Income Tax Appeal No. 624 of 2010 1 IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH. --- Income Tax Appeal No. 624 of 2010 Date of decision: 8.2.2011 The Commissioner of Income Tax-III Ludhiana --- Appellant Versus M/s. S.G. Exports --- Respondent CORAM: HON’BLE MR. JUSTICE ADARSH KUMAR GOEL HON’BLE MR. JUSTICE AJAY KUMAR MITTAL --- Present: Mr. Denesh Goyal, Standing Counsel for the appellant-Revenue. --- AJAY KUMAR MITTAL, J. This appeal under Section 260A of the Income-Tax Act, 1961 (for short “the Act”) has been filed by the Revenue against the order dated 30.4.2009, passed by the Income Tax Appellate Tribunal Chandigarh Bench ‘A’ Chandigarh (in short “the Tribunal”) in ITA No. 413/CHD/2008, relating to the assessment year 2004-2005 claiming the following substantial question of law: “Whether on the facts and in the circumstances of the case, the Hon’ble ITAT is right in upholding the order of CIT(A) dated 11.2.2008 thereby deleting the addition of Rs. Income Tax Appeal No. 624 of 2010 2 1,80,40,340/- made by the Assessing Officer on account of disallowance of bogus labour expenses.” 2. On 7.2.2011, notice of motion was issued for today to consider the plea whether the matter is liable to be remanded to the Commissioner of Income-tax (Appeals) {in short “the CIT(A)”} for fresh decision. 3. The office has reported that service is complete. However, no one has chosen to appear in Court on behalf of the respondent- assessee. 4. The facts, in brief, necessary for adjudication as narrated in the appeal, are that the respondent-assessee firm derives income from manufacturing and exports of hosiery goods. The assessee filed its return for the assessment year 2004-05 on 1.11.2004 declaring income of Rs. 3,99,53,724/-. During the course of a search operation under Section 132(1) of the Act at the business premises of Duggal Group in which the assessee is one of the constituents, certain incriminating documents pertaining to the assessee were seized. The assessment under Section 143(3) read with Sections 153A/153B of the Act was completed on 31.3.2006 at net taxable income of Rs. 1,49,36,800/- wherein an addition of Rs. 1,80,40,340/- was made by the assessing officer, vide order dated 31.3.2006, on account of disallowance of labour charges. 5. Appeal of the assessee against the order dated 31.3.2006 was partly allowed by the CIT(A) by order dated 11.2.2008 whereby addition of Rs. 1,80,40,340/- as made by the assessing officer on account of disallowance of labour charges was deleted. Income Tax Appeal No. 624 of 2010 3 6. The Revenue preferred appeal before the Tribunal. The Tribunal put its seal of affirmation on the issue and dismissed the appeal vide the order under appeal. 7. We have heard learned counsel for the Revenue and have perused the record. 8. Learned counsel for the Revenue submitted that the assessing officer had disallowed the labour expenses on the ground that the same were bogus and the assessee was not able to substantiate the genuineness of the same. The counsel referred to the findings recorded by the assessing officer in the assessment order dated 31.3.2006 in that behalf, which are to the following effect: “The assessee derives income from manufacturing and export of hosiery goods. During the year under assessment, the assessee declared gross profit of Rs. 4.16 crore on export of Rs. 14.95 crore including profit on premium on DEPB and duty drawback amounting to Rs. 1.49 crores thereby giving G.P. rate at 27.83%. Proceeds of exports are found to have been received through banking channels. A perusal of the trading account reveals that the assessee also debited Rs. 2.46 crore on account of fabrication and labour charge comprising of Rs. 9.20 lacs and Rs. 230.4 lacs on account of fabrication and labour charges respectively. On being asked the assessee could furnish the details of the parties to whom fabrication charges were paid but could not substantiate the labour charges of Rs. 2.3 crore indicating the names and addresses of the parties etc. to whom paid. However, the assessee filed a detailed chart Income Tax Appeal No. 624 of 2010 4 indicating the entry and exit in/from the H.P. barriers with regard to the entry of raw materials and exit of export goods respectively. However, in the absence of the evidence in support of the labour charges claimed to have been incurred at Rs. 2.3 crores, the same are not at all subject to any verification but keeping in view the production made, the possibility of incurring of such charges is not ruled out though the claim made by the assessee seems to be too excessive. This apart, the wages of Rs. 72,800/- have been claimed separately. It is stated that wages of Rs. 72,800/- have been paid only to the regular workers on the record of ESI/EPF etc. while the labour charges are claimed to have been paid to various workers mainly on contractual basis. Keeping in view the comparable case of M/s. Glide Impex though assessment therein is still pending, also running an industrial undertaking at Baddi in which the claim of wages has been made at Rs.10.38 lacs only against the production with reference to the total export turnover of around Rs. 34 crores for the assessment year 2004-05. No doubt, a number of processes are involved in the manufacturing activity of a particular item, which may vary from case to case, but still considering that even if the assessee would have involved itself in a number of processes for the manufacturing process as compared to the comparable case, still the claim of labour charges at Rs. 2.3 crore seems to be at too an alarming figure. Therefore, taking into consideration the entirety of the facts and circumstances of Income Tax Appeal No. 624 of 2010 5 the case, in my opinion, the assessee would not have actually incurred labour charges beyond a sum of Rs. 50 lacs for the purpose of making production relatable to the sales/exports of Rs.13.46 crore credited to the trading account. Thus, it is considered fair and reasonable to allow the claim of such labour charges to the assessee at Rs.50 lacs with the result that balance claim of Rs. 1,80,40,340/- still having been made excessively which may represent nothing but on account of bogus/fictitious labour charges. In this view of the matter, a sum of Rs. 1,80,40,340/- is hereby disallowed out of the labour charges of Rs. 2,30,40,340/- and added back to the total income of the assessee on account of inadmissible/ in-genuine and unsubstantiated business expenses for which it is also treated to have furnished its inaccurate particulars of income for the year under assessment.” 9. Learned counsel for the appellant argued that the CIT(A) and the Tribunal, while allowing the appeal of the assessee, had wrongly held that the onus lay on the Revenue to show that the payments were made to some in-genuine or non-existent parties, but such onus was wrongly placed on the Revenue. According to the learned counsel, it was for the assessee to establish that the expenses claimed by it on account of labour charges were genuine. The counsel further argued that the Tribunal had wrongly noticed that the labour charges were fully vouched and paid to identifiable persons, even if there was no specific material available on record in that behalf. Income Tax Appeal No. 624 of 2010 6 10. It would now be advantageous to refer to the findings recorded by the CIT(A) which are as under: “I have carefully considered the contention of the appellant and also perused the relevant records. The A.O. has disallowed major part of the expenses under the head labour charges, in this case, just on the ground that another assessee, namely, Glide Impex having its industrial undertaking at Baddi had claimed labour charges of Rs. 10.38 lacs only against the total export turnover of around Rs. 34 Crores. The A.O. has not referred to trading and manufacturing results of the appellant in the preceding years etc. As explained by the learned counsel, the labour charges claimed by the appellant are fully vouched and paid to identifiable persons/parties. On some of the labour charges paid, TDS is stated to have been deducted and deposited in the Govt. account. Therefore, for making such a disallowance, the AO was required to make further enquiries and bring on record that the payments were made to some in-genuine or non-existent parties. In the absence of such an evidence brought on record, the disallowance made by the A.O. in a case like this, where accounts are duly audited, cannot be held to be justified.” 11. The aforesaid findings have been affirmed by the learned Tribunal in the following manner: “We have considered the rival submissions and perused the material available on the file. Brief facts are that the assessee derives income from manufacturing and export of Income Tax Appeal No. 624 of 2010 7 hosiery goods and declared gross profit of Rs. 4.16 crores on the export of Rs. 14.95 crores including profit on premium on DEPB and Duty Draw back amounting to Rs. 1.49 crores by giving gross profit rate at 27.83%. The assessee debited Rs.2.3 crores in its trading account as labour charges out of which the learned Assessing Officer disallowed Rs.1,80,40,340/- and added to the income of the assessee by opining the same to be in-genuine. On appeal, the learned first appellate authority deleted the addition, which is under challenge before the Tribunal. We have found that the impugned disallowance was made by the learned Assessing Officer on the ground that another assessee i.e. Glide impacts claimed labour charges of Rs. 30.38 lakhs only against the total export turn over of around Rs. 34 crores. The impugned addition was deleted by the learned first appellate authority on the ground that the labour charges are fully vouched, paid and the concerned persons/ partiers are identifiable, therefore, it was held that the Assessing Officer was required to make further inquiries and to bring on record as to how the payments were in-genuine or to the non- existent parties. On a query from the Bench, as to how the case of M/s. Glide Impact is not applicable, it was explained by the learned counsel for the assessee that firstly, M/s. Glide Impacts is manufacturing different items and secondly, it is fully automatic one, whereas in the case of the assessee, it was claimed that T-shirts are manufactured wherein more and more labour is required and the Income Tax Appeal No. 624 of 2010 8 machinery is also not fully automatic. Even in the assessment order, the learned Assessing Officer has mentioned as under: “No doubt, a number of process involved in the manufacturing activity of a particular item, which may vary from case to case but still considering that even if the assessee would have involved itself in a number of processes for the manufacturing process as compared to the comparable case, still the claim of labour charges at Rs. 2.3 crores seems to be an alarming figure…..” If the aforesaid conclusion is analysed, admittedly, number of processes are involved in the manufacturing process of the assessee. Even otherwise, we have found that no contrary material has been produced by the Assessing Officer evidencing that there is a false claim by the assessee. Even during the search conducted on 15.10.2003, at the premises of the assessee, there is no finding that either no labour is involved or any other infirmity in the claim of the assessee. During appellate proceedings, before us the assessee produced the registers maintained for the purposes. Without bringing any evidence on record, no adhoc disallowance is permissible.” 12. A perusal of the findings of the CIT(A) and the Tribunal shows that both the authorities have placed onus on the Revenue to establish the in-genuineness and non-existence of the parties which is wrong. Since the assessee had claimed that it had incurred expenses Income Tax Appeal No. 624 of 2010 9 on account of the labour charges, the onus was on the assessee to prove the said fact by producing cogent and convincing evidence including the identity of the parties along with evidence of payment to those persons. Accordingly, the orders passed by the CIT(A) and the Tribunal cannot be legally sustained. The substantial question of law is, thus, answered in favour of the Revenue and the matter is remitted to the CIT(A) for decision of the aforesaid controversy afresh in accordance with law. 13. The appeal is disposed of accordingly. (AJAY KUMAR MITTAL) JUDGE (ADARSH KUMAR GOEL) February 8, 2011 JUDGE *rkmalik*