IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH “F”,
MUMBAI
BEFORE SHRI N.V.VASUDEVAN(J.M) & SHRI R.K.PANDA(A.M)
ITA NO.7320/MUM/08(A.Y.2003-04)
New Kamlesh Jewellers,
Shop No.B-16, Kent Garden, Near
M.K.High School, Opp. Jamli Galli,
Factory Lane, Borivali (W),
Mumbai – 92.
PAN:AACFN 9125B
(Appellant)
Appellant by
Respondent by
Vs.
The ITO 25(1)(4),
C-10, Pratyaksha Kar Bhavan,
Bandra Kurla Complex,
Bandra (E), Mumbai – 51.
(Respondent)
:
:
Shri D.R.Raiyani
Shri S.K. Singh
ORDER
PER N.V.VASUDEVAN, J.M,
This is an appeal by the Assessee against the order dated 20-10-2008
of CIT(A)-XXV, Mumbai, relating to AY 03-04.
2.
Ground No.1 raised by the Assessee reads as follows:
“1(a) The CIT(Appeals) was not justified in sustaining the short term
capital gain of Rs. 34,39,643/- on account of assets transferred to the
two retiring partners u/s. 45(4) relying on the decision in the case of
CIT Vs. A.N. Naik Associates (2004) 265 ITR 346 wherein it was held
that the word “otherwise” appearing in section 45(4) not only includes
cases of dissolution but also takes into its sweep cases of retirement of
partners even though there is no dissolution and the business is a
continuous one. With due respect it is submitted that if the intention
of the legislature is to tax the firm in each and every case of
distribution of assets whether the partnership is subsisting or not,
then there is no need for the words “ on dissolution or otherwise” in
section 45(4) and the expression would loose its usefulness. The
whole relevance of section 45(4) is lost if the reasoning of the Bombay
High Court is accepted. If the legislature wanted to include retirement
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under the expression otherwise, the same would have been expressly
provided.
(b) The first appellate authority failed to notice that each of the two
retiring partners was allotted stock in trade and some other assets
along with substantial liabilities.
(c) The CIT(Appeal) ought to have been that stock in trade allotted to
each of the two retiring partners, cannot be considered as “CAPITAL
ASSET” within the meaning of section 2(14) of the Income Tax Act,
1961 and if the value of stock in trade allotted to each of the retiring
partner is excluded from the assets allotted to each of them, the
balance represents excess of liabilities over other assets as allotted to
each of the retiring partner.
(d) The first appellate authority should have held that after excluding,
the stock in trade which is not a “Capital Asset”, the value of net
assets allotted to each retiring partner is a negative figure and
therefore there is no short term capital gain to be brought to tax in the
assessment of the appellant firm.”
3.
The Assessee is a partnership firm. It was formed by a partnership
deed dated 1-4-2001. The firm consisted of the following partners with the
following profit and loss sharing ratios.
Name of the Partners
Profit sharing
Ratio
(i) Chimanbhai J. Minawala
25.00%
(ii) Vinubhai J. Minawala
16.66%
(iii) Kamlesh c. Minawala
25.00%
(iv) Rakesh V. Minawala
16.67%
(v) Master Nirmal V. Minawala
16.67%
(a minor admitted to the
benefits of partnership.)
Loss sharing
Ratio
25.00%
33.33%
25.00%
16.67%
00.00%
The firm had its registered office in Borivali (West), Mumbai, with a branch
at Palace Road, Plot No.1 Corner, Rajkot, gujrat. The business premises in
Rajkot was a rented premises.
The business of the firm comprised
manufacture, purchase and sale, export and import of gold, silver, diamonds
ITA NO.7320/MUM/08(A.Y.2003-04)
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and American Diamond ornaments.
)
Under Clause 15 of the Partnership
deed dated 1/4/2001, retirement, death, or insolvency of any of the
partners, does not result in dissolution of the partnership and the remaining
partners were entitled to continue the business.
4.
Consequent to certain changes in the affairs of the families of which
the above partners are members, the partners at (i) and (iii) above desired to
retire from the firm with effect from 31/08/2002.
Accordingly a deed of
retirement was drawn up on 31/8/2002. Briefly the result of this retirement
deed was that the business of the assessee in Rajkot was taken over by the
two retiring partners in equal shares and the three continuing partners at
(ii), (iv) and (v) above took one more person (Mrs. Asha V. Minawala) and
continued the business with its office in Borivali(West),Mumbai. Thus the
five – partner firm carried on business only for 17 months from 1/4/2001 to
31/8/2002.
5.
The capital a/c. position of the retiring partners and the details of the
assets and liabilities taken over by the retiring partners were as follows:
Kamlesh Chimanlal Minawala’s Capital Account as on 31/8/2008.
Particulars
To Drawings
To Profession Tax
To Closing Balance
Amount
116024
2500
8239202
8357726
Particulars
By Opening Balance
By Capital introduced
By
Remuneration
Parnters
By Share of Profit
to
Amount
6816091
650000
106250
785385
8357726
Details of Assets and Liabilities allotted to Kamlesh C. Minawala:
Assets Takenover
Goodwill
Amount
3439642
Fixed Assets
Stock in Trade
Sundry Debtors
1669721
14798497
29150
Liabilities Taken over
Loan Kamlesh J. Minawala
HUF
Loan Poonam K.Minawala
Girish J. Minawala
Nayana Minawala
Amount
127332
2989147
4393501
3824930
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Deposits
Loans & advances to staff
Prepaid Shop Rent
Cash
Central Bank- 10526
CCB Rajkot 1022
Receivable from CJM
141285
7200
8000
59282
2929
100387
1434037
Sundry
Creditors
for
expenses
Sundry
Creditors
for
Labour Charges
TDS Payable
Provisions-Rajkot
Advance from Customers
Liabilities trfd on retirement
Net Assets Takenover
Gross Assets trfd on retirement
21690130
102268
60122
31993
165965
35850
11731106
9959024
21690130
Chimanlal Minawala’s Capital Account as on 31/8/2008
Particulars
To Drawings
To Profession Tax
Amount
75000
2500
To Closing Balance
5440937
5518437
Particulars
By Opening Balance
By
Remuneration
Partners
By Share of Profit
to
Amount
4626802
106250
785385
5518437
Details of Assets and Liabilities allotted to Chimanlal J. Minawala:
Assets Takenover
Goodwill
Amount
3439642
Fixed Assets
Stock in Trade
Sundry Debtors
Deposits
1669721
14798497
29150
141285
Loans & advances to staff
7200
Prepaid Shop Rent
Cash
Central Bank- 10526
CCB Rajkot 1022
Receivable from CJM
8000
59282
2924
100387
1434037
Gross Assets trfd on retirement
20256083
6.
Liabilities Taken over
LoanChimanlal J. Minawala
HUF
Loan Jayshree C.Minawala
Girish J. Minawala
Nayana Minawala
Sundry
Creditors
for
expenses
Sundry
Creditors
for
Labour Charges
TDS Payable
Provisions-Rajkot
Advance from Customers
Payable to NKJMumbai
Payable to Kamlesh M.wala
Liabilities trfd on retirement
Net Assets Takenover
Amount
107132
2217758
4393501
3824930
102268
60122
31993
165965
35850
721771
1434037
13095325
7160758
20256083
The summary of the above statement is that while the capital Account
of the retiring partners showed credit balance of Rs.82,39,202 and
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Rs.54,40,937 in the name of Chimanlal Minawala and Chimanlal Minawala
respectively, the value of net assets transferred to them showed that the
value of the net assets taken over by them were Rs.99,59,024 and
Rs.71,60,758 respectively. Normally the excess of net assets taken over by
the retiring partner over and above the credit balance shown in their capital
account would be treated as gain to the retiring partner. Such gain could
have been assessed as capital gain in the hands of the firm by virtue of
Sec.45(4) of the Act. The AO however did not proceed on this basis. He held
that there was a transfer of capital asset viz., good will by the firm to the
retiring partners. He also held that goodwill has no cost of acquisition and
therefore brought to tax a sum of Rs.68,79,284/- being the value of goodwill
shown as assets taken over by the retiring partner(at Rs.34,39,642 to each of
the retiring partners) . The same was taxed as capital gain of the firm on
retirement of two partners.
7.
Before CIT(A), the Assessee submitted that Section 45(4) of the I.T. Act
has no application to the facts of the Assessees case. It was submitted that
Sec.45(4) brings to tax capital gains arising on the transfer of capital asset
by way of distribution of capital assets on the dissolution of a firm or
otherwise and charges the said gain to tax as income of the firm.
The
assessee submitted that there was no dissolution in the case of our firm.
The assessee pointed out that Clause 15 of the partnership deed dated
1/4/2001 specifically states that retirement, death, or insolvency of a
partner does not result in the dissolution of the firm and that the remaining
partners would continue to carry on the firm’s business. It was submitted
that the expression “or otherwise” appearing in sec. 45(4) of the I.T. Act does
not cover the case of retirement of partners from a firm. The assessee relied
on the decision of the Jabalpur Bench of the I.T.A.T in the case of ACIT vs.
Tehmoflies India, reported at 60 ITD 554(Jbr), wherein the ITAT had held
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that even after the insertion of section 45(4) of the I.T. Act with effect from
1/4/1988 as no corresponding amendment was made in the definition of
‘transfer’ appearing in section 2(47) of the I.T. Act, cases of retirement of
partners from a firm are not covered by section 45(4) of the I.T. Act.
8.
It was further submitted that a mere entry in books of account
creating goodwill account for Rs. 68,79,284 and crediting the same equally
to the accounts of the partners in their profits sharing ratio will not result in
the firm deriving capital gains. It was argued that before capital gains can
be said to have arisen, there should be a capital asset within the meaning of
section 2(14) of the I.T. Act and the same should have been transferred in
one of the modes o transfer defined u/s. 2(47) of the Income Tax Act,1961
and the sale proceeds of such capital asset should exceed the cost of capital
asset(or indexed cost) resulting in surplus to the transferor.
Mere re-
valuation of assets and showing the excess resulting on account of such revaluation, as good will in the accounts, does not have the effect of brining in
capital gain. On this issue the assessee relied on the decision of the ITAT
Mumbai Bench in ITO vs. Smt. Paru D. Dave reported at 303 ITR (AT) 469
(Mum).
9.
It was further submitted that Section 45(4) of the I.T. Act is in the
nature of a deeming provision.
What was held as not a ‘Transfer’ by the
supreme Court and other High Courts is sought to be deemed as a ‘transfer’
under this section. The key words appearing in this section are:
(a) capital asset
(b) transfer
(c) distribution of capital assets on the dissolution of a firm, AOP, BOI etc.
(d) or other wise.
ITA NO.7320/MUM/08(A.Y.2003-04)
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)
The words “capital asset” appearing in this section should fall within the
meaning of section 2(14) of the I.T. Act.
Stock-in-trade is specifically
excluded from the definition of capital asset u/s. 2(14) of the I.T. Act, 1961.
Similarly the word ‘Transfer’ should fall within one of the modes prescribed
u/s. 2(47) of the I.T. Act, 1961.
The expression “distribution of capital
assets on the dissolution of the firm” clearly denote that the distribution
should be in specie. That is to say there should be distribution of the assets
in kind. It was reiterated that the expression ‘or otherwise’ cannot take into
account retirement of partners or re-constitution of the firm.
It was argued
that there was allotment of assets in specie to the retiring partners.
However, the major part of the assets distributed, forms part of stock-intrade, net result of the assets and liabilities (excluding stock in trade)
allotted would be a negative figure. Without prejudice to the above it was
argued that even on the basis adopted by the ITO the short term capital
gain u/s. 45(4) of the I.T. Act, would work out to only out to Rs. 34,39,642/only as mentioned below:
A.
Chimanlal J. Minawala:
(i) Value of assets allotted to him on his retirement
(including his share of good will credited to his A/c.)
(ii)Less: Amount payable by firm to RP as per his
Capital account with the firm excluding Goodwill
(iii)Balance
Rs. 71,60,758
Rs. 54,40,937
Rs. 17,19,821
B. Kamalesh C. Minawala:
(i) Value of assets allotted to him on his retirement
(including his share of goodwill credited to his A/c.)
(ii)Less: Amount payable by firm to RP as per his
Capital account with the firm excluding goodwill
(iii) Balance
Rs. 99,59,024
Rs. 82,39,203
Rs. 17,19,821
Total of A(iii) and B (iiI) above representing short term capital gain works out
to Rs.34,39,642/-.
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10. Another contention raised by the Assesee was that the value of the stock
in trade should be excluded while ascertaining the value of assets taken over
by the retiring partner because stock-in-trade is not capital asset within the
meaning of the definition of the term “capital Asset” u/s.2(14) of the Act. If
the value of stock-in-trade taken over by the retiring Partners is excluded
then there would be short term capital loss to the firm because the value of
liabilities taken over is in excess of the assets taken over. Such excess was
more than the amount that the retiring partners have to receive from the
firm as per the credit in their capital account. In such an event there would
be a short term capital loss to the firm as per the chart below.
Chimanlal J. Minawala:
Amount.
Gross Assets transferred on Retirement
20256083
Less : Value of Stock in Trade Transferred which is
not a capital asset u/s. 2(14)
14798497
Net amount of other assets transferred on retirement
5457586
Net Liabilities takenover on retirement
13095325
--------------
Excess of other liabilities taken over vis-à-vis other assets(A)
7637739
=========
Kamlesh C. Minawala:
Gross assets transferred on retirement
21690130
Less: Value of Stock in Trade Transferred which is
not a capital asset u/s. 2(14)
14798497
Net amount of other assets transferred on retirement
6891633
Net liabilities taken over on retirement
11731106
------------
Excess of other liabilities taken over vis-à-vis other assets(B)
4839473
========
ITA NO.7320/MUM/08(A.Y.2003-04)
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11.
The CIT(A) however did not accept the claim of the Assessee that there
was no transfer on retirement of partners from the firm. According to CIT(A),
on retirement of a partner from the firm and the firm continuing its existence
and the retiring partner being given assets in lieu of amounts payable to him
on retirement, has been held by the Hon’ble Bombay High Court to be
covered by the provisions of Sec.45(4) of the Act viz., a transfer giving raise
to a capital gain.
The Hon’ble Bombay High Court in the case of
Commissioner of Income-tax V. A. N. Naik Associates And Another And
Rangavi Realtors And Another. 265 ITR 346 (BOM) was dealing with a case
of Reconstitution of firm and allotment of assets to retiring partners. The
reconstitution had taken place pursuant to a family arrangement.
The
chargeability to capital gain tax in such circumstances was in issue before
the Hon’ble Court. The Court dealt with the issue as to what would be the
effect of partners of a subsisting partnership distributing assets to partners
who retire from the partnership. Does the asset of the partnership, on being
allotted
to
the
retired
partner/partners
fall
within
the
expression
"otherwise"? The Court held that the purpose and object of the Act of 1987
was to bring to charge of tax arising on distribution of capital assets of firms
which otherwise was not subject to taxation. If the language of sub-section
(4) is construed to mean that the expression "otherwise" has to partake of
the nature of dissolution or deemed dissolution, then the very object of the
amendment could be defeated by the partners, by distributing the assets to
some partners who may retire. The firm then would not be liable to be taxed
thus defeating the very purpose of the Amending Act.
The Court noticed
that the position prior to the amendment by introduction of Sec.45(4) by the
Finance Act, 1987, was that there was no transfer of assets by the firm to
the partners on dissolution or transfer of assets to the retiring partner on
retirement. The effect was that the profits or gains arising from the transfer
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of a capital asset by a firm to a partner on dissolution or otherwise would be
chargeable as the firm's income in the previous year in which the transfer
took place and for the purposes of computation of capital gains, the fair
market value of the asset on the date of transfer would be deemed to be the
full value of the consideration received or accrued as a result of the transfer.
Therefore, if the object of the Act is seen and the mischief it seeks to avoid, it
would be clear that the intention of Parliament was to bring into the tax net
transactions whereby assets were brought into a firm or taken out of the
firm.
12.
Relying on the aforesaid decision, the CIT(A) held that on retirement of
the partner there was a transfer giving raise to tax incidence on capital gain.
The CIT(A) by implication held that entry in the capital account of the
partner regarding goodwill will not give raise to capital gain in the hands of
the firm. The CIT(A) however held that the manner of computation of capital
gain has to be done on the basis of the alternative claim made by the
Assessee, whereby the Assessee computed short term capital gain at
Rs.17,19,821 in the case of Chimanlal J.Minawala and Rs.17,19,821 in the
case of Kamalesh C.Minawala. Thus short term capital gain was computed
at Rs.34,39,642/-.
We have already seen that the Assessee in its
submission before CIT(A) had requested that the value of stock taken over
should be excluded from the list of assets because stock in trade is not a
capital asset within the meaning of the definition of capital asset u/s.2(14) of
the Act.
If it is so excluded then there would be capital loss.
This
submission was not considered and adjudicated by the CIT(A). Against the
order of CIT(A), the Assessee has raised ground No.1(a) to (d) referred to
above.
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13.
)
At the time of hearing of the appeal, the learned counsel for the
Assessee very fairly submitted that he does not want to press adjudication of
ground No.1(a) in view of the decision of the Hon’ble Bombay High Court in
the case of
Commissioner of Income-tax V. A. N. Naik Associates And
Another And Rangavi Realtors And Another. 265 ITR 346 (BOM).
14.
On ground no.1(b) to (d), the learned counsel submitted that the
incidence of tax on capital gain arises only on transfer of a “capital asset”
and in this regard drew our attention to the provisions of Sec.45(4) of the
Act, which reads as follows:
"The profits or gains arising from the transfer of a capital asset by way
of distribution of capital assets on the dissolution of a firm or other
association of persons or body of individuals (not being a company or a
co-operative society) or otherwise, shall be chargeable to tax as the
income of the firm, association or body, of the previous year in which
the said transfer takes place and, for the purposes of section 48, the
fair market value of the asset on the date of such transfer shall be
deemed to be the full value of the consideration received or accruing as
a result of the transfer."
It was submitted by him that the term “Capital Asset” has been defined in
Sec.2(14) of the Act, as meaning “Property of any kind held by an Assessee,
whether or not connected with his business or profession.
The above
exhaustive definition is subject to the following exclusions like stock in
trade, consumable stores or raw material held for the purpose of business or
profession, personal effects, agricultural land in India, Certain Gold bonds,
special bearer bonds and Gold deposit bonds. According to him, the value of
stock in trade of the firm which was taken over by the retiring partners
should therefore be excluded while computing capital gain. If done so, there
would be capital loss. In this regard our attention was drawn to the decision
of the ITAT Mumbai Bench in the case of ACIT Vs. Vijay Talkies (2007)
Vol.16 SOT 370(mum) wherein it was held that the expression capital asset
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)
excludes stock in trade.
)
The learned counsel reiterated the stand of the
Assessee on this issue as was put forth before the CIT(A) which we have
already referred to in the earlier part of this order.
15.
The learned D.R. relied on the order of the CIT(A).
16.
We have considered the rival submissions. The question that arises
for consideration is as to what is transferred on retirement? Is it the share or
interest of a partner in the partnership firm or the property of the firm itself?
The Hon’ble
Supreme Court in Addanki Narayanappa v. Bhaskara
Krishnappa [1966] 3 SCR 400; AIR 1966 SC 1300 explained the nature of
partnership and the right of the partners over the asssets of the Partnership
as follows: (p. 1303 of AIR):
"................. whatever may be the character of the property which is
brought in by the partners when the partnership is formed or which
may be acquired in the course of the business of the partnership it
becomes the property of the firm and what a partner is entitled to is
his share of profits, if any, accruing to the partnership from the
realisation of this property, and upon dissolution of the partnership to
a share in the money representing the value of the property. No doubt,
since a firm has no legal existence, the partnership property will vest
in, all the partners, and in that sense every partner has an interest in
the property of the partnership. During the subsistence of the
partnership, however, no partner can deal with any portion of the
property as his own, Nor can he assign his interest in a specific item of
the partnership property to anyone. His right is to obtain such profits,
if any, as fall to his share from time to time and upon the dissolution
of the firm to a share in the assets of the firm which remain after
satisfying the liabilities set out in clause (a) and sub-clause (i), (ii) and
(iii) of clause (b) of section 48."
The position was later explained in the same judgement as follows (page1304):
" The whole concept Of partnership is to entr upon a joint
venture and for that purpose to bring in as capital money or even
property including immovable property. Once that is done whatever is
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brought in would cease to be the exclusive property of the person who
brought it in. It would be the trading asset of the partnership in which
all the partners would have interest in proportion to their share in the
joint venture of the business of partnership. The person who brought
it in would, therefore, not be able to claim or exercise any exclusive
right over any property which he has brought in, much less over any
other partnership property. He would not be able to exercise his right
even to the extent of his share in the business of the partnership. As
already stated, his right during the subsistence of the partnership is to
get his share of profits from time to time as may be agreed upon
among the partners and after the dissolution of the partnership or
with his retirement from partnership of the, of his share in the net
partnership assets as on the date of dissolution or retirement after a
deduction of liabilities and prior charges."
What is the subject matter of transfer in the case of dissolution of a firm is
the share or interest of a partner in the partnership and its assets and this
would be property which is subject matter of transfer. This would be the
capital asset within the meaning of the aforesaid definition. Therefore it is
not correct to segregate the value of stock-in-trade from the assets that is
given to a retiring partner to arrive at capital gain that the firm derives on
retirement and settling accounts of the retiring partner.
17.
The Capital gain is computed by looking at the accounts to find out as
to whether the partner was paid the sum standing to the credit of his capital
account or something more than that. It is only when something over and
above the sum standing to the credit of his capital account it can be said
that there was capital gain. The issue can be analyzed from the provisions
relating to computation of capital gain also. Sec.48 of the Act lays down the
manner of computation of capital gain. It says that from the full value of
consideration received or accruing as a result of transfer of a capital asset
one has to reduce, the cost of acquisition of the capital asset, its cost of
improvement and expenses incurred wholly and exclusively in connection
with transfer. The share or interest of a partner in the partnership and its
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assets would be property and, therefore, a capital asset within the meaning
of the definition of a capital asset.
The consideration paid to a retiring
partner on relinquishment of his share or interest as partner in the
partnership and its assets, will be considered as full value of consideration
received or accruing as a result of transfer. The initial capital contribution
or further capital contribution would be part of the cost of acquisition. Any
accrual of interest on capital, remuneration payable to partner, share of
profit of the firm already suffers tax on accrual basis or payment basis and
those items can never be part of full value of consideration received or
accruing as a result of transfer nor would they form part of cost of
acquisition. The only other item of credit in the capital account of a partner
would be profit on revaluation of assets of the firm.
Such item of credit
would be of similar nature of capital contribution which can be treated on
par with cost of acquisition of the capital asset.
In other words it is
accretion to the value of the assets of the firm in which the partner has a
share.
The full value of consideration received should be arrived at after
excluding the accrual of interest on capital, remuneration payable to
partner, share of profit of the firm.
The cost of acquisition of the capital
asset should be reckoned as initial capital contribution and further capital
contribution of capital and the profit on revaluation of assets of the firm. If
on retirement the full value of consideration (excluding interest on capital,
remuneration payable to partner, share of profit of the firm) paid to a retiring
partner exceeds initial capital contribution, further capital contribution of
capital and the profit on revaluation of assets of the firm, only then it can be
said that there is capital gain. In case there is no such excess then there
can be no capital gain which can be brought to tax. If there is deficit then it
can be said that the Assessee has incurred a capital loss.
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19.
)
The capital asset transferred on retirement of a partner from the firm
is the right as a partner. The firm settles such right by giving away assets of
the firm which includes its stock-in-trade. The stock-in-trade in that event
looses its character as stock in trade and becomes a capital asset which is
used as a mode of settlement of the claim of the retiring partner by giving it
at a value to the retiring partner. For the reasons stated above, we reject the
argument of the learned counsel for the Assessee to the effect that value of
stock-in-trade has to be excluded while determining capital gain because
what is transferred on retirement of a partner from the firm is the the share
or interest of a partner in the partnership and its assets and not the
individual items of properties of the firm which is allotted on retirement to
the retiring partner.
For the aforesaid reasons, we confirm the order of
CIT(A) and dismiss ground No.1 (a) to (d) raised by the Assessee.
19.
Ground No.2 raised by the Assessee reads as follows:
“2.(a) The first Appellate authority was not justified in sustaining
disallowance of 2% of the labour charges as claimed by the appellant.
(b) CIT(Appeals) should have seen that the books of account of the
appellant firm were audited and the labour charges paid to workman
were directly related to the ornaments/articles got manufactured
through them.
(c) At any rate, the appellant claims that the disallowance sustained
by the CIT(Appeals) is arbitrary and excessive.”
20.
The assessee had claimed as deduction a sum of Rs.51,73,783/- on
account of labour charges for making ornaments. While going through the
vouchers submitted by the assessee the A.O noticed
vouchers were having following characters.
(a) They are cash memo in the same handwriting.
(b) The cash memo numbers are almost running numbers.
(c) There is no description of ornaments made.
that most of the
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)
(d) The bills are not supported by delivery challans.
)
(e) The bills are without any telephone number and sale tax No.
(f) Many of the vouchers are in the same handwriting and no mention of
TDS thereof.
(g) Many of the vouchers are internal vouchers, generated by the assessee
having nothing but rubber stamp and amount without any description of the
work done and no other supporting.
(h) Even the internal vouchers are not having Revenue Stamp in many cases
although required by the law.
(i) Some of the vouchers are repeatedly in the name of Hari Prasad, Pankaj
Bhaskar etc.
(j) Even the internal vouchers did not bear any PAN, address of the payee.
Under the circumstances, the AO was of the view that the assessee has
inflated labour charges so as to reduce taxable profit and the assessee has
failed to justify some proportion of labour charges to the production of
ornaments and therefore a sum of Rs. 5,17,678/- being 10% of labour
charges was added back by way of bogus labour charges claimed.
21.
Before CIT(A) it was submitted that the books of the assessee are
audited and all expenses are fully vouched and verifiable. Labour charges
are incurred and paid for making ornaments and other articles sold in the
shop and sometimes for making them as per customer’s order. Karigarwise
book is maintained in respect of labour expenses giving full particulars of
weight of ornaments and manufactured and labour charges payable for the
same. It was also submitted that the assessee could obtain bills vouchers
and receipts from the karigars as far as possible. Since some of the karigars
have small set up are operating from their residence, they do not have
printed bill books. It was also submitted that karigars are illiterate, hence
are not able to prepare bills and vouchers on their own. Even in such cases
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)
)
expenditure is substantiated by self made vouchers prepared by employees
of assessee on which signatures of respective karigars are obtained. Where
TDS provisions are applicable, TDS was also deducted from payment to the
karigards. Zerox copy of TDS return was also filed. The assessee also filed
zerox copy of bills and vouchers of labour charges submitted at the time of
assessment proceedings. The assessee filed details of labour charges in this
year and also in the preceding year which was as under:
Assessment
year
Sales
turnover
Gross Profit
Labour
Charges paid
Labour
charges as%
of Turnover
Disallowance
of
labour
charges
in
assessment
order if any.
10,66,44,020
8,94,66,019
2,02,91,458
1,97,27,493
51,76,783
67,54,829
4.85%
7.55%
5,17,783
2003-04
2002-03
It was requested to delete the addition.
22.
The CIT(A) restricted the addition made by the AO from 10%to 2%
observing as follows:
“7.3 I have gone through the submissions and find that appellant firm
was constituted in 2001. This is the second year of its operation. No
doubt that there are many defects in most of the vouchers of labour
charges, but it is also a fact that appellant is engaged in jewellery
business and has to get jewellery made from karigars. Sometimes
karigars are small and not assessed to tax. It is also a fact that the
labour charges in the year under consideration are lower in
comparison to the preceding year. But the fact is that that the
assessment of the preceding year was accepted under summary
scheme. A.O discussed that the labour charges do not have bills of
ornaments made and they are not supported by delivery challans.
These are serious defects in the labour charges internal vouchers. As
the appellant is not maintaining address of the labourers and
genuineness of some of the labour charges cannot be verified, A.O is
directed to disallow labour charges to the extent of 2% of the claim
instead of 10% disallowance made by him.”
23.
Still aggrieved, the Assessee has raised ground No.2 before the
Tribunal. The learned counsel for the Assessee reiterated the submissions
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ITA NO.7320/MUM/08(A.Y.2003-04)
)
)
as were made before the CIT(A). He highlighted the fact that Tax has been
deducted at source in respect of some of the payments.
24.
We are of the view that the defects pointed out by the CIT(A) definitely
warrant disallowance. We are also of the view that the addition sustained by
the CIT(A) is reasonable and there are no circumstances which warrant
giving any further relief to the Assessee. Consequently ground No.2 raised
by the Assessee is dismissed.
25.
Ground No.3 raised by the Assessee reads as follows:
“3. The CIT(Appeals) should not have confirmed the disallowance of
Rs.14,350/- (wrongly mentioned as Rs. 1,43,500/- in para 8.1 of the
appellate order) as the appellant did not obtain any software from the
software developer and the sum of Rs. 20,500/- paid to the developer
represented payments made to develop software as required by the
appellant which could not be ultimately developed by the software
developer.”
26.
The Assessee claimed software expenses of Rs.20,500/- as deduction
while computing the total income. The AO allowed depreciation at 30% on
the value of software and made an addition of Rs.14,350/- to the total
income.
Before CIT(A), the Assessee pointed out that the amount of
Rs.20,500/- represents amount paid to SMB Inc., for their efforts in trying to
develop tailor-made software for the Assessee’s business.
Finally the
software could not be developed and the amount was paid to SMB Inc. for
the time they spent in developing the software and that no software in fact
was purchased or owned by the Assessee. The CIT(A) however upheld the
action of the AO without taking cognizance of the above submission of the
Assessee.
In our view the claim of the Assessee for deduction has to be
allowed as the expenditure did not result in ultimately the Assessee
acquiring software.
The expenditure was very much incidental to the
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ITA NO.7320/MUM/08(A.Y.2003-04)
)
business and was therefore to be allowed as deduction.
)
Ground NO.3 is
allowed.
27. In the result, appeal of the Assessee is partly allowed.
Order pronounced in the open court on the 7th day of Jan.2011
Sd/-
Sd/-
(R.K.PANDA)
ACCOUNTANT MEMBER
Mumbai,
(N.V.VASUDEVAN)
JUDICIAL MEMBER
Dated. 7th Jan.2011
Copy to: 1. The Appellant 2. The Respondent 3. The CIT City –concerned
4. The CIT(A)- concerned 5. The D.R”B” Bench.
(True copy)
By Order
Asst. Registrar, ITAT, Mumbai Benches
MUMBAI.
Vm.
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1
2
3
4
5.
6.
7.
8
9
Details
Date
Draft dictated on
24/12/2010
Draft Placed before author
4/01/2011
Draft proposed & placed
before the Second Member
Draft discussed/approved by
Second Member
Approved Draft comes to the
Sr.PS/PS
Kept for pronouncement on
File sent to the Bench Clerk
Date on which the file goes to
the Head clerk
Date of Dispatch of order
Initials
Designation
Sr.PS/PS
Sr.PS/PS
JM/AM
JM/AM
Sr.PS/PS
Sr.PS/PS
Sr.PS/PS