Income Tax Appellate Tribunal - Ahmedabad
Met Heat Engineers Pvt.Ltd.,, Baroda vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL AT AHMEDABAD
AHMEDABAD "A" BENCH
(BEFORE S/SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND
N.S. SAINI, ACCOUNTANT MEMBER)
ITA.No.2261/Ahd/2010
[Asstt. Year : 2007-2008]
Met Heat Engineers Pvt. Ltd. Vs. ACIT, Cir.4
857/2, GIDC, Makarpura Baroda.
Baroda.
(Appellant) (Respondent)
Assessee by : Shri M.G. Patel
Revenue by : Shri R.K. Dhanesta.
ORDER
BHAVNESH SAINI, JUDICIAL MEMBER: This appeal by the assessee is directed against the order of the Commissioner of Income-Tax (Appeals)-III, Baroda dated 13.04.2010 for the assessment year 2007-2008 on the following ground:
"1. The Ld.CIT(A) has erred in law as well as on facts of the case by confirming disallowance of rs.6,44,554/- under Section 40A(2)(a) of the I.T.Act., 1961.
2. We have heard the learned representatives of both the parties and perused the findings of the authorities below and considered the material available on record.
3. It was noted by the AO that the assessee had made payment of Rs.32,22,770/- to M/s.Mangalam Engineers ("ME" ), a proprietary concern of Shri N.M.Dave, one of the Directors of the assessee-company for labour charges. It was stated by the AO that the samples of metal sent in by the customer are of uneven size. The job relating to the grinding and machining is done by "ME" for which this payment has been made. The AO made various inquires and found out that "ME" had further subcontracted the job to Krishna Engineering Works ("KEW" for short). The AO compared the rates given by the assessee company to the firm of the director with the rates given by the ITA.No.2261/Ahd/2010 director's firm to the third party for the same job and found that the assessee is paying more than 40% for the same work to the firm of the director. The AO accordingly found the excessive payment and disallowed 20% out of the same under Section 40A(2)(a) of Rs.6,44,554/-.
4. It was submitted before the learned CIT(A) that the similar disallowance was made in the assessment year 2004-2005 and the addition has been deleted by the learned CIT(A). It was submitted that the payment made to the "KEW"
was only labour charges while the payment to "ME" was also for technical expertise and other overheads.
5. The learned CIT(A) however, considering the submissions of the assessee and the facts brought on record by the AO, as compared with other concerns, dismissed the appeal of the assessee. His findings in para-5.2 of the impugned order are reproduced as under:
"5.2 I have given my careful consideration to the submission made and the facts of the case. Similar issue had come up before my ld. Predecessor in A.Y.2004-05. In that year, my predecessor had allowed the claim after noting that the AO was not justified in making the disallowance of total claim when the fact that job work was done by sister concern was not in dispute and only the excess amount paid was suspect. This year, the position is different. The AO has brought on record the fact of excessive claim in tabular form.
Nature of work Rate charged by Rate charged by Krishna
Manglam Engineers Engineering Works
Tensile test Rs.60 per piece Rs.35 per piece
Root Bend Test Rs.35 Rs.20
Face Bend Test Rs.35 Rs.20
Side Bend Test Rs.35 Rs.35
The appellant's claim that M/s.Krishna Engineering Works was doing only labour work is not supported by any evidence but merely a self serving statement and therefore not reliable. Secondly, the AO has not made the total disallowance. In fact, the difference in rate between M/s.Mangalam Engineers and M/s.Krishna Engineering Works is 40% but he had made disallowance of 20% considering various aspects of the claim. There is no doubt that excess payment has been made to the Director's Firm which is not wholly and exclusively for the purpose of -2- ITA.No.2261/Ahd/2010 business. In my considered view, there is no error in the finding of the AO and therefore the addition made by the AO is confirmed."
The learned counsel for the assessee reiterated the submissions made before the authorities below and referred to PB-45 which is the order of the Tribunal in the case of the same assessee for the assessment year 2004-2005 in ITA No.3654/Ahd/2007 order dated 23rd July, 2010 whereby the department's appeal on the same ground was dismissed. He also referred to PB-52, which is the reply filed before the authorities below to show that the reasonable payment is made to the firm of the director. He has also referred to PB-18 and 19 which are the comparable rates of other concerns viz. Parmar Dies & Tools and Pritika Engineering Industries. On the other hand, learned DR relied upon the orders of the authorities below and submitted that the facts are different in the assessment year under appeal and the AO has brought on record the facts of excessive claim, as noted in the impugned order, therefore, the addition has been rightly made.
6. We have considered the rival submissions and material available on record. The learned counsel for the assessee did not dispute that the provisions of Section 40A(2)(a) of the I.T.Act are applicable in the case of the assessee. In this section, if the AO is of the opinion that the expenditure is excessive or unreasonable, having regard to the fair market value of the goods, services or facilities, for which the payment is made on the legitimate needs of the business or profession of the assessee, on the benefits derived by or accruing to him therefrom, so much of the expenditure, as is so considered by him to be excessive or unreasonable, shall not be allowed as a deduction. In the assessment year 2004-2005, the labour charges were paid to the same concern, "ME". The learned CIT(A) deleted the addition because no evidence of excessive expenditure have been brought on record. The order of the learned CIT(A) is confirmed by the Tribunal. However, in the assessment year under appeal, the AO has specifically noted that the work is assigned to the same concern, "ME" who has further subcontracted the job work to "KEW". It was -3- ITA.No.2261/Ahd/2010 also noted that the same job is assigned by "ME" to "KEW", which was assigned by the assessee to the sister concern. The rate charged by the "KEW" are quoted above and the rates given by the assessee to "ME" are also noted, which would prove that for the same work, the excessive rates are given to "ME" as compared to the work assigned on sub-contract to "KEW". Therefore, there is definitely the excessive and unreasonable payment is made by the assessee to the firm of the director of the assessee-company. The authorities below have brought on record the facts that the excessive and unreasonable payments have been made for the same work which have been assigned to the firm of the director of the assessee-company, as compared to others for the same work. No evidences have been filed on record to prove the difference in work assigned to "ME" and the sub-contract given to the "KEW". The assessee has merely stated that different jobs have been given to them, but it was not supported by any record. However, it was noted that the labour charges are paid to the same concern not only in the assessment year under appeal, but in earlier preceding years also, as is noted in the order of the Tribunal in the case of the same assessee in the assessment year 2004-2005 (PB-45). Therefore, considering the history of the assessee giving work to "ME" for the several preceding assessment years, we are of the view that the additions should be restricted to 10% as against 20% made by the AO and confirmed by the learned CIT(A). In principle, we confirm the findings of the authorities below in making the disallowance under Section 40A(2)(a). However, the disallowance is restricted to 10% considering it to be excessive and unreasonable. The AO is directed to work out the addition accordingly.
7. In result, the asssessee's appeal is partly allowed.
Order pronounced in Open Court on 13th October, 2010.
Sd/- Sd/- (N.S. SAINI) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER -4- ITA.No.2261/Ahd/2010 Place : Ahmedabad Date : 13-10-2010 copy of the order forwarded to: 1) : Appellant 2) : Respondent 3) : CIT(A) 4) : CIT concerned 5) : DR, ITAT. BY ORDER DR/AR, ITAT, AHMEDABAD -5-