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2016 (3) TMI 1445 - AT - Income TaxRevision u/s 263 by CIT - Excess manufacturing cost claimed by the assessee - HELD THAT - We find that no adverse inference with regard to melting loss of 72 kgs. can be drawn. Hence, this issue cannot be subject matter of revision proceedings u/s 263 of the Act. We further observed that the manufacturing costs, i.e wages, packing material and testing, refining charges melting loss were genuine and incurred for business purposes. It is not the case of CIT that any of these expenses were found by to be bogus or sham. The only observation in this regard is that the expenses were excessive. In the earlier paragraphs we have already explained that the manufacturing costs were not excessive. Rather the costs incurred compared favourable with the making charges recovered from related party. We have thus fully substantiated the genuineness and reasonableness of manufacturing costs incurred by the assessee. The direct costs and making charges incurred by the assessee were reasonable and even the prices charged from the related party were commensurate with the costs incurred by the assessee. Hence, the direction given by CIT for making addition on account of excess manufacturing cost is therefore vacated. Sales made to related parties at lower prices - Addition u/s 40A(a)(2) - Similar disallowance was deleted by the Gujarat High Court in the case of CIT v. Indu Nissan Oxo Chemical Industries Ltd. 2015 (2) TMI 818 - GUJARAT HIGH COURT .wherein the disallowance made u/s. 40A(2)B) in respect of payments made to the directors were deleted by the High Court, observing that the recipient of payments was taxed at maximum rate and therefore there was no avoidance or evasion of taxes as envisaged u/s 40A(20(b) of the Act. In view of the above, we are of the view that CIT was wrong in invoking provisions of Sec. 40A(a)(2) and doubting the sales made by the assessee to its sister concern, M/s Anjali Jewellers. Hence, on this issue revision cannot be made by CIT u/s 263 of the Act. Loss of gold incurred by the company in the course of manufacture of jewellery - After considering the details documents for AYs 2011-12 2012-13, more specifically the quantitative details of gold and jewellery manufactured, the AO accepted the reasonableness of melting loss of 5.28% and 4.81% in AYs 2011-12 2012-13 and no adverse inference was drawn. Even, the melting loss of 4.81% incurred in AY 2012-13 was not disputed by the Assessing Officer. The above facts show that the Department while framing the assessments u/s. 143(3) of the Act for the immediately preceding AY 2009-10 and subsequent AYs 2011-12 2012-13 accepted the melting loss of 5% in the assessee s line of business. In the circumstances, we are of the view that CIT s observations with regard to the melting loss of gold of 72 kgs. being excessive in AY 2010-11 and the directions given to examine the same is unjustified and contrary to the jurisdictional facts of the case. Hence, the same are quashed. Certain bills held to be bogus - It shall be appreciated that M/s Anjali Estate Developers had credited contractual income and offered profit to tax at normal tax rates. These jurisdictional facts further prove that there was no tax avoidance arrangement or siphoning of profits. Both the assessee and M/s Anjali Estate Developers were taxed at normal tax rates. Moreover, the assessee did not claim deduction of the impugned bill bearing number 006aEd/0-11 in the relevant FY 2009-10 but had deferred it and carried forward to the next year. On the other hand, M/s Anjali Estate 7 Developers had accounted the bill as contractual income of FY 2009-10 and paid tax at normal tax rates on its annual income. It is therefore not a case where the assessee had booked higher repairs maintenance costs to avoid taxes and/or siphoned off profits to sister concern. The revision order of CIT that repairs maintenance charges were being paid in order to avoid tax was factually incorrect, and without any cogent basis or material. Accordingly, we cancel the directions of CIT in this regard. Hence, this issues of assessee is allowed.
Issues Involved:
1. Validity of the revision order under Section 263 of the Income Tax Act, 1961. 2. Justification for setting aside the entire assessment and directing a de novo assessment. 3. Validity of the addition of Rs.11,66,78,994/- for alleged excessive manufacturing loss. 4. Disallowance of depreciation of Rs.4,74,803/-. 5. Examination of reconciliation of AIR information. 6. Application of Section 40A(2) regarding sales to related parties. 7. Examination of melting loss of gold. 8. Examination of karigars and TDS under Section 194C. 9. Disallowance of repairs and maintenance expenses paid to Anjali Estate & Developers Pvt Ltd. 10. Re-examination of rent paid after TDS. 11. Verification of professional fees, conveyance expenses, establishment expenses, investment in building, and administrative & selling expenses. 12. Verification of the allowability of discounts allowed to customers. Detailed Analysis: 1. Validity of the Revision Order under Section 263: The Tribunal found that the CIT's revision order under Section 263 was without basis. The CIT had revised the assessment on various grounds, including excessive manufacturing loss, depreciation allowance, AIR information reconciliation, sales to related parties, melting loss, and several other expenses. However, the Tribunal noted that the CIT's findings were factually incorrect and based on a misunderstanding of the assessee's manufacturing process and accounting practices. The Tribunal emphasized that the CIT's conclusions were reached in breach of principles of natural justice and without issuing a show-cause notice to the assessee. 2. Justification for Setting Aside the Entire Assessment: The Tribunal held that the CIT was unjustified in setting aside the entire assessment and directing a de novo assessment. The CIT's show-cause notice was only for specific grounds, and the entire assessment could not be set aside based on those limited issues. The Tribunal found that the CIT's direction for a de novo assessment was not warranted, as the issues raised were either already examined by the AO or did not have any basis for revision. 3. Validity of the Addition for Excessive Manufacturing Loss: The Tribunal found that the CIT's addition of Rs.11,66,78,994/- for alleged excessive manufacturing loss was unsustainable. The CIT had considered the manufacturing cost to be 7.75% of gross sales, which was factually incorrect. The Tribunal noted that the actual manufacturing cost was only 2.56% of sales, and the CIT had erroneously included melting loss and testing charges as part of manufacturing cost. The Tribunal concluded that the CIT's findings were based on incorrect facts and figures, and the addition was not justified. 4. Disallowance of Depreciation: The Tribunal held that the CIT's direction to disallow depreciation of Rs.4,74,803/- was unsustainable. The depreciation represented alleged excess depreciation allowed in earlier assessments, and the CIT did not provide any specific error in the AO's order in this regard. The Tribunal found that the CIT's direction was without any basis and could not be sustained. 5. Examination of Reconciliation of AIR Information: The Tribunal found that the CIT's direction to examine the reconciliation of AIR information was unsustainable. The AO had already examined the reconciliation during the original assessment, and no infirmity was proved by the CIT. The Tribunal concluded that the CIT's direction was without any basis and could not be sustained. 6. Application of Section 40A(2): The Tribunal held that the CIT's direction to add suppressed profit in respect of sales made to related parties by invoking Section 40A(2) was unsustainable. The Tribunal noted that Section 40A(2) applies only to disallowance of excessive expenditure and not to income received from related parties. The Tribunal found that the CIT's direction was based on a misunderstanding of the law and could not be sustained. 7. Examination of Melting Loss of Gold: The Tribunal found that the CIT's direction to examine the melting loss of gold was unsustainable. The melting loss was already considered by the CIT as part of the alleged excessive manufacturing cost, and further examination was unnecessary. The Tribunal noted that the melting loss of 5.05% was commensurate with standard industry norms and was accepted in earlier and subsequent assessments. The Tribunal concluded that the CIT's direction was without any basis and could not be sustained. 8. Examination of Karigars and TDS: The Tribunal held that the CIT's direction to examine karigars and TDS under Section 194C in the context of alleged melting loss was unsustainable. No show-cause notice was issued in this regard, and the CIT's direction was without any basis. The Tribunal found that the CIT's direction could not be sustained. 9. Disallowance of Repairs and Maintenance Expenses: The Tribunal found that the CIT's direction to disallow part of the repairs and maintenance expenses paid to Anjali Estate & Developers Pvt Ltd was unsustainable. The Tribunal noted that the assessee had not claimed the bill amount of Rs.22,44,870/- as an expense in the relevant year but had deferred it to the next year. The Tribunal concluded that the CIT's direction was factually incorrect and could not be sustained. 10. Re-examination of Rent Paid: The Tribunal held that the CIT's direction to re-examine the allowability of rent paid after TDS was unsustainable. No show-cause notice was issued in this regard, and the CIT did not prove any specific error in the AO's order. The Tribunal found that the CIT's direction could not be sustained. 11. Verification of Various Expenses: The Tribunal found that the CIT's direction to re-examine the details of professional fees, conveyance expenses, establishment expenses, investment in building, and administrative & selling expenses was unsustainable. No show-cause notice was issued in this regard, and the CIT did not prove any specific error in the AO's order. The Tribunal concluded that the CIT's direction was without any basis and could not be sustained. 12. Verification of Discounts Allowed: The Tribunal held that the CIT's direction to verify the allowability of discounts allowed by examining the customers was unsustainable. No show-cause notice was issued in this regard, and the direction was impracticable. The Tribunal found that the CIT's direction could not be sustained. Conclusion: The Tribunal quashed the CIT's revision order under Section 263 and allowed the appeal of the assessee. The Tribunal found that the CIT's directions were without any basis, factually incorrect, and based on a misunderstanding of the law and facts. The Tribunal emphasized that the CIT's conclusions were reached in breach of principles of natural justice and could not be sustained.
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