Income Tax Appellate Tribunal - Mumbai
Sheetal Internaiotnal, Mumbai vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH "E", MUMBAI
Before Shri P.M.Jagtap, Accountant Member
& Shri Amit Shukla, Judicial Member.
I.T.A. No. 3920/Mum/2011.
Assessment Year : 2007-08.
Asstt. Commissioner of Income-tax, M/s Sheetal International,
Circle-16(2), Mumbai. Vs. 6-A, Sheetal Estate,
Opp. Novelty Cinema,
M.S. Ali Road, Grant Road,
Mumbai - 400 007.
PAN AAAFS3336F
Appellant. Respondent.
Appellant by : Shri A.K.Nayak.
Respondent by : Shri V.P. Kothari.
Date of hearing : 13-03-12
Date of pronouncement : 16-03-2012.
ORDER
Per P.M. Jagtap, A.M. :
This appeal is preferred by the Revenue against the order of learned CIT(Appeals)-27, Mumbai dated 17th January, 2011.
2. In ground No.1, the Revenue has challenged the action of the learned CIT(Appeals) in deleting the addition of Rs.36 lakhs made by the AO by way of disallowance of salary paid to Ms. Deepika Rao.
3. The assessee in the present case is a partnership firm which is engaged in the business as dealer and exporter of readymade garments and their accessories. The return of income for the year under consideration was filed by it on 31-10-2007 declaring total income of Rs.2,14,17,270/-. As per the trading and profit & loss 2 ITA No.3920/Mum/2011 account filed along with the said return, the gross profit of Rs.6,90,48,908/- was shown by the assessee on the total sale of Rs.24,45,03,468/- giving a gross profit rate of 28.24% as against the gross profit rate of 23.35% declared in the immediately preceding year. In the profit & loss account, a sum of Rs.36 lakhs was debited by the assessee on account of salary paid to one Ms. Deepika Rao. The claim of the assessee for deduction of the salary paid to Ms. Deepika Rao was examined by the AO during the course of assessment proceedings. On such examination, he found that tax at source was deducted by the assessee from the salary of Ms. Deepika Rao for the first time on 11th January, 2007 and the same was followed by another deduction of tax made on 28th January, 2007. According to the AO, salary to Ms. Deepika Rao thus was not regularly paid by the assessee and even the TDS was not made regularly. According to him, even no documentary evidence was filed by the assessee to justify the payment of Rs.36 lakhs made to Ms. Deepika Rao on account of salary. As against the explanation offered by the assessee that the said payment was mainly made to Ms. Deepika Rao for designing, the AO found that dress designing charges of Rs.19,97,600/- were separately paid by the assessee. He, therefore, disallowed the claim of the assessee for deduction on account of salary paid to Ms. Deepika Rao and made an addition of Rs.36 lakhs to the total income of the assessee on this issue.
4. The disallowance of Rs.36 lakhs made by the AO on account of salary paid to Ms. Deepika Rao was disputed by the assessee in an appeal filed before the learned CIT(Appeals) and the following submissions were made on behalf of the assessee during the course of appellate proceedings before the learned CIT(Appeals) to support and substantiate its claim for deduction on account of salary paid to Ms. Deepika Rao :
3 ITA No.3920/Mum/2011"4. During the proceedings before me, the appellant's AR submitted that the appellant is a exporter of ready made garments having export turnover of Rs.24.45 crores and declared net profit of Rs.2,14,00,000/- which is almost 9% of the gross turnover. The appellant's export is mainly based on the latest fashion designing and aggressive marketing and because of the stiff competition in the international global market the appellant has to make investment by way of human resources for growing in the business and therefore the appellant has employed a marketing as well as fashion designer to look after the business of the appellant firm with a higher salary. Ms. Deepika Rao is 27 years old, she is software engineer and fashion designer and done course in merchandise from Parson Institute of Technology a division of New York University. She is educated in New York for about two years and worked with export companies in India. She is well experienced in fashion designing and she has been paid salary for rendering the services for expansion of the business and advices for cost cutting. During the year gross profit has been increased from 23% to 28% i.e. because of her efforts in cost cutting and maximum utilization of material and other services.
4.1 The AR further stated that she has also introduced the system of direct buying goods of specific design to reduce the expenditure of outside labour force. The appellant firm was depending on the labour force who were from unorganized sector which was causing delay in getting the goods manufactured on time resulting to suffer delay in executing the export orders. By introducing this system direct contracting to the manufacturers. The Gross profit has been increased from 23% to 28%. According to the AR, she has also improved the outstanding was mounting up and no payment was coming forward. Presently she has left the company and settled abroad for her better prospects.
4.2 The AR also stated that during the course of assessment proceedings the Assessing Officer has asked all the details of salary, wages and all expenses. Howeve, he did not raise any questions or query regarding the payment of salary to Ms. Deepika Rao and therefore the appellant was not given any opportunity to satisfy the Assessing Officer for the genuinety and reasonability of the payment of the salary. Since last 10 years the international markets have been fully globalized and there is great competition in the market and therefore pay package for highly qualified employees have been substantially increased. Ms. Deepika Rao has been assigned exclusive job of carrying out marketing survey for the latest fashion designer garments and she has also been given charge of training the sales 4 ITA No.3920/Mum/2011 personnel. She has been given full time duty with the appellant and she has not been allowed to join any other business or employment. Thus the remuneration paid to Ms. Deepika Rao is neither excessive nor unreasonable as held by the Assessing Officer. From the Letter of appointment it was clearly understood between the parties that the first 9 months Ms. Deepika Rao was on probation period and salary was required to be accumulated and therefore the TDS was stated to have been made only on 11.1.2007 and 20.1.2007.
4.3 With reference to the observation of the Assessing Officer that the appellant has created new head of expenses under the name Dress Designing charges and claimed additional expenses, the AR stated that in the earlier year the appellant was employing the Dress Designer and Asstt. Dress Designer on monthly salary basis where the appellant found that the productivity of the employees was not upto the mark hence Ms. Deepika Rao has suggested to discontinue the employment of dress designers, she also retrenched some the employees and retained efficient dress designers on professional basis instead of monthly fixed salary. Thus, this exercise made by Ms. Deepika Rao has in fact saved substantial salary expenses with increased productivity."
5. The learned CIT(Appeals) found merit in the above submissions made on behalf of the assessee and deleted the disallowance made by the AO on account of salary paid to Ms. Deepika Rao for the following reasons given in paragraph No. 5 of his impugned order :
" I have carefully considered the submissions made by the appellant's AR and the contents of the assessment order. At the outset, the AO appears o have disallowed the said amount only on the ground that necessary details were not available before him in this regard. Apparently, no specific details were called by the AO during the assessment proceedings and no further enquiry was also conducted in this regard. At present, the appellant has furnished all the required details to establish the genuineness of the payment made to Ms. Deepika Rao and the services rendered by her during the year under consideration. Further, from the audited financial statements it is noted that excluding the salary paid to Ms. Deepika Rao, the overall expenditure under the heads salary & bonus and dress designing charges amount to Rs.28,82,117/- for the year under consideration when compared to the amount of Rs.25,34,851/- claimed in the previous year. Thus, except for 5 ITA No.3920/Mum/2011 the salary paid to Ms. Deepika Rao, there is no considerable increase under these heads. In other words, the increase in dress designing charges is offset by decrease in the salary and bonus paid to other employees. Considering the facts brought on record as to the qualifications of Ms. Deepika Rao, the job profile executed by her and the increase in the gross profit rate compared to the earlier year and also the fact that there is no considerable increase in the overall expenditure towards salary/dress designing charges excluding the salary paid to Ms. Deepika Rao, I am of the considered opinion that the disallowance made by the AO is not warranted. Accordingly, the addition made is hereby deleted."
6. We have heard the arguments of both the sides and also perused the relevant material on record. Although the learned DR has vehemently argued the case of the Revenue on this issue by submitting that the rendering of services by Ms. Deepika Rao for the purpose of assessee's business was not established to justify the substantial expenditure of Rs.36 lakhs incurred on payment of salary made to her, it is observed that the nature of services rendered by the said employee was duly explained by the assessee before the learned CIT(Appeals). The submission of the assessee before the learned CIT(Appeals) was that it was never called upon by the AO to specifically explain the nature of services rendered by Ms. Deepika Rao and the same, therefore, wax explained in greater details by the assessee during the course of appellate proceedings before the learned CIT(Appeals). The job profile given to Ms. Deepika Rao was explained by the assessee in the light of qualification and experience possessed by her and the same was found to be satisfactory by the learned CIT(Appeals) for the reasons given in his impugned order. The objection of the AO regarding irregular deduction of tax at source from the salary payments made to Ms. Deepika Rao was also met by the assessee by offering appropriate explanation. Moreover, the efforts put in by Ms. Deepika Rao had given positive results for the development of assessee's business and the same was reflected not only in the higher turnover but also in increase in gross profit to 28% in the year under consideration as compared to 23% declared in the 6 ITA No.3920/Mum/2011 immediately preceding year. It is also pertinent to note here that Ms. Deepika Rao is not a person related to the assessee as submitted by the learned counsel for the assessee at the time of hearing before us and there was no such case made out even by the AO while making the disallowance of salary paid to her. The said disallowance was made by him mainly on the ground that the assessee could not explain the benefit derived by its business because of the employment of Ms. Deepika Rao to justify a payment of salary of Rs.36 lakhs to her. However, the assessee has satisfactorily explained the services rendered by Ms. Deepika Rao before the learned CIT(Appeals) as well as before us and the benefit which it has derived directly from the said services. There is also no dispute that the salary of Rs.36 lakhs was paid to Ms. Deepika Rao who is not a person related to the assessee and even tax at source was deducted from the said payment and deposited in the account of the Government. Having regard to all these facts of the case, we find ourselves in agreement with the learned CIT(Appeals) that the expenditure of Rs.36 lakhs on payment of salary to Ms. Deepika Rao was incurred by the assessee wholly and exclusively for the purpose of its business and the same was allowable as deduction while computing the business income of the assessee. The impugned order of the learned CIT(Appeals) giving relief to the assessee on this issue is, therefore, upheld dismissing ground No. 1 of the Revenue's appeal.
7. In ground No.2, the Revenue has challenged the action of the learned CIT(Appeals) in deleting the disallowance made by the AO out of interest expenditure to the extent of Rs.2,70,150/-.
8. During the course of assessment proceedings, the AO noticed that the assessee has given advances of Rs.11,05,060/-, Rs.8,90,000/- and Rs.11,83,179/- to M/s Nishi Creations, M/s Asha Exports and M/s Geeta International respectively. Although the assessee submitted before the AO that the said advances given 7 ITA No.3920/Mum/2011 against purchases were for the purpose of its business and that the purchases against the said advances have not been made in the year under consideration due to non receipt of specific order, the AO did not accept the same in the absence of specific details and documents furnished by the assessee in support. According to him, the said advances were given by the assessee without any business expediency and there was thus a diversion of borrowed fund for non business purpose. The interest paid by the assessee on the borrowed funds to the extent attributable to the said advances worked out at Rs.2,70,150/-, therefore, was disallowed by the AO.
9. The disallowance made by the AO out of interest expenditure was disputed by the assessee in an appeal filed before the learned CIT(Appeals) and the following submissions were made on its behalf during the course of appellate proceedings before the learned CIT(Appeals) in support of its case on this issue:
" During the proceedings before me, the AR stated that the appellant is carrying on business of export of readymade garments and has given advance to various suppliers for supplying the goods on time. The appellant is in fashion trade which requires various kinds of embroideries, designs and fashion related art work non the garments. To manufacture these garments takes longer time and therefore the appellant is required to make advances against the supply to various suppliers. Sometimes the order placed for manufacturing have been cancelled and therefore the supplies have not been made to the appellant and the advances remain with the supplies which are to be adjusted against the subsequent order. Sometimes, subsequent orders are repeated after a long time, therefore, the appellant rather than cancelling the order and paying damage to the suppliers and continue their relationship do not call for refund of advances as the suppliers have purchased the goods on account of the order of supply to the appellant and the said goods were lying with them for the long period. In the business of ready made garments the work of embroidery and patch work etc. are done by small illiterate cottage industries people and they do not have liquid funds to repay advances and therefore it is common practice in the trade and they have been given facilities of finance for timely supply. In exports the timely supply is 8 ITA No.3920/Mum/2011 the main condition for maintaining the overseas customers and therefore this kind of small advances always remain in the business.
That apart, the appellant's AR also filed copies of ledger accounts of the said parties and explained that there were regular purchases from the said parties in the earlier years and outstanding balances were on account of advances given to these parties in the normal course of the appellant's business."
10. The learned CIT(Appeals) found merit in the above submissions made by the assessee and deleted the disallowance made by the AO out of interest expenditure for the following reasons given in paragraph 7 of his impugned order :
" I have carefully considered the submissions made by the appellant and the contents of the assessment order. As seen from the details placed on record there is no reason to doubt the genuineness of these advances. Further advances have been made during the normal course of appellant's business and having regard to the turnover of the appellant such advances appear to be reasonable. Moreover, the business expediency has to be decided from the point of view of the appellant and not that of the AO. Time and again it has been held by various courts that the AO cannot step into the shoes of the businessman for deciding as to what is the business expediency. In view of the above, I am of the considered opinion that there is no room for proportionate disallowance of interest expenditure claimed by the appellant ins the given set of facts. Accordingly, the addition made by the AO is hereby deleted."
11. We have heard the arguments of both the sides and also perused the relevant material on record. Although the learned DR has submitted before us that there is no basis for the finding given by the learned CIT(Appeals) in his impugned order that the advances in question were given by the assessee to the concerned three parties during the normal course of its business, it is observed that ledger accounts of the said parties were filed by the assessee before the learned CIT(Appeals) who found from the perusal of the same that purchases were regularly made by the assessee from the said parties in the earlier years and the outstanding balance reflected in their accounts represented advances given to the said parties against 9 ITA No.3920/Mum/2011 purchases. The reason for retaining the said advances with the concerned suppliers was also explained by the assessee which was found to be satisfactory by the learned CIT(Appeals). Moreover, the assessee firm had its own capital of more than Rs.12 crores at the relevant time which in any case, was available to the assessee to pay the impugned advances free of any interest. As such, considering all the facts of the case, we are of the view that the disallowance out of interest made by the AO was not sustainable and the learned CIT(Appeals) was fully justified in deleting the same. In that view of the matter, we uphold the impugned order of the learned CIT(Appeals) giving relief to the assessee on this issue and dismiss ground No. 2 of the Revenue's appeal.
12. In the result, the appeal of the Revenue is dismissed.
Order pronounced on this 16th day of March, 2012.
Sd/- Sd/-
(Amit Shukla) (P.M. Jagtap)
Judicial Member Accountant Member
Mumbai,
Dated: 16th March, 2012.
Wakode
Copy to :
1. Appellant
2. Respondent
3. C.I.T.
4. CIT(A)
5. DR, E-Bench.
(True copy)
By Order
Asstt. Registrar, ITAT, Mumbai.