Appeal Details
Counselvise Citation
[2012] 140 COUNSELVISE.COM (IT) 63816 (ITAT-BANGALORE)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
2 year(s) 11 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
30-11-2012
Appeal Filed By
Department
Order Result
Partly Allowed
Bench Allotted
B
Next Hearing Date
26-06-2012
Assessment Year
2007-2008
Appeal Filed On
19-11-2010
Judgement Text
PAGE 1 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 1 IN THE INCOME TAX APPELLATE TRIBUNAL, BANGALORE BENCH B BEFORE SHRI N BARATHVAJA SANKAR, VICE PRESIDENT AND SHRI GEORGE GEORGE K, J.M ITA NOS.1242 & 1243/BANG/2010 (ASSESSMENT YEARS 2006-07 & 2007-08) M/S FIBRES & FIBRES INTERNATIONAL PVT. LTD., NO.21, E-1, II PHASE, PEENYA INDUSTRIAL AREA, BANGALORE-560 058. PA NO.AAACR 6841 M VS THE ASST. COMMISSIONER OF INCOME TAX, CIRCLE- 11(3), BANGALORE. (APPELLANT) (RESPONDENT) ITA NOS.1269 & 1270/BANG/2010 (ASSESSMENT YEARS 2006-07 & 2007-08) THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-11(3), BANGALORE. VS M/S FIBRES & FIBRES INTERNATIONAL PVT. LTD., NO.21, E-1, II PHASE, PEENYA INDUSTRIAL AREA, BANGALORE-560 058. PA NO.AAACR 6841 M (APPELLANT) (RESPONDENT) ITA NO. 141/BANG/2011 (ASST. YEAR 2006-07) THE DEPUTY COMMISSIONER OF INCOME TAX (INTERNATIONAL TAXATION), CIRCLE-1(1), BANGALORE. VS M/S FIBRES & FIBRES INTERNATIONAL PVT. LTD., NO.21, E-1, II PHASE, PEENYA INDUSTRIAL AREA, BANGALORE-560 058. PA NO.AAACR 6841 M (APPELLANT) (RESPONDENT) DATE OF HEARING : 15.10.2012 DATE OF PRONOUNCEMENT : 30.11.2012 PAGE 2 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 2 ASSESSEE BY : SHRI NAGESHWAR RAO, ADVOCATE REVENUE BY : SHRI FARHAD HUSSAI QURESHI, CIT-II & SHRI JAYARAM RAIPURI A, ACIT ORD ER PER BENCH : THESE FIVE APPEALS FILED BY THE ASSESSEE COMPANY AS WELL AS THE REVENUE ARE DIRECTED AGAINST THE ORDERS OF CIT (A)- I AND CIT (A)-IV, BANGALORE DATED 11.8.2010 AND 29.11.2010 RESPECTIVE LY. THE RELEVANT ASSESSMENT YEARS ARE 2006-07 AND 2007-08. I . ITA NOS.1242 & 1243/B/10 BY THE ASSESSEE: A.Y 2006-07 - ITA NO.1242/B/10 - (ASS ESSEES APPEAL) : 2. THE ASSESSEE HAS RAISED TWELVE GROUNDS IN AN IL LUSTRATIVE AND NARRATIVE MANNER. GROUND NOS.1, 10, 11 AND 12 ARE GENERAL IN NATURE AND SINCE NO SPECIFIC ISSUES INVOLVED, THEY HAVE BECOME INCONSEQUENTIAL. GROUND NO.9 IS NOT MAINTAINABLE AS CHARGING OF INTEREST U/S 23 4B AND 234C OF THE ACT IS MANDATORY AND CONSEQUENTIAL IN NATURE. THE R EMAINING GROUNDS ARE RELATING TO THE VARIOUS ISSUES, NAMELY: (1) (GROUND NO.2) THAT THE AUTHORITIES BELOW ERRED IN D ISALLOWING RS.10,68,71,384/- BEING INFO & TRACKING OF DELIVER Y SCHEDULES PAID TO SOUTH ELEGANT LIMITED (SEL); (2) (GROUND NOS. 3,4 & 5) THAT THE AUTHORITIES BELOW WE RE NOT JUSTIFIED IN DISALLOWING RS.18,35,79,000/- PAID TO SEL AS TE RMINATION FEES; (3) (GROUND NOS.6 & 7) THAT THE AUTHORITIES BELOW ERRED IN DISALLOWING/RESTRICTING THE CLAIMS UNDER VARIOUS HE ADS, NAMELY: PAGE 3 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 3 UNDER THE HEAD DISALLOWED BY THE AO RESTRICTED TO BY CIT(A) STAFF WELFARE EXPENSES RS.16,80,270/- RS.10,00,000/- ADMINISTRATION EXP. OTHERS RS.16,64,580/- RS. 9,00,000/- (4) (GROUND NO.8) THAT THE ORDER OF THE AUTHORI TY BELOW WAS BAD IN LAW THAT DURING THE COURSE OF ASSESSMENT PROCEEDING, NO OPPORTUNITY WAS GIVEN ON THE ADDITIONS MADE. A.Y 2007-08- ITA NO.1243/B/10- (ASSESSEES APPEAL) : 3. FOR THIS ASSESSMENT YEAR AS WELL, THE ASSESSEE H AS RAISED TWELVE GROUNDS , IN WHICH GROUND NOS.1, 2, 10, 11 & 12 BEING GENERAL IN NATURE, THEY DO NOT SURVIVE FOR ADJUDICATION. THE R EMAINING GROUNDS RELATE TO THE DISALLOWANCES/RESTRICTING OF THE DISALLOWANC E TO 15% OF VARIOUS CLAIMS OF THE ASSESSEE UNDER DIFFERENT HEADS, NAMELY: UNDER THE HEAD DISALLOWED BY THE AO RESTRICTED TO BY CIT(A) AT 15% STAFF WELFARE EXPENSES RS.70,38,85 9/- RS.26,39,572/- OTHERS RS. 8,33,587/- RS. 5,00,152/- WATER CHARGES RS, 5,19,993/- RS. 2,59,996/- TRAVEL & CONVEYANCE RS.22,9 8,780/- RS.11,49,390/- SAMPLE EXP & BUSINESS PROMOTION EXPENSES RS.10,00 ,000/- RS. 5,00,000/- REPAIRS & MAINTENANCE RS. 2,20 ,986/- RS. 1,00,000/- II . ITA NOS.1269 & 1270/ B/10 & 141/11 BY THE REVENUE : A.Y 2006-07- ITA NO.1269/B/10 - (REVENUES APPEAL) : 4. THE REVENUE HAS RAISED TEN GROUNDS, OUT OF WHIC H, GROUND NOS.1,2, 9 & 10 WERE GENERAL IN NATURE AND, THEREFO RE, THEY HAVE NOT BEEN ADDRESSED TO. THE REMAINING GROUNDS RELATE TO THE FOLLOWING ISSUES, NAMELY: PAGE 4 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 4 (1) (GROUND NO.3) THAT THE CIT (A) ERRED IN GIVING RELI EF OF RS.6,80,255/- UNDER THE HEAD STAFF WELFARE EXPENSE S AS AGAINST THE DISALLOWANCE OF RS.16,80,270/-; (2) (GROUND NO.4) THAT THE CIT (A) ERRED IN GIVING RELI EF OF RS.7,64,580/- UNDER THE HEAD OTHERS AS AGAINST RS.16,64,580/- D ISALLOWED BY THE AO; (3) (GROUND NO.5) THAT THE CIT (A) ALSO ERRED IN ALLOWI NG RS.8,14,25,233/- BEING REMUNERATION TO THE MD OF THE ASSESSEE AS AGA INST THE DISALLOWANCE OF THE ENTIRE SUM; & (4) (GROUND NOS.6,7 & 8) THAT THE CIT (A) ERRED IN DIRE CTING THE AO TO ADOPT THE MUNICIPAL VALUE OF THE RENT, IF IT IS IN EXCESS OF THE RENT RECEIVED. ITA NO.141/B/11 AY 2006-07(REVENUES APPEAL): 5. IN THIS APPEAL, THE REVENUE HAS RAISED FOUR GROU NDS, IN WHICH, GROUND NO.1 IS GENERAL IN NATURE AND, THEREF ORE, IT DOESNT SURVIVE FOR ADJUDICATION. THE REMAINING GROUNDS ARE AS UNDER: (1) THAT THE CIT (A) ERRED IN HOLDING THAT THE AMOUNT W AS TAXED IN THE PROCEEDINGS U/S 143 (3) OF THE ACT AND , THEREFORE, IS NOT TAXABLE U/S 201 OF THE ACT. THIS IS A SEPARATE PROCEEDINGS ALTOGETHER; - THAT THE CIT (A) ERRED IN NOT APPRECIATING THAT S. 37(1) AND S 40(A)(I) ARE NOT MUTUALLY EXCLUSIVE. A.Y 2007-08- ITA NO.1270/B/10 - (REVENUE S APPEAL) : 6. AS IN LAST ASSESSMENT YEAR, THE REVENUE HAS RAIS ED TEN GROUNDS, OUT OF WHICH, GROUND NOS.1, 2, 9 & 10 DO NOT QUALI FY FOR ADJUDICATION AS NO SPECIFIC ISSUES HAVE BEEN RAISED. IN THE REMAININ G GROUNDS, THE ISSUES RAISED ARE REFORMULATED AS UNDER: PAGE 5 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 5 UNDER THE HEAD DISALLOWED BY THE AO RELIEF ALLOWED BY CIT(A) (GR.3) STAFF WELFARE EXP. RS.7038859 RESTRICTED THE ADDITION TO 15% (GR.4) OTHERS RS. 8 33587 - DO (GR.5) WATER CHARGES RS. 519993 - DO (GR.6) TRAVEL & CONVEYANCE RS.2298780 - DO (GR.7) SAMPLE EXP. & BUSINESS PROMOTION EXPENSES RS.1000000 RS.5,00,000 (GR.8) CUSTOMS DUTY ON MACHINERY RS. 220986 RS.1,00,000 7. AS THE ISSUES RAISED IN THESE APPEALS BEING INT ER-LINKED AND PERTAINING TO THE SAME ASSESSEE, FOR THE SAKE OF CO NVENIENCE, THEY WERE HEARD, CONSIDERED TOGETHER AND DISPOSED OFF, IN THI S COMMON ORDER. 8. BRIEFLY STATED, THE ASSESSEE COMPANY [THE ASSESS EE IN SHORT] IS ENGAGED IN THE BUSINESS OF MANUFACTURE AND EXPORT O F READY MADE GARMENTS. FOR BOTH THE ASSESSMENT YEARS, THE AO HAD, FOR THE D ETAILED REASONS RECORDED IN THE ASSESSMENT ORDERS UNDER DISPUTE, MA DE VARIOUS ADDITIONS/DISALLOWANCES. AGGRIEVED BY THE IMPUGNED ORDERS OF THE AO, THE ASSESSEE TOOK UP THE ISSUES WITH THE CIT (A) FOR RE LIEF. THE CIT (A) HAD, IN HIS CONSOLIDATED ORDER, CONFIRMED SOME OF THE ADDIT IONS AND ALSO GAVE PARTIAL RELIEFS TO THE ASSESSEE UNDER VARIOUS HEADS. AGITA TED, THE ASSESSEE HAS COME UP WITH THE PRESENT APPEALS. 8.1. LIKEWISE, THE REVENUE HAS ALSO COME UP WITH T HE APPEALS AGAINST THE FINDINGS OF THE CSIT (A) ON CERTAIN ISSUES FOR BOTH THE AYS UNDER CONSIDERATION. PAGE 6 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 6 9. BEFORE VENTURING TO ADJUDICATE THE ISSUES RAISE D BY BOTH THE PARTIES, WE WOULD LIKE TO PLACE IT ON RECORD THAT T HE ASSESSEES APPEALS FOR THE AYS 2006-07 AND 2007-08 HAVE COME UP BEFORE THE HONBLE EARLIER BENCH OF THIS TRIBUNAL FOR ADJUDICATION AND THE HON BLE BENCH IN ITS FINDINGS DATED 28.2.2011 HAD REMITTED BACK THE ISSUES TO THE DESK OF THE AO WITH THE FOLLOWING FINDINGS: 3. AS SEEN FROM THE RECORDS AND THE GROUNDS OF AP PEAL RAISED BY THE ASSESSEE, THE DISALLOWANCES ARE OF EXPENDITURE TOWARDS TERMINATION FEE, EXPENDITURE UN DER THE HEAD HANDLING AND TRACKING OF DELIVERY SCHEDUL E 25% OF THE STAFF WELFARE EXPENSES, 20% OF EXPENSES DEBI TED UNDER THE HEAD OTHERS, DIFFERENCE IN RENT AND DISALLOWANCE OF REMUNERATION PAID TO MANAGING DIREC TOR. AT THE TIME OF HEARING, SHRI SRINIVAS ASHOK KAMATH, LEARNED COUNSEL FOR THE ASSESSEE, HAS FILED ADDITIO NAL EVIDENCE SEEKING ADMISSION OF THE SAME. ON GOING THROUGH THE SAID ADDITIONAL EVIDENCE, WE FIND THAT IT RELATES TO TRANSACTIONS OF THE ASSESSEE WITH 477 PA RTIES WHICH WAS NOT FILED BEFORE THE AO OR THE CIT (A). IT WAS SUBMITTED BY THE LEARNED COUNSEL FOR THE ASSESSE E THAT ADMISSION OF THIS EVIDENCE IS ESSENTIAL FOR PR OPER ADJUDICATION OF THE ISSUE. AS THIS VOLUMINOUS EVID ENCE NEEDS VERIFICATION BY THE AO, WE DEEM IT FIT AND PRO PER TO REMAND THIS ISSUE TO THE FILE OF THE AO WITH A DIRECTION TO THE ASSESSEE TO PRODUCE THESE ADDITION AL EVIDENCES BEFORE HIM AND THE AO IS DIRECTED TO RECONSIDER THE ISSUE IN ACCORDANCE WITH LAW 9.1. IN THE MEANWHILE, THE ASSESSEE CAME UP WITH A MISC. APPLICATION [M.P. NO.50/B/11 DATED 9.11.2011] WHEREIN IT HAS BE EN CLAIMED THAT IN THE ORDER OF THE EARLIER BENCH (SUPRA), AN INADVERTENT ERROR HAD CREPT IN, WHICH ACCORDING TO THE ASSESSEE, REQUIRES RECTIFICATION. TO JUSTIFY ITS CLAIM, THE PAGE 7 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 7 ASSESSEE HAD SUBMITTED THAT THE AO HAD DISALLOWED T HE ASSESSEES CLAIM OF EXPENDITURE OF (I) HANDLING AND TRACKING OF DELIVER Y SCHEDULE; AND (II) TERMINATION FEE FOR THE TERMINATION OF SUCH SERVICE S ETC. WHILE PRESENTING THE ASSESSEES CASE BEFORE THE EARLIER BENCH, THE L EARNED A R HAD FILED ADDITIONAL EVIDENCE, CERTIFYING THE GENUINENESS OF T RANSACTION ENTERED INTO BETWEEN THE ASSESSEE AND SEL. THE ADDITIONAL EVIDE NCE SOUGHT TO BE PRODUCED, ACCORDING TO THE ASSESSEE, COMPRISED OF O NLY TWO CERTIFICATES FROM SEL. HOWEVER, THE EARLIER BENCH, ACCORDING TO THE ASSESSEE, HAD REMITTED BACK THE ISSUE TO THE FILE OF THE AO ON TH E PREMISE THAT THE ADDITIONAL EVIDENCE SUBMITTED BY THE ASSESSEE OF ITS TRANSACTIONS WITH 477 PARTIES WAS VOLUMINOUS AND THEREBY REQUIRED VERIFICA TION BY THE AO ETC. HOWEVER, ACCORDING TO THE ASSESSEE, THE CONFIRMATIO N WAS MERELY CONTAINED A LIST OF 477 ORDERS WHICH WAS INADVERTENTLY MISCONS TRUED BY THE EARLIER BENCH AS BEING 477 TRANSACTIONS UNDERTAKEN BY THE AS SESSEE. THUS, THE EARLIER BENCH HAD INADVERTENTLY MISUNDERSTOOD THE NA TURE OF THE ADDITIONAL EVIDENCE AS VOLUMINOUS, WHICH REQUIRES TO BE EXAMIN ED BY THE AO ETC., WHEREAS SUCH AN ADDITIONAL EVIDENCE MERELY COMPRISED OF TWO CERTIFICATES FROM SEL. 9.2. IN CONCLUSION, IT WAS POINTED OUT THAT THE IS SUE WAS REMANDED BACK TO THE FILE OF THE AO FOR VERIFICATION BY THE E ARLIER BENCH INADVERTENTLY ON THE BASIS OF INCORRECT INTERPRETATI ON. IT WAS ALSO SUBMITTED THAT ORDER OF THE TRIBUNAL DATED 28.2.201 1 IN ASSESSEES APPEALS WERE PASSED WITHOUT NOTICING THE APPEALS FILED BY TH E REVENUE. THEREFORE, IT WAS PRAYED THAT THE ORDER OF THE HONBLE EARLIER BENCH BE RECALLED AND THE APPEALS MAY BE POSTED FOR FURTHER HEARING ALONG WITH THE REVENUES PAGE 8 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 8 APPEALS. THE TRIBUNAL VIDE ITS ORDER DATED 13.1.201 2 IN MP NO.50(B)/2011 RECALLED ITS EARLIER ORDER DATED 28.2.12011. THE R ELEVANT FINDINGS OF THE TRIBUNAL IN M.A NO. 50(B)/2010 DATED 13.1.12 READ A S FOLLOWS: THIS MISCELLANEOUS APPLICATION HAS BEEN FILED BY TH E ASSESSEE TO RECTIFY CERTAIN MISTAKES WHICH HAVE CREP T INTO THE ORDER OF THE TRIBUNAL DATED 28.2.2011 IN I TA NOS.1242 & 1243 (B)/2010 FOR THE ASSESSMENT YEARS 2006-07 & 2007-08 RESPECTIVELY. 2. IN ADDITION TO WHAT IS STATED IN THE MISCELLANE OUS PETITION, THE LEARNED COUNSEL FOR THE ASSESSEE ALSO BROUGHT TO OUR NOTICE THAT THE REVENUE HAS ALSO FIL ED APPEALS FOR THE VERY SAME ASSESSMENT YEARS, IN WHICH THE COMMON ISSUES ARE INVOLVED AND THEY ARE STILL PENDIN G BEFORE THE TRIBUNAL. 2.1. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO FILE D COPIED OF THE FORM NO.36, FILED BY THE REVENUE. TAK ING NOTE OF THESE FACTS, WE ARE INCLINED TO RECALL THE ORDER OF THE TRIBUNAL FOR BOTH THE ASSESSMENT YEARS AS IT HAS BEEN HELD BY THE HONBLE SUPREME COURT THAT BOTH TH E ASSESSEE AS WELL AS THE REVENUES APPEALS HAVE TO B E HEARD AND DISPOSED OF TOGETHER WHEN THE ISSUES INVO LVED ARE COMMON. 3. IT IS PERTINENT TO MENTION HERE THAT THE PENDEN CY OF THE REVENUES APPEAL BEFORE THE TRIBUNAL FOR THE VE RY SAME ASSESSMENT YEARS WERE NOT BROUGHT TO THE NOTICE OF THE BENCH AT THE TIME OF HEARING OF THESE APPEALS. HOWEVER, TAKING NOTE OF THE EVIDENCE FILED BY THE LE ARNED COUNSEL FOR THE ASSESSEE BEFORE US, WE ARE INCLINED TO RECALL THE ORDER OF THE TRIBUNAL DATED 28.2.2011. THE REGISTRY IS DIRECTED TO POST THE APPEALS IN DUE COU RSE FOR HEARING, PAGE 9 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 9 9.3. CONSEQUENTLY, THESE APPEALS HAVE COME UP BEFOR E THIS BENCH FOR ADJUDICATION. LET US NOW PROCEED TO DEAL WITH THE I SSUES RAISED BY THE ASSESSEE, CHRONOLOGICALLY, AS UNDER: A.Y 2006-07- ITA NO.1242/B/10 (ASSESSE ES APPEAL) : 10. FOR THE SAKE OF CLARITY, BOTH THE ISSUES, NAMEL Y, DISALLOWANCES OF (I) INFO & TRACKING SCHEDULES PAYMENT OF RS.10.68 CRORES TO SEL; AND (II) TERMINATION CHARGES OF RS.18.35 CRORES TO SEL ARE T AKEN UP TOGETHER FOR CONSIDERATION. 10.1. IN RESPECT OF THE DISALLOWANCE OF TERMINATIO N FEE OF RS.18.35 CRORES PAID TO SEL, IT WAS THE CLAIM OF THE ASSESSE E THAT IT HAD ENTERED INTO AN AGREEMENT DATED 1.7.2002 WITH SEL FOR AVAILING T HE SERVICES ON INFORMATION AND TRACKING OF DELIVERY SCHEDULES AND T HAT AT THE TIME OF ENTERING INTO THE SAID AGREEMENT, THREE POINTS, NAM ELY, DURATION, FEE AND TERMINATION WERE DISCUSSED AND AGREED TO BY BOTH THE PARTIES. THEREFORE, IT WAS CLAIMED, THE SAID ITEM OF EXPENDITURE WAS INCUR RED WHOLLY AND FULLY FOR THE PURPOSES OF BUSINESS AND THAT THERE WAS NO NEED FOR ANY DISALLOWANCE UNDER THIS HEAD. WITH REGARD TO THE DISALLOWANCE O F EXPENDITURE OF RS.10.68 CRORES UNDER THE HEAD INFO AND TRACKING AND DELIVE RY SCHEDULE, IT WAS CONTENDED BY THE ASSESSEE THAT MAJOR PART OF THE AMO UNT WAS PAID TO SEL AS THE SAID SEL HAD NECESSARY INFRASTRUCTURE AND CAPACI TY TO RENDER SERVICES REQUIRED BY THE ASSESSEE AND THAT THE SERVICES RENDE RED BY SEL WERE REALLY WARRANTING THE PAYMENTS AS AGREED UPON. PAGE 10 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 10 10.2. HOWEVER, THE AO HAD, IN HIS REMAND REPORT TO THE FIRST APPELLATE AUTHORITY, DISPUTED THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, NO CLAIM WAS MADE BY THE ASSESSEE THAT IT HAD ENTERED INTO AN AGREEMENT WITH SEL FOR AVAILING THE SERVICES ON INF ORMATION AND TRACKING OF DELIVERIES SCHEDULES. IT WAS, FURTHER, ASSERTED BY THE AO THAT EVEN ASSUMING THAT SUCH AN AGREEMENT EXISTED; THE ASSESS EE HAD NOT PRODUCED ANY ORIGINAL AGREEMENT FOR VERIFICATION. IT WAS, FU RTHER, CLAIMED BY THE AO THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, T HE ASSESSEE FILED CERTAIN DETAILS AND DOCUMENTS WHICH INCLUDED DETAIL S OF TERMINATION FEES PAID AND A COPY OF THE RELEVANT AGREEMENT, BUT, FAIL ED TO PRODUCE THE ORIGINAL SERVICE AGREEMENT DATED 1.7.2002 FOR VERIFICATION. 10.3. GIVING DETAILED EVENTS AFTER THE ASSESSEES PREMISES WAS SUBJECTED TO A SURVEY ACTION U/S 133A OF THE ACT ON 5.11.2009 IN THE REMAND REPORT WHICH HAS BEEN EXTRACTED VERBATIM BY THE CIT (A) IN HIS APPELLATE ORDER UNDER DISPUTE; THE AO CONCLUDED THAT THE TRAN SACTIONS WERE SHAM AND NON-GENUINE. THE AO, IN HIS ASSESSMENT ORDER, HELD THAT THE ASSESSEE HAD NO OTHER VALID PROOF EXCEPT THE TRANSFER OF MONEY TH ROUGH BANKING CHANNELS WHICH DID NOT RENDER THE PAYMENT BEING GENUINE. HE HAD ALSO CONCLUDED THAT THE CONTRACT WAS NOT LEGAL BEING EXECUTED ON A PLAI N PAPER AND THE AUTHORIZED SIGNATORIES AND WITNESSES NOT BEING IDEN TIFIABLE FOR EXAMINATION, THE CLAIM OF THE ASSESSEE THAT THE PAYMENT WAS ON TH E BASIS OF CONTRACT ITSELF WAS DOUBTFUL. HE HAD, FURTHER, POINTED OUT THAT THE RELATIONSHIP BETWEEN THE PAYER AND THE PAYEES WAS NOT A LIVE ONE B ECAUSE IN SPITE OF AGREEMENTS BETWEEN THE PARTIES, THE PAYEE - SEL NEVE R VISITED THE PREMISES OF THE ASSESSEE IN INDIA AND SUCH TYPE OF NON-LIVING , NON-EXISTENT PAGE 11 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 11 RELATIONSHIP ITSELF GIVES A HUNCH THAT THE PAYMENT W AS NOT GENUINE AND THE CONTRACT WAS ONLY A WINDOW DRESSING TO COVER UP THE NON-GENUINE PAYMENT. IT WAS, FURTHER, POINTED OUT BY THE AO THAT EVEN IF THE PAYMENT WAS THROUGH BANKING CHANNEL, IT DID NOT PROVE THAT THE PAYMENT W AS FOR BUSINESS PURPOSE AND CANNOT BE ALLOWED U/S 37(1) OF THE ACT. IT WAS ALSO STRESSED THAT IN ANY CASE THE ASSESSEE WHILE CREDITING THE AMOUNT TO THE ACCOUNT OF THE NON- RESIDENT SEL IN MAY, 2006, HAD NOT FILED ANY APPLICAT ION U/S 195(2) OF THE ACT AND, THEREFORE, THE ENTIRE SUM WAS TO BE ADDED U/S 40(A)(I) OF THE ACT. HE HAD RELIED ON THE RULING OF THE HONBLE JURISDIC TIONAL HIGH COURT IN THE CASE OF CIT V. M/S. SAMSUNG ELECTRONICS REPORTED IN (2009) 320 ITR 209 (KAR). 10.4. THE AFFIRMATION OF THE AO HAS BEEN STRONGLY D ENIED BY THE ASSESSEE IN ITS REJOINDER TO THE REMAND REPORT AS R ECORDED IN THE ORDER OF THE CIT (A). 10.5. AFTER DUE CONSIDERATION OF RIVAL SUBMISSIONS , THE CIT (A) HAD REJECTED THE CONTENTIONS OF THE ASSESSEE AND UPHELD THE ADDITIONS MADE ON TWIN ISSUES, NAMELY, (I) INFO & TRACKING OF DELIVERY SCHEDULES PAID TO SEL; AND (II) TERMINATION CHARGES PAID TO SEL. THE RELEVANT PORTIONS OF REASONS RECORDED BY THE CIT (A) ARE EXTRACTED AS BELOW: 5.5.1.. THE FACT IS THAT SUCH EXPENSES HAVE BEEN CLAIMED BY THE APPELLANT IN PAST I.E., IN AY 2003-04 , 2004-05 AND 2005-06 AND ALSO ALLOWED BY THE DEPARTMENT. THE FACT IS ALSO THAT SURVEY U/S 133A(1) OF I.T. ACT WAS CONDUCTED IN THE BUSINESS PREMISES OF THE ASSESSEE ON 5.11.2009 I.E., DURING THE COURSE OF ASSESSMENT PROCEEDING, IN WHICH NEITHER COPY NOR ORI GINAL PAGE 12 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 12 AGREEMENT DATED 1.7.2002 NOR THE COPY OR THE ORIGINA L OF THE SCHEME OF ARRANGEMENT DATED 1.4.2005 OR THE COP Y / ORIGINAL OF TERMINATION AGREEMENT COULD BE FOUND WH ICH ITSELF COULD BE HELD AS AN EVIDENCE THAT PAYMENTS WE RE FOR SOME OTHER PURPOSE (BECAUSE PAYMENT IS PROVED) A ND HAD NOT BEEN ON THE BASIS OF THE ALLEGED CONTRACT O R SCHEME OF ARRANGEMENT. SECONDLY, SUCH A BELIEF IS A LSO CORROBORATED IF ONE LOOKS INTO THE STATEMENT RECORD ED U/S 131 OF I. T. ACT FROM MR. KOTHARI, CMD WHO EXPRESSED HIS IGNORANCE ABOUT THE EXISTENCE OF ANY SUCH CONTRACT. MR. KOTHARI IS EULOGIZED BY THE AR AS AN ALL KNOWING PERSON HAVING FULL CONTROL OVER THE ACTIVIT IES OF THE APPELLANT EVEN IF SITTING IN ITALY COMING TO IN DIA FOR A FEW DAYS HAVING THE KNOWLEDGE OF ALL IT BITS OF THE COMPANY FOR WHICH HE IS BEING PAID A HUGE SALARY OF 8.14 CRORES PER ANNUM. IF SUCH A PERSON SAYS IN CLEAR TE RMS THAT HE DOES NOT REMEMBER ABOUT ANY AGREEMENT BETWEE N SEL AND THE APPELLANT, IT HAS TO BE HELD THAT NO AGREEMENT EXISTED AND THE PAYMENT IS NOT FOR THE PURPOSE OF BUSINESS AT ALL. THIRDLY, EVEN IF IT IS AGREED THAT THERE IS PAYMENT, IT IS NECESSARY TO EXAMINE WHETHER THE PAYEE WAS CAPABLE OF DOING SUCH BUSINESS SO AS TO MAKE IT ELIGIBLE TO RECEIVE SUCH PAYMENT. THE ARS ARGUMENT IS THAT NO PROOF WAS ASKED BY THE AO TO PROVIDE THE SAME AND HENCE NOT PROVIDED. BUT I AM NOT CONVINCED WITH SUCH AN ARGUMENT. DURING THE COURSE OF ASSESSMENT PROCEEDING, AS CAN BE SEEN FROM ASSESSME NT ORDER, THE AO SINCE THE POST SURVEY RECORDING OF STATEMENT OF CMD U/S 131, HAD INSISTED FOR PROOFS O F THE EXISTENCE OF THE COMPANY SEL AND HAD ALSO CALLED TO SHOW PROOF THAT SUCH COMPANIES OWN MANPOWER, MACHINERIES AND TECHNOLOGY TO PROVIDE THE INFO AND TRACKING OF DELIVERY SCHEDULES AND THEREFORE THE AR IS WRONG IN ALLEGING THAT NO SPECIFIC PROOF WAS REQUIRED BY THE AO. IN FACT, THE AO IN THE ASSESSMENT ORDER SPEAKS ABOU T SOME DISCREET ENQUIRY CONDUCTED IN RESPECT OF SEL WH ICH REVEALED THAT THE SEL IS LIKELY TO BE NON-EXISTENT. SUCH ALLEGATION ITSELF WOULD HAVE ROUSED THE APPELLANT A T THE PAGE 13 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 13 APPELLATE STAGE TO SHOW SUFFICIENT PROOFS AND PROVI DE SATISFACTORY EXPLANATION THAT SEL EXISTS AND IT IS FINANCIALLY SOUND AND STABLE AND CARRIED ON ACTIVITI ES IN THE NATURE OF CUSTOMER TACKING IN EUROPE SCIENTIFIC ALLY. SUCH COULD HAVE BEEN DONE BY PROVIDING COPIES OF INCORPORATION CERTIFICATE, COMMENCEMENT OF BUSINESS CERTIFICATES, MEMORANDUM AND ARTICLES OF ASSOCIATIO NS, EXACT LOCATION OF THE INDUSTRY OR PLACE OF BUSINESS , THE NATURE OF ITS ACTIVITY, THE FINANCIAL STATEMENT, THE AUDIT REPORT, ITS MANPOWER WITH QUALIFICATION OF EACH EMP LOYEE AND SO ON & SO FORTH WHICH A PRUDENT BUSINESSMAN WO ULD DEFINITELY ASK AND REQUIRE BEFORE ASSIGNING ANY CONTR ACT OF HUGE AMOUNT OF RS.10 CRORES UNLESS THE OTHER PAR TY IS A DUMMY OR / AND THE CONTRACT IS NON-EXISTENT. HOWE VER, NOTHING OF SUCH SORT HAD BEEN DONE. EVEN AT REJOIN DER STAGE, EVEN IF THE AO ALLEGED. SEL TO BE DUMMY ONE HAVING NO ACTIVITY AT ALL IN THE REMAND REPORT, NO ADDITIONAL EVIDENCE HAD BEEN FURNISHED BY THE AR TO DISPROVE SUCH ALLEGATION. INSTEAD, IT HAS BEEN ALL EGED THAT THE AO IS BIASED. I SEE NO SUCH BIAS. I SEE AO HAS PERFORMED HIS DUTIES OF INVESTIGATION IMPARTIALLY. HE HAS SHIFTED THE BURDEN OF PROOF TO THE APPELLANT TO PRO VE THE CAPACITY OF SEL TO PERFORM THE TASK OF TRACKING THE CUSTOMERS AND DELIVERY OF GOODS OF APPELLANT TO THEM . THE ONUS, SO SHIFTED HAS NOT BEEN ATTENDED TO BY THE APPELLANT AT ALL. THUS, I WONDER WHAT PREVENTED TH E APPELLANT TO FILE SUCH PROOFS, VIZ., THE CERTIFICAT E OF ROC, COPY OF MEMORANDUM, SOME ACTIVITY CHART, SOME CERTIFICATES OF PROOF OF MANUFACTURE OR SERVICES RENDERED BY THE SEL FROM HONG KONG GOVERNMENT OFFICIALS TO AT LEAST SHOW THAT SUCH COMPANY EXISTED AT THE RELEVANT PERIOD AND WAS REALLY CAPABLE OF DELIVE RING THE GOODS AND SERVICES FOR WHICH PURPOSE THE ALLEGE D AGREEMENT WAS MADE WITH IT BY THE APPELLANT. IN THE ABSENCE OF SUCH RELEVANT EVIDENCES, I HAVE NO OTHER OPTION BUT TO TREAT SUCH PAYMENT AS NOT FOR THE PURP OSE OF BUSINESS AND, HENCE, NOT ALLOWABLE AS REVENUE EXPENDITURE U/S 37(I) OF I.T ACT. I CONFIRM THE AD DITION PAGE 14 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 14 AND DISMISS THE GROUND OF APPEAL. IT MAY BE MENTION ED THAT I HAVE NOT ENTERED UPON THE DISPUTE WHETHER TH E PAYMENT IS ALLOWABLE OR DISALLOWABLE U/S 40(A)(I) OF I.T. ACT OR NOT. 5.5.2. FOR COMING TO SUCH CONCLUSION OF CONFIRMING THE ADDITION, I ALSO RELY UPON ANOTHER POINT BROUGHT OUT BY THE AO. ADMITTEDLY THE CONTRACT IS IN PLAIN PAPER A ND PRODUCED AT A MUCH LATER STAGE OF WHICH THE AR IS O F THE OPINION, DOES NOT DEBAR IT TO BE A VALID CONTRACT I .E., AN AGREEMENT ENFORCEABLE IN THE COURT OF LAW. IT IS A LSO ARGUED BY THE A R THAT SINCE THE STAMP SCAM IN KARNATAKA, IT HAS BECOME THE PRACTICE HERE TO MAKE CONTRACTS IN PLAIN PAPER. HOWEVER, I OBSERVE SUCH IS NOT TRUTH. IN FACT, I FIND THE APPELLANT HAS BELITTLED THE VALUE OF STAMP PAPER. STAMP PAPER IS DEFINED IN C IVIL PROCEDURE CODE (5 OF 1908) VIDE ORDER VII RULE 11C AS A PAPER CONTAINING AN EMBOSSED OR IMPRESSED MARK TO CERTIFY THAT THE AMOUNT STATED IN IT HAS BEEN PAID T O GOVERNMENT. SINCE DUTY IS PAID VIA STAMP PAPER TO T HE GOVERNMENT, THE GOVERNMENT IN TURN RECOGNIZES THE WRITINGS ON SUCH PAPER WHICH MAY BE ON MATTERS OF TRANSFER OF PROPERTY, SHARES, DEBENTURES, INSURANCE POLICIES AND ALSO EXECUTION OF CONTRACT AS EVIDENCE IN THE COURT OF LAW SINCE THE PAPER BEARS AN IMPRESSION, A N OFFICIAL MARK OR SEAL OF GOVERNMENT VIDE SECTION 82 OF INDIAN EVIDENCE ACT, 1872 AND SECTION 10 OF INDIAN STAMP ACT, 1899. IN BANKING PARLANCE, STAMP DUTY IS A KIND OF LEGAL/COURT FEE PAYABLE BY AFFIXING STAMPS ON THE DOCUMENTS UNDER THE PROVISIONS OF STAMP ACT, 1899 A ND ANY DOCUMENT/INSTRUMENTS NOT STAMPED ADEQUATELY AND PROPERLY IS NOT ACCEPTABLE IN A COURT OF LAW. AS PE R TAXATION LAW, IF A DOCUMENT DEALING WITH SUCH MATTE RS AS TRANSFER OF PROPERTY, SHARES, CONTRACT OF HIGH VALUE OR EVEN ANY LEGAL PROCEEDINGS OR PRIVATE INSTRUMENT OF ALMOST ANY NATURE WHATSOEVER ARE WRITTEN IS UNSTAMPE D, SUCH DOCUMENT BECOMES INVALID, VIDE COMMENTARIES ON - THE LAWS OF ENGLAND, PAGE 312 (1765) BY WILLIAM PAGE 15 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 15 BLACKSTONE. THUS, WHAT IS BEING POINTED OUT ABOVE IS THAT A CONTRACT ON STAMP PAPER IS SUO MOTO RECOGNIZED AS EVIDENCE IN A COURT OF LAW WHEREAS IF IT IS ON PAPE R, IT LOSES ITS ENFORCEABILITY AND, THEREFORE, CANNOT BE H ELD AS A CONTRACT AT ALL. IN FACT CONTRACT HAS BEEN DEFIN ED AS AN ENFORCEABLE AGREEMENT. THE AGREEMENT TO BECOME ENFORCEABLE MUST POSSESS CERTAIN CHARACTERISTICS VI Z., (I) IT MUST BE IN WRITING BECAUSE WRITING PROVIDES EXACT MEANING TO THE TERMS OF CONTRACT WHICH NEED INTERPRETATION AT THE TIME OF DISPUTE; (II) IT MUST BE SIGNED BY THE CONTRACTING PARTIES WHO ARE COMPETENT TO CONTRACT; (III) TWO WITNESSES MUST ALSO SIGN SUCH DOCUMENT; (IV) THE TERMS OF CONTRACT MUST NOT BE OPPOSED TO LAW OR PUBLIC POLICY; (V) THE CONTRACT MUST CONFORM TO THE LEGAL FORMALITIES; IN THIS CASE WHAT THE AO POINTS OUT THAT THE LEGAL FORMALITIES ARE NOT FULFILLED. ONE OF SUCH FORMALI TY AS TO IMMOVABLE PROPERTIES IS OF COMPULSORY REGISTRATION U /S 17A OF INDIAN REGISTRATION ACT. IN RESPECT OF OTHE R TRANSACTIONS/DOCUMENTS AND CONTRACT WHICH INVOLVES HIGH VALUES / DENOMINATION, THE MINIMUM LEGAL FORMALITY I S THAT IT SHOULD BE ON STAMP PAPER EITHER EXECUTED BEFORE A NOTARY OR A EXECUTIVE MAGISTRATE WHO WOULD PUT HIS S EAL AND STAMP AS WELL AS REFERENCE NO DATE, PLACE ETC., SO THAT IT GETS THE APPROVAL AND SEAL OF LEGALITY. UNL ESS SUCH IS DONE, THE CONTRACT / DOCUMENT HAVE TO BE INFERRE D AS INVALID OR VOID. IN THIS CASE, THE CONTRACT IS THU S VOID AND CONSEQUENTLY THE PAYMENTS MADE THEREON IS ALSO ILLEG AL AND, HENCE, DISALLOWABLE. WHILE PONDERING OVER SUC H HIGH VALUE PLAIN PAPER VOID AGREEMENT BETWEEN SEL & THE APPELLANT ENLIGHTENMENT DAWNED UPON ME THAT, IT IS NOT EASY TO GET BACKDATED STAMP PAPERS, THAT TOO WHEN ALLEGED DIFFERENT AGREEMENTS HAVING DIFFERENT DATES VIZ., 01.07.2002, 01.04.2005 AND AT LEAST THE AUTHORIZED PAGE 16 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 16 SIGNATORY HAS ALSO TO PUT HIS SIGNATURE ON THE STAMP VENDORS REGISTER IN TOKEN OF HAVING PURCHASED THAT PAPER WITH DATE THAT TOO IN THE YEAR OF 2009. SINCE SUCH ILLEGAL TASK INVOLVED INSURMOUNTABLE PROBLEM, THE INVENTION (NECESSITY BEING ITS MOTHER) WAS MADE OF PLAIN PAPER AGREEMENT TO SUBSTITUTE THE AGREEMENT NOT AVAILABLE (NON-EXISTENT) DURING THE TIME OF SURVEY WHICH PROBA BLY A PRUDENT BUSINESSMAN WILL NOT DESTROY IF ACTUALLY MADE BECAUSE IT INVOLVED PAYMENTS ABOVE 28 CRORES UNLESS IT CAN BE ASSUMED THAT THE APPELLANT KNEW THAT THE PAYM ENT IS NOT FOR THE PURPOSE OF BUSINESS AND FOR SOME OTH ER PURPOSE NOT WORTH REMEMBERING EVEN IF THE SUM PAID IS VERY HIGH OR THE SAME PAYMENT IS TO ONES ONESELF IN T HE GARB OF A DUMMY OF ONES OWN SELF. THUS, CONSIDERING FROM ALL POSSIBLE ANGLES, I CONCLUDE THAT THE PAYMEN T CLAIMED AS EXPENDITURE PAID TO SEL DESERVE TO BE DISALLOWED. (CONFIRMED RS.18,35,79,000/- AND RS.10,68,71,384/-). 10.6. DURING THE COURSE OF HEARING BEFORE US, THE LEARNED AR HAD REITERATED MORE OR LESS WHAT HAS BEEN REPRESENTED B EFORE THE FIRST APPELLATE AUTHORITY. IN FURTHERANCE, IT WAS SUBMIT TED THAT DURING THE COURSE OF SURVEY PROCEEDINGS, THE AGREEMENT DATED 1. 7.2002 AND ALSO THE LETTER TERMINATING SERVICES OF SEL COULD NOT BE PRO DUCED FOR VERIFICATION AS THEY HAVE BEEN DISLOCATED. HOWEVER, HE HAD ASSERTED THAT THOSE DOCUMENTS WERE AVAILABLE WITH THE DEPARTMENT EVEN BEFORE THE SURVEY OPERATION. THUS, THE LEARNED AR ARGUED, THE CONCLUSION OF THE LEARNE D CIT (A) WAS BASED ONLY ON ASSUMPTION, PRESUMPTION AND CONTRARY TO THE FACT S. HE HAD, FURTHER, CONTRADICTED THE PRESUMPTION OF THE CIT (A) THAT TH E AGREEMENT WAS NOT GENUINE AS IT WAS EXECUTED ON A PLAIN PAPER INSTEAD OF A STAMP PAPER. HE HAD ALSO DISOWNED THE THEORY OF THE CIT (A) THAT THE AGR EEMENT WAS MADE ON A PLAIN PAPER AS IT WOULD BE A PROBLEM TO OBTAIN BACK DATED STAMP PAPER. THE PAGE 17 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 17 LEARNED AR HAD REFUSED TO BUY THE CIT (A)S PHILOSOP HY THAT THE NON- EXISTENCE OF THE AGREEMENT CAME TO LIGHT ONLY DURING THE SURVEY PROCEEDINGS AND ON DEMAND A COPY OF THE NON-EXISTENT PLAIN PAPER AGREEMENT WAS PRODUCED ETC. INSTEAD, HE HAD CATEGORICALLY ADVOCATE D THAT THE COPIES OF THE AGREEMENT AS WELL AS THE TERMINATION LETTER WERE WI TH THE DEPARTMENT MUCH BEFORE THE SURVEY PROCEEDINGS INITIATED. WITH REGAR D TO THE CIT (A)S ALLEGATION OF (I)NON-PRODUCTION OF CERTIFICATE OF R OC, (II) MEMORANDUM OF ASSOCIATION, ARTICLES OF ASSOCIATION, (III) ACTIVIT Y CHART, (IV) PROOF OF MANUFACTURE/SERVICE RENDERED TO EVIDENCE THAT SEL W AS CAPABLE OF RENDERING SERVICES TO THE ASSESSEE ETC., THE LEARN ED AR HAD FURNISHED COPIES OF THE SAME FOR THE PERUSAL OF THE BENCH. 10.7. WITH REGARD TO THE ACCUSATION OF THE CIT (A) THAT THE AGREEMENT WAS ON A PLAIN PAPER WHICH WAS NEITHER ST AMPED NOR REGISTERED/NOTARIZED ETC; IT WAS ARGUED BY THE LEAR NED AR THAT ADMISSIBILITY OF A DOCUMENT AS EVIDENCE IN THE COURT OF LAW AND PROOF OF ITS GENUINENESS WERE TWO ENTIRELY DIFFERENT ISSUES. A G ENUINE DOCUMENT MAY NOT BE ADMISSIBLE IN A COURT OF LAW IF IT DOES NOT COMP LY WITH THE REQUIREMENT OF THE EVIDENCE ACT 1872. HOWEVER, IT WAS ARGUED, NON ADMISSIBILITY IN THE COURT OF LAW WOULD NOT RESULT IN THE DOCUMENT BEING CONSTRUED AS NOT GENUINE. TO STRENGTHEN HIS CONTENTIONS, THE LEARNE D A R HAD PLACED STRONG RELIANCE ON THE FOLLOWING CASE LAWS, NAMELY: (I) TRIMEX INTERNATIONAL FZE LTD V. VEDANTA ALUMINIUM L TD 2010 3 SCC 1; (II) THIRUVENGADA PILLAI V. NAVANEETHAMMAL & ANR. - WRI T PETITION (CIVIL) 290 OF 2001 DT.19/2/2008 SC PAGE 18 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 18 10.8. IN RESPECT OF THE CIT (A)S FINDINGS THAT DI SCREET ENQUIRY UNDERTAKEN BY THE AO REVEALED THAT SEL, HONG KONG WA S LIKELY TO BE A NON- EXISTENT ENTITY, IT WAS ARGUED BY THE LEARNED AR THAT NO MATERIAL HAS BEEN BROUGHT ON RECORD BY THE REVENUE TO SUBSTANTIATE THI S CLAIM. FURTHER, NO INFORMATION OR MATERIAL EVIDENCE RELATING TO DISCRE ET ENQUIRY HAS BEEN PROVIDED TO THE ASSESSEE. IT WAS ALSO ASSERTED BY T HE LEARNED AR THAT THIS FACT HAS BEEN MENTIONED BEFORE THE FIRST APPELLATE AUTHORITY IN NO AMBIGUOUS TERMS WHICH HAS, HOWEVER, NOT BEEN CONSID ERED BY THE CIT (A). IT WAS, FURTHER SUBMITTED BY THE LEARNED AR THAT NO REASONABLE OPPORTUNITY WAS GIVEN TO THE ASSESSEE TO REBUT THE SERIOUS ALLE GATIONS MADE BY THE AO WHICH, ACCORDING TO HIM, WAS VIOLATIVE OF THE PRINC IPLES OF NATURAL JUSTICE. THE LEARNED AR DREW THE ATTENTION OF THIS BENCH TO THE FACT THAT THE HONBLE BENCH, DURING THE COURSE OF HEARING, QUERIE D THE LEARNED DR/LEARNED ADDL. CIT PRESENT THE OUT COME OF SUCH PURPORTED EN QUIRY FOR WHICH THE ADDL. CIT PLEADED HIS IGNORANCE OF ANY SUCH ENQUIRY, HOWEVER, AVERRED THAT SOME OTHER ENQUIRIES WERE STILL UNDERWAY AND THE RES ULT WAS STILL AWAITED ETC. IT WAS THE CONTENTION OF THE LEARNED A R THAT EVEN AFTER THREE YEARS OF THE INITIAL ASSESSMENT CONCLUDED, THE REVENUE HAD NOT C OME UP WITH ANY EVIDENCE AND, THUS, THE DISALLOWANCE MADE WAS SOLELY ON ASSUM PTION. THUS, ACCORDING TO THE LEARNED AR, THE ASSESSMENT AS WELL AS APPELL ATE PROCEEDINGS WAS CONCLUDED MERELY ON SUSPICION, ASSUMPTION AND WITHOU T ANY CONCRETE EVIDENCE. 10.9. WITH REGARD TO THE ALLEGATION THAT NO EVIDEN CE WAS FILED EITHER DURING THE COURSE OF ASSESSMENT OR APPELLATE PROCEE DINGS TO PROVE THAT THE AMOUNTS WERE PAID AND ALSO AVAILED THE SERVICES REN DERED BY SEL, IT WAS PAGE 19 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 19 SUBMITTED BY THE LEARNED AR THAT THE FOLLOWING DOCUM ENTS WERE FURNISHED DURING THE COURSE OF ASSESSMENT PROCEEDINGS, NAMELY: (I) WRITE UP ON THE SERVICES RENDERED BY SEL; (II) AGREEMENT WITH SEL (III) COPIES OF INVOICES RAISED BY SEL AND GRUYTERS AGENTUREN BV; (IV) LEDGER EXTRACT OF THE INFO & TRACKING OF DELIVERY SCHEDULES; (V) DETAILS ABOUT PAYMENTS THROUGH BANKING CHANNELS; & (VI) CONFIRMATION FOR RECEIPT OF THE AMOUNT BY SEL AND GRUYTERS AGENTUREN BV. 10.10. FURTHER, IT WAS SUBMITTED THAT THE CONFIRMA TION RECEIVED FROM ONE OF THE CUSTOMERS, NAMELY, GSTAR HAS BEEN FILED A S ADDITIONAL EVIDENCE BEFORE THIS HONBLE BENCH TO SUGGEST THAT THE SERVI CES WERE PROVIDED BY SEL. IN RESPECT OF THE REVENUES CHARGE THAT NO CO RRESPONDENCE BETWEEN THE ASSESSEE AND THE SERVICE PROVIDER WAS FILED TO PROVE THAT THE SERVICES HAVE BEEN AVAILED OF ETC., THE LEARNED AR AVERRED T HAT A SUBMISSION DATED 8.12.2009 WAS FILED WITH THE AO CONTAINING THE E-MA IL CORRESPONDENCE BETWEEN THE ASSESSEE AND THE SERVICE PROVIDER I.E., THESE WERE PART OF THE ASSESSMENT PROCEEDINGS. 10.11. WITH REGARD TO (I) DETAILS OF ARRIVING AT T HE COMPENSATION AMOUNT & PAYMENTS MADE THROUGH BANKING CHANNELS; & (II) THE CORRESPONDENCE BETWEEN THE ASSESSEE AND SEL IN RELA TION TO TERMINATION OF THE SERVICE AGREEMENT HAS NOT BEEN BROUGHT ON RECOR D ETC., THE LEARNED AR HAD VEHEMENTLY DENIED THE ALLEGATIONS. IN FACT, HE HAD EXPLAINED THAT PAGE 20 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 20 (I) ALL THE INFORMATION SOUGHT WAS FILED WITH- (A) THE DDIT IN 2007 (DURING THE PROCEEDINGS U/S 2 01 OF THE ACT I.E., TWO YEARS EARLIER TO THE SURVEY PROCEEDINGS AND ASSESSMENT PROCEEDINGS U/S 143(3) OF THE ACT; & (B) THE AO DURING THE ASSESSMENT PROCEEDINGS VIDE SUBMISSION DT: 28.10.2009. (II) ALSO A LIST OF FOLLOWING DOCUMENTS WERE FILED DURING THE ASSESSMENT PROCEEDINGS: (A) CALCULATION OF QUANTUM OF TERMINATION FEE; (B) DETAILS OF PAYMENT THROUGH BANKING CHANNELS; (C) NOTICE FOR TERMINATION OF SERVICE AGREEMENT; (D) CONSENT LETTER FROM SEL FURTHER, THE ABOVE INFORMATION WAS ONCE AGAIN FILED WITH THE AO PURSUANT TO THE SURVEY PROCEEDINGS VIDE SUBMISSI ON DT: 27.11.2009 10.12. WITH REGARD TO THE REVENUES ALLEGATION THA T THE ASSESSEES SISTER CONCERN I.E., JEANS KNIT PRIVATE LIMITED [JK PL] HAD PAID COMMISSION TO SEL WHICH HAD SAME BENEFICIARY AS SEL DURING THE AY 2006-07 UNDER CONSIDERATION, THE LEARNED AR SUBMITTED, WITHOUT PR EJUDICE, THAT THIS IS A NEW ALLEGATION RAISED BY THE ADDL. CIT BEFORE THIS B ENCH WHICH HAS NO RELEVANCE OR BASIS WHATSOEVER. DURING THE ASSESSME NT YEAR 2006-07 UNDER CONSIDERATION, NO PAYMENT WAS MADE BY JKPL TO SEL. TH E INFORMATION PROVIDED (IN THE TABULATION) IN THE ADDL. CITS SUB MISSION IS INCORRECT. FURTHER, IT WAS SUBMITTED THAT THE NATURE OF SERVIC ES PROVIDED BY SEL TO THE ASSESSEE WAS DIFFERENT FROM THOSE PROVIDED BY SE L TO JKPL I.E., SEL WAS ASSISTING JKPL IN PROCURING FABRICS AND ACCESSO RIES WHEREAS SEL WAS ASSISTING THE ASSESSEE IN PROCURING SALES ORDERS. IN RESPECT OF THE ALLEGATION PAGE 21 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 21 THAT THE MANAGEMENT OF THE ASSESSEE WAS NOT AWARE O F THE OWNERSHIP/MANAGEMENT DETAILS OF SEL, IT WAS SUBMITT ED THAT ON SPECIFIC REQUIREMENT WAS INDICATED IN THE APPELLATE ORDER, T HE ASSESSEE HAS NOW OBTAINED THE OWNERSHIP DETAILS AND FURNISHED THE SA ME BEFORE THIS BENCH AND ALSO TO THE REVENUE. 10.13. WITH REGARD TO THE REVENUES ALLEGATION THA T THE ASSESSEE WAS NOT ABLE TO EXPLAIN WHY THE TERMINATION FEES HAD TO BE PAID TO HONG KONG ENTITY AS PER EUROPEAN REGULATION WHEN THE CONTRACT WAS ENFORCEABLE IN HONG KONG, THE LEARNED AR SUBMITTED THAT THE AO HAD ACKN OWLEDGED THE FACT THAT THE SERVICES WERE PERFORMED BY AN EUROPEAN NATI ONAL BASED IN NETHERLANDS. IT WAS THE PREROGATIVE OF THE SERVICE PROVIDER TO PLAN HIS AFFAIRS. IN THIS CASE, THE CONTRACT WAS WITH HONG KONG ENTITY DOES NOT ALTER THE DEDUCTIBILITY OF EXPENDITURE IN THE HANDS OF THE ASSESSEE. IT WAS, FURTHER, CLAIMED THAT THE FACT THAT EVEN THE DEPART MENT HAD NOT DISPUTED THE PROVIDING OF SERVICE HAS BEEN RENDERED IN EUROP E. THE BONA-FIDE UNDERSTANDING OF THE ASSESSEE ABOUT THE TERMINATION AMOUNT BEING PAYABLE AS PER EUROPEAN LAW AS WELL AS EXPRESS PROVISION OF THE WRITTEN AGREEMENT IN GOOD FAITH WOULD BE OBVIOUS EVEN FROM THE RESPONSE TO QUESTIONS RECORDED DURING NOVEMBER, 2009. THE CONTRACT ENVISAGES HONG KONG AS THE JURISDICTION WITH RESPECT TO ANY DISPUTE, GIVEN THAT THE CONTRACT WAS ENTERED INTO WITH A COMPANY INCORPORATED AND RESIDENT IN HON G KONG. THE AMOUNT PAID WAS DEDUCTIBLE AS BUSINESS EXPENDITURE AND THE COUNTER CLAIMS OF THE REVENUE BEFORE THIS HONBLE BENCH WITHOUT CITING AN Y VALID BASIS WAS ONLY ON MERE SUSPICION AND, THEREFORE, UNTENABLE. PAGE 22 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 22 10.14. IN RESPECT OF THE AMOUNT PAID WAS DEDUCTIBL E AS BUSINESS EXPENDITURE AND THE COUNTER CLAIMS OF THE REVENUE B EFORE THIS BENCH ARE WITHOUT ANY VALID BASIS AND THE REVENUES OBJECTION THAT THE ADDITIONAL EVIDENCES FURNISHED AT THIS STAGE WOULD AFFECT JURI SPRUDENCE, THE LEARNED AR COUNTERED BY ARGUING THAT THE ADDITIONAL EVIDENCE SHOULD BE ACCEPTED FOR THE FOLLOWING REASONS, NAMELY: (I) THESE WERE THE DOCUMENTS THE CIT (A) HAD SPECI FIED IN HIS ORDER WHICH WOULD AID IN ESTABLISHING THE GENUI NENESS; (II) THESE DOCUMENTS WERE NOT AVAILABLE WITH THE A SSESSEE DURING THE COURSE OF APPELLATE PROCEEDINGS BEFORE T HE CIT (A); (III) THESE DOCUMENTS CLEARLY DEMONSTRATE THE EXIST ENCE OF SEL AND THE TRANSACTIONS BETWEEN THE ASSESSEE AND S EL AND, ACCORDINGLY, FURTHER SUPPORT ITS GENUINENESS; RELIES ON CASE LAWS : TIMKEN ENGINEERING & RESEARCH INDIA PVT. LTD. V. DC IT ITA NO.974/BANG/2008 & ITA NO.983/BANG/2008; TEXT HUNDRED INDIA PVT. LTD ITA NO.2077/2010 AND ITA NO.2065/2010 DEL HC; CIT V. SURETECH HOSPITAL AND RESEARCH CENTRE LTD 29 3 ITR 53 (BOM); AM MATHUR V. DCIT 308 ITR 160 ITAT, INDORE; RAJPAL SINGH V. ITO 97 ITD 79 (ITAT, AMRITSAR). 10.15. WITH REGARD TO REVENUES CLAIM THAT THE ASS ESSEE HAD WOUND UP ITS OPERATIONS IN THE AY 2006-07 AND JKPL TOOK OVER THE BUSINESS OF THE ASSESSEE AND JKPL CONTINUED TO PAY COMMISSION TO ANO THER ENTITY BENEFICIALLY OWNED BY MR. MANFRED GRUYTERS AND, ACCORD INGLY, THERE WAS NO REASON TO TERMINATE THE SERVICE AGREEMENT ETC., IT WAS CONTRADICTED BY THE LEARNED AR THAT JKPL AND THE ASSESSEE WERE INDEPEND ENT ENTITIES CATERING PAGE 23 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 23 TO VERY DIFFERENT SEGMENTS. ACCORDINGLY, THE PRESUMPT ION OF JKPL TAKING OVER THE BUSINESS OF THE ASSESSEE WAS FACTUALLY UNFO UNDED AS THE NATURE OF SERVICES RENDERED BY SEL WAS QUITE DIFFERENT. NOTWI THSTANDING THE ABOVE, IT WAS SUBMITTED THAT THIS WAS A FRESH ARGUMENT AS NO SUCH ARGUMENT HAS BEEN MADE EITHER DURING THE ASSESSMENT OR APPELLATE PROCEEDINGS. IT WAS, FURTHER, ARGUED THAT IN THE ASSESSMENT ORDER, EXTRA CTS OF THE SURVEY CONDUCTED ON JKPL HAS BEEN PRODUCED, HOWEVER, THE A O HAD NOT CITED THIS REASON NOW ADVANCED BY THE ADDL. CIT FOR DISALLOWANC E OF THESE AMOUNTS. ACCORDINGLY, THE LEARNED AR ARGUED THAT NEITHER THE DR NOR THE ADDL. CIT HAVE THE JURISDICTION TO GO BEYOND THE ORDERS PASSE D BY THE AO AND THE CIT (A) OR RAISE ANY POINT DIFFERENT FROM THAT CONSIDERE D BY THE LOWER AUTHORITIES. IF THE DR/ ADDL. CIT WERE TO BE ALLOW ED TO TAKE THIS LINE OF ARGUMENT, IT WAS CLAIMED BY THE LEARNED AR, THAT THI S WOULD BE SETTING UP AN ALTOGETHER NEW AND DIFFERENT CASE WHICH IS NOT PERM ISSIBLE. 10.16. IN RESPECT OF THE REVENUES ARGUMENT THAT I F THE ADDITIONAL EVIDENCE WERE TO BE ACCEPTED, THE SAME SHOULD BE SE NT TO THE AO TO EXAMINE THE ISSUES ARISING FROM THE EVIDENCE FILED ETC., THE LEARNED AR SUBMITTED THAT THE CIT (A) HAD RESORTED TO CONFIRM THE DISALLOWANCE FOR THE ALLEGED TWO REASONS, NAMELY, (I) INVALID PLAIN P APER AGREEMENT; AND (II) VOID AGREEMENT AS LEGAL FORMALITIES WERE NOT FOLLOW ED WHILE ENTERING INTO SUCH AGREEMENT. 10.16.1. IN THIS CONNECTION, IT WAS SUBMITTED THAT ALL THE RELEVANT MATERIALS NECESSARY FOR DECIDING THE ISSUES IN APPE AL ARE NOW AVAILABLE ON PAGE 24 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 24 RECORD BEFORE THIS HONBLE BENCH AND, THEREFORE, IT WAS PLEADED THAT THE REVENUE SHOULD NOT BE ALLOWED TO SET UP A NEW CASE. 10.16.2. IN THE ALTERNATIVE, IF THE HONBLE BENCH CONSIDERS IT FIT TO VALIDATE THE AUTHENTICITY OF THE DOCUMENTS NOW S UBMITTED AS ADDITIONAL EVIDENCE TO FURTHER SUPPORT AND ESTABLISH THE FACT THAT SERVICES HAVE BEEN RENDERED AND THE CONTRACT WAS GENUINE, IT WAS SUBMI TTED BY THE LEARNED AR THAT THE ISSUE BE RESTORED TO THE FILE OF THE AO WI TH A SPECIFIC DIRECTION TO VERIFY THE AUTHENTICITY OR OTHERWISE OF THE ADDITIONA L EVIDENCE NOW PRODUCED AS THE DISALLOWANCE WAS CONFIRMED BY THE CIT (A) ONL Y ON TWO GROUNDS CITED ABOVE. 10.16.3. IN CONCLUSION, IT WAS SUBMITTED ON BEHALF OF THE ASSESSEE THAT THE DOCUMENTS LIKE INVOICE COPIES, SUMMARY OF I NVOICES, DETAILS OF PAYMENT THROUGH BANKING CHANNEL, E-MAIL CORRESPONDEN CE WHICH PROVE THE GENUINENESS OF THE CONTRACT WERE FILED DURING THE C OURSE OF ASSESSMENT PROCEEDINGS AND ALSO THE AO HAD THE BENEFIT OF ANAL YZING THE SAID DOCUMENTS WHILE SENDING A REMAND REPORT TO THE CIT (A). IT WAS, THEREFORE, SUBMITTED THAT IF THE ISSUE WERE TO BE RESTORED BAC K TO THE FILE OF THE AO, SPECIFIC DIRECTION BE ISSUED TO THE AO TO CONFINE H IM TO EXAMINE THE AUTHENTICITY OF THE ADDITIONAL EVIDENCE ALONE AND AR RIVE AT A CONCLUSION. IN THIS CONNECTION, THE ASSESSEE HAD RELIED ON THE RUL ING OF THE HONBLE BOMBAY HIGH COURT IN THE CASE OF COCA COLA REPORTED IN 29 0 ITR 464 (BOM). PAGE 25 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 25 10.17. ON THE OTHER HAND, THE LEARNED ADDL. CIT/ S PECIAL DR HAD MADE AN ELABORATE SUBMISSION ON THE ISSUE, THE SUBSTANCE OF WHICH IS SUMMED UP AS UNDER: - THAT THE AO HAD QUERIED THE VERACITY OF COMMISSION P AYMENT AND TERMINATION FEE TO SEL DURING THE COURSE OF AS SESSMENT AND SURVEY PROCEEDINGS. HOWEVER, THE ASSESSEE HAD CH OSEN NOT TO PROVIDE ANY POSITIVE PROOF FOR CLAIMING SUCH DEDU CTIONS. THE ASSESSEE COULD HAVE GIVEN DETAILS OF SERVICES RENDE RED BY THE COMMISSION RECIPIENT BY GIVING THIRD PARTY EVIDENCE T O PROVE THAT THE COMMISSION PAYMENT WAS GENUINE. HOWEVER, T HIS HAS NOT BEEN PRECISELY DONE BY THE ASSESSEE; - THAT IT WAS NATURAL THAT THE COMMISSION PAYMENT IN I NTERNATIONAL BUSINESS WAS A NORMAL BUSINESS EXPENDITURE, HOWEVER , IN THE PRESENT CASE, THE ASSESSEE WAS NOT ABLE TO EXPLAIN THE REASON AND TO WHOM THE COMMISSION WAS PAID; - THAT WHEN THE ALLEGED ENTIRE SERVICES WERE RENDERED IN HOLLAND, THE ASSESSEE WAS NOT ABLE TO EXPLAIN WHY THE PAYMENTS HAD TO BE MADE TO A HONG KONG [HK] ENTITY, WHOSE DIRECTORS WERE UNKNOWN; AND THAT THE ASSESSEE HAD NOT FURNISHED AN Y DETAIL OF OWNERSHIP OF SEL EITHER AT ASSESSMENT OR AT APPELLA TE STAGE; - THAT ONE MR. MANFRED GRUYTERS WHO OWNED M/S.GRUYTERS BV NETHERLANDS HAD RECEIVED COMMISSION IN THE NAME OF HIS ENTITY REGISTERED IN NETHERLANDS. IF MR. MANFRED WERE TO BE THE ULTIMATE OWNER OF SEL, THE REASON AS TO WHY HE HAD T O TAKE THE COMMISSION IN HONG KONG INSTEAD OF IN NETHERLANDS AND WHY THE ASSESSEE HAD TO MAKE THE PAYMENTS IN HONG KONG FOR W HICH, THERE WAS NO EXPLANATION FROM THE ASSESSEE; - THAT THE ASSESSEES SISTER CONCERN JKPL HAD STARTED ITS BUSINESS DURING THE AY 2006-07 AND IT HAD ALSO MADE COMMISSION PAYMENTS; AND THAT THE SAID COMMISSION PA YMENT WAS MADE TO SEL. THE ASSESSEE HAS NOW COME UP WITH A THEORY THAT THE ULTIMATE BENEFICIARY OF BOTH M/S.SOUTH ELEG ANT LTD, PAGE 26 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 26 HONG KONG AND M/S SHARP EAGLE LTD, HONG KONG WAS MR . MANFRED GRUYTERS ONLY; - THAT DURING THE YEAR UNDER DISPUTE, THE ASSESSEE HAD MADE A COMMISSION PAYMENT OF RS.10.68 CRORES TO SEL AND JKP L ALSO MADE A PAYMENT OF RS.14.75 CRORES TO SHARP EAGLE LTD , H K; AND THAT THE MOOT QUESTION IS AS TO WHY THE ASSESSEE HAD TO PAY A TERMINATION FEE OF RS.18.5 CRORES TO SEL WHEN THE S ISTER CONCERN OF THE ASSESSEE CONTINUES TO DO BUSINESS W ITH MR. MANFRED GRUYTERS THROUGH ANOTHER COMPANY, M/S. SHARP EAGLE LTD - THAT THE ASSESSEE WOUND UP ITS BUSINESS SOMETIME AR OUND THE AY 2006-07 AND JKPL TOOK OVER THE BUSINESS; THAT BY THE AY 2007-08, THE ASSESSEE WOUND UP ITS BUSINESS OPERATI ONS AND HAD ONLY CONTINUED TO BE AN ENTITY - LEASING FACTORY PREM ISES TO JKPL AND ON THE CONTRARY JKPL TOOK OVER THE BUSINESS OF THE ASSESSEE; - THAT AS PER THE STATEMENT OF THE M.D OF THE ASSESSE E ON OATH, THEY WANTED TO PAY A ONE-TIME TERMINATION FEE AND SER VICE THE MARKET DIRECTLY BY THEMSELVES. HOWEVER, IT WAS NOTIC ED THAT THE ASSESSEE DID NOT DO ANY DIRECT SOURCING; INSTEAD , IT HAD ROUTED THE SAME NATURE OF SERVICES THROUGH JKPL AND M/S. SHARP EAGLE LTD. THUS, WHEN THE ASSESSEE WAS WINDI NG UP ITS BUSINESS, IT DID NOT HAVE ANY REASON TO TERMINATE TH E CONTRACT; AND THAT THE CONTRACT WAS GETTING TERMINATED AS THE ASSESSEE WOUND UP ITS BUSINESS; - THAT THE STATEMENT OF THE M D OF THE ASSESSEE WAS A LSO MISLEADING IN AS MUCH AS THE ASSESSEE GROUP DID NOT STOP CONDUCTING BUSINESS WITH MR. MANFRED. THE ENTIRE B USINESS TURNOVER WAS SHIFTED FROM THE ASSESSEE TO JKPL AND, THUS, THE SERVICE FRONT OF MR. MANFRED WAS SHIFTED FROM SEL T O M/S. SHARP EAGLE LTD. BOTH THESE CONCERNS WERE BASED OU T OF H K, OPERATING FROM SAME ADDRESS AND HAD SAME PEOPLE HAN DLING THEM AND THE ULTIMATE BENEFICIARY OF BOTH THESE ENTI TIES WAS MR. MANFRED AND, THUS, THE TERMINATION FEE PAID WAS PROVED TO PAGE 27 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 27 BE SHAM. THE ASSESSEE HAD NOT BEEN ABLE TO PROVID E ANY EVIDENCE TO THE EFFECT THAT THE TERMINATION FEE WAS REQUIRED; - THAT THE ASSESSEE HAD NOT BEEN ABLE TO EXPLAIN ON T HE TERMINATION FEE WHICH WAS PAID TO H K ENTITY IN ACCO RDANCE WITH EUROPEAN REGULATIONS; AND, THUS, BY OPTING TO SET UP COMPANIES IN H K, MR. MANFRED HAD ACTUALLY GIVEN UP ON THE PROTE CTION OF EUROPEAN REGULATIONS WHICH WERE VERY STRINGENT. IN A NUTSHELL, THE ASSSESSEE HAD FAILED TO EXPLAIN AS TO WHY THE TE RMINATION FEE HAD TO BE PAID TO HK ENTITY AS PER EUROPEAN REGU LATIONS; - THAT WHEN THE VERY NATURE OF TERMINATION FEE CLAIMED WAS FOUND TO BE SHAM, THE OTHER PART IN THE NATURE OF COMMISS ION PAYMENT TO SEL WAS ALSO NOT ABOVE THE BOARD. THE ASSESSEE HAD NOT BEEN ABLE TO GIVE ANY POSITIVE PROOF AS REGARDS SERV ICES RENDERED BY SEL AND MOREOVER, THE OWNERSHIP AND THE TRANSACTIONS WITH SEL HAD ALSO NOT BEEN EXPLAINED B Y THE ASSESSEE EITHER DURING THE COURSE OF ASSESSMENT AS WELL AS APPELLATE PROCEEDINGS. THE MD OF THE ASSESSEE HAD, ON OATH, FEIGNED HIS IGNORANCE ABOUT THE DIRECTORS AND OWNE RS OF SEL. - THAT THE ASSESSEE HAD CLAIMED THAT THE COMMISSION P AYMENT AND THE TERMINATION FEES WERE IN ACCORDANCE WITH TH E AGREEMENT DATED 1.7.2012 (SIC) 1.7.2002 WITH SEL. THE GENUINENESS OF THIS CONTRACT, CONSIDERING IT BEING ON A PLAIN PAPER NOT BEING NOTARIZED HAS ALSO BEEN BROUGHT ON FOCAL POINT. THOUGH THE ALLEGED CONTRACT WAS ENFORCEABLE IN HK, THE ASSESSEE HAD CLAIMED THAT THE PAYMENT OF TERMINATION FEE WAS IN ACCORDANCE WITH EUROPEAN REGULATIONS. 10.18. IN CONCLUSION, IT WAS FORCEFULLY AR GUED THAT SINCE THE CLAIMS OF THE ASSESSEE WITH REGARD TO (I) PAYMENT OF RS.10.68 CRORES BEING INFO & TRACKING OF DELIVERY SCHEDULES PAID TO SEL; AND (II ) TERMINATION FEE OF RS.18.35 CRORES HAVE NOT BEEN PROPERLY EXPLAINED COU PLED WITH DOCUMENTARY PROOFS AND ALSO THE ASSESSEE HAS NOW COME UP WITH A DDITIONAL EVIDENCE BEFORE THIS HONBLE BENCH WHICH HAVE NOT BEEN PLACE D EITHER BEFORE THE PAGE 28 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 28 ASSESSMENT OR REMAND REPORT PROCEEDINGS OR AT THE A PPELLATE STAGE. THUS, FOR THE PRINCIPLES OF NATURAL JUSTICE AND FAIRNESS, THE TWIN ISSUES ARE TO BE RESTORED TO THE DESK OF THE AO FOR COMPREHENSIVE EX AMINATION OF THE ASSESSEES CLAIM. 11. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS, PERUSED THE RELEVANT MATERIALS ON RECORDS AND ALSO THE VOLUMINO US PAPER BOOK FURNISHED BY THE LEARNED AR DURING THE COURSE OF HEARING. ON HIS PART, THE LEARNED DR CAME UP WITH AN ELABORATE NOTE ALONG WITH ENCLOS URES. 11.1. BRIEFLY, THE ASSESSEE HAD, ACCOR DING TO THE LEARNED AR, ENTERED INTO AN AGREEMENT DATED 1.7.2002 WITH SEL A ND IN PURSUANCE OF SUCH AGREEMENT MADE PAYMENTS TO SEL TOWARDS COMMISSION OF RS.10.68 CRORES BEING INFO & TRACKING OF DELIVERY CHARGES AND ALSO TERMINATION FEE OF RS.18.35 CRORES. THESE PAYMENTS, ACCORDING TO THE A SSESSEE, WERE IN PURSUANCE OF PROCUREMENT OF SALES ORDERS THROUGH SE L AND THAT THE PAYMENTS WERE MADE THROUGH REGULAR BANKING CHANNELS. THE TERMINATION FEE WAS ALSO PAID FOR TERMINATION OF THE SAID AGREEMENT . 11.2. AFTER ANALYZING THE ASSESSEES CONTENT IONS, THE AO, FOR THE REASONS RECORDED IN THE ASSESSMENT ORDER UNDER DISP UTE, CAME TO THE CONCLUSION THAT THE MAJOR DEALINGS OF THE ASSESSEE INCLUDING THE EXPORT OF FINISHED GARMENTS AND IMPORT OF FABRIC ETC., WERE W ITH ITALIAN BASED COMPANIES THOUGH IN A FEW CASES THE SALES/PURCHASES HAVE BEEN MADE FROM NETHERLAND BASED COMPANIES ALSO. KEEPING THESE ASP ECTS IN VIEW, THE AO HELD THAT IT WAS HIGHLY UNLIKELY AS TO WHY THE ASSESSE E HAD PAID SUCH A HUGE AMOUNT TO A NON-RESIDENT COMPANY AT HONG KONG WITHOU T SPECIFYING THE PAGE 29 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 29 NATURE OF SERVICES RENDERED BY THEM. HE HAD FURTHER HELD THAT THE PAYMENT MADE TO SEL, HONG KONG WAS NOT A GENUINE PAYMENT AND HAD NOT BEEN INCURRED WHOLLY AND EXCLUSIVELY FOR EARNING THE BUSIN ESS INCOME OF THE ASSESSEE. WITH REGARD TO THE CLAIM UNDER THE HEAD TERMINATION FEES, THE AO DISALLOWED THE ENTIRE SUM U/S 40(A)(I) OF THE AC T TREATING THAT THE ASSESSEE WAS BOUND TO DEDUCT THE TDS U/S 195(1) AND FAILURE TO DEDUCT TDS WAS DISALLOWED U/S 40(A)(I) OF THE ACT. 11.3. WHEN THESE ISSUES HAVE TRAVELLED T O THE CIT (A) FOR RELIEF, THE CIT (A) HAD RECORDED HIS FINDINGS THAT A SURVEY U/S 133A(1) OF I.T. ACT WAS CONDUCTED IN THE BUSINESS PREMISES OF THE ASSESSEE AND DURING THE COURSE OF ASSESSMENT PROCEEDING NEITHER A COPY NOR THE ORIGINA L AGREEMENT DATED 1.7.2002 OR THE COPY OR THE ORIGINAL OF THE SCHEME O F ARRANGEMENT DATED 1.4.2005 OR THE COPY / ORIGINAL OF TERMINATION AGREE MENT WERE FOUND WHICH COULD BE HELD AS AN EVIDENCE THAT THE PAYMENTS WERE FOR SOME OTHER PURPOSE (BECAUSE PAYMENT IS PROVED) AND HAD NOT BEEN ON THE BASIS OF THE ALLEGED CONTRACT OR SCHEME OF ARRANGEMENT. SECONDLY, MR. KO THARI, CMD IN HIS STATEMENT ON OATH EXPRESSED HIS IGNORANCE ABOUT THE EXISTENCE OF ANY SUCH CONTRACT. IF SUCH A PERSON SAYS IN CLEAR TERMS THA T HE DOES NOT REMEMBER ABOUT ANY AGREEMENT BETWEEN SEL AND THE ASSESSEE, IT HAS TO BE HELD THAT NO AGREEMENT EXISTED AND THE PAYMENT WAS NOT FOR THE PURPOSE OF BUSINESS. THIRDLY, EVEN IF IT IS AGREED THAT THERE IS PAYMENT, IT IS NECESSARY TO EXAMINE WHETHER THE PAYEE WAS CAPABLE OF DOING SUCH BUSINESS SO AS TO MAKE IT ELIGIBLE TO RECEIVE SUCH PAYMENT. DURING THE COURSE OF ASSESSMENT PROCEEDING, THE AO HAD INSISTED FOR PROOFS OF THE E XISTENCE OF THE COMPANY SEL AND HAD ALSO BEEN REQUIRED TO SHOW PROOF THAT S UCH COMPANIES OWN PAGE 30 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 30 MANPOWER, MACHINERIES AND TECHNOLOGY TO PROVIDE THE INFO AND TRACKING OF DELIVERY SCHEDULES AND THEREFORE THE AR WAS WRONG IN ALLEGING THAT NO SPECIFIC PROOF WAS REQUIRED BY THE AO. IN FACT, THE AO IN THE ASSESSMENT ORDER SPEAKS ABOUT SOME DISCREET ENQUIRY CONDUCTED I N RESPECT OF SEL WHICH REVEALED THAT THE SEL IS LIKELY TO BE NON-EXISTENT. SUCH ALLEGATION ITSELF WOULD HAVE ROUSED THE APPELLANT AT THE APPELLATE ST AGE TO SHOW SUFFICIENT PROOFS AND PROVIDE SATISFACTORY EXPLANATION THAT SEL EXISTS AND IT WAS FINANCIALLY SOUND AND STABLE AND CARRIED ON ACTIVITI ES IN THE NATURE OF CUSTOMER TACKING IN EUROPE SCIENTIFICALLY. SUCH COU LD HAVE BEEN DONE BY PROVIDING COPIES OF INCORPORATION CERTIFICATE, COMM ENCEMENT OF BUSINESS CERTIFICATES, MEMORANDUM AND ARTICLES OF ASSOCIATIO NS, EXACT LOCATION OF THE INDUSTRY OR PLACE OF BUSINESS, THE NATURE OF ITS ACTIVITY, THE FINANCIAL STATEMENT, THE AUDIT REPORT, ITS MANPOWER WITH QUAL IFICATION OF EACH EMPLOYEE AND SO ON & SO FORTH WHICH A PRUDENT BUSINE SSMAN WOULD DEFINITELY ASK AND REQUIRE BEFORE ASSIGNING ANY CONTRACT OF HU GE AMOUNT OF RS.10 CRORES UNLESS THE OTHER PARTY IS A DUMMY OR / AND THE CONTRACT IS NON- EXISTENT. HOWEVER, NOTHING OF SUCH SORT HAD BEEN D ONE. SEL TO BE DUMMY ONE HAVING NO ACTIVITY AT ALL IN THE REMAND REPORT, NO ADDITIONAL EVIDENCE HAD BEEN FURNISHED BY THE AR TO DISPROVE SUCH ALLEGATION . THE AO HAD SHIFTED THE BURDEN OF PROOF TO THE APPELLANT TO PROVE THE C APACITY OF SEL TO PERFORM THE TASK OF TRACKING THE CUSTOMERS AND DELI VERY OF GOODS OF APPELLANT TO THEM. THE ONUS, SO SHIFTED HAS NOT BE EN ATTENDED TO BY THE ASSESSEE AT ALL. THUS, WHAT PREVENTED THE APPELLAN T TO FILE SUCH PROOFS, VIZ., THE CERTIFICATE OF ROC, THE COPY OF MEMORANDUM, SOME ACTIVITY CHART, CERTIFICATES OF PROOF OF MANUFACTURE OR SERVICES RE NDERED BY THE SEL FROM HONG KONG GOVERNMENT OFFICIALS TO AT LEAST SHOW THA T SUCH COMPANY EXISTED PAGE 31 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 31 AT THE RELEVANT PERIOD AND WAS REALLY CAPABLE OF DEL IVERING THE GOODS AND SERVICES FOR WHICH PURPOSE THE ALLEGED AGREEMENT WA S MADE WITH IT BY THE APPELLANT. IN THE ABSENCE OF SUCH RELEVANT EVIDENC ES, ACCORDING TO THE CIT (A), THE AO HAD NO OTHER OPTION BUT TO TREAT SUCH P AYMENT AS NOT FOR THE PURPOSE OF BUSINESS AND, HENCE, NOT ALLOWABLE AS RE VENUE EXPENDITURE U/S 37(1) OF I.T ACT. 11.4. DURING THE COURSE OF HEARING BEFORE THIS BENCH, THE LEARNED AR SOUGHT THE PERMISSION OF THIS BENCH TO PRODUCE C ERTAIN EVIDENCES WHICH, ACCORDING TO HIM, WERE VITAL PIECE OF EVIDENCE FOR CONSIDERATION. HOWEVER, THESE EVIDENCES HAVE NOT BEEN PLACED EITHER DURING THE COURSE OF ASSESSMENT OR APPELLATE PROCEEDINGS. DURING THE CO URSE OF HEARING, THE LEARNED D R ARGUED THAT IF THE ADDITIONAL EVIDENCES SOUGHT TO BE FURNISHED BY THE ASSESSEE WERE TO BE ADMITTED BY THIS BENCH, TH E TWIN ISSUES UNDER CONSIDERATION ARE TO BE REMANDED BACK TO THE FILE O F THE AO TO EXAMINE THE ISSUES AFRESH. THE LEARNED AR HAD CONCEDED TO THE ARGUMENT OF THE LEARNED D R WITH A RIDER THAT THE AO BE STRICTLY DIRECTED BY THIS HONBLE BEN CH TO CONFINE HIMSELF TO VERIFY/EXAMINE AS TO WHETHER THE ADDITIONAL EVIDENCE NOW PRODUCED IS AUTHENTIC TO THE ARGUMENT PUT FORTH OF THE ASSESSEE. 11.4.1. THE ADDITIONAL EVIDENCES NOW PRODUCED WERE THE DOCUMENTS THE CIT (A) HAD SPECIFIED IN HIS ORDER WHICH WOULD AID IN ESTABLISHING THE GENUINENESS OF THE EXPENDITURE. THESE DOCUMENTS WE RE NOT AVAILABLE WITH THE ASSESSEE DURING THE COURSE OF APPELLATE PROCEED INGS BEFORE THE CIT (A) AND THE SAME IS VITAL AND NECESSARY AND, HENCE, THE ADDITIONAL EVIDENCES NOW PAGE 32 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 32 PRODUCED IS TAKEN ON RECORD FOR ADVANCEMENT OF SUBS TANTIAL CAUSE AND JUSTICE. 11.4.2 ON A CAREFUL PERUSAL OF THE SE RVICE AGREEMENT PURPORTED TO HAVE BEEN ENTERED INTO ON 1.7.2002, IT HAS BEEN NOT ICED UNDER THE RECITALS THAT SEL IS A SOURCING AGENT FOR ORDERS WHO AMONGST OTHE R SERVICES, PROVIDE SERVICES ON INFORMATION AND TRACKING OF DELIVERIES SCHEDULES. WITH REGARD TO PREMATURE TERMINATION OF AGREEMENT BY EITHER PART Y, IT HAS BEEN RECITED UNDER THE CAPTION 4. TERMINATION, THE RELEVANT PO RTIONS OF WHICH ARE EXTRACTED AS UNDER: A. THIS AGREEMENT MAY BE TERMINATED BY EITHER PAR TY AFTER 1 ST JULY 2012, GIVING TO THE OTHER 12 MONTHS NOTICE I N WRITING; D. TERMINATION OF CONTRACT BEFORE 1 ST JULY 2012 BY FFI WILL RESULT IN PAYMENT TO SEL OF 3 TIMES THE LAST CALEN DAR YEARS COMMISSION. . 11.4.3. THE ABOVE FACTS HAVE BEEN REITE RATED BY THE ASSESSEE IN ITS STATEMENT OF FACTS ATTACHED TO THE FORM NO.35. THE RELEVANT PORTION OF SUCH ASSERTION IS AS UNDER: 2. THE APPELLANT HAD APPOINTED M/S SOUTH ELEGANT LIMITED, BASED IN HONG KONG, AS AN AGENT FOR THE TR ACKING THE ORDERS OF IMPORT AND PROVIDING INFORMATION ON S TATUS OF THE DELIVERIES OF MATERIALS AND ALSO TO CANVAS A ND ADVERTISE THE APPELLANT PRODUCT THE CUSTOMERS RESID ING OUTSIDE INDIA. 11.5. CONSIDERING THE RIVAL ARGUMENTS AND A LSO THE ADDITIONAL EVIDENCE NOW FURNISHED BY THE ASSESSEE WHICH WE HAVE ALREADY A DMITTED, WE ARE OF PAGE 33 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 33 THE CONSIDERED VIEW THAT THE TWIN ISSUES, NAMELY, (I ) DISALLOWANCE OF RS.10.68 CRORES BEING THE INFO & TRACKING OF DELIVERY SCHEDU LES PAID TO SEL, HONG KONG AND GRUYTERS BV; & (II) DISALLOWANCE OF TERMI NATION CHARGES OF RS.18.35 CRORES PAID TO SEL REQUIRE TO BE REMITTED BACK TO THE FILE OF THE AO FOR FRESH CONSIDERATION 11.5.1. WE ARE NOT IN AGREEMENT WITH THE LEARNED A. RS CONTENTION THAT THE AO BE DIRECTED TO CONFINE HIMSELF TO EXAMINE TH E GENUINENESS/AUTHENTICITY OR OTHERWISE OF THE DOCUMEN TS NOW PRODUCED BEFORE THIS BENCH AS ADDITIONAL EVIDENCES AND, IN THE EVENT, THE SAME WERE FOUND TO BE AUTHENTIC, DIRECTION BE GIVEN TO A LLOW BOTH THE EXPENSES CLAIMED AS DEDUCTIONS. HOWEVER, THE AO HAS NOT ONL Y DOUBTED THE GENUINENESS BUT ALSO QUESTIONED THE BUSINESS NECESS ITY IN MAKING SUCH HUGE PAYMENT OF COMMISSION AND TERMINATION FEES. THEREF ORE, THE AO SHALL EXAMINE THE GENUINENESS AND THE NECESSITY OF SUCH H UGE PAYMENT AS TO WHETHER IT IS COMMENSURATE WITH THE SERVICES RECEIV ED FROM SEL. IN OTHER WORDS, WHETHER SUCH PAYMENT [COMMISSION + TERMINATIO N FEE] HAS BEEN LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOS E OF BUSINESS OR WAS IT A MERE PLOY TO DIVERT FUNDS FROM THE COUNTRY 11.5.2. IN ESSENCE, BOTH THE ISSUES AS MEN TIONED (SUPRA) ARE RESTORED TO THE FILE OF THE AO WITH SPECIFIC DIRECTIONS TO L OOK INTO THE ISSUES AFRESH AND TO TAKE APPROPRIATE ACTION IN ACCORDANCE WITH T HE PROVISIONS OF THE ACT AFTER AFFORDING A REASONABLE OPPORTUNITY TO THE ASSE SSEE OF BEING HEARD. SINCE THESE ISSUES ARE RESTORED TO THE FILE OF THE AO, THE CONTENTION AS TO WHETHER THE SERVICE AGREEMENT IS VALID AND WHETHER THE PAYMENTS ARE PAGE 34 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 34 DISALLOWABLE U/S 40(A)(I) OF THE ACT HAS NOT BEEN ADJUDICATED/CONSIDERED . IT IS ORDERED ACCORDINGLY. 12. THE NEXT GROUND OF THE ASSESSEE IS THAT THE AUTHORITIES BELOW HAVE ERRED IN DISALLOWING/RESTRICTING THE CLAIMS U NDER VARIOUS HEADS, NAMELY, STAFF WELFARE EXPENSES AND ADMINISTRATION EXPENSES ETC., STAFF WELFARE EXPENDITURE & ADMINISTRATI VE EXPENSES - OTHERS : 12.1. IT WAS THE CASE OF THE AO THAT THE A SSESSEE HAD DEBITED RS.67.21 LAKHS TOWARDS STAFF WELFARE EXPENSES, HOWE VER, ON VERIFICATION, HE HAD FOUND THAT THE EXPENDITURE MAINLY ON PROVIDING F OOD TO ITS EMPLOYEES WHICH WAS NOT AN ALLOWABLE EXPENDITURE. MOREOVER, ACCORDING TO THE AO, THIS EXPENDITURE WAS OVER AND ABOVE THE CANTEEN EXPENDIT URE WHICH HAS BEEN CLAIMED SEPARATELY. FURTHER, NO BILLS/VOUCHERS WERE MADE AVAILABLE FOR VERIFICATION AND THAT A SIGNIFICANT AMOUNT WAS INCU RRED WHICH WAS UNVERIFIABLE; THE AO RESORTED TO DISALLOW 25% OF SU CH EXPENDITURE CLAIMED [RS.16.8 LAKHS]. 12.2. LIKEWISE, THE ASSESSEE HAD CLAIMED RS.83.22 LAKHS UNDER THE HEAD OTHERS. IN THE ABSENCE OF ANY DOCUMENTS/BILLS TO SUPPORT SUCH EXPENSES, THE AO WAS UNABLE TO VERIFY AS TO WHETHER SUCH EXPENDITURE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR BUSINESS PURPOSE AND, ACCORDINGLY, HE MADE A DISALLOWANCE OF 20% OF SUCH EXPENDITURE [RS. 16.64 LAKHS]. 12.3. WHEN THESE ISSUES WENT BEFORE THE CIT (A ) FOR CONSIDERATION, THE CIT HAD OPINED THAT THE AO HAD NEITHER DURING THE C OURSE OF ASSESSMENT PROCEEDINGS NOR REMAND PROCEEDINGS CALLED FOR BILLS /VOUCHERS FOR PAGE 35 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 35 VERIFICATION. HOWEVER, ONE OF THE REASONS MENTIONE D FOR SUCH DISALLOWANCE BEING CASH EXPENDITURE WHICH COULD NOT BE VERIFIA BLE, THE CIT (A) DEEMED IT FIT TO RESTRICT THE ADDITIONS TO RS.10 LAKHS AND RS .9 LAKHS IN RESPECT OF STAFF WELFARE EXPENDITURE AND ADMINISTRATIVE EXPENDITUR E RESPECTIVELY. 12.4. IT WAS CONTENDED BEFORE US BY THE L EARNED AR THAT THE CIT (A) WAS NOT JUSTIFIED IN RESTRICTING THE ADDITION TO RS .10 LAKHS UNDER THE HEAD STAFF WELFARE EXPENSES AS THE SAID AMOUNT WAS EXP ENDED TO SECURE THE HEALTHY SERVICE THEREBY PROVIDING THE FOOD AT THE PRE MISES. THE AUTHORITIES BELOW, IT WAS CONTENDED, HAVE ERRONEOUSLY TREATED TH AT THE ASSESSEE CLAIMED THE CANTEEN EXPENDITURE SEPARATELY WHEREAS NO SUCH S EPARATE LEDGER A/C EXIST AND ALL THE EXPENSES PERTAINING TO CANTEEN AR E GROUPED UNDER STAFF WELFARE. IT WAS, FURTHER, EXPLAINED THAT STAFF WEL FARE INCLUDED EXPENDITURE ON MEDICAL EXPENSES OF THE STAFF. AS THE ENTIRE EX PENDITURE UNDER THE HEAD STAFF WELFARE WAS EXPENDED WHOLLY AND EXCLUSIVELY F OR THE BUSINESS OF THE ASSESSEE, THE SAME IS ALLOWABLE U/S 37(1) OF THE AC T. 12.4.1. IN RESPECT OF DISALLOWING RS.9 LAKHS B EING THE EXPENDITURE UNDER THE HEAD ADMINISTRATIVE EXPENSES OTHERS, IT WAS ARGUED THAT THIS EXPENDITURE INCLUDED SECURITY CHARGES, BUSINESS PROM OTION, PRINTING AND STATIONARY, CONVEYANCE ETC. WHICH WERE PART OF THE BU SINESS ACTIVITY. AS THE EXPENDITURE INCURRED, ACCORDING TO THE LEARNED AR, WAS WHOLLY AND EXCLUSIVELY FOR THE BUSINESS AND, HENCE, WAS ALLOWAB LE EXPENDITURE U/S 37(1) OF THE ACT. 12.5. THE AO HAD STATED IN THE ASSESSMENT ORDER THAT NO BILLS/VOUCHERS/DOCUMENTS WERE PRODUCED FOR VERIFICA TION IN SUPPORT OF THE PAGE 36 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 36 EXPENSES CLAIMED [REFER: PARAS 6 & 7 OF THE ASST. O RDER] WHEREAS THE ASSESSEE CLAIMED DURING THE COURSE OF HEARING THAT INFORMATION SOUGHT BY THE LEARNED AO (LEDGER EXTRACTS OF STAFF WELFARE AN D OTHER ADMINISTRATIVE EXPENSES) WAS SUBMITTED TO THE LEARNED AO DURING TH E ASSESSMENT PROCEEDINGS[REFER: P 9 OF ASSESSEES NOTE DT.14.6 .2012]. 12.5.1. DURING THE COURSE OF HEARING, TH E LEARNED A R HAD FURNISHED NINE VOLUMINOUS PAPER BOOKS RUNNING INTO THOUSANDS OF PAGES WHICH, INTER ALIA, CONTAINING THE CORRESPONDENCES [ALONG WITH CO PIES OF LEDGERS ACCOUNT] MADE WITH AUTHORITIES BELOW. IN ITS LETTER DATED 8 .12.2009 ADDRESSED TO THE AO, THE ASSESSEE HAD FURNISHED THE PRINTOUT OF LEDG ERS, PERTAINING TO, AMONG OTHERS, (I) STAFF WELFARE; (II) BUSINESS PROMOTION EXPENSES; (III) OTHER ADMINISTRATIVE EXPENSES; (IV) SAMPLE EXPENSES; (V) CANTEEN EXPENSES ETC., THIS HAS BEEN DULY ACKNOWLEDGED BY THE OFFICE OF THE ADDL. CIT, RANGE-11, BANGALORE ON 8.12.2009 [COURTESY: P 1186 OF P.B. 4 P ART 1 OF A.R]. EVEN THOUGH THE AO HAD ADMITTED IN HIS ASSESSMENT ORDER DATED 8.12.2009 [PARA 4.2.] THAT THE ASSESSEE COMPANY HAS THEREAFTER FILED ITS WRITTE N REPLIES DATED 27.11.2009, 30.10.2009 AND DATED 8.12.2009 WH ICH HAVE BEEN CONSIDERED , WE ARE AFRAID, THE AO WOULD NOT HAVE BEEN IN A PO SITION TO VERIFY ALL THE CLAIMS OF THE ASSESSEE WITH REFERENCE TO TH E LEDGER ACCOUNTS, CASH VOUCHERS ETC., WHICH WERE, ADMITTEDLY, RUNNING INTO HUNDREDS OF PAGES. 12.5.2. ADMITTEDLY, IN THE INSTANT CASE , DETAILS WITH REGARD TO THE STAFF WELFARE AND OTHER ADMINISTRATIVE EXPENSES, THE BREAK-UP OF WHICH, SUCH AS THE LEDGER ACCOUNT, VOUCHER NUMBERS AND OT HER DETAILS HAVE BEEN PAGE 37 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 37 PROVIDED TO THE ASSESSING OFFICER FOR VERIFICATION( COURTESY: PAGE NO.1189 OF PB AR ]. 12.5.3. AS POINTED OUT ABOVE, THE AS SESSEE HAD FURNISHED PRINT OUT OF THE LEDGER ACCOUNTS WHICH CONTAINED THE DETAILS OF EXPENSES TOWARDS STAFF WELFARE, OTHER ADMINISTRATIVE EXPENSES ETC. EVEN THOUGH THE AO HAD VOUCHED THAT THE WRITTEN REPLIES OF THE ASSESSEE UP -TO 8.12.2009 HAVE BEEN CONSIDERED, WE ARE OF OUR OWN APPREHENSION THAT THE AO WOULD NOT HAVE ADEQUATE TIME AT HIS DISPOSAL TO CONSIDER THE VOLUM INOUS DETAILS SUBMITTED ON 8.12.2009 WHICH WAS, INCIDENTALLY, THE DATE ON WHICH THE ASSESSMENT ORDER WAS PASSED. THEREFORE, IT WAS IN-PROBABLE TO VERIF Y THE DETAILS OF EXPENSES CLAIM MINUTELY WHICH CONTAINED ENORMOUS PAGES. EVEN THE RANDOM CHECKING OF SUCH DETAILS WOULD NOT HAVE SERVED ANY MEANINGFUL PURPOSE. WHEN THE DETAILS OF SUCH EXPENSES CLAIMED BY THE ASSESSEE WER E IN THE POSSESSION OF THE AO, WE ARE OF THE CONSIDERED OPINION THAT THE A O SHOULD NOT HAVE RESORTED TO DISALLOW THE CLAIM OF THE ASSESSEE IN A N AD-HOC BASIS. IN VIEW OF THE PRINCIPLES OF NATURAL JUSTICE, BOTH THE ISSUES, NAMELY, (I) STAFF WELFARE EXPENDITURE; AND (II) ADMINISTRATIVE EXPENSES ARE R EMITTED BACK TO THE FILE OF THE AO WITH A SPECIFIC DIRECTION TO LOOK INTO TH E MATTER AFRESH WITH REFERENCE TO THE DETAILS FURNISHED BY THE ASSESSEE I N THE SHAPE OF PRINT-OUT OF LEDGER ACCOUNTS AND TO TAKE APPROPRIATE ACTION I N ACCORDANCE WITH THE PROVISIONS OF THE ACT. IT IS ORDERED ACCORDINGLY. 12.5.4. WE HAVE ALSO DULY PERUSED WITH D UE RESPECTS THE CASE LAWS ON WHICH THE LEARNED AR HAD PLACED STRONG RELIANCE AND TO REITERATE THAT THE HONBLE HIGH COURT AND HONBLE BENCHES OF THE TRIBU NALS HAVE EMPHASIZED PAGE 38 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 38 THAT AD-HOC DISALLOWANCE OF EXPENDITURE WITHOUT POI NTING OUT THE JUSTIFIABLE REASONS FOR DOING SO CANNOT BE SUSTAINED. IN THE PRESENT CASE, EVEN THOUGH THE DETAILS OF EXPENSES CLAIMED WERE IN HIS POSSESS ION, THE AO HAD, WITHOUT POINTING OUT ANY OMISSION AND COMMISSION IN THE DETA ILS FURNISHED, RESORTED TO RESTRICT THE CLAIMS OF THE ASSESSEE ON AN AD-HOC BASIS WHICH, IN OUR VIEW, IS AGAINST THE PRINCIPLES OF NATURAL JUSTICE. THUS , BOTH THE ISSUES HAVE BEEN REMITTED BACK TO THE FILE OF THE AO FOR FRESH CONSI DERATION. 13. THE OTHER ISSUE [GROUND NO.8] R AISED BY THE ASSESSEE WAS THAT THE ORDER OF THE ASSESSING OFFICER WAS BAD IN LAW A S NO OPPORTUNITY OF BEING HEARD WAS EXTENDED WHEN THE ADDITIONS WERE MADE DUR ING THE ASSESSMENT PROCEEDINGS. 13.1. AT THE OUTSET, WE WOULD LIKE TO POINT OUT THAT THERE IS NO SUBSTANCE IN THE ALLEGATION OF THE ASSESSEE SINCE T HE ASSESSMENT PROCEEDINGS WERE STRETCHED TO ALMOST FOUR MONTHS RI GHT FROM 10.9.2009 TO 8.12.2009 [SOURCE: ASST. ORDER] AND THAT THE ASSESS EE HAD AMPLE TIME AT ITS DISPOSAL TO PUT ACROSS ITS GRIEVANCE, IF ANY, AT THA T RELEVANT POINT OF TIME. THEREFORE, THIS ALLEGATION OF THE ASSESSEE DOESNT DESERVE ANY MERIT. IT IS DISMISSED ACCORDINGLY. A.Y 2007-08 ITA NO.1243/B/10- [BY THE ASSESSEE] : 14. FOR THIS ASSESSMENT YEAR TOO, THE ASSESSEE HAD RAISED A SIMILAR THEORY [GROUND NO.3] THAT THE AO HAD NOT PROVIDED AD EQUATE OPPORTUNITY TO PUT FORTH ITS VIEW ETC. IN THIS CONNECTION, WE WO ULD LIKE TO REITERATE THAT DURING THE ASSESSMENT PROCEEDINGS, THE ASSESSEE WAS EXTENDED FOUR OPPORTUNITIES (DATES OF HEARING) ON 28.10.2009, 27. 11.09, 2.12.09 AND AGAIN PAGE 39 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 39 ON 8.12.2009 TO PUT FORTH ITS OBJECTIONS/CONTENTION S ETC. SUCH BEING THE GROUND REALITY, WE FIND NO SUBSTANCE IN THE ARGUMENT OF THE ASSESSEE THAT IT HAD NOT BEEN GIVEN ADEQUATE OPPORTUNITY BY THE AO. T HIS GROUND OF THE ASSESSEE IS, THEREFORE, DISMISSED. 15. THE ASSESSEES CLAIMS UNDER VARIOUS H EADS, AS DETAILED BELOW, HAVE BEEN DISALLOWED BY THE ASSESSING OFFICER WHICH HAS B EEN RESTRICTED TO15% BY THE CIT (A) FOR THE REASONS RECORDED IN THE RESPECT IVE IMPUGNED ORDERS UNDER DISPUTE. UNDER THE HEAD DISALLOWED BY THE AO RESTRICTED TO BY CIT(A) AT 15% STAFF WELFARE EXPENSES RS.70,3 8,859/- RS.26,39,572/- OTHERS RS. 8,33,587/- RS. 5,00,152 /- REPAIRS & MAINTENANCE RS. 2,20,986/- RS. 1,00,000/- 15.1. AT THE OUTSET, WE WOULD LIKE TO REITERAT E THAT THE ABOVE DISALLOWANCES BY THE AO AS WELL AS RESTRICTIONS RESO RTED TO BY THE CIT (A) WERE PRIMARILY ON AN AD-HOC BASIS. IN THE INSTANT CA SE, ADMITTEDLY, THE RELEVANT DETAILS FURNISHED BY THE ASSESSEE WERE BEFO RE THE AO WHEN THE ASSESSMENT WAS CONCLUDED. IN SPITE OF THE SAME, TH E AO WENT AHEAD TO DISALLOW/RESTRICT THE CLAIM OF THE ASSESSEE ON AD-H OC BASIS. FOR THE PRECEDING ASSESSMENT YEAR IN THE ASSESSEES OWN CASE FOR SIMILAR ISSUES, NAMELY, (I) STAFF WELFARE EXPENSES; & (II) ADMINISTR ATIVE EXPENSES OTHERS, WE HAVE, FOR THE DETAILED REASONS RECORDED THEREIN, RESTORED THE MATTER TO THE FILE OF THE AO FOR FRESH CONSIDERATION. THE SAM E DIRECTIONS HOLD GOOD FOR THIS ASSESSMENT YEAR AS WELL. IT IS ORDERED AC CORDINGLY. PAGE 40 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 40 15.2. IN RESPECT OF THE CLAIM OF THE ASSESSEE UNDER TRAVEL AND CONVEYANCE, THE AO HAD DISALLOWED RS.22.98 LAKHS OUT OF RS.76.62 LAKHS DEBITED IN THE P & L ACCOUNT. THE OBSERVATION OF T HE AO FOR MAKING AN AD- HOC DISALLOWANCE READS AS FOLLOWS: 8. THE ASSESSEE COMPANY HAS DEBITED A SUM OF RS.76,62,602/- TOWARDS TRAVELING AND CONVEYANCE. WH EN COMPARED TO IMMEDIATE PRECEDING YEAR, ON A TURNOVER OF RS.150.90 CRORES THE ASSESSEE COMPANY HAS INCURRED A N EXPENDITURE OF RS.1.02 CRORES WHEREAS DURING THE ASSESSMENT YEAR IN QUESTION, ON A TURNOVER OF RS.20. 24 CRORES THE ASSESSEE COMPANY HAS SHOWN TO HAVE INCURR ED AN EXPENSES OF RS.0.76 CRORE WHICH IS MUCH HIGHER W HEN COMPARED TO THE PRECEDING YEAR. FURTHER ON VERIFICA TION, IT WAS FOUND THAT THE EXPENSE DEBITED UNDER THIS HE AD IS NOT FULLY SUPPORTED BY PROPER BILLS/ VOUCHERS. HENCE , A DISALLOWANCE OF 30% OF THE EXPENSES DEBITED UNDER T HIS HEAD IS MADE AND ADDED TO THE RETURNED INCOME WHICH WORKS OUT TO RS.22,98,780/-. ON FURTHER APPEAL, THE CIT (A) RESTRICTED THE ADDIT ION TO RS.11,49,390/-. THE ASSESSEE BEING AGGRIEVED IS IN APPEAL BEFORE US . THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THE ABOVE SAID EXPENSES WERE INCURRED FOR BUSINESS PURPOSE AND DULY SUPPORTED BY BILLS AND VOUCHERS. TH E AO DID NOT EXAMINE THE DETAILS OF VOUCHERS AND, THEREFORE, IT WAS SUBM ITTED IT WAS WRONG AND ERRONEOUS TO NOTE THAT THE EXPENSES DEBITED UNDER T HIS HEAD WAS NOT FULLY SUPPORTED BY BILLS AND VOUCHERS. NECESSARY DETAILS W ERE IN FACT FURNISHED AND THE AO, WITHOUT CALLING FOR FURTHER EXPLANATION MADE AN AD-HOC DISALLOWANCE; IT WAS SUBMITTED THAT A SUBSTANTIAL EXPENDITURE IS ON ACCOUNT OF PROVIDING FREE TRANSPORTATION SERVICES TO THE ST AFFS AND THE EMPLOYEES OF PAGE 41 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 41 THE COMPANY AS THE COMPANY OPERATES THREE SHIFTS I.E. , 24/7 AND, HENCE, FREE TRANSPORTATION BECAME NECESSITY AND CRITICAL. 15.2.1. THE DETAILS OF EXPENSES CLAIMED UNDE R THIS HEAD HAVE BEEN FURNISHED BY THE ASSESSEE TO THE AO WHICH HAS BEEN A CKNOWLEDGED BY THE AO. THIS BEING SO, WE ARE OF THE CONSIDERED VIEW T HAT THE AO WAS NOT JUSTIFIED IN MAKING DISALLOWANCE OF THE ASSESSEES CLAIM ON AN AD-HOC BASIS BY COMPARING THE TURNOVER AND THE EXPENSES FOR THE P REVIOUS YEAR WITH THAT OF THE CURRENT YEAR. AS RIGHTLY POINTED OUT BY THE LE ARNED AR THAT A SUBSTANTIAL PART OF THE EXPENDITURE WAS FOR PROVIDI NG FREE TRANSPORTATION SERVICES TO ITS STAFF AND EMPLOYEES AND AS SUCH THE ENTIRE EXPENDITURE CLAIMED DESERVED TO BE ALLOWED IN FULL. ACCORDIN GLY, THE ENTIRE CLAIM OF THE ASSESSEE IS ALLOWED. WATER CHARGES : 16. THE ASSESSEE HAD CLAIMED RS.20.67 LAKHS UNDER THE HEAD WATER CHARGES. IT WAS THE STAND OF THE AO THAT T HE ASSESSEE HAD NOT PRODUCED ANY EVIDENCE IN SUPPORT OF SUCH A HUGE CLAI M WHEN THE ASSESSEES TURNOVER HAD DRASTICALLY COME DOWN COMPARED TO THE P RECEDING YEARS. IN THE ABSENCE OF ANY PROOF FOR HAVING INCURRED SUCH A HUGE EXPENSES, THE AO HAD RESORTED TO DISALLOW 30% OF THE EXPENSES WHICH CAME TO RS. 5,19,993/- WHICH HAS BEEN RESTRICTED TO 15% BY THE CIT (A). 16.1. DURING THE COURSE OF HEARING, IT WAS CONTENDED THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO DID NO T CALL FOR ANY OF THE VOUCHERS AND HAD NOT CONSIDERED THE DETAILS GIVEN B Y THE ASSESSEE VIDE ITS LETTER DATED 8.12.2009 AND, THEREFORE, THE AOS COM MENT THAT THE ASSESSEE PAGE 42 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 42 HAD NOT PRODUCED ANY EVIDENCE IN SUPPORT OF THIS EXP ENDITURE WAS UNFOUNDED AS NO VOUCHERS WERE CALLED FOR DURING THE COURSE OF HEARING. IT WAS, FURTHER, CONTENDED THAT THE LEARNED CIT (A) HAD NOT RECORDED ANY REASON FOR RESTRICTING THE DISALLOWANCE TO 15% OF THE EXPE NDITURE. THE LEARNED D R PRESENT WAS HEARD. 16.2. DURING THE COURSE OF HEARING, THE LEAR NED A R HAD FURNISHED, [AS ALREADY STATED SUPRA] NINE VOLUMINOUS PAPER BOOKS RU NNING INTO THOUSANDS OF PAGES WHICH, INTER ALIA, CONTAINING THE CORRESPOND ENCES [ALONG WITH COPIES OF LEDGERS ACCOUNT] MADE WITH AUTHORITIES BELOW. IN ITS LETTER DATED 8.12.2009 ADDRESSED TO THE AO, THE ASSESSEE HAD FURNISHED COP IES OF PRINTOUT OF THE LEDGERS, PERTAINING, AMONG OTHERS, TO WATER CHARGES [REFER: PAGES 464 473 PAPER BOOK 2] THIS HAS BEEN DULY ACKNOWLEDGED BY THE OFFICE OF THE ADDL. CIT, RANGE-11, BANGALORE ON 8.12.2009 [COURTESY: P 1 53 OF P.B. 2 OF A.R]. EVEN THOUGH THE AO HAD ADMITTED IN HIS ASSESSMENT O RDER DATED 8.12.2009 [PARA 4.2.] THAT THE ASSESSEE COMPANY HAS THEREAFTER FILED ITS WRITTE N REPLIES DATED 27.11.2009, 30.10.2009 AND DATED 8.12 .2009 WHICH HAVE BEEN CONSIDERED, WE ARE OF THE CONSIDERED VIEW THAT THE AO WOULD NOT HAVE BEEN IN A POSITION TO VERIFY ALL THE CLAIMS OF THE ASSESS EE WITH REFERENCE TO THE LEDGER ACCOUNTS, CASH VOUCHERS ETC., 16.2.1. THEREFORE, WE ARE OF THE OPINION T HAT THE AO WAS NOT JUSTIFIED IN RESORTING TO DISALLOW THE CLAIM OF THE ASSESSEE ON AD-HOC BASIS WHEN ALL THE RELEVANT DETAILS WERE AVAILABLE WITH HIM. THE AO IS ACCORDINGLY DIRECTED TO VERIFY THE ASSESSEES CLAIM WITH REFERENCE TO THE DETAILS FURNISHED BY IT PAGE 43 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 43 AND TO TAKE SUITABLE ACTION IN THE MATTER. TO ENAB LE THE AO TO DO THE ABOVE MENTIONED EXERCISE, THIS ISSUE IS RESTORED TO HIM. 17. LIKEWISE, THE ASSESSEE HAD ALSO C LAIMED DEDUCTIONS UNDER THE HEADS SAMPLE EXPENSES AND BUSINESS PROMOTION EXPEN SES OF RS.5.96 LAKHS AND RS.11.27 LAKHS RESPECTIVELY. IT WAS THE CASE OF THE AO THAT ON VERIFICATION OF THE DETAILS FURNISHED BY THE ASSESSE E, IT WAS FOUND TO BE MAINLY THESE EXPENSES WERE RELATED TO THE CREDIT CAR D EXPENSES OF ITS MANAGING DIRECTOR. AS NO EVIDENCE WAS PRODUCED BY T HE ASSESSEE TO SUGGEST THAT THOSE EXPENSES WERE ATTRIBUTABLE TO THE BUSINE SS ACTIVITIES OF THE ASSESSEE, THE AO HAD RESORTED TO DISALLOW A LUMP SU M DISALLOWANCE OF RS.10 LAKHS AS, IN HIS VIEW, THE PARTIAL INVOLVEMENT OF S UCH EXPENSES FOR THE PERSONAL USE OF THE MANAGING DIRECTOR CANNOT BE RUL ED OUT. 17.1. DURING THE COURSE OF HEARING B EFORE US, THE LEARNED AR TOOK A SIMILAR STAND THAT NO BILLS/VOUCHERS WERE CALLED FO R BY THE AO AND ALSO THE DETAILS FURNISHED VIDE ITS LETTER DATED 8.12.2009 H AS NOT BEEN CONSIDERED BY THE AO ETC., AS A MATTER OF FACT, THIS ISSUE HAS SI NCE BEEN CONSIDERED BY THE AO AND OF THE VIEW THAT THOSE EXPENSES WERE REL ATED TO THE CREDIT CARD EXPENSES OF ITS MANAGING DIRECTOR. MOREOVER, THE A O HAD SPECIFICALLY POINTED OUT THAT NO EVIDENCE WAS PRODUCED BY THE ASS ESSEE TO REMOTELY SUGGEST THAT THOSE EXPENSES WERE ATTRIBUTABLE TO TH E BUSINESS ACTIVITIES OF THE ASSESSEE. 17.2. SIGNIFICANTLY, EVEN AT THIS STAGE OF HEA RING TOO, THE ASSESSEE HAS NOT COME UP WITH ANY EVIDENCE TO REBUT THE AOS FINDINGS [ PARA 17]. IN VIEW OF THE ABOVE, WE ARE OF THE CONSIDERED VIEW THAT THE AUTHORITIES PAGE 44 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 44 BELOW WERE JUSTIFIED IN RESORTING TO SUCH DISALLOWA NCE AND RESTRICTING OF THE ASSESSEES CLAIM. THEREFORE, THERE IS NO INFIRMITY I N THE CIT (A)S STAND WHICH REQUIRES OUR INTERVENTION ON THIS POINT. I T IS ORDERED ACCORDINGLY. 18. THE OTHER ISSUE RELATES TO CUSTOMS DUTY ON MACHINERY, I.E., IN GROUND NO.9, THE ASSESSEE HAD RAISED AN ISSUE THAT THE CIT (A) ERRED IN DISALLOWING A SUM OF RS.1 LAKH AS AGAINST THE CLAIM OF RS.2,20,986/-. THIS ISSUE IN BRIEF, IS THAT THE ASSESSEE HAD DEBITED RS .24,33,308 TOWARDS REPAIRS AND MAINTENANCE PLANT AND MACHINERY. HOWE VER, ON VERIFICATION OF THE DETAILS FURNISHED BY THE ASSESSEE, THE AO HAD NO TICED THAT THE ASSESSEE HAD DEBITED A SUM OF RS.2,20,986/- TOWARDS CUSTOMS DUTY MACHINERY. ACCORDING TO THE AO, SINCE THE EXPENDITURE DEBITED TOWARDS CUSTOMS DUTY ON MACHINERY WAS CAPITAL IN NATURE, THE SAME WAS NOT AN ALLOWABLE EXPENSE. 18.1. AS COULD BE SEEN FROM THE GROUND S OF APPEAL RAISED BEFORE THE CIT (A), THE ASSESSEE HAD REPRESENTED THAT GROUND NO.10. THE LEARNED DCIT ERRED IN DISALLOWING A SUM OF RS.2,20,986/- UN DER THE HEAD REPAIRS & MAINTENANCE ON THE FACTS AND CIRCUMSTAN CES OF THE CASE. EVEN IN ITS STATEMENT OF FACTS [ATTACHED TO FORM NO .35], THE ASSESSEE HAD MENTIONED AS REPAIR AND MAINTENANCE OF RS.2,20,986 /- [COURTESY: PARA 2 OF STATEMENT OF FACTS BEFORE THE CIT (A)]. HOWEVER, WHILE DEALING WITH THIS ISSUE, THE CIT (A), PERHAPS, UNDER WRONG NOTION, TR EATED THIS CLAIM OF CUSTOMS DUTY MACHINERY FALLS UNDER THE HEAD REPAIRS & MAINTENANCE [AS SUBSCRIBED BY THE ASSESSEE] AND RESTRICTED THE ADDITION OF RS. 2,20,986 /- TO RS. 1,00,000 /-. PAGE 45 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 45 18.2. WE HAVE CAREFULLY CONSIDERED THE ASS ESSEES CONTENTIONS AND ALSO DILIGENTLY PERUSED THE REASONING OF THE AO IN DISALL OWING THE ASSESSEES CLAIM. IT IS AN UNDISPUTED FACT THAT THE ASSESSEE HAD DEBITED A SUM OF RS.2.2 LAKHS TOWARDS CUSTOMS DUTY MACHINERY. ADMI TTEDLY, THE EXPENDITURE DEBITED TOWARDS CUSTOMS DUTY ON MACHINER Y WAS CAPITAL IN NATURE, THE AO WAS WELL WITHIN HIS DOMAIN TO COME T O A CONCLUSION THAT THE EXPENDITURE WAS NOTHING BUT CAPITAL IN NATURE. IT IS ORDERED ACCORDINGLY. 18.3. BEFORE PARTING WITH, WE WOULD LIKE TO REITERATE THAT THE AMOUNT OF RS.2.2 LAKHS TOWARDS CUSTOMS DUTY HAS BEEN INCLUDED BY THE ASSESSEE UNDER THE HEAD REPAIRS AND MAINTENANCE WHICH MUST HAVE PROMPTED THE CIT (A) TO RESTRICT THE ADDITION TO RS.1 LAKH BY TREATING THE S AID CLAIM ALSO FOR HAVING INCURRED FOR THE MAINTENANCE OF THE MACHINERY BY THE ASSESSEE. SINCE THIS EXPENDITURE HAS BEEN PRECISELY INCURRED TOWARDS CUS TOMS DUTY MACHINERY WHICH WAS CAPITAL IN NATURE, THE CIT (A) WAS NOT JU STIFIED TO RESTRICT THE DISALLOWANCE TO RS.1 LAKHS WITHOUT GOING INTO THE M ERITS OF THE ISSUE. WE SHALL NOW TAKE UP THE ISSUE S RAISED BY THE REVENUE FOR ADJUDICATION. II . A.Y 2006-07 - ITA NO.1242 / B/10 BY THE REVENUE: 19. WITH REGARD TO THESE TWO ISSUES R AISED BY THE REVENUE IN (I) GROUND NO.3 - STAFF WELFARE EXPENSES; AND (II) GROUND NO.4 - ADMINISTRATIVE EXPENSES OTHERS, WE WOULD LIKE TO POINT OUT THAT FOR THE REASONS RECORDED IN ASSESSEES APPEALS FOR THE AYS 2006-07 AND 2007-08 (SUPRA), BOTH OF THESE ISSUES WERE RESTORED TO THE FILES OF THE AO FOR FRESH PAGE 46 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 46 CONSIDERATION. AS THE ISSUES RAISED BY THE REVENUE A RE SIMILAR TO THAT OF THE ISSUES RAISED BY THE ASSESSEE, THE FINDINGS RECORDED IN THE ASSESSEES APPEALS HOLD-GOOD HERE TOO. IN ESSENCE, THE GROUND S RAISED BY THE REVENUE ARE ALLOWED FOR STATISTICAL PURPOSE. 20. THE OTHER ISSUE (GROUND NO.5) RA ISED BY THE REVENUE RELATES TO THE STAND OF THE CIT (A) IN ALLOWING RS.8,14,25,23 3/- BEING THE REMUNERATION PAID TO THE MD OF THE ASSESSEE. 20.1. THE ASSESSEE CLAIMED THAT IT HAD PAID REMUNERATION TO ITS MANAGING DIRECTOR SHRI ANUPAM KOTHARI OF RS.8,14,25 ,233/- FOR THE PERIOD UNDER CONSIDERATION. THE ENTIRE CLAIM OF THE ASSES SEE HAS BEEN REJECTED BY THE AO ON THE GROUND THAT SHRI KOTHARI STAYED IN MON TE CARIO, ITALY AND ACCORDING TO HIS STATEMENT ON OATH, HE HAD TOTALLY S TAYED IN INDIA IN A YEAR HARDLY FOR 14 15 DAYS AND THE EXECUTIVES OF THE ASS ESSEE CARRIED OUT THE FUNCTIONS OF THE ASSESSEE. 20.2. AGGRIEVED, THE ASSESSEE TOOK UP THE ISSUE WITH THE CIT (A) FOR RELIEF. IT WAS CONTENDED BY THE ASSESEE BEFORE THE CIT (A) THAT ITS MD WAS THE POLICY MAKER AND GIVES DIRECTION TO THE ASSE SSEE AS HOW TO CONDUCT THE BUSINESS. IT WAS, FURTHER, ARGUED THAT THE AO HAD NOT BROUGHT ANY EVIDENCE ON RECORD AS TO WHY THE EXPENDITURE HAS BEE N DISALLOWED. THE SALARY PAID TO THE MD WAS IN CONSONANCE WITH THE PRO FITS EARNED BY THE ASSESSEE AND THAT THE MD HAD HANDLED EVERY SALE WHIC H HAD BROUGHT THE KIND OF PROFIT ETC. IT WAS SUBMITTED THAT THE SALAR Y PAID TO THE MD WAS ASSESSED AS INCOME IN THE HANDS OF THE MD U/S 143(3 ) OF THE ACT WHICH HAS PAGE 47 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 47 BEEN ACCEPTED BY THE REVENUE. THERE WAS ALSO TDS O N THE ENTIRE AMOUNT OF SALARY TO PAID SHRI KOTHARI. 20.3. AFTER DUE CONSIDERATION OF THE ASS ESSEES CONTENTIONS, THE CIT (A) HAD RECORDED HIS FINDINGS THAT THE AO HAD NOT B ROUGHT ANY EVIDENCE ON RECORD TO PROVE THAT THE PAYMENT WAS EXCESSIVE, EVEN THOUGH THE AO HAD, IN THE REMAND REPORT, MENTIONED THAT THE PROVISIONS OF S.40A(2) ARE ATTRACTED. THE AOS REASONING OF MDS PHYSICAL PRESENCE IN INDI A [HARDLY FOR 14 15 DAYS IN A YEAR) WAS COUNTERED BY THE ASSESSEE THAT THE PHYSICAL STAY OF THE MD IN INDIA DOESNT HAVE ANYTHING TO DO WITH THE ASS ESSEES BUSINESS. THE CIT (A) HAD ALSO JUSTIFIED THE ARGUMENT OF THE ASSE SSEE THAT THE MD WAS DIRECTLY RESPONSIBLE FOR ITS BUSINESS AS HE HAD BROU GHT IN SALES FROM ITALY AND OTHER EUROPEAN COUNTRIES AND, THEREFORE, JUSTIF IED THE REMUNERATION PAID TO SHRI KOTHARI. THE CIT (A) HAD ALSO HIGHLIGH TED THAT THE REMUNERATION PAID TO THE MD HAS BEEN TAXED IN HIS HANDS AND ALSO NECESSARY TDS EFFECTED. THUS, HE HAD DELETED THE ENTIRE DISALLOW ANCE OF RS.8.14 CRORES. 20.4. BEFORE US, THE LEARNED D R HAD SUPPORTED THE STAND OF THE AO AND IN PARTICULAR THAT BY KEEPING HIMSELF AWAY FRO M THE WORK SPOT, THE MD HAD DIVESTED ALL HIS RESPONSIBILITIES BY DELEGATI NG THEM TO OTHERS TO MANAGE THE DAY-TO-DAY AFFAIRS OF THE ASSESSEE AND, T HUS, HE WAS INELIGIBLE TO RECEIVE SUCH REMUNERATION. IT WAS, THEREFORE, PLEA DED THAT THE STAND OF THE CIT (A) BE ASSAILED AND THAT OF THE AO BE RESTORED. 20.5. ON THE OTHER HAND, THE LEAR NED AR HAD SUPPORTED THE CIT (A)S STAND IN DELETING THE ENTIRE DISALLOWANCE. PAGE 48 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 48 20.6. WE HAVE CAREFULLY CONSIDERED THE RIVAL SUBMISSIONS. IT WAS AN UNDISPUTED FACT THAT THE MANAGING DIRECTOR OF TH E ASSESSEE HAD HARDLY POSITIONED HIMSELF IN THE WORK PLACE OF THE ASSESSE E TO MONITOR ITS AFFAIRS ON DAY-TO-DAY BASIS. HOWEVER, BEING THE MANAGING DI RECTOR, HE TOOK UPON HIMSELF TO SOLICIT GLOBAL ORDERS FOR THE PRODUCE OF THE ASSESSEE. THERE WAS NO BAR IN DELEGATING THE POWERS OF SUPERVISION, FUN CTIONING AND CONTROL OF THE ASSESSEE TO HIS TRUSTED LIEUTENANTS THEREBY HE HAD P OSITIONED HIMSELF IN A PLACE IN THE GLOBE WHERE THERE WAS A GREAT DEMAND F OR THE PRODUCTS OF THE ASSESSEE [TO PROCURE ORDERS FOR SUPPLY OF FABRICS ET C.]. MOREOVER, THE AO HAD FAILED TO BRING ANY DOCUMENTARY PROOF ON RECORD T O SUGGEST THAT THE ABSENCE OF THE MD FROM THE WORK PLACE HAD ADVERSELY REVERSED THE FORTUNE OF THE ASSESSEE. FURTHER, THE REMUNERATION OF THE MD OF THE ASSESSEE HAS BEEN TAXED IN HIS HANDS U/S 143(3) OF THE ACT AND A LSO NECESSARY TDS HAS BEEN EFFECTED. 20.6.1. KEEPING THE ABOVE FACTS AND CI RCUMSTANCES OF THE ISSUE IN VIEW, WE ARE OF THE CONSIDERED VIEW THAT THE AO WAS NOT JUSTIFIED IN DISALLOWING THE REMUNERATION OF RS.8.14 CRORES PAID TO THE MD OF THE ASSESSEE. IT IS ORDERED ACCORDINGLY. 21. THE OTHER ISSUE (GROUND NO.6 ) RAISED BY THE REVENUE RELATES TO THE CIT (A)S DIRECTION TO THE AO TO ADOPT THE M UNICIPAL VALUE OF THE RENT IN RESPECT OF YESHWANTPUR UNIT. 21.1. THE ISSUE, IN BRIEF, IS THAT THE AS SESSEE HAD CLAIMED AN EXPENDITURE OF RS.45.27 LAKHS BEING RENT PAID TO YE SHWANTPUR UNIT OF THE ASSESSEE WHICH HAS BEEN LEASED OUT TO JKPL, A SISTE R CONCERN. IT WAS THE PAGE 49 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 49 CASE OF THE AO THAT APART FROM YESHWANTPUR UNIT, TH REE OTHER UNITS HAVE ALSO BEEN LEASED OUT BY THE ASSESSEE TO JKPL FOR WHI CH THE ASSESSEE WAS GETTING RENT OF RS.12.25 LAKHS FROM JKPL INCLUDING THE YESHWANTHPUR UNIT WHICH WAS, ACCORDING TO THE AO, MEAGER CONSIDERING THE FACT THAT THE ASSESSEE WAS PAYING RENT OF RS.45.27 LAKHS IN RESPEC T OF YESHWANTHPUR UNIT TO THE LAND LORD. ACCORDING TO THE AO, THE ASSESSE ES INTENTION IN NOT CHARGING PROPER RENT FROM JKPL WAS TO ENABLE THE JK PL TO INCREASE ITS INCOME SO AS TO AVAIL BENEFIT U/S 10B OF THE ACT. ACCORDINGLY, THE AO HAD BROUGHT TO TAX RS.33.02 LAKHS BEING THE DIFFERENCE BETWEEN THE RENT PAID TO THE LAND LORD AND THE RENT RECEIVED FROM JKPL. 21.2. WHEN THE ISSUE WENT BEFORE TH E CIT (A) FOR ADJUDICATION, THE CIT (A) HAD, AFTER TAKING INTO ACCOUNT THE CONT ENTIONS OF THE ASSESSEE AS RECORDED IN HIS ORDER UNDER DISPUTE, OBSERVED TH AT IN TERMS OF SECTION 23 OF THE INCOME-TAX ACT, 1961, THE HIGHER OF THE RENT RECEIVED OR RENT RECEIVABLE FOLLOWING NEEDS TO BE ADOPTED AS ALV. S INCE THE AO HAS NOT BROUGHT ANYTHING ON RECORD TO HOLD THAT THE RENT REC EIVED IS NOT IN EXCESS OF THE MUNICIPAL VALUATION, I AM LEFT WITH NO OPTION, BUT TO AGREE WITH THE AR AND I HEREBY DIRECT THE AO TO ADOPT THE MUNICIPAL VA LUE OF THE RENT , IF IT IS IN EXCESS OF THE RENT RECEIVED.[PARA 11.1.] 21.3. BEFORE US, THE LEARNED D R HA D FORCEFULLY SUPPORTED THE AOS STAND AS THE AO HAD BROUGHT OUT THE WILLFUL IN TENTION OF THE ASSESSEE IN CHARGING LESS RENT FROM ITS SUBSIDIARY WHICH WOU LD FACILITATE ITS SISTER CONCERN TO POST INCREASED INCOME SO AS TO CLAIM EXE MPTION FROM TAX U/S 10B OF THE ACT. THIS CLANDESTINE INTENTION OF THE ASSE SSEE HAS BEEN EXPOSED BY PAGE 50 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 50 THE AO THEREBY HE HAD BROUGHT TO TAX-NET THE DIFFERE NCE BETWEEN RENT PAID AND RENT RECEIVED FROM ITS SISTER CONCERN. IT WAS, THEREFORE, PLEADED THAT THE STAND OF THE AO REQUIRES TO BE SUSTAINED. 21.4. ON THE OTHER HAND, THE LEARNED AR SUBMITTED THAT THE PREMISES ON WHICH THE RENT PAID BY THE ASSESSEE AND THE UNIT ON WHICH RENT RECEIVED BY THE ASSESSEE FROM JKPL WERE QUITE DIFFERENT AND, THEREFORE, THE AO HAS GOT THE BASIC FACTS WRONG. THEREFORE, IT WAS SUBM ITTED THAT THE AOS COMPARISON OF RENT WITH OTHER UNIT AND THE BUILDING WERE INCORRECT AS THE LOCATION, TENURE, SIZE, CONNECTIVITY, TIME OF ENTERI NG INTO AGREEMENT WERE ALL DIFFERENT AND, HENCE, NOT COMPARABLE. 21.5. WE HAVE CAREFULLY CONSIDERED THE RIVA L SUBMISSIONS AND DILIGENTLY PERUSED THE RELEVANT CASE RECORDS. IT WAS THE CASE OF THE ASSESSEE THAT DIFFERENT UNITS WERE LEASED OUT TO ITS SISTER CONCE RN. IT IS RELEVANT TO MENTION HERE THAT THE DETERMINATION OF THE RENT FOR A PROPERTY DEPENDS UPON ITS LOCATION, SIZE, AMENITIES AVAILABLE, CONNE CTIVITY TO THE MAIN THOROUGHFARE ETC. WHAT WAS RELEVANT HERE WAS AS TO WHETHER THE BUILDING ALLEGED TO HAVE BEEN TAKEN ON RENT BY THE ASSESSEE W AS THE SAME BUILDING LEASED OUT TO ITS SISTER CONCERN FOR A LESSER RENT? DURING THE COURSE OF HEARING BEFORE US, IT WAS VOUCHED BY THE LEARNED A R THAT THE BUILDING TAKEN ON RENT BY THE ASSESSEE HAS NOT BEEN LEASED OUT TO ITS SISTER-CONCERN AS PROJECTED BY THE AO IN HIS ASSESSMENT ORDER. 21.5.1. IN VIEW OF THE NEW FACT WHIC H WAS NOT BEFORE THE AO IN THE COURSE OF ASSESSMENT PROCEEDINGS, WE ARE OF THE CON SIDERED OPINION THAT IT WOULD MEET THE END OF JUSTICE, IF THE ISSUE IS ANAL YZED BY THE AO AFRESH AS PAGE 51 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 51 TO WHETHER THE BUILDING TAKEN ON HIGHER RENT WAS TH E SAME BUILDING WHICH WAS LEASED OUT FOR LESSER RENT TO ITS SISTER CONCER N. ACCORDINGLY, THIS ISSUE IS ALSO REMITTED BACK TO THE FILE OF THE ASSESSING OFFICER FOR NECESSARY ACTION AT HIS END. IT IS ORDERED ACCORDINGLY. AY 2006-07 - ITA NO.141/B/11 REVEN UES APPEAL: 22. IN THIS APPEAL, THE MAIN GROUSE OF THE REVENUE WAS THAT THE CIT (A) ERRED IN HOLDING THAT THE AMOUNT WAS TAXED IN T HE PROCEEDINGS U/S 143 (3) OF THE ACT AND, THEREFORE, WAS NOT TAXABLE U/S 201 OF THE ACT. 22.1. THE ISSUE, IN BRIEF, WAS THAT DURIN G THE COURSE OF ASSESSMENT PROCEEDINGS, AS POINTED OUT EARLIER, THE AO HAD NOT ICED THAT THE ASSESSEE HAD MADE REMITTANCES TO SEL, HONG KONG TOWARDS COMP ENSATION FOR TERMINATION OF SERVICE AGREEMENT ENTERED INTO WITH SEL AND THAT NO TDS HAS BEEN EFFECTED ON THE SAID REMITTANCES. ACCORDI NGLY, THE AO HAD INITIATED PROCEEDINGS U/S 201(1) OF THE ACT FOR THE FAILURE ON THE PART OF THE ASSESSEE TO EFFECT TDS. ACCORDING TO THE SERVICE AG REEMENT ENTERED INTO WITH SEL, THE ASSESSEE HAD ENGAGED SEL AS A SOURCIN G AGENT W. E. F. 1.7.2002 FOR A PERIOD OF TEN YEARS. AS PER THE TERMS OF THE SAID AGREEMENT, THE ASSESSEE HAD PAID COMPENSATION OF RS.18.35 CRORES F OR PREMATURE TERMINATION OF THE AGREEMENT AND THE SAID AMOUNT WA S REMITTED TO THE NON- RESIDENT SEL WITHOUT EFFECTING TDS. ACCORDING TO T HE AO, THE NATURE OF SERVICES (TO BE) RENDERED BY SEL AND ALSO THE BASIS OF COMMISSION PAYABLE ETC., HAVE NOT BEEN SPELT OUT IN THE SAID AGREEMENT . PAGE 52 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 52 22.2. DURING THE COURSE OF PRO CEEDINGS U/S 201(1) AND 201(1A) OF THE ACT, THE ASSESSEE WAS REQUIRED TO FURNISH AN D EXPLAIN THE CIRCUMSTANCES UNDER WHICH THE ASSESSEE HAD NOT EFFE CTED TDS WHILE MAKING REMITTANCES TO SEL. AFTER DUE CONSIDERATION OF THE ASSESSEES CONTENTIONS, ANALYZING THE PROVISIONS OF S. 9(1)(I) R. W. S. 5(2) (B) OF THE ACT AND FOR THE DETAILED REASONS RECORDED IN HIS IMPUGNED ORDER UN DER DISPUTE, THE AO HAD OBSERVED IN HIS CONCLUDING PARAGRAPH AS UNDER: 15. THUS, THE ASSESSEE COMPANY OUGHT TO HAVE DONE T DS ON THE OUTWARD REMITTANCES MADE TO THE NON-RESIDENT AS PER PROVISIONS OF SEC. 195(1) OF THE INDIAN I.T. AC T WHEREAS IT HAS FAILED TO DO THE SAME. THEREFORE TH E INDIAN COMPANY IS HEREBY TREATED AS DEFAULTER U/S 201 (1) AND TAXED ACCORDINGLY. 22.3. AGGRIEVED, THE ASSESSEE TOO K UP THE ISSUE WITH THE CIT (A)-IV FOR RELIEF. THE CIT (A) HAD, AFTER ANALYZING THE CONTENTIONS PUT- FORTH BY THE ASSESSEE, REASONING OF THE AO TO TREAT THE ASSESSEE AS A DEFAULTER U/S 201(1) OF THE ACT AND ALSO COMPREHENS IVELY ANALYZING THE RULING OF THE HONBLE SUPREME COURT IN THE CASE OF GE INDI A TECHNOLOGY LTD V. CIT (SUPRA), CONCLUDED THAT THERE WAS NO VIOLATION OF S .195 OF THE ACT BY THE ASSESSEE. THE RELEVANT PORTIONS OF THE FINDINGS OF THE CIT (A), FOR APPRECIATION OF FACTS, ARE REPRODUCED AS UNDER: 9.1. ITEM NO.(I): .APPARENTLY EVEN AFTER CONDUCTING SURVEY U/S 133A AT A LATER STAGE BY THE AO [AS CAN BE SEEN FROM THE REGULAR ASSESSMENT ORDER PASSED BY THE AO ON 8.12.2009 WHEREIN THIS AMOUNT WAS DISALLOWED U/S 37 (1)] IT WAS NOT ESTABLISHED THAT THE NON-RESIDENT HAD AN Y PAGE 53 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 53 PERMANENT ESTABLISHMENT IN INDIA. EVEN, THE AO HAS COME TO SUCH A CONCLUSION ON PRESUMPTIVE BASIS AND NOT ON CONCRETE FACTS. THE APPELLANT HAS CATEGORICALLY DEN IED HAVING ANY PE IN INDIA AS ALSO CARRYING OUT THE INDIA N OPERATIONS THROUGH ANY EMPLOYEE OR A REPRESENTATIVE I N INDIA. IT WAS REITERATED BY THE APPELLANT THAT THE NON- RESIDENT WAS CARRYING ON THE AGENCY COMMISSION BUSINE SS FROM HONG KONG AND THE ULTIMATE BUYERS WERE MAINLY FROM EUROPEAN COUNTRIES. IT IS RELEVANT TO QUOTE F ROM THE REGULAR ASSESSMENT ORDER OF THE AO DT. 8.12.200 9 PAGE 10 WHERE THE AO HAS CONCLUDED IN PARA 4.9 AS U NDER: SOUTH ELEGANT PEOPLE HAVE NEVER VISITED THE PREMISE S OF THE APPELLANT COMPANY. FROM THE FACTS BROUGHT ON RECORD AS ALSO FROM THE SURVEY CONDUCTED U/S 133A BY THE REGULAR AO IT IS NOT ESTABLISHED THAT M/S. SEL HAD ANY PERMANENT ESTABLISHMENT IN INDIA. ACCORDINGLY, I T IS HELD THAT M/S SEL HAD NO PE IN INDIA. 9.2. ITEM NO.(II): .ACCORDINGLY, EVEN AS PER EXPLANATION 2(A) TO SECTION 9(1)(I), SINCE M/S.SELS ACTIVITIES ARE LIM ITED TO THE AGENCY COMMISSION TOWARDS PURCHASE OF GOODS OR MERCHANDIZE FOR THE NON-RESIDENT BUYERS ABROAD, M/S. SELS ACTIVITIES CANNOT BE REGARDED AS HAVING BUSI NESS CONNECTION. ACCORDINGLY, IT IS HELD THAT NO INCOME ACCRUED OR AROSE IN INDIA SINCE THERE WAS NO BUSINE SS CONNECTION AS PER EXPLANATION 2(A) TO SECTION 9(1)( I). 9.3. ITEM NO.(III): AS PER PROVISIONS OF SECTION 28(II)(C) ANY PERSON.THERETO , GETTING ANY COMPENSATION OR ANY PAYMENT DUE TO OR RECEIVED BY BECOMES TAXABLE IN THEIR HANDS. FOR APPLYING THESE PROVISIONS, IT IS T O BE PROVED THAT THE FOREIGN AGENT HAD AN AGENCY IN INDIA BUT IN THIS CASE OF M/S SEL WAS A COMMISSION AGENT ON T HE FOREIGN SOIL I.E., IN HONG KONG AND WAS NOT HAVING ANY PAGE 54 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 54 AGENCY IN INDIA AND, ACCORDINGLY, THESE PROVISIONS AR E NOT APPLICABLE TO THE APPELLANT. . . 9.6. ITEM NO.(VI): THE VERY SAME ISSUE OF VIOLATION OF THE PROVISIONS O F SECTION 195 HAS BEEN CONSIDERED IN THE REGULAR ORDE R PASSED BY THE AO U/S 143(3) ON 8.12.2009. IN THIS O RDER, IT IS HELD THAT THERE IS VIOLATION OF PROVISIONS OF SECTION 195 AND HAS FURTHER HELD THAT, THIS VIOLATION HAS L ED TO THE DISALLOWANCE OF THE SAME AMOUNT OF RS.18,35,79,000/- U/S 40(A)(I). ACCORDINGLY, EVEN O N THE GROUND THAT IT IS NOT GENUINE EXPENDITURE WHICH IS ALLOWABLE U/S 37(1) AS ALSO IN VIEW OF VIOLATION OF SECTION 195, DISALLOWANCE IS MADE U/S 40(A)(I). THIS DISAL LOWANCE HAS NOW BEEN CONFIRMED BY THE CIT (A)-I IN ITA NO.63/DC-11(3)/A1/09-10 DATED 11.8.2010. THE RELEV ANT PORTION OF THE CONFIRMATION AS APPEARING IN PAGE 26 READS AS UNDER: IN THE ABSENCE..IT MAY BE MENTIONED THAT I HAVE NOT ENTERED INTO THE DISPUTE WHETHER THE PAYMEN T IS ALLOWABLE OR DISALLOWABLE U/S 40(A)(I) OF I.T. A CT OR NOT. FROM THESE FACTS, IT IS CLEAR THAT THE AO [ACIT, 11 (3)] HAS NOT ACCEPTED IT AS GENUINE BUSINESS EXPENDITURE ALLOWABLE U/S 37(1). EVEN AFTER DISALLOWANCE U/S 3 7(1), THE AO HAS RELIED ON THE JUDGMENT IN THE CASE OF SAMSUNG V. CIT REPORTED IN 320 ITR TO CONCLUDE THAT IT WAS ALSO DISALLOWABLE U/S 40(A)(I). NOW, THE HONB LE SUPREME COURT HAS SET ASIDE THE HONBLE KARNATAKA H IGH COURT JUDGMENT IN THE GE TECHNOLOGY CASE (327 ITR 456), RELYING SOLELY ON THE HONBLE KARNATAKA HIGH CO URT JUDGMENT DOES NOT ARISE. SINCE, IT IS HELD THAT IT IS NOT A GENUINE BUSINESS EXPENDITURE WHICH HAS ALSO BEEN CONFIRMED BY THE LEARNED CIT (A)-I HOLDING THAT ON S UCH PAGE 55 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 55 PAYMENT TAXES WHERE (SIC) WERE DEDUCTIBLE U/S 195 WO ULD GO CONTRARY. THE MOMENT IT IS HELD THAT THE TAXES A RE DEDUCTIBLE ON SUCH PAYMENT MADE TO THE NON-RESIDENT IT PUTS STAMP OF APPROVAL ON ITS GENUINENESS. THAT WI LL GO CONTRARY TO THE FINDING THAT IT WAS NOT ALLOWABLE RE VENUE EXPENDITURE U/S 37(1). PERHAPS, THIS WAS THE REASO N AS TO WHY THE CIT (A)-I CHOOSE NOT TO ENTER INTO DISPUTE REGARDING ALLOW-ABILITY OR DIS-ALLOWABILITY U/S 40(A) (I). IF IT IS HELD THAT THE PROVISIONS OF SECTION 195 ARE APPLICABLE, CONSEQUENTLY IT AMOUNTS TO ACCEPTING INDIRECTLY AS TO ITS GENUINENESS AND THAT GOES AGAIN ST THE FINDING OF THE AO OF ITS DISALLOWABLE NATURE U/S 37 (1). ACCORDINGLY, APART FROM THE REASONS DISCUSSED ABOVE, IN ITEM NOS.(I) TO (V), IN PARAGRAPHS 9.1 TO 9.5., FOR THE REASONS DISCUSSED IN THIS PARA ALSO, IT CANNOT BE H ELD TO BE VIOLATION OF SECTION 195 THIS WILL NOT PREJUDIC E THE FINDINGS OF THE AO THAT THE AMOUNT IS ALLOWABLE U/S 37(1) AND IF THE HIGHER APPELLATE AUTHORITIES GIVE A DIFF ERENT FINDING, THEN THIS ISSUE IS AGAIN OPEN FOR INTERPRE TATION. 22.4. AGGRIEVED, THE REVENUE HAS COME UP WITH THE PRESENT APPEAL. IT WAS THE CASE OF THE REVENUE THAT THE CIT (A) ERR ED IN HOLDING THAT THE AMOUNT WAS TAXED BY THE AO IN THE PROCEEDINGS U/S 14 3(3) AND, THEREFORE, IS NOT TAXABLE U/S 201(1). IT WAS FURTHER URGED THAT THIS IS A SEPARATE PROCEEDINGS ALTOGETHER. IT WAS, THEREFORE, PRAYED T HAT THE STAND OF THE AO ON THIS POINT REQUIRES TO BE RESTORED. 22.5. ON THE OTHER HAND, THE LEARNED AR SUPPORTED THE FINDINGS OF THE CIT (A) AND PLEADED THAT AS THERE WAS NO INFIRM ITY IN THE STAND OF THE CIT (A), THERE WAS NO CAUSE FOR THE REVENUE IN SEEK ING THE INTERVENTION OF THIS BENCH ON THE ISSUE. PAGE 56 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 56 22.6. WE HAVE CAREFULLY CONSIDERED THE RI VAL SUBMISSION AND DILIGENTLY PERUSED THE RELEVANT CASE RECORDS. 22.7. AT THE OUTSET, WE WOULD LIKE TO REIT ERATE THAT THE CLAIM OF DEDUCTION U/S 37 OF TERMINATION CHARGES AMOUNTING T O RS.18.35 LAKHS AS GENUINE BUSINESS EXPENDITURE WAS RESTORED TO THE FI LE OF THE AO FOR FRESH CONSIDERATION [PARA 11.5.2 SUPRA]. THEREFORE, THE QUESTION OF DISALLOWANCE OF THE SAME AMOUNT BY INVOKING THE PROVISION OF S. 4 0(A)(I) NEED TO BE DECIDED ONLY AFTER THE DECISION IS TAKEN BY THE AO AS REGARD TO THE ALLOW- ABILITY OR OTHERWISE OF THE AMOUNT U/S 37. THEREFOR E THE ADJUDICATION OF THE ISSUE THAT IS RAISED BY THE REVENUE IN THIS APPE AL IS PREMATURE AND, HENCE, NEED TO BE CONSIDERED ALONG WITH THE CLAIM O F DEDUCTION U/S 37 OF THE ACT. HENCE, THE PLEA OF THE REVENUE IS RESTORED TO THE FILE OF THE AO WITH A DIRECTION TO TAKE APPROPRIATE ACTION IN ACCORDANCE WITH LAW AFTER EXAMINING THE GENUINENESS OF PAYMENT U/S 37 OF THE ACT. IN OTHER WORDS, THE ISSUE OF DISALLOWANCE OF THE SAME AMOUNT BY INVOKING THE PROV ISION OF S. 40(A) (I) OF THE ACT IS OTHER SIDE OF THE SAME COIN. THE QUESTI ON OF DISALLOWANCE BY INVOKING THE PROVISION OF S. 40(A) (I) WILL ARISE O NLY IN THE EVENT THE PAYMENT IS FOUND TO BE ALLOWABLE U/S 37 OF THE ACT . IT IS ORDERED ACCORDINGLY. IN ESSENCE, THE APPEAL OF THE REVENUE IS ALLOWED FOR S TATISTICAL PURPOSE. A.Y 2007-08 ITA NO.1270/B/10 REVENUES APPEAL : 23. AT THE OUTSET, WE WOULD LIKE TO REIT ERATE THAT THE ABOVE DISALLOWANCES BY THE AO AS WELL AS RESTRICTIONS RESO RTED TO BY THE CIT (A) IN RESPECT OF (I) STAFF WELFARE EXPENSES; (II) ADMINIS TRATIVE EXPENSES OTHERS; WERE BASED PRIMARILY ON AD-HOC BASIS. AS POINTED OU T BY US IN THE ASSESSEES PAGE 57 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 57 OWN CASE FOR THE ASSESSMENT YEAR 2006-07 AND 2007-08 (SUPRA), NECESSARY DETAILS WITH REGARD TO THE ABOVE EXPENSES WERE MADE AVAILABLE TO THE AO ON THE DATE ON WHICH THE ASSESSMENT WAS PASSED. IN CON FORMITY WITH OUR FINDINGS IN THE ASSESSEES APPEAL THESE ISSUES ARE RESTORED TO THE AO FOR FRESH CONSIDERATION. IT IS ORDERED ACCORDINGLY. TH EREFORE, THE REVENUES GROUNDS ON THESE ISSUES ARE ALLOWED FOR STATISTICAL PURPOSE. 23.1 THE EXPENDITURE OF TRAVELLING EXPENSES WAS DI SCUSSED AT PARA 15.2 (SUPRA) AND FOR OUR REASONING MENTIONED IN PAR A 15.2.1 (SUPRA), WE DISMISS THE APPEAL OF THE REVENUE. 23.2 WITH REGARD TO SAMPLE EXP. & BUSINESS PROMOTI ON EXPENSES (GR.7), WE WOULD LIKE TO POINT OUT THAT SIMILAR ISS UE HAS BEEN RAISED BY THE ASSESSEE FOR THE AY 2007-08 UNDER APPEAL WHEREIN WE HAVE, AFTER DUE CONSIDERATION OF THE ISSUE AND FOR THE REASONS RECO RDED THEREIN, CONFIRMED THE DISALLOWANCE MADE BY THE AO. AS THE ISSUE RAISED BY THE REVENUE IS SIMILAR AND IDENTICAL, OUR FINDINGS RECORDED (IN PA RA 17.2. ABOVE) HOLDS GOOD HERE TOO. IT IS ORDERED ACCORDINGLY. IN ESSENCE, T HIS GROUND OF THE REVENUE IS ALLOWED. 24. THE LAST GROUND RELATES TO ( GROUND NO.8) CUSTOMS DUTY ON MACHINERY. THIS ISSUE HAS BEEN DEALT WITH BY US IN TH E ASSSESSEES APPEAL (SUPRA). OUR FINDINGS RECORDED THEREIN HOLD GOOD HE RE ALSO. IT IS ORDERED ACCORDINGLY. IN ESSENCE, THIS ISSUE IS DECIDED IN F AVOUR OF THE REVENUE. PAGE 58 OF 58 ITA NOS.1242 & 1243-10, 1269 & 1270-10, 141-11 58 25. IN THE RESULT : (I) THE ASSESSEES APPEAL FOR THE AYS 2006-07 AND 2007- 08 ARE PARTLY ALLOWED FOR STATISTICAL PURPOSE; (II) THE REVENUES APPEALS FOR THE AY 2006-07 [ITA NOS.1 269/B/10 & 141/B/11 TWO APPEALS] ARE PARTLY ALLOWED FOR STATI STICAL PURPOSE & (III) THE REVENUES APPEAL FOR THE AY 2007-08 IS PARTLY AL LOWED. THE ORDER PRONOUNCED ON THE 30 TH DAY OF NOVEMBER, 2012 AT BANGALORE. SD/- SD/- (N BARATHVAJA SANKAR) (GEORGE GEORGE K) VICE PRESIDENT JUDICIAL MEMBER COPY TO : 1. THE REVENUE 2. THE ASSESSEE 3. THE C IT CONCERNED. 4. THE CIT(A) CONCERNED. 5. DR 6. GF MSP/ BY ORDER SENIOR PRIVATE SECRETARY, ITAT, BAN GALORE.
Other Referred Cases
-
Laws Referred To
-
1:1 Consultation on Legal Requirements
₹1
1:1 Consultation on Business Development
₹1
1:1 Consultation on Startup Compliance
₹1
Research Collaboration Agreement
₹0
Form AOC-2 - Disclosure of Related Party Transaction
Mehul₹50
Transfer Pricing and International Tax Reforms under Finance Bill, 2026: A Practical Overview
Team Counselvise - February 07, 2026
Finance Bill, 2026: Key Direct Tax Amendments on Assessments and Appeals
Team Counselvise - February 06, 2026
Why Lacoste Won a 20-Year Trademark Battle Against Crocodile ?
Team Counselvise - March 10, 2026