TaxTMI 
TaxTMI 
2010 (12) TMI 286
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....40,050/-." 2. The brief facts pertaining to disallowance of deduction u/s 80IB agitated in ground No. (i) are that the assessee during the year had entered into a conducting agreement with its sister concern M/s Arison Ceramics Pvt. Ltd., a sister concern of the assessee, and acquired its land, building, plant and machinery on lease. The assessee explained that it had huge export order in hand from its overseas customers and to fulfil this additional need of its customers, land, building, plant & machinery of M/s Arison Ceramics Pvt. Ltd. was acquired on lease which stopped the business of manufacturing tiles in view of continuous losses. The above assets were taken on lease for a period of 36 months. According to the assessing officer, the assessee has obtained plant and machinery of a non-eligible unit u/s 80IB and separate production in respect of eligible unit and non-eligible unit is not maintained. The assessing officer noted that the assessee has violated the spirit of section 80IB as section 80IB provides deduction for profits made from production obtained from new plant and machinery not used previously for any purpose. As per the assessing officer, by combining the pro....
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....00 with new plant and machinery and since then the impugned deduction was allowed to the assessee. As has been explained to the assessing officer, the assessee owing to the mounting demand from the overseas customers entered into an agreement with M/s Arison Ceramics Pvt. Ltd., a sister concern of the assessee, who closed their production of tiles due to heavy losses for lease of their plant and machinery. The main objection of the assessing officer in withdrawing the claim u/s 80IB is that the assessee has not maintained separate production records and that the M/s Arison Ceramics Pvt. Ltd. was not eligible unit for claiming deduction u/s 80IB and the production achieved was with the use of old plant and machinery. The ld. AR invited our attention to section 80IB(2)(ii) which reads as below: "It is not formed by the transfer to a new business of machinery or plant previously used for any purpose." Drawing support from this, the ld. AR submitted that the condition of used plant & machinery applies at the time of formation of the eligible undertaking. The words "formed" and "new business" clearly defines the scope of restriction. For this proposition the ld. AR invited our att....
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....ent clearly specifies that the raw material, consumables and stores will have to be acquired by the assessee firm only; the labour cost and labour related procedures will have to be managed by the assessee firm; manufacturing cost including electricity, water, etc. will have to be borne by the assessee firm; and even the repairs and maintenance of the machinery obtained on lease will have to be borne by the assessee firm only. In a nutshell, the assessee has acquired its sister concern's land, building, plant and machinery on lease without there being any further responsibility on the part of its sister concern. With these factual matrix, could the assessee be held under an obligation to maintain separate books of account, one for the production carried out with the machinery of the assessee and the other for the production carried out with the hired machinery for the purpose of claiming deduction u/s 80IB of the Act. It transpires to us from the reading of the orders of authorities below that the only objection of the assessing officer in withdrawing he deduction already available to the assessee is non maintenance of separate production records with the plant & machinery of the a....
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.... purchase and use of any second hand machinery at the time of formation of the industrial undertaking and not purchase and use of machinery after the formation of the industrial undertaking. In yet another decision in the case of Pembril Indl & Engg Co (P) Ltd. v. DCIT cited supra, the "D" Bench of the Mumbai Tribunal held that though previously used plant and machinery has been used in the new unit, there being no transfer of plant and machinery, the deduction u/s 80-IA / 80-IB cannot be denied. 7. In the light of above discussion, we are of the considered opinion that the CIT(A) was justified in holding that the withdrawal of deduction u/s 80-IB was not justified. We uphold his order on the issue. Ground No (i) of the revenue fails. 8. With regard to disallowance u/s 40A(2)(b) as agitated in ground (ii), the facts and circumstances are akin to ground No.(i) discussed above. As against the acquisition of land, building and plant & machinery for a period of 3 years, the factory of the assessee was merged with the premises of M/s Arison Ceramics Pvt. Ltd., the assessee agreed for payment of Rs. 22,20,000 per annum vide conducting agreement dated 16^th March, 2004. The assessin....
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.... be allowed as a deduction." (emphasis ours) There is no dispute that the receipt of the contracting agreement fees, viz. M/s Arison Ceramics Pvt. Ltd. is a person classified in clause (b) of sub section (2). 10. From a plain reading of this section we find that section 40A(2) envisages that if the assessee incurs any expenditure for which payments are made to the relatives/relative concern and the assessing officer finds that such expenditure is excessive or unreasonable having regard to the fair market value of goods/services/facilities for which 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, then such excessive or unreasonable expenditure therefrom, shall not be allowed as a deduction. The conjunction "or" (highlighted) above adequately provides for different circumstances under which this provisions of section can be invoked, are - (i) such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or such facilities for which the payment is made; (ii) such expenditure is excessive or unreasonable having regard to the l....
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....mstance, the revenue authorities would be authorized to resort to disallowance of any percentage of such expenditure claimed, at their sweet will. In our considered opinion, the law really does not intend so. The provisions of section 40A(2)(b) really intends that all the three circumstances explained above go in tantum and together. In the instant case, the Assessing Officer has failed to bring on record that the expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or such facilities for which the payment is made; or that the goods, services or such facilities for which the payment is made were not for the legitimate needs of the business or profession of the assessee for which the payment is made. While it may be true that the benefit derived by the assessee was not sufficient, the fact that the payment was made for the use of land, building and plant & machinery and these assets were for the legitimate needs of the business cannot be overlooked. 11. In view of the foregoing discussions, we hold that the assessee onus cast on the assessee to justify the claim of contracting agreement fee was successfully explained by the assess....
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....value is not fulfilled on the part of the A.O. His contentions are invalid for making disallowance u/s 40A(2) and the ad-hoc method adopted by him is also not as per the law. I, therefore, hold that disallowance of 80% of the consideration amounting to Rs. 17,76,000/- made by the A.O. u/s 40A(2) is unjustified and not in accordance with the law. The same is hereby ordered to be deleted. 7.5 Alternatively also, it is seen from the details of fixed assets summary of the sister concern provided by the appellant in the paper book that the total cost of the sister concern's machinery was around Rs.2 crores. The consideration is Rs. 22,20,000/-. This in terms of percentage comes to around 11%. Therefore, the sister concern is fetching 11% of its investment by letting out the same to the appellant firm. If appreciation in the land & building is counted this percentage will go down. The return of 11% cannot be considered as excessive or unreasonable. Under the Income Tax Act, the partners are allowed 12% return on their capital investment in the firm u/s 40(b). Therefore, consideration of Rs. 22,20,000/-paid by the appellant firm is not excessive as compared to fair market value and con....
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....ing Officer and the submission of the AR of the appellant. The Assessing Officer has made this disallowance relying upon question and answer No. 30 of the Board Circular No. 715. I have carefully studied the said question and answer from the Board Circular No. 715 submitted by the appellant in the paper book. The said question and answer reads as under: "Question 30 : Whether the deduction of tax at source under section 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses? Answer: Section 194C and 194J refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source." 8.2 On careful reading, it is clear from the words and language of question and answer that it applies to a bill in which principle amount as well as reimbursement of expenses incurred on other's behalf are charged. Thus, it takes in its ambit a combined bill including principle amount and reimbursement of expenses. As per the said question and answer, when such a combined bill is issued, the assessee is required to deduct tax at source on both the principle ....
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....e treated as one. The appellant has also maintained separate account for agency commission, export freight, transportation and other expenses in its books. The only contention of the A.O. is that bill number on both the invoices remains same. In this regard, the appellant has explained that due to job being one, the bill number on both the invoices remains same as the invoices are prepared by the C&F agent on the basis of respective job and job number. On verification of the bills of C&F agent, the explanation of the appellant appears to be true as in all cases there is a similarity between bill number and job number. The appellant has placed on record an important evidence in the form of certificate by the C&F agent. In the said certificate the C&F agent has clarified regarding its pattern of issuing bills. It is clarified by the C&F agent that it has raised one invoice for agency commission and other invoice being debit note for reimbursement of expenses. Thus, the second invoice is in fact a debit note for reimbursement of expenses. This clarification from the C&F agent makes clear the way of its issuing bills for agency commission and reimbursement of expenses and throws light ....
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....'ble ITAT has held that the amounts covered by section 172(8) being demurrage charge, handling charge or any other charge of similar nature will also be covered by Board Circular No. 723. The AR submitted that these submissions and evidences were part of the proceedings before the A.O. which can be seen from the assessment order itself but the A.O. has failed to consider them while reaching to the conclusion of disallowance. On careful consideration, I agree with the appellant. The terminal handling charges and B/L charges are the income of the shipping companies and the C&F agent only recovers the same on behalf of the shipping companies. Section 172(8) clearly mentions these amounts. This being so they are covered by the Board Circular No. 723 and there is no liability of deducting the tax at source as held by the Delhi ITAT in the case of Freight Systems (India) Pvt. Ltd. relied upon by the appellant. The A.O. has failed to consider this aspect though specifically submitted by the appellant in its submission. Respectfully following the decision of Hon'ble Delhi ITAT, I hold that there can not be any liability of deducting tax at source on terminal handling charges and documentat....