VINYL CHEMICALS (INDIA) LTD, MUMBAI V. DCIT RG 3(3), MUMBAI

ITA 1066/MUM/2014

• Counselvise Citation: [2016] 121 COUNSELVISE.COM (IT) 3280 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-01-2016
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: F
• Assessment Year: 2010-2011
• Appeal Filed On: 17-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: AIRIJU JAY KUMAR
• Assessee Lawyers: KETAN PANCHMIA
• Keywords: Earning of tax free income; Corroborative evidences
• Section: 143(3); 14A; 37(1)

Judgement Text

F BEFORE SHRI SAKTIJIT DEY, JUDICIAL MEMBER AND SHRI RAMIT KOCHAR, ACCOUNTANT MEMBER ./ I.T.A. NO. 1066 /MUM/2014 ( / ASSESSMENT YEAR : 2010-11) VINYL CHEMICALS (INDIA) LTD., REGENT CHAMBERS, 7 TH FLOOR, JAMNALAL BAJAJ MARG, NARIMAN POINT, MUMBAI 400 021. / V. ASSTT. COMMISSIONER OF INCOME TAX- RANGE 3 (3), 6 TH FLOOR, AAYAKAR BHAVAN, MUMBAI- 400 020. ./ PAN : AAACV2410Q ( / APPELLANT ) .. ( / RESPONDENT ) ASSESSEE BY : SHRI KETAN PANCHMIA REVENUE BY : SHRI AIRIJU JAY KUMAR (D.R.) / DATE OF HEARING : 14-01-2016 / DATE OF PRONOUNCEMENT : 29-01-2016 / O R D E R PER RAMIT KOCHAR, ACCOUNTANT MEMBER THIS APPEAL, FILED BY THE ASSESSEE COMPANY, BEING ITA NO. 1066/MUM/2014, IS DIRECTED AGAINST THE ORDER DATED 25-11-2013 PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)- 7 , MUMBAI (HEREINAFTER CALLED THE CIT(A)), FOR THE ASSESSMENT YEAR 2010- 11. 2. THE GROUNDS RAISED BY THE ASSESSEE COMPANY IN TH E MEMO OF APPEAL FILED WITH THE TRIBUNAL READ AS UNDER:- I. THE CIT (A) HAS ERRED IN CONFIRMING ACTION OF A SSESSING OFFICER IN MAKING THE DISALLOWANCE U/S 14A R.W. RULE 8D OF RS. 3,06,852/-. CIT (A) FAILED TO APPRECIATE THE SUBMISSION OF THE AP PELLANT THAT THERE WAS HARDLY ANY EFFORT INVOLVED IN EARNING SUCH EXEMP T INCOME AND THE APPELLANT HAD ON ITS' OWN DISALLOWED RS. 10,000/- U/S 14A. ITA 1066/MUM/2014 2 THE APPELLANT PRAYS THAT THE DISALLOWANCE U/S 14A BE D ELETED OR SUITABLY MODIFIED. 2. THE CIT (A) HAS ERRED IN CONFIRMING ACTION OF AS SESSING OFFICER IN MAKING THE DISALLOWANCE U/S 40A(2) OF RS.6,86,351/- WITHOUT APPRECIATING THE FACTS OF THE CASE. CIT(A) ALSO FAILED TO APPRECIATE THAT THE SERVICE CHA RGES WERE PAID TO RELATED PARTY FOR SERVICES OF ITS EMPLOYEE AND THE A SSESSING OFFICER HAS DISALLOWED FULLY SUCH EXPENSES WITHOUT GIVING FINDIN G AS TO EXCESSIVENESS OR UNREASONABLENESS OF SUCH EXPENSES. THE APPELLANT PRAYS THAT THE DISALLOWANCE U/S 40A(2) BE DELETED. 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSE E COMPANY IS ENGAGED IN THE BUSINESS OF TRADING OF CHEMICALS. DURING THE CO URSE OF ASSESSMENT PROCEEDINGS U/S 143(2) READ WITH SECTION 143(3) OF THE INCOME TAX ACT,1961 (HEREINAFTER CALLED THE ACT) , IT WAS OBSERVED BY THE LEARNED ASSESSING OFFICER (HEREINAFTER CALLED THE AO) , THAT THE ASSESSEE COMPANY HAS CLAIMED DIVIDEND INCOME OF RS. 18,86,490/- AS EXEMPT INCOME U/S 10(35) OF THE INCOME TAX ACT, 1961. THE ASSESSEE COMPANY, FURTHE R, SUO-MOTU MADE DISALLOWANCE U/S 14A OF THE ACT AMOUNTING TO RS. 10 ,000/- WHICH AS PER THE AO IS PRIMA FACIE NOT AS PER RULE 8D OF THE INCOME TAX RULES, 1962. DURING THE COURSE OF ASSESSMENT PROCEEDINGS U/S 143(3) REA D WITH SECTION 143(2) OF THE ACT, THE ASSESSEE COMPANY WAS ASKED TO FURNISH THE DETAILS OF EXPENSES INCURRED FOR EARNING EXEMPT INCOME AND ALSO SHOW CA USE AS TO WHY THE EXPENSES INCURRED AND CLAIMED IN RESPECT OF EXEMPT INCOME SHOULD NOT BE DISALLOWED AS PER SECTION 14A OF THE ACT READ WITH RULE 8D OF THE INCOME TAX RULES, 1962. THE ASSESSEE COMPANY SUBMITTED THAT IT HAS NOT INCURRED ANY EXPENDITURE FOR EARNING EXEMPT INCOME AND HENCE NO DISALLOWANCE BE MADE. THE A.O. HELD THAT DISALLOWANCE OF EXPENSES WHICH A RE ATTRIBUTABLE FOR EARNING EXEMPT INCOME IS TO BE MADE AND THE SAME HA S TO BE COMPUTED AS PROVIDED IN RULE 8D OF THE INCOME TAX RULES,1962 WH ICH ARE APPLICABLE W.E.F. THE ASSESSMENT YEAR 2008-09 AS LAID DOWN BY THE HON BLE BOMBAY HIGH COURT IN THE CASE OF GODREJ & BOYCE MFG. CO. LTD.(2010) 1 94 TAXMAN 203( BOM.) AND ITA 1066/MUM/2014 3 THE DISALLOWANCE WAS COMPUTED AS UNDER FOLLOWING RU LE 8D OF INCOME TAX RULE, 1962:- 1 EXPENSES DIRECTLY ATTRIBUTABLE TO EXEMPT INCOME. RS. NIL II FORMULA: A X B/C A: EXPENSES NOT DIRECTLY RELATED TO EXEMPT INCOME (INTEREST) I.E. 936573. SINCE ASSESSEE DISALLOWED THE ENTIRE INTEREST EXPENDITURE IN THE COMPUTATION THE SAME HAS NOT BEEN CONSIDERED AGAIN. B: AVERAGE VALUE OF INVESTMENT ON THE OPENING AND CLOSING DAY OF THE PREVIOUS YEAR I.E. (25412797 + 101328169)/2 = 63370483 C. AVERAGE VALUE OF ASSETS ON THE OPENING AND CLOSING DAY OF THE PREVIOUS YEAR I.E. RS. NIL III 0.5% OF AVERAGE VALUE OF INVESTMENT ON THE OPENING AND CLOSING DAY OF THE PREVIOUS YEAR I.E. 0.5% OF B = 316852 RS. 3,16,852/- AGGREGATE OF I = III RS. 3,16,852/- THE A.O. ACCORDINGLY HELD THAT THE ASSESSEE COMPANY S ATTRIBUTABLE EXPENSES FOR EARNING EXEMPT INCOME AS PER RULE 8D OF INCOME TAX RULES, 1962 IS AT RS. 3,16,852/- WHICH IS TO BE DISALLOWED AS PER SECTION 14A OF THE ACT. HOWEVER, SINCE THE ASSESSEE COMPANY HAS SUO-MOTU DISALLOWED AN AMOUNT OF RS. 10,000 OF ITS OWN, THE DISALLOWANCE WAS RESTRICTED TO RS. 3,06,852/- AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE COMPANY B Y THE AO VIDE ASSESSMENT ORDERS DATED 04-02-2013 PASSED U/S 143(3) OF THE AC T. 4. AGGRIEVED BY THE ASSESSMENT ORDERS DATED 04-02-2 013 PASSED BY THE AO U/S 143(3) OF THE ACT , THE ASSESSEE COMPANY PRE FERRED AN APPEAL BEFORE THE CIT(A) AND SUBMITTED THAT IT HAS MADE ENTIRE SH ORT TERM INVESTMENTS IN BIRLA SUN LIFE MUTUAL FUND AND MAJORITY OF THE INVE STMENTS IS IN THE FORM OF WEEKLY DIVIDEND REINVESTMENTS PLAN. THE ASSESSEE COMPANY SUBMITTED THAT ITA 1066/MUM/2014 4 DIVIDEND WAS CREDITED 51 TIMES AND THE DIVIDEND WAS AUTOMATICALLY REINVESTED AS PER THE PLAN. THE DIRECT PURCHASES OF UNITS WER E EFFECTED ONLY 11 TIMES AND REDEMPTION (RTGS) WAS EFFECTED 7 TIMES. THERE I S NO EXPENDITURE, WHATSOEVER INCURRED ON TRANSACTIONS RELATING TO REI NVESTMENTS OF DIVIDEND, REDEMPTION OF MUTUAL FUNDS AS THEY ARE DIRECTLY EFF ECTED BY THE FUND MANAGERS. AS REGARDS PURCHASES MADE DURING THE YEAR ON SUCH 7 TRANSACTIONS, IT WAS SUBMITTED THAT THE ASSESSEE CO MPANY HAD ON ITS OWN DISALLOWED A SUM OF RS.I0,000/-. IN VIEW OF THE ABO VE, THE ASSESSEE COMPANY SUBMITTED THAT THE ACTION OF THE AO IS UNWARRANTED AND UNCALLED FOR. THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS AS MA DE BY THE ASSESSEE COMPANY HELD THAT THE ASSESSEE COMPANY HAS CLAIMED DIVIDEND INCOME OF RS. 18,86,490/- AS EXEMPT U/S 10(35) OF THE ACT. THE A SSESSEE COMPANY HAS SUO-MOTO MADE DISALLOWANCE OF RS.10,000/- U/S 14A O F THE ACT. PRIMA FACIE, THE DISALLOWANCE MADE BY THE ASSESSEE COMPANY U/S 1 4A IS NOT AS PER RULE 8-D OF INCOME TAX RULES, 1962. IN RESPONSE TO THE S PECIFIC QUERY RAISED BY THE AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS ON T HE ABOVE ASPECT, THE ASSESSEE COMPANY STATED THAT IT HAS NOT INCURRED AN Y EXPENDITURE FOR EARNING THE EXEMPT INCOME. DURING THE COURSE OF APPELLATE P ROCEEDINGS IT WAS STATED BY THE ASSESSEE COMPANY THAT THE DIVIDEND WAS AUTOM ATICALLY REINVESTED AS PER PLAN, DIRECT PURCHASES OF UNITS WERE EFFECTED O NLY 11 TIMES AND REDEMPTION (RTGS) WAS EFFECTED 7 TIMES AND THERE WA S NO EXPENDITURE INCURRED BY THE ASSESSEE COMPANY FOR EARNING EXEMPT INCOME. THE CIT(A) REFERRED TO THE DECISION OF HONBLE DELHI HIGH COUR T IN THE CASE OF IN MAXOPP INVESTMENT LTD. V. CIT (2012) 247 CTR 162(DELHI) (H C) WHEREIN IT WAS HELD THAT THE ARGUMENT THAT IF THE DOMINANT AND MAIN OB JECTIVE OF THE EXPENDITURE WAS NOT THE EARNING OF 'EXEMPT INCOME' THEN, THE EX PENDITURE CANNOT BE DISALLOWED U/S 14A, IS NOT ACCEPTABLE. IF THE EXPEN DITURE HAS A RELATION OR CONNECTION WITH OR PERTAINS TO EXEMPT INCOME , IT C ANNOT BE ALLOWED AS A DEDUCTION EVEN IF IT OTHERWISE QUALIFIES UNDER THE OTHER PROVISIONS OF THE ACT. ITA 1066/MUM/2014 5 THE CIT(A) ALSO REFERRED TO THE DECISION IN THE CAS E OF KALPATARU CONSTRUCTION OVERSEAS (P) LTD. V. CIT (2007) 13 SOT 194 (MUM.) W HEREIN IT HAS BEEN HELD THAT ALL EXPENSES CONNECTED WITH EXEMPT INCOME HAVE TO BE DISALLOWED U/S 14A OF THE ACT REGARDLESS OF WHETHER THEY ARE DIREC T OR INDIRECT, FIXED OR VARIABLE AND MANAGERIAL OR FINANCIAL IN ACCORDANCE WITH LAW. THE CIT(A) HELD THAT THE A.O. HAS ONLY TAKEN INTO ACCOUNT 0.5% OF A VERAGE VALUE OF INVESTMENTS ON THE OPENING AND CLOSING DAY OF THE P REVIOUS YEAR FOR DISALLOWANCE U/S.14A OF THE ACT AND IT COMES TO RS. 3,16,852/-. SINCE THE ASSESSEE COMPANY HAS MADE SUO-MOTO DISALLOWANCE OF RS. 10,000/-, THE A.O. HAS RIGHTLY RESTRICTED THE DISALLOWANCE TO RS.3,06, 852/- (RS.3,16,852 - RS.10,000/-) WHICH WAS REASONABLE AND THE LD. CIT( A) CONFIRMED THE SAME VIDE ORDERS DATED 25-11-2013. 5. AGGRIEVED BY THE ORDERS OF THE CIT(A) DATED 25-1 1-2013, THE ASSESSEE COMPANY IS IN APPEAL BEFORE THE TRIBUNAL. 6. THE LD. COUNSEL FOR THE ASSESSEE COMPANY SUBMITT ED THAT THE ASSESSEE COMPANY IS IN THE BUSINESS OF TRADING AND IMPORT OF CHEMICALS. THE ASSESSEE COMPANY HAS MADE INVESTMENTS IN BIRLA SUN LIFE MUTU AL FUND WHICH WERE DEPOSITED WHEN THERE IS A SURPLUS FUND WITH THE ASS ESSEE COMPANY AND DIVIDEND WAS RECEIVED DURING THE YEAR AMOUNTING TO RS. 18,86,490/- WHICH WAS CLAIMED AS EXEMPT INCOME U/S 10(35) OF THE ACT . THE ASSESSEE COMPANY HAS VOLUNTARILY OFFERED FOR DISALLOWANCE OF RS. 10, 000/- U/S 14A OF THE ACT. THERE WAS A CLOSING BALANCE OF RS. 10.13 CRORES IN THE MUTUAL FUND AS ON 31- 3-2010. THE LD. COUNSEL FOR THE ASSESSEE COMPANY I NVITED OUR ATTENTION TO PAGE 11 OF THE PAPER BOOK WHEREBY ALL THE TRANSACTI ONS WITH RESPECT TO THE BIRLA SUN LIFE MUTUAL FUND ARE REFLECTED. THE ASSES SEE COMPANY SUBMITTED THAT NO BORROWED FUNDS HAVE BEEN UTILISED FOR MAKI NG THE INVESTMENT. THE A.O. HAS TAKEN 0.5% OF AVERAGE INVESTMENTS HELD BY THE ASSESSEE COMPANY WHICH WAS DISALLOWED BY THE A.O. WHILE THE A.O. HAS NOT RECORDED ANY ITA 1066/MUM/2014 6 REASON/BASIS ON WHICH HE REJECTED THE CLAIM OF THE ASSESSEE COMPANY, HENCE, THE ASSESSEE COMPANY SUBMITTED THAT THE DISALLOWANC E OF RS. 10,000/- OFFERED BY THE ASSESSEE COMPANY SHOULD BE UPHELD. 7. THE LD. D.R., ON THE OTHER HAND, RELIED UPON THE ORDERS OF AUTHORITIES BELOW AND SUBMITTED THAT THE A.O. HAS RIGHTLY APPLI ED RULE 8D OF INCOME TAX RULES ,1962 IN THE CASE OF THE ASSESSEE COMPANY TO MAKE DISALLOWANCE U/S 14A OF THE ACT. 8. WE HAVE CONSIDERED THE RIVAL CONTENTION AND ALSO PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE OBSERVED THAT RULE 8- D OF THE INCOME TAX RULES, 1962 IS APPLICABLE FROM THE ASSESSMENT YEAR 2008-09 AS HELD BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE CASE OF GO DREJ & BOYCE MANUFACTURING CO. LTD.(SUPRA). SECTION 14A OF THE A CT STIPULATES FOR DISALLOWANCE OF AN EXPENDITURE INCURRED IN RELATION TO EARNING OF AN INCOME WHICH DOES NOT OR SHALL NOT FORM PART OF TOTAL INCO ME. THE RULE, 8D, HOWEVER, PROVIDES FOR METHOD OF DISALLOWANCE OF AN EXPENDITU RE IN RESPECT OF AN INCOME, WHICH DOES NOT OR SHALL NOT FORM PART OF TO TAL INCOME. THE ASSESSEE COMPANY HAS OFFERED SUO-MOTU VOLUNTARILY DISALLOWAN CE OF EXPENDITURE OF RS. 10,000/- WITHOUT STIPULATING THE BASIS OF ARRIVING AT THE FIGURE OF RS 10000/- FOR DISALLOWANCE OF EXPENDITURE IN RELATION TO AN I NCOME WHICH DOES NOT FORM PART OF THE INCOME OR SHALL NOT FORM PART OF TOTAL INCOME BEING EXEMPT INCOME WHICH IN THE CASE OF THE ASSESSEE COMPANY AMOUNTED TO RS.18,86,490/- BEING DIVIDEND INCOME EXEMPT U/S 10(35) OFF THE ACT. THE AO HAS NOT ACCEPTED THE DISALLOWANCE OF RS 10000/- OF EXPENDITURE OFFERED B Y THE ASSSESSEE AS NO BASIS OF ARRIVING AT FIGURE OF RS 10000/- FOR DISAL LOWANCE IS PROVIDED BY THE ASSESSEE COMPANY WHILE AD-HOC DISALLOWANCE WAS MADE BY THE ASSESSEE COMPANY. THE ASSESSEE COMPANY HAS AVERAGE INVESTMEN T OF RS 6.33 CRORES IN THE MUTUAL FUND DURING THE FINANCIAL YEAR WHICH YI ELDED EXEMPT INCOME IN THE FORM OF DIVIDEND INCOME WHICH WAS EXEMPT FROM T AX U/S 10(35) OF THE ACT. ITA 1066/MUM/2014 7 THE DECISION OF MAKING , MONITORING AND MAINTAINING INVESTMENTS NEED LOT OF CAREFUL PLANNING, STRATEGIZING, DISCUSSIONS, DELIBE RATIONS , DECISIONS MAKING PROCESSES FOR MAKING FRESH INVESTMENTS , MONITORIN G , MAINTAINING OR LIQUIDATING THE SAID INVESTMENTS WHICH INVOLVE COST S INCLUDING TIME COSTS OF THE PERSONNEL OF THE TAXPAYER. SECTION 14A OF THE A CT STIPULATE FOR DISALLOWANCE OF SAID EXPENDITURE WHICH ARE INCURRED IN RELATION TO EARNING OF EXEMPT INCOME WHILE RULE 8D OF INCOME TAX RULES, 19 62 IS A MACHINERY PROVISION WHICH PROVIDES FOR METHOD OF COMPUTING DI SALLOWANCE U/S 14A OF THE ACT . WE HAVE OBSERVED THAT T HERE WAS A CLOSING BALANCE OF RS. 10.13 CRORES IN THE MUTUAL FUND AS ON 31-3-2010 WHILE THE AVERAGE INVESTMENT HELD BY THE ASSESSEE COMPANY IN MUTUAL FUND DURING THE P REVIOUS YEAR WAS RS.6.33 CRORES. THE ASSESSEE COMPANY ALSO SUBMITTED THAT NO BORROW ED FUNDS HAVE BEEN UTILIZED FOR EARNING THE INVESTMENT . IN OUR CONSIDERED VIEW, THE AUTHORITIES BELOW HAVE RIGHTLY APPLIED THE RULE 8D OF INCOME TAX RULES, 1962 IN THE INSTANT CASE AS THE RELEVANT ASSESSMENT YEAR IS 2010-11 WHILE RULE 8D OF INCOME TAX RULES , 1962 IS APPLICABLE FR OM THE ASSESSMENT YEAR 2008-09 , KEEPING IN VIEW THE PECULIAR FACTS AND CI RCUMSTANCES OF THE CASE WHICH WE HAVE DISCUSSED HEREINABOVE IN THIS ORDER. WE DO NOT FIND ANY INFIRMITY IN THE ORDERS PASSED BY THE CIT(A) WHICH WE CONFIRM AND DISMISS THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE COMPANY IN THIS APPEAL. WE ORDER ACCORDINGLY. 9. THE NEXT GROUND RELATES TO THE DISALLOWANCE U/S 40A(2)(A) AND 37(1) OF THE ACT. FROM THE DETAILS, IT WAS OBSERVED BY THE AO THAT THE ASSESSEE COMPANY HAS MADE PAYMENT OF RS. 6,86,351/- TOWARDS SERVICE CHARGES TO M/S PIDILITE INDUSTRIES LTD., WHICH IS AN ASSOCIATE ENTITY OF THE ASSESSEE COMPANY. THE ASSESSEE COMPANY WAS ASKED TO FILE THE RELEVANT DETAILS WITH NECESSARY SUPPORTING EVIDENCE WITH RESPECT TO THE A BOVE SERVICE CHARGES. THE ASSESSEE COMPANY SUBMITTED AS UNDER:- ITA 1066/MUM/2014 8 IN THIS CONNECTION WE HAVE TO STATE THAT ONE MR. A .D UBHAYAKAR, WAS OVER ALL INCHARGE OF IMPORTS/PURCHASES AND SALE S OF RAW MATERIAL WITH THE ASSESSEE COMPANY PRIOR TO A.Y.201 0-11. DURING THE YEAR UNDER CONSIDERATION, MR. A.D UBHAYAKAR WAS TRANSFERRED TO PIDILITE INDUSTRIES. HE WAS ALSO LOOKING AFTER T HE PURCHASE/SALE ON BEHALF OF THE ASSESSEE COMPANY. DURING THE YEAR PIDILITE INDUSTRIES HAS PAID TOTAL REMUNERATION OF RS.62,25, 890/- TO SHRI. A.D UBHAYAKAR. PIDILITE INDUSTRIES RECOVERED ONLY R S.6,86,351/- BEING 10% OF THE SALARY FROM THE ASSESSEE COMPANY F OR SERVICES RENDERED BY SHRI. UBHAYAKAR. THIS AMOUNT IS QUITE R EASONABLE AND MAY BE ALLOWED AS EXPENDITURE INCURRED FOR BUSI NESS PURPOSE.' FROM THE ABOVE SUBMISSIONS, THE A.O. FOUND THAT THE ASSESSEE COMPANY FAILED TO BRING ON RECORD THE NECESSARY EVIDENCES THAT THE SERVICES OF MR. A.D.UBHAYAKAR, EMPLOYED WITH M/S.PIDILITE INDUSTRIE S LIMITED ARE REQUIRED AND AVAILED FOR MARKETING OF VAM WHICH IS SOLD BY A SSESSEE COMPANY MAINLY TO M/S. PIDILITE INDUSTRIES LTD., WITH WHOM MR. UBH AYAKAR IS SAID TO BE WORKING. M/S. PIDILITE INDUSTRIES LIMITED HOLDS 40. 64% EQUITY SHARES OF THE ASSESSEE COMPANY AND THE ENTIRE BOARD OF DIRECTORS IN BOTH COMPANIES IS COMMON INCLUDING THE MANAGING DIRECTOR OF THE COMPA NIES. M/S. PIDILITE INDUSTRIES LTD HAS RAISED DEBIT NOTES FOR THESE SO CALLED SERVICE CHARGES ON QUARTERLY BASIS FOR LUMPSUM AMOUNTS WITHOUT ANY WOR KING. NOWHERE, IN THESE DEBIT NOTES, IT IS STATED THAT THE CHARGES AR E FOR SERVICES RENDERED BY MR. UBHAYANKAR FOR MARKETING OF VAM FOR THE ASSESSEE CO MPANY. THE ASSESSEE COMPANY ALSO FAILED TO EXPLAIN THE BUSINESS EXIGENC Y FOR INCURRING SUCH EXPENSES. THUS, THERE IS NO REASONABLE BASIS FOR TH E ASSESSEE COMPANY TO CLAIM SUCH EXPENSES OF 'SERVICE CHARGES' ON THE SAL ES MADE TO ITS ASSOCIATE ENTITY I.E. M/S. PIDILITE INDUSTRIES LTD. ACCORDING LY THE A.O. DISALLOWED THE CLAIM OF SERVICE CHARGES AMOUNTING TO RS.6,86,351/- U/S 40A(2)(A) AND 37(1) OF THE ACT VIDE ASSESSMENT ORDERS DATED 04-02-2013 PASSED U/S 143(3) OF THE ACT. ITA 1066/MUM/2014 9 10. AGGRIEVED BY THE ASSESSMENT ORDERS DATED 04-02- 2013, THE ASSESSEE COMPANY FILED ITS FIRST APPEAL BEFORE THE CIT(A) A ND SUBMITTED THAT THAT THE ASSESSEE COMPANY HAD A MANUFACTURING UNIT AND A TRA DING DIVISION UPTO 31- 03-07. EFFECTIVE FROM 01-04-2007 THE MANUFACTURING DIVISION WAS DEMERGED FROM THE ASSESEE COMPANY AND MERGED WITH PIDILITE I NDUSTRIES LTD AS PER HONBLE HIGH COURT ORDERS DATED 18-1-2008. MAJORIT Y OF THE EMPLOYEES OF THE ASSESSEE COMPANY INCLUDING MR. A.D. UBHAYAKAR WAS T RANSFERRED TO PIDILITE INDUSTRIES W.E.F 01-05-2008. AS THE SALARY OF THES E EMPLOYEES WERE PAID BY THE ASSESSEE COMPANY UPTO 30-04-2008, IT HAD RECOV ERED SALARY FROM PIDILITE INDUSTRIES LTD. FULLY EXCEPT IN THE CASE OF MR. UBH AYAKAR, IN WHICH CASE 90% OF SALARY WAS RECOVERED FROM PIDILITE INDUSTRIES LT D. AND 10% FROM THE ASSESSEE-COMPANY. THE ASSESSEE COMPANY SUBMITTED TH AT AFTER 01-05-2008, PIDILITE INDUSTRIES LIMITED HAD PAID SALARY TO MR. UBHAYAKAR, AND ACCORDINGLY RECOVERED 10% FROM THE ASSESSEE COMPANY. IT WAS SUB MITTED THAT M/S.PIDILITE INDUSTRIES LIMITED PAID RS.62,25,890/ - TO SHRI. UB HAYAKAR AS SALARY DURING THE ACCOUNTING YEAR 2009-10. THE ASSESSEE COMPANY C OMPANY ONLY REIMBURSED RS.6,86,351/ - WHICH IS ABOUT 10% OF THE SUM PAID TO HIM. IN THIS REGARD, THE PHOTOCOPY OF THE DEBIT NOTE WAS EN CLOSED. FINALLY, IT WAS STATED THAT THE PAYMENT MADE TO PIDILITE INDUSTRIES LIMITED HAS NOT GIVEN ANY TAX BENEFIT TO THE ASSESSEE COMPANY. THE SAID SERVI CE CHARGES PAID BY THE ASSESSEE COMPANY IS NOTHING BUT TO FOLLOW THE PRINC IPLE OF ACCOUNTING SO THAT THE EXPENDITURE INCURRED BY ANOTHER PERSON ON BEHAL F OF THE ASSESSEE COMPANY IS GIVEN PROPER ACCOUNTING TREATMENT IN THE BOOKS OF ACCOUNT. THE CIT(A) AFTER CONSIDERING THE SUBMISSION OF THE ASSE SSEE COMPANY HELD THAT THE ASSESSEE COMPANY HAS MADE PAYMENT OF RS.6,86,351/ - AS SERVICE CHARGES TO M/S. PIDILITE INDUSTRIES LTD., AN ASSOCIATE ENTITY. THE ASSESSEE COMPANY HAS MADE SUBSTANTIAL SALES (86.3% OF ITS TOTAL TURNOVER ) TO THE SAID ENTITY (PIDILITE INDUSTRIES LTD). THE SUBMISSION OF THE ASSESSEE COM PANY IS THAT DURING THE YEAR PIDILITE INDUSTRIES HAS PAID TOTAL REMUNERATIO N OF RS. 62,25,890/- TO SHRI. A. D. UBHAYAKAR. PIDILITE INDUSTRIES RECOVERE D ONLY RS.6,86,351/- BEING ITA 1066/MUM/2014 10 10% OF THE SALARY FROM THE ASSESSEE-COMPANY FOR SER VICES RENDERED BY SHRI.UBHAYAKAR. IT WAS STATED THAT THIS AMOUNT BEIN G QUITE REASONABLE SHOULD BE ALLOWED AS EXPENDITURE INCURRED FOR THE PURPOSE OF BUSINESS. THE CIT(A) OBSERVED THAT IT IS STATED THAT THE SERVICES OF SHR I. UBHAYAKAR, EMPLOYED WITH M/S. PIDILITE INDUSTRIES LTD. ARE REQUIRED AND AVAI LED FOR MARKETING OF VAM WHICH IS SOLD BY THE ASSESSEE-COMPANY MAINLY TO M/S . PIDILITE INDUSTRIES LTD. THE QUESTION ARISES AS TO HOW THE PERSON WORKING WI TH THE SAME COMPANY HELPS THE ASSESSEE-COMPANY TO EFFECT SALES TO THAT COMPANY WHEN BOTH THE COMPANIES ARE UNDER THE SAME MANAGEMENT. M/S. PIDIL ITE INDUSTRIES LTD HOLDS 40.64% EQUITY SHARES OF THE ASSESSEE COMPANY AND THE ENTIRE BOARD OF DIRECTORS IN BOTH THE COMPANIES IS COMMON INCLUDING MANAGING DIRECTOR OF THE COMPANIES. ALSO, M/ S. PIDILITE INDUSTRIES LTD HAS RAISED DEBIT NOTES FOR THESE SERVICE CHARGES ON QUARTERLY BASIS FOR A LUMP SUM AMOUNT WITHOUT ANY WORKING. AS PER THE FINDING OF THE AO, NOWHERE IN T HESE DEBIT NOTES, IT IS STATED THAT THESE CHARGES ARE FOR SERVICES RENDERED BY SHRI. UBHAYAKAR FOR MARKETING OF VAM FOR THE ASSESSEE COMPANY. IN VIEW OF THE ABOVE, THE CIT(A) HELD THAT THE AO HAS RIGHTLY DISALLOWED THE ABOVE S UM OF RS.6,86,351/-. THE CIT(A) VIDE ORDERS DATED 25.11.2013 ACCORDINGLY CON FIRMED THE ORDERS OF THE A.O. 11.AGGRIEVED BY THE ORDERS DATED 25.11.2013 PASSED BY THE CIT(A), THE ASSESSEE COMPANY IS IN FURTHER APPEAL BEFORE THE TR IBUNAL. 12. THE LD. COUNSEL FOR THE ASSESSEE COMPANY SUBMIT TED THAT THE ASSESSEE COMPANY HAS PAID RS. 6,86,351/- TO M/S PIDILITE IND USTRIES ON ACCOUNT OF SERVICES OF SHRI UBHAYAKAR UTILIZED BY THE ASSESSEE COMPANY. THE TOTAL SALARY PAID TO SHRI UBHAYAKAR WAS RS. 62.25 LACS OUT OF WH ICH 90% OF SALARY WAS RECOVERED FROM M/S PIDILITE INDUSTRIES LTD. AND 10% SALARY WAS BORNE BY THE ASSESSEE COMPANY. THE LD. COUNSEL SUBMITTED THAT T HE MANUFACTURING UNIT WAS DEMERGED FROM THE ASSESSEE COMPANY AND MERGED I NTO PIDILITE INDUSTRIES ITA 1066/MUM/2014 11 LTD. W.E.F 01.04.2007 AND MAJORITY OF THE EMPLOYEES OF THE ASSESSEE COMPANY (INCLUDING SHRI UBHAYAKAR) WERE SHIFTED TO M/S PIDI LITE INDUSTRIES LTD W.E.F 01.05.2008. EARLIER, THE ASSESSEE COMPANY WAS RAISI NG DEBIT NOTE OF 90% OF SALARY OF SHRI UBHAYAKAR TO M/S PIDILITE INDUSTRIES LTD. WHICH ARE PLACED IN PAPER BOOK PAGE 20 TO 26 WHILE SHRI UBHAYAKAR WAS A BSORBED BY M/S PIDILITE INDUSTRIES LTD. PURSUANT TO THE DEMERGER OF THE MAN UFACTURING UNIT OF THEE ASSESSEE COMPANY INTO M/S PIDILITE INDUSTRIES LTD. AND NOW M/S PIDILITE INDUSTRIES LTD.. IS RAISING DEBIT NOTE IN FAVOUR OF THE ASSESSEE COMPANY WITH RESPECT TO 10% OF THE SALARY PAID TO SHRI UBHAYAKAR , PROOF OF WHICH ARE PLACED IN PAPER BOOK PAGE 12 TO 19. THE LD. COUNSEL SUBMITTED THAT MR UBHAYAKAR IS RENDERING SERVICES TO THE ASSESSEE COM PANY FOR PURCHASE AND MARKETING OF PRODUCTS. THE LD. COUNSEL SUBMITTED TH AT THE SERVICE TAX HAVE BEEN CHARGED ON THESE DEBIT NOTES WITH RESPECT TO T HE SERVICES OF SH UBHAYAKAR BEING UTILIZED BY THE ASSESSEE COMPANY AN D DUE TAXES HAVE BEEN PAID TO GOVERNMENT AND HE SUBMITTED THAT THESE EXPE NDITURE SHOULD BE ALLOWED IN THE HANDS OF THE ASSESSEE COMPANY. 13. THE LD. D.R., ON THE OTHER HAND, RELIED UPON TH E ORDER OF THE LOWER AUTHORITIES AND SUBMITTED THAT THE LD. CIT(A) WAS R IGHT IN CONFIRMING THE ORDER OF A.O. 14. WE HAVE CONSIDERED THE RIVAL CONTENTION AND ALS O PERUSED THE MATERIAL AVAILABLE ON RECORD. WE HAVE OBSERVED THAT SHRI UB HAYAKAR WAS WORKING WITH THE ASSESSEE COMPANY PRIOR TO DEMERGER OF MANUFACTU RING UNIT TO M/S PIDILITE INDUSTRIES LTD. THE ASSESSEE COMPANY IS MARKETING V AM AND THE ASSESSEE COMPANY HAS MADE SUBSTANTIAL SALES(86.3% OF TOTAL T URNOVER OF THE ASSESSEE COMPANY) TO PIDILITE INDUSTRIES LIMITED . THE SAID SH UBHAYAKUMAR IS STATED TO BE RENDERING SERVICES TO THE ASSESSEEE COMPANY W ITH RESPECT TO PURCHASE/SALE ON BEHALF OF THE ASSESSEE COMPANY. SH UBHAYAKUMAR WAS TRANSFERRED TO PIDILITE INDUSTRIES LIMITED ON 01-05 -2008 PURSUANT TO DEMERGER ITA 1066/MUM/2014 12 OF THE MANUFACTURING UNIT OF THE ASSESSEE COMPANY I NTO PIDILITE INDUSTRIES LIMITED WEF 01-04-2007 WHICH WAS APPROVED BY HONBL E HIGH COURT VIDE ORDERS DATED 18.01.2008. THUS, AS SUBMITTED BY THE ASSESSEE COMPANY, SHRI UBHAYAKAR WAS PROVIDING SERVICES TO BOTH THE COMPAN IES. THE ASSESSEE COMPANY WAS DEBITING 90% OF SALARY OF SH UBHAYAKAR TILL 30-04-2008 TO M/S PIDILITE INDUSTRIES LTD. I.E. PRIOR TO TRANSFER OF EMPLOYEES W.E.F. 01-05-2008 IN PURSUANCE OF DEMERGER OF THE MANUFACTURING UNIT OF THE ASSESSEE COMPANY W.E.F 01-04-2007 WHICH WAS APPROVED BY HONBLE HIGH COURT W.E.F 18.01.2008. SHRI UBHAYAKAR WAS TRANSFERRED TO M/S PIDILITE INDUSTRIES LTD. W.E.F 01-05-2008 AND M/S PIDILITE INDUSTRIES LTD. S TARTED DEBITING 10% OF THE SALARY ON WHICH DUE SERVICES TAXES HAVE ALSO BEEN PAID TO THE GOVERNMENT. FROM THE FACTS AND CIRCUMSTANCES OF THE CASE EMANAT ING FROM THE RECORD, THIS PRACTICE WAS CONTINUING EARLIER ALSO AND WAS ACCEPT ED BY THE REVENUE IN THE PRECEDING ASSESSMENT YEARS ALSO . THE ASSESSEE COMP ANY HAS PLACED ON RECORD THE DEBIT NOTES SO RAISED FOR EARLIER YEARS ALSO WHICH IS PLACED IN PAPER BOOK PAGE 20-26, WHICH ARE ACCEPTED BY THE REVENUE FOR EARLIER YEARS. THE PRINCIPLES OF CONSISTENCY HAS TO BE FOLLOWED AS LAI D DOWN BY HONBLE SUPREME COURT IN THE CASE OF RADHASOAMI SATSANG (1992) 60 T AXMAN 248(SC) ALTHOUGH WE ARE AWARE THAT PRINCIPLES OF RES-JUDICATA ARE NO T STRICTLY APPLICABLE TO INCOME TAX PROCEEDINGS. IN VIEW OF OUR ABOVE DISC USSIONS AND REASONING, THE ADDITION OF RS. 6,86,351/- MADE BY THE AO AND AS C ONFIRMED BY THE CIT(A) BY DISALLOWING EXPENDITURE OF RS.6,86,351/- TOWARDS SA LARY OF SH UBHAYAKAR BEING 10% OF THE TOTAL SALARY BEING DEBITED TO THE ASSESSEE COMPANY, IS HEREBY DELETED AND WE ALLOW THE APPEAL OF THE ASSES SEE COMPANY. ITA 1066/MUM/2014 13 15. IN THE RESULT, THE APPEAL FILED BY THE ASSESSEE COMPANY IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 29 TH JANUARY, 2016. # $% &' 29-01-2016 ( ) SD/- SD/- (SAKTIJIT DEY) (RAMIT KOCHAR) JUDICIAL MEMBER ACCOUNTANT MEMBER $ MUMBAI ; & DATED 29-01-2016 [ .9../ R.K. R.K. R.K. R.K. , EX. SR. PS !'#$%&%# / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. : ( ) / THE CIT(A)- CONCERNED, MUMBAI 4. : / CIT- CONCERNED, MUMBAI 5. =>( 99?@ , ?@ , $ / DR, ITAT, MUMBAI H BENCH 6. (BC D / GUARD FILE. / BY ORDER, = 9 //TRUE COPY// / ( DY./ASSTT. REGISTRAR) , $ / ITAT, MUMBAI