MEEN BEEN ELASTOMERS P. LTD, MUMBAI v. ACIT CIR 6(3), MUMBAI

ITA 6612/MUM/2009 | 2005-2006
Pronouncement Date: 23-03-2011 | Result: Partly Allowed

Appeal Details

RSA Number 661219914 RSA 2009
Assessee PAN AADCM7401K
Bench Mumbai
Appeal Number ITA 6612/MUM/2009
Duration Of Justice 1 year(s) 2 month(s) 25 day(s)
Appellant MEEN BEEN ELASTOMERS P. LTD, MUMBAI
Respondent ACIT CIR 6(3), MUMBAI
Appeal Type Income Tax Appeal
Pronouncement Date 23-03-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted J
Tribunal Order Date 23-03-2011
Date Of Final Hearing 03-03-2011
Next Hearing Date 03-03-2011
Assessment Year 2005-2006
Appeal Filed On 29-12-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH J MUMBAI BEFORE SHRI T.R.SOOD ACCOUNTANT MEMBER & SHRI R.S.PADVEKAR JUDICIAL MEMBER. I.T.A.NO.6612/MUM/2009 - A.Y 2005-06 MEEN BEEN ELASTOMERS PVT. LTD. 56/58 1 ST FLOOR DADAJEE DACKJEE BLDG. CARIBDAS STREET MUMBAI 400 003. PAN: AADCM 7401 K VS. ASST. COMMISSIONER OF I.T. CIRCLE 6 (3) MUMBAI. AND I.T.A.NO.368 /MUM/2010 - A.Y 2005-06 ASST. COMMISSIONER OF I.T. CIRCLE 6 (3) MUMBAI VS. MEEN BEEN ELASTOMERS PVT. LTD. MUMBAI. (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI I.P.RATHI. REVENUE BY : SMT. KUSUM INGLE. O R D E R PER T.R.SOOD AM: THESE ARE CROSS APPEALS BY THE ASSESSEE AND REVENU E. ONE GROUND IS COMMON THEREFORE THESE APPEALS WERE HEA RD TOGETHER AND ARE BEING DISPOSED OF BY THIS COMMON ORDER. 3. I.T.A.NO.6612/M/09 [ASSESSEES APPEAL] : IN THIS APPEAL THE ASSESSEE HAS RAISED THE FOLLOWING TWO GROUNDS: 1. THAT THE LEARNED COMMISSIONER OF INCOME TAX [APPEAL S] HAS ERRED IN CONFIRMING THE DISALLOWANCE U/S.40A(2) AT ` `` ` .6 83 988/- OUT OF INTEREST PAID ON UNSECURED LOANS. 2. THAT THE LEARNED COMMISSIONER OF INCOME TAX [APPEAL S] HAS ERRED IN CONFIRMING THE DISALLOWANCE U/S.40A(2) AT ` `` ` .24 20 000/- OUT OF DIRECTORS REMUNERATION OF ` `` ` .51 20 000/-. 2 4. THE REVENUE HAS ALSO RAISED GROUND NO.2 IN RESPE CT OF ISSUE RAISED BY THE ASSESSEE IN GROUND NO.1 BY CHALLENGIN G THE PART RELIEF GIVEN BY THE CIT[A] BY HOLDING THAT 15% INTEREST IS REASONABLE. 5. GROUND NO.1 : AFTER HEARING BOTH THE PARTIES WE FIND THAT DURI NG ASSESSMENT PROCEEDINGS AO NOTICED THAT ASSESSEE HAD PAID TOTAL INTEREST OF ` `` ` .32 55 681/- OUT OF WHICH INTEREST AMOUNTING TO ` `` ` .30 93 366/- WAS PAID TO THE RELATIVES. IT WAS FURT HER NOTICED THAT TO ALL RELATED PARTIES INTEREST WAS PAID @ 18% EXCEPT FOR SURENDRA ELASTOMERS PVT. LTD. TO WHOM INTEREST @ 12% WAS PAI D. IT WAS FURTHER NOTICED THAT ASSESSEE WAS GETTING MONEY FROM NON RE LATED PARTIES @ 12% AND THEREFORE INTEREST PAID TO RELATIVES @ 18 % WAS HELD TO BE EXCESSIVE AND ACCORDINGLY INTEREST AMOUNTING TO ` `` ` .6 63 988/- WAS DISALLOWED BEING EXCESSIVE IN VIEW OF SEC.40A(2)(A) . 6. BEFORE THE CIT[A] IT WAS MAINLY SUBMITTED THAT I NTEREST WAS PAID @ 12% TO SURENDRA ELASTOMERS PVT. LTD. BECAUSE WITH THEM ASSESSEE WAS HAVING A RUNNING ACCOUNT. INTEREST @ 15% WAS PA ID TO SOME OTHER PARTIES BECAUSE LOANS WERE OF SMALLER AMOUNTS AND F OR SHORTER PERIOD. TO MANY OTHER PARTIES INTEREST WAS PAID @ 18%. THE LD. CIT[A] AFTER CONSIDERING THE SUBMISSIONS HELD THAT 15% INTEREST IS REASONABLE AND ACCORDINGLY ALLOWED PART RELIEF VIDE PARAS 8.3 AND 8.4 WHICH ARE AS UNDER: 8.3 I HAVE CONSIDERED THE SUBMISSIONS. THE APPELLA NTS EXPLANATION WITH RESPECT TO PAYMENT OF INTEREST AT 12% AND 15% IS ACCEPTABLE. AS REGARDS OTHER PAYMENTS THE APPELLANT HAS NOT PROVE D THAT THE BANK LENDING RATES IN THE RELEVANT PERIOD WAS HIGHER THA N 18%. IT HAS NOT IN OTHER WORDS PROVED THE CONTENTION OF THE AO THAT T HE BANK RATE DURING THE PERIOD WAS 12% WRONG. THE APPELLANT HAS NOT AL SO GIVEN ANY JUSTIFICATION OF HIGHER INTEREST PAID TO RELATED PA RTIES. CONSIDERING INCIDENTAL EXPENSES SUCH AS PROCESSING FEES SECURI TY OR COLLATERAL 3 MARGIN MONEY TIME FACTOR INVOLVED IN BANK LOANS THE RATE OF PRIVATE PARTY LOANS COULD BE PEGGED AT 15%. 8.4 IN VIEW OF THE ABOVE THE AO IS DIRECTED TO RES TRICT THE DISALLOWANCE OF INTEREST AMOUNT PAID OVER AND ABOVE THE REASONABLE RATE OF 15% U/S.40A2(B). 7. BEFORE US LD. COUNSEL OF THE ASSESSEE REITERATE D THE SUBMISSIONS MADE BEFORE THE CIT[A] AND FURTHER SUBM ITTED THAT EVEN TO OTHER PARTIES INTEREST WAS PAID @ 15% AND 18% AN D HE FILED A LIST OF PARTIES TO WHOM INTEREST HAS BEEN PAID. 8. ON THE OTHER HAND LD. DR SUBMITTED THAT TO ONE RELATED PARTY WHEN INTEREST HAS BEEN PAID AT 12% AND THEN THE OTH ER PARTY SHOULD ALSO HAVE BEEN PAID INTEREST @ 12% ONLY AND THEREF ORE ACTION OF THE AO WAS JUSTIFIED. 9. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE FIND FROM THE DETAILS OF INTEREST PAID TO RELATED AND OTHER PARTIES AS UN DER: INTEREST PAID TO RELATIVES : SR.NO. NAME INTEREST AMT. RATE OF INTEREST 1 RAVINDRA PAREKH 635037.00 18% 2 INDRA PRAKEH 336363.00 18% 3 SURENDRA PAREKH 614515.00 18% 4 MINU PAREKH 159901.00 18% 5 SUKANRAJ J. PAREKH HUF 64237.00 18% 6 SURENDRA ELASTOMERS P. LTD. 1041397.00 12% 7 S RI IMPEX LTD 241913.00 18% PAID TO OTHERS : SR.NO. NAME INTEREST AMT. RATE OF INTEREST 1 JAGRUTI SHRIMANKAR 58500.00 18% 2 SHAILESH SHRIMANKAR 36000.00 18% 3 M R GEMAWAT 33750.00 15% 4 RITIKA BHANDARI 15000.00 15% 5 SNEH BHANDARI 15000.00 15% G.M.TEXTILES 4068.00 18% 6 TOTAL INTEREST PAID 3255681.00 4 FROM THE ABOVE IT IS CLEAR THAT INTEREST HAS BEEN PAID TO SURENDRA ELASTOMERS PVT. LTD. @ 12% BECAUSE WITH THEM ASSESS EE HAD A RUNNING ACCOUNT OTHERWISE ALL PARTIES HAVE BEEN PA ID INTEREST @ 18%. BUT AT THE SAME TIME INTEREST HAD BEEN PAID TO NON RELATIVES ALSO. IN MANY CASES INTEREST @ 18% HAS BEEN PAID AND 15% HAS BEEN PAID WHERE LOANS ARE VERY SMALL. THEREFORE CONSIDERING ALL THE FACTS WE ARE OF THE VIEW THAT INTEREST SHOULD HAVE BEEN ALLOWED AT 16%. ACCORDINGLY WE SET ASIDE THE ORDER OF THE LD. CIT[ A] AND DIRECT THE AO TO ALLOW INTEREST @ 16% EVEN TO RELATIVES. THUS GRO UND NO.1 OF THE ASSESSEE IS PARTLY ALLOWED AND GROUND NO.2 OF THE R EVENUES APPEAL IS DISMISSED. 10. GROUND NO.2 : AFTER HEARING BOTH THE PARTIES WE FIND THAT DURI NG ASSESSMENT PROCEEDINGS AO NOTICED THAT ASSESSEE HAS PAID SALARY TO DIRECTORS AT ` `` ` .9 LACS TO SHRI RAVINDRA S. PAREKH ` `` ` .14.10 LACS TO SHRI INDRA S. PAREKH AND ` `` ` .28.10 LAKHS TO SHRI SURENDRA S.PAREKH. THE ASSESSEE WAS ASKED TO JUSTIFY THIS SALARY. IT WAS S TATED THAT ALL THE THREE DIRECTORS WERE RUNNING THEIR OWN BUSINESSES A ND WERE EARNING FROM THEIR PROPRIETARY BUSINESS AS PER DETAILS BELO W: NAME OF PERSON & PROP. CONCERN TURNOVER (CR) INCOME SHOWN (LACS) 1. RAVINDRA S. PAREKH PROP.MEEN BEEN ELASTOMERS 2.22 19.56 2. INDIA S. PAREKH PROP. PAREKH POLYMERS PAREKH CORPORATION 2.37 2.12 6.53 3. SURENDRA S. PAREKH PROP. SURENDRA SALES CORPORATION 1.98 4.42 TOTAL TURNOVER 8.69 SINCE AFTER CLOSING THE BUSINESS THEY HAVE STARTED THIS COMPANY AND WITH THE EFFORTS OF THE DIRECTORS THE TURNOVER OF T HE COMPANY REACHED 5 ABOUT ` `` ` .47 CRORES AND INCOME OF ` `` ` .1.4/1.5 CRORES AND ACCORDINGLY PAYMENT OF SALARY WAS JUSTIFIED. THE AO AFTER CONSI DERING THE REPLY WAS OF THE VIEW THAT SALARY SHOULD BE ALLOWED ONLY TO THE EXTENT OF PROFITS EARNED BY THE INDIVIDUAL DIRECTOR FROM THEI R PROPRIETARY CONCERNS AND ACCORDINGLY RESTRICTED THE SALARY OF EACH DIREC TOR AND FOUND EXCESSIVE SALARY OF ` `` ` .7.57 LACS IN THE CASE OF SHRI INDRAKUMAR S. PAREKH [ ` `` ` .14.10- ` `` ` .6.53] ` `` ` .23.68 LACS TO SHRI SURENDRA S.PAREKH [ ` `` ` .28.10 - ` `` ` .4.42 ] AND ADDED A SUM OF ` `` ` .31.25 LACS AS EXCESSIVE SALARY AND DISALLOWED THE SAME U/S.40A(2)(A). 11. BEFORE THE LD. CIT[A] THE SUBMISSIONS MADE BEFO RE THE AO WERE REITERATED. THE LD. CIT[A] AFTER EXAMINING THE ISSU E OBSERVED THAT THE ADDITION WAS PURELY OF ADHOC NATURE. HOWEVER HE OB SERVED THAT THOUGH SHRI RAVINDRA S. PAREKH WAS PAID THE SALARY OF ` `` ` .9 LAKHS WHO HAD THE HIGHEST INCOME FROM PROPRIETARY BUSINESS T HE OTHER TWO DIRECTORS WERE PAID A SUM OF ` `` ` .14.10 LACS AND ` `` ` .28.10 LACS FOR WHICH NO GOOD REASON WAS GIVEN. ACCORDINGLY HE HELD THAT SA LARY OF ` `` ` .9 LAKHS TO EACH OF THE DIRECTOR WAS JUSTIFIED AND ACCORDINGLY RESTRICTED THE ADDITION TO ` `` ` .24 LACS. ( ` `` ` .51 - ` `` ` .27]. 12. BEFORE US LD. COUNSEL OF THE ASSESSEE SUBMITTE D THAT THERE CANNOT BE ANY COMPARISON OF DIRECTORS SALARY WITH T HE MARKET RATE. FURTHER ALMOST SIMILAR SALARY IN FUTURE HAS BEEN HE LD TO BE ALLOWABLE BY THE DEPARTMENT BY PASSING AN ASSESSMENT ORDER U/S.1 43(3). HE ARGUED THAT FOLLOWING THE PRINCIPLE OF CONSISTENCY EVEN F OR THIS YEAR SALARY SHOULD HAVE BEEN ALLOWED FULLY. 6 13. ON THE OTHER HAND LD. DR STRONGLY SUPPORTED TH E ORDER OF THE AO AND ALSO SUBMITTED THAT IF SALARY WAS PAID AS PE R THE INCOME OF PROPRIETARY BUSINESS THEN IT WAS DEFINITELY HIGHER IN THE CASE OF SHRI INDRA S. PAREKH AND SHRI SURENDRA S.PAREKH. 14. AFTER CONSIDERING THE RIVAL SUBMISSIONS WE BAS ICALLY AGREE THAT IT IS VERY DIFFICULT TO COMPARE THE SERVICES RENDERED BY THE DIRECTORS BECAUSE SAME IS NOT COMPARABLE WITH THE SERVICES OF EQUIVALENT PROFESSIONALS AVAILABLE IN THE MARKET. HOWEVER AT THE SAME TIME THERE HAS TO BE SOME JUSTIFICATION FOR THE PAYMENT OF SAL ARY. IT IS NOTED THAT IN LATER YEARS THE SALARY HAS BEEN PAID AS UNDER: NAME OF THE DIRECTOR A.Y 2005-06 A.Y 2006-07 A.Y 2007-08 A.Y 2008-09 RAVINDRA S. PAREKH 9 18 23 60 INDRA S. PAREKH 14.10 18 30 60 SURENDRA S.PAREKH 28.10 18 24 60 TOTAL 51.20 54 78 180 THE ABOVE SALARIES HAVE BEEN ALLOWED IN ASSESSMENT ORDER PASSED U/S.143(3) AND EVEN COPY OF SUCH ORDER HAS BEEN PLA CED ON RECORD. IN OUR VIEW WHEN SUCH SALARIES HAVE BEEN ALLOWED IN TH E LATER YEAR IN SCRUTINY ASSESSMENT THERE IS NO REASON NOT TO ALLO W THESE SALARIES IN THE PRESENT YEAR. HOWEVER AT THE SAME TIME IT IS T O BE NOTED THAT IN THE CASE OF SHRI SURENDRA S. PAREKH SALARY HAS BEEN PAID AT ` `` ` .28.10 LACS IN THIS YEAR WHEREAS HE HAS BEEN PAID SALARY ONLY OF ` `` ` .18 LACS AND ` `` ` .24 LACS IN A.YRS. 2006-07 AND 2007-08. THEREFORE THERE IS NO JUSTIFICATION OF SALARY PAID AT ` `` ` .28.10 LACS. CONSIDERING ASSESSEES OWN FIGURE OF SALARY OF ` `` ` .18 LACS TO SHRI SURENDRA S. PAREKH WE HOLD THAT I N HIS CASE SALARY OF ` `` ` .18 LACS ONLY IS JUSTIFIED. IN THE CASE OF SHRI RAV INDRA 7 S. PAREKH SALARY HAS BEEN PAID AT ` `` ` .9 LAKHS IN THIS YEAR WHEREAS IN A.YRS. 2006-07 AND 2007-08 IT WAS PAID AT ` `` ` .18 LACS AND ` `` ` .24 LACS AND THEREFORE SAME IS JUSTIFIED. SIMILARLY SALARY PAI D TO SHRI INDRAKUMAR S. PAREKH IN A.Y 2006-07 IS HIGHER THAN THE PRESENT SA LARY AND THE SAME IS JUSTIFIED. THUS IN OUR VIEW ASSESSEE HAS PAID EXCESSIVE SALARY OF ONLY ` `` ` .10.10 LACS IN THE CASE OF SHRI SURENDRA S. PAREKH [ ` `` ` .28.10 - ` `` ` .18]. THEREFORE WE SET ASIDE THE ORDER OF THE LD. CIT[A] AND DIRECT THE AO TO MAKE DISALLOWANCE OF ONLY ` `` ` .10.10 LACS ON ACCOUNT OF ASSESSEES SALARY. 15. IN THE RESULT ASSESSEES APPEAL IS PARTLY ALLO WED. 16. I.T.A.NO.368/M/10 [REVENUES APPEAL] : IN THE REVENUES APPEAL FOLLOWING TWO GROUNDS HAVE BEEN RAISED: 1. ON DELETION OF DISALLOWANCE OF TRADE COMPENSATIO N AMOUNTING TO ` `` ` .2 20 00 000/-. I) THE LD. CIT[A] DID NOT CONSIDER ALL THE FACTS AN D CIRCUMSTANCES RELATING TO TRADE COMPENSATION HIGHLIGHTED IN THE REMAND REPORT WHICH HAS BEEN REPRODUCED IN PARA 6.3 OF CIT[A]S O RDER. 2. THIS GROUND HAS ALREADY BEEN ADJUDICATED BY US W HILE DEALING WITH GROUND NO.1 OF ASSESSEES APPEAL. 17. GROUND NO.1: AFTER HEARING BOTH THE PARTIES WE FIND THAT DURING ASSESSMENT PROCEEDINGS AO NOTICED THAT ASSESSEE HAS DEBITED A SUM OF ` `` ` .2.20 00 000/- AS TRADE COMPENSATION. THE ASSESSEE WAS ASKED TO GIVE DETAILS OF THIS TRADE COMPENSATION BY GIVING N AMES OF THE PERSONS TO WHOM THIS COMPENSATION WAS PAID PROOF OF PAYMEN T NATURE OF SERVICES RENDERED WITH CONFIRMATION FROM THE PARTIE S TO WHOM PAYMENT WAS MADE ETC. DESPITE VARIOUS OPPORTUNITIES GIVEN O N 10-12-2007 8 20-12-2007 AND 28-12-2007 NO DETAILS WERE FURNISHED AND THEREFORE THIS AMOUNT WAS DISALLOWED. 18. BEFORE THE CIT[A] DETAILED INFORMATION WAS SUBM ITTED AND IT WAS POINTED OUT THAT SINCE THE DIRECTOR WAS BEDRIDDEN W HEN THE INFORMATION WAS REQUIRED TO BE FURNISHED BEFORE THE AO THEREFO RE SAME COULD NOT BE FURNISHED BEFORE HIM. ACCORDINGLY LD. CIT[A] SE NT THE INFORMATION TO THE AO AND SOUGHT A REMAND REPORT. THE AO SENT HIS REPORT VIDE LETTER DATED 6-6-2009 AND OBJECTED TO THE CLAIM OF THE ASS ESSEE BECAUSE AFTER THE INFORMATION RECEIVED FROM THE ASSESSEE A O MADE ENQUIRIES WITH THE PAYEE M/S PARAS PETROFILLS LTD. AND ACCOR DING TO THE AO THAT PARTY HAD NOT ACCOUNTED FOR THIS INCOME. MANY OTHER OBJECTIONS WERE RAISED BY THE AO. AFTER CONSIDERING THE SUBMISSIONS LD. CIT[A] ALLOWED THE RELIEF TO THE ASSESSEE VIDE PARAS 6.5 TO 6.10 W HICH ARE AS UNDER: 6.5 I HAVE CONSIDERED THE SUBMISSIONS. AT PARA 7 O F THE WRITTEN AGREEMENT IT IS CLEARLY STATED THAT IF EITHER PART Y RENEGES ON THE CONTRACT THAN IT WILL BE RESPONSIBLE TO COMPENSATE THE OTHER PARTY BY PAYING THE DIFFERENTIAL AMOUNT AS PER MARKET CONDI TION. THE BILL DATED 04-08.2004 MENTIONS DELIVERY TO BE MADE WITHIN 3 MO NTHS WHICH WOULD BE END NOVEMBER 2004. AS PER THE PRICE LIST FROM YNFX YARNS AND FIBRES EXCHANGE THE PRICE WAS AS FOLLOWS : AUGUST 2004 NOVEMBER 2004 US$/TON ` `` ` ./TON US$/TON ` `` ` ./TON CAPROLACTUM 1900 87970 2350 106336 6.6 THE AGREED PRICE WAS ` `` ` .89.50/KG OR ` `` ` .89500/TON. THE APPELLANT HAD MADE THE DEAL WHEN THE INTERNATIONAL PRICE WAS ` `` ` .87 970 PER TON EXPECTING THAT THERE WOULD BE A MARGIN OF PROFIT. T HE PRICE GRAPH IN THE YNFX DOCUMENT SHOWS A SPURT IN PRICES IN SEPTEMBER 2004. THE APPELLANT HAS GIVEN A CALCULATION ACCORDING TO WHIC H IF IT SUPPLIED THE MATERIAL TO THE APPELLANT IT WOULD HAVE SUFFERED A LOSS OF ` `` ` .2.6 CRORES. THEREFORE IT AGREED TO PAY A COMPENSATION OF ` `` ` .2.20 CRORES ALSO AS PER THE AGREEMENT [PARA 6 OF THE MOU]. 6.7 THE APPELLANT HAS PROVIDED EVIDENCE OF PAYMENT MADE TO PARAS THE ACCOUNTS SHOWN NO OTHER TRANSACTIONS WITH PARAS IN SUBSEQUENT YEARS. THEREFORE THE AOS PRESUMPTION THAT THE PAY MENTS COULD RELATE 9 TO SUBSEQUENT TRANSACTIONS IS NOT CORRECT. THE PAYM ENTS ARE MADE BY CHEQUE. PARAS PETROFILLS LTD. HAS FILED A COPY OF T HE LEDGER ACCOUNT OF THE APPELLANT WHICH SHOWS IT AS A DEBTOR FOR ` `` ` .2.20 CRORES AS ON 31-03- 2005. THE PAYMENTS RECEIVED FROM THE APPELLANT IN S UBSEQUENT YEARS HAVE BEEN ADJUSTED AGAINST THIS DEBT. THE BANK STAT EMENT OF PARAS [IN CITIBANK] COPY OF WHICH HAS BEEN FILED SHOWS RECEI PT AND ENCASHMENT OF THE APPELLANTS CHEQUES. 6.8 THE JUSTIFICATION GIVEN BY THE AO FOR THE ADDIT ION IS TWO FOLD: THAT THE PAYMENTS COULD BE MADE FOR OTHER TRANSACTI ONS IN THE SUBSEQUENT YEARS AND THAT THERE WAS NO LEGALLY BIND ING AGREEMENT ON STAMP PAPER. TI CANNOT BE ASSUMED ON THE APPELLANT TO SIGN A LEGALLY BINDING AGREEMENT. IT IS A BUSINESS DEAL WHICH PERH APS HAS TO BE HONORED TO CONTINUE DOING BUSINESS IN THE MARKET. T HE OTHER PARTY HAS ENTERED INTO A CONTRACT AND WOULD OBVIOUSLY TAKE AC TION IF THE APPELLANT DOES NOT FULFILL ITS COMMITMENT. AS STATED ABOVE T HE APPELLANT KNEW IF IT HONORS THE AGREEMENT IT WOULD SUFFER A HIGHER L OSS. THERE WAS THUS REASON TO SETTLE THE ISSUE. 6.9 AS REGARDS THE PAYMENTS MADE THESE WOULD OBVIO USLY BE IN RELATION TO THIS TRANSACTION SINCE THERE IS NO EVID ENCE THAT THE APPELLANT HAD ANY OTHER TRANSACTION WITH THE SAME PARTY. 6.10 IN THE ABOVE FACTS AND CIRCUMSTANCES IT CAN B E SAID THAT THE APPELLANT HAS PROVED THE GENUINENESS AND THE BUSINE SS EXIGENCY OF THE TRANSACTION. THE DISALLOWANCE OF ` `` ` .2 20 00 000/- IS THEREFORE DELETED. 19. BEFORE US LD. DR SUBMITTED THAT BEFORE THE AO NO DETAILS WERE FILED REGARDING PAYMENT OF TRADE COMPENSATION DESPI TE OF FOUR OPPORTUNITIES GIVEN ON 6-10-07 10-12-07 20-12-07 AND 28-12-07. THIS ONLY SHOWS THAT ASSESSEE DID NOT HAVE ANY EVIDENCE TO PROVE THE TRANSACTION. LATER ON SOME DETAILS WERE FILED BEFOR E THE CIT[A] AND THE CIT[A] HAD SOUGHT THE REMAND REPORT WHICH HAS BEEN EXTRACTED BY THE CIT[A] AT PAGE-5 OF HIS ORDER. HE CARRIED US THROUG H THE CONTENTS OF THE REMAND REPORT AND SUBMITTED THAT AO HAD CONDUCT ED DETAILED INVESTIGATION AND IT HAS EMERGED THAT THE OTHER PAR TY I.E. PARAS PETROFILLS LTD. HAS NOT SHOWN THIS AMOUNT IN THEIR RECEIPT. THE AO HAD PARTICULARLY ASKED FOR ALL THE DOCUMENTS PERTAINING TO THE TRANSACTION BUT NOTHING WAS FILED EVEN DURING THE REMAND REPORT . HE ARGUED THAT 10 CIT[A] HAS MAINLY GIVEN THE RELIEF ON THE BASIS THA T IT IS NOT NECESSARY THAT AN AGREEMENT FOR THIS TRANSACTION SHOULD BE ON A STAMP PAPER AND THERE WAS DEFINITELY SOME DIFFERENCE IN THE RATES B Y THE TIME SUPPLY WAS TO BE MADE. EVEN BEFORE THE CIT[A] THERE WAS NO EVIDENCE WHY ASSESSEE COULD NOT MEET ITS COMMITMENT. EVEN THE MO U COPY OF WHICH HAS BEEN FILED AT PAGES 2 & 3 OF THE PAPER BOOK DO ES NOT SPECIFY THE AMOUNT OF COMPENSATION AND HOW THE SAME HAS BEEN RE ACHED AT THE SUM OF ` `` ` .2.20 CRORES IS NOT CLEAR. THERE IS NO CORRESPONDE NCE BETWEEN THE ASSESSEE AND THE OTHER PARTY THAT WHY ASSESSEE WAS NOT ABLE TO SUPPLY THE CONTRACTED MATERIAL OR WHEN DISPUTE WAS RAISED HOW THIS AMOUNT OF ` `` ` .2.20 CRORES WAS ARRIVED AT. ALL THESE FACTORS CLEA RLY SHOW THAT IT IS ONLY AN ACCOMMODATION ENTRY. 20. THE BENCH AFTER GOING THROUGH THE PAPER BOOK AS KED THE LD. COUNSEL OF THE ASSESSEE WHETHER HE HAS ANY OTHER MA TERIAL APART FROM THE MOU TO PROVE THE TRANSACTION. IT WAS SPECIFICAL LY ASKED WHETHER ASSESSEE CAN PROVE WHEN IT ENTERED INTO A CONTRACT FOR THE SUPPLY OF VARIOUS CHEMICALS TO M/S PARAS PETROFILLS LTD WHET HER IN TURN ASSESSEE PLACED ORDER WITH THE INTERNATIONAL PARTIES. HOW TH OSE PARTIES FAILED TO SUPPLY THE MATERIAL AND WHETHER ANY STEPS WERE TAKE N FOR FAILURE TO SUPPLY OR WHETHER ANY EFFORTS WERE MADE TO RECOUP T HE CLAIM FROM OTHER PARTIES. THE LD. COUNSEL OF THE ASSESSEE SOUG HT ONE DAYS TIME TO FILE THE RELEVANT EVIDENCE AND THEREFORE CASE WAS ADJOURNED FROM 3/3/2011 TO 4/3/2011. ON 4/3/2011 LD. COUNSEL OF TH E ASSESSEE SUBMITTED THAT THERE IS NO EVIDENCE FOR PLACING THE ORDERS WITH THE INTERNATIONAL PARTIES. THERE IS ALSO NO EVIDENCE HO W THE COMPENSATION 11 WAS SETTLED WITH M/S PARAS PETROFILLS LTD. AS THE W HOLE ISSUE OF TRADE COMPENSATION WAS SETTLED THROUGH TELEPHONIC CONVERS ATION. HE FURTHER STRONGLY SUPPORTED THE ORDER OF THE CIT[A]. HE ALSO REFERRED TO PAGES 2 AND 3 OF THE PAPER BOOK AND SUBMITTED THAT MOU WAS ENTERED BETWEEN THE ASSESSEE COMPANY AND M/S PARAS PETROFIL LS LTD FOR SUPPLY OF CERTAIN CHEMICALS AT SPECIFIED RATES. AS PER CLA USE 7 IF THE ASSESSEE FAILED TO PROCURE THE SAME OR THE PARTY FAILED TO T AKE THE DELIVERY THEN PARTIES WERE REQUIRED TO SETTLE THE MATTER WITH MUT UAL DISCUSSION AND WOULD BE RESPONSIBLE FOR MAKING THE PAYMENT BY WAY OF DIFFERENCE AS COMPENSATION. HE THEN REFERRED TO PAGES 5 TO 7 OF T HE PAPER BOOK WHICH ARE COPIES OF RATES CHARGED FOR VARIOUS CHEMI CALS WHICH SHOW THAT RATES HAD INCREASED FROM THAT OF CONTRACTED RA TES. THEN HE REFERRED TO PAGE 9 OF THE PAPER BOOK AND POINTED O UT THAT AS PER NEW RATE THE COMPENSATION WORKED OUT TO ` `` ` .2 66 43 300/- AND THE SAME WAS ULTIMATELY SETTLED AT ` `` ` .2.20 CRORES. THEREFORE SAME WAS JUSTIFIED. 21. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS CAREFU LLY AND ARE UNABLE TO AGREE WITH THE SUBMISSIONS OF THE LD. COU NSEL OF THE ASSESSEE. FIRST OF ALL NO DETAILS WERE FILED BEFOR E THE AO REGARDING TRADE COMPENSATION DESPITE VARIOUS OPPORTUNITIES. W HEN DETAILS WERE FILED BEFORE THE CIT[A] SAME WERE SENT TO THE AO F OR HIS REMAND REPORT. AO MADE ENQUIRIES AND ISSUED A LETTER U/S.1 33[6] TO M/S PARAS PETROFILLS LTD. CALLING FOR OTHER DETAILS. THE ASSE SSEE WAS ALSO DIRECTED TO FILE ALL DOCUMENTS PERTAINING TO THE TRANSACTION . FROM THE DETAILS FILED BY M/S PARAS PETROFILLS LTD. IT WAS GATHERED THAT THOUGH THEY HAVE STATED THAT THE SUM OF ` `` ` .2 20 00 000/- WAS INCLUDED WHILE CALCULATING 12 THE TAX LIABILITY BUT PERUSAL OF THE RECORDS FOR A .Y 2005-06 SHOW THAT NOWHERE INCOME OF ` `` ` .220 LAKHS FORMED PART OF THE TAXABLE INCOME. THE CREDIT SIDE OF THE P & L A/C. SHOWS TURNOVER OF ` `` ` .131 62 14 084/-. OTHER INCOME OF ` `` ` .1 35 31 994/- AND DECREASE IN STOCK OF ` `` ` .3 83 12 047. NOTE 10 OF SCHEDULE -15 OF THE ACCOUN TS STATES THAT TURNOVER INCLUDE EXCISE DUTY ON SALES PROCESSING INCOME AND COMMISSION INCOME BUT IS NOT A PART OF THE TURNOVER . FURTHER SCHEDULE-9 OF THE OTHER INCOME ALSO DOES NOT INCLUD E THE AMOUNT OF ` `` ` .220 LAKHS ON ACCOUNT OF TRADE COMPENSATION. THEREF ORE IT CAN BE SAFELY CONCLUDED THAT M/S PARAS PETROFILLS LTD. HAS NOT OFFERED THE AMOUNT OF ` `` ` .2.20 CRORES AS INCOME FOR A.Y 2005-06. AO FURTHER RAISED OBJECTION THAT THIS AGREEMENT WAS NOT ON A STAMP PA PER. HE ALSO OBSERVED THAT ENTRIES FOR THE COMPENSATION WERE REC ORDED ON 31-3- 2005 BUT NO PAYMENT WAS MADE DURING THE YEAR AND PA YMENTS HAVE BEEN MADE IN A.YRS. 2005-06 TO 2007-08. HE CONCLUDE D HIS REMAND REPORT VIDE PARA 4.1.4 WHICH IS AS UNDER: 4.1.4 IN THE LIGHT OF THE ABOVE FACTS IT IS ESTABL ISHED THAT THE PAYMENT OF TRADE COMPENSATION AMOUNTING TO ` `` ` .220 LAKHS IS A BOGUS LIABILITY CREATED BY THE ASSESSEE IN ITS BOOKS TO REDUCE THE TAXABLE PROFITS FOR THE YEAR. FIRSTLY THERE IS NO CONCRETE EVIDENCE THAT T HE SAID AMOUNT HAS BEEN OFFERED FOR TAXATION AS INCOME BY PARAS PETROF ILS. SECONDLY THE CONTRACTUAL AGREEMENT DATED 2 ND AUGUST 2004 IS NOT REGISTERED DOCUMENT AND HENCE HAS NO LEGAL SANCTITY. IT IS A M ERE AFTERTHOUGHT EXECUTED TO CREATE AN IMPRESSION OF GENUINENESS FOR THE ABOVE TRANSACTION. FURTHER THE PAYMENTS MADE IN SEVERAL INSTALMENTS TO PARAS PETROFILS IN THE SUBSEQUENT YEARS MAY PERTAIN TO AN Y OTHER TRANSACTIONS ENTERED INTO BETWEEN THE ASSESSEE AND PARAS PETROFI LS. THUS AO HAS CLEARLY OBJECTED TO THE CLAIM AS HE WA S OF THE VIEW THAT THIS WAS A BOGUS CLAIM. WE FURTHER FIND THAT ASSESS EE ENTERED INTO AN 13 MOU WITH M/S PARAS PETROFILLS LTD. ON 2-8-2004 BY W HICH M/S PARAS PETROFILLS LTD. AGREED TO PLACE THE ORDER FOR THE F OLLOWING MATERIAL: CAPROLACTUM 35 00 000/- 1 000TONS @ ` .89.25 PER KG. NAPHTHALENE FLAKES (PTA)- 1 550 TONS @ ` .37.50 PER KG. CRUDE NAPHTHALENE 2 250 TONS @ ` .34.00 PER KG. AS PER CLAUSE 7 IT WAS AGREED AS UNDER: 7) IT IS DECIDED THAT IF PARTY A FAILS TO PROCURE AND SUPPLY THE SPECIFIED QUANTITY OF THE MATERIAL OR IF PARTY B F AILS TO TAKE THE DELIVERY OF THE MATERIAL EITHER OF THE PARTIES WIL L SETTLE THE MATTER WITH MUTUAL DISCUSSION AND WILL BE RESPONSIBLE TO MAKE T HE PAYMENT BY WAY OF DIFFERENCE AMOUNT AS PER THE MARKET CONDITION AS A COMPENSATION. WE FAIL TO UNDERSTAND THAT EVEN IF A FIRM COMMITMEN T FOR SUPPLY OF MATERIAL WAS MADE BY THE ASSESSEE COMPANY INVOLVING HUGE QUANTITY AND THE TOTAL ORDER WAS IN THE RANGE OF APPROXIMATE LY ` `` ` .9 CRORES THEN WHY ASSESSEE HAS NOT PLACED ANY ORDER. EVEN IF ASSU MING THAT ASSESSEE PLACED ORDER TELEPHONICALLY AS STATED BY T HE LD. COUNSEL OF THE ASSESSEE THEN WHY THE OTHER PARTY DID NOT SUPP LY THE MATERIAL. THERE IS NOT AN IOTA OF EVIDENCE TO PROVE THAT ANY ACTION WAS TAKEN AGAINST THE THIRD PARTY BECAUSE OF WHICH ASSESSEE W AS REQUIRED TO PAY SUCH HUGE COMPENSATION TO THE BUYERS OF THE MATERIA L. WHY THE OTHER PARTY REFUSED TO ANY COMPENSATION IS NOT SUPPORTED BY ANY DOCUMENTARY EVIDENCE. IF NO ORDER WAS PLACED WITH T HE THIRD PARTY THEN HOW ASSESSEE COULD ENTER INTO A CONTRACT FOR S UPPLY OF MATERIAL IS NOT CLEAR. EVEN NO CORRESPONDENCE WITH THE BUYERS I .E. M/S PARAS PETROFILLS LTD. IS THERE THEN HOW THEY MADE A CLAI M FOR COMPENSATION? WHAT NEGOTIATIONS WERE UNDERTAKEN? NOTHING IS SUPPO RTED BY ANY EVIDENCE. SIMPLY BECAUSE ASSESSEE HAD ENTERED INTO AN MOU TO SUPPLY THE MATERIAL AND RATES HAVE INCREASED AND ASSESSEE AGREED TO PAY THE 14 COMPENSATION FOR THE SAME IS NOT BELIEVABLE STORY PARTICULARLY WHEN THE AMOUNT INVOLVED IS ` `` ` .2.20 CRORES. THEN THE AMOUNT WAS NOT PAID IMMEDIATELY AFTER THE UNDERSTANDING FOR PAYMENT OF COMPENSATION. ALL THESE FACTORS CLEARLY SHOW THAT THIS IS A MAKE BELI EVE STORY WHICH CANNOT BE ACCEPTED. THE LD. CIT[A] HAS TOTALLY MISD IRECTED HIMSELF BY OBSERVING THAT THERE IS NO NEED TO HAVE A STAMP PAP ER AGREEMENT BUT HE HAS FAILED TO SEE THAT THERE WAS NO OTHER EVIDEN CE TO SUPPORT THE CLAIM. THE LD. CIT[A] HAS SIMPLY OBSERVED THAT SINC E RATES HAVE CHANGED AND PAYMENT OF TRADE COMPENSATION WAS A BUS INESS DECISION IT CANNOT BE JUSTIFIED. BECAUSE EVEN IF THE RATES H AVE CHANGED THERE HAS TO BE SOME KIND OF NEGOTIATION WITH THE BUYERS OR THE OTHER PARTY FROM WHOM THE ASSESSEE TRIED TO PROCURE THE MATERIA L. IN THE LIGHT OF THIS DISCUSSION WE ARE OF THE VIEW THAT THIS IS A BOGUS TRANSACTION AND ACCORDINGLY WE SET ASIDE THE ORDER OF THE LD. CIT[ A] ON THIS POINT AND RESTORE THAT OF THE AO. 22. IN THE RESULT REVENUES APPEAL IS PARTLY ALLOW ED. 23. IN SUM CROSS APPEALS BY THE ASSESSEE AND REVENU E ARE PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 2 3/3/2011. SD/- SD/- (R.S.PADVEKAR) (T.R.SOOD) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI: 23/3/2011. P/-*