Jivraj Tea Company, Surat v. The Dy.CIT.,Cent.Circle-2,, Surat

ITA 3005/AHD/2009 | 2006-2007
Pronouncement Date: 26-03-2010 | Result: Partly Allowed

Appeal Details

RSA Number 300520514 RSA 2009
Assessee PAN AAACJ5957E
Bench Ahmedabad
Appeal Number ITA 3005/AHD/2009
Duration Of Justice 4 month(s) 17 day(s)
Appellant Jivraj Tea Company, Surat
Respondent The Dy.CIT.,Cent.Circle-2,, Surat
Appeal Type Income Tax Appeal
Pronouncement Date 26-03-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted A
Tribunal Order Date 26-03-2010
Date Of Final Hearing 10-03-2010
Next Hearing Date 10-03-2010
Assessment Year 2006-2007
Appeal Filed On 09-11-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH A AHMEDABAD BEFORE SHRI BHAVNESH SAINI JM & SHRI A.N. PAHUJA AM I.T.A. NO.3003/AHD/2009 & S.P. NO.1/AHD/2010 (ASSESSMENT YEAR AY 2005-06) JIVRAJ TEA & INDUSTRIES LTD VS DY.CIT CENTRAL CI RCLE-2 3 RD FLOOR DR MANSUKHLAL TOWER ROOM NO.504 AAYAKAR OPP DHIRAJ SONS ATHWALINES BHAVAN MAJURA GATE SURAT SURAT 395 001 [PAN : AAACJ5957E] (APPELLANT / APPLICANT) (RESPONDENT) I.T.A. NO.3004/AHD/2009 - AY 2005-06 I.T.A. NO.3005/AHD/2009 - AY 2006-07 & S.P. NO. 2/AHD/2010 (IN I.T.A. NO 3005/AHD/2009) (ASSESSMENT YEAR 2006-07) JIVRAJ TEA COMPANY VS DY.CIT CENTRAL CIRCLE-2 5/258-259 JIVRAJ CHAMBERS ROOM NO.504 RUWALA TEKRA AAYAKAR BHAVA N BARANPURI BHAGAL SURAT MAJURA GATE SURAT [PAN : AACFJ2236R] (APPELLANT / APPLICANT) (RESPONDENT) I.T.A. NO.3006/AHD/2009 - AY 2005-06 I.T.A. NO.3007/AHD/2009 - AY 2006-07 & S.P. NO.3/AHD/2010 (IN ITA NO.3007/AHD/2009) (ASSESSMENT YEAR 2006-07) JIVRAJ TEA LIMITED VS DY.CIT CENTRAL CIRCLE-2 5/258-259 JIVRAJ CHAMBERS ROOM NO.504 RUWALA TEKRA AAYA KAR BHAVAN BARANPURI BHAGAL SURAT MAJURA GATE SURAT [PAN : AACFJ5895P] (APPELLANT / APPLICANT) (RESPONDENT) I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 2 ITA NO.3019/AHD/2009 (ASSESSMENT YEAR 2006-07) THE ACIT CENTRAL CIRCLE-2 VS M/S JIVRAJ TEA LTD SURAT 5/258-259 JIVRAJ CHAMBERS RUWALA TEKRA BARANPURI BHAGAL SURAT (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI JP SHAH AR. REVENUE BY : SHRI RAJEEV AGARWAL DR O R D E R AN PAHUJA : THE APPEALS IN ITA NOS 3003 3004& 3006/AHD/2009 FILED BY AFORESAID THREE DIFFERENT ASSESSEES AGAINST SEPAR ATE ORDERS DATED 18.8.2009 OF THE LD. CIT(A)-II AHMEDABAD FOR THE AY 2005-06 RAISE CERTAIN COMMON ISSUES RELATING TO DEDUCTION U/S 80IA(4) ON THE PRO FITS DERIVED FROM ELECTRICITY GENERATION FROM THE WINDMILLS WHILE APPEALS IN ITA NOS 3005 & 3007/AHD/2009 FILED BY AFORESAID TWO ASSESSEES AGA INST SEPARATE ORDERS DATED 18.8.2009 OF THE LD. CIT(A)-II AHMEDABAD FO R THE AY 2006-07 RAISE ANOTHER SET OF COMMON ISSUES RELATING TO DISALLOWAN CE U/S 40A(2)(A) OF THE ACT. THE APPEAL IN ITA NO.3019/AHD/2009 IS FILED BY THE REVENUE IN THE CASE OF M/S JIVRAJ TEA LTD FOR THE AY 2006-07 RAISING GR OUNDS RELATING TO DISALLOWANCE OF SALES PROMOTION EXPENSES.. THE THRE E STAY PETITIONS FILED BY THESE ASSESSEES SEEK STAY OF DEMAND RAISED IN THE RESPECTIVE ASSESSMENT YEARS. SINCE THESE APPEALS AND STAY PETITIONS BE LONG TO THE SAME GROUP OF ASSESSEES WHILE ISSUES ARE COMMON THESE WERE HEAR D SIMULTANEOUSLY FOR THE SAKE OF CONVENIENCE AND ARE BEING DISPOSED OF THROUGH THIS COMMON ORDER. ITA NO.3003/AHD/2009 - JIVRAJ TEA & INDUSTRIES LTD ITA NO.3004/AHD/2009 - JIVRAJ TEA COMPANY ITA NO.3006/AHD/2009 - JIVRAJ TEA LTD I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 3 2. IN THESE THREE APPEALS THE ASSESSEES HAVE RAIS ED GROUNDS RELATING TO THEIR CLAIM FOR DEDUCTION U/S 80IA(4) OF THE IN COME-TAX ACT 1961 (HEREINAFTER REFERRED TO AS THE ACT).FACTS IN BR IEF AS PER RELEVANT ORDERS IN THE CASE OF M/S JIVRAJ TEA & INDUSTRIES LTD. ARE TH AT RETURN DECLARING INCOME OF RS.10 43 150/- WAS FILED ON 9.9.2005 FOR THE AY 2005-06. INTER ALIA THE ASSESSEE CLAIMED DEDUCTION OF RS.97 41 412/- U/S 80 IA(4) OF THE ACT . DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSING OFFICER[AO IN SHORT] NOTICED THAT THE ASSESSEE CLAIMED DEDUCTION U/S 80I A(4) OF THE ACT @ 100% OF THE PROFITS DERIVED FROM GENERATION OF ELECTRIC ITY FROM WIND MILL SITUATED IN AHMEDNAGAR MAHARASHTRA. ON PERUSAL OF THE PROFIT & LOSS ACCOUNT AND BALANCE-SHEET OF THE WIND MILL DIVISION THE AO NOT ICED THAT: I. THE SALES OF ELECTRICITY WAS SHOWN AT RS.66 00 1 23/- IN THE PROFIT AND LOSS ACCOUNT WHEREAS IN THE REPORT IN FO RM 10CCB THE SAME WAS REPORTED AT RS.1 33 58 136/-. II. THE NET PROFIT AS PER P & L ACCOUNT WAS TAKEN AT RS.50 78 889/- WHILE IN FORM 10CCB THE SAME WAS SH OWN AT RS.79 72 790/-. III. THE ASSESSEE CREDITED SALES TAX INCENTIVE OF RS. 67 50 000/-. ACCORDING TO THE AO IT WAS HARD TO BELIEVE THAT TH E SALES-TAX INCENTIVE WOULD BE MORE THE SALES. 2.1. ACCORDINGLY THE AO INFERRED THAT: I. THE FIGURE OF SALES AND PROFIT REFLECTED IN THE P & L ACCOUNT DO NOT MATCH WITH THE FIGURES OF SALES AND PROFIT APPE ARING IN FORM 10CCB AND NO CLARIFICATION WAS GIVEN BY THE ASSESSE E IN THIS REGARD; II. NO CLARIFICATION HAS BEEN GIVEN BY THE ASSESSEE ABOUT THE SALES TAX INCENTIVES CLAIMED TO HAVE BEEN RECEIVED BY IT; III. DEDUCTION CLAIMED U/S 80IA(4) WAS WRONG INASMU CH AS THE FIGURES IN FORM 10CCB DO NOT MATCH WITH THE P&L ACCOUNT AND THEREFORE IS LIABLE TO BE REJECTED; I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 4 IV. THE ASSESSEE HAS NOT EXPLAINED AS TO HOW THE SA LES-TAX INCENTIVES WERE MORE THAN THAT OF THE SALES. THE A O PRESUMED THAT THAT THE CAPITAL SUBSIDY ON ACCOUNT OF SALES T AX INCENTIVES HAS WRONGLY BEEN CLAIMED AS REVENUE RECEIPT; AND V. IF THE CAPITAL SUBSIDY IS TAKEN OFF FROM THE PRO FIT THERE WILL BE LOSS AND NO DEDUCTION WILL BE ALLOWABLE TO THE ASSE SSEE. 2.2 IN THE LIGHT OF AFORESAID INFERENCES THE AO DENIED DEDUCTION U/S 80IA(4) OF THE ACT. LIKEWISE THE CLAIM FOR DEDUCTION U/S 80IA(4) OF THE ACT IN THE CASE OF OTHER ASSESSES M/S JIVRAJ TEA COMPANY HAVING WI NDMILL AT BHOGAT JAMNAGAR AND M/S JIVRAJ TEA LIMITED HAVING WINDMILL IN AHMEDNAGAR WAS ALSO DISALLOWED. 3. ON APPEAL THESE ASSESSEES CONTENDED THAT THE A SSESSMENT ORDER HAD BEEN PASSED IN DEFIANCE OF PRINCIPLES OF NATURA L JUSTICE SINCE THE AO DENIED THEIR CLAIM WITHOUT GIVING NOTICE OF HIS PR OPOSED ACTION .HOWEVER THE LD.CIT(A) REJECTED THIS CONTENTION THE ASSESSMENT ORDER HAVING BEEN PASSED AFTER ISSUING NOTICES U/S 143(2) /142(1) OF THE AC T AND PROVIDING PROPER HEARING. AS REGARDS MERIT OF THEIR CLAIM THE ASSES SEE CONTENDED THAT APART FROM SALES SHOWN IN THE PROFIT AND LOSS ACCOUNT T HE ASSESSEE EARNED INCOME FROM SALE OF THEIR ENTITLEMENT FOR SALES TAX EXEMPT ION TO M/S MAHINDRA & MAHINDRA LTD.. THUS THERE WAS NO DISCREPANCY IN TH E FIGURE SHOWN IN FORM 10CCB. IN THE LIGHT OF THESE SUBMISSIONS THE LD. C IT(A) HELD IN THE CASE OF JIVRAJ TEA & INDUSTRIES LTD. IN THE FOLLOWING TERMS : 3.3 I HAVE CONSIDERED THE FACTS AND THE SUBMI SSIONS. I FIND THAT DEDUCTION CLAIMED U/S 80IA CANNOT BE DISALLOWED FOR THE REASONS MENTIONED BY THE ASSESSING OFFICER. HOWEVER THE D EDUCTION U/S 80IA IS NOT ALLOWABLE TO THE APPELLANT FOR THE FOLLOWING REASONS: (A) I FIND THAT THE WIND MILL COSTING RS.5 CRORES WAS INSTALLED ON 29.03.2002. THE TOTAL INCOME EARNED FROM THIS WIND MILL IN EARLIER YEARS (AS PER DETAILS SUBMITTED BY THE APPELLANT) IS AS UNDER: I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 5 AY GROSS INCOME FROM THE WINDMILL (RS.) EXPENSES (EXCLUDING DEPRECIATION) NET INCOME (BEFORE DEPRECIATION (RS.) 2002-03 962 33 031 -32 069 2003-04 1 40 60 480 21 33 867 1 19 26 613 2004-05 1 34 80 655 47 12 888 87 67 767 2005-06 1 33 50 123 28 08 711 1 05 41 412 THUS THE TOTAL INCOME EARNED FROM THE DATE OF INST ALLATION TO THE CLOSE OF THE PREVIOUS YEAR COMES TO RS.3 12 03 723/- WHE REAS THE DEPRECIATION CLAIMED ON HIS WINDMILL FROM THE INITI AL YEAR TO THIS YEAR COMES TO RS.5 CRORES. AS PER SECTION 80IA(5) FOR T HE PURPOSE OF DETERMINING THE QUANTUM OF TAX HOLIDAY PROFITS U/ S 80IA THE TAXABLE INCOME OF THE ELIGIBLE BUSINESS OF THE INDUSTRIAL U NDERTAKING ETC. IS TO BE ASCERTAINED AS IF SUCH UNDERTAKING WERE AN INDEP ENDENT UNIT OWNED BY THE ASSESSEE CONCERNED AND THE ASSESSEE HAD NO O THER SOURCE OF INCOME. IF WE CONSIDER THE UNABSORBED DEPRECIATION FROM EARLIER YEARS ON HIS WINDMILL THERE REMAINS NO INCOME FOR THIS Y EAR FROM WINDMILL. HENCE THE APPELLANT IS NOT ENTITLED FOR DEDUCTION U/S 80IA OF THE ACT. (B) THE HONBLE ITAT MUMBAI BENCH HELD IN THE CASE OF ADDL. CIT VS. ASHOK ALCO CHEM. 96 ITD 160 AS UNDER: IT IS SEEN THAT ONLY FOR THE PURPOSES OF DETERMINI NG THE QUANTUM OF DEDUCTION U/S 80IA A LEGAL FICTION HAS BEEN CRE ATED BY SUB- SECTION (5) BY VIRTUE OF WHICH THE PROFIT OR GAINS OF ELIGIBLE BUSINESS OF AN INDUSTRIAL UNDERTAKING SHALL BE COMP UTED AS IF THE ELIGIBLE BUSINESS WERE THE ONLY BUSINESS OF THE ASS ESSEE COMPANY RIGHT FROM THE DATE OF ITS ESTABLISHMENT. T HUS THE UNABSORBED DEPRECIATION AND UNABSORBED LOSSES OF TH E ELIGIBLE BUSINESS ARE TO BE CARRIED FORWARD AND SET OFF AGAI NST THE INCOME OF ELIGIBLE BUSINESS OF CURRENT YEAR. THE DE EMING FICTION CALLS FOR THIS CARRY FORWARD AND SET OFF IRRESPECTI VE OF THE FACT THAT THE UNABSORBED DEPRECIATION AND UNABSORBED LOSSES O F THE ELIGIBLE BUSINESS HAD ALREADY BEEN SET OFF AGAINST THE INCOME OF OTHER ELIGIBLE OR NON ELIGIBLE BUSINESS IN THE YEAR IN WHICH THEY WERE INCURRED OR IN ANY SUBSEQUENT YEAR. (C) IN THE CASE OF ACIT CIRCLE 4 VS. GOLDMINE SHARE S & FINANCE PVT. LTD. 113 ITD 209 (AHD) (SB) THE SPECIAL BENCH OF HONBLE ITAT HELD AS UNDER: I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 6 IN VIEW OF THE SPECIFIC PROVISIONS OF SECTION 80IA (5) OF THE I.T. ACT 1061 THE PROFIT FROM THE ELIGIBLE BUSINESS FO R THE PURPOSE OF DETERMINATION OF THE QUANTUM OF DEDUCTION UNDER SEC TION 80IA OF THE ACT HAS TO BE COMPUTED AFTER DEDUCTION OF THE N OTIONAL BROUGHT FORWARD LOSSES AND DEPRECIATION OF ELIGIBLE BUSINESS EVEN THOUGH THEY HAVE BEEN ALLOWED SET OFF AGAINST OTHER INCOME IN EARLIER YEARS. (D) THE INCOME FROM SALE OF ENTITLEMENT OF SALES TA X EXEMPTION IS NOT DERIVED FROM THE ELIGIBLE BUSINESS BUT ONLY INC IDENTAL TO THE BUSINESS HENCE DEDUCTION U/S 80IA IS NOT ALLOWABLE ON THIS INCOME. (E) EVEN IF THE DEDUCTION CANNOT BE DISALLOWED BY C ONSIDERING THE REASON GIVEN BY THE AO IT CAN BE DISALLOWED BY CON SIDERING OTHER RELEVANT REASONS BECAUSE THE CIT(A) HAS THE SAME P OWER AS OF THE AO WHILE DECIDING THE APPEAL ON A PARTICULAR ISSUE. HENCE THE ISSUE OF APPEAL IS ALLOWABILITY U/S 80IA AND FOR THIS SUB S ECTION 80IA(5) HAS TO BE CONSIDERED EVEN IF THE SAME WAS NOT DISCUSSED BY THE AO. 3.4 IN VIEW OF THESE FACTS OF THE CASE AND THE CASE LAWS DISCUSSED ABOVE IT IS HELD THAT THE APPELLANT IS NOT ENTITLE D FOR THE DEDUCTION U/S 80IA OF THE ACT. HENCE THIS GROUND IS REJECTED. 3.1 SIMILAR FINDINGS WERE RECORDED IN THE CA SE OF TWO OTHER ASSESSEES. 4. THESE ASSESSEES ARE NOW IN APPEAL BEFORE US AGAI NST THE AFORESAID FINDINGS OF THE LD. CIT(A). THE LD. AR ON BEHALF OF THESE ASSESSEES WHILE INVITING OUR ATTENTION TO PARA 3.3 OF THE IMPUGNED ORDERS AND GROUND NOS. 1 & 2 OF THE APPEAL SUBMITTED THAT THE LD. CIT(A) WAS NOT JUSTIFIED IN REJECTING THEIR CLAIM FOR DEDUCTION CLAIMED U/S 80IA OF THE ACT ON A GROUND TOTALLY DIFFERENT FROM THE GROUND ON WHICH THE IMPUGNED DED UCTION WAS DENIED BY THE AO WITHOUT ISSUING ANY SHOW CAUSE NOTICE SO AS TO AFFORD THE ASSESSEE AN OPPORTUNITY OF BEING HEARD AND REPRESENTED IN RELAT ION TO THE NEW GROUND FOR REJECTION. THE LD. AR WHILE INVITING OUR ATTENTIO N TO THEIR WRITTEN SUBMISSIONS CONTENDED THAT THE DISALLOWANCE HAS BEEN UPHELD IN VIOLATION OF PRINCIPLES OF NATURAL JUSTICE WITHOUT ALLOWING SUFFICIENT OPPORTU NITY TO THE ASSESSEES. ON THE OTHER HAND THE LD. DR WITHOUT DISPUTING THESE SU BMISSIONS ON BEHALF THESE ASSESSEES SUPPORTED THE ORDERS OF THE LOWER AUTHOR ITIES. I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 7 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. UNDISPUTEDLY AND AS CONTENDED BY THE LD. AR ON BEHALF OF THESE ASSESSEES THE LD. CIT(A) UPHELD THE DISALLOWANCE ON AN ALTOGETHER DIFFERENT GROUND WITHOUT ALLOWING SUFFICIENT OPPORTUNITY T O THE ASSESSEES TO EXPLAIN THEIR CASE IN THE LIGHT OF RELEVANT PROVISIONS OF S EC. 80IA OF THE ACT . WE ARE OF THE OPINION THAT THE LD. CIT(A) SHOULD HAVE PASSED THE ORDER ONLY AFTER THESE ASSESSEES HAD BEEN GIVEN A REASONABLE OPPORTUNITY O F SETTING OUT THEIR CASE. A MERE RITUAL OR EMPTY FORMALITY WILL NOT BE AN OPP ORTUNITY AS CONTEMPLATED BY LAW. IT WILL BE A 'PRETENCE' OR 'MAKE BELIEVE'. THI S IS NOT A CASE OF A MERE ROUTINE OR SIMPLE MATTER. IN THIS CONNECTION HONB LE JUSTICE KRISHNA IYER J. AS HE THEN WAS STATED IN A. IBRAHIM KUNJU'S CASE AI R 1970 KER 65 AT PAGE 67: '. . . . OPPORTUNITY SHOULD BE REAL AND NOT RITUALI STIC EFFECTIVE AND NOT ILLUSORY AND MUST BE FOLLOWED BY A FAIR CONSIDERATION OF THE EXPLANATION OFFERED AND THE MATERIALS AVAILABLE CULMINATING IN AN ORDER WH ICH DISCLOSES REASONS FOR THE DECISION SUFFICIENT TO SHOW THAT THE MIND OF TH E AUTHORITY HAS BEEN APPLIED RELEVANTLY AND RATIONALLY AND WITHOUT RELIANCE ON F ACTS NOT FURNISHED TO THE AFFECTED PARTY. NATURAL JUSTICE I MUST WARN CANNOT BE PERVERTED I NTO ANYTHING UNNATURAL OR UNJUST AND CANNOT THEREFORE BE TREATED AS A SET OF DOGMATIC PRESCRIPTIONS APPLICABLE WITHOUT REFERENCE TO THE CIRCUMSTANCES O F THE CASE. THE QUESTION MERELY IS IN ALL CONSCIENCE HAVE YOU BEEN FAIR IN DEALING WITH THAT MAN ? IF YOU HAVE BEEN ARBITRARY ABSENT-MINDED UNREASONABL E OR UNSPEAKING YOU CANNOT DENY THAT THERE HAS BEEN NO ADMINISTRATIVE F AIR PLAY. ' 5.1. WE NOTICE THAT OVER THE YEARS BY A PROC ESS OF JUDICIAL INTERPRETATION TWO RULES HAVE BEEN EVOLVED AS REPRESENTING THE PRI NCIPLES OF NATURAL JUSTICE IN JUDICIAL PROCESS INCLUDING THEREIN QUASI JUDICI AL AND ADMINISTRATIVE PROCESS. THEY CONSTITUTE THE BASIC ELEMENTS OF FAIR HEARING HAVING THEIR ROOTS IN THE INNATE SENSE OF MAN FOR FAIRPLAY AND JUSTICE WHICH IS NOT THE PRESERVE OF ANY PARTICULAR RACE OR COUNTRY BUT IS SHARED IN COMMON BY ALL MEN. THE FIRST RULE IS NEMO JUDEX IN CAUSA SUA' OR NEMO DEBET ESSE JUDEX I N PROPRIA CAUSA SUA' AS STATED IN [1605] 12 CO. REP. 114 THAT IS 'NO MAN SHALL BE A JUDGE IN HIS OWN CAUSE'. THE SECOND RULE AND THAT IS THE RULE WITH W HICH WE ARE CONCERNED IN THIS CASE IS 'AUDI ALTERAM PARTEM' THAT IS 'HEAR THE OTHER SIDE'. AT TIMES AND I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 8 PARTICULARLY IN CONTINENTAL COUNTRIES THE FORM 'AU DIETUR AT ALTERA PARS' IS USED MEANING VERY MUCH THE SAME THING. A COROLLARY HAS B EEN DEDUCED FROM THE ABOVE TWO RULES AND PARTICULARLY THE AUDI ALTERAM P ARTEM RULE NAMELY 'QUI ALIQUID STATUERIT PARTE INAUDITA ALTERA AEQUAM LIC ET DEXERIT HAUD AEQUUM FACERIT' THAT IS 'HE WHO SHALL DECIDE ANYTHING WI THOUT THE OTHER SIDE HAVING BEEN HEARD ALTHOUGH HE MAY HAVE SAID WHAT IS RIGHT WILL NOT HAVE BEEN WHAT IS RIGHT' OR IN OTHER WORDS AS IT IS NOW EXPRESSED 'JUSTICE SHOULD NOT ONLY BE DONE BUT SHOULD MANIFESTLY BE SEEN TO BE DONE'. 6. IN VIEW OF THE FOREGOING ESPECIALLY W HEN THESE ASSESSEES SEEK SUFFICIENT OPPORTUNITY OF HEARING BEFORE DISPOSAL OF THEIR APPEALS BY THE LD. CIT(A) WHILE THE LD. DR DID NOT OPPOSE THE SUBMIS SIONS ON BEHALF OF THE ASSESSEE IN THE INTEREST OF SUBSTANTIAL JUSTICE & FAIR PLAY THE IMPUGNED ORDERS ARE SET ASIDE AND THESE APPEALS ARE REMITTED BACK FOR FRESH DISPOSAL AFTER GIVING SUFFICIENT OPPORTUNITY OF HEARING TO T HE ASSESSEES. THE LD. CIT(A) MAY THEREAFTER PASS SUCH ORDER AS HE DEEMS PROPER IN ACCORDANCE WITH LAW. ITA NO. 3005/AHD/2009 BY JIVRAJ TEA COMPANY SURAT AND ITA NO. 3007/AHD/2009 BY JIVRAJ TEA LTD. SURAT --------------------------------------------------- ------------------------------- 7. IN GROUND NOS. 1 TO 3 OF THESE TWO APPEALS THE ASSESSEES HAVE RAISED THE ISSUE RELATING TO DISALLOWANCE U/S 40A(2)(A) OF THE ACT. DURING THE COURSE OF ASSESSMENT PROCEEDINGS IN THE CASE OF JIVRAJ TEA COMPANY THE AO NOTICED THAT THE ASSESSEE ENGAGED IN THE TRADING BUSINESS OF TEA HAD MADE PURCHASES OF TEA FROM SEVERAL OUTSIDE PART IES AS WELL AS FROM SISTER CONCERNS FALLING WITHIN THE AMBIT O F S.40A(2)(B) OF THE ACT NAMELY M/S. JIVRAJ TEA LTD. JIVRAJ TEA & INDUSTRIES LIMITED AND M/S. SURIN CORPORATION. THE PURCHASES OF TEA FROM THE RELATED CONCERNS WERE MADE AT HIGHER RATES TH AN THE RATE OF TEA PURCHASED FROM NON RELATED CONCERNS. THE ASSESS EE MADE PURCHASES AT AN AVERAGE PRICE OF RS.103.13/- PER KG . FROM I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 9 OUTSIDE PARTIES AND @ RS.119.23 PER KG. AND RS.148 .64/- PER KG. FROM RELATED PARTIES NAMELY M/S. SURIN CORPORATION AND JIVRAJ TEA LTD.. ACCORDINGLY THE AO REQUESTED THE ASSESSE E TO JUSTIFY THE RATES OF PURCHASE OF TEA FROM SISTER CONCERNS V IS--VIS PURCHASES FROM OTHER PARTIES. THE ASSESSEE REPLIED THAT THE QUALITY OF THE TEA PURCHASED FROM SISTER CONCERNS A ND THOSE FROM OTHER PARTIES BEING DIFFERENT THE QUESTION OF JUST IFICATION OF COMPARABLE RATES DOES NOT ARISE. THE AO HOWEVER H ELD THAT SUCH AN ASSERTION BEING MERELY AN UNSUBSTANTIATED C LAIM WAS NOT ACCEPTABLE AND ACCORDINGLY TREATED THE PORTION OF PURCHASE PRICE PAID TO RELATED PARTIES OVER AND ABOVE THE AV ERAGE PRICE OF RS. 103.13/- PER KG. OF TEA AS EXCESSIVE AND UNREAS ONABLE AND DEVOID OF COMMERCIAL EXPEDIENCY ON THE GROUND THAT: A. THE CONDITIONS OF PURCHASE LIKE PAYMENT SCHEDU LES CREDIT FACILITIES ETC. ARE SIMILAR BETWEEN OUTSIDE PARTIES AS WELL AS RELATED CONCERNS. HENCE NO OTHER SPECIA L BENEFIT HAS BEEN DERIVED BY THE PARTY FROM TRANSACTION WITH RELATED CONCERNS. B. THE ASSERTION THAT THE QUALITY OF TEA PURCHASED FROM OUTSIDE PARTIES ARE DIFFERENT FROM THOSE PURCHASED FROM RELATED CONCERNS HAVE BEEN FOUND TO BE UNACCEPTABLE . C. THERE ARE NO SPECIFIC QUALITY PARAMETERS MENTION ED ON THE PURCHASE BILLS AND THE QUALITY PARAMETERS MENTI ONED ARE NOT STANDARD AND ARE NOT ASCERTAINABLE NOR VERIFIAB LE FROM EXTANT LITERATURE ON TEA QUALITY. HENCE THE QUALIT Y DIFFERENTIA IS NOT ACCEPTED AS A VALID ARGUMENT ON THE FACTS OF THE CASE. D. FURTHER FROM THE PERUSAL OF PURCHASE BILLS IT HAS BEEN FOUND THAT THE ONLY POSSIBLE DIFFERENCES WHICH APPE AR ARE AS REGARDS TO SOURCE 'GARDEN' AND 'GRADE' (DUST/LEA F- PEKOE(OP/BP/BOP) ETC). HOWEVER THE PRICES VARIATIO NS IN RESPECT OF SOURCE 'GARDEN' AS WELL AS 'GRADE' ARE N OT CONSISTENT OR APPARENT. THEREFORE THE QUALITY IN T ERMS OF 'GARDEN' OR 'GRADE' CAN NOT BE ACCEPTED AS A DIFFER ENTIATING FACTOR ON THE FACTS OF THE CASE. THE ARGUMENTS OF T HE I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 10 ASSESSEE IN RESPECT OF RATE DIFFERENCE DUE TO 'QUAL ITY' IS NOT TENABLE. E. THE FINAL SALE OF PRODUCT (TEA) HAS BEEN MADE BY THE ASSESSEE IN FORM OF STANDARDIZED PACKETS LIKE JIVRA J TEA J9 TEA J9 GREEN TEA ANOKHI TEA LA JAWAB TEA SURYAK IRAN TEA ETC. WITHOUT ANY 'GARDEN-WISE' QUALITY SPECIF ICATION. HENCE IT CAN NOT BE INFERRED OR ACCEPTED THAT THE SO-CALLED 'GARDEN-WISE' QUALITY DIFFERENCE IS MATERIAL TO THE BUSINESS OF THE ASSESSEE. IT IS CLEAR THAT THE 'GARDEN-WISE' QUALITY DIFFERENTIATION IS ONLY A PLEA TO CLAIM HIGHER AND GREATER PURCHASE PRICE IN RESPECT OF PURCHASE FROM RELATED CONCERNS. F. THE PURCHASE BILLS OF RELATED CONCERNS HAVE BEEN PERUSED AND ANALYSED. IT HAS BEEN FOUND THAT THE RELATED SE LLING PARTY HAS ALSO MADE PURCHASES FROM CERTAIN COMMON AGENCIES AS THOSE FROM WHICH THE ASSESSEE HAS PURCH ASED TEA. HENCE IT IS CLEAR THAT SIMILAR TEA HAS BEEN P ROCURED FROM ONE AND THE SAME SOURCE AS ABOVE BY BOTH THE ASSESSEE AS WELL AS THE SUPPLIER RELATED CONCERNS VIZ. JIVRAJ TEA LIMITED AND M/S. SURIN CORPORATION. BUT THE PRICE CHARGED BY THE RELATED CONCERN FOR THE SAME TEA IS HIGHER. HENCE CLEARLY AN ARTIFICIAL ENTITY IN FORM OF THE SISTER TRADING CONCERN HAS BEEN CREATED AND INTRODUCED TO HIKE UP THE PRICE OF TEA USED AS INPUTS. G. FROM THE PERUSAL AND ANALYSIS OF THE BOOKS OF AC COUNTS AND SALE REGISTER OF THE RELATED SISTER CONCERN M/S . SURIN CORPORATION IT HAS BEEN FOUND THAT THE CONCERN HAS MADE SALES ONLY TO THE ASSESSEE AND OTHER SISTER CONCERN S AND HAS NO THIRD-PARTY SALES. HENCE FROM THE FACTS IT IS CLEAR THAT THE SPECIFIED SISTER CONCERN M/S. SURIN CORPOR ATION DOES NOT HAVE ANY ROLE OR RATIONALE THAN TO ARTIFIC IALLY ENHANCE THE INPUT PRICE AND TRANSFER THE SAME INPUT TO SISTER CONCERNS. 7.1 IN VIEW OF THE AFORESAID REASONS THE AO CONC LUDED THAT THERE WAS NO COMMERCIAL EXPEDIENCY IN MAKING PAYMEN TS TO RELATED PARTIES IN EXCESS OF MARKET RATES AND THAT THE PAYMENT MADE @ RS. 103.13/- TO OUTSIDE THIRD PARTIES WAS T HE ACTUAL MARKET RATE OF TEA WHICH WAS FAIR AND REASONABLE. ANY EXPENDITURE MADE BY THE ASSESSEE OVER AND ABOVE SUC H UNIT RATE I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 11 TO THE SPECIFIED CONCERNS WAS BEREFT OF COMMERCIAL EXPEDIENCY AND REASONABILITY AND HENCE GETS HIT BY THE PROVISI ONS OF SEC. 40A(2)(A) OF THE ACT.ACCORDINGLY THE AO WORKED OUT THE EXCESSIVE PAYMENTS MADE TO SISTER CONCERNS AND MADE DISALLOWANCE OF RS.1 18 98 049/- U/S. 40A(2)(A) OF THE ACT ON ACCOUNT OF EXCESSIVE AND UNREASONABLE PAYMENTS TO RELATED PARTIES AS UNDER:- SR. NO. NAME OF SPECIFIED CONCERN QTY. UNIT RATE FAIR & REASONABLE RATE EXCESSIVE UNIT PAYMENT EXCESSIVE TOTAL PAYMENT 1 M/S SURIN CORPORATI ON 6888102 119.23 103.13 16.10 11079796 2 JIVRAJ TEA LIMITED 17980 148.64 103.13 45.51 818254 TOTALS 11898049 7.2 LIKE WISE IN THE CASE OF JIVRAJ TEA LIMI TED THE AO WORKED OUT DISALLOWANCE OF RS. 6 31 08 777 IN THE F OLLOWING MANNER: SR. NO. NAME OF SPECIFIED CONCERN QTY. UNIT RATE FAIR & REASONABLE RATE EXCESSIVE UNIT PAYMENT EXCESSIVE TOTAL PAYMENT 1 JIVRAJ TEA CO(HO) 10774 111.7 97.60 14.1 152330 2 JIVRAJ TEA & INDUSTRIES LIMITED 580727.3 126.2 97.60 28.6 16630078 3 M/S SURIN CORPORATION 11061 106.4 97.60 8.8 97799 4 M/S SURIN CORPORATION 2107932.9 119.5 97.60 21.9 46228570 TOTALS 63108777 8 ON APPEAL THE ASSESSEE WHILE RELYING UPON THE D ECISIONS IN THE CASE OF CIT VS. INDO SAUDI SERVICES(TRAVEL) P LTD. 219 CTR(BOM.) 562 DCIT VS. MICROTEX SEPARATORS LTD. 293 ITR I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 12 451(KAR) ACIT VS. RAM & CO(INTERIORS) PVT. LTD. 1 S OT 145(MUMBAI) & DCIT VS. LAB INDIA INSTRUMENTS PVT. L TD. 93 ITD 120 CONTENDED THAT RELATED CONCERNS HAVING BEEN ASS ESSED AT THE MAXIMUM RATES THE FINDINGS OF THE AO THAT THE ASSESSEE PAID EXCESSIVE PURCHASE PRICE FOR TEA FROM THE RELA TED CONCERNS WAS WITH A VIEW TO AVOID TAX IS INCORRECT. IN THE ABSENCE OF ANY MOTIVE FOR EVASION OF TAX THE PROVISIONS OF SEC. 4 0A(2)(A) WERE NOT APPLICABLE. SINCE RATE OF PURCHASE OF TEA DEP ENDS UPON NUMEROUS FACTORS LIKE SOURCE GARDEN GRADE OF TEA TIME OF PURCHASE AND RATE BID BY OTHER BIDDERS ETC. THE PUR CHASE RATES DIFFER SUBSTANTIALLY AT A DIFFERENT TIMES IN RESPEC T OF PURCHASES FROM THE SAME PARTY HAVING SAME GRADE AND GARDEN. T HEREFORE THE COMPARISON WITH THE AVERAGE RATES OF PURCHASES FROM OUTSIDE PARTIES WAS NOT PROPER. IN THIS CONNECTION THE AS SESSEE RELIED UPON DECISIONS IN THE CASE OF MARGHABHAI KISHABHAI PATEL & CO. VS. CIT 108 ITR 54(GUJ) ITO VS. JAI SATI SYNTEX (P) LTD. 121 TTJ 376(AHD.) SANCHITA MARINE PRODUCTS (P) LTD. VS. DCI T 15 SOT 280(MUMBAI) & PONDY METAL & ROLLING MILLS PVT. LTD. VS. DCIT 107 TTJ(DEL)336.SINCE THE ASSESSEE ALSO MADE P URCHASES @ RS. 132 AND RS.140/- PER KG ALSO FROM OUTSIDE PAR TIES AND EVEN AT LOWER SALE RATES FROM RELATED PARTIES COMP ARISON AT AVERAGE RATES WAS NOT CORRECT THE ASSESSEE ARGUED. SINCE GP RATE OF 13.92 % HAS BEEN ACCEPTED BY THE AO NO FUR THER ADDITION WAS POSSIBLE IN VIEW OF DECISION IN UPVAN INTERNATI ONAL VS. ITO 15TTJ(DEL.) 215. SINCE ALL THE BILLS CONTAIN SO URCE GARDEN AND GRADE OF TEA IN RESPECT OF PURCHASES FROM OUTSI DE PARTIES WHILE TRANSPORTATION COST IS SEPARATELY DEBITED AS AGAINST NO TRANSPORTATION COST IN PURCHASES FROM SISTER CONCER NS APPARENTLY COMPARISON WAS NOT PROPER ESPECIALLY WHEN NO SUCH DISALLOWANCE HAD BEEN MADE IN THE EARLIER YEARS. AF TER CONSIDERING THESE SUBMISSIONS THE LD. CIT(A) UPHE LD THE I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 13 DISALLOWANCE IN THE FOLLOWING TERMS IN THE CASE OF JIVRAJ TEA COMPANY:- 2.4 I HAVE CONSIDERED THE FACTS AND THE SUBMISSIONS . I DO NOT AGREE WITH THE APPELLANT'S VIEW FOR THE FOLLOWI NG REASONS: A) THE APPELLANT HAS MAINTAINED THAT INDEED THE QUA LITY OF TEA PURCHASED FROM OUTSIDE PARTIES ARE DIFFERENT FR OM THOSE PURCHASED FROM RELATED CONCERNS AND THEREFORE THE PRICES AND RATES ARE NOT COMPARABLE. WHEREAS THE ASSESSING OFFICER HELD THAT THE ASSERTION OF THE APPELLANT TH AT THE QUALITY OF TEA PURCHASED FROM OUTSIDE PARTIES ARE D IFFERENT FROM THOSE PURCHASED FROM RELATED CONCERNS ARE UNACCEPTABLE. THUS THE BASIC ISSUE IN APPEAL IS TH E EXISTENCE OR OTHERWISE OF VERIFIABLE AND ASCERTAINA BLE QUALITY DIFFERENCES IN THE PURCHASES OF TEA MADE BY THE ASSESSEE AS EVIDENT FROM THE PURCHASE BILLS VOUCHE RS ETC. RECEIVED MAINTAINED AND PRODUCED BY THE ASSESSEE. FROM THE PERUSAL OF PURCHASE BILLS IT HAS BEEN FOU ND THAT THE ONLY POSSIBLE DIFFERENCES WHICH APPEAR ARE AS R EGARDS TO SOURCE GARDEN OR ESTATE AND GRADE (DUST OR LEAF -PEKOE OR ORANGE OP OR BROKEN PEKOE OR BROKEN ORANGE PEKO E ETC. ETC). AS PER COMMON KNOWLEDGE TEA GRADES ARE NUMEROUS NUMBERING IN EXCESS OF FIFTY AND ARE NOT A T ALL STANDARDIZED AND MAY VARY WIDELY ACCORDING TO COUN TRY OR REGION OF ORIGIN. SINCE NUMEROUS 'GRADES' OF TEA EX IST A PARTICULAR 'GRADE' ITSELF MAY NOT UNAMBIGUOUSLY IND ICATE 'QUALITY'. ON THE SAME LINE OF NOTION IT HAS BEEN INFERRED BY THE ASSESSING OFFICER ON THE FACTS OF THE CASE TH AT THE PRICE VARIATIONS IN RESPECT OF SOURCE 'GARDEN' AS W ELL AS 'GRADE' ARE NOT CONSISTENT OR APPARENT. THE APPELLA NT HAS NOT BEEN ABLE TO SUCCESSFULLY NEGATE AND COUNTER TH IS ARGUMENT OF THE ASSESSING OFFICER WITH EVIDENCES. THEREFORE I AM INCLINED TO AGREE WITH THE ASSESSIN G OFFICER THAT QUALITY IN TERMS OF SOURCE GARDEN NAMES OR NO N- STANDARD GRADES CAN NOT BE ACCEPTED AS VERIFIABLE A ND DIFFERENTIATING QUALITY PARAMETER ON THE FACTS OF T HE CASE. B) NOW WHETHER THE DIFFERENCES WHICH APPEAR ON THE BILLS AND VOUCHERS OF PURCHASE ARE MERELY AS REGARDS TO S OURCE 'GARDEN OR TEA ESTATE' AND 'GRADE1 AND NOT 'QUALITY ' PER SE. IT IS COMMON KNOWLEDGE THAT ALL SORTS OF QUALITIES OF TEA ARE GROWN IN A TEA ESTATE AND THE MERE MENTION OF NAME OF THE I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 14 GARDEN DOES NOT CAST ANY IMPRESSION ON THE 'QUALITY 1 OF THE TEA. FROM THE PERUSAL OF THE BILLS THE PRICES FOR DIFFERENT GRADES ARE SAME EVEN IN CASE OF CONSIGNMENT TAKEN F ROM THE SAME GARDEN WHICH RENDERS THE 'GRADE' AN INCON SISTENT INDICATOR OF 'QUALITY' AND 'PRICE' AS PRICES ARE N OT LINKED TO GRADE OF THE TEA. FURTHER ALL SORTS OF QUALITIES O F TEA ARE GROWN IN AN ESTATE AND THE MERE NAME OF THE GARDEN DOES NOT ALTER THE QUALITY OF THE TEA. HENCE CLEARLY ME RE SPECIFICATION OF SOURCE GARDEN IS NOT A DEFINITE QU ALITY INDICATION AND THEREFORE THE QUALITY IN TERMS OF ' GARDEN1 OR 'GRADE1 CAN NOT BE ACCEPTED AS A DIFFERENTIATING FA CTOR ON THE FACTS OF THE CASE. ON FACTS OF THE CASE THE BA SIC PARAMETERS OF QUALITY PER SE ARE NOT AVAILABLE ON T HE BILLS PURCHASE VOUCHERS ETC. MAINTAINED AND SHOWN BY THE APPELLANT. IN SUMMARY THE ARGUMENTS OF THE APPELLA NT IN RESPECT OF RATE DIFFERENCE DUE TO DIFFERENCE IN QUA LITY IS NEITHER VERIFIABLE NOR TENABLE. C) IT HAS BEEN POINTED OUT BY THE ASSESSING OFFICER THAT THE FINAL SALE OF TEA HAS BEEN MADE BY THE APPELLANT IN FORM OF STANDARDISED PACKETS IN THE NAME AND STYLE OF ANOKH I TEA J9 TEA JIVRAJ TEA LA JAWAB TEA SURYAKIRAN TEA ET C. WITHOUT ANY 'GARDEN-WISE' OR 'GRADE-WISE' QUALITY SPECIFICATION. BASED UPON THIS FACT IT HAS BEEN AR GUED BY THE ASSESSING OFFICER THAT IT CAN NOT BE INFERRED O R ACCEPTED THAT THE 'GARDEN-WISE' OR 'GRADE-WISE' QUALITY DIFF ERENCE IS MATERIAL TO THE BUSINESS OF THE APPELLANT. FURTHER THE ASSESSING OFFICER ARGUED THAT THE 'GARDEN-WISE1 QUA LITY DIFFERENTIATION IS ONLY A PLEA TO CLAIM HIGHER AND GREATER PURCHASE PRICE IN RESPECT OF PURCHASES MADE FROM RE LATED CONCERNS. I AM INCLINED TO AGREE WITH THE ASSESSING OFFICER'S VIEW THAT THE PURCHASE VOUCHERS DO NOT CO NTAIN SUFFICIENT DETAILS INDICATING THE QUALITY OF TEA PU RCHASED. D) THE ASSESSING OFFICER HAS CONTENDED FROM THE PER USAL AND ANALYSIS OF PURCHASE BITTS OF RELATED CONCERNS THAT THE SELLER RELATED PARTY HAS ALSO MADE PURCHASES FROM C ERTAIN COMMON AGENCIES AS THOSE FROM WHICH THE APPELLANT H AS PURCHASED TEA. HENCE IT HAS BEEN INFERRED BY THE ASSESSING OFFICER THAT SIMILAR TEA HAS BEEN PROCURE D FROM ONE AND THE SAME SOURCE BY BOTH THE APPELLANT AS W ELL AS THE SELLER/SUPPLIER RELATED CONCERNS VIZ. JIVRAJ T EA LIMITED AND M/S. SURIN CORPORATION. FURTHER IT HAS BEEN IN FERRED THAT THE PRICE PAID TO THE RELATED CONCERN FOR THE SAME TEA HAS BEEN COMPARATIVELY HIGHER THAN THE PRICE PAID T O OUTSIDE PARTIES. THE APPELLANT HAS ALSO NOT BEEN AB LE TO I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 15 REBUT THIS ARGUMENT AND THEREFORE I TEND TO AGREE WITH THE ASSESSING OFFICER THAT PAYMENTS FOR SIMILAR INPUTS (TEA) HAVE BEEN MADE TO RELATED PARTIES BY MAKING HIGHER PAYMENTS THAN THOSE COMPARED TO OUTSIDE PARTIES SEL LING AT FAIR MARKET VALUE. E) THE ASSESSING OFFICER HAS POINTED OUT THAT FROM THE PERUSAL AND ANALYSIS OF THE BOOKS OF ACCOUNTS AND S ALE REGISTER OF THE RELATED SISTER CONCERN M/S. SURIN CORPORATION IT HAS BEEN FOUND THAT THE CONCERN HAS MADE SALES ONLY TO THE APPELLANT AND OTHER SISTER CONCER NS AND HAS ONLY NOMINAL THIRD-PARTY SALES. F) THE APPELLANT HAS SUBMITTED THAT THE ASSESSING O FFICER HAS ADOPTED PRICE 'AVERAGES' AS THE BASIS FOR DISAL LOWANCE AND SUCH AN ACTION IS NOT PERMISSIBLE. FOR THIS TH E ASSESSEE HAS RELIED ON THE CASE LAW OF THE JURISDIC TIONAL HIGH COURT (MARGHABHAI KISHABHAI PATEL & CO. VS. C. I.T. 108 ITR 54 (GUJ.). THE ASSESSEE'S THIS SUBMISSIONS IS NOT ACCEPTABLE BECAUSE IN THE CASE OF MARGHABHAI KISHAB HAI PATEL & CO. VS. C.I.T. IT WAS OBSERVED BY THE COUR T THAT ITO COULD NOT IGNORE THE QUALITY DIFFERENCE AND FLU CTUATIONS IN PRICE FROM TIME TO TIME TO ARRIVE AT AVERAGE PRI CE. THUS IN THAT CASE THE QUALITY OF THE ITEM UNDER CONSIDE RATION WAS CLEAR AND ASCERTAINABLE FROM THE BILLS OF PURCHASE. WHILE IN THE INSTANT CASE THE QUALITY OF THE PRODUCT WHICH IS TEA IS NOT REFLECTED AT ALL NUMEROUS BILLS OF PURCHASE. EV EN CERTAIN VOUCHERS ARE BLANK BILLS OF SALE MADE BY THE SISTER CONCERN SHOWING ONLY THE INVOICE AMOUNTS AND NOT THE BASIC DETAILS LET ALONE QUALITY. FURTHER IN THE RELIED CASE THE PREVAILING MARKET PRICE OF THE PRODUCT IN QUESTION WAS FURNISH ED BY THE APPELLANT. BUT IN THE INSTANT CASE THE APPELLANT F AILED ESTABLISH THE PREVAILING FAIR MARKET VALUE OF THE I TEM IN QUESTION TEA. IN THE RELIED CASE THE SISTER CONCE RN OF THE APPELLANT MADE SIGNIFICANT SALES TO OTHER PARTIES A LSO. BUT IN THE CASE AT HAND THE SPECIFIED CONCERN SURIN CORPORATION HAS MADE INSIGNIFICANT AND VERY LITTLE SALES TO OUTSIDE PARTIES. FURTHER THAT CASE REFERS TO THE A SSESSMENT YEAR 1962-63 TO 1965-66 WHEN NO SPECIFIC PROVISION OF SECTION 40A(2)(A) WAS THERE IN THE STATUTE WHICH WA S INTRODUCED BY THE FINANCE ACT 1968 W.E.F. 01.04.19 68. THE RATIO OF THE CASE LAWS RELIED ON BY THE APPELLA NT OF ITO VS JAI SATI SYNTEX PVT. LTD. 121 TTJ 376 IS NOT AP PLICABLE TO APPELLANT'S CASE. IN THAT CASE IT WAS HELD THAT NO DISALLOWANCE U/S.40A(2)(A) CAN BE MADE BY COMPARING THE I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 16 PURCHASE PRICE OF GOODS WITH RATES AT WHICH GOODS V ALUED AT YEAR END. HERE IT IS NOT THE CASE. THE RATIO OF THE CASE LAWS RELIED ON BY THE APPELLA NT IN THE CASE OF SANCHITA MARINE PRODUCTS PVT.LTD. VS DCIT 1 5 SOT 280 IS NOT APPLICABLE TO THE APPELLANT'S CASE. IN THAT CASE IT WAS HELD THAT THERE BEING NO MENTION IN THE ASSE SSMENT ORDER THAT THE GRADE OF FISH SUPPLIED BY ALL THE VE NDORS AND SISTER CONCERN WAS THE SAME ADDITION WAS NOT JUSTI FIED. HERE IN THIS CASE THE A.O. HAS HELD THAT QUALITY W AS NOT MENTIONED IN THE PURCHASE VOUCHER HENCE QUALITY WA S SAME SUPPLIED BY RELATED AND NON RELATED PERSONS. THE RATIO OF THE CASE LAWS RELIED ON BY THE APPELLA NT IN THE CASE OF PONDY METAL & ROILING MILLS PVT.LTD. VS DCI T 107 TTJ 336 IS NOT APPLICABLE TO THE APPELLANT'S CASE. IN THAT CASE IT WAS HELD THAT REVENUE HAS NOT COMPARED THE PRICE OF RAW MATERIAL PAID BY THE ASSESSEE WITH THE PRICE S CHARGED FOR THE SAME MATERIAL BY OTHER SUPPLIERS IN THE OPEN MARKET AND THE FACT OF BULK PURCHASES HAS NOT BEEN PROPERLY APPRECIATED. HERE IT IS NOT THE CASE. THE A.O. HAS COMPARED THE PRICE FOR THE SAME TYPE OF MATERIAL AN D QUANTITY OF PURCHASES IS ALSO COMPARABLE. IN VIEW OF THE FACT THAT THE DIFFERENCE IN QUALITY AS CLAIMED BY THE APPELLANT IS NEBULOUS AND NON-EMERGENT FROM THE BILLS OF PURCHASE AND GIVEN THE FACT THAT MAJORITY OF THE SALE OF THE SPECIFIED SISTER CONCERN HAS BEEN MADE TO APPELLANT GROUP ONLY THE USE OF 'WEIGHTED AVERAGE1 (WITH QUANTITIES WORKING AS THE WEIGHTS) PRICE OF THE PRO DUCT WILL GIVE A FAIR AND RATIONAL VIEW G) THE APPELLANT HAS SUBMITTED THAT AT SOME OCCASIO NS THE APPELLANT PURCHASED THE TEA FROM OUTSIDE PARTIES AT HEAVY RATES AND PURCHASED TEA FROM RELATED CONCERNS AT LO W RATE ALSO. BUT THIS FACT CANNOT JUSTIFY THE PURCHASE FRO M RELATED CONCERNS AT EXCESSIVE RATES FOR MOST OF THE TIME. H) THE APPELLANT HAS SUBMITTED THAT THE APPELLANT'S DISCLOSED G.P. RATE IS 13.92% AND AFTER ADDITION IT BECOMES 20.48% AND NET PROFIT RATE BECOMES 12.35% FROM 5.78 . FOR SMALL BUSINESSMAN/RETAILERS THE PRESUMPTIVE NET PR OFIT RATE IS AT 8% BUT IN THE APPELLANT'S CASE NET PROFIT BE COMES 12.35% WHICH IS NOT POSSIBLE HENCE ADDITION IS NOT JUSTIFIED. IN THIS REGARD I FIND THAT THE APPELLAN T IS NOT A MERE RETAILER JUSTIFYING 8% NET PROFIT RATE. THE AP PELLANT I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 17 PURCHASES TEA FROM AUCTION HOUSES AND AFTER PACKAGI NG AND SELLING UNDER BRAND NAME NO FIXED RATE CAN BE PRESCRIBED. WHEN THE ASSESSING OFFICER HAS MADE SPE CIFIC DISALLOWANCE U/S.40A(2)(B) AND THE N.P. RATE COMES TO 12.35% THIS MAY BE JUSTIFIABLE. IN VIEW OF THESE FACTS IT IS HELD THAT THE ACTION OF THE. ASSESSING OFFICER IS JUSTIFIED AND THE ADDITION IS CONFIRMED. ACCORDINGLY THIS GROUND OF APPEAL IS REJECTED. 8.1 LIKE WISE IN THE CASE OF JIVRAJ TEA LIMITE D THE LD. CIT(A) UPHELD THE DISALLOWANCE OF RS. 6 31 08 777/-. 9. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAIN ST THE AFORESAID FINDINGS OF THE LD. CIT(A). THE LD. AR ON BEHALF OF THE ASSESSEE WHILE REITERATING THEIR SUBMISSIONS BEFORE THE LD. CIT(A) AND RELYING UPON THE DECISION OF A CO-ORDINATE BEN CH IN THE CASE OF JIVRAJ TEA COMPANY VS. JCIT IN ITA NO. 1859 & 63 0/AHD./2003 AS ALSO DECISION IN CIT VS. INDO SAUDI SERVICES(TRA VEL) P LTD. 219 CTR(BOM.) 562 CONTENDED THAT THE LD. CIT( A) WAS NOT JUSTIFIED IN UPHOLDING THE DISALLOWANCE .ON THE OTH ER HAND THE LD. DR SUPPORTED THE FINDINGS OF THE LD. CIT(A). 10 WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE AS ALSO THE DECISIONS RELIED UPON. THE RELEVANT PROVISIONS OF SEC. 40A(2) OF THE ACT STIPULATE THAT WHERE AN ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERSON REFERRED TO IN CLAUSE (B) OF THE SAID SUB-S ECTION AND THE ASSESSING OFFICER IS OF THE OPINION THAT SUCH EXPENDITURE IS UNREASONABLE OR EXCESSIVE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS SERVICES AND THE FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEE DS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED B Y OR ACCRUING TO HIM THEREFROM SO MUCH OF THE EXPENDITURE AS IS SO CONS IDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. THE SCOPE OF I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 18 THE SECTION HAS BEEN EXPLAINED IN THE CIRCULAR OF C BDT NO. 6P(LXXXVI-66) OF 1968 DATED 6TH JULY 1968 WHEREIN IN PARAS 72 AND 74 IT WAS STATED THUS: 'PARA 72 : THE FINANCE ACT 1968 HAS INTRODUCED A NEW S. 4OA IN THE IT ACT W.E.F. 1ST APRIL 1968. UNDER SUB-S. (2) OF NEW S. 4OA EXPENDITURE INCURRED IN A BUSINESS OR PROFESSION FOR WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO THE TAXPAYER'S RELATIVES OR ASSOCIATE CONCERNS IS LIABL E TO BE DISALLOWED IN COMPUTING THE PROFITS OF THE BUSINESS OR PROFESSION TO THE EXTENT THE EXPENDITURE IS CONSIDERED TO BE EXCESSIVE OR UNREAS ONABLE. THE REASONABLENESS OF ANY EXPENDITURE IS TO BE JUDGED H AVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS SERVICES OR FACILITIES F OR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PRO FESSION OR THE BENEFIT DERIVED BY OR ACCRUING TO THE TAXPAYER FROM THE E XPENDITURE. SUCH PORTION OF THE EXPENDITURE WHICH IN THE OPINION OF THE ITO IS EXCESSIVE OR UNREASONABLE ACCORDING TO THESE CRITERIA IS TO BE D ISALLOWED IN COMPUTING THE PROFITS OF THE BUSINESS OR PROFESSION. PARA 74: IT MAY BE NOTED THAT THE NEW PROVISION IS APPLICABLE TO ALL CATEGORIES OF EXPENDITURE INCURRED IN BUSINESSES AND PROFESSIO NS INCLUDING EXPENDITURE ON PURCHASE OF RAW MATERIALS STORES OR GOODS SALA RIES TO EMPLOYEES AND ALSO OTHER EXPENDITURE ON PROFESSIONAL SERVICES OR BY WAY OF BROKERAGE COMMISSION INTEREST ETC. WHERE PAYMENT FOR ANY EX PENDITURE IS FOUND TO HAVE BEEN MADE TO A RELATIVE OR AN ASSOCIATE CONCER N FALLING WITHIN THE SPECIFIED CATEGORIES IT WILL BE NECESSARY FOR THE ITO TO SCRUTINIZE THE REASONABLENESS OF THE EXPENDITURE WITH REFERENCE TO THE CRITERIA MENTIONED IN THE SECTION. THE ITO IS EXPECTED TO EXERCISE HIS JU DGMENT IN A REASONABLE AND FAIR MANNER. IT SHOULD BE BORNE IN MIND THAT TH E PROVISION IS MEANT TO CHECK EVASION OF TAX THROUGH EXCESSIVE OR UNREASONA BLE PAYMENTS TO RELATIVES AND ASSOCIATE CONCERNS AND SHOULD NOT BE APPLIED IN A MANNER WHICH WILL CAUSE HARDSHIP IN BONA FIDE CASES.' 10.1 IN THE INSTANT CASE WE FIND THAT THE AO ANA LYSED THE AVERAGE TEA PRICES ON PURCHASE OF TEA FROM OUTSIDE PARTIES VIS-A-VIS PURCHASE PRICE FROM THE SISTER CONCERNS LIKE JIVRAJ TEA INDUSTRIES LTD. & SURIN CORPORATION AND CONCLUDED THAT THE ASS ESSEE PAID EXCESSIVE PURCHASE PRICE TO SISTER CONCERNS. THE YA RD STICK ADOPTED BY THE AO IS AVERAGE PURCHASE PRICE OF TEA FROM THE OTHER PARTIES. NOW THE TEA HAS LARGE VARIETIES AND ITS PRICE DEPENDS UPON A NUMBER OF FACTORS DEPENDING UPON IT S QUALITY;QUALITY WILL BE BETTER IN IDEAL CONDITIONS OF HUMIDITY AND HEIGHT OF THE GARDEN AND TEA PLUCKED FROM FRESH B USHES AS I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 19 AGAINST TEA GROWN AT LOWER ALTITUDES AND PLUCKED F ROM OLD BUSHES. THE TEA FROM A GARDEN AT HIGHER ALTITUD ES WILL FETCH HIGHER PRICE AS COMPARED TO TEA GROWN IN GARDENS A T LOWER ALTITUDES. FRESH TEA NORMALLY FETCHES HIGHER PRICES AS COMPARED TO OLD STOCK. TEA IS GENERALLY SOLD IN AUCTION BY V ARIOUS GARDENS AND THE MARKET RATES OF A PARTICULAR QUALITY DEPEND S UPON THE BEST BIDDING. THE PRICE OF DUST IS LOWER AS COMPARE D TO THE PRICE OF LEAF TEA. IN VIEW OF VARIETY OF FACTORS AFFECTIN G TEA TRADE THERE CAN BE NO STANDARD FOR FIXING THE PRICE OF TEA. TH E AO HAS COMPARED AVERAGE PRICE OF TEA PURCHASED FROM OUTSI DE PARTIES VIS--VIS PURCHASE FROM SISTER CONCERNS. NO ATTEMPT HAS BEEN MADE TO ASCERTAIN THE PRICE PREVAILING IN THE MARK ET ON THE DAY WHEN PURCHASES ARE STATED TO HAVE BEEN MADE FROM TH E SISTER CONCERNS ESPECIALLY WHEN THE PRICE PREVAILING ON A PARTICULAR DAY FLUCTUATES EVEN IN RESPECT OF TEA FROM THE SAME GAR DEN AND OF THE SAME GRADE. NO FINDING HAS BEEN RECORDED BY THE LD. CIT(A) ON THE PLEA ON BEHALF OF THE ASSESSEE THAT PURCHASES OF TEA FROM SISTER CONCERNS HAVE ALSO BEEN MADE AT LOWER RATES VIS--VIS PURCHASES FROM OUTSIDE PARTIES. HONBLE JURISDICTIO NAL HIGH COURT IN THE CASE OF MARGHABHAI KISHABHAI PATEL & CO. VS. CIT 108 ITR 54(GUJ) HELD THAT THE AVERAGE PRICE OF EARLIER PURCHASES CANNOT BE TA KEN AS THE BASIS OF DETERMINING COST OF SUBSEQUENT PURC HASES. BESIDES THE AO/THE LD. CIT(A) HAVE NOT ANALYSED THE IMPACT OF T RANSPORTATION COST ON PURCHASE OF TEA FROM OUTSIDE PARTIES AND H AVE ALTOGETHER IGNORED THE PLEA ON BEHALF OF THE ASSESSEES THAT HEAVY TRANSPORTATION COST WAS INCURRED ON PURCHASE OF TEA FROM THE OUTSIDE PARTIES. THE PROVISIONS OF SECTION 40A( 2)(A) CANNOT HAVE ANY APPLICATION UNLESS IT IS FIRST CONCLUDED THAT THE EXPENDITURE WAS EXCESSIVE OR UNREASONABLE AS HELD IN THE CASE OF UPPER INDIA STEEL MANUFACTURING AND ENGINEERING CO. PRIVATE LIMITED. VS COMMISSIONER OF INCOME-TAX LUCKNOW 117 ITR 569(SC). IN THE CASE UNDER CONSIDERATION T HERE IS NOTHING TO SUGGEST I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 20 THAT THE AO EVER BROUGHT ANY MATERIAL ON RECORD ON THIS ASPECT NOR EVEN CITED ANY COMPARABLE INSTANCES IN RESPECT OF THE FA IR MARKET VALUE OF THE TEA PURCHASED FROM A PARTICULAR GARDEN AND OF A SPECIFI C GRADE ON THE DATE WHEN PURCHASES WERE MADE FROM SISTER CONCERNS FOR WHICH THE PAYMENT HAS BEEN MADE BEFORE CONCLUDING THAT EXPENDITURE WAS EXCE SSIVE OR UNREASONABLE ESPECIALLY WHEN IN THE PRECEDING YEARS NO SUCH DIS ALLOWANCE HAS EVEN BEEN ATTEMPTED. IT IS THE SETTLED LEGAL POSITION THAT CO MPARISON HAS TO BE MADE AMONG EQUALS. THE ONUS IS ON THE ASSESSING OFFICER TO ESTABLISH THAT PAYMENTS MADE BY ASSESSEE WERE EXCESSIVE OR UNREASO NABLE. NO OTHER MATERIAL HAS BEEN BROUGHT TO OUR NOTICE BY THE REV ENUE TO ESTABLISH THE EXCESSIVE-NESS OF THE PAYMENTS. 10.2 MOREOVER IT IS NOT THE QUANTUM ALONE THA T GOVERNS IN SUCH CASES. FAIR MARKET VALUE OF THE GOODS SERVICES LEGITIMAT E NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE WOULD BE THE GUIDING FA CTOR IN TERMS OF SECTION 40A(2) OF THE ACT. IN THE CASE ON HAND THE ASSESSE E IS PURCHASING FROM OUTSIDE PARTIES AND SISTER CONCERNS IN THE PRECEDI NG ASSESSMENT YEARS ALSO. AS ALREADY OBSERVED PRICE OF TEA DEPENDS UPON A N UMBER OF FACTORS EVEN IN RESPECT TEA FROM THE SAME SOURCE GARDEN AND SAME GR ADE DEPENDING UPON THE BID PRICE DURING THE COURSE OF DAY. THERE IS NO MATERIAL ON RECORD AS TO WHAT WERE THE PRICES PREVAILING ON A PARTICULAR DAY WHEN TEA OF A PARTICULAR VARIETY AND QUALITY WAS PURCHASED FROM SISTER CONCE RN NOR ANY ATTEMPT SEEMS TO HAVE BEEN MADE TO COMPARE THE PRICE PAID TO SISTER CONSCENS WITH THOSE PRICES. AS POINTED OUT IN THE CASE OF INDO SA UDI TRAVEL SERVICES(P) LTD.(SUPRA) CBDT CIRCULAR NO. 6-P DT. 6TH JULY 1968 STIPULATED THAT NO DISALLOWANCE CAN BE MADE UNDER S. 40A(2) OF THE AC T IN RESPECT OF THE PAYMENTS MADE TO THE RELATIVES AND SISTER CONCERNS WHERE THERE IS NO ATTEMPT TO EVADE TAX. THE ASSESSEES BEFORE US ARE STATED T O BE PAYING TAX AT THE MAXIMUM PREVAILING RATES AND THERE IS NO EVIDENCE O N RECORD NOR THERE IS ANY ALLEGATION REGARDING EVASION OF TAX BY ANY OF THES E ASSESSEES . THE LD. DR DID NOT POINT OUT AS TO HOW THE ASSESSEE EVADED PA YMENT OF TAX BY ALLEGED I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 21 PAYMENT OF HIGHER PURCHASE PRICE TO ITS SISTER CONC ERN SINCE THE SISTER CONCERNS WERE ALSO PAYING TAX AT HIGHER RATES AS ADMITTED BEFORE US BY THE LD. AR. 10.3 MOREOVER IT IS NOBODY'S CASE THAT THE TR ANSACTIONS OF PURCHASE FROM THE SISTER CONCERNS WERE NOT BONA FIDE TRANSACTIONS NOR IS IT THE CASE OF THE REVENUE THAT THESE WERE SHAM TRANSACTIONS OR THAT T HE PRICE PAID IN RESPECT OF EACH OF THESE TRANSACTIONS BY THE ASSESSEE WAS O THER THAN THE ONE SET OUT IN THE BOOKS OF ACCOUNT OF THE ASSESSEE. UNDER THES E CIRCUMSTANCES IT APPEARS TO US THAT THE TAXING AUTHORITIES HAD NO RI GHT TO SUBSTITUTE THE AVERAGE PRICE IN PLACE OF THE PRICE OR VALUE AGREED TO BETWEEN THE PARTIES TO THE TRANSACTION SINCE THE TRANSACTION HAS NOT BEEN SHOWN TO BE A SHAM ONE NOR HAS IT BEEN SHOWN THAT THE VALUE WAS NOT THE VA LUE IN THE BOOKS OF ACCOUNT. 10.4 IN VIEW OF THE FOREGOING WE ARE NOT INCLI NED TO AGREE WITH THE REASONS OF THE LD. CIT(A) AND THEREFORE DELETE THE DISALLO WANCE MADE BY THE AO. ACCORDINGLY GROUND NOS. 1 TO 3 IN THESE TWO APPEAL S ARE ALLOWED. ITA NO. 3019/AHD/2009[ REVENUE] IN THE CASE OF JIVR AJ TEA LTD. SURAT 11. IN THIS APPEAL THE REVENUE HAVE RAISED GR OUND NOS. 1 TO 4 RELATING TO DISALLOWANCE OF RS. 1 04 65 420/- ON ACCOUNT OF SALES PROMOTION EXPENSES. THE AO NOTICED THAT THERE WAS INCREASE OF 351.54% IN SALES PROMOTION EXPENSES VIS --VIS INCREASE OF ONLY 15.54% IN TURNOVER WHILE NET PROFI T DECLINED TO 4.2% AS AGAINST 4.56% IN THE PRECEDING ASSESSMENT Y EAR. THE AO EXTRACTED THE RELEVANT DETAILS AS UNDER: SELLING & DISTRIBUTION EXPENSES PARTICULARS 2005-06 (IN RS.) 2006-07 (IN RS.) %AGE RISE I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 22 SALES 494372214 571198752 15.54 ADVERTISEMENT EXPENSES 5901895 14259203 141.60 DISCOUNTS & INCENTIVE EXPENSES 0 3025280 EXCESSIVE SALES PROMOTION EXPENSES 7349104 8030024 9.27 TOTAL OF IMPUGNED EXPENSES 13250999 59833379 351.54 TOTAL (AS %AGE OF SALES) 2.68 10.48 11.1 TO A QUERY BY THE AO THE ASSESSEE EXPLAINED THAT THERE WAS NO DIRECT OR MATHEMATICAL RELATIONSHIP BETWEEN TURNOVER AND SALES PROMOTION EXPENSES. SINCE ALL THE EXPENSES HA D BEEN INCURRED THROUGH ACCOUNT PAYEE CHEQUES WHILE STIFF COMPETITION FORCED THE ASSESSEE TO UNDERTAKE SALES PROMOTION EX PENSES NO DISALLOWANCE COULD BE MADE. HOWEVER THE AO DID NOT AGREE WITH THE REPLY OF THE ASSESSEE ON THE GROUND THAT THE AS SESSEE FAILED TO FURNISH ANY COGENT AND VERIFIABLE EXPLANATION FO R THE EXCESSIVE AND UNREASONABLE INCREASE IN SALES PROMOTION EXPENS ES NOR THE ASSESSEE ESTABLISHED THE BUSINESS NEXUS AND NECESS ITY OF THE EXPENDITURE. THE AO FURTHER OBSERVED THAT MERE PAYM ENT THROUGH ACCOUNT PAYEE CHEQUES ITSELF WOULD NOT ENTITLE THE ASSESSEE TO DEDUCTION OF THE SAID EXPENDITURE UNLESS THE SAME W AS PROVED TO BE PAID FOR COMMERCIAL CONSIDERATIONS AND THAT IT W AS FOR THE ASSESSEE TO ESTABLISH BY EVIDENCE THAT A PARTICULAR ALLOWANCE WAS JUSTIFIED. IN THIS CONNECTION THE AO RELIED UP ON DECISION IN[ NEMI CHAND KOTHARI V. CIT [2003] 264 ITR 254 (GAU) ]. RELYING UPON THE DECISIONS OF THE APEX COURT IN CIT V. CALC UTTA AGENCY LTD. (1951) 19 ITR 191 CIT V. IMPERIAL CHEMICAL IN DUSTRIES I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 23 (INDIA) (P.) LTD. (1969) 74 ITR 17 AND CIT V. C. PA RAKH AND CO. (INDIA) LTD. (1956) 29 ITR 661 THE AO FURTHER OBSE RVED THAT THE BURDEN OF PROVING THAT A PARTICULAR EXPENDITURE HAS BEEN LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS WAS ON THE ASSESSEE. IN THE CASE OF CIT VS. CHANDRAVILAS HOTEL (1987) 164 ITR 102 (GUJ) IT HAS BEEN HELD THAT IF THE EXPENDITURE IS DOUBTED BY THE ASSESSING AUTHORITY IT IS THE DU TY OF THE ASSESSEE TO PROVE BY LEADING EVIDENCE THAT THE EXPE NDITURE WAS IN FACT INCURRED. NO SUCH BURDEN HAVING BEEN DISCH ARGED BY THE ASSESSEE IN THE INSTANT CASE NOR THE ASSESSEE ESTAB LISHED THE EXISTENCE OF ANY BUSINESS CONNECTION OF ANY PAYMENT MADE TO CLAIMED ADVERTISING PARTIES THE AO DISALLOWED THE CLAIM. AS REGARDS THE PAYMENTS OF RS.30 25 280/- MADE UNDER NOMENCLATURE OF 'DISCOUNTS & INCENTIVE EXPENSES' T HE AO DISALLOWED PAYMENTS ON THE GROUND THAT THESE WERE MERELY OF THE NATURE OF TRANSFERS AND NOT BUSINESS EXPENDITUR E AND THE ASSESSEE IN THE INSTANT CASE FAILED TO ESTABLISH TH E BUSINESS NEXUS. INTER ALIA SINCE NET PROFIT OF THE ASSESSEE DECLINED FROM 4.56% DURING THE PRECEDING YEAR A.Y. 2005-06 TO 4.2 % IN THE YEAR UNDER CONSIDERATION AND THE ASSESSEE FAILED T O EXPLAIN THE FALL IN NP THE AO ON THE BASIS OF CLAIM OF SIMIL AR EXPENDITURE IN THE AY 2005-06 WORKED OUT THE DISALLOWANCE OF RS. 1 04 65 420/- AS UNDER: DISALLOWANCE FROM CLAIMED S&D EXPENSES PARTICULAR 2005-06 (IN RS.) 2006-07 (IN RS.) 2006-07 (IN RS.) 2006-07 (IN RS.) ALLOWABLE %AGE TO SALES CLAIMED EXPENDITURES ALLOWABLE EXPENDITURE DISALLOWANCE SALES 571198752 ADVERTISEMENT EXPENSES 1.19 % 14259203 6819063 7440140 I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 24 DISCOUNTS & INCENTIVES EXPENSES 0.00 % 3025280 0 3025280 SALES PROMOTION EXPENSES 1.49 % 8030024 8491171 - TOTALS 25314507 10465420 12. ON APPEAL THE ASSESSEE CONTENDED THAT THERE WAS INCREASE IN EXPENDITURE OF SALES PROMOTION EXPENSE S BY 91% AS WAS EVIDENT FROM THE FOLLOWING DETAILS AND NOT 351. 54% AS STATED BY THE AO: PARTICULARS ASSESSMENT YEAR 2006-07 (RS.) ASSESSMENT YEAR 2005-06 (RS.) ADVERTISEMENT EXPENSES 1 42 59 203 59 01 895 DISCOUNTS & INCENTIVES EXPENSES 30 25 280 0 SALES PROMOTION EXPENSES 80 30 024 73 49 104 TOTAL 2 53 14 507 1 32 50 999 RELYING UPON THE DECISIONS IN THE CASE OF CIT VS. M K BROTHERS 163 ITR 249 (GUJ) CIT VS. DHANRAJGIRI RAJA NARSINHG IRI (1973) 91 ITR 544 (SC) VOLTAMP TRANSFORMERS PVT. LTD. VS CIT (1981) 129 ITR 105 (GUJ) CIT VS. COMPUTER GRAPHICS LTD. (2006) 285 ITR 84 (MAD) ANDJ S R ENTERPRISES VS CIT (1994) 49 TTJ 363 (DEL) THE ASSESSEE CONTENDED THAT EXPENDITURE HAD BEEN INCURR ED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS. IN THE LIGHT OF THESE SUBMISSIONS THE LD. CIT(A) DELETED THE DISALLOWANC E IN THE FOLLOWING TERMS: I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 25 4. I HAVE CONSIDERED THE FACTS AND THE SU BMISSIONS AND THE CASE LAWS RELIED ON BY THE APPELLANT. I AGREE W ITH THE APPELLANT'S VIEW FOR THE FOLLOWING REASONS: A) THE TOTAL PAYMENT FOR THE EXPENSES HAVE BEE N MADE THROUGH ACCOUNT PAYEE CHEQUES/BANK DRAFTS. ALL THE DETAILS AND VOUCHERS ARE MAINTAINED AND VERIFIABLE. B) NONE OF THE PARTIES ARE RELATED TO THE APPELLANT COMPANY OR ITS DIRECTORS. C) WITH THE INCREASE IN EXPENSES SALES HAVE ALSO INCREASED. THE INCREASE NEED NOT BE IN THE SAME PR OPORTION. D) AS PER DECISION OF HON'BLE SUPREME COURT I N THE CASE OF CIT V/S DHANRAJGIRI RAJA NARSINHGIRI (1973) 91 I TR 544 (SC) IT IS HELD THAT IT IS NOT OPEN TO THE DEPARTMENT TO PRESCRIBE WHAT EXPENDITURE AN ASSESSEE SHOULD INCUR AND IN WHAT CIRCUMSTANCES HE SHOULD INCUR THAT EXPENDITURE. EVE RY BUSINESSMAN KNOWS HIS INTEREST BEST.' FURTHER AS PER DECISION OF HON'BLE GUJARAT HIGH CO URT IN THE CASE OF VOLTAMP TRANSFORMERS PRIVATE LIMITED V/S C1 T (1981) 129 ITR 105 (GUJ) IT IS HELD THAT - 'IT IS WELL SETTLED LAW THAT SO FAR AS THE QUESTION OF COMMERCIAL EXPEDIENCY AND BUSINESS NEEDS OF AN ORGA NIZATION ARE CONCERNED IT IS NOT THE VIEW POINT OF THE REVE NUE OFFICER WHICH SHOULD COUNT BUT IT SHOULD BE A VIEW POINT OF AN ORDINARY BUSINESSMAN DEALING WITH THE SITUATION LIK E THE ONE FACED BY THE PARTICULAR ASSESSEE IN QUESTION. IT IS THEREFORE FROM THAT PARTICULAR VIEW POINT THAT THE QUESTION H AS TO BE APPROACHED.' THEREFORE WHEN THE EXPENSES ARE GENUINE AND PARTIE S ARE NOT RELATED CONCERNS AND NOT COVERED U/S.40A(2)(B) THE I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 26 REASONABLENESS AND MAGNITUDE OF THE EXPENSES CANNO T BE QUESTIONED AND DECIDED BY THE ASSESSING OFFICER. E) THE FACTS THAT THERE IS SHARP INCREASE IN E XPENSES AS COMPARED TO INCREASE IN SALES FROM LAST YEAR MAY A ROSE SUSPICION AND MAY BE THE STARTING POINT OF INVESTIG ATION AND SCRUTINY BY THE ASSESSING OFFICER BUT IT ALONE CANN OT BE THE BASIS FOR THE DISALLOWANCE. AS PER THE DECISION OF HON'BLE GUJARAT HIGH COURT IN THE CASE OF CIT V/S M. K. BRO THERS 163 ITR 249 (GUJ) IT WAS HELD THAT - 'WHEREIN IT IS HELD THAT 'WHEN AN ITEM OF EXPENDITU RE PAYMENT IS MADE THROUGH CHEQUE / DRAFT TO THE RECIPIENT AND THE ASSESSING OFFICER IS UNABLE TO BRING ON RECORD ANY EVIDENCE / MATERIAL INDICATING OF THE FACT THAT THE AMOUNTS PA ID BY CHEQUE / DRAFT CAME BACK TO THE ASSESSEE IN THE FOR M OF CASH THE RELEVANT EXPENDITURE CANNOT BE DISALLOWED.' IN VIEW OF THESE FACTS AND THE CASE LAWS DISCUSSED ABOVE THE DISALLOWANCES CANNOT BE SUSTAINED. ACCORDINGLY ADD ITIONS MADE ARE DELETED AND BOTH THE GROUNDS ARE ALLOWED. 13. THE REVENUE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LD. CIT(A). THE LD. DR WHILE SUPPORTING THE ORD ER OF THE AO CONTENDED THAT THERE IS NO FINDING BY THE LD. CIT(A) REGARDING SER VICES RENDERED BY THE RECIPIENTS OF THE AFORESAID AMOUNTS ON ACCOUNT OF ADVERTISEMENT AND SALES PROMOTION EXPENSES.ON THE OTHER HAND THE LD. AR ON BEHALF OF THE ASSSESSEE WHILE SUPPORTING THE FINDINGS OF THE LD. CIT(A) REL IED UPON A DECISION IN THE CASE OF SASSOON J. DAVID AND CO. PVT. LIMITED. VS C OMMISSIONER OF INCOME- TAX BOMBAY 118 ITR 261(SC). 14. WE HAVE HEARD BOTH THE PARTIES AND GONE THRO UGH THE FACTS OF THE CASE. UNDISPUTEDLY PAYMENTS FOR THE EXPENSES HAVE BEEN M ADE THROUGH ACCOUNT PAYEE CHEQUES/BANK DRAFTS AND NONE OF THE PARTIES I S RELATED TO THE ASSESSEE COMPANY OR ITS DIRECTORS. THE LD. CIT(A) FOUND THAT ALL THE DETAILS AND VOUCHERS WERE MAINTAINED AND EXPENSES WERE VERIFIAB LE . IN NUTSHELL THE I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 27 GENUINENESS OF THE EXPENDITURE HAS NOT BEEN DOUBTED . ONLY GROUND FOR DISALLOWANCE WAS THAT THERE WAS DISPROPORTIONATE IN CREASE IN EXPENSES VIS-- VIS TURNOVER OF THE ASSESSEE. AS POINTED OUT BY THE LD. CIT(A) WHILE REFERRING TO THE DECISIONS IN THE CASE OF CIT V/S DHANRAJGIRI RAJA NARSINHGIRI (1973) 91 ITR 544 (SC) AND VOLTAMP TRANSFORMERS PRIVATE LIMIT ED V/S C1T (1981) 129 ITR 105 (GUJ) IT IS WELL SETTLED THAT IT IS NOT OPEN TO THE REVENUE TO PRESCRIBE WHAT EXPENDITURE AND IN WHAT CIRCUMSTANCES AN ASSES SEE SHOULD INCUR THE EXPENDITURE. EVERY BUSINESSMAN KNOWS HIS INTEREST B EST. CONSIDERING THE FACTS AND CIRCUMSTANCES OF THE CASE ESPECIALLY WHE N GENUINENESS OF THE EXPENDITURE HAS NOT BEEN DOUBTED AND THERE IS NO MA TERIAL BEFORE US SO AS TO ENABLE US TO TAKE A DIFFERENT VIEW IN THE MATTER WE ARE NOT INCLINED TO INTERFERE WITH THE FINDINGS OF THE LD. CIT(A). THIS VIEW OF OURS IS SUPPORTED BY THE DECISION IN THE CASE OF SASSOON J. DAVID AND CO. PVT. LIMITED.(SUPRA) WHERE IN HONBLE APEX COURT OBSERVED: :IT HAS TO BE OBSERVED HERE THAT THE EXPRESSION ' WHOLLY AND EXCLUSIVELY ' USED IN S. 10(2)(XV) OF THE ACT DOES NOT MEAN ' NEC ESSARILY '. ORDINARILY IT IS FOR THE ASSESSEE TO DECIDE WHETHER ANY EXPENDITURE SHOULD BE INCURRED IN THE COURSE OF HIS OR ITS BUSINESS. SUCH EXPENDITURE MAY BE INCURRED VOLUNTARILY AND WITHOUT ANY NECESSITY AND IF IT IS INCURRED FOR PROMOTING THE BUSINESS AND TO EARN PROFITS THE ASSESSEE CAN CLAIM DEDUCTION U NDER S. 10(2)(XV) OF THE ACT EVEN THOUGH THERE WAS NO COMPELLING NECESSITY TO IN CUR SUCH EXPENDITURE. IT IS RELEVANT TO REFER AT THIS STAGE TO THE LEGISLATI VE HISTORY OF S. 37 OF THE I.T. ACT 1961 WHICH CORRESPONDS TO S. 10(2)(XV) OF THE ACT. AN ATTEMPT WAS MADE IN THE I.T. BILL OF 1961 TO LAY DOWN THE ' NECESSITY ' OF THE EXPENDITURE AS A CONDITION FOR CLAIMING DEDUCTION UNDER S. 37. SECTI ON 37(1) IN THE BILL READ ' ANY EXPENDITURE ...... LAID OUT OR EXPENDED WHOLLY NECESSARILY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS OR PROFESSION SHAL L BE ALLOWED ...........' THE INTRODUCTION OF THE WORD ' NECESSARILY ' IN THE ABO VE SECTION RESULTED IN PUBLIC PROTEST. CONSEQUENTLY WHEN S. 37 WAS FINALLY ENACT ED INTO LAW THE WORD ' NECESSARILY ' CAME TO BE DROPPED. THE FACT THAT SOM EBODY OTHER THAN THE ASSESSEE IS ALSO BENEFITED BY THE EXPENDITURE SHOUL D NOT COME IN THE WAY OF AN EXPENDITURE BEING ALLOWED BY WAY OF DEDUCTION UN DER S.10(2)(XV) OF THE ACT IF IT SATISFIES OTHERWISE THE TESTS LAID DOWN B Y LAW. THIS VIEW IS IN ACCORD WITH THE FOLLOWING OBSERVATIONS MADE BY THIS COURT IN CIT V. CHANDULAL KESHAVLAL & CO. [1960] 3 SCR 38 AT PAGE 48 ; 38 ITR 601 610 (SC) : ' ANOTHER FACT THAT EMERGES FROM THESE CASES IS THA T IF THE EXPENSE IS INCURRED FOR FOSTERING THE BUSINESS OF ANOTHER ONLY OR WAS MADE BY WAY OF I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 28 DISTRIBUTION OF PROFITS OR WAS WHOLLY GRATUITOUS OR FOR SOME IMPROPER OR OBLIQUE PURPOSE OUTSIDE THE COURSE OF BUSINESS THEN THE EXPENSE IS NOT DEDUCTIBLE. IN DECIDING WHETHER A PAYMENT OF MONEY IS A DEDUCTIBLE EXPENDITURE ONE HAS TO TAKE INTO CONSIDERATION QUES TIONS OF COMMERCIAL EXPEDIENCY AND THE PRINCIPLES OF ORDINARY COMMERCIA L TRADING. IF THE PAYMENT OF EXPENDITURE IS INCURRED FOR THE PURPOSE OF THE T RADE OF THE ASSESSEE IT DOES NOT MATTER THAT THE PAYMENT MAY INURE TO THE BENEFI T OF A THIRD PARTY (USHER'S WILTSHIRE BREWERY LTD. V. BRUCE [1914) 6 TC 399 (HL ). ANOTHER TEST IS WHETHER THE TRANSACTION IS PROPERLY ENTERED INTO AS A PART OF THE ASSESSEE'S LEGITIMATE COMMERCIAL UNDERTAKING IN ORDER TO FACILITATE THE C ARRYING ON OF ITS BUSINESS ; AND IT IS IMMATERIAL THAT A THIRD PARTY ALSO BENEFI TS THEREBY (EASTERN INVESTMENT LTD. V. CIT [1951] SCR 594 ; 20 ITR 1 (SC). BUT IN EVERY CASE IT IS A QUESTION OF FACT WHETHER THE EXPENDITURE WAS E XPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF TRADE OR BUSINESS OF THE ASSESSEE. ' 14.1 IN VIEW OF THE FOREGOING WE DO NOT FIND A NY MERIT IN THE GROUND NOS. 1 TO 4 IN THE APPEAL OF THE REVENUE EXPENDITURE HAVING BEEN INCURRED FOR PROMOTING THE BUSINESS AN D TO EARN PROFITS. 15. GROUND NO. 5 IN ITA NOS. 3003 & 3006/AHD./20 09 GROUND NO. 6 IN 3004/AHD./2009 GROUND NO. 4 IN ITA NOS. 3005 & 3007/AHD./2009 AND GROUND NOS. 5 & 6 IN ITA NO.3019 /AHD./2009 BEING GENERAL IN NATURE DO NOT REQUIRE ANY SEPARAT E ADJUDICATION WHILE NO ADDITIONAL GROUND HAVING BEEN RAISED IN TE RMS OF RESIDUARY GROUND NO. 6 IN ITA NOS. 3003 3004 & 300 6/AHD./2009 AND GROUND NO. 5 IN ITA NOS. 3005 & 3007/AHD./2009 ALL THESE GROUNDS ARE DISMISSED. 16. IN THE RESULT APPEALS IN ITA NO.3003 3004 & 3006/AHD/2009 ARE ALLOWED FOR STATISTICAL PURPOSES WHILE APPEALS IN I TA NOS. 3005 & 3307/AHD/2009 ARE PARTLY ALLOWED. THE APPEAL OF THE REVENUE IN ITA NO. 3019/AHD./2009 IS DISMISSED. I.T.A. NO.3003 TO 3007 & 3019/AHD/2009 29 17. SINCE APPEALS BY THESE ASSESSEES HAVE BEEN DISPOSED AS INDICATED ABOVE CORRESPONDING STAY PE TITIONS DO NOT SURVIVE AND BECOME INFRUCTUOUS. ORDER PRONOUNCED ON THIS 26TH DAY OF MARCH 2010. SD/- SD/- (BHAVNESH SAINI) (A.N. PAHUJA) JUDICIAL MEMBER ACCOUNTANT MEMBER AHMEDABAD DATED: 26TH MARCH 2010 PK/- COPY TO: 1. THE ASSESSEE 2. DY.CIT CENTRAL CIRCLE-2 SURAT 3. CIT(A)-II AHMEDABAD 4. CIT CONCERNED 5. DR A BENCH BY ORDER ASSISTANT REGISTRAR ITAT AHMEDABAD