The DCIT, Circle-1(2), Baroda V. M/s. Jaytick Intermiate Pvt.Ltd., Baroda

ITA 715/AHD/2010

• Counselvise Citation: 71520514 RSA 2010
• Duration Of Justice: 2 year(s) 2 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-05-2012
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 17-05-2012
• Assessment Year: 2004-2005
• Appeal Filed On: 05-03-2010
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: DINESHCHANDRA SHARMA
• Assessee Lawyers: YAGNESH DESAI
• Keywords: Opportunity of being heard; Fair market value; Notional interest; Commercial expediency

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD A BENCH AHMEDABAD BEFORE SHRI D.K.TYAGI , JUDICIAL MEMBER AND SHRI T.R. MEENA, ACCOUNTANT MEMBER ITA NO. 715 & 716/AHD/2010 ASSESSMENT YEAR :2004-05 & 2005-06 THE DCIT., CIR.1 (2), BARODA V/S . M/S JAYTICK INTERMEDIATES P LTD. 124-18 GIDC NANDESARI, BARODA. 341340 PAN NO. AAACJ4592P (APPELLANT) .. (RESPONDENT) BY APPELLANT SHRI DINESH CHANDRA SHARMA, SR. D.R. /BY RESPONDENT SHRI YAGNESH DESAI, A.R. /DATE OF HEARING 17.05.2012 /DATE OF PRONOUNCEMENT 25.05.2012 O R D E R PER : T.R.MEENA, ACCOUNTANT MEMBER THESE ARE TWO APPEALS OF THE REVENUE ARISES OUT OF THE ORDER OF CIT(A)- I, BARODA, ORDERS DATED 25.11.2009 & 26.11.2009 FOR ASSESSMENT YEARS 2004- 05 & 2005-06 RESPECTIVELY. 2. THE MAIN ADDITION WAS MADE BY THE A.O. UNDER SEC TION 40A(2) (B) OF THE IT ACT IN A.Y. 2004-05 AT RS. 5,25,000/- AND RS . 1,50,853/- AND IN A.Y. 2005-06 THE ADDITION WAS RS. 6,00,000/- AND RS. 3,0 4,197/-. THE THIRD GROUND ITA NO. 715-716/AHD/2010 A.Y.2004-05 & 2005-06 PAGE 2 OF APPEAL FOR A.Y. 2005-06 IS AGAINST DELETING THE ADDITION OF RS.4,59,676/- ON ACCOUNT OF ADJUSTMENT OF EXCISE DUTY ON CLOSING STO CK UNDER SECTION 145A OF I.T. ACT. 3. THE EFFECTIVE GROUNDS OF ITA NO. 715/A/2010 FOR A.Y. 2004-05 ARE AS UNDER:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD.CIT(APPEALS) ERRED IN DELETING THE ADDI TION OF RS. 5,25,000/- MADE U/S.40A(2)(B) OF THE ACT BEING INTEREST ON THE AMOUNT OF RS. 50 LACS ADVANCE TO BARODA INTERMEDIATES PVT.LTD. THE LD. CIT(A) OUGHT TO HAVE APPRECIATED THE FACT THAT BY ADVANCING THE AMO UNT OF RS.50 LACS WITHOUT CHARGING INTEREST THE ASSESSEE REDUCED ITS TAX LIABILITY BY VIRTUE OF ITS TRANSACTION OF SERVICE CONTRACT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD.CIT(APPEALS) ERRED IN DELETING THE ADDI TION OF RS. 1,50,853/- MADE U/S.40A(2)(B) OF THE ACT BEING THE DIFFERENCE OF RS. 32.40 LACS (INTEREST OF RS.5.40 LACS ON THE AMOUNT OF RS.45 LA CS DEPOSITED FOR SERVICE CONTRACT WITH YUJETIDE INDUSTRIES PVT. LTD. [YIPL] TOGETHER WITH THE SERVICE CHARGES OF RS.27 LACS) AND COST OF LABOUR I NCLUDING PROFIT OF YIPL OF RS. 30,89,147/-. THE CIT(A) ERRED IN NOT A PPRECIATING THE FACT THAT THE PAYMENT ATTRACT THE PROVISIONS OF SECTION 40A(2)(A) R.W.S. 40A(2)(B) OF THE ACT. 3. THE APPELLANT CRAVES LEAVE TO ADD TO, AMEND OR A LTER THE ABOVE GROUNDS AS MAY BE DEEMED NECESSARY. 4. THE EFFECTIVE GROUNDS OF ITA NO. 716/A/2010 FOR A.Y. 2005-06 ARE AS UNDER:- 1. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE C ASE AND IN LAW, THE LD.CIT(APPEALS) ERRED IN DELETING THE ADDI TION OF RS. 6,00,000/- MADE U/S.40A(2)(B) OF THE ACT BEING INTEREST ON THE AMOUNT OF RS. 50 LACS ADVANCE TO BARODA INTERMEDIATES PVT.LTD. THE LD. CIT(A) OUGHT TO HAVE APPRECIATED THE FACT THAT BY ADVANCING THE AMO UNT OF RS.50 LACS WITHOUT CHARGING INTEREST THE ASSESSEE REDUCED ITS TAX LIABILITY BY VIRTUE OF ITS TRANSACTION OF SERVICE CONTRACT. 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD.CIT(APPEALS) ERRED IN DELETING THE ADDI TION OF RS. 3,04,197/- MADE U/S.40A(2)(B) OF THE ACT BEING THE DIFFERENCE OF RS. 32.40 LACS (INTEREST OF RS.5.40 LACS ON THE AMOUNT OF RS.45 LA CS DEPOSITED FOR SERVICE CONTRACT WITH YUJETIDE INDUSTRIES PVT. LTD. [YIPL] TOGETHER WITH THE SERVICE CHARGES OF RS.27 LACS) AND COST OF LABOUR I NCLUDING PROFIT OF ITA NO. 715-716/AHD/2010 A.Y.2004-05 & 2005-06 PAGE 3 YIPL OF RS. 29,35,803/-. THE CIT(A) ERRED IN NOT A PPRECIATING THE FACT THAT THE PAYMENT ATTRACT THE PROVISIONS OF SECTION 40A(2)(A) R.W.S. 40A(2)(B) OF THE ACT. 3. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E AND IN LAW, THE LD. CIT(APPEALS) ERRED IN DELETING THE ADD ITION OF RS.4,59,676/- BEING ADJUSTMENT MADE IN REDUCING PROFIT IN RESPECT OF EXCISE DUTY ON PURCHASE, SALES AND CLOSING STOCK U/S. 145A OF THE ACT. THE METHOD ADOPTED BY THE ASSESSEE BY EXCLUDING EXCISE DUTY FO R THE PURPOSE OF VALUATION OF FINISHED GOODS IS UNTENABLE AND IN ORD ER TO SHOW DECREASED PROFIT RATE IN VIEW OF SECTION 145A OF FINANCE (NO. 2) ACT, 1998 W.E.F.01.04.1999. 4. THE APPELLANT CRAVES LEAVE TO ADD TO, AMEND OR A LTER THE ABOVE GROUNDS AS MAY BE DEEMED NECESSARY. 5. APROPOS TO GROUND NOS. 1 AND 2 ARE AS STATED:- (A) TRANSACTION WITH M/S. BARODA INTERMEDIATES P VT-LTD. AS STATED ABOVE THE ASSESSEE COMPANY HAD ENTERED IN TO A CONTRACTUAL AGREEMENT DATED 13 TH OCT. 2000 WITH M/S, BARODA INTERMEDIATES PVT. LTD. (HEREINAFTER REFERRED TO AS BIPL) FOR CAUSING TO CARRY OUT CERTAIN PROCESSES AT ITS FACTORY FACILITY AT 128/27,GIDC, NANDESARI. UNDER THE SAID SERVICE CONTRACT THE ASSE SSEE COMPANY WAS TO PROVIDE THE CONTRACTEE I.E. BIPL THE RAW MATERIA LS FOR THE MANUFACTURE OF PRODUCTS ENLISTED IN THE SAID SERVICE CONTRACT. ALL THE OVERHEADS RELATING TO MANUFACTURE AND OTHER INCIDENTALS WERE TO BE BORNE BY M/S. BIPL. IN RECOGNITION OF THE SERVICE CONTRACT THE AS SESSEE COMPANY WAS CONTRACTED TO PAY BIPL SERVICE CHARGES OF RS.175000 /- PM. DURING THE COURSE OF ASSESSMENT PROCEEDINGS SHRI YAGNESH DESAI WAS REQUESTED TO FURNISH THE RELEVANT DETAILS IN THIS REGARD WHIC H WERE NECESSARY TO ASCERTAIN WHETHER THE PAYMENTS MADE TO M/S. BIPL WA S REASONABLE WITHIN THE MEANING OF THE PROVISIONS OF SECTION 40A (2)(A) R.W.S. 40A(2)(B), M/S. BIPL WAS DURING THE RELEVANT ASSESS MENT YEAR A PERSONS SPECIFIED UNDER THE PROVISIONS OF SECTION 4 0A(2)(B). IT WAS ALSO OBSERVED THAT THE ASSESSEE COMPANY HAD GIVEN A DEPO SIT OF RS. 50 LACS TO M/S. BIPL ON WHICH NO INTEREST WAS CHARGED BY T HE ASSESSEE COMPANY. IT IS THEREFORE STATED IN THIS REGARD THA T WHILE CONSIDERING THE OUT FLOW OF RESOURCES FROM THE ASSESSEE COMPANY IN PURSUANCE OF THE CONDITION UNDERLYING THE SERVICE CONTRACT TOWARDS D ISCHARGE OF ITS LIABILITY IN RESPECT OF THE SERVICE CHARGES, COGNIZANCE OF DE POSIT OF RS. 50 LACS IS ALSO REQUIRED TO BE TAKEN PARTICULARLY IN VIEW O F THE FACT THAT NO INTEREST WAS CHARGED BY THE ASSESSEE COMPANY FROM M ./S. BIPL ON SUCH DEPOSIT. IN THIS RESPECT THEREFORE THE INTERES T FACTOR AS WELL AS THE SERVICE CHARGES PAID BY THE ASSESSEE COMPANY TO M/S . BIPL HAVE TO BE CONSIDERED IN ENTIRETY TO ARRIVE AT THE FACTOR OF R EASONABLENESS OF ITA NO. 715-716/AHD/2010 A.Y.2004-05 & 2005-06 PAGE 4 PAYMENT U/S. 40A(2)(B). DURING THE PREVIOUS YEAR UN DER ASSESSMENT THE ASSESSEE COMPANY HAD RECEIVED 70 MT OF 4/NAP CHEMIC AL DYES- INTERMEDIATES MANUFACTURED BY BIPL UNDER THE SAID S ERVICE CONTRACT. THE ASSESSEE COMPANY HAD FURNISHED THE DETAILS OF P RODUCTION COST ENTAILED BY THE ASSESSEE AS WELL AS M/S. BIPL AS BO TH THE ASSESSEE COMPANY AS WELL AS M/S. BIPL HAD MANUFACTURED 4/NAP CHEMICAL DYES INTERMEDIATES DURING THE YEAR. ON PERUSALS OF THESE DETAILS IT WAS OBSERVED THAT THE PRODUCTION COST OF 4/NAP PER KG. IN THE CASE OF BIPL WAS RS. 25 PER KG. WHEREAS THE INHOUSE PRODUCTION O F THE ASSESSEE ENTAILED THE PRODUCTION COST OF RS. 31 PER KG,. CON SIDERING THIS AS A MARKET STANDARD COST THE COST OF 70 MT WORKED OUT T O RS. 21.70LACS (31 X 700000) THE ASSESSEE HAD PAID RS. 21 LACS AS SERV ICES CHARGES TO M/S. BIPL. HOWEVER IT HAD PLACED INTEREST FREE DEPO SIT OF RS. 50 LACS AT THE DISPOSAL OF M/S. BIPL. AS STATED ABOVE WHILE CO NSIDERING THE REASONABLENESS OF PAYMENT OF SERVICES CHARGES MADE BY THE ASSESSEE TO BIPL THE INTEREST COST CEDED IN FAVOUR OF BIPL A LSO IS REQUIRED TO BE TAKEN COGNIZANCE OF. THE CUMULATIVE CHARGES THEREFO RE INCURRED BY THE ASSESSEE WITH THE SERVICE CHARGES AND LOSS OF INTER EST ON THE SAID SUM OF RS. 50 LACS APPEARED TO BE HIGHER ON THE HIGHER SIDE RESULTING IN EXCESSIVE PAYMENTS BEING MADE BY THE ASSESSEE COMPA NY IN RESPECT OF THE TRANSACTION OF SERVICE CONTRACT WITH M/S. BI PL. ACCORDINGLY IT WAS PROPOSED THAT ADOPTING REASONABLE STANDARD RATE AS PER THE MARKET TREND 25% DISALLOWANCE WAS PROPOSED TO BE MADE. THI S ENTAILED ADDITION OF RS. 525000/- (I.E. 25 X 21 / 100) IT WA S SUBMITTED IN THIS REGARD THAT THE PAYMENT MADE TO BIPL FOR OUTSOURCIN G PRODUCTION OF 4/NAP WAS REASONABLE IN VIEW OF THE FACT THAT THE P RODUCTION CHARGES INCURRED BY THE ASSESSEE IN HOUSE WAS HIGHER THAN T HE PRODUCTION CHARGES INCURRED BY BIPL FOR THE MANUFACTURE OF THE SAME PRODUCT. IT WAS ALSO PLEADED THAT SINCE IT WAS ECONOMICAL FOR T HE ASSESSEE COMPANY TO OUTSOURCE THE MANUFACTURE OF ITS PRODUCT S IT HAD TAKEN THE BUSINESS DECISION HAVING REGARD TO COMMERCIAL EXPED IENCY TO ENGAGE THE SERVICES OF BIPL WHOSE MACHINERIES WERE OTHERWI SE LYING IDLE. IT WAS ALSO STATED THAT FOR USE OF ANY FACILITY THE OW NER OF SUCH FACILITY WOULD ALWAYS CHARGE A CERTAIN LUMPSUM AMOUNT TO PAY AS DEPOSIT FOR ENABLING THE USE OF SUCH FACILITIES AND THEREFORE I T WAS ORDINARY BUSINESS TRANSACTION FOR THE ASSESSEE COMPANY TO HAVE PAID T HE DEPOSIT OF RS. 50 LACS TO THE M/S. BIPL. I HAVE CAREFULLY CONSIDER ED THE SUBMISSION OF THE ASSESSEE. HOWEVER I DO NOT AGREE WITH THE CONTE NTIONS EXPRESSED THEREIN. IN THE FIRST PLACE IT IS STATED THAT THE I NQUIRY WHICH IS REQUIRED TO BE MADE U/S. 40A(2)(A) IS ONLY WITH REGARD TO THE R EASONABLENESS OF THE PAYMENTS MADE BY THE ASSESSEE COMPANY TO PERSONS SP ECIFIED U/S. 40A(2)(B). THEREFORE THE PARTICULAR OF PRODUCTION V ALUES ON COMPARATIVE TERMS WAS TO BE TAKEN AS THE BASIS FOR DECIDING WHE THER SERVICE CHARGES PAID BY THE ASSESSEE COMPANY WERE REASONABL E OR OTHERWISE. THIS EXERCISE HAVING BEEN DONE THE ISSUE OF DEPOSIT GIVEN TO BIPL WAS ALSO CENTRALLY ENDEMIC TO THE ISSUE OF REASONABLENE SS AS IT REPRESENTED ITA NO. 715-716/AHD/2010 A.Y.2004-05 & 2005-06 PAGE 5 THE OUT FLOW OF ECONOMIC RESOURCES FROM THE ASSESSE E COMPANY IN CONNECTION WITH THE SERVICE CONTRACT ENTERED INTO B ETWEEN THE ASSESSEE COMPANY AND M/S. BIPL. I SINCE COST OF INTEREST NOT RECOVERED BY THE - ASSESSEE FROM BIPL WOULD INDIRECTLY ADD TO THE CHAR GES INCURRED BY THE ASSESSEE IN CONNECTION WITH THE SERVICE CONTRACT, I TS ENTERING INTO THE BASIS FOR DECIDING UPON THE REASONABLENESS OF PAYME NT WOULD ALSO BE A NATURAL COROLLARY. IN THE CIRCUMSTANCES AND FACTS O F THE CASE REJECTING THE CONTENTION OF THE ASSESSEE A SUM OF RS. 525000/ - IS DISALLOWED AS BEING EXCESSIVELY AID WITHIN THE MEANING OF SECTION 40A(2)(A) R.W.S. 40A(2)(B). IN VIEW OF THE FACT THAT THE ASSESSEE HA S CAUSED TO REDUCE ITS IT LIABILITY BY VIRTUE OF ITS TRANSACTION OF SERVIC E CONTRACT WITH ITS SISTER CONCERN BY PAYING EXCESSIVELY BEYOND REASONABLE LIM IT IT HAD COST TO EVADE TAXES FOR WHICH I AM SATISFY TO INITIATE PROC EEDING OF PENALTY U/S. 271(L)(C) FOR FURNISHING INACCURATE PARTICULARS OF INCOME LEADING TO CONCEALMENT OF INCOME. (B) TRANSACTION WITH M/S. YULETIDE INDUSTRIES PVT. LTD. AS IN THE ABOVE CASE OF BIPL THE ASSESSEE HAD ENTER ED INTO A SERVICE CONTRACT WITH YUJETIDE INDUSTRIES PVT. LTD. (HEREIN AFTER REFERRED TO AS YIPL) FOR MANUFACTURE OF 4/CAP CHEMICAL DYES- INTERMEDIATES. THE ASSESSEE COMPANY HAD ALSO IN THIS CASE PLACED A DEP OSIT OF RS, 45 LACS WITH M./S. YIPL FOR THE PURPOSE. THE TOTAL QUANTIT Y OF PRODUCTION THAT WAS ACHIEVED BY YIPL IN PURSUANCE OF THE SERVICE CO NTRACT WITH THE ASSESSEE COMPANY WAS 55.065 MT. OF 4/CAP CHEMICAL D YES- INTERMEDIATES FOR WHICH THERE IS NO PRODUCTION FACI LITY IN HOUSE AT THE FACTORY PREMISES OF THE ASSESSEE COMPANY. AS PER TH E DETAILS FURNISHED IN THIS REGARD, THE PER KILOGRAM COST OF PRODUCTION FOR 4/CAP HAS BEEN WORKED OUT BY THE ASSESSEE COMPANY AT RS. 51 PER KG , THUS THE TOTAL COST INCURRED FOR MANUFACTURING OF 55.065 MT OF 4/C AP BY YIPL WORKED OUT TO RS. 2808365/- AGAINST WHICH THEY HAD RECEIVE D THE SERVICE CHARGES OF RS. 225000/- PM IN ALL AMOUNTING TO RS. 27 LACS. IT IS FURTHER TO BE STATED IN THIS REGARD THAT YIPL BEING A SEPAR ATE ENTITY ALSO WOULD BE RECOVERING A SUM EQUIVALENT COST PLUS PROFIT FOR ITS MANUFACTURING ACTIVITIES. CONSIDERING PROFIT ELEMENT OF 10% OF TH E COST OF PRODUCTION THE TOTAL SALE VALUE OF YIPL INCLUSIVE OF LABOUR AN D COST WOULD APPROXIMATELY AMOUNT TO RS. 3089147/- (I.E.2808315 + 280832 = 3089147). AS IN THE CASE OF BIPL THE ASSESSEE COMPA NY HAD PLACED A DEPOSIT OF RS. 45 LACS WITH YIPL FOR WHICH THE INTE REST LOSS AT 12% OF RS. 45 LACS IS ALSO REQUIRED TO BE CONSIDERED AS THE CO ST ADDING UPTO THE SERVICE CHARGES PAYABLE / PAID BY THE ASSESSEE COMP ANY TO YIPL. THUS A SUM OF RS. 540000/- BEING THE INTEREST INCOME WHI CH OTHERWISE WOULD HAVE BEEN EARNED STOOD CEDED IN FAVOUR OF YIPL AND TOGETHER WITH THE SERVICE CHARGES OF RS. 27 LACS, THE TOTAL OUTFLOW O F ECONOMIC RESOURCES EFFECTED BY THE ASSESSEE COMPANY IN PURSUED OF ITS LIABILITY UNDER THE ITA NO. 715-716/AHD/2010 A.Y.2004-05 & 2005-06 PAGE 6 SERVICE CONTRACT WITH YIPL AMOUNTED TO RS. 32.40 LA CS (I.E. RS. 27 LACS + RS. 5.40 LACS) AGAINST THE COST OF LABOUR INCLUDI NG PROFIT MARGIN OF YIPL WHICH WORKED OUT TO RS. 3089147/-. THE DIFFERE NCE THEREFORE REPRESENTED EXCESSIVE/ PAYMENT MADE BY THE ASSESSEE COMPANY TO YIPL AS PER THE POSTULATES OF SECTION 40A(2)(A) R.W .S. 40A(2)(BY. RECORDING A PROPOSAL WAS MOOTED TO THE AUTHORIZED R EPRESENTATIVE OF THE ASSESSEE COMPANY THAT THE SUM OF RS. 150853/- ( 3040000 - 3089147) WOULD BE TREATED AS EXCESSIVE PAYMENTS MAD E BY THE ASSESSEE COMPANY WITHIN THE MEANING OF PROVISIONS O F SECTION 40A(2)(A) R.W.S. 40A(2)(B). THE OBJECTION OF THE AR IN THIS BEHALF WAS THE SAME AS THAT WHICH WAS GIVEN TO SUBSTANTIATE TH E REASONABLENESS OF PAYMENT IN THE CASE OF M/S. BIPL. FOR THE REASONS M ENTIONED IN THE CASE OF BIPL THE CONTENTION OF THE ASSESSEE IS REJE CTED AND ADDITION TO THE TUNE OF RS. 150853/- IS MADE TO THE TOTAL INCOM E OF THE ASSESSEE. IN VIEW OF THE FACT THAT THE ASSESSEE HAS CAUSED TO RE DUCE ITS IT LIABILITY BY VIRTUE OF ITS TRANSACTION OF SERVICE CONTRACT WITH ITS SISTER CONCERN BY PAYING EXCESSIVELY BEYOND REASONABLE LIMIT IT HAD C OST TO EVADE TAXES FOR WHICH I AM SATISFY TO INITIATE PROCEEDING OF PE NALTY U/S. 271(1)(C) FOR FURNISHING INACCURATE PARTICULARS OF INCOME LEADING TO CONCEALMENT OF INCOME. 6. THE LD. CIT(A) HAS DECIDED THIS ISSUE ON PAGE 3 AND ALLOWED THE APPEAL BY OBSERVING AS UNDER:- 5. I HAVE CONSIDERED THE SUBMISSIONS OF THE ID. A .R. AND THE FACTS OF THE CASE. THERE ARE TWO ASPECTS TO THE MATTER. THE FIRST IS WHETHER THE PROVISIONS OF SECTION 40A(2)(B) WOULD BE APPLICABLE AT ALL ON THE FACTS OF THE CASE. THE SECOND ASPECT IS THE SUBSTANTIVE ONE WITH REGARD TO THE FACT AS TO WHETHER EXCESSIVE PAYMENT WAS MADE. TAKI NG UP THE FIRST ASPECT, IT IS SEEN THAT SECTION 40A(2)(B) PROHIBITS EXPENDITURE WHICH IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OR THE LEGITIMATE NEEDS OF THE BUSINESS OR THE BENEFIT DER IVED/ACCRUING THEREFROM. HOWEVER, THE RESTRICTIONS WOULD APPLY ON LY IN THE CASE OF TRANSACTIONS BETWEEN PERSONS SPECIFIED IN SECTION 4 0A(2)(B). IN THE CASE OF A COMPANY, THE PROVISIONS OF SECTION 40A(2) (B)(IV) & (VI) WOULD BE APPLICABLE. AS PER THE PROVISIONS OF THESE TWO S UB-CLAUSES, THE TRANSACTIONS ARE HIT IF THE ASSESSEE HAS A SUBSTANT IAL INTEREST IN THE BUSINESS OF THE SPECIFIED PERSON OR THE SPECIFIED P ERSON HAS A SUBSTANTIAL INTEREST IN THE BUSINESS OF THE ASSESSE E. IT IS NOTEWORTHY THAT HAVING ANY INTEREST WOULD NOT BE SUFFICIENT TO ATTRACT THE PROVISIONS; THE INTEREST MUST HE A SUBSTANTIAL INTEREST. IN THE EXPLANATION BELOW SECTION 40A(2) SUBSTANTIAL INTEREST HAD BEEN DEFINE D, IN THE CASE OF A COMPANY, TO MEAN THE BENEFICIAL OWNER OF SHARES CAR RYING NOT LESS THAN 20% OF THE VOTING POWER. HERE, THE SHAREHOLDING OF BOTH BIPL & YIPL IN THE ASSESSEE COMPANY WAS NIL, ON THE CONTRARY, THE ASSESSEE OWNED ITA NO. 715-716/AHD/2010 A.Y.2004-05 & 2005-06 PAGE 7 12.04% OF THE SHARES OF BIPL. HENCE, THE TRANSACTIO NS WITH BIPL & YIPL WOULD NOT BE HIT BY THE PROVISION OF SECTION 4 0A(2)(B). 5.5. IN THE INSTANT CASE, THE ASSESSEE MADE ADVANCE S TO ITS ASSOCIATED CONCERNS FOR ENABLING THEM TO UTILIZE TH E SAME AS OPERATING CAPITAL, WHICH IN TURN WAS TO BE USED FOR ENSURING PRODUCTION OF 4-NAP AND 4-CAP. THERE IS HENCE A DIRECT CO-RELATION AND NEXUS BETWEEN THE ADVANCES MADE AND THE BENEFIT DERIVED BY THE APPELL ANT. BY PAYING THE SERVICE CHARGES AS WELL AS THE INTEREST-FREE ADVANC ES TO ITS SISTER CONCERNS, THE APPELLANT COMPANY COULD ACHIEVE HIGHE R TURNOVER AND CORRESPONDINGLY HIGHER PROFITS. JUST BECAUSE THE PA YMENTS WERE MADE TO ITS SISTER CONCERN WOULD NOT BE SUFFICIENT REASO N FOR DISALLOWING THE EXPENSES OR ANY NOTIONAL INTEREST ON SUCH ADVANCES. 5.6. IN VIEW OF THE ABOVE, IT IS HELD THAT THE PAYM ENT OF SERVICE CHARGES AND INTEREST-FREE ADVANCES TO BIPL & YIPL W AS NEITHER MADE TO A SPECIFIED PERSON U/S 40A(2)(B) SO AS TO BE WITHIN THE AMBIT OF THE SECTION, NOR WAS UNREASONABLE OR EXCESSIVE. ON THE CONTRARY THE APPELLANT HAS GAINED FROM THE TRANSACTIONS. ACCORDI NGLY, THE ADDITIONS OF RS. 5,25,000/- AND RS. 1,50,8537- ARE DIRECTED TO B E DELETED . 7. ON SIMILAR FINDING FOR A.Y. 2005-06 IN LD. CIT ( A) ORDER DATED 26.11.2009, WAS GIVEN FOR THE GROUND NO. 1 AND 2 FO R THE SAKE OF BREVITY, THE SAME ARE NOT MENTIONED IN THIS ORDER. 8. FROM THE SIDE OF REVENUE, LD. D.R. HAS VEHEMENTL Y ARGUED THAT THE EXCESSIVE PAYMENT U/S 40A(2)(B) PAID TO THE SISTER CONCERN. ANOTHER SIDE, LD. A.R. OF THE ASSESSEE DRAW THE ATTENTION WITH THE OR DER OF LD. CIT(A) AND CLAIMED THAT THE LD. CIT(A) HAS RIGHTLY DELETED THE ADDITION. THE WRITTEN REPLY BEFORE US, WHICH IS REPRODUCED AS UNDER:- 1) SINCE DEFENDANT AS WELL AS M/S BIPL AND M/S YI PL ARE COMPANIES EXPLANATION TO SEC 40A(2) ARE RELEVANT FO R DETERMINING APPLICABILITY OF THE SAID SECTION. THESE EXPLANATI ONS STIPULATES, HOLDING IN EXCESS OF 20% BETWEEN THESE COMPANIES AND DEFEND ANT. AS PER THE FACTS DEFENDANT OWNS 12.04% OF EQUITY IN M/S BIPL A ND M/S BIPL DOESNT OWN EQUITY IN DEFENDANT. NEITHER M/S YIPL NOR DEFENDANT OWNS ANY EQUITY SHARES IN EACH OTHERS COMPANY. HENCE, CIT(APPEALS) HAS CORRECTLY HELD THAT PER SE PROVISIONS OF SEC 40A(2)(B) CANNOT BE INVOKED IN THE PAYMENTS TO THES E COMPANIES. ITA NO. 715-716/AHD/2010 A.Y.2004-05 & 2005-06 PAGE 8 2) WITHOUT PREJUDICE, ON MERITS AS WELL DEFENDANT S UPPORTS ORDER OF LD. CIT (APPEALS) AS UNDER- A) LD. AO HAS ADOPTED DIVERGENT METHODS FOR MAKING DISALLOWANCE WHERE NOTIONAL INTEREST FORGONE ON INT EREST FREE DEPOSITS MADE BY DEFENDANT TO THESE COMPANIES WAS SOUTH TO B E CONSIDERED WHICH IS CLARIFIED AS UNDER. IN CASE OF M/S YIPL, LD. AO MADE THE ADDITION AS UN DER:- PARTICULARS AMT (RS.) COST OF M/S YIPL 28,08,315 ADD: NOTIONAL PROFIT @ 10% 2,80,832 TOTAL (A) 30,89,147 SERVICE CHARGES PAID BY DEFENDANT 27,00,000 NOTIONAL INTEREST @ 12% ON DEPOSIT OF RS. 45,00,000 /- 5,40,000 TOTAL (B) 32,40,000 DISALLOWANCE (B-A) 1,50,853 B) IN CASE OF M/S BIPL LD. AO HAS SIMPLY DISALLOWE D 25% OF JOB CHARGES OF RS. 21,00,000/- WHICH WORKS TO RS. 5,25, 000/- . LD. AO IF OUGHT TO HAVE FOLLOWED THE SAME BASIS AS ADOPTED IN CASE OF M/S YIPL WHICH WORKS AS PARTICULARS AMT (RS.) COST OF M/S BIPL 23,53,100 ADD: NOTIONAL PROFIT @ 10% 2,35,310 TOTAL (A) 25,88,410 ITA NO. 715-716/AHD/2010 A.Y.2004-05 & 2005-06 PAGE 9 SERVICE CHARGES PAID BY DEFENDANT 21,00,000 NOTIONAL INTEREST @ 12% ON DEPOSIT OF RS. 50,00,000 /- 6,00,000 TOTAL (B) 27,00,000 DISALLOWANCE (B-A) 1,11,590 COPY OF AUDITED ACCOUNTS OF M/S BIPL FOR VERIFICATI ON OF COST IS ATTACHED AS PER ANNEXURE B FOR READY REFERENCE THOUGH IT HAS ALREADY BEEN FURNISHED DURING ASSESSMENT PROCEEDINGS. THUS, PRI MA FACIE EXCESS DISALLOWANCE OF RS. 4,13,410/- HAS BEEN MADE BY LD. AO WHICH MAY BE RETAINED IF YOUR HONOUR INTENDS TO ALLOW REVENUES APPEAL. 3) AS PER THE FACTS, BOTH M/S BIPL AND M/S YIPL HAS WORKED EXCLUSIVELY FOR THE DEFENDANT DURING THE HEARING, DEPLOYING THE IR PRODUCTION STAFF AND PRODUCTION FACILITY INCLUDING ELECTRICITY FOR T HE PURPOSE OF MANUFACTURING ON JOB-WORK BASIS. AS PER THE AUDITE D ACCOUNTS COST INCURRED AND JOB CHARGES EARNED BY THESE COMPANIES ARE AS UNDER- PARTY NAME JOB CHARGES COST (DEFICIT) / SURPLUS M/S BIPL 21,00,000 23,53,100 (2,53,100) M/S BIPL 27,00,000 28,08,315 (1,08,315) PRESUMPTION OF EXCESSIVE PAYMENT APPARENTLY SHOULD RESULT IN RELATIVELY EXCESSIVE PROFIT IN THE HANDS OF BENEFICIARIES. AS INDICATED ABOVE, LEAVING APART PROFIT, BENEFICIARIES IN-FACT HAVE IN CURRED LOSS IN THIS ASSIGNMENT WHICH ALSO DOESNT JUSTIFY THE DISALLOWA NCE U/S 40A(2)(B). 4) BOTH DEFENDANT AS WELL AS M/S BIPL, HAVE MANUFAC TURED THE SAME PRODUCT 4 NAP IN THEIR RESPECTIVE PLANTS DURIN G THE YEAR. AS PER THE FACTS, PRODUCTION COST IN CASE OF DEFENDANT IS RS. 41 PER KG WHILE JOB-WORK COST TO THE DEFENDANT IS ONLY RS. 25 PER K G. THUS, DEFENDANT HAS MADE COST SAVING AND THEREBY EARNED HIGHER PROF IT BY GETTING THE WORK DONE THROUGH M/S BIPL. ON THIS GROUND AS WELL DISALLOWANCE U/S 40A(2)(B) IS NOT JUSTIFIED. IN CASE OF THE PRODUCT 4 CAP MANUFACTURED BY M/S YI PL THIS PRODUCT IS NOT MANUFACTURED BY THE DEFENDANT IN ITS OWN PLANT DURING THE YEAR. 5) LD. A.O. HAS ERRONEOUSLY BELIEVED THAT DEFENDANT OUGHT TO HAVE REDUCED NOTIONAL INTEREST ON INTEREST PAID DEPOSIT, FROM THE PAYMENT OF ITA NO. 715-716/AHD/2010 A.Y.2004-05 & 2005-06 PAGE 10 JOB CHARGES MADE TO THESE COMPANIES. DEFENDANT HAS BROADLY SOUGHT TO REIMBURSE THE ACTUAL COST INCURRED BY THESE COMP ANIES AND IN THE PROCESS 100% REIMBURSEMENT HAS NOT BEEN MADE AS BOT H THE COMPANIES INCURRED LOSS AS INDICATED IN 3 ABOVE. I NCLUSION OF NOTIONAL INTEREST WOULD HAVE BEEN PURELY REVENUE NEUTRAL EXE RCISE AS IT WOULD HAVE COST INCREASE IN THE COST OF BOTH THE COMPANIE S TO BE COMPENSATED BY HIGHER JOB CHARGES TO THIS EXTENT. HENCE, FROM THIS GROUND AS WELL LD. AO IS NOT JUSTIFIED IN MAKING TH E DISALLOWANCES. 6) DEFENDANT WAS JUSTIFIED IN MAKING INTEREST FREE ADVANCE TO THESE COMPANIES ON THE GROUNDS OF COMMERCIAL EXPEDIENCY. AS PER THE AGREEMENT BOTH THE COMPANIES HAVE TO INITIALLY FUND INDIRECT EXPENSES INCLUDING LABOUR, ELECTRICITY, POLLUTION CONTROL EX PENSES AND SEEK THE PAYMENT OF JOB CHARGES FROM THE DEFENDANT. HENCE, THE ROTATING WORKING CAPITAL NEEDS TO BE FINANCED FROM SUCH ADVA NCE. LD. CIT (APPEALS) HAVE DELETED THE DISALLOWANCES BY HOLDING THAT THE DEFENDANT WAS JUSTIFIED IN MAKING INTEREST FREE ADVANCE ON TH E GROUND OF COMMERCIAL EXPEDIENCY. NONE THE LESS THE ISSUE EVO LVED IS DISALLOWANCE U/S 40A(2)(B) AND NOT THE REJECTION AN D NOT THE DISALLOWANCE OF THE INTEREST PAID U/S 36(1)(III) WH ERE THE FUNDS THEREOF HAVE BEEN USED IN MAKING INTEREST FREE LOANS. 7) U/S 40A(2)(B), ONUS IS ON THE LD. AO TO JUSTIFY UNREASONABLE OR EXCESSIVE PAYMENT WHICH IN-FACT HAS NOT BEEN SO DIS CHARGED. LD. AO HAS NOT CITED SIMILAR PAYMENTS MADE BETWEEN THE DEP ENDANT PARTIES DATA THEREOF AVAILABLE IN PUBLIC DOMAIN. SIMPLY, L D. AO HAS OPTED TO INDIRECTLY TAX THE NOTIONAL INTEREST ON INTEREST FR EE ADVANCE UNDER THE GUISE OF SEC 40A(2)(B) WHERE ITS ACTUAL TAXATION I S NOT PERMITTED U/S 28. HENCE, FROM THIS GROUND AS WELL LD. AO IS NOT JUSTI FIED IN MAKING THIS DISALLOWANCE. 9. WE HAVE PERUSED THE ORDER OF THE AUTHORITIES BEL OW. THE A.O. MADE HYPOTHETICATED CALCULATION IN ASSESSMENT ORDER WITH OUT ANY BASE AND MATERIAL. THE ADDITION WAS MADE ON PRESUMPTION. IN BOTH YEAR S, THERE IS NO NEXUS BETWEEN THE BORROWED FUND AND INTEREST FREE LOAN. THE ASSESSEE DID NOT TAKE SUBSTANTIAL INTEREST IN THE BUSINESS OF THE SPECIFI ED PERSON OR THE SPECIFIED PERSON HAS A SUBSTANTIAL INTEREST IN THE BUSINESS O F THE ASSESSEE. THE A.O. HAS NOT BROUGHT ON RECORD ANY EVIDENCE REGARDING TH E ASSESSEE HAS SUBSTANTIAL INTEREST IN M/S. YULETIDE INDUSTRIES PR IVATE LTD. AND M/S COVENENT ITA NO. 715-716/AHD/2010 A.Y.2004-05 & 2005-06 PAGE 11 INVESTMENT CO. LTD. AND VICE VERSA. FURTHER INTERE ST FREE LOAN GIVEN TO ALLEGED SISTER CONCERN WERE PART CONSIDERATION OF SERVICE R ENDERED BY BOTH THE COMPANIES. THEREFORE, IN BOTH THE YEARS, THE ORDER OF LD. CIT(A) ARE CONFIRMED AND APPEAL OF THE REVENUE ARE DISMISSED IN BOTH THE YEARS ON GROUND NOS. 1 & 2. 10. GROUND NO.3 IS AGAINST THE ADJUSTMENT OF EXCISE DUTY ON PURCHASE, SALES AND CLOSING STOCK U/S 145A OF THE ACT. ON PA GE NOS. 8 AND 9 OF ASSESSMENT ORDER SOME ADJUSTMENT HAS BEEN MADE BY T HE AO ON ACCOUNT OF EXCISE DUTY BECAUSE THE ENTRY FOR EXCISE DUTY WAS N OT MADE THROUGH P&L ACCOUNT BY THE ASSESSEE. AFTER CONSIDERING THE SUBM ISSION OF THE ASSESSEE, THE A.O. FOUND METHOD OF ACCOUNTING EXCLUSIVE OF E XCISE DUTY. HE, THEREFORE, DISALLOWED THE ASSESSEES CLAIM. THE CLAIM OF DECR EASE IN PROFIT BY RS. 4,59,676/-. 11. BEING AGGRIEVED BY THIS ORDER, THE ASSESSEE WAS IN SECOND APPEAL BEFORE LD. CIT(A)-1, BARODA. THE LD. CIT(A) HAS OB SERVED AS UNDER:- I HAVE CONSIDERED THE SUBMISSIONS OF THE LD. A.R. AND THE FACTS OF THE CASE. THE ISSUE REGARDING INCLUSION OF EXCISE DUTY ELEMENT IN THE CLOSING STOCK OF FINISHED GOODS HAS BEEN DEALT WITH BY THE MADRAS HIGH COURTS DECISION IN ENGLISH ELECTRIC CO OF INDIA LT D., 243 ITR 512. AFTER DISCUSSING ALL ASPECTS OF THE MATTER, THE COURT HAS HELD THAT THE INCLUSION OF EXCISE DUTY ELEMENT IN THE VALUE OF UN SOLD FINISHED GOODS LYING IN STOCK ON THE LAST DATE OF THE ACCOUNTING P ERIOD WAS NOT WARRANTED. FOLLOWING THE DECISION OF THE MADRAS HI GH COURT, IT IS HELD THAT THE ADDITION OF RS.4,59,676/- WAS NOT JUSTIFIE D. THE ADDITION IS DELETED. 12. WE HAVE PERUSED THE ORDERS OF AUTHORITIES BELOW AND GONE THROUGH THE CASE LAW. IN SECTION 145A, THERE IS AN AMENDMENT W .E.F. 01.04.1999 IN SUB- CLAUSE B OF SECTION 145A. FURTHER ADJUSTMENT TO IN CLUDE THE AMOUNT TO ANY ITA NO. 715-716/AHD/2010 A.Y.2004-05 & 2005-06 PAGE 12 TAX, DUTY, CESS OR FEE (WHATEVER NAME CALLED), ACTU ALLY PAID OR INCURRED BY THE ASSESSEE TO BRING GOODS TO THE PLACE OF ITS LOCATIO N AND CONDITION AS ON DATE OF VALUATION IS REQUIRED TO ADJUST AS PER LAW BY THE A .O. THEREFORE, THE A.O. IS DIRECTED TO MAKE SUITABLE ADJUSTMENT AS PER LAW AFT ER GIVING THE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE. ACCORDINGLY, THIS ISS UE IS SET ASIDE TO THE A.O. 13. IN THE RESULT, THE APPEALS ARE PARTLY ALLOWED A ND DECIDED FOR STATISTICAL PURPOSE. ORDER PRONOUNCED IN OPEN COURT ON THE DATE MENTIONE D HEREINABOVE AT CAPTION PAGE. SD/- SD/- ( D.K.TYAGI) (T.R. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER TRUE COPY S.K.SINHA ! ! ! ! '! '! '! '! / COPY OF ORDER FORWARDED TO:- 1. / APPELLANT 2. / RESPONDENT 3. '(' ) * / CONCERNED CIT 4. *- / CIT (A) 5. !./ ), ) , 12( / DR, ITAT, AHMEDABAD 6. /45 67 / GUARD FILE. BY ORDER/ , 8/ 1 ': ) , 12( ; ITA NO. 715-716/AHD/2010 A.Y.2004-05 & 2005-06 PAGE 13 STRENGTHEN PREPARATION & DELIVERY OF ORDERS IN THE ITAT 1) DATE OF TAKING DICTATION 22 & 23.05.2012 2) DIRECT DICTATION BY MEMBER STRAIGHT ON COMPUTER/LAPTOP/DRAGON DICTATE XXXX 3) DATE OF TYPING & DRAFT ORDER PLACE BEFORE MEMBER 24.05.2012 4) DATE OF CORRECTION 24.05.2012 5) DATE OF FURTHER CORRECTION 25.05.2012 6) DATE OF INITIAL SIGN BY MEMBERS 25.05.2012 7) ORDER UPLOADED ON 25.05.2012 8) ORIGINAL DICTATION PAD HAS BEEN ENCLOSED IN THIS FILE YES 9) FINAL ORDER AND 2 ND COPY SEND TO BENCH CLERK ON 25.05.2012