DCIT, Chandigarh V. M/s Bhagwati Steel Sales, Chandigarh

ITA 1387/CHANDI/2010

• Counselvise Citation: [2011] 140 COUNSELVISE.COM (IT) 51529 (ITAT-CHANDIGARH)
• Duration Of Justice: 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-10-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 13-10-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 08-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: JAI SHREE SHARMA
• Assessee Lawyers: SUDHIR SEHGAL
• Keywords: Fair market value; Corroborative evidences; Commercial expediency; Onus to prove; TDS; Set aside
• Section: 37; 260A; 40(a)(ia); 37(1); 194C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL CHANDIGARH BENCH B CHANDIGARH BEFORE MS SUSHMA CHOWLA, JUDICIAL MEMBER AND SHRI MEHAR SINGH, ACCOUNTANT MEMBER ITA NO. 1387/CHD/2010 ASSESSMENT YEAR 2007-08 DCIT, CIRCLE-I(1), V M/S BHAGWATI STEEL SALES, CHANDIGARH. PLOT NO. 379, INDL.AREA-II, CHANDIGARH. PAN: AAAFB-7947F & C.O. 48/CHD/2010 IN ITA NO.1387/CHD/2010 M/S BHAGWATI STEEL SALES, V DCIT, CIRCLE 1(1), PLOT NO. 379, INDL.AREA-II, CHANDIGARH. CHANDIGARH. (APPELLANT) (RESPONDENT) DEPARTMENT BY: SMT. JAISHREE SHARMA ASSESSEE BY : SHRI SUDHIR SEHGAL DATE OF HEARING : 13.10.2011 DATE OF PRONOUNCEMENT : 19.10.2011 ORDER PER MEHAR SINGH, AM THE PRESENT APPEAL FILED BY THE REVENUE IS AGAINST THE ORDER DATED 06.08.2010 PASSED BY THE LD. CIT(A) CHA NDIGARH U/S 250(6) OF THE INCOME-TAX ACT,1961 (IN SHORT 'TH E ACT') AND THE ASSESSEE HAS FILED THE CROSS OBJECTION. 2. IN THIS APPEAL, THE REVENUE HAS RAISED THE FOLLO WING GROUND OF APPEAL: 1. ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND AS PER PROVISIONS OF LAW, LD. CIT(A) HAS 2 ERRED IN ALLOWING THE RELIEF TO THE ASSESSEE OF RS.1,32,685/- U/S 40A(2)(B) OF THE INCOME-TAX ACT,1961 REGARDING DISALLOWED INTEREST ON UNSECURED LOANS. 2. ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND AS PER PROVISIONS OF LAW,LD. CIT(A) HAS ERRED IN ALLOWING THE RELIEF TO THE ASSESSEE OF RS.6,69,216/- REGARDING DISALLOWANCE OF INTEREST ON ACCOUNT OF INTEREST RELATED TO DIVERSION OF FUND S TRANSFERRED TO SISTER CONCERN. 3. ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND AS PER PROVISIONS OF LAW, LD. CIT(A) HAS ERRED IN ALLOWING THE RELIEF TO THE ASSESSEE OF RS.40,06,112/- U/S 40(A)(IA) OF THE INCOME-TAX ACT,1961 REGARDING DISALLOWANCE OF EXPENSES OF PURCHASE DURING THE YEAR TO THE EXTENT OF FREIGHT PAID BY THE SUPPLIER OR RAW MATERIAL. 4. ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND AS PER PROVISIONS OF LAW, LD. CIT(A) HAS ERRED IN ALLOWING THE RELIEF TO THE ASSESSEE OF RS.11,85,942/- REGARDING DISALLOWANCE OF EXPENDITURE INCURRED ON ACCOUNT OF CHANGE IN FOREIGN CURRENCY RATES ON BANK FINANCE. 5. ON FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND AS PER PROVISIONS OF LAW, LD. CIT(A) HAS ERRED IN ALLOWING THE RELIEF TO THE ASSESSEE OF RS.3,00,000/- U/S 40A(2)(B) OF THE INCOME-TAX ACT,1961 REGARDING DISALLOWANCE OF EXPENDITURE INCURRED ON ACCOUNT OF EXCESS RENT PAID. 6. WHETHER ON THE FACTS AND CIRCUMSTANCES OF THE CASE THE GOODS SUPPLIED BY M/S TATA STEEL NOT BEING INCLUSIVE OF FREIGHT AND THEREFORE THE FREIGHT CHARGES CHARGED SEPARATELY BY THE M/S TATA STEEL FALL UNDER THE PROVISIONS OF SECTION 194C OF THE INCOME-TAX ACT,1961. 7. THE APPELLANT CRAVES TO ADD OR AMEND ANY GROUND OF APPEAL BEFORE THE APPEAL IS HEARD OR DISPOSED OFF. 3. IN GROUND NO.1, THE REVENUE CONTENDED THAT THE C IT(A) ERRED IN ALLOWING THE RELIEF OF RS.1,32,685/- U/S 4 0A(2)(B) OF THE ACT REGARDING DISALLOWANCE OF INTEREST ON UNSECURED LOAN. THE LD.DR PLACED RELIANCE ON THE ORDER OF THE AO WHER EAS THE LD. AR PLACED RELIANCE ON THE ORDER OF THE CIT(A). 3 4. WE HAVE HEARD THE RIVAL PARTIES AND PERUSED THE RELEVANT RECORDS. IN THIS CASE, AN AMOUNT OF INTEREST TO THE TUNE OF RS.6,63,427/- ON UNSECURED LOAN WAS PAID TO THE PER SONS COVERED U/S 40A(2)(B) OF THE ACT. BEFORE THE AO, T HE ASSESSEE SUBMITTED THAT DURING THE PREVIOUS YEAR, SIMILAR IS SUE WAS DECIDED BY THE CIT(A) IN FAVOUR OF THE ASSESSEE. IT WAS FURTHER CONTENDED THAT INTEREST PAID @ 15% ON UNSECURED LOA N IS JUSTIFIED KEEPING IN VIEW THE INTEREST RATE PREVALE NT IN THE MARKET. THE AO REJECTED THE EXPLANATION OF THE ASSE SSEE AND DISALLOWED AN AMOUNT OF RS.1,32,685/- ON ACCOUNT OF EXCESS INTEREST PAID TO THE SPECIFIED PERSONS U/S 40A(2)(B ) OF THE ACT. LD. CIT(A) DELETED THE IMPUGNED DISALLOWANCE. THERE IS NO DISPUTE THAT THERE CAN BE DIFFERENT RATE OF INTERES T CHARGED, IN RESPECT OF UNSECURED LOAN AND SECURED LOAN. THEREF ORE, BANK RATE DOES NOT PROVIDE A MEASURING PARAMETER FOR COM PARISON OF INTEREST RATES. GENERALLY, THE INTEREST ON UNSECUR ED LOAN IS HIGHER VIS--VIS THE INTEREST RATE CHARGED ON SECUR ED LOANS. THIS CONTENTION OF THE ASSESSEE HAD SUBSTANCE AND T HE AO FAILED TO DISLODGE SUCH CONTENTION OF THE ASSESSEE. 5. HAVING REGARD TO THE FACT SITUATION OF THE CASE AND THE SUBMISSION MADE BY THE ASSESSEE ON THE ISSUE IN QUE STION, WE ARE OF THE CONSIDERED OPINION THAT THE REVENUE HAS FAILED TO MAKE OUT A CASE TO BE COVERED U/S 40A(2)(B) OF THE ACT. THEREFORE, FINDING OF THE LD. CIT(A) THAT PAYMENT O F INTEREST @ 15% IS REASONABLE, CANNOT BE ASSAILED. CONSEQUENTL Y, SUCH FINDING OF THE LD. CIT(A) ARE UPHELD. THIS GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 4 6. IN GROUND NO.2, THE REVENUE CHALLENGED THE RELIE F GRANTED TO THE ASSESSEE AMOUNTING TO RS.6,69,216/-, REGARDI NG DISALLOWANCE OF INTEREST IN RESPECT OF DIVERSION OF FUNDS TO SISTER CONCERNS. THE AO IN PARA 3 OF ASSESSMENT OR DER HELD THAT THE ADVANCE TO SISTER CONCERN WAS MADE WITHOUT ANY BUSINESS CONSIDERATION, HENCE THE DISALLOWANCE OF I NTEREST WAS MADE. IN THE COURSE OF PRESENT APPELLATE PROCEEDIN GS, LD. DR REFERRED TO THE RELEVANT PARA OF THE ASSESSMENT ORD ER AND PLACED RELIANCE ON THE ORDER OF THE AO. 7. LD. AR PLACED RELIANCE ON THE ORDER OF THE CIT (A) AND CONTENDED THAT THERE EXISTED AGREEMENT OF THE ASSES SEE WITH M/S MANGLA SONS AND THE FUNDS WERE MADE AVAILABLE I N PURSUANCE OF SUCH AGREEMENT AND PURELY FOR BUSINESS PURPOSES. THE AO DISALLOWED THE IMPUGNED INTEREST FOLLOWING THE DECISION IN THE CASE OF M/S ABHISHEK INDUSTRIES LTD. 286 ITR 1 (P&H). 8. LD. CIT(A) DELETED THE IMPUGNED ADDITION AND HEL D THAT THERE EXISTED BUSINESS EXPEDIENCY IN THE TRANSACTIO N AND BY FOLLOWING THE DECISION OF HON'BLE SUPREME COURT IN THE CASE OF S.A.BUILDERS 228 ITR 1 (S.C) DELETED THE ADDITION. IT IS UNDISPUTED FACT THAT AS PER AGREEMENT DATED 01.04.2 005 BETWEEN THE ASSESSEE AND M/S MANGLA SONS SERVICE CE NTRE, IT WAS PROVIDED THAT M/S MANGLA SONS SERVICE CENTRE WO ULD PROVIDE SERVICE TO THE ASSESSEE FOR GETTING THE JOB WORK ACTIVITIES LIKE DEDUCTION-COILING, CUTTING AND SLIT TING OF CR/HR COILS AT LESS THAN THE MARKET RATE WHICH WAS FIXED AT RS.200/- PER MT OF HR AND CR AS AGAINST RS.300/250 CHARGED F ROM OTHER CUSTOMERS. IN TURN, THE FIRM BHAGWATI STEEL SALES W OULD 5 PROVIDE M/S MANGLA SONS, CHANDIGARH INTEREST FREE A DVANCES FOR THE PURCHASE OF MACHINERY. THE AGREEMENT AND TRANSACTIONS IN PURSUANCE OF SUCH AGREEMENT ARE NOT IN DISPUTE. THE REVENUE HAS FAILED TO BRING ON RECORD TO REBUT THE EXISTENCE OF AGREEMENT AND TRANSACTION IN PURSUANCE OF SUCH AGREEMENT. THEREFORE, THE RATIO OF THE HON'BLE SUP REME COURT IN THE CASE OF S.A.BUILDERS LTD. (SUPRA) IS SQUAREL Y APPLICABLE TO THE FACT SITUATION OF THE PRESENT CASE. THE FINDIN GS OF THE LD. CIT(A) ARE CONTAINED IN PARA 14 & 15 OF THE APPELLA TE ORDER. FOR THE SAKE OF READY REFERENCE, SAME ARE REPRODUCED HE REUNDER : 14. AFTER GOING THROUGH THE ABOVE FINDINGS OF THE APEX COURT MY OBSERVATION ON THIS ISSUE ARE AS UNDE R: 1. THE APPELLANT DURING THE ASSESSMENT PROCEEDINGS, AS WELL AS DURING THE APPELLATE PROCEEDINGS ESTABLISHED THAT THE INTEREST FREE TRANSFER OF FUNDS TO ITS SISTER CONCERN WAS GIVEN AS A MEASURE OF COMMERCIAL EXPEDIENCY. 2. FURTHER, SECTION 36(1)(III) MANIFESTS ALLOWABILITY OF INTEREST PAID IN RESPECT OF CAPITAL BORROWED FOR THE PURPOSE OF BUSINESS OR PROFESSION, AND THE EXPRESSION FOR THE PURPOSE OF BUSINESS IS MUCH WIDER IN SCOPE. 3. THE AMOUNT BORROWED NEED NOT NECESSARILY BE UTILIZED IN ASSESSEE'S OWN BUSINESS; IF SUCH BORROWED FUND IS ADVANCED TO A SISTER CONCERN/SUBSIDIARY AS A MEASURE OF COMMERCIAL EXPEDIENCY, THE INTEREST SHALL STILL BE ALLOWABLE. 4. THE AO HAS NOWHERE ESTABLISHED THAT THE INTEREST FREE LOAN HAD BEEN USED FOR OTHER THAN COMMERCIAL PURPOSE. 15. IN VIEW OF THE ABOVE, I FIND THAT ALL THESE REQUISITE PARAMETERS AS LAID DOWN IN THE DECISION O F 6 APEX COURT RENDERED IN THE CASE OF S.A.BUILDERS LTD . (SUPRA) ARE ESTABLISHED AND THE DISALLOWANCE OF INTEREST OF RS.669216/- IS NOT JUSTIFIED. AS A RESU LT, APPEAL ON THIS GROUND IS ALLOWED. 9. IN VIEW OF THE ABOVE LEGAL AND FACTUAL DISCUSSIO N, THIS GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 10. AS STATED BY THE LD. AR AND LD. DR, GROUND NOS. 3 AND 6 ARE INTER-RELATED AND HENCE, THE SAME ARE ADJUDICAT ED TOGETHER. 11. IN GROUND NO.3 THE REVENUE CONTENDED THAT THE C IT(A) ERRED IN ALLOWING RELIEF OF RS.40,06,112/- U/S 40A( IA) OF THE ACT REGARDING DISALLOWANCE OF EXPENSES OF PURCHASE DURI NG THE YEAR TO THE EXTENT OF FREE FREIGHT PAID BY THE SUPPLIER OF RAW MATERIAL. IN THE COURSE OF PRESENT APPELLATE PROCEE DINGS, IT WAS STATED BY THE REPRESENTATIVES OF THE CONTENDING PAR TIES THAT ISSUE IS COVERED IN ASSESSEE'S OWN CASE, AS IS EVID ENT FROM PARA17-18 OF THE CIT(A)S ORDER AT PAGE 14. THE CIT (A) FOLLOWED THE SAID DECISION OF THE ITAT AGAINST WHICH THE DEP ARTMENTAL APPEAL U/S 260A OF THE ACT WAS DISMISSED BY THE HON 'BLE PUNJAB & HARYANA HIGH COURT. THE RELEVANT PARAS OF THE ORDER OF THE CIT(A) ARE REPRODUCED HEREUNDER : 17. DURING THE COURSE OF APPELLATE PROCEEDINGS, TH E LD. COUNSEL FOR THE APPELLANT SUBMITTED AS UNDER : THE AO HAS MADE A DISALLOWANCE OF RS.4006112/- FOR NON-DEDUCTION OF TDS U/S 194C ON THE FREIGHT AMOUNT SHOWN IN THE INVOICES RAISED BY THE TATA STEEL LTD. A SIMILAR ISSUE WAS ALSO RAISED BY THE THEN LD. AO IN THE CASE OF THE ASSESSEE FIRM FOR THE ASSESSMENT YEAR 2006-07 WHICH STAND DELETED BY THE HON'BLE TAT CHANDIGARH BENCH IN APPEAL NO.ITA 63/CHANDIGARH/ 2009 DATED 30.04.2009. FURTHER, DEPARTMENTAL APPEAL U/S 260A BEFORE THE HON'BLE PUNJAB & HARYANA HIGH 7 COURT AGAINST THE ABOVE REFERRED ITAT DECISION HAS BEEN DISMISSED VIDE JUDGEMENT DATED 21.01.2010 IN APPEAL NO.693 OF 2009. 18. I HAVE CONSIDERED THE SUBMISSIONS AND HAVE PERUSED THE JUDGEMENT QUOTED BY THE LD. COUNSEL. IN THIS CASE, THE HON'BLE TRIBUNAL IN FCI WHEREIN THE HON'BLE COURT HELD THAT IF EXPENSES INCURRED BY A PERSON ON ACCOUNT OF TRANSPORTATION, INTEREST ETC. ARE ADDED TO THE COST OF THE GOODS, IT CANNOT BE INFERR ED THAT THE PERSON WHO IS BILLED HAD PAID CERTAIN AMOU NT ON ACCOUNT OF THOSE SERVICES SEPARATELY AS THE SAME BECOMES PART OF THE COST OF THE PRODUCT PURCHASED. IT IS FOR THIS REASON THE HON'BLE HIGH COURT HELD THAT SU CH SEPARATELY CHARGED AMOUNTS CANNOT BE HELD LIABLE FO R DEDUCTION OF TAX AT SOURCE U/S 194C OF THE ACT. 19. APPLYING THAT LOGIC TO THE CASE QUOTED, THE HON 'BLE TRIBUNAL OBSERVED THAT IT IS EVIDENT THAT THE EXPE NSES OF FREIGHT INCURRED BY M/S TATA STEEL, WHICH HAVE B EEN SHOWN SEPARATELY IN THE INVOICES RAISED ON THE ASSESSEE, CANNOT BE CONSTRUED TO INFER THAT THE ASSESSEE HAS PAID ANY AMOUNT FOR TRANSPORTATION OF GOODS SEPARATELY THAN THE COST OF THE GOODS PURCHAS ED BY IT. OSTENSIBLY, IN SUCH CIRCUMSTANCES, THERE WOU LD NOT ARISE ANY NECESSITY OF DEDUCTION OF TAX AT SOUR CES ON THE FREIGHT AMOUNT SEPARATELY SHOWN IN THE INVOI CES, IN TERMS OF SECTION 194C OF THE ACT. THEREFORE, FOL LOWING THE PARITY OF REASONING LAID DOWN BY THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF FOOD CORPORATION OF INDIA (SUPRA) THE AMOUNT RAISED BY M /S TATA STEEL IN THE INVOICES SHOWN AS FREIGHT DID NOT CREATE AN OBLIGATION ON THE ASSESSEE TO DEDUCT TAX ON SUCH AMOUNTS AS PER SECTION 194C OF THE ACT. IN OU R VIEW, IF THE FREIGHT EXPENSES INCURRED BY M/S TATA STEEL ARE ADDED TO THE COST OF GOODS IN THE INVOICE RAISE D, IT CANNOT BE INFERRED THAT THE ASSESSEE HAD PAID ANY AMOUNT OF FREIGHT SEPARATELY BECAUSE THE SAME IS PA RT OF THE COST OF PRODUCT PURCHASED. THE ASSESSEE COUL D 8 NOT BE SAID TO BE AN ASSESSEE IN DEFAULT FOR NON DEDUCTION OF TAX AT SOURCE IN TERMS OF SECTION 194C OF THE ACT ON THE AMOUNT OF FREIGHT BILLED SEPARATELY BY M/S TATA STEEL. AS A CONSEQUENCE, IT FOLLOWS THAT T HE PROVISIONS OF SECTION 40(A)(IA) OF THE ACT CANNOT B E APPLIED TO DISALLOW THE AMOUNT OF SUCH FREIGHT AMOUNTING TO RS.2,01,81,428/-. FOLLOWING THE AFORES AID DISCUSSION, WE SET ASIDE THE ORDER OF THE CIT(A) AN D DIRECT THE AO TO DELETE THE IMPUGNED ADDITION. THE ASSESSEE ACCORDINGLY, SUCCEEDS ON THIS GROUND. 20. FURTHER, THE DECISION IN THIS CASE HAS BEEN UPH ELD AS FINAL IN IT APPEAL NO.693 OF 2009 DATED 21.1.201 0 BY THE HON'BLE PUNJAB & HARYANA HIGH COURT. 21. SINCE THE FACTS IN THE INSTANT CASE ARE IDENTIC AL, RESPECTFULLY FOLLOWING THE JUDGEMENT QUOTED SUPRA, PLEA OF THE ASSESSEE IS ACCEPTED, THUS FOLLOWING GROUND NO.4 OF THE APPELLANT. 12. RESPECTFULLY FOLLOWING THE DECISION OF THE TRIB UNAL AND OF THE JURISDICTIONAL HIGH COURT, AS DISCUSSED IN THE ABOVE STATED TEXT OF THE CIT(A)S ORDER, THESE GROUNDS OF APPEAL RAISED BY THE REVENUE ARE DISMISSED AND FINDINGS OF THE CIT(A ) ARE UPHELD. 13. IN GROUND NO.4, IT WAS CHALLENGED BY THE REVENU E THAT CIT(A) ERRED IN ALLOWING RELIEF TO THE ASSESSEE OF RS.11,85,942/- REGARDING DISALLOWANCE OF EXPENDITURE INCURRED ON A CCOUNT OF CHANGE IN FOREIGN CURRENCY RATE IN BANKING FINANCE. 14. THE AO, WHILE CONSIDERING THE CLAIM OF EXPENDIT URE OF RS.11,85,942/- HELD THAT SUCH EXPENSES ARE NOT ALLO WABLE U/S 37 OF THE ACT AS THE IMPUGNED AMOUNT HAS NOT BEEN E XPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ASSESSEE' S OWN 9 BUSINESS THE RELEVANT FINDINGS OF THE AO AS CONTAIN ED IN PARA 5.1 AND 5.2 ARE REPRODUCED HEREUNDER : 5.1 THE ASSESSEE HAS GIVEN A GENERAL REPLY THAT TH E FUNDS HAVE BEEN UTILIZED FOR THE PURPOSE OF BUSINES S ONLY. HOWEVER, NO DETAILS WERE GIVEN AS TO HOW THE FUNDS HAVE ACTUALLY BEEN UTILIZED. AS DISCUSSED IN EARLIER PARAGRAPHS, THE ASSESSEE HAS DIVERTED SUBSTANTIAL AMOUNT OF FUNDS TO ITS SISTER CONCERN NAMELY M/S MANGLA SONS. SINCE, IT HAS BEEN HELD THA T FUNDS TRANSFERRED TO M/S MANGLA SONS ARE FOR NON- BUSINESS CONSIDERATION, EXPENSES INCURRED ON ACCOUN T OF FOREIGN CURRENCY LOAN ACCOUNT ALSO HAS TO BE DISALLOWED. SUCH EXPENSES ARE NOT ALLOWABLE U/S 37( 1) OF THE I.T.ACT, 1961 AS THE AMOUNT OF RS.11,85,942/ - HAS NOT BEEN LAID DOWN OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE ASSESSEE'S OWN BUSINESS OR PROFESSION. THE CHANGE IN THE FOREIGN CURRENCY LIMIT HAS RESULTED IN AVAILABILITY OF ADDI TIONAL FUNDS TO THE ASSESSEE, WHICH INSTEAD OF BEING UTILI ZED FOR THE PURPOSES OF BUSINESS, HAS BEEN DIVERTED TO ITS SISTER CONCERN NAMELY M/S MANGLA SONS WITHOUT ANY BUSINESS CONSIDERATION. 5.2 WITH THESE COMMENTS, THE AMOUNT OF RS.11,85,942/- IS DISALLOWED AND ADDED BACK TO THE INCOME OF THE ASSESSEE U/S 37(1) OF THE INCOME-TAX ACT,1961. 15. LD. DR PLACED RELIANCE ON THE ASSESSMENT ORDE R AND LD. AR PLACED RELIANCE ON THE ORDER OF THE CIT(A). 16. A BARE PERUSAL OF THE FACTS OF THE CASE REVEALS THAT THE AO PROCEEDED ON WRONG ASSUMPTION OF FACTS AND WRONG AP PLICATION OF THE PROVISIONS OF SECTION 37(1) OF THE ACT. THE FUNDS WERE MADE AVAILABLE TO THE SISTER CONCERN ON ACCOUNT OF BUSINESS EXPEDIENCY, AS HELD BY THE CIT(A), FOLLOWING THE DE CISION OF THE 10 APEX COURT, IN THE CASE OF S.A.BUILDERS (SUPRA). T HE APPELLANT CLAIMED IMPUGNED EXPENSES, ON ACCOUNT OF FLUCTUATIO N OF FOREIGN CURRENCY RATES AND TO DEMONSTRATE THE JUSTI FICATION OF SUCH CLAIM, NECESSARY DOCUMENTARY EVIDENCE ISSUED B Y THE BANK WERE ADDUCED BEFORE THE CIT(A). THE CIT(A) , O N PERUSAL OF SUCH EVIDENCES OBSERVED THAT THE LIMITS HAVE BEEN A VAILED BY THE APPLICANT AGAINST THE PLANT & MACHINERY, BUILDI NG AND WORKING CAPITAL FUNDS BASE AND THE LIMIT HAS BEEN T AKEN FOR THE PURCHASE OF MACHINERY. THE ASSESSEE HAD UTILIZED TH E FUNDS FOR THE PURPOSE OF BUSINESS BY MAKING PAYMENT TO TATA S TEEL LTD. ON ACCOUNT OF PURCHASE OF STEEL MATERIAL. THE CIT(A ) BY ANALYZING THE RATIO OF THE DECISION, IN THE CASE OF CIT V DEMPO & CO.P.LTD., 206 ITR 291 (BOM.) AND THE RATIO OF TH E DECISION IN THE CASE OF GROZ-BECKERT SABOO LTD. V CIT (1981) 12 7 ITR 608 ALLOWED THE CLAIM OF LOSS OF THE ASSESSEE AS A RESU LT OF FLUCTUATION OF FOREIGN CURRENCY RATES. THE REVENUE FAILED TO BRING ON RECORD ANY MATERIAL INDICATING THAT THE FU NDS WERE NOT UTILIZED, FOR THE PURPOSE OF BUSINESS. ACCORDINGLY , THE LOSS SUFFERED BY THE ASSESSEE ON ACCOUNT OF FLUCTUATION OF THE FOREIGN CURRENCY RATES, IS RELATABLE TO THE BUSINES S OF THE ASSESSEE AND IS ELIGIBLE FOR DEDUCTION. THEREFORE, THE FINDINGS OF THE CIT(A) ARE UPHELD AND GROUND OF APPEAL OF THE R EVENUE IS DISMISSED. 17. GROUND NO.5 IS AGAINST THE RELIEF GRANTED BY TH E CIT(A) TO THE TUNE OF RS.3,00,000/- U/S 40A(2)(B) OF THE ACT REGARDING DISALLOWANCE OF EXPENDITURE INCURRED ON ACCOUNT OF EXCESS RENT PAID. THE AO HAS DISCUSSED THE ISSUE IN QUESTION I N PARA 7 OF THE ASSESSMENT ORDER. THE AO HELD THAT THE PAYMENT OF RENT 11 HAS BEEN MADE TO THE PARTIES COVERED U/S 40A(2)(B) OF THE ACT. THE EXCESS PAYMENTS ON ACCOUNT OF RENT HAVE BEEN MA DE ONLY TO REDUCE THE INCIDENCE OF TAX LIABILITY OF THE ASSESS EE FIRM. IT WAS OBSERVED BY THE AO THAT THE ASSESSEE HAS NOT BEEN I N A POSITION TO DEMARK THE EXACT AREA UTILIZED BY THE TWO ENTITI ES FOR THE PURPOSES OF THEIR BUSINESS. THE AO OBSERVED THAT THE RENT FOR THIS SIZE OF PLOT AROUND 477 SQ.YARD WITH A SHED CA NNOT BE MORE THAN RS.3 LACS AND HENCE 50% OF THE RENT PAID IS DI SALLOWED U/S 40A(2)(B) OF THE ACT. THE LD. CIT(A) DELETED T HE ADDITION. THE FINDINGS OF THE CIT(A) ARE REPRODUCED HEREUNDER : 37. I HAVE CONSIDERED THE ISSUE IN HAND. SECTION 4 0A IMPOSES RESTRICTION AND LIMITATION ON DEDUCTIBILITY OF EXPENSES PAID TO CERTAIN CATEGORIES OF PERSONS. SEC TION 40A(2) PUTS A CURB ON EXPENDITURE IN RESPECT OF WHI CH PAYMENT HAS BEEN MADE TO THE CLOSE ASSOCIATES FOR GOODS, SERVICES AND FACILITIES AND IT EMPOWERS THE AO TO DISALLOW SO MUCH OF THE EXPENDITURE IN RESPECT OF W HICH PAYMENT HAS BEEN MADE TO CERTAIN CATEGORIES OF PERS ONS AS IS CONSIDERED BY HIM EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS , SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MAD E. 38. BEFORE DISALLOWING ANY EXPENDITURE AO SHOULD DEMONSTRATE THAT THE ELEMENT OF UNREASONABLENESS IS PRESENT IN THE TRANSACTIONS. BUT NOTHING HAS BEEN POINTED OUT BY THE AO WHICH CAN BE CORRELATED TO T HE UNREASONABLENESS OF PAYMENT. ON THE OTHER HAND, APPELLANT FIRM PROVIDED THE MARKET RATE BEING CHARG ED FOR THE SIMILARLY SITUATED PROPERTIES, WHICH I FIND ARE MUCH HIGHER COMPARED TO THE APPELLANT FIRM. 39. IN THE CASE OF ACIT V RAM & CO. (INTERIORS) (P) LTD. (2004) 1 SOT 145 (MUMBAI). HON'BLE TRIBUNAL ON THE ISSUE OF PAYMENT OF RENT PAID TO SISTER CONCERN HEL D THE PROVISIONS OF SECTION 40(A)(2)(B) NOT BE APPLIED IN EACH 12 AND EVERY PAYMENT TO A SISTER CONCERN IF THE TRANSA CTION IS GENUINE AND NOT WITH THE INTEREST OF EVASION OF TAX. 40. IN VIEW OF THE ABOVE FINDINGS AND DECISION OF HON'BLE TRIBUNAL, I AM OF THE VIEW THAT WHEN NOTHIN G HAS BEEN BROUGHT ON RECORD BY THE AO TO ESTABLISH THAT THE TRANSACTION WAS NOT GENUINE AND WHEN ON THE OTHER HAND, THE APPELLANT FIRM FILED AMPLE EVIDENCE REGAR DING REASONABILITY OF RENT PAID BY THE APPELLANT FIRM, T HE ADDITION MADE CANNOT BE SUSTAINED. 18. WE HAVE CAREFULLY PERUSED THE FACTUAL MATRIX OF THE CASE AND RELEVANT RECORD. THE ONUS TO PROVE THE APPLICAB ILITY OF THE PROVISIONS OF SECTION 40A(2)(B) IS SQUARELY ON THE REVENUE BY PLACING ON RECORD RELEVANT AND CORROBORATIVE EVIDEN CES. IN THE PRESENT CASE, THE LD. AO HAS MERELY DISALLOWED INTE REST ON ESTIMATE BASIS, WITHOUT SPECIFYING THE REASON FOR T HE SAME. THE ASSESSEE MADE DETAILED SUBMISSIONS SPECIFYING THE A REAS AND RENT RATES DURING THE RELEVANT PERIOD. IT WAS POIN TED OUT BY THE ASSESSEE THAT AS PER PARA 7.4 OF THE ASSESSMENT ORD ER, IT IS MENTIONED THAT THE MAJOR PORTION OF THE INDUSTRIAL PLOT AT 379, CONSISTS OF OPEN SHED, WHICH IS NOT CORRECT. THE S HED IS FULLY COVERED BY CONCRETE WALL ON FOUR SIDES WITH FRONT G ATE AND FITTED WITH GC SHEETS ON THE ROOF. IT WAS FURTHER HIGHLIG HTED BY THE ASSESSEE THAT THE PLOT OWNERS TO WHOM THE RENT HAD BEEN PAID BY THE FIRM, FALLS UNDER THE INCOME TAX SLAB OF 30% FOR THE ASSESSMENT YEAR 2007-08. THEREFORE, THE DISALLOWAN CE MADE BY THE AO, WITHOUT BRINGING CORROBORATIVE EVIDENCES ON RECORD CANNOT BE SUSTAINED. IN VIEW OF THIS, THE FINDINGS OF THE CIT(A) ARE UPHELD. THIS GROUND OF APPEAL OF THE REVENUE I S DISMISSED. 13 19. GROUND NO. 7 & 8 ARE GENERAL IN NATURE AND HENC E, NEED NO SEPARATE ADJUDICATION. 20. IN CO NO. 48/CHD/2010, THE ASSESSEE CONTENDED T HAT CIT(A) HAS WRONGLY CONFIRMED THE ADDITION OF RS.5,3 9,850/- TO THE INCOME OF THE APPELLANT ON ACCOUNT OF JOB WORK CHARGES PAID TO SISTER CONCERN U/S 40A(2)(B) OF THE ACT. 21. THE LD. AR CONTENDED THAT THE SISTER CONCERN OF THE ASSESSEE IS IN THE SAME BRACKET OF TAXATION RATE. H ENCE, NO TAX BENEFIT WOULD ACCRUE TO THE ASSESSEE BY RESORTING T O SUCH KIND OF TRANSACTIONS AS CONCEIVED BY THE AO. HE PLACED R ELIANCE ON THE DECISION OF THE HON'BLE PUNJAB & HARYANA HIGH C OURT IN THE CASE OF CIT V SIYA RAM GARG, HUF IN ITA NO.679 OF 2 010, DATED 14.12.2010. IT WAS ALSO ARGUED BY THE LD. AR THAT VARIATION IN THE RATES CHARGED IS ATTRIBUTABLE TO THE MANUAL CUT TING AND CUTTING BY THE MACHINE. THE AO HAS FAILED TO APPRE CIATE THIS MATERIAL DIFFERENCE IN THE QUALITY OF JOB WORK PERF ORMED BY M/S SONS SERVICES CENTRE, MOHALI ON ITS AUTOMATIC AND M OST SOPHISTICATED COMPUTER CONTROLLED PLANT & MACHINERY VIS--VIS THE POOR QUALITY OF JOB WORK PERFORMED BY OTHER CUT TERS MANUALLY ON OLD CUTTER MACHINES. 22. LD. DR PLACED RELIANCE ON THE ORDER OF THE AO AND THE CIT(A). 23. THE ASSESSEE PAID AN AMOUNT OF RS.21,59,379/-, ON ACCOUNT OF JOB WORK CHARGES TO M/S MANGLA SONS AS P ER THE TDS CERTIFICATE ISSUED BY THE ASSESSEE TO M/S MANGL A SONS. THE PARTNERS IN M/S MANGLA SONS ARE EITHER PARTNERS THEMSELVES OR THEIR RELATIVES ARE PARTNERS IN THE A SSESSEE FIRM 14 AND HAVE SUBSTANTIAL INTEREST IN M/S MANGLA SONS. CONSEQUENTLY, THE PAYMENT OF JOB WORK MADE BY THE A SSESSEE TO M/S MANGLA SONS IS COVERED U/S 40A(2)(B) OF THE ACT . THE FINDINGS OF THE LD. AO AS CONTAINED IN PARA 6.1 IS REPRODUCED HEREUNDER FOR THE PURPOSE OF PROPER APPRECIATION OF THE SAME : AS DISCUSSED IN DETAIL ABOVE, THE ASSESSEE IS PAYIN G EXCESS AMOUNT ON ACCOUNT OF JOB WORK CHARGES TO ITS SISTER CONCERN AS COMPARED TO JOB WORK PAYMENTS MAD E TO OTHER PARTIES. THE ASSESSEE IS PAYING JOB WORK CHARGES @ RS.200/- PER METRIC TONNE TO M/S MANGLA SONS AS COMPARED TO RS.150/- PER METRIC TONNE CHARG ED BY OTHER PARTIES. IN THIS REGARD, COPY OF BILLS OF M/S DURGA CUTTER & ALLIED INDUSTRIES, M/S MITTAL CUTTER S & ALLIED WORK (P) LTD. AND M/S GOLDEN CUTTER & ALLIED INDUSTRIES WERE EXAMINED AND SAMPLE COPIES OF THE BILLS HAVE BEEN PLACED ON RECORD. AS PER THE BILLS OF THE ABOVE THREE INDEPENDENT PARTIES, THE RATE OF LABOUR CHARGES FOR SHEARING/CUTTING OF SHEETS IS RS.150/- PER METRIC TONNE. THUS, THE EXCESS PAYMENT MADE TO ITS SISTER CONCERN NAMELY M/S MANGLA SONS ON ACCOUNT OF JOB WORK CHARGES IS AMOUNTING TORS.50/- PER METRIC TONNE. IN VIEW OF THIS, THE EXCESS AMOUNT OF JOB WO RK CHARGES IS WORKED OUT AT 1/3 RD OF THE TOTAL AMOUNT PAID TO THE SISTER CONCERN. THE DISALLOWANCE U/S 40A(2)( B) ON ACCOUNT OF EXCESS JOB WORK CHARGES, THUS WORKS OUT TO RS.7,19,793/- 24. THE LD. CIT(A) UPHELD THE ADDITIONS BY RECORDING THE FINDINGS REPRODUCED HEREUNDER : NOW COMING TO THE ISSUE UNDER APPEAL, IN THIS CASE , THE APPELLANT HAD MADE PAYMENT OF RS.21,59,379/- TO ITS CLOSE ASSOCIATE I.E. M/S MANGLA SONS FOR SOME J OB WORK AND THE PAYMENTS MADE ARE EXCESSIVE AS REGARDS THE FAIR MARKET VALUE. IN THIS REGARD, THE AO HAS 15 EXAMINED THE BILLS OF SIMILAR JOB WORK OF UNRELATED CONCERNS AND FOUND THAT THEY ARE CHARGING RS.150/- PER METRIC TONNE WHEREAS THE APPELLANT HAS PAID RS.200/ - PER METRIC TONNE TO ITS CLOSE ASSOCIATE FOR THE SIM ILAR JOBS. THEREFORE, THE AO HAS RIGHTLY DISALLOWED THE EXCESS PAYMENT OF RS.50/- MADE BY THE APPELLANT TO M/S MANGLA SONS ON ACCOUNT OF JOB WORK, THEREBY MAKING 1/4 TH OF THE TOTAL AMOUNT PAID I.E. RS.200/- TO THE SISTER CONCERN, WHICH I FIND TO BE JUSTIFIED. 31. IN THE CASE OF M.L.B.D. BOOKS INTERNATIONAL V A CIT (2009) 184 TAXMAN 276 (DELHI), THE HON'BLE HIGH COU RT HELD THAT THE PURCHASE OF GOODS FROM A SISTER CONCE RN AT A HIGHER PRICE WOULD ATTRACT DISALLOWANCE. 32. THE AO DISALLOWED 1/3 RD OF TOTAL AMOUNT PAID BY THE APPELLANT TO ITS CLOSE ASSOCIATES AND DISALLOWE D A SUM OF RS.7,19,793/- AGAINST WHICH THE APPELLANT HA S RAISED FOLLOWING OBJECTION : THE AO HAS WRONGLY DISALLOWED 1/3 RD OF TOTAL EXPENSES AS AGAINST 1/4 TH (50/200). THE TOTAL TONNAGE ON JOB WORK OF RS.2159379/- COMES TO 10797 MT. THE EXCESS JOB WORK @ RS.50/- PER MT ON 10797 COMES TO RS.539845/- AS AGAINST RS.719793/- COMPUTED BY THE AO. 33. I FIND THAT THE AO IN HIS ORDER MENTIONED THAT THE APPELLANT HAS MADE EXCESS PAYMENT OF RS.50/- PER MT WHICH COMES TO 1/4 TH OF JOB WORK CHARGES PAID BY THE APPELLANT NOT 1/3 RD AS HELD BY THE AO. THUS AO HAS WRONGLY COMPUTED THE DISALLOWANCE AT RS.719793/- WHEREAS IT SHOULD HAVE BEEN COMPUTED AT 10797 MT X RS.50=RS.5,39,850/-. 25. WE HAVE CAREFULLY PERUSED THE RELEVANT FACTS OF THE CASE AND THE RIVAL SUBMISSIONS. A BARE PERUSAL OF THE P ROVISIONS OF SECTION 40A(2)(B) REVEALS THAT THE SPECIFIED PERSON S M/S MANGLA 16 SONS FALL UNDER THE PROVISIONS OF THE SAID SECTION. THE RELEVANT PROVISIONS OF SECTION IS REPRODUCED HEREUNDER : 40A(2)(B) THE PERSONS REFERRED TO IN CLAUSE ( A ) ARE THE FOLLOWING, NAMELY : ( I ) WHERE THE ASSESSEE IS AN ANY RELATIVE OF THE ASSE SSEE; INDIVIDUAL ( II ) WHERE THE ASSESSEE IS A ANY DIRECTOR OF THE COMPA NY, PARTNER COMPANY, FIRM, ASSOCIATION OF THE FIRM, OR MEMBER OF THE AS SO OF PERSONS OR HINDU UNCIATION OR FAMILY, OR ANY RELATIVE OF DIVIDED FAMILY SUCH DIRE CTOR, PARTNER OR MEMBER; ( III ) ANY INDIVIDUAL WHO HAS A SUBSTANTIAL INTEREST IN THE BUSINESS OR PROFESSION OF THE ASSESSEE, OR ANY RELATIVE OF SUCH INDIVIDUAL; ( IV ) A COMPANY, FIRM, ASSOCIATION OF PERSONS OR HINDU UNDIVIDED FAMILY HAVING A SUBSTANTIAL INTEREST IN THE BUSINESS OR PROFESSION OF THE ASSESSEE OR ANY DIRECTOR, PARTNER OR MEMBER OF SUCH COMPANY, FIRM, ASSOCIATIO N OR FAMILY, OR ANY RELATIVE OF SUCH DIRECTOR, PARTNER OR MEMBER; ( V ) A COMPANY, FIRM, ASSOCIATION OF PERSONS OR HINDU UNDIVIDED FAMILY OF WHICH A DIRECTOR, PARTNER OR MEMBER, AS THE CASE MAY BE, HA S A SUBSTANTIAL INTEREST IN THE BUSINESS OR PROFESSION OF THE ASSESSEE; OR ANY DIRE CTOR, PARTNER OR MEMBER OF SUCH COMPANY, FIRM, ASSOCIATION OR FAMILY OR ANY RELATIV E OF SUCH DIRECTOR, PARTNER OR MEMBER; ( VI ) ANY PERSON WHO CARRIES ON A BUSINESS OR PROFESSIO N, ( A ) WHERE THE ASSESSEE BEING AN INDIVIDUAL, OR ANY RE LATIVE OF SUCH ASSESSEE, HAS A SUBSTANTIAL INTEREST IN THE BUSINESS OR PROFESSION OF THAT PERSON; OR ( B ) WHERE THE ASSESSEE BEING A COMPANY, FIRM, ASSOCIA TION OF PERSONS OR HINDU UNDIVIDED FAMILY, OR ANY DIRECTOR OF SUCH COMPANY, PARTNER OF SUCH FIRM OR MEMBER OF THE ASSOCIATION OR FAMILY, OR ANY RELATIV E OF SUCH DIRECTOR, PARTNER OR MEMBER, HAS A SUBSTANTIAL INTEREST IN THE BUSINE SS OR PROFESSION OF THAT PERSON. EXPLANATION. FOR THE PURPOSES OF THIS SUB-SECTION, A PERSON SHA LL BE DEEMED TO HAVE A SUBSTANTIAL INTEREST IN A BUSINESS OR PROFES SION, IF, ( A ) IN A CASE WHERE THE BUSINESS OR PROFESSION IS CAR RIED ON BY A COMPANY, SUCH PERSON IS, AT ANY TIME DURING THE PREVIOUS YEAR, TH E BENEFICIAL OWNER OF SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVID END WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) CARRYING NOT LESS THAN TWENTY PER CENT OF THE VOTING POWER; AND ( B ) IN ANY OTHER CASE, SUCH PERSON IS, AT ANY TIME DU RING THE PREVIOUS YEAR, BENEFICIALLY ENTITLED TO NOT LESS THAN TWENTY PER C ENT OF THE PROFITS OF SUCH BUSINESS OR PROFESSION. 26. A PERUSAL OF THE SUBMISSION MADE BY THE ASSESSE E APPELLANT BEFORE THE CIT(A) THAT THE QUALITY OF JOB WORK PERFORMED BY M/S MANGLA SONS SERVICE CENTRE ON ITS AUTOMATIC AND MORE SOPHISTICATED COMPUTER CONTROLLER PLANT & MACHINERY VIS-A-VIS THE QUALITY OF JOB WORK PERFORMED BY OTHE R CUTTERS MANUALLY AND ON THEIR OLD CUTTER MACHINES HAS NOT B EEN APPRECIATED BY THE CIT(A) AS WELL AS BY THE AO. TH E QUALITY OF SERVICES OFFERED IS A MATERIAL FACT WHICH CANNOT BE IGNORED 17 WHILE CONSIDERING THE APPLICABILITY OF THE PROVISIO NS OF SECTION 40A(2)(B) OF THE ACT. FURTHER, THE ASSESSEE APPELL ANT PLACED RELIANCE ON THE DECISION OF THE HON'BLE JURISDICTIO NAL HIGH COURT IN THE CASE OF CIT V SIYA RAM GARG, HUF (SUPRA), WH ICH ALSO RENDERS SUPPORT TO THE CONTENTIONS RAISED BY THE AS SESSEE APPELLANT IN THE COURSE OF PRESENT APPELLATE PROCEE DINGS. THEREFORE, HAVING REGARD TO THE FACT SITUATION OF T HE CASE, RELEVANT PROVISIONS OF THE CASE AND THE RATIO LAID DOWN BY THE JURISDICTIONAL HIGH COURT IN THE CASE OF SIYA RAM G ARG, HUF (SUPRA), THE ISSUE IS DECIDED IN FAVOUR OF THE ASSE SSEE. THUS, THE ASSESSEE APPELLANT SUCCEEDS IN CROSS OBJECTION. 27. IN THE RESULT, THE APPEAL OF THE REVENUE IS DIS MISSED AND CROSS OBJECTION OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 19 TH OCTOBER,2011. SD/- SD/- (SUSHMA CHOWLA) (MEHAR SINGH) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 19 TH OCT.,2011 POONAM COPY TO: THE APPELLANT, THE RESPONDENT, THE CIT(A), THE CIT ,DR ASSISTANT REGISTRAR, ITAT, CHANDIGARH