Margadarsi Chit Fund Limited, Hyderabad v. DCIT, Hyderabad

ITA 1537/HYD/2010 | 2006-2007
Pronouncement Date: 12-11-2014 | Result: Partly Allowed

Appeal Details

RSA Number 153722514 RSA 2010
Assessee PAN AABCM4751G
Bench Hyderabad
Appeal Number ITA 1537/HYD/2010
Duration Of Justice 3 year(s) 11 month(s) 3 day(s)
Appellant Margadarsi Chit Fund Limited, Hyderabad
Respondent DCIT, Hyderabad
Appeal Type Income Tax Appeal
Pronouncement Date 12-11-2014
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted B
Tribunal Order Date 12-11-2014
Date Of Final Hearing 17-08-2011
Next Hearing Date 17-08-2011
Assessment Year 2006-2007
Appeal Filed On 09-12-2010
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL HYDERABAD BENCH B HYDERABAD BEFORE SHRI P.M. JAGTAP ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY JUDICIAL MEMBER ITA NOS. 1537 & 1538/HYD/2010 ASSESSMENT YEARS : 2006-07 & 2007-08 MARGADARSI CHIT FUND LTD. HYDERABAD. PAN AABCM 4751 G) DY. COMMISSIONER OF INCOME- TAX CIRCLE 16(2) HYDERABAD. (APPELLANT) (RESPONDENT) ITA NOS. 1554 & 1555/HYD/2010 ASSESSMENT YEARS : 2006-07 & 2007-08 DY. COMMISSIONER OF INCOME- TAX CIRCLE 16(2) HYDERABAD. MARGADARSI CHIT FUND LTD. HYDERABAD. PAN AABCM 4751 G) (APPELLANT) (RESPONDENT) ASSESSEE BY SHRI K. GOPAL REVENUE BY SHRI D. SUDHAKAR RAO DATE OF HEARING 17-09-2014 DATE OF PRONOUNCEMENT 12-11-2014 O R D E R PER SAKTIJIT DEY J.M.: THESE CROSS APPEALS ARE DIRECTED AGAINST SEPARATE O RDERS OF CIT(A)-V HYDERABAD BOTH DATED 17/09/10 PERTAINING TO AY 2006-07 AND 2007-08. AS ASSESSEE IS SAME AND ISSUES INVOLV ED IN ALL THESE APPEALS ARE COMMON THE SAME ARE CLUBBED AND HEARD TOGETHER AND THEREFORE A COMMON ORDER IS PASSED FOR THE SAKE OF CONVENIENCE. 2 ITA NOS. 1537 1538 1554 & 1555/HYD/2010 MARGADARSI CHIT FUND LTD. ITA NO. 1537 & 1538/HYD/2010 APPEALS BY ASSESSEE 2. THE FIRST ISSUE WHICH IS COMMON IN BOTH THE APP EALS OF THE ASSESSEE IS IN RESPECT OF 15% ADHOC DISALLOWANCE OU T OF THE STAFF SALARIES. 3. AS FACTS ARE IDENTICAL IN RESPECT OF THE AFORESA ID ISSUE IN BOTH THE APPEALS WE WILL DEAL WITH THE FACTS AS INVOLVE D IN AY 2006-07. 4. BRIEFLY STATED THE ASSESSEE A LIMITED COMPANY I S ENGAGED IN THE BUSINESS OF CHIT FUNDS MANUFACTURE AND SALE OF FOOD PRODUCTS ETC. IN COURSE OF SCRUTINY ASSESSMENT PROCEEDINGS AO WH ILE PERUSING THE P&L ACCOUNT NOTICED THAT ASSESSEE HAD DEBITED AN AM OUNT OF RS. 27 73 77 243 TOWARDS STAFF COST. (SALARY PAID TO ST AFF). AO NOTED THAT ASSESSEE COMPANY IS HAVING BRANCHES ALL OVER AP AND COMPANY STAFFS ARE ALSO INVOLVED IN COLLECTION AND REPAYMEN T OF DEPOSITS RELATING TO MARGADARSI FINANCIERS A DIVISION OF CH. RAMOJI RAO HUF AS MARGADARSI FINANCIERS IS HAVING NO OFFICES TO DO THIS JOB. AO NOTED THAT DURING THE COURSE OF 269SS PROCEEDING IN CASE OF CH. RAMOJI RAO HUF RELATING TO AY 2005-06 AND EARLIER YEARS WHEN ENQUIRY WAS MADE IN RESPECT OF MARGADARSI FINANCIE RS THE DEPOSITORS DEPOSED THAT THEY HAVE DEPOSITED AND TAK EN BACK MONEY FROM MARGADARSI CHIT FUND OFFICES ONLY. AO OBSERVE D THAT EMPLOYEES OF MARGADARSI CHIT FUND ALSO ADMITTED THIS FACT IN THEIR STATEMENTS GIVEN AT THE TIME OF 269SS PROCEEDINGS. AO THEREFO RE WAS OF THE VIEW THAT A PORTION OF THE SALARY PAID TO THE STAFF OF ASSESSEE COMPANY NEEDS TO BE DISALLOWED AS PART OF THE STAFF ARE ENGAGED IN PROVIDING SERVICES TO MARGADARSI FINANCIERS. HE T HEREFORE CALLED UPON ASSESSEE TO MAKE ITS SUBMISSIONS IN THIS BEHAL F. AS NOTED BY AO IN THE ASSESSMENT ORDER ASSESSEE IN ITS REPLY ADMI TTED THAT THE STAFF OF THE ASSESSEE COMPANY ASSISTED IN COLLECTING THE DEPOSITS OR RENDERING OTHER SERVICES TO MARGADARSI FINANCIERS AS IT IS A SISTER CONCERN OF THE GROUP. ASSESSEE HOWEVER REQUESTED NOT TO DISALLOW 3 ITA NOS. 1537 1538 1554 & 1555/HYD/2010 MARGADARSI CHIT FUND LTD. PART OF THE SALARY PAID TO STAFF AS SERVICES ARE DO NE ONLY TO A SISTER CONCERN AND THE TIME SPARED BY THE STAFF IN DOING T HIS JOB IS NEGLIGIBLE. AO UPON CONSIDERING THE SUBMISSIONS OF ASSESSEE AND VERIFYING THE DETAILS AVAILABLE ON RECORD FOUND THA T DURING THE YEAR UNDER CONSIDERATION THE TOTAL DEPOSITS COLLECTED BY MARGARDSHI FINANCIERS IS RS. 804 76 80 000 WHEREAS THE TOTAL R EPAYMENTS MADE BY IT WAS RS. 455 22 14 087. ALL THESE COLLECTIONS AND REPAYMENTS WERE DONE THROUGH THE STAFF OF ASSESSEE COMPANY. AO WAS OF THE VIEW THAT THE MAGNITUDE OF COLLECTIONS AND REPAYMEN TS CLEARLY SHOW THAT THERE IS NO MERIT IN ASSESSEES CONTENTION THA T THE TIME SPARED IN COLLECTION AND REPAYMENT OF ABOVE DEPOSITS BY THE S TAFF OF MARGADARSI CHIT FUNDS IS NEGLIGIBLE. THEREFORE AO KEEPING IN VIEW THE ROLE OF STAFF OF ASSESSEE COMPANY IN COLLECTION/REPAYMENT O F DEPOSITS OF MARGADARSI FINANCIERS DECIDED TO DISALLOW A PORTIO N OF EXPENDITURE INCURRED TOWARDS STAFF COST. ACCORDINGLY HE QUANTI FIED THE DISALLOWANCE AT 15% AMOUNTING TO RS. 4 16 06 586 OU T OF THE TOTAL EXPENDITURE INCURRED TOWARDS STAFF COST. BEING AGGR IEVED OF SUCH DISALLOWANCE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A). 5. BEFORE THE FIRST APPELLATE AUTHORITY ALSO ASSES SEE REITERATED THE STAND TAKEN DURING THE ASSESSMENT PROCEEDING. THE C IT(A) AFTER CONSIDERING THE SUBMISSIONS OF ASSESSEE FOUND NO M ERIT IN IT AND ACCORDINGLY SUSTAINED THE DISALLOWANCE BY OBSERVING AS UNDER: 4.1.2 I HAVE GONE THROUGH THE ARGUMENTS AND THE FAC TS OF THE CASE CAREFULLY. THE ARGUMENTS OF THE APPELLANT ARE NEITHER SUBSTANTIATED WITH EVIDENCE NOR ARE SUPPORTED WITH ANY FACTS. DURING THE YEAR THE STAFF OF THE APPELLANT COMPAN Y COLLECTED RS. 804 76 80 000 FROM A LARGE NUMBER OF INVESTORS ON BEHALF OF M/S MARGARDARSI FINANCIERS. THE AMOUNT OF REPAYMENT S MADE BY THIS VERY STAFF WAS RS. 455 22 14 087. THESE COL LECTIONS AND REPAYMENTS FAR EXCEED THE QUANTUM OF WORK DONE AND THE QUANTUM OF COLLECTIONS AND REPAYMENTS EVEN BY THE A PPELLANT COMPANY. IT IS ABSOLUTELY BEYOND PROBABILITY THAT N O TIME OR EFFORT WOULD BE USED BY THE STAFF OF THE APPELLANT COMPANY TO DO WORK WHICH IS GREATER IN QUANTUM THAN THE WORK DONE BY THE APPELLANT COMPANY. IT IS OBVIOUS THAT THE APPELLANT HAS DEBITED THE ENTIRE AMOUNT IN ITS BOOKS SO AS TO REDUCE ITS TAXABLE 4 ITA NOS. 1537 1538 1554 & 1555/HYD/2010 MARGADARSI CHIT FUND LTD. PROFITS. GIVEN THESE FACTS AND CIRCUMSTANCES I FIN D THAT THE DISALLOWANCE OF 15% IS ABSOLUTELY JUST AND REASONAB LE AND I DO NOT FIND ANY REASON TO INTERFERE WITH THE SAME. THI S GROUND OF APPEAL IS DECIDED IN FAVOUR OF THE REVENUE. 6. THE LEARNED AR SHRI K. GOPAL APPEARING FOR THE A SSESSEE SUBMITTED BEFORE US THAT OUT OF THE TOTAL STAFF COS T OF RS. 27 73 77 243 AN AMOUNT OF RS. 7 19 77 501 IS EXCLU SIVELY FOR CARRYING OUT THE BUSINESS ACTIVITY OF THE ASSESSEE ALONE. HE NCE NO DISALLOWANCE CAN BE MADE FROM THE SAID AMOUNT. SO F AR AS THE BALANCE AMOUNT OF RS. 20 53 99 742 IS CONCERNED IT IS TOWARDS STAFF SALARY OF SIXTY BRANCHES SPREAD ALL OVER AP. HE SUB MITTED THAT THE TOTAL NUMBER OF EMPLOYEES IN ALL THE BRANCHES AMOUN TED TO 2386. ALL EMPLOYEES ARE RESPONSIBLE FOR PERFORMING THE WORK A LLOCATED TO THEM AS PER THE EMPLOYMENT TERMS AND CONDITIONS. THEREFO RE IT IS INCORRECT TO SAY THAT ALL EMPLOYEES OF SIXTY BRANCHES ARE ENG AGED IN COLLECTION AND REPAYMENT OF MARGADARSI FINANCIERS. HE SUBMITT ED THAT OUT OF THE TOTAL EMPLOYEES IN ANY OF THE BRANCH ONLY ONE O R TWO EMPLOYEES MAY BE COLLECTING AND REPAYING THE DEPOSITS ON BEHA LF OF MARGADARSI FINANCIERS AS THEY DO NOT HAVE ANY BRANCHES/OFFICES . HENCE ADHOC DISALLOWANCE OF 15% OUT OF TOTAL STAFF COST IS WITH OUT ANY BASIS. THE LEARNED AR SUBMITTED THAT THERE IS NO CONFLICT OF I NTEREST SO FAR AS THE WORKING OF EMPLOYEES ARE CONCERNED. ASSESSEE PAYS T O THE STAFF FOR WORK DONE FOR ITS BUSINESS. THE LEARNED AR SUBMITTE D THAT MANY OF THE DEPOSITORS IN MARGADARSI FINANCIERS ARE ALSO C HIT SUBSCRIBERS IN ASSESSEE COMPANY. HENCE FOR BUSINESS EXPEDIENCY TH E STAFF OF THE ASSESSEE ACT AS FACILITATORS FOR MAKING INVESTMENT IN MARGADRASHI FINANCIERS. HE FURTHER SUBMITTED THAT THE EMPLOYEES ARE DOING SUCH FACILITATING ACTIVITIES ON BEHALF OF MARGADARSI FI NANCIERS ON THEIR OWN WITHOUT ANY INSTRUCTIONS FROM ASSESSEE. IN THIS CON TEXT HE REFERRED TO THE STATEMENT RECORDED FROM SHRI CH. RAMOJI RAO ON 31/03/08 A COPY OF WHICH IS PLACED AT PAGE 1 OF THE PAPER BOOK AND SPECIFICALLY DREW OUR ATTENTION TO THE STATEMENT MADE BY SHRI CH. RAM OJI RAO THAT MARGADARSI CHIT FUND LTD. HAS NO ROLE EITHER IN CO LLECTION AND 5 ITA NOS. 1537 1538 1554 & 1555/HYD/2010 MARGADARSI CHIT FUND LTD. REPAYMENTS MADE BY MARGADARSI FINANCIERS. HE ALSO DREW OUR ATTENTION TO THE STATEMENT MADE BY SHRI RAMOJI RAO TO THE EFFECT THAT ONLY EXECUTIVES OF MARGADARSI FINANCIERS ARE AUTHO RIZED TO EXAMINE APPLICATIONS TOGETHER WITH CHEQUES AND DRAFTS AND P ROCESS THEM AND ISSUE FDRS IN THE BRANCHES OF MARGADARSI CHIT FUND LTD. THE ROLE OF THE STAFF OF MCF LTD. IS ONLY LIMITED TO GUIDING TH E DEPOSITORS AND FORWARDING THE APPLICATIONS AND CHEQUES & DRAFTS TO MARGADARSI FINANCIERS. THE LEARNED AR SUBMITTED THAT IT IS IR RELEVANT WHETHER SALARY EXPENDITURE IS INCURRED BY ASSESSEE OR MARGA DARSI FINANCIERS AS BOTH ENTITIES ARE TAXED AT MAXIMUM MARGINAL RATE . THE LEARNED AR SUBMITTED THAT EVEN THOUGH THE ACTIVITY OF ASSESSEE REMAINED SAME NO SUCH DISALLOWANCE HAS BEEN MADE IN EARLIER ASSES SMENT YEAR. WITHOUT PREJUDICE TO THE AFORESAID ARGUMENT THE LE ARNED AR ALSO SUBMITTED THAT THE EMPLOYEES OF THE ASSESSEE WHO HA VE HELPED THE COLLECTION AND REPAYMENT OF CHEQUES FROM THE DEPOSI TORS ARE IDENTIFIABLE AS MARGADARSI FINANCIES PAID INCENTI VES TO THE SAID EMPLOYEES. THEREFORE AT BEST THE DISALLOWANCE CAN BE QUANTIFIED TO THE AMOUNT ACTUALLY PAID BY MARGADARSI FINANCIERS TO THESE EMPLOYEES AS THE ASSESSEE CANNOT BE EXPECTED TO BE PAYING MORE TO THESE EMPLOYEES THAN WHAT WAS PAID BY MARGADARSI F INANCIERS FOR CARRYING OUT THEIR WORK. IN THIS CONTEXT HE REFERR ED TO THE LIST OF EMPLOYEES FURNISHED AT PAGE 269 OF THE PAPER BOOK. IN SUPPORT OF HIS CONTENTION THE LEARNED AR RELIED UPON A DECISION O F HONBLE MADRAS HIGH COURT IN CASE OF CIT VS. RAMAN AND RAMAN LTD. 71 ITR 345. 7. THE LEARNED DR ON THE OTHER HAND STRONGLY SUPP ORTING THE ORDER OF THE LEARNED CIT(A) AS WELL AS AO SUBMITTED THAT THE VERY FACT THAT THE EMPLOYEES OF THE ASSESSEE HAVE MOBILIZED D EPOSITS OF RS. 804 76 80 000 AND MADE REPAYMENTS OF RS. 455 22 14 087 ITSELF SHOWS THE SCALE IN WHICH THE STAFF OF THE ASSESSEE COMPANY ARE ENGAGED IN RENDERING SERVICES TO MARGADARSI FINANC IERS. HE SUBMITTED THAT WHEN MARGADARSI FINANCIERS IS HAVIN G NEITHER ANY BRANCHES NOR EMPLOYEES OF ITS OWN AND THE ENTIRE MO BILIZATION OF 6 ITA NOS. 1537 1538 1554 & 1555/HYD/2010 MARGADARSI CHIT FUND LTD. DEPOSITS AND AS WELL AS REPAYMENTS WERE DONE THROUG H THE STAFF OF ASSESSEE IT IS LOGICAL THAT A PART OF THE SALARY P AID TO THE STAFF CANNOT BE ALLOWED AS IT IS INCURRED TOWARDS RENDERING SER VICES TO A SISTER CONCERN AND NOT FOR THE PURPOSE OF ASSESSEES BUSIN ESS. THE LEARNED DR SUBMITTED THAT CONSIDERING THE MAGNITUDE OF BUSI NESS UNDERTAKEN ON BEHALF OF THE SISTER CONCERN 15% DISALLOWANCE FR OM TOTAL STAFF COST IS REASONABLE. 8. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS OT HER MATERIALS ON RECORD. UNDISPUTEDLY MARGADARSI FINANCIERS HAS NO OTHER OFFICE EXCEPT ITS OFFICE LOCATED IN HYDERABAD. THEREFORE FOR COLLECTION OF DEPOSITS AND REPAYMENTS FROM ALL OVER THE UNDIVIDED STATE OF AP IT HAD TO DEPEND UPON THE BRANCHES OF THE ASSESSEE COM PANY AND SOME OF THE STAFF WORKING THEREIN. THOUGH THE ASSESSEE H AS CONTENDED THAT THE ROLE OF ASSESSEES STAFF IS ONLY LIMITED TO GUI DING THE INVESTORS/DEPOSITORS AND FORWARDING THEIR APPLICATI ONS ALONG WITH CHEQUES & DRAFTS TO MARGADARSI FINANCIERS BUT ON A PERUSAL OF FACTS AND MATERIALS ON RECORD IT BECOMES CLEAR THAT THE ENTIRE DEPOSITS AND REPAYMENTS OF MARGADARSI FINANCIERS IS MOBILIZED T HROUGH STAFF OF ASSESSEE COMPANY WORKING IN THE BRANCHES OF ALL OVE R THE STATE OF AP. THOUGH THE ASSESSEE HAS PLACED STRONG RELIANCE ON THE STATEMENT OF SHRI RAMOJI RAO STATING THAT THE STAFF OF ASSESSEE COMPANY HAS NO ROLE TO PLAY IN MOBILIZING THE DEPOS ITS ON BEHALF OF MARGADARSI FINANCIERS EXCEPT GUIDING THE DEPOSITOR S BUT THE FACTS ON RECORD SPEAK OTHERWISE. AS CAN BE SEEN FROM THE ST ATEMENT RECORDED ON 20/08/2008 SHRI PVSR DAS WORKING AS SENIOR EXEC UTIVE OF MARGADARSI FINANCIERS CATEGORICALLY STATED THAT MC F LTD. BRANCH OFFICES WHEREVER LOCATED ACT AS FACILITATION CENTER S AND THE BRANCH MANAGERS ACT AS COORDINATORS SO FAR AS DEPOSITS AND REPAYMENTS OF MARGADARSI FINANCIERS ARE CONCERNED. IT WAS FURTHE R STATED BY HIM THAT MARGADARSI FINANCIERS DO NOT PAY ANY SALARIES TO THE STAFF OF 7 ITA NOS. 1537 1538 1554 & 1555/HYD/2010 MARGADARSI CHIT FUND LTD. MCF LTD. FOR DOING THIS FACILITATION/COORDINATION J OB BUT ONLY REIMBURSE EXPENDITURE ON ACTUAL BASIS. 9. SIMILARLY SHRI S. ADINARAYANA RAO WORKING AS BR ANCH MANAGER OF THE ASSESSEE COMPANY DILSUKHNAGAR BRANCH IN STA TEMENT RECORDED ON 17/01/08 ALSO STATED THAT AS A BRANCH MANAGER OF THE ASSESSEE COMPANY HE ACCEPTED DEPOSIT FORMS OF MARGADARSI FI NANCIERS. HE ALSO ADMITTED THAT FOR THE SERVICES OF MARGADARSI FINANCIERS THE STAFF WORKING IN THE BRANCHES OF THE ASSESSEE COMPANY ARE UTILIZED. FROM THE AFORESAID FACTS IT BECOMES CLEAR THAT SOME OF THE STAFF WORKING IN DIFFERENT BRANCHES OF ASSESSEE COMPANY ARE ENGAGED IN PROVIDING SERVICES TO MARGADARSI FINANCIERS. THEREFORE THE ENTIRE STAFF COST INCURRED BY ASSESSEE CANNOT BE FOR THE PURPOSE OF A SESSEES BUSINESS ALONE AS IT IS PROVED BEYOND DOUBT THAT PA RT OF THE STAFF ARE ALSO RENDERING SERVICES TO MARGADARSI FINANCIERS. IN THE AFORESAID FACTS AND CIRCUMSTANCES A PART OF THE EXPENDITURE TOWARDS SALARY PAID TO STAFF CAN BE APPORTIONED TOWARDS SERVICES R ENDERED BY THE STAFF TO MARGADARSI FINANCIERS. CONSIDERED IN THE AFORESAID CONTEXT THE ENTIRE EXPENDITURE CLAIMED TOWARDS STAFF COST C ANNOT BE ALLOWED. 10. HAVING HELD SO IT IS NECESSARY TO QUANTIFY THE AMOUNT OF SALARY WHICH COULD BE REASONABLY ATTRIBUTED TOWARDS RENDER ING SERVICES TO MARGADARSI FINANCIERS. AS CAN BE SEEN AO HAS MADE AN ADHOC DISALLOWANCE OF 15% FROM THE TOTAL SALARY COST INCU RRED BY ASSESSEE. HOWEVER IT CANNOT BE SAID THAT THE ENTIRE STAFF OF ASSESSEE COMPANY IS ENGAGED IN PROVIDING SERVICES TO MARGADARSI FIN ANCIERS. IT IS QUITE POSSIBLE THAT A FEW OF THE STAFF ALONG WITH THE BRA NCH MANAGER IN EACH BRANCH MAY BE PROVIDING SERVICES TO MARGADARSI FIN ANCIERS. THIS FACT IS ALSO CORROBORATED BY THE STATEMENT GIVEN BY ASSE SSEE COMPANYS BRANCH MANAGER. IN THIS CONTEXT WE REFER TO THE LI ST OF ACCOUNTANTS SUBMITTED BY ASSESSEE AT PAGE 269 OF THE PAPER BOOK WHO ARE PROVIDING SERVICES TO MARGADARSI FINANCIERS. A PER USAL OF THE SAID LIST REVEALS THAT A TOTAL OF SIXTY NUMBER OF EMPLOYEES A RE PROVIDING 8 ITA NOS. 1537 1538 1554 & 1555/HYD/2010 MARGADARSI CHIT FUND LTD. SERVICES TO MARGADARSI FINANCIERS. SIMILARLY THE BRANCH MANAGERS MUST ALSO BE PROVIDING SERVICES TO MARGADARSI FINA NCIERS AS REIMBURSEMENT OF COST IN RESPECT OF BRANCH MANAGERS HAS ALSO BEEN CLAIMED BY MARGADARSI FINANCIERS. THEREFORE WHEN T HERE IS NOTHING ON RECORD TO SHOW THAT ENTIRE STAFF IN ALL BRANCHES ARE RENDERING SERVICES TO MARGADARSI FINANCIERS ADHOC DISALLOWANC E OF 15% OUT OF TOTAL SALARY COST IN OUR VIEW IS NOT JUSTIFIED. A NOTHER RELEVANT FACT WHICH NEEDS TO BE NOTED THAT THOUGH IN THE AFORESAI D STATEMENT THE AMOUNT PAID BY THE MARGADARSI FINANCIERS TO THESE EMPLOYEES HAS BEEN SHOWN AS INCENTIVES BUT IN THE ACCOUNTS OF MAR GADARSI FINANCIERS THE AMOUNT PAID TO THE BRANCH ACCOUNTANT S AND BRANCH MANAGERS OF ASSESSEE COMPANY HAVE BEEN SHOWN AS REI MBURSEMENT OF EXPENDITURE UNDER THE HEAD BUSINESS PROMOTION E XPENSES. THEREFORE THE TREATMENT GIVEN IN THE ACCOUNTS OF M ARGADARSI FINANCIERS COUPLED WITH THE STATEMENTS RECORDED FRO M SHRI PVSR DAS AND SHRI S. ADINARAYANA RAO MAKES IT CLEAR THAT THE AMOUNT PAID BY MARGADARSI FINANCIERS TO THE ACCOUNTANTS AND BRANC H MANAGERS OF ASSESSEE ARE IN THE NATURE OF REIMBURSEMENT OF ACTU AL COST INCURRED. THEREFORE IN OUR CONSIDERED VIEW AS THE CONCERNED EMPLOYEES CANNOT BE SAID TO BE EXCLUSIVELY DOING THE WORK OF ASSESSEE COMPANY BUT ALSO RENDERING SERVICES TO MARGADARSI FINANCIER S 15% OUT OF THE SALARY PAID TO SUCH STAFF OR THE AMOUNT EQUIVALENT TO THE EXPENDITURE REIMBURSED BY MARGADARSI FINANCIERS TOWARDS COST O F BRANCH MANAGERS AND BRANCH ACCOUNTANTS WHICHEVER IS HIGHE R CAN BE CONSIDERED FOR DISALLOWANCE TOWARDS SERVICES RENDE RED BY THE STAFF OF ASSESSEE COMPANY TO MARGADARSI FINANCIERS. THE AO MUST EXAMINE THE FACTS AND DETAILS RELATING TO THE STAFF ENGAGED IN PROVIDING SERVICES TO MARGADARSI FINANCIERS AND THE REIMBURS EMENT MADE BY MARGADARSI FINANCIERS IN RESPECT OF SUCH STAFF BY VERIFYING THE BOOKS OF ACCOUNTS OF BOTH THE ASSESSEE COMPANY AND MARGAD ARSI FINANCIERS AND THEREAFTER WORK OUT THE DISALLOWANCE ACCORDINGLY FOR BOTH THE ASSESSMENT YEARS I.E. 2006-07 AND 2007-08. THIS GROUND OF THE ASSESSEE IS CONSIDERED TO BE ALLOWED PARTLY. 9 ITA NOS. 1537 1538 1554 & 1555/HYD/2010 MARGADARSI CHIT FUND LTD. 11. THE NEXT ISSUE WHICH ARISES ONLY IN AY 2006-07 IS IN RESPECT OF DISALLOWANCE OF SHORT TERM CAPITAL LOSS ON SALE OF PLANT AND MACHINERY. 12. BRIEFLY THE FACTS RELATING TO THE AFORESAID IS SUE ARE DURING THE FY RELEVANT TO AY UNDER DISPUTE ASSESSEE PURCHASED A FACTORY BUILDING WITH PLANT AND MACHINERY IN AUCTION CONDUC TED BY EXPORT IMPORT BANK OF INDIA FOR A TOTAL CONSIDERATION OF R S. 6 79 20 930. AS PER SALE CERTIFICATE ISSUED BY EXIM BANK OF INDIA THE LAND AND BUILDING WERE VALUED AT RS. 6 22 20 930 AND THE PLA NT AND MACHINERY WERE VALUED AT RS. 57 00 000. ASSESSEE AFTER PURCH ASING THE LAND AND BUILDING ALONG WITH PLANT AND MACHINERY SOLD T HE PLANT AND MACHINERY AS SCRAP TO A SCRAP DEALER FOR A SUM OF R S. 10 84 170 AND CLAIMED SHORT TERM CAPITAL LOSS OF THE BALANCE AMO UNT WHICH WAS SET OFF AGAINST THE SHORT TERM CAPITAL GAINS ON SALE OF SHARES. AO WHILE VERIFYING ASSESSEES CLAIM DURING THE ASSESSMENT PR OCEEDING OBSERVED THAT ASSESSEE PURCHASED THE LAND AND BUILD ING ALONG WITH PLANT AND MACHINERY WHICH IS OF SCRAP VALUE BECAUSE OF THE MANDATORY CONDITION THEREFORE THE SALE VALUE OF S CRAP IS TO BE REDUCED FROM TOTAL VALUE OF LAND AND BUILDING AND P LANT & MACHINERY TO ARRIVE AT THE CORRECT VALUE OF LAND AND BUILDIN G. AO OBSERVED THAT THOUGH THE EXIM BANK ISSUED TWO SEPARATE CERTIFICAT ES BUT THE VALUE MENTIONED THEREIN MAY BE BASED ON THE BOOK VALUES F OR WHICH THE ASSETS WERE MORTGAGED TO THE BANK. AO OBSERVED THAT AS THE VALUE OF PLANT AND MACHINERY ON THE DATE OF SALE IS SCRAP AS SESSEE CANNOT CLAIM THE LOSS ON SALE OF PLANT AND MACHINERY AS SH ORT TERM CAPITAL LOSS. ACCORDINGLY HE DISALLOWED ASSESSEES CLAIM O F SHORT TERM CAPITAL LOSS. THE CIT(A) ALSO SUSTAINED THE DISALLO WANCE ON THE FOLLOWING FINDING: 4.2.2 I HAVE EXAMINED THE ISSUE CAREFULLY AND PERU SED ALL THE FACTS. I FIND FORCE IN THE ARGUMENT OF THE AO T HAT THERE WAS ACTUALLY NO PLANT AND MACHINERY ON THE PREMISES. WH ATEVER HAD BEEN INSTALLED THERE HAD DECAYED AND TURNED INTO SC RAP. THIS IS THE REASON THAT EVEN IN THE OPEN AUCTION IT WAS ONL Y A SCRAP 10 ITA NOS. 1537 1538 1554 & 1555/HYD/2010 MARGADARSI CHIT FUND LTD. DEALER WHO PURCHASED THE ITEMS. EVEN THE APPELLANT ISSUED AN AUCTION NOTICE IN THE NEWSPAPER FOR SALE OF SCRAP. FURTHER THE SO CALLED PLANT AND MACHINERY WAS NEVER A PART OF B LOCK OF ASSETS OF THE APPELLANT. ACCORDINGLY I AGREE WITH THE AO THAT THERE WAS NO LOSS ON SALE OF PLANT AND MACHINERY. R ATHER THE PRICE OF SCRAP SOLD IS TO BE REDUCED FROM THE OVERA LL COST OF LAND AND BUILDING. ACCORDINGLY THIS GROUND IS DECIDED I N FAVOUR OF REVENUE AND AGAINST THE APPELLANT. 13. THE LEARNED AR SUBMITTED BEFORE US THAT ASSESSE E HAS PAID A TOTAL CONSIDERATION OF RS. 6 79 20 930 TOWARDS SALE PRICE OF THE LAND AND BUILDING ALONG WITH PLANT & MACHINERY OUT OF W HICH AN AMOUNT OF RS. 57 00 000 WAS PAID TOWARDS PLANT AND MACHINERY. THEREFORE SO FAR AS THE ASSESSEE IS CONCERNED THE CONSIDERATION PAID TOWARDS PLANT AND MACHINERY IS RS. 57 00 000. HOWEVER ASS ESSEE COULD SALE THE PLANT AND MACHINERY AS SCRAP FOR AN AMOUNT OF R S. 10 84 170 THEREBY SUFFERING SHORT TERM CAPITAL LOSS. AS THE A SSESSEE HAS ACTUALLY SUSTAINED THE SHORT TERM CAPITAL LOSS THER E IS NO REASON TO DISALLOW THE SAME. 14. THE LEARNED DR ON THE OTHER HAND SUBMITTED TH AT THE PLANT AND MACHINERY AT THE TIME OF PURCHASE BY THE ASSESSEE I S OF SCRAP VALUE HENCE THE SO CALLED SHORT TERM CAPITAL LOSS CLAIME D BY ASSESSEE CANNOT BE ALLOWED. 15. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIALS ON RECORD AS WELL AS ORDERS OF REVENU E AUTHORITIES ON THIS ISSUE. THERE IS NO DISPUTE TO THE FACT THAT A SSESSEE IN AN AUCTION CONDUCTED BY EXIM BANK HAD PURCHASED LAND AND BUILD ING ALONG WITH PLANT AND MACHINERY FOR A TOTAL CONSIDERATION OF RS . 6 79 20 930. AS CAN BE SEEN FROM THE SALE CERTIFICATES ISSUED BY EX IM BANK WHILE THE LAND AND BUILDING HAS BEEN SOLD FOR A PRICE OF RS. 6 22 20 930 PLANT AND MACHINERY WAS SOLD FOR A CONSIDERATION OF RS. 5 7 00 000. THEREFORE SO FAR AS ASSESSEE IS CONCERNED IT HAS P URCHASED THE PLANT AND MACHINERY FOR AN AMOUNT OF RS. 57 00 000. WHEN THE ASSESSEE 11 ITA NOS. 1537 1538 1554 & 1555/HYD/2010 MARGADARSI CHIT FUND LTD. HAS SOLD THE SAID PLANT AND MACHINERY FOR A CONSIDE RATION OF RS. 10 84 170 THERE IS A SHORT TERM CAPITAL LOSS TO AS SESSEE. THEREFORE ASSESSEE IS ENTITLED TO SET OFF THIS CAPITAL LOSS A GAINST THE SHORT TERM CAPITAL GAINS FROM SHARES HENCE THE DISALLOWANCE OF ASSESSEES CLAIM IS NOT JUSTIFIED. THIS GROUND OF ASSESSEE IS ALLOWED. 16. IN THE RESULT ASSESSEES APPEALS ARE PARTLY AL LOWED. ITA NO. 1554/HYD/12 APPEAL BY DEPARTMENT 17. THE FIRST ISSUE IN THE AFORESAID APPEAL OF DEPA RTMENT IS IN RESPECT OF CIT(A) DELETING THE ADDITION MADE BY AO BY INVOKING SECTION 40(A)(IA) ON ACCOUNT OF NON-DEDUCTION OF TA X AT SOURCE ON DIVIDEND PAID TO CHIT SUBSCRIBERS. 18. BRIEFLY THE FACTS ARE DURING THE ASSESSMENT PRO CEEDING AO NOTICED THAT DURING THE YEAR UNDER CONSIDERATION AS SESSEE HAS PAID INTEREST/DIVIDEND OF RS. 5 000 AND ABOVE TO EACH SU BSCRIBER AMOUNTING TO RS. 212 37 04 662. HE FURTHER NOTED TH AT ASSESSEE COMPANY HAS NOT DEDUCTED TAX AT SOURCE ON THESE PAY MENTS. AO THEREFORE PROPOSED TO DISALLOW THE EXPENDITURE CLAI MED AS PER SECTION 40(A)(IA) OF THE ACT. THOUGH THE ASSESSEE IN ITS RE PLY SUBMITTED THAT THE DIVIDEND PAID TO CHIT SUBSCRIBERS IS NOT COVERE D WITHIN THE MEANING OF INTEREST AS DEFINED U/S 2(28A) BUT THE A O REJECTING EXPLANATION OF ASSESSEE DISALLOWED THE AMOUNT OF RS . 212 37 04 662 BY APPLYING THE PROVISIONS OF SECTION 40(A)(IA). AS SESSEE CHALLENGED THE DISALLOWANCE BEFORE THE CIT(A). THE CIT(A) BY F OLLOWING THE ORDER PASSED BY HIM EARLIER IN CASE OF THE ASSESSEE FOR A Y 2005-06 DELETED THE ADDITION MADE BY OBSERVING THAT THE DIV IDEND PAID TO THE SUBSCRIBERS ARE NOT IN THE NATURE OF INTEREST SO AS TO ATTRACT THE PROVISIONS OF SECTION 40(A)(IA). 12 ITA NOS. 1537 1538 1554 & 1555/HYD/2010 MARGADARSI CHIT FUND LTD. 19. WE HAVE HEARD THE PARTIES AND PERUSED THE RELE VANT MATERIAL ON RECORD. AS AGREED BY THE LEARNED REPRESENTATIVES OF BOTH THE SIDES THE ISSUE INVOLVED IN THE APPEAL OF THE REVENUE IS SQUARELY COVERED IN FAVOUR OF THE ASSESSEE BY THE DECISION OF THE CO ORDINATE BENCH OF THIS TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2008-09 RENDERED VIDE ORDER DATED 24.2.2012 IN ITA NO.973/H YD/2011 WHEREIN A SIMILAR DISALLOWANCE MADE BY THE ASSESSIN G OFFICER WAS HELD TO BE UNSUSTAINABLE FOLLOWING THE DECISION OF THE MADRAS HIGH COURT IN THE CASE OF BILAHARI INVESTMENTS (P)LTD.(2 88 ITR 39) WHEREIN IT WAS HELD THAT THE DIVIDEND DISTRIBUTED BY THE AS SESSEE DID NOT PART- TAKE THE CHARACTER OF INTEREST AND CONSEQUENTLY TH E ASSESSEE WAS NOT LIABLE TO DEDUCT TAX AT SOURCE. THE SAID DECISION O F THE TRIBUNAL RENDERED IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2008-09 HAS BEEN UPHELD BY THE HONBLE ANDHRA PRADESH HIGH COUR T VIDE ITS JUDGMENT DATED 10TH JULY 2013 PASSED IN ITTA NO.22 8 OF 2013 AND EVEN THE SLP FILED BY THE REVENUE AGAINST THE ORDER OF THE HONBLE ANDHRA PRADESH HIGH COURT HAS ALSO BEEN DISMISSED B Y THE HONBLE SUPREME COURT RECENTLY ON 30TH JULY 2014 IN PETITI ON FOR SPECIAL LEAVE TO APPEAL (C) NO.9457/2014. RESPECTFULLY FOLL OWING THESE JUDICIAL PRONOUNCEMENTS IN ASSESSEES OWN CASE ON S IMILAR ISSUE WE UPHOLD THE IMPUGNED ORDER OF THE LEARNED CIT(A) DE LETING THE DISALLOWANCE MADE BY THE ASSESSING OFFICER UNDER S. 40A(IA) ON ACCOUNT OF DIVIDEND PAID BY THE ASSESSEE TO THE CHI T SUBSCRIBERS FOR NON-DEDUCTION OF TAX AT SOURCE. 20. THE NEXT ISSUE IS IN RESPECT OF DISALLOWANCE MA DE BY THE AO U/S 14A READ WITH RULE 8D BUT DELETED BY CIT(A). 21. BRIEFLY THE FACTS ARE IN COURSE OF ASSESSMENT PROCEEDING AO NOTICED THAT ASSESSEE HAS INVESTED IN SHARES OF VAR IOUS COMPANIES AND EARNED DIVIDEND WHICH IS EXEMPT FROM TAX. AO WA S THEREFORE OF THE VIEW THAT EXPENDITURE ATTRIBUTABLE TO SUCH EXEM PT INCOME HAS TO BE DISALLOWED IN TERMS OF SECTION 14A. BY OBSERVING THAT SEPARATE 13 ITA NOS. 1537 1538 1554 & 1555/HYD/2010 MARGADARSI CHIT FUND LTD. FIGURES FOR EXPENDITURE INCURRED IN EARNING SUCH EX EMPT IS NOT AVAILABLE AO WORKED OUT THE DISALLOWANCE BY APPLYI NG THE PROVISIONS OF RULE 8D(II) AND 8D(III) FOR AN AMOUNT OF RS. 2 9 9 728 AND RS. 14 97 449 RESPECTIVELY TOTALING TO RS. 17 97 177. B EING AGGRIEVED OF SUCH DISALLOWANCE ASSESSEE PREFERRED APPEAL BEFORE THE CIT(A). 22. THE CIT(A) DELETED THE ADDITION MADE WITH THE F OLLOWING OBSERVATIONS: 6.1.2 I HAVE SEEN CAREFULLY THE ARGUMENTS OF THE AP PELLANT AND THE FACT OF THE CASE. I FIND THAT THE AO HAS MADE A N ABSOLUTELY ADHOC DISALLOWANCE. THE ONUS WAS ON THE AO TO POINT OUT WHICH ARE THE ITEMS OF EXPENSES WHICH RELATE TO SECTION 1 4A. HE HAS NEITHER LOOKED INTO THE ACCOUNTS NOR ONE INTO THE I SSUE AT ALL. THEREFORE I DO NOT FIND MERIT IN SUCH ADHOC DISALL OWANCES. THE SAME IS ORDERED TO BE DELETED.. 23. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE ORDERS OF THE REVENUE AUTHORITIES AS WELL AS OT HER MATERIALS ON RECORD. THOUGH IT IS A FACT THAT AO WAS NOT CORREC T IN WORKING OUT THE DISALLOWANCE BY APPLYING THE PROVISIONS OF RULE 8D WHICH IS APPLICABLE FROM AY 2008-09 BUT IT CANNOT BE DENI ED THAT ASSESSEE MUST HAVE INCURRED SOME AMOUNT OF EXPENDITURE FOR E ARNING THE EXEMPT INCOME. WE FIND FROM RECORD THAT THIS ISSUE AROSE IN CASE OF ASSESSEE IN AY 2005-06 ALSO. WHEN THE MATTER CAME U P BEFORE THE TRIBUNAL IN AN APPEAL PREFERRED BY ASSESSEE IN ITA NO. 1536/HYD/10 THE TRIBUNAL HELD AS UNDER: 14. WE HAVE HEARD THE ARGUMENTS OF BOTH THE SIDES AND ALSO PERUSED THE RELEVANT MATERIAL ON RECORD. ALTHOUGH T HE LEARNED COUNSEL FOR THE ASSESSEE HAS CONTENDED THAT THE DIS ALLOWANCE MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE LEARNED CIT(A) UNDER S.14A TO THE EXTENT OF 10% OF THE EXEM PT DIVIDEND INCOME IS EXCESSIVE AND UNREASONABLE AND THE SAME S HOULD BE RESTRICTED TO 1-2% OF THE EXEMPT DIVIDEND INCOME W E ARE UNABLE TO AGREE WITH THIS CONTENTION FULLY. IT IS O BSERVED THAT INVESTMENT IN THE RANGE OF RS.25 TO 30 CRORES WAS M ADE BY THE ASSESSEE COMPANY IN THE SHARES DURING THE YEAR UNDE R CONSIDERATION AND IN ORDER TO MANAGE THE INVESTMENT OF THIS VOLUME WHICH ALSO INVOLVED TAKING DECISIONS FROM T IME TO TIME REGARDING CHANGE IN THE PORTFOLIO CERTAIN EXPENDIT URE WAS 14 ITA NOS. 1537 1538 1554 & 1555/HYD/2010 MARGADARSI CHIT FUND LTD. REQUIRED TO BE INCURRED WHICH CANNOT BE AS LOW AS 1 OR 2% OF THE EXEMPT DIVIDEND INCOME AS CLAIMED BY THE LEARN ED COUNSEL FOR THE ASSESSEE. HAVING REGARD TO THE FACTS OF THE CASE INCLUDING ESPECIALLY THE QUANTUM OF INVESTMENT MADE BY THE ASSESSEE IN THE SHARES THE QUANTUM OF DIVIDEND INC OME RECEIVED DURING THE YEAR UNDER CONSIDERATION ETC. WE ARE OF THE VIEW THAT IT WOULD BE FAIR AND REASONABLE TO ES TIMATE THE EXPENDITURE INCURRED BY THE ASSESSEE FOR EARNING OF EXEMPT DIVIDEND INCOME AT RS.2 32 375 BEING 5% OF THE EXEM PT DIVIDEND INCOME. WE ACCORDINGLY RESTRICT THE DISALL OWANCE MADE BY THE ASSESSING OFFICER AND CONFIRMED BY THE CIT(A ) UNDER S.14A TO RS.2 32 375 AND ALLOW PARTLY GROUND NO.3 O F THE ASSESSEES APPEAL. 24. AS FACTS AND ISSUE IN THE AFORESAID APPEAL IS M ATERIALLY SAME RESPECTFULLY FOLLOWING THE AFORESAID ORDER OF COORD INATE BENCH WE DIRECT THE AO TO RESTRICT THE DISALLOWANCE U/S 14A TO 5% OF THE DIVIDEND EARNED. THIS GROUND IS PARTLY ALLOWED. ITA NO. 1555/HYD/12 BY REVENUE 25. GROUND NO. 2 & 3 ARE SAME AS GROUND NO. 2 OF IT A NO. 1554/HYD/10. FOLLOWING OUR CONCLUSION THEREIN WE D ISMISS THESE GROUNDS RAISED BY DEPARTMENT. 26. GROUND NO. 4 IS SAME AS GROUND NO. 3 OF ITA NO. 1554/HYD/10. FOLLOWING OUR DECISION THEREIN THIS GROUND IS PART LY ALLOWED. 27. IN GROUND NO. 5 THE DEPARTMENT HAS CHALLENGED THE ACTION OF THE CIT(A) IN DELETING THE ADDITION OF RS. 2 32 28 557. MADE BY THE AO BY INVOKING THE PROVISIONS OF SECTION 40(A)(IA) ON ACCOUNT OF NON- DEDUCTION OF TAX IN TERMS OF SECTION 194C OF THE AC T. 28. BRIEFLY THE FACTS RELATING TO THIS ISSUE ARE IN COURSE OF ASSESSMENT PROCEEDING AO NOTICED THAT THE ASSESSEE HAS INCURRED CERTAIN EXPENDITURE RELATING TO PRINTING AND STATIO NERY ADVERTISEMENT COMPLIMENTS COMPUTER MAINTENANCE CHARGES STAFF RE CRUITMENT 15 ITA NOS. 1537 1538 1554 & 1555/HYD/2010 MARGADARSI CHIT FUND LTD. EXPENSES ETC. HE THEREFORE CALLED UPON THE ASSE SSEE TO FURNISH THE DETAILS ABOUT THE AFORESAID EXPENDITURE. AFTER VERI FYING THE DETAILS FURNISHED BY ASSESSEE AO FOUND THAT THE EXPENDITUR ES HAVE BEEN INCURRED FOR THE FOLLOWING WORKS: S.NO. NAME OF THE PARTY SERVICES RENDERED AMOUNT PAID I) MILLENNIUM INSPIRATIONS GREETING CARDS 1 66 000 II) SAI SRI PRINTERS PRINTED STATIONERY 26 27 449 III) UNITED COMMERCIAL PRODUCTS CLOTH COVERS 4 41 878 IV) RADHA ART PRINTERS PRINTED STATIONERY 2 83 930 V) S.V. PRINTERS VISITING CARDS 2 74 815 VI) SRI SRINIVASA OFFSET PRINTERS BINDING 4 81 885 VII) SRI TIRUMALA TIRUPATI PUBLICATIONS TELUGU PANCHANGAM CALENDARS 1 95 990 VIII) SRI STRUSTI ADS. & COMMUNICATIONS SYSTEM MIXING & PROGRESSIVE MACHINE PROOFING 33 415 IX) STANDARD PRESS INDIA PVT. LTD. VIP DIARIES 43 00 866 X) S.S. ENTERPRISES POCKET TELEPHONE INDEX 2 49 480 XI) SAI TEJA ENTERPRISES POCKET DIARIES 16 03 170 XII) NANDU OFFSET PRINTERS CALENDARS 49 97 772 XIII) SEASONS COLLECTIONS DIARIES 68 48 803 XIV) MILLENNIUM INSPIRATIONS DESK TOP CALENDARS 1 60 000 XV) PRINT HEAD MICRO TECHNOLOGY PRINTER HEAD REPAIRING CHARGES 2 46 000 XVI) USHODAYA ENTERPRISES LD. ADVERTISEMENT CHARGES FOR RECRUITMENT 3 17 104 TOTAL 2 32 28 557 ON EXAMINING THE NATURE OF SERVICES RENDERED AO WA S OF THE VIEW THAT THE WORK EXTRACTED BY ASSESSEE IS TO BE TREATE D AS CONTRACT ATTRACTING PROVISIONS OF SECTION 194C. HE THEREFORE REQUIRED ASSESSEE TO EXPLAIN AS TO WHY THE EXPENDITURE CLAIMED SHOULD NOT BE DISALLOWED U/S 40(A)(IA) OF THE ACT FOR THE FAILURE ON THE PA RT OF ASSESSEE TO DEDUCT TAX AT SOURCE. AS STATED BY AO IN THE ASSESS MENT ORDER ASSESSEE IN HIS REPLY DATED 09/12/09 THOUGH ACCEPTE D THAT THE EXPENDITURE APPEARING AT SL. NO. XV AND XVI ARE SUB JECT TO DEDUCTION OF TAX U/S 194C BUT SO FAR AS THE REST OF THE EXPEN DITURE MENTIONED IN ITEM I TO XIV WERE TOWARDS DIRECT PURCHASES MADE FR OM PARTIES OF 16 ITA NOS. 1537 1538 1554 & 1555/HYD/2010 MARGADARSI CHIT FUND LTD. DIFFERENT STATIONERY ITEMS ON PAYMENT OF SALES TAX/ VAT. AS THESE EXPENDITURES ARE NOT IN THE NATURE OF ANY WORKS CON TRACT THE PROVISIONS OF SECTION 194C ARE NOT APPLICABLE. AO HOWEVER DID NOT FIND MERIT IN THE SUBMISSIONS OF ASSESSEE ON THE VI EW THAT ALL THESE WORKS ARE TRANSACTION SPECIFIC WHICH IS EXCLUSIVE T O ASSESSEE AND WAS ENTRUSTED TO THE RESPECTIVE PARTIES. HE OBSERVED TH AT THESE WORKS CANNOT BE SOLD BY THE CONCERNED PARTIES TO ANY OTHE R PERSON EXCEPT ASSESSEE. HE THEREFORE CONCLUDED THAT THE WORK ENT RUSTED IS CLEARLY IN THE NATURE OF WORKS CONTRACT WARRANTING DEDUCTIO N OF TAX AT SOURCE U/S 194C. AS THE ASSESSEE HAS FAILED TO DEDUCT TAX AT SOURCE ON SUCH PAYMENTS MADE TO THE PARTIES AO DISALLOWED AN AMOU NT OF RS. 2 32 28 557 BY APPLYING THE PROVISIONS OF SECTION 4 0(A)(IA) OF THE ACT. ASSESSEE CHALLENGED THE DISALLOWANCE MADE BEFORE TH E FIRST APPELLATE AUTHORITY. 29. THE LEARNED CIT(A) AFTER CONSIDERING THE SUBMIS SIONS OF ASSESSEE AND AFTER EXAMINING THE MATERIAL AVAILABLE ON RECORD DELETED THE ADDITION BY HOLDING AS UNDER: 4.3.2 I HAVE CONSIDERED THE ARGUMENTS OF THE APPEL LANT CAREFULLY AND THE FACTS OF THE CASE AND I FIND FORC E IN THE ARGUMENTS OF THE APPELLANT. A SIMPLE LOOK AT THE IT EMS OF EXPENSES WOULD REVEAL THAT ALL OF THEM PERTAIN TO S TRAIGHT FORWARD PURCHASE. FOR EXAMPLE ITEM NO. 1 AND 2 CLE ARLY SPEAK OF PURCHASE OF GREETING CARDS AND PURCHASE OF PRINT ING STATIONERY. ITEM NO. 9 IS THE PURCHASE OF VIP DIARI ES. ITEM NO. 15 IS THE REPAIR AND REPLACEMENT OF PRINTER HEAD. S IMILARLY ALL OTHER ITEMS ARE STRAIGHT FORWARD PURCHASES AND DO N OT INVOLVE ANY WORKS CONTRACT WHATSOEVER. THE PURCHASE OF POC KET DIARIES CALENDARS DESK TOP CALENDARS VISITING CA RDS CLOTH COVERS CANNOT BE CLASSIFIED AS WORKS CONTRACT. THE REFORE I AGREE WITH THE SUBMISSIONS OF THE APPELLANT AND HOL D THAT NO TDS WAS TO BE DEDUCTED ON THESE PURCHASES. ACCORDIN GLY THERE WAS NO APPLICABILITY OF SECTION 40(A)(IA) OF THE AC T. THE ADDITION ON THIS ACCOUNT IS ORDERED TO BE DELETED. 30. THE LEARNED DR SUBMITTED BEFORE US THAT THE NAT URE OF EXPENDITURE INCURRED CLEARLY SHOWS THAT ASSESSEE HA S ENTRUSTED CERTAIN WORKS TO VARIOUS PERSONS WHICH COME WITHIN THE MEANING OF 17 ITA NOS. 1537 1538 1554 & 1555/HYD/2010 MARGADARSI CHIT FUND LTD. WORKS CONTRACT AS PROVIDED U/S 194C OF THE ACT. THE LEARNED DR SUBMITTED THAT THE WORK ENTRUSTED IS SPECIFIC TO AS SESSEE AS THE PARTIES HAVE TO PROVIDE THE ASSESSEE WITH CALENDARS REGISTERS ETC. WITH ASSESSEES LOGO AND NAME. THEREFORE IT IS A SERVICE RENDERED BY THOSE PARTIES TO ASSESSEE. HENCE AS THE PAYMEN TS MADE BY ASSESSEE TO THE CONCERNED PARTIES IS TOWARDS SERVIC ES RENDERED BY THEM PROVISIONS OF SECTION 194C IS ATTRACTED. 31. THE LEARNED AR ON THE OTHER HAND STRONGLY SUP PORTING THE ORDER OF CIT(A) SUBMITTED THAT THESE ARE DIRECT PUR CHASES MADE BY ASSESSEE AND THERE IS NO ELEMENT OF WORKS CONTRACT INVOLVED IN THIS TRANSACTION. THE LEARNED AR SUBMITTED THAT THE CONC ERNED PARTIES HAVE ALSO CHARGED SALES TAX/VAT ON SALES EFFECTED B Y THEM. THEREFORE IT CANNOT BE SAID THAT THEY ARE IN THE N ATURE OF WORKS CONTRACT. IN SUPPORT OF SUCH CONTENTION THE LEARNE D AR RELIED ON THE FOLLOWING DECISIONS: 1. ITO VS. MILLAN DAIRY FOODS (P.) LTD. [2006] 105 TTJ 252 (DEL.) 2. ITO VS. DR. WILLMAR SCHWABE INDIA (P.) LTD. [20 05] 95 TTJ 53 (DEL.) 3. BANGALORE DISTRICT COOPERATIVE MILK PRODUCERS SO CIETIES UNION LTD. VS. ITO [2007] 11 SOT 539 (BANG.) 4. ITO VS. KUBER KHAINI (P.) LTD. [2011] 47 SOT 47 4 (DEL.) 32. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTI ES AND PERUSED THE MATERIALS ON RECORD AS WELL AS THE ORDERS OF RE VENUE AUTHORITIES. WE HAVE ALSO CAREFULLY APPLIED OUR MIND TO THE DECI SIONS PLACED BEFORE US. ON GOING THROUGH THE DETAILS IT IS VER Y MUCH EVIDENT THAT THE EXPENDITURES WERE INCURRED TOWARDS GREETING CAR DS STATIONERY VISITING CARDS CALENDARS REGISTERS ETC. THEREFO RE IT CANNOT BE SAID THAT ASSESSEE HAS MADE THE PAYMENT TOWARDS EXECUTIO N OF ANY CONTRACT WORK. ON THE CONTRARY THESE TRANSACTIONS ARE IN THE NATURE OF PURCHASE AND SALE TRANSACTIONS. THOUGH IT MAY BE A FACT THAT THE CALENDARS REGISTERS MAY BE CONTAINING THE NAME AND LOGO OF 18 ITA NOS. 1537 1538 1554 & 1555/HYD/2010 MARGADARSI CHIT FUND LTD. ASSESSEE BUT THAT BY ITSELF WILL NOT BE A CRITERIA TO CONCLUDE THAT THE TRANSACTION IS IN THE NATURE OF CONTRACT WORK. FURT HER ON EXAMINATION OF SAMPLE COPIES OF BILLS IT IS VERY MUCH EVIDENT THAT THE ASSESSEE IN FACT HAS PURCHASED CALENDARS REGISTERS ETC. FROM THE CONCERNED PARTIES ON PAYMENT OF SALES TAX/VAT WHICH CLEARLY D EMONSTRATE THAT IT IS PURELY A TRANSACTION OF PURCHASE AND SALE OF COM MODITIES AND NOT WORKS CONTRACT. AO HAS NOT BROUGHT ANY MATERIAL ON RECORD TO SHOW THAT THE CONCERNED PARTIES HAVE ONLY RENDERED SERVI CES AND THE ENTIRE MATERIAL WAS SUPPLIED BY ASSESSEE. THE DECISIONS RE LIED UPON BY THE LEARNED AR AND ALSO REFERRED TO BY LEARNED CIT(A) A LSO SUPPORT THE VIEW THAT PURCHASE OF CALENDARS REGISTERS ETC. WITH ASSESSEES NAME PRINTED ON THEM WOULD NOT AMOUNT TO WORKS CONT RACT. IN THE AFORESAID VIEW OF THE MATTER WE DO NOT FIND ANY IN FIRMITY IN THE ORDER OF CIT(A) IN HOLDING THAT THERE IS NO LIABILITY ON ASSESSEE TO DEDUCT TAX AT SOURCE U/S 194C AND CONSEQUENTLY DELETING TH E ADDITION MADE BY AO FOR AN AMOUNT OF RS. 2 26 65 453. GROUND RAIS ED IS DISMISSED. 33. IN THE RESULT BOTH THE APPEALS OF REVENUE AR E PARTLY ALLOWED. 34. TO SUM UP ASSESSEES APPEALS ARE PARTLY ALLOWE D AND APPEALS OF REVENUE ARE ALSO PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 12 TH NOVEMBER 2014 SD/- SD/- (P.M. JAGTAP) (S AKTIJIT DEY) ACCOUNTANT MEMBER JU DICIAL MEMBER HYDERABAD DATED: 12 TH NOVEMBER 2014 KV 19 ITA NOS. 1537 1538 1554 & 1555/HYD/2010 MARGADARSI CHIT FUND LTD. COPY TO:- 1) MARGADARSI CHIT FUND LTD. 5-10-195 FATEH MAIDA N ROAD HYDERABAD. 2) DCIT CIRCLE 16(2) HYDERABAD 3) CIT(A)-V HYDERABAD 4) CIT-IV HYDERABAD 5)THE DEPARTMENTAL REPRESENTATIVE I.T.A.T. HYDER ABAD. DESCRIPTION DATE INTLS 1. DRAFT DICTATED ON SR.P.S. 2. DRAFT PLACED BEFORE AUTHOR SR.P.S 3 DRAFT PROPOSED & PLACED BEFORE THE SECOND MEMBER AM 4 DRAFT DISCUSSED/APPROVED BY SECOND MEMBER VP 5 APPROVED DRAFT COMES TO THE SR.P.S./PS SR.P.S. 6. KEPT FOR PRONOUNCEMENT ON SR.P S. 7. FILE SENT TO THE BENCH CLERK SR.P.S. 8 DATE ON WHICH FILE GOES TO THE HEAD CLERK 9 DATE OF DISPATCH OF ORDER