2011-VIL-721-ITAT-MUM
Income Tax Appellate Tribunal MUMBAI
ITA No. 376/Mum/2011
Date: 29.07.2011
BHAGWANJI K GADA
Vs
INCOME TAX OFFICER
For the Appellant : A K Ghosh
For the Respondent : Usha S Nair
BENCH
Pramod Kumar AM and Asha Vijayaraghavan JM
JUDGMENT
Per Pramod Kumar:
1. By way of this appeal, the assessee has called into question correctness of order dated 30th September 2010, in the matter of assessments under section 143(3) r.w.s. 153 A of the Income Tax Act for the assessment years 2006-07, on the following ground :
On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in confirming the entire addition of Rs. 34,53,812 made by the learned Assessing Officer in respect of alleged inflated labour charges, without appreciating the fact that the appellant has paid consolidated charges to the contractors towards godown charges, inward transport, octroi, warpins, sizing, beam setter, dropin charges, weaving, jobber, clipping, folders, outward transport, electricity, mill stores spares, lubricant and hamal charges, which are claimed under the head ‘labour charges’.
2. Learned representative submit that whatever is decided in the case of B K Textile Corporation ( AY 2004-05 and 2005-06), group appeals which were heard alongwith this appeal, will follow in this case as well. It is agreed that the grievance raised before us as also developments leading to this appeal are materially the same, and, therefore, the outcome in B K Textile’s case (supra) will equally apply here as well. Vide our order of even date, we have disposed of the identical grievance of the B K Textiles (supra) by observing as follows:
4. The relevant material facts are like this. The assessee is engaged in the business of manufacturing and trading of clothes and yarn. A search and seizure operation under section 132 was carried out on the office and residential premises of the assessee. During the course of this search operation, certain incriminating documents were found and statements were also recorded. When search was conducted at the residence of Kantilal K Gada at 10/A, 501/502 Gopal Nagar, Bhiwandi, cheque books, pay in slips and books of accounts held by various persons have been found and seized. When Kalpesh Gada was confronted with this seizure, he stated that “these are the accounts of the so called job workers, operated by us for the purpose of inflating the expenses”. These accounts, used for siphoning off the amounts as wages, were maintained in branches of Abhudaya Cooperative Bank Limited and Syndicate Bank. Kalpesh Gada further admitted that though he is showing income from labour work received from Appu Textile Mills – admittedly a group family concern, the actual work is done by the said firm itself and the payments are show to have been made to him only to inflate the expenses. It was also accepted that similar exercise was also conducted by other group concerns, and that no job work is outsourced by any of the manufacturing concerns, and that the grey cloth shown to have been manufactured through outsourcing is actually made with the help of the infrastructure of the concern claimed to be outsourcing the work. The statements of some persons, whose bank account cheque books etc were so found, were also recorded and they confirmed that they are salaried employees of the group concerns and that they donot get anything other than their regular salaries, that their PAN cards, income tax returns and all such documents are only with the employer, that all the transactions in these accounts are being done by the employer, that they have only signed blank cheques and documents, and that they are not even aware of all these activities. In response to the question as to on what basis the karigars are paid, it was stated by Kalpesh Gada that ‘the karigars are paid on per meter basis’ and that ‘ average rate paid is Rs. 1.25 per meter’. On these facts, and having noted that the assessee has made huge payments for ‘laabour charges’, the Assessing Officer concluded that while actual payment to karigars is only Rs. 1.50 to Rs. 2.00 per meter at the most, the assessee has claimed labour charges @ Rs. 6.50 per meter in the name of family members and the employees. When assessee was confronted with this and the Assessing Officer required the assessee to show cause as to why labour charges should not be disallowed, it was submitted by the assessee that “Shri Kalpesh Gada has admitted inflation in job work unknowingly” as “he could not understand the question” and that “in the same matter, Bhagwanji K Gada, who is the main conductor and organizer of the entire business and the family, has strongly rejected the question of inflation of labour charges”. It was also submitted that “out of 18 labour contractors, only 2-3 persons have stated adversely and survey team has held this point strongly”. It was also submitted that “Entire expenses cannot be disallowed. Reasonable difference we have declared. Amount of Rs. 50,50,000 is substantial to match the real cost of production”. It was further submitted that the rate at which contractors are actually paid is Rs. 4 and Rs. 4.50 in the years 2004-05 to 2006-07, and not Rs. 6 as observed by the Assessing Officer, and, in consideration of payment so made, the contractors have rendered proper and sincere services. The Assessing Officer rejected these submissions, noted that ,as evident from the material found during search proceedings, the assessee was engaged in systematic and large scale inflation of expenses, that the net profit disclosed by the assessee in all these years in exceptionally low between 0.5% to 2%, and that the assessee has not produced any stock register for verification. The Assessing Officer adopted the labour charges allowable at Rs. 1.50 per meter, as admitted by the assessee in the statement, provided for a further Rs. 1.50 per meter for other incidental expenses such as transport, power and all related expenses, computed the production quantities on the basis of the tax audit report figures in the absence of the stock records, and computed the allowable labour charges by multiplying the production quantity in meters with Rs. 3 per meter. The balance claim was disallowed. As against a claim of Rs. 1,29,40,629 on account of labour charges in the assessment year 2004-05, an amount of Rs. 30,82,893 was disallowed. Similarly, out of Rs. 67,33,740 claimed as having been spent on labour charges in the assessment year 2005-06, an amount of Rs. 20,57,946 was disallowed. Aggrieved, assessee carried the matter in appeal before the CIT(A) but without any success. The CIT(A) affirmed the action of the Assessing Officer by observing as follows:
The argument of the AR is heard and the contents of the assessment order is perused. Finding of bank pass book and signed blank cheques in respect of the labourers at the residence of Kantilal Khetsi Gada goes to support the view that the appellant has deliberately, in order to reduce the tax burden, resorted to inflation of expenses. This fact has been clearly admitted by Shri Kalpesh Gada, one of the main persons in the group. Moreover, the so called contractors, namely Jethalal Prajapti, Bhavesh Prajapati, Jaisigh Khilari, Shivaji Shinde, Sikandar A Hatar, Vindo Shagatia, Dilip Prajapati, Raju G Chilveri and Jagmohan Mayrna, have all stated to be employed on salary basis, and bank accounts in their names are maintained by the employer. They have further stated that they sign on blank cheques and hand over the same to the employer. It is also established that cheques are deposited into bank accounts of the above mentioned labourers and cash is withdrawn by the employer. The AO has also found that the assessee has claimed the labour charges @ Rs. 6 per meter, whereas the actual payment has ranged from Rs. 1.5 to Rs. 2 per meter. Keeping in mind the other expenses, the AO has allowed labour charges @ Rs. 3 per meter. This, according to me, is fair enough and I, therefore, hold that the order of the Assessing Officer does not suffer from any infirmity. Accordingly, I uphold the action of the AO and dismiss this ground.
5. The assessee is not satisfied by the stand so taken by the CIT(A) and is in appeal before us.
6. We have heard the rival contentions, perused the material on record and duly considered factual matrix of the case as also the applicable legal position.
7. We have noted that even though the CIT(A) has categorically held that the assessee’s claim for labour charges payment is bogus inasmuch as the assessee was involved in a systematic inflation of expenses by using bogus bank accounts in the name of certain persons even as these accounts were actually used and operated by the assessee himself, the assessee’s limited grievance before us is on the quantum of disallowance and the quantities of production, as also rate at which inflation of expense is estimated to have been done, adopted for the computation of disallowance. Learned counsel has sighted copies of stock registers which, if adopted for basis of computation, lead to different production figures than the production figures adopted in the tax audit report. Learned counsel has also submitted that the actual rate of payment of labour charges is not Rs. 6.50 per meter as adopted by the Assessing Officer but much less than that. When, however, we asked him to identify the bills or evidences which substantiate the factual contentions embedded in his arguments to this effect, learned counsel could not do the same. It was also pointed out to the learned counsel that, as noted by the Assessing Officer, stock records were not produced before him, and this factual observation of the Assessing Officer has neither been challenged in appeal before the CIT(A) nor controverted even in the statement of facts on record. The statement of the learned counsel regarding availability of stock records before the Assessing Officer is thus not borne out of the material on record, and, therefore, we cannot proceed on the basis that the stock statements were indeed produced before the Assessing Officer. As there was no contemporaneous record of quantities, we need not be guided by the stock registers which were not available at that point of time. We, must, therefore uphold the action of the authorities in principle. Having said that, we must, however, point out that what is to be disallowed is the labour charges paid in excess of Rs. 3 per meter – as is the stand taken by the Assessing Officer himself, and therefore, the right computation of disallowance will be by adopting the said figure of labour charges rate in the actual bill of labour charges received by the assessee. To that extent, the order of the CIT(A) requires to be modified. To enable this computation, the assessee has to furnish details of all the labour bills accounted for in a particular year, and produce the same for verification, and the labour charges allowable will have to be computed by adopting Rs. 3 per meter in respect of the quantities for which the bills are raised. In case the assessee is unable to do so or to produce any other sound basis on which computations of production quantities can be done, the CIT(A) will be at liberty to adopt the production figures on the basis of tax audit report – subject to correction of mistakes as pointed out by the assessee, and compute the admissible labour charges at Rs. 3 per meter multiplied to the quantities so worked out. We may also mention that learned counsel for the assessee urged us to make adjustment for inflation in the subsequent years, but we are not favourably inclined to this prayer because the statement about labour charges rates was made by the assessee was in 2007, which must be referring to the labour charges rates payable at that point of time, whereas the years before us pertain to earlier period. To sum up, while we confirm the action of the authorities below in principle, we remit the matter to the file of the CIT(A) for the limited purposes of making corrections of quantities and rate difference, if found admissible, in the light of observations made hereinabove. We direct the assessee to fully cooperate in expeditious disposal of the remanded proceedings and make it clear that in the absence of assessee’s furnishing the required details and pointing out specific mistakes, if any, in the computations in Tax Audit Report quantitative details and computations in the assessment order, no relief will be admissible. We also direct the CIT(A) to give a due and reasonable opportunity of hearing to the assessee and to deal with all his contentions by way of a speaking order and in accordance with the law. The matter stands restored to the file of the CIT(A) with the directions as above.
8. Ground No. 1 in the both the appeals is thus allowed for statistical purposes in the terms indicated above.
3. We see no reasons to take any other view of the matter than the view so taken by us in a group case of the assessee’s group of cases. There are no distinguishing features in the facts of the said case vis-à-vis the facts of this case before us.
4. In this view of the matter, and following our decision in B K Textile’s case (supra), we remit the matter to the file of the CIT(A) for recomputing the disallowance, if necessary, in the light of our observations in the said case which have been extracted above and which will apply mutatis mutandi here as well.
5. In the result, the appeal is allowed for statistical purposes in the terms indicated above.
Pronounced in the open court today on 29th day of July, 2011.
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