Income Tax Appellate Tribunal - Agra
Foot On Shoes,, Agra vs Assessee on 8 May, 2013
IN THE INCOME TAX APPELLATE TRIBUNAL
AGRA BENCH, AGRA
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND
SHRI A.L. GEHLOT, ACCOUNTANT MEMBER
ITA No.196/Agra/2011
Assessment Year: 2007-08
M/s. Foot on Shoes, vs. Dy. Commissioner of Income Tax,
7th Km. Stone, Circle 4(1), Agra.
Delhi Bye Pass Road,
Agra.
(PAN : AAAFF 3067 G).
(Appellant) (Respondent)
Appellant by : Shri Sahib P. Satsangee, C.A.
Respondent by : Shri Waseem Arshad, Sr. D.R.
Date of hearing : 08.05.2013
Date of pronouncement : 17.05.2013
ORDER
PER A.L. GEHLOT, ACCOUNTANT MEMBER:
This is an appeal filed by the assessee against the order dated 01.03.2011 passed by the ld. CIT(A)-II, Agra for the Assessment Year 2007-08.
2. The concise grounds of appeal are reproduced as under :- 2 ITA No.196/Agra/2011
A.Y. 2007-08 "1. That the learned CIT(Appeal)-II (hereinafter referred to as 'CIT(A)' for short) has erred in law and on facts in confirming the assessment made by the AO (DCIT4(1) Agra) on an income of Rs.2,02,69,288/- as against the returned income of Rs.64,24,200 without application of mind to the faucal and legal issues involved merely on the basis of what the AO has said thus negating the underlying idea of appeal before him which require that the grounds taken by the appellant be dealt with fairly and in accordance with the principle of natural justice.
2. That the AO has wrongly and illegally made the assessment u/s 143(3) of the Income tax Act, 1961 ('Act' for short) after invoking the provisions of section 145(3) of the Act and hence the assessment made is bad in law.
3. That the CIT(A) has summarily rejected the plea relating to the jurisdiction which goes to the root of the assessment made. The assessment order passed without jurisdiction is a nullity and should have been annulled instead of being confirmed. An illegality cannot be cured by consent or on the ground that the same has not been initially challenged.
4. That the following additions made to the returned income by the AO and confirmed by the CIT(A) are based on wrong facts, contrary to law and arbitrarily made without taking into account the explanations given by the appellant and need to be deleted.
The additions made are :_
(i) Additions on account of non-inclusion: Rs.56,58,200/-
of goods in transit in the closing stock
(ii) Addition on account of expense held Rs.17,85,900/-
to be not incurred wholly and exclusively for the business purpose of the assessee.
(iii) Addition on accounts of payments made Rs.61,51,766/-
without deduction of tax at source in 3 ITA No.196/Agra/2011 A.Y. 2007-08 view of provisions of section 40(a)(ia) of the Income Tax Act, 1961
(iv) Addition on account of alleged false Rs.1,87,000/-
credit in the names of 11 persons in the account books
(v) Addition on the ground that vouchers Rs.35,202/-
showing payments of Rs.35,202/- are not supported by primary cash memos/bills.
Total Additions made Rs.1,38,45,068/-
4.2 That without prejudice to the addition made on account of non- inclusion of goods in transit in the closing stock at Rs.56,58,200/- the learned CIT(A) ahs been wrong and illegal in not adjudicating the ground that the closing stock of a year is the opening stock of succeeding year, thereby while sustaining the addition in Assessment Year 2007-2008, he should have directed to reduce the income of the assessment year 2008-2009 by the like amount.
4.3 That the arbitrariness of the AO's action is apparent from the fact that disallowance of Rs.79,37,666/- (Rs.17,85,900 + Rs.61,51,766) has been made out of wages paid to karigars when only a sum of Rs.78,57,596/- has been paid to them.
4.4 That the authorities below have erred on facts and in law in holding that the wages of Rs.61,51,766/- are paid to the Contractors instead of being paid to the individual workers without there being any contract with the contractors and having nothing found as paid to any contractors. The invocation of the Provisions of Section 40(a)(ia) read with Section 194C are totally wrong and illegal and contrary to finding recorded in respect of addition of Rs.17,85,900/- made as excess payment wages.
5. That the authorities below have erred on facts and in law in not appreciating the various submissions made during the course of assessment proceedings and the appellate proceedings. 4 ITA No.196/Agra/2011
A.Y. 2007-08
6. That the order passed by the CIT(A) is wrong in law and on facts and needs to be set aside and the appellants appeal may kindly be accepted.
7. That the appellant craves leave to add or alter or delete any or more ground or grounds as may be considered necessary at the time of hearing."
3. Ground nos.1 & 3 are not pressed, ground nos.5, 6 & 7 are general in nature, and therefore, these grounds are dismissed as not pressed and general in nature which requires no specific finding.
4. The effective ground is only one ground wherein the assessee challenges various additions. The first addition is on account of non-inclusion of goods in transit in the closing stock of Rs.56,58,200/-. During the assessment proceedings the A.O. noticed that the assesses has shown only 1542 pairs of shoes as finished goods as on 31.03.2002 and the same was taken as opening stock as on 01.04.2008. However, before the A.O. the assessee submitted that the complete details of closing stock aggregating to Rs.1,51,07,652/- is inclusive of the value of 8394 pairs of shoes taken out of stock but were neither in the factory premises being dispatched but not cleared from the custom. The A.O. after considering the assessee's submission found that the assessee did not show the cost of goods in transit in the closing stock as on 31.03.2007. The A.O. after examining the 5 ITA No.196/Agra/2011 A.Y. 2007-08 accounts held that cost of 8394 pairs of shoes were not included in the cost of raw material as shown as in return of income duly verified and signed by the assessee. On being asked about the inclusion of goods in transit in closing stock, the assessee came with the explanations for substantiating its wrong contention to escape the incidence of tax liability. The A.O. accordingly held that the assessee has not included the cost of 8394 pairs of shoes amounting to Rs.56,58,200/- and the same was added to the total income of the assessee. The CIT(A) confirmed the addition.
5. The ld. Authorised Representative submitted that the Revenue Authorities did not appreciate the facts of the issue. The ld. Authorised Representative drew our attention to page no.275 where copy of Balance Sheet has been placed. Ld. Authorised Representative submitted that closing stock under the head current assets, loans and advances as on 31.03.2007 was Rs.1,51,07,652/-. Ld. Authorised Representative drew our attention to page no.303 page wherein Balance Sheet for the year ended 31.03.2008 has been placed. Ld. Authorised Representative submitted that opening stock taken was Rs.1,51,07,652/-. Similarly, the ld. Authorised Representative referred page no.272 of the Paper Book where a copy of P&L account for the year ended 31.03.2007 has been placed wherein closing stock shown is Rs.1,51,07,652/-. Ld. Authorised Representative submitted that the assessee has filed reconciliation as well as explanation regarding closing stock 6 ITA No.196/Agra/2011 A.Y. 2007-08 through a letter dated 07.12.2009 of which copy has been placed at page no.243 & 244 of the assessee's Paper Book. Ld. Authorised Representative submitted that the complete details of closing stock aggregating to Rs.1,51,07,652/- was filed before the A.O. The value of closing stock shown at Rs.1,51,07,652/- is inclusive of the value of 8394 pairs of shoes taken out of stock register but were neither in closing stock nor in the factory premises, being dispatched but not cleared from customs. Ld. Authorised Representative submitted that it was explained before the A.O. that the assessee has followed the consistent practice not to include the like goods in sale being not cleared from the Customs which ordinarily takes 10 to 15 days. Ld. Authorised Representative submitted that the value of said goods of 8394 pairs of shoes was duly included in the overall stock of Rs.1,51,07,652/-. The value of 8394 pairs of shoes was taken at cost of Rs.56,58,200/-. In support of the contention the assessee submitted certificate from the Auditor. The relevant certificate is appearing at page no.249 of the assessee's Paper Book and same is reproduced as under:-
"December 7, 2009 To, The Partner, Foot On Shoes, Agra.
Dear Sir, 7 ITA No.196/Agra/2011 A.Y. 2007-08 With regard to the query during the course of Income Tax proceedings for the financial year 2006-2007, in respect of the stock of finished goods as on 31.03.2007, we would confirm that we have audited the accounts of your firm Foot On Shoes, Agra for the year ended 31.03.2007 and clarify the query as follows :-
1. The closing stock of finished goods as on 31.03.2007, as per stock register, was 1542 pairs of footwear. This quantity did not include stock of 8394 pairs of footwear which were in transit and in the course of sale pending export.
2. The stock in transit of 8394 pairs of footwear valued at Rs.56,58,200/- is duly included in the total stock for Rs.1,51,07,652 as on 31.03.2007, reflected in the profit & loss account and balance sheet of the firm as at 31.03.2007.
3. The stock in transit of 8394 pairs of shoes were exported in he subsequent year 2007-2008 and is duly reflected in the export sales of the subsequent year.
Thanking you, Yours faithfully, For Rallan & Co.
Chartered Accountants Sd/-
Arvind Rallan Proprietor"
6. The ld. Authorised Representative submitted that the A.O. has without appreciating the facts taken the quantity figure of closing stock from Annexure-8 where only quantity details of finished goods were required to be given and not the 8 ITA No.196/Agra/2011 A.Y. 2007-08 entire value of the closing stock. The relevant annexure has been placed at page no.296 of the assessee's Paper Book and the same is reproduced as under :-
"ANNEXURE-'8' FINISHED GOODS Footwear/ Belts Footwear Uppers
(i) Opening Stock 8,382 1,476 (ii) Purchases during the year 35,214 0
(iii) Quantity manufactured during the yr 91,438 0 (iv) Sales during the year 133,492 0
(v) Closing Stock 1,542 1,476
(vi) shortage/excess, if any NOTE: Sales does not include samples issued."
7. The ld. Authorised Representative has also drawn our attention on Annexure-9 which is Tax Audit report wherein the Auditor has given accounting ratio and while calculating accounting ratio the Auditor has included closing stock of Rs.1,51,07,652/- and closing stock of finished goods Rs.6,05,600/-. The relevant Annexure-9 is reproduced under :-
"ANNEXURE - '9' ACCOUNTING RATIO
1. Gross Profit as per Profit & Loss Account Rs.25,805,399
2. Turnover (Sales) as per Profit & Loss Account Rs.84,979,723
3. Net Profit as per Profit & Loss Account Rs. 6,458,022
4. Stock in trade (Closing Stock) Rs.15,107,652
(a) Gross Profit/Turnover 30.37
(b) Net profit/Turnover 7.60 9 ITA No.196/Agra/2011 A.Y. 2007-08
(c) Stock-in-trade/Turnover 17.78
(d) Material Consumed/Finished Goods Produced
1. Material Consumed Opening Stock of Raw Materials & goods in Rs.7,338,211 Process Add: Purchase of Raw Materials Rs.47,104,598 Rs.54,442,809 Less: Closing Stock of Raw Material & goods in process Rs.14,502,052 Material Consumed Rs.39,940,757
2. Finished Goods Produced Closing Stock of Finished Goods Rs. 605,600 Add: Sales Rs.84,979,723 Rs.85,585,323 Less: Gross Profit 25,805,399 Opening Stock of Finished Goods 3,866,620 29,672,019 Finished Goods Produced Rs.55,913,304 Material consumed/Finished goods produced = 71.43"
8. The ld. Departmental Representative, on the other hand, relied upon the order of Revenue Authorities.
9. We have heard the ld. Representatives of the parties and records perused. We notice that the A.O. has made addition without appreciating the facts. He has taken basis of closing stock of 1542 footwear from Annexure-8 of financial 10 ITA No.196/Agra/2011 A.Y. 2007-08 statement where only quantity details of opening stock, purchases during the year, quantity manufactured during the year, sales during the year and closing stock had been mentioned. In fact, this closing stock of finished goods in quantity 1542 was in accordance with RG-1 of which value comes to Rs.6,05,600/-. Rs.1,51,07,652/- includes the other stock also including finished goods in transit of 8394 in quantity of which value comes to Rs.56,58,200/-. The assessee has furnished the reasons and explanation before the A.O. and the reconciliation and summary of closing stock of the assessee which is reproduced as under :- (Page 244 PB) SUMMARY OF CLOSING STOCK AS ON 31.03.2007 S.No. Particulars Quantity Amount
1. Finished (RG-1) 1,542 605,600
2. Finished (Goods in Transit) 8,394 5,658,200
3. Work in process 1,520 706,990
4. Leather 1,272,868 6,692,908
5. Soles & Soles Sheet 623,087
6. Other Raw Materials 794,299
7. Belt 1,476 26,568 Total 15,107,652
10. We notice that the Revenue authorities, without considering the reconciliation, made the addition whereas the assessee has explained the position by reconciling the closing stock of Rs.1,51,07,652/- which includes goods in transit of 8394 in quantity of Rs.56,58,200/- in value and same has been shown in regular books of accounts maintained by the assessee. Thus, the assessee has 11 ITA No.196/Agra/2011 A.Y. 2007-08 already incorporated the value of goods in transit Rs.56,58,200/- of 8394 pairs of footwear in the closing stock. If this addition is sustained, that will amount to double addition as the assessee has already shown this goods in closing stock.
11. If we examine the issue from another angle i.e. on the basis of G.P. rate, we notice the following position from the table of comparative G.P. rate furnished by the ld. Authorised Representative which is reproduced as under :-
Comparative Position of Trading Results Particulars AY 04-05 AY 05-06 AY 06-07 AY 07-08 AY 08-09 AY 09-10 AY 10-11 Sales 7,98,41,663 8,33,30,968 9,72,12,021 8,49,79,723 *9,24,55,313 9,41,70,532/- 11,99,11,585 G.P. 2,50,85,916 2,56,66,940 2,75,92,734 2,58,05,399 2,53,11,264 2,75,25,329 3,70,19,098 G.P. Rate 31.42% 30.80% 28.38% 30.37% 27.38% 29.23 30.87 Completed 143(3) 143(1) 143(1) 143(3) 143(1) 143(1) 143(3)
12. From the above table, we notice that the assessee has shown G.P. of Rs.2,58,05,399/- and G.P. rate comes to 30.37%. If we accept the addition made by the A.O, calculation of G.P. will come to Rs.3,14,63,599/- (2,58,05,399 + 56,58,200) of which calculation in percentage comes to 37.02% and such rate of profit were never found in any other years. Thus, addition made by the A.O. on presumption basis without considering and without appreciating the correct facts of the case. He has taken up the figure of closing stock from quantity details which are furnished by the Auditor for specific purpose. The A.O. made addition without considering the entire stock shown by the assessee. As per the reconciliation 12 ITA No.196/Agra/2011 A.Y. 2007-08 submitted by the assessee, it is clearly found that the goods in transit is 8394 in quantity of which value is Rs.56,58,200/- as shown by the assessee as closing stock which includes in Rs.1,51,07,652/-.
13. Another aspect which will come out on acceptance of the A.O.'s view is that if the closing stock in quantity is 1542 pairs of shoes of which value is Rs.1,51,07,652/-, then calculation of value of per pair of shoes comes to Rs.9,797/- which is beyond imagination, therefore, the view of the A.O. cannot be accepted.
14. In the light of this clear fact, the addition made by the A.O. is not sustainable. It is also relevant to state that the Revenue has failed to point out that the said reasons and explanations furnished by the assessee are incorrect. Thus, we find that the assessee has already included goods in transit in closing stock. In the light of the fact, addition is not warranted. We, therefore, delete the addition of Rs.56,58,200/-.
15. Ground no.4(ii) pertains to the addition of Rs.17,85,900/-. During the assessment proceedings, the A.O. noticed that the assessee has claimed excess labour expenses. The A.O. on the basis of statement of Shri Purshottam Agarwal recorded on 19th November, 2009 noticed that for making a pair of shoes 6 to 7 13 ITA No.196/Agra/2011 A.Y. 2007-08 days are required and as supported by the fact that weekly payment was being made by the assessee. The A.O. noticed excess payment of Rs.36,800/- for the month of July 2006, Rs.7,14,010/- for the month of August 2006, Rs.6,05,150/- for the month of September 2006 and Rs.3,50,260/- for the month of October, 2006. The A.O., after considering the assessee's submissions and RG-1 along with closing balance of footwear, finally found that the following labour expenses were not included wholly and exclusively for the purpose of assessee's business.:- (Page no.11) "Excess payment of wages shown in July 2006 1,16,100/- Excess payment of wages shown in Aug 2006 7,14,010/-
Excess payment of wages shown in Sept 2006 6,05,150/- Excess payment of wages shown in Oct 2006 3,50,640/-
-------------
17,85,900/-
-------------"
16. The CIT(A) confirmed the order of the A.O.
17. We have heard the ld. Representatives of the parties and records perused. We notice that the A.O. has tried to co-relate the monthly payment of wages with the production. The A.O. has calculated the excess payment of wages by his own method of formula without considering the assessee's submission that the labour charges including embroidery charges and others were accounted for on the basis of accounting principle. It is relevant to note that the A.O. considered excess 14 ITA No.196/Agra/2011 A.Y. 2007-08 payment for certain months without disturbing the G.P. rate declared by the assessee. The A.O. did not give any reason how the expenditure claimed for other months were genuine. Business expenditures incurred for the purpose of business are allowable under section 37 of the Act. The said section 37 reads as under:-
General.
37. (1) Any expenditure1 (not being expenditure of the nature described in sections 30 to 36 [***] and not being in the nature of capital expenditure15 or personal expenses of the assessee), laid out or expended wholly and exclusively15 for the purposes of the business15 or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession".
[Explanation.--For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.] (2) 17[* * *] (2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.] ' 17.1 To appreciate the scheme of the Act in respect of allowably of expenditures, we would like to refer certain judgments wherein certain principles have been decided in this regard. These judgments are as under :-
CIT vs. Transport Corporation of India Limited, 256 ITR 701 (AP) --15 ITA No.196/Agra/2011
A.Y. 2007-08 (Page 705, 706 and 707)"37. General.--(1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession". Explanation.--For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure."
In order to claim deduction of expenditure under section 37(1) of the Act, at the relevant point of time and in the light of the judgments in Indian Molasses Co. P. Ltd. v. CIT [1959] 37 ITR 66 (SC); CIT v. Indian Molasses Co. (P) Ltd. [1970] 78 ITR 474 (SC); Sassoon J. David and Co. P. Ltd. v. CIT [1979] 118 ITR 261 (SC); Madhav Prasad Jatia v. CIT [1979] 118 ITR 200 (SC); CIT v. Ballarpur Industries Ltd. [1976] 119 ITR 817 (Bom); CIT v. Navsari Cotton and Silk Mills Ltd. [1982] 135 ITR 546 (Guj) and Chenab Forest Co. v. CIT [1974] 96 ITR 568 (J&K), the following conditions should be satisfied: (i)The expenditure in question should not be of the nature described under the specific provisions of sections 30 to 36 and 80VV (section 80VV was omitted with effect from April 1, 1986); (ii)The expenditure should not be of the nature of capital expenditure; (iii)It should not be a personal expenditure; and (iv) The expenditure should have been laid out or expended wholly and exclusively for the purposes of the business or profession. It is thus clear that conditions at (i), (ii) and (iii) above are negative conditions whereas the condition at (iv) above is a positive condition. If the expenditure satisfies the negative conditions, it has to satisfy the positive condition in order to be eligible for deduction under section 37(1) of the Act. Thus, section 37(1) allows deduction of any "expenditure"
subject to conditions noticed above. In Indian Molasses Co.'s case [1959] 37 ITR 66, the Supreme Court pointed out that the word "expenditure" is equal to "expense" and "expense" is money laid out by calculation and intention. But the idea of "spending" in the sense of "paying out or away" money is the primary meaning and it is with this meaning that one is concerned.
"Expenditure" is thus what is "paid out or away" and is something which is gone irretrievably. The apex court in CIT v. Nainital Bank Ltd. [1966] 62 ITR 638 held that in its normal meaning, the expression "expenditure"16 ITA No.196/Agra/2011
A.Y. 2007-08 denotes "spending" or "paying out or away", i.e., something that goes out of the coffers of the assessee. A mere liability to satisfy an obligation by an assessee is undoubtedly not "expenditure"; it is only when he satisfies the obligation by delivery of cash or property or by the settlement of accounts, that there is expenditure.
The burden of proving that a particular expenditure has been laid out or expended wholly and exclusively for the purposes of business so that the assessee may be entitled to claim deduction is on the assessee. This position is well settled by the judgments of the apex court in CIT v. Calcutta Agency Ltd. [1951] 19 ITR 191 and CIT v. Imperial Chemical Industries (India) (P.) Ltd. [1969] 74 ITR 17. The mere object of incurring expenditure is not decisive whether it is of a capital nature or revenue nature. Therefore, the onus is on the assessee to prove, inter alia, that the item of expenditure in question for admissibility to deduction is not in the nature of capital expenditure. Further, mere payment by itself would not entitle the assessee to deduction of the said expenditure unless the same was proved to be paid for commercial considerations. The onus of proof is always upon the assessee. It cannot be said that even if the taxpayer does not produce any evidence in support of the claim for deduction, the Assessing Officer himself independently is to collect evidence and decide that the deduction claimed is baseless having regard to the legitimate business needs of the assessee, as the Tribunal seems to think in the present case. It is for the taxpayer to establish by evidence that a particular allowance is justified. But, as held by the Supreme Court in CIT v. C. Parakh and Co. (India) Ltd. [1956] 29 ITR 661 whether an assessee is entitled to a particular deduction or not will depend on the provision of law relating thereto, and not on the view which he might take of his rights. At the same time, the onus is on the assessee to establish that there are facts in existence which entitle it to a deduction and it is for the assessee to adduce necessary evidence in this regard. Therefore, if the assessee fails to place sufficient material, he is not entitled to claim this allowance under section 37(1) of the Act. In CIT v. Chandravilas Hotel [1987] 164 ITR 102 (Guj), it is held that if the expenditure is doubted by the assessing authority, it is the duty of the assessee to prove by leading evidence that the expenditure was in fact, incurred." Newtone Studios Ltd. vs. Commissioner of Income-tax [1955] 28 ITR 378 (MAD.).
17ITA No.196/Agra/2011
A.Y. 2007-08 The facts of the case are that the assessee was a Private Limited Company owning a studio and engaged in the production of motion pictures. There were six shareholders. The managing director and the three technicians were remunerated by payments of what were called honoraria, which really meant salaries and also by payments of commission on a fixed percentage basis. In addition each of them got a car allowance, and when the profits justified it payment of a month's salary as bonus. In 1944 and 1945 what was paid as honoraria, that was, salary, to those four amounted to Rs. 18,000 a year. Their scale of salaries was revised for 1946 by a resolution passed by the shareholders on 30-03-1946, and the total came to Rs. 59,100 for 1946. The genuineness of the payment of that amount of Rs. 59,100 was never in dispute. The assessee claimed that payment as a deduction under section 10(2)(xv) of the 1922 Act. The ITO limited the admissible deduction to an amount not exceeding twice the amount allowed in each of the preceding years and disallowed the balance. The disallowance was upheld by the AAC as well as the Tribunal. The Madras High court while deciding the matter "Whether on the facts and in the circumstances of the case the disallowance of a sum of Rs. 23,100 out of the expenses incurred by the assessee for payment of remuneration to the managing director and the other technician directors is permissible under the provisions of section 10(2)(xv) 18 ITA No.196/Agra/2011 A.Y. 2007-08 of the Income-tax Act. The court referred certain earlier judgments which are as under :-
"In Eastern Investments Ltd. v. Commissioner of Income-tax, West Bengal [1951] 20 ITR 1, the Supreme Court referred to section 12(2) of the Act, which provides for the deduction of an expenditure incurred "solely for the purpose of making or earning such income, profits or gains" and summarised the principles to be kept in view :
(1)Though the question must be decided on the facts of each case, the final conclusion is one of law.
(2)It is not necessary to show that the expenditure was a profitable one or that in fact any profit was earned.
(3)It is enough to show that the money was expended "not of necessity and with a view to direct and immediate benefit to the trade, but voluntarily and on the ground of commercial expediency, and in order indirectly to facilitate the carrying on of the business."
(4)Beyond that, no hard and fast rule can be laid down to explain what is meant by the word "solely."
In Rayaloo Iyer and Sons v. Commissioner of Income-tax, Madras [1954] 26 ITR 265, a Bench of this Court held that the principles laid down by the Supreme Court with reference to section 12(2) of the Act should also be applied in deciding under section 10(2)(xv) whether the expenditure was incurred wholly and exclusively for the purpose of the business of the assessee and the Court pointed out that the test prescribed by section 10(2)(xv) of the Act included that of commercial expediency. At page 292 the learned Judges pointed out:
"In applying the test of commercial expediency to determine whether the expenditure is wholly and exclusively laid out for the purpose of the business, the reasonableness of the expenditure should be considered from the point of view of the businessman and not from the point of view of outsiders including the Income-tax Officer."19 ITA No.196/Agra/2011
A.Y. 2007-08 It was the same principle to which Lord Wright referred in Craddock v. Zevo Finance Company Ltd. [1946] 27 TC 267 at 290:
"The transaction here being a perfectly straightforward and honest bargain between the two companies, it seems to me that, if the present claim were upheld, it would amount to a precedent enabling the Revenue to revise every such bargain and to defeat what the parties had agreed on. The Revenue in a case under schedule D has no power to examine what they think was reasonable or to say what expenditure was necessary."
The court held as under:-
"Under our taxing system, it is for the assessee to conduct his business, and in his wisdom or otherwise to fix the remuneration to his staff. The Income-tax Act does not clothe the taxing authority with any power or jurisdiction to determine the reasonableness of the amount so fixed and paid by the assessee. The only test for the deductibility of such remuneration is whether the expenditure has been incurred solely and exclusively for the purpose of the business. If the reality of the payment is challenged or is in dispute different considerations arise : so also in cases where the tax authorities are able to point to some consideration other than the purpose of the business as accounting for any portion of the payment made. In such cases, of course, such portion of the amount claimed, which is either not held to have been paid or is held to have been paid for reasons other than business expediency, could and should be disallowed ; but the reason for the disallowance is because either the portion disallowed is not paid, or because the expenditure is not solely and exclusively for the business, and not on the ground that in the opinion of the Income-tax Officer or other taxing authority the remuneration is "unreasonably" high--either because the employee does not, in the authority's opinion, deserve so much, or because the assessee could have secured other employees on more favourable terms. The assessee certainly satisfied the third of the tests postulated by their Lordships in the Eastern Investment's case (supra), that the money was expended "not of necessity and with a view to direct and immediate benefit to the trade but voluntarily and on the ground of commercial expediency, and in order to facilitate the carrying on of 20 ITA No.196/Agra/2011 A.Y. 2007-08 the business." Even necessity for the expenditure does not enter this test.
The question referred to us is answered in the negative and in favour of the assessee"
18. In the light of the above discussion and in the premise of above noticed well established principle, let us proceed to examine the facts of the case under consideration whether the necessary condition existed to pay this labour expenses under section 37(1) of the Act and whether the assess has discharged the burden cast on it. As stated above that the A.O. did not comment on the G.P. declared by the assessee whereas considering the nature of business of the assessee the labour expenditure is directly related to the issue. Further the A.O. has selected only few months where according to the A.O. the assessee has claimed expenditure whereas the assessee maintained regular books of account and the labour payments were accounted for on the basis of accrual following Mercantile System of accounting. Therefore, merely considering labour payment for one month and coming to the conclusion that the assessee has claimed excess expenditure; such conclusion is an erroneous one because in mercantile/accrual system of accounting, the expenditures are required to be accounted for on accrual basis. In other words, some time production may be lesser or some time it is not used fully compared to production and labour payment periodically because the labour expenses are 21 ITA No.196/Agra/2011 A.Y. 2007-08 accounted for on the basis of its accrual which may not be necessary that it is accounted simultaneously with the production. For example, if there is a dispute about labour payment, it may be accounted for later on when the dispute is settled. The assessee has furnished the detailed submissions before the A.O. vide their reply dated 30th November 2009. The said reply has been reproduced by the CIT(A) in his order from page nos.38 to 41. The assessee has furnished the detailed chart showing month-wise details. It was submitted by the assessee that in the month of October entire amount of Rs.4,24,160/- relates to embroidery charges. The normal wages of October 2006 is paid in the month of November, 2006. It was also submitted by the assessee that the assessee was manufacturing and exporting first 3 types of ladies shoes and boots and certain items were purchased and sold but not manufactured. It was also explained that the assessee incurred additional wages expenses on manufacturing of embroidery sandals. The assessee furnished details in this regard of total number of pairs and average cost per pair. The assessee submitted that statement of Shri Purshottam Agarwal, Work Supervisor has no relevance in so far as during the proceedings for the year under assessment, it was submitted that he was not Work Supervisor in A.Y. 2007-08. Purchase and sales bills are fully verified. Accounts are duly audited by the Chartered Accountant. Sales as well as G.P. rates are better than the preceding year. The Apex Court in the case of CIT vs. Dhanrajgirji Raja Narasingirji, 91 ITR 22 ITA No.196/Agra/2011 A.Y. 2007-08 544 (SC) held that "it is not open to the department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best". In the case under consideration, the assessee has discharged the burden by submitting various explanations with the document that the expenditures were incurred wholly and exclusively for the purpose of business. Since there is no contrary material on record, in the light of the facts, we delete the addition of Rs.17,85,900/- made by the A.O. and sustained by the CIT(A).
19. Ground no.4(iii) pertains to the addition of Rs.61,51,766/- out of wages expenses invoking section 40(a)(ia) of the Act. During the assessment proceedings, the A.O. noticed that the assessee made payment of Rs.61,51,766/- (78,57,596 - 17,06,220) without deduction of tax. The A.O. was of the view that section 194C is applicable and since the assessee did not deduct tax at source, therefore, section 40(a)(ia) of the Act is applicable. The A.O. has reduced the amount to Rs.17,06,220/- as this addition has already been made while making bogus labour expenses which covered in the addition of Rs.17,85,900/-. The A.O. was of the view that the said payment was made to the sub-contractor. The CIT(A) confirmed the addition made by the A.O. 23 ITA No.196/Agra/2011 A.Y. 2007-08
20. The ld. Authorised Representative submitted that the assessee has paid wags aggregating to Rs.78,57,596/- whereas the A.O. has made addition of Rs.81,17,666/- as under :- (Page no.42 CIT(A)) "(i) Disallowance of Wages being not incurred wholly and Rs.17,85,900/-
exclusively for business purposes
(ii) Addition of wages by invoking the provisions of Rs.61,51,766/-
section 40(ia) of the Income Tax Act read with Section 194-C of the IT Act.
(iii) Advance to workers & employees not for business Rs.1,80,000/-
Purposes -----------------
Rs.81,17,666/-
-----------------"
21. The ld. Authorised Representative submitted that the A.O. appears to be pre- determined to achieve a target fixed in mind without considering the facts of the case. The ld. Authorised Representative submitted that the wages were paid to the workers, therefore, the payments were not subject to provision of section 194C of the Act. The ld. Authorised Representative submitted that the Revenue Authorities without appreciating the facts made the addition. The ld. Authorised Representative referring various pages of Paper Book demonstrated that individual payments to labourers were made and sums of total of weekly payment is posted in cash book for the day. The ld. Authorised Representative submitted that the A.O. relied upon the statement of Shri Purshottam Agarwal who was appointed as 24 ITA No.196/Agra/2011 A.Y. 2007-08 Production Supervisor during the A.Y. 2010-11. Assessee produced the vouchers for payment of wages and books of account. The ld. Authorised Representative submitted that the assessee has furnished complete details vide assessee's submission dated 9th September, 2009 wherein the assessee filed details of payment of wages. The ld. Authorised Representative submitted that the assessee did not make payment to the contractor. The A.O. made the addition without appreciating the facts that the labourers were arranged by the contractors, and the wages were paid to individual karigars in the presence of the contractor who settles the account with each labourer directly. The assessee has maintained relevant complete records and the same were produced before the A.O.
22. The ld. Departmental Representative, on the other hand, relied upon the orders of the Revenue Authorities.
23. We have heard the ld. Representatives of the parties and records perused. In the light of detailed discussions made in paragraph nos.17 & 18 of this order, we notice that the assessee has discharged the burden in this regard by furnishing details of books of account and others that the payments were made to the individual labourers and not to the contractor. The payment of wages of individual labourer is supported by books of account regularly maintained by the assessee. 25 ITA No.196/Agra/2011
A.Y. 2007-08 Ld. Authorised Representative referred page nos.213 to 220 wherein date-wise details of labourer payments were filed and the same has been placed on record in the Paper Book. On a perusal of details of the wages, we notice that the details contained date, name of labour & amount paid. It appears from the details that payments were made to the individual labourers. When the assessee made payment to individual labourer, section 194C is not applicable. The case of the A.O. is on presumption basis. Since the labourers have been arranged through contractor, therefore, payment was made to the contractor. The assessee has demonstrated that the labour payments were made to individual labourer. In the light of the fact, we are of the considered view that section 194C of the Act is not applicable. Since 194C of the Act is not applicable, therefore, there is no question of disallowing these expenses under section 40(a)(ia) of the Act. We, therefore, delete the addition of Rs.61,51,766/-.
24. Ground no.4(iv) pertains to the addition of Rs.1,87,000/-. During the assessment proceedings, the A.O. noticed that the assessee has given advance to 11 persons which have been shown in the cash book. The A.O. noticed that the assessee did not reflect their names in the Balance Sheet. Therefore, this indicates that no such advances have been given to these persons. The assessee has failed to produce those parties for examination. Therefore, the A.O. was of the view that 26 ITA No.196/Agra/2011 A.Y. 2007-08 the assessee has falsely credited the amount of Rs.1,87,000/- in cash book. Addition made by the A.O. has been confirmed by the CIT(A).
25. The ld. Authorised Representative submitted that the assessee has furnished details by reply dated 30th November, 2009. Before the A.O. it was explained that these advances stand reflected in the Balance Sheet under the head Sundry Creditors recoverable. Ld. Authorised Representative submitted that it was also submitted before the A.O. that these advances have not been debited to the Trading and P&L Account and not claimed as deduction. These are the advances in accordance with commercial expediency and the same were adjusted in next year.
26. The ld. Departmental Representative, on the other hand, relied upon the orders of Revenue Authorities.
27. We have heard the ld. Representatives of the parties and records perused. The admitted facts of the case are that the advances were shown by the assessee and the same were adjusted in the subsequent year. The A.O has drawn inference merely on the ground that the assessee has failed to produce those 11 parties. In this regard, it is to state that it is not necessary to produce all the labourers which may be thousands in number considering the nature of business of the assessee. 27 ITA No.196/Agra/2011
A.Y. 2007-08 The assessee has accounted for such advances on day-to-day basis in the regular books of accounts maintained on accepted accounting principle. The A.O. did not point out that which entries were incorrect or not in accordance with accounting principle, rather the A.O. has accepted that these advances have been shown in the cash book. When the assessee has given advances, we are of the view that such addition is not warranted on the basis of presumption. We, therefore, delete the addition of Rs.1,87,000/-.
28. Ground no.4(v) pertains to the addition of Rs.35,202/-. The A.O. made the addition of Rs.35,202/- being 25% out of expenses under the head consumable tools and sample development expenses on the ground that the assessee did not produce the supporting bills and vouchers. The addition made by the A.O. has been confirmed by the CIT(A).
29. We have heard the ld. Representatives of the parties and records perused. The ld. Authorised Representative did not argue much on the issue. He simply submitted that this is adhoc disallowance.
30. After hearing the ld. Departmental Representative, we notice that the assessee has failed to furnish supporting primary evidences i.e. cash memos and 28 ITA No.196/Agra/2011 A.Y. 2007-08 bills relating to the expenses under the head consumable tools and sample development expenses. In addition to that, we find that this addition is justifiable in the light of the fact that the assessee did not furnish the primary evidence and to cover up the petty defects the addition of Rs.35,202/- is confirmed and accordingly order of the CIT(A) on the issue is confirmed.
31. As regards ground no.2, invoking section 145(3) of the Act the ld. Authorised Representative did not argue much on the issue.
32. After hearing the ld. Departmental Representative and after considering totality of the facts and in view of the discussions made while dealing additions out of expense and closing sock, we confirm the order of CIT(A) on the issue. Accordingly, this ground of the appeal of the assessee is dismissed.
33. In the result, appeal of the assessee is partly allowed.
(Order pronounced in the open Court)
Sd/- Sd/-
(BHAVNESH SAINI) (A.L. GEHLOT)
Judicial Member Accountant Member
PBN/*
29
ITA No.196/Agra/2011
A.Y. 2007-08
Copy of the order forwarded to:
1. Appellant
2. Respondent
3. CIT (Appeals) concerned
4. CIT concerned
5. D.R., ITAT, Agra Bench, Agra
6. Guard File.
By Order
Sr. Private Secretary
Income-tax Appellate Tribunal, Agra
True Copy