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Income Tax Appellate Tribunal, MUMBAI BENCHES “A”, MUMBAI
Before: SHRI G.S. PANNU (AM) & SHRI RAM LAL NEGI (JM)
O R D E R
PER RAM LAL NEGI, JM
This appeal has been filed by the revenue against order dated 13/05/2015 passed by the Ld. Commissioner of Income Tax (Appeals)-32, Mumbai, for the assessment year 2011-12, whereby the Ld. CIT (A) has allowed the appeal filed the by the assessee against assessment order passed u/s 143 (3) of the Income Tax Act, 1961 (for short ‘the Act’).
Brief facts of the case are that the assessee a partnership firm having income from business and profession filed its return of income for the Assessment Year 2011-12 declaring the total income of Rs. 1,37,56,110/-. The same was processed u/s 143 (1) of the Act. The case was selected for scrutiny and notice u/s 143 (2) 142 (1) of the Act were served upon the assessee. In response thereof the authorized representative filed the requisite details and 2 Assessment Year: 2011-12 made submissions. It was noticed that fall in profit was on account of substantial amount of grading and certification expenses. The assessee was accordingly asked to explain the co-relation between grading and certification expenses and sale and closing stock. The assessee claimed the expenses genuine. It was noticed that assessee is showing positive percentage of net profit on the basis of exchange gain only while assessee is incurring loss without exchange gain on account of higher percentage of grading and certification expenses. Accordingly, the AO disallowed 30% of the grading expenses amounting to Rs. 51,83,550/- and 30% certification charges amounting to Rs. 28,44,359/-( Total Rs.80,27,909/-) and added back the said amount to the income of the assessee. In appeal, the Ld. CIT (A) deleted the addition held by the AO.
Aggrieved by the order of Ld. CIT (Appeals), the revenue preferred this appeal before the Tribunal on the following effective grounds:-
1. “Whether, on the facts and in the circumstance of the case, the Ld. CIT (A) has erred in holding that the expenditure was incurred wholly and exclusively for the purpose of business without appreciating the absence of correlation of the expenditure on gradation & certification of diamonds with the sale and stock of diamonds.
2. Whether on the facts and in the circumstances of the case, the Ld. CIT (A) has erred in deleting the disallowance made by the AO with respect to the claim of expenditure on gradation & certification of diamonds without appreciating the absence of co- relation of the expenditure with the sale and stock of diamonds.
3. Whether on the facts and in the circumstances of the case, the Ld. CIT (A) has erred in restricting the disallowance of such expenditure to 30% thereof without appreciating the absence of co- relation of the expenditure with the sale and stock of diamonds.”
3 Assessment Year: 2011-12
We notice that the revenue has inadvertently mentioned in ground No 3 of the appeal that the Ld. CIT(A) has wrongly restricted the disallowance of expenditure to 30% contrary to the fact that the CIT(A) has deleted the entire amount of addition made by the AO. The Ld. departmental representative relying on the findings of the AO, submitted before us that the Ld. CIT(A) has erred in holding that the expenditure was incurred wholly and exclusively for the purpose of business. The Ld. CIT(A) has wrongly deleted the addition without appreciating the fact that the assessee has failed to prove co-relation of the expenditure with the sale and stock of diamonds. The Ld. DR further submitted the impugned order may be set aside and the assessment order may be restored.
On the other hand, the Ld. counsel for the assessee relying on the order passed by the Ld. CIT(A) submitted that there is no infirmity in the order to interfere with the same. The AO has disallowed 30% of the expenditure claimed by the assessee without any basis. Grading expenses are fully allowable expenditure under section 37 of the Act, if the same have been laid out or expended wholly and exclusively for the purpose of the business. Moreover the percentage of grading and certification charges taken by the AO is arbitrary. Hence, the Ld. counsel submitted that there is no merit in the revenues appeal and the same is liable to be dismissed.
We have heard the rival submissions and also gone through the material on record. The only grievance of revenue is that the Ld. CIT(A) has wrongly deleted the addition made by AO by making disallowance of 30% of the total expenditure made by the assessee on grading and certification of diamond. The Ld. CIT(A) has deleted the addition after hearing the submissions of the assessee. The relevant portion of the order under challenge reads as under :
4 Assessment Year: 2011-12 “2.3 I have perused the facts of the case and appellant’s submissions carefully. The appellant has given the party wise details of Grading & Certification charges with their respective ledger statements. The Grading charges of Rs. 1,72,78,499/- are paid to three parties, i.e. (i) Rapaport Rs. 1,59,934/-, (ii) GIA Rs. 1,51,04,499/- and (iii) IGA at Rs. 20,14,468/-. The Certification charge of Rs. 94,81,195/- is paid to only one party only ie. Rapaport. These appear to be renowned laboratories, and the payments have been made by cheques after deducting TDS. As such the appellant, being engaged in diamond manufacturing and trading, is not precluded from getting the diamonds graded and certified, which in fact is an essential part of its business. Many a time the customers are attracted simply because a jeweler is selling the diamonds graded and certified from reputed laboratories. The decision as to how much to spend on a particular item rests entirely upon the assessee, which cannot be questioned simply because the assessee might have made losses consequent to such expenditure. It is not uncommon for a businessman to make excessive expenditure on a particular item keeping in view the customers satisfaction leading to long term benefits in his business, which however is entirely a business decision on case to case basis. Moreover, the AO’s conclusion that the industry average of such expenditure is just 1% is not supported by comparative facts, neither the same can be applied uniformly to every assessee. In these circumstances, the ad-hoc disallowance made at 30% of the expenditure, i.e. at Rs. 80,27,909/- is not on sound footing, hence deleted. Therefore, the ground no. 1 of appeal is allowed.”