Commissioner Of Income Tax v. Superior Crafts

$~16 to 19. *IN THE HIGH COURT OF DELHI AT NEW DELHI + ITA 244/2009, 547/2011, 548/2011 & 615/2011 COMMISSIONER OF INCOME TAX ..... Appellant Through Ms. Suruchi Aggarwal, Sr. Standing Counsel. versus SUPERIOR CRAFTS ..... Respondent Through Mr. Sastish Khosla & Mr. Manu K. Giri, Advocates. CORAM: HON'BLE MR. JUSTICE SANJIV KHANNA HON'BLE MR. JUSTICE R.V.EASWAR O R D E R % 06.03.2012 Revenue has preferred these four appeals under Section 260A of the Income Tax Act, 1961 (Act, for short) in the case of a partnership firm, Superior Crafts. ITA No. 244/2009 pertains to assessment year 2002-03 and is directed against the order dated 28[th] March, 2008 passed by the Income Tax Appellate Tribunal (tribunal, for short). As this appeal was treated as a lead case by the counsel for the parties, we will first refer to and decide this appeal. 2. In the assessment year 2002-03, the Assessing Officer had directed special audit under Section 142(2A) of the Act. After receiving a special audit report, the Assessing Officer ITA Nos. 244/2009, 547/2011, 548/2011 & 615/2011 Page 1 of 44 rejected the closing stock as declared by the respondent assessee and held that there was under-valuation of closing stock to the extent of Rs.1,49,28,900/-. 3. The CIT (Appeals) confirmed the said addition, but by the impugned order the tribunal has deleted the said addition. 4. The contention raised by the appellant Revenue is that the decision of the tribunal is perverse. Learned counsel for the appellant has placed reliance on three facets. Firstly, stock register was not maintained or at least not produced before the Assessing Officer. She submits that the Assessing Officer has recorded that the stock register was possibly maintained by the assessee but deliberately not produced. Secondly, in the special audit report, adverse remarks have been recorded, but not given due credence by the tribunal. Lastly, it is submitted that there was a change in method of valuation of closing stock. In this connection, she has drawn our attention to the table noted by the Assessing Officer, who has held that the closing stock was bifurcated into three categories; finished goods, semi finished goods and goods under process. The Assessing Officer has stated that the opening stock of finished goods was valued @ 90% of the sales recorded/made for first 20 days of the beginning of the year i.e., 1[st] April, 2001 to 20[th] April, 2001 but ITA Nos. 244/2009, 547/2011, 548/2011 & 615/2011 Page 2 of 44 the closing stock was valued @ 90% of the sales made in the period of 15 days after end of the financial year from 1[st] April, 2002 to 15[th] April, 2002. Similarly, „Semi finished Goods‟ and „Goods under Process‟ were valued @ 74% and 64% of the sale value, respectively but the period of days was 20 days and 35 days for the purpose of opening stock but 15 days and 20 days for the purpose of closing stock. She has drawn inspiration from the findings recorded by the CIT (Appeals), who has held that there was change in the method of valuation of closing stock as the assessee had computed the closing stock by applying different periods in which the sales were made viz. the opening stock. Thus, an anomaly has resulted and the consequence was understatement of closing stock. 5. To examine the contention of the learned counsel for the Revenue, we have gone through the papers and material placed before us. The stand of the appellant Revenue that there was a change in the method in the valuation of closing stock is false and wrong. Findings to this effect recorded by the CIT (Appeals) and the Assessing Officer are incorrect. The assessee‟s case, which has been accepted by the tribunal, is that the assessee was not maintaining stock register on a daily basis. This fact is also mentioned in the audit report and stated in the report 5. To examine the contention of the learned counsel for the Revenue, we have gone through the papers and material placed before us. The stand of the appellant Revenue that there was a change in the method in the valuation of closing stock is false and wrong. Findings to this effect recorded by the CIT (Appeals) and the Assessing Officer are incorrect. The assessee‟s case, which has been accepted by the tribunal, is that the assessee was not maintaining stock register on a daily basis. This fact is also mentioned in the audit report and stated in the report ITA Nos. 244/2009, 547/2011, 548/2011 & 615/2011 Page 3 of 44 submitted by the special auditor. The allegation that stock register was maintained but not produced is an assumption or surmise without any foundation. The assessee undertakes physical stock inventory at the end of the financial year. The physical inventory is divided and consists of four categories; finished goods; semi finished goods; work under process; and raw material. The finished goods are valued at 90% of the sale value i.e. the sale price received on sale made in the next year. Semi finished goods and goods under process are valued at 74% and 60% of the sale value. The raw material is valued at costs. The Assessing Officer has not disturbed or disputed the closing stock of raw material. The closing stock of finished, semi finished or work in process, it is not disputed was sold in the next assessment year and sale value was received when the export was made. The contention of the Revenue is that opening stock and closing stock of finished, semi finished or work in process must be sold/exported within the same time period. For example, opening stock of finished goods was sold within 20 days and therefore closing stock of finished goods should have sold/exported within 20 days. Accordingly, entire exports made in 20 days should be treated as closing stock of finished goods. The time period during which the finished goods, ITA Nos. 244/2009, 547/2011, 548/2011 & 615/2011 Page 4 of 44 unfinished goods and goods under process etc. were sold and exported depends upon various factors, like, availability of container, inspection by the importer‟s agent, need and requirement of the importer, time of shipment etc. The closing stock, whether finished, semi finished etc. need not be sold/exported within a fixed/specified period each year. There cannot be any such assumption and it is not logical to accept this proposition. The contention of the Revenue is that opening stock and closing stock must be sold/exported within the same period cannot be accepted. The respondent assessee has, before us, filed a chart giving year-wise details of the closing stock from the assessment year 1997-98 to 2005-06 in respect of finished goods, semi finished goods, goods under process and raw material. The said chart indicates that the closing stock was exported or was sold in different time spans in each year. This chart was filed before the tribunal. There is no consistency or certainty in this regard and indeed there cannot be any consistency and certainty as to the period when the finished, semi finished or goods under process would be sold by way of export. The charge/allegation of change of method of valuation of closing stock is baseless, factually incorrect and has to be rejected. 6. The Special Auditor in his report in respect of the stock in trade had observed as under:- “ 6. The Special Auditor in his report in respect of the stock in trade had observed as under:- “ 7. As noticed above, the tribunal has clearly and rightly held that there was no change in method of accounting for closing stock in the earlier years. The tribunal has further held that the special auditor had rightly held that the stock in the earlier year and the subsequent year was valued at a particular percentage of sale price. With regard to the elements and cost element included while valuing the stock, it will be appropriate to note that in spite of the observations of the special auditor, the Assessing Officer did not interfere/reject the valuation of the closing stock made by the assessee @ 90%, 74% and 60% of the sale value for finished, semi finished and goods under process. There is a good reason why the Assessing Officer did not disturb the said valuation. The gross profit rate, as declared by the assessee, was 28.92% and after the additions made by the Assessing Officer, it had gone up/increased substantially. In case, the closing stock is calculated by excluding the gross profit rate, the value of the closing stock would have come down substantially. The observation of the special auditor that expenses/costs have been left out while computing closing stock is factual incorrect and has no basis. No document/material has been filed by the Revenue before us to justify their contention. 8. We may reproduce the findings recorded by the tribunal on the question of closing stock in the impugned order:- “4.8 We have perused the records and considered the rival contentions carefully. The dispute raised in this ground is regarding method of valuation of semi finished, finished and goods in progress appearing in the closing stock. The assessee admittedly is not maintaining day-to-day account of the stock due to practical difficulties because of nature of business. The assessee had been taking periodical inventory of stock. The items of finished goods, semi finished goods and goods in process appearing in the closing stock at the tiend of the eyar have been valued on the basis of sales made of finished goods relating to the items appering in the closing stock in the immediate following accounting year. From the sales made in the next year, the first sales made up-to the quantity of finished stock were being allocated towards finished stock; the second sales up to the quantity of semi finished stock were appropriated towards the semi finished stock and the rest towards the goods under process. The assessee was adopting a particular percentage of these sales as per details given in para 4 of this order earlier for determining the value of closing stock. The A.O. did not accept the plea of the assessee that it was not possible to maintain proper accounts of stock records. He also noted that the assessee had taken a shipping loan against the stock at the margin of 25%, which meant that stock at the end of the year should be 125% of shipping loan but actually it was only 80%. He, therefore, rejected the method of valuation adopted by the assessee. He adopted the period of sales for the purpose of stock valuation same as in the case of opening stock but accepted the percentage of sales adopted by the assessee in respect of different categories. This resulted into addition of Rs.14928900/- on account of under valuation of closing stock. In appeal, CIT(A) also noted that the assessee had not produced the stock inspection report of the bank in connection with the shipping loan and also did not give any reason for ensuring the premises at D-13, Mundappa, although no stock was stated to be maintained there. Ensured value of stock was also pointed out to be higher. He, therefore, agreed with the decision of the A.O. and confirmed the addition. 4.9 On careful consideration of all the aspects of the matter, we find that the approach adopted and the finding given by the lower authorities in relation to closing stock valuation is not correct. It is an admitted fact that the assessee had not been maintaining day-to-day account of the stock. The assessee has been determining the closing stock items on physical verification at the end of the year. For valuing the inventory appearing in the closing stock, the assessee has to follow a particular method. The assessee has either to compute the cost of each item separately or he can derive the cost after deducting certain margin from the sale price. Considering the volume of business and numerous items involved, the assessee has been valuing the finished goods, semi finished goods and goods in progress on the basis of sale price of these items sold in the subsequent year after deducing a particular margin, which has been uniformly followed by the assessee in the earlier and the subsequent years. For computing the sale values of items of closing stock in different categories, the assessee has been appropriating the first sales towards the finished goods, the next sales towards the semi finished goods and the balance against the goods under progress. This is a systematic and reasonable basis adopted by the assessee, which has been uniformly followed. As the quantity of items appearing in closing stock will vary from year to year, the period of sales adopted for valuation of closing stock in different year will also differ. This has been demonstrated by the assessee by producing a chart regarding the valuation for different years which show that period of sales adopted for different years is different. 4.10 We find that the A.O. has accepted the basis of valuation of closing stock items adopted by the assessee i.e. as a specified percentage of sales of the closing stock items. He has rejected the inventory of closing stock and has taken the period of sales of the closing stock items as the same period as taken for the sale of closing stock of last year in order to determine the closing stock inventory and its value. One of the reasons given for rejecting the closing stock is that the value of closing stock shown was only 80% of shipping loan whereas as per terms and conditions of loan it should have been 125%. But there is no material 4.10 We find that the A.O. has accepted the basis of valuation of closing stock items adopted by the assessee i.e. as a specified percentage of sales of the closing stock items. He has rejected the inventory of closing stock and has taken the period of sales of the closing stock items as the same period as taken for the sale of closing stock of last year in order to determine the closing stock inventory and its value. One of the reasons given for rejecting the closing stock is that the value of closing stock shown was only 80% of shipping loan whereas as per terms and conditions of loan it should have been 125%. But there is no material collected by the A.O. to show that the closing stock was actually more than the one declared by the assessee. Violation of terms and conditions of loan or the fact that the assessee did not produce the stock inspection report of the bank, cannot be the ground for rejecting the closing stock declared by the assessee. Similarly, the ensured value of stock being higher or insuring of some premises other than the factory premises for the purpose of stock are also not conclusive factors in determining the stock on the last day of the year. It is an undisputed fact that there was no stock found at the insured premises. Further, the insured value i.e. the sum insured is the maximum value the assessee can get as per insurance rules and it has no relevance to availability of stock on a particular day which may vary from time to time. No efforts have been made to obtain the stock inspection report from the bank or to gather any other material to establish that the closing stock on the last day of the accounting period was higher than the declared value. Even if the A.O. rejects the closing inventory on the ground that no day to day stock register is maintained, he had to determine the gross profit only on estimate either on the basis of assessee‟s own past record or on the basis of a comparable case. No comparable case has been brought on record and the GP rate declared by the assessee this year at 28.93% is substantially higher than the GP rate 19.16% accepted in the assessee‟s own case in the immediate preceding year. In view of better results, no addition is possible on account of trading account of which closing stock value is an integral part. The assessee has followed a reasonable basis of valuation of closing stock, which has been regularly followed and accepted by the department in the earlier years and in the subsequent year. In view of this position and the GP rate declared being higher this year compared to accepted GP rate in the immediate preceding year, any addition on account of closing stock valuation is not justified. We, therefore, set aside the order of CIT(A) and delete the addition made by the A.O.” 9. The aforesaid findings recorded by the tribunal cannot be categorized and regarded as perverse. These are factual findings based on reasoning and referring to the contentions. We may note here that the assessee had total exports turnover of 25.77 crores and the closing stock declared by them was Rs.8.63 crores, which is equal to about three months of the turnover. The Assessing Officer did not go into the question of lead time, i.e., the time for preparation of the finished product from the date of purchase of the raw material. It is interesting to note that for assessment year 2003-04, an assessment order was passed on 31[st] March, 2006 and in the said assessment order no addition whatsoever was made to the closing stock but the method adopted by the assessee for the said assessment year was same. In these circumstances, no substantial question of law arises out of the finding recorded by the tribunal on the question of valuation of closing stock. 10. The next question relates to disallowance/addition of 10. The next question relates to disallowance/addition of Rs.25,80,879/- made by the Assessing Officer on account of travelling expenses incurred by Deven Chachra, who is related to the partners of the firm. Learned counsel for the Revenue has submitted that the order of the tribunal is perverse and merits interference in view of the findings recorded by the Assessing Officer, which were confirmed by the CIT(Appeals). The Assessing Officer while making the said addition has observed that Deven Chachra was paid salary of Rs.1,14,000/- per annum but this was not paid pursuant to specific employer-employee relationship. The exact findings recorded by the Assessing Officer read:- “…Upon the comments as made in other para‟s and findings given by the special auditor that the salary to Mr. Deven Chachra was only an entry and not paid in pursuance to the specific employer-employee relationship. At this stage it will not be out of place to reliance on sub-para k below, his salary is only Rs.1,14,000/- per annum and his expenditure on the mobile phone has been considered above of Rs.2,19,430/- and the same has been disallowed. Again no evidence has been placed on record to substantiate the visits of Deven for the purposes of business of the firm. The assessee is only attempting to cover up the personal expenditure as business without substantiation. In view of any evidence the entire expenditure of Tour & Travelling of Deven of Rs.25,80,879/- is disallowed.” 11. The tribunal by the impugned order has held that Deven Chachra was an employee. He is having degree of Bachelor of Science and Economics, with specialization in marketing from Pennsylvania University, Wharton School of Business. He was CEO of the firm since 1994. We may note that statement of Deven Chachra was recorded in the assessment year 2003-04 but an ad hoc amount of Rs.5 lacs was disallowed from the overseas travel expenses on his travel, on ground of personal expenses. The Revenue has not challenged and has accepted the finding of the tribunal that Deven Chachra was an employee of the respondent assessee and on the salary paid to him. But, the challenge is to the foreign travel expenses of Rs.25,80,879/-, on the ground that these were not incurred for the purpose of business. The Assessing Officer had disallowed the entire expenditure of Rs. 25,80,879/- The tribunal while partly deleting the disallowance held that the expenses were incurred for purpose of business under Section 37 and observed as under:- “8.4 We have perused the records and carefully gone through the submissions made by both the parties. The dispute raised in this ground is regarding disallowance of travelling expenses of Shri Deven Chachra in India and abroad amounting to Rs.2580579/-. The case of the assessee is that Shri Deven Chachra was an employee who had undertaken the travels for negotiation with foreign buyers, negotiation of disputed issues and settlement of rates and approval of samples etc. The assessee had filed copies of e-mails to substantiate the claim that the expenditure had been incurred for the purpose of business. It has also been submitted that the expenditure under this head had been allowed in the earlier year and in the succeeding year in scrutiny assessments, as was clear from the chart placed at page 1265 of Paper Book-IX. The case of the revenue is that, it was not established that Shri Deven Chachra was an employee and the expenditure had been incurred for the purpose of business. The e-mails produced by the assessee had originated from India, which can be sent from sitting in a room in India and these did not contain details of business activities. settlement of rates and approval of samples etc. The assessee had filed copies of e-mails to substantiate the claim that the expenditure had been incurred for the purpose of business. It has also been submitted that the expenditure under this head had been allowed in the earlier year and in the succeeding year in scrutiny assessments, as was clear from the chart placed at page 1265 of Paper Book-IX. The case of the revenue is that, it was not established that Shri Deven Chachra was an employee and the expenditure had been incurred for the purpose of business. The e-mails produced by the assessee had originated from India, which can be sent from sitting in a room in India and these did not contain details of business activities. We have considered the matter carefully. Out of total tour and travel expenses on account of Mr. Deven Chachra amounting to Rs.2580879/-, a sum of Rs.2493842/- is on foreign travelling. For claiming any expenditure as deduction, burden is on the assessee to prove that the expenditure has been incurred wholly and exclusively for the purpose of business. From e-mails, it cannot be established that the entire expenditure had been incurred for the purpose of business. The only details given by the assessee at page 43 of paper book-V were the place of visit, purchases of foreign exchange and the money spent. Merely because the person had travelled abroad and the money on foreign travel had been actually spent, cannot establish that the expenditure was incurred wholly and exclusively for the purpose of business. Even if the foreign travel had been made for the purpose of business, the personal expenses or expenses unrelated to the business trip cannot be allowed. No details were given as to how the money was spent or whether there was any invitation from the buyers for discussing any business matter. However, we can also not overlook the fact that substantial expenditure on tour and travel of Shri Deven Chachra have been incurred and allowed by the revenue in the earlier years as well as in the subsequent year. In the immediate preceding year, expenditure on this account claimed at Rs.2201052/- was allowed in assessment. In the immediate succeeding year, the assessment for which had been completed after the impugned assessment, expenditure on account of tour and travel of Shri Chachra had been claimed at Rs.2615341/- and a sum of Rs.5 lacs on estimate has been disallowed under the head „tour and travel‟. The business requirement of the substantial tour and travel by Shri Chachra has therefore, been accepted by the revenue authorities in the earlier years as well as in the subsequent year. The disallowance of entire expenditure is therefore, not justified. One of the reasons given by the authorities below for making the disallowance of entire expenditure was that he was not an employee. But this aspect, we have already dealt with while dealing with another ground relating to disallowance of salary in the later part of this order and have held in para 12.5 that salary has to be allowed as deduction. However, the full details and evidence are not available to quantify as to how much expenditure had been incurred wholly and exclusively for the purpose of business. Expenditure on travelling may vary substantially from year to year as the business requirement may not be the same. In our view, considering the entirety of facts and circumstances including the past record, it will be appropriate to disallow on estimate 20% of the expenditure claimed as not incurred wholly and exclusively for the purpose of business. We order accordingly. The order of CIT(A) will be modified to that extent.” 12. Thus, the tribunal has estimated and disallowed 20% of purpose of business. We order accordingly. The order of CIT(A) will be modified to that extent.” 12. Thus, the tribunal has estimated and disallowed 20% of the foreign travel expenditure on the ground that it may not have been incurred wholly and exclusively for the purpose of business. The said amount will be slightly more than Rs.6 lacs. We fail to understand why and on what ground the Revenue can claim and submit that the findings recorded by the tribunal are perverse. No substantial question of law, therefore, arises on the said aspect. 13. The third issue raised in the present appeal relates to deletion of addition of Rs.1,14,60,996/- made by the Assessing Officer under the heading “margin of profit on sale of raw material on cost price to sister concerns.” 14. Learned counsel for the Revenue again submits that the findings recorded by the tribunal are perverse and factually incorrect. 15. In the assessment order the Assessing Officer noticed that raw material purchased by the assessee was transferred to two sister concerns, namely, Superior Crafts India and Supreme Exports India. The raw material was transferred on cost basis. The Assessing Officer held that the respondent assessee had shown gross profit rate of 28.92% and, therefore, an addition of Rs.1,14,60,996/- should be made on the ground that the assessee should have earned profit and charged cost price plus profit margin of 28.92% from the sister concerns when they transferred/sold the raw material. The Assessing Officer rejected the contention of the respondent assessee that to secure competitive and lower rates, they had purchased raw material in bulk and sometimes the said raw material was sold to the sister concerns on cost price. It was further submitted by the assessee that quota allocation and export orders, sometimes necessitated and required transfer of raw material to sister concerns. Sale made was viable, reasonable and did not violate law of the land. The aforesaid contentions were rejected on the ground that these averments were general in nature without documentary evidence. The CIT (Appeals) had affirmed this addition. 16. The tribunal has, however, deleted the addition, inter alia, recording as under: “14.6 On careful consideration of all the aspects of the issue, we find the stand of the assessee and the arguments advanced by the ld counsel quite convincing. The raw material/semi processed goods had been 16. The tribunal has, however, deleted the addition, inter alia, recording as under: “14.6 On careful consideration of all the aspects of the issue, we find the stand of the assessee and the arguments advanced by the ld counsel quite convincing. The raw material/semi processed goods had been transferred to the sister concerns on commercial expediency as quota had been received in their names. Had the assessee not transferred the goods to sister concerns, the goods could not be exported for want of quota and the assessee would have incurred loss and therefore, commercial expediency is involved in the transfer at lower price. As all the concerns belonged to the same group, which are fun by a family, it is quite prudent to make common purchases in bulk to save cost and later transfer the goods. The ld DR has pointed out that the assessee had its own quota which was sold during the year. But the assessee has explained that quota related to some other category of goods and there is nothing to controvert this claim. The only issue is that goods have been transferred at cost price or at a price much below the market price but there is no provision in the Act as rightly pointed out by the ld counsel to make any addition on this ground. There are provisions in Section 40A(2) as per which in case the expenditure incurred on account of connected person is excessive compared to the market value, the A.O. can make disallowance but there is no such provision for making any addition on account of lower sale consideration shown compared to the market value. The only ground for making addition could be tax evasion device but for this burden lies on the revenue to establish that the transfer had been made with a view to evade tax. The ld counsel has pointed out that both the concerns are in the same tax bracket and therefore there is no tax evasion on account of any transfer at lower price. These claims have not been controverted before us. Therefore, we do not see any tax evasion device involved in the transfer. Further the corresponding value of purchase in the case of sister concerns have been accepted by the revenue. There is also no material to show that the assessee had received any money over and above the consideration stated in the books. Under the circumstances, any addition on account of lower sale value declared by the assessee is not justified in our opinion. The order of CIT(A) is accordingly set aside and the addition is deleted.” 17. On the basis of material on record, the tribunal has accepted the stand of the respondent assessee. The aforesaid findings are findings of fact and these cannot be regarded as perverse. 18. At this juncture, we may now deal with the objection of the special auditor that certain elements on costs were ignored while calculating the cost price paid b y the sister concers. It is alleged that the assessee after purchasing stock had transported the raw material. Some other expenses were also incurred. However, while charging the cost price from the sister concerns, no element of charges/expenses on account of transportation etc. were charged. The tribunal examined the said aspect and has held as under:- “14.5 …..The assessee has challenged the decision of CIT(A) and it has been argued by the ld counsel that whatever expenses had been incurred in connection with the goods transferred had been duly recovered from the sister concerns, which was clear from --the pages 904907 on the paper bookIV. It has been pointed out that the transfer was for commercial expediency as had the goods not been transferred, these were of no value to the assessee in the absence of quota. It was also argued that there was no provision for taxing notional profit and therefore, even if the goods were transferred at cost or lesser value, no addition could be made.” (emphasis supplied) 19. Revenue is not able to controvert and contest the said contention. “14.5 …..The assessee has challenged the decision of CIT(A) and it has been argued by the ld counsel that whatever expenses had been incurred in connection with the goods transferred had been duly recovered from the sister concerns, which was clear from --the pages 904907 on the paper bookIV. It has been pointed out that the transfer was for commercial expediency as had the goods not been transferred, these were of no value to the assessee in the absence of quota. It was also argued that there was no provision for taxing notional profit and therefore, even if the goods were transferred at cost or lesser value, no addition could be made.” (emphasis supplied) 19. Revenue is not able to controvert and contest the said contention. 20. The last addition subject matter of the present appeal was under Section 40A(2)(b) of the Act on the ground that excessive/unreasonable expenditure was incurred on getting garments fabricated from associate concerns, namely, R.A. Exports and Sensational Exports. It is accepted and admitted by the respondent assessee that both of them were associate concerns. The Assessing Officer also made addition in respect of payments made to Prakash Fabrication, which is not an associate concern. The entire payment of Rs.83,48,292 made to R.A. Exports, Sensational Exports and Prakash Fabrication was disallowed as if the assessee had not incurred any expenditure at all on fabrication of garments from the said concerns. The findings recorded by the Assessing Officer for the sake of convenience are reproduced below:- “Besides above payments a sum of Rs.32,27,883/- as contract payment have also been paid to M/s Prakash Fabrication unit in which transactions of similar nature to related firms have been entered. The above three firms have been shown as contractors of the assessee. The assessee was asked to prove the genuineness of transactions. Payment to the three firms aggregating to Rs.83,48,292/- should be treated as Bogus in view of the fact that above listed two firms being firms in which partners are substantially interested and M/s Prakash Fabrication since all the bills issued by Prakash Fabrication were as cash memos. Moreover at any point either during the course of audit or during the course of assessment proceedings the assessee could not substantiate its claim that the work was actually executed at its business premises or it has actually incurred such expenditure. The assesse did not produce any evidence regarding attendance record of such employees, PF/ESI records of such employees, regular entries in the books of accounts etc. with the help of which we could have relied upon the contention of the assessee. Moreover it was noticed from perusal of page 109 of Part I of Special Auditor‟s report that ESI & PF contribution of both employer and employee in respect of other similar contractor namely Ram Pravesh Contractor (Babu Finishing) has been borne by the assessee. It is thus not in doubt that assessee is bearing such contributions when the similar contract was bonafide. Also, as per Page 199-204 of Part-II of the Audit Report, the auditors has mentioned various points which were duly supported with the documentary evidence, which proves that no records were placed on record by the assessee for claiming the genuineness of such expenditure. In view of this, the entire amount of Rs.83,48,292/-, being bogus in nature, is added back to the income of the assessee u/s 37(1) of the IT Act. ADDITION OF Rs.83,48,292/-” 21. The said disallowance, it is apparent, is not under Section 40A(2)(b) as stated in the grounds of appeal by the Revenue but the Assessing Officer had treated the said expenses as non genuine or as bogus expenditure. The aforesaid addition was affirmed by CIT (Appeals). 22. The addition has been deleted by the tribunal, inter alia, observing as under:- genuineness of such expenditure. In view of this, the entire amount of Rs.83,48,292/-, being bogus in nature, is added back to the income of the assessee u/s 37(1) of the IT Act. ADDITION OF Rs.83,48,292/-” 21. The said disallowance, it is apparent, is not under Section 40A(2)(b) as stated in the grounds of appeal by the Revenue but the Assessing Officer had treated the said expenses as non genuine or as bogus expenditure. The aforesaid addition was affirmed by CIT (Appeals). 22. The addition has been deleted by the tribunal, inter alia, observing as under:- “24.7 We have perused the records and considered the rival contentions raised by both the parties. Dispute is regarding disallowance of fabrication charges paid to M/s.R.A. Exports and M/s. Sensational Exports, which are related to the assessee and to M/s. Prakash Industries, totaling Rs.8348292/-. The special auditor had reported that there were no goods receipt note (GRN) or challans made regarding receipt and dispatch of these goods. The bills in respect of these payments had been issued serially and entered on computer separately. There were also several cases of cash payment. The assessee has explained that payments were for supplying labour to the assessee for doing the stitching job at factory premises as per the conditions imposed by the foreign buyer. The A.O. however, disallowed the entire claim treating the same as bogus on the ground that there was no evidence produced that the job had actually been done at factory premises as there was neither attendance record nor there was any record for deduction of PF and ESI in respect of employees. The assessee has explained to CIT(A) that there was no record of dispatch of goods as the job had been done at the factory premises. CIT(A) however noted that the payment was not supported by any bills and vouchers and there was no record of labour maintained. There was also no agreement regarding supply of labour. He further observed that the payments had been made for engaging labour but the expenditure was declared under the head „processing charges‟. No evidence had been produced either before the A.O. or at the appellate stage to show that evidence regarding processing charges had been produced before the special auditor. CIT(A) therefore concluded that the assessee did not discharge onus that the payment had been made wholly and exclusively for the purpose of business and accordingly confirmed the disallowance. 24.8 The ld counsel has reiterated the earlier stand before us that no GRN or challans was required as the goods were fabricated at the factory premises. The attendance of labourers was required to be made by the contractor and not the assessee. It was also pointed out that violation of the provisions of PF and ESI Act, could not be made the basis for disallowance. The ld counsel also submitted that both the special auditor as well as the A.O. had raised query only in relation to section 40A(2)(b) and 40A(3). The assessee had never been asked to prove the genuineness of transaction. No disallowance under the provisions of section 40A(2)(b) could be made as there was no material before the A.O. to show that payments were excessive compared to the market value. As for the cash transactions, the auditors had not reported the same tin the audit report as the individual payments did not exceed Rs.20,000/-. As the payment for labour had been made in connection with fabrication, the expenditure had been booked under the head „purchase fabrication account‟. The assessee had filed copy of account of the parties as well as confirmation and the parties were assessed to tax separately and the payments had been made by cheques. He also referred to comparative chart placed at page 1290 of paper book-IX to show that no disallowance on this account had been made in the preceding or in the succeeding year. payments were excessive compared to the market value. As for the cash transactions, the auditors had not reported the same tin the audit report as the individual payments did not exceed Rs.20,000/-. As the payment for labour had been made in connection with fabrication, the expenditure had been booked under the head „purchase fabrication account‟. The assessee had filed copy of account of the parties as well as confirmation and the parties were assessed to tax separately and the payments had been made by cheques. He also referred to comparative chart placed at page 1290 of paper book-IX to show that no disallowance on this account had been made in the preceding or in the succeeding year. 24.9 We have carefully considered the matter. We find that the disallowance had been made mainly on the basis of some technical defaults noted by the A.O. The assessee has satisfactorily explained the absence of GRN or challans, which were not required as the work was being done at the factory premises of the assessee. Similarly, there was no requirement of any attendance record or deduction of PF & ESI as the work was being on contract and the workers were not employees of the assessee. We find sufficient force in the plea taken by the ld counsel that the A.O. had not doubted the genuineness of expenditure as query letter issued by the A.O. a copy of which is available at page 279-280 of paper book-I, makes it clear that the A.O. had asked the assessee to give justification with respect to section 40A(2) and 40A(3) only. Section 40A(2) relates to reasonableness of payments in case the expenditure had been incurred in relation to connected persona and Section 40A(3) is regarding cash payments. The assessee therefore explained the matter only with respect to these provisions vide letter dated 2.11.2005 a copy of which has been placed at page 434 of paper book –II. It has also been claimed that there was no cash payment exceeding Rs.20,000/- and the ld DR has produced no material to controvert this claim. Nor there is any material to show that the payments made to the associate concerns were excessive compared to market value. All these concerns are assessed to tax and the payments had been made by cheques. Similar payments for job work had been made in the earlier years also as well as in the succeeding year when no disallowance had been made. Under these circumstances, any disallowance this year is not justified. We, therefore, set aside the order of CIT(A) on this point and delete the additions made.” 23. We fail to understand on what ground and on what basis the Revenue contends and submits the contention that the aforesaid findings are perverse. In fact, it is difficult to appreciate the finding of the Assessing Officer that the entire expense was bogus or should be disallowed by invoking Section 48A(2)(b). The Assessing Officer did not conduct any investigation or verification into the reasonableness of the said expense with reference to payment made to third parties or fair market charges payable for similar nature of work. The Assessing Officer also included the payment made to unrelated concern, namely, Prakash Fabrication while making the said addition. It is not the case of the Assessing Officer that the garments were not fabricated or manufactured. Exports of garments have been made. Revenue is unable to show that the findings recorded by the tribunal are not supported by material or evidence. The conclusion reached is after examing a number of facts. It cannot be said that the factual finding are such that “no person acting judicially and properly instructed as to the relevant law” would have reached the same conclusion. Tribunal has not ignored or excluded relevant evidence or taken into consideration inadmissible evidence. 24. In view of the aforesaid discussion, we do not think any substantial question of law arises in the appeal No. 244/2009. ITA No. 548/2011 addition. It is not the case of the Assessing Officer that the garments were not fabricated or manufactured. Exports of garments have been made. Revenue is unable to show that the findings recorded by the tribunal are not supported by material or evidence. The conclusion reached is after examing a number of facts. It cannot be said that the factual finding are such that “no person acting judicially and properly instructed as to the relevant law” would have reached the same conclusion. Tribunal has not ignored or excluded relevant evidence or taken into consideration inadmissible evidence. 24. In view of the aforesaid discussion, we do not think any substantial question of law arises in the appeal No. 244/2009. ITA No. 548/2011 25. This appeal by the Revenue pertains to assessment year 2000-01. However, we may notice that the assessment order in this case was passed on 28[th] December, 2007, whereas the assessment order for the assessment year 2002-03 was passed on 10[th] November, 2005. The Assessing Officer in this case had rejected the books of accounts. The reasons/findings for rejecting the books of accounts as discernible from the assessment order are:- (1) Stock register was not produced and, therefore, stock ITA Nos. 244/2009, 547/2011, 548/2011 & 615/2011 Page 27 of 44 details could not be verified. (2) The audit report in form of No. 3CB and 3CD column 28(b) was left blank with the remarks “in view of the large number of items it is not possible to give such details”. The said column pertains to information in respect of qualitative details of raw material, semi finished products etc. (3) The assessee had not submitted working notes for preparation of inventory of stock and in the absence of the same, comparative qualitative details cannot be verified. (4) The assessee had insured the stock at a higher value than the figures of the closing stock quoted by the assessee. The assessee was not able to satisfactorily explain the reason for insurance at a higher value. (5) The assessee had entered into transactions of Rs.1.56 crores (approximately) with its sister concern, namely, Superior Crafts (India). [In this year, no material was transferred/sold to the sister company, namely, Supreme Exports (India)]. As per the Assessing Officer, there is no reason why the transfer was on cost basis only and not for earning profit. No direct or indirect expenses incurred by the assessee were taken into consideration while computing the cost. No evidence was brought on record to demonstrate that only raw ma