SUPREME TREVES P.LTD,MUMBAI vs. ADDL CIT 10(2), MUMBAI

Order u/s.254(1)of the Income-tax Act,1961(Act) लेखा लेखा सद�य लेखा लेखा सद�य सद�य राजे�� सद�य राजे�� राजे�� केकेकेके अनुसार राजे�� अनुसार अनुसार PER RAJENDRA, AM- अनुसार Challenging the order 27.10.10 of CIT(A)-22, Mumbai the assessee has filed the present appeal. Assessee-comapny,engaged in the business of manufacturing of automobile interior and other objects filed its return of income on 26.10.04 declaring income of Rs.8128/-.The Assessing Officer(AO)completed the assessment on 12.12.2006, u/s.143(3) of the Act,determining the income of the assessee at Rs.8,128/- at normal provision and Rs.7.32 crores under the MAT provisions. 2.First effective ground of appeal (GOA-1-3) is about confirming an ad hoc disallowance of packing expenses of Rs.17,72,000/-.During the assessment proceedings,the AO found that the assessee had claimed Rs.87,57,615/- toward packing expenses, that it had incurred expense of Rs.50.00 lacs only during the last AY. under the same head.He asked the assessee to justify the same and to submit party-wise chart of such expense with ledger account and supporting bills where amount exceeded Rs.20,000/-.Vide its reply,the assessee submitted the details of the suppliers and stated that there was only marginal increase in the expenditure, that it has increased from 1.43 % to 1.81%, that the increase in sale in terms of value was 37.22 %,that the sales had increased to a higher percent, that the assessee sell more than 100 items, that the packing and cost varies from product to product.After considering the submission of the assessee,the AO held that the assessee had failed to provide any proper and justifiable arguments in terms of quantitative details of packing material, that the expense had jumped to 72% whereas the increase in sale was 37% only.Finally, he made a disallowance of 17.72 lacs out of the total expenditure of 87.57 lacs. 2.1.Aggrieved by the order of the AO,the assessee preferred an appeal before the First Appellate Authority(FAA).Before him,it was contended that 16 new items were produced during the year under consideration,that better packing was provided,that it was dealing in ITA/9133/Mum/2010-Supreme,AY.2004-05.

large number of items and was using different kind of packing material.After considering the submission of the assessee and the assessment order,the FAA held that the production of new items and use of better packing material would not add to extra expenses,that packing was based on sales and expenses had to be more or less in the proportion of sales only,that the assessee had not explained the increase in packing expenditure.Finally,he upheld the order of the AO. 2.2.Before us,the Authorised Representative(AR)argued that the assessee had established that there was increase in sales value (quantity),that sales of automobile insulation parts had increased by 41.71% in numbers and had increased by 116.70% in mtrs.,that floor covering of carpets increased by 57.39% in number,that felt had increased by 107.93% in numbers, that the sale prices had decreased but the volume had increased,that the FAA had ignored the fact that the sale volume had increased in higher proportion that the value in several products, that the assessee sold 200 products and had added 60 new products during the year,that packing expenses would not increase exactly in line with increase in sales value,that the packing cost of the new product was not the same as the old product that the AO had not found any defect in the purchase bills submitted by the assessee.He referred to the letters of the assessee dated 11.9.06 and 1.12.06.The Departmental Representative (DR) supported the order of the FAA. 2.3.We have heard the rival submissions and perused the material before us.We find that the AO had made an addition of Rs.17.72 lacs,that he was of the opinion that the assessee had not explained the reasons for increase in packing material cost,that the assessee had filed the detail of all the supplier of packing material who had sold him goods of more than Rs. 20, 000/-during the year under consideration,that the assessee had manufactured 60 new items, that there was increase in sales of various items.In our opinion,mathematical formula cannot be applied in a routine manner for making disallowance especially when the books of account are audited and AO does not reject the book result or points out the defects in the books of accounts.In the case under consideration,details of purchases over Rs.20,000/- was available with the AO and he had not found any defect in the bills supplied by the assessee.The material used for packing the products may vary from year to year and no straight jacket method can be applied in that regard.Neither the AO nor the FAA had compared the quality of the packing material used during the year with the quality of the packing material of the earlier year.If the percent of increase is considered the difference is very negligible.The expenditure in the earlier year was 1.41 %,whereas during the year under consideration,it was 1.81%. Just because the increase in packing material is not proportionate to the total sale no disallowance can be made.It is the assessee who has to decide how much expenditure is to be incurred under a particular head. The AO can disallow the expenditure only if he find that the expenditure was not incurred wholly and exclusively for the purpose of the business.We find that the assessee had made specific submissions with regard to the increased expenditure under the head packing material in his letters dated 11.9.06 and 1.12.2006.The AO and the FAA had not considered the submissions made by it. Considering the above facts, we are of the opinion that the ad-hoc disallowance made by the AO and confirmed by the FAA is not sustainable.Ground No.1-3 are decided in favour of the assessee. 3.The next effective ground (Ground of appeal No.4-5)deals with disallowance of Rs.2.96 lacs.During the assessment proceedings,the AO found that the assessee had purchased complete wrist unit for Rs.2,96,100/-, that the assessee had claimed the expenditure under the head repairs.He held that it could not be a repair bill and made a disallowance of Rs.2.96 lacs.However,holding it as capital expenditure,he allowed depreciation of Rs. 91,920/- to the assessee company. 2 ITA/9133/Mum/2010-Supreme,AY.2004-05.

3.1.In the appellate proceedings before the FAA,the assessee contended that complete wrist unit was part of a machine i.e. water jet cutting robot, that it costed about Rs.1.3crores, that the expenditure was in the nature of replacement of a small part of a machine,that the expenditure was revenue in nature.The assessee produced photographs of water cutting robot and the wrist unit of the machine before the FAA.After considering the submission of the assessee,he held that there was no supporting evidence to prove that the expenditure was in the nature of replacement of a small part of the machine,that the bill produced by the assessee did not indicate that it was an attachment to the robot.He finally, upheld the disallowance made by the AO. 3.2.Before us,the AR stated that assessee was using an imported machine unit to manufacture its product,that the water jet cutting robot consisted of many parts,that the complete wrist unit was one of the part of the machine,that because of the wear and tear it had to be replaced, that the replaced part was called complete wrist unit,that the expenditure was incurred for repairing the robot and hence allowable.The DR supported the order of the FAA. 3.3.We have heard the rival submissions.In our opinion, the FAA had not analysed the facts of the case properly and had upheld the disallowance without understanding the basic structure of the machine.The assessee had produced the photograph of robot and the wrist unit.He could have called for further information regarding the wrist unit if he had any doubts in that regard.Therefore,reversing his order we hold that expenditure incurred by the assessee should be treated as revenue expenditure.Effective ground No.2 is decided in favour of the assessee. 4.Next effective ground of appeal, (ground of appeal No.6) is regarding disallowance of made under the head prior period expenditure amounting to Rs.8.40 lacs.During the assessment proceedings,the AO found that the assessee had claimed expenditure incurred during the earlier period as current years expenditure.He held that bill stated 26/3/03 amounting to Rs.8.40 lacs pertained to AY.2003-04.He held that the assessee was following mercantile system of accounting, that the expenditure in question could not be allowed during the year under consideration. 4.1.In the Appellate proceedings,the assessee contended before the FAA that there was time lag between raising invoice and dispatching the goods by the supplier i.e.Ingersoll Rand Wassers.The assessee filed the copies of the bill sand proof of clearance of goods before the FAA.He held that item mentioned in the bill and clearance documents were not matching, it was not possible to conclusively prove the items purchased through invoice dt.26.3.2003 were received by the assessee in the year under appeal.He upheld the disallowance made by the AO. 4.2.Before us, the AR argued that spares were purchased from Ingersoll Rand,Germany vide bill dated 26.3.2003, that a chart was produced explaining how the invoices and supporting documents like shipping advice and bill of entry were matching,that the spares were dispatch -ed by air on 31.3.2003 from Germany, the customs had cleared the consignments in April 2003, that factory records proved that goods were received in April 2003.He referred to page No.90, 94,100, 119, 126.The DR relied upon the order of the FAA. 4.3.We have heard the rival submissions and perused the material before us.We find that the goods were purchased from Germany on 26.3.2003 (Page-68-69, 73-75, 83-84, 94-95 and 100-101, 108,113,121 ),that the delivery challans and goods receipts No. prove that the spare parts were received during the period 11.4.03 to 24.4.2003 (Page 72 , 79-82, 87-89, 93,104- 105,111,119 and 126 of the paper book).We have compared the spare parts specification and quantity mentioned on the invoice,delivery notes and we find that they match the details. Considering these specific facts and circumstances of the case,we are of the opinion that the 3 ITA/9133/Mum/2010-Supreme,AY.2004-05. expenditure incurred by the assessee for purchasing the spare parts cannot be termed prior period expenditure.Therefore,reversing the order of the FAA we decide the third effective Ground of appeal in favour of the assessee. 5.The last ground of appeal (Ground of Appeal 7-9) deal with disallowance of processing charges of Rs. 15.06 lacs and Rs.1.50 lacs respectively.During the assessment proceedings AO found that the assessee had paid processing charges to various parties, amounting to Rs.1.55crores.He issued notices u/s.133(6) of the Act to seven parties.Out of the seven in two case no reply was received,in one case the notice was received back with the remark ‘not known’ and in one case the party was not available at the given address.He directed the assessee to submit confirmation from the above said parties, a copy of the ledger account and acknowledgement of return of income.Considering the entirety of facts,the AO held that the assessee had failed to establish identity and genuineness of four parties, namely Nainaben Panwar, Shri Lokhande,Vishwas Enterprises and Divercey Industrial Services(DIS).In case of remaining three parties he restricted the processing charge to 25%. Thus, he made a disallowance of Rs. 1.12 crores(1.02 croes for four parties + Rs.9.95 lacs for three parties). 5.1.Aggrieved by the order of the AO the assessee preferred an appeal before the FAA and made elaborate submissions. After considering the same the FAA called for a Remand Report(RR)from the AO.Vide his RR dt.27.2.2007,the AO made comments about the transact -tions entered into by the assessee with the seven parties.After considering the RR and the submission of the assessee,the FAA held that the AO had recorded his statements, that he had obtained relevant documents, that he had not given any adverse filing regarding ge nuineness of five parties to whom processing charges were paid namely, Nainaben R.Panwar, Munniben Bhatti, Polycam Techno Services, Vishwas Enterprises and Mohan Lokhande.He directed the AO to delete the disallowance made under the head processing charges with reference to the above mentioned parties.With regard to DIS and Laxmi Industrial Services (LIS),he held that as per the AO the payments were made for loading/unloading/packing work,that the bill produced by the assessee showed that it had paid loading unloading charges etc, that processing charges paid to DIS and LIS were rightly disallowed. 5.2.During the course of hearing before us,the AR contended that the proprietor of DIC had appeared before the AO in the remand proceedings, that he had confirmed the transaction with the assessee, that he had accepted that payments were received by him, that the AO had made no adverse comment in the remand report, that DIS was rending services since 1999, that no disallowance was made in the earlier years, that vide its letter dt.26.10.10 it was explained to the FAA, it was explained that the DIS would perform three jobs for the assessee fibre sorting, packing of finished goods and loading/unloading, that fiber sorting was booked under the head processing charges,that the statements of the proprietor of the DIS were recorded after a period of six years, that the proprietor of LIS had stated on oath that he was looking after loading/unloading and other work assigned to it by the assessee.He referred to page No.190-208 of the paper book. The DR supported the order of the FAA. 5.3.We have heard the rival submissions.We find in the Remand Report(RR) that the AO had specifically mentioned that the proprietor of DIS had categorically admitted that he had received payment from the assessee, that he had also mentioned that the identity and nature of transactions were in order.We have gone through the papers relied upon by the AR. We find that the assessee had paid separate charges for fiber sorting and had paid the amount under the head ‘processing charges’, that the AO had not enquired about the heads under which payments were received by DIS while recording the statement,that the FAA had not considered the statement of the proprietor of DIS properly and had concluded that DIS was offering services like loading/unloading and packing only.Once the recipient had admitted 4