WORK BASIS. IT FIL ED ITS RETURN OF INCOME ON 24.10.2005 FOR A.Y. 2005-06 DECLARING TOTAL INCOME OF RS. NIL. THE CASE WAS SELECTED FOR SCRUTINY AND THEREAFTER THE ASSESSMENT WAS FRAMED U/S 143(3) VIDE ORDER DATED 21.12.2007 AND THE INCOME WAS DETERMINE D AT RS.5022980/- AFTER MAKING VARIOUS ADDITIONS. AGGRIEVED BY THE ORDER O F THE A.O. ASSESSEE CARRIED THE MATTER BEFORE LD. CIT(A). LD. CIT(A) VIDE ORDE R DATED 10.07.2008 DISMISSED I.T.A. NO.88/AHD/2009 A. Y. 2005-06 2 THE APPEAL OF THE ASSESSEE. AGGRIEVED BY THE ORDER OF LD. CIT(A), ASSESSEE IS NOW IN APPEAL BEFORE US. 3. ASSESSEE HAS FILED CONCISE GROUNDS DATED 18.10 .2011 AND THE SAME ARE AS UNDER:- 1.1 THE ORDER PASSED U/S 250 ON 29.10.2008 FOR A.Y . 2005-06 BY CIT(A)-II, SURAT, CONFIRMING THE ADDITIONS/DISALLOW ANCES IS WHOLLY ILLEGAL, UNLAWFUL AND AGAINST THE PRINCIPLES OF NAT URAL JUSTICE. 1.2 THE LD. CIT(A) HAS GRIEVOUSLY ERRED IN NOT CONS IDERING FULLY AND PROPERLY THE SUBMISSIONS MADE AND EVIDENCE PRODUCED BY THE APPELLANT WITH REGARD TO THE IMPUGNED ADDITION/DISA LLOWANCES. THE OBSERVATIONS MADE AND CONCLUSIONS REACHED BY AO AND CONFIRMED BY CIT(A) TO THE EXTENT THE SAME ARE CONTRARY TO THE E VIDENCE ON RECORD ARE NOT ADMITTED BY THE APPELLANT. 2.1 THE LD. CIT(A) HAS GRIEVOUSLY ERRED IN LAW AND OR ON FACTS IN UPHOLDING THE REJECTION OF THE BOOK RESULTS OF THE APPELLANT BY AO U/S 145(2), THOUGH THERE WERE NO DEFECTS THERE IN. 2.2 THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE , THE LD. CIT(A) OUGHT NOT TO HAVE UPHELD THAT THE BOOKS OF ACCOUNT OF THE APPELLANT WERE DEFECTIVE AND THEREFORE JUSTIFIED IN REJECTING THE SAME. 3.1 THE LD. AO HAS GRIEVOUSLY ERRED IN LAW AND IN F ACTS IN CONFIRMING THE FOLLOWING ADDITIONS/DISALLOWANCES MADE BY THE A O. (I) SUPPRESSION OF JOB CHARGES - RS.65,89,082/- (II) NON GENUINE LABOUR EXP. - RS.48,40,134/- (III) INTEREST EXP. AS CAPITAL EXP. - RS.2,66,436/ - (IV) 20% OUT OF TELEPHONE EXP. - RS.26,553/- (V) 20% OUT OF VEHICLE EXP. & DEPN. _ RS.27,794/- 3.2 THAT IN THE FACTS AND CIRCUMSTANCES OF THE CASE AS WELL AS IN LAW THE LD. CIT(A) OUGHT NOT TO HAVE CONFIRMED THE ABOV E SAID ADDITION/DISALLOWANCE MADE BY AO. 4.1 THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING THAT THERE WAS VIOLATION OF SECTION 40(A)(IA) IN RESPECT OF LABOUR EXPENSES. 4. GROUND NO.1.1 AND 1.2 ARE NOT PRESSED, THEREFORE DISMISSED. 5. GROUND NO.2.1 AND 2.2 ARE IN CONNECTION WITH REJ ECTION OF BOOKS AND ARE CONSIDERED TOGETHER. I.T.A. NO.88/AHD/2009 A. Y. 2005-06 3 6. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A.O. ASKED THE ASSESSEE TO PRODUCE THE BOOKS OF ACCOUNTS ALONGWITH THE VOUC HERS ETC. BUT THE ASSESSEE DID NOT PRODUCE THE SAME FOR VERIFICATION. THE A.O . CONCLUDED THAT SINCE THE ASSESSEE HAD FAILED TO SUBSTANTIATE HIS RETURN OF I NCOME WITH ANY DOCUMENTARY EVIDENCE, THE BOOKS OF ACCOUNTS WAS NOT MAINTAINED. THE A.O. HAS FURTHER STATED THAT ASSESSEE HAD ADMITTED THAT NO DAY TO DAY PRODU CTION REGISTER OR RECORDS FOR CONSUMPTION OF COLOURS AND CHEMICALS WAS MAINTAINED BY IT. HE ALSO OBSERVED THAT THERE WAS SUPPRESSION OF PRODUCTION AND THEREB Y SUPPRESSION OF JOB CHARGES. THE A.O. RELYING ON THE DECISION IN THE CASE OF BHA RAT MILK PRODUCTS VS. CIT (1981) 128 ITR 682 (ALL) AND RATANLAL OMPRAKASH VS. CIT (1981) 132 ITR 640 (ORI) INVOKED THE PROVISIONS OF SECTION 145(3) OF T HE ACT AND REJECTED THE BOOK RESULTS. 7. AGGRIEVED WITH THE ORDER OF THE A.O. THE ASSESSE E CARRIED THE MATTER BEFORE LD. CIT(A) WHO UPHELD THE ORDER OF THE A.O. BY HOLD ING AS UNDER:- 6. I AM SIMPLY NOT CONVINCED BY THE SUBMISSIONS AN D THE CONTENTIONS OF THE ARS. TO BEGIN WITH, THE FACTS OF THE ASSESS EES CASE WERE NOT THE SAME AS THAT OF PUSHPANJALI DYING AND PRINTING MILLS PVT. LTD. (SUPRA). IN THAT CASE, COMPLETE BOOKS OF ACCOUNT, IN ACCORDANCE WITH THE PROVISIONS OF THE ACT, WERE MAINTAINED AND WERE DULY AUDITED BY THE AUDITORS, WHO HAD MADE NO ADVERSE OBSERVATION. IN THE CASE OF THE ASSESSEE, THERE WAS SIMPLY NO TRACE OF THE BOOK S OF ACCOUNT INSPITE OF SEVERAL OPPORTUNITIES AND REMINDERS GIVE N/ISSUED BY THE AO. THERE WAS NO AUDIT REPORT. THE ARS HAVE CONTENDED THAT THE DETAILS THAT WERE FURNISHED COULD NOT HAVE BEEN RETRIEVED U NLESS THE RELEVANT BOOKS HAD BEEN MAINTAINED. HOWEVER, IT IS FOR THE ASSESSEE TO EXPLAIN HOW SUCH DETAILS WERE PREPARED AND, IF INDEED THE B OOKS WERE MAINTAINED WHY THEY WERE NOT PRODUCED BEFORE THE AO . THE PRINCIPLE OF RESJUDICATA DO NOT APPLY TO INCOME-TAX PROCEEDIN GS, AND EVEN IF A SIMILAR POSITION IN EARLIER YEARS HAD BEEN ACCEPTED , IT DID NOT MEAN THAT THEY HAD TO BE ACCEPTED IN THE YEAR UNDER CONS IDERATION AS WELL. THE ARS HAVE CONTENDED IN THE WRITTEN SUBMISSION (P AGE-4), THAT ALL THESE DOCUMENTS WERE PART OF THE BOOKS OF ACCOUNT O R COPIES OF ACCOUNTS. IF THIS WAS INDEED TRUE, THEN WHERE WER E THE ORIGINAL BOOKS? IN THE ABSENCE OF THE ORIGINAL BOOKS OF ACC OUNT AS ALSO THE BILLS AND VOUCHERS, WHATEVER DETAILS THAT WERE FURN ISHED BEFORE THE AO BECAME UNVERIFIABLE AND HENCE, REDUNDANT AND IRRELE VANT. ATTEMPTING I.T.A. NO.88/AHD/2009 A. Y. 2005-06 4 TO EXPLAIN THE FINDINGS OF THE AO REGARDING THE RAT E OF CONSUMPTION OF ELECTRICITY AND THE PRODUCTION PER UNIT IN THE MONT H OF AUGUST, IT HAS BEEN SUBMITTED BY THE ARS THAT THIS WAS BECAUSE THE UNIT HAD BEEN SHUT DOWN TWICE DURING THE SAME MONTH. IF THAT WAS THE CASE, THEN THE CONSUMPTION OF ELECTRICITY SHOULD HAVE GONE DOW N AS WELL, WHICH HOWEVER WAS NOT THE CASE. THERE WAS THUS SUBSTANTI AL MERIT IN THE FINDINGS OF THE AO THAT WHILE IN THE MONTH OF JUNE THE PRODUCTION WAS 6,95,158 METERS WITH CONSUMPTION OF ONLY 1,95,925 U NITS OF ELECTRICITY, THE PRODUCTION IN THE MONTH OF AUGUST HAD FALLEN TO 2,90,483 METERS WITH ONLY A MARGINAL FALL IN THE CO NSUMPTION OF ELECTRICITY TO 1,77,008 UNITS. THE SUBMISSIONS OF THE ARS SIMPLY DO NOT ANSWER OR EXPLAIN THE CLEAR FINDINGS OF THE AO. IT HAS BEEN FURTHER ARGUED THAT SINCE THE ASSESSEE HAD APPLIED DIFFEREN T PROCESSES ON DIFFERENT TYPES OF CLOTH, THE OUTPUT VARIED EVEN TH OUGH THE ELECTRICITY CONSUMPTION HAD REMAINED SAME. THIS AGAIN IS A VER Y POOR EXPLANATION. IF THE PROCESSES ARE DIFFERENT AND AL SO THE CLOTH, THE CONSUMPTION OF ELECTRICITY IS BOUND TO VARY. THIS IS ABSOLUTELY A COMMON SENSE MATTER. AND, THE VAGUE ATTEMPT MADE B Y THE ARS IS PERHAPS BASED ON THEIR ASSUMPTION THAT THE AO AS AL SO THE APPELLATE AUTHORITY LACK EVEN SUCH BASIC SENSE. THE EXPLANAT ION REGARDING WHY IT IS DIFFICULT TO MAINTAIN THE STOCK OF COLOURS AN D CHEMICALS AS ALSO THE JOB-CHARGES ARE NOT CONVINCING AT ALL. ALSO NOT CO NVINCING IS THE EXPLANATION REGARDING THE NEW MACHINERIES NOT MAKIN G ANY DIFFERENCE TO THE PRODUCTION. 6.1 TAKING INTO ACCOUNT THE AFORESAID FACTS AND CI RCUMSTANCES OF THE CASE, IT IS HELD THAT THE AO WAS FULLY JUSTIFIED IN REJECTING THE BOOK RESULT U/S 145(3) OF THE IT ACT AND IN MAKING THE A DDITION OF RS.65,89,082 ON ACCOUNT OF SUPPRESSION OF JOB-CHARG ES. 8. AGGRIEVED WITH THE ORDER OF LD. CIT(A), THE ASSE SSEE IS NOW IN APPEAL BEFORE US. 9. BEFORE US, LD. A.R. SUBMITTED THAT THE BOOKS OF ACCOUNTS HAVE BEEN MAINTAINED AND FROM THOSE VERY BOOKS, THE RETURN HA S BEEN PREPARED. IN VIEW OF THESE FACTS, HE SUBMITTED THAT THE AO WAS NOT JUSTI FIED IN REJECTING THE BOOK RESULTS. HE FURTHER SUBMITTED THAT ASSESSEE HAD PR ODUCED THE BOOKS OF ACCOUNTS AND OTHER DETAILS SUPPORTING ETC. AS AND WHEN CALLE D BY THE A.O. HE FURTHER SUBMITTED THAT THE MILL WAS CLOSED FROM 01.08.2004 TO 06.08.2004 DUE TO FLOOD AND FROM 30.08.2004 TO 06.09.2004 DUE TO BOILER REP AIRS. HE ALSO SUBMITTED THAT THERE WAS NO DIRECT CORRELATION BETWEEN THE EL ECTRICITY CONSUMPTION AND I.T.A. NO.88/AHD/2009 A. Y. 2005-06 5 PRODUCTION BUT ON THE CONTRARY PRODUCTION IS DEPEND ENT ON VARIOUS OTHER FACTORS LIKE DYEING OR PRINTING, NATURE OF CLOTH ETC. HE F URTHER SUBMITTED THAT THE A.O. HAD WORKED OUT THE CONSUMPTION RATIO ON THE BASIS O F ELECTRICITY UNITS/PRODUCTION INSTEAD OF PRODUCTION/UNITS. HAD THE RATIO BEEN WO RKED OUT BY USING THE FORMULA OF PRODUCTION/UNITS, THE RATIO WORKS OUT TO 1.62 UN IT/METRE IN THE ENTIRE YEAR. HE FURTHER SUBMITTED THAT THE FACT THAT G.P. RATE OF 1 5.47% WAS FOUND SATISFACTORY BY BOTH THE LOWER AUTHORITIES, THERE WAS NO CASE FO R REJECTION OF BOOKS OF ACCOUNTS AND MAKING ADDITIONS. ON THE OTHER HAND, L D. D.R. SUPPORTED THE ORDER OF THE A.O. AND LD. CIT(A). 10. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. WE FIND THAT THE AO IN THE ASSESSMENT ORDER HAS REC ORDED A CATEGORICAL FINDING THAT INSPITE OF VARIOUS OPPORTUNITIES THE ASSESSEE DID NOT PRODUCE THE BOOKS OF ACCOUNTS. FURTHER THE SAME WAS EVER NOT PRODUCED B EFORE LD. CIT(A). EVEN BEFORE US, THE LD. A.R. HAS NOT DEMONSTRATED BY BRI NGING ANY MATERIAL ON RECORD THAT IT HAD PRODUCED THE BOOKS OF ACCOUNTS BEFORE L OWER AUTHORITIES. IN VIEW OF THE AFORESAID FACTUAL POSITION WE ARE OF THE VIEW T HAT THE A.O. WAS FULLY JUSTIFIED IN REJECTING THE BOOK RESULTS AND THUS THIS GROUND OF THE ASSESSEE IS DISMISSED. 11. GROUND NO.3.1, 3.2 AND 4.1 ARE CONSIDERED TOGET HER. (I) SUPPRESSION OF JOB CHARGES : RS.6589082/-. THE A.O. ON SCRUTINIZING THE DETAILS OF MONTHLY CO NSUMPTION OF ELECTRICITY FOUND THAT THERE WAS VAST DIFFERENCE OF INPUT AND O UTPUT RATIO. THE RATIO OF INPUT AND OUTPUT WITH REFERENCE TO CONSUMPTION OF ELECTRI CITY TO CONSUMPTION OF ELECTRICITY IS TABULATED AT PAGE 7 OF HIS ORDER. F ROM THE RATIO WORKED OUT IN THE AFORESAID TABLE, HE OBSERVED THAT IN THE MONTH OF J ULY, THE ASSESSEE HAD SHOWN CONSUMPTION OF 177008 UNITS OF ELECTRICITY AND THE PRODUCTION WAS 290483 I.T.A. NO.88/AHD/2009 A. Y. 2005-06 6 METERS AND THEREFORE THE CONSUMPTION RATIO WORKED O UT TO 60.94% WHICH ACCORDING TO HIM WAS UNBELIEVABLE HIGH. HE ALSO OB SERVED THAT THE CONSUMPTION RATIO FOR THE MONTH OF JUNE TO BE 28.18%. THE ASSE SSEE WAS THEREFORE ASKED TO EXPLAIN AS TO WHY THE RATIO AND EVIDENCE FOR THE MO NTH OF JUNE SHOULD NOT BE CONSIDERED AS A REASONABLE BASIS FOR ASCERTAINING T HE JOB CHARGES. IN RESPONSE, THE ASSESSEE INTERALIA SUBMITTED THAT ELECTRICITY E XPENSES ALSO INCLUDED FIXED CHARGES. IN THE MONTH OF AUGUST, DESPITE THE UNIT BEING SHUT, IT HAD TO INCUR FIXED ELECTRICITY CHARGES. IT WAS FURTHER SUBMITTE D THAT THE GROSS PROFIT RATIO WAS COMPARABLE WITH THAT OF EARLIER YEARS MEANING THERE BY THAT THE MANUFACTURING EXPENSES WERE IN SAME PROPORTION AS IT WAS IN EARLI ER YEARS. IT WAS ALSO SUBMITTED THAT ACCOUNTING RATIO CANNOT DETERMINE TH E PRODUCTION. THE AO DID NOT ACCEPT THE CONTENTIONS OF THE ASSESSEE FOR THE REASON THAT THE ASSESSEE FAILED TO PRODUCE RECORDS SHOWING CONSUMPTION OF COLOURS A ND CHEMICALS. HE ALSO REJECTED THE OTHER CONTENTIONS OF THE ASSESSEE. TH E A.O. WORKED OUT THE PRODUCTION TAKING INTO CONSIDERATION THE CONSUMPTIO N RATIO FOR THE MONTH OF JUNE AND ACCORDINGLY WORKED OUT THE PRODUCTION OF 786863 3 METERS THAT ASSESSEE OUGHT TO HAVE PRODUCED. SINCE THE ASSESSEE HAD ALR EADY SHOWN THE PRODUCTION OF 6418890 METRES, HE CONSIDERED DIFFERENCE OF 1449 743 METRES (7868633 MTS. 6418890 MTS.) TO BE SUPPRESSED PRODUCTION. TO TH E SUPPRESSED PRODUCTION OF 1449743 MTS., AO AFTER CONSIDERING THE BENEFIT OF V ARIOUS VARIABLE TO BE @ 25% WORKED OUT THE NET SUPPRESSED PRODUCTION AT 1087307 MTS. THEREAFTER, CONSIDERING THE AVERAGE JOB CHARGES OF RS.6.06/MTR, HE ARRIVED AT SUPPRESSED PRODUCTION OF RS.6589082 (1087307 * 6.06) AND ADDED IT TO THE TOTAL INCOME. 12. AGGRIEVED WITH THE ACTION OF THE A.O. ASSESSEE CARRIED THE MATTER BEFORE LD. CIT(A). CIT(A) UPHELD THE ACTION OF THE A.O. F OR THE REASONS ALREADY STATED I.T.A. NO.88/AHD/2009 A. Y. 2005-06 7 AT PARA-5 HEREIN ABOVE. AGGRIEVED WITH THE ORDER O F LD. CIT(A) THE ASSESSEE IS NOW IN APPEAL BEFORE US. 13. BEFORE US, LD. A.R. SUBMITTED THAT THERE WAS A CHANGE IN PRODUCTION MIX DURING THE YEAR. THE ASSESSEE HAD DONE LESSER DYEI NG JOB WORK AS COMPARED TO THE PRINTING JOB WORK. IT WAS FURTHER SUBMITTED TH AT THE CONSUMPTION OF COLOUR AND CHEMICALS DEPEND UPON VARIOUS FACTORS LIKE VARI ETY OF CLOTH, DESIGN, COLOUR REQUIREMENTS ETC. THE CONSUMPTION OF COLOURS AND C HEMICALS THEREFORE IS NOT UNIFORM. IN THESE CIRCUMSTANCES, IT WAS NOT PRACTI CALLY FEASIBLE TO CORRELATE THE CONSUMPTION OF COLOUR AND CHEMICALS WITH THE PROCES SING CHARGES. THE ASSESSEE HOWEVER SUBMITTED THE OPENING STOCK AND CLOSING STO CK OF CHEMICALS AND COLOURS DURING THE COURSE OF ASSESSMENT PROCEEDINGS. LD. A .R. FURTHER SUBMITTED THAT DESPITE THE UNIT BEING SHUT IN AUGUST, IT HAD TO IN CUR ELECTRICITY EXPENSES AND THEREFORE THE CONSUMPTION RATIO WAS HIGH IN THE MON TH OF AUGUST. HE FURTHER SUBMITTED THAT THERE IS NO CHANGE IN THE METHOD OF ACCOUNTING FOLLOWED BY THE ASSESSEE. IN THE EARLIER YEARS, THE CONSUMPTION OF COLOURS AND CHEMICALS WAS ACCEPTED BY THE A.O. HE FURTHER SUBMITTED THAT THE A.O. HAS CONSIDERED THE JOB CHARGE RATE TO BE RS.6.06 PER MTR. WHICH IS INCORRE CT. THE JOB CHARGE VARIED FROM RS.4.10 TO 4.54. HE FURTHER SUBMITTED THAT G.P. RA TIO OF THE ASSESSEE IN THE CURRENT YEAR IS COMPARABLE TO THAT OF EARLIER YEARS . WITHOUT PREJUDICE TO THE AFORESAID SUBMISSIONS, HE SUBMITTED THAT THERE CANN OT BE ADDITION OF ENTIRE JOB CHARGES AT ALL THE ADDITION IS TO BE MADE IT CAN BE MADE IT SHOULD BE LIMITED TO THE G.P. OF 15.67% AND FOR WHICH HE RELIED ON THE D ECISION IN THE CASE OF PRESIDENT IND. (258 ITR 654), GURUBACHAN JUNEJA (30 2 ITR 63) AND OTHER DECISIONS. I.T.A. NO.88/AHD/2009 A. Y. 2005-06 8 14. ON THE OTHER HAND, LD. D.R. POINTED OUT TO THE VARIOUS FACTS LISTED IN THE ORDER OF THE A.O. IN VIEW OF THOSE FACTS, HE URGED THAT THE A.O. WAS FULLY JUSTIFIED IN MAKING THE ADDITION. 15. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. IN THE PRESENT CASE, THE FACTUAL POSITION THAT EMER GES IS THAT ON ACCOUNT OF NON- PRODUCTION OF BOOKS OF ACCOUNTS AND VARIOUS OTHER D ISCREPANCIES THE A.O. REJECTED THE BOOKS OF ACCOUNTS. THE REJECTION OF B OOKS OF ACCOUNTS WAS DISPUTED BY THE ASSESSEE BEFORE US. WE HAVE HEREINABOVE AT PARA-7 HAVE HELD THAT IN THE FACTS OF THE PRESENT CASE THE A.O. WAS JUSTIFIED IN REJECTING THE BOOKS OF ACCOUNTS. ONCE THE BOOKS OF ACCOUNTS HAVE BEEN REJ ECTED, THE PROFITS OF THE ASSESSEE IS REQUIRED TO BE ESTIMATED. WHILE ESTIMA TING THE JOB CHARGES, THE A.O. FOR THE REASONS IN THE ORDER HAS ESTIMATED THE PROD UCTION AND AFTER TAKING INTO CONSIDERATION THE AVERAGE JOB CHARGES OF RS.6.06 PE R METER ESTIMATED PRODUCTION. THE LD. A.R. HAS OPPOSED THE ADDITION MADE BY THE A.O. BUT HAS HOWEVER SUBMITTED THAT THE ADDITION IF AT ALL IS TO BE MADE CAN ONLY BE MADE OF THE PROFIT ELEMENT IN THE JOB CHARGES AND HAS SUBMI TTED THAT THE G.P. IN THE YEAR UNDER APPEAL IS 15.47%. CONSIDERING TOTALITY OF FA CTS, WE ARE OF THE VIEW THAT ON THE FACTS AND CIRCUMSTANCES OF THE CASE ADDITION IF ESTIMATED AND MADE ON THE BASIS OF LUMP SUM ADDITION WILL MEET THE ENDS OF JU STICE. WE ACCORDINGLY DIRECT THE ADDITION BE MADE AT LUMP SUM OF RS.13 LACS INST EAD OF RS.65,89,082/- MADE BY THE A.O. (II) NON GENUINE LABOUR EXPENSES : RS.4840134/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS ON VER IFICATION OF THE BILLS OF LABOUR CHARGES, THE A.O. OBSERVED THAT IN THE BILLS THERE WERE ALTERATION IN DATES, THE BILLS HAD NO PRE-PRINTED RUNNING SERIAL NUMBERS BUT THE NUMBERS WERE WRITTEN I.T.A. NO.88/AHD/2009 A. Y. 2005-06 9 MANUALLY. IN THE CASE OF BILLS OF PARTIES LISTED O N PAGE 25 OF THE ORDER, ON INQUIRIES HE FOUND THAT NO PARTIES WERE AVAILABLE A T THE GIVEN ADDRESS. FURTHER NOTICE U/S 133(6) WERE RETURNED UNSERVED IN CASE OF TWO PARTIES. THE ASSESSEE ALSO DID NOT PRODUCE THE PARTIES BEFORE THE A.O. BU T THE ASSESSEE HOWEVER PRODUCED CONFIRMATIONS FROM THE PARTIES. THE A.O. ALSO OBSERVED THAT THE AMOUNT WERE NOT PAID BUT WERE SHOWN AS OUTSTANDING. THE A.O. ALSO OBSERVED THAT T.D.S. DEDUCTED WAS PAID ON 30.05.2005. HE TH US CONCLUDED THAT THE ASSESSEE HAD INFLATED THE EXPENDITURE AND ACCORDING LY DISALLOWED RS.4840134/-. 16. AGGRIEVED BY THE ORDER OF THE A.O. ASSESSEE CAR RIED THE MATTER BEFORE LD. CIT(A) WHO CONFIRMED THE DISALLOWANCE MADE BY THE A .O. BY HOLDING AS UNDER:- I HAVE CAREFULLY CONSIDERED BOTH THE POSITIONS. O NCE AGAIN, THE ARS HAVE PLACED HEAVY RELIANCE ON THE FACT THAT SIMILAR EXPENDITURE HAD BEEN ALLOWED IN THE A.Y. 2004-05. IT HAS ALSO BEEN CLAIMED THAT CONFIRMATION FROM THE CONTRACTORS HAD BEEN DULY FUR NISHED BEFORE THE A.O. COPIES OF THE SAME HAD BEEN SOUGHT TO BE FURN ISHED IN APPELLATE PROCEEDINGS. I HAVE GONE THROUGH SO-CALLED ACCOUNT CONFIRMATIONS. THESE ARE PLAIN AND SIMPLE TYPED OUT ACCOUNTS APPAR ENTLY IN THE BOOKS OF THE ASSESSEE. NONE OF THEM ARE HOWEVER SIGNED O N BEHALF OF THE ASSESSEE. THE SO-CALLED CONFIRMATION OF RAJ PRINTS IS NOT SIGNED AT ALL. SIMILARLY, THERE IS NO SIGNATURE ON BEHALF OF ANIL PRINTS, THE ALLEGED CONFIRMATION OF YADAV PRINTS IS SIGNED BY ONE RAVIN DRANATH YADAV, WITHOUT ANY STAMP. THE ACCOUNT OF RAHUL PRINTS IS SIGNED BY ONE JAUSILA PD.PATHAK WITHOUT ANY STAMP OR THE ASSESSEE FIRM. THE ACCOUNT OF NEHA PRINTS IS SIGNED BY ONE VAKIL AND IS WITHOUT A NY SIGNATURE OF THE ASSESSEE FIRM. THIS MEANS THAT OUT OF THE EIGHT LA BOUR CONTRACTORS LISTED BY THE A.O., CONFIRMATION FROM ONLY 5 PARTIE S HAVE BEEN FURNISHED. THERE IS NO SIGNATURE ON ANY OF THESE ACCOUNTS BY A NY PARTNER OR ANY AUTHORITY ON BEHALF OF THE ASSESSEE FIRM. THERE IS NO SIGNATURE ON BEHALF OF TWO OF THE PARTIES WHILE THE ACCOUNTS OF THREE OF THEM HAVE BEEN SIGNED BY PERSONS WHO ARE NOT IDENTIFIABLE. T HEIR SIGNATURES ARE NEITHER DATED NOR STAMPED. QUITE CLEARLY SUCH EVID ENCES ARE NOT ADMISSIBLE, AND THE A.O. HAD JUSTIFIABLY REJECTED T HE SAME. ON THE OTHER HAND, THE INQUIRIES OF THE A.O. SHOWED THAT T HE NO SUCH LABOUR CONTRACTORS DID NOT EXIST AT THE ADDRESSES GIVEN. NOTICES U/S 133(6) OF THE ACT SENT TO THE SAID PARTIES WERE RETURNED UNSE RVED. IN SUCH A SITUATION, I AM OF THE FIRM VIEW THAT THE A.O. HAD NO OTHER OPTION BUT TO DISALLOW THE EXPENSES CLAIMED TO HAVE BEEN INCURRED BY THE ASSESSEE ON ACCOUNT OF LABOUR CHARGES. THE DISALLOWANCE AND AD DITION OF RS.48,40,134 IS THEREFORE, CONFIRMED. I.T.A. NO.88/AHD/2009 A. Y. 2005-06 10 AGGRIEVED BY THE ORDER OF LD. CIT(A) THE ASSESSEE I S NOW IN APPEAL BEFORE US. 17. BEFORE US, LD. A.R. SUBMITTED THAT THE ASSESSEE HAD SUBMITTED THE CONFIRMATIONS BEFORE THE A.O. AND THE SAME WERE IGN ORED. HE POINTED OUT THAT OUT OF THE TOTAL LABOUR EXPENSES OF RS.54 LACS THE A.O. HAS DISALLOWED RS.48 LACS. HE FURTHER SUBMITTED THAT THE NATURE OF WORK OF THE ASSESSEE IS SUCH THAT THE UNIT CANNOT RUN WITHOUT LABOUR. HE SUBMITTED THAT MERE NON SERVICE OF POSTAL NOTICE WITHOUT MENTIONING THE REASONS FOR NON-SERVING BY P OSTAL DEPARTMENT CANNOT LEAD TO THE CONCLUSION OF NON-EXISTENCE OF PERSONS. HE FURTHER SUBMITTED THAT THE ASSESSEE HAD DEDUCTED NECESSARY TDS WHILE CREDITING THE ACCOUNT OF THE LABOUR CONTRACTORS AND THE T.D.S. WAS SUBSEQUENTLY PAID AN D AS PER THE AMENDED PROVISIONS OF SECTION 40(A)(IA), THE SAME WAS WITHI N TIME. HE FURTHER SUBMITTED THAT THE EXISTENCE OF SAME LABOUR CONTRACTORS WAS A CCEPTED WHILE PASSING THE ORDER U/S 143(3) FOR A.Y. 2004-05. HE THUS URGED T HAT THE ADDITION MADE BY THE A.O. BE DELETED. 18. ON THE OTHER HAND LD. D.R. SUBMITTED THAT THE A .O. HAD IN THE ORDER GIVEN THE REASONS FOR DISALLOWING THE PAYMENT. HE THUS R ELIED ON THE ORDER OF THE A.O. 19. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. THE FACTUAL POSITION IS THAT THE A.O. TREATED THE L ABOUR PAYMENTS AS BEING INFLATED FOR THE REASON THAT THE ASSESSEE COULD NOT PRODUCE THE LABOUR CONTRACTORS, THE NOTICE SERVED U/S 133(6) WERE RETU RNED UNSERVED. IT IS ALSO A FACT THAT THE TOTAL LABOUR EXPENSES DEBITED BY THE ASSESSEE WAS TO THE TUNE OF RS.54 LACS OUT OF WHICH THE DISALLOWANCE HAS BEEN M ADE TO THE EXTENT OF RS.48 LACS WHICH WORKS OUT TO ALMOST 89% OF THE EXPENSES. THE RUNNING OF THE FACTORY IS NOT IN DISPUTE. BUT AT THE SAME TIME THE ASSESS EE HAS NOT FURNISHED ENOUGH EVIDENCE TO PROVE THE GENUINENESS OF LABOUR EXPENSE S AND ARE REASONABLE. THUS I.T.A. NO.88/AHD/2009 A. Y. 2005-06 11 THE A.O. WAS RIGHT IN DISALLOWING LABOUR EXPENSES B UT AT THE SAME TIME THE DISALLOWANCE OF LABOUR EXPENSES WHICH WORKS OUT TO 89% OF TOTAL LABOUR EXPENSES APPEAR TO BE ON A HIGHER SIDE. IT IS ALSO A FACT T HAT THE ASSESSEE REQUIRES LABOUR IN ITS VARIOUS DEPARTMENTS FOR RUNNING THE FACTORY. WE FEEL THAT SINCE THE BOOK RESULTS HAVE BEEN REJECTED, A FAIR ESTIMATION NEEDS TO BE MADE WE ARE OF THE VIEW THAT THE ENDS OF JUSTICE SHALL BE MET IF THE E XPENSES ON ACCOUNT OF LABOUR EXPENSES TO BE DISALLOWED ARE ESTIMATED AT RS.10 LA CS. WE ACCORDINGLY RESTRICT THE DISALLOWANCE TO THE EXTENT OF RS.10 LACS AS AGA INST RS.4840134/- MADE BY THE A.O. THUS THIS GROUND OF THE ASSESSEE IS PARTL Y ALLOWED. (III) DISALLOWANCE OF INTEREST EXPENSES: THE A.O. NOTICED THAT ASSESSEE HAD PURCHASED MACHI NERY WORTH RS.2421161/- AND FOR WHICH IT HAD BORROWED MONEY AN D PAID INTEREST OF RS.355248/-. THE INTEREST WAS CLAIMED AS EXPENDITU RE. THE A.O. WAS OF THE VIEW THAT SINCE THE INTEREST PAID WAS FOR THE PURCH ASE OF MACHINERY, THE INTEREST IS OF CAPITAL IN NATURE AND THEREFORE NOT ALLOWABLE AS A DEDUCTION. HE ACCORDINGLY ADDED THE INTEREST TO THE COST OF MACHINERY AND ALL OWED DEPRECIATION AT 25% (RS.88812/-) AND THE BALANCE INTEREST OF RS.266436/ - WAS DISALLOWED AS REVENUE EXPENDITURE. ASSESSEE CARRIED THE MATTER BEFORE LD . CIT(A) WHO UPHELD THE ORDER OF THE A.O. BY HOLDING AS UNDER:- I FIND THAT THE ARS HAVE COMPLETELY MISSED THE POI NT. THE ISSUE WAS NOT THE ALLOWABILITY OF INTEREST ON THE GROUND OF T HE MACHINERY BEING PUT TO USE IN THE SAME YEAR. THE ISSUE CONCERNED T HE CAPITALIZATION OF THE INTEREST EXPENSES INCURRED ON THE LOAN(S) TAKEN TO PURCHASE MACHINERY. THEREFORE, THE RATIO OF THE CASE OF CIT VS. CORE HEALTH CARE LTD. (SUPRA) IS SIMPLY NOT APPLICABLE TO THE A SSESSEES CASE. I AM OF THE VIEW THAT THE AO RIGHTLY AND JUSTIFIABLY CAP ITALIZED THE INTEREST EXPENSE OF RS.3,55,248 AFTER ALLOWING FOR DEPRECIAT ION ON THE ADDED VALUE TO THE MACHINERY @ 25%. HE CORRECTLY ADDED T HE SUM OF RS.2,66,436 TO THE ASSESSEES TOTAL INCOME. THE AO S ACTION IS SUSTAINED. I.T.A. NO.88/AHD/2009 A. Y. 2005-06 12 20. AGGRIEVED WITH THE ORDER OF LD. CIT(A), THE ASS ESSEE IS NOW IN APPEAL BEFORE US. 21. BEFORE US, LD. A.R. SUBMITTED THAT THE INTEREST PAID ON BORROWED CAPITAL WAS ALLOWABLE IN VIEW OF THE DECISION OF THE APEX C OURT IN THE CASE OF CIT VS. CORE HEALTH CARE LTD. (2008) 215 CTR 1. HE THUS UR GED THAT THE INTEREST PAYMENT BE ALLOWED AS REVENUE EXPENDITURE. 22. ON THE OTHER HAND LD. D.R. RELIED ON THE ORDER OF THE A.O. 23. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL ON RECORD. LD. A.R. HAS SUBMITTED THAT THE INTEREST IS ALLOWAB LE IN VIEW OF THE DECISION OF THE APEX COURT IN CASE OF CORE HEALTH CARE (SUPRA). WE ARE OF THE VIEW THAT THE RELIANCE PLACED BY ASSESSEE ON THE DECISION OF CORE HEALTH CARE IS DISTINGUISHABLE FOR THE REASON THAT IN THAT CASE THE ASSESSMENT YEA RS INVOLVED WERE VARIOUS ASSESSMENT YEARS, THE LAST BEING A.Y. 1997-98. PRO VISO HAS BEEN INSERTED IN SECTION 36(1)(III) BY FINANCE ACT 2003 W.E.F. 1 ST APRIL, 2004 WHEREBY ANY INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR ACQUISITION OF AN ASSET SHALL NOT BE ALLOWED AS DEDUCTION. SINCE IN THE APPEAL BEFORE US THE A. Y. INVOLVED IS 2005-06, WE ARE OF THE VIEW THAT PROVISO IS APPLICABLE AND THEREFOR E THE A.O. WAS RIGHT IN DISALLOWING THE INTEREST PAYMENT. WE THUS FIND NO REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A). (IV) ADHOC DISALLOWANCE OF VEHICLE AND TELEPHONE E XPENSES: OUT OF THE TOTAL EXPENSES ON ACCOUNT OF TELEPHONE A ND VEHICLE, THE A.O. WAS OF THE VIEW THAT SINCE THE ASSESSEE COULD NOT SUBSTANT IATE HIS STAND THAT THE EXPENSE HAS BEEN INCURRED FULLY FOR THE PURPOSE OF BUSINESS, PERSONAL ELEMENT COULD NOT BE RULED OUT. HE THEREFORE, DISALLOWED 2 0% OF TELEPHONE, VEHICLE EXPENSES AND DEPRECIATION ON MOTOR CAR. THUS THE T OTAL DISALLOWANCE MADE WAS I.T.A. NO.88/AHD/2009 A. Y. 2005-06 13 TO THE EXTENT OF RS.54,347/-. THE ASSESSEE CARRIED THE MATTER BEFORE LD. CIT(A) WHO UPHELD THE DISALLOWANCE. AGGRIEVED BY THE ORDE R OF LD. CIT(A), THE ASSESSEE IS NOW IN APPEAL BEFORE US. 24. BEFORE US LD. A.R. SUBMITTED THAT THE EXPENSES HAVE BEEN DISALLOWED WITHOUT PIN POINTING ANY INSTANCE OF PERSONAL EXPEN SES. HE THEREFORE, URGED THAT THE DISALLOWANCE MADE BY THE A.O. BE DELETED. ON T HE OTHER HAND LD. D.R. SUPPORTED THE ORDER OF THE A.O. 25. WE HAVE HEARD THE RIVAL SUBMISSIONS. THE DISAL LOWANCE HAS BEEN MADE ON ADHOC BASIS BY THE A.O. BEFORE US ALSO LD. A.R. CO ULD NOT SUBSTANTIATE HIS STAND THAT THE EXPENSES WERE FULLY FOR THE BUSINESS. HOW EVER, CONSIDERING THE TOTALITY OF FACTS, WE ARE OF THE VIEW THAT THE ENDS OF JUSTI CE SHALL BE MET IF THE DISALLOWANCE IS RESTRICTED TO 10%. WE THUS DIRECT THE DISALLOWANCE TO 10% AS AGAINST 20% MADE BY THE A.O. THUS, THIS GROUND OF THE ASSESSEE IS PARTLY ALLOWED. 26. THUS THE APPEAL OF THE ASSESSEE IS PARTLY ALLOW ED. ORDER PRONOUNCED IN OPEN COURT ON 28.12.201 2 SD/- SD/- (G.C. GUPTA) (ANIL CHATURVEDI) VICE PRESIDENT ACCOUNTANT MEMBER N.K. CHAUDHARY, SR. P.S. / COPY OF ORDER FORWARDED TO:- 1. / APPELLANT 2. / RESPONDENT 3. / CONCERNED CIT 4. - / CIT (A) 5. , ! , '# / DR, ITAT, AHMEDABAD 6. $% &' / GUARD FILE. BY ORDER/ , ) / ' * ! , '# +