Income Tax Appellate Tribunal - Ahmedabad
Bhikhabhai Rajabhai Dhameliya, Surat vs Department Of Income Tax on 17 June, 2009
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD BENCH "C"
(BEFORE S/SHRI N S SAINI AND MAHAVIR SINGH)
ITA No.2586/Ahd/2009
(Assessment Year: 2006-07)
The Income-tax Officer, V/s Shri Bhikhabhai Rajabhai
Ward-9(1), Room No.422, Dhameliya, Prop. of Avni
Aayakar Bhavan, Diamond, 36, Baroda
Majuragate, Surat Pristage, Varachha Road,
Surat
PAN: AAPPD 7018 L
(Appellant) (Respondent)
Appellant by :- Shri M C Pandit, Senior DR
Respondent by:- None
ORDER
Per Mahavir Singh (Judicial Member): This appeal has been filed by the Revenue against the order dated 17/06/2009 passed by the Learned Commissioner of Income-tax (Appeals)-V, Surat ["the CIT(A)" for short] in Appeal No.CAS-V/307/2008-09, for Assessment Year (AY) 2006-07.
2 None appeared on behalf of the assessee. We, therefore, decided to dispose of the appeal after hearing the learned Departmental Representative.
3 The first issue relates to deletion of the disallowance of Rs.10,22,043/- in respect of labour expenses. The brief facts of the case are that during the course of assessment proceedings, the Assessing Officer (AO) observed that the assessee being 1 engaged in the activity of polishing of diamonds on job-work basis, had incurred an expenditure of Rs,1,02,20,430/- towards own labour and an amount of Rs.63,28,952/- towards outside labour i.e. two job workers viz. Shri Mukeshbhai and Shri Sureshbhai. As regards own labour, the AO observed that the wages register for the month of February, 2006 and March, 2006 were signed by the labourers but did not contain the dates thereof. The AO further observed that the assessee did not have any preliminary record for working out the wages paid to the labourers. It was also observed by the AO that the per piece labour paid by the assessee was Rs.19,04 as compared to Rs.18.85 and Rs.17.55 paid by his job workers viz. Shri Mukeshbhai and Shri Sureshbhai, respectively. As regards job- work charges paid to contractors the AO observed that the bills were prepared by the assessee himself and on monthly basis however, the AO has not made any disallowance out of the labour charges paid by the assessee to the job workers. Thus, on the basis of comparison of the per piece wage rate paid by the assessee and his job workers, the AO framed an opinion that the wages paid by the assessee to his own labour were excessive and accordingly, the AO made an ad-hoc disallowance of Rs.10,22,043/- being 10% wages of Rs.1,02,20,430/-.
4 The assessee filed an appeal before the CIT(A) and submitted that the book results for the current year have improved significantly as compared to the earlier year, as is evident from the following analysis:
2Particulars AY 2006-07 AY 2005-06 -------------------------- -------------- -------------- Total Labour Receipts 1,95,85,122 1,81,38,871 Gross Profit (Rs.) 7,49,010 5,28,465 Gross Profit (%) 3.82% 2.91% Net Profit (Rs.) 3,55,533 2,86,745 N P (%) 1.82% 1.58%
Secondly, it was submitted that the total labour expenses as a percentage of job work income has decreased to 87.87% in the current year as against 92.14% in the earlier year, as is evident from the following analysis however, the AO has compared only the salary and wages paid to own labour without taking into consideration the amount paid to outside parties for job work:
Particulars AY 2006-07 AY 2005-06
-------------------------- -------------- --------------
Total Labour Receipts 1,95,85,122 1,81,38,871
(Job-work income)
Labour Charges paid to 63,28,952 1,29,50,256
outside parties
(job workers)
Salary & Wages 1,08,80,430 37,62,937
(own labour)
-------------- ---------------
Total Labour 1,72,09,382 1,67,13,193
Labour as a % of 87.87% 92.14%
job work income
Thirdly, it was submitted that though the per piece wages paid by the assessee are higher than that paid by his contractors, the same if considered in percentage terms are at par or even lower 3 than that paid by the contractors, as is evident from the following analysis:
Particulars Assessee Mukeshbhai Sureshbhai Total Labour Receipts 1,32,56,171 40,42,963 22,85,988 (Job work income) Wages & Salaries 1,02,20,430 32,86,487 17,33,241 Labour as a % of job- 77.09% 81.29% 75.82% work income It was also submitted before the CIT(A) that the assessee's factory is located at a remote place at Village Areth, Tal:
Mandvi, Dist. Surat and not in the city of Surat and hence, the labour is not readily available at that place which also increases the cost to some extent and hence, is not directly comparable with the other 2 cases who are having factory in Surat.
Accordingly, in view of the facts that the book results having improved in the current year as compared to the earlier year, the percentage of labour expenses having decreased in the current year as compared to the earlier year, the percentage of wages paid by the assessee being at par with that paid by his contractors and on considering the remote location of the factory where labour is scarce and hence costly, the assessee pleaded that the ad-hoc disallowance as made by the AO on the allegation that the wages paid are excessive, is erroneous and hence, the same needs to be deleted.
Before the CIT(A), the assessee also relied on the direct decision of the Ahmedabad Bench of ITAT in the case of Dhirubhai 4 Becharbhai Dhamelia in ITA No.3188/Ahd/2007, wherein the ITAT has deleted the disallowance made out of labour expenses, by following its own decision in the cases of (i) Pravinbhai R Shah (HUF) ITA No.2336/Ahd/2004, (ii) Bharatkumar Ramniklal Mehta ITA No.1296/Ahd/2004 and (iii) Anish B Shah (HUF) ITA No.2223/Ahd/2004.
5 After considering the above submissions made by the assessee, the CIT(A) deleted the ad-hoc disallowance by observing as under:-
"I have considered the facts of the case, the view taken by the ITO and the submissions of the appellant. It is observed that the ITO has not rejected the books of accounts but has made the impugned disallowance mainly on the basis of the allegation that the wage rate per piece paid by the appellant was higher than that paid by his contractors and that the wages register was signed but did not contain the dates thereof and further, the appellant did not have any preliminary evidence for working out the wages paid.
As regards the allegation that the wage rate per piece is high as compared to the wages paid by the job worker, I am of the opinion that since, the appellant's factory is located at a remote place at Village Areth, Tal. Mandvi, Dist. Surat and not in the city of Surat where the factory of the other two job workers is located, the wage rate is not directly comparable. Further, it is seen that if the salary and wages are viewed as a percentage of labour income, the appellant's expense is 77.09% as against an expenditure of 81.29% incurred by one of the job worker viz. Shri Mukeshbhai. Further, if comparison of labour expenses has to be made then the same to be made for total labour expenses i.e. own labour and job work expenses and that too as a percentage of income and on doing so it is observed that the total labour expense as a percentage of turnover in the case of the appellant has reduced to 87.87% in the current year as against 92.14% in the earlier year and hence, the total labour expenses cannot be said to have been inflated. Moreover, another important aspect is that the appellant has achieved higher GP ratio of 3.82% in the current year as against 2.91% in the earlier year and similarly, the NP has also increased to 1.82% in the current year as compared to 1.58% in the earlier year, which clearly shows that the book results 5 have in fact improved in the current year as compared to the earlier year and therefore, I hold that in view of these facts of the case, no ad-hoc disallowance is warranted for out of salary and wages on the ground that it is excessive.
Further, in the case of Dhirubhai Becharbhai Dhemelia in ITA No.3188/Ahd/2007, the jurisdictional Ahmedabad Bench of ITAT had deleted the disallowance of labour expenses as made by the AO, by following its own decision in the case of Bharatkumar Ramniklal Mehta ITA No.1296/Ahd/2003 and others, wherein it has held as under:
".... For the purpose of clarifying the doubt whether the assessee has arbitrarily claimed labour expenses, the best method is to be considered, is his GP rate.
The expenses on labour payment is directly related to trading account and if the assessee has claimed any bogus labour expenses, the GP rate is bound to be abnormal, but in the case under consideration we find that the assessee has shown 3.62% GP in comparison to 3.50% which has been accepted by the department in the earlier year. After considering the overall position of the comparative gross profits, we are of the view that no addition is warranted." ....
Considering all the facts and circumstances of the case and the Tribunals orders in favour of the assessee, we delete the disallowance of Rs.10,81,172/ confirmed by the CIT(A). "
In the present case, as already discussed herein before, the GP as also the NP of the appellant have increased to 3.82% and 1.82% respectively in the current year, as compared to 2.91% and 1.58% respectively in the earlier year. Further, the labour charges as a percentage of turnover have also decreased to 87.87% in the current year as compared to 92.14% in the earlier and moreover, the wages in percentage terms are at par with that paid by the job workers. Therefore, in view of these facts and by most respectfully following the decisions of the jurisdictional ITAT in the cases of (i) Pravinbhai R Shah (HUF) ITA No.2336/Ahd/2004, (ii) Bharatkumar Ramniklal Mehta ITA No.1296/Ahd/2004, (iii) Anish B Shah (HUF) ITA No.2223/Ahd/2004 and (iv) Dhirubhai Becharbhai Dhemelia in ITA No.3188/Ahd/2007, I hereby delete the ad-hoc disallowance of Rs.10,22,043/- as made by the ITO out of labour expenses. Thus, this ground of appeal of the appellant stands allowed."
66 We have heard the learned DR and perused the material on record. We have also gone through the orders of the authorities below. The assessee is an individual engaged in the business of diamond cutting and polishing on job work basis in the name of his proprietary concern viz. Avani Diamond. The books of accounts of the assessee are audited u/s 44AB and the audit report was duly submitted with the return of income filed for the year under consideration. We noted that the amount of gross profit as also the GP rate has increased substantially in the year under consideration to 3.82% from 2.91% in the earlier year. Even the amount of net profit as also the NP ratio has increased in the year under consideration to 1.82% from 1.58% in the earlier year. We find that the CIT(A) has dealt with the issue in great detail and after considering the various factors and circumstances of the case as also the decision of the ITAT in the case of Dhirubhai Becharbhai Dhamelia (supra), has deleted the addition. No cogent material or evidence was brought on record by the Revenue on the basis of which a different view than what is taken by the CIT(A) can be taken. We, therefore, do not find any illegality or infirmity in the order of the CIT(A) and we accordingly uphold the same in this regard. Thus, this ground raised by the Revenue stands dismissed.
7 The second ground relates to deletion of the addition of Rs.8,13,369/- made by the AO on account of diesel expenses. The brief facts of the case are that according to the AO, the assessee had incurred huge expenses on power and fuel and out of the total expenses of Rs.16,26,729/-, the expenses on amount of diesel is Rs.11,54,643/-. The AO observed that none of the bills of diesel purchase bear the name of the assessee and the 7 said bills are obtained from different pumps at different villages. The AO concluded that the power and fuel cost of the assessee were high and excessive. The AO accordingly made ad-hoc disallowance of Rs.8,13,369/- being 50% of total power and fuel expenses amounting Rs.16,26,729/-. Being aggrieved, the assessee preferred an appeal before the CIT(A). The CIT(A) has dealt with the issue and deleted the ad-hoc disallowance by observing as under:-
"During the course of appellate proceedings, the appellant submitted that his factory is located at a remote place at Village Areth, Tal. Mandvi, Dist. Surat and not in the city of Surat and hence, the power supply being not consistently available at the remote place, the appellant had to run its factory on generator by consuming diesel, which increases the cost of power and fuel, as compared to the other 2 cases who are having their factory in Surat and have the facility of consistent electric power supply, which costs low as compared to diesel. Further, as regards the learned ITO's observation that the diesel bills are obtained from different pumps of different villages and that they do not bear any name, it was submitted that as matter of accepted trade practice, the person filling the petrol / diesel at any pump, who issues the bills only fills up the date, no. of litres and the amount, but never the name of the buyer and hence, on this ground the bills cannot be said to be non-genuine. Further, it was explained that since the appellant's factory is at Village Areth, Tal Mandvi, the purchase bills are of pumps of nearby villages and not of the city of Surat and hence, the said bills are more justifiable then purchase bills of Surat. Lastly, it was submitted that the cost of power and fuel in percentage terms had in fact decreased in the current year as compared to the earlier year, as is evident from the following analysis.
Particulars AY 2006-07 AY 2005-06
Total Labour Receipts 1,95,85,122 1,81,38,871
Less: Given directl y to outside parties 63,28,952 1,29,50,256
Own work done
1,32,56,170 51,88,615
8
Electricit y Expenses
4,72,086 6,32,001
Diesel Expenses
11,54,643 2,65,212
Total Power & Fuel Expenses ------------ -----------
16,26,730 8,97,213
Power & Fuel Exp. As a % of own
work 12.27% 17.29%
I have considered the facts of the case, the view taken by the ITO and the submissions of the appellant. First of all it is seen that the power and fuel expenses as incurred by the appellant in the current year has reduced considerably to 12.27% from 17.29% in the earlier year. Further, it is seen that the ITO has not been able to prove that the power and fuel expenses is bogus being not supported by any authentic or genuine bill but he has only pointed out that the said bill does not bear the name of the appellant, in this regard, I agree with the appellant that the petrol / diesel bills generally do not contain the name of the buyer and if the ITO had any doubt as regards the genuineness of the said expenses, he should have made some inquiries for the same.
Further, as regards comparison of power and fuel cost of the appellant with the job workers, I am of the opinion that only likes can be compared with likes and in the present case, the appellant is having his factory in a remote village at Areth where, the power supply is not constant whereas, the job workers are having their factory in Surat city and are consuming consistent and cheap electric power. Thus, considering these facts, the power and fuel cost of the appellant is bound to be higher as compared to that of the contractors and therefore, the power and fuel cost of the appellant could not be compared with that of the contractors.
Further, as per the decision of the jurisdictional ITAT in the case of Bharatkumar Ramniklal Mehta (supra), the GP rate of the assessee has to be compared, in order to judge whether an assessee has claimed any arbitrary expense or not, since, in such circumstances, the GP would be low. In the present case, not only the GP and NP of the appellant have increased to 3.82% and 1.82% respectively in the earlier year, but most importantly, even the power and fuel cost in percentage terms has decreased to 12.27% in the current year as compared to 17.29% in the earlier year. Thus, on considering these facts and most respectfully following the decision of the jurisdictional 9 ITAT in the case of Bharatkumar Ramniklal Mehta (supra), I hereby delete the ad-hoc disallowance of 50% amounting to Rs.8,13,269/- as made by the ITO out of diesel expenses. Thus, this ground of appeal stands allowed."
8 We have heard the learned DR and perused the material on record. We have also gone through the orders of the authorities below. We find that the CIT(A) has rightly observed that the ITO has not been able to prove that the power and fuel expenses is bogus being not supported by any authentic or genuine bill but he has only pointed out that the said bill does not bear the name of the assessee. The CIT(A) has also correctly observed that the petrol / diesel bills generally do not contain the name of the buyer and if the ITO had any doubt as regards the genuineness of the said expenses, he should have made some inquiries for the same. We find that the CIT(A) has dealt with the issue in great detail and after following the various factors and circumstances of the case as also the decision of the ITAT in the case of Bharatkumar Ramniklal Mehta (supra), has deleted the addition. No cogent material or evidence was brought on record by the Revenue on the basis of which a different view than what is taken by the CIT(A), can be taken. We, therefore, do not find any illegality or infirmity in the order of the CIT(A) and we accordingly uphold the same in this regard. Thus, this ground raised by the Revenue stands dismissed.
109 In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the open court on 08-01-2010 Sd/- Sd/-
(N S SAINI) (MAHAVIR SINGH)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Date : 08-01-2010
Copy of the order forwarded to :
1. Shri Bhikhabhai Rajabhai Dhameliya, Prop. of Avni Diamond, 36, Baroda Pristage, Varachha Road, Surat
2. The Income-tax Officer, Ward-9(1), Room No.422, Aayakar Bhavan, Majuragate, Surat
3. The CIT concerned
4. The CIT(A)-V, Surat
5. The DR, ITAT, Ahmedabad
6. Guard File BY ORDER DY.R/AR, ITAT, AHMEDABAD 11