LARS MEDICARE PVT. LTD.,NEW DELHI vs. DCIT, NEW DELHI

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.

“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.