Income Tax Appellate Tribunal - Chandigarh
M/S R.B. Knit Export, Ludhiana vs Acit, Ludhiana on 3 November, 2017
1
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCHES 'B' CHANDIGARH
BEFORE SHRI. SANJAY GARG, JUDICIAL MEMBER AND
DR. B.R.R. KUMAR, ACCOUNTANT MEMBER
ITA Nos. 265 to 267/Chd/2017
Assessment Years: 2010-11 to 2012-13
The ACI T Vs. R.B. Knit Export
Circle-7 415, I ndustrial Area A
Ludhiana Ludhiana
PAN No. AABFR4116K
ITA Nos. 136 to 138/Chd/2017
Assessment Years: 2010-11 to 2012-13
R.B. Knit Export Vs. The ACI T
415, I ndustrial Area A Circle-7
Ludhiana Ludhiana
(Appellant) (Respondent)
Assessee By : Sh. Ashwani Kumar
Sh. Aditya Kum ar
Department By : Sh. Ravi Sarangal
Sm t. C. Chandrakanta
Date of hearing : 23/08/2017
Date of Pronouncement : 03/11/2017
ORDER
PER.DR. B.R.R. KUMAR, A.M:
All the above appeals filed by the Revenue and the Assessee against the com mon order dated 23/11/2016 passed by the Ld. CI T(A)-3, Ludhiana.
2. Revenue has raised following grounds in I TA No. 265/Chd/017 for the AY 2010-11 i. Wh et h e r on t h e f act s an d ci rc um st an ce s of t h e ca se an d i n law the l ea rn e d C om m i ssi on er of In com e Ta x ( A p p eal s ) wa s j u st i fi ed in h ol di n g the di sal l o wa n c e of f ab ri c at i on ch a rg e s m ad e b y t h e As se s si n g Of f i cer a s n ot p r op e r an d re st ri cti n g the s am e to Rs 15 , 00, 000 /- a gai n st the 2 di sal l o wan ce m ade of Rs . 1.9 7, 32, 23 2 /- wi t h o ut ap p r eci at i n g t h e fact t h at t h e a ss e s se e c o ul d n ot di s ch a rg e its on u s b ef o re the As se s si n g Of f i cer by j ust i f yi n g the gen ui n en e s s t h e s e exp en s e s an d est ab l i sh i n g t h e i den t i t y of t h e p er s on s to wh om the exp en se s cl ai m ed to h av e b een p ai d i n ca sh .
ii. Wh et h e r on t h e f act s an d ci rc um st an ce s of t h e ca se an d i n l a w, the l ea rn ed C om m i ssi on e r of In c om e Ta x ( A p p eal s ) wa s j ust i f i ed i n t reat i n g t h e s ub si dy r ec ei ved un de r T UF F s t o b e t ak e n a s p a rt of a ss et f or cal c ul at i on of a ddi ti on al dep reci at i on .
3. The Assessee has raised following grounds in I TA No. 136/Chd/2017 for the AY 2010-11:
i. That order passed u/s 250(6) of the Income Tax Act, 1961 by the Ld. Commissioner of Income Tax (Appeals)-3, Ludhiana is against law and facts on the file in as much as she was not justified to arbitrarily uphold a disallowance of Rs. 15,00,000/- out of fabrication charges made by the Ld. Assessing Officer at Rs. 1,97,32,232/-.
Ii. That she was further not justified to arbitrarily uphold action of the Ld. Assessing Officer in disallowing claim of additional depreciation amounting to Rs. 5,58,504/-.
4. Revenue has raised following grounds in I TA No. 266/Chd/2017 for the AY 2011-12:
i) Wh et h e r o n t h e f act s an d ci rc um st an c es of t h e ca se a n d i n l aw t h e l ea rn ed C om m i ssi on er of In c om e Ta x ( Ap p eal s ) wa s j u st i fi ed i n h ol di n g t h e di sal l o wan ce of f ab r i cati on ch a r ge s m ad e b y t h e A s se s si n g O f fi cer a s n ot p ro p e r an d r e st ri ct i n g t h e sam e t o R s. 2 5, 00, 0 00 /- agai n st t h e di sal l o wan ce m a de of Rs . 5, 43, 52, 4 93 /- wi t h out ap p reci at i n g t h e f act t h at t h e a s s es s ee co ul d n ot di sch a rg e i t s on us b ef o re t he A ss e ssi n g Of f i cer b y ju st i f yi n g t h e gen ui n en e s s t h es e exp en se s an d e st abl i sh i n g t h e i den t i t y of t h e p e rs on s t o wh om t h e exp en s e s cl ai m ed t o h a ve b e en p ai d i n ca sh .
ii) Wh et h e r on t h e f act s an d ci rcum st an c es of t h e ca se, t h e l ea rn ed C om m i ssi on er of In c om e T a x ( Ap p eal s ) wa s j u st i fi ed i n del et i n g t h e ad di ti on of R s. 3 2.5 3, 15 6 /- ( wh i ch i s i n cl u de d i n t h e addi t i on of R s. 5, 43, 52, 49 3 /- ) b y ac cep t i n g t h e a ss es s ee ' s p l ea t h at p ro p ri et or of M/ s. M. S . E m b roi de r y Wo rk s wa s p r od uc ed i n A. Y .
20 12- 13 wi t h o ut ap p reci at i n g t h e f act t hat addi t i on wa s r el a t i n g t o A.Y. 20 1 1- 12 a s t h e exp en di t ur e h a s b ee n cl ai m ed i n t h e A. Y . 20 11- 12 an d t h e a s s es se e o ugh t t o j ust i f y t h e c l ai m i n t h e p r oc ee di n gs f or A. Y. 2 01 1- 1 2 on l y .
iii) Wh et h e r on t h e f act s an d ci rc um st an ce s of t h e ca se an d i n l a w, t h e l e a rn ed C om m i ssi on er of In c om e Ta x ( Ap p eal s ) wa s j u st i fi ed i n del et i n g t h e addi ti on m ade b y t h e A ss e ssi n g Of f i cer of Rs. 17, 67, 1 80 /- o n ac co un t : of c om m i ssi on p ai d f or B ran d Rat e DB K b y i gn ori n g t h e ob ser v at i on of t h e As se s s i n g Of fi cer m ade i n t h e A ss e ssm en t or de r t h at n o d o c um en t a ry evi de n ce of r en deri n g se rvi ce h a s b e en f ur n i sh ed.
5. The Assessee has raised following grounds in I TA No. 137/Chd/2017 for the AY 2011-12.
i. That order passed u/s 250(6) of the Income Tax Act, 1961 by the Ld. Commissioner of Income Tax (Appeals)-3, Ludhiana is against law and facts on 3 the file in as much as she was not justified to arbitrarily uphold a disallowance of Rs. 25,00,000/- out of fabrication charges made by the Ld. Assessing Officer at Rs. 5,42,52,493/-.
ii. That she was further not justified to arbitrarily uphold action of the Ld. Assessing Officer in disallowing a sum of Rs. 72,52,666/- out of commission to foreign agents.
iii. That she was gravely erred in upholding disallowance of Rs. 4,28,175/- in addition to Rs. 3,25,854/- already disallowed by the appellant out of telephone expenses, car expenses and car depreciation.
6. Revenue has raised following grounds in I TA No. 267/Chd/017 for the AY 2012-13:
i. Wh et h e r on t h e f act s an d ci rc um st an ce s of t h e ca se an d i n l a w t h e l ea rn ed C o m mi ssi on er of In c om e T a x ( Ap p eal s ) wa s ju st i fi ed i n h ol di n g t h e di sal l o wa n c e of f ab ri cat i on c h a r ge s m ad e b y t h e A ss e ssi n g Of f i cer a s n ot p rop er an d re st ri ct i n g t h e sam e t o R s .
15. 00 .0 00 /- ag ai n st t h e di sal l o wan ce m ade of R s. 3, 67, 1 4.8 33 /-
wi t h o ut a p p r eci at i ng t h e f act t h at t h e a ss es s ee c o ul d n ot di sch a r ge i t s on us b ef or e t h e A s se s si n g Of f i cer b y j ust i f yi n g t h e gen ui n en e s s t h es e exp en s e s an d e st ab l i sh i n g t h e i den t i t y of t h e p er s on s t o wh om t h e exp en se s cl ai m ed t o h av e b een pai d i n ca sh .
ii) Wh et h e r on t h e f act s an d ci rc um st an ce s of t h e ca se an d i n l a w, t h e l ea rn e d C om m i ssi on er of In com e Ta x ( A p p e al s ) wa s ju st i fi ed ( i ) i n del et i ng t h e addi ti on m ade b y t h e A ss e ssi n g Of f i cer of R s. 28. 14, 7 49 /- m ad e un d er se ct i on 14 A of t h e In c om e- t a x Act , 19 61r ea d wi t h R ul e 8D of t h e In c om e f a x R ul e s. 19 62 b y n ot ap p r eci at i n g t h e Ci rc ul a r N o. 5 of 20 1 4 an d ( i i ) i n h ol di n g t h at p ro vi si on s of sect i on 14 A r ea d wi t h R ul e 81 ) a re n ot at t ract ed i n a s se s see " s ca se .
7. The Assessee has raised following grounds in I TA No. 138/Chd/2017 for the AY 2012-13:
1. That order passed u/s 250(6) of the Income Tax Act, 1961 by the Ld. Commissioner of Income Tax (Appeals)-3, Ludhiana is against law and facts on the file in as much as she was not justified to arbitrarily uphold a disallowance of Rs. 15,00,000/- out of fabrication charges made by the Ld. Assessing Officer at Rs.
3,67,14,833/-.
2. That she was further not justified to arbitrarily upholding disallowance of Rs. 7,21,104/- out of telephone expenses, car expenses and car depreciation on account of estimated personal use thereof.
A- In nutshell, the grounds of disallowance on account of fabrication charges is common in all the appeals of the Revenue as well as the Assessee's pertaining to AY's 2010-11, 2011-12 & 2012-13.
B- AY 2010-11 -Revenue Appeal- 1. Subsidy under TUFF C- AY 2011-12 -Revenue Appeal -1. M/s. M.S. Embroidary Works Charges.
2. Commission paid to Brand Rate DBK D- AY 2011-12 -Assessee Appeal- 1. Commission paid to Foreign Agents.
2. Disallowance on Telephone Expenses.
4E- AY 2012-13 -Revenue Appeal- 1. Disallowance u/s 14A F- AY 2012-13 -Assessee Appeal- 1. Disallowance on Telephone Expenses. The issue of fabrication charges is commonly dealt for all the three years. The order of AY 2010-11 is taken as the lead order in all the cases incorporating the findings of the survey conducted subsequently. The issue of disallowance of Telephone and Car expenses are dealt commonly for the AY 2011-12 and 2012-
13.
8. Brief facts of the case are that the assessee filed its return of income declaring total income at Rs. 2,28,04,828/-. The assessee is engaged in the business of manufacturing and export, sale of Hosiery and also earning fabrication commission.
9. During the assessment proceedings enquiries were conducted regarding the payments of fabrication charges on which no TDS was deducted. This pertains to 2440 parties to whom payments have been made below Rs. 50,000/-. Based on the report of the inspector about non traceability of such addresses given by the assessee, the Assessing Officer has asked the assessee to produce 89 persons for verification.
10. During the proceedings the assessee produced 39 job workers before the Assessing Officer. The Assessing Officer has held that the assessee has produced 39 persons only out of the 2440 persons who have received payments on account of fabrication charges. Consequently the Assessing Officer has disallowed 50% of such expenses out of the fabrication charges wherein amounts have been paid in cash and are below Rs. 50,000/-.
11. Aggrieved the Assessee filed appeal before the Ld. CIT(A) who has upheld an amount of Rs. 15,00,000/- out of the disallowance of Rs. 1,97,32,232/- made by the Assessing Officer.
12. Aggrieved with the order of the Ld. CIT(A) the Revenue filed appeal before us against the deletion of Rs. 1,82,32,232/- whereas the Assessee filed cross appeal against upholding of disallowance of Rs. 15,00,000/- .
13. Before us, the Ld. DR strongly relied on the assessment order and vehemently argued on the points elaborated in the assessment order.
514. The arguments of the Ld. Sr. DR are summarized below:
14.1 That the assessee has paid total amount of Rs. 3,94,64,463/- on which TDS was not deducted. The addresses pertaining to 89 parties were found to be non existing as per the report of the inspector the assessee could not even produce a meager sample of 5% of the work force. None of the 39 parties which the assessee could produce on three different days pertains to the 89 addresses given by the assessee. Thus the assessee could not produce the 89 parties who could not be traced owing to the non existing addresses. Since the assessee could not discharge the primary onus of producing the parties and also the Revenue has through their enquiries proved that the parties were not existing the disallowance has been rightly made by the Assessing Officer.
14.2 The Ld. DR has also pointed out that there was also slight fall in the GP and the fabrication charges have also been increased from 31% to 35% of the turnover which goes to prove that the fabrication charges have been inflated.
The ld. DR further argued that the disallowance of 50% of the fabrication charges was also made in the AY 2009-10 but this year this disallowance is after a thorough enquiry and also on account of non- production of parties for verification before the AO. To sum up the Ld. DR has succinctly quoted from the Assessment Order the following points in support of validity of the addition made by the Assessing Officer and argued that the addition needs to be confirmed. Excerpts from the assessment order:
I) Payment of Rs. 3,94,64,463/- has been made. II) The payments are below Rs. 50,000/-. III) All the payments are by way of cash. IV) Only vouchers have been prepared by the assessee which can be done at any point of time. It does not prove its genuineness. V) No TDS has been made. VI) The assessee was asked to provide name and address of such persons. VII) The addresses provided were found to be non-existent i.e. fake.
VIII) Inspector was deputed to verify the existence of job worker at the given address and verify the genuineness of fabrication charges paid.
IX) It was reported by the inspector that the address provided are fake or no such person ever stayed or worked at the address in case the address was identifiable. X) Assessee was provided opportunity to produced the job workers from 16.01.2013 to 18.02.2013 i.e. for period of more than one month but only 39 persons out of the list of 2440 persons'were produced. The name and address of persons produced did not tally with the 6 name and address mentioned in the list provided. Hence even the persons produced cannot be treated as genuine.
XI) The assessee has not able to produce all the persons to whom fabrication charges were paid by way of cash inspite of sufficient opportunity provided. XII) The assessee has not been able to produce any confirmation from the job worker. XIII) Onus to prove is on the assessee which it has failed to discharge because neither the confirmations were filed nor the job worker could be produced inspite of sufficient opportunity provided.
XIV) The principle of Res Judicata does not apply to income tax proceeding so even if the addition is deleted in earlier year or no such addition is made in earlier year does not mean that no addition can be made in this year.
15. The Ld. DR Shri Ravi Sarangal and Ld. Sr. DR Smt. C. Chandrakanta have argued that the Assessing Officer has duly considered 50% of the expenses paid and disallowed only 50% of the fabrication charges that have been paid by the way of cash on which no TDS has been made and below 50,000/- are only disallowed. It was argued that since assessee was allowed a fair amount under fabrication charges and also keeping in view the fall in GP the disallowance made by the Assessing Officer needs to be confirmed.
15.1 The Ld. DR's further argued that a survey has been conducted and the various documents and material collected during the survey would prove that the fabrication expenses have been inflated and non-genuine. The details of the arguments are as under which were also furnished before the Ld. CIT(A):
(3) In addition, consequent upon a survey u/s 133A conducted at the premises of the Appellant on 6-7.01.2014 (AY-2015-16) the Ld Assessing Officer has also sought to make additional submissions on the basis of alleged infirmities observed therein as follows which have been reported to Your Honour vide letter No. ACIT/Cit-
VI/Ldh/13-14/12 dated 04.04.2014:-
I) Payment of nearly 50% of Fabrication Charges has been made in cash, which is below Rs. 50,000/-
II) No TDS has been deducted III) The addresses provided were found to be non-existent i.e. fake or incomplete.
IV) Inspector was deputed to verify the existence of job worker in A. Y 2009-10 and A.Y. 2010-11 at the given address and verify the genuineness of fabrication charges paid.
V) It was reported by the inspector in both the years that the address provided are fake and no such person ever stayed or worked at the address in case the address was identifiable.
VI) Assessee was provided opportunity to produce the job workers, in both the years. The assessee could produce only 83 person in A. Y. 2011-12 and 39 persons in A.Y. 2010-11. The name and address of persons produced did not tally with the name and address mentioned in the list provided. Hence even the persons produced cannot be treated as genuine.7
VII) The assessee has not able to produce all the persons to whom fabrication charges were paid by way of cash inspite of sufficient opportunity provided in both the Asstt. Years.
VIII) The assessee has not been able to produce any confirmation from the job worker.
IX) Onus to prove is on the assessee which he has failed to discharge because neither the confirmations were filed nor the job worker could be produced in-spite of sufficient opportunity provided.
X) The assessee is employing nearly 3000 workers. Such large numbers of workers cannot be handled without labour contractor. The assessee has its own employees as well as labour contractors. It appears that work is done by them but the cash expense are shown just to reduce the profit. It is apparent that the work is done by them at the factory by its own employees as well as labour contractors.
XI) Every year list of around 3000 workers is prepared without any complete address. This has been found to be modus operandi of the assessee. Perhaps the assessee feels that it is not possible for the Department to make such large number of enquiries.
XII) Vouchers of cash payments are prepared just to inflate the expenses as is evident from the blank signed vouchers impounded during the survey actions.
XIII) The principle of Res Judicata does not apply to income tax proceeding especially so in the present case as consequent to survey action new evidence have come to light which have been discussed in details before and again highlighted below:
• Blank signed bills and bill books found in the premises of the firm • Fabrication Bills of two years During the course of survey two years i.e 2012-13 and 13-14 related fabrication bills where found which were all written in same handwriting • False Addresses of the workers • Statement recorded during assessment proceedings for A. Y. 2011-12 & 2010-11.
The same above mentioned facts have also come to notice while perusing the statements of workers recorded during the assessment proceedings for A. Y. 2011-
12. Copies of some of such statements are enclosed for ready reference.
I. Addresses are not verifiable as per inspector's report.
II. Further during statement address do not match the address given earlier. III. Further out of about 3154 only 83 job workers produced. Even last year 39 job workers produced out of 2440.
XIV) Further it needs to be stressed that the facts gathered during the survey were not available before the Tribunal. Order of the IT AT may not be acceptable to the Department. Moreover, the Tribunal has given a finding that the order of the CIT(A) deleting the entire addition is not correct. The Hon'ble Tribunal did not have sufficient evidence before it while deciding the appeal but now the department has sufficient evidence to prove that the expenses are not genuine.
15.2 Thus quoting the findings of the survey conducted subsequently the Ld. Sr. DR and the Ld. DR argued that since even the findings of the survey revealed 8 inflation of payments on account of fabrication charges the disallowance made on account of fabrication charges needs to be confirmed.
16. Before us the Ld. AR argued that the assessee has employed nearly 3000 workers which consists of his own employees and labour contractors. The Ld. AR mainly relied on the arguments taken before the Ld. CIT(A). The excerpts of the arguments are as under:
(1) Before proceeding to discuss the ground of appeal and build up a case to negate the action of the Ld Assessing Officer, it would be topical to get an insight into the Appellant Firm's business, its production process and other pertinent facts which when considered in totality would highlight certain difficulties faced in its operations and the consequent perceived shortcomings in its record keeping (accounts/documentary evidence). The said exercise would only lead to the conclusion that the Ld Assessing Officer's line of thinking and consequent result is unreasonable and unjustified and that the method of accounting, record keeping followed by the Appellant Firm does not warrant any adverse action/negative opinion.
(2) The Appellant Firm is a manufacturer of Hosiery Knitwear and mainly exports cotton knitwear, as per the buyer's specifications and instructions without any brand name of the firm being used, to European Countries which activity forms more than 90% of its total turnover. The Appellant Firm is also engaged in fabrication for other export houses. Manufacture of hosiery goods is a multi stage process wherein the raw-material i.e. yarn passes through various processes viz.
Dyeing, Knitting, Panels, Washing, Pressing, Cutting, Tailoring, Linking, Checking, Mending, Scouring & Milling before the finished items is produced each of which requires a set of skilled/semi-skilled/unskilled workers having specific capabilities honed over constant practice and experience gained over a period of time.
(3) It should be noted that the entire operations of the Unit essentially involve a series of processes integrated and dovetailing into each other whereby the end-product of one process serves as the input for the subsequent process. The manner in which the various processes involved in the manufacture of a garment such as knitting, cutting, tailoring, linking, hand press etc and the operations of the unit are organized are discussed below:-
> All the workers in a particular section work under a supervisor/master who allocates jobs to be done by a particular worker on a given day. The same is recorded by the supervisor in a Diary/ Register maintained by him and sometimes, but not always, also by the worker to reconcile the material received for work and returned back after doing the necessary job. Given the literacy and awareness levels of the workers they maintain records, if at all, only in a haphazard manner and the primary, if not sole record, is the one maintained by the supervisor/master.
> After completion of the requisite job by the respective worker, the material is returned for the next process which fact is again duly recorded by the supervisor in the Production Register as well as the Diary/Register in which issue of material was recorded.
> On the basis of the production details of each worker, a calculation of the amount due to him is recorded on the Production Register itself taking in consideration the nature of job/work done and the corresponding rate. It would be noted that keeping in view the stringent labour laws, such migrant labour is 9 generally employed on piece rate basis wherein the quantum of remuneration depends upon the nature and quantum of work done/completed.
> On or around the 20th of every month, advance is given to workers on the basis of an estimate of their work done which fact is recorded as an advance by the Accounts Department on payment basis and also in the Production Register. Although a general occurrence, the fact of advance is not a necessity and may not arise in specific situations.
> At the end of each month a bill of each of the workers/fabricators is prepared/taken which is tallied with the Production Register and is duly recorded in the accounts. The payment for the same is made after reducing the advance, if any, already paid.
(4) Complete details of Fabrication Charges, irrespective of whether tax had been deducted thereon or not, and the amount involved were duly filed before the Ld Assessing Officer .The said detail gives complete details of Fabrication Charges including the name, address and the amount paid to individual workers.
As such on the basis of such preliminary documentation itself, the expenditure under the said head gets duly documented and proved.
(5) The labour engaged in this industry mostly comprises of migrants who come from different parts of the country temporarily, stay and work for a few months and return back to their native places and have no permanent local address where they can be physically found. Such migrant labour motivated and lured as it is by the possibility of short term financial gain has the least loyalty towards a particular unit and keeps moving from one unit to another unit very frequently at the first available opportunity which is also a generally accepted and inevitable practice in the Hosiery Industry. Most of the labour comes to the Appellant Firm through reference of past/present workers/fabricators working with it. The workers, to whom Fabrication Charges have been paid, are migrant labourers, come from different states and lead a nomadic existence by shifting from factory to factory based on the possibility of short term financial gain. In these circumstances the possibility of the same labourer working with the same firm for several years in succession is remote and the same set of workers, invariably does not get repeated in subsequent years. It also needs to be emphasized here that these migrant labourers do not have any semblance of a permanent residence in Ludhiana and once they leave it is practically impossible to locate and find them. These workers do not function in an organized manner but keep migrating from place to place in search of work and as such once they leave the possibility of finding them is remote.
(6) It should also be noted here that Fabrication Charges are historically and even practically a normal, necessary, integral and inalienable part of the Appellant Firm's business and involve payments to labour for work carried out at various stages of the production process for conversion of raw - material into finished products i.e. hosiery goods. A review of the past records and income tax proceedings would not only bear out but also confirm this fact. Moreover the assessments for the preceding years have also been completed under scrutiny and after due consideration invariably, no adverse inference has been drawn in respect of Fabrication charges except for Assessment Year 2009-10. Even in that year an addition on account of allegedly unverifiable Fabrication Charges was made on the basis that neither the parties to whom fabrication charges were paid, were produced and nor were they traceable at addresses given in the details, which was subsequently deleted by the then Ld Commissioner of Income Tax (Appeals). Subsequently, the addition on that account was limited by the Hon'ble Income Tax Appellate Tribunal to only Rs. 15 Lacs.
17. The Ld. AR reinforced that the Appellant Firm maintains regular and complete books of accounts which are duly supported by vouchers and bills 10 and the entire system functions in an environment subjected to a rigorous system of checks, balances and audit.
18. The Ld. AR argued that owing to the peculiar nature of the Appellant Firms' business no adverse inference needs to be drawn from the fact that either the addresses of the workers are non-existent or that they were not found at the given address or that many workers had the same addresses since as already submitted above almost all of these workers are migratory in nature and have no fixed place of stay in Ludhiana. They generally move around in groups and find a temporary seasonal / place to stay keeping in view availability, suitability and other economic considerations. Even if, the same set of workers return over successive years, they in all likelihood find a new place for lodging and as such would not be available at the address originally furnished. In the light of these facts, payments are also invariably made to them in cash, being of small amounts, and the question of any deduction of tax at source does not arise since the amount paid does not exceed the exemption limit below which no tax is required to be deducted at source.
19. To the arguments of the Ld. DR that from the details of fabrication charges furnished by the Assessee Firm during the course of assessment proceedings, it appears that no TDS has been deducted on the payment of fabrication charges to the tune of Rs. 3,94,64,463/-paid to various parties to whom such payments were made less than Rs. 50000/-.
a). Out of the above payments some of the payments were also made in cash.
b). Initially 89 persons as per the list given in the notice were to be produced for verification of having made such payments to those parties during the period from 16.01.013 to 18.01.2013.
c). The time for production of these parties was extended as requested was extended to 18.02.2013. Inspector was appointed to make enquiries in respect of the parties to whom the payments were made who reported that none of the parties were available at the addresses provided by the Assessee Firm.
20. The Ld. AR argues in reply that manufacture of Knitwears and woollen garments is entirely seasonal in nature with the season lasting from April to December during which period orders are booked, and the requisite Production 11 related activities take place and during which the workers are almost always present at the factory premises. The end of the season is followed by an extremely slack/lull in activity during which (from January to March) where apart from recurring maintenance and other minimal activities only preparatory activities for the next season are undertaken with hardly any production related activities being undertaken and as a result very few workers can be found at the factory premises. The worker also being essentially migrant labourer utilize the opportunity to visit their native place and spend time with their families.
20.1 In this scenario, the Appellant Firm was asked to produce 89 persons listed in the notice issued by the Ld Assessing Officer. At the relevant time, no manufacturing activity was being carried out and hardly any worker was present/available as per the list of persons provided by the Ld Assessing Officer who were to be produced. In spite of all this, the Appellant Firm after some effort was able to produce 39 persons from the said list despite the fact that majority of the manufacturing activity stood closed down during the months of January and February. All the persons who were produced before the Ld Assessing Officer have stated and confirmed that they -
> are doing work where they are getting comparatively better earnings;
> keep on changing the work place and have no permanent work place > do not have any permanent address as they are here to earn their bread and butter and go back in the slack/lean period to their native places. > worked with the Appellant Firm on job work basis and they were paid through their respective supervisors.
> the address given in the bill might have been written by the supervisors of their own and as they are not educated and are concerned only with their job charges.
20.2 The same logic also applies with respect to the alleged adverse report of the Income Tax Inspector with respect to which it is respectfully submitted that keeping in view the fact that January - February is a slack - period wherein most of the workers return back to their native places, it is practically impossible to trace the workers physically at the given addresses.
20.3 It should also be emphasized that payments made to workers as are also duly and properly vouched. Complete vouchers relating to the work done and 12 payments made with respect to the workers mentioned in the notice issued by the Ld Assessing Officer were duly filed before him. Inability to produce the remaining workers in such a short period and in such a scenario is owing to a reasonable cause bordering on impossibility of performance in the facts and circumstances of the Appellant's business. It should be appreciated that it is really impractical and impossible to keep a day-to-day track of all such people/labourers since being essentially migrant labour employed for carrying out the production of garments after end of season they start returning to their native place as neither they are living with their families nor do they have any permanent residence in the area.
21. The Ld. DR has taken on argument that the fall in the GP to 27.53% from 29.11% is also gives an indisputable proof that the expenses are been inflated to the curtail the profits for which the Ld. AR replied that the Gross Profit rate, which is defined to as the ratio of gross profit to sales turnover, is a combined result of the function of two different variables viz. gross profit and sales. Gross Profit in turn is derived by reducing cost of goods sold from the sales proceeds. As such the movement in two variables viz. cost of goods sold and selling price has to be analyzed and considered in tandem, globally and by adopting a holistic approach with a macro-view to be able to determine the reasons for any upward/downward movement in Gross Profit Ratio and any variable cannot be considered in isolation.
21.1 The Ld. AR further argued that with particular reference to the Appellant Firm's case it is submitted that the fall in Gross Profit rate was consequent upon normal business fluctuations/exigencies and the specific reasons arising therefore can be summed up as follows although certain other accentuating factors:-
> The ratio of export incentives to turnover has come down from 9.39% to 8.61% i.e. a fall of 0.78%.
> Increase of sale on account of yarn, chemicals etc. which was just * 1.78 lacs in the last year i.e. in financial year 2008-09 to ' 41.61 lacs during the year under appeal. Trading of yarn and chemicals, which although purchased for own consumption, but could not be so used and sold, as it is, at a reduced/negligible profit margin.13
> If the sale component of these trading items is reduced, the G. P. will come to 28.0% as against 27.53%.
> Increase in the proportion of expenditure on wages In the Appellant's Firm's line of trade which is seasonal, there is a shortage of labour particularly for skilled workers resulting in fixed payments even though the sales may be less. Even otherwise general increase in the wages cannot be avoided particularly where there is an acute shortage of labour. During the year under consideration, the Appellant Firm could not achieve the sales level which has been achieved during the last year resulting in proportionate expenditure on wages being higher by more than 1.2% as compared to the previous year's.
22. Regarding the observations of the Ld. DR on the findings of the survey under section 133A conducted on 06/01/2014 such as presence of blank signed bills and bill books found in the premises of the firm and similarity of the handwriting on the bills proving that the bills were bogus the Ld. AR replies as under:
(a) With regard to the issue as to why the signed bills of some of the parties/job workers were found from the business premises of the Appellant Firm and no amount being mentioned thereon, attention is invited to the system of recording of production and payments discussed earlier. In this connection, it is also submitted, even at the cost of repetition, that the Appellant Firm is engaged in the manufacturing of garments which business is seasonal in nature with the peak months being April to November/December. The workers whose bills were found have already left the work as the season has come to an end. They have been paid as per the work done by them recorded in the Production Register which stands duly recorded in the books of accounts, necessary evidence duly filed before the Ld Assessing Officer and again being enclosed herewith (Annexure -3) with respect to the details of work given to them by the supervisor and recorded by him in the Production Register as per the system of recording of work done by the workers as mentioned supra in respect of each and every bill found and impounded.
(b) In this connection, reference may again also be made to the system of recording production/payments etc. as already discussed above 14 wherein it was stated that bills are generally prepared monthly and that the labourers workers being illiterate do not maintain any records themselves but invariably depend upon their master/supervisor for maintaining or preparing the necessary records. As such the bill books/vouchers are handed over to the concerned master/supervisor who maintains it on behalf of the workers and prepares the bills periodically, generally at month end. This fact was also confirmed by Sh Vinay Adya, Partner of the Appellant Firm in his statement recorded in the course of survey u/s 133A of the Act. The workers being illiterate generally only maintain a mental record of the work done for which the necessary documentary evidence is generally kept by an employee, generally the concerned supervisor/master. In this situation and the fact of complete trust and faith between the workers and this supervisor, blank bill book, sometimes even signed, were left in the custody of the supervisor. Such a situation, when viewed in the context of the manner in which the unit of the firm operates and the entire manufacturing processes consisting of as it is of a series of process interwined into each other would eminently justify the prevailing situation. Further upon the completion of the season the workers invariably leave blank bill books with the Appellant Firm to be used in case he comes back to work subsequently. It is worth mentioned here that only single-single signed bill was found during the course of survey that too was to be sued by the appellant for raising their pending bill for the immediate past month since the payment to those parties were already made and accounted for in the books because of the fact that their work was no more required and they had left for their home town due to season was at fag end.
(c) Further with regard to the personal presence of the workers, it is submitted that as already stated above, due to lean season they had no work and after settling their accounts have already left for their native places to be back at the beginning of the fresh season. The Appellant Firm during the course of the survey operation had duly expressed its willingness to produce them personally as soon as they return back to work. It may be submitted that many of the workers are back to work in our premises and can be produced when desired.15
(d) With respect to workers to whom payments were made as per Annexure A-8 to A- 10 found and impounded from the business premises of the Appellant Firm during the course of survey u/s 133A, it is submitted that the system of recording of the work done and payments made to these workers is the same as that mentioned hereinbefore in these written submissions. All the parties/workers to whom such payments were made are the workers of the Appellant Firm and were getting their payments through these vouchers. Necessary evidence in respect of some of the workers who had done work with the Appellant's Firm during the respective period was duly filed during the survey proceedings and is again being enclosed herewith (Annexure - 4). During the course of survey, the Ld Assessing Officer had also drawn a list of workers who were going out of the business premises during lunch hours /on duty. A list of such workers whose names are in the list drawn on the date of survey and also in the list of parties/workers to whom payments were made as per Annexure A-8 to A-10 was duly drawn and filed before the Ld Assessing Officer and is again being enclosed herewith (Annexure - 5) which clearly shows that the workers to whom the payments as Annexure A-8 to A-10 were made are very much the workers of the firm.
(e) Regarding the issue of difference of closing balance of stock as on the date survey with outside parties for job work, it is submitted that the details of 1637 Kgs of material mostly yarn lying with different parties, as provided by the Accounts Department is in respect of material, given to different parties during the period ending on the date of survey, for knitting thereof.
Most of the material is being given to job workers from the premises situated at 342, Industrial Area-A, as the raw material is stored there only. After knitting the same is received back along with their bill for charges. But the quantity of 647 Pes as per details noted during the course of survey from the outward register is the semi finished pieces sent out for embroidery. The same are in normal course received back from the concerned persons after 10-12 days with their bill for charges. As very small quantity of pieces is being given for this job work and no such record is being maintained in respect of the same in accounts otherwise also no amount is involved except their job charges/bills, which are duly accounted for in the books of accounts. Some of the bills which were paid 16 by the Appellant Firm to these parties against their similar work done during the period ending on the date of survey were duly filed before the Ld Assessing Officer. The said averments fully explain the alleged difference pointed out in respect of material remaining with the job workers as on the date of survey. This query has not much relevance in the year under appeal and replied because it was also a query during the course of survey. Therefore it has relevance for A/y 2014-15.
22.1 To sum up, the points made by the Assessing Officer while disallowing the fabrication charges and the explanation of the assessee is as under:
Sl. No. Arguments of the AO / Arguments of the Assessee Comments DR 1 Payment of Rs. Factual statement As per records 3,94,64,463/- has been made.
2 Factual statement As per records
The payments are
below Rs. 50,000/-.
3 Matter of fact As per records. No infirmity
All the payments are
or bar on cash payment for
by way of cash.
fabrication charges.
4 Only vouchers have Detailed explanation by the Preparation of vouchers for
been prepared by the assessee how the vouchers payments is a practice for
assessee which can be are prepared and payments accounting. Availability of
done at any point of have been done has been voucher cannot be treated
time. It does not prove explained as bogus payments.
its genuineness.
5 No TDS has been Matter of fact As per the statute. Cannot
made be a reason for
disallowance.
6 The assessee was Duly provided The reasons for non
asked to provide name availability of the parties
and address of such was duly examined by the
persons. CIT(A). Migration of the
workers during the lean
period is a normal
phenomena
7 Inspector was deputed The assessee has produced Report of the Inspector
to verify the existence 39 parties for examination reads as under:
of job worker at the before the Assessing Officer "Sir, as per your kind
given address and directions I visited the
verify the genuineness following Localities / Areas
of fabrication charges to enquire about the
paid. persons mentioned in the list
provided to me, today i.e.,
02/01/2013........"(Report dt.
03/01/2013) and in total the
inspector is purported to
have enquired about 87
parties in a single day.
8 Parties not produced Available parties produced, Owing to the rotation of
old parties not available. labour the same persons
were not available for
examination after a lapse of
considerable time.
17
9 It has been already
examined by the Ld. CIT(A)
why the old workers could
not be produced. It was
also difficult to produce all
2400 persons in the lean
period where the factory
work is at the lowest level.
10 Payments are by It is a normal method of The vouchers would serve
vouchers only making payments as evidences for receipt of
the payment.
11 Confirmations were not Previous workers leave during These two are interlinked
filed post December production. since the workers were on
move and on rotation they
were not produced so as
the confirmation.
12 Res-judicata is not Every year is an independent The facts can be viewed
applicable and survey year. So as the addition taking into consideration
findings can be a tool during the year is also viewed the totality of the facts and
to find out the truth. on a standalone basis not on circumstances
the basis of earlier additions
22.2 The chart showing the total fabrication charges paid month- wise by the Appellant firm which will clearly show that fabrication charges paid in the months of December to April are very less as compared to the fabrication charges paid during the other seven months indicating migration-out of the labour during the lean period.
Month fabrication charges
April 1336579.00
May 9522666.00
June 10417892.00
July 14029184.80
Aug 10362750.00
Sept 7705758.20
Oct 10504263.60
Nov 5102779.60
Dec 3703451.20
Jan 2580497.00
Feb 1651130.00
March 3040127.00
Total 79957079
23. On examination of these facts and going through the material placed before us the decision of the Ld. CIT(A) is revisited. The CIT(A) held as under:
3.7 I am inclined to agree with the contention of appellant. Apparently, this is the case wherein the AO has not appreciated some basic facts of the case.
Apparently, the appellant is engaged in the business of manufacturing and export/sale of hosiery. During assessment proceedings, the AO noted that the appellant had incurred some abnormal expenses on fabrication i.e embroidery work, tailoring, ironing, turpai etc. The AO further noted that in the assessment proceedings of A.Y. 2009-10, it was found that the appeallent has been incurring a large amount of expenditure under the head fabrication charges. The appellant had made payments in cash to a large number of workers ranging from 2500 to 3500 in which almost 50% of the payments were in cash without deducting TDS and the balance 50% were by cheque by deducting TDS. The AO 18 after analysis of certain factors pertaining to appellant's business, came to conclusion that in normal business practice, in this nature of work, it should have so many labour but in that case, as it would be difficult to handle so many labourors, so ideally payment should have been made to the contractor so that issues pertaining to labour could be solved at one point only. In that case, payment would exceed Rs. 50,000/- and thus would come within the ambit of provisions of TDS but the appellant had been maintaining practice of engaging workers independently ranging from 2500 to 3500 directly. The AO made disallowance of Rs. 1,97,32,232/- on account of fabrication account, as the AO found it unverifiable. Mainly, the AO plea for this disallowance is unverifiable nature of payments to the laboures. The payments which were made in Cash have been disallowed© 50% by the AO, on the plea that the appellant could not produce the persons for verification.
3.8 The appellant during the course of assessment proceedings, was asked to file the complete details of payments made by the appellant to the laboures. The appellant has stated that complete list of 3000 persons along with the addresses of parties were filed with the Assessing Officer and this information was filed on the basis of whatever information the appellant had, about such parties. The appellant further contended that the suppliers of these goods have no permanent places for carrying on the business. In view of the circumstances and the regular practice as described by the appellant, the appellant could not produce or lead any evidence as per the Assessing Officer other than 39 parties and the Assessing Officer without considering the huge turnover of the appellant and without considering the modalities as to how in absence of these payments, the appellant would have carried on with the fabrication work having turnover of Rs. 2279.1 lacs wherein the fabrication charges are to the tune of Rs. 799.57 lacs that works out to around 35.08% of turnover out of this the total payment o f R s . 799.57 lacs the cash payments/non TDS works out to Rs. 394.64 lacs. The TDS component of fabrication charges are Rs. 404.93 lacs, out of which the disallowance carried out by the is AO Rs. 197.32 lacs. This addition is for the reason that the appellant could produce except only 29 persons during the course of hearing before the Assessing Officer. The appellant had debited an amount in the manufacturing and trading A/c of Rs. 3,94,64,463/- owing to fabrication charges out of which a sum of Rs.1,97,32,232/- has been disallowed on the following basis:
Particulars Amount(Rs.) Fabrication charges paid in cash below 1,97,32,232/- Rs.50,000/- to each of about 3000 workers and on which no TDS has to be deducted 3.9 The assessee has debited Fabrication charges to its P & L Account to the
extent of Rs. 3,94,64,463/-. Out of the said fabrication charges, the payments which have been made in cash and are below Rs. 50,000/- to one person are to the extent of Rs. 1,97,32,232/-. As discussed above, such expenses are disallowed. Disallowance on this account comes to Rs. 1,97,32,232/-.
3.10 I have carefully considered the basis of addition made by AO and detailed arguments of assessing officer. The remand report sent by the AO and subsequent reports of AO have also been considered. The important part of the basis of AO's view is the report of ITI, making enquiries of varacity of fabrication charges claimed by appellant. I have gone through in detail, the report of ITI and the detailed submission filed by the appellant on this issue. I am inclined to partly agree with the contention of appellant. The main component of AO's satisfaction w.r.t. addition is apparently, the ITI's report and survey carried out in the premises of appellant on 06&07.01.2014. Although in later year, During the course of assessment proceedings, the AO has relied upon the material impounded during the course of survey proceedings. I have carefully perused all the relevant facts and reports of AO, it is seen that the AO in his remand report dated 20.10.2014 has given detailed submission.
193.11 The appellant has also contested that the assessing officer observed that the appellant had produced only 39 persons out of list of 2440 laboures, filed by the appellant and on the repeated request the appellant failed to produce remaining persons. In this regard, I have carefully gone through the contention of both sides. Here, it is also be proper to keep the basic facts related to appellants working profile. The appellant is a manufacturer of Hosiery Knitwear and mainly exports cotton knitwear and this activity forms more than 90% of its total turnover. The appellant is also engaged in fabrication for other export houses. Manufacture of hosiery goods is a multi stage process wherein the raw-material i.e._yarn passes through various processes viz. Dyeing, Knitting, Panels, Washing, Pressing, Cutting, Tailoring, Linking, Checking, Mending, Scouring & Milling before the finished items is produced each of which requires a set of skilled/semi-skilled/ unskilled workers having specific capabilities honed over constant practice and experience gained over a period of time. Accordingly, in view of the above facts, it is also apparent that without having so much fabrication work, the appellant cannot work smoothly. As stated above, the processes is lengthy and involves so many processes all together. Therefore, apparently the action of AO in holding 50% all cash paid fabrication charges Rs. 1,97,32,232/- non verifiable, is not justifiable. The cause of this huge addition is that, the appellant failed to produce the persons as required by the AO. With the result, the AO treated whole of the payments made in cash as non genuine. In my considered view, this action of AO, is not proper, as without considering the magnitude of the appellant's manufacuturing activities and past history, whole of the payment can not be disallowed. The AO has disallowed 50% of cash payment of fabrication which is not justifiable.
3.12 I have also considered all other relevant factors pertaining to the appellant. It is also to be appreciated that fabrication charges are essential part of manufacturing activities of appellant. This fact also is to be kept in mind that payments made below the prescribed limit in cash without TDS would be to the individual who don't have fixed or permanent existence or fixed address. Such labour from season to season moves from one factory to other and other cities according to availability of work conditions. The appellant has filed detailed relevant data and records pertaining to all the persons. The perusal of the data shows that the appellant has meticulously maintained the relevant data in respect of each such person along with the supporting documents which shows the details of work done by each of the worker against which the payment has been made and mode of payment. There is no instance, wherein the AO, has pointed out discrepancy in records kept of the appellant which it has been keeping regularly in the same manner as in past year the appellant have maintained its record which have never been subjected to change except in assessment year 2009-10. It is seen that data as diligently maintained by the appellant on examination enables anyone to work out the detail of work done by the each labour and the basis of payment out by the appellant accordingly. Another important fact brought out by the assessing officer is lowered gross profit growth reflected by the appellant during the year. In this connection the appellant has vehemently argued, that the appellant's financial results shows that though this year the fabrication charges are bit higher than the earlier years however the growth in fabrication charges is not abnormal comparing to the results of the appellant when compared with its turnover in last five years. It is so seen that in A.Y. 2008-09 the % of fabrication in comparison of turnover was 37.48%. Therefore, apparently the results of appellant have been consisting. The history of the turnover G.P. fabrication charges of the appellant can be tabulated as under:
3.13 It is seen that the AO has based its opinion from the ITI report and on the basis on documents found at the time of survey has drawn adverse inference. In my considered view, there are several important factors which are very relevant in the case of appellant and the assessing officer has skipped to consider these aspects.
3.14 The appellant has vehemently argued that the labour pertaining to fabrication is a season based labour, which keeps on moving from one factory to other the factory and one city to another city, according to the demand.20
Important factor is that in the case of appellant, there is no past history which is adverse to the appellant except in assessment year 2009-10. Ultimately, it is seen that in assessment year 2009-10 too the jurisdictional ITAT has given substantial relief after giving consideration to all the relevant facts of the appellant. In view of the overall facts of the case in my considered opinion also it is seen that this year too, the assessing officer has made huge addition in fabrication charges on the basis of the inspectors report and the documents filed at the time of survey subsequent years and has disallowed the entire hundred percent fabrication charges paid in cash or where there is no TDS element.
3.15 However, considering the quantum and magnitude of appellant's turnover and manufacturing activity it is not understandable as to how the appellant would got it carried out this quantum of work without paying huge fabrication charges. In my considered opinion, the AO has not at all considered these facts while making disallowance of entire cash paid fabrication charges. Even the assessing officer has not considered 46 persons produced by the appellant along with there relevant details. Although, the address may be different however the persons were produced and there particulars were verifiable from records maintained by the appellant. The important fact is that the AO has nowhere denied this fact in its assessment order. The AO has raised suspicion at the fag end of the assessment year based on the report of ITI and facts gathered at the time of survey. It is important fact that the AO has raised suspicion on the fabrication payments made in cash but has failed to recognize that such huge expenditure would be requied to achieve such big turnover. Overall the reasonableness of the expenditure related to fabrication charges along with the turnover of the appellant and other related factors. Such kind of expenditure has to be reviewed and appreciated in the background of financial result of the appellant. Accordingly, the disallowance on account of 50% of fabrication charges of cash paid application charges wherein no TDS involved cannot be termed as justified at all.
3.16 Another factor which is very important in the case of the appellant that in the case of appellant's own case in AY 2009-10, the Hon'ble ITAT has given substantial relief in the case of appellant after considering all the facts in detail. Which is reproduced as under:-
6. Before us, the Ld. D.R. for the Revenue carried us through various paras of the Assessing officer and submitted that the Assessing officer has clearly found so many defects still the Ld. CIT(A) has allowed relief by merely relying on the profitability and fabrication charges ratio.
7. On the other hand, the Ld. Counsel for the assessee strongly supported the order of the Ld. CIT(A). He also submitted that in this case the assessee has filed return of income declaring income of Rs. 2,80,94,049/- on total exports approximately 32.5 crores without claiming any deduction under any provisions of law. This itself show that the assessee had no intention to hide any profit from the Department.
8. We have gone through the rival submissions carefully and we are satisfied with the reasoning given by the Ld. CIT(A) for allowing relief. No doubt Gross profit rate during the year was 29.19 from 27.29% in earlier year and similarly fabrication charges have also gone down f rom approximately 35% in the earlier year to 31.33%. However, at the same time all the defects pointed out by the Assessing officer have not been clarified by the assessee before the Ld. CIT(A). It has also to be appreciated that it is very difficult that the migrants who come temporarily from various parts of the country. But as we have observed earlier all the defects have not been fully explained by the assessee, therefore to avoid any leakage of Revenue and over booking of fabrication charges we are of the opinion that if an addition of Rs. 15 lakhs is made that would meet the ends of justice. Accordingly we set aside the order of the Ld. CIT(A) and direct the Assessing officer to make an addition of Rs. 15 lakhs on account of fabrication charges.
9. In the result, appeal of the Revenue is partly allowed.
3.17 Accordingly, in view of detailed facts as discussed above and after going through the submission of appellant and contention of AO, remand report and subsequent report of assessing officer and the rebuttal filed by the appellant, I am inclined to agree with the contention of appellant. In my view, the assessing 21 officer has failed to apply the logic behind the rejection of an entire disallowance of 50% cash paid fabrication charges whereas it has not given any logic as to how the appellant to carry out his regular work without getting the application then to meet out such huge turnover demand. The assessing officer has also not applied any logic before rejecting entire cash paid fabrication charge that too without bringing any other detailed defects in the books of accounts of the appellant and rejecting it in a proper manner. In my considered view the assessing officer before rejection of the entire cash paid fabrication charges should have also given the modalities and logic of meeting out the huge requirement of the fabrication charges as claimed throughout in in the past years by the appellant company to meet out the huge turnover. The assessing officer has not even cared to reject the books of accounts under section 145(3) of the Act before applying his logic of making such huge addition. The fact that of accounts of the appellant has been audited by the chartered accountant and the assessing officer has not pointed out any major defects and rejected the books of accounts in order to arrive the true affairs of the appellant. Apparently, it is observed that the assessing officer has completely ignored the history of the appellant in preceding years and subsequent years. The net profit shown by the appellant shows that the net profit rate reflected by the appellant all these years is ranging between at almost consisting figures. Assessing Officer has concluded on the basis of a lengthy and detailed analysis that the appellant has inflated expenses by way of bogus Fabrication Charges. It is seen that the important fact ^Fabrication Charges being an integral part of the appellant's business has not been disputed in any manner by the assessing officer throughout the assessment proceedings. It is observed that although, there might be certain shortcomings in the record keeping, which have already been explained and justified with reference to the peculiar nature of the Appellant Firm's business, the fact remains that the appellant has also disclosed consistent results over a period of time and its operations have shown tremendous growth for the last several year. No evidence of the relevant assessment year was found during the survey, which, would warrant reaching a conclusion that the fabrication expenses were bogus.
3.18 Similarly, considering the issue pertaining to the documents found at the time of survey is also important. It is seen that in the survey no documents directly related to the assessment year in concern have been found by the Department.
The department has relied upon some of the signed blank bills of the sum of the parties found that the premises in which some amounts were mentioned. The appellant has argued that the appellant is engaged in the manufacturing of garments which business is seasonal in nature with the peak months being April to November/ December. The workers whose bills were found have already left the work as the season has come to an end. They have been paid as per the work done by them recorded in the Production Register which stands duly recorded in the books of accounts. The appellant also stated that bills are generally prepared monthly and that the labourers/workers being illiterate do not maintain any records themselves but invariably depend upon their master/supervisor for maintaining or preparing the necessary records. As such the bill books/vouchers are handed over to the concerned master/supervisor who maintains it on behalf of the workers and prepares the bills periodically, generally at month end. Such a situation, when viewed in the context of the manner in which the unit of the firm operates and the entire manufacturing processes consisting of as it is of a series of process integrated into each other would eminently justify the prevailing situation.
3.19 Further with regard to the personal presence of the workers, the appellant submitted that, due to lean season they had no work and after settling their accounts have already left for their native places to be back at the beginning of the fresh season.
3.20 Going by all the facts in detail in my considered view the analysis of assessing officer wherein the assessing officer has concluded on the basis of filling the edited analysis that the appellant had inflated expenses by way of bogus fabrication charges is based on presumptions and assumptions without any solid base. It is seen that the fabrication charges being paid by the appellant amount consistently since past so many years is being an integral part of the appellant's 22 business and interestingly the same has not been disputed in any manner by the assessing officer.
3.21 While there might be certain shortcomings in the record keeping, the fact remains that the appellant has also disclosed consistent results over a period of time and its operations have consistent since last so many years. Therefore, in totality going through the facts of the case and the past and recent history of the case in my considered view the addition doubt by the assessing officer considering hundred percent of cash paid fabrication charge is not justified......
3.25 Accordingly, in view of the above detailed discussions and the arguments of the appellant and the detailed rationale of the assessing officer behind this addition, the remand report filed by the assessing officer during the course of appellate proceedings, in my considered view the addition on account of disallowance of fabrication charges of Rs. 1,97,32,232/- out of the fabrication charges is not justified. Therefore, the addition on account of fabrication charges needs to be reconsidered. Therefore, after considering all the facts of the case and the decisions relied upon by the appellant in my considered view the addition of Rs. 15,00,000/-would be enough to take care of the deficiencies worked out by the assessing officer. On this account, in my view the assessing officer should have rejected the books of accounts stating the defects in the books of accounts of the appellant. Therefore, subject to the addition of Rs. 15,00,000/-, the disallowance on account of fabrication charges to the extent of Rs. 1,97,32,232/-." is ordered to be deleted. Accordingly, this ground of appeal stands partly allowed.
24. On perusal of the order of the CIT(A) we found that the order has dealt in detail about the reasons for non production of parties before the Assessing Officer owing to migration by taking into the wages paid at different months. The Ld. CIT(A) also dealt in detail about the vouchers taking into consideration the survey findings wherein even the survey findings did not lead to any cogent evidence for inflation of fabrication charges. Similarly the reasons were fall in GP have been examined and found that the fall in GP percentage ranged from 25.56 to 26.07 which is in the average range of fluctuation over the period of seven years period. The GP rate with the addition of the fabrication charges disallowed shoots to 38.3%, 41.75%, 43.35% which is also very high GP even on estimate basis keeping in view the industry averages.
25. The total fabrication charges paid on a turnover of 2279 Lacs for which fabrication charges are to the tune of 799.57 Lacs out of which the TDS was not deducted on Rs. 394.65 Lacs. Out of this 394.65 Lacs the Assessing Officer disallowed Rs. 197.32 Lacs which is 50% of the fabrication charges paid. Based on the above discussions the reasons for such disallowance are found to be not justified. The Ld. CIT(A) considered the disallowance of Rs. 15 Lacs to take care of the deficiencies worked out after taking into consideration the entire facts and circumstances. Hence, we decline to interfere in the order of the Ld. CIT(A) and the grounds of the Revenue and Cross Appeal of the assessee are 23 dismissed. Similarly the rationale of the Ld. CIT(A) is also accepted for the AY 2011-12.
26. Ground No. 2 for the AY 2010-11 of the Revenue in ITA No. 265/CHD/2017 relates to calculation of additional depreciation on the subsidy received under TUFFS scheme.
27. The Assessing Officer has disallowed the depreciation holding that the depreciation claimed was not in accordance with the section 32(1)(iia). The Assessing Officer held that the assessee has reduced the amount of old machinery purchased while calculating additional depreciation. However, the amount of capital subsidy under TUFS has not been reduced from the addition to machinery while calculating the additional depreciation although it has been reduced from the cost of addition to machinery while claiming depreciation. Depreciation or additional depreciation is allowable to the assessee on actual cost to it. As per provisions of section 43(1) of the I.T. Act if the cost of the asset has been met directly or indirectly by any person or authority it has to be reduced from the cost of the asset to arrive at the actual cost. The assessee has not done so. Hence by not reducing the amount of subsidy received under TUFS the assessee has claimed excess additional depreciation which is not allowable to it.
28. Before us, the Ld. DR relied on the assessment order while the Ld. AR relied on the order of the Ld. CIT(A).
29. We have heard Ld. Representatives of both the parties and perused the material placed before us.
30. A careful perusal of scheme in question showed that it was intended to accelerate industrial development of the State and the incentive was given for setting up of industries in the State and for the purpose of determining the amount of subsidy to be given, cost of eligible investment was taken as the basis, though it was not specifically intended to subsidise the cost of the capital. Under the circumstances, the incentive in the form of subsidy could not be considered as a payment directly or indirectly to meet any portion of the actual cost and, thus, it fell outside the ken of the Explanation 10 to Section 43(1). Therefore, for the purpose of computing depreciation allowable to the assessee, the subsidy amount could not be reduced from the cost of the capital asset. Sasisri Extractions Ltd. V. Asstt CIT, Circle 2(1), Guntur [(2010) 122 ITD 428(Visakhapatnam)] 24
31. This issue is covered in favour of the assessee by the Jurisdictional High Court in the case of CIT Vs. Shyam Lal Bansal in ITA No. 472 of 2010 wherein it was held that interest subsidy received under TUFFS scheme is capital in nature. Hon'ble Apex Court in the case of M/s. Ponni Sugars and Chemicals Ltd. 306 ITR 392 held that purpose of incentive decides its nature and in the present case this incentive is given to accelerate industrial development and for setting up of industries. Hence, the assessee is eligible for additional depreciation on the subsidy received which is treated as a capital receipt. The order of the Ld. CIT(A) is hereby upheld.
32. In the result, this ground of appeal of the Revenue is dismissed.
33. The Ground No. 2 for the AY 2011-12 in ITA No. 266/CHD/2017 of the Revenue relates to deletion of the disallowance of Rs. 32,53,156/- paid to M/s M.S. Embroidery Works. This matter has been dealt in the AY 2012-13. This amount was disallowed on the basis of the report of the notice server, according to which no one was available on the address given by the assessee. The assessee has produced the proprietor of M.S. Embroidery Works before the Assessing Officer during the assessment proceeding for the AY 2012-13. And it was also proved that he has been working with the assessee since long. Tax was duly deducted while making the payments to him by duly following the provisions of TDS is only corollary but can be taken to prove genuineness of the transaction . Thus the factum of rendering of the services has been proved. This issue is inclusive of the disallowances made of Rs. 5,18,52,493/-. Hence, no separate addition is required in this case.
34. The grounds of the Revenue is dismissed.
35. Ground No. 3 for the AY 2011-12 in ITA No. 266/CHD/2017 of the Revenue relates to deletion of disallowance of Rs. 17,67,180/- made by the Assessing Officer on account of commission paid for Brand Rate DBK.
36. Brief facts of the case are that the Assessee has paid Rs. 17,67,180/- as commission for Brand Rate DBK to one Shri. Sameer Bhanot and Regular Traders to one Shri. Gaurav. The Assessing Officer has disallowed these amounts paid as commission on the grounds that there was no legal agreement between the parties and the commission was paid @40%. The disallowance was made further on the grounds that there was no documentary evidence of rendering the services and the assessee being the only party for which the above two agents have done their work.
2537. The Ld. DR argued that the genuineness of the payment is even more doubtful as the two individuals' income is not taxable and showing losses in business. The Ld. DR has also relied on the points made by the Assessing Officer while making disallowance viz. High percentage of commission and the absence of written agreement.
38. Ld. AR argued that they have engaged the commission agents for betterment of the business and for avoiding delays to get money which was lawfully due to them at an early date in order to utilize the same in its business. We have gone through the fact on record and perused the material available before us. The persons were produced before the Assessing Officer and wherein they have clearly accepted and in detail explain the nature of the work carried out by them for the assessee. The filing of loss returns by these individuals cannot be attributed to the assessee so as to disallow the commission paid. What is to be seen is whether the services have been rendered or not. And in this case the fact of services being rendered has been proved even before the Assessing Officer and the Assessing Officer could not bring any material on record to prove that services were indeed not rendered hence, no disallowance is called for. We decline to interfere in the order of the Ld. CIT(A) in deleting the disallowance.
39. The ground no. 2 for the AY 2011-12 in ITA No. 137/CHD/2017 of the Assessee relates to disallowance of Rs. 72,52,666/- out of commission to foreign agents.
40. During the assessment proceedings the Assessing Officer has disallowed an amount of Rs. 72,52,666/- under section 40a(ia) of the Act as TDS has not deducted from the payment of the commission paid to foreign agents. The disallowance was confirmed by the Ld. CIT(A)on the grounds that the assessee has failed to prove any nexus between the payments made to the foreign agents and the services rendered by them to the assessee company. It was held by the Ld. CIT(A) that the assessee has failed to file any details of services provided by these agents.
41. During the hearing the Ld. AR argued that the sale commission was paid by the assessee company to non-resident agents for the services rendered by them from outside India in procuring export orders to the assessee company. These non-resident agents have no business connection in India nor they have any permanent establishment in India and therefore the provisions of Section 26 195 have no application for the commission payments. The Ld. AR relied on the judgment of the Hon'ble High Court of Madras in the case of CIT Vs. Fluid Therm Technology Pvt. Ltd. (2015) 57 Taxman 87.
42. The Ld. DR relied on the assessment order and on the order of the Ld. CIT(A).
43. We have perused the details before us and it is observed that the factum of rendering of the service has not been submitted fully by the assessee before the lower authorities and neither the Assessing Officer nor the Ld. CIT(A) had the opportunity to examine the issue of need of invoking the provisions of TDS on the commission payments. Hence the matter is being restored to the file of the Assessing Officer to examine in detail regarding the allowability of the commission per se and also liability of the assessee to deduct tax on the commission payments made to non-resident agents. Following the above discussion this ground is allowed for statistical purposes.
44. Ground No. 3 for the AY 2011-12 in ITA No. 137/CHD/2017 and Ground No. 2 for the AY 2012-13 in ITA No. 138/CHD/2017 of the Assessee relates to disallowance of 4,28,175/- and of Rs. 7,21,104/- respectively out of telephone expenses, car expenses and car depreciation.
45. During the assessment proceedings the Assessing Officer has observed that the expenses of Car, Telephone and Conveyance are of mixed in nature and disallowed 1/5th of these expenses amounting to Rs. 7,54,029/-. It is observed that the assessee has already disallowed Rs. 3,25,854/- by themselves. The Ld. CIT(A) has confirmed the addition on the grounds that the assessee has not maintained log book and call details and personal usage of these items cannot be ruled out.
46. Before us the assessee argued that no further disallowance is called as assessee has already disallowed Rs. 3,25,854/- suo moto. All the vehicles and telephones are mostly used for business purpose only and no further disallowance is warranted. Since the use of the vehicles and telephones for personal and non business purpose cannot be ruled out and in the absence of the data contrary the disallowance made by the Assessing Officer and as 27 upheld by the Ld. CIT(A) is hereby confirmed for the AY 2011-12 and similarly for AY 2012-13. This ground of the assessee is dismissed.
47. The ground no. 2 for the AY 2012-13 in ITA No. 267/CHD/2017 of the Revenue is as under:
Wh et h e r on t h e f ac t s an d ci rcum st an ce s of t h e ca s e an d i n l a w, t h e l ea rn e d C om m i ssi on e r of In c om e Ta x ( Ap p eal s ) wa s j u st i fi ed ( i ) i n del et i n g t h e addi ti on m ade b y t h e As s es si n g Of f i cer of R s. 28, 14, 7 49 /- m ad e un d er se ct i on 14 A of t h e In c om e- t a x Act , 19 61r ea d wi t h R ul e 8D of t h e In c om e f a x R ul e s. 19 62 b y n ot ap p r eci at i n g t h e Ci rc ul a r N o. 5 of 20 1 4 an d ( i i ) i n h ol di n g t h at p ro vi si on s of sect i on 14 A r ea d wi t h R ul e 81 ) a re n ot at t ract ed i n a s se s see " s ca se .
48. Brief facts of the case are that during the year the assessee made investments of Rs. 5,40,00,000/- and has shown interest expenditure of Rs. 1,10,02,497/-. The Assessing Officer has disallowed Rs. 28,14,749/- under section 14A by resorting to the provisions of Rule 8D.
49. The Ld. CIT(A) has deleted the disallowance made under section 14A on the grounds that the assessee did not earn any exempt income during the year under the appeal.
50. We have gone through the facts of the case. The assessee has not earned any income which has been exempt. The Hon'ble Punjab & Haryana High Court in the case of CIT Vs. Lakhani Marketing 111 DTR 149. held that, from the reading of Section 14A of the Act, it is clear that before making any disallowance the following condition are to exist:-
a) That there must be income taxable under the Act, and
b) That this income must not form part of the total income under the Act, and
c) That there must be an expenditure incurred by the assessee, and
d) That the expenditure must have a relation to the income which does not form part of the total income under the Act. Therefore , unless and until, there is receipt of exempted income for the concerned assessment years (dividend from shares), s. 14A of the Act cannot be invoked.
51. Similar view has been taken in the case of Hero Cycles 323 ITR 518 (P&H) and Winsome Textile 319 ITR 204 (P&H). Hence keeping in view the fact that the exempt income has been earned by the assessee and based on the judgments quoted above we hereby delete the disallowance made on account of Section 28 14A as no exempt income is earned by the assessee during the relevant assessment year.
52. This ground of the Revenue is dismissed
53. In the result appeals of the assessee are partly allowed and of the Revenue are dismissed.
Order pronounced in the Open Court on 03/11/2017
Sd/- Sd/-
(SANJAY GARG) (DR. B.R.R. KUMAR)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 03/11/2017
AG
Copy to: The Appellant, The Respondent, The CIT, The CIT(A), The DR