ARUN TRADING COMPANY,KOLKATA vs. I.T.O WD - 30(2),KOLKATA., KOLKATA

This appeal of the assessee arises out of the order of the Learned CIT(A), XIV, Kol in Appeal No. 731/CIT(A)-XIV/Kol/11-12 dated 01-01-2013 for the assessment year 2009-10 against the order of assessment framed by the Learned AO u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).

2.1. The brief facts of this issue is that the assessee is an exporter of fabrics and embroidered fabrics and is in the business of exporting them to several countries in Asia and Europe. The assessee visits various countries abroad on regular basis as fresh designs emerge and new trends appear every few months. During the course of assessment proceedings, the ld.AO found that the assessee had debited a sum of Rs.11,11,466/- towards foreign travel expenses in its P & L account. On requisition,

1 M/s. Arun Trading Company the assessee furnished statement giving details of country visited, period of stay, expenses incurred and purpose of visit. The ld. AO observed that in respect of travel expenses to the tune of Rs. 4,69,734/- in connection with foreign tour to UAE, Sri Lanka, Saudi Arabia, the assessee could not produce the evidences relating to business expediency. Hence, he held that this is personal in nature and accordingly, disallowed the same, which was also confirmed by the ld.CIT(A) on 1st appeal. Aggrieved, the assesee is in appeal before us on the following ground:- 1. For that the learned Commissioner of Income Tax (Appeals) erred in law as well as in facts in confirming the disallowing a sum of Rs 4,69,734/- out of Travel Expenses incurred by the assessee although the entire expense being fully verifiable was incurred for the purpose of business and for which relevant evidence was produced during assessment; 2.2. The Learned AR argued that in line with the business in which the assessee is engaged the assessee is bound to make frequent visits to abroad. He stated that the ld.AO wanted to see the invitation letters from the buyers in respect of assessee’s visits to Saudi Arabia and UAE. In response to this, the assessee stated that assessee had travelled to these countries on business visa and not on tourist visa. The ld.AR for the assessee further stated that business visa was granted by the embassy only after the embassy had satisfied itself that the visit is being made by the assessee for the purpose of business. He further argued that more than 50% of the sales has been made by the assessee to these counties i.e Saudi Arabia and UAE relating to which invitation was being sought by the ld.AO. The ld.AR argued that assessee has been dealing with these customers for the last 10 years and stated that the custom of the trade is to visit the buyer to generate his interest in the product the seller has to offer. Trips for this purpose have to be made more than once in a year because new designs and fabrics have to be exhibited to the customer. Accordingly, he prayed for allowance of the said expenditure on the ground of business expediency. In response to this, the ld. DR vehemently relied on the orders of the lower authorities.

2 M/s. Arun Trading Company 2.3. We have heard the rival submissions and perused the material available on record including the paper book filed by the assessee. We find from the paper book that the assessee had given complete details of foreign travel i.e. details of countries visited, period of stay, copy of passport, expenses incurred, foreign currency drawn, purpose of visit , travel agent’s invoice for air tickets, travel agents service bills for visa cost etc. as per regulations of RBI. We also find that the assessee had exported more than 50% of its sales to these countries and since the assessee is engaged in the fashion industry, it is imperative that the assessee had to visit abroad to keep abreast latest fashion trends and market depth to understand the customers needs and to offer latest designs to the customers and also look for new customers. The revenue had not controverted the arguments of the Learned AR that more than 50% of turnover is exported to these countries by the assessee. We feel that visiting the customers in these countries is essential in line with the fashion industry in which assessee is engaged and also to know the latest trends, designs and wish list of the customers. We find that the foreign travel expenses of Rs. 4.69.734/- has been disallowed by the revenue only on flimsy grounds. We find that business expediency of the foreign travel is proved beyond doubt and accordingly, expenditure incurred thereon was squarely covered allowable as deduction in the assessment. Hence, the ground no. 1 raised by the assessee is allowed.

3.1. The brief facts of this issue is that the assessee claimed a sum of Rs.13,12,925/- under the head ‘ embroidery charges’ in its P & L account. The breakup of the same is as below:- Embroidery charges : Rs. 13,10,373/- Less: Realized from Renka Industrial Corprn Rs. 3,58,335/-

3 M/s. Arun Trading Company

Total: Rs. 9,52,038/- Add: Furnishing & Making charges grouped under ‘ Embroidery Expenses’ Rs. 3,60,887/- Total: Rs.13,12,925/- 3.2 According to the ld.AO, the ‘ Embroidery Charges’ were only to the extent of Rs.9,52,038/- and Rs.3,60,887/- as claimed by the assessee before him is excessive and bogus claim. Accordingly, he proceeded to disallow the same which was also upheld by the ld. CIT(A) on 1st appeal. Aggrieved, the assessee is in appeal before us on the following ground:-

2. For that in the facts and circumstances of the case the learned Commissioner of Income Tax (Appeals) erred in law as well as in facts in confirming the disallowance a sum of Rs.3,60,887/- out of the embroidery charges paid by the assessee though the expenses were genuinely incurred and fully verifiable for which relevant evidence was produced during assessment; 3.3. The Learned AR argued that total details of ‘ Embroidery Charges’ were duly filed before the ld.AO vide letter dated 08/11/2011, which includes ‘ Furnishing & Making Charges’ of Rs. 3,60,887/- included under the head ‘ Embroidery charges’. The entire addition was made by the AO without understanding the grouping of expenditure made by the assessee in its P & L account. Vide said letter dated 08-11- 2011 (page 19 of the paper book) the assessee had also furnished the entire breakup of Rs.13,12,925/- towards ‘ Embroidery Charges’ (Rs.9,52,038) and ‘ Furnishing & Making Charges’ (Rs.3,60,887) containing the name of the parties, quantity details and payments made thereon. He, therefore, pleaded before us that no addition need to be made in the facts and circumstances of the case. In response to this, the ld.DR vehemently supported the orders of the lower authorities.

3.4. We have heard the rival submissions and perused the materials available on record including the details of paper book filed by the assessee. We find from the paper book that the assessee had clearly given the entire details on ‘ Embroidery

4 M/s. Arun Trading Company Charges’ & ‘ Furnishing & Making Charges’ separately together with the name of the parties and amounts incurred with quantity details etc. before the ld.AO vide said letter dated 08/11/2011, which is part of the paper book filed by the assessee before us. We find that the entire addition has been made due to wrong understanding of the facts. Hence, we have no hesitation to delete the impugned addition as made by the AO and confirmed by the ld.CIT(A). Accordingly, the ground no.2 raised by the assessee is allowed.

3. For that the learned Commissioner of Income Tax (Appeals) erred in law as well as in facts in adding Rs.1,30,635/- being amount paid as embroidery charges to the income of the assessee as non-existent liability merely because notices u/s. 133(6) of the Income Tax Act, 1961, sent to these parties were returned with the remark ‘ not known’ notwithstanding the assessee’s explanation regarding status of these parties and the fact that payments for all the bills were made by a/c payee cheques and the embroidered fabric work was exported by the assessee; payments being genuine and having been incurred for the purpose of business, ought to be allowed; 4.1. The Learned AR argued that the amount paid to the concerned sundry creditor towards embroidery charges were by a/c payee cheques. The expenses were incurred

5 M/s. Arun Trading Company genuinely. The ld.CIT(A) has erred in upholding the addition made by the AO. He further argued that the ld.AO added the same as notices were returned with the remark ‘ Not Known’. He argued that the assessee could only give the address of the sundry creditor which is in his possession. He further argued that the Learned AO had not disturbed the trading results of the assessee. He, therefore, pleaded before us that no addition need to be made in the facts and circumstances of the case. In response to this, the ld.DR vehemently supported the orders of the lower authorities.

4.2. We have heard the rival submissions and perused the materials available on record including the details of paper book filed by the assessee. We find that the assessee had made payments to the concerned sundry creditor for embroidery charges by a/c payee cheques. We find that the ld.AO added the same as notices were returned with the remark ‘ Not Known’. We hold that merely because the notice u/s 133(6) of the Act could not be served on the concerned sundry creditor, the Ld.AO cannot automatically treat the said creditor as non-existent and bogus. He has to enquire whether the incurrence of embroidery charges are genuine in nature. It is not in dispute that the trading results of the assessee after considering the subject mentioned embroidery charges have been accepted by the revenue and hence there is no scope for making separate addition towards sundry creditors being non-existent. We also find lot of force in the arguments of the Learned AR that notices u/s 133(6) of the Act were sent to several parties by the Learned AO and out of that, the notices were returned only in respect of M/s Bharat Fabrics and Mr.Vinay Kumaar Jaldhari and those job workers were of meager means and their continuance in the business at one place depended upon whether they were able to get enough business or not. The Learned AR further argued before us that these job workers are artisans and if they find a lucrative employment or better job work elsewhere, they change their place of work. We also find from the submissions of the Learned AR that the assessee had engaged these job workers for embroidery work in 2008-09 and lost touch with them after they had moved out of their known address. We find nothing prevented the Ld.

6 M/s. Arun Trading Company AO from making further enquiries with the banks as the payments were admittedly made to the concerned job workers by account payee cheques. In these circumstances, we have no hesitation to delete the impugned addition as made by the AO and confirmed by the ld.CIT(A). Accordingly, the ground no.3 raised by the assessee is allowed.

THIS ORDER IS PRONOUNCED IN OPEN COURT ON 27-11-2015