SUPERSONIC TURNERS PVT. LTD,JAIPUR vs. ACIT, JAIPUR

आयकर अपीलीय अधिकरण] जयपुर न्यायपीठ] जयपुर IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR Jh dqy Hkkjr] U;kf;d lnL; ,oa Jh foØe flag ;kno] ys[kk lnL; ds le{k BEFORE: SHRI KUL BHARAT, JM & SHRI VIKRAM SINGH YADAV, AM vk;dj vihy la-@ITA No. 276/JP/2014 fu/kZkj.k o"kZ@Assessment Year : 2010-11 cuke M/s Supersonic Turners Pvt. Ltd., The A.C.I.T., Vs. F-393A, Road No.9 F2, Circle-4, VKI Area, Jaipur. Jaipur. LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AADCS 5144 H vihykFkhZ@Appellant izR;FkhZ@Respondent

fu/kZkfjrh dh vksj ls@ Assessee by : Shri Satish Gupta (C.A.) jktLo dh vksj ls@ Revenue by : Shri Prithivi Raj Meena (Add. CIT)

lquokbZ dh rkjh[k@ Date of Hearing : 21/02/2017 mn?kks"k.kk dh rkjh[k@ Date of Pronouncement :23/02/2017 vkns'k@ ORDER

PER: VIKRAM SINGH YADAV, A.M.

This is an appeal filed by the assessee against the order of Ld.

CIT(A) dated 21.02.2014 for A.Y. 2010-11. The grounds of appeal taken

by the assessee are as under:-

2 ITA No.276/JP/2014 M/s Supersonic Turners v ACIT, Circle 4, Jaipur

or disproportionate. Ld. A.O. or CIT(A) even could not find a single instance of any unvouched exp., unsigned voucher or voucher without description. Therefore the observation of Ld. CIT(A) that the defect noticed by A.O. were found by him also is wrong fact as he also has not mentioned any specific defect. 2 On the facts & circumstances of the case & in law also Ld. Lower authorities grossly erred in confirming the disallowance of Rs.5,11,060/- on a/c of disallowance of interest paid.

during the assessment proceedings, it was observed by the AO that the

assessee company has claimed job work expenses of Rs.8,77,81,594/-

as per the profit and loss account. The assessee was specifically

requested to furnish bills in respect of these claimed expenses. However,

the bills so produced were found to be without any description of the

work done. While some of the bills were found to be unsigned, in some

of the bills signatures were found to be in the same handwriting. These

discrepancies were also pointed out to the assessee. In response, it was

submitted by the assessee that majority payments were made through

banking channels and the TDS was duly deducted and paid on all these

payments. The submission of the assessee was considered by AO and it

was stated by the AO that the reply of the assessee falls short of

justification in respect of discrepancies as enumerated in the bills above,

3 ITA No.276/JP/2014 M/s Supersonic Turners v ACIT, Circle 4, Jaipur

because without any detailed description of the work done and

appropriate endorsement, the veracity of the expenses claimed under

job work stands disputed, unverified and unproved. Total job work

charges debited in the P/L account are Rs.8,77,81,594/-. The AO noted

that disallowance @ 10% of these expenses comes out to

Rs.87,78,159/- and @ 5% comes out to Rs.43,89,80/-. Keeping in view

the reply of the assessee and looking to all possibilities invoked, a lump

sum disallowance of Rs.25,00,000/- was thereafter made by the AO and

added to the total income of the assessee.

CIT(A), who has confirmed the order of the AO by observing in para 2.3

of his order as under:

“2.3: I have considered the facts of the case; assessment order and appellant’s written submission. Assessing Officer disallowed Rs.25 lakhs out of job work charges on account of defects in the bills such as certain bills not bearing signature, description of factual work done not there etc. The disallowance made by the assessing officer is less than 3% of the total job work charges paid and therefore it can be seen that disallowance made by the Assessing Officer is not exorbitant or disproportionate. During appeal proceedings this issue was again examined and it is found that apart from the defects noticed by the Assessing Officer, appellant made cash payment on account of job work

4 ITA No.276/JP/2014 M/s Supersonic Turners v ACIT, Circle 4, Jaipur

charges to associated concerns. Payment of job work charges to the extent of more than Rs.20 lakhs were made by cash to M/s Pawansut. In the tax audit report, payment for job work and others to related parties was reported to be more than Rs.1 crore therefore the genuineness and business purpose of these expenses are not beyond doubt. Considering the defects in vouchers and substantial cash payment to related parties, part disallowance of job work charges is justified. Since assessing Officer disallowed less than 3% expense which is quite reasonable and even less than cash payments made for job work charges, disallowance deserves to be confirmed. The appellant’s arguments that no such disallowance was made in earlier years is of no consequence since Assessing Officer found defect in the expense claimed and therefore disallowance can be made in the year of verification. Accordingly, disallowance made by the Assessing Officer is confirmed”.

at page 2 of the assessment order where the Assessing Officer made the

disallowance by mentioning “The reply of the assessee has been

carefully considered, which falls short of justification in respect of

discrepancies as enumerated in the bills above, because without any

detailed description of the work done and appropriate endorsement, the

veracity of the expenses claimed under job work stands disputed,

unverified and unproved. Total job work charges debited in the P/L

account are Rs.8,77,81,594/-. Disallowance @ 10% of these expenses

5 ITA No.276/JP/2014 M/s Supersonic Turners v ACIT, Circle 4, Jaipur

comes out to Rs.87,78,159/- and @ 5% comes out to Rs.43,89,80/-.

Keeping in view, the reply of the assessee and looking to all possibilities

invoked, a lump sum disallowance of Rs.25,00,000/- is made out of the

job work expenses claimed and added to the total income of the

assessee.”

4.1 It was submitted that from the perusal of the above para of the

AO’s order that it is clear that the disallowance has been made on lump

sum basis without specifying any voucher or bill which is without any

description of work done, which is found unsigned and bills where

signatures were found to be in the same handwriting. No consideration

was given to the reply that majority payments were made through

banking channels and TDS has been deducted and paid on all eligible

payments.

4.2 The ld AR further reiterated the submissions made before the ld

CIT(A). It was submitted before the ld CIT(A) that the AO has

disallowed a sum of Rs.25,00,000/- on a/c of job work expenses claimed

by the Assessee. This disallowance has been made on lump sum basis

without having any specific adverse material. The assessee is a company

doing the business of manufacturing and job work of bearing rings since

last so many years. The assessee do manufacturing and job work at his

6 ITA No.276/JP/2014 M/s Supersonic Turners v ACIT, Circle 4, Jaipur

own plant and also get the job work done from others small job works.

The assessee filed return of income declaring an income of

Rs.1,79,38,482/-. During the year, the assessee claimed job work

expenses of Rs.8,77,81,594/-in the P&L A/C. It has been mentioned by

the AO at Para 3 of page 1 of the assessment order that the Assessee

company was asked to furnish bills of job work. It has also been

admitted by the AO that the assessee produced all the bills. As per the

AO, some of the bills were unsigned and in some of the bills signature

were found to be in same handwriting and in some cases description

was not there. However, the AO did not mention any such specific

instance in the assessment order. In this respect, we further submit

that the entire expenditure was vouched. Almost all the payments

have been made through A/C payee cheque/banking channel. In all

eligible cases, TDS has been deducted and deposited on job work

payments. TDS returns have also been filed. The same was also verified.

All such parties are income tax assesses and LD AO could have made

enquires directly for verification of payment/work, if there was any doubt

on account of any unsigned bill or same handwriting. It is not

understandable that how signatures can be in different handwriting on

the bills. The necessary description was there on the bills. If some of

the bills were not upto the mark of LD AO the enquiry should have been

7 ITA No.276/JP/2014 M/s Supersonic Turners v ACIT, Circle 4, Jaipur

made from the job worker before making lump sum disallowance. The

Assessee is an old Assessee and in past assessments have also been

made under scrutiny. For example, assessment of preceding year i.e.

A.Y. 2009-10 was also made under scrutiny but no such disallowance

was made. We may submit all the bills of job work for your kind perusal

and verification if your honour kindly permit. Some of the bills of job

work are hereby submitted for your kind perusal and verification.

4.3 It was further submitted that the ld CIT (Appeals) confirmed the

disallowances by bringing one more allegation in the order that in some

cases cash payment on account of job work charges has also been made

to the related parties.

4.4 It was further submitted that the expenses are 100% vouched and

no specific instance of any unvouched expenses has been given by Ld

lower authorities. That on all the bills the description has been

mentioned in the bills in short form, the language adopted by the trade.

For example for the job work BORE/OD/FACE the words in shortcut BOF

has been mentioned. Likewise, IR represents Inner Ring and OR

represents Outer Ring. Likewise DP represents Drilling and Parting.

Therefore it is not correct observation of Ld lower authorities that

description of work done was not mentioned. Regarding another alleged

8 ITA No.276/JP/2014 M/s Supersonic Turners v ACIT, Circle 4, Jaipur

defects that bills were found to be unsigned and some of the bills

signatories were found in same handwriting are irrelevant observations

because no specific instance was given even no enquiry whatsoever was

made from such job workers. Therefore the disallowance has been made

on irrelevant and unconfirmed facts.

4.5 It was further submitted that no such addition was made in the

past and this fact was not considered by Ld. CIT (Appeals). The

observation of Ld. CIT (Appeals) that the payments have been made in

cash and to the related parties is not lawful because Ld. CIT (Appeals)

himself in the appeal order has mentioned that assessee has declared

such payments to relatives in the tax audit reports and there is no

allegation that payments to relatives have been made over and above

the market price and there is no such allegation that cash payment have

been made in violation of Section 40A(3) of the Income Tax Act, 1961.

Therefore, the disallowance is simply based on assumptions and

presumptions and no evidence against the assessee has been brought

on the record, hence the disallowance is unlawful.

4.6 It was further submitted that the disallowance made with the

remark that it is only less than 3% of the expenses should not be

9 ITA No.276/JP/2014 M/s Supersonic Turners v ACIT, Circle 4, Jaipur

allowed to be made and the assessment should be made on the basis of

books of accounts, vouchers and bills.

4.7 It was submitted that the assessee claimed deduction u/s 37(1) of

the Income Tax Act, 1961 and as per the provision of the said section,

disallowance can be made only in the circumstances where the alleged

expenditure is capital expenditure, personal expenses of the assessee or

was not incurred wholly and exclusively for the purpose of business or

which is unlawful. In this case before making disallowance, none of the

above defect has been brought on the record therefore the disallowance

is bad in law. It is also submitted that the expenditure was supported by

proper supporting and bills. The expenditure was incurred wholly and

exclusively for the business purposes.

4.8 It was submitted that all the payments are subject to TDS and

cash payment was also made to the person who is assessed to income

tax and the payment was within the permissible limits of Section 40A(3)

of the Act. The expenses are reasonable and are resulting into receipts

because these expenses are directly related to the manufacturing part.

The lower authorities have not pointed out any specific payment which is

not verifiable. It is not the case of the Ld A.O. that expenses are

inflated or fake. It is humbly submitted that all the expenses are

10 ITA No.276/JP/2014 M/s Supersonic Turners v ACIT, Circle 4, Jaipur

verifiable and no disallowance should have been made. The receipt of

the assessee during the year under consideration was of Rs.51.20 crore.

Some of the vouchers which are also submitted before Ld CIT (Appeals)

are part of paper book for the perusal and verification of the Hon’ble

Bench.

authorities and also submitted that the sample size of sample bills

produced is not commensurate with the quantum of job work expenses

claimed in the profit/loss account.

available on record. The Assessing Officer has disallowed a lump sum

amount of Rs.25 lacs out of Rs. 8,77,81,594/- job work expenses

claimed by the assessee in its profit & loss account. As per the

Assessing Officer, the bills submitted by the assessee for verification

donot contain any detailed description of the work and some of bills

were found to be unsigned and some of the bills were signed in the

same handwriting. The matter was again examined by the Ld. CIT(A).

Considering the defects in vouchers and substantial cash payment of

more than Rs.20 lacs paid to related party, M/s Pawansut and given that

the expenses disallowed by the Assessing Officer is less than 3% of the

11 ITA No.276/JP/2014 M/s Supersonic Turners v ACIT, Circle 4, Jaipur

total expenses claimed, the disallowance made by the Assessing Officer

was found reasonable and disallowance was confirmed by ld CIT(A). The

Ld. A.R. has submitted that 100% of the job work expenses are vouched

and no specific instance of any unvouched expenses has been given by

the lower authorities. All the bills contains the description of work done,

though in short form, as per the trade practice and custom of the

assessee trade. So far as the payment in cash is concerned, the same

was made within the permissible limits of Section 40A(3) of the Act. We

have given a careful consideration to the matter and we are of the view

that the assessee’s contention deserves to be accepted. Firstly, the

addition has been made on purely an adhoc basis without highlighting

any specific instance where the payment is not verifiable or the

expenses claimed by the assessee are bogus or have not been incurred

for the purpose of business. Further, no specific instance of cash

payment has been highlighted which has violated the provisions of

Section 40A(3) of the Act. In light of above, we hereby delete the

disallowance of Rs.25 lacs made by the Assessing Officer. In the result,

ground No.1 of the assessee is allowed.

assessee has paid interest of Rs 17,88,712 to M/s Poddar Consultancy

12 ITA No.276/JP/2014 M/s Supersonic Turners v ACIT, Circle 4, Jaipur

Organization @ 16.8%. Since M/s Poddar Consultancy Organization is a

shareholder in Supersonic Turners (P) Ltd., the excess claim of interest

paid to this concern was disallowed and restricted to 12%, being the

normal rate of interest at which interest was paid to other concerns.

Hence, the excess interest paid of Rs.5,11,060/- was disallowed and

added back to the total income of the assessee.

CIT(A), who has confirmed the order of the AO by observing in para 3.3

of his order as under:

“I have considered the facts of the case; assessment order and appellant’s written submission. Assessing Officer restricted the interest paid to related party at the rate of 12% of the ground that the rate of interest with bank and institution is 12%. Appellant submitted that the recipient has offered the same as income. However if excess interest is paid such excess is disallowable under Section 40A(2)(b) irrespective of disclosure of such income by the recipient. Therefore appellant’s argument is not justified. When appellant was borrowing from banks at 12%, how interest of 16.8% paid to related party can be reasonable. The interest payment in earlier years will not be relevant to decide the issue of disallowance of interest this year. Considering all these facts, it is held that disallowance of interest made by the Assessing Officer is justified and accordingly the same if confirmed”.

13 ITA No.276/JP/2014 M/s Supersonic Turners v ACIT, Circle 4, Jaipur

this recipient as related party having the belief that the recipient is

shareholder of the company and it was mentioned before Ld

CIT(Appeals) that the recipient is not the shareholder of the company.

Surprising, Ld CIT (Appeals) did not consider this facts and even did not

mention this fact in his order under the head written submission of the

assessee.

7.1 The assessee in the financial statement has given all the details of

related parties and M/S Poddar Consultancy Organization is not the

related party, therefore the disallowance has been made on wrong facts.

As per the clause (ii) of Section 40A(2)(b), for a company assessee, the

related party is only director of the company or any relative of such

director of the company, therefore even the section is not applicable on

the payments to shareholders of a company.

7.2 The ld CIT (Appeals) held that even if the recipient has declared

the income in his/her return of income, the excess amount is

disallowable u/s 40A(2)(b) of the Income Tax Act. In this respect, it is

humbly submitted that when the recipient has declared the income in

the return of income then there is no loss to revenue and the

disallowance is unlawful. Moreover it is also submitted the payment is

14 ITA No.276/JP/2014 M/s Supersonic Turners v ACIT, Circle 4, Jaipur

genuine and not excessive because the finance from banks and finance

from private parties cannot be on the same rates because the loan from

private parties is without security whereas loan from bank is secured and

therefore rate of interest @ 16.8% to a private lender is quite

reasonable and justified. We rely on Hon’ble ITAT Ahmedabad in the

case of Omkarmal Gaurishanker v/s ITO 92 TTJ (Ahd.) 223, in the case

of Y. Mehta v/s ACIT ITA No.869/Ahd/2010 and in the case of ACIT v/s

M/s Raj Steel Industries ITA No.2245/AHD./2010.

authorities.

available on record. The assessee has paid interest @ 16.8% to M/s

Poddar Consultancy Organization. The Assessing Officer has restricted

the allowance of interest @ 12% on the ground that firstly M/s Poddar

Consultancy Organization is a shareholder in the assessee company and

being a related party, the payment would be subject to Section

40A(2)(b) of the Act and secondly, the rate of interest paid to banks was

12% and amount over and above that is disallowable under Section

40A(2)(b) of the Act. The appellant has contended that firstly M/s

Poddar Consultancy Organization is not a shareholder of the assessee

15 ITA No.276/JP/2014 M/s Supersonic Turners v ACIT, Circle 4, Jaipur

company and secondly, the payment of interest is quite reasonable and

genuine because the finance from banks and finance from private

parties cannot be compared as loan from private parties is without

security whereas loan from a bank is secured and therefore, there is a

variance in the rate offered by the private parties and charge by the

banks. In our view, the rate of interest on borrowing need to be

benchmarked with the third party transaction in the similar facts &

circumstances of the case. In the instant case, what is being compared

is a rate of interest on an unsecured borrowing vis-à-vis a secured

borrowing. In absence of a comparable case being highlighted by the

Assessing Officer, we are unable to accept the stand of the revenue that

the interest paid is on a higher side. In light of above, the ground No.2

of the assessee is allowed.

In the result, appeal of the assessee is allowed.

Order pronounced in the open court on 23/02/2017.

Sd/- Sd/- ¼dqy Hkkjr ½ ¼foØe flag ;kno½ (Kul Bharat) (Vikram Singh Yadav) U;kf;d lnL;@Judicial Member ys[kk lnL;@Accountant Member

Tk;iqj@Jaipur fnukad@Dated:- 23/02/2017. *Sanjeev*.

16 ITA No.276/JP/2014 M/s Supersonic Turners v ACIT, Circle 4, Jaipur आदेश की प्रतिलिपि अग्रेf’ात@ब्वचल वf जीम वतकमत वितूंतकमक जवरू vihykFkhZ@The Appellant- M/S supersonic Turners, Jaipur. 1. 2. izR;FkhZ@ The Respondent- The ACIT, Circle-4, Jaipur. 3. vk;dj vk;qDr@ CIT 4. vk;dj vk;qDr@ CIT(A) विभागीय प्रतिनिधि] आयकर अपीलीय अधिकरण] जयपुर@क्त्ए प्ज्Aज्ए Jंपचनत 5. xkMZ QkbZy@ Guard File {ITA No. 276/JP/2014}. 6.

vkns'kkuqlkj@ By order,

सहायक पंजीकार@Aेेज. त्महपेजतंत