2010 (2) TMI 940 - AT - Income Tax

Disallowance of labour charges - process carried out by outside manufacturers Held that - average cost per carat of diamonds processed at the premises of the assessee is Rs. 378.71 but if done from outside is only Rs. 351 per carat. considering the labour charges in percentage of turnover, the manufacturing labour charges for the assessment year 2003-04 were 2.22 per cent., whereas in the year under appeal the same is only 1.30 per cent. Thus, the labour charges paid for outside manufacturing are all within limits as compared to the earlier assessment years. Assesse has maintained a complete record for issue of rough diamonds for processing and receipt back of polished diamonds after processing. The fact has not been denied by any of the persons examined by the Assessing Officer. Expenses being within reasonable limits as compared to earlier year and also within the industry norms are allowable as such. Total deletion of the disallowance as made by the Assessing Officer. Deletion of disallowance out of various expenses Held that - Assessing Officer has merely observed that personal use expenses cannot be ruled out and, hence, 10 per cent. of the expenses are disallowable. The assessee has been exporting diamond. In connection with export, foreign travel was undertaken and complete details were filed in this regard. Out of the total expenses incurred on account of saving labour, postage and angadia, factory expenses and foreign travelling expenses, 10 per cent. expenses are disallowed on ad hoc basis. The vouchers in this regard have been produced. When the major expenses is in relation to factory expenses, it cannot be said that they have any personal element. postage and angadia expenses also, there cannot be any personal element. Foreign expenses are exclusively for the purpose of business. Disallowance was rightly deleted by the learned Commissioner of Income-tax (Appeals). appeal of the assessee is allowed and that of the Revenue is dismissed

Issues Involved:

1. Confirmation of addition at 25% of job charges by the Commissioner of Income-tax (Appeals).
2. Deletion of addition on account of saving labour, postage, angadia, and foreign expenses.
3. Restriction of the addition of labour charges at 25% instead of 50% disallowed by the Assessing Officer.
4. Whether the order of the Commissioner of Income-tax (Appeals) should be upheld or the order of the Assessing Officer restored.

Issue-Wise Detailed Analysis:

1. Confirmation of Addition at 25% of Job Charges:

The Assessing Officer observed discrepancies in the labour charges paid to outside parties, issuing notices under section 133(6) of the Income-tax Act, 1961. Statements from eight persons revealed they were name lenders, not actual job workers, and the money withdrawn was returned to the assessee. The assessee countered that the job charges were genuine, supported by vouchers and bills, and payments were made via account payee cheques with tax deducted at source. The Commissioner of Income-tax (Appeals) acknowledged the statements but noted that the actual processing of diamonds was not disputed. Consequently, the Commissioner reduced the disallowance to 25%, reasoning that some amount would have been paid to third parties at a cheaper rate, aligning with the decision in the case of Vijay Proteins.

2. Deletion of Addition on Account of Saving Labour, Postage, Angadia, and Foreign Expenses:

The Assessing Officer disallowed 10% of various expenses, suspecting personal use. The Commissioner of Income-tax (Appeals) found this disallowance to be ad hoc and unsupported by evidence. The assessee provided complete details of foreign travel expenses related to business purposes. The Commissioner upheld the deletion of the disallowance, noting that the majority of expenses were factory-related and had no personal element. The Commissioner also upheld a nominal disallowance of Rs. 1 lakh for possible personal use, which was deemed reasonable.

3. Restriction of the Addition of Labour Charges at 25% Instead of 50% Disallowed by the Assessing Officer:

The Assessing Officer disallowed 50% of the job charges based on the statements of the eight persons, which indicated that the bills were bogus. The Commissioner of Income-tax (Appeals) reduced the disallowance to 25%, considering that the diamonds were indeed processed and some amount would have been paid for the job work. The Commissioner found the affidavits filed by the parties to be an afterthought with no evidentiary value. The Commissioner concluded that a 25% disallowance was fair and reasonable, given the circumstances and the decision in Vijay Proteins.

4. Whether the Order of the Commissioner of Income-tax (Appeals) Should Be Upheld or the Order of the Assessing Officer Restored:

The Revenue argued that the disallowance was justified based on the specific enquiries and statements from the parties involved. The assessee maintained that the job charges were genuine, supported by account payee cheques and complete records of diamond processing. The Tribunal reviewed the comparative data of job charges for the current and previous years, noting that the expenses were within reasonable limits and aligned with industry norms. The Tribunal found that the diamonds were processed by outside parties and the payments were made by account payee cheques. Consequently, the Tribunal deleted the disallowance upheld by the Commissioner of Income-tax (Appeals), resulting in the total deletion of the disallowance made by the Assessing Officer.

Conclusion:

The Tribunal allowed the assessee's appeal, deleting the disallowance of job charges, and dismissed the Revenue's appeal, upholding the deletion of disallowance on various expenses by the Commissioner of Income-tax (Appeals).

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