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TaxTMI 
TaxTMI 
TaxTMI 
2023 (5) TMI 35
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....ing it as not sustainable in law. 3. The facts in brief for the first year are that the assessee is a company located in Cochin Special Economic Zone, Kochi, engaged in the manufacture of electronic components since 01.12.2007. It filed it's return of income for AY 2010-11 on 14.10.2010 at an income of Rs.186.01 lakhs after claiming exemption u/s.10AA of the Act at Rs.199.33 lakhs, and set off of brought forward business loss of Rs.124.56 lakhs. A scrutiny of it's Profit and Loss Account (operating statement) revealed the expenditure on salary and wages, claimed at Rs.245.33 lakhs, to be at an increase of 238% over that for the immediately preceding year, i.e., AY 2009-10, even as the increase in turnover, vis-a-vis the said year, was, at 18%, much lesser. Sure, the said expenditure may not be in direct proportion to the sale (output), the increase therein, at over 18 times the increase in output, was abnormal and, in any case, warranted being examined. The situation in fact becomes all the more quizzical considering that the expenditure on electricity and water charges witnessed a decline by 15% over the preceding year, indicating lower consumption with reference thereto inasmuch....
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....der that the question of law answered in Supreme Court judgment in SA Builders Vs CIT is "Whether the amount advanced to the subsidiary or associated company or any other party was advanced as a measure of commercial expediency?". 3. The CIT(A) failed to consider the fact that the question raised by the AO was not regarding the commercial expediency but related to the genuinity of the transactions. 4. The CIT(A) ought to have considered the case laws relied on by the AO i. Lakshminarayan Madan Lal vs CIT(SC) 86 ITR 439 ii. Swaseshi Cotton Mills Co Ltd vs. CIT (SC) 63 ITR 57 iii. Lakshmiratan Cotton Mills Co Ltd Vs. CIT (SC) 73 ITR 634 5. The CIT(A) failed to consider the fact that AO has reason to believe that the assessee has inflated the expenses on salaries, wages and Non-Recurring Engineering charges. 6. The CIT(A) failed to consider that assessee had not fully and truly disclosed all material facts necessary for the assessment u/s 143(3) which forced AO to disallow the unreasonable claims. 7. The CIT(A) failed to consider that the onus to prove the claim for expenses lies on the claimant. 8. It is prayed that the orders of the learned Commissioner of Income T....
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....f the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". Explanation 1.-For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. To be a permissible deduction, there has to be a direct and intimate connection between the expenditure and the character of the assessee as a trader. That is, it must be incidental to his business and justified by commercial expediency (Travancore Titanium Product Ltd. v. CIT [1966] 60 ITR 277 (SC)). This is precisely what the Apex Court clarifies, once again, in S.A. Builders Ltd. (supra). The onus to show so, which is on the assessee, is to be discharged before the assessing authority, i.e., the authority designate....
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...., thus, a complete failure on the part of the assessee to discharge his onus u/s. 37(1). It is, further, clearly wrong on it's part to say, accepted by the ld. CIT(A), that the AO had not doubted the incurring of the expenditure, considering which it was therefore not permissible for him (AO) to question the amount that ought to have been reasonably incurred under the circumstances. And, thus, very neatly shifting the burden cast by law on him on the AO. What we wonder led the ld. CIT(A) to buy that? In the facts of the instant case, very clearly the AO, in view of the steep, unexplained increase in expenditure, entertained serious doubts of the assessee having incurred the said expenditure. That is, had valid reasons to doubt the genuineness of the assessee's claim, which has to satisfy the test of 'wholly' and 'exclusively'. It is well-settled that while 'exclusively' concerns the purpose for which the expenditure is incurred, the word 'wholly' adverts to its quantum, so that, where called upon to, as in the instant case, the entire of it is shown to have been incurred for purposes of business to merit deduction u/s. 37(1) in its respect. These principles stand enumerated upon in....
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....n-wise details. The same, along with their function ought to have been furnished by the assessee at the minimum; rather, vis-à-vis the preceding year, explaining the reasons for the quantum increase therein. It is then said that the expenditure on salary and wages is not liable to vary in direct proportion as well. The same does not help the assessee's case in any manner. It does not, firstly, absolve the assessee from proving the claimed expenditure as having been incurred wholly and exclusively for the purpose of its business. Two, the argument could equally validly be advanced to disallow the entire increase in expenditure (over the preceding year), allowing only that incurred during the preceding year inasmuch as the increase in volume may not translate into an increase in expenditure as well. That is, the argument is neither here nor there, and stands made only to mislead. We may, next, though not required to inasmuch as the same does not form the basis of his adjudication by the ld. CIT(A), nor relied upon before us, yet also consider the explanation advanced by the assessee before the first appellate authority (refer para 3 - pages 10 & 11) of the impugned order. It ....
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....e impugned disallowance is sustainable in law, and is accordingly, restored in result. Any consequent change in the exemption u/s. 10AA, if and to the extent exigible, shall be made by the AO. We decide accordingly. ITA 398/Coch/2020 (AY 2011-12) 6. The Revenue raising the same Grounds, we though find the facts for AY 2011-12 as somewhat different. For this year, the AO observed a further increase of 371% in the salary and wages expenditure, i.e., w.r.t. AY2010-11, the immediately preceding year, even as the increase in turnover witnessed w.r.t. that year was at 27%. The assessee furnished break-up of the expenditure as under: Particulars Amounts Salaries Paid to employees Rs. 1,80,51,409/- Salaries Paid to Contract Staff Rs.3,37,13,273/- Contract for NRE Rs.6,38,32,157/- Grand Total Rs.11,55,96,839/- The contract labour was for development of tools, moulds, and design and development of protos (prototypes). It is only once a prototype is approved by the customer that it turns out to be a business for the company, increasing it's sales. This expenditure, required to be outsourced for want of sufficient manpower resources with the company, had in fact led to substantia....
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....t made (Rs.362.35 lakhs). Two, the material cost is, as a percentage of sale for the current year, at the same rate as for the preceding year. This constancy of cost (ratio) across years implies that for the processing cost as well. That is, speaking broadly, as labour and sales rates are without doubt subject to variation with time, which may not be to the same extent across years. The obtaining labour expenditure for AY 2010-11 is 3.55%. This expenditure, however, has been found to be in excess by Rs.176.49 lakhs, i.e., by 2.52%. Adopting the said expenditure for the current year as a basis, as the AO does, would thus be inconsistent with the fact of the disallowance of the said expenditure. Sure, the said disallowance was for the reason of non-substantiation of claim, a ground sufficient for the disallowance. The same in fact continues for the current year as well; the assessee's explanation being only in respect of contract labour, i.e., as being for development of moulds and prototypes, and which stands, accordingly, giving credence thereto, removed by the AO in working the claim of expenditure vis-a-vis the sales. Our third observation in the matter is that the expenditure on....