The DCIT, Circle-1, Surat V. M/s. Ganga Fashions Pvt.Ltd., Surat

ITA 987/AHD/2011

• Counselvise Citation: [2016] 131 COUNSELVISE.COM (IT) 9898 (ITAT-AHMEDABAD)
• Duration Of Justice: 5 year(s) 7 month(s) 19 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 24-11-2016
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 17-11-2016
• Assessment Year: 2007-2008
• Appeal Filed On: 04-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SITA RAM MEENA
• Assessee Lawyers: M K PATEL
• Keywords: Corroborative evidences; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD D BENCH (BEFORE SHRI N.K. BILLAIYA, ACCOUNTANT MEMBER & SHRI S.S. GODARA, JUDICIAL MEMBER) ITA. NO: 987/AHD/2011 (ASSESSMENT YEAR: 2007-08) THE DY. COMMISSIONER OF INCOME-TAX CIRCLE-1, SURAT V/S M/S. GANGA FASHIONS PVT. LTD. PLOT NO. 287, GIDC, PANDESARA, SURAT (APPELLANT) (RESPONDENT) PAN: AAACG8709K APPELLANT BY : SHRI SITA RAM MEENA, SR. D .R. RESPONDENT BY : SHRI M. K. PATEL, A.R. ( )/ ORDER DATE OF HEARING : 17 -11-201 6 DATE OF PRONOUNCEMENT : 24 -11-2016 PER N.K. BILLAIYA, ACCOUNTANT MEMBER: 1. THIS APPEAL BY THE REVENUE IS PREFERRED AGAINST THE ORDER OF LD. CIT(A)-I, SURAT DATED 20.01.2011 PERTAINING TO A.Y. 2007-08. ITA NO. 987/ AHD/2011 . A.Y. 2007-08 2 2. THE ONLY GRIEVANCE OF THE REVENUE IS THAT THE LD. C IT(A) ERRED IN DELETING THE ADDITIONS MADE ON ACCOUNT OF DISALLOWANCE OF LABOUR CHARGES. 3. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF PROCESSI NG OF ART SILK CLOTH ON JOB WORK BASIS. DURING THE YEAR UNDER CONSIDERATION, TH E ASSESSEE HAS SHOWN GROSS PROFIT OF RS. 23,64,630/- ON TOTAL TURNOVER O F RS. 7,38,01,741/- WHICH WORKS OUT TO 3.20% AS AGAINST THE G.P. OF 16.92% ON TOTAL TURNOVER OF RS. 8,88,79,255/- SHOWN IN THE IMMEDIATE PRECEDING YEAR . 4. THE A.O. FOUND THAT THE SHARP FALL IN THE GROSS PRO FIT IS DUE TO EXORBITANT INCREASE IN THE LABOUR CHARGES WHICH IS ABOUT MORE THAN 200%. THE ASSESSEE WAS ASKED TO JUSTIFY THE REASONS FOR SUCH ABNORMAL INCREASE. THE ASSESSEE EXPLAINED THAT THE MACHINERIES HAVE BECOME OBSOLETE AND WERE NOT GIVING PROPER PRODUCTION AND THE EXISTING LABOU R WAS NOT ACCUSTOMED TO RUN THE NEW MACHINERIES WHICH WERE INSTALLED DUR ING THE YEAR UNDER CONSIDERATION. TO RUN THE NEW MACHINERIES, THE ASSE SSEE HAD TO ENGAGE HIGHLY SKILLED LABOURS WHICH HAS RESULTED INTO INCR EASED LABOUR PAYMENTS WHICH IS THE REASON FOR INCREASE IN LABOUR CHARGES VIS--VIS COMPARE TO THE PRECEDING YEAR. THIS EXPLANATION OF THE ASSESSEE DI D NOT FIND ANY FAVOUR WITH THE A.O. WHO PROCEEDED BY DISALLOWING LABOUR C HARGES OF RS. 1,13,52,714/-. 5. ASSESSEE CARRIED THE MATTER BEFORE THE LD. CIT(A) A ND REITERATED ITS CONTENTION. AFTER CONSIDERING THE FACTS AND THE SUB MISSIONS, THE LD. CIT(A) WAS CONVINCED THAT THE A.O. WAS NOT JUSTIFIED IN RE JECTING THE BOOKS OF ITA NO. 987/ AHD/2011 . A.Y. 2007-08 3 ACCOUNTS WITHOUT FINDING SPECIFIC DEFECTS. THE LD. CIT(A) FURTHER OBSERVED THAT THE ASSESSEE HAS SUBMITTED VARIOUS DETAILS WHI CH WERE ALSO SUBMITTED BEFORE THE A.O. ALONG WITH COPIES OF BILLS, VOUCHER S, WAGES REGISTERS, SUPPORTING EVIDENCES ETC. THE LD. CIT(A) FOUND THAT THE A.O. HAS NOT POINTED OUT ANY SPECIFIC DEFECT IN THESE DIRECT EVIDENCES. THE FACTUAL OBSERVATIONS OF THE LD. CIT(A) READS AS UNDER:- NOW COMING TO THE ALTERNATIVE ACTION OF DISALLOWAN CE OUT OF LABOUR EXPENSES, IT IS OBSERVED THAT THE DETAILS AS WELL AS VARIOUS EVI DENCES SUBMITTED BEFORE ME (WHICH WERE ALSO SUBMITTED BEFORE THE AO) AND THE A NALYSIS MADE FROM SUCH DETAILS FOR JUSTIFICATION OF RISE IN LABOUR CHARGES CLEARLY EXPLAIN THAT THE APPELLANT COMPANY HAD INCURRED GENUINE LABOUR EXPENSES UNDER A PECULIAR FACTS AND CIRCUMSTANCES OF THE CASE. THE APPELLANT COMPANY WA S RUNNING ITS PLANT SINCE 1990 AND OVER A PERIOD OF TIME, DUE TO NORMAL WEAR AND TEAR AS WELL AS TECHNOLOGICAL CHANGES COMPELLED THE APPELLANT COMPA NY TO GO FOR LARGE SCALE UPGRADATION OF EXISTING PLANT AND MACHINERIES. IT I S OBSERVED THAT THE APPELLANT COMPANY HAD FIRSTLY INCURRED VARIOUS REPAIRS AND MA INTENANCE EXPENSES FOR UPGRADATION OF PLANT AND MACHINERIES BY REPLACEMENT OF VARIOUS PARTS AND MADE THE EXISTING MACHINERIES MORE FUNCTIONAL AND VIABLE TO GO AHEAD FOR TECHNICAL UPGRADATION. THEREAFTER, THE APPELLANT COMPANY PURC HASED NEW MACHINERIES TO THE TUNE OF RS. 63 LACS FOR TECHNOLOGICAL UPGRADATI ON OF ITS PLANT . IT IS OBSERVED FROM THE DETAILS SUBMITTED THAT DURING THIS PROCESS , THE APPELLANT COMPANY HAD CLOSED DOWN ITS PRODUCTION ACTIVITIES FOR A PERIOD OF ABOUT 2 MONTHS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE APPELLANT COM PANY HAD PRODUCED ALL THE EVIDENCES AND BILLS AND VOUCHERS ETC FOR REPAIRING AND MAINTENANCE EXPENSES AS WELL AS THE COPIES OF BILLS OF NEW PLANT AND MACHIN ERIES. IT IS OBSERVED THAT THE AO COULD NOT POINT OUT ANY WHERE THAT THESE EXPENSE S INCURRED BY THE COMPANY WERE NOT GENUINE. THEREFORE, IT IS CLEAR THAT THE FACT REGARDING TECH NOLOGICAL UPGRADATION WAS UNDISPUTED. NOW COMING TO THE LABOU R EXPENSES, IT IS OBSERVED THAT THE APPELLANT COMPANY HAD PRODUCED ITS WAGES R EGISTERS FOR THE CURRENT YEAR AS WELL AS THE EARLIER YEAR WHICH WERE DULY SIGNED BY WORKERS AND NO WHERE THE ITA NO. 987/ AHD/2011 . A.Y. 2007-08 4 AO COULD POINT OUT ANY DEFECT TO ESTABLISH THAT NO SUCH PAYMENTS WERE EVER MADE BY THE COMPANY . FROM THE AVAILABLE DETAILS IT WAS OBSERVED THAT T HE APPELLANT HAD EMPLOYED MORE WORKERS AS COMPARED TO EARLIER YEAR A ND THE EMPLOYEES WITH HIGHER WAGES WERE MORE THAN THOSE IN EARLIER YEARS WHICH IS EVIDENT FROM THE TABLE OF MONTHWISE DETAILS OF WAGES IN THE SCALE OF RS. 9,000/- TO RS. 12,000/= DISCUSSED HEREINABOVE. THE SUBMISSION OF THE APPELL ANT THAT NUMBER OF SKILLED LABOUR WITH HIGHER WAGES HAD INCREASED IS SUPPORTED BY THE EVIDENCES OF PF/ESI RECORDS AND THE SAME IS EVIDENT FROM THE FOLLOWING. ASSESSMENT YEAR NO. OF EMPLOYEES LIABLE TO PF CONTRIBUTION NO. OF EMPLOYEES LIABLE TO ESI CONTRIBUTION 2006-07 1482 1488 2007-08 982 983 THIS SHOWS THAT MORE EMPLOYEES WERE EMPLOYED AS COM PARED TO EARLIER YEAR IN HIGHER SCALE WHERE PF/ESI LAWS WERE NOT APPLICABLE. THE SUBMISSION OF THE APPELLANT THAT MORE NUMBER OF TECHNICAL PERSONS WER E EMPLOYED DURING THE YEAR WAS ALSO FOUND TO BE CORRECT. FROM THE DETAILS AND COPY OF ACCOUNTS FURNISHED IN RESPECT OF TECHNICAL EMPLOYEES IT IS OBSERVED THAT THERE WERE ONLY 3 TECHNICAL EMPLOYEES IN A.Y. 2006-07 WHEREAS, IN THE YEAR UNDE R APPEAL 7 TECHNICAL PERSONS WERE EMPLOYED DURING APRIL 2006 TO OCTOBER 2006 AND 10 TECHNICAL EMPLOYEES WERE EMPLOYED DURING DECEMBER 2006 TO MARCH 2007. T HE CONTENTION OF THE APPELLANT THAT THE QUALITY OF THE PRODUCT HAS GONE UP AS COMPARED TO PRECEDING YEAR ESPECIALLY FROM DECEMBER 2006 ONWAR DS IS EVIDENT FROM THE DETAILS AS WELL AS BOOK RESULTS WHERE IT WAS FOUND THAT THE AVERAGE JOB CHARGES PER METER DURING FIRST EIGHT MONTHS WAS AS LOW AS R S. 8.93 PER METER WHICH HAD GONE TO RS. 12.18 PER METER DURING THE LATER PART O F THE YEAR AND HAD GONE TO RS. 13.75 PER METER IN THE SUBSEQUENT YEAR . IT IS ALSO EVIDENT FROM THE WAGES REGISTERS THAT THE WORKERS DURING THE EARLIER PERIOD OF THE Y EAR AND DURING THE LATER PERIOD OF THE YEAR WERE DIFFERENT WHICH SUGGESTED THAT THE APPELLANT COMPANY HAD ITA NO. 987/ AHD/2011 . A.Y. 2007-08 5 GRADUALLY PHASED OUT OLD LOT OF RELATIVELY LOW SKIL LED WORKERS AND EMPLOYED MORE SKILLED WORKERS DURING THE LATER PART OF THE YEAR. THE PRODUCTION OF THE APPELLANT COMPANY HAD ALSO SUBSTANTIALLY INCREASED FROM 75,33,448 METERS TO 85,65,005 METERS IN A.Y. 2008-09 AND 89,31,977 METE RS IN A.Y. 2009-10 AND THAT TOO OF HIGHER QUALITY PRODUCT. ALL THESE DATA ARE S UGGESTIVE OF THE FACT THAT THE EFFORTS OF THE APPELLANT COMPANY TO DEVELOP THE QUA LITY AND PRODUCTION EFFICIENCY AND PROPER PRODUCTION PLANNING AND MANAGEMENT WITH MORE TECHNICAL AND SKILLED PERSONNEL RESULTED INTO A POSITIVE DIRECTIO N LEADING TO A BETTER GROSS PROFIT MARGIN IN THE SUBSEQUENT YEAR. I AGREE WITH THE CON TENTION OF THE ARS THAT IT WAS A COMMERCIAL EXPEDIENCY ON THE PART OF THE APPELLANT COMPANY TO GO FOR TECHNICAL UPGRADATION TO SURVIVE IN THE COMPETITIVE MARKET DU E TO OBSOLETE TECHNOLOGY AND NO PRUDENT BUSINESSMAN WOULD SPEND SO HEAVY EXPENSE S ON TECHNOLOGICAL UPGRADATION IF HIS BUSINESS WOULD BE PROFITABLE IN THE EXISTING CIRCUMSTANCES. BECAUSE OF DISCONTINUANCE OF PRODUCTION ACTIVITIE S AND RESHUFFLING OF PRODUCTION PLANNING AND MANAGEMENT, THE FIGURES OF THE CURRENT YEAR IN THE BOOKS OF ACCOUNTS ARE LIKELY TO BE EFFECTED AND THE SAME CAN NOT BE COMPARED WITH THE FIGURES OF THE EARLIER YEARS BECAUSE THE CIRCUMSTAN CES OF BOTH THE YEARS ARE NOT COMPARABLE. IT IS ALSO TRUE THAT WHEN NEW PLANTS AND MACHINERIES ARE INSTALLED WITH TECHNOLOGICAL UPGRADATION AND THAT TOO DURING THE LATER PART OF THE YEAR, THE BENEFIT OF THE SAME ARE BOUND TO BE RECE IVED IN THE SUBSEQUENT YEARS AS THERE CANNOT BE IMMEDIATE EFFECT OR RESULTS OUT OF SUCH PROCESS. HOWEVER, THE POSITIVE DIRECTION WAS DEFINITELY EVIDENT FROM THE RESULTS OF THE LATER PART OF THE YEAR AND THE MARGIN OF GROSS PROFIT HAD DEFINITELY INCREASED SUBSTANTIALLY IN THE SUBSEQUENT YEARS WHICH IS EVIDENT FROM THE FACT THA T THE GROSS PROFIT RATIO OF A.Y. 2008-09 WAS 8.90% WHEREAS IT WAS 11.20% IN A.Y. 200 9-10 AND THE ABSOLUTE AMOUNT OF GROSS PROFIT HAD ALSO GONE UP FROM RS. 23 .64 LACS TO RS. 1.02 CRORES AND RS.1.73 CRORES IN SUBSEQUENT YEARS. ALL THESE FACTS AND FIGURES ARE SUGGESTIVE OF THE FACT THAT THE APPELLANT COMPANY HAD ACHIEVED BETTER RESULTS WITH RESHUFFLING OF LABOUR FORCE AND THEREFORE, THERE WA S A JUSTIFICATION IN INCREASE IN LABOUR CHARGES DURING THE YEAR UNDER APPEAL. I AGREE WITH THE CONTENTION OF THE ARS THAT THE AO COULD NOT POINT OUT A SINGLE CA SE TO ESTABLISH THAT NO ITA NO. 987/ AHD/2011 . A.Y. 2007-08 6 PAYMENTS WERE MADE TO THE WORKERS AND THAT THE PAYM ENTS SHOWN BY THE APPELLANT WERE BOGUS AND ALSO THAT THERE WAS NO NECESSITY FOR THE APPELLANT TO GO FOR TECHNOLOGICAL UPGRADATION AND AS AGAINST THAT, THE APPELLANT HAD EXPLAINED THE RESULTANT BENEFITS OF RESTRUCTURING IN PRODUCTION P LANNING WITH BETTER QUALITY OF PRODUCTION DURING THE LATER PART OF THE YEAR AS WEL L AS IN SUBSEQUENT YEARS. IN NUTSHELL, THE AO TOTALLY FAILED TO ESTABLISH THAT T HE HIGHER LABOUR CHARGES INCURRED BY THE APPELLANT WAS UNJUSTIFIABLE WHEREAS THE APPE LLANT COMPANY HAS ESTABLISHED WITH EVIDENCE THAT THE LABOUR EXPENSES INCURRED BY IT WAS TOTALLY JUSTIFIABLE. UNDER SUCH CIRCUMSTANCES, I AM INCLINED TO REJECT T HE STAND TAKEN BY THE AO TO DISALLOW THE LABOUR CHARGES OF RS. 1,13,52,714/- OU T OF TOTAL LABOUR CHARGES AS CLAIMED BY THE APPELLANT AND ACCORDINGLY THE ADDITION IS HEREBY DELETED. 6. BEFORE US, THE LD. D.R. COULD NOT POINT OUT ANY FAC TUAL ERROR OR INFIRMITY IN THE OBSERVATIONS OF THE FIRST APPELLATE AUTHORITY. WE HAVE GIVEN A THOUGHTFUL CONSIDERATION TO THE FACTUAL FINDINGS OF THE FIRST APPELLATE AUTHORITY. WE FIND THAT THE LABOUR PAYMENTS ARE WEL L SUPPORTED BY DIRECT EVIDENCES. WE ALSO FIND THAT DURING THE YEAR UNDER CONSIDERATION DUE TO THE AUTOMATION OF MACHINERIES HIGHLY SKILLED LABOURS WE RE EMPLOYED AS COMPARED TO THE PRECEDING YEARS. IN OUR CONSIDERED OPINION, THE INCREASE IN THE LABOUR PAYMENTS WAS DUE TO THE EMPLOYMENT OF HI GHLY SKILLED LABOURS. WE DO NOT FIND ANY ERROR OR INFIRMITY IN THE FINDIN GS OF THE LD. CIT(A). APPEAL FILED BY THE REVENUE IS ACCORDINGLY DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 24 - 11- 20 16 SD/- SD/- (S. S. GODARA) TRUE COPY (N. K. BILLAIYA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD DATED: /11/2016