Southern Sizing Mills v. The Deputy Commissioner Of Income Tax Cirlce I, Erode

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 18.3.2015 THE HON'BLE MR.JUSTICE R.SUDHAKARANDTHE HON'BLE MR.JUSTICE R.KARUPPIAH Southern Sizing Mills285, Eswaran Koil StreetErode – 638 001... Appellant/AppellantVs. The Deputy Commissioner of Income TaxCirlce I, Erode... Respondent/Respondent PRAYER: Appeal under Section 260A of the Income Tax Act, 1961 againstthe order of the Income Tax Appellate Tribunal, “D' Bench, Chennai,dated 30.11.2007 made in I.T.A.No.736/Mds/2006 for the assessmentyear 2002-2003. against the Orders of the Commissioner of Income Tax Appeals-1Coimbatore, Camp Office - Erode dated 16.1.2006 made in AppealNo.183/05-06 which was preferred against the assessment Order of theDeputy Commissioner of Income Tax, Circle -I, Erode in PAN/GIRNo.AAFFS84972/ICF S0007 for the assessment year 2002-03. This appeal is filed by the assessee under Section 260A of theIncome Tax Act, 1961 against the order of the Income Tax AppellateTribunal, “D' Bench, Chennai, dated 30.11.2007 made inI.T.A.No.736/Mds/2006 for the assessment year 2002-2003 and the samewas admitted on the following question of law: “Whether on the facts and in the circumstances of thecase, the Tribunal is right in law in confirming the https://hcservices.ecourts.gov.in/hcservices/ disallowance of a portion of the weaving charges paidand whether the Tribunal ought not to have held that inthe facts and circumstances of the case, no portion ofthe expenditure can be disallowed?” 2.1. The facts in a nutshell are as under: Theappellant/assessee is a firm engaged in the manufacture and sale ofcloth. The assessee filed its return of income admitting total incomeof Rs.9,30,130/- on 1.10.2002. The return was processed underSection 143(1) of the Income Tax Act on 15.10.2002. 2.2. The case was taken for scrutiny and notice under Section143(2) of the Act was issued. The authorized representative of theassessee appeared before the Assessing Officer and produced the booksof account, which showed that the assessee is purchasing yarn andgiving it to weavers for manufacture of cloth, and according to thelearned counsel for the assessee, it is the consistent practice ofthe trade that weaving charges are paid to one person, who representsall the weavers, and payments are made through the Master Weaver. Itwas also submitted that the purchase and sales are supported byinvoice/bills. 2.3. The Assessing Officer sought details of month-wise purchaseand sales; manufacture and sales; break up details for closing andopening stock; vouchers for expenses claimed, etc. from the assesseeand the assessee filed details on the subsequent hearing date. Inthe present case, we are concerned only with expenses paid towardsweaving charges. 2.4. In the assessment order, it is observed that the assesseeis purchasing yarn and pavoo and giving the same for weaving to theweavers. On verification of the vouchers produced for weavingcharges paid, it was observed that one person has signed in thevouchers prepared in the names of various weavers. When a specificquestion was posed in this regard, the partner of the assessee firmstated that weavers are not coming to the business premises and,therefore, he obtained signature of the weavers through the singlepoint contact person, namely, the Master Weaver. That explanation ofthe assessee was not accepted. According to the Assessing Officer,the vouchers are self-serving documents and the signature of oneperson on the vouchers leads to suspicion that the expenses under thehead of weaving charges are inflated. The Assessing Officer heldthat the claim of weaving charges appears to be on higher side and,therefore, a sum of Rs.7,50,000/- was disallowed on weaving charges. 2.5. Assailing the said order, the assessee appealed to theCommissioner of Income Tax (Appeals), raising a specific plea asunder: https://hcservices.ecourts.gov.in/hcservices/ 2.5. Assailing the said order, the assessee appealed to theCommissioner of Income Tax (Appeals), raising a specific plea asunder: https://hcservices.ecourts.gov.in/hcservices/ “The Learned Assessing Officer ought to have appreciatedthe fact that the payment of Weaving Charges is underthe wage settlement made between the Weavers Associationand the Sizing Mills Owners' Association. Hence theWeaving Charges have been paid based on these and thereis no necessity to inflate any expenses in this regardto the Appellant. Hence the additions made onassumptions by the Learned Assessing Officer is inerror.” (emphasis supplied) 2.6. On the above plea, the Commissioner of Income Tax (Appeals)took a different route altogether by making a comparative study ofthe cloth manufacturing expenses for the preceding three years andarrived at the percentage of manufacturing expenses at 9.7%, 9.22%and 9.13% respectively as against the current year's 10.14%.Thereafter, he worked out the average of the three preceding years at9.35% and the above percentage was recorded as reasonable percentagefor allowance of cloth manufacturing expenses during the assessmentyear in question. Thus, the Commissioner of Income Tax (Appeals)worked out the reasonable cloth manufacturing expenses by adopting9.35% of the total cloth manufactured during the year of the value ofRs.3,46,62,993 and allowed the cloth manufacturing expenses to thetune of Rs.32,40,990/-. After deducting Rs.32,40,990/- fromRs.35,13,929/- (which was claimed by the assessee), the Commissionerof Income Tax (Appeals) determined the amount towards excessiveexpenditure at Rs.2,72,939/-. In all, the Commissioner of Income Tax(Appeals) reduced the disallowance from Rs.7,50,000/- toRs.2,72,939/-. 2.7. Aggrieved by the said order, the assessee pursued thematter before the Tribunal. The Tribunal gave a further relief of10% out of the disallowance of Rs.2,72,939/-, in the following manner: “2.3. Against this order of the learned Commissioner ofIncome Tax (Appeals), Assessee is in appeal before us.The learned counsel of the assessee contended that it isthe practice of the trade that weaving charges be paidto one person representing all the weavers. It is alsocontended that comparing only manufacturing charges isnot reasonable and fair and percentage needs to becompared with the increase in turnover also. 2.4. We have heard both the counsels and perused therelevant records. We find that it is admitted that theentire weaving charges paid is backed by paymentvouchers signed by only one person whereas actually thepayment belonged to various persons. On the facts ofthe case, comparison by reference to averagemanufacturing charges can also not be said to be unfair. However, in view of increase in turnover, in this regardsome flexibility in the said percentage can be grantedin this case. Hence, in our opinion, the interest ofjustice will be served if 10% further relief is grantedout of the disallowance of Rs.2,72,939/- made by thelearned Commissioner of Income Tax (Appeals). Weaccordingly direct the Assessing Officer to grant thisrelief.” 2.8. Calling into question the said order, the assessee hasfiled this appeal on the question of law referred supra. 3. We have heard Dr.Anita Sumanth, learned counsel for theassessee and Mr.T.R.Senthil Kumar, learned Standing Counsel appearingfor the Revenue. 4. The main plea raised by the learned counsel for the assesseeis that when a specific plea was made before the Commissioner ofIncome Tax (Appeals) that payment of weaving charges is under thewage settlement made between the Weavers Association and the SizingMill Owners' Association and the same was accepted by theCommissioner of Income Tax (Appeals), no disallowance ought to havebeen made on the manufacturing expenses claimed by the assessee. 2.8. Calling into question the said order, the assessee hasfiled this appeal on the question of law referred supra. 3. We have heard Dr.Anita Sumanth, learned counsel for theassessee and Mr.T.R.Senthil Kumar, learned Standing Counsel appearingfor the Revenue. 4. The main plea raised by the learned counsel for the assesseeis that when a specific plea was made before the Commissioner ofIncome Tax (Appeals) that payment of weaving charges is under thewage settlement made between the Weavers Association and the SizingMill Owners' Association and the same was accepted by theCommissioner of Income Tax (Appeals), no disallowance ought to havebeen made on the manufacturing expenses claimed by the assessee. 5. We find that the Assessing Officer after rejecting theweaving charges as claimed by the assessee, disallowed a sum ofRs.7,50,000/-. There appears to be no reason or logic behind suchdisallowance of a sum of Rs.7,50,000/-, except saying that thevouchers signed by one person on behalf of all the weavers are notacceptable. That has been explained by the assessee and recorded bythe Tribunal in paragraph 2.3 of its order to the effect that “it isthe practice of the trade that weaving charges be paid to one personrepresenting all the weavers.” 6. As regards the order of the Commissioner of Income Tax(Appeals), though it looks somewhat logical to arrive at expenses onthe basis of average, we are not inclined to accept such a procedurebecause expenses have been incurred and reflected in the books ofaccount and, therefore, the same should be either accepted orrejected on the basis of specified data or parameters. The law ofaverages adopted by the Commissioner of Income Tax (Appeals) cannotbe held to be justifiable, as in the case on hand books of accountswere properly maintained and produced before the Department. We aresurprised to note that in the order of the Commissioner of Income Tax(Appeals), the average manufacturing expenses seems to be fluctuatingfrom year to year. There is marginal increase in the manufacturingexpenses every year and such increase cannot be simply brushed aside.We have to take into consideration the revision of wages, in thelight to the terms of the wage settlement. That record speaks foritself and justifies the expenses as claimed by the assessee. This https://hcservices.ecourts.gov.in/hcservices/ is accepted by the Commissioner of Income Tax (Appeals) and theTribunal. Therefore, there appears to be no justification inrejecting the books of account or the vouchers merely on the speciousplea that one person signed for all the persons. As we have alreadystated, the Tribunal has clearly recorded that it is the practice ofthe trade that weaving charges are paid to one person, representingall the weavers. 7. In any event, we find that the Tribunal also was not correctin granting further relief of 10% with no rational or reason. Theentire exercise of the department appears to be on conjectures andsurmises. In the facts and circumstances of the case and in view ofthe reasoning given aforesaid, we find that the expenses claimed bythe assessee are justified. For the foregoing reasons, this appeal is allowed and thesubstantial question of law is answered in favour of the assessee andagainst the Revenue. No costs. Sd/- Assistant Registrar //True Copy// Sub Assistant Registrar sasi To: 1. The Assistant Registrar, Income Tax Appellate Tribunal Chennai Bench "D", Chennai. 2. The Commissioner of Income Tax (Appeals) - I Coimbatore, Camp Office: Erode. Coimbatore, Camp Office: Erode. 3. The Deputy Commissioner of Income Tax Circle-I, Erode. Circle-I, Erode. 1 cc to Dr.Anita Sumanth ,Advocate, SR.No.154941 cc to Mr.T.R.Senthil Kumar ,Advocate, SR.No.15378 sr(co)pmk.8.4.2015 T.C.(A).No.335 of 2008