ACIT, Pune v. M/s. Universal Construction Machinery, Pune

ITA 1200/PUN/2009 | 2006-2007
Pronouncement Date: 30-09-2016 | Result: Partly Allowed

Appeal Details

RSA Number 120024514 RSA 2009
Assessee PAN AABFR5145G
Bench Pune
Appeal Number ITA 1200/PUN/2009
Duration Of Justice 6 year(s) 11 month(s) 23 day(s)
Appellant ACIT, Pune
Respondent M/s. Universal Construction Machinery, Pune
Appeal Type Income Tax Appeal
Pronouncement Date 30-09-2016
Appeal Filed By Department
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 30-09-2016
Date Of Final Hearing 04-07-2016
Next Hearing Date 04-07-2016
Assessment Year 2006-2007
Appeal Filed On 07-10-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL PUNE BENCH A PUNE . . BEFORE MS. SUSHMA CHOWLA JM AND SHRI R.K. PANDA AM . / ITA NO. 12 00 /PN/20 09 / ASSESSMENT YEAR : 20 0 6 - 0 7 THE ADDL. COMMISSIONER OF INCOME TAX RANGE - 3 PUNE . / APPELLANT VS. VS. M/S. UNIVERSAL CONSTRUCTION MACHINERY 4/1 GANESH PETH PUNE 411030 . / RESPO NDENT PAN: AABFR5145G / APPELLANT BY : SHRI ANIL CHAWARE / RESPONDENT BY : S /S HRI SUNIL PATHAK AND MANDAR KHARPUDIKAR / DATE OF HEARING : 04 . 0 7 .201 6 / DATE OF PRONOUNCEME NT: 30 . 0 9 .201 6 / ORDER PER SUSHMA CHOWLA JM: THIS APPEAL FILED BY THE REVENUE IS AGAINST ORDER OF C I T (A) - I I PUNE DATED THIS APPEAL FILED BY THE REVENUE IS AGAINST ORDER OF C I T (A) - I I PUNE DATED 31 . 0 7 .20 09 RELATING TO ASSESSMENT YEAR 200 6 - 0 7 AGAINST ORDER PASSED UNDER SECTION 143 (3) OF THE INCOME TAX ACT 19 61 (IN SHORT THE ACT) . 2 . THE REVENUE HAS RAISED THE FOLLOWING CONCISE GROUND S OF APPEAL: - 1. THE ORDER OF THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) IS CONTRARY TO LAW AND TO THE FACTS AND CIRCUMSTANCES OF THE CASE. 2. THE LEARNED COMMISSIONER OF INCO ME - TAX (APPEALS) GROSSLY ERRED IN ALLOWING 2. THE LEARNED COMMISSIONER OF INCO ME - TAX (APPEALS) GROSSLY ERRED IN ALLOWING THE ASSESSEE'S APPEAL INSTEAD OF CONFIRMING THE ASSESSING OFFICER'S ORDER. ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 2 3. THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) GROSSLY ERRED IN DELETING THE DISALLOWANCE OF RS. 57 16 864 / - MADE U/S 40A(2) ON ACCOU NT OF EXCESS P AYMENT OF COMMISSION MADE BY THE ASSESSEE TO ITS SISTER CONCERN NOT APPRECIATIN G THE FACTS THAT THE COM M ISSION SO PAID WAS PATENTLY EXCESSIVE VIS - A - VIS PAID TO OTHERS AND THAT THE ASSESSEE WAS REIMBURSING EXPENSES TO ITS SISTER CONCERNS WHIC H AS PER THE MEMORAN D UM OF UNDERSTANDING WERE TO BE BORNE BY THE SISTER CONCERN. 4. THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) GROSSLY ERRED IN ATTACHING UNDUE IMPORTANCE TO THE FACT THAT ITS SISTER CONCERN BEING ASSESSED T O TAX WHICH IS NOT RELE VANT TO SEC. 40A(2) WHICH DEALS WITH REASONABLENESS OF THE PAYMENTS MADE V IS - A - VI S THE SERVICES PROVIDED. 5. THE LEA RNED C OMMISSIONER OF INCOME - TAX (APPEALS) GROSSLY ERRED IN OBSERVING THAT THE ASSESSEE'S SISTER - CONCERN (UNIVERSAL SALES CORPORATION) WAS ALSO PAYING TAXES IN THE HI G HER BRACKETS WHEN AS APPEARS PRIMA FACIE THIS CO N CERN WAS INCURRING LOSS I N ITS OTHER BUSINESS ACTIVITY. 6. THE LEARNED COMMISSIONER OF INCOME - TAX (APPEALS) GROSSLY ERRED IN IGNORING THE FACT THAT THE ASSESSEE HAD SHOWN OTHER PLANTS AND MACHINERIES UND E R THE HEAD 'COMPUTER AN D CRANES' AND THEREBY HOLDING THE ASSESSEE TO BE E LIGIBLE FOR DEDUCTION U /S 80 IB (3) WHEN IN FACT THE ASSESSEE'S INVESTMENT IN PLANT & MACHINERY EXCEEDED RS. 1 CRORE. 7. THE LEARNED C OMMISSIONER OF INCOME - TAX (APPEALS) GROSSLY ERRED IN HOLDING THAT THE ASSESSEE'S CASE WAS COVERED UNDER THE PROVISIONS OF SEC. 47(XIII) AND THEREFORE SE C TION 45(4) WOULD NOT APPLY WITHOUT APPRECIATING THAT THE REVALUATION OF THE ASSETS AND THE CONSEQUENTIAL DISTRIBUTION OF T HE ENHANCED VALUE AMONGST THE TWO PARTNERS WAS PATENTLY IN THE NATURE OF DISTRIBUTION OF CAPITAL ASSETS THEREBY CONF IRM ING BENEFITS ON THE PARTNERS WHO WOULD NOT HAVE GOT ANY SHARES FROM THE NEW COMPANY AS THEIR CAPITAL BALANCES WERE OTHERWISE NEGATIVE B UT FOR SUCH CONFERMENT. 8. FOR THESE AN D SUCH OTHER GROUNDS AS MAY BE URGED AT THE TIME OF H E ARING THE ORDER OF THE LEARNED CIT (APPEALS) MAY BE VACATED AND THAT OF THE ASSESSING OFFICER BE RES T ORED. 3. THE GROUNDS OF APPEAL NO.1 AND 2 RAISED BY THE REVENUE ARE GENERAL IN NATURE AND HENCE ARE DISMISSED. 4. THE ISSUE IN GROUND OF APPEAL NO.3 IS AGAINST DELETION OF DISALLOWANCE MADE UNDER SECTION 40A(2) OF THE ACT ON ACCOUNT OF EXCESS PAYMENT OF COMMISSION BY THE ASSESSEE TO ITS SISTER CONCERN AT RS. 5 7 16 864/ - . THE GROUNDS OF APPEAL NO.4 AND 5 ARE INTER - LINKED TO THE ISSUE RAISED VIDE GROUND OF APPEAL NO.3. 5. BRIEFLY IN THE FACTS OF THE CASE THE ASSESSEE WAS ENGAGED IN MANUFACTURING OF CONSTRUCTION EQUIPMENT. FOR THE YEAR UNDER CONSIDERATION TH E ASSESSEE HAD FURNISHED RETURN OF INCOME DECLARING TOTAL INCOME OF RS. 89 35 270/ - . THE ASSESSEE WAS A PARTNERSHIP FIRM WHICH WAS IN EXISTENCE TILL 31.12.2005 AND W.E.F. 01.01.2006 ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 3 THE ASSETS & LIABILITIES OF ASSESSEE FIRM WERE TAKEN OVER BY PRIVATE LIMI TED COMPANY UNIVERSAL CONSTRUCTION MACHINERY AND EQUIPMENT PVT. LTD. BY WAY OF TAKEOVER AGREEMENT. THE ASSESSEE FIRM WAS CONSTITUTED OF TWO PARTNERS I.E. MR. R.H. MORE AND MR. R.R. MORE. THE SISTER CONCERN BY THE NAME OF UNIVERSAL SALES CORPORATION WAS T HE PROPRIETARY CONCERN OF SHRI ABHIJIT MORE SON OF MR. R.H. MORE AND BROTHER OF MR. R.R. MORE . DURING THE YEAR UNDER CONSIDERATION THE ASSESSEE HAD PAID COMMISSION OF RS.2 20 19 027/ - TO THE SISTER CONCERN UNIVERSAL SALES CORPORATION (HEREINAFTER REFERR ED TO AS USC) . THE SAID COMMISSION WAS PAID AS USC HAD DONE MARKETING JOB OF THE PRODUCTS OF THE ASSESSEE FIRM. THE ASSESSEE WAS ASKED TO JUSTIFY THE PAYMENT OF RS.2.20 CRORES TO USC AND ALSO ASKED TO GIVE THE RATE OF COMMISSION WHICH WAS PAID TO USC A ND OTHER PARTIES. THE ASSESSEE CLAIMED THAT IT PAID COMMISSION @ 7.5% TO USC AS PER THE MEMORANDUM O F UNDERSTANDING EXECUTED ON 01.10.2004 . IN RESPECT OF THE OTHER PARTIES NORMALLY THE COMMISSION WAS PAID @ 10% TO 13% BUT THERE WERE INSTANCES WHERE IT WAS PAID AT 3%. THE ASSESSING OFFICER NOTED FROM THE ACCOUNT OF USC THAT EVERY MONTH THERE WAS CREDIT ASSESSING OFFICER NOTED FROM THE ACCOUNT OF USC THAT EVERY MONTH THERE WAS CREDIT OF COMMISSION WHICH WAS 7.5% ON THE NET SALES AND OTHER SUM WHICH WAS THE DIFFERENCE IN SALES COMMISSION FOR THE SAID MONTH. FOR THE MONTH OF JUNE 20 05 THE COMMISSION ON NET SALES WAS RS. 17 96 724/ - AND THE DIFFERENCE IN SALES COMMISSION WAS RS.18 84 352/ - . THE ASSESSEE EXPLAINED THAT THE DIFFERENCE IN SALES COMMISSION WAS ON ACCOUNT OF DIFFERENCE BETWEEN DEALER PRICE AND SALES PRICE. THE NET SALES EFFECTED BY USC WERE TO THE TUNE OF RS.13.02 CRORES AGAINST WHICH IT WAS PAID SALES COMMISSION OF RS. 97 74 081/ - AND DIFFERENTIAL SALES COMMISSION OF RS. 1 02 70 957/ - . THE TOTAL AMOUNT PAID AFTER DEDUCTING SERVICE TAX WAS RS. 2 00 45 038/ - . THE ASSESSING OFFICER NOTED THAT THE SAME WORKED OUT TO 15.39% WHICH WAS MUCH HIGHER THAN THE COMMISSION PAID TO OTHER PARTIES. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE EXCESS SALES COMMISSION PAID TO USC BE NOT DISALLOWED AS EXCESSIVE IN VIEW OF THE PROVISION S OF SECTION 40A(2) OF THE ACT. THE ASSESSEE VIDE REPLY DATED 11.12.2008 POINTED OUT THAT THE COMMISSION PAID WAS NOT ONLY FOR SALES BY USC BUT ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 4 ALSO THAT USC HAD INCURRED EXPENDITURE ON EMPLOYEES SELLING AND DISTRIBUTION EXPENSES TRAVELLING EXPENSES AD VERTISING AND EXH IBITION EXPENSES ETC. AND HENCE THE AMOUNT PAID WAS REASONABLE. THE ASSESSING OFFICER NOTED THAT AS PER MOU BETWEEN THE PARTIES USC WAS COMPLETELY RESPONSIBLE FOR MARKETING OF THE TOTAL RANGE OF PRODUCTS MANUFACTURED BY THE ASSESSEE. THE USC WAS TO APPOINT STAFF UNDERTAKE EXTENSIVE TRAVELLING TAKE PART IN ALL SALES EXHIBITION ETC. IN CASE OF WARRANTY SERVICES USC WAS TO INFORM THE ASSESSEE AND THE COST WAS TO BE BORNE BY USC AND ALL THE COMPONENTS / PARTS WHICH THE ASSESSEE HAD G IVEN WARRANTY TO CUSTOMERS WERE TO BE PROVIDED BY THE ASSESSEE FREE OF COST. THE ASSESSEE HAD CLAIMED USC WAS ALSO GIVEN REIMBURSEMENT OF EXPENSES INCURRED BY IT ON ACCOUNT OF SEMINARS CONFERENCES TRAVELLING EXPENSES LODGING CHARGES AND OTHER SALES REL ATED EXPENSES INCURRED FOR THE ASSESSEE. THE ASSESSING OFFICER NOTED THAT THE EXPENDITURE INCURRED BY USC FOR SEMINARS CONFERENCES TRAVELLING EXPENSES ETC. WAS REIMBURSED BY THE ASSESSEE AND ALSO THE COST OF PARTS WHICH WERE REPLACED IN THE WARRANTY PE RIOD WERE ALSO BORNE BY THE ASSESSEE. THE EXPENDITURE ON WAGES TRAVEL ETC. WERE COMMON TO ALSO BORNE BY THE ASSESSEE. THE EXPENDITURE ON WAGES TRAVEL ETC. WERE COMMON TO ANY BUSINESS AND HAVE NO SPECIAL BEARING WITH THE TRANSACTIONS WITH THE ASSESSEE. THE OTHER CONCERNS HAD BEEN PAID COMMISSION @ 10% 13% OR 3% WHO WERE ALSO INCU RRING THESE EXPENSES AND WERE NOT BORNE BY THE ASSESSEE. THE PLEA OF THE ASSESSEE BEFORE THE ASSESSING OFFICER WAS THAT USP HAD SHOWN THE ENTIRE COMMISSION RECEIVED AS INCOME AND PAID TAXES. HOWEVER THIS FACT WAS BRUSHED ASIDE BY THE ASSESSING OFFICER A S THE ISSUE WAS TO BE SEEN FROM ANGLE OF REASONABLENESS OF THE PAYMENT MADE VIS - - VIS THE SERVICES PROVIDED. RE FERRING TO THE PROVISIONS OF SECTION 40A(2) OF THE ACT HE WAS OF THE VIEW THAT THE ASSESSEE HAD PAID EXCESSIVE COMMISSION TO USC WHICH WAS THE PROPRIETARY CONCERN OF THEIR FAMILY MEMBERS. WHERE THE SAID CONCERN WAS REIMBURSED FOR THE EXPENDITURE ALSO INCLUDING SEMINARS EXHIBITION WARRANTY ETC THE ASSESSING OFFICER WAS OF THE VIEW THAT THERE WAS NO NEED TO PAY COMMISSION @ 15.39%. IN VIEW T HEREOF THE ASSESSING OFFICER HELD THAT COMMISSION @ 11% WOULD BE REASONABLE AS THAT WAS ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 5 AVERAGE RATE OF COMMISSION PAID TO OTHER PARTIES. ACCORDINGLY THE NET COMMISSION @ 11% AT RS.1 43 28 174/ - WAS ALLOWED AND THE DIFFERENCE OF RS.57 16 864/ - WAS DISAL LOWED. 6. BEFORE THE CIT(A) THE CONTENTION OF THE ASSESSEE WAS THAT OUT OF TOTAL AMOUNT OF COMMISSION PAID OF RS.2 CRORES THERE WAS ELEMENT OF REIMBURSEMENT OF EXPENSES OF RS.1.31 CRORES AND ONLY THE BALANCE AMOUNT OF RS. 69 43 393/ - ACTUALLY RELATED TO THE COMMISSION PAID WHICH WORKED OUT TO 5.33% ON THE SALES. THE ASSESSEE FURTHER POINTED OUT THAT THERE WAS NO EXERCISE TO EVADE TAX BY MAKING THIS PAYMENT AS USC HAD ALSO PAID TAXES AT THE MAXIMUM RATE OF 30%. IN THIS REGARD RELIANCE WAS PLACED ON THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN CIT VS. INDO SAUDI SERVICES (TRAVEL) PVT. LTD. (2009) 310 ITR 306 (BOM) IN WHICH THE ISSUE OF DISALLOWANCE OF COMMISSION WAS DECIDED ON THE PARAMETERS OF TAX IMPLICATION. THE ASSESSEE ALSO FILED DETAILE D SUBMISSIONS WHICH ARE REPRODUCED AT PAGES 4 TO 7 OF THE APPELLATE ORDER. THE FIRST CONTENTION RAISED BY THE ASSESSEE IN THIS REGARD WAS THAT APPELLATE ORDER. THE FIRST CONTENTION RAISED BY THE ASSESSEE IN THIS REGARD WAS THAT THE PAYMENT MADE TO USC WAS OF MARKETING COMMISSION WHEREAS THE PAYMENT MADE TO OTHER PARTIES WAS SIMPLY SALES COMMISSION. IT WAS FURTHER STATED THAT THE ASSESSEE HAD NOT INCURRED THE MARKETING EXPENSES WHICH WERE INCURRED BY USC I.E. THE EXPENSES ON MARKETING STAFF TRAVELLING AND CONVEYANCE OF MARKETING STAFF ETC. THE ASSESSEE FURTHER CONTENDED THAT EFFECTIVE LY COMMISSION @ 19.27% WAS PAID IN THE FINANCIAL YEAR 2003 - 04 15.22% WAS PAID IN FINANCIAL YEAR 2004 - 05 AND 15.34% WAS PAID IN FINANCIAL YEAR 2005 - 06 AND THE SAME HAD BEEN ALLOWED VIDE ORDER PASSED UNDER SECTION 143(3) OF THE ACT EXCEPT SUM OF RS.75 000/ - WAS DISALLOWED IN ASSESSMENT YEAR 2004 - 05 FOR WANT OF VOUCHERS AGAINST WHICH REIMBURSEMENT OF EXPENSES WAS CLAIMED. IN THE YEAR UNDER APPEAL THE ASSESSEE POINTED OUT THAT THE EXPENSES ARE NOT REIMBURSED SEPARATELY BUT THE RATE OF COMMISSION WAS INCLUSI VE OF REIMBURSEMENT OF EXPENSES. IT WAS STRESSED BY THE ASSESSEE THAT THE COMMISSION PAID INCLUDED AN ELEMENT OF REIMBURSEMENT OF EXPENDITURE SINCE FOR THE PAST TWO ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 6 YEARS USC WAS GIVEN REIMBURSEMENT OF EXPENDITURE IN ADDITION TO THE COMMISSION WHEREAS I N THE YEAR UNDER APPEAL NO SUCH SEPARATE REIMBURSEMENT WAS GIVEN. IN THIS REGARD THE ASSESSEE STRESSED THAT THE ELEMENT OF REIMBURSEMENT OF EXPENSES WAS TO THE TUNE OF RS.1.31 CRORES AND THE RATE OF COMMISSION AFTER EXCLUDING THE SAME WORKED OUT TO 5.33 %. ANOTHER PLEA WAS RAISED THAT THERE WAS NO EVASION OF TAX BY MAKING COMMISSION PAYMENT. THE CIT(A) OBSERVED THAT THERE WAS MOU BETWEEN THE ASSESSEE AND USC ACCORDING TO WHICH IT HA D COMPLETE RESPONSIBILITY FOR MARKETING OF TOTAL RANGE OF ASSESSEES P RODUCTS. ACCORDINGLY CERTAIN EXPENSES OF EMPLOYEES AS WELL AS RELATED TO THE SALES FUNCTIONS EXHIBITIONS TRAVELLING ETC. WAS UNDERTAKEN BY USC WHICH WAS ALSO REIMBURSED BY THE ASSESSEE. AFTER EXCLUDING THESE REIMBURSEMENTS AS PER THE ASSESSEE THE RA TE OF COMMISSION WORKED OUT ONLY TO 5.33%. THE CIT(A) OBSERVED THAT THE ASSESSING OFFICER HAD NOT DOUBTED THE SERVICES RENDERED BY ASSOCIATE CONCERN USC NOR REIMBURSEMENT OF EXPENSES HAVE BEEN DOUBTED. ONLY THE ADHOC DISALLOWANCE HAS BEEN MADE OUT OF TOT AL PAYMENT RELYING ON AVERAGE RATE OF PAYMENT OF COMMISSION TO OTHER PARTIES WHICH WORKED OUT RELYING ON AVERAGE RATE OF PAYMENT OF COMMISSION TO OTHER PARTIES WHICH WORKED OUT TO 11%. REFERENCE WAS MADE TO THE RATIO LAID DOWN BY HONBLE BOMBAY HIGH COURT IN CIT VS. INDO SAUDI SERVICES (TRAVEL) PVT. LTD. (SUPRA) FOR THE PROPOSITION THA T IN THE FACTS OF SAID CASE THE HONBLE HIGH COURT NOTED THAT SISTER CONCERN TO WHOM THE COMMISSION WAS PAID TO THE ASSESSEE WAS ALSO ASSESSED TO TAX. THEREFORE IT RELIED ON CBDT CIRCULA R NO.6P DATED 06.07.1968 IN WHICH IT WAS STATED THAT NO DISALLOWAN CE UNDER SECTION 40A(2) OF THE ACT WAS TO BE MADE IN RESPECT OF PAYMENT MADE TO RELATIVES AND SISTER CONCERNS WHERE THERE WAS NO ATTEMPT TO EVADE TAX BY MAKING SUCH PAYMENT S. THE CIT(A) VIDE PARA 3.4 OF THE APPELLATE ORDER NOTED THAT ON THE DISALLOWED AM OUNT OF RS.57 16 864/ - THE TAX EFFECT WOULD WORKED OUT TO RS. 19 24 29 6/ - . ON THE OTHER HAND THE SAME WAS EXCLUDED FROM THE PAYMENT TO USC T HE NET TAX EFFECT WOULD WORKED OUT TO RS. 19 36 186/ - . THEREFORE THE CIT(A) IN THIS REGARD OBSERVED THAT THE DIS ALLOWANCE OF COMMISSION PAID TO SISTER CONCERN ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 7 BEING REVENUE NEUTRAL AND FOLLOWING THE JUDGMENT OF JURISDICTIONAL HIGH COURT DISALLOWANCE MADE UNDER SECTION 40A(2) OF THE ACT WAS THUS DELETED. 7. THE REVENUE IS IN APPEAL AGAINST THE ORDER OF CIT(A). 8. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT THE ISSUE RAISED VIDE GROUNDS OF APPEAL NO.1 TO 5 WAS IN RELATION TO THE COMMISSION PAID TO SISTER CONCERN WHICH WAS DISALLOWED BY INVOKING THE PROVISIONS OF SECTION 40A(2) OF THE ACT. THE ASSESSEE HAD PAID TO ITS SISTER CONCERN COMMISSION @ 7.5% AND ALSO PAID SALES VALUE OVER AND ABOVE THE LISTED PRICE. HE REFERRED TO THE MOU EXECUTED BETWEEN THE PARTIES PLACED AT PAGES 35 AND 36 OF THE PAPER BOOK WHEREIN UNDER CLAUSE 9 IT WAS AGREED THAT THE COMMISSION WOULD BE PAID TO USC TO COVER THE COST OF EMPLOYEES ETC. OUR ATTENTION WAS DRAWN TO THE PROFIT & LOSS ACCOUNT PLACED AT PAGE 38 OF THE PAPER BOOK AND IT WAS POINTED OUT THAT THE ASSESSEE ON ONE HAND HAD PAID COMMISSION TO COVE R COST OF EMPLOYEES ETC. ON ACCOUNT OF MARKETING BUT HAD ALSO SIMULTANEOUSLY INCURRED EXPENSES ON VARIOUS ITEMS AND DEBITED TO ITS PROFIT & LOSS ACCOUNT . 9. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN TURN RELYING ON VARIOUS CLAUSES OF MOU POINTED OUT THAT THE ASSESSEE WAS PAYING COMMISSION @ 7.5% OF THE NET SALES FOR MARKETING OF ITS PRODUCTS AND IF THE MACHINERY WAS SOLD FOR HIGHER PRICE THEN IT WAS AGREED THAT BALANCE WOULD BE RETAINED BY USC. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE HOWEVER STRESSED THAT THE QUANTUM OF COMMISSION PAID WAS SIMILAR / CONSTANT OVER A PERIOD OF TIME. IT WAS ALSO POINTED OUT BY HIM THAT THERE WAS NO TAX EVA SION AND IN THE ABSENCE OF THE SAME THERE WAS NO MERIT IN ANY DISALLOWANCE OF SAI D EXPENDITURE . HE FURTHER CLAIMED THAT THE SAID AMOUNT WAS PAID AS BUSINESS EXIGENCY AND SINCE SIMILAR RATE WAS ALLOWED IN THE EARLIER YEARS I.E. 3.78% IN ASSESSMENT YEAR 2004 - 05 10.76% IN ASSESSMENT YEAR ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 8 2005 - 06 WHICH WAS EXCLUDING THE REIMBURSEMENT OF EXPENSES THEN THE RULE OF CONSISTENCY IS TO BE APPLIED AND THE AMOUNT IS TO BE ALLOWED AS DEDUCTION. ANOTHER ISSUE RAISED BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS THAT 75% OF SALES MADE BY THE ASSESSEE WERE THROUGH USC AND HENCE TH E NECESSITY TO MAKE THE AFORESAID PAYMENT. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS ASKED TO COMPARE THE TERMS OF AGREEMENT WHICH WERE EARLIER ENTERED INTO BY THE ASSESSEE AND THE NEW AGREEMENT WHICH WAS APPLICABLE TO THE YEAR UNDER APP EAL. THE MATTER WAS ADJOURNED TO NEXT DATE OF HEARING. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE POINTED OUT THAT AS PER EARLIER AGREEMENT IN ADDITION TO THE COMMISSION PAID TO THE SISTER CONCERN THERE WAS REIMBURSEMENT OF EXPENSES. HOWEV ER UNDER THE NEW MOU THERE W AS ONLY PAYMENT OF COMMISSION TO USC AS PER MOU PLACED AT PAGES 35 AND 36 OF THE PAPER BOOK. HE STRESSED THAT COMMISSION PAID DURING THE YEAR WAS COMPARABLE TO THE EARLIER YEARS. HOWEVER THE ASSESSING OFFICER HAD INVOKED T HE PROVISIONS OF SECTION 40A(2) OF THE ACT SINCE SHRI ABHIJIT MORE WHO WAS THE PROPRIETOR OF USC WAS RELATED PERSON OF THE PARTNERS OF ABHIJIT MORE WHO WAS THE PROPRIETOR OF USC WAS RELATED PERSON OF THE PARTNERS OF ASSESSEE FIRM. OUR ATTENTION WAS DRAWN TO THE DETAILS OF EXPENSES CLAIMED AND THE COMPARISON CHART PLACED AT PAGE 37 OF THE PAPER BOOK. HE FURTHER STRESSED THAT THERE WAS NO TAX EVASION SINCE IN EARLIER YEARS ALSO SAME RATE OF COMMISSION WAS PAID TO USC IN ASSESSMENT YEAR 2004 - 05 COMMISSION @ 19.74% WAS WORKED OUT AND THE ASSESSING OFFICER HAD ALSO ACCEPTED THE SAME. T HE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN THIS REGARD PLACED RELIANCE ON THE RATIO LAID DOWN BY THE HONBLE BOMBAY HIGH COURT IN CIT VS. INDO SAUDI SERVICES (TRAVEL) PVT. LTD. (SUPRA) WHEREIN THE SISTER CONCERN WAS PAYING TAXES AT HIGHER TA XES AND THE COMMISSION PAID WAS ALLOWED IN ENTIRETY BY THE HONBLE BOMBAY HIGH COURT. ANOTHER POINT RAISED BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE WAS THAT THE ASSESSING OFFICER HAD ALLOWED COMMISSION @ 11% OUT OF TOTAL PAYMENT @ 15%. H E FURTHER STRESSED THAT WHERE A BUSINESS DECISION HAD BEEN TAKEN TO PAY COMMISSION THEN THE ASSESSING OFFICER CANNOT SIT IN JUDGMENT OF THE DECISION OF ASSESSEE. ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 9 REFERENCE WAS MADE TO VARIOUS CASE LAWS WHEREIN THE RATE OF COMMISSION PAID WAS HIGHER. 10 . WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD. THE ASSESSEE BEFORE US WAS ENGAGED IN THE BUSINESS OF MANUFACTURING OF CONSTRUCTION EQUIPMENT. THE ASSESSEE WAS CARRYING ON HIS BUSINESS FOR THE PAST SEVERAL YEARS BUT DURING THE ACCOUNTING P ERIOD THE ASSETS AND LIABILITIES OF ASSESSEE FIRM W ERE TAKEN OVER BY PRIVATE LIMITED COMPANY UNDER THE NAME AND STYLE OF M/S. UNIVERSAL EQUIPMENT MACHINERY AND EQUIPMENT PVT. LTD. ON 31.12.2005. THE ASSESSEE CLAIMS THAT IT HAD ENTERED INTO MOU WITH USC F OR MARKETING OF ITS PRODUCTS. THE ASSESSEE FIRM CONSTITUTED OF TWO PARTNERS I.E. MR. R.H. MORE AND MR. R.R. MORE . THE SISTER CONCERN USC WAS THE SOLE PROPRIETOR CONCERN OF SHRI ABHIJIT MORE WHO IS SON OF MR. R.H. MORE AND BROTHER OF MR. R.R. MORE . THE ASSESSEE HAD PAID COMMISSION TO THE TUNE OF RS.2.20 CRORES TO USC DURING THE YEAR AND SINCE THE PAYMENT WAS MADE TO RELATED PARTY AS DEFINED UNDER SECTION 40A(2)(B) OF THE ACT THE ASSESSEE WAS ASKED TO JUSTIFY PARTY AS DEFINED UNDER SECTION 40A(2)(B) OF THE ACT THE ASSESSEE WAS ASKED TO JUSTIFY THE PAYMENT MADE TO THE RELATED PARTY. THE A SSESSEE IN THIS REGARD CLAIMED THAT IT HAD PAID COMMISSION @ 7.5% TO USC AS PER MOU DATED 01.10.2004. HOWEVER THE ASSESSING OFFICER NOTED THAT IN ADDITION TO THE COMMISSION PAID THERE WAS CREDIT OF OTHER AMOUNTS WHICH WAS DIFFERENT FROM THE SALES COMMI SSION FOR THE SAID MANUFACTURE. THE TOTAL SALES EFFECTED BY USC FOR THE ACCOUNTING PERIOD WERE TO THE TUNE OF RS.13.02 CRORES AGAINST WHICH SALES COMMISSION OF RS. 97 74 081/ - WAS PAID AND DIFFERENTIAL SALES COMMISSION OF RS. 1 02 70 957/ - WAS PAID. THUS THE TOTAL AMOUNT PAID WAS RS.2.00 CRORES AFTER DEDUCTING SERVICE TAX WHICH WORKED OUT TO 15.39% WHICH WAS HIGHER THAN THE C OMMISSION PAID TO OTHER PARTIES WHO WERE BEING REIMBURSED @ 10% TO 13%. THE ASSESSEE IN THIS REGARD WAS ASKED TO JUSTIFY REASONA BLENESS OF PAYMENT MADE TO SISTER CONCERN IN VIEW OF THE PROVISIONS OF SECTION 40A(2) OF THE ACT. ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 10 11. IN ORDER TO ADJUDICATE THE ISSUE RAISED BY WAY OF GROUNDS OF APPEAL WE NEED TO TAKE NOTE OF THE TERMS AGREED UPON BETWEEN THE PARTIES FOR THE PAYMENT OF AFORESAID SALES COMMISSION. THE ASSESSEE HAD INITIALLY ENTERED INTO MOU ON FIRST DAY OF APRIL 2003 WITH USC BY WHICH THE SAID CONCERN WAS APPOINTED AS COMMISSION AGENT . AS PER CLAUSE (1) OF THE SAID AGREEMENT COP Y OF WHICH WAS PLACED ON RECORD DUR ING THE COURSE OF HEARING USC WAS TO ACT AS COMMISSION AGENT FOR THE TOTAL RANGE OF PRODUCTS MANUFACTURED BY THE ASSESSEE. FURTHER AS PER CLAUSE (2) USC WAS TO APPOINT STAFF EXCLUSIVELY FOR THE ASSESSEE OF WHICH THE SALARY AND OTHER EXPENSES SUCH AS TR AVELLING LODGING ETC. WOULD BE REIMBURSED AT ACTUAL ON SUBMISSION OF PROOF OF EXPENDITURE. FURTHER VIDE CLAUSE (3) USC WAS TO OBTAIN ORDERS IN THE NAME OF ASSESSEE WHO WOULD PASS THE BILL DIRECTLY TO CUSTOMERS/ DISTRIBUTORS. AS PER CLAUSE (4) IN CA SE OF WARRANTY SERVICES USC WAS TO INFORM THE ASSESSEE WHO WOULD TAKE CARE OF WARRANTY SERVICES. IT WAS AGREED BETWEEN THE PARTIES AS PER CLAUSE (5) ALL THE COMPONENTS PART S OF WHICH THE ASSESSEE HAD GIVEN WARRANTY TO CUSTOMERS WOULD BE PROVIDED BY TH E ASSESSEE FREE OF COST. IN VIEW WARRANTY TO CUSTOMERS WOULD BE PROVIDED BY TH E ASSESSEE FREE OF COST. IN VIEW THEREOF IT WAS AGREED AS PER CLAUSE (6) THE ASSESSEE WOULD MAKE ON ACCOUNT PAYMENT OF RS.7.5 LAKHS PER MONTH TO USC AS SPECIFIED UNDER CLAUSE (3) FOR WHICH USC WAS TO PROVIDE THE STATEMENT OF EXPENDITURE ALONG WITH PROO F OF REIMBURSEMENT. IF IN ANY GIVEN MONTH THE EXPENDITURE WAS LOWER THAN THE AMOUNT SO STATED IT WAS TO BE ADJUSTED IN THE FOLLOWING MONTHS. IN A MONTH WHERE THE EXPENDITURE REIMBURSEMENT WAS BEYOND THE LIMIT OF RS.7.5 LAKHS THEN IT WAS AGREED THAT TH E AMOUNT IN EXCESS OF RS.7.5 LAKHS WOULD BE BORNE BY USC AND THE ASSESSEE WOULD NOT REIMBURSE THE SAME. IN ADDITION TO THE SAID RS.7.5 LAKHS THE ASSESSEE WAS TO F URTHER PAY SALES COMMISSION OF 2.5% OF NET SALES TO USC ON QUARTERLY BASIS. THIS MOU BETWE EN THE PARTIES WAS IN FORCE TILL 30.09.2004. THE MOU BETWEEN THE PARTIES WAS AMENDED W.E.F. 01.10.2004 . AS PER THE AMENDED MOU THE ASSESSEE APPOINTED USC AS THE MARKETING ORGANIZATION I.E. FOR THE MARKETING OF TOTAL RANGE OF PRODUCTS MANUFACTURED BY IT. AS PER CLAUSE (2) OF THE SAID MOU USC WAS TO TAKE THE TOTAL ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 11 RESPONSIBILITY OF MARKETING APPOINTING DISTRIBUTION AND PROMOTION OF SALES OF ALL THE PRODUCTION OF ASSESSEE. FOR THIS AS PER CLAUSE (3) USC WAS TO APPOINT STAFF WHICH WOULD UNDERTAKE EXTE NSIVE TRAVELLING APPOINT DEALERS/DISTRIBUTORS ALL OVER INDIA EXCLUSIVELY FOR THE ASSESSEE. THE UNDERSTANDING WAS THAT USC WOULD OBTAIN ORDERS IN THE NAME OF ASSESSEE WHO IN TURN WOULD BILL DIRECTLY TO CUSTOMERS / DISTRIBUTORS. ANOTHER TERM AGREED BETW EEN THE PARTIES AS PER CLAUSE (5) USC WOULD TOTALLY BE RESPONSIBLE FOR COLLECTION OF PAYMENT AND IN CASE IF THE PAYMENT BECOMES B AD USC WAS TO TAKE RESPONSIBILITY OF LEGAL ACTION AND FOLLOW UP OF PAYMENT. FURTHER TREATMENT OF BAD DEBTS WAS TO BE DECID ED WITH MUTUAL UNDERSTANDING ON CASE TO CASE BASIS. IT WAS FURTHER AGREED BETWEEN THE PARTIE S AS PER CLAUSE (6) THAT USC WOULD TAKE PART IN ALL THE SALES EXHIBITIONS AS WELL AS WOULD UNDERTAKE THE RESPONSIBILITY OF PRINTING OF LEAFLETS BROCHURES. IN RES PECT OF WARRANTY SERVICES AS PER CLAUSES (7) AND (8) OF MOU USC HAD TO INFORM THE ASSESSEE AND ALL THE COMPONENTS / PARTS OF WHICH THE ASSESSEE HAD GIVEN WARRANTY TO ITS CUSTOMERS WOULD BE PROVIDED BY THE ASSESSEE FREE OF COST. AS PER CLAUSE (9) IT WA S AGREED THAT THE ASSESSEE WOULD MAKE PAYMENT FREE OF COST. AS PER CLAUSE (9) IT WA S AGREED THAT THE ASSESSEE WOULD MAKE PAYMENT AS SALES COMMISSION TO COVER THE COST OF EMPLOYEES OTHER EXPENSES INCLUDING EXHIBITION EXPENSES DEALER COMMISSION AND OTHER SERVICES RENDERED WHICH WOULD BE ON THE BASIS OF 7.5% OF NET SALES AND DIFFERENCE BE TWEEN SELLING PRICE AND DEALERS PRICE. AS PER CLAUSE (10) USC WAS TO RAISE AN INVOICE ON THE ASSESSEE FOR THE SALES COMMISSION DUE ALONG WITH ALL THE DETAILS ON MONTHLY BASIS. IT WAS ALSO AGREED BETWEEN THE PARTIES AS PER CLAUSE (11) THAT USC WOULD TAK E WRITTEN CONSENT FROM THE ASSESSEE FOR ANY SPECIAL DISCOUNT TO BE OFFERED TO ANY CUSTOMER. THE DELIVERIES WERE TO BE MADE IN THE FACTORY AND TRANSPORTATION CHARGES WOULD BE CHARGED AS PER THE TERMS OF ORDER. IN AGREEMENT THEREOF THE MOU WAS SIGNED BETW EEN THE PARTIES COPY OF WHICH IS PLACED AT PAGES 35 AND 36 OF THE PAPER BOOK. 12. AS PER AMENDED CLAUSES OF MOU ENTERED INTO ON 01.10.2004 THE UNDERSTANDING WAS THAT THE ASSESSEE AS MANUFACTURER OF ITS GOODS APPOINTED USC ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 12 AS MARKETING ORGANIZATION WH EREIN USC UNDERTOOK THE TOTAL RESPONSIBILITY OF MARKETING APPOINTING DISTRIBUTORS AND PROMOTION OF SALES OF THE ASSESSEE . IT WAS THE DUTY OF USC TO APPOINT STAFF AND TO UNDERTAKE EXTENSIVE TRAVELLING APPOINT DEALERS / DISTRIBUTORS ALL OVER INDIA EXCLUSI VELY FOR THE ASSESSEE. IN ADDITION USC ALSO UNDERTOOK THE RESPONSIBILITY FOR COLLECTION OF PAYMENTS AND ALSO TO APPOINT ALL SALES EXHIBITIONS. HOWEVER THE WARRANTY COMMITMENTS HAD TO BE PROVIDED BY THE ASSESSEE AT ITS OWN COST. THE UNDERSTANDING BETWE EN THE PARTIES WAS THAT THE SALES COMMISSION WOULD COVER THE COST OF EMPLOYEES OTHER EXPENSES INCLUDING EXHIBITION EXPENSES DEALER COMMISSION AND OTHER SERVICES RENDERED BY MAKING PAYMENT @ 7.5% ON NET SALES AND ALSO IN ADDITION PAYING THE DIFFERENCE BET WEEN SELLING PRICE AND DEALERS PRICE. THE TERMS OF THE MOU IMPLIED THAT THE DEALERS PRICE WOULD BE CHARGED BY THE ASSESSEE AND IN CASE USC MANAGES TO SELL THE PRODUCTS AT A PRICE HIGHER THAN THE DEALERS PRICE THEN THE DIFFERENCE BETWEEN THE SALES PRIC E AND DEALERS PRICE WOULD BE RETAINED BY HIM IN ADDITION TO THE PAYMENT OF COMMISSION @ 7.5% ON NET SALES. HOWEVER IN THE EARLIER UNDERSTANDING BETWEEN THE PARTIES WHEN 7.5% ON NET SALES. HOWEVER IN THE EARLIER UNDERSTANDING BETWEEN THE PARTIES WHEN THE ASSESSEE WAS NEW TO THE MARKET THE UNDERSTANDING WAS THAT USC WOULD ACT AS CO MMISSION AGENT FOR THE TOTAL RANGE OF PRODUCTS MANUFACTURED BY THE ASSESSEE BY WAY OF APPOINTMENT OF STAFF EXCLUSIVELY FOR THE ASSESSEE COST OF SALARY AND OTHER EXPENSES WAS TO BE REIMBURSED AT ACTUAL ON SUBMISSIONS OF PROOF OF EXPENDITURE. THE UPPER LI MIT OF RS.7.5 LAKHS PER MONTH WAS SPECIFIED ON THIS ACCOUNT. IT WAS UNDERSTOOD BETWEEN THE PARTIES THAT THE EXPENSES ON ACCOUNT OF STAFF WOULD BE TO THE TUNE OF RS.7.5 LAKHS PER MONTH AND IN CASE IN ANY MONTH IT WAS LESSER OF RS.7.5 LAKHS THEN THE SAME WOULD BE ADJUSTIED IN THE FOLLOWING MONTHS. HOWEVER IN CASE IT WENT BEYOND THE LIMIT OF RS.7.5 LAKHS THE AMOUNT IN EXCESS HAD TO BE BORNE BY USC AND THE ASSESSEE WOULD NOT REIMBURSE THE SAME. IN ADDITION THE SALES COMMISSION WAS TO BE PAID @ 2.5% OF N ET SALES TO USC ON QUARTERLY BASIS. THESE WERE THE TERMS ENTERED INTO BY THE ASSESSEE WITH USC WHICH IS A RELATED CONCERN AT THE START OF ITS BUSINESS OF MANUFACTURING OF CONSTRUCTION MACHINERY. ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 13 13. BUT LATER ON THE TERMS WERE AMENDED BY WAY OF MOU EN TERED ON 01.10.2004 WHEREIN AS AGAINST SALES COMMISSION 2.5% OF NET SALES IT WAS AGREED BETWEEN THE PARTIES THAT THE COMMISSION WOULD BE PAID @ 7.5% OF NET SALES. ADMITTEDLY THE SAID SALES COMMISSION WAS TO COVER THE COST OF EMPLOYEES OTHER EXPENSES INCLUDING EXHIBITION DEALER S COMMISSION ETC. IN ADDITION . T HE HIGHER RATE OF COMMISSION OF 7 .5 % ON NET SALES WAS AS AGAINST 2.5% AGREED BETWEEN THE PARTIES EARLIER. ALSO ANOTHER REMUNERATION WAS AGREED UPON BETWEEN THE PARTIES. THE PARTIES CAME TO AN UNDERSTANDING THAT USC CAN SELL THE PRODUCTS MANUFACTURED BY THE ASSESSEE AT A PRICE HIGHER THAN THE DEALERS PRICE AND THE DIFFERENCE BETWEEN THE SELLING PRICE AND DEALERS PRICE WAS RETAINED BY USC. OTHER TERMS OF PROVIDING WARRANTY ON THE GOODS MANUFA CTURED BY THE ASSESSEE WERE THE RESPONSIBILITY OF ASSESSEE INCLUDING COST OF COMPONENTS AND PARTS ON WHICH THE ASSESSEE HAD GIVEN WARRANTY TO THE CUSTOMERS. THE ASSESSEE HAS FURNISHED COMPARISON PERCENTAGE OF COMMISSION PAID TO USC YEAR - WISE . THE PERUSA L OF THE SAID DETAILS FILED AT PAGE 37 OF THE PAPER BOOK REFLECTS THAT THE TOTAL SALES OF ASSESSEE HAVE STEADILY INCREASED FROM YEAR TO YEAR I.E. AS THAT THE TOTAL SALES OF ASSESSEE HAVE STEADILY INCREASED FROM YEAR TO YEAR I.E. AS AGAINST SALES OF RS.6.59 CRORES IN FINANCIAL YEAR 2003 - 04 SALES IN FINANCIAL YEAR 2004 - 05 WERE TO THE TUNE OF RS.11.26 CRORES. FURTHER IN THE YEAR UNDER CONSIDERATION FOR THE PERIOD UP TO 31.12.2005 SALES WERE TO THE TUNE OF RS. 18.25 CRORES. THE PERCENTAGE OF SALES THROUGH USC TO TOTAL SALES WAS 89% IN THE FIRST YEAR TO 96% IN THE NEXT YEAR AND ONLY 17.34% IN THE YEAR UNDER APPEAL. THE ASSESSEE HAD PAID COMMISSION TO USC IN FINANCIAL YEAR 2003 - 04 AT RS.22 20 761/ - IN FINANCIAL YEAR 2004 - 05 AT RS. 1 16 44 891/ - AND IN THE YEAR UNDER APPEAL WAS AMOUNTING TO RS. 1 99 80 971/ - . IN ACTUAL FACT AS NOTED BY THE ASSESSING OFFICER ON SALES EFFECTED BY USC TO THE TUNE OF RS.13.02 CRORES THE ASSESSEE HAD PAID SALES COMMISSION OF RS. 97 74 081/ - AND HAD PAID DIFFERENTIAL SALES COMMISSION OF RS. 1 02 70 957/ - WHICH TOTALED TO RS.2.00 CRORES AFTER DEDUCTING SERVICE TAX. THE ASSESSEE HAD REIMBURSED THE EXPENSES TO USC TO THE TUNE OF RS. 90 90 349/ - IN FINANCIAL YEAR 2003 - 04 AND RS.48 21 709/ - IN FINANCIAL YEAR 2004 - 05. THE CLAIM OF THE ASSESSEE BEFORE US WHICH ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 14 WAS VEHEMENTLY STRESSED BY THE LEARNED AUTHORIZED REPRESENTA TIVE FOR THE ASSESSEE TIME AND AGAIN THAT THE PERCENTAGE OF TOTAL COMMISSION TO THE SALES THROUGH USC AFTER INCLUDING THE REIMBURSEMENT OF EXPENSES WORKED OUT TO 19.27% IN FINANCIAL YEAR 2003 - 04 15.22% IN FINANCIAL YEAR 2004 - 05 AND 15.34% IN FINANCIAL YE AR 2005 - 06 WHICH WAS IN RANGE. HOWEVER IN CASE THE REIMBURSEMENT OF EXPENSES IS EXCLUDED THEN THE ASSESSEE HAD PAID COMMISSION @ 3.78% TO USC IN THE FINANCIAL YEAR 2003 - 04 @ 10.76% IN FINANCIAL YEAR 2004 - 05 AND @ 15.34% IN FINANCIAL YEAR 2005 - 06. 1 4 . ANOTHER ASPECT WHICH HAS BEEN HIGHLIGHTED BY THE ASSESSEE IS PROFIT & LOSS ACCOUNT PREPARED FOR THE YEAR ENDING 31.03.2006 WHEREIN THE ASSESSEE HAD BIFURCATED THE COMMISSION INCOME AND THE TRADING INCOME VIS - - VIS THE COMMISSION EXPENSES AND TRADING EXPE NSES. THE PERUSAL OF DETAILS FILED AT PAGE 38 OF THE PAPER BOOK REFLECTED THE TRADING SALES TO BE AT RS.2.82 CRORES WHEREAS IN THE COMPARISON FIGURE TOTAL SALES OF ASSESSEE WERE DECLARED AT RS.1.82 CRORES. THE PERUSAL OF ASSESSMENT ORDER WITH SPECIAL M ENTION AT PAGE 4 OF THE ASSESSMENT ORDER REFLECTED ASSESSMENT ORDER WITH SPECIAL M ENTION AT PAGE 4 OF THE ASSESSMENT ORDER REFLECTED THAT THE ASSESSEE VIDE REPLY DATED 11.12.2008 HAD CLAIMED THAT THE COMMISSION WAS PAID TO USC NOT ONLY FOR SALES BUT ALSO SINCE USC HAD INCURRED EXPENDITURE ON EMPLOYEES SELLING AND DISTRIBUTION EXPENSES TRAVELLING EXPENSES ADVERTISEMENT AND EXHIBITION ETC. HOWEVER IN A LATER PARAGRAPH THE ASSESSING OFFICER NOTES THAT THE ASSESSEE HAD REIMBURSED THE EXPENSES INCURRED BY USC ON ACCOUNT OF SEMINARS CONFERENCE TRAVELLING EXPENSES LODGING CHARGES AND OTHER SALES RELATED EXPENSES INCURRED FOR THE ASSESSEE. THE ASSESSING OFFICER FURTHER REITERATES THAT THE EXPENDITURE INCURRED BY USC FOR SEMINARS CONFERENCE TRAVELLING ETC. WERE REIMBURSED BY THE ASSESSEE. THE ASSESSEE IN THE WRITTEN SUBMISSIONS FILE D BEFORE THE CIT(A) CLAIMS THAT THE COMMISSION PAID TO USC INCLUDED THE ELEMENT OF REIMBURSEMENT OF EXPENDITURE TO THE TUNE OF RS.1.31 CRORES AND IN CASE THE SAME IS EXCLUDED FROM THE TOTAL COMMISSION PAYMENT THEN THE RATE OF COMMISSION WOULD BE WORKED OU T TO 5.33% . IN THIS THE ASSESSEE HAS TAKEN THE TURNOVER ON WHICH ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 15 COMMISSION HAS BEEN PAID AT RS.13.02 CRORES AND AFTER EXCLUDING THE ELEMENT OF REIMBURSEMENT OF EXPENSES AT RS.1.31 CRORES OUT OF TOTAL COMMISSION OF RS.2.00 CRORES. THE ASSESSEE CLAIMS TH AT THE ACTUAL COMMISSION PAID WAS ONLY RS.69 43 393/ - . IN CASE THE REIMBURSEMENT OF EXPENSES AS MADE UNDER THE PRESENT MOU ARE COMPARED TO THE REIMBURSEMENT OF EXPENSES AS UNDER THE EARLIER MOU WHERE THERE WAS AN UPPER LIMIT OF REIMBURSEMENT OF EXPENDITUR E TO THE TUNE OF RS.7.5 LAKHS PER MONTH WHEREAS IN THE YEAR UNDER CONSIDERATION WHERE THE BUSINESS OF ASSESSEE STANDS ESTABLISHED THE REIMBURSEMENT OF EXPENDITURE IS CLAIMED TO BE TO THE TUNE OF RS.1.31 CRORES. THE CLAIM MADE BY THE ASSESSEE THUS IS O N HIGHER SIDE AND SINCE THE PERSON TO WHOM THE PAYMENT HAS BEEN MADE I S RELATED CONCERN THE ONUS IS UPON THE ASSESSEE TO ESTABLISH THAT THE SAID PAYMENT HAS BEEN MADE ON REASONABLE BASIS AS PER MARKET CONDITIONS. 15. IN ORDER TO ESTABLISH ITS CLAIM TH E ASSESSEE TIME AND AGAIN HAS CLAIMED THAT IN CASE IT IS HELD THAT THE ASSESSEE HAD MADE EXCESS PAYMENT OF SALES COMMISSION TO CASE IT IS HELD THAT THE ASSESSEE HAD MADE EXCESS PAYMENT OF SALES COMMISSION TO USC BY RS. 57 16 864/ - THEN IT IS TAX NEUTRAL AS THE USC HAS PAID EXCESS TAX ON SALES COMMISSION. IN ORDER TO JUSTIFY ITS CLAIM THE ASSESSEE HAS RE - WORKED THE FIGURES OF TRADING AND PROFIT & LOSS ACCOUNT OF USC UNDER WHICH IT WAS POINTED OUT THAT USC HAS TWO TYPES OF TRANSACTION; ONE TRADING ON ITS OWN AND SECOND ONE IS COMMISSION INCOME EARNED BY THE SAID USC. THE EXPENSES HAVE ALSO BEEN BIFURCATED BETWEEN THE TWO UNITS WHEREIN AS PER THE DETAILS FILED ON SALES OF RS.2.82 CRORES USC HAS INCURRED LOSS OF RS. 23 68 451/ - AS AGAINST NET PROFIT OF RS. 73 48 947/ - ON TOTAL COMMISSION OF RS.2.04 CRORES. THE LOSS ARISING IN THE TRADIN G BUSINESS IS TO BE SET OFF AGAINST THE PROFIT ARISING IN THE COMMISSION BUSINESS. THE PROFIT & LOSS ACCOUNT WAS RE - CASTED BY THE ASSESSEE IN ORDER TO WORK OUT THE PROFIT ON COMMISSION INCOME. HOWEVER NO SUCH BIFURCATION IS MADE BY USC IN ITS BOOKS OF A CCOUNT. THE SAID CONCERN USC HAS ONLY SHOWN NET PROFIT OF RS.49 80 496/ - IN ITS CUMULATIVE TRADING PROFIT & LOSS ACCOUNT FOR ITS TRADING BUSINESS AND ALSO THE ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 16 COMMISSION INCOME EARNED BY IT. THE COPY OF PROFIT & LOSS ACCOUNT IS PLACED AT PAGE 41 OF THE PAPER BOOK. THE SOLE PROPRIETOR OF USC MR. ABHIJIT MORE HAS FURNISHED THE RETURN OF INCOME DECLARING INCOME FROM UNIVERSAL SALES CORPORATION AT RS. 49 18 574/ - . IN ADDITION IT HAS DECLARED INCOME FROM ANOTHER UNIT AND INCOME FROM OTHER SOURCES DECLARING TOTAL INCOME OF RS. 63 72 716/ - . THE CONTENTION OF ASSESSEE THAT ON THE SO - CALLED INCOME SALES COMMISSION OF RS. 57 16 864/ - MR. ABHIJIT MORE HAD PAID TAXES @ 33.66% IS MISPLACED AS FROM THE SOLE PROPRIETARY CONCERN OF USC ONLY NET INCOME OF RS. 49 18 574 / - HAS BEEN DECLARED. AS REFERRED TO IN THE PARAS HEREINABOVE THE SAID RS. 49 18 574/ - IS INCLUSIVE OF TRADING INCOME ON SALES OF RS.2.82 CRORES AND ALSO THE COMMISSION RECEIVED. THE BALANCE INCOME DECLARED BY THE SAID SHRI ABHIJIT MORE IN HIS RETURN OF INCOME IS FROM ANOTHER SERVICE DIVISION AT RS.13 92 220/ - WHICH THEN TOTALS UP TO INCOME OF RS.62 10 754/ - HAS NO CONNECTION WITH THE SALES COMMISSION PAID BY THE ASSESSEE TO USC AND HENCE THE BENEFIT OF SAME CANNOT BE ALLOWED IN ORDER TO DETERMINE WHETHE R TRANSACTION IS REVENUE NEUTRAL OR NOT. IN THE GIVEN SET OF FACTS WHERE THE RECIPIENT OF COMMISSION REVENUE NEUTRAL OR NOT. IN THE GIVEN SET OF FACTS WHERE THE RECIPIENT OF COMMISSION HAS DECLARED ITS INCOME AT A FIGURE LOWER THAN THE DISALLOWANCE MADE IN THE HANDS OF ASSESSEE THERE IS NO MERIT IN THE CLAIM OF ASSESSEE IN THIS REGARD. CONSEQUENTLY THE RELIANCE PLACED UPON BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE ON THE RATIO LAID DOWN BY T HE HONBLE BOMBAY HIGH COURT IN CIT VS. INDO SAUDI SERVICES (TRAVEL) PVT. LTD. (SUPRA) IS MISPLACED. 1 6 . NOW COMING TO THE ALLOW ABILITY OF CLAIM OF COMMISSION IN THE HANDS OF ASSESSEE VIS - - VIS PROVISIONS OF SECTION 40A(2) OF THE ACT. THE PROVISIONS OF SECTION 40A(1) OF THE ACT SHALL HAVE EFFECT NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED IN ANY OTHER PROVISIONS OF THE ACT RELATING TO COMPUTATION OF INCOME UNDER THE HEAD PROFITS AND GAINS OF THE BUSINESS THE PROVISIONS OF THIS SECTION WOULD APPLY. UNDER SECTION 40A(2)(A) OF THE ACT IT IS PROVIDED THAT WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMEN T IS MADE OR IS TO BE MADE TO ANY PERSONS ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 17 SPECIFIED UNDER CLAUSE (B) OF THE SAID SUB - SECTION AND WHERE THE ASSESSING OFFICER IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE MARKET VALUE OF THE GOODS SERVICES OR FA CILITIES FOR WHICH THE PAYMENT IS MADE THEN SO MUCH OF THE EXPENDITURE AS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS DEDUCTION. THE LIST OF PERSONS REFERRED TO IN CLAUSE (A) ARE PROVIDED UNDER CLAUSE (B) TO THE SAID SUB - SECTION. ADMITTEDLY IN THE GIVEN FACTS OF THE CASE THE PAYMENT MADE BY THE ASSESSEE TO US C IS COVERED BY THE PROVISIONS OF SECTION 40A(2)(A) OF THE ACT AS US C IS A PERSON COVERED UNDER CLAUSE (B) TO THAT SUB - SECTION. THE ISSUE WHICH ARISES IS WHETHER IN THE FACTS AND CIRCUMSTANCES OF THE PRESENT CASE THE EXPENDITURE INCURRED BY THE ASSESSEE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE MARKET VALUE OF THE GOODS SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE. AS POINTED OUT IN THE PARAS HER EINABOVE THE ASSESSEE HAD PAID SALES COMMISSION OF RS. 97 74 081/ - AND HAD PAID DIFFERENTIAL SALES COMMISSION OF RS. 1 02 70 957/ - . THE DIFFERENTIAL SALES COMMISSION WAS THE DIFFERENCE BETWEEN THE LISTED PRICE OF THE GOODS AND THE PRICE AT WHICH THE DIFFERENCE BETWEEN THE LISTED PRICE OF THE GOODS AND THE PRICE AT WHICH THE COMMIS SION AGENT I.E. US C HAD SOLD THE SAID GOODS IN THE MARKET. THE SALES COMMISSION WAS PAID @ 7 .5% OF NET SALES. THE ASSESSEE WAS ALSO PAYING THE COMMISSION TO OTHER PARTIES. HOWEVER THERE WAS NO SUCH CLAUSE OF PAYING ANY DIFFERENTIAL SALES COMMISSION TO ANY OTHER PERSON. EVEN IN EARLIER YEARS WHEN THE ASSESSEE WAS SETTING UP HIS BUSINESS NO SUCH UNDERSTANDING EXISTED BETWEEN THE PARTIES. THE CONTRACT PROVIDED CERTAIN AMOUNT TO BE PAID ON ACCOUNT OF COMMISSION BUT THERE WAS NO UNDERSTANDING TO PAY ANY D IFFERENTIAL SALES COMMISSION. THE TOTAL COMMISSION PAID TO THE ASSESSEE WORKS OUT TO ABOUT RS.2 CRORES AFTER DEDUCTING SERVICES TAX WHICH WORKED OUT TO 15.39% ON THE SALES EFFECTED THROUGH US C WHICH WAS ADMITTEDLY HIGHER THAN THE COMMISSION PAID TO OTHE R PARTIES WHO WERE BEING REIMBURSED AT 10% TO 13%. THE ASSESSEE CLAIMS THAT IT WAS BUSINESS DECISION AND UNDERSTANDING BETWEEN THE PARTIES AND THE SAME CANNOT BE DISTURBED BY ANY OF THE AUTHORITIES. HOWEVER IN CASE S WHERE THE PROVISIONS OF SECTION 40A(2 )(A) OF THE ACT ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 18 ARE ATTRACTED THEN THE SAID PROVISIONS ARE TO BE APPLIED IRRESPECTIVE OF THE UNDERSTANDING BETWEEN THE PARTIES. THE ENDEAVOUR OF ASSESSEE IN THIS REGARD WA S TO JUSTIFY THE MARKET VALUE OF SERVICES PROVIDED BY US C AGAINST WHICH THE PAYMENT WA S BEING MADE TO THE ASSESSEE. THE AMENDED CLAUSES OF AGREEMENT AS AGREED UPON VIS - - VIS CLAUSES OF ORIGINAL AGREEMENT ITSELF POINTS OUT THAT IN THE SCENARIO WHERE THE SALES THROUGH US C HAD DROP PED SUBSTANTIALLY BUT THE RATE OF COMMISSION HAS BEEN INC REASED WITHOUT ANY BASIS. THE ASSESSING OFFICER HAD ALLOWED THE COMMISSION @ 11% OUT OF TOTAL PAYMENT OF 15%. AGAINST THE SAID ORDER OF ASSESSING OFFICER THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE BEFORE US HAS REFERRED TO VARIOUS CASE LAWS WHERE THE RATE OF COMMISSION PAID WAS HIGHER THAN WHAT HAS BEEN ALLOWED IN THE HANDS OF ASSESSEE. WE FIND NO MERIT IN THE SAID RELIANCE PLACED UPON BY THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN VIEW OF PECULIAR FACT S AND CIRCUMSTANCES OF T HE CASE WHERE THE ASSESSEE IN ADDITION TO PAYING SALES COMMISSION AT A PARTICULAR RATE HAS FURTHER PAID DIFFERENTIAL SALES COMMISSION ON ACCOUNT OF DIFFERENCE IN LISTED PRICE AND THE PRICE AT WHICH THE GOODS ARE SOLD. THERE ACCOUNT OF DIFFERENCE IN LISTED PRICE AND THE PRICE AT WHICH THE GOODS ARE SOLD. THERE IS NO JUSTIFICATION FOR SUCH A PAYMENT IN VIEW OF PROVISIONS OF SECTION 40A(2)(A) OF THE ACT. WE HOLD THAT ENDS OF JUSTICE WOULD BE MET BY ALLOWING THE NET COMMISSION @ 12.5% AND THE BALANCE WOULD BE DISALLOWED IN THE HANDS OF ASSESSEE. ACCORDINGLY THE FIRST ISSUE RAISED BY THE REV ENUE IS THUS PARTLY ALLOWED. 17. THE SECOND ISSUE RAISED BY WAY OF GROUND OF APPEAL NO.6 BY THE REVENUE IS AGAINST THE CLAIM OF DEDUCTION UNDER SECTION 80IB(3) OF THE ACT. 18. BRIEFLY THE FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSEE FOR THE YEAR U NDER CONSIDERATION HAD CLAIMED DEDUCTION ON ACCOUNT OF SMALL SCALE INDUSTRIAL UNDERTAKING @ 25% OF THE PROFITS AND GAINS DERIVED FROM THE INDUSTRIAL UNDERTAKING U/S.80IB(3) OF THE ACT . THE ASSESSEE CLAIMS THAT IT WAS REGISTERED AS SMALL SCALE INDUSTRIAL (SSI) UNDERTAKING IN DECEMBER 1995 AND WAS CLAIMING DEDUCTION UNDER ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 19 SECTION 80IB(3) OF THE ACT . ACCORDING TO THE ASSESSEE THE YEAR UNDER APPEAL I.E. ASSESSMENT YEAR 2006 - 07 WAS THE LAST YEAR FOR CLAIMING DEDUCTION. THE ASSESSING OFFICER NOTED THAT IN O RDER TO BE ELIGIBLE FOR CLAIMING THE DEDUCTION UNDER SECTION 80IB(3) OF THE ACT ONE OF THE PRE - CONDITIONS WAS THAT THE INVESTMENT OF ASSESSEE IN PLANT & MACHINERY AS ON LAST DATE OF PREVIOUS YEAR SHOULD NOT EXCEED RS.1 CRORE. IN THIS REGARD RELIANCE WAS PLACED ON THE RATIO LAID DOWN BY THE HONBLE KERALA HIGH COURT IN CIT VS. HINTANNIA PLASTICS (P) LTD. REPORTED IN 267 ITR 114 (KER) . IN ORDER TO EXAMINE THAT THE ASSESSEE WAS FULFILLING THE CRITERIA THE ASSESSING OFFICER SHOW CAUSED THE ASSESSEE TO GIV E THE SCHEDULE OF FIXED ASSETS FROM INCEPTION. THE ASSESSEE IN REPLY FILED SCHEDULES FROM FINANCIAL YEAR 1996 - 97 TO FINANCIAL YEAR 2005 - 06 EXCEPT FOR FINANCIAL YEAR 1998 - 99. THE ASSESSEE FURTHER RELIED ON CIRCULAR ISSUED BY MINISTRY O F SSI AGRO AND RURA L INDUSTRIES AS PER WHICH ANY UNIT WHICH HAD RECEIVED PROVISIONAL / PERMANENT REGISTRATION PRIOR TO 24.12.1999 AND HAD TAKEN CONCRETE STEPS FOR IMPLEMENTING THE PROJECT WOULD CONTINUE TO ENJOY THE SSI STATUS SO LONG AS INVESTMENT IN PLANT & MACHINERY DOE S NOT EXCEED RS.300 LAKHS. THE SO LONG AS INVESTMENT IN PLANT & MACHINERY DOE S NOT EXCEED RS.300 LAKHS. THE UPPER LIMIT OF INVESTMENT IN PLANT & MACHINERY UP TO 10.12.1997 WAS RS.100 LAKHS WHICH WAS INCREASED TO RS.300 LAKHS W.E.F. 11.12.1998 AND W.E.F. 21.12.1999 THE INVESTMENT LIMIT WAS AGAIN REDUCED TO RS.100 LAKHS. THE ASSES SING OFFICER NOTED TH E CLARIFICATION WITH REGARD TO UNITS WHICH HAVE BEEN REGISTERED WHEN THE CREDIT LIMIT WAS RS.300 LAKHS AND THOSE WHO HAD TAKEN CONCRETE STEPS FOR IMPLEMENTING THE PROJECT. HOWEVER WHEN THE ASSESSEE WAS REGISTERED AS SSI THE INVESTME NT LIMIT IN PLANT & MACHINERY WAS ONLY RS.100 LAKHS AND EVEN WHEN THE LIMIT WAS INCREASED TO RS.300 LAKHS THE ASSESSEES INVESTMENT DID NOT EXCEED RS.100 LAKHS SO AS PER THE ASSESSEE THE CIRCULAR HAD NO RELEVANCE TO THE INSTANT CASE. THE ASSESSING OFFI CER HAS TABULATED YEAR - WISE INVESTMENTS IN PLANT & MACHINERY COMPUTER AND CRANES OFFICE EQUIPMENT AND VEHICLES AT PAGE 7 OF THE ASSESSMENT ORDER. AS PER THE ASSESSEE FOR ARRIVING AT INVESTMENT FIGURE IN PLANT & MACHINERY THE ITEMS SHOWN UNDER THE HEAD PLANT & MACHINERY IN THE CHART ONLY SHOULD BE TAKEN. HOWEVER THE ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 20 ASSESSING OFFICER WAS OF THE VIEW THAT SINCE AS PER THE DEPRECIATION SCHEDULE OF INCOME TAX ACT PLANT & MACHINERY INCLUDE S OFFICE EQUIPMENT COMPUTER S VEHICLES ETC. AND EVEN THE MINIS TRY OF INDUSTRY VIDE S.O. NO.857(E) DATED 10.12.1997 HAD DEFINED THE PLANT & MACHINERY WHICH EXCLUDES COST OF RESEARCH & DEVELOPMENT POLLUTION CONTROL EQUIPMENT TOOL JIGS DIES MOULDS AND SPARE PARTS. BANK CHARGES ERECTION AND INSTALLATION CHARGES COST OF TRANSPORTATION ETC. THE ASSESSING OFFICER FURTHER NOTED THAT WHATSOEVER HAD TO BE EXCLUDED AS PER SAID NOTIFICATION HAD BEEN EXCLUDED AND COST HAD BEEN ARRIVED ACCORDINGLY. THE ASSESSING OFFICER FURTHER OBSERVED THAT EVEN IF COST OF PLANT & MAC HINERY AS DESCRIBED BY THE ASSESSEE WAS TAKEN COST OF INVESTMENT WAS RS. 1 02 26 946/ - AND IN CASE THE COST OF INVESTMENT IN OFFICE EQUIPMENT COMPUTERS CRANES AND VEHICLES WAS ALSO TAKEN BY ADOPTING THE PLANT & MACHINERY AS PER THE INCOME TAX ACT THEN C OST COMES TO RS. 1 81 87 705/ - . THE ASSESSING OFFICER THUS HELD THAT THE ASSESSEE WAS INELIGIBLE TO CLAIM THE DEDUCTION UNDER SECTION 80IB(3) OF THE ACT AND ACCORDINGLY SUM OF RS. 29 77 149/ - WAS ADDED BACK TO THE RETURNED INCOME. WAS ADDED BACK TO THE RETURNED INCOME. 19. THE CIT(A) VIDE PAR A 4 ONWARDS CONSIDERED THE CLAIM OF ASSESSEE UNDER SECTION 80IB(3) OF THE ACT. THE CASE OF ASSESSEE BEFORE THE CIT(A) WAS THAT WHILE CALCULATING INVESTMENT IN PLANT & MACHINERY FOR WORKING OUT THE COST AT RS. 1 02 26 946/ - THE ASSESSING OFFICER HAD MADE A N ARITHMETIC ERROR. THE ASSESSEE STRESSED THAT ONLY INVESTMENT IN PLANT & MACHINERY WAS TO BE CONSIDERED AND THE EXTENDED MEANING UNDER THE INCOME TAX ACT WAS NOT TO BE APPLIED AND CONSEQUENTLY COMPUTERS OFFICE EQUIPMENT AND VEHICLES WERE NOT TO BE CONS IDERED AS PLANT & MACHINERY. THE ASSESSEE FURTHER POINTED OUT THAT THE INVESTMENT IN PLANT & MACHINERY AS ON 31.12.2005 WAS RS.96 94 358/ - WHICH WAS MUCH LESS THAN THE CEILING LIMIT OF RS.1 CRORE HENCE THE ASSESSEE WAS TO BE REGARDED AS SSI UNDER SECTION 11B OF INDUSTRIES (DEVELOPMENT AND REGULATION) ACT 1951 (IDRA) AND WAS THUS ENTITLED TO THE CLAIM OF DEDUCTION UNDER SECTION 80IB(3) OF THE ACT. THE ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 21 ASSESSEE POINTED OUT THAT CERTAIN COSTS HAD TO BE EXCLUDED IN CALCULATI NG THE COST OF PLANT & MACHINERY AS PER NOTIFICATION ISSUED UNDER SECTION 11B OF IDRA. FURTHER RELIANCE WAS PLACED ON CERTIFICATE ISSUED BY THE DISTRICT INDUSTRIES CENTRE WHICH WAS THE AUTHORITY TO GRANT STATUS OF SSI UNDER THE IDRA UNDER WHICH IT HAS BEEN CERTIFIED THAT THE ASSESSEE WAS SSI. THE ASSESSEE ELABORATED THE WORKING OUT OF COST OF PLANT & MACHINERY BY WAY OF APPLICATION FILED UNDER RULE 46A OF INCOME TAX RULES 1962 (THE RULES) AND POINTED OUT TH E YEAR - WISE ADJUSTMENTS TO BE MADE IN THE HANDS OF ASSESSEE. THE ADDITIONAL EVIDENCE WAS FORWARDED TO THE ASSESSING OFFICER IN VIEW OF RULE 46 OF THE RULES WHO IN TURN FILED REMAND REPORT. THE ASSESSING OFFICER COMMENTED UPON VARIOUS DOCUMENTS FURNISHED BY THE ASSESSEE AND CONCLUDED BY STATING THAT WHERE THE ASSESSEE HAD SUBMI TTED THE RELEVANT DETAILS ALONG WITH CERTAIN DOCUMENTS THE ASSESSEES CONTENTION REGARDING THE ADDITIONS TO PLANT & MACHINERY AND CENVAT DEDUCTION IN RESPECTIVE YEARS APPEARED TO BE GENUINE AND HENCE THE ASSESSEES CLAIM FOR DEDUCTION UNDER SECTION 80IB( 3) OF THE ACT BE DECIDED ON MERITS. THE CIT(A) VIDE PARA 4.5 NOTED THAT THE ASSESSEE HAD POINTED OUT THAT THERE WAS AN THE CIT(A) VIDE PARA 4.5 NOTED THAT THE ASSESSEE HAD POINTED OUT THAT THERE WAS AN ERROR TO THE EXTENT OF RS. 2 51 227/ - IN RESPECT OF FIGURE OF ADDITION IN THE PLANT & MACHINERY FOR ASSESSMENT YEAR 1999 - 2000 AND RS. 2 19 770/ - IN RESPECT OF ASSESSMENT YEAR 2005 - 06 WHICH WAS FOUND TO BE CORRECT BY THE ASSESSING OFFICER AS PER HIS REPORT. FURTHER TOTAL AMOUNT OF RS. 61 392/ - TOWARDS COST OF TOOLS WAS NOT DEDUCTED FROM PLANT & MACHINERY VALUE WHEREAS AS PER NOTIFICATION D EFINING SSI ISSUED UNDER THE PROVISIONS OF SECTION 11B OF IDRA THIS WAS REQUIRED TO BE DEDUCTED. CONSIDERING THEREOF THE CIT(A) REFERRED TO THE REMAND REPORT OF ASSESSING OFFICER DATED 28.07.2009 IN WHICH THE ASSESSING OFFICER HAD ACCEPTED THE CONTENTI ON OF ASSESSEE AND HELD THAT AFTER EXCLUDING THE AMOUNTS AS STATED BY THE ASSESSEE THE CONDITION OF INVESTMENT IN PLANT & MACHINERY BELOW RS.1 CRORE WAS FULFILLED AND AS SUCH THE ASSESSEE WAS ENTITLED TO THE CLAIM OF DEDUCTION UNDER SECTION 80IB(3) OF TH E ACT . ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 22 20. THE REVENUE IS IN APPEAL AGAINST THE ORDER OF CIT(A). 21. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE P LACED RELIANCE ON THE ORDER OF ASSESSING OFFICER AND POINTED OUT THAT NO DEDUCTION IS TO BE DISALLOWED IN THE HANDS OF ASSESSEE AS THE INVESTMENT IN PLANT & MACHINERY WAS MORE THAN RS.1 CRORES. 22. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE IN THE FIRST INSTANCE POINTED OUT THAT THE ASSESSEE IS ELIGIBLE TO THE AFORESAID DEDUCTION IN VIEW OF THE CERTIFICATE OF REGIS TRATION GRANTED TO THE ASSESSEE AS ON 31.12.2005. HE FURTHER POINTED OUT THAT THE ASSESSING OFFICER HAS COMPUTED THE COST OF PLANT & MACHINERY AT RS. 1 02 70 957/ - . HOWEVER THE PERUSAL OF LIST AT PAGE 76 OF THE PAPER BOOK REFLECTS THAT IN ASSESSMENT YEAR 2005 - 06 IT APPEARS THAT CENVAT CREDIT OF RS. 2 19 770/ - IN THE SCHEDULE OF FIXED ASSETS HAD REMAINED TO BE DEDUCTED. IN THIS REGARD THE ASSESSEE PLACED RELIANCE ON THE CALCULATION PLACED AT PAGE 76 OF THE PAPER BOOK. HE FURTHER PLACED RELIANCE ON THE CALCULATION PLACED AT PAGE 76 OF THE PAPER BOOK. HE FURTHER POINTED OUT THAT OUT OF ADDITIONS MADE DURING THE YEAR OF RS. 37 43 971/ - AN AMOUNT OF RS.9 85 137/ - ON ACCOUNT OF COST OF TOOLS IS TO BE EXCLUDED. HE FURTHER POINTED OUT THAT IN CASE BOTH THESE ADJUSTMENTS ARE GIVEN TO THE ASSESSEE THE COST OF PLANT & MACHINERY FOR THE YEAR UN DER CONSIDERATION WOULD GO BELOW RS.1 02 70 957/ - AND HENCE THE ASSESSEE WOULD BE ELIGIBLE TO CLAIM THE DEDUCTION UNDER SECTION 80IB(3) OF THE ACT. THE ADJUSTED WORKING OF COST OF PLANT & MACHINERY IS ANNEXED AT PAGE 76 OF THE PAPER BOOK. THE LEARNED AUT HORIZED REPRESENTATIVE FOR THE ASSESSEE FURTHER POINTED OUT THAT THE COST OF VEHICLES OFFICE EQUIPMENT AND COMPUTERS HAVE TO BE EXCLUDED WHILE COMPUTING THE TOTAL COST OF PLANT & MACHINERY. 23. WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUSED THE RECORD . THE ISSUE ARISING IN THE PRESENT APPEAL VIDE GROUND OF APPEAL NO.6 IS IN RELATION TO THE CLAIM OF DEDUCTION UNDER SECTION 80IB(3) OF THE ACT ON ACCOUNT OF UNIT BEING SSI. THE ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 23 REQUIREMENT OF SAID SECTION 80IB(3) OF THE ACT IS THAT WHERE INVESTMENT IN PL ANT & MACHINERY IS LESS THAN RS.100 LAKHS THEN IN SUCH CIRCUMSTANCES THE ASSESSEE IS ENTITLED TO CLAIM THE DEDUCTION. AS PER SUB - SECTION (3) TO SECTION 80IB OF THE ACT THE TERM SMALL SCALE INDUSTRIAL UNDERTAKING IS DEFINED UNDER SECTION 80IB(14)(G) O F THE ACT WHICH READS AS UNDER: - 80IB(14)(G) SMALL SCALE INDUSTRIAL UNDERTAKING MEANS AN INDUSTRIAL UNDERTAKING WHICH IS AS ON THE LAST DAY OF THE PREVIOUS YEAR REGARDED AS A SMALL SCALE INDUSTRIAL UNDERTAKING UNDER SECTION 11B OF THE INDUSTRIES (D EVELOPMENT AND REGULATION) ACT 1951. 24. UNDER SECTION 11B OF IDRA 1951 THE CENTRAL GOVERNMENT IS EMPOWERED TO ISSUE NOTIFICATION DEFINING SMALL SCALE INDUSTRIES WHICH HAS BEEN SO ISSUED BY THE CENTRAL GOVERNMENT. AS PER THE SAID NOTIFICATION INVES TMENT IN FIXED ASSETS AND PLANT & MACHINERY SHOULD NOT EXCEED RS.100 LAKHS AND FURTHER IT IS PROVIDED THAT INVESTMENT IN PLANT & MACHINERY ONLY IS TO BE CONSIDERED IN THIS REGARD. IT IS FURTHER PROVIDED THAT CERTAIN BASI C COSTS WHICH ARE TO BE CAPITALIZE D TO THE COST OF PLANT & MACHINERY UNDER THE INCOME TAX ACT ARE ALSO NOT TO BE INCLUDED AND ARE TO BE MACHINERY UNDER THE INCOME TAX ACT ARE ALSO NOT TO BE INCLUDED AND ARE TO BE EXCLUDED VIDE NOTE TO CLAUSE (B) OF SAID NOTIFICATION. THE CASE OF ASSESSEE BEFORE THE AUTHORITIES BELOW AND ALSO BEFORE US WAS THAT ONLY COST OF PLANT & MACHINERY AND NOT THE COMPUTERS OFFICE EQUIPMENT AND VEHICLES WERE TO BE CONSIDERED AS PLANT & MACHINERY. THE ASSESSEE FURTHER CLAIMS THAT APPLYING THE SAID PROVISIONS INVESTMENT IN PLANT & MACHINERY WAS LESS THAN THE CEILING LIMIT OF RS.1 CRORE AND AS SUCH THE ASSESSEE WAS ENTITLED TO THE CLAIM OF DEDUCTION UNDER SECTION 80IB(3) OF THE ACT. ANOTHER FACET TO THE ISSUE IS THAT THE DISTRICT INDUSTRIES CENTRE HAS GRANTED STATUS OF SSI UNDER THE IDRA 1951 TO THE ASSESSEE AND THE SAME HAS NOT BEEN WITHDRA WN. THE COPY OF NOTIFICATION ISSUED BY THE CENTRAL GOVERNMENT UNDER SECTION 11B OF IDRA DEFINING THE SSI IS PLACED AT PAGES 84 TO 87 OF THE PAPER BOOK. 25. THE PERUSAL OF SAME REFLECTS THAT WHILE CALCULATING THE VALUE OF PLANT & MACHINERY IT IS PROVIDED THAT THE COST OF EQUIPMENT SUCH AS TOOLS JIG S DIES MOULDS ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 24 AND SPARE PARTS FOR MAINTENANCE AND ALSO THE COST OF CONSUMABLE STORES COST OF INSTALLATION OF PLANT & MACHINERY COST OF RESEARCH & DEVELOPMENT EQUIPMENT AND POLLUTION CONTROL EQUIPMEN T COS T OF GENERATION SET COST OF BANK CHARGES AND SERVICE CHARGES COST INVOLVED IN PROCUREMENT OR INSTALLATION OF CABLES WIRING BUS BARS ELECTRICAL CONTROL PANELS ETC. TRANSPORTATION CHARGES (EXCLUDING SALES TAX AND EXCISE) AND CHARGES PAID FOR TECHNICAL KNOW - HOW HAVE TO BE EXCLUDED . FURTHER CERTIFICATE ISSUED BY DISTRICT INDUSTRIES CENTRE SATARA CERTIFYING THE ASSESSEE TO BE SSI AS ON 31.12.2005 WHICH IN TURN IS BASED ON CERTIFICATE ISSUED ON APPLICATION BY UNIT VIDE LETTER DATED 05.06.2009 IS ENCLOS ED AT PAGE 88 OF THE PAPER BOOK. FURTHER IN VIEW OF DEFINITION OF PLANT & MACHINERY UNDER SECTION 11B OF IDRA THE COST OF OFFICE EQUIPMENT COMPUTERS AND VEHICLES ARE NOT TO BE INCLUDED AS PLANT & MACHINERY. IN VIEW OF THE CERTIFICATE ISSUED BY STATUTO RY AUTHORITY ADMITTEDLY THOSE ITEMS ARE NOT TO BE INCLUDED IN ORDER TO HOLD THAT THE ASSESSEE IS ELIGIBLE AS SSI. 26. THE PLEA OF ASSESSEE BEFORE US IS TWO - FOLD THAT THE WORKING OF TOTAL VALUE OF 26. THE PLEA OF ASSESSEE BEFORE US IS TWO - FOLD THAT THE WORKING OF TOTAL VALUE OF PLANT & MACHINERY AT RS. 1 02 70 957/ - BY THE ASSESSING OFFICER IS INCORRECT. EVEN IF WE CONSIDER THE ADDITIONS MADE FROM YEAR TO YEAR THE FIRST ISSUE RAISED IN THIS REGARD IS INCLUSION OF CENVAST CREDIT OF RS.2 90 770/ - WHICH IS TO BE EXCLUDED FROM THE SCHEDULE OF FIXED ASSETS FILED BY THE ASSESSEE FOR THE F INANCIAL YEAR 2004 - 05. FURTHER THE COST OF TOOLS AT RS. 9 85 137/ - WHICH WAS PART OF ADDITIONS MADE DURING THE YEAR AT RS. 37 43 971/ - ALSO HAS TO BE EXCLUDED. THE PERUSAL OF CHART PLACED AT PAGE 76 OF THE PAPER BOOK REFLECTS THAT THOUGH THE CLAIM WAS MA DE IN RESPECT OF EXCLUSION OF RS.2 19 770/ - BUT NO SUCH CLAIM WAS MADE IN RESPECT OF EXCLUSION OF COST OF TOOLS OF RS. 9 85 137/ - BE FORE THE CIT(A). IN LINE OF THE ARGUMENTS OF ASSESSEE WE ARE OF THE VIEW THAT THIS PARTICULAR ASPECT NEEDS TO BE VERIFIED B Y THE ASSESSING OFFICER AND IN CASE THE ABOVE TWO COSTS ARE TO BE EXCLUDED I.E. RS.2 19 770/ - AND RS. 9 85 137/ - THEN ADMITTEDLY THE VALUE OF PLANT & MACHINERY WOULD GO BELOW RS.100 LAKHS AND THE ASSESSEE WOULD BE ENTITLED TO CLAIM THE ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 25 DEDUCTION UNDER SEC TION 80IB(3) OF THE ACT. AN ERROR IN EXCLUDING RS.2 51 227/ - IN RESPECT OF FIGURE OF ADDITION IN THE PLANT & MACHINERY HAD ARISEN BECAUSE THE ANNUAL ACCOUNTS FOR THE SAID FINANCIAL YEAR 1998 - 99 WERE NOT TRACEABLE DURING THE COURSE OF ASSESSMENT PROCEEDING S. IN RESPECT OF TOOLS THE ASSESSEE CLAIMS THAT THIS ITEM WAS POINTED OUT TO THE CIT(A) WHICH HAS NOT BEEN CONSIDERED. NOW BEFORE US THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE HAS PREPARED A LIST OF OTHER ITEMS WHICH NEED TO BE EXCLUDED BU T NO SUCH CLAIM WAS MADE BEFORE THE ASSESSING OFFICER AND CIT(A) IN THIS REGARD AND WE FIND NO MERIT IN THE SAME. 27. THE SECOND ASPECT OF THE CASE IS EXCLUSION OF VARIOUS OTHER ASSETS I.E. COMPUTERS OFFICE EQUIPMENT AND VEHICLES WHICH HAVE BEEN HELD TO BE NOT PART OF PLANT & MACHINERY BY THE DECISION OF HONBLE HIGH COURT OF KERALA IN CIT VS. TRAVANCORE MATS & MATTINGS CO. (1998) 229 ITR 93 (KER) AND PARTLY BY THE DECISION OF AHMEDBAD BENCH OF TRIBUNAL IN DCIT VS. SAMIR DIAMOND MFG. (P) LTD. (1998) 67 ITD 25 (AHD.TRIB). ACCORDINGLY WE HOLD THAT THE SAME ARE TO BE EXCLUDED. WE DIRECT ITD 25 (AHD.TRIB). ACCORDINGLY WE HOLD THAT THE SAME ARE TO BE EXCLUDED. WE DIRECT THE ASSESSING OFFICER TO VERIFY THE CLAIM OF ASSESSEE AND RE - COMPUTE THE COST OF PLANT & MACHINERY ACCORDINGLY AND ALSO THEREAFTER ALLOW THE DEDUCTION UNDER SECTION 80I B(3) OF THE ACT IF TOTAL COST OF PLANT & MACHINERY IS LESS THAN RS.100 LAKHS. THE GROUND OF APPEAL NO.6 RAISED BY THE REVENUE IS THUS ALLOWED FOR STATISTICAL PURPOSES . 28. NOW COMING TO THE LAST ISSUE RAISED BY THE REVENUE I.E. ADDITION MADE ON ACCO UNT OF CAPITAL GAINS UNDER SECTION 45(4) OF THE ACT AT RS. 1 40 77 446/ - . 29. BRIEFLY T HE FACTS RELATING TO THE ISSUE ARE THAT THE ASSESSEE WAS A PARTNERSHIP FIRM WHICH WAS IN EXISTENCE TILL 31.12.2005. M/S. UNIVERSAL CONSTRUCTION MACHINERY & EQUIPMENT P VT. LTD. WAS INCORPORATED ON 09.09.2005 AND B Y AN AGREEMENT DATED 02.07.2006 THE ASSETS AND LIABILITIES OF THE ASSESSEE FIRM WERE TAKEN OVER BY THE SAID COMPANY. THE PARTNERS OF THE FIRM I.E. MR. R.H. MORE AND MR. R.R. MORE ARE ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 26 ALSO THE DIRECTORS OF PRIV ATE LIMITED COMPANY. AS PER CLAUSE (2) OF THE SAID AGREEMENT IT IS PROVIDED THAT THE COMPANY WOULD TAKE OVER THE EXISTING BUSINESS OF PARTNERSHIP FIRM NAMED M/S. UNIVERSAL CONSTRUCTION MACHINERY PUNE WITH ALL ITS ASSETS AND LIABILITIES AND THE ACTIVITIE S ; AND UPON SUCH TAKEOVER THE PARTNERSHIP FIRM SHALL STAND DISSOLVED. THE ASSESSING OFFICER NOTED FROM THE SCHEDULE OF FIXED ASSETS THAT THE OPENING WDV OF FACTORY BUILDING FOR ASSESSMENT YEAR 2006 - 07 WAS RS.40 55 705/ - AND ADDITION TO THE EXTENT OF RS.2 9 60 999/ - WAS MADE DURING THE YEAR. THE OLD BUILDING WAS RE - VALUED AT RS. 1 00 58 695/ - AND ON THE GROSS VALUE OF RS. 1 70 75 399/ - DEPRECIATION OF RS. 4 43 529/ - WAS CLAIMED AND CLOSING WDV WAS TAKEN AT RS. 1 66 31 871/ - . THE CAPITAL INTRODUCTION BY BOTH THE PARTNERS MR. R.H. MORE AND MR. R.R. MORE WAS TO THE EXTENT OF RS. 70 36 223/ - EACH BY WAY OF RE - VALUATION OF FACTORY BUILDING. AS PER THE ASSESSEES EXPLANATION THE NEW COMPANY HAD NOT CLAIMED DEPRECIATION ON THE REVALUED AMOUNT BUT HAD CLAIMED DEPREC IATION ONLY ON THE OLD WDV. BOTH THE PARTNERS WHO HAD BECOME DIRECTORS IN THE NEW COMPANY HAD BEEN ALLOTTED SHARES TO THE EXTENT OF CAPITAL BALANCE IN THE FIRM. THE COMPANY HAD BEEN ALLOTTED SHARES TO THE EXTENT OF CAPITAL BALANCE IN THE FIRM. THE ASSESSEE WAS ASKED TO EXPLAIN AS TO WHY THE ACCRETION TO THE CAPITAL ACCOUNT DUE TO THE R EVALUATION OF THE FACTORY BUILDING SHOULD NOT BE TAKEN AS DISTRIBUTION OF ASSETS BY THE FIRM. REFERENCE WAS MADE TO SECTION 45(4) OF THE ACT AND THE ASSESSING OFFICER SHOW CAUSED THE ASSESSEE. THE ASSESSING OFFICER FURTHER NOTED THAT AS PER TAKEOVER AGRE EMENT THE FIRM STOOD DISSOLVED AND WHEN THE ASSETS AND LIABILITIES WERE TAKEN OVER BY THE COMPANY SO THIS WAS A CASE OF DISTRIBUTION OF ASSETS ON DISSOLUTION OF FIRM. HE FURTHER OBSERVED THAT EVEN ASSUMING THAT THE ASSESSEES STAND THAT THERE IS NO QUES TION OF DISSOLUTION OF THE FIRM AS THE SAME WAS TAKEN OVER AS GOING CONCERN THE ASSESSING OFFICER OBSERVED THAT THE TRANSACTION WOULD FALL UNDER THE FRAMEWORK OF OTHERWISE. HE FURTHER POINTED OUT THAT THE FACT REMAINED THAT THE ASSETS HAVE BEEN DISTRIB UTED AMONGST THE TWO PARTNERS AND THEY HAVE GOT THE BENEFIT OF SHARES TO THAT EXTENT FROM THE COMPANY AND HENCE IT WAS CLEAR CASE OF DISTRIBUTION OF ASSETS. VIDE SUBMISSIONS DATED 02.12.2008 THE ASSESSEE EXPLAINED ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 27 THAT ITS CASE FELL WITHIN SECTION 47(XI II ) OF THE ACT WHICH WAS TRANSACTION NOT REGARDED AS A TRANSFER AS PER WHICH FOUR CONDITIONS HAD TO BE FULFILLED FOR TRANSACTION NOT TO BE REGARDED AS A TRANSFER WHICH ARE AS UNDER: - (A) ALL THE ASSETS AND LIABILITIES OF THE FIRM (OR THE ASSOCIATION OF PERSONS OR BODY OF INDIVIDUALS) RELATING TO THE BUSINESS IMMEDIATELY BEFORE THE SUCCESSION BECOME THE ASSETS AND LIABILITIES OF THE COMPANY. (B) ALL THE PARTNERS OF THE FIRM IMMEDIATELY BEFORE THE SUCCESSION BECOME THE SHAREHOLDERS OF THE COMPANY IN THE SAME PROPORTION IN WHICH THEIR CAPITAL ACCOUNTS STOOD IN THE BOOKS OF THE FIRM ON THE DATE OF SUCCESSION. (C) THE PARTNERS OF THE FIRM DO NOT RECEIVE ANY CONSIDERATION OR BENEFIT DIRECTLY OR INDIRECTLY IN ANY FORM OR MANNER OTHER THAN BY WAY OF ALLOTM ENT OF SHARES IN THE COMPANY AND (D) THE AGGREGATE OF THE SHAREHOLDING IN THE COMPANY OF THE PARTNERS OF THE FIRM IS NOT LESS THAN FIFTY PER CENT OF THE TOTAL VOTING POWER IN THE COMPANY AND THEIR SHAREHOLDING CONTINUES TO BE AS SUCH FOR A PERIOD OF FIVE YEARS FROM THE DATE OF THE SUCCESSION. 30. THE ASSESSING OFFICER OBSERVED THAT THE ASSESSEES CASE WAS NOT COVERED BY THE SAID SECTION BECAUSE CLAUSE (C) OF THE SAID SECTION STATES THAT THE PARTNERS OF THE FIRM HAVE NOT RECEIVED ANY CONSIDERATION OR BENEF IT DIRECTLY OR INDIRECTLY IN ANY FORM OR MANNER OTHER THAN BY WAY OF ALLOTMENT OF SHARES IN THE COMPANY. THE ASSESSING OFFICER NOTED THAT IN THE PRESENT CASE THE PARTNERS HAD BENEFITED BY WAY OF ACCRETION TO THE CAPITALS ON ACCOUNT O N REVALUATION OF FACT ORY BUILDING . IN CASE THE SAME WAS NOT DONE THE I R CAPITAL BALANCES WOULD HAVE BEEN IN THE NEGATIVE AND SINCE BOTH THE PARTNERS HAD BENEFITED BY WAY OF ADDITION OF SHARES THAN WHAT THEY WERE OTHERWISE ENTITLED T HE ASSESSEES CASE WAS HELD TO BE NOT COVER ED UNDER SECTION 47(XIII) OF THE ACT. THE ASSESSING OFFICER FURTHER HELD AS UNDER: - MOREOVER THE W.D.V. OF THE FACTORY BUILDING BEFORE REVALUATION WAS RS.40 55 705/ - TO WHICH REVALUATION OF RS.1 00 58 695/ - HAS BEEN ADDED. AFTER SOME ADDITIONS THE GROS S VALUE OF THE BUILDING HAS BEEN TAKEN AT RS. 1 70 75 399/ - AND AFTER CLAIMING A DEPRECIATION OF RS. 4 43 529/ - THE CLOSING WDV IS SHOWN AT RS.1 66 31 871/ - . THE PARTNERS CAPITALS HAVE BEEN INCREASED DUE TO THIS REVALUATION WITH AN AMOUNT OF RS.70 36 223/ - EACH. THE ACCRETION TO THE CAPITALS OF THE PARTNERS PUT TOGETHER ON THIS COUNT IS RS.1 40 72 446/ - . THIS SHOWS THAT IT IS NOT JUST INCREASE OF REVALUATION WHICH IS ADDED TO THEIR CAPITAL BUT THE ENTIRE VALUE OF THE BUILDING WHICH MEANS THE ASSET OF THE F ACTORY BUILDING HAS BEEN DISTRIBUTED BETWEEN THE TWO PARTNERS AND THE MARKET VALUE OF THE BUILDING HAS BEEN DISTRIBUTED EQUALLY BETWEEN THEM. THEREFORE THE CAPITAL GAINS HAS TO BE CHARGED AS PER SECTION 45(4) OF THE INCOME TAX ACT 1961 IN THE HANDS OF THE FIRM ON THE SALE CONSIDERATION OF RS.1 40 77 446/ - . ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 28 31. BEFORE THE CIT(A) THE ASSESSEE AGITATED THE SAID ADDITION MADE ON ACCOUNT OF CAPITAL GAINS UNDER SECTION 45(4) OF THE ACT. IN THE ALTERNATE IT WAS ALSO AGITATED THAT THE CAPITAL GAINS WOULD B E CHARGEABLE @ 20% ALONG WITH INDEXATION. THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS MADE BY THE ASSESSEE WAS OF THE OPINION THAT THE ASSESSEES CASE WAS COVERED UNDER THE PROVISIONS OF SECTION 47(XIII) OF THE ACT WHEREIN THE PREAMBLE OF SECTION 47 OF THE ACT PROVIDES THAT NOTHING CONTAINED IN SECTION 45 OF THE ACT SHALL APPLY TO THE FOLLOWING TRANSFERS. THE CIT(A) HELD THAT THERE WAS NO QUESTION OF APPLICATION OF SECTION 45(4) OF THE ACT. THE CIT(A) FURTHER OBSERVED THAT THE PROVISIONS OF SECTION 45 (4) OF THE ACT ARE TO BE READ WITH CIRCULAR NO.495 DATED 22.09.1987 AND IT WAS EXPLAINED THAT THE SECTION WOULD BE APPLICABLE IN CASE OF DISSOLUTION OF FIRM AND DISTRIBUTION OF CAPITAL ASSETS OF THE FIRM TO A PARTNERS AT THE TIME OF DISSOLUTION OR OTHERWIS E. IN CASE THERE WAS NO DISTRIBUTION OF CAPITAL ASSETS OF THE FIRM AMONGST THE PARTNERS ON DISSOLUTION THERE WAS NO CAPITAL GAINS . IT WAS ALSO EXPLAINED THAT THE PRESENT CASE WAS TAKE OVER OF ALL ASSETS AND LIABILITIES OF THE FIRM BY THE SUCCESSOR COMPAN Y BY WAY OF AGREEMENT DATED 02.01.2006. ONCE THE FIRM BY THE SUCCESSOR COMPAN Y BY WAY OF AGREEMENT DATED 02.01.2006. ONCE THE ENTIRE ASSETS OF THE ASSESSEE FIRM HAD BEEN TAKEN OVER BY THE COMPANY AS SINGLE PARTY THERE WAS NO DISTRIBUTION IN THE SENSE THAT DISTRIBUTION PRESUPPOSES TWO OR MORE PARTIES. THE CIT(A) HELD THAT IN CASE OF THE ASSESSEE IT WAS NEITHER TRANSFER OF ASSETS TO A RETIRING PARTNER NOR DISTRIBUTION OF ASSETS ON DISSOLUTION AND HENCE THERE WAS NO MERIT IN THE ASSESSABILITY OF CAPITAL GAINS IN THE HANDS OF ASSESSEE. 32. THE REVENUE IS IN APPEAL AGAINST THE ORDE R OF CIT(A) IN THIS REGARD. 33. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE POINTED OUT THAT THE ASSESSEE HAD REVALUED THE BUILDING WHICH WAS TAKEN OVER BY THE SUCCESSOR COMPANY AND THE EFFECT OF REVALUATION WAS THE CAPITALIZATION OF PARTNERS CAPITAL ACCOUNT HENCE ADDITION IN THE CASE IS WARRANTED UNDER SECTION 45(4) OF THE ACT. ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 29 34. THE LEARNED AUTHORIZED REPRESENTATIVE FOR THE ASSESSEE ON THE OTHER HAND POINTED OUT THAT THERE WAS NO DISSOLUTION OF THE FIRM AND THERE WAS NO DISTRIBUTION OF SAID ASSETS TO THE PARTNERS AND HE FURTHER SUBMITTED THAT THE ASSESSEE SATISFIED ALL THE CONDITIONS OF PROVISO TO SECTION 45(III) OF THE ACT. OUR ATTENTION WAS DRAWN TO THE CLAUSES OF AGREEMENT DATED 02.01.2006 PLACED AT PAGES 89 TO 92 OF THE PAPER BOOK. HE FURTHER SUBMITTED THAT THE ERSTWHILE PARTNERS HAD S A ME SHAREHOLDING IN THE SUCCESSOR COMPANY. HE OPPOSED THE ORDER OF ASSESSING OFFICER IN APPLYING THE PROVISIONS OF SECTION 45(4) OF THE ACT WHICH DEALT WITH DISTRIBUTION OF ASSETS ON THE DISSOLUTION O F PARTNERSHIP. HOWEVER IN THE FACTS OF PRESENT CASE THERE WAS NO DISSOLUTION BUT THERE WAS TAKEOVER OF ASSETS AND LIABILITIES BY THE SUCCESSOR COMPANY WHICH RESULTED IN TRANSFER OF BUSINESS FROM PARTNERSHIP FIRM TO THE COMPANY AND HENCE THE PROVISIONS OF SECTION 4 7 (XIII) OF THE ACT WERE APPLICABLE. FURTHER RELIANCE WAS PLACED ON THE DECISION OF AHMEDABAD BENCH OF TRIBUNAL IN ITO VS. M/S. ALTA INTER - CHEM INDUSTRIES IN ITA NO.223/AHD/2012 RELATING TO ASSESSMENT YEAR 2008 - 09 ORDER DATED 19.10.2012. HE ADMITTED THAT THERE WAS REVALUATION OF ASSETS BUT THERE ORDER DATED 19.10.2012. HE ADMITTED THAT THERE WAS REVALUATION OF ASSETS BUT THERE WAS NO DISTRIBUTION OF ASSETS. IT WAS ALSO ADMITTED BY THE ASSESSEE THAT THE PARTNERS HAD NEGATIVE BALANCES AND ONLY ON REVALUATION OF ASSETS THE PARTNERS HAD POSITIVE BALANCE AGAINST WHICH SHARES ALLOTTED BY THE SUCCESSOR COMPANY. HE STRESSED THAT UNDER THE PROVISIONS OF SECTION 47(XIII) OF THE ACT THERE IS NO BAR ON REVALUATION OF ASSETS . HE STRONGLY OPPOSED TO THE APPLICATION OF SECTION 45(4) OF THE ACT BY THE ASSESSING OFFICER WHICH WAS TO BE APPLIED ONLY WHEN THERE WAS DISTRIBUTION OF ASSETS. 35. THE LEARNED DEPARTMENTAL REPRESENTATIVE FOR THE REVENUE IN REJOINDER POINTED OUT THAT IN CASE THERE WAS NO REVALUATION OF ASSETS THEN NO SHARES WOULD HAVE BEEN ALLOTTED TO THE PARTNERS OF ASSESSEE FIRM. HE FURTHER REFERRED TO THE PROVISIONS OF SECTION 45(4) OF THE ACT AND POINTED OUT THAT THE TERM OTHERWISE COVERS THE TRANSACTION OF ASSESSEE UNDER WHICH THE ASSESSEE HAD BEEN ALLOTTED SHARES IN SUCCESSOR COMPANY. ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 30 36. WE HAVE HEARD THE RIVAL CONTENT IONS AND PERUSED THE RECORD. THE ASSESSEE WAS A PARTNERSHIP FIRM WHICH CONTINUED IN BUSINESS TILL 31.12.2005 I.E. DURING THE ACCOUNTING PERIOD UNDER CONSIDERATION. THE ASSESSEE ENTERED INTO AN AGREEMENT WITH UNIVERSAL CONSTRUCTION MACHINERY AND EQUIPMENT PVT. LTD. UNDER WHICH IT WAS AGREED THAT ALL THE ASSETS AND LIABILITIES OF THE ASSESSEE FIRM WOULD BE TAKEN OVER BY THE SUCCESSOR COMPANY. AS PER AGREEMENT EXECUTED ON 02.01.2006 THE SUCCESSOR COMPANY WAS TO TAKE OVER ENTIRE BUSINESS OF ASSESSEE FIRM W .E.F. 01.01.2006 AND IN CONSIDERATION OF TAKEOVER OF ENTIRE BUSINESS THE SUCCESSOR COMPANY WAS TO ISSUE EQUITY SHARES OF AN AMOUNT EQUAL TO THE TOTAL AMOUNT TO THE CREDIT OF EACH OF THE PARTNERS CAPITAL ACCOUNT AS PER BALANCE SHEET OF DISSOLVED FIRM AS ON 31.12.2005. IT WAS AGREED BETWEEN THE PARTIES THAT THE PARTNERS IMMEDIATELY BEFORE SUCCESSION WOULD BECOME THE SHARE HOLDERS OF THE COMPANY. AS PER CLAUSE (5) OF THE AGREEMENT THE PARTNERS OF ASSESSEE FIRM WERE NOT ENTITLED TO RECEIVE ANY CONSIDERATION OR BENEFIT DIRECTLY OR INDIRECTLY IN ANY FORM OR MANNER OTHER THAN BY WAY OF SHARES IN THE COMPANY. VARIOUS OTHER TERMS AND CONDITIONS WERE ALSO AGREED UPON BETWEEN THE COMPANY. VARIOUS OTHER TERMS AND CONDITIONS WERE ALSO AGREED UPON BETWEEN THE PARTIES AS PER AGREEMENT PLACED AT PAGES 89 TO 92 OF THE PAPER BOOK. THE ASSESSEE B EFORE US HAS REVALUED THE ASSETS OF PARTNERSHIP FIRM AND CORRESPONDING ENTRY WAS MADE IN THE CAPITAL ACCOUNT OF THE PARTNERS. THE PARTNERS BEFORE CAPITALIZATION OF REVALUATION OF THE ASSETS HAD NEGATIVE BALANCE. HOWEVER AFTER REVALUATION HAD POSITIVE C APITAL BALANCE AGAINST WHICH IT WAS ALLOTTED SHARES BY THE COMPANY WHICH HAD TAKEN OVER BY THE PARTNERSHIP FIRM. THE CASE OF THE ASSESSING OFFICER IN THIS REGARD WAS THAT IN CASE THERE WAS NO REVALUATION OF ASSETS THEN NO SHARES WOULD HAVE BEEN ALLOTTE D TO THE PARTNERS OF THE ASSESSEE FIRM AND HENCE IT WAS CASE OF DISSOLUTION OF PARTNERSHIP FIRM WHICH WAS TO BE CHARGED TO TAX UNDER SECTION 45(4) OF THE ACT. THE PERUSAL OF SAID PROVISIONS REFLECT THAT WHERE PROFITS OR GAINS ARISES FROM THE TRANSFER OF CAPITAL ASSET BY WAY OF DISTRIBUTION OF CAPITAL ASSETS ON DISSOLUTION OF A FIRM OR AOP OR BODY OF INDIVIDUALS OR OTHERWISE THEN THE SAME IS CHARGEABLE TO TAX AS INCOME OF THE FIRM ASSOCIATION OR BODY OF THE PREVIOUS YEAR IN ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 31 WHICH THE SAID TRANSFER TAKE N PLACE. THE SUB - SECTION FURTHER PROVIDES THAT FOR THE PURPOSE OF SECTION 48 OF THE ACT THE FAIR MARKET VALUE OF THE ASSET ON THE DATE OF SUCH TRANSFER SHALL BE DEEMED TO BE THE FULL VALUE OF CONSIDERATION RECEIVED OR ACCRUING AS A RESULT OF TRANSFER. T HE PROVISIONS OF SECTION 45 OF THE ACT ARE ATTRACTED WHERE THERE IS A TRANSFER OF ASSET AND UNDER SUB - SECTION (4) DEEMED TRANSFER OF ASSETS IS COVERED I.E. IN CASE THERE IS DISSOLUTION OF FIRM OR AOP OR BODY OF INDIVIDUALS THEN IT IS PROVID ED THAT ON SUCH DISSOLUTION WHERE THE CAPITAL ASSETS ARE DISTRIBUTED IN THE CASE OF FIRM TO THE PARTNERS THEN THE PROFITS OR GAINS ARISING FROM SUCH TRANSFER ARE TO BE BROUGHT TO TAX. HOWEVER IN THE FACTS OF THE PRESENT CASE BEFORE US THE PARTNERSHIP FIRM WHICH WAS CARRYING ON THE BUSINESS WAS TAKEN OVER BY PRIVATE LIMITED COMPANY AND THE QUESTION WHICH ARISES IS THAT ONCE SUCH TAKEOVER TAKES PLACE WHETHER IT IS COVERED UNDER SECTION 45(4) OF THE ACT. WE FIND NO MERIT IN THE ORDER OF ASSESSING OFFICER IN THIS REGAR D SINCE ON TAKEOVER OF PARTNERSHIP FIRM BY THE PRIVATE LIMITED COMPANY THERE IS NO DISSOLUTION OF FIRM AND CONSEQUENTLY THERE IS NO DISTRIBUTION OF CAPITAL ASSETS. ON THE OTHER HAND THE TRANSACTION IN QUESTION IS IS NO DISTRIBUTION OF CAPITAL ASSETS. ON THE OTHER HAND THE TRANSACTION IN QUESTION IS COVERED BY THE PROVISIONS OF SECTION 47 OF THE ACT WHICH PROVIDES THE LIST OF TRANSACTIONS WHICH ARE NOT REGARDED AS TRANSFER OF ASSETS. UNDER CLAUSE (XIII) TO SECTION 47 OF THE ACT IT IS PROVIDED THAT ANY TRANSFER OF A CAPITAL ASSET OR INTANGIBLE ASSET BY A FIRM TO A COMPANY AS A RESULT OF SUCCESSION OF THE FIRM BY A COMPANY SHALL NOT BE REGARDED AS TRANSFER AND NOTHING CONTAINED IN SECTION 45 OF THE ACT SHALL APPLY TO SUCH TRANSFER. WE ARE NOT REFERRING TO THE BALANCE PROVISIONS OF THE SAID CLAUSE AS THE SAME ARE NOT RELEVANT TO DECIDE TH E PRESENT ISSUE. THE TRANSACTION ENTERED INTO BETWEEN THE PARTIES I.E. THE ASSESSEE BEFORE US AND THE PRIVATE LIMITED COMPANY WAS SUCCESSION OF FIRM BY THE COMPANY UNDER WHICH THE ASSETS AND LIABILITIES OF THE FIRM WERE TAKEN OVER BY THE COMPANY AND AS A GAINST THE CAPITAL ACCOUNT OF PARTNERS SHARES WERE ALLOCATED. ADMITTEDLY THE CAPITAL ACCOUNT OF THE PARTNERS WAS NEGATIVE HOWEVER THERE WERE CERTAIN ASSETS IN THE HANDS OF FIRM WHICH WERE REVALUED AGAINST WHICH THE CAPITAL BALANCE OF THE PARTNERS WAS ENHANCED AND ITA NO . 12 00 /PN/20 09 M/S. UNIVERSAL CONSTRUCTION MACHINERY 32 AGAINST SUCH ENHANCED CAPITAL BALANCE SHARES WERE ALLOTTED. HOWEVER THE PRIVATE LIMITED COMPANY TOOK OVER THE ASSETS AT ITS ORIGINAL VALUE AND NOT AT THE ENHANCED VALUE AND DID NOT CLAIM THE APPRECIATED VALUE ON THE SAID ASSETS. IN VIEW T HEREOF WHERE THE TRANSACTION UNDERTAKEN BY THE ASSESSEE FIRM WAS NOT A TRANSFER THERE IS NO MERIT IN COMPUTING THE INCOME FROM CAPITAL GAINS IN THE HANDS OF ASSESSEE. THE PARTNERS DID NOT RECEIVE ANY CONSIDERATION ON ACCOUNT OF ENHANCED VALUE OF CAPITAL ASSETS. IN THIS REGARD WE FIND SUPPORT FROM THE RATIO LAID DOWN BY AHMEDABAD BENCH OF TRIBUNAL IN ITO VS. M/S. ALTA INTER - CHEM INDUSTRIES ( SUPRA). UPHOLDING THE ORDER OF CIT(A) WE DISMISS THE THIRD ISSUE RAISED BY THE REVENUE. THE GROUNDS OF APPEAL R AISED BY THE REVENUE ARE PARTLY ALLOWED. 37 . IN THE RESULT THE APPEAL OF THE REVENUE IS PARTLY ALLOWED. ORDER PRONOUNCED ON THIS 30 TH DAY SEPTEMBER 201 6 . SD/ - SD/ - ( R.K. PANDA ) (SUSHMA CHOWLA) / ACCOUNTANT MEMBER / JUDICIAL MEMBER / PUNE ; D ATED : 30 TH SEPTEMBER 201 6 . GCVSR / COPY OF THE ORDER IS FORWARDED TO : 1. / T HE APPELLANT ; 2. / THE RESPONDENT; 3. ( ) / THE C I T (A) - I I PUNE ; 4. / THE C I T - II PUNE ; 5. / DR A ITAT PUNE; 6. / GUARD FILE . / BY ORDER // TRUE COPY // / SR. PRIVATE SECRETARY / ITAT PUNE