TMI Blog2017 (3) TMI 1920X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 And C.O. No. 16/Chd/2015 In ITA No. 746/Chd/2014 (Assessment Year : 2010-11) - - - Dated:- 3-3-2017 - Shri Bhavnesh Saini, Judicial Member And Ms. Annapurna Gupta, Accountant Member For the Assessee : Shri Sudhir Sehgal. For the Department : Shri Manjit Singh, DR. ORDER PER ANNAPURNA GUPTA, A.M. : The appeal filed by the Revenue is directed against the order of learned Commissioner of Income Tax (Appeals), Panchkula dated 14.7.2014 relating to assessment year 2010-11. The assessee has filed Cross Objections against the same. 2. Since ground No.1 of the Revenues appeal and ground No.1 of Cross Objection of the assessee are on the same issue and are interrelated, we shall be dealing with the same together. 3. Ground No.1 raised by the Revenue in its appeal in ITA No.746/Chd2014 reads as under: 1. On the facts and in the circumstances of the case the Ld, CIT(A) has erred in deleting the disallowance of Rs.36,11,800/- ignoring the fact the disallowance was made by the A.O. after recording the statements of two contractors u/s 131, who had denied to have done any contract work for the assessee and the other persons were not produced by the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the assessee submitted that in order to maintain confidentiality of manufacturing process it had developed its own team and engaged its team of employee workers to work as contractors themselves. The assessee also asked for an opportunity to cross examine the persons. The Assessing Officer again issued summons to provide opportunity for crass examination but no compliance to the summons was made by the two persons. Thereafter the Assessing Officer noted that the statements had been recorded on oath u/s 131 of the Act which was an admissible evidence. The Assessing Officer also noted that the copies of the statements had been supplied to the assessee. He, therefore, stated that there was no case of denial of opportunity to the assessee and placed reliance in the case of Arvind M. Karia Vs. ACIT 2013-TIOL 128 I.T.A.T.-Mum in this regard. Thereafter the Assessing Officer summarized his findings in para 3.7 of the assessment order and on the basis of circumstances of the case reached to the conclusion that the fabrication charges debited in the names of six individual contractors were bogus. The Assessing Officer considered the case in view of the human probabilities by drawing suppo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... recorded and which amounted in all Rs.20,64,900/-, the Ld. CIT (Appeals) held that the assessee had failed to satisfactorily discharge its onus to support his claim for deduction u/s 37(1). The Ld. 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. The relevant finding of the Ld. CIT (Appeals) at paras 6.2 to 6.7 of the order is reproduced hereunder: 6.2 After considering the facts recorded by the AO and the appellant submissions, it is noted that the AO on examination of books of account and bills found some anomaly in the bills pertaining to fabrication charges and thus proceeded to examine the genuineness of claim of expenditure claimed as fabrication charges. The format of bills and its printing led to further examination. The AO summoned the persons in whose name such charges were debited and could examine two persons as the summons to all six persons could not be served. In the statements, the persons have clearly stated that they were employee of the firm and were drawing salary. They have denied ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), the claim for deduction of expenditure is not admissible. Therefore, it was primary onus of the appellant to explain the genuineness of the claim of fabrication charges rather asking the department to provide opportunity for cross examination of appellant s own employees. The opening of bank account, filing of return , deduction of TDS and withdrawal of refund through these bank accounts in name of alleged contractors was an effort on the part of appellant firm to create evidences In its favour and to make these transactions appearing to be genuine. 6.4 Regarding the appellant s contention that no defects were pointed out in the audited books of account and neither the books of account were rejected u/s 145(3), I find that the AO proceeded to examine the genuineness of fabrication charges claimed in the P L account and it is not necessary that if a claim is examined and found to be non-genuine, the books of account has compulsorily to be rejected u/s 145(3) of the Act. The AO has not made any addition on account of estimation of gross or net profit, so it was not necessary that the AO has to categorically reject the books of account to make disallowance of non-genuine clai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under consideration in the current year has not been considered in earlier years in accordance with the varying facts and circumstances of the case. 6.7 However, it is also found that the AO has examined only two alleged contractors who have denied any contract work done for the appellant or received payments of fabrication charges on contract. Based on the statement of two persons, the AO has extrapolated the finding presuming that similar mode of operation was adopted by the appellant firm in the name of all six individuals. Since, there is fact finding only in respect of Sh. Mange Ram and Sh. Dushyant Singh, I am of the view that fabrication charges debited against these two persons can be considered to be non-genuine on the basis of facts and discussion as given in preceding paras. The AO was not justified in extending the facts gathered from statements given by these two persons and applying to other four individual contractors who were neither examined nor any other contrary facts were gathered that they have not carried out the fabrication work for the appellant firm. Therefore, the fabrication charges in the name of Sh.Mange Ram for Rs.8,26,730/- and Sh.Dushyant Singh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ishan Chand Chella Ram Vs. CIT (1980) 124 ITR 713 (SC). ii) Kalra Glue Factory Vs. Sales Tax Tribunal Others (1987) 167 ITR 498 (SC). iii) Dolly Farms Resorts Pvt. Ltd. Vs. DCIT (2001) 15 ITR 159 (I.T.A.T., Delhi). iv) CIT, Patiala Vs. M/s Radhey Sham Sita Ram (2003) 22 ITR 667 (P H). 10. The Ld. DR, on the other hand, relied upon the order of the Ld. CIT (Appeals) and stated that the assessee had not discharged its onus of proving its claim of expenses incurred and the statements of two workers corroborated the said facts. The Ld. DR contended that the documents filed by the assessee in the form of bank accounts of the workers/contractors, their filing of return, deduction of TDS and withdrawal of refund through these bank accounts was only an effort on the part of the assessee to collect evidence in his favour so as to make the transaction appear to be genuine. 11. We have heard the contentions of both the parties and perused the documents produced before us. The issue in the present appeal pertains to the genuineness of the claim of the assessee of fabrication charges incurred during the year. We are in complete agreement with the Ld. CIT (Appeals) that the on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne in nature. 13. The assessee had given detailed explanation of the circumstances which led to the employment of its own workers as contractors. The 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. The relevant explanation of the assessee filed to the lower authorities is reproduced hereunder: 1. The assessee is a fabricator/manufacturer of machineries/machinery parts and accessories thereof as in earlier years. During the year under consideration, the main customers of the assessee were Bharat Heavy Electricals Ltd. (A Govt. of India Public Sector Undertaking) and Larsen Toubro (A reputed Private Sector Undertaking). The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich comes alongwith order, raw material to be used by the manufacturer (Appellant) for making parts and drawings are enclosed in the paper book to substantiate the above fact. This is being mentioned only to highlight strict norms under which the appellant has to work for providing quality products, which are only supplied to the above parties and total confidentiality is maintained in the manufacturing of the products. 4. It is further brought to your kind notice that the manufacturing process of the assessee is highly technical in nature and strict quality norms have to be maintained. The unit of the assessee is ISO certified and for that purpose, the process wise Flow Chart is being enclosed in the paper book and this chart is being submitted to substantiate the fact that all the processes are carried out in the factory premises of the appellant only in order to maintain the confidentiality and secrecy. This is foremost concern of the customers as stated above. 5. These drawings and the list of the material and other details which are sent by customers of the appellant are highly confidential and this fact is borne out from the note given on the drawings which reads ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Charges 110.65 19.38% 40.50 4.41% 77.22 3.78% 19.99% 4.99% 4.18% 14. The assessee had also contended that this practice was prevalent in other fabrication units of the area also and had filed a certificate from Yamuna Nagar Jagadhri Chamber of Commerce and Industry placed at Paper Book page No.38. The contents of the certificate are as under: Yamuna Nagar - Jagadhri Chamber of Commerce Industry , started over 40 years ago , has come a long way in becoming the foremost representative of Industry , Trade Services in the twin towns of Yamuna Nagar and Jagadhri. The Chamber comprises of members from Trade, Services Industry of the large, medium, small scale sectors 100% EOU's. The member industries belong to diverse manufacturing disciplines such as Heavy Light Engineering, Paper, Sugar, Distillery, Plastics, Hydraulics, Chemical, Automobile Components, Steel Other Metal Fabrication, Plywood, Stone Crushers, etc. M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the Assessing Officer. It had also been shown that the payments had been made to the said contractors by cheques. The said amount, it had been demonstrated, had been deposited in the respective bank account of the contractors who had also withdrawn money from their accounts. The assessee had also filed the income tax returns of the said contractors reflecting income from fabrication charges received from the assessee firm and claiming refund of tax deducted at source thereon. The assessee had also demonstrated that the said refund had been withdrawn by the contractors after depositing the same in their bank accounts. 16. The only conclusion which can be drawn from all the above explanations and evidences taken together is that the 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. It has not denied or controverte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erious flaw which made the order nullity. The relevant portion of the order is as under : According to us, not allowing the assessee to cross-examine the witnesses by the Adjudicating Authority though the statements of those witnesses were made the basis of the impugned order is a serious flaw which makes the order nullity inasmuch as it amounted to violation of principles of natural justice because of which the assessee was adversely affected. It is to be borne in mind that the order of the Commissioner was based upon the statements given by the aforesaid two witnesses. Even when the assessee disputed the correctness of the statements and wanted to cross-examine, the Adjudicating Authority did not grant this opportunity to the assessee. It would be pertinent to note that in the impugned order passed by the Adjudicating Authority he has specifically mentioned that such an opportunity was sought by the assessee. However, no such opportunity was granted and the aforesaid plea is not even dealt with by the Adjudicating Authority. 19. Having said so we may also add that the assessee in any case, without having been granted an opportunity of cross examination had pointed out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... On the facts and in the circumstances of the case the Ld. CIT(A) has erred in deleting the addition of Rs.4,79,429/- made by the A.O. on account of unaccounted scrap at the rate of 05% of the total turnover ignoring the fact that the identical addition was made in the preceding year, which was accepted by the assessee. 23. Brief facts relating to the issue are that the Assessing Officer had noted that the assessee had shown scrap worth Rs.5,41,573/- in its closing stock which came to only 0.26% of the total turnover, whereas in he preceding the assessee had agreed that the scrap generated during it manufacturing activities was about 0.5% of the total turnover. The Assessing Officer observed that the manufacturing activities of the assessee remained the same as in the previous year and there was no major change in any of the variable. He also noted that the turnover has substantially increased and gross profit rate had fallen by 0.4%. The Assessing Officer further noted that the assessee had not mentioned ratio of material consumed/finished products in the Audit Report furnished during assessment proceedings. In the absence of such ratio the Assessing Officer held that the GP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the estimation of scrap of 0.5% of total turnover was adopted in the preceding assessment year as no scrap generation was shown in the accounts in the preceding assessment year. Since, there was no other major addition in the assessment, the appellant accepted the estimation and no appeal was filed against the estimated scrap. However, during the year appellant has shown the value of scrap which not necessarily would be equivalent to the estimation made in the preceding assessment year. After considering the appellant submission, I am of the view that in the absence of any scrap shown in the accounts in the preceding assessment year, the estimation was made by the AO at 0.5% of the total turnover. The turnover in the preceding year was much lower than the turnover in the current year. There was no other evidence during the year which can suggest that the scrap shown by the appellant in its account is not correct as the reasons given for the scrap generation may not remain same. Since, the addition is on the basis of estimation of preceding year where the facts were different than the current year, therefore, the AO was not justified in enhancement of scrap generation on an est ..... X X X X Extracts X X X X X X X X Extracts X X X X
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