The DCIT, Circle-1(1), Baroda V. M/s. Diamines & Chemicals Ltd., Baroda

ITA 244/AHD/2011

• Counselvise Citation: [2015] 140 COUNSELVISE.COM (IT) 85516 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 11 month(s) 15 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 16-01-2015
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 13-01-2015
• Assessment Year: 2001-2002
• Appeal Filed On: 31-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: B L YADAV
• Assessee Lawyers: S R SHAH
• Keywords: Depreciation; Fair market value; Corroborative evidences; Scheme of amalgamation; Capital expenditure

Judgement Text

, IN THE INCOME TAX APPELLATE TRIBUNAL D BENCH, AHMEDABAD 0 0 , 0 0 , BEFORE SHRI G.C. GUPTA, VICE PRESIDENT AND SHRI N.S. SAINI , ACCOUNTANT MEMBER ITA NO. ASSESSMENT YEAR APPELLANT RESPONDENT 1925/AHD/ 20 10 2005 - 06 DCIT, CENTRAL CIRCLE - 1(1), BARODA M/S. DIAMINES & CHEMICALS LTD, PLOT NO.13, PCC AREA, PO PETROCHEMICALS, DIST : BARODA PAN : AAACD 5356 R 244/AHD/2011 2001 - 02 REVENUE ASSESSEE 245/AHD/2011 2002 - 03 REVENUE ASSESSEE 253/AHD/2011 2002 - 03 ASSESSEE REVENUE REVENUE BY : SHRI B.L. YADAV, SR. DR. ASSESSEE(S) BY : SHRI S.R. SHAH, AR / DATE OF HEARING : 1 3 / 01 /201 5 / DATE OF PRONOUNCEMENT: 16 /01/2015 / O R D E R PER SHRI N.S. SAINI, ACCOUNTANT MEMBER: ITA NOS. 245AHD/2011 AND 253/AHD/2011 ARE THE CROSS - APPEALS FILED BY THE REVENUE AND THE ASSESSEE RESPECTIVELY AGAINST THE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) - I, BARODA DATED 30 . 11 .201 0 IN ASSESSMENT YEAR 200 2 - 0 3 . ITA NOS. 244/AHD/2011 AND 1925/AHD/2010 ARE THE APPEALS FILED BY THE REVENUE AGAINST THE ORDER S OF THE COMMISSIONER OF INCOME TAX (APPEALS) - I, BARODA DATED 23.11.2010 AND 30.03.2010 RESPECTIVELY IN ASSESSMENT YEARS 2001 - 02 AND 2005 - 06. ITA NOS 1925 /AHD/ 2010, 244, 245 & 253 /AHD/ 2011 DIAMINES & CHEMICALS LTD FOR AY S 2001 - 02, 02 - 03 & 05 - 06 2 2. THE SOLE GROUND OF APPEAL IN THE APPEALS OF THE REVENUE FOR ASSESSMENT YEARS 2001 - 02 AND 2002 - 03 & THE GROUND NOS. 1 AND 3 OF REVENUES APPEAL IN ASSESSMENT YEAR 2005 - 06 ARE COMMON, AND READS AS UNDER: - ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(A) ERRED IN DELETING THE ADDITION MADE U/S 40A(2)(B) OF THE ACT ON ACCOUNT OF ROYALTY/SUPERVISION CHARGES. THE LD. CIT(APPEA LS) ERRED IN NOT APPRECIATING THE FACT THAT THE ASSESSEE HAD FAILED TO ESTABLISH WITH SUPPORTING EVIDENCE THAT THESE EXPENDITURE WAS REASONABLE COMPARED TO THE NATURE OF SERVICE RECEIVED BY IT IN RETURN. 3. THE DEPARTMENTAL REPRESENTATIVE SUBMITTED THAT THE FACTS AND ISSUE INVOLVED IN ALL THE THREE YEARS UNDER CONSIDERATION ARE SAME AND HE IS ARGUING THE APPEAL FOR ASSESSMENT YEAR 2001 - 02 AND THE SAME ARGUMENTS SHOULD BE TAKEN FOR ASSESSMENT YEARS 2002 - 03 AND 2005 - 06 ALSO. HE SUBMITTED THA T THE ASSESSING OFFICER IN THE ASSESSMENT YEAR 2001 - 02 MADE THE ADDITION BY OBSERVING AS UNDER: - 3. ADDITION U/S. 40 A(2)(B) 3.1. FROM THE DETAILS FURNISHED BY THE ASSESSEE, IT WAS NOTED THAT THAT HEAVY AMOUNTS WERE PAID BY ALKYL FINANCE & TRADING LIMITED TO VARIOUS CONCERNS ON ACCOUNT OF ROYALTY, COMMISSION, SERVICE CHARGES, ETC. FURTHER, ALL THE CONCERNS TO WHOM THESE PAYMENTS HAVE BEEN MADE FELL UNDER THE CATEGORY OF CONCERNS COVERED U/S.40A(2)(B) OF THE INCOME - TAX ACT. THEREFORE, A SHOW CAUSE LE TTER DATED 17.3.2004 WAS ISSUED TO THE ASSESSEE STATING AS UNDER: - 'FROM THE DETAILS FILED BY YOU, IT IS NOTICED THAT YOU HAVE PAID RS. 25,01, 675/ - TO ALKYL AMINES CHEMICALS LTD. ON ACCOUNT OF ROYALTY AND FURTHER RS.25,01,675/ - IS PAID TO VALUE HEALTHCARE PVT. LTD. AS COMMISSION. SIMILARLY, CHEMICALS RS.23,86, 685/ - IS PAID TO ALKYL AMINS CHEMICALS LTD. AS SERVICE CHARGE AND FURTHER RS.6,33,600/ - IS PAID TO PERFOCHEM (INDIA) PVT. LTD. AS WELL AS RS.3,71,2 00 / - IS PAID TO VALUE HEALTHCARE PVT. LTD. ON ACCOUNT OF SERVICE CHARGES. THE COMPANIES TO WHOM ABOVE PAYMENTS ARE MADE ARE ITA NOS 1925 /AHD/ 2010, 244, 245 & 253 /AHD/ 2011 DIAMINES & CHEMICALS LTD FOR AY S 2001 - 02, 02 - 03 & 05 - 06 3 COVERED BY SECTION 40A(2) OF THE INCOME - TAX ACT, 1961. IT IS ALSO NOTICED THAT DURING THE YEAR UNDER CONSIDERATION ALKYL AMINS CHEMICALS LTD. AND VALUE HEALTHCARE PVT. LTD. WERE RUNNING HEAVY LOSSES. FURTHER, ON GOING THROUGH THE VARIOUS AGREEMENT FOR PAYMENTS SO CALLED COMMISSION, ROYALTY AND SERVICE CHARGES, IT IS NOTED THAT THE SERVICES PROVIDED AS MENTIONED IN THE AGREEMENT ARE AS BELOW. - I. ASSISTANCE IN COMPANY SECRETARIAL DUTIES II. ASS ISTANCE IN LEGAL AND OTHER STATUTORY COMPLIANCES III. ASSISTANCE IN MAINTAIN ING IN BOOKS OF ACCOUNTS IV. ASSISTANCE IN ARRANGING FINANCE V. ASSISTANCE IN ARRANGING FINANCE VI. ASSISTANCE IN PROCURING OF MATERIAL VII.ASSISTANCE IN CLEARANCE OF GOODS VIII. ANY OTHER OFFICE SUPPORT IX . PROCESS CONSULTANCY AND TECHNICAL TROUBLE SHOOTING AS AND WHEN REQUIRED. FROM THE NATURE OF SERVICES PROVIDED, IT SEEMS THAT THEY ARE VERY GENERAL IN NATURE AND, THEREFORE, IT APPEARS THAT A DELIBERATE ATTEMPT HAS BEEN MADE TO SIPHON OF THE PROFITS OF ALKYI FINANCE & TRADING LTD, TO THE LOSS MAKING COMPANIES. FURTHER, THE PAYMENTS ARE MADE BY YOU ON ALL THESE ACCOUNTS NOTWITHSTANDING THE FACTS THAT SEPARATELY ALSO LEGAL AND PRO FESSIONAL CHARGES HAVE BEEN CLAIMED BY YO U. IN VIEW OF ALL THE ABOVE OBSERVATIONS, IT IS PROPOSED TO WITHDR AW YOUR CLAIM OF EXPENDITURES ON ACCOUNT OF SO CALLED COMMISSION, ROYALTY AND SERVICE CHARGES MADE TO CONCERNS COVERED U/S.40A(2) OF THE IN COME - TAX ACT.' 3.2. THE ASSESSEE VIDE ITS LETTER D ATED 29.3.2004 FURNISHED ITS REPLY, WHICH IS REPRODUCED BELOW: - 'DIAMINES AND CHEMICALS LTD. WAS MANUFACTURING ETHYLENEDIAMINE (EDA) AND OTHER ETHYLENEAMINES WITH ETHYLENEDICHOLRLDE (EDC) AS THE RAW MATERIAL. THE COMPANY WAS MAKING GOOD PROFITS TILL THE YEAR 1993 - 94 THE ERA WHEN CUSTOM DUTIES WERE AT ITS PEAK. GLOBALISATION AND LI BERISATLON LED TO REDUCTION IN CUSTOMS DUTY DUE TO WHICH IMPORTS BECAME CHEAPER AND DIA MLNES FACED SEVER E COMPETITION FROM DIRECT IMPORTS. ALSO THE COST OF MANUFACTURING EDS FROM EDC WAS MUCH HIGHER THAN THE LANDED COST OF THE IMPORTED EDS. THE COMPANY STARTED MAKING LOSSES IN THE YEARS 1994 - 95 AND LANDED UP IN BIFR ITA NOS 1925 /AHD/ 2010, 244, 245 & 253 /AHD/ 2011 DIAMINES & CHEMICALS LTD FOR AY S 2001 - 02, 02 - 03 & 05 - 06 4 IN THE YEAR 1998. THE ACC UMULATED LOSS AS AT 31.3.00 IS RS.26.66 CRORES AS IS APPARENT FROM THE REPORTED ACCOUNTS . THE NEW PROMOTERS I.E. ALKYL AMINES & CHEMICALS LTD. AND S. AMIT GROUP ACQUIRED DIAMINES FROM SINTEX GROUP THE PROVISIONS OWNERS AND MANAGEMENT. TO FACILITATE THIS TA KEOVER ALKYL FINANCE & TRADING LTD. WAS USED AS A SPECIAL PURPOSE VEHICLE. THIS COMPANY WAS ULTIMATELY MERGED WITH DIAMINES & CHEMICALS LTD. WITH EFFECT FROM 1.4.2000. THE NEW PROMOTERS OF DIAMINES RETROFITTED THE PLANT, DISCONTINUED THE USE OF EDC AS THE RAW MATERIAL, DISCONTINUED EDA AS THE MAIN PRODUCT, INTRODUCED PIPRAZINE AS THE MAIN PRODUCT WHICH WAS PRODUCED WITH CRUE PIPERAZINE AMINE (CPA) AS THE MAIN RAW MATERIAL AND THE TECHNICAL KNOW - HOW FROM ALKYL AMINES CHEMICALS LTD. TECHNICAL KNOWL EDGE /ROYAL TY ALKYL AMINES AND CHEMICALS LTD. TO WHOM ROYALTY HAS BEEN PAID, HAS BEEN IN THE BUSINESS OF MANUFACTURING OF AMINES SINCE LAST MORE THAN 25 YEARS. THEY PROVIDED THE TECHNICAL KNOWLEDGE FOR PROJECT RETROFITTING AND ESTABLISHING THE PRODUCTION PROCESS. I T CAN BE SEEN FROM THE ANNUAL ACCOUNTS OF ALKYL FINANCE & TRADING LTD. WHERE PRODUCTION HAS REGISTERED A SUBSTANTIAL GROWTH DUE TO ESTABLISHMENT AND SMOOTHENING OF PRODUCTION PROCESS. MARKETING/SALES COMMISSION MR. AM I T MEHTA, CHAIRMAN OF VALUE HEALTHCAR E LTD., IS THE CHAIRPERSON OF THE S. AMIT GROUP AND IS IN THE BUSINESS OF MARKETING CHEMICALS AND HAS A NAME TO RECKON WITH SINCE LAST MORE THAN 20 YEARS. THE SALES COMMISSION IS PAID TO THEM FOR ESTABLISHING THE MARKET FOR THE PRODUCT. THE COMPANY DID NOT HAVE ANY ESTABLISHED MARKETI NG SET UP TO CATER AND CANVAS FOR BUSINESS . AS CAN BE SEEN FROM THE WORKING RESULTS I TSELF THAT FROM THE YEAR 20 00 - 2001, THE COMPANY HAS STARTED RECOVERING VERY FAST FROM THE FIRST YEAR I.E. 2000 - 01. THE TURNOVER OF THE COMPANY HAS GONE UP FROM RS.3.55 CRORE TO RS.20.88 CRORE WHICH IS NEARING 6 TIMES. N EEDLESS TO SAY THE REASONS ARE ATTRIBUTABLE TO NEW PRODUCTION LINE CREATED AND PRODUCT MARKETING. ITA NOS 1925 /AHD/ 2010, 244, 245 & 253 /AHD/ 2011 DIAMINES & CHEMICALS LTD FOR AY S 2001 - 02, 02 - 03 & 05 - 06 5 SERVICE CHARGES SINCE DIAMINES WAS I NCURRING LOSSES MOST OF THE EFFICIENT AND COMPETENT EMPLOYEES WHETHER IN MARKETING, TECHNICAL AND FINANCE/ACCOUNTS LEFT THE ORGANISATION WHO COULD GET JOBS ELSEWHERE. THERE WAS, THUS, A SHORTAGE OF COMPETENT MANPOWER WHO COULD MANAGE THE AFFAIRS WELL FOR THE COMPANY AND, THEREFORE, TECHNICAL AND MARKETING AND GENERAL MANAGEMENT SUPPORT NEEDED TO BE EXTENDED TO MERGED ENTITY FOR COMING OUT OF FINANCIAL CRISIS. THE SUCCESSFUL RESTRUCTURING OF THE COMPANY WAS DONE WITH THE HELP OF COMPETENT PEOPLE FROM AACL AND VALUE HEA1TNCARE LTD AND PERFOCHEM INDIA PVT. LTD. WHOSE SERVICES ARE AVAILED CONTINUOUSLY WHETHER FOR OPERATIONAL MATTERS LIKE IMPORTS/EXPORTS, SECRETARIA L, FINANCE AND ACCOUNTS OR GENERAL MANAGEMENT. SINCE THE COMPANY DID NOT HAVE FUNCTIONAL COMPETENT PEOPLE, THESE SERVICES ARE AVAILED SO AS TO BRING SUCCESSFUL RESTRUCTURING AT THE EARLIEST. IN THE ABOVE REFERRED LETTER, IT IS ALSO STATED THAT THERE IS DE LIBERATE ATTEMPT TO REDUCE THE PROFIT OF ALKYL FINANCE & TRADING LTD. AND INCREASING THE INCOME OF LOSS MAKING COMPANIES TO WHOM PAY MENTS ARE EFFECTED. IN THIS CONNECTION, IT MAY PLEASE BE NOTED THAT THE MERGED ENTITY I TSELF HAS ACCUMULATED UNABSORBED LOSS ES AND DEPRECIATION EVEN UNDER INCOME - TAX OF RS.19.01 CRORE AND THE TAX PAID FOR THE RELEVANT YEAR IS ONLY ON THE SHORT TERM CAPITAL GAIN ARISING OUT OF THE SALE OF ASSETS. THUS, THERE IS NO RESULTANT REDUCTION IN THE PROFIT OF THE COMPANY'. 3.3. I HAVE C ONSIDERED THE REPLY OF THE ASSESSEE. THE CONTENTION OF THE ASSESSEE THAT THE MERGED ENTITY WAS HAVING ACCUMULATED LOSSES AND DEPRECIATION TO THE EXTENT OF RS.19 CRORES AND, THEREFORE, EVEN IF THE AMOUNTS IN QUESTION WERE PAID TO SISTER CONCERNS BY ALKYL FI NANCE & TRADING PVT. LTD., IT DID NOT AFFECT THE OVERALL TAXABILITY AS THE FINAL INCOME AFTER SET OFF OF LOSSES WAS NIL IS NOT ACCEPTABLE. AS A MATTER OF FACT, THE PAYMENTS IN QUESTION WERE MADE BETWEEN APRIL, 2000 TO MARCH, 2001 .Y FURTHER, THE SCHEME OF AMALGAMATION WAS APPROVED ONLY IN JULY, 2001. HAD THE SCHEME OF AMALGAMATION NOT BEEN APPROVED, THERE WOULD HAVE BEEN A HIGHER TAX LIABILITY ON ALKYL FINANCE & TRADING LIMITED. FURTHER, BY TRANSFERRING THE AMOUNTS IN QUESTION TO THE CONCERNS COVERED U/S.40 A(2)(B), THE ASSESSEE REDUCED ITS TAX ITA NOS 1925 /AHD/ 2010, 244, 245 & 253 /AHD/ 2011 DIAMINES & CHEMICALS LTD FOR AY S 2001 - 02, 02 - 03 & 05 - 06 6 LIABILITY BECAUSE ALL THE CONCERNS TO WHOM THE PAYMENTS WERE MADE WERE RUNNING HUGE LOSSES . 3.3.1. WITHOUT PREJUDICE TO THE ABOVE, IT IS ALSO NOTED THAT THE AMOUNTS PAID IN QUESTION ARE VERY HEAVY COMPARED TO THE NATU RE OF SERVICES RECEIVED, WHICH ARE DISCUSSED IN THE SHOW - CAUSE LETTER DATED 17.3.2004 REPRODUCED IN PARAGRAPH 3.1 AB OVE. FURTHER, IT IS VERY IMPORTANT TO NOTE THAT THE ASSESSEE HAS GIVEN ONLY A WRITTEN SUBMISSION REGARDING THE PAYMENTS MADE IN QUESTION. H OWEVER, THE ASSESSEE HAS FAILED TO FURNISH ANY SUPPORTING EVIDENCES / DOCUMENTS IN SUPPORT OF ITS CONTENTION E.G. NAMES OF PERSONS, THEIR QUALIFICATION AND EXPERTISE FOR WHICH THE CONSIDERATION WAS PAID AS WELL AS THE MODE OF PAYMENTS MADE TO THESE PERSONS . 3.3.2. BASED ON THE ABOVE DISCUSSION, IT IS HELD THAT THE VARIOUS AMOUNTS AS DISCUSSED ABOVE WERE PAID BY ALKYL FINANCE & TRADING LTD. TO ASSOCIATE CONCERNS IN ORDER TO REDUCE THE TAX LIABILITY. IT IS A DIFFERENT MATTER ALTOGETHER THAT LATER ON THE SCHEME OF AMALGAMATION WAS APPROVED BY THE HONOURABLE BOMBAY HIGH COURT AND GUJARAT HIGH COURT AND FINALLY THE TAX LIABILITY WAS REDUCED TO NIL BECAUSE OF CARRIED FORWARD LOSSES OF DIAMINES & CHEMICALS LIMITED, WHICH WERE SET OFF AGAINST THE PROFIT OF ALKY L FINANCE & TRADING LTD. HAD THE SCHEME NOT BEEN APPROVED, THERE WOULD HAVE BEEN CERTAINLY ADDITIONAL TAX LIABILITY IN THE HANDS OF ALKYL FINANCE & TRADING LTD. HENCE, IT IS HELD THAT IT WAS A COLOURABLE DEVICE IN ORDER TO REDUCE THE TAX LIABILITY SUBSTANT IALLY. THEREFORE, THE FOLLOWING AMOUNTS ARE HELD TO BE DISALLOWABLE IN THE HANDS OF THE ASSESSEE: - SR. NO. NAME OF THE CONCERN NATURE OF PAYMENT AMOUNT (RS.) 1 ALKYL AMINES CHEMICALS LTD. ROYALTY 2,501,675 2 VALUE HEALTHCARE PVT. LTD. COMMISSION 2,501,675 3 ALKYL AMINES CHEMICALS LTD. SERVICE CHARGE 2,386,685 4 PERFOCHEM INDIA PVT. LTD. SERVICE CHARGE 633,600 5 VALUE HEALTHCARE PVT. LTD. SERVICE CHARGE 371,200 TOTAL 8,394,835 THEREFORE, AN ADDITION OF RS.83,94,835/ - IS MADE TO THE INCOME OF THE ASSESSEE. PENALTY PROCEEDINGS U/S.271 (1)(C) OF THE INCOME - TAX ACT ARE INITIATED. {ADDITION RS.83,94,835/ - } ITA NOS 1925 /AHD/ 2010, 244, 245 & 253 /AHD/ 2011 DIAMINES & CHEMICALS LTD FOR AY S 2001 - 02, 02 - 03 & 05 - 06 7 4. HE FURTHER SUBMITTED THAT THE ASSESSING OFFICER FOLLOWED THE SAME REASONING AND MADE THE ADDITIONS IN THE ASSESSMENT YEAR 2002 - 03 AND 2005 - 06. 5. HE SUBMITTED THAT THE CIT(A) HAD DECIDED FIRST THE APPEAL FOR ASSESSMENT YEAR 2005 - 06, WHEREIN HE HELD AS UNDER: - 5. GROUND NO.3 ASSAILS THE ADDITION OF RS. 18,79,106 U/S. 40A(2)(B) IN RESPECT OF SERVICE CHARGES INCURRED. THE BRIEF FACTS ARE THAT THE ASSESSEE COMPANY HAD INCURRED EXPENSES ON ACCOUNT OF SERVICE CHARGES PAYABLE TO PERSONS COVERED WITHIN THE MEANING OF R ELATED PARTIES U/S. 40A(2)(B). THE AO D ISALLOWED THE ENTIRE SUM OF RS. 18,79,106 FOLLOWING HIS PREDECESSOR'S ORDERS FOR A.YS. 2001 - 02 AND 2002 - 03 STATING THAT SIMILAR AMOUNTS WERE DISALLOWED IN THE SAID ASSESSMENT YEARS AND THAT THERE WAS NO CHANGE IN THE FA CTS OF THE CASE. T HE DETAILS OF THE AMOUNT OF RS. 18,79,106 ARE AS UNDER: 5.1 IN APPEAL, THE ID. AR REITERATED THE BACKGROUND OF THE ASSESSEE COMPANY AS MENTIONED IN PARA 3.1 ABOVE. IT WAS FURTHER SUBMITTED THAT IN THE EARLIER YEARS WHEN THE ASSESSEE COMPANY HAD LANDED UP IN THE BIFR, MOST OF ITS COMPETENT EMPLOYEES WHETHER I N MARKETING, TECHNICAL AND FINANCE / ACCOUNTS HAD LEFT THE COMPANY RESULTING IN AN ACUTE SHORTAGE OF COMPETENT MANPOWER. TECHNICAL, MARKETING AND GENERAL SUPPORT WAS, THEREFORE, REQUIRED TO BE EXTENDED TO THE ASSESSEE COMPANY WHEN THE NEW MANAGEMENT TOOK O VER. THE AFORESAID ENTITIES EXTENDED THE SERVICES OF THE COMPETENT PEOPLE AVAILABLE WITH THEM TO THE ASSESSEE COMPANY. IN FACT, THE SUCCESSFUL RESTRUCTURING OF THE APPELLANT WAS DONE WITH THE HELP OF SUCH COMPETENT PEOPLE FROM THE AFORESAID ENTITIES WHOSE SERVICES WERE AVAILED FOR OPERATIONAL MATTERS LIKE IMPORTS / EXPORTS, SECRETARIAL, FINANCE, MARKETING AND ACCOUNTS OR EVEN FOR GENERAL MANAGEMENT. SR. NO. NAME OF THE CONCERN AMOUNT (RS.) 1. ALKYL AMINES AND CHEMICALS LTD. AACL) 8,93,050 2. PERFOCHEM (I) PVT. LTD. 9,01,421 3. VALUE HEALTHCARE LTD. 84,635 TOTAL 18,79,106 ITA NOS 1925 /AHD/ 2010, 244, 245 & 253 /AHD/ 2011 DIAMINES & CHEMICALS LTD FOR AY S 2001 - 02, 02 - 03 & 05 - 06 8 5.2 IT WAS FURTHER SUBMITTED THAT THE AFORESAID ENTITIES HAD SPARED THEIR MANPOWER FOR PERFORMING THE ACTIVI TIES ON BEHALF OF THE ASSESSEE COMPANY AND HAD, THEREFORE, BEEN PAID SERVICE CHARGES AT THE AGREED RATES BASED ON TIME SPENT BY THE EXECUTIVES OF THE AFORESAID ENTITIES AND TAK ING INTO CONSIDERATION THEIR LE VEL AND EXPERIENCE. THE L D. AR FURTHER SUBMITTED THAT AS A RESULT OF THE EFFORTS OF THE EXECUTIVES OF THE AFORESAID ENTITIES, THE ASSESSEE COMPANY HAS COME OUT OF THE PURVIEW OF BIFR AND HAS ALSO RETURNED INCOME UNDER THE NORMAL PROVISIONS OF THE ACT FOR THE YEAR UNDER CONSIDERATION. 5.3 IT WAS FURTHER S UBMITTED THAT THE AO HAS DISALLOWED THE ENTIRE AMOUNT OF EXPENSES U/S. 40A(2)(B) WHILE AGREEING THAT THE ASSESSEE COMPANY HAS RECEIVED SERVICES FROM THE RELATED PARTIES AND WITHOUT PROVIDING ANY COMPARABLE AMOUNTS WHICH COULD BE CONSIDERED TO BE REASONABLE . THIS IS DESPITE THE FACT THAT SECTION 40A(2)(B) MANDATES DISALLOWANCE OF ONLY THAT PORTION OF THE EXPENDITURE WHICH IS EXCESSIVE OR UNREASONABLE IN THE OPINION OF THE AO HAVING REGARD TO FAIR MARKET VALUE OF THE GOODS OR SERVICES AS THE CASE MAY BE. THE L D. AR REFERRED TO A NUMBER OF TRIBUNAL DECISIONS ON THIS ISSUE. 5.4 I HAVE CONSIDERED THE SUBMISSIONS OF THE ID. A.R. AND THE FACTS OF THE CASE. I FIND FROM A PERUSAL OF THE ASSESSMENT ORDER FOR AY 01 - 02 (WHEN THIS ISSUE WAS BROUGHT UP FOR THE FIRST TIME) THAT THE DISALLOWANCE U/S 40A(2)(B) WAS MADE ON THE GROUND THAT THE ASSESSEE HAD MADE PAYMENTS TO ITS SISTER CONCERNS, WHICH WERE ALL LOSS MAKING ENTITIES, AND THEREBY CAUSING LOSS TO REVENUE. HOWEVER, IT IS SEEN FROM THE DETAILS OF THE INCOME RETURNED BY EACH OF THEM OVER A PERIOD OF YEARS THAT FIRSTLY, NOT ALL THE COMPANIES WERE LOSS MAKING AND SECONDLY, THE ASSESSEE ITSELF WAS A LOSS MAKING COMPANY. AS A RESULT OF UTILISING THE EMPLOYEES OF ITS SISTER CONCERNS AND ON PAYMENT OF SERVICE CHARGES, THE ASSE SSEE COMPANY STARTED MAKING OPERATIONAL PROFITS FROM AY 2001 - 02 ONWARDS. THE DISALLOWANCE CAN BE MADE U/S 40A(2)(B) ONLY WHERE THE EXPENDITURE IN QUESTION CAN BE SHOWN TO HAVE BEEN INCURRED WHICH WAS EITHER EXCESSIVE OR UNREASONABLE. ON THE FACTS, IN MY OP INION, THE PAYMENT OF SERVICE CHARGES WAS JUSTIFIED BY THE RESULTS OBTAINED. FURTHER, NO MATERIAL HAS BEEN BROUGHT ON RECORD TO SHOW THAT THE PAYMENTS IN QUESTION EXCEEDED THE FAIR VALUE OF THE SERVICES RECEIVED. ACCORDINGLY, THE DISALLOWANCE OF RS. 1 8,79,1 06/ - IS DIRECTED TO BE DELETED. ITA NOS 1925 /AHD/ 2010, 244, 245 & 253 /AHD/ 2011 DIAMINES & CHEMICALS LTD FOR AY S 2001 - 02, 02 - 03 & 05 - 06 9 6. THE CIT(A) HAS FOLLOWED THE ORDER FOR ASSESSMENT YEAR 2005 - 06 IN ASSESSMENT YEAR 2001 - 02 AND 2002 - 03 FOR DELETING THE ADDITIONS. 7 . THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE RELIED ON THE ORDER OF THE CIT(A). 8 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF THE LOWER AUTHORITIES AND MATERIAL AVAILABLE ON RECORD. WE FIND THAT THE ASSESSING OFFICER DISALLOWED THE EXPENDITURE IN QUESTION ON THE GROUND THAT THE PAYMENTS WERE MADE TO LOSS MAKING COMPA NIES AND THEREFORE, PAYMENTS WERE MADE TO REDUCE THE TAX LIABILITY. WE FIND THAT THE ASSESSEE CLAIMED TO HAVE MADE PAYMENTS OF ROYALTY TO M/S. ALKYL AMINES AND CHEMICALS LTD. (AACL) @ 2% OF SALES ON EX - FACTOR Y SELLING PRICE OF RS. 34,26,720/ - AMOUNTING TO R S.68,534/ - AND SUPERVISION CHARGES @ RS.20 PER KILOGRAM ON 6090 KILOGRAM AMOUNTING TO RS.1,20,800/ - FOR SALE OF TRI - ETHYLENE DIAMINE (TEDA) AND ROYALTY @ 2% ON EX - FACTORY SELLING PRICE OF RS.1,32,29,550/ - AMOUNTING TO RS.2,64,591/ - AND SUPERVISION CHARGES @ RS.4/ - PER KILOGRAM ON 1,83,542 KGS AMOUNTING TO RS.7,34,168/ - ON MONO - ETHYLINE AMINE (MEA) . THUS, THE TOTAL AMOUNT OF RS.13,23,108/ - WAS PAID IN ASSESSMENT YEAR 2005 - 06 FOR RECEIVING OF TECHNICAL KNOW - HOW FROM M/S. ALKYL AMINES AND CHEMICALS LTD. 9 . SIMILARLY, IN ASSESSMENT YEAR 2002 - 03, THE ASSESSEE PAID ROYALTY TO M/S. ALKYL AMINES AND CHEMICALS LTD (AACL) OF RS.24,00,451/ - , COMMISSION OF RS.22,88,034/ - TO VALUE HEALTHCARE PVT LTD AND PROFESSIONAL FEES OF RS.24,11,160/ - TO ALKYL AMINS CHEMICALS LTD . 10 . SIMILARLY, IN ASSESSMENT YEAR 2001 - 02, THE ASSESSEE PAID ROYALTY TO M/S. ALKYL AMINES AND CHEMICALS LTD (AACL) OF RS.25,01,675/ - , COMMISSION OF RS.25,01,675/ - TO VALUE HEALTHCARE PVT LTD, SERVICE ITA NOS 1925 /AHD/ 2010, 244, 245 & 253 /AHD/ 2011 DIAMINES & CHEMICALS LTD FOR AY S 2001 - 02, 02 - 03 & 05 - 06 10 CHARGE OF RS.23,86,685/ - TO ALKYL AMINS CHEMICALS L TD AND RS.3,71,200/ - TO VALUE HEALTHCARE PVT. LTD. 1 1 . WE FIND THAT NO MATERIAL HAS BEEN BROUGHT ON RECORD BY THE ASSESSING OFFICER TO SHOW THAT M/S. ALKYL AMINES AND CHEMICALS LTD WAS NOT IN POSSESSION OF TECHNICAL KNOW - HOW AND TECHNICAL NOW - HOW WAS NOT PROVIDED TO THE ASSESSEE. FURTHER, NO MATERIAL WAS ALSO BROUGHT ON RECORD TO SHOW THAT THE ROYALTY @ 2% OF THE SALE VALUE WAS IN EXCESS OF THE FAIR MARKET VALUE PREVAILING AT THE M ATERIAL TIME FOR THE T ECHNICAL KNOW - HOW IN CONSIDERATION OF WHICH THE ROYALTY WAS PAID. IN SUCH CIRCUMSTANCES, IN OUR CONSIDERED VIEW, NO INTERFERENCE WITH THE ORDER OF THE CIT(A) IS WARRANTED. 12 . SIMILARLY, IN RESPECT OF SALE COMMISSION AND SUPERVISIO N CHARGES, WE FIND THAT NO MATERIAL WAS BROUGHT ON RECORD BY THE REVENUE TO CONTROVERT THE CLAIM OF THE ASSESSEE THAT T HE SAME WAS PAID FOR SERVICES RECEIVED OR TO SHOW THAT THE PAYMENTS WERE MORE THAN THE FAIR MARKET VALUE OF SUCH SERVICES. WE, THEREFORE, DO NOT FIND ANY GOOD REASON TO INTERFERE WITH THE ORDER OF THE CIT(A) WHICH IS HEREBY CONFIRMED AND THE GROUNDS OF APPEALS OF THE REVENUE ARE DISMISSED. 13 . GROUND NO.2 OF THE REVENUES APPEAL IN ASSESSMENT YEAR 2005 - 06 READS AS UNDER: - 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(APPEALS) ERRED IN ALLOWING DEPRECIATION OF RS.2,36,250/ - ON GOODWILL WITHOUT APPRECIATING THAT THE DEPRECIATION IS ALLOWABLE FOR WEAR AND TEAR OF ASSETS, BUT IN THE CASE OF THE ASSESSEE, THE VAL UE OF THE ASSET I.E., GOODWILL INCREASE OVER THE PERIOD OF TIME. ITA NOS 1925 /AHD/ 2010, 244, 245 & 253 /AHD/ 2011 DIAMINES & CHEMICALS LTD FOR AY S 2001 - 02, 02 - 03 & 05 - 06 11 1 4 . GROUND NO .1 OF THE ASSESSEES APPEAL IN ASSESSMENT YEAR 2002 - 03 READS AS UNDER: 1. THE LEARNED CIT(A) HAS ERRED IN RETAINING THE ADDITION OF RS.5,60,000/ - , BEING THE AMOUNT OF DEPRECIATION ON GOODWILL, BY HOLDING THAT GOODWILL IS NOT ELIGIBLE FOR DEPRECIATION. 1 5 . THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CLAIMED DEPRECIATION ON GOODWILL WHICH WAS DISALLOWED BY THE ASSESSING OFFICER ON THE GROUND THAT IT WAS NOT ELIGIBLE FOR DEPRECIATION. 1 6 . ON APPEAL, THE CIT(A) IN THE ASSESSMENT YEARS 2005 - 06 ALLOWED TH E CLAIM OF THE ASSESSEE BY FOLLOWING THE DECISION OF MUMBAI BENCH OF THE TRIBUNAL IN THE CASE OF SKYLINE CATERERS VS. ITO, 306 ITR (80) 369 (MUM) AND THE DECISION OF THE DELHI BENCH OF THE TRIBUNAL IN THE CASE OF HINDUSTAN COCA COLA BEVERAGE VS. DCIT IN AP PEAL NO.1884/DEL/06 FOR ASSESSMENT YEAR 2001 - 02 HOLDING THAT THE ASSESSEE ACQUIRED THE GOODWILL AT THE COST OF OVER AND ABOVE THE TANGIBLE ASSET AND THEREFORE DEPRECIATION WOULD BE ALLOWABLE ON THE INTANGIBLE ASSET. HOWEVER, IN ASSESSMENT YEAR 2002 - 03, THE CIT(A) CONFIRMED THE ORDER OF THE ASSESSING OFFICER DISALLOWING THE CLAIM OF THE DEPRECIATION. 17 . BOTH THE PARTIES BEFORE US AGREED THAT THE ISSUE STANDS COVERED BY THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. SMIFS SECURITIES LTD. , [2012] 24 TAXMANN.COM 22 (SC), WHEREIN IT WAS HELD AS UNDER: - EXPLANATION 3 TO SECTION 32(1) STATES THAT THE EXPRESSION ASSET SHALL MEAN AN INTANGIBLE ASSET, BEING KNOW - HOW, PATENTS, COPYRIGHTS, TRADEMARKS, LICENSES, FRANCHISES OR ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE. A READING OF THE WORDS AN Y OTHER BUSINESS OR COMMERCIAL RIGHTS OF SIMILAR NATURE IN CLAUSE (B) OF EXPLANATION 3 INDICATES THAT GOODWILL WOULD FALL UNDER THE EXPRESSION ANY OTHER BUSINESS OR COMMERCIAL RIGHTS OF A SIMILAR NATURE. THE PRINCIPLE OF EJUSDEM GENERIS WOULD STRICTLY APPLY ITA NOS 1925 /AHD/ 2010, 244, 245 & 253 /AHD/ 2011 DIAMINES & CHEMICALS LTD FOR AY S 2001 - 02, 02 - 03 & 05 - 06 12 WHILE INTERPRETING THE SAID EXPRESSION WHICH FINDS PLACE IN EXPLANATION 3 (B) (PARA 4). IN VIEW OF THE ABOVE, IT IS OPINED THAT GOODWILL IS AN ASSET UNDER EXPLANATION 3(B) TO SECTION 32(1). (PARA 5). THEREFORE, WE CONFIRM THE ORDER OF THE CIT(A ) IN ASSESSMENT YEAR 2005 - 06 AND DISMISS THE APPEAL OF THE REVENUE FOR ASSESSMENT YEAR 2005 - 06. WE SET ASIDE THE ORDER OF THE CIT(A) IN ASSESSMENT YEAR 2002 - 03 AND DIRECT THE ASSESSING OFFICER TO ALLOW THE DEPRECIATION ON GOODWILL AS PER LAW TO THE ASSESS EE. THUS, THIS GROUND OF APPEAL OF THE REVENUE IN ASSESSMENT YEAR 2005 - 06 IS DISMISSED AND GROUND OF APPEAL OF THE ASSESSEE IN ASSESSMENT YEAR 2002 - 03 IS ALLOWED. 1 8 . GROUND NO.4 OF REVENUES APPEAL IN ASSESSMENT YEAR 2005 - 06 READS AS UNDER: - 4. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CASE AND IN LAW, THE LD. CIT(APPEALS) ERRED IN DELETING THE ADDITION OF RS. 2,26,191/ - FOR CARPETING OF EXISTING ROAD BY TREATING IT AS CAPITAL EXPENDITURE WITHOUT APPRECIATING THAT THESE EXPENDITURE EXTENDED THE LIFE T IME, RELYING ON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF CIT VS. SARAVANA SPINNING MILLS PVT. LTD. (2007) 293 ITR 201 (SC). 19 . THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSING OFFICER OBSERVED THAT DURING THE YEAR THE ASSESSEE - COMPANY HAS INCURRED EXPENDITURE OF RS.2,26,191/ - ON REPAIRING OF EXISTING ROAD WHICH WAS CAPITAL IN NA TURE AND HENCE, DISALLOWED THE SAME IN COMPUTING THE INCOME OF THE ASSESSEE. 2 0 . ON APPEAL, THE CIT(A) HELD THAT THE EXPEN DITURE OF RS.2,26,191/ - WAS INCURRED FOR RESURFACING OF EXISTING ROAD, HENCE THE DISALLOWANCE MADE BY THE ASSESSING OFFICER WAS NOT JUSTIFIED AND DELETED THE SAME. ITA NOS 1925 /AHD/ 2010, 244, 245 & 253 /AHD/ 2011 DIAMINES & CHEMICALS LTD FOR AY S 2001 - 02, 02 - 03 & 05 - 06 13 2 1 . THE DEPARTMENTAL REPRESENTATIVE RELIED ON THE ORDER OF THE ASSESSING OFFICER AND THE AUTHORIZED REPRESENTATIVE OF THE ASSESSEE SUPPORTED THE ORDER OF THE CIT(A). 2 2 . WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT IT IS NOT IN DISPUTE THAT THE EXPENDITURE OF RS.2,26,191/ - WAS INCURRED FOR RESURFACING OF EXISTING ROAD. THUS, THE EXPENDITURE INCURRED WAS ON ACCOUNT OF MAINTENANCE OF EXISTING ROAD. NO MATERIAL WAS BROUGHT ON RECORD BY THE REVENUE TO SHOW THAT THE EXPENDITURE IN QUESTION WAS INCUR RED FOR ACQUIRING ANY NEW ASSET. THEREFORE, WE FIND NO GOOD REASON TO INTERFERE WITH THE ORDER OF THE CIT(A) WHICH IS CONFIRMED AND THE GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 2 3 . IN THE RESULT, THE APPEALS OF THE REVENUE IN ASSESSMENT YEARS 2001 - 0 2, 2002 - 03 AND 2005 - 06 ARE DISMISSED, WHEREAS THE APPEAL OF THE ASSESSEE IN ASSESSMENT YEAR 2002 - 03 IS ALLOWED. ORDER PRONOUNCED IN THE COURT ON F R I D A Y , THE 1 6 T H OF JANUARY , 201 5 AT AHMEDABAD. SD/ - SD/ - ( G.C. GUPTA ) VICE PRESIDENT ( N.S. SAINI) ACCOUNTANT MEMBER AHMEDABAD; DATED 1 6 / 01 /201 5 *BIJU T , PS / COPY OF THE ORDER FORWARDED TO : 1. / THE APPELLANT 2. / THE RESPONDENT. 3. / CONCERNED CIT 4. ( ) / THE CIT(A) - I, BARODA 5. , , / DR, ITAT, AHMEDABAD 6. [ / GUARD FILE . / BY ORDER, TRUE COPY / ( DY./ASSTT.REGISTRAR) , / ITAT, AHMEDABAD