Valvoline Cummins Ltd, New Delhi v. ACIT, New Delhi

ITA 1026/DEL/2009 | 2003-2004
Pronouncement Date: 23-07-2010 | Result: Allowed

Appeal Details

RSA Number 102620114 RSA 2009
Assessee PAN AAACW0287A
Bench Delhi
Appeal Number ITA 1026/DEL/2009
Duration Of Justice 1 year(s) 4 month(s) 4 day(s)
Appellant Valvoline Cummins Ltd, New Delhi
Respondent ACIT, New Delhi
Appeal Type Income Tax Appeal
Pronouncement Date 23-07-2010
Appeal Filed By Assessee
Order Result Allowed
Bench Allotted I
Tribunal Order Date 23-07-2010
Date Of Final Hearing 15-07-2010
Next Hearing Date 15-07-2010
Assessment Year 2003-2004
Appeal Filed On 19-03-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH `I : NEW DELHI BEFORE SHRI G.E. VEERABHADRAPPA VICE PRESIDENT AND SHRI C.L. SETHI JUDICIAL MEMBER. I.T.A.NOS.1026 & 1059/DEL/2009 ASSESSMENT YEARS : 2003-04 & 2004-05 VALVOLINE CUMMINS LIMITED ASSTT. COMMISSIONER OF INCOME-TAX 52 OKHLA INDUSTRIAL ESTATE VS. CIRCLE 17(1) NEW DELHI. PHASE-III NEW DELHI. PAN: AAACW0287A I.T.A.NOS.1159 & 1451/DEL/2009 ASSESSMENT YEARS : 2003-04 & 2004-05 ASSTT. COMMISSIONER OF INCOME-TAX M/S. VALVOLI NE CUMMINS LTD. CIRCLE-17(1) NEW DELHI. VS. 52 OKHLA INDUSTRIAL ESTATE PHASE-III NEW DELHI. (APPELLANTS) (RESPONDENTS) APPELLANT BY : S/SH. AJAY VOHRA & GAURAV JAIN & MS. NEHA KHEMKA ADVOCATE. RESPONDENT BY : MS. ANUSHA KHURANA DR. O R D E R PER C.L. SETHI JUDICIAL MEMBER. THESE ARE CROSS APPEALS FILED BY THE ASSESSEE AS W ELL BY THE REVENUE AGAINST TWO SEPARATE ORDERS DATED 05.01.2009 AND 16 .01.2009 OF THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS) PERTAINING TO THE ASSESSMENT YEARS 2003-04 AND 2004-05 RESPECTIVELY. 2. WE SHALL FIRST TAKE UP THE APPEALS FILED BY THE REVENUE. 2 ITA NOS.1159 & 1451/DEL/2009 GROUND NO.1 IN ASSESSMENT YEAR 2003-04 RAISED BY TH E REVENUE IS DIRECTED AGAINST THE CIT(A)S ORDER IN DELETING THE DISALLOWANCE OF RS.5 04 245/- OUT OF THE SERVICES CHARGES PAID TO C UMMINS DIESEL SALES & SERVICES INDIA LTD. (CDSS). IDENTICAL ISSUE HAS AL SO BEEN RAISED IN ASSESSMENT YEAR 2004-05 VIDE GROUND NO.1 WHERE THE REVENUE HAS DISPUTED THE CIT(A)S ORDER IN DELETING THE DISALLOWANCE OF RS.14 05 175/- OUT OF THE SERVICE CHARGES PAID TO CDSS. 3. IN THE ASSESSMENT YEAR 2003-04 DURING THE COURS E OF ASSESSMENT PROCEEDINGS IT WAS NOTICED BY THE ASSESSING OFFICE R THAT THE ASSESSEE HAS PAID SERVICE CHARGES OF RS.90 67 708/- TO CDSS IN RESPECT OF WHICH THE ASSESSEE SUBMITTED A COPY OF SERVICE AGREEMENT TO T HE AO. FROM THE SERVICE AGREEMENT IT WAS NOTED BY THE AO THAT IN CONSIDERAT ION OF SERVICES RENDERED CDSS WAS ENTITLED TO RECEIVE SERVICE CHARGES @ 0.7% OF ITS NET SALES. THE AO WAS OF THE VIEW THAT NET SALE WOULD MEAN GROSS S ALES AS REDUCED BY SALES RETURNED DURING THE RELEVANT PERIOD. THE ASSESSEE WAS THEN ASKED TO FURNISH WORKING OF AMOUNT OF RS.90 67 708/- PAID TO CDSS W HICH WORKING AS SUBMITTED BY THE ASSESSEE IS AS UNDER:- GROSS SALES 1557840256 LESS: CAR CARE 5599689 BASE OIL 2695038 EMPTY BARRELS 799392 3 OTHER TRADED ITEMS 2064424 EXPORT SALES 11377678 FOC PROVISION (NET OF LAST YEAR) (1320221) 21216001 SALE OF LUBRICANTS 1536624256 LESS: DISCOUNT 241237387 NET SALES 1295386868 SERVICE CHARGES @ 0.7% ON NET SALES 9067708 FROM THE AFORESAID WORKING IT WAS NOTICED BY THE AO THAT THE ASSESSEE HAS TAKEN THE AMOUNT OF DISCOUNT AT RS.24 12 37 387/- THOUGH IN THE COMPUTATION OF THE AMOUNT OF ROYALTY PAYABLE TO VAL VOLINE INC. THE VALUE OF DISCOUNT WAS TAKEN AT RS.31 32 72 366/-. THE AO T HEREFORE TAKEN THE AMOUNT OF DISCOUNT AT RS.31 32 72 366/- AND WORKED OUT THE NET SALES ON WHICH SERVICE CHARGES @ 0.7% WAS WORKED OUT AS UNDE R:- SALE OF LUBRICANTS 1536624256 LESS: DISCOUNT 313272366 NET SALES 1223351890 SERVICE CHARGES @ 0.7% ON NET SALES 8563463 IN THE LIGHT OF THE AFORESAID WORKING MADE BY THE A O THE AO ALLOWED THE SERVICE CHARGES TO THE EXTENT OF RS.85 63 463/- AND DISALLOWED THE BALANCE AMOUNT OF RS.5 04 245/-. 3.1 SIMILARLY IN THE ASSESSMENT YEAR 2004-05 THE A O WORKED OUT THE SERVICE CHARGES AT RS.1 14 13 616/- AS AGAINST TOTA L SERVICE CHARGES OF RS.1 28 18 791/- CLAIMED BY THE ASSESSEE. THE DIFF ERENCE IN THE SERVICE CHARGES WAS DUE TO THE REASON THAT THE AMOUNT OF DI SCOUNT WAS TAKEN BY THE 4 AO AT RS.41 19 88 477/- AS AGAINST RS.31 25 78 229/ - SHOWN BY THE ASSESSEE. THUS THE DIFFERENCE OF RS.14 05 175/- WA S DISALLOWED BY THE AO OUT OF THE TOTAL PAYMENT OF SERVICE CHARGES. 4. ON APPEAL THE LEARNED CIT(A) IN THE ASSESSMENT YEAR 2003-04 DELETED THE DISALLOWANCE BY OBSERVING AND HOLDING A S UNDER:- 20. THE AR EXPLAINED THAT FOR THE PURPOSE OF QUANT IFYING SERVICE CHARGES NET SALES WAS TAKEN AND FOR THE PU RPOSE OF QUANTIFYING ROYALTY NET SALES WAS THAT OF NET EX F ACTORY SALES PRICE. THESE METHODS WERE FOLLOWED CONSISTENTLY AN D THERE WAS NO DISPUTE ON THE SAME BY RECIPIENT OF COMMISSION O R ROYALTY. THE AR STATED THAT THERE WERE DIFFERENT AGREEMENTS ONE WITH CDSS AND OTHER WITH M/S. VALVOLINE INC. AND AS PER THESE AGREEMENTS QUANTIFYING AMOUNTS WERE WORKED OUT. TH E AO HAS NOT VERIFIED THESE FACTS AND ALSO NOT CONTROVERTED. THE ASSESSEE GAVE THE DETAILS OF WORKING AND REASONS FOR DOING S O. THE AO HAS NOT GIVEN REASONS FOR NOT ACCEPTING THE WORKING GIVEN BY THE ASSESSEE FOR QUANTIFICATION OF COMMISSION/ROYAL TY PAID. AFTER GOING THROUGH THE SUBMISSIONS OF THE AR WORK ING FURNISHED BY HIM THE DISALLOWANCE IS NOT CALLED FO R. ACCORDINGLY GROUND NO.3 IS ALLOWED. (RELIEF: RS.5 04 245/-). 4.1 THE CIT(A)S ORDER IN ASSESSMENT YEAR 2003-04 H AS BEEN FOLLOWED IN ASSESSMENT YEAR 2004-05 AND THE ADDITION OF RS.14 0 5 175/- MADE BY THE ASSESSING OFFICER WAS THUS DELETED. 5. HENCE IN BOTH THE YEARS THE REVENUE HAS CHALLE NGED THE CIT(A)S ORDER IN DELETING THE AFORESAID ADDITION OF DISALLO WANCE OF SERVICE CHARGES. 6. WE HAVE HEARD BOTH THE PARTIES AND HAVE CAREFULL Y PERUSED THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE PERUSED THE VARI OUS PAPERS PLACED IN THE PAPER BOOK FILED BY THE ASSESSEE. THE AO HAS NOT D ISPUTED THE FACT THAT THE 5 PAYMENT OF SERVICE CHARGES BY THE ASSESSEE TO CDSS WAS AS PER THE SERVICE AGREEMENT. THE AO HAS ALSO NOT DISPUTED THE SERVIC ES RENDERED BY CDSS TO THE ASSESSEE. THE DISALLOWANCE HAS BEEN MADE BY TH E AO ONLY BY REDUCING THE SALES FIGURE BY TAKING THE AMOUNT OF DISCOUNT A T THE AMOUNT MORE THAN THE AMOUNT SHOWN BY THE ASSESSEE BECAUSE OF THE FA CT THAT ACCORDING TO THE AO THE AMOUNT OF DISCOUNT SHOWN BY THE ASSESSEE WA S MORE WHILE COMPUTING THE AMOUNT OF ROYALTY PAYABLE TO M/S. VAL VOLINE INC. THE AO HAS NOT GONE INTO TO VERIFY THE REASON AS TO WHY TH E DIFFERENCE IN THE AMOUNT OF DISCOUNT HAD OCCURRED. IT HAS BEEN EXPLAINED BY THE ASSESSEE THAT FOR THE PURPOSE OF QUANTIFYING SERVICE CHARGES NET SALES W AS TAKEN WHILE FOR THE PURPOSE OF QUANTIFYING ROYALTY NET SALES WAS THAT OF NET EX FACTORY SALES PRICE. THIS DISTINCTION WAS NOT NOTICED BY THE AO. THIS METHOD HAS BEEN CONSISTENTLY FOLLOWED BY THE ASSESSEE. MOREOVER IN THE AGREEMENT WITH CDSS THE AMOUNT OF NET SALES WAS TO BE TAKEN AS BAS IS FOR THE PURPOSE OF QUANTIFYING SERVICE CHARGES WHILE FOR THE PURPOSE O F COMPUTING ROYALTY PAYABLE TO ANOTHER CONCERN M/S. VALVOLINE INC. THE NET SALES WERE TO BE TAKEN EQUAL TO THE NET EX FACTORY SALES PRICE. IN THE LIGHT OF THIS CLARIFICATION WHICH HAS BEEN RIGHTLY ACCEPTED BY THE LEARNED CIT( A) IN ABSENCE OF ANY EVIDENCE OR MATERIAL CONTRARY TO THE FACTS SO POINT ED OUT ABOVE WE ARE IN FULL AGREEMENT WITH THE LEARNED CIT(A) IN DELETING THE D ISALLOWANCE OF SERVICE 6 CHARGES PAID BY THE ASSESSEE TO CDSS IN BOTH THE AS SESSMENT YEARS UNDER CONSIDERATION. THE ORDER OF THE CIT(A) IS THUS UPH ELD ON THIS COUNT AND THE GROUND NO.1 IN BOTH THE ASSESSMENT YEARS RAISED BY THE REVENUE IS REJECTED. 7. NEXT GROUND IN ASSESSMENT YEAR 2003-04 IS AGAINS T THE CIT(A)S ORDER IN DELETING THE DISALLOWANCE OF RS.17 80 312/- OUT OF TRAVELLING AND CONVEYANCE EXPENSES. DURING THE RELEVANT PERIOD TH E ASSESSEE CLAIMED TO HAVE INCURRED TRAVELLING AND CONVEYANCE EXPENSES AM OUNTING TO RS.1 92 80 312/-. THE ASSESSEE WAS ASKED BY THE AO TO FURNISH DETAILS THEREOF ALONG WITH SUPPORTING VOUCHERS/BILLS. IN RE PLY THERETO THE ASSESSEE HAD PRODUCED ONLY THOSE BILLS IN RESPECT OF FOREIGN TRAVELING WHICH WERE IN EXCESS OF RS.1 00 000/-. AS REGARDS DOMESTIC TRAVE LLING IT WAS SUBMITTED BY THE ASSESSEE THAT EXPENSES ON DOMESTIC TRAVELLING W ERE INCURRED DURING THE COURSE OF CARRYING OUT THE BUSINESS ACTIVITIES AND FOR THE PURPOSE OF BUSINESS SUCH AS SALES PROMOTION ACTIVITIES CONFERENCES AND TECHNICAL SEMINARS. WITH REGARD TO FOREIGN TRAVELLING EXPENSES IT WAS SUBMI TTED THAT THESE EXPENSES WERE INCURRED FOR BUSINESS MEETINGS SALES PROMOTIO N ACTIVITIES CONFERENCES AND TECHNICAL SEMINARS IN VARIOUS COUNTRIES. IT WA S NOTICED BY THE AO THAT THE TRAVELLING EXPENSES INCURRED DURING THE YEAR AS COMPARED TO THE IMMEDIATE PRECEDING YEAR WERE EXCESSIVE. THE AO N OTICED THAT THE ASSESSEES TURNOVER HAS INCREASED BY ALMOST 40% IN THE CURRENT YEAR AS 7 COMPARED TO THE IMMEDIATE PRECEDING YEAR. THE AO F URTHER FOUND THAT THE TRAVELLING AND CONVEYANCE EXPENSES IN THE IMMEDIATE PRECEDING YEAR WERE CLAIMED AT RS.1 25 80 104/-. THE AO HAS TAKEN A VI EW THAT INCREASE IN TRAVELLING AND CONVEYANCE EXPENSES TO THE EXTENT OF 40% OF THE TOTAL EXPENSES INCURRED IN EARLIER YEAR WOULD ONLY BE JUS TIFIED AS THE ASSESSEES TURNOVER HAS ONLY INCREASED BY 40%. HE THEREFORE ALLOWED THE TRAVELLING EXPENSES ONLY TO THE EXTENT OF RS.1 75 00 000/- AS AGAINST RS.1 92 80 312/- CLAIMED BY THE ASSESSEE AND DISALLOWED THE BALANCE SUM OF RS.17 80 312/-. 8. ON AN APPEAL THE LEARNED CIT(A) DELETED THE ADD ITION AFTER OBSERVING THAT THE WORKING MADE BY THE AO THOUGH LOOKS ATTRAC TIVE BUT IS WITHOUT ANY LEGAL BASIS AND SUCH AN APPROACH OF THE AO CANNOT BE APPROVED. THE CIT(A) FURTHER OBSERVED THAT NO DISCREPANCIES OR MI STAKES WERE POINTED OUT IN THE DETAILS FURNISHED BY THE ASSESSEE. THE CIT( A)S ORDER IN THIS REGARDS READS AS UNDER:- 24. THE INCREASE IN SALES OVER LAST YEAR WAS 40%. THE AO WORKED OUT THE TRAVELING & CONVEYANCE EXPENDITURE I N THE SAME PROPORTION AND FOUND THAT EXCESS AMOUNT WORKS OUT T O RS.17 80 312/- AS DETAILED BELOW WHICH WAS DISALLOW ED. EXPENDITURE IN A.Y. 2002-03 - 1 25 80 104 40% INCREASE - 56 00 000 PROBABLE EXPENDITURE 1 75 80 104 ROUNDED OFF 1 75 00 000/- INCURRED EXPENDITURE 1 92 80 312/- EXCESS EXPENDITURE DISALLOWED 17 80 312/- 8 25. THE WORKING LOOKS ATTRACTIVE WITHOUT ANY LEGAL BASIS. SUCH APPROACH CANNOT BE APPROVED. NO DISCREPANCY/M ISTAKES WERE POINTED OUT IN THE DETAILS FURNISHED. THE DIS ALLOWANCE IS TOTALLY INJUSTIFIED. I AM IN AGREEMENT WITH THE LE GAL POSITION CITED BY THE AR TO THE FACTS OF THE CASE. ACCORDIN GLY GROUND NO.4 IS ALLOWED. RELIEF: RS.17 80 312/- 9. WE HAVE HEARD BOTH THE PARTIES AND HAVE CAREFULL Y GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. IT IS NOT IN DISP UTE THAT THE TRAVELLING AND CONVEYANCE EXPENDITURE IN THE IMMEDIATE PRECEDING Y EAR CLAIMED AT RS.1 25 80 104/- WAS FULLY ALLOWED. IT IS ALSO SEE N THAT THE AO HAS ALLOWED THE TRAVELLING AND CONVEYANCE EXPENSES TO THE EXTEN T OF RS.1 75 00 000/- OUT OF TOTAL AMOUNT OF RS.1 92 80 312/-. THE AO HAS RE DUCED THE CLAIM OF THE ASSESSEE WITH REFERENCE TO THE TURNOVER SHOWN BY TH E ASSESSEE IN THE CURRENT YEAR AS COMPARED TO IMMEDIATE PRECEDING YEAR WHICH IN OUR CONSIDERED OPINION CANNOT BE A LEGAL BASIS TO DISALLOW THE EX PENSES. FROM THE ASSESSMENT YEAR IT IS CLEAR THAT THE ASSESSEE HAD F ILED THE DETAILS AS REQUIRED BY THE AO. THE ASSESSEE HAD PRODUCED THE BOOKS OF ACCOUNT ALSO BEFORE THE AO AND IN THE BOOKS OF ACCOUNT NO DEFECT HAS BEEN P OINTED OUT BY THE AO. IT IS ALSO SEEN THAT THE AO HAS FAILED TO POINT OUT ANY ITEM OF TRAVELLING AND CONVEYANCE EXPENSES WHICH CAN BE SAID TO BE OF INA DMISSIBLE IN NATURE. THE AO HAS MERELY DISALLOWED THE ASSESSEES CLAIM O N AD HOC BASIS. IN THIS VIEW OF THE MATTER THE DISALLOWANCE MADE BY THE AO HAS BEEN RIGHTLY 9 DELETED BY THE LEARNED CIT(A). WE ACCORDINGLY UP HELD THE CIT(A)S ORDER AND REJECT THIS GROUND RAISED BY THE REVENUE. 10. IN THE ASSESSMENT YEAR 2004-05 THE NEXT GROUND RAISED BY THE REVENUE IS AGAINST THE CIT(A)S ORDER IN DELETING T HE DISALLOWANCE OF RS.4 50 000/- CONSISTING OF THE FOLLOWING ITEMS:- (I) RS.1 50 000/- OUT OF STAFF WELFARE; (II) RS.1 00 000/- OUT OF MISCELLANEOUS EXPENSES; & (III) RS.2 00 000/- OUT OF ADVERTISEMENT AND PUBLICITY EX PENSES. 11. OUT OF THE STAFF WELFARE EXPENSES OF RS.37 98 4 39/- MISCELLANEOUS EXPENSES OF RS.34 44 310/ AND ADVERTISEMENT & PUBLI CITY AND SALES PROMOTION EXPENSES OF RS.7 71 22 088/- A SUM OF RS .1 50 000/- RS.1 00 000/- AND RS.2 00 000/- HAS BEEN DISALLOWED BY THE AO BY OBSERVING THAT THE ASSESSEE HAS NOT FURNISHED COMPL ETE DETAILS TO SHOW THAT THESE EXPENSES WERE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. 12. ON AN APPEAL THE CIT(A) DELETED THE ADDITION B Y OBSERVING AS UNDER:- 7.5 THE APPELLANT HAD INCURRED THE ABOVE MENTIONED EXPENDITURE FOR THE PURPOSE OF ITS BUSINESS AND THE SAME IS EVIDENT FROM A PERUSAL OF THE LEDGERS THAT WERE SUB MITTED IN CASE OF STAFF WELFARE EXPENDITURE AND ADVERTISEMENT PUBLICITY AND SALES PROMOTION EXPENDITURE. 7.6 IT IS RESPECTFULLY SUBMITTED THAT THESE AD-HOC DISALLOWANCES BE DELETED. RELIANCE IN THIS REGARD IS PLACED ON THE JUDICIAL PRECEDENTS REFERRED IN GROUND NO 4 ABO VE WHICH 10 HAVE HELD THAT AD-HOC DISALLOWANCE SHOULD BE DELETE D. THE SAME ARE MENTIONED BELOW FOR EASE OF REFERENCE: GOOD YEAR INDIA LTD. V ITO 73 ITD 189 (DEL) EXPRESS MOVERS (P) LTD. V DCIT 61 ITD 528 (DEL) RAMAN AND RAMAN V CIT 46 ITR 400 (MAD) SANJEEVI AND CO. VS. CIT 62 ITR 156 (MAD) AMARJOTHI PICTURES VS. CIT 69 ITR 755 (MAD) 33. SINCE THE AO HAS NOT POINTED OUT ANY MISTAKE/DISCREPANCIES IN THE DETAILS FURNISHED AND IN ABSENCE OF DETAILED REASONING FOR THE SAID DISALLOWANCE THE A CTION OF AO CANNOT BE APPROVED. (RELIEF: RS.4 50 000/-) 13. WE HAVE HEARD BOTH THE PARTIES AND THE ORDERS O F THE AUTHORITIES BELOW HAVE BEEN PERUSED. IN THIS CASE THE AO HAS HIMSELF ALLOWED MAJOR PORTION OF THE AFORESAID EXPENSES BEING INCURRED FOR THE PURPO SE OF BUSINESS. THE ASSESSING OFFICER HAS ESTIMATED THE SUM OF RS.1 50 000/- RS.1 00 000/- AND RS.2 00 000/- OUT OF THE AFORESAID THREE NATURES OF EXPENSES BEING NOT INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS BUT HE HAS FAILED TO POINT OUT ANY ITEM OF THESE EXPENSES WHICH COUL D BE SAID TO HAVE BEEN INCURRED NOT FOR THE PURPOSE OF BUSINESS. THE AO H AS DISALLOWED EXPENSES MERELY ON HIS ASSUMPTION AND SURMISES WHICH IN OUR CONSIDERED VIEW IS NOT TENABLE. THE LEARNED CIT(A) HAS RIGHTLY CONSIDERED THE ISSUE AND DELETED THESE ADDITIONS. ACCORDINGLY THIS GROUND RAISED B Y THE REVENUE IS ALSO REJECTED. 11 ITA NOS.1026 & 1059/DEL/2009 14. NOW WE SHALL COME TO THE APPEALS FILED BY THE A SSESSEE. ONE COMMON GROUND RAISED IN BOTH THE ASSESSMENT YEARS IS AGAIN ST THE CIT(A)S ORDER IN CONFIRMING THE DISALLOWANCE OF THE SERVICE CHARGES PAID TO M/S. CUMMINS AUTO SERVICES LTD. (CASL) AMOUNTING TO RS.52 00 000 /-. 15. IN THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS NOTICED BY THE AO THAT THE ASSESSEE HAS CLAIMED DEDUCTION OF PAYMENT OF RS .52 00 000/- ON ACCOUNT OF SERVICE CHARGES PAID TO CUMMINS AUTO SERVICES LT D. THE TOTAL SERVICE CHARGES PAID TO DIFFERENT PARTIES WAS AMOUNTING TO RS.1 82 23 148/- AS DETAILED BELOW:- NAME OF THE PARTY AMOUNT (RS.) C & F CUMMINS AUTO SER LTD. (CASL) 5200000 ELGI EQUIPMENTS LTD. (ROYALTY) 3955440 CUMMINS DIESEL SALES & SERVICES (CDSS) 9067708 TOTAL 18223148 IN SUPPORT OF THE PAYMENT OF SERVICE CHARGES TO CAS L AS WELL TO CDSS THE ASSESSEE SUBMITTED THAT BOTH THESE CONCERNS WERE HA VING A LARGE INFRASTRUCTURE FACILITIES AND ALSO EXCELLENT DEALER S NET WORK AND WITH A VIEW TO TAKE BENEFIT AND ADVANTAGE OF THEIR LARGE INFRAS TRUCTURE AND DEALERS NETWORK TO FACILITATE THE ASSESSEES BUSINESS ACTIV ITIES THE ASSESSEE HAD ENTERED INTO AN AGREEMENT WITH THEM AND COPIES OF T HESE AGREEMENTS WERE FURNISHED TO THE AO. THE ASSESSING OFFICER THEN SP ECIFICALLY ASKED VIDE 12 LETTER DATED 10.01.2006 TO GIVE THE NAMES AND ADDRE SSES OF THE DEALERS WHO WERE INTRODUCED BY CASL AND THE TOTAL SALES MADE BY THE ASSESSEE BY USING THE DEALERS NETWORK OF CASL. THE ASSESSEE VIDE LET TER DATED 23.01.2006 SUBMITTED THAT ON PERUSAL OF THE VARIOUS ANNEXURES ATTACHED TO THE LETTER IT WAS EVIDENT THAT CASL AND CDSS HAD A WIDE NETWORK A CROSS THE COUNTRY WHICH HAD ASSISTED THE ASSESSEE IN PROMOTING ITS MA RKETING ACTIVITIES. THE AO AGAIN ASKED THE ASSESSEE TO GIVE DETAILS OF THE SALES MADE THROUGH DEALERS APPOINTED BY CASL. IN REPLY THERETO THE A SSESSEE SUBMITTED THAT THE ASSESSEE MADE THE PAYMENT TO CASL UNDER CONTRACTUAL OBLIGATION FOR AVAILING THEIR FACILITIES AND IT WAS VERY DIFFICUL T TO CALCULATE THE AMOUNT OF TOTAL SALES MADE BY EACH DEALER APPOINTED BY CASL O R THE AMOUNT OF SALES MADE BY USING THE DEALERS NETWORK OF CASL AS NO SUC H DEALER-WISE REPORT WAS EVER PREPARED OR MAINTAINED BY THE ASSESSEE. T HE ASSESSING OFFICER THEN EXAMINED THE COPY OF AGREEMENT DATED 01.01.100 1 ENTERED INTO BETWEEN THE ASSESSEE AND CASL AND STATED HIS FINDINGS IN TH AT REGARD AS UNDER:- FROM THE ABOVE IT IS CLEAR THAT THE ASSESSEE WILL PAY SERVICE CHARGES/SALES COMMISSION (THE AGREEMENT IS TERMED AS SALES COMMISSION AGREEMENT) AS PER THE AGREED TERMS OF THE AGREEMENT I.E. IF QUANTUM OF SALES MADE USING DEALE RS NETWORK OF CASL OR THROUGH DEALERS APPOINTED BY CASL EXCEED S A PARTICULAR/SPECIFIED LIMIT THEN OVER AND ABOVE THE FIXED CHARGES OF RS.13 00 000/- A FURTHER SUM WILL ALSO BE PAID T O CASL. THUS IN ORDER TO ENFORCE THE TERMS AND CONDITIONS OF THE ALLEGED AGREEMENT IN REAL SENSE THE ASSESSEE HAS TO MAINTAI N THE RECORDS OF THE ALES MADE THROUGH CASL. BUT AS PER THE SUBM ISSIONS OF 13 THE ASSESSEE AS DISCUSSED IN THE ABOVE PARAGRAPHS OF THIS ORDER IT HAS NOT MAINTAINED ANY RECORD OF THE SALES MADE THROUGH THE DEALERS OF CASL. UNDER THESE CIRCUMSTANCES IT APPE ARS THAT THIS AGREEMENT IS NOTHING BUT AN ARRANGEMENT TO PAS S ON THE INCOME OF THE ASSESSEE TO ANOTHER COMPANY UNDER THE CONTROL OF THE SAME MANAGEMENT THEREBY REDUCING ITS TAX LIABIL ITY. THIS AGREEMENT IS USED AS A DEVICE TO GIVE COLOUR OF GEN UINENESS TO THE INCOME SO DIVERTED OR PASSED TO ANOTHER COMPANY . UNDER THESE CIRCUMSTANCES THE ALLEGED AGREEMENT FOR PAYME NT OF SERVICE CHARGES TO CASL HAS NO SANCTITY AS ITS TERM S AND CONDITIONS HAVE NOT BEEN DULY COMPLIED WITH. IN VI EW OF THE ABOVE THE UNDERSIGNED IS FORCED TO TREAT THE ALLEGE D AGREEMENT AS SHAM WHICH HAS BEEN JUST USED TO GIVE COLOUR OF GENUINENESS TO THE PAYMENT OF SERVICE CHARGES. KEEPING IN VIEW ALL THE ABOVE THE TRANSACTION OF PAYMENT OF SALE COMMISSIO N/SERVICE CHARGES OF RS.52 00 000/- TO CASL IS TREATED AS BOG US AND ADDED BACK TO THE INCOME OF THE ASSESSEE COMPANY. THE UNDERSIGNED IS ALSO SATISFIED THAT TO THE EXTENT OF RS.52 00 000/- THE ASSESSEE HAS CONCEALED/FURNISHED INACCURATE PAR TICULARS IN RESPECT OF ITS INCOME AND FOR THAT PENALTY PROCEEDI NGS U/S 27(1)(C) HAVE BEEN INITIATED SEPARATELY. (ADDI TION OF RS.52 00 000/-) THE AO THUS DISALLOW PAYMENT OF SERVICE CHARGES OF RS.52 00 000/- TO CASL AGAINST WHICH THE ASSESSEE PREFERRED AN APPEA L BEFORE THE LEARNED CIT(A). 16. BEFORE THE CIT(A) THE ASSESSEE SUBMITTED THAT T HE ASSESSEE MADE THE PAYMENT OF SERVICE CHARGES TO CASL TO TAKE BENEFIT OF THE ESTABLISHED DEALERS NETWORK OF CASL AND AS A RESULT OF THE SERV ICES BEING RENDERED BY DEALERS THE ASSESSEES SALES REVENUE WERE INCREASE D BY A REMARKABLE 40.68% WHICH GOES TO PROVE THAT THE PAYMENT WAS MADE WHOLL Y AND EXCLUSIVELY ON THE PRINCIPLE OF COMMERCIAL EXPEDIENCY. IT WAS FUR THER SUBMITTED THAT THERE 14 WAS NO MATERIAL BROUGHT BY THE AO TO ESTABLISH THAT THE PAYMENT MADE TO CASL WAS BOGUS AND NON-GENUINE AND THE AGREEMENT WA S ENTERED INTO WITH A VIEW TO REDUCE THE TAX BURDEN OF THE ASSESSEE. V ARIOUS DECISIONS WERE ALSO CITED BY THE ASSESSEE IN SUPPORT OF THE CLAIM. 17. AFTER GOING THROUGH THE ASSESSMENT ORDER AND TH E WRITTEN SUBMISSIONS OF THE ASSESSEE THE LEARNED CIT(A) CONFIRMED THE A DDITION MADE BY THE AO. THE LEARNED CIT(A) OBSERVED THAT EXCEPT AGREEMENT N O OTHER EVIDENCE WAS PRODUCED BY THE ASSESSEE. THE LEARNED CIT(A) FURTH ER OBSERVED THAT IN THE LIGHT OF THE PROVISIONS CONTAINED IN SEC. 37(1) OF THE ACT THE ASSESSEE HAD AN ONUS TO PROVE THAT A PARTICULAR EXPENDITURE WAS LAI D OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. THE CIT(A) FURTHER OBSERVED THAT MERE FILING CERTAIN DETAILS AND MAKING PAYMENT BY ITSELF WOULD NOT ENTITLE THE ASSESSEE TO CLAIM DEDUCTION OF EXPENDIT URE UNLESS THE SAME WAS PROVED TO BE PAID FOR COMMERCIAL CONSIDERATION AND COMMERCIAL EXPEDIENCY. THE LEARNED CIT(A) HAS THEREFORE TAKEN A VIEW THAT THE ASSESSEE HAS NOT SUCCESSFULLY DEMONSTRATED THAT SERVICES WERE RECEIV ED FROM CASL WARRANTING ANY PAYMENT AND TO BE CLAIMED AS BUSINES S EXPENDITURE. STILL AGGRIEVED THE ASSESSEE IS IN APPEAL BEFORE US. 18. THE LEARNED COUNSEL FOR THE ASSESSEE SHRI AJAY VOHRA ASSISTED BY SHRI GAURAV JAIN AND MS. NEHA KHEMKA HAS SUBMITTED THAT THE ASSESSEE 15 COMPANY WAS ENGAGED IN THE BUSINESS OF INTER ALIA MANUFACTURING MARKETING AND TRADING OF LUBRICANTS GREASES AND IN DUSTRIAL OILS. CASL WAS A COMPANY WHICH WAS ENGAGED IN THE BUSINESS OF DISTR IBUTION OF AUTOMOTIVE SPARES AND ACCESSORIES AND PROVIDING SERVICE SOLUTI ONS TO CUSTOMERS OF COMMERCIAL VEHICLES THROUGH A CHAIN OF EXCELLENT DE ALER NETWORK AND WAS VESTED WITH UP-TO-DATE TRADE INTELLIGENCE TRAINED AND COMPETENT STAFF AND OTHER INFRASTRUCTURE FACILITIES. HE FURTHER POINTE D OUT THAT THE ASSESSEE ENTERED INTO AN AGREEMENT DATED JANUARY 1 1999 WIT H CASL IN ORDER TO AVAIL CASL DISTRIBUTION/MARKETING NETWORK TO INCREA SE SALES OF ASSESSEES PRODUCTS AND ALSO TO UTILIZE OTHER FACILITIES OF CA SL FOR MARKETING OF ASSESSEES PRODUCTS I.E. LUBRICATING OILS AND GREAS ES. HE FURTHER SUBMITTED THAT IN CONSIDERATION OF AVAILING CASL DISTRIBUTION AND MARKETING NETWORK AND OTHER INFRASTRUCTURAL FACILITIES THE ASSESSEE HAD AGREED TO PAY A FIXED COMMISSION OF RS.13 00 000/- FOR EACH QUARTER AGGR EGATING TO RS.52 00 000/- PER ANNUM AND A FURTHER COMMISSION IF SPECIFIED LIMIT IS EXCEEDED. DURING THE RELEVANT YEAR NO FURTHER COMM ISSION WAS PAID SINCE THE SALES MADE THROUGH DEALER OF CASL DID NOT EXCEE D THE STIPULATED LIMIT AND THEREFORE THE FIXED COMMISSION/SERVICE CHARGES OF RS.52 00 000/- WAS PAID TO CASL. 16 19. DURING THE COURSE OF HEARING OF THESE APPEALS THE LEARNED COUNSEL FOR THE ASSESSEE POINTED OUT THAT THE ASSESSEE BY FURNI SHING FOLLOWING DOCUMENTS BEFORE THE AO SUPPORTED THE PAYMENT OF SERVICE CHA RGES TO CASL:- COPY OF SALES COMMISSION AGREEMENT WITH CASL. DETAIL OF DEALER NETWORK OF CASL INCLUDING NAME AND ADDRESSES OF DEALERS. COPY OF LEDGER ACCOUNTS OF DEALERS OF CASL ON SAMPL E BASIS. DETAILS OF PAYMENT MADE TO CASL ON ACCOUNT OF SERVI CE CHARGES. DETAILS OF DEBIT NOTES ISSUED BY CASL. COPY OF SAMPLE INVOICES OF SALES MADE THROUGH THE D EALERS OF CASL 19.1 HE FURTHER POINTED OUT THAT THE AFORESAID DOCU MENTS WERE ALSO FILED BEFORE THE CIT(A). IT WAS CLARIFIED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT THE ASSESSEE WAS UNDER BONA FIDE BELIEF THAT T HE AFORESAID DOCUMENTS IF READ AS A WHOLE WOULD BE SUFFICIENT TO PROVE AND E STABLISH THAT THE SERVICES WERE ACTUALLY RENDERED BY CASL IN CONSIDERATION OF WHICH SERVICE CHARGES WERE PAID BY THE ASSESSEE AND IN VIEW THEREOF NO FURTHER DOCUMENTS WERE FILED BY THE ASSESSEE EITHER BEFORE THE AO OR BEFOR E THE CIT(A). HE THEREFORE SUBMITTED THAT THE ASSESSEE HAS NOW PLAC ED BEFORE THE TRIBUNAL FURTHER EVIDENCES TO ESTABLISH THAT CASL HAD RENDER ED CERTAIN SERVICES TO THE ASSESSEE IN LIEU OF WHICH THE SERVICE CHARGES WERE PAID BY THE ASSESSEE TO THEM. FURTHER EVIDENCES PRODUCED BY THE ASSESSEE B EFORE US ARE AS UNDER AND COPIES OF WHICH HAVE BEEN GIVEN TO THE LEARNED DR:- 17 THE COPY OF MISCELLANEOUS CORRESPONDENCES BETWEEN T HE APPLICANT AND CASL PLACED AS ADDITIONAL EVIDENCE AT PAGES 22 TO 69 ESTABLISHES THAT (I) APPLICANT HAD NEGOTIATED SAL ES PRICE QUANTITY OF SALES MODE OF TRANSPORT ETC. OF ITS PRODUCTS SOLD THROUGH DEALER/DISTRIBUTION NETWORK OF CASL WITH CASL ONLY ; (II) COMPLAINTS WITH RESPECT TO PRODUCTS SENT BY APPLICA NT TO DEALERS OF CASL WERE NEGOTIATED AND SETTLED BETWEEN CASL AND APPLICANT ONLY. FURTHER THE APPLICANT HAD INITIATED TRAINING PROGR AMS FOR ITS CUSTOMERS VIZ. MECHANICS ETC. USING THE AUTOMOTI VE PRODUCTS IN ORDER TO INCREASE THE AWARENESS OF ITS PRODUCTS AND COMPANYS BRAND IMAGE. PURSUANT TO THE AFORESAID INITIATIVE THE APPLICANT COMPANY AVAILED SERVICES OF CASL WHICH HAD THE CAP ABILITIES OF PROVIDING THE AFORESAID TRAINING. THE AFORESAID SE RVICES WERE RENDERED BY CASL IN PURSUANCE OF SUBJECT AGREEMENT ENTERED BETWEEN THE APPLICANT AND CASL. IN RELATION TO THE ABOVE THE APPLICANT HAS PLACED AT PAGES 70 TO 91 CERTAIN DOCUMENTS IN THE NATURE OF PRESENTATIONS AN D BROCHURES FOR SUCH TRAINING PROGRAMS CERTIFICATES ISSUED TO PART ICIPANTS OF TRAINING PROGRAM ETC. AS ADDITIONAL EVIDENCE WHICH CLEARLY SUBSTANTIATE THE IMPARTING OF TRAINING BY CASL. 20. IN THE LIGHT OF THE VARIOUS DOCUMENTS AND EVIDE NCES ALREADY FILED BEFORE THE AUTHORITIES BELOW TOGETHER WITH THE FURT HER EVIDENCES FILED BEFORE US IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THAT ALL THESE EVIDENCES WOULD ESTABLISH THAT CASLS DISTRIBUTION OR DEALERS NETWORK AND/OR SERVICES OF CASL WERE ACTUALLY USED BY THE A SSESSEE FOR THE PURPOSE OF BUSINESS IN CONSIDERATION OF WHICH THE SERVICE CHARGES/COMMISSION WERE PAID BY THE ASSESSEE AND THESE EXPENSES ARE THUS ALLOWABLE AS DEDUCTION WHILE COMPUTING THE ASSESSEES INCOME UNDER THE ACT . 18 21. THE LEARNED DR ON THE OTHER HAND SUBMITTED THA T THE ASSESSEE HAS NOT BEEN ABLE TO GIVE DETAILS OF THE DEALER-WISE SALES MADE BY THE ASSESSEE BY USING THE DISTRIBUTION OR DEALERS NETWORK AND HAS ALSO NOT GIVEN ANY EVIDENCE BY WHICH IT COULD BE ESTABLISHED THAT CAS L HAS ACTUALLY RENDERED SERVICES TO THE ASSESSEE. HE THEREFORE CONTENDED THAT SINCE THE ASSESSEE HAS FAILED TO PROVE THAT ANY SERVICES HAVE ACTUALLY BEE N RENDERED BY CASL TO THE ASSESSEE IN CONNECTION WITH THE BUSINESS ACTIVITY O F THE ASSESSEE COMPANY THE PAYMENT MADE TO CASL IS PRIMA FACIE DISALLOWABL E AS BUSINESS EXPENDITURE UNDER SEC. 37(1) OF THE ACT. 22. WE HAVE HEARD BOTH THE PARTIES AND HAVE CAREFUL LY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE ALSO CARE FULLY PERUSED THE MATERIAL PLACED IN THE PAPER BOOK FILED BY THE ASSESSEE. WE HAVE ALSO EXAMINED THE VARIOUS EVIDENCES FILED BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW AS WELL AS BEFORE US. 23. FROM THE PERUSAL OF THE DETAILS FILED BY THE AS SESSEE IT IS NOT IN DISPUTE THAT A COPY OF AGREEMENT DATED 01.01.2001 ENTERED I NTO BETWEEN THE ASSESSEE AND CASL WAS FILED BY THE ASSESSEE BEFORE THE AO. AS PER THIS AGREEMENT IT WAS AGREED BETWEEN THE ASSESSEE AND CASL THAT TH E ASSESSEE WOULD USE THE MARKETING NETWORK AND OTHER RELATED INFRASTRUCT URAL SERVICES SET UP BY CASL IN CONSIDERATION OF WHICH A FIXED COMMISSION OF RS.13 00 000/- FOR 19 EACH CALENDAR QUARTER WAS PAYABLE SUBJECT TO A FURT HER COMMISSION PROVIDED THE SALES EXCEEDS THE SPECIFIED LIMIT. BEFORE THE AUTHORITIES BELOW THE ASSESSEE HAS ALSO SUBMITTED THE DETAILS OF THE DEAL ERS NETWORK OF CASL INCLUDING NAMES AND ADDRESSES OF THE DEALERS. COPY OF LEDGER ACCOUNT OF DEALERS OF CASL ON SAMPLE BASIS WAS ALSO FILED BEFO RE THE AO. IT IS NOT IN DISPUTE THAT THE PAYMENT WAS ACTUALLY MADE TO CASL AGAINST THE DEBIT NOTE ISSUED BY CASL TO THE ASSESSEE. THE ASSESSEE ALSO PRODUCED COPY OF SAMPLE INVOICES OF SALES MADE THROUGH THE DEALERS OF CASL. THE SPECIFIC REQUIREMENT OF THE AO WAS ONLY TO SUBMIT THE DETAIL S OF SALES DEALER-WISE. THE ASSESSING OFFICER HAS NOT MADE ANY ENQUIRY EITH ER FROM CASL OR ITS APPOINTED DEALERS OR ITS OVERALL NETWORK TO FIND OU T AS TO WHETHER THE ASSESSEE HAD USED THE MARKETING NETWORK AND OTHER R ELATED INFRASTRUCTURAL SERVICES OF CASL AS SO AGREED BY THE PARTIES VIDE A GREEMENT DATED 01.01.2001. THE AO HAS ALSO NOT MADE ANY ENQUIRY I N THIS REGARD TO DISPROVE THE ASSESSEES CLAIM THAT THE ASSESSEE USE D THE MARKETING NETWORK AND OTHER RELATED INFRASTRUCTURAL SERVICES OF CASL WITH A VIEW TO INCREASE OR PROMOTE THE ASSESSEES SALES OF VARIOUS ITEMS SUCH AS LUBRICANTS GREASES AND INDUSTRIAL OILS THROUGH THE MARKETING NETWORK AND OTHER RELATED INFRASTRUCTURAL SERVICES ALREADY SET UP BY CASL. T HE AO HAS TAKEN A VIEW THAT THE AGREEMENT DATED 01.01.2001 WAS MERELY A DE VICE TO GIVE A COLOUR OF 20 GENUINENESS SO THAT THE INCOME OF THE ASSESSEE CAN BE DIVERTED OR PASS OVER TO ANOTHER COMPANY BUT THE AO HAS FAILED TO BRING A NY IOTA OF EVIDENCE TO ESTABLISH THAT THE AGREEMENT IN QUESTION IS MERELY A COLOURABLE DEVICE TO PASS OVER THE ASSESSEES INCOME TO ANOTHER COMPANY. IT IS NOT THE CASE OF THE ASSESSING OFFICER THAT THE CASL IS NOT AN INCOME-TA X ASSESSEE OR HAS NOT INCLUDED THE AMOUNT OF SERVICE CHARGES RECEIVED FRO M THE ASSESSEE IN ITS INCOME DECLARED TO THE DEPARTMENT. THE AO HAS MERE LY DRAWN ASSUMPTION AND PRESUMPTION AS TO THE GENUINENESS OF THE AGREEM ENT IN QUESTION WITHOUT THERE BEING ANY IOTA OF EVIDENCE OR MATERIAL TO SAY SO. DURING THE COURSE OF HEARING OF THESE APPEALS BEFORE US THE ASSESSEE HA S SUCCESSFULLY BEEN ABLE TO DEMONSTRATE THAT VARIOUS ACTIVITIES IN THE COURSE O F MAKING SALES OF ITS PRODUCT WERE CARRIED OUT THROUGH THE DEALERS/DISTRI BUTION NETWORK OF CASL AND AS A RESULT THEREOF THE ASSESSEES TURNOVER HA S ALSO BEEN CONSIDERABLY INCREASED FROM YEAR TO YEAR. 24. FOR THE REASONS GIVEN ABOVE AND CONSIDERING THE TOTALITY OF THE FACTS AND CIRCUMSTANCES OF THE CASE INCLUDING THE VARIOU S EVIDENCES FILED BY THE ASSESSEE BEFORE THE AUTHORITIES BELOW AS SUPPORTED BY VARIOUS ADDITIONAL EVIDENCES FILED BEFORE US COPIES OF WHICH WERE GIV EN TO THE LEARNED DR FOR HER COMMENTS AND IN THE ABSENCE OF ANY MATERIAL DI SPUTING GENUINENESS OF THE VARIOUS MATERIALS AND DOCUMENTS AND EVIDENCES FILED BEFORE US WE HOLD 21 THAT THE ASSESSEES CLAIM OF PAYMENT OF RS.52 00 00 0/- IN EACH YEAR ON ACCOUNT OF SERVICE CHARGES PAID TO CASL IS TO BE AL LOWED AS A BUSINESS EXPENDITURE. AT THIS STAGE IT IS PERTINENT TO NOT E THAT THE AGREEMENT IN QUESTION WAS ENTERED INTO ON 01.01.2001 AND IT WAS EFFECTIVE FROM THAT DATE. IT IS ALSO SEEN THAT THE QUARTERLY PAYMENT WAS ALSO PAID DURING THE ASSESSMENT YEAR 2001-02 FOR ONE QUARTER AMOUNTING T O RS.13 00 000/- AND THE OVERALL ANNUAL PAYMENT OF RS.52 00 000/- WAS AL SO PAID IN THE ASSESSMENT YEAR 2002-03 AND IN THE COURSE OF ASSESS MENT MADE UNDER SEC. 143(3) FOR THE ASSESSMENT YEAR 2001-02 THE PAYMENT OF RS.13 00 000/- CLAIMED BY THE ASSESSEE AS DEDUCTION WAS NOT DISALL OWED BY THE AO. IT IS FURTHER NOTICED THAT IN THE ASSESSMENT YEAR 2002-03 THE ASSESSEE ALSO MADE A CLAIM OF RS.52 00 000/- IN THE RETURN OF INCOME A ND THE RETURN OF INCOME FOR THAT YEAR WAS MERELY PROCESSED UNDER SEC. 143(1 ) AND WAS NOT SELECTED FOR SCRUTINY WITH A VIEW TO DISALLOW THE ASSESSEES CLAIM ON ACCOUNT OF SERVICE CHARGES PAID TO CASL AND NOT TO REOPEN THE ASSESSMENT UNDER SEC. 263 OR SEC. 147 OF THE ACT. WE FIND THAT THE IDENT ICAL PAYMENT OF RS.52 00 000/- WAS ALSO PAID IN THE ASSESSMENT YEAR 2005-06 AND THE AMOUNT OF RS.26 00 000/- HAS BEEN CLAIMED IN THE AS SESSMENT YEAR 2006- 07 DURING WHICH YEAR A SERVICE AGREEMENT STOOD TER MINATED ON AND FROM 30.9.2005. THEREFORE FROM THIS POINT OF VIEW THAT THE DEPARTMENT HAS 22 ACCEPTED THE ASSESSEES CLAIM IN EARLIER ASSESSMENT YEARS I.E. 2001-02 2002-03 AND THERE BEING NO FRESH MATERIAL REBUTTIN G THE ASSESSEES CLAIM THE CLAIM OF THE ASSESSEE IN ASSESSMENT YEARS 2003-04 A ND 2004-05 IS NOT LIABLE TO BE REJECTED. WE THEREFORE ALLOW THIS GROUND R AISED BY THE ASSESSEE WITH A DIRECTION TO THE ASSESSING OFFICER TO MODIFY THE AS SESSMENT ORDER BY ALLOWING THE CLAIM OF THE ASSESSEE ON ACCOUNT OF PA YMENT OF SERVICE CHARGES PAID TO CASL. WE ORDER ACCORDINGLY. 25. GROUND NO.2 IN ASSESSMENT YEAR 2003-04 RAISED B Y THE ASSESSEE IS WITH REGARD TO THE DISALLOWANCE OF REPAIR AND MAINT ENANCE EXPENDITURE AMOUNTING TO RS.8 03 490/- CONFIRMED BY THE CIT(A) BY TREATING THE SAME AS OF CAPITAL IN NATURE. 26. DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS NOTICED BY THE AO THAT OUT OF TOTAL EXPENSES OF RS.21 65 171/- INC URRED UNDER THE HEAD REPAIR AND MAINTENANCE PAYMENT OF RS.8 03 490/- WAS OF CAPITAL IN NATURE BUT CLAIMED AS REVENUE EXPENDITURE BY THE AS SESSEE. DATE-WISE AND ITEM-WISE DETAIL OF TOTAL EXPENDITURE OF RS.8 03 49 0/- HAS BEEN STATED IN THE ASSESSMENT ORDER. ON PERUSAL OF THE SAME IT IS SE EN THAT ALL THESE EXPENDITURES WERE INCURRED UNDER THE HEADS PLANT & M/C MAINTENANCE EXPENSES COMPUTER MAINTENANCE EXPENSES OFFICE EQUIPMENT MAINTENANCE EXPENSES AND OFFICE MAINTENANCE EXPEN SES. THE ASSESSEE 23 WAS THEREFORE ASKED BY THE ASSESSING OFFICER TO E XPLAIN AS TO WHY THESE EXPENDITURES ARE NOT TO BE CAPITALIZED. IN REPLY T HERETO THE ASSESSEE VIDE LETTER DATED 06.03.2006 STATED THAT ALL THESE EXPEN DITURES WERE OF REVENUE IN NATURE AND IN SUPPORT THEREOF THE ASSESSEE FILED CO PIES OF BILLS IN RESPECT OF ALL THE SAID EXPENDITURES. THE AO THEN STATED THAT ON PERUSAL OF THE COPIES OF THE BILLS IT WAS NOTICED THAT ALL THE EXPENDITURES WERE OF CAPITAL IN NATURE. OUT OF THE TOTAL EXPENSES OF RS.8 03 490/- THE AO POINTED OUT THE EXPENSES OF RS.1 56 000/- INCURRED TOWARDS PURCHASE OF WOODE N PALLETS FROM ONE SARVODYA TIMBER INDUSTRIES WHICH WERE TREATED AS CA PITAL EXPENDITURE BY THE AO. WITH REGARD TO THE BALANCE SUM OF RS.6 47 490/ - THE AO STATED THAT THE BILLS PRODUCED WERE TOWARDS PURCHASE OF NEW COMPUTE RS FURNITURE AND FIXTURE AND BUILDING CONSTRUCTIONS. THE AO THERE FORE TREATED THE BALANCE AMOUNT ALSO TO BE OF CAPITAL IN NATURE. THE AO THE N ALLOWED DEPRECIATION OF RS.88 129/- ON RS.6 47 490/- AND MADE THE ADDITION OF THE BALANCE AMOUNT OF RS.5 59 361/- OUT OF THE TOTAL EXPENSES OF RS.6 47 490/-. THE AO ALSO MADE THE ADDITION OF RS.1 56 000/- ON ACCOUNT OF PU RCHASE OF WOODEN PALLETS TREATING THE SAME TO BE OF CAPITAL IN NATURE. THUS TOTAL DISALLOWANCE MADE BY THE AO WAS OF RS.7 15 361/- AFTER ALLOWING DEPRE CIATION OF RS.88 129/- FROM TOTAL EXPENSES OF RS.8 03 490/-. 24 27. ON APPEAL THE LEARNED CIT(A) CONFIRMED THE AO S ORDER. WITH REGARD TO THE ADDITION OF RS.1 56 000/- THE LEARNED CIT(A) HAS STATED THAT THE ASSESSEE HAS NOT BEEN ABLE TO EXPLAIN AS TO WHY SOM E EXPENDITURES WERE CLAIMED AS CAPITAL EXPENDITURE AND OTHERS ARE AS RE VENUE EXPENDITURE. WITH REGARD TO THE BALANCE AMOUNT OF RS.6 47 490/- THE CIT(A) OBSERVED THAT THESE EXPENDITURES WERE INCURRED FOR PURCHASE OF NE W COMPUTERS FURNITURE AND FIXTURES. THE ASSESSEES EXPLANATION THAT THES E EXPENDITURES INCURRED FOR ONLY TO MAINTAIN THE EXISTING ASSETS WAS REJECTED. 28. STILL AGGRIEVED THE ASSESSEE IS IN APPEAL BEFO RE US. 29. WE HAVE HEARD BOTH THE PARTIES AND HAVE CAREFUL LY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE PERUSED T HE MATERIAL ON RECORD. IN SO FAR AS THE EXPENSES OF RS.1 56 000/- TOWARDS PUR CHASE OF WOODEN PALLETS (TWO WAY DOUBLE DECK REVERSAL TYPE SIZE 48 X 48 R UNNING INTO 100 NUMBERS) WE FIND THAT THERE IS NO FINDING THAT THE SE WOODEN PALLETS WERE UTILIZED IN CREATING ANY NEW ASSETS. THESE WERE US ED FOR THE PURPOSE OF TRANSPORTATION OF BARRELS OF OIL FROM FACTORY TO TH E COMPANY OWNED DEPOT AND STORING THE SAME TILL THE TIME THE GOODS ARE TRANSP ORTED TO VARIOUS PARTIES LOCATIONS. THESE WOODEN PALLETS IN THE NATURE OF P LANKS OF WOOD ON WHICH THE BARRELS OF OIL ARE STORED AND THEY NEED TO BE REPLACED EVERY YEAR AS IT IS NOT FEASIBLE TO USE THEM MORE THAN A YEAR. THE ASS ESSEE HAS EXPLAINED THAT 25 THESE PALLETS WERE PURCHASED TO MAINTAIN THE EXISTI NG ASSETS. HAVING REGARD TO THE NATURE OF ITEM PURCHASED WE ARE OF THE CONS IDERED VIEW THAT THE EXPENSES INCURRED TOWARDS PURCHASE OF WOODEN PALLET S ARE TO BE CONSIDERED TO BE OF REVENUE IN NATURE INASMUCH AS THE SAME WER E SPENT TO MAINTAIN THE EXISTING ASSETS OF THE ASSESSEE WITHOUT CREATING AN Y NEW ASSET. WITH REGARD TO THE BALANCE EXPENSES TO THE EXTENT OF RS.6 47 49 0/- WE FIND THAT THESE EXPENSES WERE INCURRED TOWARDS FOR MAINTENANCE OF E XISTING COMPUTER SYSTEM OR FOR UP-GRADATION OF EXISTING COMPUTERS. THE EXPENDITURES WERE ALSO INCURRED TOWARDS E-NET CARDS ATX CABLE SCROLL MOUSE AND MONITOR ETC. THESE ARE PERISHABLE ITEMS WHICH NEED TO BE UPDATE D FROM TIME TO TIME AND NO NEW ASSETS WERE BROUGHT INTO EXISTENCE. SOME EX PENSES WERE ALSO INCURRED TOWARDS CAPITAL ETHERNET WHICH BY ANY STR ETCH OF IMAGINATION CAN BE HELD TO BE OF CAPITAL IN NATURE. THE ASSESSEE H AS ALSO PURCHASED CERTAIN MEMORY CARD FOR COMPUTERS AS WELL AS SOME SCREEN AN D MOUSE. WE THEREFORE HOLD THAT ALL THESE EXPENDITURES ARE INC URRED TOWARDS DAY-TO-DAY MAINTENANCE AND REPAIRING OF FURNITURE FITTINGS AN D COMPUTER MAINTENANCE. WE THEREFORE DIRECT THE AO TO ALLOW THE ASSESSEE S CLAIM OF EXPENSES AMOUNTING TO RS.8 03 490/- AS REVENUE EXPENDITURE. HOWEVER THE DEPRECIATION OF RS.88 129/- ALLOWED BY THE AO SHALL STAND WITHDRAWN. THUS 26 THIS ISSUE RAISED BY THE ASSESSEE IN ASSESSMENT YEA R 2003-04 IS DECIDED IN FAVOUR OF THE ASSESSEE. 30. NEXT GROUND NOS.3 & 4 RAISED BY THE ASSESSEE IN ASSESSMENT YEAR 2003-04 ARE DIRECTED AGAINST THE CIT(A)S ORDER IN CONFIRMING THE DISALLOWANCE OF RS.1 00 000/- OUT OF THE TOTAL AD H OC DISALLOWANCE OF RS.2 27 610/- AND RS.1 00 000/ OUT OF THE TOTAL AD HOC DISALLOWANCE OF RS.2 00 000/- ON ACCOUNT OF VEHICLE EXPENDITURE AND TELEPHONE EXPENDITURE RESPECTIVELY. 31. THE ASSESSING OFFICER DISALLOWED THE SUM OF RS. 2 27 610/- BEING 1/10 TH OF THE TOTAL EXPENDITURE INCURRED ON VEHICLE REPAI R AND MAINTENANCE BY OBSERVING THAT THE PERSONAL USE OF THE VEHICLE CANN OT BE RULED OUT. SIMILARLY THE AO DISALLOWED THE SUM OF RS.2 00 000/- OUT OF T ELEPHONE EXPENSES ON THE GROUND THAT THE SAME WERE PERSONAL IN NATURE. 32. ON AN APPEAL THE LEARNED CIT(A) REDUCED THE DI SALLOWANCE TO RS.1 00 000/- UNDER EACH HEAD. WITH REGARD TO THE VEHICLE EXPENDITURE THE CIT(A) HAS OBSERVED THAT THE ASSESSEE ALREADY TAKEN CAR ALLOWANCE AS PERQUISITE IN THE HANDS OF SOME OF ITS EMPLOYEES. STILL THE CIT(A) CONSIDERED IT FIT TO RESTRICT THE DISALLOWANCE TO R S.1 00 000/- WHICH IN OUR CONSIDERED OPINION IS TOTALLY BASED ON SURMISES AN D PRESUMPTIONS. THE CIT(A) HAS NOT GIVEN ANY JUSTIFIABLE BASIS TO UPHEL D THE DISALLOWANCE TO THE 27 EXTENT OF RS.1 00 000/- UNDER THE HEAD VEHICLE EXP ENSES. SIMILARLY UNDER THE HEAD TELEPHONE EXPENSES THE CIT(A) HAS REDUC ED THE DISALLOWANCE TO RS.1 00 000/- WITHOUT THERE BEING ANY MATERIAL TO S UPPORT THE DISALLOWANCE. 33. AFTER CONSIDERING THE TOTALITY OF THE FACTS AND CIRCUMSTANCES OF THE CASE AND HAVING REGARD TO THE ADMITTED POSITION THA T THE DISALLOWANCE HAS BEEN MADE PURELY ON AD HOC BASIS WITHOUT THERE BEI NG ANY MATERIAL TO SUPPORT THE SAME WE DELETE THE DISALLOWANCE OF RS. 1 00 000/- EACH UNDER THE HEAD TRANSPORT EXPENSES AND TELEPHONE EXPENSES RESPECTIVELY AS UPHELD BY THE CIT(A). IN OTHER WORDS THE DISALLOW ANCE OF RS.1 00 000/- UNDER BOTH THE HEADS UPHELD BY THE CIT(A) IS DELE TED. 34. THE LAST GROUND BEING GROUND NO.2 IN ASSESSMENT YEAR 2004-05 TAKEN BY THE ASSESSEE IS AGAINST CIT(A)S ORDER IN CONFIRMING THE DISALLOWANCE OF TRAVELLING AND CONVEYANCE EXPENSES AMOUNTING TO RS.7 16 300/-. 35. IN THE COURSE OF ASSESSMENT PROCEEDINGS THE AS SESSEE WAS ASKED BY THE AO TO FURNISH DETAILS OF FOREIGN TRAVELLING UND ERTAKEN BY THE EMPLOYEES AND DIRECTORS OF THE ASSESSEE COMPANY. THE ASSESS EE COMPANY FURNISHED THE BILLS IN RESPECT OF EXPENSES CLAIMED AND ALSO FURNI SHED THE DETAILS OF FOREIGN TRAVELLING EXPENSES AMOUNTING TO RS.28 65 214/-. A FTER EXAMINING THE DETAILS THE AO HAD TAKEN A VIEW THAT THE ASSESSEE H AS NOT FURNISHED ANY 28 DOCUMENTARY EVIDENCE AS TO HOW THE FOREIGN TRAVELS UNDERTAKEN BY THE EMPLOYEES AND DIRECTORS OF THE ASSESSEE COMPANY HE LPED THE ASSESSEE COMPANY IN PROMOTING ITS BUSINESS. THE AO ALSO STA TED THAT MOST OF THE EMPLOYEES AND DIRECTORS HAD UNDERTAKEN THE JOURNEY ON TOURIST VISA. AFTER CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE THE AO THEN DISALLOWED 25% OF TOTAL TRAVELING EXPENSES OF RS.28 65 214/- A ND THUS DISALLOWED THE SUM OF RS.7 16 300/-. 36. ON AN APPEAL THE CIT(A) CONFIRMED THE DISALLOW ANCE BY SAYING THAT THE ASSESSEE HAS NOT PRODUCED ANY RECORDS OR MINUTE S OF BOARD MEETINGS AND HAS NOT SUCCESSFULLY DEMONSTRATED THE PURPOSE OF FO REIGN VISITS WARRANTING THE ALLOWANCE OF EXPENDITURE CLAIMED. THE LEARNED CIT(A) FURTHER OBSERVED THAT THERE WAS NO BAR TO DISALLOW EXPENDITURE ON ES TIMATE BASIS WHEN THERE WAS A GROUND FOR DISALLOWANCE OF EXPENDITURE. 37. HENCE THE ASSESSEE IS IN APPEAL BEFORE US. 38. WE HAVE HEARD BOTH THE PARTIES AND HAVE CAREFUL LY GONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. WE HAVE CAREFULLY GONE THROUGH THE MATERIAL ON RECORD. IT IS NOT IN DISPUTE THAT THE DETAILS O F FOREIGN TRAVELLING EXPENSES INCLUDING THE NAMES OF THE EMPLOYEES OR PERSONS CON CERNED WHO VISITED FOREIGN COUNTRY PERIOD DURING WHICH THE JOURNEY WA S UNDERTAKEN THE PURPOSE FOR WHICH THE CONCERNED PERSON VISITED THE COUNTRY AND THE NAME OF 29 THE PLACE OR COUNTRY WHERE VISITED ALONG WITH THE A MOUNT OF EXPENDITURE INCURRED HAVE BEEN FURNISHED BEFORE THE AO COPIES OF WHICH ARE PLACED AT PAGES 1 TO 2 OF THE PAPER BOOK FILED BY THE ASSESSE E. ON PERUSAL OF THE DETAILS WE FIND THAT GENERAL MANAGER (F&A) V.P. ( MARKETING) V.P. (SALES) CEO V.P. (TECHNICAL & INDUSTRY) DIRECTOR MANAGER (TECHNICAL & INDUSTRY) WERE AMONGST THE PERSONS WHO HAD GONE TO FOREIGN COUNTRY FOR THE PURPOSE OF ATTENDING SEMINARS PAYING MARKETING VIS ITS AND TO PROMOTE THE BUSINESS OF THE ASSESSEE. CERTAIN VISITS WERE ALSO MADE TO ATTEND DISTRIBUTORS MEETING ORGANIZED ABROAD. FROM THE DETAILS IT IS THUS CLEAR THAT THE ASSESSEE HAS FURNISHED THE PURPOSE FOR WHICH THE VISIT WAS U NDERTAKEN. THE ASSESSEE HAS ALSO PRODUCED COPY OF LEDGER ACCOUNT OF TRAVELI NG FOREIGN EXPENSES. ALL THE PAYMENTS WERE MADE THROUGH BANKING CHANNEL. THE NAMES OF THE CONCERNED EMPLOYEES OR PERSONS ARE MENTIONED AGAINS T THE RELEVANT PAYMENT. THE AO HAS NOT BEEN ABLE TO POINT OUT ANY ITEM WHICH COULD BE SAID TO HAVE NOT BEEN INCURRED BY ANY EMPLOYEE OR D IRECTOR OF THE ASSESSEE COMPANY FOR THE PURPOSE OF ASSESSEES BUSINESS. TH E AO HAS DISALLOWED THE PART EXPENSES ON ESTIMATED BASIS BY APPLYING RATE O F 25% OF TOTAL EXPENSES. THE AO HAS NOT GIVEN ANY BASIS OR REASON FOR APPLYI NG THE RATE OF 25% FOR THE PURPOSE OF DISALLOWING PART OF THE FOREIGN TRAV ELING EXPENSES. IT IS NOT THE AOS CASE THAT THE VISIT TO FOREIGN COUNTRY WAS NOT MADE FOR THE PURPOSE 30 OF ASSESSEES BUSINESS AS WOULD BE CLEAR FROM HIS O RDER ITSELF WHERE HE HAS HIMSELF ALLOWED 75% OF THE EXPENSES OF FOREIGN TRAV ELING. IN THESE CIRCUMSTANCES WE THEREFORE DO NOT FIND ANY REASON TO SUSTAIN THE ORDER OF THE CIT(A) IN CONFIRMING THE ASSESSING OFFICERS AC TION IN DISALLOWING PART OF THE FOREIGN TRAVELLING EXPENSES ON AD HOC BASIS. WE THEREFORE DELETE THE DISALLOWANCE AND DIRECT THE ASSESSING OFFICER TO AL LOW THE ASSESSEES CLAIM OF FOREIGN TRAVELLING EXPENSES IN FULL. THE ASSESS ING OFFICER SHALL MODIFY THE ASSESSMENT ORDER ACCORDINGLY. 39. IN THE RESULT THE APPEALS FILED BY THE ASSESSE E FOR THE ASSESSMENT YEAR 2003-04 AND 2004-05 ARE ALLOWED AND THAT OF THE RE VENUE ARE DISMISSED. PRONOUNCED IN THE OPEN COURT ON 23 RD JULY 2010. SD/- SD/- (G.E. VEERABHADRAPPA) (C.L. SETHI) VICE PRESIDENT JUDICIAL MEMBER DATED: 23 RD JULY 2010. COPY OF THE ORDER FORWARDED TO:- 1. APPELLANT 2. RESPONDENT 3. CIT 4. CIT(A) 5. DR BY ORDER *MG DEPUTY REGISTRAR ITAT.