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2017 (3) TMI 1920 - AT - Income TaxDisallowance made of fabrication charges - Addition made to the income of the assessee holding the fabrication charges to be bogus and in-genuine - onus of proving the necessary facts in order to avail deduction u/s 37(1) - assessee contended that the disallowance on the basis of human probability and preponderance of probability cannot be made without bringing any evidence or material on record to substantiate the findings - CIT (Appeals) also held that the bills of fabrication charges were not signed by the contractors who had also denied receipt of any fabrication charges which clearly established that the fabrication charges were not genuine - HELD THAT - We are in complete agreement with the Ld. CIT (Appeals) that the onus of proving the necessary facts in order to avail deduction u/s 37(1) is on the assessee and if the assessee fails to establish the facts necessary to support his claim, then the said claim for deduction of expenditure is not admissible. As in the case of CIT Vs. Calcutta Agency Ltd. 1950 (12) TMI 4 - SUPREME COURT has settled the aforestated legal proposition. But having said so, we, however, do not agree with the Ld. CIT (Appeals) that the assessee in the present case before us has failed to discharge its onus. Assessee had given detailed explanation of the circumstances which led to the employment of its own workers as contractors. Assessee had explained that it was manufacturing machinery parts and accessories thereof for reputed companies on tailor made basis as per the specifications of the customers. Designs and drawings for the job were supplied by the customers which were covered under the confidentiality clause and to maintain the secrecy of the drawings the assessee had evolved modus operandi of getting fabrication work done at its own premises with its own machinery using his own workers and technical staff who were otherwise technically competent to undertake the work after the regular working hours on contract basis. Assessee had incurred fabrication charges and had duly discharged it onus of proving the same. Further we find that no anomaly in the above evidences and explanations was pointed out by the Revenue. None of the above facts have been controverted by the Revenue except that the bills were not signed. The Revenue has not denied that the assessee had to incur fabrication charges in the course of its manufacturing process. The only anomaly pointed out by the Department is that the bills were unsigned. Considering the voluminous evidences and explanations filed by the assessee, we do not consider the non-signing of the bills to be a factor major enough to displace the other evidences filed by the assessee and proving conclusively that fabrication charges incurred were bogus. Sole basis for holding the impugned expenses as bogus is the statement of two contractors recorded by the Assessing Officer, which as per the Revenue has evidentiary value since it was recorded on oath. On this aspect, we are in agreement with assessee that since no opportunity of cross examination was afforded to the assessee despite specific request made by the assessee in this behalf, the evidentiary value of such statement given at the back of the assessee have no value. Thus we hold that the assessee had discharged its onus of proving that the fabrication charges were incurred by it for the purpose of its business and there was no reason to deny any portion of the expenses to the assessee at all. In view of the above, the entire expenses incurred on fabrication charges are allowed to the assessee. Addition of unaccounted scrap at the rate of 0.5% of the total turnover - CIT-A deleted the addition - HELD THAT - No infirmity in the order of the Ld. CIT (Appeals) deleting the disallowance made on account of unaccounted scrap. It is not denied that in the preceding year scrap generated had been estimated by the AO - AO in the impugned year had adopted the same basis for calculating the scrap generated without taking into consideration the fact that there were differences in the facts of the two years, the turnover in the preceding year being much lower than the turnover in the current year. More importantly the addition is based only on estimates and no other evidence was brought on record by the Revenue to suggest that scrap, more than what was shown by the assessee, was generated during manufacturing process by the assessee in the impugned year. In view of the same, we uphold the order of the CIT (Appeals) on this account deleting the disallowance made on account of unaccounted scrap - Decided against revenue.
Issues Involved:
1. Disallowance of Fabrication Charges 2. Addition on Account of Unaccounted Scrap Detailed Analysis: Disallowance of Fabrication Charges Revenue's Appeal: The Revenue challenged the deletion of disallowance of Rs.36,11,800/- made by the Assessing Officer (AO) on account of fabrication charges. The AO had disallowed these charges based on the statements of two contractors, Shri Mange Ram and Shri Dushyant Kumar, recorded under Section 131 of the Income Tax Act, 1961. These contractors denied having done any contract work for the assessee and claimed to be salaried employees. The AO concluded that the fabrication charges were bogus and added Rs.56,76,791/- to the income of the assessee. Assessee's Cross Objection: The assessee contested the partial disallowance of Rs.20,64,900/- upheld by the Commissioner of Income Tax (Appeals) [CIT(A)]. The CIT(A) had deleted the disallowance for four contractors whose statements were not recorded but upheld it for the two contractors who denied the fabrication work. Tribunal's Findings: - The assessee provided substantial evidence to support the genuineness of the fabrication charges, including bills, payment proofs, income tax returns of contractors, and explanations for using employees as contractors due to confidentiality clauses with customers like BHEL and L&T. - The Tribunal noted that the AO's reliance on the statements of the two contractors was flawed as no opportunity for cross-examination was given to the assessee, which is a violation of natural justice. - The Tribunal referenced several case laws, including Kishan Chand Chella Ram Vs. CIT and M/s Andaman Timber Industries Vs. CIT, emphasizing the necessity of cross-examination. - The Tribunal found that the assessee had successfully discharged its onus of proving the expenses and that the non-signing of bills was not significant enough to deem the expenses bogus. Conclusion: The Tribunal dismissed the Revenue's appeal and allowed the assessee's cross-objection, thereby allowing the entire fabrication charges as genuine business expenses. Addition on Account of Unaccounted Scrap Revenue's Appeal: The Revenue contested the deletion of an addition of Rs.4,79,429/- made by the AO for unaccounted scrap. The AO had estimated the scrap generated at 0.5% of the total turnover based on the previous year's estimation, which was accepted by the assessee. Tribunal's Findings: - The CIT(A) found that the AO's estimation was based on the previous year's figures without considering the current year's facts, such as the substantial increase in turnover. - The CIT(A) noted that the assessee had shown scrap worth Rs.5,41,573/- in its closing stock, which was 0.26% of the total turnover, and provided a reasonable explanation for the lower scrap percentage due to the nature of the manufacturing process. - The Tribunal upheld the CIT(A)'s decision, emphasizing that the addition was based on mere estimation without concrete evidence to suggest that the scrap shown by the assessee was incorrect. Conclusion: The Tribunal dismissed the Revenue's appeal, upholding the deletion of the addition on account of unaccounted scrap. Final Order: The appeal of the Revenue was dismissed, and the Cross Objection of the assessee was allowed. The Tribunal pronounced the order in the open court.
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