Income Tax Appellate Tribunal - Ahmedabad
Prakashbhai Prahladbhai Gami, vs Assessee on 16 July, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL AT
AHMEDABAD
AHMEDABAD "B"BENCH
Before Shri Mukul Kumar Shrawat, Judicial Member and
Shri B.P. Jain, Accountant Member
ITA No.3305/ Ahd/2008
Assessment Year:2005-06
Shri Prakashbhai बनाम Asst. Commissioner
Prahladbhai Gami, /V/s. of Income-tax,
Gangakrupa Building, Circle-6, Surat
Puna Village, Dist.
Surat
PAN No. ADSPP6520F
अपीलाथȸ/ Appellant .. ू×यथȸ/ Respondent
अपीलाथȸ कȧ ओर से / By Appellant Shri Munish J Shah, AR
ू×यथȸ कȧ ओर से / By Respondent Shri Samir Tekriwal, SR-DR
सुनवाई कȧ तारȣख / Date of Hearing 25-01-2012
घोषणा कȧ तारȣख / Date of Pronouncement 31-01-2012
आदे श/ORDER
PER B.P. Jain, Accountant Member:-
This appeal of the assessee arises from the order of Ld. Commissioner of Inc-tax (Appeals)-IV, Surat dated 16-07-2008 for the assessment year 2005-06. The assessee has raised the following ground of appeal:-
"1. The C.I.T.(Appeals) erred in upholding the addition of Rs.27,60,383/- under Sec.40A(2)(b) being the so-called excess payment to the sister concerns.
2. The C.I.T.(Appeals) failed to take into consideration the overall facts and evidences before confirming the above mentioned addition."
2. The brief facts are that assessee had shown gross profit @ 2% compared 2.53% last year whereas the other parties engaged in the similar ITA No.3305/Ahd/2008 A.Y. 2005-06 Sh. Prakashbhai P Gami v. ACIT Cir-6,. SRT Page 2 line of business were showing gross profit ranging from 5.51% to 12.5% as per chart reproduced from page-3 and 4 of the assessment order. When required to justify the lower GP, the assessee sated that it was a small scale industry and nature of income was diamond job-work commission where rough diamonds received from the supplier were given to sub-contractors from manufacturing and the assessee would pay labour charges to them. It was stated that increase of 2.40% in labour cost was just marginal and was the result of market conditions and quality of diamonds. The Assessing Officer did not accept the explanation holding that the same was not based on any business pattern. The AO further held that one of the major factors for decrease in the GP was labour expenses most of which were paid to the parties covered u/s.40A(2)(b) of the Income-tax Act. The AO analyzed the payments made to the sister concerns on page-10 of her assessment order and concluded that per piece cost for sister concern worked out to Rs.40 whereas the same was at Rs.21.50 per piece in respect of outside parties and therefore the payment made to the sister concern was not at the market rate. The AO therefore held that reasonableness of labour payment to sister concerns was unverifiable and therefore called for rejection of book results. After invoking the provisions of Section 145(3) of the Act the AO estimated GP at 6% and made a addition of Rs.30,89,816/-.
3. The Ld. CIT(A) for the reasons mentioned in his order held that the job charges have been paid at a lower rate to the outside parties and it would be fair and reasonable if 10% of the excess payments made to the sister concern is disallowed u/s.40A(2)(b) of the Act. Therefore, the Ld. CIT(A) restricted addition at Rs.27,60,383/-.
4. Learned Counsel for the assessee, Mr. Manish J Shah, advocate invited our attention at page-9 para-8.3 of Assessing Officer's order which specific ITA No.3305/Ahd/2008 A.Y. 2005-06 Sh. Prakashbhai P Gami v. ACIT Cir-6,. SRT Page 3 reference at pag-10 and 11 of the AO"s order, where the AO had committed glaring mistake in noting down the figures for payment etc. At page-10 of AO's order, the payment to the persons u/s.40A(2)(b) of the Act has been shown by the AO at Rs.5,96,30,298/-, whereas the same should have been at Rs.4,49,53,842/-. Similarly, at page-11, the figure has been shown by the AO at Rs.5,96,30,298/-, whereas it should have been Rs.6,62,27,891/-. The figure shown by the AO at Rs.1,14,92,099/- should have been Rs.17,92,821/-. The figure shown at Rs.14,92,099/- should have been Rs.12,53,440/- and finally the figure at Rs.5,96,30,298/- should have been at Rs.4,49,53,842/-. All the accurate figures were available before the Assessing Officer. Our attention was invited at pages-7, 18 & 19 of the paper book of the assessee. At the said pages, the assessee had submitted that payments made to sister concern per piece is Rs.35.86 on the average which is less than payment made to outsiders at Rs.39.23 per piece. Therefore, the complete theory of excess payments to sister concern fails on merit and the order of the AO is liable to be quashed.
5. On the other hand, Ld. SR-DR Shri Samir Tekriwal argued and pointed out that individually in few cases, the assessee has paid excess rate per piece to sister concern as compared to the outside parties. Therefore, he supported the orders of both the authorities below.
6. We have heard the rival contentions and perused the facts of the case. In the present case, the issue before us is rejection of books of account u/s.145(3) of the Act, which as a matter of fact, the Assessing Officer applied because she was of the view that there was excess payments to the sister concern u/s.40A(2)(b) of the Act amounting to Rs.2,76,03,831/-. Since the said disallowance could have led to enhancement of profit at 37.73%, therefore, the AO by applying provisions of Section 145(3) of the Act restricted ITA No.3305/Ahd/2008 A.Y. 2005-06 Sh. Prakashbhai P Gami v. ACIT Cir-6,. SRT Page 4 the addition by applying a GP rate of 6% on the turnover declared by the assessee instead of 2% GP declared on the declared turnover by the assessee and made an addition of Rs.30,89,816/-. The Ld. CIT(A) on the other hand restricted the addition on a different premise by disallowing the payment at 10% of excess payments made to sister concern which was worked out at Rs.27,60,383/-.
7. There is no dispute to the fact that as pointed out by Mr. Tikriwal appearing for the Revenue that individually in a few cases, the assessee had made excess payments per piece to the sister concern as compared to the outsider. At the same time, the Assessing Officer has not taken into consideration the reply of the assessee at page-10 of assessment order, which was given is in response to show-cause given by the AO. In the said reply to the show-cause of the AO, the assessee had submitted as under:-
"Assessee is an ISO 9001 : 2000 certified concern. Assessee manages a small scale industry and his nature of income is Diamond job work commission. In this business assessee receives rough diamonds from the supplier. After assorting the rough diamonds according to different size, shape and shed it gives it to subcontractor according to their manufacturing capacity and quality consciousness.
As per details on your records it appears that per piece labaour payment to sister concerns is more than labour payment to outsiders but we would like to draw your kind attention to the fact that on receipt of rough diamonds we undertake assortment work and our assortment department assorts the diamonds according to different size, shape, purity, shade and charni and allots them different assort number (As per Ananexdure-1).
Assort number SFD, OPC, J01, N01 are much clear and precious than others. Assessee has to take special care and use specialized skill on these diamonds to maintain their market value. Assessee's such care and its outcome in the shape of final product helps them to maintain their customers, reputation and continuous flow of rough diamonds for manufacture. Therefore assessee have to arrange the processing to ITA No.3305/Ahd/2008 A.Y. 2005-06 Sh. Prakashbhai P Gami v. ACIT Cir-6,. SRT Page 5 such high quality diamonds under supervision of trusted and reputed concerns and assessee has such sister concerns on whom they can rely for performance of special skills, quality assurance and completion of work within given time as per instructions of the customers. It is obvious that for special care to the product and application of high skilled labour assessee have to pay higher labour charges to them for this type of diamonds (As per Annexure -2).
Other type of assortment numbers requires lower grade of labour and skill than earlier and hence they receives lower rate of labour charges. You may appreciate that as per common practice in diamond industries you will find differential rate of labour every where. The labour charges are actually paid by the assessee and recipients have shown the same in their financial statements as income. Both the concern parties have confirmed the figures and labour charges are as per prevailing practice in the industry and certainty not excessive, the labour cost may be fully allowed. I trust the same to meet your valued satisfaction. Before we conclude, we remain with a request that be there any material which, in your opinion, requires any explanation from our side, kindly point out and confront us precisely with the same for our rebuttal to serve the ends of natural justice."
8. From the said reply it is evident that the assessee had assorted the rough diamond and according to the specialized skill, which was available only with the sister concern, the assessee had given such diamond to the sister concerns. Other type of assorted rough which required lower grade of labour and skill were given to the outsiders. This explanation of the assessee was not taken into consideration by the Assessing Officer or the Ld. CIT(A). It is also not a disputed fact which was available before the Ld. CIT(A) that sister concerns have been paid Rs.35.86 per piece on the average as compared to Rs.39.27 to the outsiders. Therefore in the circumstances and facts of the case, the excess payments to the sister concern is without any evidence and has not been proved by any of the authorities below. Since the AO has invoked application of Section 145(3) of the Act because of the application of u/s.40A(2)(b) of the Act and the excess payments remaining to be proved in the absence of any evidence against the assessee, the AO is not justified in ITA No.3305/Ahd/2008 A.Y. 2005-06 Sh. Prakashbhai P Gami v. ACIT Cir-6,. SRT Page 6 applying the provisions of Section 145(3) of the Act. Therefore, in the circumstances and facts of the case the order of the Ld. CIT(A) is reversed. Thus the ground of the assessee is allowed.
9. In the result, assessee's appeal is allowed.
इस आदे श कȧ घोषणा Ǒदनांकः 31/01/2012 को खुले Ûयायालय मɅ कȧ गई । This Order pronounced in Open Court on 31/01/2012.
Sd/- Sd/- (Mukul Kumar Shrawat) (B.P. Jain) (Judicial Member) (Accountant Member) Ǒदनांकः- 31/01/2012 अहमदाबाद । Dkp*
आदे श कȧ ूितिलǒप अमेǒषत / Copy of Order Forwarded to:-
1. अपीलाथȸ / Appellant
2. ू×यथȸ / Respondent
3. संबंिधत आयकर आयुƠ / Concerned CIT
4. आयकर आयुƠ- अपील / CIT (A)
5. ǒवभागीय ूितिनिध, आयकर अपीलीय अिधकरण, अहमदाबाद / DR, ITAT, Ahmedabad
6. गाड[ फाइल / Guard file.
By order/आदे श से, /True Copy/ उप/सहायक पंजीकार आयकर अपीलीय अिधकरण, अहमदाबाद ।