ITO 4(2)(1), MUMBAI vs. KAMADGIRI FASHION (SYNTHETICS ).LTD, MUMBAI

The Revenue is aggrieved by the decision rendered by learned CIT(A) on following issues :-

We have heard the parties and perused the record. The assessee- company is engaged in the business of manufacture and sale of fabrics. The first issue relates to disallowance of amalgamation expenses. The Assessing Officer disallowed a sum of ` 3,52,313/- relating to amalgamation expenses incurred in connection with amalgamation of a company named M/s. Strips Apparels Ltd. with it, on the reasoning that the same is capital in nature.

Learned Departmental Representative submitted that the expenses incurred on amalgamation of company cannot be treated as revenue expenditure, since amalgamation would give enduring benefit to the assessee.

On the contrary, learned AR submitted that the assessee has never claimed amalgamation expenditure as revenue expenditure and the Assessing Officer has committed an error in presuming so. Learned AR invited our attention to page No. 69 of the paper book and submitted that the amalgamation expenses of ` 3.52 lakhs has been deducted from the general reserve available with the assessee and it has not been debited to the profit and loss account. Learned AR further submitted that amalgamation expense has been claimed by the assessee u/s. 35DD of the Act to the extent of 20% as provided in that section. Learned AR further submitted that the Assessing Officer, having allowed deduction u/s. 35DD of the Act, could not have disallowed amount of ` 3.52 lakhs.

Having heard the rival submissions, we are of the view that there is merit in the contentions of the assessee. Since the assessee has not debited the profit and loss account with the amalgamation expenses of ` 3.52 lakhs, the question of disallowing the same does not arise. From the annual report furnished by the assessee, we notice that the assessee reduced amalgamation expenses from the general reserves account. Hence, we are of the view that lthe AO has made disallowance on the wrong appreciation of the facts. Even though, the learned CIT(A) has not considered the factual aspects discussed above, however, for the reasons discussed above, we are of the view that his final decision does not called for any interference, since the disallowance of an 3 Kamadgiri Fashion Pvt. Ltd.

Next issue contested by the Revenue relates to the disallowance made out of salary and wages expenses. The Assessing Officer noticed that the assessee has claimed sum of ` 16.19 crores under the head “salary and wages”. He noticed that the increase in salary and wages expenses was not commensurate with the increase in sales. Accordingly, he asked the assessee to produce the books of account along with supporting vouchers. As against the claim of ` 16.19 crores made under this head, the assessee produced supporting evidence to the tune of ` 5.52 crores. He also noticed that the major part of labour charges payments have been made by way of self made vouchers which are not independently verifiable. The Assessing Officer also observed that the assessee did not submit complete details with regard to contract labour payments. Since increase in salary and wages expenses was not commensurate with the increase in sale, the Assessing Officer took the view that the labour expenses should be allowed at 110% of the expenses claimed in immediately preceding year. Accordingly, he allowed expenses to the extent of ` 13.19 crores and disallowed the balance amount of ` 3.00 crores. Learned CIT(A) restricted the disallowance to ` 25 lakhs and hence the Revenue is aggrieved by this decision.

At the time of hearing, learned AR submitted that the assessee has maintained proper vouchers in respect of entire amount of ` 16.19 crores claimed as salary and wages expenses. He submitted that the assessee would be in a position to furnish all the vouchers before the Assessing Officer for his verification. Learned Departmental Representative also agreed that this issue may be set aside to the file of the Assessing Officer for carrying out necessary verification. We accordingly set aside the order passed by learned CIT(A) on this issue and restore the same to the file of the Assessing Officer with the 4 Kamadgiri Fashion Pvt. Ltd.