2024 (4) TMI 644 - AT - Income Tax

Disallowance of total job work charges paid to sister concern - invocation of section 40A(2) - HELD THAT - Lower Authorities failed to make comparative study of the job work charges with any third party, therefore A.O. is not correct in making disallowance u/s. 40A(2)(b) of the Act. Thus the disallowance made by the Lower Authorities are hereby deleted. Thus Ground Nos. 1 to 4 raised by the assessee are hereby allowed. Disallowance on adhoc basis on the job work charges - Addition at Rs. 2 per Kg for 16710 Kgs. on estimated basis on the job work carried out - HELD THAT - CIT(A) confirmed the disallowance only on the ground that the smallness of the disallowance which is not excessive. However the Assessing Officer has not justified the above disallowance with proper evidence, but only on misconception of the correct facts. Therefore the adhoc disallowance made by the Assessing Officer is not sustainable in law. Therefore we direct the A.O. to delete the above disallowance. Addition of duty drawback incentive which is offered for taxation on cash receipt basis in subsequent year - D.R. submitted that the assessee is not aggrieved by this issue and the CIT(A) already given relief to the assessee, hence this ground is liable to be dismissed - HELD THAT - We find that the Ld. D.R. is correct in stating that the assessee is not aggrieved on this issue and there is already a direction given by Ld. CIT(A) to verify this issue and rectify the assessment accordingly. Therefore this ground raised by the assessee is hereby dismissed

Summary

Issues Involved:
1. Disallowance of job work charges paid to Chevron Pharma Pvt. Ltd.
2. Adhoc disallowance on job work charges.
3. Addition of duty drawback incentive.

Summary:

1. Disallowance of Job Work Charges Paid to Chevron Pharma Pvt. Ltd.:
The Assessing Officer (AO) disallowed Rs. 44,89,985/- out of Rs. 92,67,600/- paid to Chevron Pharma Pvt. Ltd., invoking provisions of Section 40A(2)(b) of the Income Tax Act, 1961. The AO noted a 300% increase in job work charges within six months and deemed the transactions collusive to reduce tax liability. The CIT(A) upheld this disallowance. However, the Tribunal found that both lower authorities failed to verify comparable job work rates in the market, thus not proving the unreasonableness of the payments. Citing precedents like CIT Vs. Ashok J. Patel and PCIT Vs. Gujarat Gas Financial Services Ltd., the Tribunal deleted the disallowance, stating the onus was on the AO to establish excessive payments, which was not discharged.

2. Adhoc Disallowance on Job Work Charges:
The AO made an adhoc disallowance of Rs. 33,420/- on job work payments to M/s. Microtech, based on handmade bills without GST, CST, or VAT. The Tribunal noted that the AO misunderstood the nature of job work and the absence of GST, VAT, and CST, which were not applicable at the time. The Tribunal directed the deletion of this disallowance, finding it unjustified and based on incorrect facts.

3. Addition of Duty Drawback Incentive:
The AO added Rs. 98,558/- as duty drawback incentive, which the assessee claimed was offered for taxation on a cash receipt basis in the subsequent year. The CIT(A) directed the AO to verify and rectify this issue. The Tribunal dismissed this ground, noting that the assessee was not aggrieved as the CIT(A) had already provided relief by directing verification and rectification.

Conclusion:
The appeal was partly allowed, with the Tribunal deleting the disallowances related to job work charges and confirming the CIT(A)'s direction regarding the duty drawback incentive. The decision emphasized the necessity of substantiating disallowances with proper evidence and comparable market rates.