DCIT, NEW DELHI vs. M/S. DEEPAK FASHION PVT. LTD., NEW DELHI

The first ground is against the deletion of addition of Rs.18,15,257/- made by the AO on account of Employees Benefit Expenses.

Briefly stated, the facts of the ground are that the assessee claimed deduction for a sum of Rs.24,65,440/- on account of Employees Benefit Expenses. The AO observed that in the immediately preceding year, the assessee incurred salary and wages amounting to Rs.39,000/-, which increased to Rs.18.58 lac during the year. In response, the assessee submitted that during the current year it carried out more manufacturing/export in comparison with the preceding year which led to increase in salary and wages. The AO noticed that whereas the revenue from operations increased by 11.85% alone, salary and wages increased by 4666%. By allowing a hike of 11.85% to the amount of salary and wages incurred in the preceding year, the AO disallowed excessive salary amounting to Rs.18,15,257/-. The ld. CIT(A) deleted the addition.

I have heard the rival submissions and perused the relevant material on record. It is seen that the assessee shifted from trading to manufacturing of garment during the year. The assessee placed details of month-wise expenses, salary sheet, muster roll before the AO during the assessment proceedings, but, no adverse inference was drawn. In my considered opinion, the ld. CIT(A) has rightly observed that change in the nature of business from trading to manufacturing garments led to increase in salaries and wages. Apart from that, it is seen that the AO has not given any cogent reason for making this disallowance except for increasing the amount of allowable salary by 11.85%, being the percentage increase in revenue from operation. This is not a right course of action. If the AO was not satisfied with the claim of expenses, he ought to have carried out examination by going through the details furnished and further records, if necessary. Nothing of the sort has been done. In my considered opinion, the ld. CIT(A) was right in deleting the disallowance.

The only other issue is against the deletion of addition of Rs.16,53,085/- made by the AO by invoking the provisions of section 40A(2)(b) of the Act. The facts apropos this ground are that the assessee paid a sum of Rs.16,53,085/- to Ms Anita Gugnani as fashion designer fees, who happened to be a daughter of one of the directors. The AO 3

After considering the rival submissions and perusing the relevant material on record, it is seen that the assessee paid a sum of Rs.16.53 lac to Ms Anita Gugnani, who is a fashion designer and consultant. Since the assessee started the business of manufacturing in the current year, as against trading in the preceding year, it was, but, natural that the services of fashion designers were required for the purpose. Apart from earning income from the assessee, Ms Anita Gugnani earned income from other sources as well. From her return filed for the current year, the ld. CIT(A) noticed that she declared gross receipts of Rs.39.54 lac and offered her business income u/s 44AD, which has not been disputed by the Department. These facts have not been controverted by the ld. DR with any contrary material. In view of the foregoing discussion, I am of the considered opinion that the ld. CIT(A) was right in deleting this addition.

In the result, the appeal is dismissed.