M/S. THIRUMALAI CHEMICALS LTD., MUMBAI v. THE JT CIT RG 1(3),

ITA 539/MUM/2008 | 2004-2005
Pronouncement Date: 29-12-2010 | Result: Partly Allowed

Appeal Details

RSA Number 53919914 RSA 2008
Bench Mumbai
Appeal Number ITA 539/MUM/2008
Duration Of Justice 2 year(s) 11 month(s) 6 day(s)
Appellant M/S. THIRUMALAI CHEMICALS LTD., MUMBAI
Respondent THE JT CIT RG 1(3),
Appeal Type Income Tax Appeal
Pronouncement Date 29-12-2010
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted J
Tribunal Order Date 29-12-2010
Date Of Final Hearing 23-12-2010
Next Hearing Date 23-12-2010
Assessment Year 2004-2005
Appeal Filed On 23-01-2008
Judgment Text
1 IN THE INCOME TAX APPELLATE TRIBUNAL J BENCH MUMBAI. [ CORAM D.K.AGARWAL JM AND PRAMOD KUMAR AM ] I.T.A NO.2203/ MUM/2007: ASSESSMENT YEAR: 2002-0 3 THIRUMALAI CHEMICALS LTD. .. APPELLANT THIRUMALAI HOUSE PLOT NO.101/102 ION ROAD NO.29 SION (E) MUMBAI. PA NO.AAACT 2015 M VS DCIT 1 (3) . RESPONDEN T MUMBAI. I.T.A NO.538/ MUM/2008: ASSESSMENT YEAR: 2003-04 THIRUMALAI CHEMICALS LTD. .. APPELLANT VS JCIT 1 (3) . RESPONDEN T MUMBAI. I.T.A NO.539/ MUM/2008: ASSESSMENT YEAR: 2004-05 THIRUMALAI CHEMICALS LTD. .. APPELLANT VS ADDL. CIT 1 (3) . RESPONDEN T MUMBAI. APPELLANT BY : SHRI HIRO RAI RESPONDENT BY : MRS KUSUM INGLE CIT DR O R D E R PER BENCH: 2 1. THESE THREE APPEALS PERTAIN TO THE SAME ASSESSEE INVOLVED SOME COMMON ISSUE THEREFORE THEY WERE HEARD TOGETHER AND ARE BEING D ISPOSED OF BY THE COMMON ORDER FOR THE SAKE OF CONVENIENCE. WE WILL FIRST TAKE ITA NO.220 3/M/2007 FOR THE ASSESSMENT YEAR 2002- 03. 2. IN THE FIRST GROUND OF APPEAL THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCE:- THE LD CIT (A) WAS NOT JUSTIFIED IN CONFIRMING THE VIEW OF THE LEARNED DY.CIT THAT WHILE COMPUTING THE BOOK PROFIT U/S.115JB AN A MOUNT OF ` . 78 85 986/- ON ACCOUNT OF DEDUCTION U/S. 80 HHC WAS NOT TO BE R EDUCED. THE REASONS GIVEN BY HIM IN THIS REGARD ARE INCORRECT. 3. LEARNED REPRESENTATIVES AGREE THAT THE AFORESAID ISSUE IS NOW COVERED IN FAVOUR OF THE ASSESSEE BY THE HONBLE SUPREME COURT JUDGEMENT IN THE CASE OF AJANTA PHARMA LTD V CIT 327 ITR 305(SC) IN FAVOUR OF THE ASSESSEE. L EARNED DEPARTMENTAL REPRESENTATIVE HOWEVER DUTIFULLY RELIED UPON THE ORDERS OF THE AU THORITIES BELOW. ONCE THE REPRESENTATIVES FAIRLY ACCEPTS THAT THE ISSUE IS CO VERED BY THE HONBLE SUPREME COURT JUDGEMENT IN THE CASE OF AJANTA PHARMA LTD (SUPRA) THERE CANNOT BE ANY GOOD REASON TO UPHOLD THE DISALLOWANCE IN QUESTION. RESPECTFULLY FOLLOWING THE DECISION OF THE HONBLE SUPREME COURT(SUPRA) WE UPHOLD THE GRIEVANCE OF TH E ASSESSEE AND DIRECT THE ASSESSING OFFICER TO GRANT DEDUCTION OF ` . 78 85 986/- ON ACCOUNT OF DEDUCTION U/S. 80 HHC I N COMPUTATION OF BOOK PROFIT UNDER SECTION 115JB AS W AS CLAIMED BY THE ASSESSEE.. 4. GROUND NO.1 IS THUS ALLOWED. 5. GROUND NO.2 RELATES TO DISALLOWANCE OF ` . 37 254/- U/S.14A ON AN ESTIMATED BASIS. THIS GROUND WAS NOT PRESSED THEREFORE THE SAME IS DISMISSED AS NOT PRESSED. 6. IN GROUND NO.3 & 4 THE ASSESSEE HAS RAISED THE FOLLOWING GRIEVANCE: 3. THE LD CIT (A) WAS NOT JUSTIFIED IN NOT ALLOWIN G A DEDUCTION OF ` . 3 22 94 771/- IN RESPECT OF EXPENDITURE ON CATALYST S IN LINE WITH THE STAND TAKEN BY THE DEPARTMENT IN THE EARLIER YEARS. THIS CLAIM IS WITHOUT PREJUDICE TO THE CLAIM OF THE APPELLANT THAT EXPENDITURE IN THE YEAR IN WHICH IT IS INCURRED. 3 4. THE LD CIT (A) WAS NOT JUSTIFIED IN NOT ALLOWING A DEDUCTION OF ` . 25 84 492/- IN RESPECT OF LEAST RENTALS IN LINE WIT H THE STAND TAKEN BY THE DEPARTMENT IN THE EARLIER YEARS. THIS CLAIM IS WIT HOUT PREJUDICE TO THE CLAIM MADE BY THE APPELLANT IN RESPECT OF LEASE RENTALS I N THE EARLIER YEARS. 7. LEARNED REPRESENTATIVE FAIRLY SUBMITS THAT THESE GRIEVANCES DO NOT SURVIVE ANY LONGER BECAUSE THESE ARE IN THE NATURE OF ALTERNATI VE CLAIMS AND THE ORIGINAL CLAIM OF THE ASSESSEE HAS BEEN UPHELD BY THE CIT (A). HE HOWEV ER SUBMITS THAT SINCE THE MATTER HAS NOT REACHED FINALITY INASMUCH AS THE ISSUE HAS TRAVELED IN APPEAL BEFORE THE HIGHER FORUM IT IS NECESSARY TO KEEP THE GRIEVANCE ALIVE AS A MEASURE OF ABUNDANT CAUTION. IN VIEW OF THE FACTS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSEE THE GRIEVANCES SO RAISED ABOVE MUST BE DISMISSED AS INFRUCTUOUS AT THIS STAGE. WE DO SO. 8. GROUND NO.3 & 4 ARE THUS DISMISSED AS INFRUCTUOU S. 9. IN GROUND NO.5 & 6 WHICH ARE INTER-LINKED THE A SSESSEE HAS RAISED THE FOLLOWING GRIEVANCES:- 5. THE LD CIT (A) WAS NOT JUSTIFIED IN CONFIRMIN G THE VIEW OF THE LEARNED DY.CIT THAT EXPENSES OF ` . 11 10 884/- WERE TO BE DISALLOWED. HE HAS ERRED IN HOLDING THAT THESE DID NOT PERTAIN TO THIS YEAR AND ARE PRIOR PERIOD EXPENSES. 6. WITHOUT PREJUDICE TO GROUND NBO.5 ABOVE NOT DIR ECTING THAT EXPENSES OF ` . 5 09 529/- DISALLOWED IN THE NEXT YEAR I.E. AY 20 03-04 AS PRIOR PERIOD EXPENSES SHOULD BE ALLOWED FOR THIS YEAR I.E. AY 2002-03. 10. LEARNED REPRESENTATIVES FAIRLY AGREED THAT THE AFORESAID GRIEVANCE SO RAISED BY THE ASSESSEE IS SQUARELY COVERED BY THE TRIBUNALS DECI SION IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEAR 1996-97 WHEREIN A CO-ORDINATE BEN CH OF THIS TRIBUNAL VIDE ORDER DATED 6 TH JANUARY 2009 INTER ALIA OBSERVED AS FOLLOWS: 32. GROUND NOS.7 AND 8 DEAL WITH THE DISALLOWANCE TOWARDS PRIOR PERIOD EXPENSES. IN GROUND NO.7 THE ASSESSEE IS ASSAILIN G THE CONFIRMATION OF DISALLOWANCE OF ` . 21 03 290/- AS PRIOR PERIOD EXPENSES WHICH AMOUNT WAS DISALLOWED BY THE AO. IN GROUND NO.8 IT IS CONTEN DED THAT IN THE NEXT YEAR I.E. 1997-98 DISALLOWANCE OF ` . 6 92 027/- HAS BEEN MADE TOWARDS PRIOR PERIOD EXPENSES. THE LEARNED A.R. SUBMITTED THAT T HE BILLS WERE RECEIVED AFTER THE CLOSE OF THE YEAR AND AS SUCH THE DEDUCTI ON OUGHT TO HAVE BEEN ALLOWED FOR `.21.03 LAKHS. HE RELIED ON SOME DECIS IONS IN SUPPORT OF HIS CASE. IN THE ALTERNATIVE IT WAS PLEADED THAT SINCE THE P ROCEEDINGS FOR AY 1996-97 4 ARE OPEN BY VIRTUE OF THESE APPEALS THE DISALLOWAN CE MADE IN THE SUCCEEDING YEAR FOR THE EXPENSES RELATABLE TO THE INSTANT YEAR BE ALLOWED. 33. WE FIND THAT THE ASSESSEE IS A COMPANY MAINTAIN ING ITS ACCOUNTS ON MERCANTILE BASIS. UNDER THIS SYSTEM OF ACCOUNTING THE EXPENSES ARE ALLOWED AS DEDUCTION ON THE BASIS OF ACCRUAL NOTWITHSTANDIN G THE DATE OF PAYMENT. THE IMPORTANT THING TO BE CONSIDERED IS THE TIMING OF CRYSTALISATION OF THE LIABILITY AND NOT WHEN THE ACTUAL PAYMENT IS MADE. IN CONTRAST IN THE CASH SYSTEM OF ACCOUNTING THE DEDUCTION IS ALLOWED TOWAR DS EXPENSES AS AND WHEN PAYMENT IS MADE IRRESPECTIVE OF THE TIME OF TH E ACCRUAL OF LIABILITY. THE DISPUTED AMOUNT REPRESENTS THE CASES IN WHICH T HE LIABILITY WAS INCURRED BY THE ASSESSEE IN THE PRECEDING YEAR BUT THE BILLS WERE RECEIVED IN THE CURRENT YEAR. AS THE ASSESSEE WAS ENTITLED TO C LAIM DEDUCTION FOR THESE AMOUNTS IN THE YEAR IN WHICH THESE WERE INCURRED B EING THE PRECEDING YEAR AND NOT THE PRESENT YEAR THE SAME CANNOT BE ALLOWE D IN THE CURRENT YEAR ON THE RECEIPT OF BILLS OR MAKING OF THE PAYMENT. IF THE PRIOR PERIOD EXPENSES ARE ALLOWED IN THE SUBSEQUENT YEAR THE VERY CONCEP T OF THE MERCANTILE SYSTEM OF ACCOUNTING WILL STAND ABROGATED. WE THE REFORE HOLD THAT THE ASSESSEE HAS BEEN RIGHTLY DENIED THE BENEFIT OF DED UCTION OF ` . 21.03 LAKHS REPRESENTING PRIOR PERIOD EXPENSES. SIMILAR VIEW HA S BEEN TAKEN BY THE JODHPUR BENCH OF THE TRIBUNAL IN THE CASE OF ARAVAL I MINERALS & CHEMICALS INDUSTRIES (P)LTD V ACIT (2007) 108 ITD 163 (JODH) TO WHICH ONE OF US (NAMELY THE AM) IS PARTY. GROUND NO.7 IS THUS NOT ALLOWED. INSOFAR AS GROUND NO.8 IS CONCERNED WE FIND MERIT IN ALLOWING DEDUCTION FOR THE REASON THAT IN THE SUCCEEDING YEAR THE SAME AMOUNT WAS DIS ALLOWED AS RELATABLE TO THE INSTANT YEAR. SINCE THE PROCEEDINGS FOR THE IN STANT YEAR ARE CONTINUING IN THE FORM OF THE PRESENT APPEALS IN OUR CONSIDERED OPINION THE ASSESSEE DESERVES DEDUCTION OF ` . 6.92 LAKHS. GROUND NO.8 IS THEREFORE ALLOWED. RESPECTFULLY FOLLOWING THE VIEWS SO ARTICULATED BY OUR ESTEEMED COLLOGUES WE DISMISS GROUND NO.5 AND ALLOW GROUND NO.6 AS THE OBSERVATIO NS MADE BY THE TRIBUNAL IN THE AFORESAID ORDER WILL APPLY MUTATIS-MUTANDIS IN THE PRESENT YEAR AS WELL. 11. GROUND NO.5 IS DISMISSED AND GROUND NO.6 IS ALL OWED. 12. GROUND NO.7 RELATES TO DISALLOWANCE OF ` . 37 254/- U/S.14A OF THE ACT. THIS GROUND WAS NOT PRESSED THEREFORE THE SAME IS DISMISSED A S NOT PRESSED. 13. IN THE RESULT APPEAL IS PARTLY ALLOWED. ITA NO.538/M/2008: AY: 2003-04: 5 14. GROUND NOS.1 & 2 ARE AS FOLLOWS: 1. THE LD CIT (A) WAS NOT JUSTIFIED IN CONFIRMIN G THE DISALLOWANCE OF EXPENSES OF ` .5 09 529/- ON THE GROUND THAT THE SAME ARE PRIOR P ERIOD EXPENSES. 2. THE LD CIT (A) WAS NOT JUSTIFIED IN NOT CONFIR MING THE CLAIM MADE BEFORE HIM THAT THE EXPENSES OF ` .1 56 588/- DISALLOWED IN A.Y. 2004-05 AS PRIOR PERIOD EXPENSES BE ALLOWED FOR THIS YEAR. HE HAS F AILED TO APPRECIATE THE CLAIM MADE BEFORE HIM IN THIS REGARD. THIS GROUND RAISED IS WITHOUT PREJUDICE TO GROUND NO.1 ABOVE. 15. GROUND NO.1 AND GROUND NO.2 ARE SAME AS GROUND NO.5 & 6 TAKEN IN THE ASSESSMENT YEAR 2002-03 ABOVE. IN LINE WITH OUR DECISION IN PARA 10 ABOVE GROUND NO.1 IS DISMISSED AND GROUND NO.2 IS ALLOWED. 16. IN GROUND NO.3 THE ASSESSEE HAS RAISED THE FOL LOWING GRIEVANCE: THE LD CIT (A) WAS NOT JUSTIFIED IN NOT ALLOWING A DEDUCTION OF ` . 25 84 492/- IN RESPECT OF LEAST RENTALS IN LINE WIT H THE STAND TAKEN BY THE DEPARTMENT IN THE EARLIER YEARS. THIS CLAIM IS WIT HOUT PREJUDICE TO THE CLAIM MADE BY THE APPELLANT IN RESPECT OF LEASE RENTALS I N THE EARLIER YEARS. 17. GROUND NO.3 IS SIMILAR TO GROUND NO.4 TAKEN IN THE ASSESSMENT YEAR 2002-03 ABOVE. IN LINE WITH OUR DECISION IN PARA 7 ABOVE GROUND N O.3 IS DISMISSED AS INFRUCTUOUS. 18. GROUND NO.4 RELATES TO CONFIRMATION OF DISALLOW ANCE OF ` . 1 65 08 264/- OUT OF BAD DEBTS AND GROUND NO. 5 RELATES TO REDUCTION IN THE DEDUCTION U/S. 80M BY ` . 44 720/-. THESE GROUNDS WERE NOT PRESSED; THEREFORE SAME ARE DISMI SSED AS NOT PRESSED. 19. IN THE RESULT APPEAL IS PARTLY ALLOWED. ITA NO.539/M/2008: AY: 2004-05: 20. GROUND NOS.1 & 2 ARE AS FOLLOWS:- 1. THE LD CIT (A) WAS NOT JUSTIFIED IN CONFIRMIN G THE DISALLOWANCE OF EXPENSES OF ` .1 56 558/- ON THE GROUND THAT THE SAME ARE PRIOR P ERIOD EXPENSES. 6 2. THE LD CIT (A) WAS NOT JUSTIFIED IN NOT DIRECT ING THAT THE EXPENSES IN A.Y. 2005-06 BE ALLOWED AS A DEDUCTION FOR THIS YEAR. T HIS GROUND RAISED IS WITHOUT PREJUDICE TO GROUND NO.1 ABOVE. 21. GROUND NO.1 AND GROUND NO.2 ARE SAME AS GROUND NO.5 & 6 TAKEN IN THE ASSESSMENT YEAR 2002-03 ABOVE. IN LINE WITH OUR DE CISION IN PARA 10 ABOVE GROUND NO.1 IS DISMISSED AND GROUND NO.2 IS ALLOWED. 22. IN GROUND NO.3 THE ASSESSEE HAS RAISED THE FOL LOWING GRIEVANCE:- THE LD CIT (A) WAS NOT JUSTIFIED IN NOT ALLOWING A DEDUCTION OF ` . 25 84 492/- IN RESPECT OF LEAST RENTALS IN LINE WIT H THE STAND TAKEN BY THE DEPARTMENT IN THE EARLIER YEARS. THIS CLAIM IS WIT HOUT PREJUDICE TO THE CLAIM MADE BY THE APPELLANT IN RESPECT OF LEASE RENTALS I N THE EARLIER YEARS. 23. GROUND NO.3 IS SIMILAR TO GROUND NO.4 TAKEN IN THE ASSESSMENT YEAR 2002-03 ABOVE. IN LINE WITH OUR DECISION IN PARA 7 ABOVE GROUND N O.3 IS DISMISSED AS INFRUCTUOUS. 24. IN GROUND NO.4 THE ASSESSEE HAS RAISED THE FOL LOWING GRIEVANCE:- THE LD CIT (A) WAS NOT JUSTIFIED IN NOT ALLOWING A DEDUCTION OF ` . 1.03.39 014/- IN RESPECT OF EXPENDITURE ON CATALYST S IN LINE WITH THE STAND TAKEN BY THE DEPARTMENT IN THE EARLIER YEARS. THIS CLAIM IS WITHOUT PREJUDICE TO THE CLAIM OF THE APPELLANT IN RESPECT OF LEASE RENTALS IN THE EARLIER YEARS . 25. GROUND NO.4 IS SIMILAR TO GROUND NO.3 TAKEN IN THE ASSESSMENT YEAR 2002-03. IN LINE WITH OUR DECISION IN THE SAID YEAR (SUPRA) THIS GR OUND IS DISMISSED AS INFRUCTUOUS. 26. IN GROUND NO.5 THE ASSESSEE HAS RAISED THE FOL LOWING GRIEVANCE:- THE LD CIT (A) WAS NOT JUSTIFIED IN CONFIRMING THE DISALLOWANCE OF ` . 13 13 365/- REPRESENTING SUNDRY BALANCES WRITTEN OF F. THE REASONS GIVEN BY HIM IN THIS REGARD ARE INCORRECT AND UNJUSTIFIED. HE HAS GROSSLY ERRED IN OMITTING TOE CONSIDER VARIOUS DECISIONS RELIED UPON BEFORE HIM IN THIS REGARD AND WHICH WERE CONTAINED IN THE PAPER BOOK BEFORE H IM. EVEN THE DECISIONS RELIED UPON BY HIM IN THIS REGARD WERE NEVER PUT TO OUR COUNSEL IN THE COURSE OF HEARING. 7 27. SO FAR AS THIS GRIEVANCE OF THE ASSESSEE IS CON CERNED MATERIAL FACTS ARE NOT DISPUTE. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE AS SESSING OFFICER NOTED THAT THE ASSESSEE HAS WRITTEN OFF SUNDRY BALANCES OF ` . 13 13 365/- WHICH REPRESENTS SHORT PAYMENT WRITT EN OFF/OLD BALANCES WRITTEN OFF WHICH WERE OUTSTANDIN G FOR A PERIOD EXCEEDING 2-3 YEARS. THIS CLAIM HOWEVER WAS DECLINED BY THE AO ON THE GROUN D THAT THE ASSESSEE IS REQUIRED TO ESTABLISH THAT THE AMOUNT HAS ACTUALLY BECOME BAD I N ORDER TO BE ELIGIBLE FOR DEDUCTION AS BAD DEBT. AGGRIEVED THE ASSESSEE CARRIED THE MATT ER IN APPEAL BEFORE THE CIT (A) BUT WITHOUT ANY SUCCESS. THE CIT (A) WAS OF THE VIEW T HAT SINCE THE ASSESSEE HAS NOT MADE ATTEMPTS TO PROVE THAT THE DEBTS HAD BECOME BAD AND RECOVERY OF THESE DUES WAS POSING DIFFICULTY THE CLAIM WAS RIGHTLY DECLINED BY THE A O. THE ASSESSEE IS NOT SATISFIED AND IS IN FURTHER APPEAL BEFORE US. 28. WE HAVE HEARD THE LEARNED REPRESENTATIVES PERU SED THE MATERIAL ON RECORD AND DULY CONSIDERED FACTUAL MATRIX OF THE CASE AS ALSO THE A PPLICABLE LEGAL POSITION. 29. THERE IS NO DISPUTE ABOUT THE FACT THAT THE AMO UNTS HAVE BEEN WRITTEN OFF IN THE PREVIOUS YEAR. THE DISPUTE IS CONFINED TO THE QUEST ION WHETHER THE ASSESSEE HAS BROUGHT ON RECORD REASONABLE EVIDENCE TO SUBSTANTIATE THAT THE AMOUNT WRITTEN OFF HAS ACTUALLY BECOME BAD AND INCAPABLE OF BEING RECOVERED FROM THE DEBTO RS CONCERNED. ON THESE FACTS AND PARTICULARLY IN VIEW OF THE HONBLE SUPREME COURT J UDGEMENT IN THE CASE TRF LTD VS CIT (323 ITR 397) WHEREIN THE HONBLE SUPREME COURT HAS HELD THAT A MERE WRITE OFF OF THE DEBT IS ENOUGH TO CLAIM DEDUCTION AS BAD DEBT AND T HAT THE ASSESSE IS REQUIRED TO ESTABLISH THAT AMOUNTS HAVE ACTUALLY BECOME BAD THE ASSESSE MUST SUCCEED IN HIS CLAIM. THE GROUND ON WHICH THE DEDUCTION HAS BEEN DECLINED IN VIEW O F THE HONBLE SUPREME COURT JUDGEMENT IN THE CASE OF TRF LTD (SUPRA) IS NO LONGER SUSTAIN ABLE IN LAW. WE THEREFORE UPHOLD THE GRIEVANCE OF THE ASSESSEE AND DIRECT THE ASSESSING OFFICER TO DELETE THE IMPUGNED DISALLOWANCE. 30. GROUND NO.5 IS THUS ALLOWED. 31. IN GROUND NO.6 THE ASSESSE HAS RAISED THE FOLL OWING GRIEVANCE:- THE LD CIT(A) WAS NOT JUSTIFIED IN CONFIRMING THE DISALLOWANCE OF RS.7 98 673/- U/S. 40A(2)(B). 8 32. THIS GRIEVANCE IS SET OUT IN A NARROW COMPASS O F UNDISPUTED FACTS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS NOTED BY THE ASSE SSING OFFICER THAT THE ASSESSE COMPANY HAD PURCHASED CERTAIN PACKING MATERIAL FROM ITS SIS TER CONCERN I.E. NARASHIMA PLASTICS. WHEN THE ASSESSE WAS REQUIRED TO DEMONSTRATE THAT T HE EXPENDITURE SO INCURRED ON PURCHASES MADE FROM NARASHIMA PLASTICS IS AT FAIR MARKET VALUE THE ASSESSE SUBMITTED DETAILS OF SIMILAR PURCHASE FROM ONE M/S. VIGRO POL YMERS. THE ASSESSE ACCEPTED THAT THE AMOUNT PAID TO NARASHIMA PLASTICS IS RS.7 98 763/- WHICH IS MORE THAN SIMILAR PURCHASE FROM M/S. VIGRO POLYMERS. THE REASONS OF SUCH EXCES S PAYMENT AS PUT BY THE ASSESSE WERE NOT TO THE SATISFACTION OF THE ASSESSING OFFICER. THE ASSESSEES CONTENTION WHICH WAS SO BRUSHED ASIDE BY THE ASSESSING OFFICER WAS THAT TH E PRICE IS NOT ONLY CRITERIA ON WHICH THE DECISION TO PURCHASE IS MADE AND THE QUALITY OF MAT ERIAL AS ALSO TIME SUPPLY IS AN IMPORTANT CRITERIA IN MAKING THE PURCHASE DECISION AND THAT P URCHASE OF PACKING MATERIAL FROM SISTER CONCERN IS AT SLIGHTLY HIGHER PRICE THAN THE PRICE CHARGED FOR THE SIMILAR PRODUCT FOR VIGRO POLYMERS WAS JUSTIFIED ON THE GROUND OF RELIABILIT Y IN TERMS OF SUPPLY. HAVING REJECTED THIS SUBMISSION AND ALSO HAVING BRUSHED ASIDE THIS SUBMI SSION THE AO PROCEEDED TO DISALLOW THE AMOUNT OF RS.7 98 863/-. AGGRIEVED THE ASSESS E CARRIED THE MATTER IN APPEAL BUT WITHOUT ANY SUCCESS. THE CIT (A) CONFIRMED THE AC TION OF THE ASSESSING OFFICER AND WHILE DOING SO OBSERVED THAT THE QUALITY AND TIMELY SUPPLY OF THE MATERIAL IS AL WAYS A CONCERN OF ANY ENTERPRISE WHICH WISHES TO COMPETE IN THE OPEN MARKET BUT THIS CANNOT BE A REASON FOR PAYMENT IN EXCESS OF FAIR MARKET VALUE TO A SISTER CONCERN. THE ASSESSEES ARGUMENT THAT IT WAS A LARGE COMPANY AND PAYMENT WAS TAX NEUTRAL FRO M THE GROUP PERSPECTIVE WAS ALSO BRUSHED ASIDE BY THE CIT (A) OBSERVING THAT THE AO NEED NOT GO INTO THE ENTIRE REALM OF THE GROUPS TAX PLANNING BEFORE A DECISION TO DISALLOW A SUM U/S.40A(2)(B) IS REACHED. THE ASSESSE IS NOT SATISFIED BY THE STAND SO TAKEN BY T HE CIT (A) AND IS IN FURTHER APPEAL BEFORE US. 33. WE HAVE HEARD THE RIVAL CONTENTIONS AND MATERIA L AVAILABLE ON RECORD. WE HAVE NOTED THAT ASSESSEES CLAIM REGARDING VARIATION IN THE QUALITY STANDARD HAVE NOT BEEN CONTROVERTED BY ANY OF THE AUTHORITIES BELOW AND AR E SIMPLY BRUSHED ASIDE. THE QUESTION OF ASCERTAINING THE FAIR MARKET VALUE FOR THE PURPOSE OF DISALLOWANCE U/S.40A(2)(B) MUST TAKE INTO ACCOUNT THE RELEVANT FACTORS SUCH AS QUALITY AND OF COURSE COMMERCIAL FACTORS SUCH AS RELIABILITY AND TIMELY SUPPLY. ANY COMPARISON WHIC H DOES NOT TAKE INTO ACCOUNT THE QUALITY OF THE PRODUCT IS CLEARLY ON A SUPERFICIAL LEVEL AN D CANNOT BE A REASON GOOD ENOUGH FOR 9 RESORTING THE DISALLOWANCE ON THE GROUND THAT PAYME NT IS EXCESSIVE OR UNREASONABLE VIS-- VIS FAIR MARKET VALUE. IT IS ALSO IMPORTANT TO BEA R IN MIND AS HAS BEEN STRENUOUSLY POINTED OUT BY LEARNED COUNSEL FOR THE ASSESSE THAT BOTH T HE RELATED ENTERPRISES ARE IN THE HIGHEST TAX BRACKETS AND EVEN IT IS ASSUMED THAT THE MARKET PRICE IS UNREASONABLE OR EXCESSIVE SUCH TRANSACTION WILL BE ENTIRELY TAX NEUTRAL. UNDER SU CH CIRCUMSTANCES THERE IS LESSER MOTIVE FOR MANIPULATING PRICE ON WHICH RELATED ORGANISATIONS E NTERED INTO TRANSACTIONS. WHILE WE TAKE INTO ACCOUNT ALL THESE FACTS IN ENTIRETY WE FIND I T DIFFICULT TO APPROVE THE DISALLOWANCE SUSTAINED BY THE CIT (A) BECAUSE NOT ONLY THAT THE AUTHORITIES BELOW ARE COMPLETELY DISREGARDED THE QUALITY ASPECT BUT ALSO AS WE HAVE NOTED ABOVE ANY VARIATION IN TRANSACTION PRICE ON THE GIVEN FACTS IS TAX NEUTRAL AND THEREFORE THERE IS NO GOOD REASON TO DO SO. IN VIEW OF THESE DISCUSSIONS AND BEARING IN MIND THE ENTIRETY OF THE CASE WE DIRECT THE AO TO DELETE THE DISALLOWANCE. THE ASSESSE GET S RELIEF ACCORDINGLY. 34. GROUND NO.6 IS THUS ALLOWED. 35. IN GROUND NO.7 THE ASSESSE HAS RAISED THE FOLL OWING GRIEVANCE: THE LD CIT (A) WAS NOT JUSTIFIED IN PRESUMING THAT AN ESTIMATED 10% OF DIVIDEND HAD BEEN INCURRED IN EARNING THE SAME. AC CORDINGLY HE HAS ERRED IN DISALLOWING AN AMOUNT OF RS.3 12 953/- U/S.14A. 36. SO FAR AS THIS GRIEVANCE IS CONCERNED IT IS SU FFICIENT TO TAKE NOTE OF THE FACT THAT THERE IS NO ALLEGATION TO THE FACT THAT THE INVESTMENT ON WHICH DIVIDENDS HAVE BEEN EARNED ARE MADE OUT OF BORROWED FUNDS AND THIS DISALLOWANCE HA S BEEN MADE BY THE ASSESSING OFFICER ONLY ON THE GROUND THAT UNREASONABLE PROPORTION OF OVERALL EXPENDITURE INCURRED BY THE ASSESSE MUST BE ATTRIBUTED TO THE EARNINGS FROM DI VIDENDS. WHILE THE AO HAS ALLOWED 25% OF THE DIVIDEND INCOME AND IN DOING SO HE HAS PURP ORTEDLY TAKEN INTO ACCOUNT OF QUANTUM OF INVESTMENT AND NUMBER OF INVESTMENT CARRIED OUT THE PURCHASE AND SALES OF THESE SHARES. THE CIT(A) HAS RESTRICTED THE DISALLOWANCE TO 10% O F THE DIVIDEND INCOME. NONE OF THE AUTHORITIES BELOW HAS GIVEN ANY REASON IN SUPPORT O F SUCH QUANTUM OF SUCH DISALLOWANCE. THE ASSESSE IS AGGRIEVED BY THE DISALLOWANCE OF ADH OC DISALLOWANCE OF 10% SO CONFIRMED BY THE CIT(A) THE ASSESSE IS IN APPEAL BEFORE US. 37. LEARNED COUNSEL FOR THE ASSESSE FAIRLY ACCEPTS THAT SOME PORTION OF THE DIVIDEND EARNINGS CAN INDEED BE DISALLOWED UNDER SECTION 14A . HE SUBMITS THAT THE QUANTUM OF DISALLOWANCE WHICH HAS BEEN ASSERTED BY CIT (A) IS CLEARLY EXCESSIVE IN THE PRESENT CASE. HE 10 POINTS OUT THAT IN THE IMMEDIATELY PRECEDING YEAR THE QUANTUM OF DISALLOWANCE IS 2% AND THE ASSESSE HAS NOT RAISED ANY GRIEVANCE AGAINST TH E SAME. HE SUBMITS THAT HE HAS NO OBJECTION TO THE SAME QUANTUM BEING ADOPTED IN THE CURRENT YEAR AS WELL. LEARNED DEPARTMENTAL REPRESENTATIVE ON THE OTHER HAND REL IED UPON THE ORDERS OF THE AUTHORITIES BELOW. 38. WE SEE SUBSTANCE IN THE LEARNED COUNSELS PLEA IN VIEW OF THE FACT THAT THE DISALLOWANCE @ 2% FROM DIVIDEND INCOME HAS BEEN REA CHED FINALITY IN OTHER YEARS AND IN VIEW OF THE FACT THAT THE DISALLOWANCE @ 10% FOR TH E PROPORTIONATE MANAGEMENT EXPENDITURE INDEED APPEARS TO BE EXCESSIVE INASMUCH AS NO REASONS HAVE BEEN ASSIGNED BY ANY OF THE AUTHORITIES BELOW TO DEMONSTRATE ANY DIR ECT EXPENSES INCURRED FOR EARNING THE DIVIDEND INCOME OR TO DEMONSTRATE THAT SUCH A HIGHE R PERCENTAGE OF OVERALL EXPENDITURE CAN INDEED BE ATTRIBUTED TO THE ACTIVITIES RELATING TO EARNING OF DIVIDEND INCOME-PARTICULARLY IT IS NOT EVEN THE CASE OF THE REVENUE THAT ANY BORROWED FUNDS HAVE BEEN USED IN MAKING THE INVESTMENT. WE THEREFORE DIRECT THE ASSESSING OF FICER TO RESTRICT THE QUANTUM OF DISALLOWANCE TO 2% OF THE DIVIDEND INCOME. THE ASS ESSE GETS RELIEF ACCORDINGLY. THIS GROUND IS PARTLY ALLOWED. 39. IN THE RESULT THE APPEAL IS PARTLY ALLOWED. PRONOUNCED IN THE OPEN COURT ON 29 TH DECEMBER 2010 SD/- (D.K.AGARWAL ) (JUDICIAL MEMBER) SD/- (PRAMOD KUMAR) (ACCOUNTANT MEMBER) MUMBAI DATED 29 TH DECEMBER 2010 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS) XXI MUMBA I 4. COMMISSIONER OF INCOME TAX CITY-1 MUMBAI 5. DEPARTMENTAL REPRESENTATIVE BENCH J MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR ITAT MUMBAI 11 12