The ACIT,(OSD)Circle-8, Ahmedabad V. Shenco Valves Pvt.Ltd., Ahmedabad

ITA 3953/AHD/2008

• Counselvise Citation: [2011] 135 COUNSELVISE.COM (IT) 1841 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 3 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-03-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 15-03-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 04-12-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: U S RAINA SRDR
• Assessee Lawyers: S N DIVATIA
• Keywords: Gross profit estimation; Gift; Additional evidence
• Section: 43B; 145

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH D AHMEDABAD BEFORE SHRI D.K. TYAGI, HONBLE JUDICIAL MEMBER AND SHRI A.N.PHAUJA, HONBLE ACCOUNTANT MEMBER ITA NO.3953/AHD/2008 ASSESSMENT YEAR:2005-06 DATE OF HEARING:15.3.11 DRAFTED:16.3.11 ACIT (OSD), CIRCLE-8, AHMEDABAD V/S. SHENCO VALVES PVT. LTD., F/3, KESHAV APARTMENT, OPP. MEMNAGAR TALAV, MEMNAGAR, AHMEDABAD PAN NO.AAJCS6358K (APPELLANT) .. (RESPONDENT) APPELLANT BY :- SHRI U.S. RAINA SR-DR RESPONDENT BY:- SHRI S.N.DIVATIA, AR O R D E R PER D.K. TYAGI, JUDICIAL MEMBER:- THIS IS REVENUES APPEAL AGAINST THE ORDER OF COMM ISSIONER OF INCOME- TAX(APPEALS)-XIV, AHMEDABAD IN APPEAL NO. CIT(A)-XI V/CIR.8/291/2007-08 DATED 26-09-2008 FOR THE ASSESSMENT YEAR 2005-06. 2. THE REVENUE HAS TAKEN THE FOLLOWING GROUND:- 1. THE LD. COMMISSIONER OF INCOME-TAX(A)-XIV, AHME DABAD HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS. 4,97,423/- ON ACCOUNT OF LOW GROSS PROFIT. 2. THE LD. COMMISSIONER OF INCOME-TAX(A)-XIV, AHMED ABAD HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS. 13,64,673/- ON ACCOUNT OF SALES COMMISSION. 3. THE LD. COMMISSIONER OF INCOME-TAX(A)-XIV, AHMED ABAD HAS ERRED IN LAW AND ON FACTS IN DELETING THE ADDITION OF RS. 5,18,490/- ON ACCOUNT OF ROYALTY PROVISION. 4. THE LD. COMMISSIONER OF INCOME-TAX(A)-XIV, AHMED ABAD HAS ERRED IN LAW AND ON FACTS IN DELETING THE DISALLOWANCE OF RS.50,000/- OUT OF OFFICE EXPENSES. ITA NO. 3953/AHD/2008 A.Y. 2005-06 ACIT (OSD) CIR-8 ABD V. SHENCO VALVES PVT. LT D. PAGE 2 3. THE FIRST GROUND RELATES TO ADDITION OF RS.4,97, 423/- FOR LOW GROSS PROFIT. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSING OFFI CER DURING THE ASSESSMENT PROCEEDINGS FOUND THAT ASSESSEE HAD SHOWN GROSS PRO FIT OF RS.85,38,688/- @ 15.79% AS COMPARED TO GROSS PROFIT SHOWN IN THE IMM EDIATE PRECEDING YEAR OF 17.63%. WHEN ASKED THE ASSESSEE SUBMITTED BEFORE TH E ASSESSING OFFICER THAT DURING THE YEAR THE SALE PRICE OF GOODS REMAIN ED AT THE LEVEL OF ASSESSMENT YEAR 2003-04 AND THERE WAS NO INCREASE I N THE SALE PRICE, WHEREAS THERE WAS INCREASE IN PRICES OF RAW MATERIA L. IN RESPONSE TO SHOW- CAUSE NOTICE AS TO WHY THE GROSS PROFIT RATE OF 16. 70% SHOULD NOT BE ADOPTED BY INVOKING THE PROVISION OF SECTION 145(1) OF THE I.T. ACT, AS THE ASSESSEE HAS ADMITTED NO DAY-TO-DAY STOCK REGISTER OR INWARD AND OUTWARD REGISTERS FOR THE GOODS MAINTAINED BY IT, IT WAS CONTENDED THAT G ROSS PROFIT RATION WAS LOWER THAN PREVIOUS YEAR, WHICH WAS NOT A BIG DIFFERENCE AND FROM THE DETAILS OF ASSESSMENT YEARS 2004-05 AND 2005-06 IT COULD BE SE EN THAT THERE WAS AN INCREASE IN PURCHASE PRICE OF RAW MATERIAL AND COST OF PURCHASE HAS GONE UP BY RS.9,86,413/-, WHEREAS THERE WAS NO SIMULTANEOUS INCREASE IN SALE PRICE. FURTHER THERE WAS ALSO INCREASE IN SALARY, WAGES, E LECTRICITY EXPENSES AND OTHER FACTORY EXPENSES. IT WAS FOUND BY AO THAT THE BILLS PRODUCED BY THE ASSESSEE DID NOT INDICATE THE PRICE OF THE ITEMS RE FERRED TO BUT INDICATED SOME OTHER ITEMS OF GOODS WHICH HAS NO RELEVANCY ON THE TRANSACTIONS MADE BY ASSESSEE. THE AO WAS OF THE VIEW THAT ASSESSEE WAS SUPPOSED TO COMPARE WITH THE GOODS OF SIMILAR NATURE WITH REFERENCE TO PURCHASE MADE IN EARLIER ASSESSMENT YEARS. THE AO PLACED RELIANCE ON THE CAS E OF GHANSHYAMDAS PARMANAND V. CIT (1952) 21 ITR 79, WHEREIN THE IMPORTANCE OF STOCK R EGISTER WAS POINTED OUT AND HE FURTHER RELIED UPON THE DECI SION OF HONBLE SUPREME COURT IN THE CASE OF NAMASIVAYAM CHETTIAR V. CIT (1960) 38 ITR 579 (SC) AND HELD THAT IF FROM THE METHOD OF ACCOUNTING THE CORRECT PROFITS OF THE BUSINESS CAN NOT BE DEDUCED AND THE OPERATION OF TH E PROVISO OF SECTION 145(1) OF THE I.T. ACT WOULD BE ATTRACTED. THEREFOR E, THE AO REJECTED THE BOOKS OF ACCOUNT OF THE ASSESSEE AND ADOPTED GROSS PROFIT AT 16.70% BEING THE AVERAGE GROSS PROFIT OF THE THREE YEARS AND MADE AD DITION OF RS.4,97,423/-. IN ITA NO. 3953/AHD/2008 A.Y. 2005-06 ACIT (OSD) CIR-8 ABD V. SHENCO VALVES PVT. LT D. PAGE 3 APPEAL, LD. CIT(A) DELETED THE ADDITION. AGGRIEVED BY THIS ORDER REVENUE IS IN APPEAL BEFORE TRIBUNAL. 4. AT THE TIME OF HEARING LD. SR-DR RELIED ON THE O RDER OF ASSESSING OFFICER. LD. AUTHORIZED REPRESENTATIVE ON THE OTHER HAND RELIED ON THE ORDER OF LD. CIT(A). 5. AFTER HEARING BOTH THE PARTIES AND PERUSING THE RECORDS, WE FIND THAT LD. CIT(A) HAS GIVEN RELIEF TO THE ASSESSEE BY OBSERVIN G AS UNDER:- 2.3 I HAVE CONSIDERED THE FACTS OF THE CASE AND TH E SUBMISSIONS MADE BY THE A.R OF THE APPELLANT. IT IS SEEN THAT THE A. O MADE THE ADDITION ON ACCOUNT OF FALL IN G.P. BY 1.34% ONLY ON THE GROUND THAT THE APPELLANT HAS NOT MAINTAINED ANY STOCK REGISTER. I FIND FROM THE TAX AUDIT REPORT AT CLAUSE 28 THE APPELLANT HAS GIVEN QUANTITATIVE DETA ILS FOR RAW MATERIALS AND FINISHED GOODS. THE APPELLANT HAS ALSO FILED QU ANTITATIVE INFORMATION IN RESPECT OF CLOSING STOCK OF RAW MATERIALS AND FI NISHED GOODS IN SCHEDULE-Q TO ANNUAL ACCOUNTS. THE STOCK OF FINISHE D GOODS OF THE APPELLANT IS SUBJECT TO PERIODICAL SCRUTINY BY EXCI SE AUTHORITIES. THUS IT CAN NOT BE SAID THAT THE APPELLANT HAS NO STOCK REC ORDS. THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF ASHOK REFRACTORIES P. LTD. HAS DISCUSSED THE DECISION OF NAMASIVAYAM CHETTIAR RELI ED UPON BY THE A.O. IN THAT CASE THE HONBLE COURT HAS HELD AS FOL LOWS: IN THE PRESENT CASE, THE QUESTION IS AS TO WHETHER THE BOOKS OF ACCOUNT COULD BE REJECTED ONLY IN THE ABSENCE OF ST OCK REGISTER SO FAR AS THE ASSESSMENT YEAR 1990-91 IS CONCERNED AND ON THE GROUNDS THAT THE ITEM-WISE STOCKS WERE NOT MAINTAIN ED IN THE STOCK REGISTER COULD BE A GROUND SUFFICIENT TO REJE CT THE BOOKS OF ACCOUNT FOR THE ASSESSMENT YEAR 1991-92 WITHOUT ANY FINDING THAT THE ACCOUNTS WERE INCOMPLETE OR WERE INCORRECT OR T HAT THOUGH THE ACCOUNTS WERE COMPLETE AND CORRECT, THE METHODS APP LIED WERE SUCH THAT THE INCOME COULD NOT BE DEDUCED. WITHOUT A FINDING OR FORMING AN OPINION TO THE EXTENT INDICATED IN EXPRE SSED TERMS IN THE SECTION ITSELF, THE BOOKS OF ACCOUNT CANNOT BE REJECTED, MERELY ON THE ABSENCE OF STOCK REGISTER OR FAILURE TO MAIN TAIN ITEM-WISE STOCK IN THE STOCK REGISTER WHEN THERE WERE OTHER M ATERIALS AVAILABLE FROM WHICH INCOME COULD BE DEDUCTED. IN A CASE WHERE THE BOOKS OF ACCOUNT ARE SO REJECTE D WITHOUT THE INGREDIENTS OF SECTION 145 BEING FULFILLED, SUCH RE JECTION IS PERVERSE AND VOID. ITA NO. 3953/AHD/2008 A.Y. 2005-06 ACIT (OSD) CIR-8 ABD V. SHENCO VALVES PVT. LT D. PAGE 4 HAVING REGARD TO THE FACTS AND CIRCUMSTANCES OF THE CASE AS DISCUSSED ABOVE, IN OUR VIEW, THE BOOKS OF ACCOUNT FOR THE ASSESSMENT YEARS 1990-91 AND 1999-92 COULD NOT BE R EJECTED AND AS SUCH THE ORDER OF THE LEARNED TRIBUNAL IN BO TH THE CASES IS LIABLE TO BE SET ASIDE. IN THE CASE OF NAMASIVAYAM CHETTIAR IT WAS HELD THA T IF AFTER TAKING INTO ACCOUNT ABSENCE OF STOCK REGISTER COUPLED WITH OTHE R MATERIALS, THE INCOME-TAX OFFICER WAS OF THE OPINION THAT THE CORR ECT PROFITS AND GAINS CANNOT BE DEDUCTED, THEN THERE WOULD BE JUSTIFICATI ON TO ATTRACT SECTION 13 OF THE 1922 ACT. THUS ONLY ABSENCE OF STOCK REGI STER WOULD NOT BE ENOUGH TO REJECT BOOKS OF ACCOUNTS AND THERE HAS TO BE FINDING OF THE A.O THAT INCOME OF THE APPELLANT CAN NOT BE PROPERL Y DEDUCTED WHICH IS NOT THERE IN THE PRESENT CASE. BY FOLLOWING THE DECISION IN THE CASE OF ASHOK REFRACTORIES P. LTD., SUPRA, I AM OF THE OPINION THAT MERELY ON THE GROUN D THAT THE STOCK REGISTER WAS NOT MAINTAINED, THE ADDITION FOR FALL IN G.P. CANNOT BE MADE BY REJECTING THE BOOK RESULT. IN FACT, THE A.O HAS NOT BEEN ABLE TO SPECIFICALLY POINT OUT ANY OMISSION OR DEFECT IN TH E ACCOUNTS, WHICH WOULD WARRANT REJECTION OF BOOKS BY INVOKING THE PR OVISIONS OF SEC. 145(1) OF THE I.T. ACT. THE BOOKS OF ACCOUNTS WERE DULY AUDITED AND THE SALES/PURCHASES WERE ALSO SUPPORTED BY BILLS/INVOIC ES. SINCE THE FALL IN G.P. WAS DUE TO INCREASE IN PURCHASE PRICE OF RAW M ATERIALS WHILE THERE WAS NO SIMULTANEOUS INCREASE IN SALES PRICE, THERE IS NO JUSTIFICATION FOR ANY ADDITION ON THIS COUNT. FURTHER, THE EXPENSES L IKE SALARIES, WAGES, ELECTRICITY EXPENSES AND OTHER FACTORY EXPENSES HAV E INCREASED. THUS THE APPELLANT HAS CLEARLY EXPLAINED THE REASONS FOR FALL IN G.P. AND THE FALLING G.P. IS MARGINAL ONLY. CONSIDERING THE ABOV E FACTS, AS THE APPELLANT HAS EXPLAINED THE FALL IN G.P. AND THE A. O HAS NOT POINTED OUT ANY SERIOUS MISTAKES IN THE ACCOUNTS, THE ACTION OF A.O IN REJECTING THE BOOKS OF ACCOUNT IS HELD TO BE NOT JUSTIFIED AND, T HE ADDITION MADE ON THIS COUNT IS DIRECTED TO BE DELETED. THE ABOVE FINDING OF LD. CIT(A) HAS REMAINED UNCONT ROVERED AT THE TIME OF HEARING BEFORE US. WE FURTHER FIND THAT LD. CIT(A) HAS GIVEN RELIEF TO THE ASSESSEE BY FOLLOWING THE DECISION OF HONBLE CALCU TTA HIGH COURT IN THE CASE OF ASHOKE REFRACTORIES P. LTD. V. CIT (2005) 279 ITR 457 (CAL), WHEREIN IT WAS HELD THAT MERELY BECAUSE STOCK REGISTER WAS NOT MAI NTAINED THE ADDITION FOR FALL IN GP CANNOT BE MADE BY REJECTING BOOKS OF ACC OUNT. THEREFORE, WE FIND NO INFIRMITY IN THE ORDER PASSED BY LD. CIT(A) AND SAME IS UPHELD. THIS GROUND IN THIS APPEAL OF REVENUE IS REJECTED. ITA NO. 3953/AHD/2008 A.Y. 2005-06 ACIT (OSD) CIR-8 ABD V. SHENCO VALVES PVT. LT D. PAGE 5 6. THE SECOND GROUND RELATES TO THE ADDITION OF RS. 13,64,673/- ON ACCOUNT OF SALES COMMISSION. THE BRIEF FACTS OF THE CASE AR E THAT THE SALE COMMISSION OF RS.6,91,625/- TO SHRI R.K. MUNJAL AND RS.6,73,04 8/- TO SHRI SURESH KAKAR WERE DISALLOWED ON THE GROUND THAT THE EVIDENCE REL ATING TO THE SERVICES RENDERED BY EACH OF THEM WAS NOT FURNISHED BY THE A SSESSEE. THE ASSESSING OFFICER, DURING THE COURSE OF ASSESSMENT PROCEEDING S ASKED THE ASSESSEE TO FURNISH THE CONTEMPORARY VERIFIABLE EVIDENCES ESTAB LISHING THE ACTUAL RENDERING OF SERVICES BY COMMISSION AGENT. THE ASSE SSEE REPLIED WAS THAT BOTH THE AGENTS WERE GETTING ORDERS FOR THE ASSESSE E FROM PRIVATE LIMITED COMPANIES OF NORTHERN INDIA AND BOTH THE PARTIES WE RE WITH THE ASSESSEE SINCE LONG AND THEY WERE BEING PAID THE COMMISSION REGULARLY, THIS EXPLANATION WAS NOT ACCEPTABLE TO AO AND HE OBSERVE D THAT THE FACT THAT IT WAS GIVING COMMISSION TO SIMILAR AGENTS YEARS TOGET HER WAS NOT A GROUND FOR ALLOWING THE COMMISSION CLAIM AND WHILE EXAMINING T HE ALLOWABILITY OF THE SAID EXPENSES, THE PRIMARY FACT THAT NEEDS TO BE ESTABLI SHED BY THE ASSESSEE WAS THAT THE COMMISSION AGENTS TO WHOM PAYMENTS HAVE BE EN MADE HAVE ACTUALLY RENDERED SOME SERVICES. BY RELYING UPON VARIOUS JUD ICIAL DECISIONS, AO HELD THAT THE ONUS OF ESTABLISHING THAT THE PAYMENTS OF COMMISSION WERE ALLOWABLE AND THE BURDEN OF PROVE THAT THE AMOUNT WAS ACTUALL Y LAID OUT OR EXPENDED AS COMMISSION FOR THE PURPOSE OF BUSINESS LIES ON THE ASSESSEE. SINCE THE ASSESSEE FAILED TO PROVE THE COMMISSION PAYMENT, TH E AO DISALLOWED THE COMMISSION OF RS.13,64,673/-. IN APPEAL LD. CIT(APP EALS) DELETED THIS ADDITION. AGGRIEVED BY THIS ORDER, NOW REVENUE IS I N APPEAL BEFORE THE TRIBUNAL. 7. AT THE TIME OF HEARING, LD. SR-DR RELIED ON THE ORDER OF ASSESSING OFFICER, WHEREAS LD. AUTHORIZED REPRESENTATIVE REIT ERATED THE SAME SUBMISSION MADE BEFORE LD. CIT(A) AND FURTHER SUBMI TTED THAT MOST OF THE SALES WERE MADE ONLY BECAUSE OF EFFORTS OF THESE TW O AGENTS FOR WHICH DEBIT NOTES WERE ISSUED BY THE SAID PARTIES AND THEIR NAM ES HAVE BEEN MENTIONED IN THE PURCHASE ORDERS AND CONFIRMATION LETTERS WER E ALSO PRODUCED FROM THE ITA NO. 3953/AHD/2008 A.Y. 2005-06 ACIT (OSD) CIR-8 ABD V. SHENCO VALVES PVT. LT D. PAGE 6 PURCHASERS. THE ASSESSING OFFICER FAILED TO APPRECI ATE THAT BOTH OF THEM WERE ASSESSED TO TAX AND EVEN TDS WERE MADE FROM THE COM MISSION PAYMENTS. IT WAS ALSO EXPLAINED TO AO THAT TWO AGENTS WERE PAID COMMISSION IN VIEW OF GETTING SALES ORDERS FROM ALLOVER INDIA. DURING THE COURSE OF APPEAL HEARING, ASSESSEE FURNISHED FRESH EVIDENCE BY WAY OF CONFIRM ATION LETTERS FROM THE PURCHASERS, WHICH WERE FORWARDED TO ASSESSING OFFIC ER AND AFTER OBTAINING THE COMMENTS OF AO LD. CIT(A) HAS GIVEN RELIEF TO THE A SSESSEE. THEREFORE, THE ORDER PASSED BY LD. CIT(A) MAY KINDLY BE UPHELD. 8. AFTER HEARING BOTH THE PARTIES AND PERUSED THE R ECORDS LD. CIT(A) HAS GIVEN RELIEF TO THE ASSESSEE AFTER OBTAINING THE RE MAND REPORT ON THE ADDITIONAL EVIDENCE PRODUCED BEFORE HIM BY THE ASSESSEE BY OBS ERVING AS UNDER:- 3.3 I HAVE CONSIDERED THE FACTS OF THE CASE, THE S UBMISSIONS OF THE APPELLANT, THE ADDITIONAL EVIDENCES NOW FILED AS WE LL AS THE REMAND REPORT OF THE A.O DATED 30-04-2008. IT IS SEEN THAT THE APPELLANT FURNISHED NECESSARY CONFIRMATIONS FROM THE TWO PART IES IN RESPECT OF THE PAYMENTS OF COMMISSION AND THEIR NAMES WERE FULLY M ENTIONED IN THE PURCHASE ORDERS. FROM THE DETAILS FILED BY THE A.R. , IT CAN BE SEEN THAT THE SERVICES HAVE BEEN RENDERED BY THE SAID AGENTS, FOR WHICH COMMISSION WAS PAID, THE COMMISSION AGENTS WERE TO PROCURE ORDERS FOR THE APPELLANT FROM ALL AVER INDIA AND CONSIDERI NG THE FACT THAT THE APPELLANT HAS TO DEPEND ON THE AGENTS TO PROCURE OR DERS, SUCH PAYMENT OF COMMISSION COULD NOT BE HELD AS NON-GENUINE IN H IS REMAND REPORT, THE A.O HAS NOT STATED ANY NEW REASONING, EXCEPT RE ITERATING THE FACTS NARRATED IN THE ASSESSMENT ORDER, IN SPITE OF THE F ACT THAT THE EVIDENCES NOW FILED BY THE A.R WERE FORWARDED TO THE A.O WITH A REQUEST TO EXAMINE THE SAME AND SEND A REPORT THEREON. FURTHER , IT IS ALSO SEEN THAT NO SUCH DISALLOWANCE HAS BEEN MADE IN EARLIER YEARS OUT OF COMMISSION PAYMENTS. CONSIDERING THE FACT THAT MOST OF THE SALES WERE MADE DUE TO THE EFFORTS OF THESE TWO AGENTS I.E. SA LES OF RS.2,30,54,170/- WERE MADE THROUGH AGENT RK MUNJAL AND SALES OF RS.1,59,04,355/-WERE MADE THROUGH AGENT SURESH KUMA R AND THEIR NAMES ARE FOUND ENTERED IN THE PURCHASE ORDERS AND THERE WAS SUBSTANTIAL INCREASE IN SALES AS COMPARED TO THE PR ECEDING YEAR, I AM OF THE OPINION THAT THE DISALLOWANCE \MADE FOR PAYMENT OF COMMISSION IS NOT JUSTIFIED. THE A.O IS THEREFORE DIRECTED TO DEL ETE THE DISALLOWANCE MADE ON THIS COUNT. ITA NO. 3953/AHD/2008 A.Y. 2005-06 ACIT (OSD) CIR-8 ABD V. SHENCO VALVES PVT. LT D. PAGE 7 AS THE FINDING OF LD. CIT(A) REMAIN UNCONTROVERTED AT THE TIME OF HEARING BEFORE US, WE FEEL NO NEED TO INTERFERENCE WITH THE ORDER PASSED BY HIM AND SAME IS HEREBY UPHELD. THIS GROUND OF REVENUES APP EAL IS DISMISSED. 9. THE GROUND NO.3 RELATES TO DISALLOWANCE OF ADDIT ION OF RS.5,18,490/- ON ACCOUNT OF ROYALTY. DURING THE ASSESSMENT PROCEEDIN GS ASSESSING OFFICER HAS DISALLOWED THE ROYALTY ON THE GROUND THAT ASSESSEE HAS DEBITED THE SALE AMOUNT IN PROFIT AND LOSS ACCOUNT AND SAME HAS BEEN SHOWN AS PROVISION IN BALANCE-SHEET. THEREFORE, IT WAS HELD BY AO THAT RO YALTY EXPENSES WERE NOT ACTUALLY INCURRED DURING THE YEAR BY ASSESSEE AND H E ADDED THE ADDITION. IN APPEAL, THIS ADDITION WAS DELETED BY LD. CIT(APPEAL S). AGGRIEVED BY THIS ORDER, NOW REVENUE IS IN APPEAL BEFORE TRIBUNAL. 10. AT THE TIME OF HEARING LD. SR-DR RELIED ON THE ORDER OF ASSESSING OFFICER WHILE LD. AUTHORIZED REPRESENTATIVE REITERA TED THE SUBMISSION MADE BEFORE LD. CIT(A) THAT ASSESSEE WAS FOLLOWING MERCA NTILE SYSTEM OF ACCOUNTING AND THE PROVISION WAS MADE FOR ROYALTY P AYABLE TO M/S. SHAKTI ENGINEERING CO. AS PER THE AGREEMENT WITH THE SAID PARTY AND AO FAILED TO APPRECIATE THAT ROYALTY WAS PAYABLE TO THE SAID CON CERN IN RESPECT OF USER OF ITS REGISTERED TRADEMARK SHENCO RELATING TO THE ROLL VALVES. 11. AFTER HEARING BOTH THE PARTIES WE FIND THAT LD. CIT(A) WHILE GIVING RELIEF TO THE ASSESSEE HAS OBSERVED AS UNDER:- 4.2 AFTER CONSIDERING THE FACTS OF THE CASE AND TH E APPELLANTS SUBMISSION, I FIND THAT THE ROYALTY WAS PAID BY IT FOR USER CHARGES FOR TRADE MARK SHENCO AND THE SAME WAS PAID AFTER REA CHING AN AGREEMENT WITH THE M/S. SHAKTI ENGG. CO. SINCE THE ROYALTY HAS BEEN PROVIDED AS PER THE AGREEMENT AND THE APPELLANT HAS BEEN FOLLOWING MERCANTILE SYSTEM OF ACCOUNTING THE SAME IS ALLOWAB LE EXPENDITURES AND SUCH PAYMENT IS ALSO NOT COVERED UNDER THE PROV ISIONS OF SEC. 43B OF THE ACT. I ALSO FIND THAT NO SUCH DISALLOWANCE W AS MADE IN EARLIER YEARS. I, THEREFORE, HOLD THAT THE DISALLOWANCE OF ROYALTY MADE BY THE A.O IS NOT JUSTIFIED AND DELETE THE SAME. ITA NO. 3953/AHD/2008 A.Y. 2005-06 ACIT (OSD) CIR-8 ABD V. SHENCO VALVES PVT. LT D. PAGE 8 THERE IS NO INFIRMITY IN THE ORDER PASSED BY LD. CI T(A) AND SAME IS HEREBY UPHELD. THIS GROUND OF REVENUES APPEAL IS DISMISSE D. 12. THE FORTH GROUND RELATES TO DISALLOWANCE OF RS. 50,000/- ON ACCOUNT OF OFFICE EXPENSES. THE ASSESSING OFFICER OBSERVED THA T ASSESSEE HAS INCURRED VERY HIGH EXPENSES FOR DISTRIBUTING SWEETS AND OTHE R GIFT ARTICLES TO THEIR CORPORATE AND OTHER CUSTOMERS ON THE OCCASIONS OF D IWALI AND OTHER FESTIVALS. AO FOUND THAT SUCH EXPENSES ARE EXCESSIVE AND HENCE THE ENTIRE AMOUNT OF RS.50,000/- WAS DISALLOWED AND ADDED TO THE INCOME OF ASSESSEE. IN APPEAL, LD. CIT(A) HAS DELETED THIS ADDITION BY OBSERVING T HAT ASSESSING OFFICER HAS NOT DOUBTED THE GENUINENESS OF SUCH EXPENSE AND THE PURPOSE OF INCURRING THE SAME. IT WAS ALSO OBSERVED THAT IT WAS CUSTOMAR Y TO DISTRIBUTE SWEETS AND GIVE GIFTS DURING THE FESTIVALS. THEREFORE ACCORDIN G TO HIM, THIS EXPENSE WAS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF ASSESSEES BUSINESS. WE FIND NO FAULT WITH THE ORDER OF LD. CIT(A) AND THE SAME IS HEREBY UPHELD. THIS GROUND OF REVENUES APPEAL IS ALSO DISMISSED. 13. IN THE RESULT, REVENUES APPEAL IS DISMISSED. ORDER PRONOUNCED IN OPEN COURT ON 15/03/2011 SD/- SD/- (A.N.PHAUJA) (D.K. TYAGI) (ACCOUNTANT MEMBER) (JUDICIAL MEMBER) AHMEDABAD, DATED : 15/03/2011 *DKP COPY OF THE ORDER FORWARDED TO :- 1. THE APPELLANT. 2. THE RESPONDENT. 3. THE CIT(APPEALS)-XIV, AHMEDABAD 4. THE CIT CONCERNS. 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE. BY ORDER, /TRUE COPY/ DEPUTY / ASSTT.REGISTRAR ITAT, AHMEDABAD