The DCIT, Circle-2(1)(2),, Surat v. M/s. Sumilon Industries Ltd.,, Surat

ITA 2722/AHD/2016 | 2012-2013
Pronouncement Date: 31-08-2021 | Result: Dismissed

Appeal Details

RSA Number 272225614 RSA 2016
Assessee PAN AADCS3567L
Bench Surat
Appeal Number ITA 2722/AHD/2016
Duration Of Justice 4 year(s) 10 month(s) 9 day(s)
Appellant The DCIT, Circle-2(1)(2),, Surat
Respondent M/s. Sumilon Industries Ltd.,, Surat
Appeal Type Income Tax Appeal
Pronouncement Date 31-08-2021
Appeal Filed By Department
Order Result Dismissed
Bench Allotted DB
Tribunal Order Date 31-08-2021
Assessment Year 2012-2013
Appeal Filed On 21-10-2016
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL SURAT BENCH SURAT BEFORE SHRI PAWAN SINGH JUDICIAL MEMBER AND DR. ARJUN LAL SAINI ACCOUNTANT MEMBER ITA NO.2722/AHD/2016(AY 2012-13) (H EARING IN VIRTUAL COURT) THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-2(1)(2) SURAT. VS SUMILON INDUSTRIES LIMITED 6/121 VAIRAGINI WADI DELHI GATE SURAT. [PAN: AADCS 3567 L] APPLICANT RESPONDENT ASSESSEE BY SHRI GAURANG SOLANKI CA REVENUE BY SHRI SREENIVAS T.BIDARI CIT( DR ) DATE OF HEARING 09 . 0 6 .2021 DATE OF PRONOUNCEMENT 31.08.2021 ORDER UNDER SECTION 254(1) OF INCOME TAX ACT PER PAWAN SINGH JUDICIAL MEMBER: 1. THIS APPEAL BY REVENUE IS DIRECTED AGAINST THE ORDERS OF LD. COMMISSIONER OF INCOME TAX (APPEALS)-2 SURAT DATED 02.07.2016 WHICH IN TURN ARISE FROM THE ASSESSMENT ORDER UNDER SECTION 143(3) OF THE ACT 1961 FOR THE ASSESSMENT YEAR (AY) 2012-13. THE REVENUE HAS RAISED FOLLOWING GROUNDS OF APPEAL: 1. ON THE FACTS AND CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITIONS MADE OF RS.1 90 32 000-ON ACCOUNT OF DISALLOWANCE OF EMPLOYEE BENEFIT EXPENSES AND RS. 132.10 LACS ON ACCOUNT OF DISALLOWANCE OF OTHER EXPENSES. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) HAS ERRED IN NOT APPRECIATING THAT WHEN PRODUCTION OF THE ASSESSEE COMPANY HAS DECLINED W.R.T. PREVIOUS YEAR THEN INCREASE IN WAGES CANNOT BE SAID JUSTIFIABLE. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD. CIT(A) HAS ERRED BY DELETING THE DISALLOWANCES ON ACCOUNT OF OTHER ITA NO.2722/AHD/2016 M/S.SUMILON INDUSTRIES PVT. LTD. (AY 2012-13) 2 EXPENSES OF RS . 132.10 LAKHS MERELY ON THE SUBMISSION THAT THE MANUFACTURING EXPENSES WEREON LOWER SIDE. THE LD. CIT(A) FAILED TO APPRECIATE THAT DECLINE RATIO OF OTHER EXPENSES WAS NOT IN CONSONANCE WITH FALL IN PRODUCTION. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW THE LD.CIT(A) SURAT OUGHT TO HAVE UPHELD THE ORDER OF THE ASSESSING OFFICER. IT IS THEREFORE PRAYED THAT THE ORDER OF THE LD.CIT(A)-2 SURAT MAY BE SET- ASIDE AND THAT OF THE ASSESSING OFFICER'S ORDER MAY BE RESTORED. 2. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A COMPANY ENGAGED IN THE MANUFACTURING OF PLAIN METALLISED AND LACQUERED POLYESTER FILMS DEALER IN METALLIC YARN IMITATION JARI KASAB EMBROIDERY THREADS AND GENERATION OF POWER BY WIND MILL. THE ASSESSEE FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR (A.Y.) 2012-13 DECLARING LOSS OF RS.2.56 CRORE. THE CASE WAS SELECTED FOR SCRUTINY. THE ASSESSING OFFICER (AO) AFTER SERVING STATUTORY NOTICES PROCEEDED FOR ASSESSMENT. DURING THE ASSESSMENT THE AO NOTED THAT ASSESSEE HAS SHOWN ITS TURNOVER OF RS.98.09 CRORE AND DECLARED GROSS PROFIT AT 12.80%. THE GROSS PROFIT (GP) IN THE IMMEDIATELY PRECEDING YEAR WAS 24.34% ON THE TURNOVER OF RS. 154.83 CRORE. THE AO TOOK NOTE OF THE FACT THAT THERE WAS A DRASTIC DECREASE IN THE FALL OF GROSS PROFIT (GP) AS WELL AS NET PROFIT (NP). THE ASSESSEE WAS ASKED TO FURNISH COMPARATIVE DATA OF COMPARABLE COMPANIES [OTHER ASSESSEE] OPERATING IN THE SAME ACTIVITY AND THEIR GROSS PROFIT AND NET PROFIT MARGIN. THE ASSESSEE PROVIDED CERTAIN DATA OF COMPARABLE COMPANIES. THE AO ON PERUSAL OF AUDIT REPORTS OF VARIOUS OTHER COMPARABLES HELD THAT THOSE INDUSTRIES WERE OPERATING ON LARGE SCALE ITA NO.2722/AHD/2016 M/S.SUMILON INDUSTRIES PVT. LTD. (AY 2012-13) 3 AS COMPARED TO ASSESSEE THOSE COMPARATIVE COMPANIES TURNOVER IS 7 TO 25 TIME AS COMPARED WITH THE ASSESSEE. THE SIZE OF INDUSTRY PLAY A VITAL ROLE IN MAKING DATA COMPARABLE WITH OTHER UNIT OPERATIVE IN THE SAME LINE OF BUSINESS. THE AO ON EXAMINATION OF COST OF MATERIAL CONSUMED PURCHASE OF STOCK EMPLOYEE BENEFIT EXPENSES AND OTHER DIRECT AND INDIRECT EXPENSES FIND THAT THERE IS OVERALL REDUCTION SHOWN IN THE DETAILS PROVIDED BY THE ASSESSEE WHICH THE AO SUMMARISED IN THE FOLLOWING MANNER: PRODUCTION 2011-12 2010-11 FALL IN PROD. (% AGE) PLAIN POLYESTER FILM 28 10 755.00 55 57 786.00 49.43 METT. &LACQ. POLY FILM 37 72 581.00 44 19 747.00 14.64 BADLA 23 32 012.00 25 35 805.00 8.04 KASAB 17 37 327.00 18.39 622.00 5.56 TOTAL 106 52 675.00 143 52 960.00 25.78 3. ON COMPARISON OF PRODUCTION AND EMPLOYEE EXPENSES THE AO TOOK HIS VIEW THAT THERE IS UNREASONABLE HIKE IN THE EMPLOYEE BENEFIT EXPENSES. THE AO ISSUED SHOW CAUSE FOR JUSTIFICATION OF SUCH INCREASE OF EMPLOYEE BENEFIT EXPENSES. IN REPLY TO JUSTIFICATION OF INCREASE THE ASSESSEE CONTENDED THAT THERE IS GENERAL RISE IN THE SCALE OF WAGE AND SALARIES PAID TO WORKERS/EMPLOYEES ON ACCOUNT OF RISE IN OVERALL INFLATION. THE REPLY OF ASSESSEE WAS NOT ACCEPTED BY THE AO. THE AO HELD THAT INCREASE IN THE EXPENSES CANNOT BE SAID TO BE A GENERAL RISE DUE TO INFLATION. THERE IS ALWAYS A DIRECT RELATION OF EMPLOYEE EXPENSES AND TURNOVER / PRODUCTION IN CASE OF MANUFACTURING INDUSTRY. THERE MAY BE A SLIGHT FLUCTUATION BECAUSE OF SEMI VARIABLE NATURE BUT IT CANNOT GET FLUCTUATED BY 70%. THE RATIO OF EMPLOYEE ITA NO.2722/AHD/2016 M/S.SUMILON INDUSTRIES PVT. LTD. (AY 2012-13) 4 EXPENSES IN PREVIOUS YEAR WAS 3.28% WHICH IS INCREASE TO 5.50%. THUS THE AO CONSIDERING THE EARLIER YEARS EMPLOYEE BENEFIT EXPENSES TREATED IT AS UNREASONABLE AND THEREBY APPLYING PREVIOUS YEARS EXPENSES RATIO WITH INFLATION OF 5% THE EXCESSIVE EMPLOYEE BENEFIT AMOUNTING TO RS.1.90 CRORE WAS DISALLOWED AND ADDED BACK IN THE INCOME OF THE ASSESSEE. 4. THE AO FURTHER NOTED THAT THE EXPENSES OF ASSESSEE WHEN COMPARED WITH OTHER COMPANIES THAT THERE IS A REDUCTION IN OTHER DIRECT EXPENSES IN OTHER COMPANIES WHEREAS THE ASSESSEE COMPANY HAS SHOWN SUBSTANTIAL INCREASE IN OTHER DIRECT EXPENSES. THE OTHER DIRECT EXPENSES HAVE BEEN INCREASED FROM 20.70% OF THE TURNOVER IN PRECEDING YEAR TO 28.56% OF TURNOVER IN PRESENT YEAR. THE AO MADE THE FOLLOWING SUMMARY OF EXPENSES WITH PRODUCTION IN COMPARISON WITH PRECEDING YEAR: 2011-12 2010-11 PRODUCTION 106 52 675.00 143 52 960.00 PACKING EXPENSES 182 52 996.00 211 55 295.00 PER UNIT EXP. 1.71 1.47 POWER AND FUEL 1542 12 741.00 1657 59 820.00 PER UNIT EXP. 14.48 11.55 STORES AND SPARES 140 94 216.00 97 10 458.00 PER UNIT EXP. 1.32 0.68 5. THE AO HELD THAT PACKAGING EXPENSES ARE DIRECTLY RELATED TO PRODUCTION AND SALE. SALES AS WELL AS PRODUCTION HAVE SUBSTANTIAL DECREASE. HOWEVER THE PACKAGING EXPENSES HAVE NOT BEEN REDUCED RATIONALLY. THE AO NOTED THAT THERE IS DECREASE IN THE SALE OF RS.46.74 CRORE AND THE PACKAGING EXPENSES HAS ALSO BEEN DECREASED BY RS.29 02 299/-. THERE IS AN INCREASE IN ITA NO.2722/AHD/2016 M/S.SUMILON INDUSTRIES PVT. LTD. (AY 2012-13) 5 PACKAGING EXPANSES BY 30% COMPARATIVE TO PREVIOUS YEAR. THE AO AFTER ISSUING SHOW CAUSE NOTICE AND CONSIDERING THE SUBMISSION OF ASSESSEE DISALLOWED 5% DIRECT EXPENSES AND WORKED OUT THE DISALLOWANCES OF RS.1.32 CRORE. 6. AGGRIEVED BY THE DISALLOWANCES/ ADDITIONS THE ASSESSEE FILED APPEAL BEFORE THE LEARNED CIT(A). BEFORE THE LD. CIT(A) THE ASSESSEE FILED DETAILED WRITTEN SUBMISSION ON BOTH THE DISALLOWANCES. THE SUBMISSION OF ASSESSEE IS RECORDED IN PARA 5 AT PAGE 6 TO 23 OF LD. CIT(A)S ORDER. IN SUM AND SUBSTANCE THE ASSESSEE ON DISALLOWANCES OF EMPLOYEE BENEFIT EXPENSES SUBMITTED THAT PROFIT OF THE ASSESSEE REDUCED DRASTICALLY MAINLY FOR TWO REASONS VIZ. FALL IN TURNOVER AND INCREASE IN COST OF EXPENSES INCURRED. THE ASSESSEE STATED THAT THEY ARE MAINLY ENGAGED IN THE MANUFACTURING OF PLAIN POLYESTER FILM METALIZED FILM METALIZED LACKENED FILM JARI KASAB AND GENERATION OF POWER IN WIND MILL. THE INCOME FROM GENERATION OF POWER DECREASE COMPARED TO EARLIER YEARS. IT IS MAINLY DUE TO THE FACT THAT SECOND HAND POLYESTER FILM PLANT AT GANDHIDHAM WAS NOT RUNNING PROPERLY AND HAD TO BE TEMPORARILY SHUT DOWN FROM TIME TO TIME. THIS RESULTED IN FALL OF CONSUMPTION OF POWER UNIT AND HENCE THE CREDIT OF POWER UNITS GENERATED FROM WIND MILL COULD NOT BE FULLY UTILISED AGAINST THE POWER BILL OF GANDHIDHAM UNIT. THE ASSESSEE ALSO STATED THAT OVER ALL UNITS SOLD HAD DECREASE DURING THE YEAR. THE STATEMENT OF POWER UNIT GENERATION CERTIFICATE ITA NO.2722/AHD/2016 M/S.SUMILON INDUSTRIES PVT. LTD. (AY 2012-13) 6 ISSUED BY PGVSL [PASCHIM GUJARAT VIJ COMPANY LTD.] FOR CURRENT YEAR WERE FURNISHED. THE ASSESSEE ALSO STATED THAT DURING THE YEAR THE FALL IN PRODUCTION OF FILM BADLA KASAB WERE CHALLENGING COMPARED TO EARLIER YEARS. THE HONBLE SUPREME COURT DIRECTED TO BAN ON THE SALE OF TOBACCO PRODUCT LIKE GUTKAS AND PAN MASALA IN PLASTIC POUCHES FROM MARCH 2021 WHICH RESULTED IN FALL IN DEMAND OF POLYESTER FILMS. THE BAN OF END PRODUCT HAD ALREADY COMMENCED AND IMPLEMENTED IN SEVERAL STATES WHICH RESULTED INTO SIGNIFICANT IMPACT ON PRICE AND MARGIN ON MOST OF THE MANUFACTURER OF POLYESTER FILMS. THE ASSESSEE FURTHER STATED THAT THERE IS A MIS-MATCH IN DEMAND SUPPLY RATIO POLYESTER FILM JARI KASAB BADLA WHICH ARE MAIN PRODUCT OF ASSESSEE CREATED IMPACT ON SALE PRICE OF THESE PRODUCTS AS WELL. THE ASSESSEE FURNISHED THE QUANTITATIVE SALE AND AVERAGE VALUE FOR PRECEDING YEAR AND OF CURRENT YEARS. THE ASSESSEE ALSO SUBMITTED THAT THERE IS INCREASE IN THE PURCHASE PRICES OF RAW MATERIAL. THE ASSESSEE ALSO FURNISHED THE INCREASE OF EMPLOYEE BENEFIT EXPENSES CONSISTING OF SALARY AND WAGES OF WORKERS CONTRIBUTION TO PROVIDENT FUND DIRECTORS REMUNERATION AND SECURITY GUARD EXPENSES STAFF WELFARE EXPENSES AND SUBMITTED THAT THERE HAS BEEN A GENERAL RISE IN THE SCALE OF WAGES AND SALARIES PAID TO WORKERS. THE DIRECTORS REMUNERATION WAS CLAIMED TO HAVE DECREASE. 7. ON THE DISALLOWANCE OF OTHER EXPENSES THE ASSESSEE STATED ASSESSEE COMPANY HAS TAKEN A DIFFERENT EXPENSES IN DIFFERENT HEADS AND HENCE ON LACK OF ITA NO.2722/AHD/2016 M/S.SUMILON INDUSTRIES PVT. LTD. (AY 2012-13) 7 UNIFORMITY IN TAKING EXPENSES UNDER CERTAIN HEAD. THE RATIO MAY SLIGHTLY VARY. THE ASSESSEE FURNISHED THE BRAKE UP OF VARIOUS DIRECT EXPENSES AND SUBMITTED THAT SOME COMPANIES CERTAIN EXPENSES ARE OF SAME KIND AS THE ASSESSEE WHILE IN SOME COMPANIES THOSE EXPENSES ARE PART SOMEWHERE ELSE THOUGH IN TOTALITY OVERALL EXPENSES HAVE INCREASED IN ALL COMPANIES. THE SAID FACT IS EVIDENT BY THE FACT THAT INDIRECT EXPENSES OF THOSE COMPANIES IS ON VERY HIGH SIDE COMPARED WITH ASSESSEE. THE ASSESSEE HAD MORE SECURITY MANPOWER EMPLOYED IN CURRENT YEAR COMPARED TO EARLIER YEARS RESULTING IN SECURITY EXPENSES. THE COMPLETE DETAILS OF SECURITY EXPENSES WERE FURNISHED. ALL EXPENSES ARE GENUINE. ON THE OBSERVATION OF LD.AO ON HIGHER CLAIM OF OTHER EXPENSES THE ASSESSEE EXPLAINED THAT COMPARISON MADE BY THE LD.AO OF DIRECT EXPENSES OF ASSESSEE AS WELL AS OTHER COMPANIES IS NOT PROPER. SINCE THERE ARE MANY EXPENSES WHICH ARE CONSIDERED BY ASSESSEE WHILE THE SAME EXPENSES ARE NOT FORM PART OF DIRECT EXPENSES OF OTHER COMPANIES. THUS WHICH IS MAKING ADDITION LOOKING TO THE PERCENTAGE OF OTHER COMPANY WITHOUT CONSIDERING THE FACT AND FIGURES OF ASSESSEE IS NOT PROPER. THE ASSESSEE CLAIMED THAT ASSESSEE HAS EXPLAINED THE REASONS OF INCREASE IN OVERALL EXPENSES AS WELL AS PER UNIT EXPENSES. THE EXPLANATION FURNISHED BY THE ASSESSEE WAS OVER LOOKED BY THE AO. 8. THE LD. CIT(A) AFTER CONSIDERING THE SUBMISSION OF ASSESSEE DELETED BOTH THE ADDITIONS. WHILE DELETING THE ADDITIONS/DISALLOWANCES OF EMPLOYEE BENEFIT ITA NO.2722/AHD/2016 M/S.SUMILON INDUSTRIES PVT. LTD. (AY 2012-13) 8 EXPENSES THE LD.CIT(A) HELD THAT THE AO HAS NOT MADE ANY ENQUIRY REGARDING INCREASE IN THE EMPLOYEE BENEFIT EXPENSES WHICH MAINLY CONSIST OF SALARY AND WAGE PROVIDENT FUND CONTRIBUTION SECURITY GUARD EXPENSES AND DIRECTORS REMUNERATION. THE MAIN INCREASE UNDER THIS HEAD IS ON ACCOUNT OF SALARY OF SECURITY GUARD. IN CASE THE AO HAD DOUBTED ABOUT THE GENUINENESS OF EXPENSES THE CORRECT COURSE SHOULD HAVE BEEN TO EXAMINE THE VARIOUS EXPENSES UNDER THIS HEAD TO FIND OUT GENUINENESS OF EXPENSES CLAIMED. THE DISALLOWANCES ARE MADE ON GENERAL OBSERVATION REGARDING FALL IN GROSS PROFIT AND SUBSTANTIATED BY ANY OTHER FACT. THE EMPLOYEE BENEFIT EXPENSES LIKE DIRECTORS REMUNERATION STAFF WELFARE EXPENSES CANNOT BE DIRECTLY LINKED WITH THE TURNOVER OR WITH INCREASE OR DECREASE IN THE TURNOVER. AS THESE EXPENSES DO NOT INCREASE OR DECREASE WITH THE SAME PROPORTION. 9. ON DISALLOWANCES OF DIRECT EXPENSES THE LD. CIT(A) HELD THAT THE AO HAS NOT APPRECIATED THE FACT THAT MANUFACTURING EXPENSES HAVE BEEN REDUCED FROM RS. 29.10 CRORE TO RS. 26.97 CRORE DUE TO VARIOUS FACTORS. THE ASSESSEE FURNISHED THE DETAILS WHICH SHOWS THAT THERE HAS BEEN A DECREASE IN PACKAGING EXPENSES FROM RS. 2.11 CRORE TO RS. 1.82 CRORE BUT DUE TO FALL IN TURNOVER THE EXPENSES ARE SHOWING IN INCREASING PERCENTAGE TERMS. ON THE COST OF MACHINERY REPAIR THE EXPENSES REDUCED FROM RS. 3.78 CRORE TO RS. 3.40 CRORE. SIMILARLY IN CASE OF POWER AND FUEL EXPENSES HAS INCREASED DUE TO CHANGE OF THE RATE PER UNIT OF POWER BY POWER SUPPLY COMPANY. THE ITA NO.2722/AHD/2016 M/S.SUMILON INDUSTRIES PVT. LTD. (AY 2012-13) 9 LD.CIT(A) FURTHER HELD THAT INCREASE IN THE STORES AND SPARES EXPENSES WHICH CONSIST OF ITEM LIKE GRAPHITE FIBRE BELTS ETC. THE PRICE HAS INCREASED DUE TO SHARP DEVOLUTION OF RUPEE WITH US DOLLAR. THE AO CALCULATED THE EXPENSES IN COMPARISON TO PRODUCTION OF ONLY OF FOUR PRODUCTS AND NOT CONSIDERED THE OTHER PRODUCT. THE AO HAS NOT POINTED OUT ANY DEFECTS IN THE BOOKS OF ACCOUNTS AND DELETED THE DISALLOWANCE OF DIRECT EXPENSES AS WELL. AGGRIEVED BY DELETING BOTH THE DISALLOWANCES/ ADDITIONS THE REVENUE HAS FILED PRESENT APPEAL BEFORE THIS TRIBUNAL. 10. WE HAVE HEARD THE SUBMISSION OF LEARNED COMMISSIONER OF INCOME TAX- DEPARTMENTAL REPRESENTATIVE (LD. CIT-DR) FOR THE REVENUE AND LEARNED AUTHORISED REPRESENTATIVE (AR) OF THE ASSESSEE. WE HAVE ALSO GONE THROUGH THE ORDER OF LOWER AUTHORITIES. WE HAVE NOTED THAT THE REVENUE HAS RAISED AS MANY AS FOUR GROUNDS OF APPEAL. HOWEVER IN OUR CONSIDERED OPINION THE REVENUE HAS RAISED ONLY TWO SUBSTANTIAL GROUNDS OF APPEAL. THAT IS GROUND NO.1 DELETING THE DISALLOWANCE OF BENEFIT EXPENSES AND THE GROUND NO.2 DELETING THE DISALLOWANCE OF OTHER EXPENSES. 11. GROUND NO.1 RELATES TO DELETING THE DISALLOWANCES OF EMPLOYEE BENEFIT EXPENSES. THE LD CIT-DR FOR THE REVENUE SUPPORTED THE ORDER OF THE AO. THE LD CIT-DR FOR THE REVENUE FURTHER SUBMITS THAT DURING ASSESSMENT THE AO ON COMPARISON OF PRODUCTION AND EMPLOYEE EXPENSES FIND THAT THERE IS UNREASONABLE HIKE IN THE EMPLOYEE BENEFIT EXPENSES. IN REPLY TO THE SHOW ITA NO.2722/AHD/2016 M/S.SUMILON INDUSTRIES PVT. LTD. (AY 2012-13) 10 CAUSE THE ASSESSEE TRY TO MAKE JUSTIFICATION OF INCREASE AND CONTENDED THAT THERE IS GENERAL RISE IN THE SCALE OF WAGE AND SALARIES PAID TO WORKERS/EMPLOYEES ON ACCOUNT OF RISE IN OVERALL INFLATION. THE REPLY OF ASSESSEE WAS NOT ACCEPTABLE TO THE AO WHO HELD THAT INCREASE IN THE EXPENSES CANNOT BE SAID TO BE A GENERAL RISE DUE TO INFLATION. THERE MAY BE A SLIGHT FLUCTUATION BECAUSE OF SEMI VARIABLE NATURE BUT IT CANNOT GET FLUCTUATED BY 70%. THE RATIO OF EMPLOYEE EXPENSES IN PREVIOUS YEAR WAS 3.28% WHICH IS INCREASE TO 5.50%. THUS THE AO CONSIDERING THE EARLIER YEARS EMPLOYEE BENEFIT EXPENSES TREATED IT AS UNREASONABLE AND THEREBY APPLYING PREVIOUS YEAR EXPENSES RATIO WITH INFLATION OF 5%. THE AO MADE DISALLOWANCE AT A REASONABLE BASIS. THE LD CIT(A) DELETED THE DISALLOWANCE BY SIMPLY ACCEPTING THE SUBMISSIONS OF THE ASSESSEE. 12. ON THE CONTRARY THE LEARNED AR FOR THE ASSESSEE SUPPORTED THE ORDER OF THE LEARNED CIT(A). THE LD. AR FOR THE ASSESSEE SUBMITS THAT DURING THE PRVIOUS YEAR THE PROFIT OF THE ASSESSEE REDUCED DRASTICALLY MAINLY FOR TWO REASONS VIZ. FALL IN TURNOVER AND INCREASE IN COST OF EXPENSES INCURRED. THE ASSESSEE IS MAINLY ENGAGED IN THE MANUFACTURING OF PLAIN POLYESTER FILM METALIZED FILM METALIZED LACKENED FILM JARI KASAB AND GENERATION OF POWER IN WIND MILL. THE INCOME FROM GENERATION OF POWER DECREASE COMPARED TO EARLIER YEARS DUE TO THE FACT THAT SECOND HAND POLYESTER FILM PLANT AT GANDHIDHAM WAS NOT RUNNING PROPERLY AND HAD TO BE TEMPORARILY SHUT DOWN FROM TIME TO ITA NO.2722/AHD/2016 M/S.SUMILON INDUSTRIES PVT. LTD. (AY 2012-13) 11 TIME WHICH RESULTED IN FALL OF CONSUMPTION OF POWER UNIT AND HENCE THE CREDIT OF POWER UNITS GENERATED FROM WIND MILL COULD NOT BE FULLY UTILISED AGAINST THE POWER BILL OF GANDHIDHAM UNIT. THE LD AR FOR THE ASSESSEE SUBMITS THAT THE HONBLE SUPREME COURT BANNED THE SALE OF TOBACCO PRODUCT LIKE GUTKAS AND PAN MASALA IN PLASTIC POUCHES FROM MARCH 2021 WHICH RESULTED IN FALL IN DEMAND OF POLYESTER FILMS AND THE BAN OF END PRODUCT HAD ALREADY COMMENCED AND IMPLEMENTED IN SEVERAL STATES WHICH ALSO RESULTED INTO SIGNIFICANT IMPACT ON PRICE AND MARGIN ON MOST OF THE MANUFACTURER OF POLYESTER FILMS. LD AR FOR THE ASSESSEE SUBMITS THAT THERE IS INCREASE IN THE PURCHASE PRICES OF RAW MATERIAL. DURING ASSESSMENT THE ASSESSEE FURNISHED THE DETAILS OF INCREASE OF EMPLOYEE BENEFIT EXPENSES CONSISTING OF SALARY AND WAGES OF WORKERS CONTRIBUTION TO PROVIDENT FUND DIRECTORS REMUNERATION AND SECURITY GUARD EXPENSES STAFF WELFARE EXPENSES AND JUSTIFICATION THEREOF. THE LD AR FOR THE ASSESSEE SUBMITTED THAT THERE HAS BEEN A GENERAL RISE IN THE SCALE OF WAGES AND SALARIES PAID TO WORKERS. THE AO HAD NOT DOUBTED THE GENUINENESS OF THE EXPENSES UNDER THE HEAD OF EMPLOYEE EXPENSES. THE DISALLOWANCE WAS MADE BY GIVING GENERAL OBSERVATION REGARDING THE FALL OF GP AND NOT APPRECIATED OTHER FACTS. THE LD CIT(A) APPRECIATED THE FACTS AND DELETED THE DISALLOWANCES. 13. WE HAVE CONSIDERED THE SUBMISSIONS OF BOTH THE PARTIES AND HAVE GONE THROUGH THE ORDERS OF THE LOWER AUTHORITIES. THE AO MADE DISALLOWANCE OF ITA NO.2722/AHD/2016 M/S.SUMILON INDUSTRIES PVT. LTD. (AY 2012-13) 12 THE EMPLOYEE EXPENSES BY TAKING VIEW THAT THERE IS UNREASONABLE HIKE IN THE EMPLOYEE BENEFIT EXPENSES. THE INCREASE IN THE EXPENSES CANNOT BE SAID TO BE A GENERAL RISE DUE TO INFLATION. THERE IS ALWAYS A DIRECT RELATION OF EMPLOYEE EXPENSES AND TURNOVER / PRODUCTION IN CASE OF MANUFACTURING INDUSTRY THERE MAY BE A SLIGHT FLUCTUATION BECAUSE OF SEMI VARIABLE NATURE BUT IT CANNOT GET FLUCTUATED BY 70%. IT WAS ALSO HELD BY AO THAT THE RATIO OF EMPLOYEE EXPENSES IN PREVIOUS YEAR WAS 3.28% WHICH IS INCREASE TO 5.50%. THE AO CONSIDERING THE EARLIER YEARS EMPLOYEE BENEFIT EXPENSES TREATED IT THE RISE IN EXPENSES AS UNREASONABLE AND THEREBY APPLYING PREVIOUS YEARS EXPENSES RATIO WITH INFLATION OF 5% THE EXCESSIVE EMPLOYEE BENEFIT AMOUNTING TO RS.1.90 CRORE WAS DISALLOWED. AS RECORDED ABOVE BEFORE LD CIT(A) THE ASSESSEE FILED DETAILED WRITTEN SUBMISSIONS TO SUBSTANTIATE THE INCREASE IN SUCH EXPENSES AND FALL OF GP. THE LD CIT(A) AFTER CONSIDERING THE FACTS AND THE SUBMISSIONS OF THE ASSESSEE HELD THAT AO HAS NOT MADE ANY ENQUIRY REGARDING INCREASE IN THE EMPLOYEE BENEFIT EXPENSES WHICH MAINLY CONSIST OF SALARY AND WAGE PROVIDENT FUND CONTRIBUTION SECURITY GUARD EXPENSES AND DIRECTORS REMUNERATION. THE MAIN INCREASE UNDER THIS HEAD IS ON ACCOUNT OF SALARY OF SECURITY GUARD. IF THE AO HAD DOUBTED ABOUT THE GENUINENESS OF EXPENSES THE CORRECT COURSE SHOULD HAVE BEEN TO EXAMINE THE VARIOUS EXPENSES UNDER THIS HEAD TO FIND OUT GENUINENESS OF EXPENSES CLAIMED. THE DISALLOWANCES ARE MADE ON GENERAL OBSERVATION REGARDING FALL ITA NO.2722/AHD/2016 M/S.SUMILON INDUSTRIES PVT. LTD. (AY 2012-13) 13 IN GROSS PROFIT AND SUBSTANTIATED BY ANY OTHER FACT. THE EMPLOYEE BENEFIT EXPENSES LIKE DIRECTORS REMUNERATION STAFF WELFARE EXPENSES CANNOT BE DIRECTLY LINKED WITH THE TURNOVER OR WITH INCREASE OR DECREASE IN THE TURNOVER. WE FIND THAT THE LD CIT(A) ALSO EXAMINED CAUSE SUBSTANTIAL DECREASE IN THE TURNOVER IS DUE OF FALL OF PRODUCTION AND DECREASE IN THE INCOME FROM POWER GENERATION. FURTHER THERE WAS FALL OF PRODUCTION OF FILMS BADLA KASAB COUPLED WITH DECREASE IN SELLING PRICE. THE LD CIT(A) ALSO EXAMINED THE PRODUCTION AND SALES OF VARIOUS PRODUCTS IN PRECEDING ASSESSMENT YEAR. THE LD CIT(A) FINALLY HELD THAT THE ASSESSEE HAS PROVIDED ENOUGH EVIDENCE AND DETAILS TO JUSTIFY IN INCREASE IN THE EMPLOYEE BENEFITS EXPENSES AND THE REASONS FOR FALL IN GP AND DELETED THE ENTIRE DISALLOWANCE. BEFORE US THE LD CIT-DR COULD NOT CONTROVERT FINDING OF THE LD CIT(A). IN OUR VIEW THE LD CIT(A) GRANTED RELIEF ON VERIFICATION OF ALL FACTS AND THE EVIDENCES PLACED BEFORE HIM WHICH WE AFFIRM. NO CONTRARY FACTS OR LAW IS BROUGHT TO OUR NOTICE TO TAKE THE OTHER VIEW. IN THE RESULT GROUND NO. 1 OF THE APPEAL RAISED BY REVENUE IS DISMISSED. 14. GROUND NO. 2 RELATES TO DELETING THE DISALLOWANCES OF DIRECT EXPENSES. THE LEARNED CIT-DR FOR THE REVENUE SUPPORTED THE ORDER OF THE AO. THE LD CIT- DR FOR THE REVENUE FURTHER SUBMITS THAT DURING THE RELEVANT PERIOD UNDER CONSIDERATION THERE IS A REDUCTION IN OTHER DIRECT EXPENSES IN COMPARABLE HOWEVER THE ASSESSEE COMPANY HAS SHOWN SUBSTANTIAL INCREASE IN OTHER ITA NO.2722/AHD/2016 M/S.SUMILON INDUSTRIES PVT. LTD. (AY 2012-13) 14 DIRECT EXPENSES. THE DIRECT EXPENSES HAVE BEEN INCREASED FROM 20.70% OF THE TURNOVER IN PRECEDING YEAR TO 28.56% OF TURNOVER IN PRESENT YEAR. THE PACKAGING EXPENSES ARE DIRECTLY RELATED TO PRODUCTION AND SALE. THE SALES AS WELL AS PRODUCTION HAVE SUBSTANTIAL DECREASE BUT THE PACKAGING EXPENSES HAVE NOT BEEN REDUCED RATIONALLY THEREFORE THE AO MADE REASONABLE DISALLOWANCES. THE LD. CIT-DR PRAYED FOR RESTORING THE ORDER OF AO. 15. ON THE OTHER HAND THE LD AR FOR THE ASSESSEE SUPPORTED THE ORDER OF THE LD CIT(A). THE LD. AR FOR THE ASSESSEE FURTHER SUBMITS THAT MANUFACTURING EXPENSES WERE REDUCED SUBSTANTIALLY DURING THIS YEAR FROM RS. 29.10 CRORE TO RS. 26. 97 CRORES AS COMPARED TO EARLIER YEARS BUT DUE TO SUBSTANTIAL FALL IN TURNOVER IN THE RELEVANT PERIOD THE PERCENTAGE TERM OF SAID EXPENSES ARE SHOWING INCREASE TREND. THE AO MERELY CALCULATED THE EXPENSES IN COMPARISON TO PRODUCTION OF ONLY FOUR PRODUCTS AND NOT OTHER PRODUCT. THE AO ARRIVED AT THE CONCLUSION THAT THERE IS INCREASE IN PER UNIT EXPENSES UNDER THE HEAD PACKING EXPENSES POWER AND FUEL EXPENSES AND STORE AND SPARE EXPENSES. THE AO MADE GENERAL OBSERVATION WITHOUT POINTING ANY SPECIFIC DEFECT IN THE BOOKS OF ACCOUNTS OF THE ASSESSEE. THE LD CIT(A) APPRECIATED THE FACTS AND DELETED THE ENTIRE DISALLOWANCES. 16. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS OF THE PARTIES AND HAVE GONE THROUGH THE ORDERS OF THE LOWER AUTHORITIES. THE AO MADE DISALLOWANCES OF DIRECT EXPENSES OF RS. 1.32 CRORE BY TAKING VIEW THAT THE EXPENSES HAVE BEEN ITA NO.2722/AHD/2016 M/S.SUMILON INDUSTRIES PVT. LTD. (AY 2012-13) 15 INCREASED FROM 20.70% OF THE TURNOVER IN PRECEDING YEAR TO 28.56% OF TURNOVER IN PRESENT YEAR. THE AO FURTHER HELD THAT PACKAGING EXPENSES ARE DIRECTLY RELATED TO PRODUCTION AND SALE. SALES AS WELL AS PRODUCTION HAVE SUBSTANTIAL DECREASE. THE PACKAGING EXPENSES HAVE NOT BEEN REDUCED RATIONALLY FURTHER THERE IS DECREASE IN THE SALE OF RS.46.74 CRORE AND THE PACKAGING EXPENSES HAS ALSO BEEN DECREASED BY RS.29 02 299/-. AND THAT THERE IS AN INCREASE IN PACKAGING EXPANSES BY 30% COMPARATIVE TO PREVIOUS YEAR. THE AO DISALLOWED 5% DIRECT EXPENSES AND WORKED OUT THE DISALLOWANCES OF RS.1.32 CRORE. 17. THE LD CIT(A) DELETED THE DISALLOWANCES OF THE DIRECT EXPENSES BY HOLDING THAT AO HAS NOT APPRECIATED THE FACT THAT MANUFACTURING EXPENSES HAVE BEEN REDUCED FROM 29.10 CRORE TO 26.97 CRORE BECAUSE OF VARIOUS FACTORS. THE ASSESSEE HAD FURNISHED THE DETAILS SHOWING THAT THERE HAS BEEN A DECREASE IN PACKAGING EXPENSES FROM RS. 2.11 CRORE TO RS. 1.82 CRORE; HOWEVER DUE TO FALL IN TURNOVER THE EXPENSES ARE SHOWING IN INCREASING PERCENTAGE TERMS. THE LD CIT(A) FURTHER HELD THAT THE COST OF MACHINERY REPAIR THE EXPENSES ARE REDUCED FROM RS. 3.78 CRORE TO RS. 3.40 CRORE. AGAIN IN CASE OF POWER AND FUEL EXPENSES HAS BEEN INCREASED DUE TO CHANGE OF THE RATE PER UNIT OF POWER BY POWER SUPPLY COMPANY. THE LD.CIT(A) FURTHER HELD THAT INCREASE IN THE STORES AND SPARES EXPENSES WHICH CONSIST OF ITEM LIKE GRAPHITE FIBRE BELTS ETC. THE PRICE HAS INCREASED DUE TO SHARP DEVOLUTION OF RUPEE WITH US ITA NO.2722/AHD/2016 M/S.SUMILON INDUSTRIES PVT. LTD. (AY 2012-13) 16 DOLLAR. IT WAS HELD THAT THE AO CALCULATED THE EXPENSES IN COMPARISON TO PRODUCTION OF ONLY OF FOUR PRODUCTS AND NOT CONSIDERED THE OTHER PRODUCT. THE LD CIT (A) FURTHER HELD THAT THE AO HAS NOT POINTED OUT ANY DEFECTS IN THE BOOKS OF ACCOUNTS AND DELETED THE DISALLOWANCE OF ENTIRE DIRECT EXPENSES. 18. BEFORE US THE LD CIT-DR COULD NOT CONTROVERT FINDING OF THE LD CIT(A). IN OUR VIEW THE LD CIT(A) GRANTED RELIEF ON VERIFICATION OF ALL FACTS AND THE EVIDENCES PLACED BEFORE HIM WHICH WE AFFIRM. NO CONTRARY FACTS OR LAW IS BROUGHT TO OUR NOTICE TO TAKE THE OTHER VIEW. 19. IN THE RESULT THE GROUND NO. 2 OF THE APPEAL IS ALSO DISMISSED. 20. IN THE RESULT THE APPEAL OF THE REVENUE IS DISMISSED. ORDER ANNOUNCED ON 31 AUGUST 2021 BY PLACING RESULT ON THE NOTICE BOARD. SD/- SD/- ( DR ARJUN LAL SAINI) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER SURAT DATED: 31/08/2021 / SGR COPY TO: 1. APPELLANT 2. RESPONDENT 3. CIT(A) 4. CIT 5. DR 6. GUARD FILE TRUE COPY/ BY ORDER / / TRUE COPY / / ASSISTANT REGISTRAR ITAT SURAT