The Commissioner Of Income Tax-Iiiludhiana v. M/S. S.g. Exports

IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. --- Income Tax Appeal No. 624 of 2010Date of decision: 8.2.2011 The Commissioner of Income Tax-IIILudhiana --- Appellant Versus M/s. S.G. Exports --- Respondent CORAM:HON’BLE MR. JUSTICE ADARSH KUMAR GOELHON’BLE MR. JUSTICE AJAY KUMAR MITTAL --- Present:Mr. Denesh Goyal, Standing Counselfor the appellant-Revenue. --- AJAY KUMAR MITTAL, J. This appeal under Section 260A of the Income-Tax Act, 1961(for short “the Act”) has been filed by the Revenue against the orderdated 30.4.2009, passed by the Income Tax Appellate TribunalChandigarh Bench ‘A’ Chandigarh (in short “the Tribunal”) in ITA No.413/CHD/2008, relating to the assessment year 2004-2005 claiming thefollowing substantial question of law: “Whether on the facts and in the circumstances of the case,the Hon’ble ITAT is right in upholding the order of CIT(A)dated 11.2.2008 thereby deleting the addition of Rs. 1,80,40,340/- made by the Assessing Officer on account of disallowance of bogus labour expenses.” 2.On 7.2.2011, notice of motion was issued for today toconsider the plea whether the matter is liable to be remanded to theCommissioner of Income-tax (Appeals) {in short “the CIT(A)”} for freshdecision. 3.The office has reported that service is complete. However,no one has chosen to appear in Court on behalf of the respondent-assessee. 4.The facts, in brief, necessary for adjudication as narrated in the appeal, are that the respondent-assessee firm derives income frommanufacturing and exports of hosiery goods. The assessee filed itsreturn for the assessment year 2004-05 on 1.11.2004 declaring incomeof Rs. 3,99,53,724/-. During the course of a search operation underSection 132(1) of the Act at the business premises of Duggal Group inwhich the assessee is one of the constituents, certain incriminatingdocuments pertaining to the assessee were seized. The assessmentunder Section 143(3) read with Sections 153A/153B of the Act wascompleted on 31.3.2006 at net taxable income of Rs. 1,49,36,800/-wherein an addition of Rs. 1,80,40,340/- was made by the assessingofficer, vide order dated 31.3.2006, on account of disallowance of labourcharges. 5.Appeal of the assessee against the order dated 31.3.2006was partly allowed by the CIT(A) by order dated 11.2.2008 wherebyaddition of Rs. 1,80,40,340/- as made by the assessing officer onaccount of disallowance of labour charges was deleted. 6.The Revenue preferred appeal before the Tribunal. TheTribunal put its seal of affirmation on the issue and dismissed theappeal vide the order under appeal. 7.We have heard learned counsel for the Revenue and haveperused the record. 8.Learned counsel for the Revenue submitted that theassessing officer had disallowed the labour expenses on the groundthat the same were bogus and the assessee was not able tosubstantiate the genuineness of the same. The counsel referred to thefindings recorded by the assessing officer in the assessment orderdated 31.3.2006 in that behalf, which are to the following effect: “The assessee derives income from manufacturing andexport of hosiery goods. During the year under assessment,the assessee declared gross profit of Rs. 4.16 crore onexport of Rs. 14.95 crore including profit on premium onDEPB and duty drawback amounting to Rs. 1.49 croresthereby giving G.P. rate at 27.83%. Proceeds of exports arefound to have been received through banking channels. Aperusal of the trading account reveals that the assesseealso debited Rs. 2.46 crore on account of fabrication andlabour charge comprising of Rs. 9.20 lacs and Rs. 230.4lacs on account of fabrication and labour chargesrespectively. On being asked the assessee could furnish thedetails of the parties to whom fabrication charges were paidbut could not substantiate the labour charges of Rs. 2.3crore indicating the names and addresses of the parties etc.to whom paid. However, the assessee filed a detailed chart indicating the entry and exit in/from the H.P. barriers withregard to the entry of raw materials and exit of export goodsrespectively. However, in the absence of the evidence insupport of the labour charges claimed to have been incurredat Rs. 2.3 crores, the same are not at all subject to anyverification but keeping in view the production made, thepossibility of incurring of such charges is not ruled outthough the claim made by the assessee seems to be tooexcessive. This apart, the wages of Rs. 72,800/- have beenclaimed separately. It is stated that wages of Rs. 72,800/-have been paid only to the regular workers on the record ofESI/EPF etc. while the labour charges are claimed to havebeen paid to various workers mainly on contractual basis.Keeping in view the comparable case of M/s. Glide Impexthough assessment therein is still pending, also running anindustrial undertaking at Baddi in which the claim of wageshas been made at Rs.10.38 lacs only against the productionwith reference to the total export turnover of around Rs. 34crores for the assessment year 2004-05. No doubt, anumber of processes are involved in the manufacturingactivity of a particular item, which may vary from case tocase, but still considering that even if the assessee wouldhave involved itself in a number of processes for themanufacturing process as compared to the comparablecase, still the claim of labour charges at Rs. 2.3 crore seemsto be at too an alarming figure. Therefore, taking intoconsideration the entirety of the facts and circumstances of the case, in my opinion, the assessee would not haveactually incurred labour charges beyond a sum of Rs. 50lacs for the purpose of making production relatable to thesales/exports of Rs.13.46 crore credited to the tradingaccount. Thus, it is considered fair and reasonable to allowthe claim of such labour charges to the assessee at Rs.50lacs with the result that balance claim of Rs. 1,80,40,340/-still having been made excessively which may representnothing but on account of bogus/fictitious labour charges. Inthis view of the matter, a sum of Rs. 1,80,40,340/- is herebydisallowed out of the labour charges of Rs. 2,30,40,340/-and added back to the total income of the assessee onaccount of inadmissible/ in-genuine and unsubstantiatedbusiness expenses for which it is also treated to havefurnished its inaccurate particulars of income for the yearunder assessment.” 9. Learned counsel for the appellant argued that the CIT(A) andthe Tribunal, while allowing the appeal of the assessee, had wronglyheld that the onus lay on the Revenue to show that the payments weremade to some in-genuine or non-existent parties, but such onus waswrongly placed on the Revenue. According to the learned counsel, itwas for the assessee to establish that the expenses claimed by it onaccount of labour charges were genuine. The counsel further arguedthat the Tribunal had wrongly noticed that the labour charges were fullyvouched and paid to identifiable persons, even if there was no specificmaterial available on record in that behalf. It would now be advantageous to refer to the findings recorded by the CIT(A) which are as under: 9. Learned counsel for the appellant argued that the CIT(A) andthe Tribunal, while allowing the appeal of the assessee, had wronglyheld that the onus lay on the Revenue to show that the payments weremade to some in-genuine or non-existent parties, but such onus waswrongly placed on the Revenue. According to the learned counsel, itwas for the assessee to establish that the expenses claimed by it onaccount of labour charges were genuine. The counsel further arguedthat the Tribunal had wrongly noticed that the labour charges were fullyvouched and paid to identifiable persons, even if there was no specificmaterial available on record in that behalf. It would now be advantageous to refer to the findings recorded by the CIT(A) which are as under: “I have carefully considered the contention of the appellantand also perused the relevant records. The A.O. hasdisallowed major part of the expenses under the head labourcharges, in this case, just on the ground that anotherassessee, namely, Glide Impex having its industrialundertaking at Baddi had claimed labour charges of Rs.10.38 lacs only against the total export turnover of aroundRs. 34 Crores. The A.O. has not referred to trading andmanufacturing results of the appellant in the preceding yearsetc. As explained by the learned counsel, the labour chargesclaimed by the appellant are fully vouched and paid toidentifiable persons/parties. On some of the labour chargespaid, TDS is stated to have been deducted and deposited inthe Govt. account. Therefore, for making such adisallowance, the AO was required to make further enquiriesand bring on record that the payments were made to somein-genuine or non-existent parties. In the absence of such anevidence brought on record, the disallowance made by theA.O. in a case like this, where accounts are duly audited,cannot be held to be justified.” 11. The aforesaid findings have been affirmed by the learnedTribunal in the following manner: “We have considered the rival submissions and perused thematerial available on the file. Brief facts are that theassessee derives income from manufacturing and export of hosiery goods and declared gross profit of Rs. 4.16 croreson the export of Rs. 14.95 crores including profit on premiumon DEPB and Duty Draw back amounting to Rs. 1.49 croresby giving gross profit rate at 27.83%. The assessee debitedRs.2.3 crores in its trading account as labour charges out ofwhich the learned Assessing Officer disallowedRs.1,80,40,340/- and added to the income of the assesseeby opining the same to be in-genuine. On appeal, thelearned first appellate authority deleted the addition, which isunder challenge before the Tribunal. We have found that theimpugned disallowance was made by the learned AssessingOfficer on the ground that another assessee i.e. Glideimpacts claimed labour charges of Rs. 30.38 lakhs onlyagainst the total export turn over of around Rs. 34 crores.The impugned addition was deleted by the learned firstappellate authority on the ground that the labour charges arefully vouched, paid and the concerned persons/ partiers areidentifiable, therefore, it was held that the Assessing Officerwas required to make further inquiries and to bring on recordas to how the payments were in-genuine or to the non-existent parties. On a query from the Bench, as to how thecase of M/s. Glide Impact is not applicable, it was explainedby the learned counsel for the assessee that firstly, M/s.Glide Impacts is manufacturing different items and secondly,it is fully automatic one, whereas in the case of theassessee, it was claimed that T-shirts are manufacturedwherein more and more labour is required and the machinery is also not fully automatic. Even in theassessment order, the learned Assessing Officer hasmentioned as under: machinery is also not fully automatic. Even in theassessment order, the learned Assessing Officer hasmentioned as under: “No doubt, a number of process involved in themanufacturing activity of a particular item, which mayvary from case to case but still considering that even ifthe assessee would have involved itself in a number ofprocesses for the manufacturing process as comparedto the comparable case, still the claim of labourcharges at Rs. 2.3 crores seems to be an alarmingfigure…..” If the aforesaid conclusion is analysed, admittedly, numberof processes are involved in the manufacturing process ofthe assessee. Even otherwise, we have found that nocontrary material has been produced by the AssessingOfficer evidencing that there is a false claim by theassessee. Even during the search conducted on15.10.2003, at the premises of the assessee, there is nofinding that either no labour is involved or any other infirmityin the claim of the assessee. During appellate proceedings,before us the assessee produced the registers maintainedfor the purposes. Without bringing any evidence on record,no adhoc disallowance is permissible.” 12. A perusal of the findings of the CIT(A) and the Tribunalshows that both the authorities have placed onus on the Revenue toestablish the in-genuineness and non-existence of the parties which iswrong. Since the assessee had claimed that it had incurred expenses A perusal of the findings of the CIT(A) and the Tribunal on account of the labour charges, the onus was on the assessee toprove the said fact by producing cogent and convincing evidenceincluding the identity of the parties along with evidence of payment tothose persons. Accordingly, the orders passed by the CIT(A) and theTribunal cannot be legally sustained. The substantial question of law is,thus, answered in favour of the Revenue and the matter is remitted tothe CIT(A) for decision of the aforesaid controversy afresh inaccordance with law. 13.The appeal is disposed of accordingly. (AJAY KUMAR MITTAL) JUDGE February 8, 2011*rkmalik* (ADARSH KUMAR GOEL) JUDGE