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M/s JLC Electromet Pvt. Ltd. Versus Addl. Commissioner of Income Tax, Range-4, Jaipur.

2016 (5) TMI 868 - ITAT JAIPUR

Ad hoc disallowance of processing of material and handling charges - Held that:- It is undisputed fact that the assessee’s expenses under the head processing and handling had gone up twice compared to preceding year but during the year under consideration, a new product namely Nickel Plated Dument Wire had been started by the assessee, for which the assessee had taken services from its sister concerns namely M/s Gem Electro Mechanical Pvt. Ltd. and M/s New Age Alloys Pvt. Ltd. The assessee’s sal .....

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arges to it to get the services done. The remaining payments were made to other sister concern namely M/s New Age Alloys Pvt. Ltd. for wire drawing, annealing and spooling processing work made per kg whereas platting and oxidizing, the payments were made in per meter. The assessee did not have sufficient capacity for drawing, annealing and spooling, therefore, he had outsourced this work to M/s New Age. The assessee’s manufacturing activities are under the supervision of the excise department. T .....

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xpenses - Held that:- There is a substantial increase in the staff welfare expenses during the year under consideration but the assessee has justified the increase under this head. There is an agreement between the assessee and the worker regarding staff welfare is to be incurred on the employee. Accordingly, the assessee had provided uniform and shows during the year under consideration. The assessee has produced all the bill and vouchers but the Assessing Officer made disallowance on surmises .....

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nterest has been shown as income by the assessee in earlier year on FDRs and these FDRs were encashed by the appellant, therefore bank has charged interest on premature FDRs. The AR tried to explain on the basis of evidence that how the bank had debited the interest expenses on FDRs. Accordingly, this issue is required to verify from the record with reference to disclosure of the interest income of FDRs and claiming interest expenses on premature of the FDRs. It appears that the liability is per .....

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is is an appeal filed by the assessee against the order dated 11/03/2013 of the learned CIT(A)-II, Jaipur for A.Y. 2009-10. The effective grounds of appeal are as under:- 1 The learned CIT-(A) erred in law as well as on the facts of the case in partly confirming the disallowance of ₹ 38,67,600/- out of processing of material and handling charges. The disallowances so made and partly confirmed by the CIT(A) being totally contrary to the provisions of law and facts of the case, kindly be del .....

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ditional Interest Income from Bank on the basis of TDS Certificates. 2. The 1st ground of the assessee s appeal is against ad hoc disallowance of ₹ 38,67,600/- out of processing of material and handling charges. The assessee firm is engaged in the business of manufacturing of wire and other product made of various metals including Nickel, copper, iron, chromium etc. The assessee company filed its return on 24/09/2009 declaring total income of ₹ 11,76,27,560/-. The case was scrutinize .....

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observed by the Assessing Officer that the assessee had claimed more than double the expenses compared to previous year. It is further found that 50% of these expenses were paid to sister concerns namely M/s Gem Electro Mechanical Pvt. Ltd. and M/s New Age Alloys Pvt. Ltd.. The details of payments are reproduced as under:- Name Current year Previous year 1 Gem Electro Mechanicals Pvt. Ltd. 19,55,892/- Nil 2 Gem Clad Wires Pvt. Ltd. 2,52,641/- 1,00,080/- 3 New Age Alloys Private Limited 33,85,933 .....

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td., the assessee got the wire drawing processing work done in earlier years. This work was done by the assessee company itself. After considering the assessee s reply, the ld Assessing Officer held that the assessee company has been manufacturing wires and other products made of Nickel, copper, iron and other metals including alloy of all metals at VKI Area, Jaipur since last 25 years. Even if it is considered that a new product has come into existence during the year under consideration, then .....

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rent year Previous year Increase over the previous year Production 12,39,693 Kg. 9,94,237 kg 24.68% Sales 12,35,108 Kg. 10,04,575 kg 22.95% Processing & Handling charges 1,24,87,317/- 57,46,478 kg 117.3% She further held that these above expenses had been claimed in excessive than the actual increase in the production and sales ratio over the previous year. If the production has increased by 24.68% and the sales have increased by 22.95% over the previous year, then the processing and handlin .....

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Thus, he disallowed expenses of ₹ 38,67,600/-. 3. Being aggrieved by the order of the ld Assessing Officer, the assessee carried the matter before the ld CIT(A), who had confirmed the addition by observing as under:- Written submission of the appellant is placed on record which is repetition of what was stated before the AO. The thrust of the appellant s argument is that the quantity of production sold increased over last year and therefore even if processing of material and handling char .....

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essing of which was got done from the first sister concern. That to the second sister concern wire drawing charges were paid which in the earlier year was done by the assessee itself. The argument of the appellant is not acceptable because the objection of the AO that processing of material and handling charges increased by 117.3% in comparison to last year has not been disputed. This year processing of material and handling charges have been claimed of ₹ 1,24,87,317 as against of ₹ .....

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AO has not made any disallowance out of the charges paid to sister concerns, and has only used it as an example to state her point that increase by 117% in processing and handling charges was not justified. The AO has not been unreasonable as she has accepted 50% increase in processing of material and handling charges over last year, treating ₹ 86,19,717 (Rs 57,46,478 + 50% of ₹ 57,46,478 which is ₹ 28,73,239 as increase) ₹ 28,73,239) as reasonable processing of material .....

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see is in appeal before us. The ld AR of the assessee has submitted that during the year under consideration a new product namely Nickel Plated Dumet Wire was produced and sold in local and overseas market, which was got manufactured through Gem Electro and hence, there was no occasion to make any payment to them in the preceding year. Further the wire drawing processing was being done by the assessee itself. However, this year it was outsourced and got done on job basis through New Age. Hence, .....

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ged by the revenue on the basis of finding given by the ld CIT(A). The only question to answer before the Hon ble Court that these expenses were incurred wholly and exclusively for the business purposes U/s 37(1) of the Act or not? The ld Assessing Officer as well as the ld CIT(A) partly accepted that these expenses were incurred for the business purposes but whatever disallowance made by the Assessing Officer and confirmed by the ld CIT(A) were made only suspicion, surmises and conjecture. The .....

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act that the assessee s sale has slightly gone down but in terms of quantity, there was an increase in the turnover for the reasons that in terms of quantity this year it stood at 12,39,693 Kg as against 10,04,575 Kg in preceding year. There was an increase in quantity production of 23% during the year as the assessee started a new product namely Nickel Plated Dumet Wire the job work of platting and oxidizing process was outsourced to M/s Gem Electro to whom the assessee paid Dumet Plating proce .....

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cleaning and cut charges work of steel wire. Payment to New Age of ₹ 33,85,933/- the assessee company got the wire drawing, annealing and spooling processing work done from the said company to whom wire drawing charges were paid @ ₹ 60/- per kg for Nickel Alloy Mix Wire and @ ₹ 25/- per Kg for Steel Wire. The assessee company was doing this business in the preceding year, but the capacity available with the assessee was inadequate, therefore, it was outsourced. It is further ar .....

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to preceding year. The GP has gone down for 11.19% in preceding year to 18.47%. Similarly the NP rate from 5.05% to 8.52%. The quantity production has gone up, however, in term of value the ale has slightly declined due to the fall in price per ton. Both the sister concerns also paying maximum marginal rate tax, therefore, there is no revenue loss. It is legitimate business need to outsource this work to these companies. It is further argued that similar payment made in subsequent year had been .....

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asonable having regard to the fair market value of the service. Thus, no disallowance U/s 40A((2)(a) can be made. He further relied on the decision in the case of Upper India Publishing House P. Ltd. (1979) 117 ITR 569 (SC) wherein it has been held that expenditure must be proved as excessive U/s 40A(2)(a) of the Act. Therefore, he prayed to delete the addition. 5. At the outset, the ld DR has vehemently supported the order of the lower authorities. 6. We have heard the rival contentions of both .....

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e down but in quantity production has gone up. This fact has not disputed by the revenue even GP as well as NP has gone up compared to preceding year. The assessee s new product was got manufactured from M/s Gem Electro Mechanical Pvt. Ltd. who has facility of platting and oxidizing, which was not available with the assessee. It was claimed by the assessee that it is an import substitute item and no one was manufacturing in the India. Therefore, the assessee had to pay these charges to it to get .....

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ficer had not brought on record any evidence that payments made to the sister concerns were more than fair market value, as such no comparable case has been considered by the Assessing Officer or ld CIT(A). The recipient company also paying maximum marginal rate of tax, as such there is no revenue loss. A similar claim was also allowed in subsequent years by the Assessing Officer even in scrutiny assessment. The case laws cited by the assessee are squarely application on the present issue before .....

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ard on this issue. The assessee also filed explanation and break up of Staff welfare of the previous year as well as current year. It was submitted by the assessee that during the year under consideration, the main reason for increase in these expenses was due to increase in expenditure incurred on account of uniforms and shoes, which are required to pay as per agreement of the workers as welfare activities. After considering the assessee s reply, the ld Assessing Officer has held that as per ag .....

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owed 50% out of total expenses claimed under this head. 8. Being aggrieved by the order of the Assessing Officer, the assessee carried the matter before the ld CIT(A), who had allowed the appeal partly by observing as under:- After going through rival submissions it is seen that the appellant claimed Staff welfare expenses of ₹ 5,67,063 last year, but the expenses increased by 3 times this year coming to ₹ 16,49,402. The argument of the AO that the staff welfare expenses were not tot .....

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efore us. The ld AR of the assessee has submitted that there was an agreement between the assessee and workers. As per this agreement, there is contractual obligation upon the assessee. The expenditure incurred on shoes and uniform is as per terms and conditions of the agreement and accordingly incurred wholly and exclusively for the business purposes. The ld Assessing Officer had not pointed out any specific defects in the vouchers produced before her. She had made general remark on the voucher .....

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ted the order of the ld CIT(A). 11. We have heard the rival contentions of both the parties and perused the material available on the record. There is a substantial increase in the staff welfare expenses during the year under consideration but the assessee has justified the increase under this head. There is an agreement between the assessee and the worker regarding staff welfare is to be incurred on the employee. Accordingly, the assessee had provided uniform and shows during the year under con .....

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ant detail before the Assessing Officer for claiming expenses and proved the liability, had been crystallized during the year under consideration but the ld Assessing Officer made addition of ₹ 13,298/- being prior period expenses which has been confirmed by the ld CIT(A) by holding that these additions were made by the Assessing Officer on the basis of audit report. The ld AR for the assessee has not proved during the appellate proceedings that these expenses crystallized during the year .....

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erial available on the record as well as observations made by the lower authorities. Even ld AR of the assessee had not been able to prove these expenses were crystallized during the year under consideration. Therefore, order of the ld CIT(A) is upheld. Accordingly, this ground of the assessee s appeal is dismissed. 14. The 4th ground of the assessee s appeal is against confirming the addition of ₹ 6,34,187/- on account of additional interest income from bank on the basis of TDS certificat .....

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