M/S BALAJI EXPORT CORPORATION,KOLKATA vs. ACIT, CIRCLE-25, KOLKATA, KOLKATA

ORDER Shri S.S.Viswanethra Ravi, JM:

This appeal by the Assessee is directed against the order of the Commissioner of Income Tax (Appeals), 7, Kolkata dt. 20-09-2016 for the A.Y 2013-14.

In the second to fourth grounds, the appellant is disputing the disallowance of Rs. 36,02.374/- under the head fabrication charges was on estimate basis when all the expenses were fully vouched and verifiable and no particular expense was pin pointed by the AO to be not genuine or not incurred for business purposes. It is submitted that during the course of assessment proceedings all the books of accounts along with bills and vouchers were produced and verified by the AO on test checked basis. No defect what so ever has been found in the books nor any particular bill or voucher was pin pointed by the Ld. AO which was missing or unverifiable. The chart showing the gross profit % vis-a-vis sales during the year and the preceding years were filed before the AO and is also enclosed herewith. The gross profit % and the net profit % were more than that declared in earlier years. the books of accounts were produced, verified and accepted by the AO and no addition in tradi118 results is permissible when the books were accepted. Copy of the letter dated 18.2.2016 was filed before the AO which is enclosed herewith in which it was stated that the assessee is a manufacturer of leather goods of various qualities, items and designs like hand bags, ladies bogs, wallets purses etc and the products are manufactured and exported to the different countries as per specification provided by the buyers. For manufacturing export quality items, expert and special labour who can manufacture such products as per specifications has to be searched and services are taken accordingly. The assessee has no permanent labour on its pay roll, therefore manufacturing jobs is get done on job work basis. The list of the job workers is quite large in number. The expenses incurred for such job work is otherwise fully verifiable with reference to the books of accounts, bills, vouchers, challans and the stock registers. Apart from that we may also again high light the modus operandi of the entire manufacturing process:-

(a) We buy leather being raw material by account payee cheques where is also verified with reference to bills of the suppliers and such quantity is duly entered into in our raw material register.

(b) The supply is made to the job workers for manufacturing the required goods on the basis of the challans after calculating quantify of such leather required for manufacturing of the particular product and such quantiy is entered into in the raw material register as quantity supplied. It may be mentioned here that we get the goods manufactured only after we received the orders from the buyers and it is therefore not difficult to identity and calculate the quantity required for such product and the quality to be manufactured as per specification of the buyer.

( c) The ob worker supplies the manufactured quantity within the time frame and such quantity received is entered into in the finished goods stock register, which shows the entry of the goods received on manufacturing and thereafter the same goods are exported to the buyer.

(d) The job for manufacturing a particular quality and quantity is not given to a single job worker but to a number of job workers at the same rate of job charges.

(e) There is no dispute and there cannot be any dispute with regard to the goods manufacturing by them since the same very goods on manufacturing by them since the same very goods on manufacturing have been exported.

(f) The job voucher for a particular job contain full details of the goods manufactured alone with the job charges paid and each of such item received is fully identifiable with reference to the export of the same.

(g) We have earned better rate of gross profit and net profit in comparison to the earlier years and in support of the same a comparative chart is also enclosed.

(h) Each and every entry in our books is fully verified with reference to the evidences and day to day stock register maintained for raw materials, job done and the finished goods.

(i) The ledger copy of account of the party alone with the stock details of the items are produced herewith for ready reference.

Moreover the turnover of the assessee has also increased by more than 17.50% compared to the preceding year. Not only that it was also coupled with increase in the cost of wages as compared to preceding gear. The only ground for making the disallowance is that the expenditure claimed was exaggerated. The books of accounts were duly audited and therefore no such adhoc disallowance is permissible when the same have not been rejected. Reference in this connection is invited to the judgement of Kolkata ITAT in the case 01 Shree Hari Agro Industries Ltd in pronounced on 16/10/2015 which has held as under:

"The AO did not reject the book results before resorting to an estimation of income. For rejecting the book results, the provisions of Sec.145(3) of the Act requires that the Assessing Officer should be not be satisfied about the correctness or completeness of the accounts of the assessee, or where the method of accounting provided u/s.145(1) of the Act or accounting standards as notified under Section 145(2) of the Act have not been regularly followed by the Assessee. The AO has to comp e income from business accounting to the books of accounts of the Assessee. It is only when the book results are rejected the question of estimation of income arises for consideration. The AO has to specifically point out the defects in the books or incomplete and incorrectness in the books of accounts and call upon the Assessee as to why the books of accounts should not be rejected.

Reference is also invited to the judgment of Kolkata ITAT in the case of Sarkar Engineering Co, copy of which is also enclosed.

Further, copies of the assessment orders under sec. 143(3) for the A. year 2012-13 and earlier years are enclosed herewith from which it would be evident that no such disallowance was ever made under fabrication charges. Therefore, the disallowance may please be directed to be deleted. “

I have perused the grounds of appeal, the assessment order and the submissions made by the appellant. It is seen that there is a major increase in fabrication charges amounting to Rs.44.32% vis-à-vis increase in raw material charges of 7.10% and sales turnover of 17.54%. It is also seen that the appellant has shown to have incurred an amount of Rs.72,04,748/- as fabrication charges paid to labour for which addresses of the parties are not available. Further, these expenses are not fully verifiable. During the appellate proceedings the appellant was asked as to why the matter should not be remanded to the AO for verification of these payments for fabrication charges made in cash. However, the A/R of the appellant submitted that no point will be served by remanding the matter as these parties are unlikely to appear in response to summon as their addresses are either not available or are incomplete. Therefore, in my view the disallowance of 25% of these expenses amounting to Rs.18,01,187/- will serve the ends of justice.

6. Before us the ld.AR filed a paper book of 1-48 pages. He also submits that all the details relating to fabrication charges was produced, which are available at page 36 of the paper book, wherein details such as name and PAN are reflected. He further submits that during the A.Y under consideration the assessee made the payments in cash and referred to page 40 of the paper book and argued that only 29.20% total fabrication charges constituted below Rs.75,000/-, wherein all the TDS was deducted. He also referred to page 3 of the paper book and argued that assessee has shown net profit at 6.40%, which is more as compared to earlier years and, therefore, submits the payment involving under the head ‘fabrication charges’ is not excessive and prayed to allow the grounds raised by the assessee in the appeal.

7. On the other hand, the ld. DR argued that the details as submitted before the Tribunal were not available before the AO and CIT-A and referred to para 4 of CIT-A’s order therefore, the matter involved in the appeal is liable to be remanded to the file of the AO for fresh verification of fabrication charges and prayed to remand the same to the AO.

8. Heard both the parties and perused the material on record including the paper book details. On perusal of record, we find that the details as available before the Tribunal, the same were not before the AO & CIT-A for their consideration. It could be seen from both the orders of the AO & CIT-A that no verifiable details mentioning addresses and identification of parties were filed. On perusal of pages 36 to 38 of the paper book filed before us by the assessee, we find that names and PANs were given. But, however, we are conscious of the fact that the CIT- has suggested to remand the issue to the file AO and the assessee has submitted that it would not be possible for the parties to appear in the remand proceedings. Therefore, taking into consideration the facts of the case, we are of the considered opinion that interest of justice would be met if the disallowance in question is restricted to 10% of the ‘fabrication charges’ claimed. Thus, ground nos. 2 to 5 raised by the assessee are allowed in part. Ground no. 6 is general in nature and needs no adjudication. Hence, the same is dismissed.