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Before: Shri Amit Shukla & Shri L.P. Sahu
ORDER Per L.P. Sahu, A.M.: This appeal at the instance of assessee is directed against the order dated 29.10.2015 of ld. CIT(A)-5, New Delhi for the assessment year 2011-12 (wrongly mentioned in impugned order as 2005-06). The assessee has raised following grounds of appeal : 1.) That the learned Commissioner of Income Tax (Appeals)-5, New Delhi has erred both in law and on facts in upholding the addition of Rs.28,71,280.00 on account of wages claimed by the aggrieved appellant ignoring the submissions made during the assessment proceedings as well as appellate proceedings before the CIT respectively. 2.) That the learned Commissioner of Income Tax (Appeals) while upholding the addition, has mechanically proceeded to rely on findings in the order of assessment, disregarding the submission and explanation tendered by the assessee that wages have actually been paid by the appellant and without appreciating the fact that no prudent business man shall incur an expenditure which is unnecessary for running its business.
3.) That the learned Commissioner of Income Tax (Appeals) has upheld the additions made by Learned Assessing Officer on the premise that petty cash payments have been made to different set workers every month without appreciating the fact that it was on account of the Labour turnover, the assessee had taken Labour contractors on board to run the manufacturing operations. 4.) That it is therefore, prayed that, it be held that assessment made by the learned Deputy Commissioner of Income Tax and sustained by the learned Commissioner of Income Tax (Appeals) be quashed and, further addition so upheld by the learned Commissioner of Income Tax (Appeals) along with interest levied be deleted and appeal of the appellant be allowed.
Briefly stated, the facts of the case are that the assessee-company is engaged in the manufacturing of intravenous cannulae and other surgical disposables. The appellant company filed its return of income on on 25.09.2011 declaring income of Rs.33,29,730/- and book profit u/s. 115JB of Rs.1,41,66,350/-. The appellant company is eligible for deduction u/s. 10 B of the IT Act, being a company registered as 100% EoU unit. The case was selected for scrutiny and statutory notices were issued to the assessee. During the assessment proceedings, the Assessing Officer observed that there was decline in G.P. rate from 42.28% in F.Y. 2009-10 to 37.14% in F.Y. 2010-11 relevant to assessment year under consideration. The Assessing Officer noticed that the assessee had claimed an amount of Rs.2,07,94,935/- under the head wages, as appearing in the trading, profit & Loss account under manufacturing expenses. The Assessing Officer observed that the wages expenses claimed were more than 75.71% as compared to the preceding year’s expenses. He also noted that there was an increase in merely 29% in sales value of the main product as compared to 20% in the last year. The assessee was asked to justify the abnormal increase in wages payment. In response, the assessee submitted a detailed reply before the Assessing Officer as incorporated in the assessment order. The Assessing Officer, however, was not satisfied with the reply of assessee and disallowed the wages expenses of Rs.28,71,820/- . The observations of the Assessing Officer and working of wages expenses are as under : The reply of the assessee company has been considered. The contention of the assessee that contractual labour was employed should have resulted in decline in workers' wages bill. Even after considering the increase in additional cost of 15% by employing contractual labour and increase in minimum wages by 10%, the increase is wages is still high vis a vis increase in sales. It is also to be noted that the incremental sales does not require the wage bill to increase in the same proportion, therefore a sum of Rs. 28,71,820/- (difference of 2,07,94,935-1,79,23,115) is being disallowed and added back to the income of the assessee company worked out as under:- Wage bill for FY 2009-10 1,18,34,346.00 Add: 10% for increase in Minimum Wages 11,83,435.00 Add: 30% Increase in wages due to increased production 39,05,334.00 Add: Increase of cost by 15% due to employment of contractual labour 10,00,000.00 Total Wages for FY 2010-11 and added back to the income of the assessee 1,79,23,115.00 The assessee carried the matter in appeal before the ld. CIT(A), who after considering the detailed submissions of the assessee and the assessment order, upheld the action of the Assessing Officer vide impugned order. Aggrieved, the assessee is in appeal before the Tribunal.
During the course of hearing, the ld. Authorized Representative of assessee, Shri Gautam Jain, Advocate, reiterated the submissions made before the ld. Authorities below and also submitted a per book containing 166 pages. He has also placed before us a written synopsis stating as under :
“UNDISPUTED FACTS:
1 That the appellant is engaged in manufacturing of intravenous cannulae and other surgical disposables.
2 That unit of the appellant company is 100% EoU unit and eligible for deduction under section 10B of the Act.
2.1 That books of accounts are duly audited both under the Companies Act, 1956 and under section 44AB of the Act.
2.2 That books of accounts stood accepted in assessment framed under section 143(3) of the Act.
2.3 That the comparative chart of the sales, gross profits and net profit is as under: Assessment Sales GP GP% NP NP% Assess year ment u/s 2010-11 12,84,32,241 5,43,01,426 42.28 1,76,23,915 13.72 143(1) 2011-12 16,72,71,829 6,21,23,099 38.85 1,41,66,346 8.47 143(3) 2012-13 22,22,82,426 9,10,92,582 40.98 2,15,14,049 9.68 143(1) 2013-14 39,51,19,661 17,98,17,313 45.51 7,57,33,789 19.17 143(3) 2014-15 44,73,70,299 21,08,71,219 47.14 9,07,10,624 20.28 143(3) 2015-16 45,60,54,699 20,77,56,278 45.56 7,07,39,195 15.51 143(3)
2.4 That the learned Assessing Officer on account of the fact that GP rate had fallen from 42.28% to 37.14%, made an addition of Rs. 65,68,000/- in the order of assessment under section 143(3) of the Act by enhancing profits by 4% of sales. This addition stood deleted by the learned Commissioner of Income Tax (Appeals) as would be evident from pages 3 to 13 of the order of learned Commissioner of Income Tax (Appeals) and relevant findings contained in para 4 to 4.2 at pages 11 to 13 of order of Commissioner of Income Tax (Appeals). The aforesaid deletion of addition by the learned Commissioner of Income Tax (Appeals) has not been challenged by the revenue in this appeal.
3. Apart from above, the learned Assessing Officer in the impugned order had also made the disallowance of Rs. 28,71,820/- out of expenditure incurred on wages by the appellant company. This disallowance had been sustained by the learned Commissioner of Income Tax (Appeals) vide her findings at pages 13 to 18 in paras 5 to 5.23 and, operative findings are at pages 17 to 18 of the order.
3.1 The basis of the aforesaid disallowance is as under:
Sr. Particulars Amount No. (Rs.) i) Wage bill for financial year 2009-10 1,18,34,346 ii) Add: 10% for increase in minimum wages 11,83,435 iii) Add: 30% increase in wage due to increased 39,05,334 production iv) Add; Increase of cost by 15% due to employment of 10,00,000 contractual labour v) Total wages for financial year 2010-11 and added 1,79,23,115 back to the income of the assessee 3.2 From the aforesaid tabulation, it would be apparent that the learned Assessing Officer held that according to his own basis on the explanation tendered, wages should have been incurred at Rs. 1,79,23,115/- as against Rs. 2,07,94,935/- claimed by the appellant and therefore, the excess expenditure incurred is not allowable.
3.3 At the outset it is submitted that the above basis is contrary to scope of provisions contained in section 37(1) of the Act. It is respectfully submitted that once an expenditure has been incurred wholly and exclusively for the purpose of business then irrespective of the allegation that such expenditure was not necessary, deduction ought to have been allowed. The Hon’ble Apex Court in the case of Sassoon J. David & Co. (P) Ltd. v. CIT reported in 118 ITR 261 has held as under:
“It has to be observed here that the expression "wholly and exclusively" used in section 10(2)(xv) of the Act does not mean "necessarily". Ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under section 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. It is relevant to refer at this stage to the legislative history of section 37 of the Income-tax Act, 1961 which corresponds to section 10(2)(xv) of the Act. An attempt was made in the Income-tax Bill of 1961 to lay down the "necessity" of the expenditure as a condition for claiming deduction under section 37. Section 37(1) in the Bill read "any expenditure. . . . laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed" The introduction of the word "necessarily" in the above section resulted in public protest. Consequently when section 37 was finally enacted into law, the word "necessarily" came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under section 10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law. This view is in accord with the following observations made by this Court in CIT v. Chandulal Keshavlal & Co. [1960] 3 SCR 38 at page 48 : "Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party—Usher's Wiltshire Brewerv v. Bruce 6 TC 399 (HL). Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business ; and it is immaterial that a third party also benefits thereby — [Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC)]. But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee."
3.4 It is submitted that in arriving at the aforesaid conclusion, it will be apparent that the learned Assessing Officer has not at all disputed any of the explanation tendered by the appellant company. He has merely accepted the explanation and thus adopted percentages to compute the allowable expenditure which is a process unknown to law and therefore, not tenable. It is submitted that once expenditure has been incurred and debited in the books of accounts, duly supported by relevant vouchers and bills, there was no justification to deny the said claim of expenditure. Infact, explanation tendered by the appellant is extracted in para 4 of the order of assessment whereby it was stated as under:
“a) Regarding in Wages Cost – During the year under assessment, the Company paid the wages amounting to Rs. 2,07,94,935.00 as compared to last year of Rs. 1,18,34,346.00. The Wages cost increased due to following reasons:- b) The Company is manufactured of I V Cannula which is manually assembled of different parts by the workers. During the year the Company increased the production of I V Cannula/other products from 271,24,465 pcs to 3,70,85,045 pcs. We are enclosing herewith the Month-wise Production and Wages for your kind perusal. It is also to be understood here that the company is manufacturing a product which has a direct touch with the human body and is subjected to more than 30 tests before being considered fit for human use. The precision quality and hygienic standards are a must for their product which requires a lot of trained and experienced labour. The requirement of labour is mainly for assembly section wherein the labour is made to be sit in a Clean Air conditioned room with no outside air interefernece are made to wear special dress for sitting in the Clean Room and the tolerance level are too low for any outside particle to come in the room. Thus regular trained labour to ensure precision quality product is a must for the manufacturing operations of the company since the company is supplying mainly to companies outside India. c) During the year under review the company had on account of constant turnover of labour appointed contractors to supply the labour which was expensive to the tune of 15% being the margin availed by the contractor on the total wages plus fringe benefit of PF and ESI. As against the total contractual labour payment of Rs. 16.75 lacs in FY 2009-10, the company incurred a sum of Rs. 71.80 lacs on contractual labour. As already stated, the operations of the company involve lot of manual labour which needs to be trained labour. Constant entry exit of labour due to unrest in the area was affecting the quality of the production and hence in order to ensure continuous supply of trained labour, the company appointed labour contractors to supply labour. Copy of Labour contractors accounts are being submitted. The company had paid ESI and PF liability on all payment to contractual labour too which is reflected in the amount spent on PF/ESIC rising to Rs. 31.33 lacs from Rs. 25.38 lacs in FY 2008-09. d) Due to increase in Minimum Wages by Haryana Government during the year under review resulting in increase in cost by 10%. The company has also appointed certain senior professionals like the GM production in the year under review in view of the increase visible in production and for development of new products for customers which also contributed to increase in wages cost. The sales of the company increased in next financial year i.e. FY 2011-12 to Rs. 16.42 crore.”
3.5 It is submitted that having regard to the aforesaid explanation and the comparative chart hereunder, disallowance made is absolutely uncalled for: Assessment Sales Wages Disallowance Assessment year if any u/s 2010-11 128,432,241 11,834,346 Nil 143(1) 2011-12 167,271,829 20,794,935 2871820 143(3) (disputed in appeal) 2012-13 222,282,426 23,909,307 Nil 143(1) 2013-14 395,119,661 28,447,430 Nil 143(3) 2014-15 447,370,299 31,134,084 Nil 143(3) 2015-16 456,054,699 42,368,726 Nil 143(3)
3.6 Apart from the above, following evidences have been filed in support of the expenditure incurred on wages and claimed by the appellant company:- Sr. Nature of evidence Pages of No. Paper Book i) Agreement for labour /manpower contract dated 11-17 28.01.2009 between assessee and M/s Khemchand Enterprises ii) Point discussed and to be followed regarding contract 18 laobur in meeting dated 10.11.2009 with Ms Khemchand Enterprises iii) Agreement for labour /manpower contract dated 19-25 23.03.2010 between assessee and M/s B & D Enterprises iv) Agreement for labour /manpower contract dated 26-33 12.01.2011 between assessee and M/s Bull Eye Security and Housekeeping Services v) Details of contractor wise/month wise salary, 132 Provident Fund/ ESI payment vi) Details of 985 contract labour alongwith PF and 134-156 salary details vii) Letter from Labour commissioner, Haryana regarding 162 increase in minimum salary subject to Consumer Price Index. viii) Ledger account of PF payable 165 ix) Ledger account of PF payable 166 3.7 It is settled law that, no disallowance can be made and sustained on the basis of suspicion. Reliance for the proposition is placed on Uma Charan Shaw & Bros. Co. vs. CIT reported in 37 ITR 271. It has been further held in the following cases that suspicion howsoever strong cannot take the place of proof: i) 37 ITR 151(SC) Omar Salay Mohammad Sait v CIT ii) 26 ITR 736 (SC) Dhirajlal Girdharilal v CIT, Bombay iii) 26 ITR 775 (SC) Dhakeshwari Cotton Mills ltd. v CIT iv) 37 ITR 288 (SC) Lal Chand Bhagat Ambica Ram v CIT 3.7 Furthermore, the learned Commissioner of Income Tax (Appeals) has upheld the disallowance on the ground that it is difficult to appreciate that when the appellant is manufacturing a product which requires high degree of precision and hygienic standards and consequently trained and experienced labour then how the labour engaged month to month is different and since the impugned payments have been made in cash which are not subject to tax deduction at source and hence not amenable to independent verification and there has been abnormal rise in the wages and therefore, reasonable basis adopted by the revenue in arriving at the figure of wages ought, is not justified. It is submitted that here too, the learned Commissioner of Income Tax (Appeals) has merely proceeded on surmises, conjectures and suspicion. Mere fact that there was no common persons operating on month to month basis, it does not mean that expenditure was not incurred by the appellant company. It is submitted that sales are not in dispute, books of accounts are not in dispute, incurring of expenditure is not in dispute, then merely on vague assumptions and surmiseful belief, restriction of legitimate business expenditure is not tenable and therefore, may kindly be deleted. That the perusal of aforesaid would show that, no disallowance has been made in the past and, succeeding years. It is submitted, to carry on such huge volume of business, the assessee has to necessarily expenditure and entertain it business associates and, hence expenditure so incurred is eligible business expenditure. Reliance is placed on the following judicial pronouncements: i) 254 ITR 377 (Del) CIT vs. Dalmia Cement ii) 288 ITR 1 (SC) S.A. Builiders Ltd. vs. CIT “31. We agree with the view taken by the Delhi High Court in CIT vs. Dalmia Cement (Bharat) Ltd. (2002) 174 CTR (Del) 188 : (2002) 254 ITR 377 (Del) that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the armchair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman can be compelled to maximize its profit. The IT authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own viewpoint but that of a prudent businessman. As already stated above, we have to see the transfer of the borrowed funds to a sister- concern from the point of view of commercial expediency and not from the point of view whether the amount was advanced for earning profits.
We wish to make it clear that it is not our opinion that in every case interest on borrowed loan has to be allowed if the assessee advances it to a sister- concern. It all depends on the facts and circumstances of the respective case. For instance, if the directors of the sister-concern utilize the amount advanced to it by the assessee for their personal benefit, obviously it cannot be said that such money was advanced as a measure of commercial expediency. However, money can be said to be advanced to a sister-concern for commercial expediency in many other circumstances (which need not be enumerated here). However, where it is obvious that a holding company has a deep interest in its subsidiary, and hence if the holding company advances borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would, in our opinion, ordinarily be entitled to deduction of interest on its borrowed loans.
In view of the above, we allow these appeals and set aside the impugned judgments of the High Court, the Tribunal and other authorities and remand the matter to the Tribunal for a fresh decision, in accordance with law and in the light of the observations made above.” It is thus prayed that disallowance made may kindly be deleted.” 3.8
On the other hand, the ld. DR relied on the orders of the authorities below and submitted that since the assessee could not be able to furnish plausible explanation to substantiate abnormal hike in wages payment claimed, the ld. Authorities below were justified to make the impugned addition to the income of the assessee.
We have considered the rival submissions and have gone through the entire material available on record and we find no justification to sustain the impugned order. It is pertinent to note that the ld. Authorities below while disallowing the impugned wages payments have nowhere observed that any of the wages expenses claimed was not incurred wholly and exclusively for the purpose of business, particularly when the said expenditure were incurred by the assessee, debited in the books of account and supported by bills and vouchers. The Assessing Officer has stressed on wages expenditure, which could be payable by the assessee as per his own hypothetical calculations without pointing out that any such payment on wages or any such voucher/bill was disallowable in particular or was not laid wholly or exclusively for the purpose of business, being the true intent of section 37(1) of the IT Act. For this view, we stand fortified by catena of decision of Hon’ble Apex Court in Sasson J. David & Co. (P) Ltd. vs. CIT (supra) relied by the assessee and various other decisions.
Apart from the above we have examined the trading, profit & loss account in the light of explanation given by assessee before the ld. Authorities below and we find considerable substance in the contention of the assessee that owing to constant labour supply through contractors, the contractual labour payment was increased from Rs.16,75,000/- in A.Y. 2010-11 to Rs.71,80,000/- in A.Y. 2011-12, i.e., the year under consideration. Since this payment of Rs.71,80,000/- was made through banking channel, the ld. Authorities below themselves have not doubted this payment anymore nor did they drew any adverse inference on the basis of this contractual labour payment. The Assessing Officer has also not made any addition on this score. Therefore, in our opinion, once the main hike was in contractual labour payment and this payment was accepted by the ld. Authorities below as genuine, the working of the authorities below cannot be sustained for disallowance of wages expenses. Moreover, the ld. Authorities below appear to have not considered the explanation of the assessee in right perspective that the assessee has paid substantial amounts of ESI/PF on all the wages payments, which resulted into substantial increase in the amount spent on ESIC/PF from Rs.25.38 lacs in preceding year to Rs.31.33 lacs in the year under consideration. We also find that if the contractual labour payments, on genuineness of which there is no dispute, are set apart, the increase in other labour payments is of only Rs.34,54,759/- i.e., from Rs.1,01,59,706/- to Rs.1,36,14,465/-, which in view of increase in production and other factors relevant to such increase as explained by the assessee, cannot be said to be unreasonable. The ld. CIT(A) appears to have sustained the action of the Assessing Officer on the premise that different individuals were employed every month, which goes to belie the explanation of the assessee that trained labour is needed for the manufacture of product. In our considered opinion, the monthly change of individuals, would not suggest that the changed labour was not trained one and such extraneous facts would not be suffice to disallow the wages payments claimed by the assessee. If the ld. CIT(A) had any doubt on the genuineness of labour payments made by assessee, he could call for examination of the payees exercising his powers vested u/s. 250(4) of the IT Act, which is lacking in the instant case. Therefore, mere on suspicion and fake presumption, no disallowance can be made, as held in plenty of decisions of various higher courts. The ld. Counsel for the assessee has submitted a comparative chart before us giving various factors responsible for increase in labour payments, which stands uncontroverted on behalf of the Revenue. If the factors responsible for increase in wages payments as explained by the assessee are considered in right perspective, the wages payments claimed by the assessee cannot be said to be unreasonable. In the totality of facts and circumstances and in view of our above discussion, we, find the appeal of the assessee full of merits which deserves to be allowed.