DCIT, NEW DELHI vs. SMT. ROSHINI DEVI, NEW DELHI

PER KULDIP SINGH, JUDICIAL MEMBER :

2. The appellant, Deputy Commissioner of Income-tax, Circle 22 (1), New Delhi, by filing the aforesaid appeals, sought to set aside the impugned order dated 11.03.2011, 07.09.2011 and 14.03.2013 passed by ld. Commissioner of Income-tax (Appeals)- XXIII, New Delhi qua the assessment years 2007-08, 2008-09 and 2009-10 respectively on the grounds inter alia that :-

AY 2007-08 “1. On the facts and on the circumstances of the case the Ld. CIT (A) has erred in deleting the addition of Rs.6,77,07,368/- made by AO on account of wages paid by the assessee.

2. On the facts and on the circumstances of the case the Ld. CIT (A) has erred in restricted the 10% of expenses of Rs.3,26,33,960/- instead of 10% disallowance of expenses of Rs.98,29,185/- made by AO.

3. The appellant craves leave to add, alter or amend any of the grounds of appeal before or during the course of hearing of the appeal.”

AY 2008-09 “1. On the facts and on the circumstances of the case the Ld. CIT (A) has erred in deleting the addition of Rs.5,46,99,265/-.

2. On the facts and on the circumstances of the case the Ld. CIT (A) has erred in deleting the addition of 10% of expenses made by the AO under the head Staff Welfare, Conveyance & Travelling, Printing & Stationery, Office Repair & Maintenance and Postage.

AY 2009-10 “1. On the facts and on the circumstances of the case the Ld. CIT (A) has erred in deleting the addition of Rs.6,17,95,105/- made by the AO on account of salary and wages.

2. The appellant craves leave to add, alter or amend any of the grounds of appeal before or during the course of hearing of the appeal.”

Assessee has gross receipts of Rs.76.53 crores and shown the net profit of Rs.27,94,728/- which is about 0.36% of the total receipts. In the balance sheet, assessee has shown closing balance in her capital account at Rs.21,13,000/- and has shown fixed assets at Rs.11,52,000/- and another non-business investments at Rs.38,80,000/- and the major part of the balance sheet pertains to sundry debtors and wages payable. Assessee furnished the explanation to explain the aforesaid queries. Major issues come up for scrutiny before AO is a cash payment of wages to the tune of Rs.68.59 crores during the year under assessment. AO noticed that though the assessee claimed that her workers were keep changing and was not in a position to produce such large number of workers for verification but assessee had shown payment of ESIC and PF in case of some workers but major portion of payment of wages is shown to have been paid to the workers where ESIC and PF were not deducted. AO also noticed that the salary register maintained by the assessee is not bearing thump impression of the payee and thereby rejected results of trading and profit & loss account. As against the turnover of Rs.76.53 crores, assessee shown negligible net profit at 0.36%. gathered that assessee is not doing the business which she has tried to project through her books of account and consequently rejected the same u/s 145(3) of the Act. AO also came to the conclusion that since the fabrication is done by the manufacturer from their own labour but shown in the name of assessee and as such, the non-payment of wages to the workers cannot be ruled out.

Assessee in connivance with manufacturers manipulated the expenditure on account of fabrication for such manufacturing units and own profits by adjusting the cash figures arbitrarily. AO considered the cash payment made to the non-ESIC deducted workers doubtful and consequently disallowed the reasonable and proportionate amount as under :-

Total wages payable as per balance Rs.68,69,92,456 sheet Total wages payable to the persons Rs.34,74,55,612/- where ESI was deducted Total wages shown paid to workers Rs.33,85,36,843/- where ESIC has not been deducted On failure of the assessee to substantiate his cash payment on account of wages by evidence and justification, AO worked out an ad hoc amount to the tune of 20% of the wages paid on account of ESIC and PF workers to the following effect :- ./2011 ITA No.5427/Del./2011 ITA No.3712/Del./2013 “Total cash wages paid to non-ESI workers Rs.33,85,36,843/- 20% of Rs.33,85,36,843/- comes to Rs.6,77,07,368/- is disallowed and added back to the net income of the assessee for the relevant assessment year.” and thereby made an addition of Rs.6,77,07,368/- qua AY 2007-08 & AY 2009-10 and Rs.5,46,99,265/- qua AY 2008-09.

AO disallowed 10% of these expenses for lack of complete books, vouchers and books and thereby made an addition of Rs.7,65,373/-.

However, on the other hand, ld. AR for the assessee while supporting the impugned order passed by ld. CIT (A) contended inter alia that the assessee is merely a supplier of labour to the garment manufacturing industries on seasonal basis and they being migrant labourer could not be produced before the AO; that the entire addition has been made by the AO on the basis of suspicion which has been rightly deleted by the ld. CIT (A); that in the AY 2010-11 no such addition has been made by the AO as per order dated 26.03.2014; that assessee being a contractor completes most of the jobwork in the premises of the manufacturer and supplies necessary infrastructure except consumable items which accounts for less than 0.5% to the total receipt and all the related activities are completed under the supervision of clients; that the employer is not under obligation to deduct ESIC if gross wage of worker is more than Rs.7,500/-; that total number of workers drawings more 2007 and in the last three months, it was 5887,6380 and 8940 workers and this information was duly supplied to the AO who has arbitrarily misinterpreted the same; that employer is not under obligation to deduct ESIC and PF if the gross amount and the basic wage does not exceed Rs.10,000/- and Rs.6,5000/- respectively.

GROUND NO.1 OF (AY 2007-08) GROUND NO.1 OF ITA No.5427/DEL/2011 (AY 2008-09) GROUND NO.1 OF (AY 2009-10)

“as to whether CIT (A) has erred in deleting the additions made by the AO on account of wages paid by the assessee by rejecting books of account u/s 145 of the Act?”

labour to the garment manufacturing units having turnover exceeding Rs.100 crores who have recorded the direct expenses in their manufacturing accounts, there was no material whatsoever with the AO to reach at the conclusion that the assessee has inflated her wages and bogus expenses;

(ii) that when the AO has duly carried out the cross verification of the expenses shown in the books of account by the assessee with the export houses to whom, the assessee was supplying labour, the AO was required to bring on record the evidence to prove that the payment made by the assessee for providing labour to the export houses has been bogus and inflated. The AO rather recorded in para 3.2 of the assessment order that :-

“The nature of business of the assessee has shown by her and preparation of books of accounts and balance sheet it is rather difficult to rely upon the book results or to entire reject such results of the trading and profit and loss account. The assessee has shown huge turnover at Rs.76.53 crore (roundly) but shown net profit at 0.36% which is very negligible and cannot be relied keeping in view of prudent business practices. In case, 1% of assessee's receipts-are ./2011 ITA No.5427/Del./2011 ITA No.3712/Del./2013 results in bad debt then assessee may immediately plunged into net losses. Assessee is receiving payment from large industrial units such as Orient Craft Ltd., Pareals Global Ltd. Vishal Megamart and other big names of readymade manufacturing industry. Such large houses cannot rely upon assessee to do the work of fabrication for them who are mainly exporters. As assessee has little financial worth, it is not understandable easily that she is doing business for such large industrial houses. All such factors were kept in mind to draw conclusion from the business activities as shown by the assessee. However certain issues were tried to solve the mystery of business of the assessee.” and proceeded to declare the balance payment as doubtful and disallowed the ad hoc amount to the tune of 20% of the wages paid on account of non-ESI and PF workers on the basis of estimation;

(iii) that when the AO has himself admitted the payment shown in the ESIC and PF return and has cross verified the entire payment on account of wages made by the export houses, he has illegality disallowed an ad hoc amount to the tune of 20% of the wages paid on account of non-ESIC and PF workers;

(iv) that when the ld. CIT (A) during the appellate proceedings have sought the report from the AO on the inspection report issued by ESI / PF authorities, he has not preferred to do so;

(v) that the ld. CIT (A) having co-terminus powers examined inspection reports issued by ESI / PF authorities regarding the workers / labourers supplied to the export houses by the assessee and has not found any illegally or perversity in the same and have rightly deleted the addition;

(vi) that had there been any violation of labour law i.e. ESI

/ PF Act, the same would have been brought on record by ESI / PF Authorities by initiating penal action against the assessee / export houses;

(vii) that the AO disbelieved the net profit shown at 0.36% of the receipt as claimed by the assessee on the ground that the same is negligible which is not based upon any comparative study brought on record by the assessee;

(viii) that profit of any business house cannot be disputed on the basis of conjectures and surmises unless sustainable evidence is not brought on record that actual profit is more than claimed by the assessee; immediately withdrawn from the bank after clearance of cheque, the wage bill cannot be declared as inflated or bogus one because this practice of making payment is an accepted feature. Moreover, in case of contract labourer, payment invariably made immediately after completion of the jobwork;

(x) that when the assessee has duly explained the deduction on account of ESI and PF which was not to be deducted in case of each and every worker regarding which Inspection Report in the form of Annexure ‘E’ is available at pages 46 to 49 of the Paper Book filed by the assessee, the general findings returned by the AO that the assessee has inflated the wage bill of the workers whose ESI and PF was not deducted, are not sustainable;

(xi) that the AO, in such circumstances, was required to point out specifically by discussing each and every case of the worker in the light of the report given by the ESI and PF authorities to declare the wage bill as inflated and bogus; account, balance sheet, P&L account with the accounts books of export houses to whom labour was being supplied by the assessee has proceeded on the basis of suspicion and estimation to disallow the 20% of the wages paid on account of non-ESI and PF workers as bogus expenditure which is not permissible under law. Because suspicion cannot take the place of proof;

(xiii) that there is not an iota of material on the file if ESI and PF Department have ever recorded any findings for non-payment of ESI and PF to any of the eligible worker;

(xiv) that when undisputedly the assessee has made payment in cash to the workers because most of them were contract labourers and it was not plausible to maintain their bank accounts and the assessee has also paid ESI and PF in respect of its eligible worker covered under the Act, the question of inflated / bogus wage bill does not arise;

PF deduction is not applicable to each and every worker unilaterally came to the conclusion that in case of some of the workers since ESI and PF was not deducted, the assessee has raised bogus wage bills;

(xvi) that the AO has not separately examined both ESI and PF wage bill and non-ESI and PF wage bill to work out the wages paid to non-skilled worker which were outside the purview of ESI and PF Act, rather arbitrarily declared the same as inflated and bogus one.

(xvii) that in the subsequent assessment year 2010-11, no such expenses on account of wages paid by the assessee have been disallowed by the AO as is evident from the assessment order dated 26.03.2014 made available on the record by the assessee.

GROUND NO.2 OF (AY 2007-08)

“13. The submissions made by the appellant vis-a-vis the basis of disallowance made by the Assessing Officer have been considered. It is apparent that the Assessing Officer has made the disallowance on purely ad hoc basis without going into the facts pertaining to each item of expenditure claimed by the appellant. The Assessing Officer has made the disallowance under the presumption that no input of consequence has been made by the appellant apart from acting as a mediator. However, the perusal of details submitted by the appellant in respect of various expenses shows that the appellant has been actively engaged in the sourcing of labour of various types on behalf of different export houses. The telephone expenses details submitted shows that almost all the payments have been made by cheque for operating 126 cell phones by employees of the assessee, which by itself is evidence enough of actual work being carried out by the appellant. Therefore, there can be no basis for disallowance of any expenses under this head. Further, ./2011 ITA No.5427/Del./2011 ITA No.3712/Del./2013 the details submitted in respect of printing & stationery reveal that various forms have been printed by the appellant which are used on a regular basis to facilitate various aspects of human resource management being carried out by the assessee on behalf of his clients. Substantial part of these payment have also been made by cheque. In the face of evidence submitted by the appellant, adhoc disallowance to the extent of 10% by the Assessing Officer is deleted. Further, the godown rent has been paid to accommodate workers at the time of their arrival and the Assessing Officer has also not pointed out anything with regard to this expense to merit disallowance of 10%. However, it is seen that there is no detailed explanation with respect to claim of expenses debited under the head purchase of consumables to the tune of Rs.36,33,960/-. All these expenses have been met in cash, therefore, disallowance by the Assessing Officer to the tune of 10% of these expenses is justified and therefore, upheld. As such, addition to the tune of Rs.3,63,396/- is upheld.”

GROUND NO.2 OF (AY 2008-09)