The DCIT, Circle-2,, RAJKOT-GUJARAT v. M/s Choice Sanitaryware Industries,, RAJKOT-GUJARAT

ITA 274/RJT/2008 | 2005-2006
Pronouncement Date: 23-12-2010 | Result: Dismissed

Appeal Details

RSA Number 27424914 RSA 2008
Assessee PAN AACFC0736D
Bench Rajkot
Appeal Number ITA 274/RJT/2008
Duration Of Justice 2 year(s) 7 month(s) 14 day(s)
Appellant The DCIT, Circle-2,, RAJKOT-GUJARAT
Respondent M/s Choice Sanitaryware Industries,, RAJKOT-GUJARAT
Appeal Type Income Tax Appeal
Pronouncement Date 23-12-2010
Appeal Filed By Department
Order Result Dismissed
Bench Allotted DB
Tribunal Order Date 23-12-2010
Date Of Final Hearing 16-12-2010
Next Hearing Date 16-12-2010
Assessment Year 2005-2006
Appeal Filed On 09-05-2008
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL RAJKOT BENCH RAJKOT BEFORE SHRI A.L. GEHLOT (AM) AND SHRI D.T. GARASIA (JM) I.T.A. NO.274/RJT/2008 (ASSESSMENT YEAR 2005-06) DCIT CIR.2 VS M/S CHOICE SANITARYWARE RAJKOT INDUSTRIES 116 CREATIVE CHAMBERS OPP HOTEL RUBI KANAK ROAD RAJKOT PAN : AACFC0736D (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI JM SAHAY RESPONDENT BY : SHRI VIMAL DESAI O R D E R GARASIA : THIS APPEAL BY THE REVENUE IS DIRECTED AG AINST THE ORDER OF CIT(A)-III RAJKOT DATED 19-02-2008 FOR THE ASSESSMENT YEAR 200 5-06. THE FOLLOWING GROUNDS ARE TAKEN BY THE REVENUE: (I) THE LD.CIT(A)-III RAJKOT HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE MADE ON ACCOUNT OF DEDUCT ION U/S 80IB OF THE ACT OF RS.4 1`7 036/-. (II) THE LD.CIT(A)-III RAJKOT HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE MADE ON ACCOUNT OF U/S 40 A(2)(B) OF THE ACT OF RS.17 76 000/-. (III) THE LD.CIT(A)-III RAJKOT HAS ERRED IN LAW AN D ON FACTS IN DELETING THE DISALLOWANCE MADE U/S 40(A)(IA) OF THE ACT OF RS.64 78 719/-. (IV) THE LD.CIT(A)-III RAJKOT HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE MADE ON DEPRECIATION ON C AR OF RS.40 050/-. 2. THE BRIEF FACTS PERTAINING TO DISALLOWANCE OF DE DUCTION U/S 80IB AGITATED IN GROUND NO. (I) ARE THAT THE ASSESSEE DURING THE YEA R HAD ENTERED INTO A CONDUCTING AGREEMENT WITH ITS SISTER CONCERN M/S AR ISON CERAMICS PVT LTD A ITA NO.274/RJT/2008 2 SISTER CONCERN OF THE ASSESSEE AND ACQUIRED ITS LA ND BUILDING PLANT AND MACHINERY ON LEASE. THE ASSESSEE EXPLAINED THAT IT HAD HUGE EXPORT ORDER IN HAND FROM ITS OVERSEAS CUSTOMERS AND TO FULFIL THIS ADDITIONAL NEED OF ITS CUSTOMERS LAND BUILDING PLANT & MACHINERY OF M/S ARISON CERAMICS PVT LTD WAS ACQUIRED ON LEASE WHICH STOPPED THE BUSINESS OF MAN UFACTURING TILES IN VIEW OF CONTINUOUS LOSSES. THE ABOVE ASSETS WERE TAKEN ON LEASE FOR A PERIOD OF 36 MONTHS. ACCORDING TO THE ASSESSING OFFICER THE AS SESSEE HAS OBTAINED PLANT AND MACHINERY OF A NON ELIGIBLE UNIT U/S 80IB AND SEPAR ATE PRODUCTION IN RESPECT OF ELIGIBLE UNIT AND NON ELIGIBLE UNIT IS NOT MAINTAIN ED. THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS VIOLATED THE SPIRIT OF SECTI ON 80IB AS SECTION 80IB PROVIDES DEDUCTION FOR PROFITS MADE FROM PRODUCTION OBTAINED FROM NEW PLANT AND MACHINERY NOT USED PREVI9OUSLY FOR ANY PURPOSE. AS PER THE ASSESSING OFFICER BY COMBINING THE PRODUCTION OF ELIGIBLE UNIT AND NO N ELIGIBLE UNIT THE ASSESSEE HAS TRIED TO CLAIM DEDUCTION FROM THE PRODUCTION OB TAINED FROM OLD PLANT & MACHINERY. BASED ON THESE CONTENTIONS AND BY REFER RING TO THE PROVISIONS OF SECTION 80IB(3) R.W.S. 80IA THE ASSESSING OFFICER CONCLUDED THAT THE ASSESSEE IS NOT ELIGIBLE FOR DEDUCTION U/S 80IB OF THE ACT. 3. ON APPEAL THE LEARNED CIT(A) DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE. WHILE DOING SO HE DREW SUPPORT FORM THE ORDER OF MUMBAI ITAT IN THE CASE OF LAXMI PACKERS 14 SOT 303 (MUM) WHICH DE CISION WAS RENDERED IN REGARDS TO SECTION 80IB(2)(II) HOLDING AS BELOW: CL.(II) OF SUB-S.(2) OF S.80-IB PROHIBITS THE USE OF SECOND HAND PLANT AND MACHINERY IN THE FORMATION OF THE INDUSTRIAL UN DERTAKING. AN INDUSTRIAL UNDERTAKING CAN BE SAID TO HAVE BEEN FOR MED WHEN IT STARTS PRODUCTION. ASSESSEE PURCHASED A SECOND HAN D PLATTER MACHINE TO MEET THE ADDITIONAL REQUIREMENT OF ITS M AJOR CUSTOMER AFTER IT HAD STARTED PRODUCTION. IT IS NOT THE INT ENTION OF THE LEGISLATURE TO PROHIBIT PURCHASE OF ANY SECOND HAND MACHINERY EVEN AFTER THE FORMATION OF THE INDUSTRIAL UNDERTAKING. ONLY PROHIBITION IS AGAINST THE FORMATION OF THE INDUSTRIAL UNDERTAKING USING SECOND- HAND MACHINERY. THEREFORE CIT(A) WAS JUSTIFIED IN HOLDING THAT THE ASSESSEES CLAIM FOR DEDUCTION UNDER S.80-IB CANNOT BE DISALLOWED. ITA NO.274/RJT/2008 3 AGGRIEVED THE REVENUE AGITATES THE ISSUE BEFORE TH E TRIBUNAL. 4. THE LD.DR SUBMITTED THAT THE CIT(A) WAS NOT JUST IFIED IN GRANTING THE DEDUCTION. THE ASSESSEE USED SECOND HAND MACHINERY FOR THE PURPOSE OF MANUFACTURING. SECTION 80IB PROHIBITS USAGE OF SEC OND HAND MACHINERY FOR THE PURPOSE OF CLAIMING DEDUCTION U/S 80IB. THOUGH THE ASSESSEE HAS USED SECOND HAND PLANT AND MACHINERY OF A NON ELIGIBLE UNIT WH ICH HAVE BEEN OBTAINED ON LEASE FOR A PERIOD OF 36 MONTHS HAS NOT MAINTAINED SEPARATE PRODUCTION RECORDS IN RESPECT OF ELIGIBLE UNIT AND NON ELIGIBLE UNIT. AND THAT THE ASSESSEE HAS TRIED TO CLAIM DEDUCTION OF THE PRODUCTION OBTAINED FROM OLD PLANT & MACHINERY USED FOR SUCH PRODUCTION. IN THE ABSENCE OF SEGREGATION OF PRODUCTION OBTAINED FROM OLD PLANT & MACHINERY ACQUIRED ON LEASE FROM A NON ELIG IBLE UNIT AND THE UNIT ELIGIBLE FOR DEDUCTION THE ASSESSING OFFICER WAS JUSTIFIED IN DENYING THE DEDUCTION TO THE ASSESSEE. 5. THE LD.AR OF THE ASSESSEE ON THE OTHER HAND SU BMITTED THAT THE ASSESSEES UNIT WAS STARTED IN THE YEAR 2000 WITH N EW PLANT AND MACHINERY AND SINCE THEN THE IMPUGNED DEDUCTION WAS ALLOWED TO TH E ASSESSEE. AS HAS BEEN EXPLAINED TO THE ASSESSING OFFICER THE ASSESSEE OW ING TO THE MOUNTING DEMAND FROM THE OVERSEAS CUSTOMERS ENTERED INTO AN AGREEME NT WITH M/S ARISON CERAMICS PVT LTD A SISTER CONCERN OF THE ASSESSEE WHO CLOSED THEIR PRODUCTION OF TILES DUE TO HEAVY LOSSES FOR LEASE OF THEIR PLA NT AND MACHINERY. THE MAIN OBJECTION OF THE ASSESSING OFFICER IN WITHDRAWING T HE CLAIM U/S 80IB IS THAT THE ASSESSEE HAS NOT MAINTAINED SEPARATE PRODUCTION REC ORDS AND THAT THE M/S ARISON CERAMICS PVT LTD WAS NOT ELIGIBLE UNIT FOR C LAIMING DEDUCTION U/S 80IB AND THE PRODUCTION ACHIEVED WAS WITH THE USE OF OLD PLA NT AND MACHINERY. THE LD.AR INVITED OUR ATTENTION TO SECTION 80IB(2)(II) WHICH READS AS BELOW: IT IS NOT FORMED BY THE TRANSFER TO A NEW BUSINESS OF MACHINERY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE. ITA NO.274/RJT/2008 4 DRAWING SUPPORT FROM THIS THE LD.AR SUBMITTED THAT THE CONDITION OF USED PLANT & MACHINERY APPLIES AT THE TIME OF FORMATION OF THE E LIGIBLE UNDERTAKING. THE WORDS FORMED AND NEW BUSINESS CLEARLY DEFINES THE SCO PE OF RESTRICTION. FOR THIS PROPOSITION THE LD.AR INVITED OUR ATTENTION TO THE FOLLOWING DECISIONS: (I) BAJAJ TEMPO LTD VS CIT 196 ITR 188 (SC) (THOUGH THIS DECISION IS RENDERED WITH RESPECT TOP SECTION 15C OF 1922 ACT SINCE THE SAME PRESCRIBED THE SAME CONDITION FOR PLANT & MACHINERY THE JUDGM ENT IS RELEVANT). THE HONBLE APEX COURT IN THIS JUDGMENT HELD AS BELOW: THE KEY TO INTERPRETATION IS THAT THE NEW UNDERTAK ING SHOULD NOT BE FORMED BY TRANSFER OF BUILDING PLANT OR MACHINER Y. EMPHASIS IS ON FORMATION AND NOT ON USE. THEREFORE IT IS NOT EVE RY TRANSFER BUT THE ONE WHICH CAN BE HELD TO HAVE RESULTED IN THE FORMA TION OF THE UNDERTAKING. (II) CIT VS NIPPON ELECTRONICS (INDIA) P LTD 181 IT R 518 (KAR). THOUGH THIS DECISION IS RENDERED IN THE CONTEXT OF SECTION 80J( 4)(II) THE SAME CONTAINED SAME PROVISION IN RESPECT OF PLANT & MACHINERY. THE HON BLE HIGHH COURT IN THIS JUDGMENT HAS HELD AS BELOW: TRANSFER TO THE NEW BUSINESS OF MACHINERY OR PLANT PREVIOUSLY USED AS CONTEMPLATED BY SECTION 80J(4)(II) IS ONE A T THE TIME OF FORMATION OF THE NEW UNDERTAKING. (III) ITO VS LAXMI PACKERS (14 SOT 303 (MUM). THIS DECISION HAS BEEN FOLLOWED BY THE CIT(A) IN HIS DECISION. (IV) PEMBRIL INDL & ENGG CO (P) LTD VS DY.CIT 30 SO T 340 (MUM) WHERE THE ASSESSEE SET UP A NEW INDUSTRIAL UNIT AND SOME OLD MACHINERIES WERE ALSO TAKEN ON HIRE FOR RUNNING THE NEW UNDERTAKING AND THE TRI BUNAL HELD THAT THOUGH PREVIOUSLY USED PLANT AND MACHINERY HAS BEEN USED I N THE NEW UNIT THERE BEING NO TRANSFER OF PLANT AND MACHINERY THE DEDUCTION U NDER S. 80IA / 80IB CANNOT BE DENIED. ITA NO.274/RJT/2008 5 THE LD.AR THEREFORE PLEADED THAT THE CIT(A) WAS JU STIFIED IN HIS ACTION AND HIS ORDER ON THE ISSUE MAY BE UPHELD. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL PLACED BEFORE US. THERE IS NO DISPUTE THAT THE ASS ESSEE FIRM WAS ESTABLISHED IN THE YEAR 2000 AND SINCE THEN THE DEDUCTION U/S 80IB WAS GRANTED TO THE ASSESSEE UPTO THE ASSESSMENT YEAR PRECEDING THIS AS SESSMENT YEAR. THERE IS ALSO NO DISPUTE THAT OWING TO THE INCREASED OVERSEA S DEMAND THE ASSESSEE HAS ENTERED INTO LEASE AGREEMENT WITH SISTER CONCERN M /S ARISON CERAMICS PVT LTD A SISTER CONCERN NON ELIGIBLE FOR DEDUCTION U/S 80IB WHO HAD STOPPED PRODUCTION OF TILES DUE TO HEAVY LOSSES FOR HIRE OF PLANT & MACH INERY FOR A PERIOD OF 3 YEARS. COPY OF THE AGREEMENT ENTERED INTO WITH M/S ARISON CERAMICS PVT LTD IS PLACED IN THE PAPER BOOK. THE AGREEMENT CLEARLY SPECIFIES TH AT THE4 RAW MATERIAL CONSUMABLES AND STORES WILL HAVE TO BE ACQUIRED BY THE ASSESSEE FIRM ONLY; THE LABOUR COST AND LABOUR RELATED PROCEDURES WILL HAVE TO BE MANAGED BY THE ASSESSEE FIRM; MANUFACTURING COST INCLUDING ELECTRI CITY WATER ETC. WILL HAVE TO BE BORNE BY THE ASSESSEE FIRM; AND EVEN THE REPAIRS AN D MAINTENANCE OF THE MACHINERY OBTAINED ON LEASE WILL HAVE TO BE BORNE B Y THE ASSESSEE FIRM ONLY. IN A NUTSHELL THE ASSESSEE HAS ACQUIRED ITS SISTER CO NCERNS LAND BUILDING PLANT AND MACHINERY ON LEASE WITHOUT THERE BEING ANY FURT HER RESPONSIBILITY ON THE PART OF ITS SISTER CONCERN. WITH THESE FACTUAL MATRIX COULD THE ASSESSEE BE HELD UNDER AN OBLIGATION TO MAINTAIN SEPARATE BOOKS OF ACCOUNT ONE FOR THE PRODUCTION CARRIED OUT WITH THE MACHINERY OF THE ASSESSEE AND THE OTHER FOR THE PRODUCTION CARRIED OUT WITH THE HIRED MACHINERY FOR THE PURPOS E OF CLAIMING DEDUCTION U/S 80IB OF THE ACT. IT TRANSPIRES TO US FROM THE READ ING OF THE ORDERS OF AUTHORITIES BELOW THAT THE ONLY OBJECTION OF THE ASSESSING OFFI CER IN WITHDRAWING HE DEDUCTION ALREADY AVAILABLE TO THE ASSESSEE IS NON MAINTENANC E OF SEPARATE PRODUCTION RECORDS WITH THE PLANT & MACHINERY OF THE ASSESSEE AND THOSE HIRED FROM THE SISTER CONCERN WHICH WAS NOT ELIGIBLE UNIT FOR CLA IMING DEDUCTION U/S 80-IB OF HE ACT. THUS IT IS CLEARLY UNDERSTOOD THAT BUT FOR T HE PRODUCTION ACHIEVED THROUGH HIRED PLANT & MACHINERY EVEN AS PER THE ASSESSING OFFICER THE ASSESSEE IS ITA NO.274/RJT/2008 6 ENTITLED FOR DEDUCTION U/S 80IB OF THE ACT. THE CON DITIONS ASCRIBED FOR CLAIMING DEDUCTION U/S 80IB ARE PRESCRIBED IN SUB SECTION (2 ) OF SECTION 80IB OF THE ACT WHICH ARE AS FOLLOWS: (2) THIS SECTION APPLIES TO ANY INDUSTRIAL UNDERTAK ING WHICH FULFILS ALL THE FOLLOWING CONDITIONS NAMELY: (I) IT IS NOT FORMED BY SPLITTING UP OR THE RECON STRUCTION OF A BUSINESS ALREADY IN EXISTENCE: PROVIDED XXXXXXXXXXXXXXXXXX (II) IT IS NOT FORMED BY THE TRANSFER TO A NEW BUSI NESS OF MACHINERY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE; (III) IT MANUFACTURES OR PRODUCES ANY ARTICLE OR TH ING NOT BEING ANY ARTICLE OR THING SPECIFIED IN THE LIST IN THE ELEVENTH SCHEDULE OR OPERATES ONE OR MORE COLD STORAGE PLANT OR PLANTS IN ANY PART OF INDIA: PROVIDED XXXXXXXXXXXXXXXXXXXXXX CLAUSE (II) TO SUB SECTION (2) OF SECTION 80IB IS V ERY MUCH RELEVANT TO DECIDE THE ISSUE UNDER CONSIDERATION. IT STATES THAT IT IS N OT FORMED BY THE TRANSFER TO A NEW BUSINESS OF MACHINERY OR PLANT PREVIOUSLY USED FOR ANY PURPOSE. IN THE CASE ON HAND THE ASSESSEE FIRM WAS ALREADY IN EXISTENCE SI NCE 1990 AND WAS AVAILING DEDUCTION U/S 80IB SINCE THEN. THEREFORE IT CANNO T BE SAID THAT IT IS NOT FORMED BY THE TRANSFER TO A NEW BUSINESS OF MACHINERY OR P LANT PREVIOUSLY USED FOR ANY PURPOSE. IT CAN ALSO NOT BE SAID THAT BY ACQUIRIN G SOME OF THE ASSETS ON LEASE FOR A FIXED PERIOD WHICH WERE USED BY THE SISTER C ONCERNS THE ASSESSEE HAS TAKEN OVER THE BUSINESS OF THE ASSESSEES SISTER CO NCERN. AS SUCH THE QUESTION OF MAINTAINING TWO SEPARATE SETS OF BOOKS FOR PRODU CTION DOES NOT ARISE. IN THE CASE OF BAJAJ TEMPO LTD CITED SUPRA THE HONBLE AP EX COURT HELD THAT THE RESTRICTION WOULD COME INTO PICTURE TO DENY THE DED UCTION ONLY IF THE SECOND HAND ASSET RESULTS IN FORMATION OF THE UNDERTAKING. IN THE INSTANT CASE THERE IS NO FORMATION OF AN UNDERTAKING. THE FACTS AND CIRCUMS TANCES IN THE CASE OF LAXMI PACKERS (14 SOT 303) DEALT BY THE MUMBAI TRIBUNAL A RE PARI MATERIAL TO THE CASE ITA NO.274/RJT/2008 7 ON HAND. THE HONBLE CO-ORDINATE BENCH HAS HELD TH AT THE PROHIBITION IN CLAUSE (II) TO SUB SECTION (2) OF SECTION 80IB IS ONLY WIT H REGARD TO PURCHASE AND USE OF ANY SECOND HAND MACHINERY AT THE TIME OF FORMATION OF THE INDUSTRIAL UNDERTAKING AND NOT PURCHASE AND USE OF MACHINERY AFTER THE FOR MATION OF THE INDUSTRIAL UNDERTAKING. IN YET ANOTHER DECISION IN THE CASE O F PEMBRIL INDL & ENGG CO (P) LTD VS DCIT CITED SUPRA THE D BENCH OF THE MUMBA I TRIBUNAL HELD THAT THOUGH PREVIOUSLY USED PLANT AND MACHINERY HAS BEEN USED I N THE NEW UNIT THERE BEING NO TRANSFER OF PLANT AND MACHINERY THE DEDUCTION U /S 80-IA / 80-IB CANNOT BE DENIED. 7. IN THE LIGHT OF ABOVE DISCUSSION WE ARE OF THE CONSIDERED OPINION THAT THE CIT(A) WAS JUSTIFIED IN HOLDING THAT THE WITHDRAWAL OF DEDUCTION U/S 80-IB WAS NOT JUSTIFIED. WE UPHOLD HIS ORDER ON THE ISSUE. GROU ND NO (I) OF THE REVENUE FAILS. 8. WITH REGARD TO DISALLOWANCE U/S 40A(2)(B) AS AGI TATED IN GROUND (II) THE FACTS AND CIRCUMSTANCES ARE AKIN TO GROUND NO.(I) D ISCUSSED ABOVE. AS AGAINST THE ACQUISITION OF LAND BUILDING AND PLANT & MACHI NERY FOR A PERIOD OF 3 YEARS THE FACTORY OF THE ASSESSEE WAS MERGED WITH THE PREMISE S OF M/S ARISON CERAMICS PVT LTD THE ASSESSEE AGREED FOR PAYMENT OF RS.22 2 0 000 PER ANNUM VIDE CONDUCTING AGREEMENT DATED 16 TH MARCH 2004. THE ASSESSING OFFICER RAISED OBJECTION AS TO HOW THE PAYMENT OF RS.22 20 000 WAS JUSTIFIED WHEN M/S ARISON CERAMICS PVT LTD WAS INCURRED LOSS IN THE PRECEDING YEAR. REJECTING THE DETAILED REASONS FURNISHED BY THE ASSESSEE THE ASSESSING OF FICER DISALLOWED 80% OF THE CONSIDERATION OF RS.22 20 000 WHICH RESULTED IN AN ADDITION OF RS.17 76 000 BY INVOKING PROVISIONS OF SECTION 40A(2)(B) OF THE ACT BY HOLDING THAT THE PAYMENT WAS UNREASONABLE WITH RESPECT TO THE INCREMENTAL PR ODUCTION SALES AND GROSS PROFIT AND THAT THE ASSESSEE HAS USED THE DEVICE TO REDUCE PROFITS BY PASSING HE BENEFITS TO ITS SISTER CONCERN TO AVOID TAXES. ON APPEAL THE CIT(A) DELETED THE DISALLOWANCE. ITA NO.274/RJT/2008 8 9. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PER USED THE MATERIAL PLACED ON RECORD. THE UNDISPUTED FACT IS THAT THE ASSESSEE HIRED THE LAND BUILDING AND PLANT & MACHINERY OF M/S ARISON CERAMI CS PVT LTD UNDER A CONDUCTING AGREEMENT ENTERED INTO WITH THEM FOR A C ONSIDERATION OF RS. 22 LAKHS PER ANNUM AND THE SAME WERE USED FOR THE PURPOSES O F BUSINESS OF THE ASSESSEE. THE OBJECTION OF THE ASSESSING OFFICER R EVOLVES AROUND A NARROW COMPASS THAT BY USE OF THESE ASSETS THE INCREMENTA L PRODUCTION SALES AND THE GROSS PROFIT WAS NOT COMMENSURATE. THEREFORE THE ASSESSEE BEING A RELATED CONCERN HE INVOKED PROVISIONS OF SECTION 40A(2)(B) OF THE ACT AND DISALLOWED 80% OF THE EXPENDITURE SO CLAIMED. SO HERE WE HAV E TO SEE WHETHER UNDER THE ABOVE FACTS AND CIRCUMSTANCES WHETHER OR NOT IN CO NSONANCE WITH PROVISIONS OF SECTION 40A(2)(B) AUTHORIZED THE ASSESSING OFFICER WAS JUSTIFIED IN ACTION OF RESTRICTING THE EXPENDITURE TO ONLY 20% WHICH WAS AUTHENTICATED BY A VALID CONTRACTING AGREEMENT ENTERED INTO BETWEEN THE ASSE SSEE AND M/S ARISON CERAMICS PVT LTD THE SISTER CONCERN. PROVISIONS O F SECTION 40A(2)(A) READS AS BELOW: (2)(A) WHERE THE ASSESSEE INCURS ANY EXPENDITURE I N RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERS ON REFERRED TO IN CLAUSE (B) OF THIS SUB-SECTION AND THE ASSESSIN G OFFICER IS OF OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREA SONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS SERVI CES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO HIM THEREFROM SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. (EMPHASIS OURS) THERE IS NO DISPUTE THAT THE RECEIPT OF THE CONTRAC TING AGREEMENT FEES VIZ. M/S ARISON CERAMICS PVT LTD IS A PERSON CLASSIFIED IN C LAUSE (B) OF SUB SECTION (2). 10. FROM A PLAIN READING OF THIS SECTION WE FIND TH AT SECTION 40A(2) ENVISAGES THAT IF THE ASSESSEE INCURS ANY EXPENDITURE FOR WHI CH PAYMENTS ARE MADE TO THE RELATIVES / RELATIVE CONCERN AND THE ASSESSING OFFI CER FINDS THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE F AIR MARKET VALUE OF GOODS / ITA NO.274/RJT/2008 9 SERVICES / FACILITIES FOR WHICH PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEF IT DERIVED BY OR ACCRUING TO HIM THEREFROM THEN SUCH EXCESSIVE OR UNREASONABLE EXPENDITURE THEREFROM SHALL NOT BE ALLOWED AS A DEDUCTION. THE CONJUNCTION OR (HIGHLIGHTED) ABOVE ADEQUATELY PROVIDES FOR DIFFERENT CIRCUMSTANCES UND ER WHICH THIS PROVISIONS OF SECTION CAN BE INVOKED ARE - (I) SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE H AVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS SERVICES OR SUCH FA CILITIES FOR WHICH THE PAYMENT IS MADE; (II) SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE FOR WHICH THE PAYMENT IS MADE; AND (III) SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE BENEFIT DERIVED BY OR ACCRUING TO HIM THEREFROM FOR WHICH THE PAYMENT IS MADE. IN OUR OPINION THE PRIMARY ONUS TO PROVE THAT THE EXPENDITURE SO INCURRED WAS EXCESSIVE OR UNREASONABLE OR NOT COMMENSURATE WITH THE BENEFIT ACCRUED TO THE ASSESSEE FROM THE LEASE OF THESE ASSETS IS SQUARELY ON THE ASSESSING OFFICER. IN THE CASE ON HAND THE ASSESSEE HAD EXPLAINED THE RE ASONABILITY OF THE CONSIDERATION BY SUBMITTING A CHART OF INCREMENTAL PRODUCTION INCREMENTAL SALES AND INCREMENTAL GROSS PROFIT AND COMPARISON THEREOF WITH CONSIDERATION PAID TO THE SISTER CONCERN FOR USAGE OF ITS FACTORY PREMISE S AND PLANT & MACHINERY. SINCE THE PREMISES AND PLANT & MACHINERY WERE USED IN A COMBINED MANNER THE ASSESSEE COULD NOT FURNISH SEPARATE PRODUCTION DATA IN RESPECT OF PRODUCTION OBTAINED FROM OWN PLANT & MACHINERY AND PRODUCTION OBTAINED FROM LEASE PLANT & MACHINERY. THE ASSESSING OFFICER WHILE DISALLOWING THE MAJOR PORTION OF THE EXPENDITURE MERELY ON THE BASIS OF OBSERVATION THAT THERE WAS A NOMINAL INCREASE IN PRODUCTION FAILED TO LOOK INTO THE OTHER ASPECTS OF THE MATTER. PROVISIONS OF SECTION PROVIDES FOR THREE DIFFERENT CIRCUMSTANCES AS ENUMERATED ABOVE FROM (I) ITA NO.274/RJT/2008 10 TO (III). THE REASON OF DISALLOWANCE RESORTED TO B Y THE ASSESSING OFFICER ONLY IN SOUR CONSIDERED OPINION AT THE MOST SATISFIES THE THIRD CIRCUMSTANCE AS THERE IS NO NEGATIVE FINDING RECORDED BY THE ASSESSING OFFIC ER WITH REGARD TO THE OTHER TWO CIRCUMSTANCES I.E. (I) AND (II) ABOVE. THERE IS N O FINDING THAT THE ASSESSEE HAS NOT LEASED THE LAND BUILDING AND PLANT & MACHINERY FROM THE SISTER CONCERN; THERE IS ALSO NO FINDING THAT THESE ASSETS HIRED FROM THE SISTER CONCERN WAS NOT FOR THE LEGITIMATE BUSINESS NEEDS OF THE ASSESSEE. IN THE ABSENCE OF THESE FINDINGS FROM THE ASSESSING OFFICER WE HAVE TO SEE WHETHER THE ASSESSING OFFICER WAS JUSTIFIED IN ONLY CENTERING AROUND THE BENEFIT DERI VED BY OR ACCRUED THEREFROM TO THE ASSESSEE; AND IF YES WHETHER THE LEGISLATURE R EALLY INTENDED FOR SUCH A COURSE OF ACTION ON THE PART OF THE REVENUE AUTHORI TIES. IF THIS IS REALLY MEANT BY THE LEGISLATURE THERE WOULD BE A SITUATION WHERE AN ASSESSEE FULFILS BOTH THE CIRCUMSTANCES EXPLAINED AT (I) AND (II) ABOVE AND F AILS IN THE THIRD CIRCUMSTANCE THE REVENUE AUTHORITIES WOULD BE AUTHORIZED TO RESO RT TO DISALLOWANCE OF ANY PERCENTAGE OF SUCH EXPENDITURE CLAIMED AT THEIR SW EET WILL. IN OUR CONSIDERED OPINION THE LAW REALLY DOES NOT INTEND SO. THE PR OVISIONS OF SECTION 40A(2)(B) REALLY INTENDS THAT ALL THE THREE CIRCUMSTANCES EXP LAINED ABOVE GO IN TANTUM AND TOGETHER. IN THE INSTANT CASE THE ASSESSING OFFIC ER HAS FAILED TO BRING ON RECORD THAT THE EXPENDITURE IS EXCESSIVE OR UNREASONABLE H AVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS SERVICES OR SUCH FACILIT IES FOR WHICH THE PAYMENT IS MADE; OR THAT THE GOODS SERVICES OR SUCH FACILITIE S FOR WHICH THE PAYMENT IS MADE WERE NOT FOR THE LEGITIMATE NEEDS OF THE BUSIN ESS OR PROFESSION OF THE ASSESSEE FOR WHICH THE PAYMENT IS MADE. WHILE IT M AY BE TRUE THAT THE BENEFIT DERIVED BY THE ASSESSEE WAS NOT SUFFICIENT THE FAC T THAT THE PAYMENT WAS MADE FOR THE USE OF LAND BUILDING AND PLANT & MACHINERY AND THESE ASSETS WERE FOR THE LEGITIMATE NEEDS OF THE BUSINESS CANNOT BE OVERLOOK ED. 11. IN VIEW OF THE FOREGOING DISCUSSIONS WE HOLD T HAT THE ASSESSEE ONUS CAST ON THE ASSESSEE TO JUSTIFY THE CLAIM OF CONTRACTING AGREEMENT FEE WAS SUCCESSFULLY EXPLAINED BY THE ASSESSEE AND THERE WA S NO OCCASION FOR THE ASSESSING OFFICER TO DISALLOW 80% OF THE EXPENDITUR E AMOUNTING TO RS. 17 76 000 ITA NO.274/RJT/2008 11 BY INVOKING PROVISIONS OF SECTION 40A(2)(B) OF THE ACT. WE ALSO HOLD THAT MERE MAKING OF PAYMENT TO A RELATIVE WILL NOT AUTOMATICA LLY CALL FOR DISALLOWANCE U/S 40A(2)(B) OF THE ACT AS THE ASSESSING OFFICER HAS T O PROVE THAT THE PAYMENT SO MADE WAS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS SERVICES OR SUCH FACILITIES FOR WHICH TH E PAYMENT IS MADE; OR SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REG ARD TO THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE FOR W HICH THE PAYMENT IS MADE; AND SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE H AVING REGARD TO THE BENEFIT DERIVED BY OR ACCRUING TO HIM THEREFROM FOR WHICH T HE PAYMENT IS MADE. 12. IN VIEW OF THE ABOVE WE UPHOLD THE FOLLOWING F INDINGS RECORDED BY THE CIT(A): 7.5 IN VIEW OF THE ABOVE I HOLD THAT THE VARIOUS CONTENTIONS OF THE A.O. FOR THE IMPUGNED DISALLOWANCE ARE UNJUSTIF IED AND INVALID. THE DISALLOWANCE MADE BY THE A.O. IS NOT IN ACCORDA NCE WITH SECTION 40A(2) AS PER WHICH THE DISALLOWANCE OF PAY MENTS WHICH IS EXCESSIVE OR UNREASONABLE AS COMPARED TO FAIR MARKE T VALUE CAN ONLY BE MADE. THE A.O. HAS NOT MADE ANY SINGLE ATT EMPT TO FIND OUT FAIR MARKET VALUE OF THE SUBJECT MATTER OF THE AGREEMENT. WITHOUT THIS NO DISALLOWANCE U/S 40A(2) CAN BE MAD E AS HELD BY THE APEX COURT IN THE CASE OF UPPER INDIA PUBLISHIN G HOUSE LTD (117 ITR 569) RELIED UPON BY THE APPELLANT. IT IS FOUND IMPROPER THAT THE SCHEME OF THE SECTION 40A(2) AND APEX COUR T DECISION HAVING BEEN SUBMITTED AND RELIED UPON BY THE APPELL ANT BEFORE THE A.O. THE A.O. WITHOUT BOTHERING TO WORK OUT THE FA IR MARKET VALUE AND COMPARING THEM WITH THE CONSIDERATION PAID BY T HE APPELLANT MADE THE DISALLOWANCE BY PUTTING FORWARD THE CONTEN TIONS WHICH CANNOT BE TAKEN AS BASIS FOR THE PURPOSE OF SECTION 40A(2). I AGREE WITH THE APPELLANT THAT AD-HOC AND ESTIMATED DISALL OWANCES ARE NOT PERMISSIBLE U/S 40A(2) AND DISALLOWANCE OF SPECIFIC AMOUNT WHICH IS FOUND TO BE EXCESSIVE AND UNREASONABLE AS COMPAR ED TO FAIR MARKET VALUE CAN ONLY BE MADE UNDER THIS SECTION. IN A NUTSHELL THE A.O. HAS FAILED TO DISCHARGE HIS ONUS OF PROVIN G THE EXPENDITURE AS EXCESSIVE OR UNREASONABLE AS COMPARED TO FAIR MA RKET VALUE AS REQUIRED U/S 40A(2). THE PRE REQUISITE OF COMPARIS ON WITH FAIR MARKET VALUE IS NOT FULFILLED ON THE PART OF THE A. O. HIS CONTENTIONS ARE INVALID FOR MAKING DISALLOWANCE U/S 40A(2) AND THE AD-HOC METHOD ADOPTED BY HIM IS ALSO NOT AS PER THE LAW. I THEREFORE HOLD THAT DISALLOWANCE OF 80% OF THE CONSIDERATION AMOUN TING TO ITA NO.274/RJT/2008 12 RS.17 76 000/- MADE BY THE A.O. U/S 40A(2) IS UNJUS TIFIED AND NOT IN ACCORDANCE WITH THE LAW. THE SAME IS HEREBY ORDERE D TO BE DELETED. 7.5 ALTERNATIVELY ALSO IT IS SEEN FROM THE DETAILS OF FIXED ASSETS SUMMARY OF THE SISTER CONCERN PROVIDED BY THE APPEL LANT IN THE PAPER BOOK THAT THE TOTAL COST OF THE SISTER CONCER NS MACHINERY WAS AROUND RS.2 CRORES. THE CONSIDERATION IS RS.22 20 000/-. THIS IN TERMS OF PERCENTAGE COMES TO AROUND 11%. THEREFORE THE SISTER CONCERN IS FETCHING 11% OF ITS INVESTMENT BY LETTIN G OUT THE SAME TO THE APPELLANT FIRM. IF APPRECIATION IN THE LAND & BUILDING IS COUNTED THIS PERCENTAGE WILL GO DOWN. THE RETURN OF 11% CA NNOT BE CONSIDERED AS EXCESSIVE OR UNREASONABLE. UNDER THE INCOME TAX ACT THE PARTNERS ARE ALLOWED 12% RETURN ON THEIR C APITAL INVESTMENT IN THE FIRM U/S 40(B). THEREFORE CONSIDERATION OF RS.22 20 000/- PAID BY THE APPELLANT FIRM IS NOT EXCESSIVE AS COMP ARED TO FAIR MARKET VALUE AND CONSIDERING THE ADDITIONAL PROFITS EARNED BY THE APPELLANT FIRM. THEREFORE THE DISALLOWANCE MADE B Y THE A.O. IS REQUIRED TO BE DELETED IN TOTO. THIS GROUND OF APP EAL IS ACCORDINGLY ALLOWED. 13. WITH REGARD TO GROUND NO.(III) PERTAINING TO DI SALLOWANCE U/S 40A(IA) AMOUNTING TO RS.64 78 719 THE BRIEF FACTS ARE THAT THE IMPUGNED DISALLOWANCE WAS RESORTED BY THE ASSESSING OFFICER ON THE GROUND THAT THE ASSESSEE HAS NOT DEDUCTED TAX AT SOURCE FROM THESE AMOUNTS PAID TO T HE CLEARING AND FORWARDING AGENTS BESIDES PAYMENT OF AGENCY COMMISSION. THES E AMOUNTS WERE REIMBURSEMENT OF VARIOUS EXPENSES CLAIMED BY THE C& F AGENT. RELYING ON THE QUESTION AND ANSWER NO.30 OF BOARDS CIRCULAR NO.71 5 THE ASSESSING OFFICER HELD THAT THE ASSESSEE WAS REQUIRED TO DEDUCT TAX ON THE REIMBURSEMENT OF EXPENSES AS WELL. THE SUBMISSIONS OF THE ASSESSEE THAT (I ) THE C&F AGENT RECOVERED PRINCIPLE AMOUNT OF AGENCY COMMISSION AND REIMBURSE MENT OF EXPENSES BY TWO SEPARATE INVOICES ONE OF WHICH WAS PRINCIPAL INVOI CE AND THE OTHER WAS DEBIT NOTE FOR REIMBURSEMENT OF EXPENSES AND THAT SINCE T HE PRINCIPAL AMOUNT I.E. AGENCY COMMISSION AND REIMBURSEMENT OF EXPENSES WER E NOT COVERED BY SINGLE BILL THE ASSESSEES LIABILITY TO DEDUCT AT SOURCE APPLIES ONLY IN RESPECT OF AGENCY COMMISSION AND IT DOES NOT EXTEND TO REIMBURSEMENT OF VARIOUS EXPENSES IN RESPECT OF INDIVIDUAL ITEMS OF EXPENSES WHICH ARE R EIMBURSED; (II) EXPORT FREIGHT TERMINAL HANDLING CHARGES AND DOCUMENTATION CHARGES ARE COVERED BY BOARD ITA NO.274/RJT/2008 13 CIRCULAR NO.723 AND THEREFORE THEY ARE NOT LIABLE T O TDS; (II) PART OF THE TRANSPORTATION EXPENSES WERE RECOVERED FROM THE OVE RSEAS CUSTOMERS AND TO THAT EXTEND THEY ARE NOT CLAIMED AS EXPENSES IN THE P & L ACCOUNT AND THEREFORE THEY CANNOT BE DISALLOWED U/S 40(A)(II) WERE NOT FO UND ACCEPTABLE TO THE ASSESSING OFFICER. THE ASSESSING OFFICER OBSERVED THAT THE BILL NUMBER ON THE INVOICE OF AGENCY COMMISSION AND THE INVOICE OF REI MBURSEMENT OF EXPENSES IS SAME. ACCORDINGLY THE ASSESSING OFFICER MADE THE IMPUGNED DISALLOWANCE OF RS.64 78 719 WHICH WAS EXCLUSIVE OF THE AMOUNTS STA TED TO BE COVERED BY BOARD CIRCULAR NO.723. 14. THE ASSESSING PREFERRED APPEAL BEFORE CIT(A) A ND THE CIT(A) AFTER CONSIDERING THE ELABORATE SUBMISSIONS MADE BY THE A SSESSEE DECIDED THE ISSUE IN FAVOUR OF THE ASSESSEE WITH THE FOLLOWING OBSERV ATIONS: 8.2 I HAVE CAREFULLY CONSIDERED THE FINDING GIVEN B Y THE ASSESSING OFFICER AND THE SUBMISSION OF THE AR OF T HE APPELLANT. THE ASSESSING OFFICER HAS MADE THIS DISALLOWANCE RE LYING UPON QUESTION AND ANSWER NO.30 OF THE BOARD CIRCULAR NO. 715. I HAVE CAREFULLY STUDIED THE SAID QUESTION AND ANSWER FROM THE BOARD CIRCULAR NO.715 SUBMITTED BY THE APPELLANT IN THE P APER BOOK. THE SAID QUESTION AND ANSWER READS AS UNDER: QUESTION 30 : WHETHER THE DEDUCTION OF TAX AT SOUR CE UNDER SECTION 194C AND 194J HAS TO BE MADE OUT FO THE GRO SS AMOUNT OF THE BILL INCLUDING REIMBURSEMENTS OR EXCLUDING REIM BURSEMENT FOR ACTUAL EXPENSES? ANSWER : SECTION 194C AND 194J REFER TO ANY SUM PAI D. OBVIOUSLY REIMBURSEMENTS CANNOT BE DEDUCTED OUT OF THE BILL A MOUNT FOR THE PURPOSE OF TAX DEDUCTION AT SOURCE. 8.2 ON CAREFUL READING IT IS CLEAR FROM THE WORDS AND LANGUAGE OF QUESTION AND ANSWER THAT IT APPLIES TO A BILL IN WHICH PRINCIPLE AMOUNT AS WELL AS REIMBURSEMENT OF EXPENSES INCURRE D ON OTHERS BEHALF ARE CHARGED. THUS IT TAKES IN ITS AMBIT A COMBINED BILL INCLUDING PRINCIPLE AMOUNT AND REIMBURSEMENT OF EXP ENSES. AS PER THE SAID QUESTION AND ANSWER WHEN SUCH A COMBINED BILL IS ISSUED THE ASSESSEE IS REQUIRED TO DEDUCT TAX AT SOURCE ON BOTH THE PRINCIPLE AMOUNT AS WELL AS THE REIMBURSEMENT OF EX PENSES. IN ITA NO.274/RJT/2008 14 SUCH A CASE THE ASSESSEE3 CANNOT EXCLUDE REIMBURSE MENT OF EXPENSES FOR THE PURPOSE OF DEDUCTION OF TAX AT SOU RCE. IN THIS REGARD THE DELHI ITAT DECISION IN THE CASE OF ITO VS. DR. WILLMAR SCHWABE (INDIA) PVT LTD (95 TTJ 53) RELIED UPON BY THE APPELLANT IS VERY MUCH RELEVANT. IN THAT CASE THE HONBLE DELH I ITAT HAS EXAMINED THE APPLICABILITY OF ABOVE QUESTION AND AN SWER TO A CASE WHERE SEPARATE BILLS ARE ISSUED FOR PRINCIPLE AMOUN T AND REIMBURSEMENT OF EXPENSES. IN THAT CASE THE HONBL E ITAT OBSERVED AS UNDER: THE CBDT CIRCULAR NO.715 DT. 8 TH AUG. 1995 RELIED UPON BY THE A.O. IN SUPPORT OF HIS CASE ON THIS ISSUE WAS A PPLICABLE ONLY IN THE CASES WHERE BILLS ARE RAISED FOR THE GR OSS AMOUNT INCLUSIVE OF PROFESSIONAL FEES AS WE4LL AS REIMBURS EMENT OF ACTUAL EXPENSES AND THE SAME THEREFORE WAS NOT AP PLICABLE TO THE FACTS OF THE PRESENT CASE WHERE BILLS WERE RAISED SEPARATELY BY THE CONSULTANTS FOR REIMBURSEMENT OF ACTUAL EXPENSES INCURRED BY THEM. AS SUCH CONSIDERING AL L THE FACTS OF THE CASE WE ARE OF THE VIEW THAT THE PROV ISIONS OF S.194J WERE NOT APPLICABLE TO THE REIMBURSEMENT OF ACTUAL EXPENSES AND THE ASSESSEE-COMPANY WAS NOT LIABLE TO DEDUCT TAX AT SOURCE FROM SUCH REIMBURSEMENT. IN T HAT VIEW OF THE MATTER WE UPHOLD THE IMPUGNED ORDER OF LEAR NED CIT(A) ON THIS ISSUE AND DISMISS THE RELEVANT GROUN DS OF THE REVENUES APPEAL. THUS IT IS CLEAR THAT THE QUESTION AND ANSWER NO. 30 OF BOARD CIRCULAR NO.715 APPLIES TO A CASE OF COMBINED BILL WHEREIN PRINCIPLE AMOUNT AS WELL AS REIMBURSEMENT OF EXPENSES ARE INC LUDED. THE SAID QUESTION AND ANSWER DO NOT APPLY IN A SITUATIO N WHERE PRINCIPLE AMOUNT AND REIMBURSEMENT OF EXPENSES ARE SEPARATELY RECOVERED. 8.3 NOW COMING TO THE APPELLANTS CASE IT IS SEEN FROM THE COPY OF BILLS OF C&F AGENT FURNISHED IN THE PAPER BOOK T HAT THE C&F AGENT HAS RAISED TWO INVOICES. THE PREPARATION OF INVOICES SUGGESTS THAT INVOICE FOR AGENCY COMMISSION AND INV OICE FOR REIMBURSEMENT OF EXPENSES ARE SEPARATE. IN THE INV OICE OF AGENCY COMMISSION ONLY AGENCY COMMISSION AND SERVICE TAX THEREON IS CHARGED. THIS INVOICE ENDS WITH THE TOTAL OF THESE TWO ITEMS. IN THE SECOND INVOICE THE VARIOUS EXPENSES INCURRED ON BE HALF OF THE APPELLANT ARE CHARGED AND THE INVOICE ENDS WITH THE TOTAL OF ALL THESE EXPENSES. THERE IS NO CONTINUATION BETWEEN T HE TWO INVOICES SO THAT THEY CAN BE TREATED AS ONE. THE APPELLANT HAS ALSO MAINTAINED SEPARATE ACCOUNT FOR AGENCY COMMISSION EXPORT FREIGHT TRANSPORTATION AND OTHER EXPENSES IN ITS B OOKS. THE ONLY CONTENTION OF THE A.O. IS THAT BILL NUMBER ON BOTH THE INVOICES ITA NO.274/RJT/2008 15 REMAINS SAME. IN THIS REGARD THE APPELLANT HAS EX PLAINED THAT DUE TO JOB BEING ONE THE BILL NUMBER ON BOTH THE INVOI CES REMAINS SAME AS THE INVOICES ARE PREPARED BY THE C&F AGENT ON TH E BASIS OF RESPECTIVE JOB AND JOB NUMBER. ON VERIFICATION OF THE BILLS OF C&F AGENT THE EXPLANATION OF THE APPELLANT APPEARS TO BE TRUE AS IN ALL CASES THERE IS A SIMILARITY BETWEEN BILL NUMBER AND JOB NUMBER. THE APPELLANT HAS PLACED ON RECORD AN IMPORTANT EVI DENCE IN THE FORM OF CERTIFICATE BY THE C&F AGENT. IN THE SAID CERTIFICATE THE C&F AGENT HAS CLARIFIED REGARDING ITS PATTERN OF IS SUING BILLS. IT IS CLARIFIED BY THE C&F AGENT THAT IT HAS RAISED ONE I NVOICE FOR AGENCY COMMISSION AND OTHER INVOICE BEING DEBIT NOTE FOR R EIMBURSEMENT OF EXPENSES. THUS THE SECOND INVOICE IS IN FACT A DEBIT NOTE FOR REIMBURSEMENT OF EXPENSES. THIS CLARIFICATION FROM THE C&F AGENT MAKES CLEAR THE WAY OF ITS ISSUING BILLS FOR AGENCY COMMISSION AND REIMBURSEMENT OF EXPENSES AND THROWS LIGHT ON THE F ACT THAT ONE BEING BILL AND THE OTHER BEING DEBIT NOTE ARE DISTI NCT AND SEPARATE FROM EACH OTHER. IT IS OBSERVED FROM THE ASSESSMEN T ORDER THAT THIS CLARIFICATIONS AND CERTIFICATE OF C&F AGENT WAS PLA CED ON RECORD BY THE APPELLANT BEFORE THE A.O. HOWEVER IN THE CONC LUSIVE PART THE A.O. HAS NOT MADE ANY MENTION THEREOF AND COMPLETEL Y BYPASSED THEM. HE HAS JUST STUCK TO THE CONTENTION OF SAME BILL NUMBER WHICH OTHERWISE WAS SATISFACTORILY EXPLAINED BY THE APPELLANT ALONGWITH SUPPORTING EVIDENCE IN THE FORM OF CERTIF ICATE FROM C&F AGENT. THIS APPROACH IS NOT PROPER AND JUSTIFIED. IF THE AQ.O. HAD ANY DOUBTS HE COULD HAVE MADE FURTHER INQUIRIES TO THE APPELLANT OR TO THE C&F AGENT. INSTEAD OF THAT HE CHOSE TO IGNO RE THE SUBMISSIONS AND EVIDENCES OF THE APPELLANT. 8.4 ON CAREFUL CONSIDERATION OF THE FACTS OF THE CA SE AND EVIDENCES AND CASE LAWS I HOLD THAT SINCE THE AGEN CY COMMISSION AND REIMBURSEMENT OF EXPENSES ARE SEPARATELY CHARGE D AND RECOVERED THE APPELLANT WAS NOT REQUIRED TO DEDUCT TAX AT SOURCE ON REIMBURSEMENT OF EXPENSES AS HELD BY THE HONBLE ITAT IN THE DECISION DISCUSSED SUPRA. THE DISALLOWANCE OF RS.6 4 78 719/- IS THEREFORE NOT TENABLE AND HENCE HEREBY D3ELETED. 8.5 THE APPELLANT HAS RAISED ALTERNATIVE PLEA IN RE SPECT OF EXPORT FREIGHT TERMINAL HANDLING CHARGES DOCUMENTATION C HARGES AND TRANSPORTATION EXPENSES. OUT OF THIS THE A.O. HAS ACCEPTED THE PLEA REGARDING TO EXPORT FREIGHT IN VIEW OF BOARD C IRCULAR NO.723. THE AR OF THE APPELLANT SUBMITTED SUBMITTED THAT TH E A.O. ACCEPTED APPELLANTS SUBMISSION WITH REGARD TO THE EXPORT FR EIGHT THAT IN VIEW OF BOARD CIRCULAR NO.723 THE APPELLANT WAS NOT REQ UIRED TO DEDUCT TAX AT SOURCE ON EXPORT FREIGHT WHILE REIMBURSING T HE SAME TO THE C&F AGENT. THE APPELLANT ALSO SUBMITTED THAT TERMI NAL HANDLING CHARGES AND DOCUMENTATION CHARGES ALSO GO IN THE PO CKET OF ITA NO.274/RJT/2008 16 SHIPPING COMPANIES AND THEREFORE THEY FALL WITHIN T HE PURVIEW OF SECTION 172(8) AND THEREFORE THEY ARE ALSO COVERED BY THE BOARD CIRCULAR NO.723 AND HENCE WHILE REIMBURSING THE SAM E TO THE C&F AGENT NO TDS WAS REQUIRED. THE APPELLANT SUBMITTED COPY OF THE INVOICES ISSUED BY SHIPPING COMPANIES WHICH INCLUDE D FREIGHT TERMINAL HANDLING CHARGES AND B/L CHARGES (DOCUMENT ATION CHARGES). IN SUPPORT OF ITS CONTENTION THE APPELL ANT RELIED ON DELHI ITAT DECISION IN THE CASE OF FREIGHT SYSTEMS (INDIA ) PVT LTD (103 TTJ 103) WHEREIN THE HONBLE ITAT HAS HELD THAT THE AMOUNTS COVERED BY SECTION 172(8) BEING DEMURRAGE CHARGE H ANDLING CHARGE OR ANY OTHER CHARGE OF SIMILAR NATURE WILL A LSO BE COVERED BY BOARD CIRCULAR NO.723. THE AR SUBMITTED THAT THESE SUBMISSIONS AND EVIDENCES WERE PART OF THE PROCEEDINGS BEFORE T HE A.O. WHICH CAN BE SEEN FROM THE ASSESSMENT ORDER ITSELF BUT TH E A.O. HAS FAILED TO CONSIDER THEM WHILE REACHING TO THE CONCL USION OF DISALLOWANCE. ON CAREFUL CONSIDERATION I AGREE WI TH THE APPELLANT. THE TERMINAL HANDLING CHARGES AND B/L CHARGES ARE T HE INCOME OF THE SHIPPING COMPANIES AND THE C&F AGENT ONLY RECOV ERS THE SAME ON BEHALF OF THE SHIPPING COMPANIES. SECTION 172(8 ) CLEARLY MENTIONS THESE AMOUNTS. THIS BEING SO THEY ARE COV ERED BY THE BOARD CIRCULAR NO.723 AND THERE IS NO LIABILITY OF DEDUCTING THE TAX AT SOURCE AS HELD BY THE DELHI ITAT IN THE CASE OF FREIGHT SYSTEMS (INDIA) PVT LTD RELIED UPON BY THE APPELLANT. THE A .O. HAS FAILED TO CONSIDER THIS ASPECT THOUGH SPECIFICALLY SUBMITTED BY THE APPELLANT IN ITS SUBMISSION. RESPECTFULLY FOLLOWING THE DECI SION OF HONBLE DELHI ITAT I HOLD THAT THERE CAN NOT BE ANY LIABIL ITY OF DEDUCTING TAX AT SOURCE ON TERMINAL HANDLING CHARGES AND DOCUMENT ATION CHARGES. 8.6 AS REGARDS TRANSPORTATION EXPENSES THE APPELLA NT SUBMITTED THAT PART OF TRANSPORTATION COST WAS RECOVERED FROM OVERSEAS CUSTOMERS. THE APPELLANT SUBMITTED COPY OF ONE BIL L WHEREIN TRANSPORTATION WAS CHARGED TO THE OVERSEAS CUSTOMER S. THE APPELLANT SUBMITTED THAT THIS EXTENT THERE WAS A R ECOVERY OF TRANSPORTATION EXPENSES WHICH WAS INCLUDED IN SALES . SINCE THIS TRANSPORTATION IS RECOVERED IT IS NOT CLAIMED AS E XPENSES IN P&L ACCOUNT AS DEBIT IS SET OFF BY CREDIT IN SALES. TH E AR SUBMITTED THAT THOUGH THIS SUBMISSION WAS BEFORE THE A.O. THE A.O . HAS FAILED TO TAKE NOTE OF THAT WHILE REACHING TO THE CONCLUSION OF DISALLOWANCE. THE SUBMISSION OF THE APPELLANT IS CONVINCING. THE TRANSPORTATION TO THE EXTENT RECOVERED FROM CUSTOMERS CAN NOT BE S AID TO HAVE BEEN CLAIMED AS EXPENSE. WHEN THEY ARE NOT CLAIMED AS DEDUCTION THERE CAN NOT BE ANY DISALLOWANCE U/.S 4 0(A)(IA). THE DISALLOWANCE CAN COME INTO PICTURE ONLY WHEN ALLOWA NCE IS CLAIMED. I THEREFRE HOLD THAT TRANSPORTATION EXP ENSES TO THE EXTENT ITA NO.274/RJT/2008 17 IT IS RECOVERED BY THE APPELLANT FROM ITS CUSTOMERS CAN NOT BE DISALLOWED U/S 40(A)(IA). 8.7 THUS THE ALTERNATIVE PLEA OF THE APPELLANT WIT H REGARD TO TERMINAL HANDLING CHARGES DOCUMENTATION CHARGES AN D TRANSPORTATION CHARGES ARE ACCEPTED. HOWEVER SINC E I HAVE DELETED ENTIRE DISALLOWANCE THE ACCEPTANCE OF ALTE RNATIVE PLEA DOES NOT REQUIRE ANY FURTHER ADJUSTMENT IN THE COMP UTATION OF TOTAL INCOME WHILE GIVING EFFECT TO THIS ORDER. 15. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND GO NE THROUGH THE MATERIAL PLACED BEFORE US. THE LD.DR RELIED UPON THE ORDER OF THE ASSESSING OFFICER WHEREAS THE LD.AR RELIED UPON THE ORDER OF THE CIT( A). WE FIND THAT THE MAIN OBJECTIONS OF THE ASSESSING OFFICER IN MAKING THE D ISALLOWANCE ARE THAT AS PER CBDT CIRCULAR 715 DATED 8 TH AUGUST 1995 THE REIMBURSEMENT OF ACTUAL EXPENSES CANNOT BE DEDUCTED FROM THE COMMISSION CHA RGES PAID BY THE ASSESSEE. THE LD.CIT(A) DRAWING SUPPORT FROM THE C O-ORDINATE BENCH DECISION IN THE CASE OF ITO VS DR. WILLMAR SCHWABE (INDIA) LTD 95 TTJ (DEL) 53 WHEREIN IT HAS BEEN HELD THAT THE CIRCULAR IS APPLICABLE ONLY IN CASES WHERE THE BILLS ARE RAISED FOR THE GROSS AMOUNT INCLUSIVE OF PROFESSION AL FEES AS WELL AS REIMBURSEMENT OF ACTUAL EXPENSES HELD THAT THE CIRC ULAR WAS NOT APPLICABLE IN THE CASE OF THE ASSESSEE AS C&F AGENT RAISED TWO SEPARA TE BILLS ONE FOR THE COMMISSION AND THE OTHER FOR THE REIMBURSEMENT OF E XPENDITURE. THE OTHER OBJECTION OF THE ASSESSING OFFICER IS THAT THOUGH T HE ASSESSEE CLAIMED THAT THE C&F AGENT RAISED TWO BILLS ONE IN RESPECT OF COMMIS SION AND ONE IN RESPECT OF REIMBURSEMENT OF EXPENSES THE VOUCHERS BORE THE SA ME NUMBER. TO THIS THE ASSESSEE SUBMITTED THAT THE REIMBURSEMENT OF EXPEND ITURE IS CLAIMED THROUGH RAISING DEBIT NOTE WHICH THE CIT(A) FOUND THAT THE BILL AND DEBIT NOTE ARE DISTINCT AND SEPARATE FROM EACH OTHER. WE DO NOT SEE ANY IN FIRMITY IN THE FINDINGS RECORDED BY THE CIT(A). WE UPHOLD HIS ORDER AND RE JECT GROUND NO.(III) RAISED BY THE DEPARTMENT. 16. THE LAST GROUND I.E. GROUND NO.(IV) PERTAINS T O DISALLOWANCE OF DEPRECIATION ON CAR AMOUNTING TO RS.40 050. THE AS SESSING OFFICER FOUND THAT ITA NO.274/RJT/2008 18 SINCE THE CAR WAS PURCHASED IN THE NAME OF PARTNER THE OWNERSHIP LIES WITH HIM AND THEREFORE THE DEPRECIATION CLAIMED ON THE SAME AMOUNTING TO RS.40 050. THE SUBMISSION OF THE ASSESSEE THAT WITH REFERENCE TO SECTION 14 OF THE INDIAN PARTNERSHIP ACT THE FUNDS FOR THE PURCHASE OF THE C ASE WERE PAID BY THE FIRM AND THEREFORE THE CAR BELONGED TO THE FIRM DID NOT FIND FAVOUR WITH THE ASSESSING OFFICER. ON APPEAL THE LD.CIT(A) FOUND THAT FUNDS FOR PURCHASE OF CAR WAS GIVEN BY THE FIRM AND THE CAR WAS USED IN THE BUSINESS OF THE ASSESSEES BUSINESS. THE LD.CIT(A) NOTED THAT THE CONCEPT OF OWNERSHIP U NDER THE INCOME-TAX ACT IS NOT DIFFERENT THAN WHAT IS PRESCRIBED IN SECTION 14 OF INDIAN PARTNERSHIP ACT. HE THEREFORE HELD THAT SINCE THE FUNDS FOR PURCHASE OF CAR WAS GONE OUT OF THE COFFER OF THE FIRM IT IS UNDOUBTEDLY PROVED THAT THE ASSES SEE FIRM IS THE OWNER OF THE CASE. THE LD.CIT(A) THEREFORE ALLOWED CLAIM OF DEPRECIATION AMOUNTING TO RS.40 050. UPON HEARING THE RIVAL SUBMISSIONS WE ARE NOT INCLINED TO INTERFERE WITH THE ORDER OF THE CIT(A). THE ORDER OF CIT(A) IS UPHELD ON THIS ISSUE. 17. IN THE RESULT THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 23-12-2010 SD/- SD/- (A.L. GEHLOT) (D.T. GARASIA) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI DT : 23 RD DECEMBER 2010 PK/- COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE CIT(A)-III RAJKOT 4. THE CIT-II RAJKOT 5. THE DR (TRUE COPY) BY ORDER ASSTT.REGISTRAR ITAT RAJKOT