THE DCIT, -1(1), Indore V. M/S. RITSPIN SYNTHETICS LTD., Pithampur

ITA 89/IND/2016

• Counselvise Citation: [2018] 125 COUNSELVISE.COM (IT) 0569 (ITAT-INDORE)
• Duration Of Justice: 2 year(s) 7 month(s) 27 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-09-2018
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 04-09-2018
• Assessment Year: 2005-2006
• Appeal Filed On: 22-01-2016
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: ASHIMA GUPTA LD
• Assessee Lawyers: P D NAGAR
• Keywords: Capital asset; Depreciation; Principle of natural justice; Corroborative evidences; Revenue expenditure; Capital expenditure
• Section: 143(3)

Judgement Text

RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 1 , , IN THE INCOME TAX APPELLATE TRIBUNAL, INDORE BENCH, INDORE BEFORE SHRI KUL BHARAT, JUDICIAL MEMBER AND SHRI MANISH BORAD, ACCOUNTANT MEMBER ITA NO.01/IND/2016 & ITA NO.89/IND/2016 ASSESSMENT YEAR: 2005-06 REVENUE BY S MT. ASHIMA GUPTA, LD.CIT ASSESSEE BY SHRI P.D. NAGAR ,C A DATE OF HEARING 04.09. 2018 DATE OF PRONOUNCEMENT 19 . 0 9 .2018 O R D E R PER MANISH BORAD, AM . THESE CROSS APPEALS AT THE INSTANCE OF THE ASSESSE E AND REVENUE PERTAINING TO A.Y. 2005-06 ARE DIRECTED AG AINST THE ORDER OF LD. COMMISSIONER OF INCOME TAX(APPEALS)-II, INDO RE, (IN SHORT CIT(A)), VIDE APPEAL NO. IT-547/14-15/73 ORDER DA TED 16.10.2015 WHICH IS ARISING OUT OF THE ORDER U/S 143(3) OF THE INCOME TAX ACT M/S RITSPIN SYNTHETICS LTD, PLOT NO.2, KHEDA, INDUSTRIAL GROWTH CENTRE, PITHAMPUR (DIST), DHAR VS. A CIT, CIRCLE 1(2), INDORE ( APPELLANT ) (RESPONDENT ) PAN NO.AA A CR8303E RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 2 1961(HEREINAFTER CALLED AS THE ACT) FRAMED ON 17. 12.2007 BY ACIT- 1(2), INDORE. 2. BRIEF FACTS OF THE CASE AS CULLED OUT FROM THE RECORDS ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN MA NUFACTURING OF SYNTHETIC YARN. LOSS OF RS.3,93,27,630/- WAS DECLAR ED IN THE RETURN OF INCOME FILED ON 25.10.2005. THE CASE WAS SELECT ED FOR SCRUTINY AND NOTICE U/S 143(2) OF THE ACT WAS SERVED. WRIT TEN SUBMISSIONS WERE FILED AND BOOKS OF ACCOUNTS WERE PRODUCED WHIC H WERE EXAMINED ON TEST BASIS. ASSESSMENT WAS COMPLETED O N 7.12.2007 AFTER MAKING VARIOUS DISALLOWANCES AT RS.3,28,27,84 4/- THEREBY ASSESSING LOSS AT RS.64,99,786/- COMPUTED IN FOLLOW ING MANNER; INCOME AS PER RETURN RS.(-)3,93,27,630/- ADD:ADDITION ON ACCOUNT OF 1. REPAIR & MAINTENANCE RS.64,18,438 2. HIRE CHARGES FOR MACHINERY RS.1,32,15,000 3. COMMISSION ON SALES RS. 64,63,146 4. TRAVELLING & CONVEYANCE EXPENSES RS.52,82,990 5. MISCELLANEOUS EXPENSES RS.10,00,000 6. VEHICLE EXPENSES RS. 4,48,270 3,28,27, 844/- NET TOTAL INCOME (-)64,99,786/- RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 3 LESS: SET-OFF FROM NET LOSS C/F AS PER PROVISION OF I.T. ACT 64,99,786/- NET BALANCE INCOME LIABLE TO TAX NIL ============== 3. AGGRIEVED ASSESSEE PREFERRED APPEAL BEFORE LD. C IT(A) AND PARTLY SUCCEEDED. 4. NOW BOTH THE ASSESSEE AND REVENUE ARE IN APPEAL BEFORE THE TRIBUNAL RAISING FOLLOWING GROUNDS OF APPEAL; GROUNDS RAISED BY THE ASSESSEE : GROUND NO.1: REPAIRS AND MAINTENANCE RS. 85,57,917/- THAT THE LEARNED COMMISSIONER OF INCOME TAX (A) ERR ED IN LAW IN CONFIRMING THE DISALLOWANCE OF RS. 30,00,000/-- OUT OF TOTAL REPAIRS & MAINTENANCE EXPO OF RS. 85,57,917/- ON THE GROUND THAT EXPENDITURE ON REPAIRS TO WARTSILA DG SET AT RS. 40,97,741/- MAY BE PARTIALLY CAPITAL IN NATURE HENCE TO SUCH EXTENT IT WAS TO BE TREATED AS CAPITAL EXPENDITURE IGNORING THE FACT THAT DURIN G MATERIAL TIME, THERE WAS ACTUATE SHORTAGE AND INTERRUPTED POWER SU PPLY IN PITHAMPUR. TREATMENT OF SUCH REPAIRS EXPENDITURE AS CAPITAL EXPENDITURE IS VERY EXCESSIVE, WHOLLY UNJUSTIFIED, IMPROPER, BAD IN LAW AND DESERVES TO BE SET ASIDE. RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 4 GROUND NO.2: MACHINE HIRE CHARGES OF RS.1,32,15,000 /- THAT THE LEARNED COMMISSIONER OF INCOME TAX (A) ERR ED IN LAW IN CONTINUING THE DISALLOWANCE TO THE EXTENT OF RS. 39,64,500/- I.E. EQUAL TO 30% OUT OF TOTAL MACHINE HIRE CHARGES PAID AT RS. 1,32,15,000/-- WITHOUT APPRECIATING THE FACT THAT NEITHER IN THE EARLIER YEAR NOR IN THE SUBSEQUENT YEARS SUCH EXPEN DITURE WAS DISALLOWED. THE MACHINE HIRE CHARGES WERE PAID TO I NTER CORPORATE BODIES & ON SUCH PAYMENT, TAX WAS DEDUCTED AT SOURCE @ 15%. MACHINES WERE TAKEN ON MONTHLY HIRE BASIS AND UTILI ZATION OF SUCH MACHINERY WAS NOT DOUBTED UPON, EVEN IF THE MACHINE S COULD NOT BE UTILIZED CONTINUOUSLY OR WHOLLY, HIRE CHARGES CO ULD NOT BE AVOIDED. DISALLOWANCE OF HIRE CHARGES ON AD-HOC BAS IS TO THE EXTENT OF 30% IS UNJUSTIFIED & BAD- IN LAW DESERVES TO BE SET ASIDE: GROUND NO.3: COMMISSION OF SALES OF RS.64,63,146/- THAT THE LEARNED COMMISSIONER OF INCOME TAX (A) ERR ED IN LAW IN CONFIRMING THE DISALLOWANCE OF AMOUNT EQUAL TO 15% OF COMMISSION PAID ON SALES AT RS. 38,77,888/- OUT OF TOTAL COMMISSION PAID AT RS. 2,58,52,585/- WITHOUT APPRECIATING THE FACT THAT COMMISSION ON DOMESTIC SALES WAS NORMALLY GIVEN @ 1.25% TO 1.5% WHEREAS ON EXPORT SUCH COMMISSION WAS PAID AT HIGHER RATES ON WHICH TAX WAS DEDUCTED AT RS.24,69,452/- AND AT RS.42,72,213/- RESPECTIVELY. DISALLOWANCE OF SUCH EXPENDITURE IGNORING THE SUBMI SSION OF COMPLETE DETAILS IS WHOLLY UNJUSTIFIED, IMPROPER, B AD IN LAW AND RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 5 DESERVES TO BE SET ASIDE. GROUND NO.4: TRAVELLING & CONVEYANCE EXPENSES RS.52 ,82,990/- THAT THE LEARNED COMMISSIONER OF INCOME TAX (A) ERR ED IN LAW IN CONFIRMING THE DISALLOWANCE AN AMOUNT EQUAL TO 35% OF TRAVELLING & CONVEYANCE EXPENSES AT RS. 36,98,093/- OUT OF TOTAL EXPENSES INCURRED AT RS. 1,05,65,979/- WITHOUT APPRECIATING THAT SUCH EXPENDITURE WERE INCURRED EXCLUSIVELY FOR BUSINESS PURPOSES FOR ATTENDING SEMINARS, SALES CONFERENCES AND DAY-TO-DA Y ROUTINE MATTERS BOTH AT PLANT AND CORPORATE OFFICE. FOREIGN TOURS BY DIRECTORS OR EXECUTIVES WERE FOR THE PURPOSE OF EXP ORT OF FINISHED PRODUCTS WHICH IS EVIDENT FROM THE FACT THAT THE EX PORT TURNOVER WAS INCREASED DURING THE YEAR FROM RS. 65.05 CRORES TO RS. 84.10 CRORES. DISALLOWANCE OF SUCH EXPENDITURE & CONFIRMATION THEREOF IS THEREFORE, UNJUSTIFIED, IMPROPER, BAD IN LAW AND DE SERVES TO BE SET ASIDE. GROUND NO.5: VEHICLE EXPENSES RS.4,48,270/- THAT THE LEARNED COMMISSIONER OF INCOME TAX (A) ERR ED IN LAW IN CONFIRMING THE DISALLOWANCE OF AMOUNT EQUAL TO 10% OF VEHICLE EXPENSES AT RS. 4,48,270/-- OUT OF TOTAL EXPENSES OF RS. 44,82,710/-- ON THE GROUND OF PERSONAL USE OF VEHICLES BY THE DI RECTORS AND THEIR RELATIVES IGNORING THE BREAK UP OF SUCH EXPENDITURE INCURRED WHICH INCLUDES EXPENDITURE ON RUNNING OF BUS FOR WORKERS FROM INDORE TO RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 6 PITHAMPUR, TRAX FOR WORKERS, STAFF BUS FROM INDORE TO PITHAMPUR,CAR TAXI FOR GUESTS, HOD, AUDITORS AND CA R RUNNING & MAINT. EXPENSES OF OWN CARS. DISALLOWANCE SO MADE E QUAL TO 10% OF ENTIRE EXPENSES & CONFIRMATION THEREOF IS VERY EXCESSIVE, IMPROPER, BAD IN LAW AND DESERVES TO BE SET ASIDE. GROUNDS RAISED BY THE REVENUE: 1. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE THE LD. CIT(A) WAS JUSTIFIED IN LAW IN TREATING THE CAP ITAL EXPENDITURE OF RS.85,57,917/- AS REVENUE EXPENDITUR E AND RESTRICTING THE ADDITION RS.30,00,000/- ONLY. 2. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE THE LD. CIT(A) WAS JUSTIFIED IN RESTRICTING THE DISALLO WANCE OF MACHINE HIRE CHARGES AT 30% AS AGAINST 75% DISALLOW ED BY THE A.O. 3. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE THE LD. CIT(A) WAS JUSTIFIED IN RESTRICTING THE DISALLO WANCE OF COMMISSION EXPENSES AT 15% AS AGAINST 25% DISALLOWE D BY A.O. 4. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE THE LD. CIT(A) WAS JUSTIFIED IN RESTRICTING THE DISALLO WANCE OF TRAVELLING EXPENSES AT 35% AS AGAINST 50% DISALLOWE D BY THE AO. 5. WHETHER ON THE FACTS AND IN THE CIRCUMSTANCES OF TH E CASE THE LD. CIT(A) WAS JUSTIFIED IN RESTRICTING THE DISALLO WANCE OF RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 7 MISCELLANEOUS EXPENSES AT 10% AS AGAINST 10,00,000/ - DISALLOWED BY THE AO. 5. THE FIRST ISSUE RELATES TO REPAIR AND MAINTENANC E EXPENSES : BRIEF FACTS RELATING TO THIS COMMON ISSUE IS THAT T HE ASSESSEE CLAIMED EXPENDITURE OF RS.85,57,917/- UNDER THE HEA D REPAIRS & MAINTENANCE. THE LD.A.O CONSIDERED THEM TO BE A C APITAL IN NATURE AND MERELY ALLOWED DEPRECIATION ON THE IMPUG NED AMOUNT THEREBY MAKING ADDITION OF RS.64,18,438/-. LD. CIT (A) WHILE DEALING WITH THE ISSUE OBSERVED THAT MOST OF THE EX PENDITURE ARE OF REVENUE IN NATURE EXCEPT THE ONE INCURRED TOWARDS R EPAIR OF DG SETS AND THEREFORE SUSTAINED THE DISALLOWANCE AT R S.30,00,000/-. 6. NOW THE ISSUE IS BEFORE THE TRIBUNAL. 7. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT THE COMPANY INCURRED EXPENSES TOWARDS REPAIRS AND MAINTENANCE O F PLANT AND MACHINERY, COMPUTERS, DG SET, FURNITURE & FIXTURES, OFFICE EQUIPMENTS, FACTORY BUILDING, ROAD ETC. WHICH WERE REVENUE IN NATURE AND ARE INCURRED IN NORMAL COURSE OF BUSINES S TOWARDS NORMAL WEAR AND TEAR OF CAPITAL ASSETS. INCURRING O F EXPENDITURE WAS NOT DOUBTED UPON BUT ENTIRE EXPENDITURE WAS CON SIDERED AS SUBSTANTIAL IMPROVEMENT IN PLANT AND MACHINERY HENC E TREATED AS CAPITAL EXPENDITURE BY ALLOWING DEPRECATION THEREON . THE LEARNED CIT(A) CONSIDERED THAT RS.30 LACS AS CAPITAL EXPEND ITURE OUT OF RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 8 RS.40,97,7411- INCURRED TOWARDS REPAIRS OF DG SET W ITH THE DIRECTION TO ALLOW DEPRECIATION THERE ON. HE DID NO T APPRECIATE THAT SUCH EXPENDITURE WERE INCURRED IN PIECE MEAL DURING THE WHOLE YEAR AND INDIVIDUAL PAYMENTS IN EXCESS OF RS. ONE LAC WE RE AT THREE INSTANCE ONLY (COPIES OF THREE INVOICES ANNEXED). D ESCRIPTION OF SPARE PARTS ETC. PURCHASED PROVED BEYOND DOUBT AND NATURE OF EXPENDITURE WAS THAT OF REVENUE AND NOT CAPITAL. (P APER BOOK - I PAGE NO. 1 TO 12 AND PAGE NO.73 TO 77 OF PAPER BOOK - II). 8. THE LD. DEPARTMENTAL REPRESENTATIVE SUPPORTED THE FINDINGS OF LD. AUTHORIZED REPRESENTATIVE AS WELL AS THE FAVOUR ABLE FINDINGS OF LD. CIT(A). 9. WE HAVE HEARD THE RIVAL CONTENTIONS AND RECORD S PLACED BEFORE US. THE ISSUE BEFORE US RELATES TO THE EXPENDITURE OF REPAIR AND MAINTENANCE OF RS.85,57,917/-. LD. COUNSEL FOR THE ASSESSEE IS PLEADING THAT THE IMPUGNED AMOUNT IS PURELY OF REVE NUE IN NATURE AND THE LD. A.O HAS WRONGLY TREATED IT AS CAPITAL E XPENDITURE WHEREAS THE LD.CIT(A) HAS WRONGLY SUSTAINED THE DIS ALLOWANCE TO RS.30,00,000/- OUT OF TOTAL DISALLOWANCE OF RS.85,5 7,917/- OBSERVING AS FOLLOWS; GROUND NO.1 3. THIS GROUND OF APPEAL IS RAISED AGAINST AN ADDIT ION OF RS. 85,57,917/- ON ACCOUNT OF REPAIRS AND MAINTENANCE. I HAVE GONE THROUGH THE RELEVANT FACTS BROUGHT OUT BY THE AO IN THE ASSESSMENT ORDER AND ALSO THE SUBMISSIONS FILED BY THE APPELLANT. THE DETAILS OF EXPENDITURE INCURRED HAVE BEEN FILED RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 9 FROM WHICH IT IS EVIDENT THAT SUCH EXPENDITURE CANN OT BE TREATED AS CAPITAL EXPENDITURE. FROM THE ASSESSMENT ORDER, IT IS EVIDENT THAT THE ASSTT. COMMISSIONER OF INCOME T AX DISALLOWED ENTIRE REPAIRS AND MAINTENANCE EXPENSES OF RS. 85,57,917/- WITHOUT CONSIDERING AND EXAMINING THE D ETAILS OF SUCH EXPENDITURE FROM WHICH IT IS EVIDENT THAT SUCH EXPENDITURE EXCEEDING RS. ONE LAC WERE APPARENTLY R EVENUE IN NATURE AS UNDER :_ A) MACHINERY AND OTHER REPAIRS RS.6,54,091/- IN AGG REGATE B) REPAIRS TO ROAD INSIDE FACTORY RS.14, 13,064/ _ C) REPAIRS TO WARTSILA DG SET RS. 4O,97,741/- IN AGGREGATE TOWARDS SPARE PARTS. 3.1 FURTHER, THE BOOKS OF ACCOUNTS ARE FOUND TO BE AUDITED AND ON THE OTHER HAND, THE APPELLANT COMPANY SUFFERED H UGE LOSSES YEAR AFTER YEAR HENCE THERE COULD NOT BE ANY MOTIVE TO DEBIT CAPITAL EXPENDITURE IN PROFIT AND LOSS ACCOUNT. SUC H REPAIRS ALSO INCLUDED ROAD CONSTRUCTION WORK AFTER A GAP OF TEN YEARS THROUGH CONTRACTOR INCLUDING MATERIAL AND LABOUR. T HE REPAIRS OF THE ROAD INSIDE THE FACTORY AFTER A PERIOD OF TEN YEARS CANNOT BE TREATED AS CAPITAL EXPENDITURE IN ANY MANNER. SI MILARLY, MACHINERY REPAIRS EXPENSES DO NOT INDICATE ANY MAJO R REPAIR WHICH CAN BE SAID TO BE CAPITAL IN NATURE. HOWEVER, CONSIDERING THE AMOUNT OF EXPENDITURE INCURRED TOWA RDS REPAIRS TO DG SET AT RS.4O,97,741/- MAY BE PARTIALLY CAPITAL IN NATURE HENCE IN THE INTEREST OF JUSTICE A SUM OF RS.30 LACS MAY BE TREATED AS CAPITAL EXPENDITURE. THE AO ALLOWED D EPRECIATION @ 25% I.E. R S.21,39,479/- WHILE TREATING EN TIRE EXPENSES AS CAPITAL IN NATURE WHIC H ITSELF IS INCORRECT BECAUSE DEPRECIATION ON ROAD CONSTRUCTED SIDE THE FACTORY IS ELIGIBLE @ 10% ONLY. ACCORDINGLY, THE DISALLOWANCE IS RESTRICTED TO RS.3 0 LACS ONLY AND APPELLANT WILL GET RELIEF OF RS.55,57,917/-. THE AO IS RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 10 DIRECTED TO RECALCULATE THE DEPRECIATION ACCORDINGLY THIS GROUND OF APPEAL IS PARTLY ALLOWED. 10. FROM GOING TO THE FINDINGS OF LD.CIT(A) AS WEL L AS PERUSAL OF RECORDS, WE FIND THAT THE MAJOR EXPENDITURE FOR REP AIR ARE TOWARDS REPAIR OF DG SETS AT RS.40,97,741/-. THIS REPAIR E XPENDITURE WAS INCURRED BY THE ASSESSEE TOWARDS REPAIR OF WARTSILA DG SETS AND DETAILS ARE AVAILABLE AT PAGE-7 OF THE PAPER BOOK. ON PERUSAL OF THIS LEDGER ACCOUNT OF REPAIR WE OBSERVE THAT THERE ARE REGULAR MINOR EXPENDITURE FOR REPAIR FROM MAY 2004 TILL CLOSE OF THE YEAR BUT AT FAG END OF THE YEAR I.E. 31.03.2005 A SUM OF RS.40,97,7 41/- HAS BEEN INCURRED. LD. COUNSEL FOR THE ASSESSEE HAS BEEN UN ABLE TO PROVE THAT THIS PARTICULAR EXPENDITURE WILL NOT GIVE BENE FIT TO THE COMPANY FOR A LONG PERIOD. 11. IN THESE CIRCUMSTANCES WE ARE OF THE CONSIDER ED VIEW THAT THE AMOUNT OF RS.40,97,741/- CANNOT BE CATEGORIZED AS A REVENUE EXPENDITURE UNDER THE HEAD REPAIR AND MAINTENANCE A ND THE SAME NEEDS TO BE CAPITALIZED AND CERTAINLY THE ASSESSEE WILL BE ELIGIBLE TO CLAIM THE DEPRECIATION AS PROVIDED UNDER THE PROVIS IONS OF LAW ON THIS CAPITAL EXPENDITURE OF RS.40,97,741/-. WE ACC ORDINGLY DISMISS THE ASSESSEES GROUND NO.1 AND PARTLY ALLOW THE REV ENUES GROUND NO.1 THEREBY TREATING THE SUM OF RS.40,91,741/- AS CAPITAL EXPENDITURE OUT OF THE TOTAL REPAIR AND MAINTENANCE EXPENSES OF RS.85,57,917/- CLAIMED BY THE ASSESSEE. THE LD. A. O IS DIRECTED TO ALLOW THE DEPRECIATION AND CALCULATE THE DISALLOWAN CE ACCORDINGLY. RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 11 GROUND NO.1 RAISED BY THE ASSESSEE IS DISMISSED AND GROUND NO.1 RAISED BY THE REVENUE IS PARTLY ALLOWED . 12. NEXT COMMON ISSUE RAISED IN GROUND NO.2 BY BOT H THE ASSESSEE AND REVENUE RELATES TO MACHINE HIRE CHARGE S OF RS.1,32,15,000/-. 13. BRIEF FACTS RELATING TO THIS ISSUE ARE THAT TH E ASSESSEE COMPANY BEING A SICK UNIT REGISTERED UNDER BIFR COU LD NOT AVAIL TERM LOAN FACILITY FROM ANY FINANCIAL INSTITU TION/BANK THEREFORE UNABLE TO ACQUIRE NEW ASSETS. IN ORDER TO MANUFACTURE TWISTED YARN IT TOOK TEXTILE MACHINES O N HIRE FROM VARIOUS LEASING AND FINANCE COMPANIES AND PAID RS.1,76,20,000/- AS MACHINE HIRE CHARGES DURING THE YEAR. ASSESSEE WAS UNABLE TO PLACE NECESSARY MATERIAL ON RECORD BEFORE THE LD.A.O TO JUSTIFY THE HIRE CHARGES AND GENUINENESS OF THE EXPENDITURE. IN ABSENCE OF THE C ONCRETE EVIDENCE THE LD.A.O ONLY ALLOWED 25% OF THE HIRE CH ARGES AT RS.44,05,000/- AND BALANCE AMOUNT OF RS.1,32,15,000 /- WAS ADDED TO THE INCOME. WHEN THE MATTER CAME UP B EFORE THE LD.CIT(A) HE GIVE PART RELIEF TO THE ASSESSEE S USTAINING THE DISALLOWANCE @30%. NOW THE ASSESSEE IS IN APPE AL BEFORE THE TRIBUNAL. 14. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT T HE APPELLANT COMPANY DID NOT OWN MACHINERIES TO MANUFA CTURE RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 12 TWISTED YARN AND BEING A SICK UNIT REGISTERED UNDER BIFR, TERM LOAN FACILITY COULD NOT BE AVAILED FROM ANY FINANCIAL IN STITUTION/BANK TO ACQUIRE NEW ASSETS. THEREFORE, TO CATER DEMAND OF T WISTED YARN, THERE WAS NO ALTERNATIVE EXCEPT TO TAKE THE MACHINE S ON HIRE. THEREFORE, VARIOUS TEXTILE MACHINERIES WERE TAKEN O N HIRE FOR WHICH MACHINE HIRE CHARGES OF RS.L,76,20,000/- WERE PAID TO FIVE LEASING AND FINANCE COMPANIES. (PAPER BOOK-I PAGE NO. 13 TO 16). SUCH HIRE CHARGES WERE PAID IN SUBSEQUENT YEARS ALSO BUT NO D ISALLOWANCES WERE MADE. THE AO DISALLOWED 75% OF SUCH CHARGES ON TWO GROUNDS:- (A) THAT 'SINCE THE INSTALLED CAPACITY OF MACHINERIES HAVE NOT BEEN UTILIZED FULLY THEN IT IS VERY DIFFICULT T O ACCEPT THE NEED OF MACHINERIES ON HIRE' AND (B)PROOF OF TRANSPORTATION OF MACHINERY WAS NOT FURNISHED. THE CIT(A) VIDE PARA 4 OF THE OR DER OBSERVED THAT 'SUCH DISALLOWANCE HAS ALSO BEEN MADE ON THE GROUND THAT PROOF OF TRANSPORTATION OF MACHINERY WAS NOT FURNISHED'. HOW EVER, HE FURTHER OBSERVED THAT 'THE AO HAS NEITHER DOUBTED T HE AGREEMENTS EXECUTED FOR HIRING OF MACHINE NOR EXISTENCE OF MAC HINES OR THEIR USE. THE AO HAS ALSO NOT POINTED OUT ANY SPECIFIC D EFECT OR NON- BUSINESS PURPOSE OF USE OF MACHINERY. BUT THE FACT REMAIN THAT APPELLANT HAD FAILED TO FILE PROOF OF HAVING INCURR ED TRANSPORTATION CHARGES AS BROUGHT OUT BY THE AO IN THE ASSESSMENT ORDER. WHEN THE REQUIREMENT OF HIRING MACHINERY HAS NOT BEEN PR OVED AND NO PROPER BILLS AND VOUCHERS WERE PRODUCED DURING ASSE SSMENT PROCEEDINGS THE AO HAS BEEN FOUND JUSTIFIED IN MAKI NG APPROPRIATE DISALLOWANCES'. HE CONSIDERED DISALLOWANCE AS EXCES SIVE AND RESTRICTED THE SAME TO 30%. IT IS SUBMITTED THAT TH E MACHINERIES RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 13 WERE TAKEN ON HIRE WHICH WERE INSTALLED BY THE LESS OR AT THEIR OWN COST HENCE TRANSPORTATION CHARGES WERE BORNE BY THE LESSORS AS PER PARA 3 OF EACH AGREEMENT. (PAGE 78 TO 108 OF LIND P APER BOO K). NONE OF THE DIRECTORS OF THE APPELLANT COMPANY WAS INTER ESTED IN LESSOR COMPANIES WHO HAD GIVEN MACHINES ON HIRE. BILLS WER E NOT ISSUED FOR BECAUSE SUCH PAYMENT WAS MADE AS PER THE AGREEM ENTS. ON SUCH PAYMENTS, TAX WAS DEDUCTED AT SOURCE BY THE AP PELLANT. IT IS SETTLED LAW THAT IN ORDER TO DETERMINE THE QUESTION OF REASONABLENESS OF THE EXPENDITURE, THE TEST OF COMM ERCIAL EXPEDIENCY WOULD HAVE TO BE ADJUDGED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT OF THE IT DEPARTMENT. RELIANCE IS PLACED OF FOLLOWING JUDGMENTS:- I. S.A. BUILDERS LTD VS. CIT(A) (2007) 288 ITR 1 (S C) II. C.I.T. VS TRAVANCORE SUGAR & CHEMICALS LTD. 881 TR1 (SC) III. C.I.T. VS PANIPATWOOLLEN& GENERAL MILLS CO. LT D. 103 ITR 66 (SC) 15. ON THE OTHER HAND THE LD. DEPARTMENTAL REPRESEN TATIVE VEHEMENTLY ARGUED AND SUPPORTED THE FINDINGS OF CIT (A). 16. WE HAVE HEARD THE RIVAL CONTENTIONS AND RECORD S PLACED BEFORE US. ASSESSEE CLAIMED MACHINE HIRE CHARGES AT RS.1, 76,20,000/-. LD.A.O ONLY ALLOWED THIS EXPENDITURE TO THE EXTENT OF 25% AND THIS DISALLOWANCE WAS MAINTAINED TO 30% BY LD.CIT(A) AT RS.62,86,000/- OBSERVING AS FOLLOWS: GROUND NO.2: 4. THIS GROUND OF APPEAL IS RAISED AGAINST AN ADDITION OF RS.1,32,15,000/- ON ACCOUNT OF MACHINE HIRE CHARGES. THE AO HAS DISCUSSED THE ISSUE IN BRIEF AT PARA 2 OF RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 14 ASSESSMENT ORDER WHEREIN THE AO HAS BROUGHT OUT THA T DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE APPELLANT HAD FAILED TO PRODUCE THE PROOF OF INCURRING SUCH EXPENDITURE. FURTHER, IT HAS BEEN OBSERVED BY THE AO THAT SINCE THE PLANT & MACHINERY WAS NOT FULLY UTILIZED, THERE WAS NO NEED OF HIRING THE MACHINERY. THE AO PROCEEDED TO MAKE A DISALLOWANCE OF RS. 1.32 CRORES OUT OF TOTAL EXPENDITURE OF RS. 1.76 CR ORES WHICH WORKS OUT TO 75% OF TOTAL EXPENDITURE. THE APPELLAN T HAS FILED THE DETAILED WRITTEN SUBMISSIONS WHICH HAVE BEEN RE PRODUCED ABOVE. IT IS EVIDENT THAT THE AO HAS DISALLOWED 75% OF MACHINE HIRE CHARGES PAID BY THE APPELLANT ON THE GROUND TH AT 'THE CLAIM OF THE COMPANY IS NOT TENABLE SINCE THE INSTALLED C APACITY OF THE MACHINERIES HAVE NOT BEEN UTILIZED FULLY THEN IT IS VERY DIFFICULT TO ACCEPT THE NEED OF MACHINERIES ON HIRE'. SUCH DI SALLOWANCE HAS ALSO BEEN MADE ON THE GROUND THAT PROOF OF TRAN SPORTATION OF THE MACHINERY WAS NOT FURNISHED. THE AO HAS NEIT HER DOUBTED THE AGREEMENTS EXECUTED FOR HIRING OF MACHI NES, NOR EXISTENCE OF MACHINES OR THEIR USE. THE AO HAS ALSO NOT POINTED OUT ANY SPECIFIC DEFECT OR NON BUSINESS PURPOSE OF USE OF MACHINERY. BUT THE FACTS REMAIN THAT THE APPELLANT HAD FAILED TO FILE PROOF OF HAVING INCURRED HIRE CHARGES AS BROUG HT OUT BY THE AO IN THE ASSESSMENT ORDER. WHEN THE REQUIREMENT OF HIRING MACHINERY HAS NOT BEEN PROVED AND NO PROPER BILLS A ND VOUCHERS WERE PRODUCED DURING THE ASSESSMENT PROCEE DINGS, THE AO HAS BEEN FOUND JUSTIFIED TO MAKING APPROPRIA TE DISALLOWANCES BUT CERTAINLY MAKING DISALLOWANCES OF 75% OF EXPENDITURE WAS NOT JUSTIFIABLE. THEREFORE, THE SAM E HAS BEEN FOUND HIGHLY EXCESSIVE. IN MY OPINION, IN THE INTER EST OF JUSTICE DISALLOWANCE OF 30% OF EXPENDITURE ON THIS ACCOUNT SHALL BE SUFFICIENT TO COVER THE INFIRMITIES POINTED BY THE AO. THEREFORE, AO IS DIRECTED TO REWORK THE DISALLOWANCE AND ALLOW 70% OF THE RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 15 SAID EXPENDITURE. THIS GROUND OF APPEAL IS PARTLY A LLOWED. 17. WE FIND THAT THE ASSESSEE TOOK MACHINES ON HIRE FOR MANUFACTURING TWISTED YARN AT THE PREMISES AND THIS IS ALSO A FACT THAT THE COMPANY IS A SICK UNIT AND NO TERM LOAN FA CILITY WAS PROVIDED BY THE BANKERS. FOR THIS VERY REASON IT T OOK MACHINES ON HIRE AND PAID SUM OF RS.1,76,20,000/- TO THE FOLLOW ING FIVE CONCERNS OUT OF WHICH EXCEPT M/S. WEARIT GLOBAL LTD , INDORE WHICH CHARGED RS.1,25,000/- OF THE MACHINE HIRE CHARGES A ND THE REMAINING AMOUNT OF RS.1,74,95,000/- HAS BEEN GIVEN TO FOUR PRIVATE LIMITED COMPANIES BASED AT KOLKATA; S.NO. PARTY NAME TOTAL HIRE PERIOD AMOUNT ADDRESS 1 BHAGWAT KRIPA TRADING P. LTD 02 YEARS 41,25,000 70/F, ANANDPALIT ROAD, KOLKATTA-700014 2 GMB FINVEST PVT.LTD 02 YEARS 29,70,000 70/F, ANAN DPALIT ROAD, KOLKATTA-700014 3 KOTHSONS FINANCE & COUNSULTANCY P.LTD 02 YEARS 52,00,000 5,CLIVE ROW, 1 ST FLOOR, ROOM NO.4, KOLKATTA- 700001 4 AARKEY TIE-UP PVT. LTD 02 YEARS REVOKABLE ON TWO MONTH 52,00,000 5,CLIVE ROW, 1 ST FLOOR, ROOM NO.4, KOLKATTA- 700001 5 WEARIT GLOBAL LTD NOTICE 1,25,000 21/03, OLD PALA SIA, INDORE 18. DURING THE COURSE OF ASSESSMENT PROCEEDINGS TH E LD.A.O ASKED FOR AGREEMENT OF PAYMENT OF HIRE CHARGES, DETAILS O F MACHINES TAKEN ON HIRE WITH THE INSTALLED CAPACITY AS WELL AS THE PROOF OF TRANSPORTATION OF THE MACHINES. ALL THESE DETAILS WERE GOING TO THE ROOT OF THE ALLEGED EXPENDITURE AND THE GENUINENESS OF THE EXPENDITURE SHOULD HAVE BEEN PROVED WITH ALL THESE DETAILS. IT IS NOWHERE COMING FROM THE RECORDS ABOUT THE TYPE OF M ACHINES TAKEN ON HIRE FROM THE COMPANIES LOCATED AT KOLKATA I.E. BHAGWAT RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 16 KRIPA TRADING P. LTD, GMB FINVEST PVT.LTD LOCATED A T THE SAME ADDRESS AT 70/F, ANANDPALIT ROAD, KOLKATA AND THE R EMAINING TWO COMPANIES KOTHSONS FINANCE & CONSULTANCY P.LTD AND AARKEY TIE- UP PVT.LTD AT 5, CLIVE ROW, 1 ST FLOOR, ROOM NO.24, KOLKATA . IT HAS BEEN CLAIMED THAT THE PERIOD OF HIRE CHARGES ARE FO R TWO YEARS BUT THESE ARE NOT SUPPORTED BY WRITTEN AGREEMENT. NO P ROOF OF TRANSPORTATION OF THE MACHINES TO THE ASSESSEES FA CTORY PREMISES HAS BEEN SHOWN. MERELY BY MAKING THE PAYMENTS BY A CCOUNT PAYEE CHEQUE AND DEDUCTION OF TAX AT SOURCE ON THE IMPUGN ED PAYMENT CANNOT PROVE THE GENUINENESS OF THE MACHINE HIRE CH ARGES FOR THE COMPANY WHICH IS RUNNING IN HUGE LOSS. 19. IN OUR CONSIDERED VIEW NECESSARY INVESTIGATIO N OUGHT TO HAVE BEEN CONDUCTED BY THE LD.ASSESSING OFFICER AND HE W AS REFRAINED FROM DOING SO BY NON CO-OPERATION BY THE ASSESSEE B Y NOT FILING NECESSARY DETAILS. WE ALSO CANNOT SUPPORT THE FINDI NGS OF LD.CIT(A) WHICH ARE WITHOUT GOING INTO THE BASIC FACTS OF THE ISSUE. WE THEREFORE ARE OF THE CONSIDERED VIEW THAT THIS ISSU E OF GENUINENESS OF THE EXPENDITURE OF HIRE CHARGES FOR MACHINE NEED S TO BE SET ASIDE TO THE FILE OF LD. CIT(A). IF NECESSARY HE CAN CAL L FOR A DETAILED REMAND REPORT FROM THE LD.AO AFTER CARRYING OUT NEC ESSARY INVESTIGATION OF THE ALLEGED FINANCE AND LEASING CO MPANIES ON THE BASIS OF DETAILS AND INFORMATION TO BE PROVIDED BY THE ASSESSEE AS AND WHEN REQUIRED WITHOUT TAKING ANY UNNECESSARY AD JOURNMENT. RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 17 20. ACCORDINGLY GROUND NO.2 OF THE ASSESSEE AS WELL AS REVENUES APPEAL RELATING TO MACHINE HIRE CHARGES IS ALLOWED FOR STATISTICAL PURPOSES. 21. NEXT COMMON ISSUE RAISED BY THE ASSESSEE AND RE VENUE IN GROUND NO.3 RELATES TO COMMISSION EXPENSES . 22. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE CLAIMED COMMISSION EXPENSES OF RS.2,58,52,585/-. IT WAS CL AIMED BY THE ASSESSEE THAT THE COMMISSION IS BEING PAID TO PROCU RE ORDERS FOR EXPORT BUSINESS AS WELL AS DOMESTIC SALES. NO AGRE EMENTS WERE ENTERED WITH THE COMMISSION AGENTS WHICH PROMPTED T HE LD.A.O TO CONCLUDE THAT THE COMMISSION PAID WAS AS AN EXTRA C OMMERCIAL CONSIDERATION AND FURTHER DUE TO LACK OF PROOF OF C ORRESPONDENCES BETWEEN THE ASSESSEE AND THE AGENTS, THE TRUTH OF A CTUAL RENDERING OF SERVICES WAS NOT BROUGHT ON RECORD. LD.A.O THER EFORE DISALLOWED 25% OF THE COMMISSION EXPENSE CLAIMED BY THE ASSESS EE AND DISALLOWED RS.64,63,146/-. WHEN THE MATTER CAME UP BEFORE THE LD.CIT(A) THE DISALLOWANCE WAS SCALED DOWN TO 15% T HEREBY GIVING PART RELIEF TO THE ASSESSEE. 23. NOW BOTH THE PARTIES ARE IN APPEAL BEFORE THE T RIBUNAL. 24. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THE DETA ILS OF COMMISSION PAID DURING THE YEAR BY THE APPELLANT AS COMPARED TO PRECEDING YEAR AS UNDER :- RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 18 ASSESSMENT YEAR TURNOVER COMMISSION ON SALES 2004 - 05 RS.88.77 CRORES RS.175.36 LACS 2005 - 06 RS.104.83 CRORES RS.258.52 LACS INCREASED BY 18% 47% REASONS FOR INCREASE WERE (A) INCREASE IN EXPORT T URNOVER BY RS.19.05 CRORES. (B) PAYMENT OF COMMISSION IN EXCEP TIONAL CIRCUMSTANCES WAS PAID @ 10 AND 12 BUT ON DOMESTIC SALES IT WAS GIVEN @ 1.25 TO 1.5 AND ON EXPORT SALES SUCH COMMISSION WAS PAID BETWEEN 2 TO 5 AND IN MAXIMUM CASES IT WAS 3 ONLY. (PAGE 18 TO 20 OF PAPER BOOK). COMMISSION PAYABLE IS MENTIONED IN THE EXPORT DOCUM ENTS VIZ. SDP FROM WITHOUT WHICH THE BANK DOES NOT REMIT ANY COMMISSION TO ANY OVERSEAS AGENT. TDS WAS DEDUCTED ON COMMISSI ON PAYMENT ON DOMESTIC SALES AT RS.24,69,452/- AND ON EXPORT SALES AT RS.42,72,213/- AS PER DETAILS ANNEXED AND SUBMITTED BEFORE LOWER AUTHORITIES. SUCH PAYMENTS WERE MADE TO REGULAR AGE NTS TO PROCURE ORDERS FROM INTERNATIONAL AS WELL AS DOMESTIC MARKE T. RENDERING OF SERVICES BY THE AGENTS HAVE NOT BEEN DOUBTED UPON A ND NONE OF THE AGENTS WAS RELATIVE OF ANY OF THE DIRECTORS OF THE COMPANY. THE AO OBSERVED THAT PAYMENT OF COMMISSION WAS FOR EXTRA C OMMERCIAL CONSIDERATION AND THIS WAS DONE TO FACILITATE MAKIN G CERTAIN PAYMENTS TO THE FRIENDS. THEREFORE, IN THE ABSENCE OF WRITTEN AGREEMENTS WITH THE AGENTS HE DISALLOWED 25% OF THE PAYMENTS ON AD-HOC BASIS. THE CIT(A)OBSERVED THAT EXECUTION OF AGREEMENT WAS NOT NECESSARY WHEN PAYMENTS WERE MADE TO REGULAR AG ENTS YEAR RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 19 AFTER YEAR AND AO DID NOT POINT OUT SPECIFIC DEFECT IN INCURRING SUCH EXPENDITURE. HOWEVER, IN ABSENCE OF SUPPORTING EVID ENCES AND JUSTIFICATION FOR MAKING SUCH HUGE COMMISSION HE RE DUCED THE DISALLOWANCE @ 15% AS AGAINST 25%. 25. ON THE OTHER HAND THE LD. DEPARTMENTAL REPRESEN TATIVE VEHEMENTLY ARGUED AND SUPPORTED THE FINDINGS OF LD. CIT(A). 26. WE HAVE HEARD THE RIVAL CONTENTIONS AND RECORDS PLACED BEFORE US. THE ISSUE RAISED BEFORE US THROUGH THIS COMMON GROUND BY BOTH PARTIES RELATES TO COMMISSION EXPENSES. THE A SSESSEE IS AGGRIEVED WITH THE DISALLOWANCE OF 15% OF COMMISSIO N EXPENSES WHEREAS THE REVENUE IS AGGRIEVED WITH THE PART RELI EF GIVEN BY THE LD.CIT(A) AGAINST THE DISALLOWANCE OF 25% MADE BY LD.A.O TO 15% OBSERVING AS FOLLOWS; GROUND NO.3 : 5. THIS GROUND OF APPEAL HAS BEEN RAISED AGAINST THE DISALLOWANCE OF COMMISSION ON SALE AMOU NTING TO RS.64,63,146/- , BEING 25% OF SUCH EXPENDITURE. THE AO HAS DISCUSSED THE ISSUE BRIEFLY AT PARA 3 OF THE ASSESS MENT ORDER WHEREIN IT HAS BEEN BROUGHT OUT THAT THE APPELLANT HAD FAILED TO PROVE THE REQUIREMENT AND EXIGENCIES TO INCUR SUCH EXPENDITURE AND HAS FAILED TO EXPLAIN THE NATURE OF SERVICES RE NDERED BY THE COMMISSION AGENTS. THEREFORE, THE AO HAD CONCLUDED THAT THE IMPUGNED EXPENDITURE WAS INCURRED FOR EXTRA COMMERC IAL CONSIDERATION. THE APPELLANT HAS FILED THE DETAILED WRITTEN SUBMISSION WHICH IS REPRODUCED ABOVE. IT IS EVIDENT FROM THE ASSESSMENT ORDER THAT, THE AO, WITHOUT DOUBTING THE EXTENT OF SERVICES RENDERED BY THE AGENTS OR ITS GENUINENESS, HAS RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 20 DISALLOWED 25% OF PAYMENTS TO COMMISSION AGENTS ON ADHOC BASIS BY OBSERVING THAT 'PAYMENT OF COMMISSION WAS FOR EXTRA COMMERCIAL CONSIDERATION AND THIS WAS DONE TO FACIL ITATE MAKING CERTAIN PAYMENTS TO THE FRIENDS IT WOULD BE WORTHWHILE TO MENTION HERE THAT THE ASSESSEE HAS NOT PRODUCED ANY WRITTEN AGREEMENT ENTERED INTO BETWEEN ITSELF AND T HE AGENTS AND THERE IS NO CORRESPONDENCE TO SUGGEST THAT THES E PERSONS DID IN FACT RENDERED ANY SERVICES TO THE ASSESSEE'. IT IS CONTENDED THAT THE AO DID NOT RAISE ANY DOUBT REGAR DING RATE OF COMMISSION ON SALES, SALES EFFECTED THROUGH THE AGENTS AND TDS ON PAYMENT OF COMMISSION, ETC . HE PARTIALLY AC CEPTED THAT SERVICES WERE RENDERED EVEN THOUGH AGREEMENTS WERE NOT EXECUTED WITH THE COMMISSION AGENTS. THE CLAIM OF T HE APPELLANT THAT SUCH PAYMENTS WERE MADE TO REGULAR A GENTS YEAR AFTER YEAR, HENCE EXECUTION OF AGREEMENT WAS N OT CONSIDERED NECESSARY, CANNOT BE BRUSHED ASIDE. IT H AS ALSO BEEN CONTENDED THAT THE AO HAS NOT BROUGHT ON RECOR D ANYTHING TO PROVE THAT SUCH COMMISSION WAS PAID FOR EXTRA COMMERCIAL CONSIDERATION AND IT WAS FOR NON-BUSINES S PURPOSE. HOWEVER, AFTER CONSIDERING THE TOTALITY OF THE FACTS AND CIRCUMSTANCES AND THE FACT THAT THE APPELLANT H AD FAILED TO FILE THE REQUIRED DETAILS AND PRODUCE RELEVANT DOCU MENTS, THE AO HAS RIGHTLY CONCLUDED THAT THE APPELLANT HAD FAI LED TO PRODUCE SUPPORTING EVIDENCES TO JUSTIFY THE CLAIM U NDER THIS HEAD. NO FORMAL AGREEMENT AND BASIS FOR PAYMENT OF SUCH COMMISSION WERE PLACED ON RECORD BY THE APPELLANT D URING THE COURSE OF ASSESSMENT PROCEEDINGS. NO DETAILS OF SER VICES RENDERED BY THE COMMISSION AGENTS WERE FILED BY THE APPELLANT. DURING THE COURSE OF APPEAL PROCEEDINGS ALSO, DESPI TE OPPORTUNITIES THE APPELLANT HAS FAILED TO PRODUCE C OMPLETE DETAILS AND SUPPORTING EVIDENCES AND JUSTIFICATION FOR MAKING RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 21 SUCH HUGE COMMISSION PARTICULARLY WHEN THE COMPANY WAS RUNNING LOSS. THEREFORE, THE AO HAS BEEN FOUND JUST IFIED IN MAKING SUCH DISALLOWANCES. HOWEVER, DISALLOWANCE OF COMMISSION @25% HAS BEEN FOUND UNREASONABLY HIGH PARTICULARLY WHEN THE AO HAD NOT POINTED OUT ANY SP ECIFIC DEFECT IN INCURRING SUCH EXPENDITURE. THEREFORE, IN THE INTEREST OF NATURAL JUSTICE IT SHALL BE REASONABLE TO DISALL OW THE COMMISSION @15% AS AGAINST 25% WHICH SHALL BE SUFFICIENT TO COVER THE DISCREPANCY NOTICED BY THE AO. THIS GROUN D OF APPEAL IS PARTLY ALLOWED . 27. WE FIND THAT IT IS AN UNDISPUTED FACT RELATING TO THE ALLEGED EXPENSES OF COMMISSION THAT NO FORMAL AGREEMENTS HA VE BEEN PREPARED BETWEEN THE ASSESSEE AND THE AGENTS WHICH CAN PROVE THE BASIS FOR PAYMENT OF SUCH EXPENSES. IT IS ALSO NOT DISPUTED THAT THE DETAILS OF SERVICES RENDERED BY EACH COMMISSION AGE NT WAS ALSO NOT FILED. IN SOME CASES THE COMMISSION PAID ARE AROUN D 12 TO 15% WHEREAS IN MOST OF THE CASES THE ALLEGED COMMISSION IS RANGING BETWEEN 2 TO 4%. IT IS ALSO WORTH NOTING THAT IN C OMPARISON TO PRECEDING FINANCIAL YEAR THE TURNOVER HAS INCREAS ED BY ONLY 18% WHEREAS THE COMMISSION EXPENSES HAS INCREASED BY 47 %. IN THESE CIRCUMSTANCES WHEN EXPENSES HAS INCREASED ABNORMALL Y IN COMPARISON TO PAST YEAR AND NECESSARY DETAILS TO P ROVE THE GENUINENESS OF THE EXPENSES ARE NOT TO THE MARK AS THEY ARE REQUIRED TO BE, WE FIND NO INCONSISTENCY IN THE FIN DINGS OF LD.CIT(A) SUSTAINING DISALLOWANCE AT 15% OF THE TOTAL COMMISS ION EXPENSES INCURRED BY THE ASSESSEE DURING THE YEAR. IN THE R ESULT THE GROUNDS RAISED BY THE ASSESSEE AND REVENUE IS DISMISSED. RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 22 28. NOW WE TAKE UP GROUND NO.4 OF RESPECTIVE APPEAL S OF THE ASSESSEE AND THE REVENUE WHICH RELATES TO DISALLOWA NCE OF TRAVELLING EXPENSES . 29. BRIEF FACTS RELATING TO THIS ISSUE ARE THAT SU M OF RS.1,05,65,979/- WAS DEBITED IN THE PROFIT AND LOSS ACCOUNT UNDER THE HEAD TRAVELLING AND CONVEYANCE EXPENSES. ON PERUSAL OF THE LIST OF EXPENDITURE THE LD.A.O NOTICED THAT IT ALSO INCLUDED FREQUENT TRAVELLING OF THE DIRECTORS ACROSS THE COUNTRY AND THE NEXUS OF THE TRAVELLING FOR THE BUSINESS PURPOSES WAS NOT WELL E STABLISHED BEFORE THE LD.A.O. HE TOOK THE VIEW THAT THE PERSONAL ELE MENT IN THE EXPENDITURE COULD NOT BE SET ASIDE AND ACCORDINGLY DISALLOWED 50% OF THE EXPENDITURE AND ADDED RS.52,82,990/- TO THE INCOME. WHEN THE MATTER CAME UP BEFORE THE LD.CIT(A), HE AFTER G OING THROUGH THE SUBMISSIONS MADE BY THE ASSESSEE SUSTAINED THE DISA LLOWANCE OF RS.37,00,000/- THEREBY GIVING RELIEF AT RS.15,82,99 0/- TO THE ASSESSEE. 30. NOW BOTH THE ASSESSEE AND REVENUE ARE IN APPEAL BEFORE THE TRIBUNAL. 31. THE LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT DETAILS OF COMPARATIVE TRAVELLING EXPENSES INCURRED BY THE APP ELLANT ARE AS UNDER:- RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 23 ASSESSMENT YEAR TURNOVER TRAVELLING EXPENSES DISALLOWANCE AS PER CIT(A) 2004 - 05 RS.88 .77 CRORES RS.1,16,00,203/ - RS.NIL 2005 - 06 RS.104.83 CRORES RS.1,05 ,65,979/ - 50% DISALLOWED BY AO RS.37,00,000/ - (35%) 32. THESE EXPENSES WERE INCURRED BY DIRECTORS & EMP LOYEES OF THE COMPANY EXCLUSIVELY FOR BUSINESS PURPOSE INCLUDING FOR ATTENDING SEMINARS, SALES CONFERENCES AND DAY-TO-DAY ROUTINE MATTERS BOTH AT PLANT AND CORPORATE OFFICE AT KOLKATA. THE PLANT IS SITUATED AT PITHAMPUR (NEAR INDORE) WHEREAS, THE CORPORATE AND MARKETING OFFICE IS SITUATED AT KOLKATA THEREFORE, IT BECOMES NECESSARY FOR THE EXECUTIVES AS WELL AS THE DIRECTORS OF THE COMPANY TO HAVE OFFICIAL MEETINGS QUITE OFTEN.(DETAILS AT PAGE NO. 21 TO 41 OF PAPER BOOK-I). FOREIGN TOURS BY DIRECTORS OR EXECUTIVES WERE FOR T HE PURPOSE OF EXPORT OF FINISHED PRODUCTS WHICH IS EVIDENT FROM T HE FACT THAT THE EXPORT TURNOVER WAS INCREASED DURING THE YEAR FROM RS. 65,05 CRORES TO RS. 84.10 CRORES. (DETAILS AT PAGE NO. 42 TO 47 OF PAPER BOOK-I). THE. AO OBSERVED THAT THERE WAS NO JUSTIFI CATION FOR EMPLOYEES AND DIRECTORS OF THE COMPANY TO TRAVEL AL L AROUND THE COUNTRY SINCE THE BUSINESS OF THE COMPANY IS MANUFA CTURING AND EXPORTING THE GOODS. ACCORDING TO AO, TRAVELLING IS NOT WHOLLY FOR BUSINESS PURPOSES AND THERE WAS NO POSITIVE ADVANTA GE TO THE COMPANY, HE THEREFORE, DISALLOWED SUCH EXPENDITURE TO THE EXTENT OF 50%. THE CIT (A) CONSIDERED THE DISALLOWANCES AS EXCESSI VE AND RESTRICT THE SAME TO 35% OF THE TOTAL EXPENDITURE. RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 24 33. THE LD. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY ARGUED AND SUPPORTED THE FINDINGS OF LD. ASSESSING OFFICER. 34. WE HAVE HEARD THE RIVAL CONTENTIONS AND RECORD S PLACED BEFORE US. THE ISSUE RAISED IN THIS GROUND BY BOTH THE PA RTIES RELATES TO DISALLOWANCE OF TRAVELLING AND CONVEYANCE EXPENSES WHEREIN LD. CIT(A) SUSTAINED THE DISALLOWANCE AT RS.37,00,000/- AS AGAINST THE DISALLOWANCE OF RS.52,82,990/- MADE BY THE LD.A.O @ 50% OF THE TOTAL EXPENDITURE OF RS.1,05,65,979/- . THE LD.CIT( A) GAVE PART RELIEF TO THE ASSESSEE OBSERVING AS ; GROUND NO.4 6. THIS GROUND OF APPEAL HAS BEEN RAISED AGAINST T HE DISALLOWANCE OF RS.52,82,990/ - @50% OF TOTAL EXPEN DITURE OF RS.L,05,65,979/- UNDER THE RELEVANT HEAD OF EXPENDI TURE. THE AO HAS DISCUSSED THE ISSUE AT PARA 4 OF THE ASSESSM ENT ORDER WHEREIN THE AO HAS OBSERVED THAT ''THERE WAS NO JUSTIFICATION FOR EMPLOYEES AND DIRECTORS OF THE COMPANY TO TRAVEL ALL AROUND THE COUNTRY SINCE THE BUSINESS OF THE COMPANY IS MANUFACTURING AND EXPORTING THE GOODS. ON ONE HAND THE COMPANY INCURRING EXPENSE TOURS AND TRAVELS AND ON THE OTHER HANDS GENERATING HUGE LOSSES. ACCORDING TO HIM IT WAS CRYSTAL CLEAR THAT TRAVELLING WAS NOT WHOLLY ESPECIALLY FOR BUSINESS PURPOSE AND THERE WAS NO POSITIVE ADVANTAGE FOR THE COMPANY'. THEREFORE, WITH THESE OBSERVATION, THE AO HAD PROCE EDED TO MAKE DISALLOWANCE OF 50% OF SUCH EXPENDITURE ON ADH OC BASIS. 6.1 THE APPELLANT HAS FILED THE WRITTEN SUBMISSIONS WHICH ARE REPRODUCED ABOVE. I HAVE GONE THROUGH THE ASSESSMEN T ORDER, RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 25 WRITTEN SUBMISSIONS AND FACTS AND CIRCUMSTANCES OF THE CASE. IT IS OBSERVED FROM THE DETAILS OF TRAVELING EXPENS ES SUBMITTED THAT CONSIDERING THE INCREASE IN THE TURNOVER BY 18 %, TRAVELLING EXPENSES INCURRED AT RS.I05.66 LACS DURI NG THE YEAR APPEARS TO BE EXCESSIVE. MOREOVER, THE APPELLANT HA D FAILED TO FILE REQUIRED DETAILS, SUPPORTING EVIDENCES AND JUS TIFICATION FOR INCURRING SUCH HUGE EXPENDITURE DURING THE COURSE O F ASSESSMENT PROCEEDINGS AS WELL AS APPEAL PROCEEDING S DESPITE DUE OPPORTUNITIES. THEREFORE, THE AO HAS BEEN FOUND JUSTIFIED IN MAKING SUCH DISALLOWANCES. HOWEVER, THE DISALLOW ANCE HAS BEEN FOUND EXCESSIVE. THEREFORE, IN THE INTEREST OF NATURAL JUSTICE, THE SAME IS REQUIRED TO BE RESTRICTED TO 3 5% OF TOTAL EXPENDITURE. THEREFORE ADDITION OF RS.37 LACS IS C ONFIRMED UNDER THIS HEAD. APPELLANT GETS RELIEF OF RS.15,82 ,990/-. THIS GROUND OF APPEAL IS PARTLY ALLOWED. 35. THE BASIS FOR DISALLOWANCE MADE BY THE LD.A.O WAS MAINLY ON THE PREMISE THAT THE IMPUGNED EXPENDITURE WAS NOT C OMPLETELY FOR BUSINESS PURPOSES AND THERE WAS NO POSITIVE ADVANTA GE TO THE COMPANY AND ALSO THE PERSONAL ELEMENT BEING PART OF SUCH EXPENDITURE CANNOT BE RULED OUT. LD.CIT(A) GIVE PA RT RELIEF EVEN WHEN THE APPELLANT FAILED TO SUBMIT THE REQUIRED DE TAILS WITH SUPPORTING EVIDENCES AND JUSTIFICATION FOR INCURRIN G IMPUGNED EXPENDITURE. FROM PERUSAL OF THE PAPER BOOK PAGE-2 1 TO 47 PROVIDING ALL THE DETAILS OF TRAVELLING EXPENSES, W E FIND THAT THE COMPLETE DETAILS OF EACH EXPENDITURE ALONG WITH PUR POSES OF TOUR BY RESPECTIVE EMPLOYEES HAS BEEN MENTIONED. DIRECTORS AS WELL AS STAFF OFFICIALS OF THE COMPANY ALSO TRAVELLED EXTEN SIVELY ACROSS/ RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 26 OUTSIDE THE COUNTRY. THERE HAVE BEEN FREQUENT TRAV ELS TO EUROPEAN COUNTRIES ALSO. HOWEVER, ASSESSEE FAILED TO BRING ON RECORD THE CONNECTION OF THE FOREIGN TRAVELS FOR THE BUSINESS PURPOSES IN THE FIRM IN THE FORM OF DETAILS OF THE PARTIES WHICH HA VE BEEN VISITED, COMMUNICATIONS WITH THOSE PARTIES WITH REGARD TO EX PORT/IMPORT AND WHETHER ANY ORDERS WERE PROCURED. IN THESE GIV EN FACTS AND CIRCUMSTANCES OF THE CASE AND FAIR PLAY, WE ARE OF THE VIEW THAT DISALLOWANCE OF 20% OF THE TOTAL EXPENDITURE WILL C OVER THE DEFICIENCY IN THE RECORDS OF THE ASSESSEE. WE ACCO RDINGLY HOLD SO AND SUSTAIN THE DISALLOWANCE TO RS.21,13,196/-. AS SESSEES GROUND NO.4 IS PARTLY ALLOWED AND THAT OF REVENUES STANDS DISMISSED. 36. NOW WE TAKE UP GROUND NO.5 RAISED BY ASSESSEE R ELATING TO DISALLOWANCE OF VEHICLE EXPENSES. 37. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE I NCURRED RS.44,82,710/- AS VEHICLE EXPENSES DURING THE YEAR. DUE TO LACK OF LOG BOOKS MAINTAINED BY THE COMPANY, LD.A.O DISALLO WED 10% OF THE EXPENDITURE AT RS.4,48,270/- AND SAME WAS CONFI RMED BY LD.CIT(A). 38. NOW THE ASSESSEE IS IN APPEAL BEFORE THE TRIBU NAL. RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 27 39. LD. COUNSEL FOR THE ASSESSEE SUBMITTED THAT D URING THE YEAR, THE COMPANY INCURRED VEHICLE EXPENSES AT INDORE AND KOLKATA AT RS. 44,82,710/- AS AGAINST LAST YEARS EXPENDITURE OF RS. 44,99,549/- (PAPER BOOK PAGE NO.48 TO 72). BREAK UP OF SUCH EXP ENDITURE INCURRED DURING THE YEAR IS AS UNDER :- BUS FOR LADIES WORKERS FROM INDORE TO PITHAMPUR RS . 6,60,228/- TRAX FOR WORKERS RS.10,48,937/- STAFF BUS FROM INDORE TO PITHAMPUR, RS. 6,68,283 /- CAR TAXI FOR GUESTS, HOD, AUDITORS RS. 4,51,744/ - RS.28,29,192/- LESS: RECOVERY AGAINST TAXI CHARGES RS. 40,11 1/- RS.27,89,081/- ADD : CAR RUNNING & MAINT. EXPENSES (OWN CARS) RS. 16,93,629/- RS.44,82,710/- THE COMPANY DEDUCTED TAX AT SOURCE ON PAYMENTS OF RS.28,29,192/-.THE APPELLANT BEING SEPARATE LEGAL ENTITY, THERE CANNOT BE ANY PERSONAL USE OF VEHICLES. CONSIDERING THE NATURE AND VOLUME OF BUSINESS, DISALLOWANCE EQUAL TO 10% OF EN TIRE EXPENSES INCURRED ON STAFF BUS, TRACKS ETC. WAS NOT JUSTIFIE D AT ALL. THE SAME COULD HAVE BEEN MADE OUT OF CAR RUNNING AND MAINTEN ANCE EXPENSES INCURRED AT RS.16.93 LACS AT ANY REASONABL E PERCENTAGE. DISALLOWANCES UNDER AFORESAID HEADS OF EXPENSES WER E MADE BY AO AS WELL BY LEARNED CIT(A) ON ADHOC BASIS WHICH IS N OT PERMISSIBLE. RELIANCE IS PLACED ON FOLLOWING JUDGMENTS :- RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 28 (I)RAJATTRADECOM INDIA (P) LTD.VS. DCIT (2009) 120 LTD 48 (INDORE TRIB.) (II)P.D. AGRAWAL INFRASTRUCTURE LTD VS. ADDL. CIT ( 2010) 15 ITJ 764 (INDORE) (III) ACIT VS. INDIRA EXPORTS PVT LTD (2013) 21 ITJ 132 (INDORE TRIB.) (IV)ACIT VS. GANPATI ENTERPRISES LTD (2013) 142 SOT 118 (DEL. TRIB.) 40. THE LD. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY ARGUED AND SUPPORTED THE FINDINGS OF LD. ASSESSING OFFICER. 41. WE HAVE HEARD THE RIVAL CONTENTIONS AND RECORDS PLACED BEFORE US. ISSUE RAISED BY THE ASSESSEE RELATES TO DISALL OWANCE OF VEHICLE EXPENSES AT RS.4,48,270/- . IN THE SUBMISSIONS MAD E BY THE LD. COUNSEL BIFURCATION OF EXPENDITURE HAS BEEN GIVEN O UT OF WHICH RS.16,93,629/- SPECIFICALLY RELATES TO CAR RUNNING AND MAINTENANCE OF THE CARS OWNED BY THE COMPANY. REST OF OTHER EX PENSES RELATES TO THE VEHICLE EXPENSES FOR THE STAFF AND AUDITORS. IN THESE CIRCUMSTANCES WHEREIN COMPLETE DETAILS HAVE BEEN P ROVIDED BY THE ASSESSEE TOWARDS THE CAR RUNNING AND MAINTENANCE EX PENSES, WE ARE OF THE CONSIDERED VIEW THAT DISALLOWANCE OF 10% AT RS.16,93,629/- IS JUSTIFIED TO COVER THE PERSONAL E XPENSES OF RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 29 DIRECTORS/PROMOTERS. WE ACCORDINGLY DO SO AND SUST AIN THE DISALLOWANCE TO RS.1,69,336/- AS AGAINST RS.4,48,27 0/- CONFIRMED BY THE LD.CIT(A). GROUND NO.5 OF THE ASSESSEE IS P ARTLY ALLOWED. 42. NOW WE ARE LEFT WITH GROUND NO.5 OF REVENUES A PPEAL WHEREIN THE REVENUE HAS CHALLENGED THE FINDINGS OF LD.CIT(A ) SUSTAINING THE DISALLOWANCE OF MISCELLANEOUS EXPENSES TO 10% OF TH E TOTAL EXPENDITURE OF RS.67,02,718/- AS AGAINST AD-HOC DIS ALLOWANCE OF RS.10,00,000/- MADE BY THE LD. ASSESSING OFFICER. 43. LD. DEPARTMENTAL REPRESENTATIVE VEHEMENTLY ARGU ED AND SUPPORTED THE ORDERS OF LD. ASSESSING OFFICER. 44. LD. COUNSEL FOR THE ASSESSEE ARGUED THAT THE IM PUGNED EXPENDITURE IS FOR THE BUSINESS PURPOSES ONLY. 45. WE HAVE HEARD THE RIVAL CONTENTIONS AND RECORDS PLACED BEFORE US. THE ISSUE RELATES TO DISALLOWANCE MADE OUT OF MISCELLANEOUS EXPENSES. WE FIND THAT THE MISCELLANEOUS EXPENSES ARE TOWARDS ELECTRICITY CHARGES, GARDEN EXPENSES, INTERNAL AUDI T, OFFICE RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 30 MAINTENANCE, PRINTING AND STATIONERY, LEGAL EXPENSE S ETC. BOOKS OF ACCOUNTS ARE AUDITED. THE FINDING HAS BEEN GIVEN B Y LD. ASSESSING OFFICER ABOUT AD-HOC DISALLOWANCE MADE BY HIM. HOW EVER, LD.CIT(A) RESTRICTED THE DISALLOWANCE TO 10% OF RS. 67,02,718/- FOR THE LACK OF RELEVANT BILLS AND VOUCHERS SHOULD HAVE BEEN PRODUCED BY THE ASSESSEE BEFORE THE LOWER AUTHORITY. WE THE REFORE IN THE GIVEN FACTS AND CIRCUMSTANCES OF THE CASE ARE OF TH E VIEW THAT THE NATURE OF EXPENDITURE INCURRED UNDER THE HEAD MISC ELLANEOUS EXPENSES EVEN THOUGH RELATED TO BUSINESS PURPOSES BUT DUE TO LACK OF PROPER DETAILS MINOR DISALLOWANCE OF 5% WOULD ME ET THE END OF JUSTICE. WE ACCORDINGLY DO SO AND RESTRICT THE DIS ALLOWANCE TO 5% OF TOTAL EXPENDITURE AND SUSTAIN IT TO RS.3,35,136/-. GROUND NO.5 OF REVENUE IS PARTLY ALLOWED. 46. IN THE RESULT GROUND NO.1 OF THE ASSESSEE IS D ISMISSED AND REVENUES APPEAL IS PARTLY ALLOWED, GROUND NO.2 OF BOTH THE PARTIES ALLOWED FOR STATISTICAL PURPOSE, GROUND NO.3 OF BOT H THE PARTIES ARE DISMISSED, GROUND NO.4 OF ASSESSEE S PARTLY ALLOWED AND REVENUE IS DISMISSED AND GROUND NO.5 OF BOTH THE PARTIES ARE P ARTLY ALLOWED. CROSS APPEALS ARE PARTLY ALLOWED FOR STATISTICAL PU RPOSES. RITSPIN SYNTHETICS LTD ITA NO.01 & 89/IND/2016 31 THE ORDER PRONOUNCED IN THE OPEN COURT ON 19.9.201 8. SD/- SD/- ( KUL BHARAT) (MANISH BORAD) JUDICIAL MEMBER ACCOUNTANT MEMBER / DATED : 19 TH SEPTEMBER, 2018 /DEV COPY TO: THE APPELLANT/RESPONDENT/CIT CONCERNED/CIT (A) CONCERNED/ DR, ITAT, INDORE/GUARD FILE. BY ORDER PRIVATE SECRETARY/DDO, INDORE