DCIT CIR 4(2), MUMBAI V. KANAKSHREE FABRICS P. LTD, MUMBAI

ITA 1172/MUM/2010

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 8813 (ITAT-MUMBAI)
• Duration Of Justice: 11 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-01-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: G
• Next Hearing Date: 13-01-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 12-02-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Fair market value
• Section: 143(3)

Judgement Text

I.T.A NO.1172/ MUM/2010 ASSESSMENT YEAR: 2006-07 1 IN THE INCOME TAX APPELLATE TRIBUNAL, G BENCH, MUMBAI. [ CORAM: PRAMOD KUMAR, AM AND V. DURGA RAO, JM ] I.T.A NO.1172/ MUM/2010 ASSESSMENT YEAR: 2006-07 DY.COMMISSIONER OF INCOME TAX 4(2) .. APPELLANT AAYAKAR BHAVAN, M.K. ROAD, MUMBAI. VS KANAKSHREE FABRICS P. LTD. ,. RESPONDEN T 204, VINOD VILLA, JAGRUTI MATAJI MARG, RAMA WADI, MUMBAI. PA NO.AAACK 4756 E A.K. NAYAK FOR THE APPELLANT C.V. JAIN, FOR THE RESPONDENT O R D E R PER PRAMOD KUMAR: 1. BY WAY OF THIS APPEAL, THE ASSESSEE HAS CALLED INTO QUESTION CORRECTNESS OF CIT(A)S ORDER DATED 3 RD NOVEMBER, 2009, IN THE MATTER OF ASSESSMENT UNDER SECTION 143(3) FOR THE ASSESSMENT YEAR 2006-07, ON THE FOL LOWING GROUNDS: 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD CIT (A) ERRED IN DELETING THE ADDITION U/S.40A(2) S TATING THAT THE AO WITHOUT ANY GOOD REASON DISALLOWED 5% OF PAYMENTS A S EXCESSIVE I.T.A NO.1172/ MUM/2010 ASSESSMENT YEAR: 2006-07 2 THOUGH THE AO HAD GIVEN GOOD AND SUFFICIENT REASONS FOR SUCH DISALLOWANCE. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD CIT (A) ERRED IN DELETING THE ADDITIONS U/S.40A(2) WITHOUT APPRECIATING THE FACT THAT VOUCHERS FOR PAYMENTS TO RELATED PART IES WERE NOT SIGNED, THUS GENUINENESS OF THE TRANSACTIONS WERE NOT ESTAB LISHED. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CA SE AND IN LAW, THE LD CIT (A) ERRED IN DELETING THE ADDITIONS U/S.40A(2) WITHOUT APPRECIATING THE FACTS THAT HUGE PAYMENTS MADE TO R ELATED PARTIES, WAS TO REDUCE THE INCIDENCE OF TAXATION AS ONE OF T HE PARTY HAS SHOWN HUGE LOSSES AND THE OTHER HAS SHOWN VERY LITTLE INC OME. 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE IMPUGNED ORDER OF THE LD CIT (A) IS CONTRARY TO LAW AND CONSEQUENTLY MERITS TO BE SET ASIDE AND THAT OF THE AO BE RESTOR ED. 2. BRIEFLY STATED THE MATERIAL FACTS ARE LIKE THIS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER NOTED THAT THE ASSESSEE HAS MADE PAYMENTS ON ACCOUNT OF WEAVING CHARGES TO ITS RELAT ED ENTERPRISES DEFINED U/S.40A(2)(B), NAMELY JAGANNATH C. TAPARIA (RS.1,90 ,67,644) AND SHREE KANAK FAB (P)LTD., (RS.32,10,881). THE ASSESSEE WAS ASKED TO JUSTIFY THE PAYMENTS MADE TO THESE RELATED ENTERPRISES AND ALSO TO JUSTIFY AS TO HOW THIS ARRANGEMENT HAS BENEFITED THE BUSINESS OF THE ASSESSEE. THE ASSESS EES EXPLANATION TO THE EFFECT THE PAYMENTS WERE MADE FOR BUSINESS NECESSITY AND THAT THEY WERE GENUINE PAYMENTS DID NOT SATISFY THE AO. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE ASSESSEE HAS NOT DISCHARGED HIS ONUS OF ESTABLISHING THAT THE PA YMENT TO RELATED ENTERPRISES IS NOT EXCESSIVE OR UNREASONABLE. IT WAS IN THIS BACK DROP THAT THE AO CONCLUDED THAT 5% OF THE AMOUNTS PAID TO THE RELATED ENTERPRISES A RE TO BE TREATED AS EXCESSIVE, ON THE REASONING THAT WHILE MANUFACTURING EXPENSES HAV E INCREASED FROM 17% TO 23%, THE ASSESSEE HAS NOT GIVEN ANY REASON FOR SUCH INCR EASE. ACCORDINGLY, A DISALLOWANCE OF RS.11,12,926 WAS MADE. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN APPEAL BEFORE THE CIT (A). THE CIT (A) DELETED THE IMPUGN ED DISALLOWANCE BY OBSERVING AS FOLLOWS:- I.T.A NO.1172/ MUM/2010 ASSESSMENT YEAR: 2006-07 3 1.2 I HAVE GONE THROUGH THE ORDER OF THE AO AND SU BMISSION OF THE APPELLANT. AS MAY BE SEEN FROM PARA 3.6 OF THE ASS ESSMENT ORDER OF THE AO QUOTED AT PAGE 2 OF THIS ORDER, THE AO HA S NOT GIVEN ANY GOOD REASON WHY 5% OF THE PAYMENT IS EXCESSIVE. TH E AO HAS ACCEPTED THE GENUINENESS OF TRANSACTION AND WITHOUT ANY REASONABLE REASONS, ON MERE ESTIMATION, CONSIDERED 5% OF PAYMENT TO BE EXCESSIVE. THE ESTIMATED DISALLOWANCE WITHOUT ANY REASONABLE REASON IS FOUND TO BE NOT SUSTAINABLE, H ENCE, DISALLOWANCE OF RS.11,13,926 IS DELETED. THE ASSESSING OFFICER IS AGGRIEVED AND IN APPEAL BE FORE US. 3. HAVING HEARD THE RIVAL CONTENTIONS AND HAVING PE RUSED THE MATERIAL ON RECORD, WE ARE INCLINED TO UPHOLD THE CONCLUSIONS A RRIVED AT BY THE CIT (A) FOR THE SHORT REASON THAT THERE IS NO FINDING BY THE ASSESS ING OFFICER TO THE EFFECT THAT THE PAYMENTS MADE BY THE ASSESSEE ARE EXCESSIVE OR UNRE ASONABLE VIS--VIS FAIR MARKET VALUE OF THE SERVICES RENDERED IN CONSIDERATION OF WHICH THE PAYMENTS ARE MADE. AS A FIRST STEP, FOR COMPUTING THE DISALLOWANCE UNDER SECTION 40A(2)(B), THE AO IS REQUIRED TO ASCERTAIN THE FAIR MARKET VALUE OF THE SERVICES OR GOODS FOR WHICH THE PAYMENT IS MADE TO THE RELATED ENTERPRISES AND IT I S ONLY WHEN THE PAYMENT MADE IS FOUND TO BE IN EXCESS OF SUCH FAIR MARKET VALUE, TH E DISALLOWANCE UNDER SECTION 40A(2)(B) CAN BE RESORTED TO. IN THE PRESENT CASE, HOWEVER, THE AO HAS PROCEEDED TO EXAMINE THE ULTIMATE PROFITABILITY IN THE HANDS OF THE RELATED ENTERPRISES TO WHICH PAYMENTS HAVE BEEN MADE AND DRAWN INFERENCE ABOUT U NREASONABLENESS OF PAYMENT FROM THE SAME. THE AO HAS ALSO OBSERVED TH AT THERE IS INCREASE IN THE MANUFACTURING EXPENSES AND FOR THIS REASON; HE HAS DISALLOWED PAYMENT MADE TO RELATED ENTERPRISES AS EXCESSIVE. HOWEVER, WE ARE UNABLE TO SEE ANY MERITS IN THIS APPROACH AS WE HAVE NOTED ABOVE THAT SO FAR AS THE DISALLOWANCE UNDER SECTION 40A(2)(B) IS CONCERNED, IT IS ON ACCOUNT OF PAYMENT BEING EXCESSIVE OR UNREASONABLE AND THAT THE ONLY FACTOR IT MUST GOVERN SUCH DISALL OWANCE. THE AO HAS FAILED TO BRING ON RECORD ANY MATERIAL TO SHOW THAT THE AMOUN T PAID TO THE RELATED ENTERPRISES IS UNREASONABLE OR EXCESSIVE VIS--VIS FAIR MARKET VALUE RENDERED BY I.T.A NO.1172/ MUM/2010 ASSESSMENT YEAR: 2006-07 4 THESE RELATED ENTERPRISES. IN THIS VIEW OF THE MAT TER AND BEARING IN MIND THE ENTIRETY OF THE CASE, WE DEEM IT FIT AND PROPER TO UPHOLD THE CONCLUSIONS ARRIVED AT BY THE CIT (A) AND, ACCORDINGLY, DECLINE TO INTERFE RE. 4. IN THE RESULT, THE APPEAL STANDS DISMISSED. PRONOUNCED IN THE OPEN COURT ON 19 TH JANUARY, 2011 SD/- (V. DURGA RAO ) (JUDICIAL MEMBER) SD/- (PRAMOD KUMAR) (ACCOUNTANT MEMBER) MUMBAI, DATED 19 TH JANUARY, 2011 PARIDA COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. COMMISSIONER OF INCOME TAX (APPEALS),8, MUMBAI 4. COMMISSIONER OF INCOME TAX, 4 , MUMBAI 5. DEPARTMENTAL REPRESENTATIVE, BENCH G, MUMBAI //TRUE COPY// BY ORDER ASSTT. REGISTRAR, ITAT, MUMBAI I.T.A NO.1172/ MUM/2010 ASSESSMENT YEAR: 2006-07 5 I.T.A NO.1172/ MUM/2010 ASSESSMENT YEAR: 2006-07 6