SHRI KAILASHCHANDRA M. KANODIA,,AHMEDABAD vs. THE INCOME TAX OFFICER, WARD-1(2)(2),, AHMEDABAD

Revenue by: Shri S.K. Dev, Sr. D.R. Assessee by: Shri Vinit Moondra, A.R. Date of hearing : 27-06-2019 Date of pronouncement : 31-07-2019 आदेश/ORDER PER : AMARJIT SINGH, ACCOUNTANT MEMBER:-

These two appeals filed by assessee for A.Y. 2012-13, arises from order of the CIT(A)-10, Ahmedabad, in proceedings under section 144 & 271(1)(c) of the Income Tax Act, 1961; in short “the Act”.

The fact in brief is that assesse has filed return of income on 31st 3. March, 2014 declaring total income at Rs. 1,90,370/-. The case of the assessee was subject to scrutiny and notice u/s. 143(2) of the act was issued on 3rd Sep, 2014. During the course of assessment proceedings, the assessing officer stated that in spite of giving a number of opportunities, the books of account and other evidences on the basis of which the assessee had prepared the return of income for the assessment year under consideration were not produced for verification. Therefore, claim of various expenses including claim of purchases of Rs. 49,38,99,250/- and job charges expenses of Rs. 4,77,18,580/- were not verifiable. Consequently, the assessing officer issued a show cause notice to the assessee to explain why not 5% of total receipt of Rs. 53,27,30,687/- should be brought to tax as business income. The assessing officer stated that authorized representative of the assessee has attended and furnished written submission dated 11th March, 2015 but neither books of account nor other evidences on the basis of which the return of income prepared were produced for verification. The assessing officer observsed that on total turn-over of Rs. 5,32,73,068/-, the assessee has shown gross profit of Rs. 4,83,46,723/- but the net profit was shown only of Rs. 1,90,370/- @ 0.04% of the total sales. Since the assessee has not produced the books of account and other evidences for verification as referred above, the assessing officer has finalized the assessee’s case u/s 144 of the act and estimated the net business income of the assessee @ 5% of his total turn-over of Rs. 5,32,73,087/- u/s. 144 of the act to the amount of Rs.2,66,36,534/-.

4. Aggrieved assessee has filed appeal before the ld. CIT(A). During the appellate proceedings before the ld. CIT(A), the ld. CIT(A) has observed that out of total purchases of Rs. 49,69,36,069/-, purchases of Rs. 37,91,63,039/- have been made from various parties based in Surat and weaving parties based in Bhiwandi, Mumbai. The ld. CIT(A) observed that assessee has not debited any expenses for freight inward and freight outward, therefore, he has issued notice for enhancement of income. The relevant part of enhancement notice is produced as under:- "2. On going through the assessment order as well as the written submissions and other documents filed by you, it is observed that you are engaged in the business of trading in cloth. On going through the Profit & Loss Account, it is observed that you have shown sales of Rs. 53,27, 30,687/- during the year whereas the cost of goods sold has been worked out by you at Rs. 48,43,83,964/- thereby showing a Gross Profit (G.P) of Rs. 4,83,46,723/-. Out of this GP of Rs. 4.83 crores, you have claimed weaving charges/job charges paid of Rs. 4,77,18,580/-. If me weaving charges/job charges are reduced from your GP comes to Rs. 6,28,143/- on a total sales of Rs. 53.27/- crores, which comes to 0. 11% on the total sales. Since you are a trader in clothes, the expenditure to the tune of Rs. 4.77 crores on the job charges/weaving charges paid by you during the year has not given any value addition whatsoever which is reflected in the GP of your business, which is 0.11% if the job charges are reduced from the GP (since the job charges/weaving charges is a direct cost, the same should have been reflected in the trading account of the appellant and the GP should have been worked out after reducing the job charges). 3. During the course of appeal proceedings, you have filed the details of partywise purchases made by you during the year. On a perusal of the same, it is noticed that out of total purchases of Rs. 49,69,36,069/-, Rs. 37,91, 63,039/- has been purchased from various parties based in Surat. The purchases from various parties from Surat come to 76% of the total purchases. Likewise, the major parties to whom the sales have been made are also based in Surat. However, on going through the statement of weaving charges as well as the bills/invoices raised by them, it is noticed that the parties who has claimed to have done weaving charges are based in Bhiwandi, Mumbai. It is a/so seen that on the invoices, the name of the appellant has been mentioned but either the address is given of Kalbadevi, Mumbai or simply 'Mumbai'. On a perusal of the records of the appellant, it is observed that the only address given of the appellant's business premises is that of 1st Floor, Krishna Mansion, Kalupur Ghee Bazar, Ahmedabad-2. There is no mention of Kalbadevi address anywhere in the records filed by you. therefore, it is not known as to why these vendors have raised the invoices on the Mumbai address. It is also not clear as to why your address has been mentioned at Kalbadevi Mumbai when no such office has been reflected/shown in the Return of Income filed by you. It is also seen that the invoices for weaving charges have been raised by the vendors throughout the year. On a perusal of the Profit & Loss Account, it is observed that there are no expenses debited for freight inward or freight outward by you. In fact, the total expenses claimed by you in the Profit & Loss account are being reproduced as under- Audit fees 8,000 Bank charges 15,734 Conveyance & travelling 8,000 Discount 2,12,185 Office rent 30,000 Printing & stationery 8,940 Professional fees 5,000 Salary 1,20,000 Staff welfare 15,960 Travelling expenses 12,650 4. The total expenses claimed by you are very minuscule in comparison to the total turnover of the business. Moreover, there are no charges whatsoever for either freight inward or freight outward. Therefore, once the goods are purchased from.Surat, how the same are being transported to Bhiwandi for the weaving purpose and after the weaving, how the goods are being transported back to Surat, as most of the parties of purchase and sales are based in Surat, are not known.

5. The invoices for weaving charges have been raised by various different parties on various dates. Therefore, there should be substantial expenses being incurred by you for transportation during the whole year but there are no such expenditure being debited at all in the Profit & Loss Account. Kindly reconcile this discrepancy with actual movement of goods from Surat to Mumbai to Surat with documentary evidences.

6. Moreover, you have debited the salary of Rs. 1,20,000/- for the whole year which is not more than one person being paid Rs. 10,000/- per month. If the appellant has only one person who is looking after the business, it is not possible to run two offices simultaneously in Ahmedabad and Mumbai. This is also reflected in the office rent being paid by you which is Rs. 30,000/- per annum, i.e. Rs. 25007- per month^ In such a small rent, you cannot hire two offices, one in Ahmedabad and one in Mumbai. It is also seen that the total travelling expenses debited by you during the year is Rs. 12,650/- and conveyance and travelling expenses is Rs. 80007- during the whole year. These expenses also do not support your claim of weaving charges which has been claimed to have been incurred in Bhiwandi, Mumbai.

5. In view of the above, it is clear that the job charges/weaving charges are not genuine at all as the same are not supported by any of the expenditure claimed by you especially there being no expenditure being incurred for freight inward and freight outward. Since no expenditure has been incurred for freight and most of the purchases and sales are made in Surat, whereas the waving has been done in Mumbai, explain as to why the same should be allowed while deciding your appeal.

6. Even the GP shown by you does not support the value addition in the form of weaving charges by your business. The total GP after deducting weaving charges is 0.11% on the total sales which is not acceptable in any of the businesses especially when there is value addition in the form of weaving charges being incurred by you. Therefore, even on this account also, the weaving charges spent by you are not supported by the proper percentage of GP. In view of the above, it is evident that the weaving charges claimed by you of Rs. 4,77,18,580/- are not genuine and the same should have been added in your profits by the A.O. while finalizing the assessment.

Show cause as to why your income should not be enhanced by an amount of Rs. 4,77,18,580/- being the non genuine expenses claimed by you on account of weaving charges, as elaborated above.

1. 1. In respect of nature of business, our real nature of business is manufacturing and trading of cloth and not just trading of cloth. There was a typographical error in our Tax Audit report for F Y 2011-12, in respect of which the statutory auditor has given a certificate which says that actual nature of business is manufacturing and trading. Copy of such certificate is attached. Accordingly, the weaving charges becomes party of direct expenses for the purpose of calculation of Gross Profit.

2. In respect of major purchase and sales done with parties from Surat, we submit that Surat is one of the biggest centres for our business. Our raw materials yam is available in Surat at cheapest rates and prices of finished cloth are also best available in Surat. Also, payment terms in Surat is largely acceptable. Accordingly, major business is done in Surat Regarding office at Kalbadevi, Mumbai, we submit that this office is taken on rent by our family members firm M/s Shubhkaran Kanodia & Sons, and (hey have given us permission to do business from there. They have a/so taken (he premises at very nominal rent of Rs. 750 per month. For your reference, their monthly rent letter and certificate allowing us to do business from Mumbai office is attached herewith. The reason behind having this address on invoices of weavers is that most of the weavers are from Bhiwandi, Maharashtra and our other family firms run from Kalbadevi, Mumbai office, and the weavers are contacted majorty from there. Accordingly they write kalbadevi office on their address. We do not have to pay any rent for the same. Regarding office at 1st floor, Krishna Mansion,Kalupur Ghee Bazar, Ahmedabad, it is our family office and we need not pay any rent on the same. In respect of rent paid of Rs. 30000 annually, it is for our Surat office. In respect of freight inward and freight outward charges, kindly note that the raw materials i.e. yarn is sourced and directly delivered at the weavers place at Bhiwandi, Maharashtra, and he freight cost is included in the raw material purchase price. The finished cloth is directly delivered from the weavers place to the end customer, and the freight cost is borne by the end customer. This is the generally practice followed by all in our line of business. Accordingly we do not have freight inward and outward costs. In respect of low administrative cost and low salary cost of Rs. 120000, we submit that most of our business is required to be done over phone, due to which we need only one person other (nan owner. The travelling is a/so very negligible as all orders for raw material is placed over phone and sale of finished goods is also done over phone due to well set industry standard and transparency. For your reference, copy of trading, P & L and balancesheet of M/s Shri Raymata Rayon is attached herewith. In respect of weaving charges, we submit the following documents: 4. Journal book showing entries of weaving charges, duly audited by our statutory auditor.

However, the ld. CIT(A) has not agreed with the submission of the assessee and determined the total addition to the amount of Rs. 4,77,18,580/- resulting in enhancement of Rs. 2,10,82,046/-. Relevant part of the decision of ld. CIT(A) is reproduced as under:- “Decision 9. The written submissions filed by the appellant has been critically examined and placed on record. The assessment order passed by the A.O has also been gone through. The reply of the appellant in response to the enhancement notice has also been perused. The same are being decided as under:- I. The appellant has stated in the reply that there was a typographical error in the tax audit report. The real nature of business of the appellant is manufacturing and trading of cloth and not just trading of cloth. The appellant has also enclosed a copy of the certificate issued by the auditor. Since the appellant is also engaged in the business of manufacturing the weaving charges becomes part of direct expenses for the purpose of calculation of gross profit. However, the contention of the appellant is not acceptable due to the following factors:- (i) To verify the content of the appellant as well as the certificate of the auditor, the tax audit report of the appellant was perused. As per col.32 of the Tax Audit Report(TAR), the auditor is required to report the various ratios. The Col.32 of the TAR are reproduced as under:-

"32 Report the following major ratios: As per Exhibit '2'" It has been reported by the auditor in this column that the details of the ratios is given in exhibit-2 to the TAR. Exhibit-2 of the TAR is being reproduced as under. - Exhibit '2' Accounting year ended 31st March,2012. Assessment Year 2012-2013 Refer Clause 32 of Form 3CD a) (1) Sales 532,730,687 (A) 532,730,687 Less: Cost of goods sold 484,383,964 (B) 484,383,964 Gross Profit: 532,730,687 484,383,964 (A-B) 48,346,723' (a) Gross Profit/ Turnover 48,346,723/532,730,687 • 9.08% (b) Net Profit/ Turnover: 190,370 / 532,730,687 = 0.04% (c) Stock in. Trade/Turnover9,51S,286/532,730,687 = 1.79% (d) Material Consumed/Finished goods Purchased (i/ii) :Nil) Net Purchase Purchases 493,899,250 Less: Closing Stock 9,515,286 (i) 484,383,964 Value of goods consumed Purchase 484,383,964 (ii) 484,383,964" On a perusal of this report, it is clearly established that the auditor has not included the weaving charges as part of the direct cost. In fact in this report, it has clearly been provided by the auditors that material consumed/finished goods purchased is Nil. Even in the Column of value of goods consumed, the auditor has only shown the purchase of the goods. Therefore, this clearly establishes beyond doubt that the appellant has not manufactured anything as has been claimed by the appellant himself or the auditor. (ii) In the certificate issued by the auditor, the auditor has mentioned that the facts have been verified from the books of accounts and related records of the firm. However, as per the tax audit report Col. No.9(b), the auditor is required to give the details of books of accounts maintained (in case books of accounts are maintained in a computer system, mention the books of accounts generated by such computer system). It has been reported by the auditor in this column that the assessee maintains books of accounts in computer system. The books of accounts generated and examined are sale and purchase register, cash and bank book, ledger, general ledger and general register etc. As per this list all books of accounts being maintained, there is no mention of the stock register or manufacturing register being maintained by the appellant. The only books of accounts relating to purchase and sale are the sales and purchase register. In col.9(c) the auditor is required to report the list of books of accounts examined by him. In this column it has been reported by the auditor as "same as point No.9(b)”, therefore, it is clear from the above that the appellant has not been maintaining the stock register or manufacturing register. The auditor has not reported about any other books of accounts been maintained other than the ones mentioned above, therefore, how did the auditor verify that it is also engaged in manufacturing activities and there is a direct delivery of the purchased yarn at Bhiwandi for weaving process and after this weaving, the finished cloth was delivered to the customers direct from weavers at Bhiwandi. The auditor has not elaborated as to what documents/books of accounts were examined by him to come to this finding/conclusion. As per the books of accounts mentioned in Col.9(b) and 9(c) of TAR, none of the books of accounts mentioned in those columns and examined by the auditor of tax audit report would help the auditor in reaching this conclusion. Therefore, this certificate is not based on the facts of the case. The appellant has also not produced the original certificate issued by the auditor for verification, therefore, even the genuineness and veracity of the claim of the appellant based on the certificate of the auditor is also doubted. The appellant has filed the copy of the material inward and outward register showing inflow of raw materials and outflow of finished goods. However, as per the tax audit report, no such book was being maintained/ generated by the auditor and examined by him. If such books of accounts were not in existence at the time of tax audit report, how the same has come into existence now after the enhancement notice has been issued by the undersigned. The same is the case with material inward and, outward register showing inflow of raw material and outflow of finished goods as well as the production register showing details of finished goods manufactured. Even at the cost of repetition it is pointed out that no such register have been generated as per the report of the auditor in TAR col.no.9(b) or examined by the auditor as given in col.no.9(c) of TAR, therefore, the genuineness of these documents submitted by the appellant cannot be proved and relied upon especially in view of the auditor's report in TAR as discussed above. In fact all the circumstances after the issue of enhancement notice proves otherwise. The appellant's claim that all these documents have been verified by the tax auditor arid no adverse remark has been made in his report is also not true to the facts of the case. The appellant is trying to make the statement without verifying the report of the auditor which has clearly been given in col.9(b) and 9(c) of the TAR. Therefore, this statement of the appellant is completely contrary to the facts of the case and report of the auditor and therefore rejected. The claim of the appellant that the quantity details submitted proves the claim of the appellant is also not based on facts of the case as these documents/books of accounts have never been generated/in existence and examined by the auditor. The argument of the appellant that the conversion process has been accepted in all their assessments is also a question of fact which is to be decided on the basis of the facts of the case. If the appellant is actually engaged in the business of manufacturing, the process of the appellant has to be accepted, however, in this year the claim of the appellant has been proved otherwise. In fact in the TAR filed by the appellant the only address given by the auditor is that of Ahmedabad. The assessment file from the A.O was called for to examine the details of the appellant. As per the assessment records, the appellant has given the details of the premises in which the address of Kalbadevi Mumbai has been mentioned, however, as per the bank statement produced during the course of assessment proceedings by the appellant, the address of Surat is being shown on the bank statement maintained with the Kalupur Commercial Co.Op. Bank Ltd. Surat. "The auditor has only mentioned one address of Ahmedabad in the TAR. When the A.O asked the appellant to furnish the details of addresses, the appellant has given only the Mumbai address. The appellant has not furnished the address of Ahmedabad to the A.O. As per the bank statement produced during the course of assessment proceedings, a third address of the appellant has been shown which is at Surat. Therefore, the appellant is still not showing as to from how many addresses, the business of the appellant is being run. Even the auditor has not taken proper care to report all the addresses of the appellant which is one of the basic requirements of the auditors report. Therefore, the auditor has also failed in reporting the correct address of the appellant. This also becomes important in view of the fact that the appellant has only debited Rs. 30.000/- as office rent for the whole year* The office rent paid by the appellant comes to Rs. 2500 per month. This also explains and points the defects/problems in the auditors report as well as the certificate of the auditor as the auditor has not taken proper care in reporting all the addresses of the appellant only. The appellant has produced product-wise stock ledger in reply to the show cause notice for enhancement. It has already been stated in the earlier part of this order that the same has not been maintained by the appellant and examined at the time of audit as has clearly been reported in col.9(b) and 9(c) of the TAR by the auditor. Therefore, the same cannot be taken as an evidence/authentic document. Although it has been claimed by the appellant that the yarn is sourced and directly delivered at the weavers place at Bhiwandi, Maharashtra and the freight cost is included in the raw material purchase price and the same is the case with the finished goods which is also freight is included in the invoice price. However, no evidence whatsoever has been furnished by the appellant to prove his claim. No invoice whatsoever has been furnished for the purchase showing the freight cost or the finished goods showing the freight cost. It has clearly been stated in the show cause notice that you are requested to file your reply/explanation with all the documentary evidences which you may rely upon in support of your reply. It was also made clear in the show cause notice that please note that merely stating something without proper evidences/documents would not be taken as an evidence in support of your reply. Despite this the appellant has not given any evidence whatsoever in support of his claim. It has clearly been provided in the show cause notice that if the weaving charges are included as direct expenses, The G.P of your business comes to 0.11%. It is a well known fact that the appellant would go for value addition in any product only when the profit being earned by the appellant is more than the profit being earned in the trading. Since the appellant's gross profit is only 0.11%, this does not justify even otherwise the argument of the appellant that he is also involved in the manufacturing activity. The argument of the appellant that the cost of trading on the business is less as most of the business of the appellant is done over phone is also not based on the facts of the case. However, to verify the claim of the appellant the P & L A/c. filed by the appellant was perused. On perusal, it is seen that the appellant has not debited single rupee on account of telephone expenses in the P & L A/c. Even if the appellant's version is accepted that the business of the appellant is being done on phone, at least there should be some telephone calls/expenses which requires to be debited in the P & L A/c. Therefore, the argument even on this account is completely not based on the facts of the case. This goes on to show that the appellant is trying to justify his case by hook or by crook. In view of the above, it is held that the submissions filed by the appellant is nothing but an afterthought which is not based on the facts of the case as has been discussed at length and proved in the earlier part of this order and therefore, the same cannot be relied upon. In view of the above the income of the appellant is determined at Rs. 4,77,18,580/-. It may be clarified here that the A.O made the addition of Rs. 2,66,36,534/- on an estimation basis by adopting 5% profit of his total turnover u/s.144 of the Act. The income being determined at Rs. 4,77,18,580/- includes the addition made by the A.O of Rs. 2663G534/- which has been made by the A.O on an estimation basis. Accordingly, the income of the appellant is being determined at Rs. 4,77,18,5807-resulting in an enhancement of Rs. 2,10,82,046/-. The A.O is directed to give effect, to this order accordingly. The grounds of appeal taken by the appellant are dismissed.”

During the course of appellate proceedings before us, the ld. counsel has furnished the paper book containing detail of information and document furnished before the assessing officer and CIT(A) during the course of assessment proceedings and appellate proceedings. The ld. counsel has also referred the decision of Hon’ble Jurisdictional High Court in the case of the assessee itself vide Tax Appeal Nos. 682 to 684 of 2015 with 410 to 412 of 2015 dated 01/08/2016 wherein the Hon’ble High Court has justified the decision of the ITAT in restricting the disallowance on similar fact and issue to the extent of 2.5% out of total job work charges paid by the assessee. On the other hand, ld. departmental representative has supported the order of the lower authorities.

5. We have heard the rival contention and perused the material on record carefully. During the course of assessment, the assessee has failed to produce the books of account and other documents for verification. Therefore, the assessing officer has estimated the business income of the assessee at 5% of his total receipt of Rs. 53,27,30,687/- to the amount of Rs. 2,66,36,534/-. In response to the notice for security assessment before ld. CIT(A) the assessee has furnished detail as required from time to time, copy of audit report, balance sheet and confirmation of creditors and debtors along with details which was not fully considered by the assessing officer. It is also stated that assessing officer has neither rejected the books of account produced before him and has nor recorded any justification for assessing income of the assessee on estimate basis. It is also stated that in the submission before the ld. CIT(A) that assessee had produced all details regarding purchase of Rs. 49,38,99,250/- and job charges of Rs. 4,77,18,580/-, ledgers and bills during the assessment proceedings. The assessee has again submitted the detail with following along with detail of books of account before the ld. CIT(A) as mentioned below from the submission made before the ld. CIT(A). “1.Books of accounts, Profit and Loss a/c with supporting ledgers of Raw Material Purchase, Job charges and all Administrative Expenses 2.Purchase Register with all creditors ledger & their confirmations 3-Ledger of Weaving charges & Copies of invoices received from weavers in respect of weaving charges incurred. Further, confirmation of accounts from all creditors for purchase and weaving charges were submitted before the AO, the same are once again attached. We also submit as under: 1. Copy of Audit Report

2.Copy of assessment orders of similar cases in assesses own group -Kailashchandra Ajay HUF [A Y 13-14] & Kailashchandra Suryakant HUF [A Y 13-14], In these cases, the nature of business is exactly same and the department has duly accepted without any addition. In light of the above, we request your goodself to delete the addition made."

However, the ld. CIT(A) was of the view that the parties to whom weaving charges were paid were based Bhiwandi, Mumbai and assessee has not debited any expenses for freight inward or freight outward. Therefore, the ld. CIT(A) has given notice for enhancement of income as reproduced above in this order. In response to notice of enhancement, assessee has submitted his rely vide letter dated 15th March, 2017 which is reproduced as above in this order stating that raw material i.e. yarn was sourced directly delivered at the weaver place at Bhiwandi, Mumbai and the freight cost was included in the raw material purchase price. It was also explained that finished cloth was directly delivered form the weaver place to the end customer and the freight cost was born by the end customer. However, The ld. CIT(A) has not considered the submission of the assessee on the ground that the same was an afterthought not based on facts. Therefore, he has made enhancement of Rs. 2,10,82,046/- by disallowing the 100% weaving charges of Rs. 4,77,18,580/-. After perusal of the aforesaid finding of the ld. CIT(A) we observe that ld. CIT(A) has not considered the material fact that assessee was dealing in manufacturing of finished cloth after purchasing the yarn without weaving process. It is not possible to sell finished cloth out of the yarn. The ld. CIT(A) has not disproved all the material fact and relevant evidences submitted by the assessee i.e. general book showing entry of weaving charges bill audited by auditor, cash book, bank book showing payment to job workers for weaving charges, material inward and outward register as raw material finished cost, detail of finished goods manufactured, production register, purchase bill, register sales register, ledger account etc. Further, the assessee is in the business of process of yarn into cloth and incurred expenses on weaving charges for converting the raw material in the form of yarn to finished product as a finished cloth. It is undisputed fact that without weaving charges, the cloth cannot be finished from the raw material. The ld. CIT(A) has not disproved the relevant material and evidences submitted by the assessee and just made enhancement on estimation basis which is not justified. It is further noticed that assessee has been claiming weaving charging from the last number of years and in the assessment year 2012-13 even the Hon’ble High Court has justified the decision of Hon’ble ITAT Ahmedabad in confirming the decision of ld. CIT(A) to restricting the disallowance on account of weaving charges to 2.5% of weaving charges. In this regard, the relevant part of decision of Hon’ble High Court is reproduced as under:- “2. The respondent-assessee is an individual and is engaged in the business of manufacturing of grey cloth. For the assessment years 2007-08, the assessee had filed return of income declaring total income of Rs. 2.42 lacs. The return was taken under scrutiny by the Assessing Officer. He noticed that the assessee had claimed weaving charges of Rs. 3.85 crores. He called upon the assessee to justify such expenditure. On the ground that the assessee failed to do so and that the expenditure was extremely high, the Assessing Officer disallowed 25% thereof or Rs. 96.35 lacs and adding excise duty component to the same, computed the total income of Rs. 98.98 lacs. The Assessee carried matter in appeal. The CIT(Appeals) gave partial relief to the assessee and limited the disallowance to 2.5% of the claim of expenditure. The issue was carried in further appeal both by the Revenue as well as the assessee. The Tribunal dismissed both appeals making following observations: “6. We have carefully considered rival submissions and perused the orders of the AO and the CIT(A). We find that the CIT(A) has passed a well reasoned speaking order in this case, while disposing of the appeal of the assessee. He has dealt with each and every defect pointed out by the AO in detail. He has given a finding that the plea of the AO that the assessee could not give a complete address to whom the payment for job work charges were made, was not correct. The assessee has filed all the relevant details in full addresses of the vendors and copies of their bills. The assessee has pleaded before the CIT(A) that all the vendors were from Bhiwandi, Maharastra and it was not practically possible to obtain confirmatory letters from each of them after the passage of such a long time since the transactions were made. We find that the AO had demanded copies of cheques issued to suppliers, but it was practically not possible to obtain copies of each and every cheque issued to the vendors. We find that the AO could not record any justifiable reason for making disallowance of a higher rate of 25% of the total weaving charges on an estimate basis. We find that CIT (A) has discussed a number of decisions cited at the Bar while deciding the appeal of the assessee. We find that in the line of business of the assessee of manufacturing of grey cloth, finished cloth could on not be sold unless it is weaved and processed and the cost of weaving and processing is the direct cost which has to be incurred by the assessee. Purchase of yarn cloth and sale of grey cloth could not be disputed by the Revenue. The CIT(A) has given a finding that the assessee has given copy of list of parties to whom weaving charges were paid in which complete address have been given and has also filed copies of bills of job work expenses containing names and address of such parties. The CIT (A) has also recorded that the AO has not pointed any defect in the purchase bills or sales bills or job work charges bills except saying that complete address of the parties were not given in respect of whom the job work charges were paid. The CIT (A) has recorded in his appellate order that the AO has not made any inquiry at all as can be seen from the assessment order, and when the quantity of sales of cloth and purchase of yarn is accepted by the AO, as he has done in this case he could not disallow the weaving charges at the rate of 25% without bringing some material on record to show that the inflation was so huge. The CIT(A) has further recorded that the AO has brought no material on record to prove that either the parties were bogus or the job charges were inflated to the extent of 25% and in the absence of the same, disallowance made by the AO was not correct. However, the CIT (A) has considered that the turnover of the assessee was Rs. 30.37 crores and the GP of the assessee was extremely low at Rs. 4,72,252/- and some inflation of expenses in respect of job charges could not be denied in this case. In these facts, he has restricted the disallowance out of job work charges to 2.5% as against 25% disallowed by the AO. We are of the considered view that considering high turnover of the assessee and a very low GP shown by him, the possibility of some inflation in job work charges could not be ruled out. Accordingly, the action of the CIT (A) in restricting the disallowance out of job work charges to 2.5% out of total job work charges paid by the assessee by way of estimate as against 25% disallowance made by the AO seems to just and fair, and is accordingly confirmed. In this view of the matter, we see no merit in the ground of the appeals of the assessee and the Revenue, and they are accordingly dismissed.”

5. Having heard learned counsel for the parties and having perused the documents on record, we do not find that the Tribunal has committed any error. The Tribunal, while dismissing the Revenue's appeal, noted that before CIT (Appeals), the assessee had pointed out the relevant details with full addresses of the vendors and copies of their bills. These vendors were from Bhivandi, Maharastra. It was not possible to obtain a confirmatory letter from each of them after long passage of time. The Tribunal noted that the Assessing Officer had not recorded any justifiable reason for making such disallowance on estimate basis. The Tribunal was of the opinion that in the line of the business namely of manufacturing of grey cloth, finished cloth could not be sold unless it is weaved and processed and the cost of weaving and processing is direct cost which has to be incurred by the assessee. The assessee had supplied the list of parties to whom weaving charges have paid with complete addresses of such persons. He had also filed copies of bills of job work expenses containing details such as names and addresses of the parties.

6. Thus, the issue was examined by the CIT (Appeals) and the Tribunal on the basis of available materials on record. Such concurrent findings do not call for any interference. The same would be the position with respect to the retention of the limited disallowance by the said authorities.”

Respectfully following the decision of Hon’ble High Court, we do not find any merit in the decision of ld. CIT(A), therefore, we restrict the disallowance as 2.5% of the weaving charges. Therefore, the appeal of the assessee is partly allowed.