VENUS PETROCHEMICASL ( BOMBAY) P. LTD, MUMBAI V. ACIT CEN CIR 18 &19, MUMBAI

ITA 3325/MUM/2010

• Counselvise Citation: [2011] 119 COUNSELVISE.COM (IT) 6681 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 2 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 22-07-2011
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: F
• Next Hearing Date: 18-07-2011
• Assessment Year: 2006-2007
• Appeal Filed On: 28-04-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: P C MAURYA
• Assessee Lawyers: SHAITESH N DOSHI
• Keywords: Fair market value
• Section: 6; 15

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH F, MUMBAI BEFORE SHRI D.K. AGARWAL (JM) AND SHRI PRAMOD KUM AR (AM) I.T.A.NO.3325/MUM/2010 ASSESSMENT YEAR :2007-08 M/S. VENUS PETROCHEMICALS (BOMBAY) PVT. LTD., 27, 1 ST FLOOR, MINERVA MOVIETONE COMPOUND, SEWREE BUNDER ROAD, SEWREE (EAST), MUMBAI 400 015. PAN: AAACV 2215R VS. THE ASST. COMMISSIONER OF INCOME- TAX, CIRCLE 18 & 19, AAYAKAR BHAVAN, M.K. ROAD, MUMBAI.400 020. (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI SHAITESH N. DOSHI RESPONDENT BY : SHRI P.C. MAURYA O R D E R PER D.K. AGARWAL, JM: THIS APPEAL PREFERRED BY THE ASSESSEE IS DIRECTED A GAINST THE ORDER DATED 31.3.2010 PASSED BY THE LEARNED COMMISSIONER OF INC OME-TAX (APPEALS) FOR THE ASSESSMENT YEAR 2007-08. 2. BRIEFLY STATED, THE FACTS OF THE CASE ARE THAT THE ASSESSEE COMPANY IS ENGAGED IN THE BUSINESS INDENTORS, IMPORTERS, DISTR IBUTORS AND TRANSPORTERS OF PETROCHEMICAL PRODUCTS. IT FILED RETURN DECLARING T OTAL INCOME OF ` 2,55,83,821/-. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, ON VER IFICATION OF THE DETAILS FILED BY THE ASSESSEE, THE ASSESSING OFFICER NOTICED THAT TH E ASSESSEE HAS PAID HIRE CHARGES TO THE FOLLOWING PERSONS: (I) MR. ATUL M. THAKKAR, DIRECTOR .. ` 35,98,430 (II) MR. SUNIL M. THAKKAR, DIRECTOR .. ` 26,96,205 (III) MR. LOPA S. THAKKAR, DIRECTOR .. ` 13,46,135 ----------------- TOTAL .. ` 76,40,770 ========= THE ASSESSEE WAS ASKED TO FURNISH LIST OF PAYMENTS MADE TO PERSONS COVERED UNDER SECTION 40A(2)(B) ALONG WITH EVIDENCE TO PROV E THAT THE PAYMENTS WERE NOT ITA NO.3325/MUM/2010 VENUS PETROCHEMICALS (BOMBAY) P.LTD. 2 UNREASONABLE AS PER SECTION 40A(2)(B). SUBSEQUENTLY , THE ASSESSING OFFICER ALSO ASKED THE ASSESSEE TO FURNISH THE DETAILS OF PAYMEN TS MADE TO THE PERSONS COVERED U/S.40A(2)(B) ALONG WITH JUSTIFICATION AND PROOF. FINALLY, THE ASSESSING OFFICER ISSUED A SHOW CAUSE NOTICE DATED 29.10.2009 TO THE ASSESSEE ASKING THE ASSESSEE TO FURNISH THE DETAILS OF HIRE CHARGES PAI D TO THE DIRECTORS WITH JUSTIFICATION OF THE SIMILAR PAYMENTS MADE TO THE OTHER PARTY WITH PROOF, FAILING WITH 10% OF THE HIRE CHARGES PAID TO MR. ATUL M. TH AKKAR, DIRECTOR ` 35,98,430/-, MR. SUNIL M. THAKKAR, DIRECTOR ` 26,96 205/- AND MR. LOPA S. THAKKAR, DIRECTOR ` 13,46,135/- AMOUNTING TO ` 76,40,770/- WILL BE DISALLOWED TREATING THE SAME A S EXCESSIVE/UNREASONABLE AND WILL BE ADDED TO THE TOT AL INCOME. IN RESPONSE, THE ASSESSEE FURNISHED SOME DETAILS STATING THE JUSTIFI CATION FOR PAYMENT MADE TO RELATED PERSONS U/S.40A(2)(B). BUT THE ASSESSING O FFICER NOTICED THAT NO COMPARISON OF THE PAYMENTS MADE WITH THE OTHER PART IES PAYMENTS WITH PROOF WERE FILED FOR VERIFICATION. THE ASSESSING OFFICER STATED THAT IN THE ABSENCE OF DETAILS FOR THE REASONABLENESS OF PAYMENTS MADE TO DIRECTORS, THE GENUINENESS OF THE PAYMENTS OF HIRE CHARGES COULD NOT BE VERIFIED. HENCE, THE ASSESSING OFFICER DISALLOWED AN AMOUNT OF ` 7,64,070/- BEING 10% OF THE HIRE CHARGES PAID TO DIRECTORS, TREATING THE SAME AS EXCESSIVE AND UNREA SONABLE U/S.40A(2)(B) AND ADDED TO THE TOTAL INCOME OF THE ASSESSEE. 3 ON FIRST APPEAL, IT WAS SUBMITTED THAT THE ASSESS EE HAS FURNISHED THE STATEMENT OF EXTRACT (COMPARATIVE CHART) ON RANDOM BASIS TO JUSTIFY AS TO HOW THE HIRE CHARGES PAID TO THE DIRECTORS ARE MORE OR LESS SAME AS THE HIRE CHARGES PAID TO OUTSIDE SUPPLIERS OF TANKERS FOR THE SAME QUANTI TY OF PRODUCT TRANSPORTED AND THE SAME PLACE OF DESTINATION. THE ASSESSEE ALSO PR ODUCED RECORDS AND THE BILLS BEFORE THE ASSESSING OFFICER DURING THE ASSESSMENT PROCEEDINGS TO SHOW THE COMPARATIVE PRICES. SAMPLE COPIES OF SUCH INVOICES ISSUED BY OUTSIDE SUPPLIERS OF TANKERS AND MENTIONED IN THE COMPARATIVE CHART SUBM ITTED BEFORE THE ASSESSING ITA NO.3325/MUM/2010 VENUS PETROCHEMICALS (BOMBAY) P.LTD. 3 OFFICER DURING THE ASSESSMENT PROCEEDINGS HAVE ALSO BEEN SUBMITTED BEFORE THE LD. CIT(A) DURING THE APPELLATE PROCEEDINGS THE ASS ESSEE ALSO SUBMITTED THAT IT HAD STATED BEFORE THE ASSESSING OFFICER THAT THE PA YMENTS MADE TO THE DIRECTORS ARE PREVAILING MARKET PRICE AND ARE NOT AIMED AT DI VERTING ANY PROFITS TO THE ASSOCIATED PERSONS AND THE TRANSACTION WITH ALL THE PERSONS ARE TAX NEUTRAL AS THE CONCERNED DIRECTORS FALL IN THE HIGHEST BRACKET OF TAX WHICH IS AT PAR WITH THE TAX RATE APPLICABLE TO THE ASSESSEE COMPANY. IN SUPPORT OF THIS CONTENTION THE ASSESSEE HAS FILED THE COMPUTATIONS OF INCOME/RETUR NS/ACCOUNTS OF ALL THE THREE ASSOCIATED PERSONS. IT WAS FURTHER SUBMITTED BY THE ASSESSEE THAT IT IS JUDICIALLY WELL SETTLED THAT FOR INVOKING THE PROVISIONS OF SE CTION 40A(2)(B), THE ASSESSING OFFICER HAS TO GIVE DUE CONSIDERATION TO THE FOLLOW ING THREE IMPORTANT INGREDIENTS EMBODIED IN SECTION 40A(2)(B): (A) FAIR MARKET VALUE OF THE FACILITIES FOR WHICH PAYMENT IS MADE (B) LEGITIMATE BUSINESS NEEDS OF THE AS SESSEE, AND (C) THE BENEFIT DERIVED BY THE ASSESSEE FROM SUCH PAYMENT IT WAS FURTHER SUBMITTED THAT THE ASSESSING OFFICER HAS OVERLOOKED ALL THE THREE INGREDIENTS EMBODIED IN THE SECTION 40A(2)(B) AND T HAT HIS ORDER IS SILENT ABOUT THE CONCRETE/CONVINCING REASONS FOR FORMING THE OPINION THAT PAYMENTS OF HIRE CHARGES TO THREE DIRECTORS ARE UNREASONABLE HAVING REGARD T O THE THREE STIPULATED CONDITIONS FOR DISALLOWANCE. IT WAS FURTHER SUBMITT ED THAT THE ASSESSING OFFICER DID NOT MAKE ENQUIRY ABOUT THE RATE PREVALENT IN THE MA RKET FOR HIRING TANKERS AND THAT HAD THE AO DONE SO, THE AO WOULD NOT HAVE CARR IED OUT THE ADDITION AT ALL. IT WAS FURTHER SUBMITTED THAT THE AO HAS WRONGLY MENTI ONED IN THE ASSESSMENT ORDER THAT THE ASSESSEE HAD NOT MADE COMPARISON WITH THE PAYMENTS MADE TO THE OTHER PARTIES, WHICH WAS PROVIDED BY THE ASSESSEES LETTE R DATED 16.11.2009 TO THE AO WITH THE COMPARATIVE CHART ANNEXED TO THE SAID LETT ER. ACCORDINGLY, THE ASSESSEE ITA NO.3325/MUM/2010 VENUS PETROCHEMICALS (BOMBAY) P.LTD. 4 SUBMITTED THAT THE SAID ADDITION BE DELETED AS THE SAME IS BASED ON WILD GUESS, CONJECTURES AND SURMISES. 4. THE LEARNED CIT(A) AFTER GOING THROUGH THE COMPA RATIVE CHART SUBMITTED BY THE ASSESSEE EXTRACTED AT PAGE 7 OF THE APPELLAT E ORDER OBSERVED THAT SOME TIMES THE DIRECTORS WERE PAID ` 10/- PER KILO LITRE FOR MORE THAN THE OTHER TRANSPORTERS. THE DIFFERENCE IS NOT VERY ABNORMAL A ND ACCORDINGLY HE HELD THAT 5% DISALLOWANCE IS SUFFICIENT AND, THEREFORE, HE DIREC TED THE AO TO DISALLOW 5% INSTEAD OF 10%. 5. BEING AGGRIEVED BY THE ORDER OF THE LEARNED CIT( A), THE ASSESSEE IS IN APPEAL BEFORE US CHALLENGING IN ALL THE GROUNDS THE SUSTENANCE OF DISALLOWANCE AT 5% U/S.40A(2)(B) OF THE ACT. 6. AT THE TIME OF HEARING THE LEARNED COUNSEL FOR T HE ASSESSEE WHILE REITERATING THE SAME SUBMISSIONS AS SUBMITTED BEFOR E THE AO AND THE LEARNED CIT(A) FURTHER SUBMITS THAT SINCE THE ASSESSEE HAS FILED A COMPARATIVE CHART BEFORE THE AO AND THE LEARNED CIT(A) TO SHOW THAT THE PAYM ENTS MADE BY THE ASSESSEE ARE REASONABLE AS COMPARED TO THE OTHER TRANSPORTER S EXCEPT IN SOME CASES WITH A VERY NORMAL DIFFERENCE OF ` 10/- PER KILO LITRE , THEREFORE, THE LEARNED CIT(A) WAS NOT JUSTIFIED IN SUSTAINING THE DISALLOWANCE AT 5 % AS AGAINST 10% MADE BY THE AO. HE FURTHER SUBMITS THAT ALL THE DIRECTORS FALL IN THE HIGHEST BRACKET OF TAX WHICH IS AT PAR WITH THE TAX RATE APPLICABLE TO THE ASSES SEE AND, THEREFORE, IT IS A CASE OF REVENUE NEUTRAL AND HENCE EVEN OTHERWISE NO DISALLO WANCE IS CALLED FOR AND FOR THIS PROPOSITION, RELIANCE WAS ALSO PLACED ION THE DECISION IN THE CASE OF CITV. SIYA RAM GARG (HUF)(2011) 237 CTR (P&H) 321. HE, THEREF ORE, SUBMITS THAT THE DISALLOWANCE SUSTAINED BY THE LEARNED CIT(A) BE DEL ETED. 7. ON THE OTHER HAND, THE LEARNED DEPARTMENTAL REPR ESENTATIVE SUPPORTS THE ORDER OF THE AO AND THE LEARNED CIT(A). ITA NO.3325/MUM/2010 VENUS PETROCHEMICALS (BOMBAY) P.LTD. 5 8. WE HAVE CAREFULLY HEARD THE SUBMISSIONS OF THE R IVAL PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. WE FIND THAT THE FACTS ARE NOT IN DISPUTE. UNDER SECTION 40A(2)(A) OF THE ACT, THE EXPENDITURE INCUR RED BY THE ASSESSEE MAY BE DISALLOWED BY THE AO IF HE CONSIDERS THE SAME TO BE EXCESSIVE OR UNREASONABLE HAVING REGARD TO : (A) THE FAIR MARKET VALUE OF THE GOODS/SERVICES OR FACI LITIES FOR WHICH THE PAYMENT IS MADE; OR (B) THE LEGITIMATE BUSINESS NEEDS OF THE ASSESSEES BUS INESS OR PROFESSION; OR (C) THE BENEFIT DERIVED BY OR ACCRUING TO THE ASSESSEE FROM THE PAYMENT. UNDOUBTEDLY, THE AO HAS THE AUTHORITY AS WELL AS TH E JURISDICTION TO EVALUATE THE EXCESSIVE OR UNREASONABLE EXPENSES INCURRED BY THE ASSESSEE IN FAVOUR OF A RELATIVE OF THE ASSESSEE. IN THE CASE BEFORE US THE RE IS NO DISPUTE THAT THE ASSESSEE HAD FILED A COMPARATIVE CHART SHOWING THE PAYMENTS OF TRANSPORT CHARGES PAID BY THE ASSESSEE AS COMPARED WITH OTHER TRANSP ORTERS WHICH IS APPEARING AT PAGE 7 OF THE ORDER OF THE CIT(A) AND THE SAME IS R EPRODUCED BELOW: SR. NO DATE T/L NO. FROM TO QTY RATE AMOUNT TRANSPORTER 1 29.04.06 MH04CA 8456 MAHUL AMBERNATH 4 KL 300 120 0 OMKAR TRANSPORT 2 18.04.06 MH04CA 2631 BPCL AMBERNATH 5 KL 300 1500 LOPA S. THAKKAR 3 10.04.06 MH43E 1170 BPCL LOTE 10 KL 700 7000 SHAH ID ROADLINE 4 18.04.06 MH04CA 3238 BPCL LOTE 10 KL 700 7000 A. M. THAKKAR 5 30.04.06 MH04CA 2631 BPCL LOTE 10 KL 700 7000 LOP A S. THAKKAR 6 09.05.06 MH04AL 3086 BPCL DOMBIVALI 10 KL 300 300 0 SHAHID ROADLINE 7 24.05.06 MH04CA 2445 BPCL DOMBIVALI 10 KL 300 300 0 A.M. THAKKAR 8 09.05.06 MH04CA 2631 BPCL PALGHAR 9.32 MT 450 417 6 LOPA S. THAKKAR 9 22.05.06 MH04BU 8776 BPCL PALGHAR 9.32 MT 450 419 9 SHAHID ROADLINE 10 06.06.06 MH04AC 1211 BPCL PALGHAR 9.32 MT 450 41 81 SHAHID ROADLINE 11 19.06.06 MH04CA 2446 BPCL PALGHAR 9.32 MT 450 42 08 A.M. THAKKAR 12 08.07.06 MH04CP 3396 BPCL SINNER 10 KL 600 6000 JAI GANESH TRANSPORT 13 03.07.06 MH04CA 2632 BPCL SINNER 10 KL 610 6100 A.M. THAKKAR 14 14.07.06 MH04CA 2631 BPCL SINNER 10 KL 610 6100 LOPA S. THAKKAR 15 24.07.06 MH27C 775 BPCL SINNER 10 KL 600 6000 SH AHID ROADLINE 16 01.08.06 MH04CA 2631 BPCL SINNER 10 KL 610 6100 S.M. THAKKAR 17 03.08.06 MH04CA 2632 BPCL SINNER 10 KL 610 6100 A. M. THAKKAR 18 18.08.06 MH04CA 3712 BPCL SINNER 10 KL 600 6000 SHAHID ROADLINE 19 13.09.06 MH06K 2237 BPCL PALGHAR 10 KL 418 4180 SHAHID ROADLINE 20 29.09.06 MH04CA 2445 BPCL PALGHAR 9.24 MT 460 42 50 A.M. THAKKAR 21 31.11.06 MH04CA 2631 BPCL PALGHAR 9.14 MT 450 42 35 S.M. THAKKAR 22 04.10.06 MH27C 775 BPCL VASHI 10 KL 288 2880 SHA HID ROADLINE 23 20.10.06 MH04CA 2632 BPCL VASHI 10 KL 300 3000 A .M. THAKKAR 24 11.11.06 MH04CA 2444 BPCL VASHI 10 KL 300 3000 S .M. THAKKAR 25 07.06.06 MH04CA 2444 BPCL WADA 10 KL 370 3700 L OPA S. THAKKAR 26 11.11.06 MH18M 4438 BPCL WADA 10 KL 360 3600 SHA HID ROADLINE 27 12.10.06 MH04CA 2632 BPCL WADA 10 KL 370 3700 A. M. THAKKAR 28 03.12.06 MH04CA 3239 BPCL VAPI 10 KL 570 5700 S. M. THAKKAR 29 30.12.06 MH04BG 5937 BPCL VAPI 10 KL 560 5600 SH AHID ROADLINE 30 24.01.07 MH04CA 2445 BPCL VAPI 10 KL 570 5700 A. M. THAKKAR 31 13.01.07 MH04CG 3669 BPCL TARAPUR 9.32 MT 450 41 94 SHAHID ROADLINE 32 29.01.07 MH04CA 2444 BPCL TARAPUR 9.35 MT 450 42 08 S.M. THAKKAR 33 13.02.07 MH04CA 3238 BPCL TARAPUR 9.22 MT 450 41 49 A.M. THAKKAR 34 03.02.07 MH04CA 5788 BPCL MURBAD 10 KL 370 3700 SHAHID ROADLINE 35 05.02.07 MH04CA 2632 BPCL MURBAD 10 KL 380 3800 A. M. THAKKAR 36 01.03.07 MH04CA 2631 BPCL MURBAD 10 KL 380 3800 S.M. THAKKAR 37 06.03.07 MH04CG 3669 BPCL MURBAD 10 KL 370 3700 SHAHID ROADLINE 38 10.03.07 MH04CA 2444 BPCL MURBAD 10 KL 380 3800 S. M. THAKKAR 39 18.03.07 MH04CA 2445 BPCL MURBAD 10 KL 380 3800 A. M. THAKKAR ITA NO.3325/MUM/2010 VENUS PETROCHEMICALS (BOMBAY) P.LTD. 6 FROM THE ABOVE CHART, IT IS SEEN THAT ON 8 TH JULY 2006, THE MARKET RATE WAS ` 600 PER 10 KILO LITRE WHEREAS ON 3 RD JULY OR 14 TH JULY 2006, THE ASSESSEE HAS PAID TRANSPORT CHARGES AT ` 610/- PER 10 KILO LITRE, I.E. DIFFERENCE IS ONLY ` 10/- PER KILO LITRE AS COMPARED TO OTHER TRANSPORTERS. HOWEVER, W E FIND THAT THERE IS NO MATERIAL ON RECORD TO SHOW THAT ON THE SAME VERY DATE THE LO WER MARKET RATE WAS PREVAILING AGAINST WHICH THE ASSESSEE HAS MADE THE HIGHER PAYMENT. THE ASSESSING OFFICER WAS REQUIRED TO COMPARE THE SAID PRICE WHICH PREVAILED IN THE LOCAL MARKET ON THE SAME DATE WHICH HE FAILED TO DO SO. IN THE ABSENCE THEREOF AND KEEPING IN VIEW THE OBSERVATION OF THE LEARNED CIT(A) THAT THE DIFFERENCE IS NOT VERY ABNORMAL, WE ARE OF THE VIEW THAT THE AD H OC DISALLOWANCE OF 10% MADE BY THE AO REDUCED BY THE LD. CIT(A) TO 5% WITHOUT BRINGING ON RECORD ANY SUPPORTING MATERIAL IS NOT SUSTAINABLE IN LAW AND A CCORDINGLY, WE DELETE THE DISALLOWANCE MADE BY THE AO AND SUSTAINED BY THE LE ARNED CIT(A). THE GROUNDS TAKEN BY THE ASSESSEE ARE, THEREFORE, ALLOWED. 9. IN THE RESULT, THE ASSESSEES APPEAL STANDS ALLO WED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 22 ND DAY OF JULY, 2011. SD. SD. (PRAMOD KUMAR) (D.K. AGARWAL) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI, DATED THE 22 ND JULY, 2011. KN COPY TO: 1. THE ASSESSEE 2. THE REVENUE 3. THE CIT, CENTRAL-II, MUMBAI. 4. THE CIT(A)-39, MUMBAI 5. THE DR F BENCH, MUMBAI BY ORDER /TRUE COPY/ ASST. REGISTRAR, ITAT, MUMBAI