Sujag Fine Chemicals Pvt.Ltd., Baroda V. The ACIT.,Circle-4, Baroda

ITA 1621/AHD/2010

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 2378 (ITAT-AHMEDABAD)
• Duration Of Justice: 8 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-01-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 25-01-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 14-05-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DR RAJA RAM SAH
• Assessee Lawyers: TALATI
• Keywords: Fair market value; Corroborative evidences

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'C' BEFORE SHRI MAHAVIR SINGH,JM & SHRI A N PAHUJA,AM ITA NO.1621/AHD/2010 (ASSESSMENT YEAR:-2006-07) SUJAG FINE CHEMICALS P. LTD., 42/6 & 7, GIDC ESTATE, AT & POST: NANDESARI, DISTRICT:BARODA V/S ASSISTANT COMMISSIONER OF INCOME-TAX, CIRCLE-4, BARODA PAN: AADCS 2989 J [APPELLANT] [RESPONDENT] ASSESSEE BY :- SHRI S H TALATI, AR REVENUE BY:- DR. RAJA RAM SAH, DR O R D E R A N PAHUJA: THIS APPEAL BY THE ASSESSEE AGAINST AN ORDER DATED 25- 01-2010 OF THE LD. CIT(APPEALS)-III, BARODA FOR TH E ASSESSMENT YEAR (AY) 2006-07, RAISES THE FOLLOWING GROUNDS:- 1. THE ORDER PASSED BY THE HONORABLE COMMISSIONER OF I NCOME TAX (APPEALS) IS BAD IN LAW, CONTRARY TO LEGAL PRONOUNC EMENTS AND SAME BE QUASHED. 2. THE HONORABLE CIT (A) HAS ERRED IN CONFIRMING TH E ADDITION OF RS.57,091/- BEING PRIOR PERIOD EXPENSES WITHOUT CON SIDERING THE FULL FACTS OF THE CASE. YOUR APPELLANT SUBMITS THAT THE LIABILITY IS CRYSTALLIZED DURING THE YEAR AND HENCE BE ALLOWED I N THE YEAR UNDER CONSIDERATION. SAME BE DELETED NOW. 3. THE HON'BLE CIT(A) HAS ERRED IN CONFIRMING THE A DDITION OF RS.51,269/- BEING FOREIGN TRAVELLING EXPENSES. THE EXPENSES INCURRED BEING FOR THE PURPOSE OF BUSINESS U/S 37(1 ) OF THE INCOME TAX ACT, 1961 AND BE ALLOWED AS CLAIMED. HENCE THE SAME IS DELETED NOW. 4. THE HON'BLE CIT(A) HAS ERRED IN CONFIRMING THE A DDITION OF RS.4,55,759/- BY INVOKING PROVISIONS OF SECTION 40A (2)(A) OF THE ACT WITHOUT CONSIDERING THE FULL FACTS OF THE CASE. YOU R APPELLANT SUBMITS THAT JOB WORK CHARGES PAID ARE NEITHER EXCESSIVE NO R UNREASONABLE. YOUR APPELLANT CRAVES FOR LEAVE TO ADD / ALTER / AM END / WITHDRAW / MODIFY ANY OF THE ABOVE GROUNDS BEFORE HEARING. ITA N O.1621/A/10 2 2 ADVERTING FIRST TO GROUND NO.2 IN THE APPEAL, FAC TS, IN BRIEF, AS PER RELEVANT ORDERS ARE THAT RETURN DECLARING INCOM E OF RS.5,39,660/- FILED ON 23-12-2006 BY THE ASSESSEE, AFTER BEING PR OCESSED U/S 143(1)(A) OF THE INCOME-TAX ACT, 1961 [HEREINAFTER REFERRED TO AS THE ACT], WAS SELECTED FOR SCRUTINY WITH THE SERVICE OF A NOTICE U/S 143(2) OF THE ACT ISSUED ON 10-10-2007. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER[AO IN SHORT] NOTICED THAT THE ASSESSEE DEBITED NET PRIOR PERIOD EXPENSES OF RS.57,091/- IN ITS PROFIT AND LOSS ACCOUNT. TO A QUERY BY THE A O, THE ASSESSEE SUBMITTED A COPY OF THE LEDGER ACCOUNT, WHICH REVE ALED THAT THE EXPENSES RELATED TO SALES TAX, LEGAL AND PROFESSION AL , SERVICE CONTRACT, COMMISSION ETC. THE AO DISALLOWED THESE E XPENSES ON THE GROUND THAT THE ASSESSEE HAVING REGULARLY FOLLOWED MERCANTILE SYSTEM OF ACCOUNTING , COULD NOT CLAIM EARLIER YEA R EXPENSES. 3. ON APPEAL ,THE LEARNED AR ON BEHALF OF THE ASS ESSEE SUBMITTED THAT SINCE THE LIABILITY FOR THE SAID EXPENSES ACCR UED AND AROSE DURING THE YEAR UNDER CONSIDERATION, THE SAME MAY B E ALLOWED OR ALTERNATIVELY MAY BE SENT FOR VERIFICATION. AFTER C ONSIDERING THE SUBMISSIONS, THE LEARNED CIT(A) UPHELD THE FINDINGS OF THE AO IN THE FOLLOWING TERMS:- 4.2 I HAVE CONSIDERED THE SUBMISSION. THE AO HAS C ATEGORICALLY MENTIONED THAT THESE ARE PRIOR PERIOD EXPENSES. THE RE IS NO POINT IN ASKING THE AO TO VERIFY FURTHER WHEN THE APPELLANT IS NOT ABLE TO REBUT THE FINDINGS OF THE AO RECORDED IN THE ASSESSMENT ORDER . THE APPELLANT HAS NOT FILED ANY EVIDENCE BEFORE ME TO WARRANT ANY DEV IATION FROM THE FINDINGS RECORDED BY THE AO. THIS GROUND OF APPEAL IS DISMIS SED. 4. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINST THE AFORESAID FINDINGS OF THE LEARNED CIT(A). THE LD. AR ON BEHA LF OF THE ASSESSEE WHILE REFERRING TO THEIR WRITTEN SUBMISSIONS AND P AGE NO. 25 TO 29 OF THE PAPER BOOK CONTENDED THAT THE EXPENDITURE CLAIMED BY THEM WAS STRICTLY NOT PRIOR PERIOD EXPENDITURE AS THE LIABILITY FOR THES E EXPENSES ACCRUED AND BECAME DUE AND PAYABLE DURING THIS YEAR ONLY. INTER ALIA, THE LD. AR RELIED UPON DECISIONS IN SAURASHTRA CEMENT & CHEMICAL INDUSTRIES LTD. VS. CIT, 213 ITR 523(GUJ) AND ITA N O.1621/A/10 3 STATE BANK OF TRAVANCORE VS. ACIT,318 ITR(AT) 171(C OCHIN) AS ALSO DECISION DATED 21.1.2011 OF A CO-ORDINATE BENCH IN THE CASE OF BABTIE CONSULTANTS(INDIA) P LTD. IN ITA NO.1765/AHD./2009 .THE LEARNED DR, ON THE OTHER HAND, SUPPORTED THE FINDINGS OF THE LEARNED CIT(A). 5. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. AS IS APPARENT FROM THE IMPUGNED ORDER, T HE LD. CIT(A) DID NOT CARE TO ANALYSE THE NATURE OF LIABILITIES UNDER THE RELEVANT BILLS NOR RECORDED ANY FINDING AS TO WHETHER OR NOT THE L IABILITY ON ACCOUNT VARIOUS EXPENSES ,INCLUDING IN RESPECT OF AN AMOUNT OF RS. 43,750/- TOWARDS COMMISSION PAYABLE TO MR. RAJNIKANT SHAH ,ACCRUED OR AROSE IN THE YEAR UNDER CONSIDERATION. ADMITTEDLY, THE ASSESSEE IS FOLLOWIN G MERCANTILE SYSTEM OF ACCOUNTING. IT IS WELL SETTLED THAT ACCRUAL OF A STATUTORY LIABILITY DEPENDS UPON THE TERMS OF THE RELEVANT STATUTE. THE QUANTIFICATION OR ASCERTAINMENT CAN NOT POSTPONE ITS ACCRUAL TO THE EXTENT OF ADMITTED LIAB ILITY. ON THE OTHER HAND, CONTRACTUAL LIABILITY ACCRUES WHEN THE BASIS FOR IT S QUANTIFICATION IS SETTLED BY AN AGREEMENT OR OTHERWISE. AS HELD BY THE HONBLE JURI SDICTIONAL HIGH COURT IN THEIR DECISION IN SAURASHTRA CEMENT & CHEMICAL INDUSTRIES LTD.(SUPRA),MERELY BECAUSE AN EXPENSE RELATES TO A TRANSACTION OF AN EARLIER Y EAR IT DOES NOT BECOME A LIABILITY PAYABLE IN THE EARLIER YEAR UNLESS IT CAN BE SAID THAT THE LIABILITY WAS DETERMINED AND CRYSTALLIZED IN THE YEAR IN QUESTION ON THE BASIS OF MAINTAINING ACCOUNTS ON THE MERCANTILE BASIS. IN EACH CASE WHER E THE ACCOUNTS ARE MAINTAINED ON THE MERCANTILE BASIS IT HAS TO BE FOU ND IN RESPECT OF ANY CLAIM, WHETHER SUCH LIABILITY WAS CRYSTALLIZED AND QUANTIF IED DURING THE PREVIOUS YEAR SO AS TO BE REQUIRED TO BE ADJUSTED IN THE BOOKS OF AC COUNT OF THAT PREVIOUS YEAR. IF ANY LIABILITY, THOUGH RELATING TO THE EARLIER YEAR, DEPENDS UPON MAKING A DEMAND AND ITS ACCEPTANCE BY THE ASSESSEE AND SUCH LIABILI TY HAS BEEN ACTUALLY CLAIMED AND PAID IN THE LATER PREVIOUS YEARS IT CANNOT BE D ISALLOWED AS DEDUCTION MERELY ON THE BASIS THE ACCOUNTS ARE MAINTAINED ON MERCANT ILE BASIS AND THAT IT RELATED TO A TRANSACTION OF THE PREVIOUS YEAR, THE HONBLE HIGH COURT OBSERVED. IT WAS FURTHER CONCLUDED THAT IT IS ACTUALLY KNOWN INCOME OR EXPENSES, THE RIGHT TO RECEIVE OR THE LIABILITY TO PAY WHICH HAS COME TO B E CRYSTALLIZED, WHICH IS TO BE TAKEN INTO ACCOUNT UNDER THE MERCANTILE SYSTEM OF M AINTAINING BOOKS OF ACCOUNT. ITA N O.1621/A/10 4 AN ESTIMATED INCOME OR LIABILITY, WHICH IS YET TO B E CRYSTALLIZED, CAN ONLY BE ADJUSTED AS A CONTINGENCY ITEM BUT NOT AS AN ACCRUE D INCOME OR LIABILITY OF THAT YEAR. IN VIEW OF THE FOREGOING AND IN THE LIGHT O F VIEW TAKEN BY THE HONBLE JURISDICTIONAL HIGH COURT IN THE AFORECITED DECISIO N, ESPECIALLY WHEN THE LD. CIT(A) HAVE NOT RECORDED ANY FINDINGS AS TO WHETHER OR NOT THE LIABILITY IN RESPECT OF EACH OF THE CLAIM MADE BY THE ASSESSEE CRYSTALLIZED IN T HE YEAR UNDER CONSIDERATION, WE CONSIDER IT FAIR AND APPROPRIATE TO SET ASIDE TH E ORDER OF THE LD. CIT(A) AND RESTORE THE MATTER TO HIS FILE FOR DECIDING THE IS SUE RAISED IN THE GROUND NO.2 IN THIS APPEAL, AFRESH IN ACCORDANCE WITH LAW IN THE L IGHT OF VARIOUS JUDICIAL PRONOUNCEMENTS, INCLUDING THOSE REFERRED TO ABOVE, AFTER ALLOWING SUFFICIENT OPPORTUNITY TO BOTH THE PARTIES. NEEDLESS TO SAY TH AT WHILE REDECIDING THE ISSUE, THE LEARNED CIT(A) SHALL PASS A SPEAKING ORDER, KEE PING IN MIND, INTER ALIA, THE MANDATE OF PROVISIONS OF SEC. 250(6) OF THE ACT, BR INGING OUT CLEARLY AS TO WHETHER OR NOT THE AFORESAID H EXPENSES REALLY CRYSTALLIZE D IN THE HANDS OF THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION. WITH THESE OBSERVATIONS, GROUND NO.2 IN THE APPEAL OF THE ASSESSEE IS DISPOSED OF. 6. GROUND NO.3 IN THE APPEAL RELATES TO A DISALLOWA NCE OF RS.51,269/- ON ACCOUNT OF FOREIGN TRAVELLING EXPENS ES. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE AO NOTICED TH AT THE ASSESSEE CLAIMED FOREIGN TRAVEL EXPENSES OF RS.51, 269/- IN RESPECT OF MRS. HEMABEN S SHETH, WIFE OF A DIRECTOR OF THE COMPANY. TO A QUERY BY THE AO, THE ASSESSEE REPLIED THAT MRS. HE MA S. SHETH, WIFE OF DIRECTOR SURESH B SHETH COMPLETED HER M. SC. IN ORG ANIC CHEMISTRY JUST BEFORE MARRIAGE AND PROCEEDED TO USA. IN USA SHE WORKED I N LAB AS ANALYTICAL & R&D CHEMIST. SHE GAINED VALUABLE EXPERIENCE BOTH ANALYT ICAL AS WELL AS SYNTHETIC ORGANIC CHEMISTRY. HER FOREIGN VISIT WAS FOR MEETIN G PARTIES AND DEVELOP BUSINESS AND TO GET INPUT FOR NEW PRODUCTS. HOWEVER, THE AO DID NOT ACCEPT SUBMISSIONS OF THE ASSESSEE ON THE GROUND THAT THE WIFE OF THE DI RECTOR WAS NEITHER A DIRECTOR NOR AN EMPLOYEE OF THE ASSESSEE COMPANY NOR THE ASS ESSEE PLACED ON RECORD ANY DOCUMENTARY EVIDENCE TO SHOW THE WORK DONE BY M RS. SHETH FOR THE ASSESSEE COMPANY DURING HER TOUR ABROAD WITH MR. SH ETH. MOREOVER SHE WAS ITA N O.1621/A/10 5 RUNNING HER OWN CONSULTATION FIRM. ACCORDINGLY, THE AO DISALLOWED THE CLAIM FOR DEDUCTION OF RS. 51,269/-. 7. ON APPEAL, THE LEARNED CIT(A) UPHELD THE FIND INGS OF THE AO IN THE FOLLOWING TERMS:. 2.5 I HAVE CONSIDERED THE SUBMISSIONS OF THE APPEL LANT I DO NOT FIND ENOUGH JUSTIFICATION FOR THE CLAIM. SMT.HEMA SHETH IS RUNNING HER OWN CONSULTANCY BUSINESS, THE TRAVELING EXPENDITU RE INCURRED ON THE WIFE OF A DIRECTOR IS NOT FOR THE PURPOSE OF BUSINESS. THE ARGUMENTS GIVEN FOR THE CLAIM IS EXTREMELY GENERALIZED AND CAN BE APPLIED T O ANY EXPENDITURE INCURRED. THERE ARE NO EVIDENCES IN SUPPORT OF THE CLAIM. THESE ARE SELF SERVING ARGUMENTS. THIS GROUND IS DISMISSED. 8. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAIN ST THE AFORESAID FINDINGS OF THE LD. CIT(A). THE LD. AR ON BEHALF O F THE ASSESSEE WHILE REITERATING THEIR SUBMISSIONS BEFORE THE LEAR NED CIT(A) INVITED OUR ATTENTION TO PAGE 33 OF THE PAPER BOOK AND CON TENDED THAT THE DIRECTOR OF AGRIGUARD ALONE VIDE LETTER DATED 3.3.2 005 HAD INVITED THE DIRECTOR OF THE COMPANY ALONG WITH HIS WIFE TO SING APORE/KUALA LAMPUR. INTER ALIA, THE LD. AR RELIED UPON DECISION S IN HERO HONDA MOTORS LTD. VS. JCIT 95 TTJ (DEL) 782 AND GOVIND RU BBER LTD. VS. DCIT,90 TTJ (MUMBAI) 1068.THE LEARNED DR, ON THE OTHER HAND , SUPPORTED THE FINDINGS OF THE LEARNED CIT(A) AND CONTENDED THAT T HERE IS NOTHING ON RECORD TO SUGGEST AS TO HOW THE FOREIGN VISIT OF WIFE OF A DIRECTOR OF THE COMPANY BENEFITED THE BUSINESS OF THE COMP ANY. 9. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. AS IS APPARENT FROM THE IMPUGNED ORDER, THERE IS NO EVIDENCE ON RECORD THAT THE VISIT OF WIFE OF A DIRECTOR OF THE COMPANY ACCOMPANYING THE SAID DIRECTOR, WAS WHOLLY AND EXCLUSIVELY FOR THE PURPO SE OF BUSINESS OF THE COMPANY. NEITHER BEFORE THE AO NOR BEFORE THE LD. CIT(A) ANY SUCH EVIDENCE WAS PLACED . EVEN BEFORE US A COPY OF LETTER DATED 3.3.2005 OF THE DIRECTOR OF AGRIGUARD ,INVITING THE DIRECTOR OF THE COMPANY ALO NG WITH HIS WIFE TO SINGAPORE/KUALA LUMPUR, WAS PLACED. HOWEVER , WHAT ACTUALLY WIFE DID AT SINGAORE DURING THE VISIT AND HOW HER VISIT BENEFITED THE ITA N O.1621/A/10 6 COMPANY , NOT AN IOTA OF EVIDENCE IS ON RECORD . S IMPLY BECAUSE WIFE OF THE DIRECTOR IS M SC OR WORKED IN USA AS AN ANALYST ,DOES NOT ESTABLISH THE PURPOSE OF VISIT TO SINGAPORE/KUA LA LUMPUR. IN THE ABSENCE OF ANY EVIDENCE , EVEN THE RELIANCE ON TWO DECISIONS BY THE LD. AR IS ALSO MISPLACED. SINCE THE EXPLANATION OFF ERED BY THE ASSESSEE HAS NOT BEEN SUBSTANTIATED THROUGH ANY MATERIAL OR EVIDENCE ON RECORD, WE ARE NOT INCLINED TO INTERFERE. IT IS WELL SETTLED THAT THE ONUS IS ON THE ASSESSEE TO PROVE THAT EXPENDITURE IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THEIR BUSINESS. IN THE INSTANT CASE, THE SAID ONUS HAS NO T BEEN DISCHARGED. THEREBEING NO MATERIAL BEFORE US SO AS TO ENABLE US TO TAKE DI FFERENT VIEW IN THE MATTER, WE HAVE NO HESITATION IN UPHOLDING THE FINDINGS OF THE LD. CIT(A). THEREFORE, GROUND NO.3 IN THE APPEAL IS DISMISSED. 10. GROUND NO.4 IN THE APPEAL RELATES TO DISALLOWAN CE OF RS.4,55,750/-. THE AO NOTICED THE ASSESSEE MADE FO LLOWING PAYMENTS TO THE PERSONS SPECIFIED IN SECTION 40A(2 )(B) OF THE ACT FOR THE JOB WORK: [A] AGRIGUARD MANUFACTURING PVT. LTD. RS.1 7,17,318/- [B] VAISHVANAR ORGANICS PVT. LTD.[VOPL] RS.22,7 8,795/- TO A QUERY BY THE AO, THE ASSESSEE EXPLAINED THAT T HEY MANUFACTURED THE PRODUCT POA DURING THE YEAR UNDER CONSIDERATION. WHILE EXPLAINING THE PROCESS, THE ASSESSSEE SUBMITTED THA T FOR EVERY KG OF PRODUCT SOLD, THEY NEED TO RECOVER 4 KG OF SOLVENT. AND CO ST OF 1 KG. OF INPUTS WORKED AS UNDER::- [1] COST OF FUEL RS.3.33 [2] COST OF POWER RS.0.25 [3] COST OF LABOUR RS.0.20 [4] COST OF COOLING WATER RS.0.05 [5] LOADING/UNLOADING/HANDLING RS.0.10 TOTAL DIRECT COST RS.3.93 [6] INDIRECT COST AND PROFIT (25%) RS.1.00 TOTAL JOB CHARGES RS.4.93 ITA N O.1621/A/10 7 SINCE AGRIGUARD WAS UNDER THE SAME MANAGEMENT, OVER HEAD AND PROFIT WERE NOT ALLOWED AND JOB AT RS.4.00/KG. WAS AGREED UPON WHIL E VOPL WAS ALLOWED TO RECOVER OVERHEAD AND PROFIT AND SO WAS PAID RS.5 PE R KG. HOWEVER, THE AO DID NOT ACCEPT THE SUBMISSIONS OF THE ASSESSEE ON THE GROUND THAT THE ASSESSEE DID NOT SUBMIT THE MARKET RATE FOR SUCH JOB WORK. A S REGARDS CONTENTION OF THE ASSESSEE THAT AGRIGUARD IS UNDER THE SAME MANAGEMEN T, SO MINIMUM RATE HAS BEEN GIVEN, THE AO CONCLUDED THAT EVEN IF AGRIGUARD WAS UNDER THE SAME MANAGEMENT, THE ASSESSEE COULD NOT GET THE JOB WORK DONE AT LESSER RATE AND THEREBY CAUSE LOSS TO AGRIGUARD. SINCE THE ASSESSEE DID NOT PLACE ON RECORD ANY AGREEMENT ENTERED INTO BETWEEN THESE PARTIES NOR FU RNISHED THE BASIS FOR WORKING OUT DIRECT COST AS WELL AS INDIRECT COST IN RESPECT OF 1 KG. OF INPUTS BY ADDUCING ANY SUPPORTING EVIDENCE AND NOR EVEN ANY PLAUSIBLE EXPLANATION FOR GIVING RS.1 PER KG. IN EXCESS TO VOPL VIS-A-VIS WHAT WAS PAID T O AGRIGUARD, THE AO CONCLUDED THAT THE RATE PAID TO VOPL WAS HIGHER BY RS.1 PER KG., RESULTING IN DISALLOWANCE OF RS.4,55,759/-. 11. ON APPEAL, THE LEARNED CIT(A) UPHELD THE FINDIN GS OF THE AO IN THE FOLLOWING TERMS:- 6.1 THE AR CONTENDED THAT THE AO WAS NOT JUSTIFIED IN COMPARING THE JOB WORK RATES OF TWO COMPANIES IN SO FAR AS THE RA TE OF JOB WORK CHARGED FROM VOPL AT RS.5 PER KG IS NOT DISPUTED AS DISCUSS ED IN THE BODY OF THE ASSESSMENT ORDER. WHILE IN THE CASE OF AGRIGUARD MA NUFACTURING PVT. LTD., THE JOB WORK RATE IS OF RS.4 PER KG., THIS IS SO BE CAUSE THE COMPANY HAS NOT CONSIDERED THE ELEMENT OF PROFIT FROM THIS COMP ANY. BOTH, THE APPELLANT AND VOPL ARE TAX PAYERS AND THERE IS NO INTENTION T O AVOID TAX BY PAYING SO CALLED EXCESSIVE AMOUNT OF JOB WORK. THEREFORE, THE AR OF THE APPELLANT REQUESTED THAT THE ADDITION MADE BY THE AO ON THIS COUNT BE DELETED. 6.2 HAVING GIVEN CAREFUL CONSIDERATION TO THE SUBMI SSIONS MADE AND THE FACTS OF THE CASE, I AM IN AGREEMENT WITH THE A O THAT THERE IS NO JUSTIFICATION FOR MAKING HIGHER PAYMENTS TO ASSOCIA TE CONCERNS FOR THE SAME JOB FOR WHICH IT IS PAYING REMUNERATION AT A L OWER RATE TO A OUTSIDER. THE REASONS GIVEN BY THE APPELLANT ARE NOT SUPPORTE D BY ANY VERIFIABLE EVIDENCES. IT IS HELD THAT THE TRANSACTIONS ARE NOT AT ARMS LENGTH. ACCORDINGLY THIS GROUND IS DISMISSED. ITA N O.1621/A/10 8 12. THE ASSESSEE IS NOW IN APPEAL BEFORE US AGAINS T THE AFORESAID FINDINGS OF THE LD. CIT(A).THEE LEARNED A R ON BEHALF OF THE ASSESSEE REITERATED THEIR SUBMISSIONS BEFORE THE LE ARNED CIT(A) AND FURTHER CONTENDED THAT THE AO DID NOT BRING OUT O N RECORD WHAT IS THE MARKET PRICE NOR ESTABLISHED RS.5/- PER KG. PAID TO VOPL WAS IN EXCESS OF PREVAILING MARKET PRICE. IN FACT RS.5/- PER KG. WAS THE CORREC T MARKET PRICE INASMUCH AS VOPL HAS BEEN CHARGING RS.4.75 AS EARLY AS IN 1999 AND NO DISALLOWANCE HAD EVER BEEN MADE IN ANY SCRUTINY ASSESSMENT OF THE AS SESSEE COMPANY. SINCE THERE WAS NO ATTEMPT TO EVADE OR AVOID TAX AND THE AO HAS NOT ABLE TO SHOW HOW RS.5/- IS EXCESS AS PER MARKET VALUE, NO ADDITION C OULD BE MADE IN TERMS OF THE DECISION IN THE CASE OF CIT VS. INDO SAUDI SERVIC ES(TRAVEL) (P) LTD.,219 CTR(BOM.)562 AND DECISION DATED 17.4.2009 IN THE CA SE OF NEW VISION LASER CENTRE(RAJKOT) LTD. VS. ITO IN ITA NO.1301/AHD./200 6. OF AHMEDABAD ITAT. THE LEARNED DR, ON THE OTHER HAND, SUPPORTED THE FINDIN GS OF THE LEARNED CIT(A). 13. WE HAVE HEARD BOTH THE PARTIES AND GONE THROUGH THE FACTS OF THE CASE. THE ISSUE BEFORE US IS AS TO WHETHER OR NOT THE RA TE OF JOB WORK CHARGED FROM VOPL AT RS.5 PER KG WAS EXCESSIVE IN TERMS OF THE P ROVISIONS OF SECTION 40A(2)(A) OF THE ACT? FOR THIS MATTER, WE MAY REFER TO THE PROVISIONS OF SECTION 40A(2) (A) OF THE ACT, THE RELEVANT PORTION OF WHIC H READS AS FOLLOWS '40A(2)(A). WHERE THE ASSESSEE INCURS ANY EXPENDITU RE IN RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERSON REF ERRED TO IN CLAUSE (B) OF THIS SUB-SECTION, AND THEASSESSING OFFICER IS OF THE OPI NION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MAD E OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEF IT DERIVED BY OR ACCRUING, TO HIM THEREFROM, SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION.' A MERE GLANCE AT THE AFORESAID PROVISION REVEALS T HAT THE EXPENDITURE MENTIONED THEREIN IS IN RELATION TO ANY PERSON REFERRED TO IN CLAUSE (B) OF THE SUB-SECTION AND THE EXPENDITURE HAS TO BE CONSIDERED IN RELATION TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ITA N O.1621/A/10 9 ACCRUING TO THE ASSESSEE THEREFROM. HONBLE JURISDI CTIONAL HIGH COURT RECENTLY OBSERVED IN CORONATION FLOUR MILLS VS. ACIT,188 TAX MAN 257 THAT IN RELATION TO THE DISALLOWANCE UNDER THE PROVISIONS OF SECTION 40 A(2) OF THE ACT, A PLAIN READING OF THE PROVISION REVEALS THAT WHERE AN ASSE SSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT IS REQUIRED TO BE MADE OR HAS BEEN MADE TO ANY PERSON REFERRED TO IN CLAUSE ( B ) OF SECTION 40A(2) OF THE ACT AND THE ASSESSING OFFICER IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO ( A ) FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACIL ITIES FOR WHICH THE PAYMENT IS MADE; OR ( B ) THE LEGITIMATE NEEDS OF THE BUSINESS OF THE ASSES SEE; OR ( C ) THE BENEFITS DERIVED BY OR ACCRUING TO THE ASSESS EE ON RECEIPT OF SUCH GOODS, SERVICES OR FACILITIES, THEN THE ASSESSING O FFICER SHALL NOT ALLOW AS A DEDUCTION SO MUCH OF THE EXPENDITURE AS IS SO CONSI DERED BY THE ASSESSING OFFICER TO BE EXCESSIVE OR UNREASONABLE. THEREFORE, IT BECOMES APPARENT THAT THE ASSESSING OFFICER IS REQUIRED TO RECORD A FINDING A S TO WHETHER THE EXPENDITURE IS EXCESSIVE OR UNREASONABLE IN RELATION TO ANY ONE OF THE THREE REQUIREMENTS PRESCRIBED, WHICH ARE INDEPENDENT AND ALTERNATIVE T O EACH OTHER. ALL THE THREE REQUIREMENTS NEED NOT EXIST SIMULTANEOUSLY. IN A GI VEN CASE, IF ANY ONE CONDITION IS SHOWN TO BE SATISFIED THE PROVISION CAN BE INVOK ED AND APPLIED, IF THE FACTS SO WARRANT. THUS, ONLY SO MUCH OF THE EXPENSES, IF PAI D TO A PERSON REFERRED TO IN CLAUSE (B), ARE ALLOWABLE WHICH ARE FOUND TO BE NOT EXCESSIVE AND UNREASONABLE AND THE EXCESSIVE OR UNREASONABLE PORTION HAS TO BE DISALLOWED. IT IS WELL SETTLED THAT THE PROVISIONS OF SECTION. 40A(2)(A) OF TH E ACT CANNOT HAVE ANY APPLICATION UNLESS IT IS FIRST CONCLUDED THAT THE EXPENDITURE W AS EXCESSIVE OR UNREASONABLE, AS HELD IN THE CASE OF UPPER INDIA STEEL MANUFACTUR ING AND ENGINEERING CO. PRIVATE LIMITED, 117 ITR 569(SC). THE PROVISIONS OF SECTION 40A(2)(A) CAME UP FOR CONSIDERATION BEFORE THE HONBLE KARNATAKA HIGH COURT IN T. T. PVT. LTD. V. ITO [1980] 121 ITR 551 , AND VENKATARAMAIAH J., AT PAGES 567 TO 570 OF THE REPORTED JUDGMENT, CONSIDERED THE SCOPE OF THE AFORESAID PRO VISION IN THE LIGHT OF THE EXTANT PROVISIONS OF SECTION 40 AND OBSERVED THAT THE GOODS, SERVICES AND FACILITIES REFERRED TO IN SECTION 40A(2) (A) ARE TH OSE WHICH HAVE A MARKET VALUE AND WHICH ARE COMMERCIAL IN CHARACTER. IN THE INSTA NT CASE, THE AO CONCLUDED THAT PAYMENT MADE TO VOPL @RS. 5 PER KG. OF THE PR ODUCT WAS EXCESSIVE VIS-- VIS PRICE PAID TO ANOTHER ASSOCIATE CONCERN M/S AGR IGUARD MANUFACTURING PVT. LTD. ITA N O.1621/A/10 10 BUT THERE IS NOTHING TO SUGGEST THAT THE AO FOUND THE SAID PAYMENT TO VOPL EXCESSIVE HAVING REGARD TO EITHER ( A ) FAIR MARKET VALUE OF THE SERVICES OR FACILITIES; OR ( B ) THE LEGITIMATE NEEDS OF THE BUSINESS OF THE ASSES SEE; OR ( C ) THE BENEFITS DERIVED BY OR ACCRUING TO THE ASSESSEE ON RECEIPT OF SUCH SERVICES OR FACILITIES. NOT A WHISPER HAS BEEN MADE BY THE AO IN RESPECT OF ANY OF THESE THREE INGREDIENTS IN HIS ASSESSMENT ORDER. THERE IS NOTHING TO SUGGEST THAT THE AO EVER BROUGHT ANY MATERIAL ON RECORD ON THIS ASP ECT IN RESPECT OF THE FAIR MARKET VALUE OF THE FACILITIES, FOR WHICH THE PAYM ENT HAD BEEN MADE, BEFORE CONCLUDING THAT EXPENDITURE WAS EXCESSIVE OR UNREA SONABLE. WE ARE OF THE OPINION THAT DISALLOWANCE UNDER S. 40A(2) IS TO BE CONSIDERED VIS-A-VIS THE MARKET VALUE OF THE SERVICES OR FACILITIES OR ON FULFILLM ENT OF ANY OF THE OTHER INGREDIENTS MENTIONED HEREINBEFORE AND NOT THE INDIVIDUAL ACTI ON OF THE ASSESSEE IN CHARGING FROM ANOTHER ASSOCIATE CONCERN .MOREOVER, HONBLE B OMBAY HIGH COURT IN INDO SAUDI SERVICES(TRAVEL) (P) LTD.(SUPRA) HELD THAT IN VIEW OF CIRCULAR NO. 6-P DATED 6.7.1968,NO DISALLOWANCE U/S 40A(2)(A) CAN BE MADE IN RESPECT OF PAYMENT MADE TO A SISTER CONCERN WHERE THERE IS NO ATTEMPT TO EV ADE TAX. IN THE INSTANT CASE , M/S VOPL HAVE FILED RETURN FOR THE AY 2006-07 ON 7 .12.2006 REFLECTING INCOME OF RS. 2,37,740/-.THUS, IT APPEARS THAT NO TAX EVASION ATTEMPT CAN BE SPELT OUT. IN VIEW THE FOREGOING, ESPECIALLY WHEN THERE IS NO MAT ERIAL ON RECORD IN SUPPORT OF FAIR MARKET VALUE OF THE JOB WORK FOR THE PRODUCT, WE HAVE NO HESITATION IN VACATING THE FINDINGS OF THE LD. CIT(A), THERE BEIN G NO COGENT MATERIAL ON RECORD TO INVOKE PROVISIONS OF SEC. 40A(2)(A) OF THE ACT. THE REFORE, GROUND NO. 4 IN THIS APPEAL IS ALLOWED.. 14. GROUND NO. 1 BEING GENERAL IN NATURE NOR ANY SUBMISSIONS HAVING BEEN MADE BY THE LD. AR, DOES NOT REQUIRE AN Y SEPARATE ADJUDICATION WHILE NO ADDITIONAL GROUND HAVING BEEN RAISED BEFORE US IN TERMS OF THE RESIDUARY GROUND, THESE GROUNDS ARE DISMISSED. 15. NO OTHER PLEA OR ARGUMENT WAS MADE BEFORE US. ITA N O.1621/A/10 11 16. IN THE RESULT, APPEAL IS ALLOWED, BUT PARTLY FOR STATISTICAL PURPOSES. ORDER PRONOUNCED IN THE COURT TODAY ON 31 -01-201 1 SD/- SD/- (MAHAVIR SINGH) JUDICIAL MEMBER (A N PAHUJA) ACCOUNTANT MEMBER DATED : 31-01-2011 COPY OF THE ORDER FORWARDED TO: 1. SUJAG FINE CHEMICALS P. LTD., 42/6 & 7, GIDC EST ATE, AT & POST: NANDESARI, DISTRICT : BARODA 2. ACIT, CIRCLE-4, BARODA 3. CIT CONCERNED 4. CIT(A)-III, BARODA 5. DR, ITAT, AHMEDABAD BENCH-C, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABAD