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Income Tax Appellate Tribunal, KOLKATA BENCH ‘SMC’, KOLKATA
Before: Shri P.M. Jagtap, AM]
order : July 06, 2018 ORDER This appeal filed by the assessee is directed against the order of Ld. CIT (Appeals) – 14, Kolkata dated 28.10.2016.
The issue involved in ground no 1 relates to the addition of Rs. 35,40,260/- made by the A.O. and confirmed by the Ld. CIT(A) by way of disallowance of 19% of the job charges.
The assessee in the present case is a partnership firm which is engaged in the business of iron galvanizing work on labour job basis. The return of income for the year under consideration was filed by it on 28.09.2012 declaring a total income of Rs. 1,26,016/-. During the course of assessment proceedings, it was found by the A.O. that the expenditure claimed by the assessee on consumables to the tune of Rs. 1,32,18,734/- was about 71% of the total labour charges of Rs.
Assessment Year: 2012-13 M/s. Hazi Heritage 1,86,33,472/- received by it during the year under consideration. He noted that the expenditure on consumables claimed in two comparable cases from the same locality was to the tune of 40% and 21% of the job charges received. He, therefore, required the assessee to explain the abnormally higher expenditure claimed by it on consumables. In reply, the following explanation was offered by the assessee: “As per our accounts, the consumption of consumables for the A.Y. 2012- 13 is near about 71% of the labour charges earned. For your information, it is not for a particular year. Our practical and general consumption of consumables of every year remains between 65% to 72%, so it is not abrupt of sudden case.
It may kindly be noted here that the consumption of consumables has got no relation of locality of the manufacturer. It depends upon the size of production, method of production, number of employees engaged, work load and the size of vat, whether it is oil fired or coal fired. So, giving the instance of other manufacturer of the same locality has got no meaning of consumption of consumables and no comparison stands at all. In the matter of assessment case for the A.Y. 2010-11, the Ld. ITO had given two examples or instances. In one case, the Ld. A.O. had mentioned the percentage of consumption of consumable is 40% whereas in the other case it is only 21%. So, there is a huge difference of consumption in between the two as cited by the Ld. A.O. At the same time, the Ld. A.O. did not mention in the assessment order, which percentage of consumable he depended or relied upon for determining the percentage of consumables your assessee. The Ld. A.O. did not take into account about the volume of work and nature of job and its process performed by your assessee. It cannot be the same process of job of your assessee and other two units as mentioned by the Ld. A.O. Even the percentage of consumables is not same and/or nearer percentage of those two units mentioned by Ld. A.O.
The Ld. A.O. failed to take care of the process of job done by your assessee. Instead of that only on thumb rule comparison he had taken while finalizing the assessment order with other two units. It may kindly be noted that there is no standard practice in this trade for consumption of Assessment Year: 2012-13 M/s. Hazi Heritage consumables in relation with the job charges received. There are so many other factors for fluctuations of consumables for one unit to the other mostly depending on the technical norms of the industry. It is not correct to depend on the arithmetical percentage of consumption on job charges without determining the size of the vat run by oil fired or coal fired etc. and other components.
The consumption of consumables depends on whether the process in run by coal fired vat or oil fired vat. Moreover, the size of the vat is also very important. In our case, size of the vat is 22 x 3 x 3 oil fired which consumes huge consumables instead of labour components, moreover, the size of the vat of other two units as mentioned by the Ld. A.O. is very small and in one case it is like a small pot or kadai. So the comparison made by the Ld. A.O. is not at all acceptable.
The Ld. A.O. mentioned in his order, the turnover of those two concern is Rs. 1,54,57,056/- in the A.Y. 2010-11 whereas the turnover of your assessee for the A.Y. 2010-11 is Rs. 4,51,42,147/-. It is clearly stated here that your assessee is much more big concern than other two mentioned concern in terms of production and volume of work. Beside this your assessee is a ISO registered concern, it has to keep several kinds of standard in production style and maintenance of factory. The turnover of your assessee itself, says that the volume of work was extremely huge on that particular year. In extreme work pressure, no one can depend only on manual process, it has to use some technical, mechanical or chemical process which usually save the time. For example, if your assessee has to galvanize or process some sub-graded black iron which huge rust or oil on it, your assessee can remove those rust or oil by manually using labour and spending several valued hours or it can be cleared in acid house within only half an hour using some strong acid and chemicals or consumables. Now, it can be clearly understood, in enormous work load one will only choose the second way. The assessee had also obtained the certificate from one technical consultant, Mr. Bibhuti Nath Misra who shows that the consumption of consumables of the assessee is correct as the standard consumption should be 75% to 80% as the norms of the vat used by the assessee.
That your assessee is maintaining the ISO Standard. So the production and utilization of consumables are guided by ISO norms. This sort of norms are not followed by those two units, which has been mentioned by the ld. AO. That your assessee pointed out at the time of assessment proceedings that one unit, name A.M. Industries, who are also operating
Assessment Year: 2012-13 M/s. Hazi Heritage in the same area had the percentage of consumables at about 65% on job charges during the F.Y. 2005-06, i.e. A.Y. 2006-07. This case was selected for scrutiny and the ld. AO of Ward-48(4), Kolkata had admitted the said percentage of consumables. That during the course of assessment proceedings, your assessee submitted comparative figure of G.P. and NP for the preceding two years which shows that the GP and NP ratios are more or less same in this assessment year. If the consumption of consumables are more from the earlier years, it would affect the percentage of GP So, the opinion of higher percentage of consumption of consumables is not at all tenable and liable to be rejected.
The above explanation offered by the assessee was not found acceptable by the A.O. for the following reasons:
1. 1. As regards to the case of M/s. A.M. industries as relied upon by the assessee, it is seen that the furnace of this case is run by coal and not by oil. Whereas the furnace of the assessee and the other two cases relied upon is run by oil. So, the ratio of the case as relied upon by the assessee is not acceptable. The assessee could not point out any case where furnace is run by oil and percentage of consumable is nearly 71% on job charges.
2. The assessee claims that says that the volume of work was extremely huge on that particular year i.e. Rs. for the A.Y.2010-11 is Rs.4,51,42,147/- which leads to higher consumables @69% of job charges. But in the instant case for the A.Y.2012-13, the turnover of the assessee is Rs.1,86,33,472/-, (comparatively lower than A.Y.2010-11) and consumables claimed by the assessee @ 71% ,comparatively higher than the A.Y.2010-11. Thus, there is no relevance for higher consumables rate is required for huge turnover as claimed by the assessee.
3. As regards to engineers certificate as claimed by the assessee, the certificate has not been produced before the undersigned. However, it is unearthed in the A.Y.2010-11, that the said engineer was not a production engineer and he had no expertise knowledge in production.
4. The issue here is whether the expenses claimed by way of consumables is justified and reasonable. It is not the issue that the assessee has not purchased the consumable. The assessee might have purchased he consumable but that does not mean that huge percentage of expenses by Assessment Year: 2012-13 M/s. Hazi Heritage way of consumables is justified and reasonable and has actually been used for that extent as claimed.”
For the above reasons, the Assessing Officer held that the expenditure claimed by the assessee on consumables was excessive and unreasonable. He accordingly allowed the claim of the assessee for consumables only to the extent of 52% of the job charges and disallowed the balance portion of 19% which resulted in a disallowance of Rs. 35,40,360/-.
The disallowance made by the A.O. on account of consumables was challenged by the assessee in the appeal filed before the Ld. CIT(A) and since the submission made by the assessee in support of its case on this issue was not found acceptable by the Ld. CIT(A), the later proceeded to confirm the disallowance made by the A.O. out of expenditure claimed by the assessee on consumables for the following reasons given in his impugned order: “As regards the appellant’s contention that this was an oil based furnace whereas in other cases it was coal based. There is nothing on record to suggest that this is true. Even if this was true, which has not been established, it has also not been established by the appellant that that consumption level so much higher in an oil based furnace than that of a coal based furnace. This fact has to be established by the appellant by specifying the technical specifications which lead to such a difference. He also has to establish by explaining the process involved as to how this high consumption occurs. The appellant has not done anything of this kind despite being asked. From a simple reasonable point of view, even if we accept that the appellant's machines were more modern, then one would expect them to be more efficient. Oil based furnace's in general in any case are more efficient than coal based furnaces. This contrary view, if true, has to be established by the appellant himself. The appellant was asked to produce comparable cases where the consumption level was comparable to that of the appellant. He has however not produced even one single case.
Assessment Year: 2012-13 M/s. Hazi Heritage The appellant has not produced the quantitative consumption details either in the assessment or appeal proceedings. Thus he has denied the revenue the opportunity to correlate the consumption process with the actual consumption of the consumables. The AO has also been denied the opportunity of verifying the genuineness of the expenses so claimed. The question of finding defects in the books does not arise therefore. The AO of course has commented that the mere showing of purchases in the books without actually pointing out where this consumption was used cannot be an acceptable claim of the assessee. The books, in my opinion have not been proved for heir veracity since they have not been connected to the consumption process involved. In these circumstances, they cannot be relied upon and stand rejected. As regards the reliance on the claimed consultant, the AO has made a categorical finding that the said consultant is not a production Engineer with no knowledge of this production process. The appellant, during appeal proceedings, has said that the consultant was not issued a notice. But he has not even tried to produce this claimed consultant during appeal proceedings to establish the competence of this consultant and the veracity of his own statements. It is the appellant who is agitating the findings of the AO and therefore the onus rests upon him to produce evidence to show that the findings of the AO were incorrect. The appellant has not even tried to discharge this onus. As regards the fact that appellant is an ISO company, he has not established that the others are not. In addition, he has not produced even a single case of a company which is an ISO company that is showing the level of consumption shown by the appellant. In any case, he has not shown how an ISO certified company would end up showing a higher level of consumption and therefore be less efficient that a company that has not passed the rigorous tests of efficiency and business processes that an ISO certified company has to pass through. The contentions of the appellant, without any supporting evidence or reasoning, on the face of it, sound unreasonable and contrary to common sense. The appellant's contention that there is no standard practice in is particular trade, does not cut much ice in this context since an ISO certification necessarily involves the standardization of processes and practices.”
I have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that a similar issue relating to the disallowance made by the A.O. on account of Assessment Year: 2012-13 M/s. Hazi Heritage consumable expenses to the extent of 19% of the job charges earned by the assessee was involved in assessee’s own case for A.Y. 2010-11 and the same was decided by the Division Bench of this Tribunal vide its order dated July 31, 2007 passed in vide paragraph no 8 as under: “We have considered the rival submissions and also perused the relevant material available on record. It is observed that the disallowance on account of consumable expenses was made by the AO to the extent of 19% of the job charges earned by the assessee by mainly relying on the two comparable cases where the consumable expenses claimed were relatively on the lower side. During the course of assessment proceeding, it was pointed out on behalf of the assessee that the said cases cited by the AO were actually not comparable in as much as the vats used by them were small in sizes having volume of 33.75 cu.ft. as compared the vat of 198 cu.ft. used by the assessee. A comparable case of M/s. A.M. Industries was also cited by the assessee wherein the expenses claimed on consumables were nearly 65% of the job charges earned. A certificate issued by a Plant Engineer was also filed by the assessee to show that the percentage of consumable expenses in the industry of assessee’s type was 75 to 80%. As rightly contended by the learned counsel for the assessee, it appears that the Assessing Officer however brushed aside all these submissions made by the assessee to justify the consumable expenses of 69% claimed by it and disallowed the same to the extent of 19% point. The Ld. CIT(A) however appreciated all these relevant aspects of the case in the right perspective and also considered the past result of the assessee’s case for the immediately succeeding two years wherein the consumable expenses claimed by the assessee were 67.63% and 67.75% as against the consumable expenses of 69.98% claimed by the assessee for the year under consideration. He accordingly found that the claim of the assessee for the consumable expenses as made in the year under consideration was slightly higher by 2% than that of the immediately preceding two years and accordingly restricted the disallowance of 19% made by the AO to the extent of 2% of the job charges earned. Having regard to all the facts of the case, we find no infirmity in the impugned order of the Ld. CIT (JA) restricting the disallowance of 19% made by the AO to the extent of 2% and upholding the same, we dismiss the appeal filed by the revenue.”
Assessment Year: 2012-13 M/s. Hazi Heritage 8. As the issue involved in the year under consideration as well as all the material facts relevant thereto are similar to A.Y. 2010-11, I respectfully follow the order of the Division Bench of this Tribunal for A.Y. 2010-11 and restrict the disallowance made by the A.O. out of consumable expenditure at 19% of the total job charges earned to the extent of 2%. The impugned order of the Ld. CIT(A) on this issue is accordingly modified and ground no 1 of the assessee’s appeal is partly allowed.
The issue involved in ground no 2 relates to the addition of Rs. 1,24,850/- made by the A.O. and confirmed by the Ld. CIT(A) by way of disallowance of weigh-bridge charges under section 40(a)(ia) for non-deduction of tax at source.
During the year under consideration, the assessee had paid a total amount of Rs. 1,24,850/- to M/s. Murshed Weigh Bridge on account of weigh-bridge charges. According to the A.O., the assessee was required to deduct tax at source from the said payment as per section 194C of the Act and since no such tax was deducted at source by the assessee, he disallowed the weigh-bridge expenses claimed by the assessee under section 40(a)(ia) of the Act. On appeal, the Ld. CIT(A) confirmed the said disallowance made by the A.O.
I have heard the arguments of both the sides on this issue and also perused the relevant material available on record. The learned counsel for the assessee has submitted the weigh-bridge was used by the assessee as and when goods were received and there was no contract entered into between the assessee and M/s. Murshed Weigh
Assessment Year: 2012-13 M/s. Hazi Heritage Bridge to attract and provisions of section 194C. He has contended that the assessee, therefore, was not liable to deduct tax at source from the payment of weighbridge charges in the absence of any contract and the disallowance made by the A.O. under section 40(a)(ia) and confirmed by the Ld. CIT(A) is not sustainable. The learned DR, on the other hand, has submitted that this contention specifically raised by the learned counsel for the assessee for the first time before the Tribunal requires verification by the A.O. as there is no finding given either by the A.O. or by the Ld. CIT(A) on this aspect of the matter. I find merit in this contention of the learned DR. The impugned order of the Ld. CIT(A) on this issue is accordingly set aside and the matter is restored to the file of the A.O. for deciding the same afresh after verifying the claim of the assessee that there was no contract between the assessee and M/s. Murshed Weigh Bridge for use of waybridge. Ground no 2 of the assessee’s appeal is accordingly treated as allowed for statistical purpose.
In the result, the appeal of the assessee is partly allowed. Order Pronounced in the Open Court on 6th July, 2018.