ITO, New Delhi V. M/s Maharaja Appliances Ltd., New Delhi

ITA 1543/DEL/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 86816 (ITAT-DELHI)
• Duration Of Justice: 3 year(s) 10 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-02-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: E
• Next Hearing Date: 09-02-2015
• Assessment Year: 2007-2008
• Appeal Filed On: 30-03-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Depreciation; Question of law
• Section: 37(1)

Judgement Text

1 ITA 1543/DEL/2011 ITO VS. MAHARAJA APPLIANCES LTD. IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH E NEW DELHI BEFORE SHRI S.V. MEHROTRA : ACCOUNTANT MEMBER AND SHRI ABY. T. VARKEY : JUDICIAL MEMBER ITA NO. 1543/DEL/2011 A.Y. 2007-08 INCOME-TAX OFFICER, VS M/S MAHARAJA APPLIANCES LT D., WARD 6(1), NEW DELHI. 1/7, EAST PATEL NAGAR, NEW DELHI-110008. PAN: AACM 1791 M ( APPELLANT ) ( RESPONDENT ) APPELLANT BY : SHRI PADAM KANUHJHA SR. DR RESPONDENT BY : SHRI S.R. WADHWA ADV. DATE OF HEARING : 12-02-2015 DATE OF ORDER : 20-02-2015. O R D E R PER S.V. MEHROTRA, A.M:- THIS APPEAL, PREFERRED BY THE DEPARTMENT, IS DIREC TED AGAINST THE ORDER DATED 30-11-2010, PASSED BY THE CIT(APPEALS)-IX, N EW DELHI, RELATING TO A.Y. 2007-08. 2. BRIEF FACTS ARE THAT THE ASSESSEE, IN THE RELEVA NT ASSESSMENT YEAR, WAS ENGAGED IN THE BUSINESS OF TRADING OF HOME APPLIAN CES AS DISTRIBUTOR/ WHOLESALER. IT HAD SOLD PRODUCTS THROUGH ITS NETWOR K OF DEALERS AND DISTRIBUTORS. THE ASSESSEE HAD FILED ITS RETURN DEC LARING INCOME OF RS. 4,10,580/-. THE ASSESSMENT WAS COMPLETED AT A TOTAL INCOME OF RS. 2 ITA 1543/DEL/2011 ITO VS. MAHARAJA APPLIANCES LTD. 62,91,888/-, INTER ALIA, MAKING ADDITION/ DISALLOWA NCE IN RESPECT OF FOLLOWING: (I) DISALLOWANCE U/S 37(1) SALES TAX INTEREST & PENALTY RS. 2,05,705/- (II) DISALLOWANCE U/S 32(1) ASSETS NOT USED FOR BUSINESS RS. 3,11,610/- (III) DISALLOWANCE OF SALES SERVICE CHARGES RS. 31,89,625 /- (IV) DISALLOWANCE U/S 37(1) ADMINISTRATIVE EXPENSES RS. 22,43,445/- (V) SHORT TERM CAPITAL GAIN ON SALE OF ASSETS RS. 2,228 65/-. 2.1. IN FIRST APPEAL, THE LD. CIT(A) PARTLY ALLOWE D THE ASSESSEES APPEAL. AGGRIEVED, WITH THE ORDER OF LD. CIT(A) THE ASSESSE E IS IN APPEAL BEFORE US. FOLLOWING GROUNDS ARE RAISED: 1. THE ORDER OF THE LEARNED CIT(APPEALS) IS ERRONEO US & CONTRARY TO THE FACTS & LAW. 2. ON THE FACTS AND IN THE C I RCUMSTA N CES OF T H E CASE AND IN L A W , TH E L E ARN E D C IT ( APPEALS) HAS ERRED I N R ESTRIC TIN G T HE A DDIT ION ON ACCOUNT OF INTERE S T AND PENALTY TO R S . 1,25,8466/- AS AGA IN S T R S .2 , 05 , 705 / - M A D E B Y THE A. . 2 . L . T H E L D . C I T( A ) I G N O RED THE F INDING RECORDED B Y TH E A . O . A ND T H E FA CT TH A T T H E EX P E N SES I N QU ES TI O N A R E PEN A L IN N A TU R E . 3. 0N TH E FACTS A ND IN T H E C IRCUM S T A N CES OF TH E CASE A ND I N LAW , T H E LEARNED CIT(A PP EA L S) H AS ER R E D IN D E L ET IN G T H E A DDI T I O N OF R S .2 , 22, 86 5 / - MA D E B Y A . O . O N A CCOUNT OF S H O RT TER M CA PIT A L GA IN O N A C C OUNT OF SA L E OF ASSE T S . 3. L . TH E L D. C I T(A) I G NOR E D TH E F INDIN G R E C O RD E D B Y THE A . O . A ND T H E FAC T T H AT TH E A S S ESSEE IT SE L F H AS CON F I RME D THE S ALE OF MACHI N ER Y V IDE LE T TER D ATE D 24/12/2009. . 4 . 0N TH E FACT S A ND IN TH E CIR C UM STA NC ES OF TH E CASE A ND IN L AW, TH E L EARNE D C I T( APPE A L S) H AS E RR E D IN D E L ET IN G T HE A DD ITI ON OF R S . 3,1 1 , 6 1 0 / - MA D E B Y A . O . U / S 32(1 ) OF THE ACT ON A C CO UNT O F D EP R E CI A TI O N . 4 . 1 . TH E LD.C I T(A) IGNO R E D TH E F INDIN G R E C O RD E D B Y TH E A . O . 3 ITA 1543/DEL/2011 ITO VS. MAHARAJA APPLIANCES LTD. A ND T H E FAC T THAT T H E ASSESSEE I T SE L F H AS CONFIRME D T H E SA L E OF M AC HIN ERY V ID E L ETTER D ATE D 2 4 1 1 2 / 2009. 5 . O N T H E F A C TS AN D IN THE CIRC U MS T A N CES OF T H E C ASE AND I N LAW , T HE L EA RN E D C IT ( APP EA L S) H AS E RR E D I N R ESTRICTI N G T H E A DDI T I O N ON ACCOUNT OF SALE AND SERVICE TO RS. 4,26,887/- AS AGAINST RS. 31,89,625/- MADE BY THE AO. 5.1. TH E L D .C IT (A) I G N ORE D T H E F INDIN G REC O R D E D BY T H E A . O. A ND T H E FAC T T H AT T H E ASSESSEE COULD N OT S UB STA NTI A T E IT S C L A IM DURIN G TH E ASSESS M E NT PROCEE DIN GS . 6 . ON THE FA CTS A ND IN THE CIRCUM S T A NCES OF THE CAS E AND I N L AW , T H E L EA RN E D C IT (A PP EA L S) H AS E RR E D IN RE ST RI CT IN G TH E A D D ITI O N O N ACCO UN T OF A DMINI S T RAT I VE EX P E N SES TO R S . 98 , 123 / - AS AGA IN ST RS.22 , 43 , 445 / - M A D E BY T H E A.O . 6. 1. T H E L D .CIT(A) IG N O R E D TH E F INDING RE CO R D E D B Y TH E A.O. AN D TH E FACT T H A T TH E A SSESSEE C O ULD N OT S UB S T AN TI A T E I TS C L A IM DU RI N G T HE A SSESS M E NT PR OCEE D I N GS 7.TH E A PP E LL A N T C R AVES L EAVE TO A DD , TO A LT E R , OR A M E ND A N Y G R O UND S RAISED ABO VE AT TH E TIME OF HE A RIN G. 3. AT THE OUTSET LD. COUNSEL FOR THE ASSESSEE SUBM ITTED THAT THE REVENUE HAS ACCEPTED THE CIT(A)S ORDER FOR AY 2009-10 AND 2010-11, INASMUCH AS, IN BOTH THE ASSESSMENT YEARS, FOLLOWING THE CIT(A) S ORDER, THE AO HAS RESTRICTED THE DISALLOWANCES, AS DIRECTED. 4. GROUND NOS. 1 & 7 ARE GENERAL IN NATURE AND REQU IRE NO ADJUDICATION. 5. GROUND NO. 2 & 2.1. :BRIEF FACTS OF THE CASE ARE THAT ASSESSEE HAD CLAIMED A SUM OF RS. 3,71,060/- ON ACCOUNT OF ADD ITIONAL SALES TAX PENALTY APPEAL. THE TAX AUDIT REPORT REVEALED TH E SALES TAX PENALTY AND INTEREST BORNE BY THE ASSESSEE AT RS. 2,05,705/-, T HE AO, THEREFORE, DISALLOWED THE SAME. 5.1. BEFORE LD. CIT(A), THE ASSESSEE HAD, INTER ALI A, SUBMITTED AS UNDER: FURTHER RS. 88,453/- OUT OF THE TOTAL DISALLOWANC E RELATES TO SALES TAX & PENALTY WHICH IS OF COMPENSATORY NATURE & NOT PENAL. BREAKUP OF SUCH EXPENSES IS GIVEN BELOW: 4 ITA 1543/DEL/2011 ITO VS. MAHARAJA APPLIANCES LTD. S. NO. PARTICULARS NATURE AMOUNT IN RS. 1. SALES TAX ADDITIONAL DEMAND DUE TO NON RECEIPT OF FORM F AT AHMEDABAD. DD FOR PAYMENT OF SALES TAX DEMAND SALES TAX ADDITIONAL DEMAND 28,919/- 2. AMOUNT FOR LATE PAYMENT OF SALE TAX. COMPENSATION FOR LATE PAYMENT 8,594/- 3. VAT PAID AT MAHARASHTRA, CALCULATION. MVAT PAID 50,940/- TOTAL 88,453/-. 5.2. LD. CIT(A) NOTED THAT OUT OF RS. 88,453/-, RS. 8,594/- WAS PENAL IN NATURE AND, THEREFORE, HE ALLOWED A RELIEF OF RS. 7 9,859/- AND RESTRICTED THE ADDITION AT RS. 1,25,846/-. 5.3. LD. COUNSEL FOR THE ASSESSEE POINTED OUT THAT IN AY 2009-10 AND 2010- 11, THE AO HAS RESTRICTED THE DISALLOWANCE ACCORDIN GLY TO RS. 12,000/- AND RS. 2500/- RESPECTIVELY. 5.4. HAVING HEARD BOTH THE PARTIES, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF LD. CIT(A), BECAUSE ONLY THOSE PAYMENTS, W HICH WERE PENAL IN NATURE, COULD BE DISALLOWED. GROUND IS REJECTED. 6. GROUND NO. 3 & 3.1.:FROM THE FIXED ASSETS CHART, THE AO NOTICED THAT ASSESSEE HAD SOLD MACHINERY WORTH WRITTEN DOWN VALU E OF RS. 47,50,500/-. IN TERMS OF SECTION 50, HE COMPUTED THE SHORT TERM CAP ITAL GAINS AT RS. 2,22,865/- AS UNDER: SALE CONSIDERATION RS. 70,36,357/- OPENING WRITTEN DOWN VALUE RS. 68,13,492/- 5 ITA 1543/DEL/2011 ITO VS. MAHARAJA APPLIANCES LTD. ADDITION TO PLANT & MACHINERY RS. NIL. SHORT TERM CAPITAL GAIN RS. 2,22,865/- 6.1. LD. CIT(A) IN PARA 3 OF HIS ORDER OBSERVED AS UNDER: 5.3 ON GOING THROUGH THE DETAILED SUBMIS S IONS FI L ED BY THE APPELLANT , I HAVE FOUND THE SAME ' TO BE CORRECT . IT APPEARS THAT THE LD . AO ERRONEOUSLY TOOK TH E FIGURE OF SALES PROCEEDS OF THE ASSETS AT RS . 70 , 36 , 357/ - WHICH INCLUDED MODVAT , EXCISE DUTY ETC . AS AGAINST THE ACTUAL SALE CONSIDERATION OF RS . 47 , 50 , 5001- . THE LD . AO AL S O MISSED OUT THE FACT THAT THE ENT I RE BLOCK WAS NOT SOLD OUT AND THE R E WAS AN ADDITION OF RS.29 , 5001- TO THE SAME DUR I NG THE YEAR . THE ADDITION OF PLANT AND MACHINERY OF RS . 29 , 5001- HAD TO BE INCLUDED TO THE BLOCK , AS IS EVIDENT FROM THE BLOCK OF FIXED ASSETS . THUS , THE VALUE OF THE SAID BLOCK OF A S SETS D I D NOT BECOME NIL AT THE END OF YEAR AND AS SUCH UNDE R THE SCHEME OF BLOCK OF A SSETS THERE WA S NO SCOPE TO TR E AT IT AS SHORT TERM CAPITAL GAINS. UNDER THE CIRCUMSTANCES, THE LD. AO WAS NOT RIGHT IN INVOKING THE PROVISIONS OF SECTION 50 OF THE ACT TO WORK OUT THE SHORT TERM CA PITAL GAIN OF RS. 2,22,865/-. THE SAME BEING WRONGLY DONE IS DIRECTED TO BE DELETED. 6.2. THE FINDING OF LD. CIT(A) THAT THE BLOCK OF AS SETS DID NOT BECOME NIL, HAS NOT BEEN CONTROVERTED. 6.3. HAVING HEARD BOTH THE PARTIES, WE FIND THAT TH IS ISSUE IS COVERED BY THE RATIO OF DECISION OF HONBLE DELHI HIGH COURT IN TH E CASE OF CIT VS. EASTMAN INDUSTRIES LTD. (2008) 219 CTR 593 (DEL.), HOLDING AS UNDER: SECTION 50 (2) OF THE ACT COMES INTO PLAY ONLY IF ASSETS OF THE SAME CLASS CEASE TO EXIST FOR THE REASON THAT ALL ASSETS IN THAT BLOCK ARE TRANSFERRED DURING THE PREVIOUS Y EAR. THE BLOCK OF ASSETS CEASE TO EXIST IN ACCORDANCE WITH SUB- SECTION (2) OF SECTION 50 ONLY WHEN, ALL ASSETS IN THAT BLOCK ARE TRANSFERRED DURING THE PREVIOUS YEAR. THE EXPRESSION PREVIOUS YEAR IS PRECEDED BY THE WORD DURING. IT IS WELL SETTLED THAT THE INTENTION OF THE LEGISLATURE IS BE ST ASCERTAINED BY RESORTING TO THE PLAIN MEANING OF TH E WORDS USED IN THE LEGISLATION. THE PLAIN MEANING OF THE W ORD DURING CLEARLY INDICATES THAT THE PROVISION REFER S TO TRANSFER OF ASSETS IN THE BLOCK, IN A DEFINED PERIO D AND NOT AT ANY PARTICULAR POINT IN TIME. THUS, IT IS ONLY WHEN THE 6 ITA 1543/DEL/2011 ITO VS. MAHARAJA APPLIANCES LTD. FOLLOWING CONDITIONS ARE FULFILLED DOES SECTION 50( 2) GET TRIGGERED IN I) ALL THE ASSETS IN THE BLOCK, II) AR E TRANSFERRED III) THROUGHOUT THE COURSE OF OR AFTER THE COMMENCE MENT AND BEFORE THE EXPIRATION OF IV) THE FINANCIAL YEAR OF THE ASSESSEE IMMEDIATELY PRECEDING THE ASSESSMENT YEAR. A BARE READING OF THE PROVISION OF SUB-SECTION (2) OF SECTION 50 OF THE ACT WOULD SHOW THAT, THE VERY FACT THAT, THERE IS A REFERENCE TO, IN ARRIVING AT THE COST OF ACQUISITIO N, TO THE WRITTEN DOWN VALUE OF THE BLOCK OF ASSETS AT THE BEGINNING OF THE PREVIOUS YEAR AS INCREASED BY ACTUAL COST OF ASSETS FALLING WITHIN THE BLOCK OF ASSETS ACQUIRED DURIN G THE PREVIOUS YEAR WOULD SHOW THAT WHAT IS REQUIRED TO B E SEEN IS THAT WHETHER AT THE END OF THE PREVIOUS YEAR, TH E BLOCK OF ASSETS HAVE CEASED TO EXIST OR, IN OTHER WORDS WHAT IS TO BE SEEN IS THAT WHETHER THROUGHOUT THE COURSE OF OR AFTER THE COMMENCEMENT AND BEFORE THE EXPIRATION OF THE PREVI OUS YEAR (I.E., THE FINANCIAL YEAR IMMEDIATELY PRECEDING TH E RELEVANT ASSESSMENT YEAR) THERE WAS AN ASSET WHICH FELL WITHIN THE BLOCK OF ASSETS. IN THE EVENT THE BLOC K OF ASSETS I.E., A CLASS OF ASSET(S) BEARING SAME RATE OF DEPR ECIATION EXIST(S) WAS WITH THE ASSESSEE AT THE END OF THE PR EVIOUS YEAR, THEN THE PROVISION OF SECTION 50 (2) WOULD NO T APPLY. THE SECTION CREATES A DEEMING FICTION. IT CANNOT BE EXTENDED BEYOND THE PURPOSE FOR WHICH IT HAS BEEN E NACTED. THE SECTION IS A SPECIAL PROVISION, WHICH PROVIDES FOR BRINGING TO TAX BY WAY OF SHORT TERM CAPITAL GAINS DEPRECIABLE ASSETS WHICH ARE TRANSFERRED DURING THE PREVIOUS YEAR AS AGAINST THOSE PROVIDED IN SECTION 2 (42A). AS NOTED BY THE TRIBUNAL, AS WELL AS, THE CIT THAT SUB-SECTI ON (2) OF SECTION 50 OF THE ACT PROVIDES FOR THE COMPUTATION OF CAPITAL GAINS WHERE BLOCK OF ASSETS CEASES TO EXI ST FOR THE REASON THAT ALL THE ASSETS IN THE BLOCK ARE TRA NSFERRED IN THE PREVIOUS YEAR. IN THE INSTANT CASE, ALL THE AS SETS HAD NOT BEEN TRANSFERRED DURING THE PREVIOUS YEAR BECAUSE O F THE FACT THAT SOME ASSETS STILL REMAINED IN THE BLOCK A T THE END OF THE YEAR. THIS FACT, AS NOTED BY THE TRIBUNAL, I S NOT 7 ITA 1543/DEL/2011 ITO VS. MAHARAJA APPLIANCES LTD. DISPUTED. IN OUR VIEW, IN THE CIRCUMSTANCE, THAT TH E ASSETS WERE AVAILABLE IN THE BLOCK OF ASSETS AT THE END OF THE PREVIOUS YEAR, THE PROVISION OF SECTION 50 (2) WILL NOT BE APPLICABLE, AS HELD BY BOTH THE TRIBUNAL AND THE CI T. IN THE CIRCUMSTANCE, NO SUBSTANTIAL QUESTION OF LAW HAS AR ISEN FOR OUR CONSIDERATION. 6.4. RESPECTFULLY FOLLOWING THE DECISION OF HONB LE HIGH COURT, WE SEE NO REASON TO INTERFERE IN THE ORDER OF LD. CIT(A) O N THE ISSUE IN QUESTION. ACCORDINGLY, GROUND NOS. 3 & 3.1 STAND REJECTED. 7. GROUND NO. 4: DURING THE COURSE OF ASSESSMENT PR OCEEDINGS THE AO NOTICED THAT DEPRECIATION OF 3,11,661/- WAS CLAIMED ON PLANT AND MACHINERY. KEEPING IN VIEW THE FACT THAT ASSESSEE WAS NO MORE INVOLVED IN ANY MANUFACTURING ACTIVITY, THE AO REQUIRED THE ASSESSE E TO SHOW AS TO WHY DEPRECIATION CLAIMED ON PLANT & MACHINERY SHOULD NO T BE DISALLOWED. THE ASSESSEE, INTER ALIA, POINTED OUT THAT COMPANY HAD TEMPORARILY STOPPED ITS MANUFACTURING AND STARTED MORE CONCENTRATION ON TR ADING ACTIVITY. THE MANAGEMENT WAS LOOKING FOR STARTING MANUFACTURING A NEW BUSINESS LINE IN APPLIANCE INDUSTRY IN WHICH COMPANY HAD EXPERTISE. THE AO, HOWEVER, DID NOT ACCEPT THE ASSESSEES CONTENTION AND, INTER ALI A, POINTED OUT THAT SUCH SALE FORMED 70% OF THE TOTAL PLANT AND MACHINERY, THAT T OO AT THE BEGINNING OF THE PREVIOUS YEAR I.E. 1-4-2006. AFTER SUCH SALES, ASSE SSEE WAS ONLY LEFT WITH 30% OF THE PLANT AND MACHINERY. HE, THEREFORE, DISA LLOWED THE ASSESSEES CLAIM OF DEPRECIATION OF RS. 3,11,660/- . 7.1. LD. CIT(A), TAKING NOTE OF THE FACT THAT ASSET S WERE KEPT READY FOR USE, ALLOWED THE ASSESSEES CLAIM OF DEPRECIATION, OBSER VING IN PARA 6.6 AS UNDER: 6 . 6 I HAVE CONS I DERED THE SUBM I SS I ONS OF THE APPELLANT , 8 ITA 1543/DEL/2011 ITO VS. MAHARAJA APPLIANCES LTD. VARIOUS JUDIC I AL PRONOUNCEMENTS RELIED UPON BY THE I D . AR , THE F I NDINGS RECORDED BY THE ID . AO AS PER THE ASSESSMENT ORDER AND THE FACTS OF THE CASE ON RECORD . IT HAS BEEN CONSISTENTLY . HELD BY VARIOUS JUDICIAL AUTHORITIES THAT I F THE ASSETS ARE KEPT READY FOR USE , THE CLAIM OF DEPRECIATION IS ALLOWABLE TO AN ASSESSEE . THE SAME VIEW WAS HELD BY THE JURISDICTIONAL HIGH COURT I N THE CASES RELIED UPON BY THE APPELLANT. IN THE INSTANT CASE , ALTHOUGH , THERE WAS NO MANUFACTU R ING ACTIVITY DURING THE YEAR UNDER CONS I DERATION BUT I N THE NEXT YEA R THE SAME TOOK PLACE AS CAN BE SEEN FROM THE SUBMISSIONS FILED BY THE I D . AR. THE APPELLANT HAS SUBMITTED THE DETAILS OF RAW MATER I AL CONSUMPTION AND MANUFACTU RI NG OF GOODS FOR THE SUCCEEDING YEAR WHEN THE PLANT AND MACHINERY WAS ACTUALLY PUT TO USE . THIS ESTABLISHES THE FACT THAT DUR I NG THE YEAR UNDER CONSIDERATION , THE ASSETS WERE , I N FACT KEPT READY FOR USE . THEREFORE , IN THE L I GHT OF THE RULINGS OF THE HON ' BLE JUR I SDICTIONAL HIGH COURT RELIED U PON BY THE APPELLANT AND AFTER CONS I DE RI NG THE SUBMISSIONS FILED BY THE LD . AR , I AM OF THE OPINION THAT THE CLA I M OF DEPREC I ATION IS LEGITIMATELY ALLOWABLE TO THE APPELLANT. THE ADDITION OF RS . 311661/- MADE BY THE LD . AO IS , THEREFORE , DELETED . 7.2. HAVING HEARD BOTH THE PARTIES, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A). FIRSTLY, BECAUSE THE BLOCK OF PLANT AND MACHINERY CONTINUED TO EXIST AND THE MANUFACTURING ACTIVITIES HAD TEMPORARILY BEEN SUSPENDED AND THE BUSINESS WAS NOT CLOSED DOWN. SECONDLY, THE MACHINERY WAS KEPT READY FOR FUTURE U SE AND, THEREFORE, IN VIEW OF THE DECISION IN FOLLOWING CASES, THE ASSESS EES CLAIM WAS RIGHTLY ALLOWED BY LD. CIT(A) : - CAPITAL BUS SERVICE (P) LTD. V. CIT 123 ITR 404 (DE L.); - CIT VS. YAMAHA MOTOR INDIA PVT. LTD. 183 TAXMANN 29 1 (DEL.); - CIT V. REFRIGERATION & ALLIED INDUSTRIES LTD. 113 T AXMANN 103 (DEL). 9 ITA 1543/DEL/2011 ITO VS. MAHARAJA APPLIANCES LTD. 7.3. THE ORDER OF LD. CIT(A) ON THE ISSUE IN QUESTI ON IS UPHELD. GROUND IS REJECTED. 8. GROUND NO. 5 & 5.1.: THE AO NOTICED THAT ASSESS EE HAD DEBITED IN ITS P&L A/C WITH A SUM OF RS. 74,04,151/- ON ACCOUNT OF SALES SERVICE CHARGES UNDER THE HEAD SELLING AND DISTRIBUTION EXPENSES. THE ASSESSEE JUSTIFIED ITS CLAIM, INTER ALIA, POINTING OUT THAT A SSESSEE COMPANY W AS IN BUSINESS OF M A N U F A CTURING AND M A RK E T I NG OF HOME APPLIANCES SINCE LAST MANY YEARS, H A VING STRONG N ET W ORK O F DISTRIBUTORS AND DEALERS ALL OVER INDIA. BESIDES, ASSESSEE H AD GOOD W ORKING NET W ORK OF PROVIDING AFT E R- SA L E SERVICE S TO C U S T OM ER S THROUGH ITS FRANCHISEES, HAVING STR E NGTH OF PR OV ID I N G T H E S E FACILITY ALL OVER INDIA. IT WAS FURTHER EXPLAINED THAT ASSES SEE WAS BUYING PRODUCTS FROM ITS P R I NCIP A L SUPPLIERS W ITH UNDERSTANDING THAT AFTER SALES SERV I CES WAS TO BE P R O V ID E D B Y TH E COMPANY ITSELF. AFTER SALE SERVICES WERE PROVIDED THROUGH S E RVICE FR ANC H ISER S W H O WERE PAID ON FI X ED & VARIABLE BASIS . ASSESSEE HAD C LAIM E D P A RT OF E X PENSES FROM ITS MAIN DISTRIBUTORS FAR EAST MARKETING PV T . LTD ., W HI C H WA S A L SO AN E X ISTING INCOME TAX PAYING ASSESSEE . THE ASSESSEE POINTED OUT THAT IT COULD PR O DU CE CONFIRMATION FROM BOTH THE ABOVE CONCERN IN THAT REG A RD . 8.1. THE AO, HOWEVER, DID NOT ACCEPT THE ASSESSEES CONTENTION AND AFTER CONSIDERING THE SERVICE CHARGES TO BE DIVIDED BETWE EN ASSESSEE AND DISTRIBUTOR, HELD THAT EXPENDITURE ON ACCOUNT OF SA LES SERVICES TO THE EXTENT OF RS. 31,89,625/- WAS EXCESSIVE AND DISALLOWED THE S AME U/S 37(1). 8.2. LD. CIT(A) SUSTAINED THE ADDITION TO THE EXTEN T OF 4,26,887/- BY OBSERVING AS UNDER: 7.2 DURING HIS SUBMISSIONS BEFORE ME , THE LD. AR ARGUED THAT THE 10 ITA 1543/DEL/2011 ITO VS. MAHARAJA APPLIANCES LTD. APPORTIONMENT OF SALES AND SERVICE EXPENSES WAS MAD E ON THE BASIS OF REGION WISE SALES ACHIEVED BY THE APPELLATE AND FEM PL. HE ALSO PRODUCED A STATION WISE LIST OF SALE AND SERVICE FRANCHISEE TO WHICH APPORTIONMENT WAS MADE AS UNDER : 51. CENTRE FRANCHISEE SALES SERVICE NO. CLAIM 1 LUCKNOW MIS . E L ECT R ICA L SOLUT I ONS 144296/- 2 KOLKATTA M/S . EUROPA SALES & SE R VICE 216500 1 - 3 INDORE M / S . G L ACIE R A IRC ON 1500001- 4 JAIPUR M/S . MAHA R AJA SE R V I CES PO I NT 123365/- 5 LUDHIANA M/S.OR I ON APPL I ANCES 116459/ - 6 CHENNAI M/S . G . K . M . CUSTOMER CARE CENTRE 2750001- 1025620/ 7 . 3 WHILE DISCUSSING THE S U BM I SS I ONS AND ON VERIFICATION OF THE DOCUMENTS LIKE COPY OF A/C OF SALES AND SE R V I CES CHARGES , IT WAS NOT I CED THAT A FURTHER SUM O F RS . 4 , 26 , 887 /- WAS ATTRIBUTABLE TO FEMPL AS PAYMENT MADE TO THE FOLLOWING CONCE R NS WHICH WERE ACTING ON ITS BEHALF : M/S . HELPING HANDS ( SE R V I CE ) RS. 1,37,450/- M/S . HI TECH ELECTRIC SE R VICE - ( S ) RS. 2,28,410/- M/S . JA I SALES (SERVICE ) RS. 61,027/- RS. 4,26,887/- THE APPELLANT WAS, THEREFORE, ASKED TO EXPLAIN AS T O WHY THE SAME BE NOT DISALLOWED. THE LD. AR LATER ON ADMITTED THAT THE A FORESAID PAYMENTS OF RS. 4,26,887/- ACTUALLY PERTAINED TO FEMPL ONLY AND WERE WRONGLY REMAINED TO BE APPORTIONED TO IT. THEREFORE, FURTHE R A SUM OF RS. 4,26,887/- IS HELD TO BE SALES AND SERVICE CHARGES ATTRIBUTABLE TO FEMPL APART FROM RS. 1025620/- SHOWN BY THE APPELLANT. T HUS, A TOTAL AMOUNT OF RS. 14,52,507/- (10,25,620+4,26,887) PERTAINS TO FE MPL AS AGAINST A SUM OF RS. 31,89,625/- DISALLOWED BY THE AO. HENCE, THE ADDITION TO THE EXTENT OF RS. 4,26,887/- IS SUSTAINED. 8.3. LD. COUNSEL FOR THE ASSESSEE CLARIFIED THAT TH E SALES SERVICE CHARGES NOT RELATED TO FRANCHISE HAVE BEEN CONFIRMED BY LD. CIT(A) AND TO THIS EXTENT THE AO HAS ALSO CONFIRMED THE SALES AND SERVICE CHA RGES IN AY 2009-10 AND 2010-11 AT RS. 12,20,768/- AND RS. 8,75,535/- RESPE CTIVELY. 11 ITA 1543/DEL/2011 ITO VS. MAHARAJA APPLIANCES LTD. 8.4. HAVING HEARD BOTH THE PARTIES, WE DO NOT FIND ANY REASON TO INTERFERE WITH THE ORDER OF LD. CIT(A) BECAUSE THE AO HAS N OT DISPUTED THE RENDERING OF AFTER SALES SERVICE BY ASSESSEE. HIS ONLY OBJECT ION WAS THAT ASSESSEE WAS NOT BEARING THE ENTIRE COST OF RENDERING AFTER SALE S SERVICE AND SAME OUGHT TO HAVE BEEN MET PARTLY BY OTHER DISTRIBUTORS. WE FIND THAT LD. CIT(A) HAS RIGHTLY RESTRICTED THE DISALLOWANCE ONLY RELATING T O NON-FRANCHISE. WE ACCORDINGLY, CONFIRM THE ORDER OF LD. CIT(A) ON THE ISSUE IN QUESTION. GROUND IS REJECTED. 9. GROUND NO. 6: DURING THE COURSE OF ASSESSMENT PR OCEEDINGS, THE AO POINTED OUT THAT WHILE EXAMINING THE TRANSACTIONS W ITH RELATED PARTIES, IT WAS FOUND THAT THE ADDRESS OF ASSESSEE I.E. 1/7, WEST PATEL NAGAR, NEW DELHI WAS BEING SHARED BY THE ASSESSEE WITH FIVE OF ITS S ISTER CONCERNS VIZ. M/S EMPIRE HOME APPLIANCES LTD., M/S OMEX INDUSTRIES AN D M/S FAR EAST MARKETING PVT. LTD. M/S ASIATIC ENGINEERS PVT. LTD ., M/S HINDUSTAN APPLIANCES. AS REGARDS THE ISSUE OF SALES SERVICE C HARGES, HE POINTED OUT THAT THE TRANSACTIONS OF THE ASSESSEE WITH ITS SISTER CO NCERNS WERE FOUND TO BE NOT AT ARMS LENGTH. HE APPORTIONED THE FOLLOWING EXPEN SES BETWEEN ASSESSEE AND SISTER CONCERNS, AS UNDER: PERSONNEL EXPENSES RS. 1069844/- BOOKS & PERIODICALS RS. 894/- TELEPHONE EXPENSES RS. 485219/- OFFICE WATER & ELECTRICITY RS. 1147076/- TOTAL: RS. 2692133/- 9.1. THE AO, ACCORDINGLY, ALLOWED THE EXPENSES OF R S. 4,48,688/- BEING 1/6 TH OF SUCH EXPENDITURE AND THE BALANCE SUM OF RS. 22, 43,445/- WAS DISALLOWED. 12 ITA 1543/DEL/2011 ITO VS. MAHARAJA APPLIANCES LTD. 9.2. THE LD. CIT(A) RESTRICTED THE DISALLOWANCE TO RS. 98,123/- BY OBSERVING AS UNDER: 8 . 2.1 THE LD. AR IN HIS SUBMISSIONS BEFORE ME CONTENDED T HAT THE ADDITION WAS ARBITR A RY IN NATURE. HE STATED THAT THE EXPENSES CLAIMED AS PER THE P&L ACCOUNT PERT A INED NOT ON L Y TO THE PREM I SES SITUATED AT 1/7 , WEST PATEL NAGAR , NEW DELHI BUT TO OTHER PREM I SES ALSO. HE P R ODUCED DETA I LED WORKING SHOWING HEAD W I SE AND PREMISES WISE B I FURCATION OF THE TOTAL EXPENSES CLAIMED AS UNDER : - PARTICULARS SALARY STAFF SECU RI TY TELEPHO - OFFICE TOTA L INCOME WELFA - EXP . NE & WATER & I NCOME AS TAX RE EXP O MOBILE ELECTRICI- PER ROI PAID EXP . TY I NCU RR ED A T 1 /7 , W ES T PA T E L N AGA R MA 43283 40 1 07 74061 397055 9 1 640 410580 154849 EHAL 2934766 3197 - 137549 - ( - ) - 7404212 OMEX 678220 301 1 4 194237 328139 - 191735407 INDUSTR I ES FEMPL 32142363 1300 1 5 66581 122833 87126 . 52 1 710 1 95 1 61 ASIAT I C - - - - - - - ENGINEERS PVT . LTD . . HINDUSTAN - - - - - - - APPLIANCES . IN CU RR E D AT OTHER PR E MI SE S . MA - 177620 734773 88164 1045436 - - EHAL 8642120 321008 584545 75285 9146510 - - OMEX 12059508 295947 518051 1963332 3917252 - - INDUSTRIES FEMPL - - - - - - - ASIATIC - - - - - - - ENGINEERS PVT . LTD . . H I NDUSTAN - - - - - - - APPLIANCES 13 ITA 1543/DEL/2011 ITO VS. MAHARAJA APPLIANCES LTD. 8. 2.2 THE LD . AR ALSO MENTIONED THAT THE S I S TER CONCERNS OF THE A PPELLANT WERE ALSO ASSESSED AT THE SAME RATES OF I NCOME TAX. HENCE , THERE WAS NO I NTENT I ON / REQUIR E M E NT TO TRANSFER THE BOOK I NG OF THE EXP E ND I TURE INC I DENCE I N A TAX NEUTRA L SCEN A RIO . 8.3 THE LD. AR FURTHER SUBM I TTED THAT OUT OF THE TOTAL EXPENSES OF 2692 1 33 / - ALLOC A TED BY THE LD . AO . , ONLY RS . ? , 46 , 146/- R EL A T E TO THE PREMISES LOCATED AT 11 7 , W E ST P A TEL NAGAR , NEW DELHI AND , THEREFOR E , THER E WAS NO QUESTION OF AL L OCATION O F TH E EXPENDITURE OF RS.20 , 45 , 993 / - I NCURRED A T OTH E R PR E MISES TO THE SISTER CONCERNS S ITU A T E D AT 117 , WEST P A TEL NAGAR , NEW DELHI . 8 . 4 I HAVE CAREFULLY CONS I DERED THE DETAIL E D SUBMISSIONS MADE BY THE APPE LL A NT AND FINDINGS RECORDED BY THE ID . AO AS PER TH E ASS ESS MENT ORDER AND THE FACTS OF THE C A SE ON RECORD . AS MENTIONED EAR L IER , THE LD . AO H A S DISALLOWED A 5/6 T H OF THE T O T A L ADMINISTRATIVE EXPENSES OF RS . 26 , 92 , 133 / - . WHILE DOING SO HE MISTAKEN L Y TOOK THE WHOL E AMOUNT AS PERTAIN I NG TO THE PREM I SES SITU A T E D AT 1 / 7 , WEST PATE L NAGA R , NEW DELHI, WH E RE IT CAN BE SEEN FROM THE SUBMISSION OF THE APPELLANT THA T ON L Y AN AMOU NT OF RS . 6 , 46 , 146 / - WAS I NCURRED FOR THE SAID PR E MIS ES . THUS , THERE WAS N O J UST I F I CAT I O N FOR CONSID E RING THE WHOLE AMOUN T FO R DISALL OWA N CE . MOREOVER , PREMISES IT I S SEEN TH A T MO S T OF THE SISTER CONCERNS HAVE BOOK E D E XP E N D ITURE UNDER MOST OF THE HEADS . ON THE PERUSAL OF THE CHART PRODUCED IN TH E SU BMI SS I O N S , IT IS HO W EVER , SEEN THAT IN TH E C ASE ELF SOME OF THE SISTER CONCERNS , TH E E X PEND ITURE ON TH E H EA DS AS DISCUS S ED BELOW HAVE NOT BEEN BOOKED FO R T H E SAID PREMISES S ITU A TED AT 1 / 7 , WEST PATEL NAGAR , N E W DELH I . THE DIS A LLOWANCE UNDER THE FOLLOWIN G H EA DS IS TH E REFORE CONS I DERED N E C ESSA RY. 9.3. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT FO LLOWING THE LD. CIT(A)S FINDINGS FOR A.Y. 2007-08 THE AO HAS RESTRICTED THE DISALLOWANCE TO RS. 26,03,867/- AND RS. 10,17,800/- IN A.Y. 2009-10 AND 2010-11 RESPECTIVELY. 14 ITA 1543/DEL/2011 ITO VS. MAHARAJA APPLIANCES LTD. 9.4. HAVING HEARD BOTH THE PARTIES, WE FIND THAT TH E FINDINGS OF LD. CIT(A) REGARDING ALLOCABLE EXPENSES TO SISTER CONCERNS HAV E NOT BEEN CONTROVERTED BY THE DEPARTMENT. THEREFORE, WE CONFIRM THE ORDER OF LD. CIT(A) IN RESTRICTING THE ADDITION ON ACCOUNT OF ADMINISTRATI VE EXPENSES TO RS. 98,123/- GROUND IS REJECTED. 10. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 20-02-2015. SD/- SD/- (ABY. T. VARKEY ) ( S.V. MEHROTRA ) JUDICIAL MEMBER ACCOUNTANT MEMBER DATED: 20-02-2015. MP: C OPY TO : 1. ASSESSEE 2. AO 3. CIT 4. CIT(A) 5. DR