Synbiotics Ltd., Vadodara V. Dy. Commissioner Of Income Tax, Circle- 2(1)(1), Vadodara

CO 35/AHD/2022

AI Insights

The case involves multiple appeals and cross objections between the Department of Income Tax and Synbiotics Ltd. concerning the assessment year 1994-95. The primary issues revolved around the disallowance of corporate service charges, service charges paid to a division of the holding company, and the alleged unaccounted production and sale of pharmaceuticals. The Assessing Officer had initially made substantial additions to the assessee's income, which were later deleted by the CIT(Appeals). The Department appealed against these deletions, leading to the current proceedings before the Tribunal. The Tribunal examined the evidence and arguments presented, including the compliance with previous ITAT directions and the substantiation of the expenses claimed by the assessee.

• Counselvise Citation: [2023] 140 COUNSELVISE.COM (IT) 131484 (ITAT-AHMEDABAD)
• Duration Of Justice: 10 month(s) 1 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 30-10-2023
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Next Hearing Date: 24-10-2023
• Assessment Year: 1994-1995
• Appeal Filed On: 29-12-2022
• Other Referred Cases: Purushottam Khatri vs. CIT, Enviro Control Associated (P.) Ltd. vs. CIT, Technip Energies Italy S.P.A. vs. CIT, Voltamp Transformers (P.) Ltd. vs. CIT, Modi Xerox Ltd. vs. CIT, Nestle India Ltd. vs. CIT
• Laws Referred To: Income Tax Act
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Maximum Marginal Rate; Additional evidence; Fair market value; Set aside
• Section: 143(3); 250; 274; 13; 22

Judgement Text

THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “D” BENCH Before: Ms. Annapurna Gupta, Accountant Member And Shri Siddhartha Nautiyal, Judicial Member Th e DCIT, Circle-2 (1 )(1), Baro da (Appellant) Vs Synb iotics Ltd. Sarabhai Campus, Genda Circle, Subh anpu ra Vadodara PAN: AACCS9 831Q (Resp ondent) Synbiotics Ltd. Sarabhai Ca mpu s, Genda Circle, Subhanpura Vad odara PAN: AACCS98 31Q (Appellant) Vs The DCIT, Circle-2(1)(1 ), Baroda (Resp ondent) Asses see b y : Shri Dhrun al Bha tt & Shri Biren Shah, A. Rs. Revenue by : Dr. Da rsi Suman Ratnam, CIT- D. R. Date of hearing : 25-10 -2 023 Date of pronouncement : 31-10 -2 023 ITA No. 441/Ahd/2022 Assessment Year 1995-96 C.O. No. 35/Ahd/2022 (In ITA No. 441/Ahd/2022) Assessment Year 1995-96 I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 2 आदेश/ORDER PER : SIDDHARTHA NAUTIYAL, JUDICIAL MEMBER:- This appeal filed by the Revenue and Cross Objection filed by the assessee are against the order of National Faceless Appeal Centre (NFAC), Delhi, in proceeding u/s. 250 vide order dated 19/09/2022 passed for the assessment year 1994-95. 2. The Department has raised the following Grounds of Appeal: “1. "On the facts and in the circumstances of the case and in law the learned CIT (A) erred in deleting the addition of Rs.33,65,154/- being the amount of corporate services charges paid to Ambalal Sarabhai Enterprises Ltd, the holding company, which was disallowed by the A.O. treating the same as not paid for the business of the assessee, without appreciating that the conditions laid down by the ITAT in its directions to the AO while setting aside the matter, have not been fulfilled by the assessee". 1.1 "Whether on the facts and in the circumstances of the case, the Ld. CIT(A) is justified in deleting the addition of Rs. 33,65,154/- made by the AO being the amount of corporate services charges paid to Ambalal Sarabhai Enterprises Ltd, the holding company, without giving an opportunity to examine additional evidences to the AO?" 2. "On the facts and in the circumstances of the case and in law the learned CIT (A) erred in deleting the addition of Rs.1,00,00,000/- being the amount of services charges paid to Sarabhai Common Services, a division of the holding company, which was disallowed by the A.O. under section 40A(2)(b) of the IT. Act, treating the same as not paid for the business purpose of the assessee, without appreciating that the assessee failed to provide the details so as to examine the basis of rate charged by M/s.Sarabhai Common Services for various services and to verify the method adopted by Sarabhai Common Services for arriving at the rates for various services provided by them to the assessee, as directed by the Hon'ble ITAT? I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 3 2.1 "Whether on the facts and in the circumstances of the case, the Ld.CIT(A) is justified in deleting the addition of Rs.1,00,00,000/- made by the AO being the amount of services charges paid to Sarabhai Common Services, a division of the holding company, without giving an opportunity to examine additional evidences to the AO?." 3. "On the facts and in the circumstances of the case and in law the learned CIT (A) erred in deleting the addition of Rs.4,56,56,380/- being the value of unaccounted production and sale of Streptomycin and Tetracycline without appreciating the fact that the assessee could not produce any evidence before the AO to prove the captive consumption as directed by the Hon'ble ITAT?" 3.1 "Whether on the facts and in the circumstances of the case, the Ld.CIT(A) is justified in deleting the addition of Rs.4,56,56,380/- made by the AO being the value of unaccounted production and sale of Streptomycin and Tetracycline, without giving an opportunity to examine additional evidences to the AO. ? 4. The appellant craves leaves to add, modify, amend or alter any grounds of appeal at the time of, or before, the hearing of appeal. It is prayed that the order of the CIT(A) on the above issues be set-side and that of the Assessing Officer be restored.” 3. The assessee has raised the following Grounds of Cross Appeal: “1. In law and in the facts and circumstances of the case, the learned CIT(A) has erred in confirming the disallowance of expenses of Rs.19,47,252 made by the Assessing Officer on account of salary of employees deputed to the assessee- company from its holding company Ambalal Sarabhai Enterprises Ltd. just on the ground that the assessee could submit deputation letters pertaining to only 11 employees out of 25 employees deputed to the assessee-company. 2. In law and in the facts and circumstances of the case, the learned CIT(A) has failed to appreciate that : (i) the details of all 25 employees giving their names, designation, nature of work done, salary etc. were on record; (ii) the assessee-company could not submit such appointment letter as it pertained to more than 20 years and such record was destroyed and was not available. In such circumstances, having regard to ratio of decision in the case of Purushottam Khatri 312 CTR 323 (SC), adverse view should not be taken. I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 4 (iii) the recovery of salary of such employees was recorded by holding company in their books which was actual amount of salary paid and the same was credited in the books of ASE Ltd. who is being taxed at maximum marginal rate and there is thus no tax evasion. (iv) Similar reimbursement of deputed employees was being made in the earlier years and was allowed by the Assessing Officer. 3. Having regard to the facts and circumstances of the assessee's case the learned CIT(A) ought to have deleted such disallowance. 4. The respondent craves leave to add, alter, amend and/or withdraw any ground or grounds of cross objection either before or during the course of hearing of the same.” 4. We shall first take up the Department is Grounds of appeal. Brief history of the present appeals 5. The brief facts of the case are that the original assessment order in this case was passed on 31.3.1997 u/s 143(3) determining total income at Rs. 1,29,02,948, as against the returned income of Rs. Nil. In that order, the AO made additions and determined total income of Rs.8,75,89,774/- against which he allowed set off of unabsorbed losses of earlier years amounting to Rs.7,46,91,326. The CIT(A)-3, Baroda, vide order dated 8.8.2002 allowed the appeal and the additions made by the AO were deleted. The Department carried the matter to the ITAT against the order of the CIT(A). In the Departmental appeal, the grounds pertained to the following additions which were deleted by the CIT(A): I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 5 i) Disallowance of Rs.33,65,154/- of corporate service charges paid to Ambalal Sarabhai Enterprises Ltd., the holding company of the appellant. ii) Disallowance of Rs.26,47,252 being the amount of reimbursement of salary of staff of holding company deputed to the appellant. iii) Disallowance of Rs. 1,00,00,000 out of service charges paid to Sarabhai Chemical Ltd., a division of Ambalal Sarabhai Ltd. us.40A(2)(b) of the Act. iv) Disallowance of Rs.50,00,000 being the service charges paid to Sarabhai Chemicals u/s.40A(2)(b). v) Disallowance of interest of Rs.32,31,270 on account of interest free advances given to a subsidiary company. vi) Addition of Rs.4,56,56,380 for the alleged unaccounted production & sale of Streptomycin and Tetracycline. 5.1 The Hon'ble ITAT, Ahmedabad Bench vide order dated 23.3.2012 in respect of the Departmental appeal, set aside the some issues back to the AO. While doing so, they have made certain observations and directions in their order. The Ld. Assessing Officer in the assessment order u/s 143(3) r.w.s. 254 of the Act, has again made additions in respect of the 4 issues. the assessee filed appeal before Ld. CIT(Appeals) and relief was afforded to the assessee with respect to three issues, against which the Department is in appeal before us and in respect of one issue, the assessee is in appeal before us. I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 6 6. We shall now discuss the Department’s appeal in respect of the aforesaid issues. Grounds Number 1: Ld CIT (A) erred in deleting the addition of Rs.33,65,154/- being the amount of corporate services charges paid to Ambalal Sarabhai Enterprises Ltd 7. The brief facts in relation to this ground of appeal are that the assessee paid service charges to its holding company for advisory services on corporate matters being provided by the management and senior executives of the holding company. The assessing officer disallowed the claim on the ground that the details of services rendered were not provided and therefore the aforesaid expenses were not allowed to the assessee. In the first round of appeal, Ld. CIT(Appeals) allowed the appeal of the assessee on the ground that this issue was covered in favour of the assessee for earlier assessment years, more particularly assessment years 1980-81 to 1990-91, 1992-93 and 1993-94. Relying on the orders of Ld. CIT(Appeals) for the aforesaid earlier years, Ld. CIT(Appeals) in the first round of appeal allowed the appeal of the assessee on this issue. In the Department appeal against the aforesaid issue, ITAT set aside the matter to the file of AO to examine the basis of expenses allowed in the earlier years and the basis for allowability in the present year. In the remand proceedings, AO again confirmed the original addition holding that the assessee has not furnished comparative position of these expenses for earlier years as directed by ITAT. In the second round of appeal, Ld. CIT(Appeals) allowed the appeal of the assessee with the following observations: I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 7 I have examined the issue in great depth and perused the paper book filed by the assessee. I find that pages 10 to 24 of the PB contain evidence in respect of this ground of appeal. At this stage, it is to be noted that the total expenditure of Rs 33,65,154 is broken up into 3 parts. Rs 30,12,298 which is Corporate Service Charges debited to ASE Ltd, Rs 1,20,000 being Management Audit Services debited to ASE Ltd and Rs 2,02,886 paid to BOEPL (Business Executives Organisation Pvt Ltd - another group company). These details are available on page 23 of the PB filed before the CIT(A) & ITAT in the original appeal as well as before the AO in the set aside assessment and before me in the present faceless appeal. The debit notes for the same are from pages 17 to 22 of the PB. Page 24 of the PB is the details of Where allocation of service charges for the AY 2003-04, which the assessee has filed to strengthen his claim that these expenses are charged to all group companies every year and that the basis of charge every year is the same. Pages 10 to 14 of the PB are the agreements providing the authority for such charge. I find that that the assessee vide letter dated 17/02/1997 addressed to the then DCIT (Asst) Special Range 7, Ahmedabad has submitted the agreement outlining the scope of services rendered by the parent company to the assessee. The services rendered by ASE Ltd include proposals for foreign collaboration, finance and banking, insurance, legal & taxation, secretarial services and Management Audit. The agreement is at pages 10 to 13 of the PB. Page 14 of the PB is a separate agreement with BOEPL which provides services of I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 8 Corporate planning, licensing, HR as well as Legal & taxation. In these agreements, it is clearly mentioned that the basis of charge is the ratio of turnover of each group company and that the costs would be allocated based on such turnover key. The assessee has also furnished the allocation of these service charges between group companies at pages 15 & 16 of the PB. The assessee has also furnished the basis of apportionment of service charges between various group companies for the AY 2003-04 to prove that the basis of allocation every year is the same, which is the turnover ratio of group companies. Given this evidence, I am of the view that the 1st direction of the ITAT is satisfied, that is to say, the basis of charge is on a sound footing, without any mark up, remains the same every year and is based on the turnover ratio. As regards the other direction of the ITAT that the AO examine the comparative position, the assessee has stated that there are no records available as the matter is very old (about 20 years). The /op comparative position is nothing but examination of the basis of charge of earlier years vis-à-vis this year. On an examination of the evidence on record, I am of the view that the assessee has discharged his burden by providing details of AY 2003- 04, which even though is a later year, but the basis of allocation in that year being the same as in the present AY, surely is persuasive in nature. On a thoughtful consideration, I am of the view that the conditions laid down by the ITAT in its directions to the AO while setting aside the matter, have been fulfilled by the assessee and therefore the deduction needs to be allowed. Based on the discussion I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 9 above, the disallowance of Rs. 33,65,154/- is deleted and ground No. 1 is allowed. 8. The Department is in appeal before us against the aforesaid relief provided by Ld. CIT(Appeals). The primary contention of the DR is that no new material has been furnished by the assessee in the second round of litigation and Ld. CIT(Appeals) has given relief to the assessee on the basis of the very same material on the basis of which the relief was given to the assessee in the first round of litigation. Accordingly, it was submitted that in absence of any fresh new material having been submitted by the assessee as directed ITAT, this issue needs to be adjudicated against the assessee. 9. In response, the counsel for the assessee submitted that even the ITAT in Para 7 of its order has specifically noted that corporate expenses have been recovered from the assessee and other group companies in the ratio of turnover. Further, it was submitted that even in the assessment order dated 28-03-2013, the assessing officer has admitted that the evidences in the form of debit notes have been filed by the assessee, but the claim of the assessee has been denied primarily on the ground that assessee has not given comparative position of earlier years. It was submitted that Ld. CIT(Appeals) in the second round of litigation vide order dated 19-09- 2022 has amongst various other things also observed that assessee has discharged the burden by providing the details of allocation for assessment year 2003-04 and this has been consistently followed by the Department. Accordingly, in view of the aforesaid facts, there is no I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 10 infirmity in the order of Ld. CIT(Appeals) so as to call for any interference. Further, the counsel for the assessee submitted that records of the assessee were washed out in floods and further the matter being very old, hence it was unable to produce complete details of the relevant year’s records. 10. We have heard the rival contentions and perused the material on record. In our considered view, looking into the facts of the case, we observe that Ld. CIT(Appeals) has correctly allowed the appeal of the assessee on this issue for the following reasons: firstly, the assessee has filed comparative chart for assessment year 2003-04 to strengthen its claim that these expenses are charged to all group companies every year and that the basis of charge every is the same; secondly, the assessee has furnished the relevant agreements providing authority for such charge in which it has been clearly mentioned that the basis of charge is the ratio of turnover of each group company and that the costs would be allocated based on such turnover key; thirdly, with respect to direction of the ITAT to give a comparison, the assessee has duly furnished the comparison with assessment year 2003-04, wherein similar payments as for the impugned assessment year were made and therefore, in our considered view Ld. CIT(Appeals) has correctly observed that the directions of ITAT have been met and lastly, it is also fact that this matter is very old pertaining to assessment year 1994-95 and owing to floods at that time, it was not possible for the assessee to produce the complete factual records. Accordingly, looking into the facts of the instant case, we find no I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 11 infirmity in the observations made by Ld. CIT(Appeals) while giving relief to the assessee on this issue. 11. In the result, ground number 1 of the Department’s appeal is dismissed. Ground number 2: Ld. CIT(Appeals) erred in deleting addition of 1,00,00, 000/- being the amount of service charges paid toSarabhai Common Services, a division of the company, which was disallowed by the AO under section 40A(2)(b) of the Act 12. The brief facts in relation to this ground of appeal are that the AO observed that the assessee had debited service charges of Rs.8,12,33,688/- paid to Sarabhai Common Services, a division of holding company ASE. It was explained to the AO that the Sarabhai Common Services (SCS) was providing steam, electricity, water and other common services to the industrial units situated in the same campus for which service charges was paid. The AO wanted to examine the reasonableness of these charges and called for the details of expenses incurred by SCS and the basis of expenses apportioned to different units. According to the AO, these details were not submitted and he therefore made a lump sum addition of Rs. 1 crore, holding that the service charges were unreasonable us 40A(2)(b). In first appeal, the CIT(A) noted that the appellant was not having its own infrastructure facility for such services and had used the facility from SCS, who supplied such facilities to various units and companies located in the said campus. It was also explained before the CIT(A) that there was no profit element involved in I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 12 the charges recovered by SCS. It was stated that the transactions are genuine and bona fide and that it was not open to the AO to disregard the transactions shown in the books. The appellant had also explained to the Ld. CIT(A) that section 40A(2)(b) could be invoked in a case where there is tax evasion as clarified by the Circular dated 6.7.1968. The CIT(A) was of the view that the charges are recovered for actual services at cost and there was no basis for invoking section 40A(2)(b). The CIT(A) further held that the AO has to prove that the payment is excessive or unreasonable having regard to the fair value of the goods or services for which the payment is made. The AO had not shown the basis for the conclusion that the payment to the extent of Rs. 1 crore is unreasonable. The addition was, therefore, deleted. In the Departmental appeal before the ITAT, the Hon'ble ITAT set aside the matter back to the AO, holding that even though there is no doubt the debit notes are available in the paper book, but for the purpose of examining as to whether the rate charged by the holding company is reasonable or not, basis of charging the rate in the debit notes has to be examined and looked into. In remand proceedings, the Ld. Assessing Officer again confirmed the aforesaid addition on the ground that the assessee did not furnish evidence to explain the basis of rates charged by SCS to the assessee. 13. In the second round of appeal before Ld. CIT(Appeals), he allowed the appeal of the assessee with the following observations: The assessee has filed comprehensive details in pages 274 to 276, 292-293 and 489-492 of the paper book on this issue. Pages 274-276 I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 13 show the basis of rates charged by SCS to the assessee and another group company Sarabhai M Chemicals, for the months of Oct, Dec 93 and Mar 94. It is seen that the same rate is charged to both companies for Steam, Electricity, Water & Effluent treatment. The assessee has also produced the debit notes as well as the register maintained by it for allocation of expenses between various group companies. Pages 292 & 293 pertain to the allocation of expenses on the above heads between several group companies. It is seen from the reply of the assessee as well as the details produced before me, that SCS is merely recovering the cost incurred without any mark up. Further, the cost per unit of steam, water etc is charged to each group company multiplied by the units actually consumed by them. Meaning to say, the charges are incurred by each group company based on actual consumption. To my mind, the assessee has been able to explain the basis of charge to itself as well as other group companies satisfactorily. There being no difference in rates charged to the assessee and other group companies, there is no cause to question the reasonableness of this expenditure. I also agree with the CIT(A) in the 1st round of appeal, wherein he has held that to invoke sec 40A(2)(b), the AO has to first examine the FMV of services provided, which could only be done if comparative rates of similar service provided by SCS is examined. From the details before me, it is evident that SCS provides services only to its group concerns and not to others, and further that there is no difference in rates charged. To my mind therefore there is no case to invoke sec 40A(2)(b). Lastly, it must be remembered that the AO has made an ad hoc disallowance. I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 14 Based on this discussion, I delete the disallowance of Rs 1,00,00,000 and allow ground 3. 14. The Department is in appeal before us against the aforesaid relief provided by Ld. CIT(Appeals). Before us, the Ld. DR submitted that the assessee has not been able to produce conclusive evidence to prove that reasonable amount had been charged by SCS to the assessee for the aforesaid services during the impugned year under consideration. In response, the counsel for the assessee submitted that Ld. CIT(Appeals) in the appellate order has correctly observed that same rate has been charged by the SCS to another group company and accordingly, the assessee has been able to reasonably explain the basis for the aforesaid expenses. Further, it was submitted that it is not the case of the Department that the assessee was providing these services to outside parties as well, for which the different it was charged. It was submitted that all these services have been a weird by the group companies itself and the same rate was charged by SCS to the assessee as well as to another group company. Accordingly, it was submitted that Ld. CIT(Appeals) has correctly allowed the appeal of the assessee on this issue. 15. We have heard the rival contentions and perused the material on record. In our considered view, looking into the facts of the instant case, we observe that Ld. CIT(Appeals) has correctly pointed out that the assessing officer has not brought anything on record to show/demonstrate that SCS has charged an unreasonable amount to the assessee for the I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 15 aforesaid services. The CIT observed that the assessee has given a comparative basis for similar services charged by SCS to another group company and the said services were charged on the same rate to the assessee as well. Further, there is no basis for the assessing officer to make an ad hoc disallowance of Rs. 1 crore and the same was made on a purely ad hoc basis. Further, in our view, CIT has also taken into consideration the fact that the assessee has been able to demonstrate that the services were charged by SCS to the assessee only by way of reimbursement of costs and no excessive sum was charged to the assessee for the aforesaid services. The assessing officer has not been able to bring anything conclusive to controvert the aforesaid findings made by Ld. CIT(Appeals) in the first round of appeal as well. In the case of Enviro Control Associated (P.) Ltd.43 taxmann.com 291 (Gujarat), the Gujarat High Court held that where there was no material before Assessing Officer such as comparable rates etc. to come to conclusion that excessive payment was made to sister concern which warranted disallowance/ad hoc disallowance; deduction was to be allowed. In the recent case of Technip Energies Italy S.P.A.150 taxmann.com 525 (Delhi - Trib.), the ITAT Delhi has held that AO cannot invoke Sec. 40A(2) without demonstrating excessive & unreasonable expenses. Similar findings have also been given by various Courts and Tribunals in the below cases: 2. Voltamp Transformers (P.) Ltd. v. CIT [1981] 5 Taxman 253 (Guj.); 3. CIT v. Modi Xerox Ltd. [2011] 10 taxmann.com 73/199 Taxman 271 (Allahabad) (Mag.) ; I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 16 4. CIT v. Nestle India Ltd. [2011] 11 taxmann.com 106/199 Taxman 321 (Mag.)337 ITR 103 (Delhi). 15.1 Accordingly, looking into the instant facts and the judicial precedents on the subject, we are of the considered view that Ld. CIT(Appeals) has correctly allowed the appeal of the assessee and no interference is called for in the order passed by Ld. CIT(Appeals). 16. In the result, ground number 2 of the Department’s appeal is dismissed. Ground number 3: Ld. CIT(Appeals) erred in deleting the addition of Rs.4,56,56,380/ - being the value of unaccounted production and sale of Streptomycin and Tetracycline without appreciating the fact that the assessee could not produce any evidence before the AO to prove the captive consumption as directed by the Hon'ble ITAT 17. The brief facts of the case are that during the course of assessment proceedings, AO referred to Schedule K of the Annual Accounts wherein details of opening stock, production and sales of products were given and on the basis of such details, he observed that there is a discrepancy of quantity of Streptomycin and Tetracycline. He therefore, worked out difference and held the difference in quantity as unaccounted sales of the drugs made outside the books. For quantifying the addition, the AO applied average rate of sale to the above difference in quantity and held it to be unaccounted sales. Accordingly, the addition was worked out at Rs.2,93,56,394 for Streptomycin by applying rate of Rs. 1854.92 per Kg. and addition of Rs. 1,62,99,986 for Tetracycline by applying rate of Rs. 1,432. The AO thus I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 17 made a total addition of Rs.4,56,56,380 on this count. Before the CIT(A), the assessee explained that the AO was not justified in presuming that this difference in quantity represents unaccounted sales. It was submitted that Streptomycin and Tetracycline were used for captive consumption also for manufacturing of various formulations. The assessee claimed before the CIT(A) that the same was duly disclosed in the notes to in Sch. K of the Balance Sheet. The assessee also submitted that the AO has picked up the quantitative details from the same Sch K, without giving credit to the quantity consumed for captive consumption and therefore he has wrongly presumed that the difference in quantity represents unaccounted sales. The assessee also submitted before the CIT(A) that as per Enclosure 3 of the Tax Audit Report, in quantitative details, captive consumption was clearly shown and in respect of Streptomycin captive consumption was shown 15,834 Kgs. and for Tetracycline 11,380 Kgs. Based on the above reconciliation, the CIT(A) held that there was no difference as presumed by the AO and the addition of Rs 4,56,56, 380 was deleted. In the Departmental appeal before the ITAT, the Hon'ble ITAT set aside the matter back to the AO, holding as under: "30. We have considered the rival submissions, perused the records and gone through the order of the authorities below. We find that clear finding was given by the AO in the assessment order than when the assessee was asked to explain this discrepancy, no explanation has been submitted by the assessee. The explanation in the form of theory of captive consumption was given by the assessee for the first time before the CIT(A) and no opportunity was given by the Ld CIT(A) I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 18 to the AO on this aspect by asking for a remand report. Under these facts, we feel that this issue should go to the file of the AO for fresh decision. The AO shall examine the contention of the assessee regarding unaccounted sales worked out by him and contention of the assessee that it is explained by captive consumption of these two products and if this is found correct, then no addition is called for." 18. The AO, in the set aside assessment, held that as per Sch. K it was noticed that the production includes captive consumption which is a general remark given at the heading of point no. 17. The AO further noted that Enclosure-3 of tax audit report claimed to contain details of captive consumption of two products, was not found in the file along with the Audited Accounts. Therefore, the AO did not accept the claim that Enclosure-3 was submitted along with the tax audit report and held that the captive consumption of Streptomycin and Tetracycline claimed by the assessee is not supported by documentary proof. The AO therefore retained the original addition of Rs 4,56,56,380. 19. In the second round of appeal, Ld. CIT(Appeals) deleted the additions on this issue with the following observations: 8.6 In the set aside assessment, the AO did not find Enclosure-3 of tax audit report claimed to contain details of captive consumption of two products, & therefore held that this was not filed with the TAR. He consequently rejected the claim of captive consumption. This is the only reason for the AO to reject the claim of captive consumption. I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 19 Having carefully considered the issue, I am of the view that the claim of captive consumption deserves to be accepted. The written submission of the assessee as reproduced above, speaks for itself. The reconciliation of quantities of 2 products is as per Encl 3 to Sch K of the TAR, which is filed along with original return. It is not in doubt that the Tax Audit Report is filed along with the return. Enc 3 to Sch K clearly explains the apparent discrepancy in quantities of 2 products. Before me, the assessee has filed Sch K to the TAR along with Enc 3 from pages 552 to 559 of the PB, which clearly indicates the details of captive consumption. The CIT(A) in the 1st round of appeal, has through a speaking order reconciled the discrepancy. The ITAT granted an opportunity to the AO to examine this issue once again with a specific direction to examine the captive consumption. The AO seems to have ignored this direction of the ITAT and instead held that Encl 3 is not found on file. However, the fact remains that the same was filed before both the CIT(A) as well as the ITAT, meaning thereby that Encl 3 to Sch K of the TAR was always available to the AO in the set aside proceedings. However, instead of examining the matter on merits, the AO rejected the claim as he could ostensibly not find the details in his assessment record. While doing so, the AO has overlooked the specific directions of the ITAT reproduced above, wherein it has been specifically directed that the contention of captive consumption is to be examined and if found correct, then no addition is called for. It is evident on facts that the assessee has been able to explain the discrepancy in quantities as they have been captively consumed. These facts were before the CIT(A) as I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 20 well as ITAT in the 1St round of appeal, which the AO has overlooked in the set aside assessment. To reiterate, the sole remit of the AO was to examine the claim of captive consumption on merits, which for the reasons best known to him, he has not done. In the circumstances, I am of the view that the addition needs to be deleted as the assessee has already established before the CIT(A) and ITAT in the 1st round of appeals, that 2 products have been captively consumed by him. I therefore delete the addition of Rs 4,56,56,380 and allow ground 4. 20. The Department is in appeal before us against the aforesaid relief provided by the Ld. CIT(Appeals) on this issue. Before us, the Ld. DR relied on the fact that assessee has simply given an expression that the aforesaid discrepancy is on account of captive consumption, but the details of the same have not been furnished by the assessee and the assessee has not been able to demonstrate that the apparent discrepancy is on account of captive consumption itself. In response, the counsel for the assessee submitted that the AO confirmed the addition only on the ground that enclosure 3 is not found on the file. However, it was submitted that the AO has overlooked the fact that these facts were on record before the Ld. CIT(Appeals) as well as before ITAT in the first round of appeal itself. Accordingly, it was submitted that the additions have been confirmed by the AO on an incorrect assumption of facts. Accordingly, it was submitted that looking into the instant facts, Ld. CIT(Appeals) has not erred in facts and in law in allowing the appeal of the assessee on this issue. I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 21 21. We have heard the rival contentions and perused the material on record. In our considered view, we observe that the counsel for the assessee has correctly submitted that the aforesaid details of captive consumption have been duly certified by the auditors of the company and the details thereof were filed before the assessing officer for his consideration. Further, the aforesaid company being a pharmaceutical company, the accounts of the company are subject to audit under the Companies Act, Tax Audit and also there is Cost Audit of the accounts of the company. We observe that Ld. CIT(Appeals) in the instant facts has given a categorical finding that the assessing officer has confirmed the disallowance on the basis of an incorrect assumption of facts. While allowing the relief to the assessee on this issue, Ld. CIT(Appeals) made a specific observation that the reconciliation of quantities of 2 products was as per Encl 3 to Sch K of the TAR, which was filed along with original return Accordingly, in the instant facts, in our considered view Ld. CIT(Appeals) has not erred in facts and in law in allowing the appeal of the assessee on this issue. 22. In the result, ground number 3 of the Department’s appeal is dismissed. Now we shall take up the assessee’s cross objection 23. The CO of the assessee is against the disallowance of Rs. 19,47,252/- being salaries of employees deputed to the assessee by its holding company Ambalal Sarabhai Enterprises Ltd. In the original assessment order, the AO has made this disallowance on the ground that the appellant had not I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 22 submitted evidence in support of the claim that the amount was representing reimbursement of salary of the staff of the holding company deputed to the assessee company whose services are used for the business of the appellant. In the 1st round of appeal, the CIT(A) deleted this addition of Rs.26,47,252, holding there are no new employees seconded during the year and they are the same who were seconded since many years. Nowhere in the past nor in the subsequent assessment years, the department has made any disallowance in this regard having regard to the nature of arrangement between the appellant company and ASE. The copies of the letters issued by ASE, on sample basis, addressed to the concerned seconded employee wherein the fact of deputation to the appellant, their annual remuneration, their duties with the appellant, etc are all mentioned. The assessee also maintains the attendance register of such seconded employees including their leave account, etc. Therefore, it was held that there was no reason for the Assessing Officer to deviate from the stand taken by the Assessing Officer in earlier years and make such disallowance. Accordingly, the CIT(A) held that the amount of service charges represented reimbursement of employees cost deputed to the work of the appellant and the letters addressed to them regarding deputation clearly established that services were rendered by the deputed employees to the assessee. On this basis, as well as the fact that there was no such disallowance in the past AYs, the CIT(A) deleted the addition. 24. In the Departmental appeal before the ITAT, the Hon'ble ITAT set aside the matter back to the AO for verification and examination that the I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 23 staffs were deputed and whether they have rendered any services to the assessee company. 25. In the second round before the assessing officer, he confirmed disallowance to the extent of 19,47,252/-, which was confirmed by Ld. CIT(Appeals) with the following observations: 6.6 Before me, the assessee has filed the details of deputation letters at pages 34 to 41, 42, 46, 53, 58, 63,65, 71, 77, 83, 84 & 90 of the Paper Book. These are deputation letters pertaining to 11 employees out of the 25 claimed. The salary pertaining to these employees amounts to Rs 4,93,440, which has been allowed by the AO in the set aside assessment. The AO has also fairly allowed a further deduction and restricted the disallowance to Rs 19,47,252. I find from the details filed before me that there is no change in the position and that the assessee has been able to file deputation letters pertaining to only 11 out of the 25 employees claimed. In this circumstance, I have no option but to confirm the disallowance made by the AO, as the assessee has not been able to satisfy the 1st direction of the ITAT as to whether the staff members were actually deputed. This condition is a sine-qua-non for claim of deduction. As the assessee is not able to prove the very fact of deputation, there is no question of proceeding further to examine whether any services have been rendered. The argument of the assessee that he had filed debit notes of these expenses and this should be considered sufficient proof of the fact of deputation as well as that services have been rendered cannot be I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 24 accepted in light of the specific directions of the ITAT. Both the AO as well as I am bound by those directions. Both the fact of deputation as well as rendering of services have to be proved for the assessee to be allowed this claim. As discussed above, the assessee has been able to prove the fact of deputation for only 11 of 25 employees and the AO has fairly allowed him the claim in respect of these 11 employees in the set aside assessment. In absence of deputation letters pertaining to the balance 14 employees, the assessee cannot prove that these persons were indeed deputed to him. I therefore uphold the disallowance of Rs 19,47,252 and dismiss ground 2. 26. The assessee is in appeal before us against the aforesaid order passed by Ld. CIT(Appeals) confirming the disallowance of Rs 19,47,252/-. Before us, the counsel for the assessee submitted that copies of secondment letters were produced on sample basis before the assessing officer for his verification. Further, since the assessment year under consideration is 1994- 95, it is not possible to produce all relevant records since the matter is substantially old and also owing to floods during the impugned year under consideration, it is not possible for the assessee to produce the complete records. However, secondment letters, on sample basis were produced before the assessing officer for his verification, which clearly establish the fact that the employees were in fact seconded to the assessee company and the nature of services rendered were also given in the said secondment letters. In response, DR placed reliance on the observations made by Ld. CIT(Appeals) and Assessing Officer in their respective orders, while partly confirming the addition. I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 25 27. We have heard the rival contentions and perused the material on record. In our considered view, looking into the facts of the instant case, the addition deserves to be deleted for the following reasons: firstly, the aforesaid employees had not been deputed to the assessee company during the impugned year under consideration but the employees had been seconded to the assessee company during the earlier assessment years. It were the same employees who had been seconded to the assessee company during the earlier assessment years, who continued to be in the employment of the assessee company during the impugned assessment year as well. In the first round of litigation before Ld. CIT(Appeals), he specifically observed that even in the earlier and subsequent assessment years, the payment towards secondment of employees to the assessee company had not been challenged by the Department. And therefore, following the principles of consistency, disallowance cannot be made for the impugned year under consideration since the employees had not been seconded during this year but had been seconded in the earlier years and they continue to be employed by the assessee during the impugned year under consideration. Secondly, it is also observed that the assessee had furnished copies of secondment letters on sample basis before the assessing officer for his verification. The contents of the aforesaid secondment letters have not been disputed by the assessing officer. Accordingly, in our considered view, the assessee has reasonably discharged its onus, wherein copies of secondment letters were furnished before the assessing officer for his verification. Further, the matter being very old pertaining to assessment year 1994-95, it would not be possible for the assessee to produce complete records, especially in the light of the fact that during the impugned year under consideration the records of the I.T.A No. 441/Ahd/2022 & CO 35/Ahd/2022 A.Y. 1994-95 Page No. Synbiotics Ltd. vs. DCIT 26 assessee were destroyed owing to floods. Accordingly, looking into the facts of the instant case, in our considered view, the aforesaid addition with respect to secondment of employees to the assessee company, deserves to be deleted. 28. In the result, the cross objection of the assessee company is allowed. 29. In the combined result, the appeal of the Department is dismissed and the cross objection of the assessee is allowed. Order pronounced in the open court on 31-10-2023 Sd/- Sd/- (ANNAPURNA GUPTA) (SIDDHARTHA NAUTIYAL) ACCOUNTANT MEMBER JUDICIAL MEMBER Ahmedabad : Dated 31/10/2023 आदेश क त ल प अ े षत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/ आदेश से, उप/सहायक पंजीकार आयकर अपील य अ धकरण, अहमदाबाद