Income Tax Appellate Tribunal - Mumbai
Bhansali & Co., Mumbai vs Assessee on 11 December, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "G", MUMBAI
BEFORE SHRI RAJENDRA SINGH, ACCOUNTANT MEMBER
AND SHRI VIVEK VARMA, JUDICIAL MEMBER
ITA No. 2282/Mum/2010
(Assessment year: 2005-06)
M/s. Bhansali & Co., Vs Addl. Commissioner of
640/646 Panchratna, Income-tax Range-16(3),
Mama Parmanand Marg, Matru Mandir,
Mumbai-400 004 Tardeo Road,
PAN: AACFB 8643 C Mumbai -400 034
(Appellant) (Respondent)
Appellant by : Shri Apurva Shah
Respondent by : Shri Mohit Jain
Date of Hearing :11-12-2012
Date of Pronouncement :19-12-2012
ORDER
PER VIVEK VARMA, JM:
The appeal is filed by the assessee arises from the order of CIT(A) 27, Mumbai, dated 27.01.2010, wherein, the assessee has raised the following grounds:
"The Commissioner of Income-tax (Appeals) 27, Mumbai, has erred-
1. in confirming the disallowance under section 40A(2)(b) in respect of labour charges paid to Akash Diamonds without appreciating the relevant facts of the case and on the basis of various presumptions and surmises
2. in not appreciating that the said disallowance was made without any adequate basis and without any external comparables.
3. in holding that the appellant had admitted to a portion of the evidence.
4. in not appreciating the appellant's submissions that reasonableness or otherwise had to be viewed by considering the expenses actually incurred by Akash Diamonds and that hence the comparison of rates in Surat and Deesa and other such queries were actually irrelevant in the matter.
5. Without prejudice, the said disallowance is excessive and needs to be substantially reduced."
2. The solitary issue involved is with regard to the disallowance under section 40A(2)(b) in respect to labour charges paid by the assessee to its vendor at Deesa.
2 M/s. Bhansali & Co.
ITA No. 2282/Mum/20103. The facts are that the assessee is in the business of manufacturing and treading of cut and polished diamonds. The assessee has engaged Aakash Diamonds, the only vendor for doing its cutting and polishing of diamonds.
4. Aakash Diamonds operates its facilities at Surat and Deesa. In the year under consideration, the assessee paid job charges to Aakash which amounted to Rs. 9,14,75,525/-, who was doing the job work only for the assessee.
5. In the assessment proceedings, the AO noticed that the assessee and Aakash were related parties and thus the provisions of section 40A(2)(b) would get attracted and the other thing he noticed was that the average labour charges of Rs. 523/- per carat in the last year had increased to Rs. 636/- per carat in the current year. Even in the interse comparison, there was a huge fluctuation of labour charges paid, i.e. from Rs. 525/- per carat to Rs. 800/- per carat. This fluctuation, according to the AO, had not be substantiated by the assessee, as no distinction has been drawn with regard to cut, colour, size and clarity of diamonds. The AO also noted that the labour charges paid at Surat and at Deesa were also at variance. According to the observations of the AO, the average rate paid for job work at Surat was coming at Rs. 588.21, whereas at Deesa, it was coming at Rs. 666.38. The AO, therefore, accepted the labour charges paid by the assessee at Surat, but, estimated the labour charges at Deesa at Rs. 600/- per carat and added the balance of Rs. 66.38 per carat, which came at Rs. 43,97,624 to the income of the assessee.
6. The assessee approached the CIT(A), who after considering the detailed submissions made before him and the AO, rejected the appeal of the assessee on this issue. The CIT(A) pointed out that, 3 M/s. Bhansali & Co.
ITA No. 2282/Mum/2010"This is just an arrangement made between the 2 firms to decrease the liability of taxation of the 2 firms and inflate the expenses. No explanation has been given as to why the labour cost was much more at Dessa than at Surat and subsequently an explanation was offered which was contradictory in nature that the labour cost at Surat was higher than that at Dessa. They have given no analysis of labour, wages, etc. paid and cost of cutting and polishing of diamonds. If the labour charges at Surat were much higher then why was the work not done at Dessa. Why did the appellant give higher charges at the Dessa Branch when the same could have got is done at a lower cost at Surat Branch? They have not given any details of labour charges paid to outside parties and what is the cost of labour from the last to this year. This agreement between the 2 parties as stated earlier was just to benefit each other as it belonged to the same people and the 2 firms had been created so that labour charges could be inflated in the other firm and as admitted by the appellant himself, the labour expenses were excessive, I find that the AO has made a very reasonable disallowance of Rs. 43,97,624/- considering the turnover of Rs. 189,85,83,474/- of the appellant and Rs. 9,14,75,525/- paid to M/s Akash Diamonds, the addition is totally justified and in absence of any proper reply and justification of the appellant, the same is confirmed".
7. The CIT(A), therefore, confirmed the addition.
8. Aggrieved, the assessee is now before the ITAT.
9. Before us, the AR submitted that the assessee had engaged Aakash Diamonds as its only source for cutting and polishing of diamonds and which had its facilities at two places, i.e. at Surat & Deesa and the AR further states/reiterates the assessee was fully justified to have paid the regular labour charges to Aakash, which were prevailing at those places. He further submitted that had the assessee not appointed Aakash as its manufacturing vendor, the assessee would have had to set up its own facility(s), which it had outsourced completely. The AR submitted that whatever expenses had been incurred by Aakash would have had to be borne by the assessee, had the manufacturing were not outsourced. He further submitted that in any case, the job work charges paid to Aakash was fully justified.
10. The DR on the other hand supported the action of the revenue authorities.
4 M/s. Bhansali & Co.
ITA No. 2282/Mum/201011. We have heard the arguments in detail and we find that Mr. Mahesh Bhasali, partner of the assessee firm is also a partner in 75% ratio in Aakash, hence, the assessee and the vendor, i.e. Aakash are associates and provisions of section 40A(2)(b) are attracted. On the issue of justification of addition made by the AO and sustained by the CIT(A), we find from the impugned order that the assessee had, in fact, accepted that some addition could be justified, the question is how much, i.e. Rs 5,64,000 as admitted by the assessee or Rs. 43,97,629/- as computed by the AO. Since the assessee has accepted to some addition, in the submissions made before the CIT(A), we cannot now, accept that there cannot be any addition. This observation gathers strength from the order of the CIT(A), wherein he observes, "they have given no analysis of labour, wages, etc. paid and cost of cutting and polishing of diamonds.....".
12. In our opinion, neither the assessee has provided any comparable rates to the revenue authorities nor the revenue authorities have made any attempt either by asking the assessee to provide for the comparable nor they suo moto collected any data from the market. What the revenue authorities have done is that they have relied on the internal comparable only to arrive at a figure of estimated charges per carat. In fact, the AO should have collected independent data or have asked the assessee to provide comparable periodic rates prevailing in the market at Deesa to set the bench mark. This exercise has not been done by the AO or by the CIT(A), which according to us, the revenue authorities should have done to arrive at some definite estimate.
13. In these circumstances, we are of the opinion that in the interest of justice to both the sides, the AO must make enquiries and examine the comparable rates from the third parties at Deesa and then 5 M/s. Bhansali & Co.
ITA No. 2282/Mum/2010benchmark the average job work rate for the financial year in question and compute the job work charges.
14. We, therefore, set aside the order of the CIT(A) on the issue of addition of Rs. 43,97,624/- with the above direction to the AO, who shall afford adequate and reasonable opportunity to the assessee to present its case.
15. In the result, the appeal is treated as allowed for statistical purposes.
Order pronounced in the open Court on 19th December, 2012.
Sd/- Sd/-
(RAJENDRA SINGH) (VIVEK VARMA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai: 19th December, 2012
Copy to:
1) The Appellant
2) The Respondent
3) The CIT (A)-13, Mumbai.
4) The CIT -7, Mumbai
5) The DR, "G" Bench Mumbai
By Order
/ / True Copy / /
Asst. Registrar,
ITAT, Mumbai
*Chavan