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2023 (5) TMI 35 - AT - Income TaxDisallowance of expenditure on salary and wages - establishment of nexus between the expenditure and the purpose of business - CIT-A deleted addition on finding it as not sustainable in law - HELD THAT:- Trite law that the burden to prove it’s return, and the claim/s preferred thereby, is on the assessee, who only is in the intimate know of his affairs - The onus to show so, which is on the assessee, is to be discharged before the assessing authority, i.e., the authority designated and charged by law to frame an assessment under the Act. The assessee’s claim in the instant case is wholly unsubstantiated. No explanation, much less material, stands furnished before the AO. How, pray, could his action be faulted within law? He was accordingly well within his powers to make a reasonable estimate and disallow what he regarded as excessive or as not explained. It is well-settled that while ‘exclusively’ concerns the purpose for which the expenditure is incurred, the word ‘wholly’ adverts to its quantum, so that, where called upon to, as in the instant case, the entire of it is shown to have been incurred for purposes of business to merit deduction u/s. 37(1) in its respect. CIT(A) as an appellate authority, as indeed the assessing authority himself, could proceed only on the basis of the material on record, while in the instant case the AO, none of whose findings, we reiterate, are controverted, clearly states that the assessee, despite being called upon to, did not furnish any material or explanation, failing to provide even the basic data, viz., the person-wise details. The same, along with their function ought to have been furnished by the assessee at the minimum; rather, vis-à-vis the preceding year, explaining the reasons for the quantum increase therein. It is then said that the expenditure on salary and wages is not liable to vary in direct proportion as well. The same does not help the assessee’s case in any manner. It does not, firstly, absolve the assessee from proving the claimed expenditure as having been incurred wholly and exclusively for the purpose of its business. Two, the argument could equally validly be advanced to disallow the entire increase in expenditure (over the preceding year), allowing only that incurred during the preceding year inasmuch as the increase in volume may not translate into an increase in expenditure as well. That is, the argument is neither here nor there, and stands made only to mislead. We have no hesitation in, setting aside the impugned order, vacate the findings by the first appellate authority, and restore that of the AO. The impugned disallowance is sustainable in law, and is accordingly, restored in result. Any consequent change in the exemption u/s. 10AA, if and to the extent exigible, shall be made by the AO. Increase of 27% in the salary and wages expenditure - AY 2011-12 - HELD THAT:- As the increase in sales vis-a-vis the preceding year is at 17.38%, and not at 27%, a constancy of material cost w.r.t. the preceding year leads to a presumption of constancy of manufacturing operations. Increase in labour cost, claimed at ~ 1% of sales for AY 2009-10, would require being justified on the basis of new processes added, besides of course the increase in labour rate over time, which may be more or less of that obtaining for the goods sold and the cost of tools, moulds and prototypes, including material and labour cost thereon; with the latter including that incurred in-house as well, may require being capitalised as part of cost of acquisition thereof, where not held as stock-in-trade but as capital asset/s. In view of the foregoing, we only consider it proper to, in the interest of justice, restore the matter of allowance of the assessee’s claim for salary and wages for this year (AY 2011-12) back to the file of the AO for fresh determination. The assessee, who shall have to prove the same on the anvil of s. 37(1), would be at liberty to adduce materials in support of it’s contentions, as indeed the AO to cause verification, including adducing that in contradiction thereof.The incidental claim for depreciation, where the moulds, prototypes, etc., where found as held as capital assets, shall also be considered as per law.
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