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Income Tax Appellate Tribunal, G Bench, Mumbai
Before: Shri B.R. Baskaran & Shri Amarjit SinghDr. E. Moses Road, Mahalaxmi
This appeal filed by Revenue is directed against the order dated 29.02.2016 passed by the CIT(A)-39, Mumbai and it relates to A.Y. 2006-07.
Revenue is aggrieved by the decision rendered by the CIT(A) on the following issues: -
(a) Disallowance made under Section 40A(2)(b) of the Income Tax Act (hereinafter “the Act”).
(b) Disallowance made under Section 14A of the Act.
We have heard the parties and perused the record. The assessee is engaged in the business of manufacturing and export of garments. The first issue relates to disallowance made by the AO under Section 40A(2)(a) of the Act. The AO noticed that the assessee has paid job work charges of `7.42 crores to a sister concern named M/s. Cebon Apparels Pvt. Ltd. The AO also noticed that the assessee has also done job work for M/s. Cebon
M/s. Tropical Clothing Co. P. Ltd. Apparels Pvt. Ltd., and has received job work charges of `1,92 crores from the said concern. The AO noticed that the assessee has paid stitching charges of `95/- for Pyjama sets/Wraps/Night dress, `65/- for Trousers, `45/- for Night Shirt and `30/- for Shorts to M/s. Cebon Apparels Pvt. Ltd. The AO has also noticed that the assessee has collected `95/- for Pyjama sets, `75/- for Short sets, `65/- for Pyjama (bottom) and `45/- for Pyjama (top)/Night Shirt from M/s. Cebon Apparels Pvt. Ltd. On comparison of rates the AO was satisfied that job work charges for stitching the garments paid by the assessee and also collected by the assessee were identical. However, the AO computed the average rate of charges paid by the assessee by considering the total job work charges and the total number of pieces stitched. It so worked out that the average job work charges paid by the assessee was `70.52 per piece and the average stitching charge received by the assessee per piece was `58.78. The AO treated the difference as excess payment and accordingly disallowed a sum of `123.50 lakhs under Section 40A(2)(a) of the Act. The AO further noticed that the assessee has stitched bags for the garments, but did not charge anything from its sister concern. The AO took the stitching charges for bag at Rs.30/- per bag and accordingly added a sum of Rs.3.79 lakhs. Accordingly the AO disallowed a sum of Rs.127.30 lakhs u/s 40A(2)(a) of the Act. The learned CIT(A) deleted the same with the following observation: -
“9. As regards ground no.6, it is noted that the AO has made the addition on the premise that the assessee should have used its surplus capacity for production purpose and should not have used the production facility of other concern. Otherwise the AO is of the view that both the parties manufacturing for each other, has charged the same rate for various items. The appellant has made a detailed submission which is reproduced above. Looking into the entirety of the facts, in my opinion, since the rate charged is same for similar type of product, therefore, no addition on this account is called for on the basis of average rate. Similarly, in respect of the bags, it has been stated that as part of the agreement. The pajama sets are to be packed in bags for the purchaser and the purchase price includes cost of bags. The AO has arbitrary taken the value at Rs.30/- for bags and made addition accordingly. The appellant has duly submitted that the price of the bags is included in the cost during the assessment
M/s. Tropical Clothing Co. P. Ltd. proceedings, therefore, looking in to the facts of the case, I am of the opinion that this addition cannot be sustained. In the re-suit, this ground of appeal is allowed.”
4. The learned D.R. strongly supported the order passed by the AO. He submitted that the Ld CIT(A) has deleted the addition without making detailed discussions.
The learned A.R., on the contrary, submitted that the methodology adopted by the AO to work out the excess payment is not correct. He submitted that the AO has computed the average rate of stitching charge without considering the product mix. He submitted that the average rate of stitching charges would vary depending upon the quantity of each of the dress stitched, since the stitching charges differ on each of the garment. He submitted that computation of simple average rate would give misleading results. The learned A.R. further submitted that the AO has compared the individual rate of stitching charges for each of the garment and has recorded a finding that the individual rates for each of the dress charged by the assessee as well as paid by the assessee is one and the same. Under these set of facts, the learned A.R. submitted that there is no chance of making excess payment as concluded by the AO. Accordingly he submitted that the order passed by the learned CIT(A) on this issue does not call for any interference. With regard to the stitching of bags, the Ld A.R submitted that the same was included in the stitching charges of garments and hence the AO was not justified in separately estimating the same.
Having heard the rival submissions we find merit in the submissions made by the learned A.R. As submitted by him, the average rate of stitching charges paid by the assessee would vary if there is change in the product mix. For example, if more quantity of garments having higher stitching charge is stitched, the average rate of stitching charge would go up. On the contrary, if more quantity of garments having lower stitching charge is stitched, the average rate of stitching charge would go down. Hence what are required to be compared is the specific stitching charges
M/s. Tropical Clothing Co. P. Ltd. collected and paid by the assessee in respect of each of the type of garments stitched. In the instant case, the AO himself has given a finding that individual stitching charges paid by the assessee as well as collected by the assessee is identical. Hence there is merit in the contentions of the assessee that there is no scope for making any disallowance under Section 40A(2)(a) of the Act, as there is no case of makingany excess payment. Accordingly, we are of the view that the order passed by the learned CIT(A) does not call for any interference.
The next issue relates to the disallowance made by the AO under Section 14A of the Act. The AO noticed that the assessee has received dividend income of `234.46 lakhs and long term capital gain of `235.22 lakhs and claimed both the income as exempt. The AO further noticed that the assessee has disallowed a sum of `3.25 lakhs being legal and professional charges, under Section 14A of the Act. The AO noticed that the assessee has invested its funds in unquoted Mutual Funds as well in quoted Equity Shares. The total value of investment as on 31.03.2006 stood at `1627.30 lakhs. Accordingly the AO computed the disallowance under Section 14A of the Act by applying Rule 8D of I.T. Rules and disallowed a sum of `12.56 lakhs under Section 14A of the Act. Before the CIT(A) the assessee submitted that its investments are being managed by portfolio managers and hence the assessee has disallowed the portfolio management charges paid by it. It was also submitted that the own funds available with it is in far excess of the value of investment and hence no disallowance out of interest expenditure is called for. Accordingly it was submitted that, since the investment portfolio was managed by portfolio managers, no further expenses need to be disallowed. It was submitted that an identical issue was considered by the learned CIT(A) in A.Y. 2008- 09 and the learned CIT(A) has deleted the addition made by the AO on similar facts. The First Appellate Authority was convinced with the contentions of the assessee and accordingly deleted the disallowance made by the AO.
M/s. Tropical Clothing Co. P. Ltd. 8. The learned D.R. supported the order passed by the AO and the learned A.R. supported the order passed by the learned CIT(A).
We have heard the rival contentions and perused the record. We noticed that the learned CIT(A) has given a finding that the own funds available with the assessee is in far excess of the value of investment and hence the disallowance of interest expenditure is not called for as per the decision rendered by the Hon'ble Bombay High Court in the case of HDFC Bank Ltd. 366 ITR 505. With regard to other expenses, even though it is the contention of the assessee that its investments are being managed by portfolio managers and hence only the expenditure incurred in relation to exempt income is the portfolio management charges of `3,25,703/-, yet it cannot be said that the assessee did not use its other resources in connection with management of the investments. Accordingly we are of the view that a portion of administrative expenses also need to be disallowed under Section 14A of the Act. There is no dispute with regard to the fact that the provisions of Rule 8D will not apply to the year under consideration, in view of the decision of Hon’ble Bombay High Court in the case of Godrej & Boyce Manufacturing Co Ltd (328 ITR 81). Accordingly, we are of the view that the aggregate amount of disallowance under Section 14A may be estimated at `5,00,000/- and the same would take care of other resources used by the assessee. Accordingly we modify the order passed by the learned CIT(A) and direct the AO to restrict the `5,00,000/- disallowance to which shall include the voluntary disallowance of `3.5 lakhs made by the assessee. We order accordingly.
In the result, the appeal filed by the Revenue is partly allowed.