TMI Blog2023 (5) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... 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- -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 incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) for short] dismissing the appeals contesting it s assessments under section 143(3) of Income Tax Act, 1961 ( the Act hereinafter) dated 25.3.2013 and 25.3.2014 for assessment years (AYs.) 2010-11 and 2011-12 respectively, vide order of even date (18.9.2020). The subject matter of the two appeals being largely the same, the same were heard together, and are being disposed off vide this common order for the sake of convenience. 2. The issue arising in both the appeals is the validity of the disallowance of expenditure on salary and wages effected in assessment(s) by the Assessing Officer (AO), since deleted by the ld. CIT(A) on finding it as not sustainable in law. 3. The facts in brief for the first year are that the assessee is a company located in Cochin Special Economic Zone, Kochi, engaged in the manufacture of electronic components since 01.12.2007. It filed it s return of income for AY 2010-11 on 14.10.2010 at an income of Rs.186.01 lakhs after claiming exemption u/s.10AA of the Act at Rs.199.33 lakhs, and set off of brought forward business loss of Rs.124.56 lakhs. A scrutiny of it s Profit and Loss Account (operating statement) revealed the expenditure on sala ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eels Ltd vs. the Department of Income Tax, the ITAT Hyderabad Pronounced that as long as there is a nexus between the expenditure incurred and the business of the assessee, the Assessing Officer cannot step into the shoes of a businessman to say that the expenditure incurred is not required in the interests of the business. Accordingly, I hereby delete the disallowance of Rs.1,76,49,417/-. The Ground of Appeal is hence Allowed . Aggrieved, Revenue is in appeal, raising the following Grounds: - 1. The orders of the Commissioner of Income Tax (Appeals)-I, Kochi are opposed to the facts and circumstances of the case. 2. The CIT(A) failed to consider that the question of law answered in Supreme Court judgment in SA Builders Vs CIT is Whether the amount advanced to the subsidiary or associated company or any other party was advanced as a measure of commercial expediency ? . 3. The CIT(A) failed to consider the fact that the question raised by the AO was not regarding the commercial expediency but related to the genuinity of the transactions. 4. The CIT(A) ought to have considered the case laws relied on by the AO i. Lakshminarayan Madan Lal vs CIT(SC) 86 ITR 43 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re having regard to the circumstances of the case. The Revenue s case, on the other hand, is that the claim of expenditure is wholly unsubstantiated. Discussion/Findings 5.2 We shall begin by setting out, albeit briefly, the law in the matter. It is, to begin with, 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 ( CIT v. Calcutta Agency Ltd . [1951] 19 ITR 191 (SC); Lakshmiratan Cotton Mills Co. Ltd. v. CIT [1969] 73 ITR 634 (SC)). Two, section 37(1) of the Act, under which the impugned claim is preferred, reads as under: General 37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . Explanation 1 . For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of Rule 46A (of the Income Tax Rules, 1962) regulating admission of additional evidence before him, mandatory in character, the same may not be liable to be admitted in view of sufficient opportunity to adduce the same having been provided in assessment. Why, even assuming it being admitted, as where the assessee satisfactorily explains the circumstances preventing its furnishing earlier, the same could be relied upon only on allowing the AO opportunity to examine the same as well as to adduce evidences to meet the same (r. 46A (3)).All this is, given the uncontroverted and undisputed fact of no improvement in its case at the first appellate stage, in fact, academic, and is only to bring forth the law in the matter. There has been, thus, a complete failure on the part of the assessee to discharge his onus u/s. 37(1). It is, further, clearly wrong on it s part to say, accepted by the ld. CIT(A), that the AO had not doubted the incurring of the expenditure, considering which it was therefore not permissible for him (AO) to question the amount that ought to have been reasonably incurred under the circumstances. And, thus, very neatly shifting the burden cast by law on him on the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e respectively, constitute as they do direct and indirect expenditure, have been clubbed, as also the component of each. Where an assessee fails to substantiate it s claim, it becomes incumbent on the AO to estimate, based on the relevant materials on record, the sum that could be considered as admissible in the given facts and circumstances of the case. The ld. 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- -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 ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -noted, the assessee s case, however, is sans any explanation, much less materials, and even as the same does not form part of the impugned order being supported by the assessee, reference thereto is made only for the sake of a comprehensive examination of the matter by us. In fact, the claim is inconsistent with the fall in the energy input cost, which we find to be lower by nearly 28%, being at 4.76% (Rs. 279.19 lakhs on a sale of Rs.5865.66 lakhs) for the preceding year as against 3.44 % (Rs.237.55 lakhs on a sale of Rs.6908.92 lakhs) for the current year. For the reasons afore-stated, 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. We decide accordingly. ITA 398/Coch/2020 (AY 2011-12) 6. The Revenue raising the same Grounds, we though find the facts for AY 2011-12 as somewhat different. For this year, the AO observed a further increase of 371% in the salary and wages expenditure, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id head for comparison with reference to sales as well that incurred for the preceding year. This is understandable as the outsourced contract labour is for a different purpose, generating non-recurring energy revenue (Rs.611.48 lakhs). Going by the same, the disallowance works to Rs.198.72 lakhs (and not Rs.362.35 lakhs, as made by the AO), as under: (Amount in Rs. lacs) Sr. No. Particulars/ AY 2011-12 (% age) 2010-11 (% age) Remarks 1 Sales 8109.41 (100.00) 6908.92 (100.00) 2 Cost of material 5871.57 (72.40) 5003.73 (72.40) 3 Salary and Wages 517.65 245.33 (03.55) 4 Increase @ 30% 318.93 245.33 x 130% 5 Excess 198.72 [(3) (4)] 7.2 The increase in sales for the prece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis 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; (d) 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. Needless to add, the assessee shall cooperate in the proceedings, furnish explanation, details and material in substantiation and justification ..... X X X X Extracts X X X X X X X X Extracts X X X X
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