C. DINESH & COMPANY P.LTD, MUMBAI V. ACIT 5(1), MUMBAI

ITA 6990/MUM/2012

• Counselvise Citation: [2016] 133 COUNSELVISE.COM (IT) 3508 (ITAT-MUMBAI)
• Duration Of Justice: 3 year(s) 3 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-02-2016
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: C
• Next Hearing Date: 10-03-2015
• Assessment Year: 2009-2010
• Appeal Filed On: 22-11-2012
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: AMIT KUMAR SINGH
• Assessee Lawyers: K A VAIDYALINGAN
• Keywords: Related party transaction; Rule of consistency; Fair market value
• Section: 260A; 43(5)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL,MUMBA I BENCH C, MUMBAI BEFORE SHRI G.S.PANNU, ACCOUNTANT MEMBER AND SHRI PAWAN SINGH, JUDICIAL MEMBER ITA NO.6990/MUM/2012 ASSESSMENT YEAR: 2009-10 M/S C. DINESH & COMPANY PVT. LTD. DW-2332, BHARAT DIAMOND BOURSE, BANDRA KURLA COMPLEX, BANDRA (E), MUMBAI-400051. PAN: AADCC 0451 B VS. ACIT 5(1), AAYAKAR BHAVAN, MUMBAI-400020 (APPELLANT) (RESPONDENT) ASSESSEE BY : SHRI K.A. VAIDYALI NGAN (AR) REVENUE BY : SHRI AMIT KUMAR SI NGH (DR) DATE OF HEARING : 24.02.2016 DATE OF PRONOUNCEMENT : 29.02.2016 O R D E R PER PAWAN SINGH, JM: 1. THE PRESENT APPEAL IS FILED BY THE ASSESSEE AGAINST THE ORDER OF CIT(A)-9, MUMBAI DATED 24.09.2012 IN RESPECT OF ASSESSMENT YEAR (AY) 2009- 10. IN THE APPEAL THE ASSESSEE HAS FILED THE APPEAL RAISING FOUR GROUNDS OF APPEAL, HO WEVER, IN OUR OPINION ONLY TWO BASIC ISSUES ARE RAISED IN THE PRESENT APPEAL. (I) UPHOLDING THE ADDITION OF RS. 29,05,000/- IN RESPEC T OF CANCELLATION OF FORWARD CONTRACTS HOLDING SPECULATIVE IN NATURE AND NOT ALL OWABLE AS PER THE PROVISIONS OF SEC. 43(5) OF THE ACT. (II) UPHOLDING THE ADDITION OF RS. 3,20,000/- U/S. 40A(2 )(B) ON AVERAGE BASIS. 2. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE W HO IS ENGAGED IN THE BUSINESS OF IMPORTING, MANUFACTURING & EXPORTING OF DIAMONDS, F ILED ITS RETURN OF INCOME FOR AY- 2009-10 ON 18.09.2009 DECLARING TOTAL INCOME AT RS. 2,22,52,010/-. THE CASE WAS SELECTED FOR SCRUTINY AND AFTER SERVING THE STATUTO RY NOTICE, THE ASSESSING OFFICER (AO) MADE THE CERTAIN ADDITION/DISALLOWANCE INCLUDING OF DISALLOWANCE U/S. 40A(2)(B) OF RS. 3,20,000/- AND FURTHER DISALLOWED A SUM OF RS. 29,0 5,500/- AS MARK TO MARKET LOSS IN THE 2 ITA NO. 6990/M/2012 M/S C. DINESH & COMPANY PVT. LTD. ASSESSMENT ORDER DATED 26.12.2011 AGAINST WHICH THE APPEAL WAS FILED BEFORE THE CIT(A). THE LD. CIT(A) WHILE DEALING WITH THE APPEA L OF THE ASSESSEE CONFIRMED BOTH THE ADDITIONS IN ITS ORDER DATED 24.09.2012 AGAINST WHICH THE PRESENT APPEAL IS FILED BEFORE US. 3. WE HAVE HEARD LD. AUTHORISED REPRESENTATIVE (AR) OF THE ASSESSEE AND LD. DEPARTMENTAL REPRESENTATIVE (DR) FOR THE REVENUE AN D PERUSED THE MATERIAL AVAILABLE ON RECORD. 4. THE FIRST GROUND FOR OUR CONSIDERATION IS UPHOLDING THE ADDITION OF RS. 29,05,000/- IN RESPECT OF CANCELLATION OF FORWARD CONTRACTS HOLDIN G SPECULATIVE IN NATURE AND NOT ALLOWABLE AS PER THE PROVISIONS OF SEC. 43(5) OF TH E ACT. 5. THE AO WHILE DISALLOWING MARK TO MARKET LOSS BY OBS ERVING THE SAME AS NOTIONAL IN NATURE AND CONCLUDED THAT MARK TO MARKET LOSS IN CA SE OF DERIVATIVES, IT HAD TO BE CONSIDERED THAT THESE LOSSES HAVE NOT BEEN ACCRUED BUT ARE BEING REPORTED MERELY THAT THE SAME IS REQUIRED DUE TO THE ACCOUNTING CODE TO BE F OLLOWED APPARENTLY THESE LOSS ARE NOTIONAL IN NATURE AND THERE IS ALWAYS POSSIBILITY, THERE MAY BE LOSS IN BALANCE-SHEET BUT SUBSEQUENTLY WHEN THE DERIVATIVES EXPIRED IT MAY YI ELD A GAIN AND LIABILITY LOSS MAY ULTIMATELY SEIZED TO EXIST AND FURTHER WHILE REFER RING THE CIRCULAR/INSTRUCTION NO. 3/2010 FROM CBDT AND CONCLUDED THAT MARK TO MARKET LOSS IS IN SUBSTANCE OF MYTHOLOGY OF SEIZING VALUE TO POSITION HELD IN A FINANCIAL INSTR UMENT BASIS ON ITS MARKET PRICE ON THE CLOSING DAY OF THE ACCOUNTING OR REPORTING RECORD. THE LOSS IS A NOTIONAL LOSS AS NO SALE/SETTLEMENT OF CONTRACT HAS TAKEN PLACE AND THE ASSET CONTINUES TO BE OWNED BY THE COMPANY AND THUS A LOSS ON ACCOUNT OF MARK TO MARKE T LOSS IS MERELY A NOTIONAL AND SAME WAS DISALLOWED. 6. THE CIT(A) WHILE CONSIDERING THE DISALLOWANCE HAS OBSERVED THAT THE DETAILS AVAILABLE BEFORE HIM INDICATES THAT ASSESSEE HAS ENTERED INTO SEVERAL FORWARD CONTRACT, WHICH WERE CANCELLED DURING THE YEAR. THE FORWARD CONTRACT IS AN AGREEMENT BETWEEN THE BUYER AND SELLER AND SELLER WHOLLY DEBIT THE SELLER TO DELIVE R THE SPECIFIED ASSET OF SPECIFIED QUALITY AND QUANTITY TO THE BUYER ON A SPECIFIED DATE AND P LACE AND THE BUYER IS OBLIGED TO PAY THE SELLER A PRE-NEGOTIATED PRICE IN EXCHANGE OF D ELIVERY. THE ASSESSEE IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND EXPORTING OF DIAMOND, WHO ENTERED INTO FORWARD CONTRACT IN RESPECT OF FOREIGN EXCHANGE RECEIVABLE AT THE RE SULT OF EXPORT. THIS WAS DONE TO AVOID THE RISK OF LOSS DUE TO FOREIGN EXCHANGE FLUCTUATIO N. THE ASSESSEE AT THE TIME OF CONTRACT FOR EXPORT TOOK INTO CONSIDERATION ITS COST IN RUPE E AND THIS CONSIDERED THE SPOT PRICE OF THE RUPEE . AGAINST THE FOREIGN EXCHANGE AND WHEN THE ACTUAL EX PORT WAS MADE, THE SPOT PRICE MAY BE DIFFERENT AS AGAINST THE RATE WITHOUT ON THE DATE ON WHICH ASSESSEE EXPECTED 3 ITA NO. 6990/M/2012 M/S C. DINESH & COMPANY PVT. LTD. TO EXPORT ORDER. ON THE DATE OF RECEIPT OF FOREIGN EXCHANGE, IF SPOT PRICE OF RS. AGAINST THE FOREIGN EXCHANGE INCREASED THE ASSESSEE WOULD C ERTAINLY BE BENEFITED AND GIVEN AN EXAMPLE THAT IF ASSESSEE INDICATE TO RECEIPT THE EX PORT ORDER, IF THE VALUE OF 1 USD IS INR 45 AND WHEN ACTUAL EXPORT IS MADE THE VALUE OF 1 US D MAY DIFFERENT AND IN CASE ON THE RECEIPT OF FOREIGN EXCHANGE, THE RATE OF 1 USD IS I NR 50, THE ASSESSEE WOULD BE BENEFITED BY THE INR 5 PER USD AND CONCLUDED THAT A S PER THE PROVISION OF SECTION 43(5) CERTAIN CATEGORY OF TRANSACTION WHICH CANNOT BE TRE ATED AS SPECULATIVE TRANSACTION. EXCLUSION IS OF TRANSACTION IN RESPECT OF CONTRACT ACTUAL DELIVERY OF GOODS MANUFACTURED OR MERCHANDISE SOLD BY HIM AND IN CASE OF ASSESSEE IN RESPECT OF FOREIGN EXCHANGE WHICH IS NOT GOODS MANUFACTURE BY ASSESSEE, HENCE IT CANN OT BE SAID THAT TRANSACTION OF SETTLEMENT OF FOREIGN EXCHANGE CONTRACT SETTLED WIT HOUT ACTUAL DELIVERY CAN BE CONSIDERED TO BE COVERED U/S. 43(5) OF THE ACT. 7. THE AR OF THE ASSESSEE HAS ARGUED THAT THE ASSESSEE HAS ENTERED INTO FORWARD CONTRACT FOR US $8,00,000/- AND WERE PENDING MATURITY AT THE END OF THE YEAR IN RESPECT OF CONTRACT AND ASSESSEE HAD RECOGNIZED THE LOSS OF RS.29,05,00 0/- BY REVALUING THE SAME @ PREVALENT AT THE YEAR ENDED WHICH WAS DONE CONSISTE NTLY FROM YEAR TO YEAR BASIS IN ACCORDANCE WITH REQUIREMENT OF ACCOUNTING STANDARD- 11(AS-11), AS AT THE END OF YEAR THE ASSESSEE HAS OUTSTANDING EXPORT RECEIVABLE IN F OREIGN CURRENCY OF USD 40,43,463/- WHICH IS EQUIVALENT TO RS. 9.40 CRORE WHICH WAS RES TATED AS CLOSING RATE AND NOTIONAL GAIN OF RS. 1,11,67,890/- WAS RECOGNIZED AS INCOME. AS AGAINST THESE UNDERLINE EXPORT RECEIVABLE, THE ASSESSEE HAD OUTSTANDING FORWARD CO NTRACT OF USD 8,00,000/- WHICH WAS DISALLOWED BY AO ON THE GROUND THAT IT WAS NOTIONAL AND CONTINGENT WHICH WAS MISUNDERSTOOD BY THE CIT(A) BY CONSIDERING THIS LOS S ON ACCOUNT OF CANCELLATION OF FORWARD CONTRACT. 8. THE DR OF THE REVENUE HAS SUPPORTED THE FINDING OF AUTHORITIES BELOW. 9. LD. AR OF THE ASSESSEE HAS RELIED UPON THE CASE OF M/S INTER JEWEL PVT. LTD. DECIDED BY THE CO-ORDINATE BENCH OF THIS TRIBUNAL (ITA NO. 701 3/MUM/2012) DT. 13.02.2015 & M/S OSIA DIAMONDS (ITA NO. 2163/MUM/2013 DATED 31.07.20 15, WHEREIN THE IDENTICAL GROUNDS WERE RAISED AS UNDER: 6.GROUND NO.2 RELATES TO THE CONFIRMATION OF THE AD DITION MADE AT RS. 2,59,623/- BEING MARK TO MARKET LOSSES TREATING IT AS ONLY NOTIONAL AND CONT INGENT. 7.WHILE SCRUTINIZING THE RETURN OF INCOME, THE AO N OTICED THAT THERE ARE 65 UNMATURED EXPORT FORWARD CONTRACTS AS ON 31.03.2008, OUT OF WHICH ON LY 17 CONTRACTS SHOW GAIN ON ACCOUNT OF M TO M COMPUTATION. ALL OTHER CONTRACTS SHOW LOSS. TH E NET RESULT COMES TO RS. 2,59,623/-. THE ASSESSEE WAS ASKED TO EXPLAIN ITS STAND. IT WAS EXP LAINED THAT FOLLOWING THE ACCOUNTING STANDARD AS-11, THE ASSESSEE HAS RECOGNIZED NET GAIN IN RESP ECT TO MARK TO MARKET TREATMENT AND LOSS IS AT THE END OF THE YEAR AND IS AN ALLOWABLE LOSS IN THE LIGHT OF THE DECISION IN THE CASE OF WOODWARD GOVERNOR INDIA PVT. LTD. 294 ITR 451 294 ITR (DEL.) RELIANCE WAS FURTHER PLACED ON THE DECISION OF SPECIAL BENCH OF THE MUMBAI TRIBUNAL IN THE CASE OF BANK OF BAHRAIN & KUWAIT IN 4 ITA NO. 6990/M/2012 M/S C. DINESH & COMPANY PVT. LTD. ITA NO. 4404 & 1883/MUM/04. IT WAS FURTHER EXPLAINE D THAT THE ASSESSEE HAS EARNED NET GAIN ON ACCOUNT OF MARK TO MARKET TREATMENT AT RS. 3,04,35, 109/-, WHICH HAS BEEN SHOWN SEPARATELY. THE NET GAIN COMES TO RS. 3,01,75,486/-. IN EFFECT THE ASSESSEE HAS SHOWN SUBSTANTIAL GAIN FROM THE MARK TO MARKET TREATMENT. THE EXPLANATION OF THE AS SESSEE WAS DISMISSED BY THE AO., WHO WAS OF THE FIRM BELIEF THAT THE LOSS OR GAIN IS ONLY NOTIO NAL AND CONTINGENT. DRAWING SUPPORT FROM THE CBDT INSTRUCTION NO.3 OF 2010 THE AO DISALLOWED RS. 2,59,623/-. THE ASSESSEE CARRIED THE MATTER BEFORE LD. CIT(A), BUT WITHOUT ANY SUCCESS. 8.BEFORE US, THE LD. COUNSEL FOR THE ASSESSEE REITE RATED WHAT HAS BEEN STATED BEFORE LOWER AUTHORITIES. LD. COUNSEL FOR THE ASSESSEE POINTED O UT THAT THE REVENUE AUTHORITIES HAVE PROCEEDED ON A MISTAKEN BEFORE THE ASSESSEE HAS CAN CELLED THE FORWARD CONTRACTS AND, THEREFORE, THE CONTRACTS ME SPECULATIVE IN NATURE, WHEREAS THE LOSS IS ON ACCOUNT OF RESTATEMENT OF OUTSTANDING FORWARD CONTRACT AT THE END OF THE YEAR . LD. COUNSEL FOR THE ASSESSEE RELIED UPON THE DECISION OF WOODWARD GOVERNOR INDIA PVT. LTD. 312 I TR 254 (SE) AND THE MUMBAI TRIBUNAL 'S SPECIAL BENCH DECISION IN THE CASE OF BANK OF BAHRA IN & KUWAIT,5 ITR (TTIB.) 301. LD. COUNSEL ALSO RELIED UPON NUMBER OF DECISIONS OF THE TRIBUNA L WHICH HAVE FOLLOWED THE DECISION OF THE HON'BLE SUPREME COURT AND SPECIAL BENCH OF THE TRIB UNAL. 9, PER CONTRA, LD OR STRONGLY SUPPORTED THE FINDING S OF THE REVENUE AUTHORITIES 10. WE HAVE CAREFULLY PERUSED THE ORDER OF LD. CIT( A) AND THE DECISIONS BROUGHT TO OUR NOTICE. IN OUR CONSIDERED OPINION AND THE UNDERTAKING OF TH E FACTS WE FIND THAT THE REVENUE AUTHORITIES HAVE PROCEEDED ON A WRONG ASSUMPTION OF FACTS. WE F IND THAT THE DECISION OF THE TRIBUNALS SPECIAL BENCH IN THE CASE OF BANK OF BAHRAIN & KUWA IT (SUPRA) SQUARELY APPLY ON THE FACTS OF THE CASE AND ALSO BY THE VARIOUS JUDICIAL PRONOUNCEMENT S LIKE KUMBH GEMS IN ITA NO. 6600/MUM/2012, H. DIPAK & CO. IN ITA NO. 7659/MUM/2 011, BHAVANI GEMS IN ITA NO. 2855/MUM/2010 AND M/S. SUTARIYA GEMS PVT. LTD. IN 3 361/MUM/2011. THEREFORE, WE HAVE NO HESITATION IN SETTING ASIDE THE ORDER OF LD. CIT(A) AND IN DIRECTING THE AO TO DELETE THE ADDITION OF RS. 2,59,623/-. GROUND NO.2 IS ALLOWED. 10. WE HAVE GIVEN THE CAREFUL CONSIDERATION TO THE OBSE RVATION MADE BY THE AO AS WELL AS CIT (A), WHILE CONFIRMING THE DISALLOWANCE ON ACCO UNT OF MARKED TO MARKET LOSS, WE FOUND THAT LOWER AUTHORITY HAS MADE THEIR OPINION O N THE BASIS OF PRESUMPTIONS AND THE CO-ORDINATE BENCH OF THIS TRIBUNAL HAS REDRESSED TH E SIMILAR ISSUE IN M/S INTER JEWEL PVT. LTD. AND THE SAME SQUARELY COVERS THIS GROUND SO, F OLLOWING THE PRINCIPLE OF CONSISTENCY, WE ACCEPT THE APPEAL OF THE ASSESSEE AND ALLOW THIS GROUND. 11. NEXT ISSUE FOR OUR CONSIDERATION IS ADDITION OF RS. 3,20,000/- U/S. 40A(2)(B), THE AO WHILE DEALING WITH THE ADDITION HAS OBSERVED THAT D URING THE YEAR UNDER CONSIDERATION, ASSESSEE PURCHASED POLISHED DIAMOND OF RS. 5,00,000 /- FROM ITS RELATED PARTY AND AO ASKED THE ASSESSEE AS TO WHY THE DISALLOWANCE SHOUL D NOT BE MADE AS THE PURCHASE PRICE APPEARS TO BE ON A HIGHER SIDE AND THE ASSESSEE MAD E A STATEMENT BEFORE THE AO THAT PRICE PAID TO M/S AURA JEWELS IS REASONABLE HAVING REGARD TO THE LEGITIMATE NEED OF THE BUSINESS OF THE COMPANY WHICH WAS NOT UNRESULTED AN D AS PER QUALITY OF POLISHED DIAMOND AND THE SAME WAS NOT ACCEPTED BY THE AO ON THE GROUND THAT THE ASSESSEE HAD OPENING STOCK OF CUT AND POLISHED DIAMOND OF 33197, 48 CARAT WHICH WAS VALUED AT RS. 39,88,42,225/- AND THE AVERAGE RATE PER CARAT COMES TO RS. 3646/- AND SIMILARLY AVERAGE RATE PER CARAT FOR PURCHASE CUT OF POLISHED DIAMOND DURING THE YEAR WAS RS. 7483.96/- WHEREAS SALES IS RS.11,453.77/- IN RESPECT OF PURCH ASE FROM M/S AURA JEWELS, THE AVERAGE PER CARAT COMES TO RS.41,666.66 (12 CARAT @ 5,00,000/-) AND BY DEDUCTING 5 ITA NO. 6990/M/2012 M/S C. DINESH & COMPANY PVT. LTD. AVERAGE RATE FROM PURCHASE MADE FROM M/S AURA JEWEL S A SUM OF RS. 3,20,000/- WAS ADDED BACK TO THE TOTAL INCOME OF ASSESSEE. 12. THE CIT(A) WHILE DEALING WITH THIS GROUND CONCLUDE D THAT M/S AURA JEWELS IS RELATED PARTY AS DEFINED U/S. 40A(2)(B) OF THE ACT AND THE ASSESSEE HAD PAID EXCESSIVE CONSIDERATION FOR THE PURCHASE OF 12 CARAT ON DIAMO ND FROM OTHER PERSONS ARE MUCH LOWER AND THE PURCHASE RATE FROM SISTER CONCERN IS UNJUSTIFIABLE AND EXCESSIVE AND FURTHER CONCLUDED THAT AO HAS GIVEN SUBSTANTIAL RELIEF BY C OMPARING THE PURCHASE MADE FROM M/S AURA JEWELS WITH THE RATE OF 200% OF THE AVERAG E PURCHASE PRICE MADE FROM OUTSIDE AND UNRELATED CONCERN DURING THE SAME FINANCIAL YEA R AND CONFIRMED THE ADDITION. 13. AR OF THE ASSESSEE HAS ARGUED THAT AO AS WELL AS CI T(A) FAILED TO APPRECIATE THAT SINCE NO TWO DIAMONDS CANNOT BE SIMILAR OR IDENTICAL AND THEIR VALUE IS BASED ON VARIOUS FACTORS CALLED COLOUR, CLARITY, CUT, CARATS ETC. AN D AVERAGE FOR COMPARISON OF PRICE IS NOT PROPER AND APPROPRIATE AS IT WOULD TEND TO DISTORT THE VALUE AND RELIED UPON THE JUDGMENT OF JURISDICTIONAL HIGH COURT IN CASE OF CIT VS. IND O SAUDI SERVICES (TRAVEL) (P) LTD. REPORTED VIDE 310 ITR 306 AND DECISION OF ITAT, MUM BAI IN ITA NO. 7119/M/11 TITLED AS INDO BEARING TRADERS. THE LD. AR FOR ASSESSEE ALSO ARGUED THAT THE PERCENTAGE OF THE TOTAL INCOME TURNOVER IN THE CASE OF RELATED PA RTY FIRM IS 1.94 , WHEREAS IN THE CASE OF ASSESSEE COMPANY ,IT IS 2.7. APPLYING THE DIFFEREN TIAL NET PROFIT PERCENTAGE OF 0.23% ON TURNOVER OF RS. 5 LAC, THE NET PROFIT OF THE ASSESS EE WOULD HAVE BEEN HIGHER BY RS. 1150/- AND THE DIFFERENCE OF TAX IS MERELY OF RS.391/-HOWE VER THE DISALLOWANCE U/S 40A(2)(B) WAS AT RS 3.20 LACS, HENCE MADE A EMPHASIS RATE T HAT THERE WAS NO MOTIVE OF TAX EVASION IN THESE TRANSACTION. 14. LD. DR RELIED UPON THE ORDER OF AUTHORITIES BELOW. 15. WE HAVE PERUSED THE ORDER OF AO AS WELL AS CIT(A), NO DOUBT THE AO HAS ASSESSED THE VALUE OF RELATED PARTY TRANSACTION ON THE BASIS OF ITS VOLUME DIVIDED BY COST AND THIS CALCULATED THE DIFFERENCE OF COST OF DIAMOND PER CA RAT INSTEAD OF FINDING THE QUALITY, COLOR, CLARITY, CUT AND CARATS OF THE DIAMOND. 16. IN CIT VS. INDO SAUDI ARABIA TRAVELS P. LTD., THE H ONBLE JURISDICTIONAL HIGH COURT WHILE CONSIDERING THE SIMILAR ISSUES HAS HELD THAT NO DISALLOWANCE IS TO BE MADE IN RESPECT OF PAYMENT TO SISTER CONCERN WHERE THERE IS NO ATTEMPT TO EVADE TAX. 17. THE CO-ORDINATE BENCH OF THIS TRIBUNAL IN THE CASE OF INDO BEARING TRADERS VS. ACIT, (ITA NO. 7119/M/11 DATED 10.10.2012) WHILE FOLLOWIN G THE JUDGEMENT OF THE HON'BLE JURISDICTIONAL HIGH COURT HAS HELD AS UNDER : 2.4 IT IS CLEAR THAT THE OBJECTIVE OF SECTION 40A( 2) IS TO CHECK EVASION OF TAX THROUGH EXCESSIVE OR UNREASONABLE PAYMENTS TO THE ASSOCIATES CONCERN AND, THEREFORE, THIS PROVISION SHOULD NOT BE 6 ITA NO. 6990/M/2012 M/S C. DINESH & COMPANY PVT. LTD. APPLIED IN A MANNER WHICH WILL CREATE HARDSHIP IN B ONAFIDE CASES. THE ASSESSEE HAS CLAIMED AND FILED DETAILS BEFORE US SHOWING THAT THE RECIPIENT OF THE INTEREST ARE PAYING THE INCOME TAX AT THE HIGHEST RATE AND EQUIVALENT TO THE RATE OF TAX AT W HICH THE ASSESSEE'S PAYING TAX. TO SUBSTANTIATE THE CONTENTION, THE LEARNED AR OF THE ASSESSEE HAS RELIED UPON THE DECISION OF THE HON'BLE JURISDICTIONAL HIGH COURT IN THE CASE OF CIT VS. IN DO SAUDI SERVICES (TRAVEL) P. LTD. (SUPRA), WHEREIN THE HON'BLE HIGH COURT HAS OBSERVED IN PARA 5 AS UNDER :- '5. IN VIEW OF THE AFORESAID ADMITTED FACTS WE ARE OF THE VIEW THAT THE TRIBUNAL WAS CORRECT IN COMING TO THE CONCLUSION THAT THE COMMIS SIONER OF INCOME-TAX (APPEALS) WAS WRONG IN DISALLOWING HALF PER CENT COMMISSION TO TH E SISTER CONCERN OF THE ASSESSEE DURING THE ASSESSMENT YEARS 1991-92 AND 1992-93. TH E LEARNED ADVOCATE APPEARING FOR THE APPELLANT IS ALSO NOT IN A POSITION TO POINT OU T HOW THE ASSESSEE EVADED PAYMENT OF TAX BY THE ALLEGED PAYMENT OF HIGHER COMMISSION TO ITS SISTER CONCERN SINCE THE SISTER CONCERN WAS ALSO PAYING TAX AT HIGHER RATE AND COPI ES OF THE PAYMENT ORDERS OF THE SISTER CONCERN WERE TAKEN ON RECORD BY THE TRIBUNAL .' 2.5 SIMILARLY, IN THE CASE OF CIT VS. V.S. DEMPO & CO. (P.) LTD.(SUPRA), THE HON'BLE HIGH COURT HAS HELD IN PARA 4 AS UNDER :- '4. CLAUSE (A) OF SUB-SO (2) OF S. 40A OF THE INCOM E-TAX PROVIDES THAT WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT HAS BEE N OR IS TO BE MADE TO ANY PERSON REFERRED TO IN CL. (B) OF THE SUB- SECTION AND THE A 0 IS OF TH E OPINION 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 MADE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT 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 A DEDUCTION. CLAUSE (B) OF SUB-SO (2) OF S. 40A OF THE INCOME-TAX MENTIONS THE CLASS OF PERSONS IN RESPECT OF WHOM CL. (A) IS ATTRACTED. LEARNED COUNSEL FOR THE RESPONDENT SUBMI TS THAT M/S DEMPO MINING CORPORATION (P) LTD., (HEREINAFTER REFERRED TO AS 'THE SUBSIDIARY C OMPANY'') FROM WHICH THE ASSESSEE PURCHASED THE IRON ORE IS NOT ONE OF THE PERSONS MENTIONED IN CL. (B) OF SUB-SO (2) OF S. 40A AND, THEREFORE, SUB-S. 2(A) WAS NOT ATTRACTED. IN THE ALTERNATIVE H E SUBMITTED THAT THE FINDING RECORDED BY THE CIT(A) AS WELL AS THE TRIBUNAL THAT THE ASSESSEE HA D PAID A LITTLE HIGHER THAN THE USUAL RATE TAKING INTO CONSIDERATION THE FACT THAT THE ASSESSE E WAS ASSURED A HUGE QUANTITY OF SUPPLY, AS WELL AS THE QUALITY OF SUPPLY THAT IT CANNOT BE SAI D THAT THE RATE WAS UNJUSTIFIED, WAS A FINDING OF FACT. IN THE ABSENCE OF ANY PERVERSITY, THE FINDING OF FACT RECORDED BY THE CIT(A) AND CONFIRMED BY THE TRIBUNAL CANNOT BE INTERFERED WITH IN AN APP EAL UNDER S. 260A OF THE ACT. HE FURTHER SUBMITTED THAT BOTH THE ASSESSEE, AS WELL AS THE SU BSIDIARY WERE REGISTERED COMPANIES UNDER THE COMPANIES ACT, 1956 LIABLE TO PAY THE INCOME-TAX AT THE SAME RATE. THEREFORE, THERE WAS NO QUESTION OF DIVERSION OF ANY FUNDS. HE INVITED OUR ATTENTION TO THE CBDT CIRCULAR NO. 6-P DT. 6TH JULY, 1968, WHICH STATES THAT NO DISALLOWANCE IS TO BE MADE UNDER S. 4OA(2) IN RESPECT OF THE PAYMENTS MADE TO THE RELATIVES AND SISTER CONCERNS WHERE THERE IS NO ATTEMPT TO EVADE TAX. HE SUBMITTED THAT THE CIT(A) AS WELL AS THE TRIBUNAL H AVE ALSO RECORDED A FINDING OF FACT THAT THERE WAS NO ATTEMPT OF EVASION OF TAX AND, THEREFORE, IN VIEW OF THE CBDT CIRCULAR DT. 6TH JULY, 1968, S. 4OA(2) WAS NOT ATTRACTED AND SHOULD NOT HAVE BEE N APPLIED BY THE AO. THE CIRCULAR IS BINDING ON THE DEPARTMENT AND ON THIS GROUND ALSO THE APPEA L SHOULD BE DISMISSED. 18. THE PRINCIPAL ENUNCIATED IN THE JUDGEMENT DISCUSSE D ABOVE, CLEARLY, ESTABLISH THAT THE PAYMENT MADE TO THE SISTER CONCERN, SHOULD NOT BE U NREASONABLE OR EXCESSIVE, FURTHER THERE MUST NOT BE AN ELEMENT TO AVOID TAX. IN THE PRESENT CASE THE AO CALCULATED THE PRICE OF DIAMONDS AT THE AVERAGE BASIS OF ITS VOLUME DIVIDED BY COST AND THUS CALCULATED THE DIFFERENCE OF COST OF DIAMOND PER CARAT INSTEAD OF CONSIDERING THE QUALITY THE QUALITY, COLOUR, CLARITY, CUT AND CARATS OF THE DIAMOND. 7 ITA NO. 6990/M/2012 M/S C. DINESH & COMPANY PVT. LTD. 19. WE HAVE ALSO NOTICED THAT THAT THE PERCENTAGE OF T HE TOTAL INCOME TURNOVER IN THE CASE OF RELATED PARTY FIRM IS 1.94 , WHEREAS IN THE CASE OF ASSESSEE COMPANY ,IT IS 2.7, APPLYING THE DIFFERENTIAL NET PROFIT PERCENTAGE OF 0.23% ON TURN OVER OF RS. 5 LAC, THE NET PROFIT OF THE ASSESSEE WOULD HAVE BEEN HIGHER BY RS. 1150/- AND T HE DIFFERENCE OF TAX IS MERELY OF RS.391.(EMPHASIS SUPPLIED) 20. IN VIEW OF THE ABOVE DISCUSSION, GROUND NO.2 RAIS ED IN THE PRESENT APPEAL IS ALSO ALLOWED. IN THE RESULT, APPEAL FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS DAY OF 29 TH FEBRUARY, 2016. SD/- SD/- ( G.S.PANNU ) (PAWAN SINGH) ACCOUNTANT MEMBER JUDICIAL MEMBER MUMBAI; DATED 29/02/2016 S.K.PS/JV, SPS / COPY OF THE ORDER FORWARDED TO : / BY ORDER, / (ASSTT.REGISTRAR) , / ITAT, MUMBAI 1. / THE APPELLANT 2. / THE RESPONDENT. 3. ( ) / THE CIT(A), MUMBAI. 4. / CIT 5. , , / DR, ITAT, MUMBAI 6. !'# / GUARD FILE. $ //TRUE COPY/