DCIT, Bangalore V. M/s Dhaanya Seeds Pvt. Ltd., Bangalore

ITA 1523/BANG/2012

• Counselvise Citation: 152321114 RSA 2012
• Duration Of Justice: 10 month(s) 5 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-09-2013
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Assessment Year: 2005-2006
• Appeal Filed On: 22-11-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Non-deduction of tax; Revenue expenditure; Capital expenditure
• Section: 194C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCH B BEFORE SHRI N.V. VASUDEVAN, JUDICIAL MEMBER AND SHRI JASON P. BOAZ, ACCOUNTANT MEMBER I.T.A. NO. 1523 /BANG/2012 (ASSESSMENT YEAR : 2005-06) DY. COMMISSIONER OF INCOME TAX, CIRCLE 11(1), BANGALORE. VS. M/S. DHAANYA SEEDS PVT. LTD., PLOT NO.3, KIADB, 4 TH PHASE, BOMMASANDRA, BANGHALORE-560 099 PAN AABCD 7328L APPELLANT RESPONDENT. C.O. NO. 55 /BANG/201 3 (IN ITA NO.1523/BANG/2012) (ASSESSMENT YEAR 2005-06) M/S. DHAANYA SEEDS PVT. LTD., BANGALORE. VS. DY. COMMISSIONER OF INCOME TAX, CIRCLE 11(1), BANGALORE. APPELLANT RESPONDENT REVENUE BY : DR. P. V. PRADEEP KUMAR. ASSESSEE / C.O. BY : SHRI V. SRIDHAR. DATE OF HEARING : 26.7.2013. DATE OF PRONOUNCEMENT : 27.09.2013. O R D E R PER SHRI JASON P. BOAZ, A.M. : THIS APPEAL BY REVENUE IS DIRECTED AGAINST THE ORD ER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-I, BANGALORE DT.17.8.2012 FOR ASST. YEAR 2005-06. THE ASSESSEE HAS ALSO SEPARATELY FILED CROSS OBJECTIONS (C.O.) IN RESPECT OF THE AFO RESAID ORDER OF THE LEARNED CIT(APPEALS) I, BANGALORE. BEING INTER CONNECTED, BOTH THE APPEAL AND C.O. WERE HEARD TOGETHER AND ARE BEING DISPOSED OFF BY WAY OF THIS CONSOLIDATED ORDER. 2. THE FACTS OF THE CASE, IN BRIEF, ARE AS UNDER : 2 ITA NO.1523/BANG/2012 & C.O. NO.55/BANG/2013 2.1 THE ASSESSEE, A COMPANY ENGAGED IN DEVELOPMENT OF SEEDS AS WELL AS IN PRODUCTION OF SEEDS FILED ITS RETURN OF INCOME FOR ASSESSMENT YEA R 2005-06 ON 30.10.2005 DECLARING A LOSS OF RS.2,19,71,140. THE RETURN WAS PROCESSED U/S. 143(1 ) OF THE INCOME TAX ACT, 1961 (THE ACT IN SHORT) AND THE CASE WAS SUBSEQUENTLY TAKEN UP FOR S CRUTINY. THE ASSESSMENT WAS COMPLETED BY AN ORDER U/S.143(3) OF THE ACT DT.24.12.2007 WHEREI N THE LOSS WAS DETERMINED AT RS.1,08,82,186 BY MAKING THE FOLLOWING DISALLOWANCES : (I) U/S.43B : RS.6,205. (II) U/S.40(A)(IA) : RS.43,93,515. (III) SHORTAGE OF RAW MATERIAL : RS.11,70,705 (IV) SEED DEVELOPMENT COST : RS.55,18,529. 2.2 AGGRIEVED WITH THE ORDER OF ASSESSMENT FOR ASSE SSMENT YEAR 2005-06 DT.24.12.2007,THE ASSESSEE PREFERRED AN APPEAL BEFORE THE LEARNED CIT (APPEALS) I, BANGALORE. THE LEARNED CIT(APPEALS) DISPOSED THE ASSESSEES APPEAL BY ORDE R DT.17.8.2012 ALLOWING THE ASSESSEE PARTIAL RELIEF. 3. AGGRIEVED BY THE ORDER OF THE LEARNED CIT(APPEAL S) I, BANGALORE DT.17.8.2012 FOR ASSESSMENT YEAR 2005-06,REVENUE IS IN APPEAL BEFORE US RAISING THE FOLLOWING GROUNDS : 1. THE ORDER OF THE LEARNED CIT (APPEALS) IN SO F AR AS IT IS PREJUDICIAL TO THE INTEREST OF REVENUE, IS OPPOSED TO LAW AND THE FACTS AND CIR CUMSTANCES OF THE CASE. 2. THE LEARNED CIT (APPEALS) HAS ERRED IN HOLDING THAT THE REIMBURSEMENTS OF RS.4,78,499 ARE NOT LIABLE FOR TAX DEDUCTION AT SOU RCE, WITHOUT APPRECIATING THE FACT THAT SECTIONS 194C AND 194J REFER TO ANY SUMS PAID AND THAT CIRCULAR NO.715 DATED 8.8.1995 ANSWERS THIS QUESTION IN THE AFFIRMATIVE A T QUESTION NUMBER 30. 3. THE LEARNED CIT (APPEALS) HAS ERRED IN HOLDING THE DISALLOWANCE OF RS.;11,70,705 AS UNREASONABLE WITHOUT APPRECIATING THE FACT THAT THE COMPANY HAS NOT SUBSTANTIATED ITS CLAIM OF SHORTAGE WITH ANY SUPPOR TING MATERIAL. 4. THE LEARNED CIT (APPEALS) HAS ERRED IN RESTRICT ING THE CAPITALISATIN OF SEED DEVELOPMENT COST TO RS.7,59,989 FROM RS.55,18,529 H OLDING THAT THE BALANCE WAS TOWARDS PRODUCTION OF PARENT SEEDS WITHOUT APPRECIA TING THAT THE AGREEMENT ENTERED BY THE COMPANY WAS A CONTRACT FOR DEVELOPME NT OF SEEDS AND THEREFORE THE ENTIRE EXPENDITURE WAS CAPITAL IN NATURE. 3 ITA NO.1523/BANG/2012 & C.O. NO.55/BANG/2013 5. FOR THESE AND SUCH OTHER GROUNDS THAT MAY BE U RGED AT THE TIME OF HEARING, IT IS HUMBLY PRAYED THAT THE ORDER OF THE CIT (APPEALS) B E REVERSED AND THAT OF THE ASSESSING OFFICER BE RESTORED. 6. THE APPELLANT CRAVES LEAVE TO ADD, ALTER, AMEND OR DELETE ANY OF THE GROUNDS THAT MAY BE URGED AT THE TIME OF HEARING OF THE APPEAL. 4. THE ASSESSEE HAS ALSO FILED CROSS OBJECTIONS RAI SING THE FOLLOWING GROUNDS : 1. THE LEARNED CIT (APPEALS) ERRED IN CONFIRMING A SUM OF RS.7,89,989 AS CAPITAL EXPENDITURE OUT OF RS.55,18,529 BEING THE REIMBURSE MENT OF EXPENSES WHEN NO ASSET OF ENDURING NATURE WAS ACQUIRED BY THE APPELL ANT. 2. WITHOUT PREJUDICE TO THE ABOVE GROUND, THE LEAR NED CIT (APPEALS) ERRED IN NOT ALLOWING DEPRECIATION ON A SUM OF RS.7,59,989 AFTER HOLDING THAT THE EXPENDITURE IS OF CAPITAL IN NATURE. 3. FOR THESE AND OTHER GROUNDS THAT MAYBE URGED AT THE TIME OF HEARING THE CROSS OBJECTION / APPEAL MAY BE ALLOWED AND JUSTICE RENDE RED. ITA NO.1523/BANG/2012 REVENUES APPEAL FOR ASSESS MENT YEAR 2005-06. 5. THE GROUNDS RAISED BY REVENUE AT S.NOS.1, 5 & 6 BEING GENERAL IN NATURE, NO ADJUDICATION IS CALLED FOR THEREON. 6.0 DISALLOWANCE U/S.40(A)(IA) REIMBURSEMENT OF E XPENSES TO C&F AGENTS RS.4,78,499 .. 6.1.1 IN THE ORDER OF ASSESSMENT, THE ASSESSING OF FICER HAD MADE DISALLOWANCES U/S.40(A)(IA) OF THE ACT UNDER VARIOUS HEADS AGGREGATING TO RS.43 ,93,515 FOR NON-DEDUCTION OF TAX ON SUCH PAYMENTS. HOWEVER, WHAT IS BEFORE US IN THE PRESENT APPEAL IS THE ISSUE OF DISALLOWANCE U/S.40(A)(IA) OF THE ACT IN RESPECT OF REIMBURSEMEN T OF EXPENSES AMOUNTING TO RS.4,78,499 MADE TO C&F AGENTS. 6.1.2 ON APPEAL, THE LEARNED CIT(APPEALS) OBSERVED THAT THESE EXPENSES WERE INCURRED BY C&F AGENTS ON BEHALF OF THE ASSESSEE; THAT THE CLAI MS WERE MADE IN THEIR BILLS ON ACTUAL BASIS AND THE AMOUNTS WERE SHOWN SEPARATELY AND SUPPORTED BY NECESSARY EVIDENCE. THE LEARNED CIT(APPEALS) OBSERVING THAT SINCE THESE PAYMENTS WE RE MADE ON ACTUAL BASIS AND DID NOT CONTAIN ANY ELEMENT OF INCOME, HELD THAT THESE PA YMENTS WERE NOT LIABLE FOR DEDUCTION OF TAX 4 ITA NO.1523/BANG/2012 & C.O. NO.55/BANG/2013 U/S.195 OF THE ACT AND IN THAT VIEW OF THE MATTER, THE ACTION OF THE ASSESSING OFFICER IN INVOKING THE PROVISIONS OF SECTION 40(A)(IA)OF THE ACT WAS H ELD TO BE UNTENABLE AND THE DISALLOWANCE WAS DELETED. 6.2 THE LEARNED DEPARTMENTAL REPRESENTATIVE CONTEND ED THAT THE ASSESSEES SUBMISSIONS THAT THE REIMBURSEMENTS ARE MADE THROUGH SEPARATE B ILLS AND SINCE DO NOT HAVE ANY ELEMENT OF INCOME, THEY DO NOT COME WITHIN THE AMBIT OF TAX DE DUCTED AT SOURCE (TDS) U/S.194COTA IS NOT TENABLE. IT IS SUBMITTED BY THE LEARNED D.R. THAT T HE SCHEME OF TDS PROVISIONS APPLY TO THE GROSS SUM PAID TO EACH C&F AGENT, BUT NOT THE SUM PAID BI LL-WISE. IN THIS REGARD, THE LEARNED D.R. RELIED ON CBDT CIRCULAR NO.715 DT.8.8.1995 WHEREIN AT ANSWER TO QUESTION NO.30 IT WAS CLARIFIED THAT REIMBURSEMENTS CANNOT BE DEDUCTED OU T OF THE BILL AMOUNT FOR THE PURPOSES OF TDS. IN VIEW OF THIS, THE LEARNED D.R. CONTENDED THAT TDS HAS TO BE MADE ON THE GROSS AMOUNT OF THE BILL, IF THE PAYMENT IS MADE ON ACCOUNT OF A CONTRACTUAL OBLIGATION/S.194C OF THE ACT. IT WAS SUBMITTED THAT IT IS IN ORDER TO OVERCOME THE V IEW OF THE CBDT AS CLEARLY BROUGHT OUT IN ANSWER TO QUESTION NO.30 OF CBDT CIRCULAR NO.715 DT .8.8.1995, IT HAS BECOME A PRACTICE TO RAISE A SEPARATE BILL IN RESPECT OF REIMBURSEMENT O F EXPENSES BY THE PERSON RAISING BILL FOR SUCH EXPENSES; WHICH IS NOT TENABLE IN LAW. IN THIS REG ARD, THE LEARNED D.R. RELIED ON THE FOLLOWING JUDICIAL DECISIONS TO SUPPORT THE PROPOSITION THAT TDS IS APPLICABLE ON REIMBURSEMENTS EVEN IF A SEPARATE INVOICE IS RAISED FOR THE PURPOSE AND EVEN IF THERE IS NO INCOME ELEMENT IN SUCH REIMBURSEMENTS : (I) TRANSMISSION CORPORATION OF A.P. LTD. (1999) 23 9 ITR 587. (II) CIT VS. ELLY LILLY & CO. INDIA LTD. (2009) 312 ITR 225. (III) VAN OORD ACZ INDIA (P) LTD. 112 ITD 79 (2008 ). 5 ITA NO.1523/BANG/2012 & C.O. NO.55/BANG/2013 IT WAS SUBMITTED THAT EVEN THOUGH THE CITED CASES P ERTAINED TO SECTION 195 OF THE ACT, THE RATIO OF THE JUDGEMENTS APPLIES TO THE FACTS OF THE CASE ON HAND. TO SUM UP, THE LEARNED DRS ARGUMENTS ON THIS ISSUE ARE AS UNDER : (I) THE SCHEME OF TDS APPLIES TO GROSS PAYMENTS, WHETHE R PAID THROUGH ONE BILL OR SEVERAL BILLS, AS LONG AS THE PAYMENTS ARE MADE TO THE SAME PERSON DURING THE YEAR; (II) IT IS NOT OPEN TO THE ASSESSEE TO EXAMINE THE TAXAB ILITY OF A PARTICULAR PAYMENT AT THE TIME OF PAYMENT; (III) THE TAXABILITY OF THE PARTICULAR PAYMENT (I.E. WHET HER IT HAS GOT THE CHARACTER OF INCOME OR NOT), IS BEYOND THE SCOPE OF 40(A)(IA) OF THE ACT. IN VIEW OF THE ABOVE ARGUMENTS PUT FORTH, THE LEARN ED D.R. PRAYED FOR REVERSAL OF THE ORDER OF THE LEARNED CIT(APPEALS) ON THIS POINT AND ALLOWING REVENUES APPEAL. 6.3.1 PER CONTRA, THE LEARNED A.R. SUPPORTED THE OR DER OF THE LEARNED CIT(APPEALS) IN DELETING THE DISALLOWANCE OF RS.4,78,499 MADE BY THE A.O. U/ S.40(A)(IA) OF THE ACT. THE LEARNED A.R. SUBMITTED THAT IT IS WELL SETTLED BY SEVERAL JUDICI AL DECISIONS THAT WHERE THE AMOUNT REIMBURSED DOES NOT CONTAIN ANY ELEMENT OF INCOME, THE QUESTIO N OF MAKING TDS THEREON DOES NOT ARISE. IN SUPPORT OF THIS PROPOSITION, THE LEARNED A.R. RELIE D ON THE DECISION OF THE HONBLE APEX COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE (P) LTD V C IT (2010) 327 ITR 456 WHEREIN IT WAS HELD THAT - .. THE EXPRESSION CHARGEABLE UNDER THE PROVISIO NS OF THE ACT IN SECTION 195(1) SHOWS THAT THE REMITTANCE HAS GOT TO BE A TRADING R ECEIPT, THE WHOLE OR PART OF WHICH IS LIABLE TO TAX IN INDIA. IF TAX IS NOT SO ASSESSABLE, THERE IS NO QUESTION OF TAX AT SOURCE BEING DEDUCTED. 6 ITA NO.1523/BANG/2012 & C.O. NO.55/BANG/2013 THE LEARNED A.R. ALSO SUBMITTED THAT THE DECISION OF THE ITAT, DELHI, RELIED ON BY THE LEARNED D.R. HAS BEEN OVER RULED BY THE HONBLE DEL HI HIGH COURT IN VAN OORD ACZ INDIA LTD.(2010) 323 ITR 130. 6.3.2 THE LEARNED A.R. FURTHER SUBMITTED THAT THE ANSWER TO QUESTION NO.30 OF THE CBDT CIRCULAR NO.715 DT.8.8.1995 IS APPLICABLE ONLY IN C ASES WHERE THE GROSS AMOUNT OF THE BILL INCLUDES REIMBURSEMENT OF EXPENSES AND THE SAME CAN NOT BE SEPARATELY IDENTIFIED IN THE BILL AND DOES NOT APPLY IN RESPECT OF REIMBURSEMENT OF A CTUAL EXPENSES. IT IS SUBMITTED THAT IF THE BILL IN QUESTION IS ONLY IN RESPECT OF REIMBURSEMEN T OF ACTUAL EXPENSES, THERE IS NO QUESTION OF DEDUCTION OF TAX AT SOURCE FROM SUCH PAYMENTS. IN THIS REGARD THE LEARNED A.R. RELIED ON THE DECISION OF THE DELHI TRIBUNAL IN THE CASE OF ITO V DR. WILLMAR SCHWABE INDIA P. LTD. (2005) 95 TTJ 53 WHEREIN IT WAS HELD THAT WHEN THE BILL IS FO R REIMBURSEMENT OF ACTUAL EXPENSES THERE IS NO NEED FOR MAKING TDS ON SUCH PAYMENT. THE LEARNE D A.R. DREW OUR ATTENTION TO THE TRIBUNALS CONCLUSION AT PARA 12 OF THE SAID ORDER WHICH IS EXTRACTED HEREUNDER : AFTER CONSIDERING THE RIVAL SUBMISSIONS AND PERU SING THE RELEVANT MATERIAL ON RECORD, WE FIND NO INFIRMITY IN THE IMPUGNED ORDER OF LEARNED CIT (APPEALS) ON THIS ISSUE. IT IS OBSERVED THAT AS AGREED BY AND BETWE EN THE ASSESSEE COMPANY AND M/S. INDOCHEM TECHNO CONSULTANTS LTD., A VEHICLE WAS TO BE PROVIDED BY THE ASSESSEE COMPANY TO THE SAID CONSULTANT FOR ATTENDING TO ITS WORK AND THUS, THE ASSESSEE COMPANY WAS TO BEAR THE VEHICLE EXPENSES ACTUALLY I NCURRED BY THE SAID PARTY. BILLS FOR SUCH EXPENSES INCURRED BY THE SAID CONSULTANT W ERE SEPARATELY RAISED BY THEM ON THE ASSESSEE COMPANY IN ADDITION TO BILLS FOR FEES PAYABLE ON ACCOUNT OF TECHNICAL SERVICES AND SINCE THE AMOUNT OF BILLS SO RAISED WA S TOWARDS THE ACTUAL EXPENSES INCURRED BY THEM, THERE WAS NO ELEMENT OF ANY PROFI T INVOLVED IN THE SAID BILLS. IT WAS THUS A CLEAR CASE OF REIMBURSEMENT OF ACTUAL EX PENSES INCURRED BY THE ASSESSEE AND THE SAME, THEREFORE, WAS NOT OF THE NATURE OF P AYMENT COVERED BY S. 194J REQUIRING THE ASSESSEE TO DEDUCT TAX AT SOURCE THER E FROM. THE CBDT CIRCULAR NO.715, DT.8THAUG., 1995, RELIED UPON BY THE ASSESS ING OFFICER IN SUPPORT OF HIS CASE ON THIS ISSUE WAS APPLICABLE ONLY IN THE CASES WHER E BILLS ARE RAISED FOR THE GROSS AMOUNT INCLUSIVE OF PROFESSIONAL FEES AS WELL AS RE IMBURSEMENT OF ACTUAL EXPENSES AND THE SAME, THEREFORE, WAS NOT APPLICABLE TO THE FACTS OF THE PRESENT CASE, WHERE BILLS WERE RAISED SEPARATELY BY THE CONSULTANTS FOR REIMBURSEMENT OF ACTUAL EXPENSES 7 ITA NO.1523/BANG/2012 & C.O. NO.55/BANG/2013 INCURRED BY THEM. AS SUCH, CONSIDERING ALL THE FACT S OF THE CASE, WE ARE OF THE VIEW THAT THE PROVISIONS OF SECTION 194J WERE NOT APPLIC ABLE TO THE REIMBURSEMENT OF ACTUAL EXPENSES AND THE ASSESSEE COMPANY WAS NOT L IABLE TO DEDUCT TAX AT SOURCE FROM SUCH REIMBURSEMENT. IN THAT VIEW OF THE MATTE R, WE UPHOLD THE IMPUGNED ORDER OF LEARNED CIT (APPEALS) ON THIS ISSUE AND DI SMISS THE RELEVANT GROUNDS OF THE REVENUES APPEAL. THE LEARNED A.R. ;PLEADED THAT IN VIEW OF THE ABOVE SUBMISSIONS, THE ORDER OF THE LEARNED CIT(APPEALS) OUGHT TO BE UPHELD AND REVENUE S APPEAL ON THIS ISSUE DISMISSED. 6.4.1 WE HAVE HEARD BOTH PARTIES AND PERUSED AND CA REFULLY CONSIDERED THE MATERIAL ON RECORD, INCLUDING THE JUDICIAL DECISIONS CITED. IN TERMS OF SUB-SECTION (2) OF SECTION 4 OF THE ACT, WHICH IS THE CHARGING SECTION, IN RESPECT OF INCOME CHARGEABLE UNDER SUB-SECTION (1), INCOME TAX SHALL BE DEDUCTED AT SOURCE OR PAID IN ADVANCE, WHERE IT IS SO DEDUCTIBLE OR PAYABLE UNDER ANY PROVISION OF THIS ACT. FROM THIS, IT IS CLEAR THAT TAX IS TO BE DEDUCTED ONLY WHERE THE ELEMENT OF INCOME IS PART OF THE PAYMENT. SINCE RE IMBURSEMENT OF EXPENSES DO NOT CONSTITUTE TRADING RECEIPTS OR HAVE ANY ELEMENT OF INCOME THER EIN, TDS IS NOT LIABLE TO BE MADE FROM REIMBURSEMENTS. THOUGH SECTION 194C OF THE ACT MENT IONS TDS BEING MADE ON ANY SUM PAID TO A RESIDENT IN PURSUANCE OF A CONTRACT, THE TERM ANY SUM CANNOT BE STRETCHED TO MEAN EVEN EXPENSES INCURRED ON BEHALF OF THE CLIENT AND LATER RECOVERED FROM THEM. WHEN A C& F AGENT INCURS EXPENSES LIKE CUSTOM DUTY, PORT DUES, AND OT HER SUNDRY CHARGES, HE IS MERELY ACTING AS A FRONT MAN OF HIS CLIENT AND ON HIS BEHALF. THESE E XPENSES DO NOT NORMALLY HAVE ANY NEXUS WITH THE COMMISSION HE IS SUPPOSED TO EARN FOR HIS WORK. THOUGH THE DECISION OF THE HONBLE APEX COURT IN TRANSMISSION CORPORATION WAS RENDERED IN R ELATION TO TDS TO BE MADE ON PAYMENTS TO NON-RESIDENTS, THE PRINCIPLE COULD BE APPLIED TO SE CTION 194C OF THE ACT AS WELL. THE HONBLE COURT HELD THAT ANY SUCH PAYMENT MUST CONSTITUTE A TRADING RECEIPT OF THE RECIPIENT AND MUST BEAR THE CHARACTER OF INCOME EITHER WHOLLY OR PARTI ALLY AND IN EITHER CASE IT WOULD CALL FOR 8 ITA NO.1523/BANG/2012 & C.O. NO.55/BANG/2013 DEDUCTION OF TAX AT SOURCE. IT IS, THEREFORE, IMPOR TANT TO FIRST ESTABLISH THAT THE RECEIPT SHOULD BEAR THE CHARACTER OF INCOME FOR MAKING IT LIABLE T O TDS. 6.4.2 THE RELIANCE PLACED BY REVENUE ON CBDT CIRCUL AR NO.715 DT.8.8.1995 TO HOLD THESE REIMBURSEMENTS LIABLE TO TDS IS, IN OUR VIEW, MISPL ACED. THE QUESTION NO.30 IN THIS CIRCULAR WAS WHETHER TDS SHOULD BE MADE ON THE GROSS AMOUNT OF THE BILL INCLUDING REIMBURSEMENTS OR EXCLUDING REIMBURSEMENTS. THE ANSWER THERETO WAS T HAT TDS IS ON ANY SUM PAID AND HENCE REIMBURSEMENTS CANNOT BE DEDUCTED OUT OF THE BILL A MOUNT FOR TDS. THIS DOES NOT MEAN TO LAY DOWN A PROPOSITION THAT ANY PAYMENT MADE TO A C&F A GENT SHOULD BE SUBJECTED TO TDS. THE CIRCULAR DOES NOT AND CANNOT DILUTE THE PROPOSITION THAT TDS IS LIABLE ONLY ON THE INCOME ELEMENT. IF THE PAYMENT INCLUDES BOTH AN INCOME EL EMENT AND A REIMBURSEMENT ELEMENT, THEN TDS HAS TO BE ON THE TOTAL AMOUNT. THIS IS THE PRI NCIPLE ENUNCIATED BY THE HONBLE APEX COURT IN THE CASE OF TRANSMISSION CORPORATION OF A.P. LTD . (SUPRA). IF THE PAYMENT IS ONLY FOR REIMBURSEMENT OF EXPENSES, THEN TDS IS NOT LIABLE T O BE MADE ON SUCH PAYMENTS. IN THIS REGARD, WE AGREE WITH THE FINDING OF THE LEARNED CI T(APPEALS) AT PARA 4.6 OF HIS ORDER WHICH IS EXTRACTED AS UNDER : 4.6 AS REGARDS THE AMOUNT OF RS.4,78,499 TOWARDS REIMBURSEMENT OF ACTUAL EXPENSES, THE ASSESSING OFFICER RELIED ON THE BOARD S CIRCULAR NO.715 DATED 8.8.1995. I HAVE CONSIDERED THE SAID CIRCULAR AND ALSO THE VARIOUS DECISIONS RELIED ON BY THE APPELLANT IN THIS REGARD. THERE IS NO DISPU TE ABOUT THE NATURE OF EXPENDITURE CLAIMED BY THE APPELLANT. IT IS TOWARDS THE REIMBU RSEMENT OF EXPENSES INCURRED BY THE C&F AGENTS ON BEHALF OF THE APPELLANT. AS EXPL AINED BY THE APPELLANT, THESE EXPENSES WERE INCURRED BY THE C&F AGENTS ON BEHALF OF THE APPELLANT AND CLAIMS WERE MADE IN THEIR BILLS ON ACTUAL BASIS AND THE AM OUNTS WERE SHOWN SEPARATELY SUPPORTED BY NECESSARY EVIDENCE. THEREFORE, THESE PAYMENTS WERE MADE ON ACTUAL BASIS AND THEY DO NOT CONTAIN ANY ELEMENT OF INCOME . HENCE, SUCH A PAYMENT IS NOT LIABLE FOR DEDUCTION OF TAX UNDER SECTION 195 OF TH E ACT. FURTHER THE BOARDS CIRCULAR IS APPLICABLE ONLY WHERE THERE IS NO INDICATION ABO UT THE REIMBURSABLE AMOUNTS IN THE BILLS SEPARATELY. IN THAT CASE, THE GROSS AMO UNT HAS TO BE CONSIDERED FOR DEDUCTION OF TAX. IN VIEW OF THIS FACTUAL AND LEGA L POSITION, THE AMOUNT OF 9 ITA NO.1523/BANG/2012 & C.O. NO.55/BANG/2013 RS.4,78,499 IS NOT LIABLE FOR TDS. HENCE, IT CANNO T BE DISALLOWED UNDER SECTION 40(A)(IA). IN VIEW OF THE ABOVE FINDINGS, THE DISA LLOWANCE OF RS.12,41,217 (RS.87,807 AND THE AMOUNT OF RS.11,53,410) IS SUSTAINED AS AGA INST THE AMOUNT OF RS.43,93,515 MADE BY THE ASSESSING OFFICER IN THE ASSESSMENT ORD ER ON VARIOUS ITEMS DISCUSSED ABOVE. 6.4.3 IN THE CASE ON HAND, AS POINTED OUT BY THE LE ARNED CIT(APPEALS), THE EXPENSES HAVE BEEN INCURRED BY THE C&F AGENTS ON BEHALF OF THE AS SESSEE; THE CLAIMS WERE MADE ON ACTUAL BASIS AND THE AMOUNTS WERE SEPARATELY SHOWN WITH PR OPER EVIDENCE. THE FACT THAT THE REIMBURSEMENT OF EXPENSES HAVE BEEN SEPARATELY BILL ED, IN THE CASE ON HAND, IS NOT DISPUTED. THE C&F AGENTS ARE APPOINTED TO PROVIDE THE SERVICE OF CARRYING OUT SALES FOR WHICH THEY ARE PAID SERVICE CHARGES ON WHICH TDS HAS BEEN MADE AND NOT FOR THE PURPOSE OF INCURRING EXPENSES ON BEHALF OF THE ASSESSEE. IN THIS VIEW OF THE MATTER, THE REIMBURSEMENT OF EXPENSES BY C&F AGENTS CANNOT BE HELD TO BE CONTRACT / SERVI CE ON WHICH THE PROVISIONS OF SECTION 194C OF THE ACT WOULD COME INTO PLAY AND APPLY. IN VIEW OF THE FACTUAL POSITION AS LAID OUT ABOVE AND FOLLOWING THE DECISION OF THE HON'BLE DELHI HIGH CO URT IN THE CASE OF VAN OORD ACZ INDIA (P) LTD. (SUPRA), WE HOLD THAT THERE IS NO NEED TO DEDUCT TD S ON REIMBURSEMENT OF EXPENSES TO C& F AGENTS WHICH ARE SEPARATELY BILLED AND ACCORDINGLY UPHOLD THE ORDER OF THE LEARNED CIT(APPEALS). CONSEQUENTLY, WE DISMISS GROUND NO.2 RAISED BY REVENUE. 7.0 DISALLOWANCE DUE TO SHORTAGE RS.11,70,705 7.1 IN THE GROUND AT S.NO.3 , REVENUE CONTENDS THAT THE LEARNED CIT(APPEALS)S ORDER IS ERRONEOUS IN HOLDING THE DISALLOWANCE OF RS.11,70,7 05 AS UNREASONABLE, WITHOUT APPRECIATING THE FACT THAT THE ASSESSEE HAD NOT SUBSTANTIATED IT S CLAIM OF SHORTAGE WITH ANY SUPPORTING MATERIAL. IN WRITTEN SUBMISSIONS MADE BEFORE US, THE LEARNED D.R. HAS CONTENDED THAT THE CLAIM OF SHORTAGES IS UNCALLED FOR AND THE ENTIRE C LAIM OF SHORTAGES AMOUNTING TO RS.25,96,379 10 ITA NO.1523/BANG/2012 & C.O. NO.55/BANG/2013 MADE IS TO BE DISALLOWED AND ALTERNATIVELY, THE PA RT DISALLOWANCE MADE BY THE A.O. TO THE EXTENT OF RS.11,70,705 NEEDS TO BE SUSTAINED. IT IS THE CONTENTION OF THE LEARNED D.R. THAT IN THE SEED BUSINESS, THE SEED PRODUCTION IS GENERALLY GIV EN FOR CONTRACT FARMING IN WHICH THE ENTIRE COST OF SEED PRODUCTION, PROCESSING AND MARKETING I S DEBITED TO THE PROFIT AND LOSS ACCOUNT AND CORRESPONDINGLY THE SALE PROCEEDS OF THE PROCESSED AND PACKED SEEDS ARE CREDITED TO THE PROFIT AND LOSS ACCOUNT AS TURNOVER. THEREFORE, THERE I S NO NEED FOR SEPARATELY ACCOUNTING FOR ANY LOSS / SHORTAGE. IN SUPPORT OF THIS CONTENTION, THE LEARNED D.R. SUBMITTED A COPY OF THE FINANCIAL STATEMENTS OF ASSESSMENT YEAR 2008-09 OF M/S. NAMDH ARI SEEDS, A LEADING SEED COMPANY OF BANGALORE, WHICH SHOW THAT THIS ENTITY HAS NOT CLAI MED ANY EXPENDITURE ON ACCOUNT OF SHORTAGE THEREIN. THE LEARNED D.R. PRAYED THAT IN VIEW OF T HE ABOVE SUBMISSIONS, THE TRIBUNAL REVERSE THE ORDER OF THE LEARNED CIT(APPEALS) AND DIRECT T HAT THE ENTIRE EXPENDITURE OF RS.25,96,379 CLAIMED ON ACCOUNT OF SHORTAGE BE DISALLOWED. ALTE RNATIVELY, THE DISALLOWANCE OF RS.11,70,705 MADE BY THE ASSESSING OFFICER ON ACCOUNT OF SHORTAG E BE SUSTAINED. 7.2 PER CONTRA, THE LEARNED A.R. SUPPORTED THE DECI SION OF THE LEARNED CIT(APPEALS) ON THE ISSUE OF SHORTAGE. THE LEARNED A.R. SUBMITS THAT, I N THE BUSINESS OF SEED PROCESSING NORMALLY 5% TO 7% SEEDS GET ELIMINATED DUE TO PROCESSING ACTIVI TY AND THEREFORE THE ASSESSEES CLAIM OF SHORTAGE OF 3.64% WAS REASONABLE. THE LEARNED A.R. SUBMITTED THAT, AS IN THE CASE OF NAMDHARI SEEDS CITED BY THE LEARNED D.R., IN THE CASE OF THE ASSESSEE ALSO THERE IS NO SEPARATE DEBIT TO THE PROFIT AND LOSS ACCOUNT IN RESPECT OF SHORTAGE OF RAW MATERIALS. THE LEARNED A.R. SUBMITTED THAT THE LEARNED CIT(APPEALS)S ORDER / FINDING ON THE ISSUE OF SHORTAGES WAS BASED ON THE ASSESSEE'S OWN CASE FOR EARLIER AND SUBSEQUENT YEAR S AND HELD THE SHORTAGES CLAIMED IN THE PERIOD UNDER CONSIDERATION TO BE REASONABLE. IN VIE W OF THIS, THE LEARNED A.R. PRAYED THAT NO 11 ITA NO.1523/BANG/2012 & C.O. NO.55/BANG/2013 INTERFERENCE IS CALLED FOR IN THE ORDER OF THE LEAR NED CIT(APPEALS) AND SOUGHT DISMISSAL OF THIS GROUND RAISED BY REVENUE. 7.3.1 IT IS SEEN FORM THE RECORDS THAT IN THE COURS E OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER FOUND THAT THE ASSESSEE CLAIMED AN AMOUNT O F RS.25,96,379 TOWARDS SHORTAGE OF RAW MATERIALS INCURRED IN THE COURSE OF BUSINESS WHICH AMOUNTED TO3.64% OF THE CONSUMPTION OF RAW MATERIALS DURING THE YEAR UNDER CONSIDERATION. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE CLAIM WAS EXCESSIVE AND OBSERVING THAT THE ASSE SSEE HAD NOT PRODUCED ANY EVIDENCE TO SUBSTANTIATE ITS CLAIM OF SHORTAGES, THE ASSESSING OFFICER HELD THAT ONLY 2% OF CONSUMPTION OF RAW MATERIALS AS SHORTAGE WAS ALLOWABLE AND THE BAL ANCE 1.64% AMOUNTING TO RS.11,70,705 WAS HELD TO BE EXCESSIVE AND DISALLOWED. 7.3.2 IN APPEAL, THE LEARNED CIT(APPEALS) ALLOWED T HE CLAIM OF THE ASSESSEE AND DELETED THE DISALLOWANCE MADE BY THE ASSESSING OFFICER IN VIEW OF THE FOLLOWING OBSERVATIONS :- (I) THAT THE ASSESSEE DEALS IN THE PROCESSING OF S EEDS FROM THE RAW STAGE TO PACKING STAGE AND IN THE PROCESS OF REMOVING STONES, DUST, MUD, ETC. SHO RTAGES ARE BOUND OCCUR; (II) THAT THE ASSESSEE IS DEALING IN SEEDS OF VARIO US CATEGORIES AND IT IS DIFFICULT TO ASSUME THAT THE SHORTAGES IS UNIFORM FOR ALL MANUFACTURERS; (III) NO COMPARABLE CASE HAS BEEN BROUGHT ON RECO RD TO SHOW THAT THE SHORTAGE CLAIM OF THE ASSESSEE IS EXCESSIVE; AND (IV) THE SHORTAGES CLAIMED IN THE EARLIER AND SUB SEQUENT YEARS (I.E. A.YS 2004-05 & 2006-07) WERE 9.75% AND 4.68% AND HENCE THE CLAIM OF 3.64% I N THE PERIOD UNDER CONSIDERATION IS NOT UNREASONABLE. 12 ITA NO.1523/BANG/2012 & C.O. NO.55/BANG/2013 7.4.1 WE HAVE HEARD THE RIVAL CONTENTIONS AND PERUS ED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. THE FRESH ARGUMENTS PUT FORTH BY THE LEA RNED D.R. ABOUT CONTRACT FARMING AND EVIDENCE IN THE FORM OF FINANCIAL STATEMENTS OF A NOTHER COMPANY IS TOO GENERAL AND VAGUE TO MERIT ANY SERIOUS CONSIDERATION AT THIS STAGE. FIR STLY, THE ASSESSING OFFICER HAS NOT RENDERED ANY FINDING THAT THE ASSESSEE IS INTO CONTRACT FARM ING AND HENCE NO SHORTAGES / WASTAGES OCCUR AT ALL. FURTHER, AS OBSERVED BY THE LEARNED CIT(APP EALS), THE ASSESSEE HAS CLAIMED SUCH SHORTAGES IN THE EARLIER YEARS WHICH HAVE BEEN ALLO WED. IT IS TRITE TO STATE THAT THE ACCOUNTING PRACTICES CONSISTENTLY FOLLOWED BY THE ASSESSEE CAN NOT BE NEGATED BY THE A.O. WITHOUT GOOD REASON AND A FINDING IN THIS REGARD. WE ARE, THERE FORE, CONFINING OURSELVES TO THE FINDINGS GIVEN BY THE A.O. IN THE ORDER OF ASSESSMENT AND THAT OF THE LEARNED CIT (APPEALS) IN HIS ORDER. 7.3.2 IT IS SEEN THAT THE A.O. IN THE ORDER OF ASSE SSMENT HAS ACCEPTED THAT IN THIS LINE OF BUSINESS IT IS NORMAL THAT SHORTAGES OCCUR. THE ON LY ISSUE OF DISPUTE IS WHETHER THE CLAIM OF THE ASSESSEE OF SHORTAGES AT 3.64% OF CONSUMPTION OF RA W MATERIAL IS REASONABLE OR EXCESSIVE. THE ASSESSING OFFICER WAS OF THE VIEW THAT THE CLAIM OF SHORTAGES WAS EXCESSIVE AND HENCE ALLOWED THE SAME TO THE EXTENT OF 2% OF CONSUMPTION OF RAW MATERIALS. IN DOING SO, WE FIND THAT, THE ASSESSING OFFICER DID NOT ASSIGN ANY REASONS FOR MA KING SUCH AN ADHOC ESTIMATE. IN THE ABSENCE OF ANY BASIS FOR THE ASSESSING OFFICER TO ADOPT SHO RTAGES AT 2% IN THE ABSENCE OF ANY INDUSTRY AVERAGE, WE FIND THAT, THE LEARNED CIT (APPEALS) E XAMINED THE SHORTAGES CLAIMED BY THE ASSESSEE IN THE PERIOD 2004-05 TO 2006-07. IT IS S EEN THAT THE SHORTAGE OF ASSESSMENT YEAR 2004-05 WAS 9.75% AND THAT OF ASST. YEAR 2006-07 WA S 4.68% WHICH FLUCTUATED AND WAS IN EXCESS OF THE 3.64% SHORTAGE OF THE CURRENT YEAR. IN THIS FACTUAL VIEW OF THE MATTER, WE AGREE WITH THE LEARNED CIT (APPEALS) THAT THE SHORTAGES A T 3.64% IN THE CURRENT YEAR IS LESS THAN THAT 13 ITA NO.1523/BANG/2012 & C.O. NO.55/BANG/2013 OF BOTH THE EARLIER AND SUBSEQUENT YEAR AND IS THER EFORE REASONABLE. IN VIEW OF THE ABOVE, WE FIND NO INFIRMITY IN THE ORDER OF THE LEARNED CIT ( APPEALS) AND UPHOLD THE SAME. CONSEQUENTLY, WE DISMISS GROUND NO.3 RAISED BY REVENUE. 8. SEED DEVELOPMENT EXPENSES DISALLOWED RS.7,59,9 89 . 8.1 IN THE GROUND RAISED AT S.NO.4 , REVENUE CONTENDS THAT THE LEARNED CIT (APPEALS) E RRED IN RESTRICTING THE DISALLOWANCE OF SEED DEVELOPMENT EX PENSES TO RS.7,59,989 AS AGAINST RS.55,18,529 DISALLOWED BY THE ASSESSING OFFICER ; HOLDING THAT THE BALANCE WAS TOWARDS PRODUCTION OF PARENT SEEDS, AND WITHOUT APPRECIATIN G THAT SINCE THE AGREEMENT ENTERED INTO BY THE ASSESSEE WAS A CONTRACT FOR DEVELOPMENT OF SEED S THE ENTIRE EXPENDITURE WAS CAPITAL IN NATURE. IN THE C.O. FILED, THE GROUNDS NO.1 TO 3 R AISED BY THE ASSESSEE CHALLENGE THE ORDER OF THE LEARNED CIT (APPEALS) IN BOTH CONFIRMING THE DI SALLOWANCES TO THE EXTENT OF RS.7,59,989 AND ALSO ALTERNATIVELY IN NOT ALLOWING DEPRECIATION THE REON. 8.2 IN THE COURSE OF ASSESSMENT PROCEEDINGS, TH E ASSESSING OFFICER OBSERVED THAT THE ASSESSEE, WHO IS IN THE BUSINESS OF DEVELOPING AND MULTIPLYING SEEDS, HAD ENTERED INTO A CONTRACT FOR DEVELOPMENT OF SEEDS WITH M/S. METAHEL IX LIFE SCIENCES PVT. LTD. (METAHELIX) VIDE AGREEMENT DT.15.11.2002 AND SUPPLEMENTARY AGREEMENT DT.31.1.2003 BY WHICH THAT COMPANY PROVIDED THE ASSESSEE WITH SEED TECHNOLOGY FOR MANU FACTURE AND DEVELOPMENT OF CERTAIN SEEDS AND VEGETABLES. CONSIDERING THAT THE ASSESSEE IS A SEED MANUFACTURING COMPANY WHICH UTILISES VARIOUS TECHNOLOGIES FOR DEVELOPMENT OF SEEDS, THE ASSESSING OFFICER HELD THAT THESE EXPENSES WERE CAPITAL IN NATURE AND DISALLOWED THE ENTIRE AM OUNT OF RS.55,18,529 CLAIMED AS SEED DEVELOPMENT COST. THOUGH THE ASSESSING OFFICER HEL D THAT DEPRECIATION IS ALLOWABLE THEREON, IT 14 ITA NO.1523/BANG/2012 & C.O. NO.55/BANG/2013 APPEARS FROM A PERUSAL OF THE ORDER OF ASSESSMENT T HAT NO DEPRECIATION WAS ALLOWED WHILE COMPUTING THE ASSESSEE'S TOTAL INCOME. 8.3 ON APPEAL, THE LEARNED CIT (APPEALS) ON EXAMINA TION OF THE MATTER, FOUND THAT OUT OF THE TOTAL AMOUNT OF RS.55,18,529 ONLY, AN AMOUNT OF RS.7,59,989 SPENT TOWARDS DEVELOPMENT OF SEEDS AS R&D EXPENSES WHICH HAS TO BE CONSIDERED AS CAPITAL IN NATURE. THE BALANCE OF RS.47,58,542 SPENT TOWARDS PRODUCTION OF SEEDS WAS HELD BE REVENUE IN NATURE. IN THIS MANNER, THE LEARNED CIT (APPEALS) AT PARA 6.3 AND 6.4 OF HI S ORDER RESTRICTED THE DISALLOWANCE ON ACCOUNT OF CAPITAL EXPENDITURE TO RS.7,59,989 AND ALLOWED T HE BALANCE AMOUNT OF RS.47,58,542 AS REVENUE EXPENDITURE. 8.4 BEFORE US IN THIS APPEAL, REVENUE IS IN APPEAL AGAINST THE ORDER OF THE LEARNED CIT (APPEALS) IN RESTRICTING THE DISALLOWANCE ON ACCOUN T OF SEED DEVELOPMENT EXPENSES TO RS.7,59,989. THE ASSESSEE IN ITS C.O. HAS CHALLENG ED THE ORDER OF THE LEARNED CIT (APPEALS) IN SUSTAINING THE AFORESAID DISALLOWANCE OF RS.7,59,98 9 AND ALSO THAT THE LEARNED CIT (APPEALS) DID NOT GRANT DEPRECIATION ON THE SAME. 8.5 THE LEARNED D.R. HAS FILED A PAPER BOOK ELABORA TELY DISCUSSING THE BUSINESS PROCESS OF DEVELOPMENT OF SEED TECHNOLOGY BY THE PARENT COMPAN Y M/S. METAHELIX LIFE SCIENCES (P) LTD. FROM WHICH THE ASSESSEE HAS PURCHASED THE PARENT SE ED IN ORDER TO BUTTRESS THE PROPOSITION OF REVENUE THAT THERE IS AN ENDURING BENEFIT FOR A NUM BER OF YEARS TO THE ASSESSEE AND THEREFORE THE EXPENSES OFRS.55,18,529 ARE CAPITAL IN NATURE A ND OUGHT TO BE DISALLOWED. IN WRITTEN SUBMISSIONS, THE LEARNED D.R. SUBMITS AS UNDER : FROM THE START OF THE BREEDING PROGRAM TO THE END OF THE RELEASE OF NEW VARIETY / HYBRID, IT WILL USUALLY TAKE 4-8 YEARS, SOMETIMES E VEN MORE TIME. THE R&D LEADINGTO DEVELOPMENT OF NEW VARIETIES / HYBRIDS IS A VERY EX PENSIVE ACTIVITY. THE LIFE CYCLE OF A NEWLY RELEASED HIGH YIELDING VARIETY / HYBRID IS AROUND 6-8 YEARS. THAT MEANS ONCE 15 ITA NO.1523/BANG/2012 & C.O. NO.55/BANG/2013 EITHER A NEW VARIETY/ HYBRID IS PRODUCED OR ACQUIRE D THROUGH CONTRACT, ITS BENEFIT FLOWS TO THE SEED COMPANY OVER A PERIOD OF TIME. E VERY YEAR, THE SEED COMPANY HAS TO JUST MULTIPLY THE PARENT SEEDS OF IMPROVED VARIE TY / HYBRID FOR COMMERCIAL EXPLOITATION; AND THIS MULTIPLICATION IS GENERALLY TAKEN UP THROUGH CONTRACT FARMING. 8.6.1 THE LEARNED AUTHORISED REPRESENTATIVE ALSO F ILED WRITTEN SUBMISSIONS. THE LEARNED A.R. CONTENDS THAT THE ASSESSEE DEPENDS ON THE PARENT SE ED DEVELOPED AND PRODUCED BY METAHELIX FOR ITS BUSINESS OPERATIONS OF PRODUCTION, MARKETIN G AND SALE OF HYBRID SEEDS TO THE FARMERS. AS PER THE AGREEMENT BETWEEN PARTIES, THE ACTUAL EXPEN SES INCURRED BY METAHELIX FOR DEVELOPMENT AND PRODUCTION OF PRODUCT SEEDS WILL BE REIMBURSED BY THE ASSESSEE. AS FAR AS THE ASSESSEE IS CONCERNED, THE ENTIRE EXPENSES REIMBURS ED TO METAHELIX IS TOWARDS PURCHASE OF PARENT SEEDS USED BY THE ASSESSEE AS RAW MATERIAL T O MULTIPLY AND SELL THE SEEDS AND THEREFORE IS REVENUE EXPENDITURE SINCE THERE IS NO ENDURING B ENEFIT TO THE ASSESSEE. 8.6.2 THE LEARNED A.R. SUBMITS THAT OUT OF THE TOT AL EXPENDITURE OF RS.55,18,529 EXPENDED ON SEED DEVELOPMENT, THE LEARNED CIT (APPEALS) HELD TH AT TO THE EXTENT OFRS.47,58,542 REIMBURSED TO METAHELIX TOWARDS PRODUCTION OF PARENT SEED THE EXPENSES WERE REVENUE IN NATURE, WHEREAS RS.7,59,988 EXPENDED TOWARDS DEVELOPMENT OF PARENT SEED WAS CAPITAL IN NATURE. IT IS SUBMITTED BY THE LEARNED A.R. THAT THE REMAND REPOR T OF THE A.O. DT.3.8.2012 CLARIFIED THE POSITION THAT THE ENTIRE EXPENDITURE WAS SPENT FOR ACQUIRING PARENT SEED, BEING THE ASSESSEES STOCK-IN-TRADE WHICH IS MULTIPLIED AND SOLD AND BY NO STRETCH OF IMAGINATION CAN THIS BE HELD AS CAPITAL EXPENDITURE. IN THIS REGARD, THE LEARNED A .R. PLACED RELIANCE ON THE FOLLOWING JUDICIAL DECISIONS: (I) J.K. INDUSTRIES V UOI (2008) 297 ITR 176 (SC) (II) EMPIRE JUTE CO. LTD. V CIT (1980) 124 ITR 1 (S C) (III) ITO V FIVE STAR AUDIO (ITA NO.1921/MDS/2012, C.O. NO.187/MDS/2012 DT.15.1.2013. 16 ITA NO.1523/BANG/2012 & C.O. NO.55/BANG/2013 8.7.1 WE HAVE HEARD THE RIVAL SUBMISSIONS AND P ERUSED AND CAREFULLY CONSIDERED THE MATERIAL ON RECORD. THE ASSESSEE COMPANY IS IN THE BUSINESS OF ACQUIRING, PRODUCING, MANUFACTURING AND DEVELOPMENT OF VARIOUS SEEDS AND VEGETABLES. FOR DEVELOPMENT OF SEEDS, IT IS USING TECHNOLOGIES DEVELOPED BY VARIOUS COMPANIE S. IN THIS CONTEXT, THE ASSESSEE ENTERED INTO AN AGREEMENT WITH METAHELIX DT.15.11.2002 AND SUPPLEMENTARY AGREEMENT DT.31.1.2003 UNDER WHICH METAHELIX WILL DEVELOP PARENT SEEDS (BO TH MALE AND FEMALE) OF SUPERIOR QUALITY. THE ASSESSEE PROCESSES SUCH PARENT SEEDS FORM METAH ELIX AND SUPPLIES IT TO FARMERS WHO GROW AND DEVELOP THESE SEEDS. THE FULLY DEVELOPED SEEDS ARE RECEIVED BY THE ASSESSEE FROM THE FARMERS AFTER 3 TO 6 MONTHS, AND ARE ABOUT 20 TIMES MORE THAN THE PARENT SEEDS RECEIVED BY THE ASSESSEE FROM METAHELIX. THE ASSESSEE, AFTER R ECEIVING THESE SEEDS FROM THE FARMERS, PROCESSES THESE SEEDS IN ITS PLANT WHICH CONSISTS O F MANY OPERATIONS LIKE CLEANING, PROCESSING, CONDITIONING, CHEMICAL TREATMENT, ETC. AND THEN DOE S PACKING OF THE SAME. IN THIS PROCESS, THE DAMAGED AND BAD SEEDS ARE REMOVED AND ONLY TOP QUAL ITY SEEDS ARE PACKED. 8.7.2 IN THE LIGHT OF THE ACTIVITIES INVOLVED IN TH E ASS BUSINESS MODEL, THE FOLLOWING FACTS EMERGE :- (I) THAT METAHELIX DOES RESEARCH AND DEVELOPMENT L EADING TO DEVELOPMENT OF NEW TECHNOLOGIES ENABLING NEW STRAINS IN VARIETIES OF C ROPS; (II) THE ASSESSEE PURCHASES THE PARENT SEED FROM METAHELIX, WHICH ARE THE RESULT OF THE RESEARCH PROGRAM OF METAHELIX; (III) THESE PARENT SEEDS ARE GIVEN BY THE ASSESSE E TO FARMERS, WHEREBY IT IS MULTIPLIED MANY TIMES INTO HYBRID SEEDS; (IV) THE PARENT SEEDS DEVELOPED BY METAHELIX LOS E ITS LIFE ONCE IT IS GIVEN TO FARMERS FOR FURTHER DEVELOPMENT. (V) THE PARENT SEEDS ARE MATERIAL INPUT FOR THE AS SESSEE TO DEVELOP HYBRID SEEDS AND MULTIPLY THEM; (VI) IF THE DEVELOPMENT OF THE PARENT SEEDS INVOLV E RESEARCH AND DEVELOPMENT, SUCH ACTIVITIES ARE CARRIED OUT BY THE METAHELIX AND NOT BY THE ASSESSEE; 17 ITA NO.1523/BANG/2012 & C.O. NO.55/BANG/2013 (VII) IF AT ALL ANY RESEARCH ACTIVITY CARRIED OUT, IT IS BY METAHELIX AND NOT BY THE ASSESSEE. THE ABOVE FACTS CLEARLY INDICATE THAT THE AMOUNTS PAID BY THE ASSESSEE TO METAHELIX IS TOWARDS PROCUREMENT OF PARENT SEEDS, A FINDING MADE BY THE LEARNED CIT (APPEALS) AS WELL. IT IS SEEN THAT THE LEARNED CIT (APPEALS) HAS ALSO GIVEN A FINDING THAT THE ASSESSEE IS NOT ENGAGED IN RESEARCH AND DEVELOPMENT. IN THE LIGHT OF THE ABOV E FACTUAL MATRIX, WE ARE IN AGREEMENT WITH THE LEARNED CIT (APPEALS) THAT SEED DEVELOPMENT COS T IS NOT CAPITAL BUT REVENUE IN NATURE AND HENCE IS ALLOWABLE EXPENDITURE. 8.7.3 WE, HOWEVER, FIND THAT THE LEARNED CIT (APPEA LS) AFTER RENDERING A FINDING THAT THE ASSESSEE IS NOT DOING ANY RESEARCH AND DEVELOPMENT ACTIVITY, HAS HELD THAT ABOUT OF THE TOTAL REIMBURSEMENT OF EXPENSES MADE BY THE ASSESSEE TO M ETAHELIX, AN AMOUNT OF RS.7,59,989 HAS BEEN USED BY METAHELIX FOR DEVELOPMENT OF SEEDS AN D THEREFORE DISALLOWED THESE EXPENSES AS CAPITAL IN NATURE. WE ARE UNABLE TO AGREE WITH THIS FINDING OF THE LEARNED CIT (APPEALS). IT IS AN UNCONTROVERTED FACT THAT THE ASSESSEE DOES NOT CARR Y OUT ANY RESEARCH AND DEVELOPMENT ACTIVITY. THE FACTS ON RECORD ESTABLISH THAT THE E XPENSES INCURRED BY THE ASSESSEE WERE TOWARDS PURCHASE OF PARENT SEEDS. IF A PART OF THE AMOUNT PAID BY THE ASSESSEE HAVE BEEN UTILISED BY METAHELIX FOR DEVELOPMENT OF SEEDS, THE EXPENSES CA N BE CAPITAL IN NATURE FOR METAHELIX BUT NOT FOR THE ASSESSEE. MERELY BECAUSE THE EXPENSES PAID BY THE ASSESSEE TO METAHELIX IS TOWARDS DEFRAYING THE EXPENSES OF DEVELOPMENT OF PA RENT SEEDS, IT DOES NOT CHANGE THE NATURE OF THE EXPENDITURE BY THE ASSESSEE WHICH IS FOR PRO CUREMENT OF PARENT SEEDS. AS FAR AS THE ASSESSEE IS CONCERNED, THE ENTIRE EXPENDITURE IS IN CURRED TOWARDS PURCHASE OF PARENT SEEDS AND THEREFORE IT IS ENTIRELY REVENUE IN NATURE. THERE IS NO ENDURING BENEFIT TO THE ASSESSEE DUE TO THE PURCHASE OF PARENT SEEDS AS THEY LOSE THEIR EXI STENCE AND FORM ONCE THEY ARE CONVERTED 18 ITA NO.1523/BANG/2012 & C.O. NO.55/BANG/2013 INTO HYBRID SEEDS. IN THIS VIEW OF THE MATTER, WE ARE OF THE CONSIDERED OPINION THAT THE ENTIRE EXPENDITURE OFRS.55,18,529 IS REVENUE IN NATURE AND ARE THEREFORE ENTIRELY ALLOWABLE EXPENDITURE. 9. IN THE RESULT, REVENUES APPEAL FOR ASSESSMENT YEAR 2005-06 IS DISMISSED AND THE CROSS OBJECTIONS RAISED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 2 7 TH SEPT., 2013. SD/ - SD/- (N.V. VASUDEVAN) (JASON P BOAZ) JUDICIAL MEMBER ACCOUNTANT MEMB ER *REDDY GP COPY TO : 1. APPELLANT 2. RESPONDENT 3. C.I.T. 4. CIT(A) 5. DR, - B BENCH. 6. GUARD FILE. (TRUE COPY ) BY ORDER ASST. REGISTRAR, ITAT, BANGALORE