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Income Tax Appellate Tribunal, KOLKATA BENCH “B” KOLKATA
Before: Shri Mahavir Singh & Shri Waseem Ahmed
आदेश /O R D E R
PER Waseem Ahmed, Accountant Member:-
This appeal by the assessee is against order u/s 263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) passed by Commissioner of Income Tax-IV, Kolkata (in short ‘CIT’) vide M No.CIT.Kol-IV/263/2014- 15/4453-55 dated 21.10.2014. Assessment was framed by JCIT, Range-10, Kolkata u/s 143(3) of the Act vide his order dated 18.03.2013 for assessment year 2010-11.
The only issue in this appeal of assessee is against the revision order passed u/s 263 of the Act by Ld. CIT-IV Kolkata revising the assessment
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 2 framed by the AO u/s. 143(3) of the Act. For this, assessee has raised following 12 grounds:- “ 1. For that on the facts and in the circumstances of the case, the revision order u/s. 263 be cancelled since it was passed without complying with conditions precedent and improperly holding that the assessment order passed was erroneous and prejudicial to the interests of Revenue when n fact it was not so.
For that on the facts and in the circumstances of the case, the CIT was unjustified in setting aside the entire assessment and directing passing of de nove assessment when the show cause notice issued was only for specific grounds.
For that on the facts and in the circumstances of the case, the CIT’s order u/s. 263 directing AO to make addition of Rs.11,66,78,994/- being alleged excessive manufacturing loss be held to be unsustainable as no show cause notice on this issue was issued and the finding was recorded arbitrarily by considering incorrect and inappropriate facts & figures.
For that on the facts and in the circumstances of the case, the CIT’s order directing AO to disallow depreciation of Rs.4,74,803/- be held unsustainable since the same represented alleged excess depreciation allowed in the earlier assessments.
For that on the facts and in the circumstances of the case, the CIT’s order directing AO to examine reconciliation of AIR information be held unsustainable since such reconciliation had already been examined in the original assessment and no infirmity was proved by the CIT.
For that on the facts and in the circumstances of the case, the CIT’s order directing AO to add suppressed profit in respect of sales made to related party by invoking Section 40A(2) be held unsustainable as the said Section has no application in respect of income received from related party but applies only for disallowance of excessive expenditure.
For that on the facts and in the circumstances of the case, the order of the CIT directing AO to examine melting loss of gold be held to be unsustainable as no infirmity was proved in assessment order and the said melting loss being considered to be the excess manufacturing cost, the direction amounted for making double addition in respect of the same item.
For that on the facts and in the circumstances of the case, the CIT’s order directing AO to examine karigars with regard to receipt of gold
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 3 and TDS u/s. 194C in the context of alleged melting loss be held unsustainable since no show cause notice in that regard was issued.
For that on the facts and in the circumstances of the case, the CIT’s order directing AO to disallow part repairs & maintenance expenses paid to Anjali Estate & Developers Pvt Ltd be held to be unsustainable even though no show cause notice in that regard was issued and full particulars of these expenses were examined by the AO in the course of assessment.
For that on the facts and in the circumstances of the case, the CIT’s order directing AO to re-examine allowability of rent paid after TDS be held unsustainable since no show cause in that regard was issued and no specific error in the AO’s order in that regard was proved by the CIT.
For that on the facts and in the circumstances of the case, the CIT’s order directing AO to re-examine the details of professional fees, conveyance expenses, establishment expenses, investment in building as well as administrative & selling expenses be held unsustainable since no show cause in that regard was issued and no specific error in the AO’s order in that regard was proved by the CIT.
For that on the facts and in the circumstances of the case, the CIT’s order directing AO to verify allowability of discount allowed by examining the customers to whom payments are made be held to be unsustainable since no show cause notice on this issue was given and the direction being impracticable is liable to be cancelled.”
Briefly stated facts are that assessee is engaged in the business of manufacturing and trading of jewellery and following the mercantile system of accounting. For the relevant AY 2010-11, the assessee filed its return of income on 30.09.2010 and assessment was framed by JCIT, Range-10 Kolkata u/s. 143(3) of the Act after issuing notices u/s. 143(2) and 142(1) of the Act along with a detailed questionnaire dated 18.10.2012. The assessee produced complete books of accounts along with bills and vouchers of sales and purchases and stock register. The AO made certain additions and disallowances and framed assessment u/s. 143(3) of the Act. Subsequently, the Ld. CIT on examination of assessment records for the relevant AY 2010- 11 observed that the assessment framed by AO u/s. 143(3) of the Act dated 18.03.2013 is erroneous and prejudicial to the interest of Revenue and for this
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 4 purposes he issued show cause notice No. Kol/CIT-IV/263/Anljali Jew/2010- 11/13-14/5894 dt. 10.01.2014 wherein he has raised the primary issues that:- (i) Issue of excess depreciation allowance made in earlier years; (ii) Issue of non-verification / reconciliation of AIR information; (iii) Non-examination of loss of gold of 72.019 kg in the absence of details and evidences of different types of ornaments actually manufactured; (iv) Issues of secured loans, unsecured loans, addition to fixed assets, advances, reconciliation of income with 26 AS; (v) Non-compliance Notice u/s/. 142(1) of the Act dated 18.10.2012; (vi) Reasonableness of payments of sales and purchases to sister concern to be examined u/s. 40A(2)(b) of the Act.
The assessee filed replies before Ld. CIT dated 17.01.2014 and 10.02.2014. The reply dated 10.02.2014 (which is part of assessee’s paper book pages 5 to 18) is for show cause notice para-wise wherein assessee has explained that complete details of assets were filed which is part of audited accounts and tax audit report. According to assessee, the detailed head-wise working of assets is given in depreciation chart which is enclosed with return of income itself. In regard to secured and unsecured loans, addition to fixed assets, advances, reconciliation of income with 26AS was submitted before the AO during the course of assessment proceedings. This can be examined from the assessment report that the assessee has furnished before the AO complete breakup of secured and unsecured loans apart from furnishing of detailed break up of loans taken. All the documentary evidences to substantiate the outstanding amounts as on 31.03.2010 were furnished. The AO thoroughly examined these details before completion of assessment. As regards to addition to fixed assets, the Tax Auditor has given complete particulars of the additions made to different blocks of depreciable assets in his Tax Audit Report. The assessee has also explained and reconciled his
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 5 income vis-à-vis 26AS inasmuch as the tax was deducted only on interest income which was fully accounted for in the assessee’s books.
In respect to the information of AIR, the AO during the course of assessment proceedings asked the assessee to reconcile but from the notice u/s. 142(1) of the Act it is clear that AO had not required the assessee to reconcile any AIR information. Even the show cause notice is silent as to what AIR information was available in the records, which was not reconciled by assessee. As regards to another allegation, the company has reported to manufacturing loss of 72.02 kg. of gold and no enquiry was conducted about the reasonableness of such loss. The assessee explained that though loss of 72. Kg. of gold is substantial in numeric terms but such loss cannot be considered to be in relative terms seeing the size of the business of assessee. It was explained that in the business of manufacture of gold jewelleries, the gold is purchased either in pure form i.e. 24 carats or it is purchased of lesser cartage. Jewelleries however cannot be made in 24 carat gold. The jewelleries are manufactured in gold having 22 carats or less. In order to manufacture jewelleries, gold is required to be melted in fire and in the process of jewellery making there is always melting loss. It was explained by the assessee that in the immediately preceding 3 years the melting loss incurred by the company was 56.95; 57.91 & 37.61 kgs which in percentage was 5.68%; 4.94% 8.98% respectively. In the current year the loss of 72 kgs in percentage terms was 5.05% of the jewelleries manufactured. According to assessee, the melting loss incurred was thus commensurate with the loss incurred in the earlier years as well.
In regard to the issue of assessee’s transactions with its sister concern and the proposed disallowance u/s 40A(2) of the Act, the assessee explained that complete details of purchases and sales with the sister concern as well as other parties were furnished during the course of assessment proceedings. The assessee explained that the allegation is factually incorrect for the reason
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 6 that the AO has examined the sales and purchases with sister concerns as well as with other parties. With regard to purchase made from sister concerns, the AO had specifically asked to furnish the details of purchases made but he cannot ask about the sales made to sister concerns in the context of provision of Sec. 40A(2) of the Act. According to assessee, the assessee had not only furnished the information with regard to purchase made from sister concerns but also from other parties and AO was satisfied with the explanation of assessee that it had purchased only gold items from its sister concerns and the rate at which the assessee made purchases from them were at the prevailing market rate and no excessive payment was made. In terms of the above, assessee explained before Ld. CIT that the assessment framed by AO is neither erroneous nor prejudicial to the interest of Revenue.
But the Ld. CIT revised the assessment and directed the AO to frame assessment de novo with the following directions:- a) Make an addition of Rs.11,66,78,994/-- (7.75% less 2.96%) of sales Rs.243,58,87,153/- an excess manufacturing cost claimed b the assessee.
b) Make an addition of Rs.4,74,803/- being excess depreciation allowance claimed by the assessee in various year referred in para .2.2(vii)
c) To call for the reconciliation of AIR information and examined the same.
d) Sales to sister concern is not on arm’s length price, which was not examined by AO making the order erroneous and prejudicial to the interest of revenue. Same is required to be examined by AO u/s. 40A(2)(b) and addition on suppression of profit in the hands of assessee is to be considered.
e) Examine the loss of gold of 72.09 kg worth Rs.10,87,26,931.99 by calling for the details of evidences of different types of ornaments actually manufactured. Examination of the parties / Kariganrs is to be made their receipts including gold may be examined u/s. 194C.
f) During the course of assessments proceedings the assessee has submitted some details along with forwarding letter dated December, 3
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 7 2012 before the assessing officer. During the curse of discussion in 263 proceedings the documents filed by the assessee before the AO was verified. It appears form Annexure-E the assessee has made huge payment to its sister concern M/s Anjali estate and developers. The Assessing Officer has called the details of the expenditure and assessee has submitted the expenditure above Rs.1 lakh. The Assessee has also enclosed 7 bills along with Annexure-B. The 1st three bills are prepared on the different dated but received only on 8th January, 2010 by the assessee. Bills available on record assessee as under: Date Bill No. Value (Rs) 08.01-2010 529 200855.52 08.01.2010 533 182282.23 08.01.2010 537 169556.05 30.03.2010 06/AED/10-11 2244870.00 31.03.2010 541/AED/09-10 126700.00 31.03.2010 542/AED/09-10 103009.00 31.03.2010 547/AED/09-10 221870.00 Surprisingly the 4th bill No. 006/AED/10-11 for Rs.22,44,870/- was prepared by sister concern on 25.04.2010 which was received by the assessee on 30.03.2010, copy enclosed, which is formed part of this order. The preparations and claim of bills by issuing sister concern M/s Anjali estate developers was made in Financial Year 2010-11 which were prepared also in Financial Year 2010-11 but surprisingly claimed by assessee in preceding financial year. All the above bills are prima facie unpaid and were prepared after the financial year to avoid tax liability of assessee. The expenditure claim by the assessee through these bills were neither seen nor verified by the Assessing Officer at all. Prima facie these are bogus bills only for the one purpose i.e. to reduce the retuned income and evade the Income-tax chargeable on the actual profit of the company. These bogus bills should have been properly examined and disallowed. The Assessing Officer is therefore directed to examine the records of assessee as well as m/s Anjali estate developers carefully and also examined how the taxable income has been siphoned to the sister’s concerned M/s Anjali estates and developers. The Assessing Officer should consider initiating proceeding under section 271(1)© and also proposed proceedings under section 276C and 277A read with Section 278B of the Income-tax Act, 1961. g) As per details filed assessee paid rent of Rs.15,96,00/- which is not verifiable from the TDES document provided during assessment proceedings. Therefore, AO has to examine this issue also. h) The assessee company has claimed professional charges of Rs.19,94,169/- while a scrutiny of the documents produced during the
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 8 assessment proceedings reveals that total of professional charges of Rs.8,17,868/-. Similarly, the conveyance expenses claimed Rs.10,90,235/- while as per details submitted total of conveyance charge comes to Rs.51,485/-
i) During the course of 263 proceedings it was noticed and discussed that certain expenses were increased exorbitantly which have no justification with reference to increase from preceding year. Such items are establishment charges increased from Rs.73,35,080/- to Rs.1,68,52,923/-. Administrative, selling and other charges, from 5.7% to 12.33% and increase of 72 items in miscellaneous expenses. Similarly investment in building Rs.88,69,006/-. These issues were remained to be verified.
j) The claim of discount allowed to the buyers amounting to Rs.1,50,01,453/-. Without justification of business expediency. The AO must ask assessee to produce these parties and examine genuineness of such huge expenditure. The assessee must be asked to identify recipients and prove the genuineness and amount paid is verifiable from returns of the recipients.
From the above facts, it emerges that CIT has revised the assessments on the following issues: a) Directed the AO to make addition of Rs.11,66,78,994/- on account of excess manufacturing cost calculated @ 4.79% of gross sales.
b) Directed the AO to make addition of Rs.4,74,803/- being excess depreciation allowance granted in earlier years. c) Directed the AO to reconciliation of AIR information & examine the same; d) Directed the AO that sales to sister concerns is not at arm’s length price and he has not examined the same. The AO to examine in terms of Sec. 40A(2)(b) of the Act and addition be made on account of suppression of profit in the hands of the assessee. e) Directed the AO to examine the loss of manufacturing of gold of 72.019 kgs amounting to Rs.10,87,26,932/- after the examining the details and evidences of different type of ornaments manufactured by
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 9 assessee. He also directed that the receipts of parties / karigars are to be examined in terms of Sec. 194C of the Act. f) Directed the AO to examine the claim of expenditure of 4 unpaid bills received by assessee from sister concerns M/s Anjali Estate and Developers on 30/31.03.2010. According to Ld. CIT this was not examined by AO and these bills prima facie seems to be bogus. Hence, he directed the AO to examine the records of assessee as well as sister concern M/s Anjali Estate and Developers. He also issue advisory for initiation of penalty proceedings u/s. 271(10© of the act and prosecution proceedings u/s. 276C, 277A r.w.s. 278B of the Act. g) Directed the AO to verify the rent paid by assessee amounting to Rs.15.96 lakhs from the TDS documents provided in the assessment proceedings; h) Directed the AO to verify the professional charges and conveyance charges amounting to Rs.19,94,169/- and Rs.10,90,235 respectively, while from the details the expenses disclosed are at Rs.8,17,868/- and Rs.51,485/- respectively. i) Directed the AO to go into justification of establishment charges increased from Rs.73,35,080/- to Rs.1,68,52,923/-. Also administrative, selling and other expenses from 5.7% to 12.33% and increased of 72 times in misc. expenses. Also, the investment in building remained unverified amounting to Rs.88,69,006/-. j) Directed the AO to see the justification of business expediency in respect to discount to the buyers amounting to Rs.1,50,01,453/-.
Aggrieved against the revision order of Ld. CIT, assessee came in appeal before Tribunal.
We have heard rival contentions and gone though the facts and circumstances of the case. We find that following first three issues are inter- related and the Ld. Counsel for the assessee has explained three issues.
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 10 • Excess manufacturing cost claimed by the assessee; • Sales made to related parties at lower prices; • Loss of gold incurred by the company in the course of manufacture of jewellery First of all the assessee explained that the AO had called for the “quantitative details of purchases, sales, opening balance and closing balance of gold” which was furnished by the assessee but CIT opined that the details of manufacturing activities carried out by the assessee were not examined and therefore the assessment order suffered from lack of enquiry. The assessee explained before us that the quantitative details of gold were in fact provided by the tax auditor in Annexure-F to the Tax Audit report and complete quantitative details of gold were furnished at the time of filing of return itself and this was examined and considered by AO prior to framing of assessment and said details are part of the assessment records. Ld. Counsel argued that it is only with reference to the quantitative details available in the assessment records, the CIT could quantify the alleged excessive manufacturing loss and direct AO to make disallowance of Rs.11,66,78,994/-. We find that allegation of CIT regarding excessive manufacturing loss is in paras 3.7 and 3.8 of the impugned order and he has computed “manufacturing costs” by taking into account the following expenses: Wages & labour Rs.6,23,51,872/- • Packing Material Rs.55,72,915/- • Testing & refining charges Rs.1,20,11,512/- Total Rs.7,99,36,299/-
We observed from records that CIT also considered value of melting loss as part of manufacturing cost. According to CIT, value of gold lost in melting process was Rs.10,87,26,931/- and this loss was part of the “manufacturing cost”. Total manufacturing cost was therefore taken by him at Rs.18,,86,63231/- i.e. (Rs.10,87,26,931 + Rs.7,99,36,299/-). He then compared the “manufacturing cost-vis-a-vis the quantity of gold sale to its
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 11 retail customers and one related party viz., M/s. Anjali Jewellers Ltd. Based on his analysis, CIT concluded that the assessee claimed excess manufacturing cost to the extent of Rs.11,66,78,994/-. But no such SCN was issued to the assessee. CIT reached his conclusion in breach of principles of natural justice and his finding recorded suffered from several factual infirmities because the facts and figures considered were picked up at random and conclusions were drawn without correctly understanding the nature of assessee’s manufacturing process.
Ld. Counsel for the assessee explained that while arriving at quantum of alleged excessive manufacturing cost, the CIT observed that the “making charges” recovered from the sale made to related party was 3.29% and after allowing profit margin of 100% the CIT worked out the manufacturing cost of jewerllry sold to M/s. Anjali Jewellers in relative terms at 2.69%. The CIT was of the view that manufacturing cost should therefore be 2.96% across all sales and therefore treated the difference between 7.75% (being the manufacturing cost to total sales as worked out by the CIT) and 2.96% as the alleged excess manufacturing cost. Ld. Counsel explained the entire dispute by facts and figures as under:- He explained that, it is first necessary to put the acts of the relevant year in proper context. From the audited accounts of the assessee and the quantitative details furnished in Annexure –F of the tax audit report, it shall be observed that the quantity and the cost of gold consumed (in terms of 22 cts) during the year was as follows:- Opening stock 57,979 gms Purchases 13,67,216 gms 14,25,195 gms Less: Closing stock 89,211 gms Gold consumed 13,35,984 gms
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 12 The cost of gold of 13,35,985 gms as per assessee’s books was Rs.191,36,05,009/- which resulted in average per gram cost of 1432.35 The melting loss which the assessee incurred in the process of making jewellery was 72,019 gms and therefore the net recovery of the gold for selling purposes was 12,63,966 gms (13,35,985 – 72,019). The melting loss of 72,019 gms out of consumption of 13,35,984 in % terms worked out at 5.05%. In the circumstances when cost of melting loss was factored into costing then average cost of gold sold worked out at Rs.1504.68 per gm (Rs.1432.35 x 1.505) In addition to per gram cost of gold, the assessee incurred the following direct costs as outlined in the revision order. Direct costs • Wages & labaour 6,,23,51,872/- • Packing charges 55,72,914/- • Testing charges 1,20,11,512/- 7,99,36,299/- The direct costs at Sr. No. (i) & (iii) pertained to jewelleries manufactured by the assessee and sold to both M/s Anjali Jewellers and Retail customers. However the packing charges were incurred only in respect of sales made to retail customers. The ornaments were sold to M/s Anjali Jewellers in bulk and hence packing charges were not incurred by the assessee. Instead, M/s Anjali jewelers incurred packaging cost when the said firm sold gold ornaments to its own retail customers at its own show rooms. Accordingly, the packaging cost incurred by the assessee was exclusively allocable to the quantity of ornaments sold to retail customers. The average cost of packaging material per gram of gold sold to retail customer, therefore worked out as follows: Sales made to retail customers (in gms) 872208.78 gms Packing charges Rs.55,72,914/- Average packing charges per gram Rs.6,38/ gm Sold to retail customers
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 13 Testing & refining charges were directly connected with the purchase of gold. For working out the sales price, the testing & refining charges are therefore considered by the assessee as a component of the metal value and not the “making charges”. Accordingly, the cost of gold metal sold during the year works out as follows: Average cost of gold (as computed above) 1504.68 / gm Testing charges (1,20,11,512/13,35,984) 8.99 / gm Average cost of gold sold 1513.687 / gm The remaining direct costs i.e. wages & labour, incurred per gram of gold sold during the year worked out as follows: Total quantity of metal sold 12,63,965 gms Wages & labour 6,23,51,872/- Average cost of labour per gram Rs.49.33 / gm From the above stated facts the final picture that emerges in respect of peer gram of gold jewellery and ornaments sold is as follows: Average cost of gold metal sold Rs.1513.67 / gm Average labour wages for making of gold jewellery Rs. 49.33 / gm Average packing charge (only retail customers) Rs. 6.68 / gm Rs.1569.38 / gm
Ld. Counsel also explained that as per the practice followed by the jewelers in West Bengal, when an invoice is issued by the jeweller to his customer the invoiced value is broken and disclosed by way of following two component: • Cost of metal, & • Making charges This break up is only to let know the customer the rate of gold on the date of sale which the jewerller has adopted. The component of “making charge” shown in the invoice has no relation whatsoever with actual cost incurred by the jeweler. Accordingly he argued that in such circumstances it is wrong for
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 14 the CIT to presume that “making charges” recovered through invoice value represented recovery of manufacturing cost.
In view of the above facts, Ld. Counsel stated the facts that break-up of gross sales between M/s Anjali Jewerllers and retail customers was as follows:- Sales to Anjali Jewellers: Metal (in Qty) 416669.062 gms Metal value Rs.64,57,87,674/- Rs.1550 / gm (avg) Making charges Rs.2,32,40,165/- Rs. 56 / gm (avg)
Sales to retail customers: Metal (in Qty) 872208.78 gms Metal value Rs.136,67,86,332/- Rs.1567 / gm (avg) Making charges Rs.2139,60,087/- Rs.245 / gm (avg) Based on the above data, he stated that the comparative figures cost and price of jewellery sold to Anjali Jewellers, retail customers and the operating profit margin in respective segment was as follows:- Particulars Anjali Jewellers Retail customers Sales per gram • Metal 1550 1567 • Making charge 56 245 1606 1812 Cost of sales per gram • Metal 1514 1514 • Making charge 49 49 • Packing -- 6.40 1563 1569.40 Net margin (profit) 43 242.40
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 15 From the above table, we find that while making sale of ornaments, the assessee earned profit on sale made both to M/s Anjali Jewellers and retail customers though margin of profit in the case of sale made to Anjali Jewellers was lower. The fact is that the overall “cost of sales” incurred by the assessee was commensurate with the sale price realized from Anjali Jewellers as well as retail customers. We find from the facts of the case that this finding did not have any basis for any prudent person to record a finding that assessee incurred excessive manufacturing cost and thereby incurred fictitious loss in relation to sales made to related party.
From the above it is clear that CIT wrongly considered loss of gold to be part of “manufacturing cost”, which in his is opinion was recovered by the assessee in form of “making charges” from customers but the melting loss of gold which arose in the course of manufacturing of ornaments formed part of the purchase cost of gold and therefore recovered from customers as part of the “metal value” and not “making charges”. The average cost of gold sold after taking in the melting loss was Rs.1432.35 per gm., which after taking into account the melting loss stood increased to Rs1504.68 per gm. The melting loss was recouped by the assessee from its customers in the form of price for “metal” component which was always disclosed separately in the sale invoice. The melting loss was never recovered from customers as component of “making charges” which was separately shown in the sale invoice. The average per gram metal sales value recovered from M/s Anjali Jewellers was at Rs.1550 per gm. whose corresponding cost per gram was Rs.1504.68. This factual data proves that even after melting loss of gold was factored into costing of gold metal component the average per gm. cost of gold at Rs.11,504.68 was less than Rs.1550 per gm. which the assessee recovered from Anjali Jewellers, a related party. These facts demonstrate beyond doubt that assessee did not incur any loss nor the manufacturing loss was excessive resulting in fictitious loss. In the facts stated in the foregoing it is therefore concluded that the melting loss of Rs.10,8726,931/- was wrongly considered
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 16 by Ld. CIT to be part of manufacturing cost and thereby he erroneously compared with recovers made by the assessee in the form of “making charges” disclosed in the invoices. By considering loss of gold in the process of melting as part of manufacturing loss and not treating such loss to be part of metal cost CIT distorted the figures of “metal” and “making charges” components included in invoices and arrived at wrong conclusion. We are of the view that in view of the foregoing facts the assessee recovered “melting loss” component of the cost by way of “metal sale” value billed to customers and not “making charges”. In the circumstances the melting loss of Rs.10,87,26,931/- should have been excluded from the manufacturing cost of Rs.18,86,63,231/- for ascertaining the true manufacturing costs incurred vis-à- vis the “making charges” billed to customers.
In regard to making charges, these were never part of “manufacturing cost” and it was wrong to presume that such cost was recovered in form of “making charges”. It was explained that testing & refining charges were paid accredited agencies to verify the purity of gold re-purchased from the customers and testing & refining charges were inextricably linked to the purchase value of gold. The testing charges therefore formed part of the metal component of the invoiced value and not the “making charges”. The “metal sales value” of Rs.1550 per gm charges from M/s Anjali Jewellers or for that matter Rs.1567 per gm charges from the retail customers was more than the average per gm metal cost of Rs.1504.68 per gm (excluding testing charges) if per gm testing charge component is included in the gold metal cost then the same stands increased to Rs.1513.67 / gm. On the other hand, the sale price of metal to Anjali Jewellers and the retail customers was Rs.1550 and Rs.1567 per gm respectively which was sufficiently higher than the cost of the gold sold. In view of these facts it was stated that the testing charges of Rs.1,20,11,512/- was wrongly considered by CIT to be part of “manufacturing cost” recouped by way of “marking charges”. Hence, we are of the view that testing charges were part of “manufacturing cost” but
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 17 these were not recouped in the form of “making charges” but “metal sale” value and accordingly, it should not have considered testing charges of Rs.1,20,11,512/- for ascertaining the costs incurred vis-à-vis the “making charges” billed to customers.
In regard to the packing charges of Rs.55,72,914/- were exclusively incurred it sales made to retail customers. The jewellery was always sold to M/s Anjali Jewellers in unpacked condition. M/s Anjali Jewellers thereafter incurred packaging costs. Ld. Counsel for the assessee explained that it manufactured jewellery in bulk quantities for M/s Anjali Jewelleers. The final packaging of the jewellerey was done by M/s Anjali Jewellers at its own cost and at its own showrooms. This is verified from the fact that for the relevant year M/s Anjali Jewellers incurred packing costs of Rs.18,56,983/- with reference to the sale of Rs.83,58,00,993/-. The assessee explained that packing charges of Rs.55,72,915/- pertained only to sales made to “retail customers” in the circumstances the packing charges should be excluded from the “manufacturing cost” for the purposes of ascertaining the direct costs related to sales made to related party, Ms Anjali Jewellers. In view of these facts, we are of the view that “costs” and expenses” which were considered by CIT to be “manufacturing cost” for the purpose of comparing it with recoveries made as “making charges” were principally recovered by the assessee in the invoices in the form of “metal Value”. Nature of each component of the cost considered by CIT is analyzed in the following table (which was filed by the assessee):- Manufacturing costs:- Wages & labour 6,33,51,872 To be considered for making charges Packing material 55,72,915 To be considered but only with reference to sales made to retail customers. 1,20,11,512 Testing & refining To be considered as part of “gold metal cost” and not “making charges charges Loss of gold 10,87,26,931 To be considered as part of “gold
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 18 metal cost” and not “making charges”.
• The figures stated above are the figures cited by the Ld. CIT in the revision order/Analysis of manufacturing costs & sales value Sales as per P & L a/c Rs.243,58,87,153 Les: Sales to other retail customers not considered By CIT in his analysis Rs. 18,61,12,896 Net sales considered by Ld. CIT for comparison Rs.224,97,74,257 Metal value (in Rs) Making charges (in Rs) 201,25,74,006 Recovery in form 23,72,00,252 A. Recovery in form of metal sales value of making charges A1. Quantity sold Quantity sold 12,63,965 gms 12,63,965 gms 1593 / gm B1. Sales value / gm (A ÷A1) C. Metal gold cost 180,48,78,078 Wages & labouar 6,23,51,872 (being direct cost of jewellery making) 10,87,26,931 D. Loss of gold 1,20,11,512 E. Testing & refining charges F. TOTAL (C+D+E) 192,56,16,521 TOTAL 6,23,51,872 1523 / gm 2.56% Cost of gold / gm Direct Mfg. cost (F÷A1) as % of sales
We find from the above table that the direct manufacturing cost (excluding metal cost) as a percentage of sales was actually only 2.56% and not 7.75% as computed by the CIT. As can be seen from above, the melting loss of gold and testing charge was erroneously considered in the revision order to be part of “making charges”. These expenses in fact formed integral part of the “metal cost” and recouped by the assessee from the customers in the form of “metal sale value”. Further the packing charges did not pertain to the sales made to M/s Anjali Jewellers and therefore the same was not considered in the overall analysis of costs as above.
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 19 16. Further, in the revision order at page 6, CIT took into account the statement giving component wise break-up of invoiced price in respect of sales made to M/s Anjali Jewellers and other retail customers. From the side statement CIT observed that total sale for the relevant year was Rs.243,58,87,153/-. This had two components namely “metal sale” value & “making charges”. The CIT observed that manufacturing cost was Rs.18,86,63,231/ which worked out to 7.75% of gross sales of Rs.243,58,87,153/-. This in his opinion was very excessive because he found that recovery of sale in the form of making charges from Anjali Jewellers was 3.29% which was much lower than the alleged manufacturing cost of 7.75% computed by him. From the discussions above and various tables, it will be evidently clear that the “manufacturing cost” i.e. cost of wages and labour charges, was only 2.56% of sales and not 7.75% as observed by CIT. The remaining component of costs considered by CIT as manufacturing cost in fact represented “cost of gold metal sold” and therefore recovered by the assessee in its invoices in the form of “Metal Value” of sales. Since 2.56% of making cost compares favourably with 3.48% of making charges [(56 ÷ 1606) x 100] recovered from M/s Anjali Jewellers, undeniably the manufacturing cost was not excessive. The assessee explained that the figure of 7.75% as well as the consequential excessive manufacturing cost computed by CIT at Rs.11,66,78,994/- was factually incorrect. The assessee has thus sufficiently established that the actual “manufacturing cost” incurred by the assessee which was recouped in the form of “making charges” was reasonable and not excessive and therefore the directions given by CIT for making addition of Rs.11,66,78,994/- deserves to be cancelled.
We find from the facts of the case and arguments of the ld. Counsel that the CIT has not considered various materials facts while analyzing and comparing the manufacturing cost and making charges recovered by the assessee from sales made to related party, M/s Anjali Jeweellers and the
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 20 sales made to retail customers, which had a bearing on the comparability, which were as follows;-
Functional & cost differences between sales to Anjali Jewellers and other retail customers (ground Nos. 12-15). M/s Anjali Jewellers is a Partnership firm which deals in jewellery and ornaments and is a separate, independent and operational firm having its own showrooms & establishments. M/s Anjali Jewellers incurs separate operational costs including cost of establishment, packing and marketing costs for marketing and sales so jewelries sourced from the assessee in bulk. Promoters / Directors of the assessee and partners of the said firm belong to same family the assessee as well as the firm are regular assessee and pay tax on their income at the same rate. In order to have centralized control, enjoy economies of sale, avoid duplication of functions and achieve overall cost reduction; precious metal is first purchased by the assessee. The metal purchased is then given to karigars along with designs and ornaments are made as per the quantity requirements of assessee as well as the partnership form. The ornaments sourced from the assessee by the said firm are then marketed and sold to retail customers through the showrooms of the firm. All expenses on setting up and operating showrooms, marketing and selling of the jewellery from such show rooms are incurred and borne by the said partnership firm. In the circumstances the assessee could not have charged similar level of “making charges” from M/s Anjali Jewellers as it charged to its retail customers. Sufficient margins had to be allowed to M/s Anjali Jewellers being a bulk consumer engaged in retiling to recoup its own marketing & establishment costs and earn profit on sale o jewellery and ornaments to ultimate retail customers. The comparative data of average per gram metal cost & manufacture cost vis a vis recoveries made in the form of metal price & making
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 21 charges from M/s Anjali Jewellers and Retail Customers of assessee for the relevant year was as follows: Particulars Anjali Jewellers Retail customers Sales per gram - Metal 1550 1567 - Labour / making 56 245 charges 1812 1606
Cost per gram - Metal 1514 1514 -Labour 49 49 -Packing -- 6.40 1563 1569.40 Net margin (Profit) 43 242.40
The ornaments sourced from the assessee were in turn marketed by Anjali Jewellers to the retail customers through its own showrooms. The sales turnover of Anjali Jewellers for the year ended 31.0 2010 was Rs.83,58,00,993/-. Copy of the audited profit & loss account of the side firm is at pages at 96 to 98 of the APB. The gross profit of the said firm for the relevant year was 10.26% as certified by the auditors. As reported the average per gram realization of Anjali Jewellers for the FY 2009-10 was approximately Rs.1767 per gram from its retail customers whereas average per gram realization from the retail customers by the assessee was Rs.1812 per gram as detailed above. As such price charged by the firm to its own retail customers was comparable to the prices charged by the assessee from its own retail customers. In view of the above data, it would be observed that neither the manufacturing cost incurred with regard to the sales made to M/s Anjali Jewellers was excessive nor the price charged from M/s Anjali Jewellers was on the lower side. Operating margin of 10% was allowed to M/s Anjali Jewellers to meet its own establishment & marketing costs and also earn profit from its marketing and selling activity. For the relevant AY 2010-11 M/s Anjali Jewellers returned total income at Rs.1,77,91,572/- and this was taxed at
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 22 maximum marginal rate. Copy of the IT acknowledgement of M/s Anjali Jewellrs for AY 2010-11 is filed in the APB. Accordingly, we are of the view that the prices charged from M/s Anjali Jewellers were therefore fair and reasonable and the assessee did retain profit margin while selling jewelleries to the related party and the assessee declared no excessive manufacturing cost. Further, sales made to related party, M/s Anjali Jewellers were in bulk (representing 26.91% of total sales). Apart from the bulk sales to M/s Anjali Jewellers, the assessee did not make any bulk sale to any other institutional customer. It is a well understood commercial maxim that bulk sale to a single customer entail economics of scale, which have to be passed on to the customer; thereby resulting in lower operating margin for the manufacturer.
In view of the above factors, and the above cited functional and operational differences are taken into account, then disparity between the making charges charged to M/s Anjali Jewellers and the retail customers stand explained. We have already considered that the manufacturing costs (2.56%) actually incurred by the assessee compared favourably with “making charges”(3.48%) recovered from M/s Anjali Jewellers. The figure of 7.75% computed by CIT in the revision order suffered factual infirmities. Taking into account the correct figures as computed above, directions given by CIT for making addition of Rs.11,66,78,994/- deserves to be cancelled and vacated.
Another connected issues regarding manufacturing cost of Rs.18,86,63,231/- outlined in impugned order and out of which CIT ordered disallowance to the extent of Rs.11,66,78,994/- inter alia included the following:- Particulars Amount Remarks Wages & labaour 6,23,51,872 Complete list of parties, was submitted before Assessing Officer. TDS deducted u/s 194C, wherever applicable. Some parties were examined u/s. 133(6) Packing material 55,72,915 Complete party-wise details submitted
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 23 1,20,11,512 Testing & Paid to accredited agencies. TDS u/s. refining charges 194J deducted and paid 10,87,26,931 Melting loss of In % terms – it was only 5.05% & gold comparable with standard norms issued by Commerce Ministry as per which loss in jewellery making ranges between 3% - 9%
Assessee explained that in the course of assessment, assessee had furnished complete details of wage & labour payments of Rs.6,23,51,872/-. and complete details of payments made to karigars and labour is at page Nos. 85 to 86 of APB. It contains name, address, PAN, an amount of TDS deduced thereon. It was explained that in course of assessment, notices u/s. 133(6) was issued by AO to karigars to confirm payments for making charges & wages. All notices were served and replies were received AO. It was explained that the wages/making charges of Rs.6,23,51,872/- paid by the assessee were allowed by the AO only after carrying out prope enquiry and CIT having not found or proved any specific infirmity could not consider the assessment to be erroneous and direct AO to conduct fresh enquiries. Moreover when the expenses on labour & wages were allowed by AO after verification no disallowance out of wages could be ordered by CIT on the ground of alleged excess manufacturing cost, which had been fully explained by assessee and cannot be subject matter of revision u/s 263 of the Act.
As regards to payments of Rs.1,20,11,512/- majorly comprised of testing and refining charges paid to accredited agencies such as A.J. Hall marking Centre, G.N. Hallmarking & Refinery Pvt. Ltd. & Rahul hallmarks Pvt. Ltd. all the payments were made through proper banking channel and subjected to TDS u/s. 194J of the Act, wherever applicable. Complete details thereof had already been submitted in the course of original assessment u/s. 143(3) of the Act, which is also enclosed at page 88 of the APB. In the circumstances the correctness and genuineness of testing& refining charges stood firmly established and therefore no disallowance / addition on its
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 24 account was warranted and, hence, the same cannot be subject matter of revision u/s 263 of the Act.
As regards to details of consumption of packing material of Rs.55,72,914/-, the assessee has filed complete details before the AO during assessment proceedings.. The same are enclosed at page 87 of APB in% terms packing expenses formed only 0.32% of sales of Rs.175,18,82,567/- to Retail customers. These expenses were neither excessive nor unreasonable and therefore no part thereof could be directed to be disallowed. And, hence, the same cannot be subject matter of revision u/s 263 of the Act.
As regards melting loss of gold of Rs.10,87,26,931/-, Ld. Counsel for the assessee explained that in Annexure – F of the Tax Audit Report, the auditor had certified that melting loss of gold was 72.019 kgs in the entire year. In percentage terms, the loss of gold was only 5.05% of total gold consumed. It was further explained that although loss of 72 kgs gold may appear “substantial” in numeratic term, yet such loss cannot be considered to be so, in the relative terms. In the business of manufacture of gold, jewelleries, gold is purchased either in pure form i.e. 224 carats or it is purchased of lesser cartage. In fact in the assessee’s line of business, on many occasions it has to purchase old ornaments from the retail customers who get them remade. Old ornaments purchased are required to be melted to obtain the gold content and in this process higher melting loss is suffered as old ornaments generally contain higher impurities. Jewelleries are not made from gold which is 24 Ct but manufactured in gold having 22 carats or less. In order to manufacture jewelleries and ornaments, gold is first melted in fire and in the process, there is always melting loss. In the immediately preceding and subsequent year the melting loss incurred by the company in percentage terms was 5.25% and 5.28% respectively. In the current year the loss of 72 kgs in percentage terms was 5.05% of gold consumed. The melting loss incurred was thus commensurate with the loss incurred in the earlier as well
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 25 as the subsequent year where no adverse inferences was drawn by any tax authority. The assessee before CIT furnished the certificate issued by Swarna Shilpa Bachao; an apex body of jewellery manufacturers in the state of West Bengal. This certificate certifies that in the process of manufacture of finished jewelleries from raw gold there occurs a loss of gold which is not recoverable. It is further certified that loss of gold depends on the intricacy of designs and such loss varies between 4% to 10%. It is certified that in the cases of stone studded ornaments such loss can be higher than 10%. On reference to assessee’s audited account for the FY 20009-10, it was explained that the melting loss was 72 kgs which in percentage terms was only 5.05% was well within the standard limits. Such loss was commensurate with the loss disclosed in the audited accounts of the earlier and succeeding years. Before CIT assessee had also furnished the communication issued by the All India Gems & Jewellery Trade Federation, wherein it was confirmed that percentage of wastage in making of jewellery ranges between 2% to 10%. The median value comes to 6%. The melting loss of 5.05% incurred by the assessee was thus commensurate with the permitted wastage as per standard trade limits. Reference was further made to the Handbook of Procedures published by the Director General of Foreign Trade, Ministry of Commerce 7 Industry, Government of India dated 19.04.2007. at page 76 of the Handbook, the Ministry of Commerce & Industry has prescribed the standard wastage limits in the gem & jewellery industry. The standard wastage in manufacture of plain gold jewellery & studded / ornamented jewellery is notified at 3.5% & 9% respectively. The assessee is engaged in the business of manufacture and marketing of both plain as well as studded jewellery. The melting loss of 5.05% incurred by the assessee in manufacture of such jewellery therefore was also commensurate with the standard wastage limits of 3.5% - 9% prescribed by the Director General of Foreign Trade, Ministry of Commerce & Industry, Government of India.
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 26 23. From the above facts , we find in the similar circumstances, ITAT, Ahmedabad in the case of Gem Star Company Pvt. Ltd. Vs. ITO ITA No. 3412/Ahd/2010 decided case that the assessee had incurred loss of 7.59% in manufacturer of gold jwewellery. The AO however held that loss in such business should be 1% and therefore disallowed the balance claim of loss. On appeal, the Ld. CIT(A) partly allowed the assessee;’s claim and restricted the wastage in business of manufacture of gold jewellery to 5%. On further appeal by the assessee, the Tribunal referring to the Handbook of Procedures published by the Director General of Foreign Trade, Ministry of Commerce & Industry, Government of India wherein standard loss of 9% was notified; upheld the claim of the assessee and deleted the entire addition made by the AO on the ground of excess manufacturing loss claimed by the assessee. Similarly, ITAT, Hyerabad in the case of DCIT vs. Sanghi Jewellers Pvt. Ltd. (ITA No. 280 & 284/Hyd/2013) wherein the Tribunal held that wastage of 5% in the business of manufacture and sale of studded gold jewellery was held to be reasonable & justified.
24 In the above factual background and the decisions of coordinate benches & documents relied upon, we find that no adverse inference with regard to melting loss of 72 kgs. can be drawn. Hence, this issue cannot be subject matter of revision proceedings u/s 263 of the Act. We further observed that the manufacturing costs, i.e wages, packing material and testing, refining charges & melting loss were genuine and incurred for business purposes. It is not the case of Ld.CIT that any of these expenses were found by to be bogus or sham. The only observation in this regard is that the expenses were excessive. In the earlier paragraphs we have already explained that the manufacturing costs were not excessive. Rather the costs incurred compared favourable with the ‘making charges’ recovered from related party. We have thus fully substantiated the genuineness and reasonableness of manufacturing costs incurred by the assessee. The direct costs and making charges incurred by the assessee were reasonable and even the prices
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 27 charged from the related party were commensurate with the costs incurred by the assessee. Hence, the direction given by CIT for making addition on account of excess manufacturing cost of Rs.11,66,78,994/- is therefore vacated.
The next issue in this appeal of assessee is as regards to the sales made to related parties, the CIT is of the view that the sales to sister concern were not at arm‘s length” and therefore the AO should have examined the sale transactions in light of Sec. 40A(2) of the Act.
In this regard, the assessee explained that Sec. 40A(2)(b) of the Act is applicable only to expenditure” and not sales/income and therefore the invocation of the revisionary powers by Ld. CIT on its issue is prima facie erroneous and legally unjustified. Ld. Counsel explained that it is well understood that Sec. 40A(2) of the Act mandates disallowance of “excessive payments towards expenditure” and it is not applicable to an item of income. In the circumstances provisions of Sec. 40A(2)(b) had no application to the present case. Ld, Counsel also placed reliance on the decision of Hon'ble Allahabad High Court in the case of CIT v. Bhargav book Depot (40 taxman.com 213) wherein it has been held that where the transaction with related concern did not involve any payment or expenditure, provisions of Sec. 40A(2)(b) cannot be invoked. Hon'ble High Court held as under: Sir Ashok Kumar submitted that there is no justification to offer a discount of 3% to its sister concern while 2.5% was allowed by the assessee to other customers. He further submitted that there was no justification to sell dictionaries at price lesser than what it was charging from other whole sellers. He thus submitted that the order of assessing authority ought to have been restored. The submission is wholly misconceived. The Tribunal has found that the assessee had offered 2.5% on the counter sales whereas 3% discount was given to sister concern, M/s Sri Ganga Pustakalay, which was carrying the sale outside Varanasi and incurring the expenses on account of packing, transportation etc., Therefore, the Tribunal was of the view that the Assessing Officer was not justified in making the disallowance under
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 28 Section 40A(2) of the Act. The Tribunal has further held that the provisions of Section 40A(2)(a) of the Act would apply where any deduction is claimed towards excessive and unreasonable expenditure has been incurred by assessee but I the present case neither any expenditure has been incurred nor any deduction has been claimed for the amount which has been charged less than that form other customers, thus provision would not apply. It is not disputed that the assessee has neither claimed any deduction as expenditure incurred towards discount offer nor the lesser price charged by it.”
In view of the above, the assessee also explained on merits that the sales made to related parties cannot be examined in the light of provisions of Sec. 40A(2)(b) of the Act since the said provisions are not applicable to income derived from related parties. According to assessee CIT was wholly erroneous in holding the assessment to be erroneous on the ground that AO did not examine assessee’s transactions with related party from the perspective of applying provision of S. 40A(2)of the Act. Ld. Counsel for the assessee argued that even the domestic transfer pricing provisions are not applicable to the present case. Domestic transfer pricing provisions were introduced by the Finance Act, 2012 with effect from 01.04.2013. in the circumstances the said provisions were not applicable to AY 2010-11 in question.
Further, Ld. Counsel for the assessee argued that even if the assessee was charging lower price form its sister concern, it was not a case where the assessee incurred loss on sales made to related party. From the facts stated in earlier paragraphs, it shall be observed that the average sales price to M/s Anjali Jewellers worked out to Rs.1606 per gram whereas the costs incurred by the assessee was Rs.1563 per gram. The assessee therefore earned a net margin of Rs.43 per gram sold to M/s Anjali Jewellers. in view of these facts he argued that CIT’s finding that the sales made to M/s Anjali Jewellers were at prices lower than the “cost” and thereby inference that assessee deliberately incurred loss was erroneous and unjustified. We find that it is not
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 29 a case that lower price was being charged in order to avoid tax and / or the arrangement between the assessee and the sister concern was a sham. One may wish to look at the sales made to related party to ascertain whether the assessee in conjunction with its related party avoided paying taxes by shifting profits in the form of lower sale value to sister / related concerns. In the preset case prices at which sales were made to M/s Anjali jewelers did not result in avoidance or evasion of taxes. Nor it even resulted in reduction of overall tax liability of the Group. It was not an arrangement between the assessee and its sister concern which can legitimately be called as sham or colorable device to evade payment. It was explained before us that M/s Anjali Jewelleres is an independent operational firm which is assessed under the charge of Deputy Commissioner of Income-tax, Circle-28, Kolkata. The sales made by the assessee to M/s Anjali Jewellers were debited in the firm’s books as its cost of purchase. The Jewelleers purchased from the assessee were sold to third party customers at arms’s length prices. Sales turnover of the firm for the AY 2010-11 was Rs.83,58,00,993/- on which M/s Anjali Jewellers earned gross profit margin of Rs.8,57,19,247/- i.e., 10.26%. for the relevant AY 2010-11 M/s Anjali Jewellers returned total income of Rs.1,77,91,572/- and paid tax thereon at maximum marginal rate of 3% which was same as assessee. The assessee has enclosed a comparative chart giving details of profit earned by M/s Anjali Jewellers for AYs 2010-11 to 2012-13 which shows that the firm has been consistently earning gross profit in the range of 10% and has been reporting profits which are being taxed at the same rate at which income of the assessee is being taxed. It is therefore not a case where, by charging lower prices the assessee avoided payment of tax or passed on any tax benefit to the sister concern. Both the assessee and its sister concern are taxed on their income at maximum marginal rates. Therefore whatever may be the quantum of sales value, the overall tax liability of the assessee and its sister concern taken together remained same. Hence the allegation of CIT that lower prices were charged to avoid payment of tax was without any cogent basis or material.
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 30 29. Further, reliance was placed on the decision of the Hon'ble Madras High Court in the case of CIT vs. Forbes Tea Brokers (315 ITR 404 (Mad). In the decided case the assessee had paid remuneration to a related concern for attending auctions on behalf of the assessee and managing its affairs. The AO held that nature of services were vague and therefore disallowed the payments made by the assessee under Section 40A(20(b) of the Act. On appeal, the High Court held that the AO did not bring any cogent material on record which would show that the payment was excessive or unreasonable. The court observed that the assessee had established that the payee had credited the payments received in its P&L a/c and had paid taxes on the higher side which showed that there was no intention to deceive or evade any tax in the circumstances the High Court deleted the disallowance made u/s. 40A(2)(b) of the Act. Similar disallowance was deleted by the Gujarat High Court in the case of CIT v. Indu Nissan Oxo Chemical Industries Ltd. 45 taxman. Com 478 (Guj) wherein the disallowance made u/s. 40A(2)B) in respect of payments made to the directors were deleted by the High Court, observing that the recipient of payments was taxed at maximum rate and therefore there was no avoidance or evasion of taxes as envisaged u/s 40A(20(b) of the Act. In view of the above, we are of the view that CIT was wrong in invoking provisions of Sec. 40A(a)(2) and doubting the sales made by the assessee to its sister concern, M/s Anjali Jewellers. Hence, on this issue revision cannot be made by CIT u/s 263 of the Act.
In regard to the direction of CIT in point (e) of his revision order directing examination of loss of gold of 72.019 kgs. It was explained that loss of gold was already considered by CIT as part of the alleged excess manufacturing cost. Disbelieving such loss to be genuine, directions were given at Point (a) of the impugned order to make addition of Rs.11,66,78,994/-. Once the Ld. CIT disbelieved the genuineness of the melting loss and directed AO to straightway make addition of the alleged excessive manufacturing cost, then nothing more was left for the AO to examine. This shows only that the CIT's
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 31 direction is nothing but directing AO to conduct roving & fishing enquiries. When the melting loss of gold had already been considered and directions to disallow the same on account of excess manufacturing cost was given by CIT at point (a) of the impugned order, then further directions for verification & examination of melting loss was purposeless. Even otherwise, it is clear from the details of the gold as well the manufacturing costs, which did not dispute the melting loss of 5.25%. The said melting loss was found to be fair and reasonable and no adverse inference was drawn in this regard. It is further pertinent to mention that the income tax assessments for the subsequent AYs 2011-12 & 2012-13 were framed u/s. 143(3) in the months of March 2014 and March 2015 respectively. After considering the details & documents for AYs 2011-12 & 2012-13, more specifically the quantitative details of gold and jewellery manufactured, the AO accepted the reasonableness of melting loss of 5.28% and 4.81% in AYs 2011-12 & 2012-13 and no adverse inference was drawn. Even, the melting loss of 4.81% incurred in AY 2012-13 was not disputed by the Assessing Officer. The above facts show that the Department while framing the assessments u/s. 143(3) of the Act for the immediately preceding AY 2009-10 and subsequent AYs 2011-12 & 2012-13 accepted the melting loss of 5% in the assessee’s line of business. In the circumstances, we are of the view that CIT’s observations with regard to the melting loss of gold of 72 kgs. being excessive in AY 2010-11 and the directions given to examine the same is unjustified and contrary to the jurisdictional facts of the case. Hence, the same are quashed.
The next issue in this appeal is regarding certain bills held to be bogus by Ld. CIT in his revision order. In the revisionary order CIT has observed that the assessee had furnished certain bills raised by M/s Anjali Estate & Developers towards repairs and maintenance carried out at various showrooms of the assessee. From the copies of bills submitted CIT observed that one particular bill of Rs.22,44,870/- bearing number 006/AED/10-11 was dated 25.04.2010 but had been received by the assessee on 30.03.2010.
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 32 According to Ld. CIT the aforesaid bill was bogus and had been claimed to avoid tax on profits.
It was explained by assessee that admittedly the assessee had booked the bill of Rs.22,44,870/- bearing number 006/AED/10-11 on the last date of the financial year 2009-10. However, the aforesaid bill was not claimed as an ‘expense’ or ‘deduction’ by the assessee in the relevant year. The assessee explained that it had transferred an aggregate sum of Rs.24,87,140/- out of ‘Repairs & Maintenance’ to accounting Head of ‘Deferred Revenue Expenditure” which inter alia included the aforesaid bill amount of Rs.22,44,870/-. The assessee explained that the bill of Rs.22,44,870/- bearing number 006/AED/10-11 pertained to repair carried out at Ballygunge Showroom which was unfinished ad incomplete. In arriving at its taxable income declared in the return the assessee did not claim deduction for Rs.22,44,870/- as an expense but carried forward the invoiced amount to the subsequent year. As a consequence Ld. CIT’s directions to verify and disallow the expense of Rs.22,44,870/- is unsustainable. The assessee explained that it did not claim deduction of Rs.22,44,870/- by way of repairs & maintenance during the relevant AY 2010-11 and therefore the question of disallowance of an expense which in the first place was not claimed by way of deduction by the assessee does not arise. It is further explained that M/s Anjali Estate & developers accounted in its books the bill of Rs.22,44,870/- bearing number 006/AED/10-11 for the FY 2009-10. The said bill amount was offered as income by M/s Anjali Estate & Developers during the relevant year under consideration. It shall be appreciated that M/s Anjali Estate & Developers had credited contractual income of Rs.57,21,370/- and offered profit of Rs.13,57,715/- to tax at normal tax rates. These jurisdictional facts further prove that there was no tax avoidance arrangement or siphoning of profits. Both the assessee and M/s Anjali Estate & Developers were taxed at normal tax rates. Moreover, the assessee did not claim deduction of the impugned bill of Rs.22,44,870/- bearing number 006aEd/0-11 in the relevant FY 2009-10
ITA No.2252/Kol/2014 A.Y.2010-11 Anjali Jewellers Pvt. Ltd. v. DCIT, Cir-10(1) Kol. Page 33 but had deferred it and carried forward to the next year. On the other hand, M/s Anjali Estate 7 Developers had accounted the bill of Rs.22,44,870/- as contractual income of FY 2009-10 and paid tax at normal tax rates on its annual income. It is therefore not a case where the assessee had booked higher repairs & maintenance costs to avoid taxes and/or siphoned off profits to sister concern. The revision order of CIT that repairs & maintenance charges were being paid in order to avoid tax was factually incorrect, and without any cogent basis or material. Accordingly, we cancel the directions of CIT in this regard. Hence, this issues of assessee is allowed.
In view of the facts in entirety on all the issues raised by Ld. CIT in his revision order is without any basis and hence the revision order is quashed and appeal of the assessee is allowed.
In the result, assessee’s appeal stands allowed. Order pronounced in the open court 21/03/2016 Sd/- Sd/- (Mahavir Singh) (Waseem Ahmed) (Judicial Member) (Accountant Member) Kolkata, *Dkp �दनांकः- 21/03/2016 कोलकाता । आदेश क� ��त�ल�प अ�े�षत / Copy of Order Forwarded to:- 1. अपीलाथ�/Appellant-Anjali Jewellers Pvt. Ltd. 28A Gariahat Road, Kolkata-700029 2. ��यथ�/Respondent-DCIT, Circle-10(1), Aayakar Bhawan, Kolkata 3. संबं�धत आयकर आयु�त / Concerned CIT Kolkata 4. आयकर आयु�त- अपील / CIT (A) Kolkata 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, कोलकाता / DR, ITAT, Kolkata 6. गाड� फाइल / Guard file. By order/आदेश से, /True Copy/ उप/सहायक पंजीकार आयकर अपील�य अ�धकरण, कोलकाता ।