TaxTMI 
TaxTMI 
2016 (3) TMI 1445
X X X X Extracts X X X X
X X X X Extracts X X X X
....t 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. 2. 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. 3. 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. 4. 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. 5. 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 r....
X X X X Extracts X X X X
X X X X Extracts X X X X
....use notice on this issue was given and the direction being impracticable is liable to be cancelled." 3. 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 201011 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 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 ea....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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. 6. In regard to the issue of assessee's transact....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tter dated December, 3 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 w....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e genuineness and amount paid is verifiable from returns of the recipients. 8. 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 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 concern....
X X X X Extracts X X X X
X X X X Extracts X X X X
....dered 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 retail customers and one related party viz., M/s. Anjali Jewellers Ltd. Based on....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 Testing & refining charges were directly connected with the purchase of gold. For working out the sales price, the te....
X X X X Extracts X X X X
X X X X Extracts X X X X
....stomers Sales per gram *Metal *Making charge 1550 56 1606 1567 245 1812 Cost of sales per gram * Metal * Making charge * Packing 1514 49 -- 1563 1514 49 6.40 1569.40 Net margin (profit) 43 242.40 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. 13. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ies 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 these were not recouped in the form of "making charges" but "metal sale" value and accordingly, it should not....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rm of making charges 23,72,00,252 A1. Quantity sold 12,63,965 gms Quantity sold 12,63,965 gms B1. Sales value / gm (A /A1) 1593 / gm C. Metal gold cost 180,48,78,078 Wages & labouar (being direct cost of jewellery making) 6,23,51,872 D. Loss of gold 10,87,26,931 E. Testing & refining charges 1,20,11,512 F. TOTAL (C+D+E) 192,56,16,521 TOTAL 6,23,51,872 Cost of gold / gm (F/A1) 1523 / gm Direct Mfg. cost as % of sales 2.56% 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. 16. Further, in the revision order at page 6, CIT took in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s & 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 custom....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s 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. 18. 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cumstances the correctness and genuineness of testing& refining charges stood firmly established and therefore no disallowance / addition on its account was warranted and, hence, the same cannot be subject matter of revision u/s 263 of the Act. 21. 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. 22. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d 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. 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 rest....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ation 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 a....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... than the "cost" and thereby inference that assessee deliberately incurred loss was erroneous and unjustified. We find that it is not 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 so....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e 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. 30. 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 direction is nothing but directing AO to conduct roving & fishing enquiries. When the melting loss of gold had already been considered and direct....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e' 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....