2016 (5) TMI 868 - AT - Income Tax

Tribunal allows appeal on processing charges & staff welfare expenses, upholds disallowance of prior period expenses, sets aside interest income addition.

The Tribunal allowed the assessee's appeal on the disallowance of processing charges and staff welfare expenses, citing justifications for the increased ... Ad hoc disallowance of processing of material and handling charges - Held that:- It is undisputed fact that the assessee’s expenses under the head processing and handling had gone up twice compared to preceding year but during the year under consideration, a new product namely Nickel Plated Dument Wire had been started by the assessee, for which the assessee had taken services from its sister concerns namely M/s Gem Electro Mechanical Pvt. Ltd. and M/s New Age Alloys Pvt. Ltd. The assessee’s sale has slightly gone down but in quantity production has gone up. This fact has not disputed by the revenue even GP as well as NP has gone up compared to preceding year. The assessee’s new product was got manufactured from M/s Gem Electro Mechanical Pvt. Ltd. who has facility of platting and oxidizing, which was not available with the assessee. It was claimed by the assessee that it is an import substitute item and no one was manufacturing in the India. Therefore, the assessee had to pay these charges to it to get the services done. The remaining payments were made to other sister concern namely M/s New Age Alloys Pvt. Ltd. for wire drawing, annealing and spooling processing work made per kg whereas platting and oxidizing, the payments were made in per meter. The assessee did not have sufficient capacity for drawing, annealing and spooling, therefore, he had outsourced this work to M/s New Age. The assessee’s manufacturing activities are under the supervision of the excise department. The ld Assessing Officer had not brought on record any evidence that payments made to the sister concerns were more than fair market value, as such no comparable case has been considered by the Assessing Officer or ld CIT(A). The recipient company also paying maximum marginal rate of tax, as such there is no revenue loss. A similar claim was also allowed in subsequent years by the Assessing Officer even in scrutiny assessment. - Decided in favour of assessee Addition of staff welfare expenses - Held that:- There is a substantial increase in the staff welfare expenses during the year under consideration but the assessee has justified the increase under this head. There is an agreement between the assessee and the worker regarding staff welfare is to be incurred on the employee. Accordingly, the assessee had provided uniform and shows during the year under consideration. The assessee has produced all the bill and vouchers but the Assessing Officer made disallowance on surmises and conjecture, which is not justified. Therefore, we delete the addition confirmed by the ld CIT(A).- Decided in favour of assessee Disallowance under the head prior period expenses - Held that:- AR of the assessee had not been able to prove these expenses were crystallized during the year under consideration. - Decided against assessee Addition on account of additional interest income from bank on the basis of TDS certificate - Held that:- It is undisputed fact that the interest has been shown as income by the assessee in earlier year on FDRs and these FDRs were encashed by the appellant, therefore bank has charged interest on premature FDRs. The AR tried to explain on the basis of evidence that how the bank had debited the interest expenses on FDRs. Accordingly, this issue is required to verify from the record with reference to disclosure of the interest income of FDRs and claiming interest expenses on premature of the FDRs. It appears that the liability is pertained to F.Y. 2007-08 whereas the assessee has claimed this expenditure in A.Y. 2009-10. Therefore, Assessing Officer is directed to verify the claim of the assessee and decide the issue as per law. Accordingly, this ground of appeal is set aside to the Assessing Officer for denovo. Issues Involved:1. Disallowance of Rs. 38,67,600/- out of processing of material and handling charges.2. Addition of Rs. 7,98,808/- from out of Staff Welfare Expenses.3. Disallowance of Rs. 13,298/- in respect of prior period expenses.4. Addition of Rs. 6,34,187/- as additional Interest Income from Bank on the basis of TDS Certificates.Issue-wise Detailed Analysis:1. Disallowance of Rs. 38,67,600/- out of processing of material and handling charges:The assessee, engaged in manufacturing wire and other metal products, claimed processing and handling charges of Rs. 1,24,87,317/- for the year, significantly higher than the previous year's Rs. 57,46,478/-. The Assessing Officer (AO) noted that 50% of these expenses were paid to sister concerns and deemed them excessive and unreasonable. The AO allowed only a 50% increase over the previous year's expenses, disallowing Rs. 38,67,600/-.The CIT(A) upheld the AO's decision, noting the excessive increase in expenses without a corresponding increase in sales, which had actually decreased. The assessee argued that the increase was due to the introduction of a new product and outsourcing to sister concerns, which was necessary due to lack of in-house facilities.The Tribunal found that the assessee's claims were justified, noting the increase in production quantity and the necessity of outsourcing due to insufficient in-house capacity. The Tribunal also noted that the AO did not provide comparable cases to prove the expenses were excessive. Thus, the disallowance was deleted, allowing the assessee's appeal on this ground.2. Addition of Rs. 7,98,808/- from out of Staff Welfare Expenses:The AO observed a significant increase in staff welfare expenses from Rs. 5,67,063/- to Rs. 16,49,402/-. The AO disallowed 50% of these expenses due to unverifiable vouchers and lack of supporting evidence. The CIT(A) accepted a 50% increase over the previous year's expenses, allowing Rs. 8,50,594/- and disallowing Rs. 7,98,808/-.The assessee argued that the increase was due to contractual obligations to provide uniforms and shoes as per an agreement with workers. The Tribunal found that the assessee had justified the increase and provided all necessary vouchers. The disallowance was deemed unjustified and deleted, allowing the assessee's appeal on this ground.3. Disallowance of Rs. 13,298/- in respect of prior period expenses:The AO disallowed Rs. 13,298/- as prior period expenses based on the tax audit report. The CIT(A) upheld the disallowance, noting that the assessee failed to prove the expenses were crystallized during the year under consideration.The Tribunal agreed with the lower authorities, noting the assessee's failure to prove the expenses were crystallized in the relevant year. Thus, the disallowance was upheld, dismissing the assessee's appeal on this ground.4. Addition of Rs. 6,34,187/- as additional Interest Income from Bank on the basis of TDS Certificates:The AO added Rs. 6,34,187/- to the assessee's income based on TDS certificates showing interest credited by banks. The CIT(A) upheld the addition, noting discrepancies in the interest reversal claimed by the assessee.The assessee argued that the interest on prematurely encashed FDRs was already accounted for in the previous year, and the addition would result in double taxation. The Tribunal directed the AO to verify the claim and decide as per law, setting aside this ground for denovo consideration.Conclusion:The Tribunal allowed the assessee's appeal on the first and second grounds, deleted the disallowances, upheld the third ground disallowance, and set aside the fourth ground for verification by the AO. The appeal was partly allowed.