Income Tax Appellate Tribunal - Jaipur
Jlc Electromet Pvt. Ltd., Jaipur vs Assessee on 24 February, 2016
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IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR
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BEFORE: SHRI T.R.MEENA, AM & SHRI LALIET KUMAR, JM
vk;dj vihy la-@ITA No. 511/JP/2013
fu/kZkj.k o"kZ@Assessment Year : 2009-10
M/s JLC Electromet Pvt. Ltd., cuke Addl. Commissioner of
E-153-A, Road No. 11-H, VKI Vs. Income Tax,
Area, Jaipur. Range-4, Jaipur.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No. AABCJ 8786 A
vihykFkhZ@Appellant izR;FkhZ@Respondent
fu/kZkfjrh dh vksj ls@ Assessee by : Shri Mahendra Gargieya (Adv)
jktLo dh vksj ls@ Revenue by : Shri O.P. Bhateja (Addl.CIT)
lquokbZ dh rkjh[k@ Date of Hearing : 28/01/2016
mn?kks"k.kk dh rkjh[k@ Date of Pronouncement : 24/02/2016
vkns'k@ ORDER
PER T.R. MEENA, A.M.
This is an appeal filed by the assessee against the order dated 11/03/2013 of the learned CIT(A)-II, Jaipur for A.Y. 2009-10. The effective grounds of appeal are as under:-
"1 The learned CIT-(A) erred in law as well as on the facts of the case in partly confirming the disallowance of Rs. 38,67,600/- out of processing of material and handling charges. The disallowances so made and 2 ITA No. 511/JP/2013 M/s JLC Electromet Pvt. Ltd. Vs Addl.CIT partly confirmed by the CIT(A) being totally contrary to the provisions of law and facts of the case, kindly be deleted in full.
2. The learned CIT(A) erred in law and on facts in upholding the balance addition of Rs. 7,98,808/- from out of Staff Welfare Expenses made by the learned A.O which was duly supported by evidences.
3. The learned CIT(A) erred in law and on facts in upholding the disallowing of Rs. 13,298/- in respect of prior period expenses made by the learned A.O.
4. The learned CIT(A) erred in law and on facts in upholding the addition of Rs. 6,34,187/- made by the learned A.O. as additional Interest Income from Bank on the basis of TDS Certificates."
2. The 1st ground of the assessee's appeal is against ad hoc disallowance of Rs. 38,67,600/- out of processing of material and handling charges. The assessee firm is engaged in the business of manufacturing of wire and other product made of various metals including Nickel, copper, iron, chromium etc. The assessee company filed its return on 24/09/2009 declaring total income of Rs. 11,76,27,560/-. The case was scrutinized U/s 143(3) of the Income Tax Act, 1961 (in short the Act). The ld Assessing Officer observed that the assessee had claimed expenses on account of processing of material and handling charges of Rs. 1,24,87,317/- for the year under consideration as against Rs. 57,46,478/- claimed in the immediately preceding previous year. The 3 ITA No. 511/JP/2013 M/s JLC Electromet Pvt. Ltd. Vs Addl.CIT material handling expenses are directly relatable to the sales made and the processing of material charges are directly relatable to the production. It is further observed by the Assessing Officer that the assessee had claimed more than double the expenses compared to previous year. It is further found that 50% of these expenses were paid to sister concerns namely M/s Gem Electro Mechanical Pvt. Ltd. and M/s New Age Alloys Pvt. Ltd.. The details of payments are reproduced as under:-
Name Current year Previous year
1 Gem Electro Mechanicals Pvt. Ltd. 19,55,892/- Nil
2 Gem Clad Wires Pvt. Ltd. 2,52,641/- 1,00,080/-
3 New Age Alloys Private Limited 33,85,933/- Nil
Total 55,94,466/-
The ld Assessing Officer found that these payments to be excessive for which he gave reasonable opportunity of being heard to the assessee, who also submitted reply. It was submitted before the ld Assessing Officer that the assessee company started manufacturing a new product namely Nickel Plated Dument Wire during the year under consideration, which was sold both in local market and overseas market. From M/s Gem Electro Mechanical Pvt. Ltd. and M/s New Age Alloys Pvt. Ltd., the assessee got the wire drawing processing work done in earlier years. This work was done by the assessee company itself. After considering the assessee's reply, the ld Assessing Officer held that the assessee company has been 4 ITA No. 511/JP/2013 M/s JLC Electromet Pvt. Ltd. Vs Addl.CIT manufacturing wires and other products made of Nickel, copper, iron and other metals including alloy of all metals at VKI Area, Jaipur since last 25 years. Even if it is considered that a new product has come into existence during the year under consideration, then also it is seen that there is only an increase of 24.68% over the last year, in respect of the total production made whereas the material processing and handling charges have been increased by 117%. Since these charges have been mainly paid to the sister concerns, they are treated to be excessive and unreasonable having regard to the fair market value of the services for which the payment has been made and hence she held these expenses disallowable. He calculated the disallowances as under:-
Current year Previous year Increase over the
previous year
Production 12,39,693 Kg. 9,94,237 kg 24.68%
Sales 12,35,108 Kg. 10,04,575 kg 22.95%
Processing & 1,24,87,317/- 57,46,478 kg 117.3%
Handling charges
She further held that these above expenses had been claimed in excessive than the actual increase in the production and sales ratio over the previous year. If the production has increased by 24.68% and the sales have increased by 22.95% over the previous year, then the processing and handling charges should also be in the same ratio. 5 ITA No. 511/JP/2013
M/s JLC Electromet Pvt. Ltd. Vs Addl.CIT However, since the assessee had produced a new item during the year under consideration as claimed by it, it would be reasonable if 50% as against 117.3% increase over the previous year in respect of processing and handling charges is allowed during the year under consideration, moreover because these payments have been made to sister concerns covered U/s 40A(2)(b) and no comparable case has been quoted to justify the payment so made to these concerns. Thus, he disallowed expenses of Rs. 38,67,600/-.
3. Being aggrieved by the order of the ld Assessing Officer, the assessee carried the matter before the ld CIT(A), who had confirmed the addition by observing as under:-
"Written submission of the appellant is placed on record which is repetition of what was stated before the AO. The thrust of the appellant's argument is that the quantity of production sold increased over last year and therefore even if processing of material and handling charges increased in comparison to last year they should be allowed. It was also stated that the AO had wrongly presumed that the appellant paid excessive processing charges to its sister concerns which had not been paid at all last year:6 ITA No. 511/JP/2013
M/s JLC Electromet Pvt. Ltd. Vs Addl.CIT
(i) M/s Gems Electro Mechanicals Pvt. Ltd. Rs 19,55,892.
(ii) M/s New Age Alloys Pvt Ltd. Rs 33,85,933/- The appellant has stated that during this year it started manufacturing a new product namely "Nickel Platted Dumet Wire the platting and oxidizing processing of which was got done from the first sister concern. That to the second sister concern wire drawing charges were paid which in the earlier year was done by the assessee itself.
The argument of the appellant is not acceptable because the objection of the AO that processing of material and handling charges increased by 117.3% in comparison to last year has not been disputed. This year processing of material and handling charges have been claimed of Rs 1,24,87,317 as against of Rs 57,46,478 of last year whereas the Sales including exports and domestic have decreased this year to Rs 139.87 crore as against Rs 140.61 crore of last year. The appellant has not been able to explain why such high wire drawing charges were paid to M/s New Age Alloys Pvt. Ltd. of Rs 33,85,933 its sister concern, when till last year this work was done by the appellant itself. The AO was therefore right in commenting about excessive charges being paid to the sister concerns, but the AO has not made any disallowance out of the 7 ITA No. 511/JP/2013 M/s JLC Electromet Pvt. Ltd. Vs Addl.CIT charges paid to sister concerns, and has only used it as an example to state her point that increase by 117% in processing and handling charges was not justified. The AO has not been unreasonable as she has accepted 50% increase in processing of material and handling charges over last year, treating Rs 86,19,717 (Rs 57,46,478 + 50% of Rs 57,46,478 which is Rs 28,73,239 as increase) Rs 28,73,239) as reasonable processing of material and handling charges, instead of Rs. 1,24,87,317 claimed by the appellant showing 117.3% increase over last year which is certainly too much of increase in expenses not supported by commensurate Sales which declined this year. In view of the above discussion the processing of material and handling charges out of Rs 1,24,87,317 claimed are held reasonable of Rs 86,19,717 and the balance disallowance of Rs 38,67,600 (Rs1,24,87,317 - Rs 86,19,717) is upheld."
4. Now the assessee is in appeal before us. The ld AR of the assessee has submitted that during the year under consideration a new product namely Nickel Plated Dumet Wire was produced and sold in local and overseas market, which was got manufactured through Gem Electro and hence, there was no occasion to make any payment to them in the preceding year. Further the wire drawing processing was being done by 8 ITA No. 511/JP/2013 M/s JLC Electromet Pvt. Ltd. Vs Addl.CIT the assessee itself. However, this year it was outsourced and got done on job basis through New Age. Hence, there was no such payment in the preceding year. He admitted that there is an increase in the expenses during the year under consideration. The export and domestic sale have decreased from Rs. 140.61 crore for preceding year to Rs. 139.87 crore this year. The ld Assessing Officer had not made disallowance out of the payment made to the sister concerns but disallowed due to increase by 117.3% in processing and handling charges. The payments made to the sister concerns had not been challenged by the revenue on the basis of finding given by the ld CIT(A). The only question to answer before the Hon'ble Court that these expenses were incurred wholly and exclusively for the business purposes U/s 37(1) of the Act or not? The ld Assessing Officer as well as the ld CIT(A) partly accepted that these expenses were incurred for the business purposes but whatever disallowance made by the Assessing Officer and confirmed by the ld CIT(A) were made only suspicion, surmises and conjecture. The reasonableness of the expenditure has to be judged from businessman point of view for which he relied on the decision in the case of T.T. Pvt. Ltd. v/s CIT (1980) 121 ITR 551 (Kar.), Udhoji Shrikrishandas (1987) 139 ITR 827 (MP), (1969) JK Woolen Manufacturers 72 ITR 612 (SC). The whole expenditure was 9 ITA No. 511/JP/2013 M/s JLC Electromet Pvt. Ltd. Vs Addl.CIT incurred on processing not on handling as this head of expenditure has been coming since from previous years, therefore, handling charges has been shown wrongly by the assessee. It is undisputed fact that the assessee's sale has slightly gone down but in terms of quantity, there was an increase in the turnover for the reasons that in terms of quantity this year it stood at 12,39,693 Kg as against 10,04,575 Kg in preceding year. There was an increase in quantity production of 23% during the year as the assessee started a new product namely Nickel Plated Dumet Wire the job work of platting and oxidizing process was outsourced to M/s Gem Electro to whom the assessee paid Dumet Plating processing charges @ Rs.80/- per mtr. The appellant was not having the facility of nickel plating and oxidizing process. Earlier this product by imported. No one else in the country is manufacturing the same except M/s Gem Electro. The assessee exported, this year more than Rs. 2.46 crores and had shown better G.P. compared to preceding year.
4.1 Similarly payment made to M/s Gem Clad Wires Pvt. Ltd. of Rs.2,52,641/- for the work done by the company i.e. cut length, platting, spooling, cleaning and cut charges work of steel wire. Payment to New Age of Rs.33,85,933/- the assessee company got the wire drawing, 10 ITA No. 511/JP/2013 M/s JLC Electromet Pvt. Ltd. Vs Addl.CIT annealing and spooling processing work done from the said company to whom wire drawing charges were paid @ Rs.60/- per kg for Nickel Alloy Mix Wire and @ Rs.25/- per Kg for Steel Wire. The assessee company was doing this business in the preceding year, but the capacity available with the assessee was inadequate, therefore, it was outsourced. It is further argued that all the manufacturing activities were carried under the supervision of the Excise Department. The excise record was produced before the Assessing Officer during the assessment proceedings. The ld Assessing Officer had not rejected the books of account U/s 145(3) of the Act. Such disallowance under the law is not permitted for which he relied on the decision in the case of Maharaja Shree Ummaid Mills vs. CIT 192 ITR 565 (Raj.) The overall performances of the company are better compared to preceding year. The GP has gone down for 11.19% in preceding year to 18.47%. Similarly the NP rate from 5.05% to 8.52%. The quantity production has gone up, however, in term of value the ale has slightly declined due to the fall in price per ton. Both the sister concerns also paying maximum marginal rate tax, therefore, there is no revenue loss. It is legitimate business need to outsource this work to these companies. It is further argued that similar payment made in subsequent year had been allowed Assessing Officer himself wherein 11 ITA No. 511/JP/2013 M/s JLC Electromet Pvt. Ltd. Vs Addl.CIT assessment was made U/s 143(3) of the Act. The Assessing Officer had not pointed out any comparable case, which proved fair market value was paid much more than prevailing in the market. The ld AR relied on the decision in the case of Jagdamba Rollers Flour Mill Ltd. v/s CIT (2009) 121 TTJ 761/20 DTR 370/117 ITD 260 (Nag) (TM) wherein it has been held that no enquiry was made by the Assessing Officer to ascertain whether the payment was excessive or unreasonable having regard to the fair market value of the service. Thus, no disallowance U/s 40A((2)(a) can be made. He further relied on the decision in the case of Upper India Publishing House P. Ltd. (1979) 117 ITR 569 (SC) wherein it has been held that expenditure must be proved as excessive U/s 40A(2)(a) of the Act. Therefore, he prayed to delete the addition.
5. At the outset, the ld DR has vehemently supported the order of the lower authorities.
6. We have heard the rival contentions of both the parties and perused the material available on the record. It is undisputed fact that the assessee's expenses under the head processing and handling had gone up twice compared to preceding year but during the year under consideration, a new product namely Nickel Plated Dument Wire had been 12 ITA No. 511/JP/2013 M/s JLC Electromet Pvt. Ltd. Vs Addl.CIT started by the assessee, for which the assessee had taken services from its sister concerns namely M/s Gem Electro Mechanical Pvt. Ltd. and M/s New Age Alloys Pvt. Ltd. The assessee's sale has slightly gone down but in quantity production has gone up. This fact has not disputed by the revenue even GP as well as NP has gone up compared to preceding year. The assessee's new product was got manufactured from M/s Gem Electro Mechanical Pvt. Ltd. who has facility of platting and oxidizing, which was not available with the assessee. It was claimed by the assessee that it is an import substitute item and no one was manufacturing in the India. Therefore, the assessee had to pay these charges to it to get the services done. The remaining payments were made to other sister concern namely M/s New Age Alloys Pvt. Ltd. for wire drawing, annealing and spooling processing work made per kg whereas platting and oxidizing, the payments were made in per meter. The assessee did not have sufficient capacity for drawing, annealing and spooling, therefore, he had outsourced this work to M/s New Age. The assessee's manufacturing activities are under the supervision of the excise department. The ld Assessing Officer had not brought on record any evidence that payments made to the sister concerns were more than fair market value, as such no comparable case has been considered by the Assessing Officer or ld 13 ITA No. 511/JP/2013 M/s JLC Electromet Pvt. Ltd. Vs Addl.CIT CIT(A). The recipient company also paying maximum marginal rate of tax, as such there is no revenue loss. A similar claim was also allowed in subsequent years by the Assessing Officer even in scrutiny assessment. The case laws cited by the assessee are squarely application on the present issue before us. Therefore, we delete the addition confirmed by the ld CIT(A). Accordingly, first ground of the assessee's appeal is allowed.
7. The 2nd ground of the assessee's appeal is against confirming the addition of Rs. 7,98,808/- out of staff welfare expenses. The ld Assessing Officer observed that the assessee had claimed staff welfare expenses at Rs. 16,49,402/- as against Rs. 5,67,063/- paid in the immediate preceding year. The Assessing Officer gave reasonable opportunity of being heard on this issue. The assessee also filed explanation and break up of Staff welfare of the previous year as well as current year. It was submitted by the assessee that during the year under consideration, the main reason for increase in these expenses was due to increase in expenditure incurred on account of uniforms and shoes, which are required to pay as per agreement of the workers as welfare activities. After considering the assessee's reply, the ld Assessing Officer has held that as per agreement, 14 ITA No. 511/JP/2013 M/s JLC Electromet Pvt. Ltd. Vs Addl.CIT this benefits are to be provided every year as the assessee had provided shoes and uniforms once in three years. On verification of staff welfare vouchers, she noticed that some of the vouchers were self made and handmade and without supporting evidence. Some of the vouchers lacked complete narration or complete address of the persons to whom it was paid. Some of the expenses were incurred in cash, therefore, these expenses are not verifiable from the third person. Therefore, she disallowed 50% out of total expenses claimed under this head.
8. Being aggrieved by the order of the Assessing Officer, the assessee carried the matter before the ld CIT(A), who had allowed the appeal partly by observing as under:-
"After going through rival submissions it is seen that the appellant claimed Staff welfare expenses of Rs 5,67,063 last year, but the expenses increased by 3 times this year coming to Rs16,49,402. The argument of the AO that the staff welfare expenses were not totally verifiable and were supported by self made vouchers has not been disputed. Accepting 50% increase in expenses over last year, (Rs 5,67,063 claimed last year plus 50% of Rs 5,67,063 that is Rs 2,83,531 = Rs 8,50,594) . Staff welfare expenses of Rs 8,50,594 are 15 ITA No. 511/JP/2013 M/s JLC Electromet Pvt. Ltd. Vs Addl.CIT accepted and the balance disallowance of Rs 7,98,808 (Rs16,49,402 - Rs 8,50,594 ) is upheld. The appellant gets relief of Rs 25,893 (Rs 8,24,701 - Rs 7,98,808)."
9. Now the assessee is in appeal before us. The ld AR of the assessee has submitted that there was an agreement between the assessee and workers. As per this agreement, there is contractual obligation upon the assessee. The expenditure incurred on shoes and uniform is as per terms and conditions of the agreement and accordingly incurred wholly and exclusively for the business purposes. The ld Assessing Officer had not pointed out any specific defects in the vouchers produced before her. She had made general remark on the vouchers produced before her. In preceding and succeeding year, no such disallowance was made by the Assessing Officer. It is assessee's business to decide in which year it has to incur the expenditure on staff welfare. The Assessing Officer cannot step into shoe of the business man, therefore, it is a decision of a prudent business man to entertain and provide welfare facilities. Therefore, he prayed to delete the addition confirmed by the ld. CIT(A).
10. At the outset, the ld DR has vehemently supported the order of the ld CIT(A).
16ITA No. 511/JP/2013
M/s JLC Electromet Pvt. Ltd. Vs Addl.CIT
11. We have heard the rival contentions of both the parties and perused the material available on the record. There is a substantial increase in the staff welfare expenses during the year under consideration but the assessee has justified the increase under this head. There is an agreement between the assessee and the worker regarding staff welfare is to be incurred on the employee. Accordingly, the assessee had provided uniform and shows during the year under consideration. The assessee has produced all the bill and vouchers but the Assessing Officer made disallowance on surmises and conjecture, which is not justified. Therefore, we delete the addition confirmed by the ld CIT(A).
12. The 3rd ground of the appeal is against confirming the disallowance of Rs. 13,298/- under the head prior period expenses. The Assessing Officer observed that the assessee had claimed prior period expenses at Rs. 13,298/- as tax audit report. The assessee filed relevant detail before the Assessing Officer for claiming expenses and proved the liability, had been crystallized during the year under consideration but the ld Assessing Officer made addition of Rs. 13,298/- being prior period expenses which has been confirmed by the ld CIT(A) by holding that these additions were made by the Assessing Officer on the basis of audit report. The ld AR for 17 ITA No. 511/JP/2013 M/s JLC Electromet Pvt. Ltd. Vs Addl.CIT the assessee has not proved during the appellate proceedings that these expenses crystallized during the year under consideration. The ld AR submitted before us that it is settled legal position that under accrual basis of accounting expenditure may relate to prior period yet the liability thereto accrued only when it is ascertained and quantified. This liability had been utilized during the year under consideration, therefore, same may be deleted. At the outset, the ld AR has vehemently supported the order of the ld CIT(A).
13. We have heard the rival contentions of both the parties and perused the material available on the record as well as observations made by the lower authorities. Even ld AR of the assessee had not been able to prove these expenses were crystallized during the year under consideration. Therefore, order of the ld CIT(A) is upheld. Accordingly, this ground of the assessee's appeal is dismissed.
14. The 4th ground of the assessee's appeal is against confirming the addition of Rs. 6,34,187/- on account of additional interest income from bank on the basis of TDS certificate. The ld Assessing Officer observed that the assessee had declared interest on FDR from banks at Rs. 42,57,512/- in the return of income. However, on perusal of TDS 18 ITA No. 511/JP/2013 M/s JLC Electromet Pvt. Ltd. Vs Addl.CIT certificate furnished during the course of assessment proceedings, the total interest credited in the name of assessee was Rs. 48,51,699/- upon which TDS of Rs. 10,07,691/- had been deducted by the bank. Therefore, he made addition of Rs. 6,34,187/-, which was confirmed by the ld CIT(A) on the basis that the prematuring of the FDRs happened on 11/4/2007 while the appellant is reverting interest on 31/3/2009. The interest reversal is not proved by any bank document. The ld AR of the assessee before us has submitted that the interest on FDR already accounted for which he has drawn our attention on page No. 87-88 of paper book. The assessee had encashed FDRs prematurely, therefore bank had reverted or debited the interest of Rs. 6,08,117/- in the F.Y. 2007-08. The assessee had claimed these expenses during the year under consideration, therefore, it amounts to double taxation. Accordingly, he prayed to delete the addition. At the outset, the ld DR has vehemently supported the order of the ld CIT(A) and argued that the relevant debit entry is not pertained to year under consideration.
15. We have heard the rival contentions of both the parties and perused the material available on the record. It is undisputed fact that the interest has been shown as income by the assessee in earlier year on 19 ITA No. 511/JP/2013 M/s JLC Electromet Pvt. Ltd. Vs Addl.CIT FDRs and these FDRs were encashed by the appellant, therefore bank has charged interest on premature FDRs. The AR tried to explain on the basis of evidence that how the bank had debited the interest expenses on FDRs. Accordingly, this issue is required to verify from the record with reference to disclosure of the interest income of FDRs and claiming interest expenses on premature of the FDRs. It appears that the liability is pertained to F.Y. 2007-08 whereas the assessee has claimed this expenditure in A.Y. 2009-10. Therefore, Assessing Officer is directed to verify the claim of the assessee and decide the issue as per law. Accordingly, this ground of appeal is set aside to the Assessing Officer for denovo.
16. In the result, the assessee's appeal is partly allowed. Order pronounced in the open court on 24/2/2016.
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(Laliet Kumar) (T.R. Meena)
U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member
Tk;iqj@Jaipur
fnukad@Dated:- 24th February, 2016
Ranjan*
vkns'k dh izfrfyfi vxzsf'kr@Copy of the order forwarded to:
1. vihykFkhZ@The Appellant- M/s JLC Electromet Pvt. Ltd., Jaipur.20 ITA No. 511/JP/2013
M/s JLC Electromet Pvt. Ltd. Vs Addl.CIT
2. izR;FkhZ@ The Respondent- The Addl.CIT, Range-4, Jaipur.
3. vk;dj vk;qDr@ CIT
4. vk;dj vk;qDr¼vihy½@The CIT(A)
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur
6. xkMZ QkbZy@ Guard File (ITA No. 511/JP/2013) vkns'kkuqlkj@ By order, lgk;d iathdkj@Asst. Registrar