TaxTMI 
TaxTMI 
2017 (10) TMI 685
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.... order of the ld CIT(A)-XIII, New Delhi is taken as lead matter and are facts culled out therefrom. ITA No 1061/Del/2013 A Y 2009-10 2. The ld Assessing Officer has raised following two grounds in its appeal:- "1. On the facts and circumstances of the case and in law, the ld CIT(A) has erred in deleting the addition of disallowance of expenditure of Rs. 2411392/- made by the AO under subscription deposit scheme. 2. on the facts and circumstances of the case and in law the ld CIT(A) has erred in deleting the addition made by AO u/s 40A(2)(b) of the Act of Rs. 1297897/-. Brief facts 3. The assessee is a company engaged in the business of printing and publishing. Its main work is to undertake the work of printing from the newspapers and periodical published. For the year it filed its return of income on 26.09.2009 for Rs. 1377850/-. Assessment Proceedings before AO 4. The case of the assessee was selected for scrutiny and the ld Assessing Officer noted that a sum of Rs. 2411392/- is claimed as deduction under the head 'subscription deposit scheme service'. The assessee submitted its reply on 30.11.2011 contending that under the scheme a fixed deposi....
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....lised for the purpose of the business and does not carry any interest. The magazines are supplied by purchasing it from its sister concern Delhi Prakashan Vitran Ltd and cost is debited to the P&L Account. Therefore, he held that such expenses are allowable. 7. With respect to the payment u/s 40A(2) he held that all the companies whom payments have been made are accessed to tax and therefore, there is no question of diversion of profits. He further stated that 2% disallowance made by the ld AO is merely on the basis of suspicion and without brining any adverse material on record. Therefore, he deleted the disallowance of Rs. 1946818/-. The revenue aggrieved by the order of the ld CIT(A) dated 17.12.2012 has preferred appeal before us. Arguments of the Revenue 8. The revenue submitted that subscription deposit scheme expenditure are not matching with the revenue booked by the assessee and with respect to the payment made to relatives the reliance was placed on the order of the Assessing Officer. Argument of the assessee 9. The assessee submitted written submission with respect to above two disallowances which are as under:- "APPEAL No. 5001/DEL/2014 A.Y....
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....of paper book at pg 141-145). It is submitted that the aforesaid expenditure was consistently allowed by the department up to the A.Y.2004-05 and for the first time the addition was made by disallowing the expenditure in the A.Y. 2005-06 on the ground of matching principle and thereafter repeated till the A.Y. 2013-14. It is pertinent to mention here that in the first round the appeals of the A.Y. 2005-06, 2006-07 and 2007-08 were allowed by the CIT(A) against which the department had filed appeal before the Hon'ble ITAT. In further appeal the Hon'ble ITAT vide it's common order dt. 15.07.2011 for all the three years i.e. from A.Y. 2005- 06 to 2007-08 after examining the issue set aside the order and remanded before the AO with very specific directions i.e. to examine whether subscription deposit receipts have been utilized for the purpose of business or not and if it has been utilized for the purpose of business then no disallowance ought to be made. The relevant portion of the order is reproduced as under. (Copy of order dt.15.07.2011 is enclosed which forms part of P.B at Page 76-95) "We make it clear that the A.O. shall keep in mind the past history when these....
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....ly (IDBI Bank the main business account of the assessee company) and such amount was exclusively utilized for the business purpose. There is a nexus between deposit of receipt under the scheme and utilization of such amount for the business purpose of the appellant like purchase of raw materials, ink and paper etc. The CIT(A) on account of nexus of this fund with the business of the assessee and taking into account the past history that the expenditure had consistently been allowed earlier i.e. prior to A.Y. 2005-06 had allowed the appeal of assssee. Without prejudice to the aforesaid, here we would like to submit that besides the scheme, the Ld. A.O has not appreciated the fact that under this scheme the company gets interest free deposit which at present is to the tune of approximately Rs. 3.17 Cr which is to be used for the purpose of business. It is because of utilization of deposit amount towards the Fixed Assets as well as working capital of the company, that the company dependence of the loan is almost minimal. For the allow ability of any business expenditure, it has to be nexus with the business. Had the company taken or borrowed any secured loans for bus....
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....r the purpose of business. The expenditure may not have been incurred under any legal obligation, but yet it is allowable as a business expenditure it was incurred on grounds of commercial expediency from a prudent businessman point of view. The Hon'ble Supreme Court in the case of CIT v/s S.A.Builders (288 ITR 1). while agreeing with the view taken by the Delhi High Court in CIT v. Dalmia Cement (B.) Ltd. [2002] 254 ITR 377 held that once it is established that there was nexus between the expenditure and the purpose of the business (which need not necessarily be the business of the assessee itself), the revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. No businessman "can be compelled to maximize his profit. The income-tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman. Moreover, without prejudice to the above, this....
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.... material change in the facts of the case. Therefore we are also placing reliance on the rule of consistency. "It is settled legal position in plethora of decisions by the Hon'ble Supreme Court as well as various High Courts including the jurisdictional High Court that although^ the doctrine of resjudicata does not apply to income tax proceedings since each assessment year is independent of the other but where an issue had been decided consistently in a particular manner for earlier assessment years or the sake of consistency the same view should continue to prevail for subsequent years unless there is material change in the facts. For the said proposition, reliance is placed on the following judicial pronouncements" 1. 193 ITR 321 (SC) ( Radhasoami Satsang v/s CIT) 2. 245 ITR 492(Del) (CIT v/s Neo Poly Pack(P) Ltd) 3. 264ITR 276(Del) (CIT v/s ARJ Security Printers) 4. 279ITR 86(Del) (CIT v/s Rajeev Grinding Mills) 2. The Second ground of appeal is against the addition of Rs. 48,59,360 by disallowing certain part of the expenditure i.e @ 8% on estimate /adhoc basis without making any inquiry with respect to transaction cov....
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....lding that the payments in excess of the prevailing market rate has disallowed the expenditure on adhoc basis. Thus the A.O on a complete mechanical basis and without making any outside enquiry has disallowed the expenditure @ 8% on adhoc basis and erred in making addition of Rs. 48,59,360/- For the perusal 85 Convenience, we are enclosing a comparative Chart Party wise which contains the detail of nature of Work and the rates charged for the same work by our related party and by the outside Party and furnished before CIT(A) too. From the chart it is crystal clear that the various works viz Data Processing work has been done by related Party @25 86 15 per page whereas for the same work, the rate of Outside Party is Rs. 28 85 15 per page. For the Work of Stacking 8& Bundling, the rate charged by the related party is @ 5/- per thousand whereas for the same work the rate of Outside party is Rs. 6.50/- per thousand. The rate of Printing with related party is 560/250 per thousand forms whereas the same with outside party is for 600/- per thousand forms, The rate of Proof reading charge with related party at Rs. 35 per Page whereas for the same work the outside rate is Rs. 40/- ....
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..... - Further the Assessing Officer must establish that the payment is excessive or unreasonable. The authorities cannot proceed merely on the basis of surmises and conjectures. The Revenue has to place on record evidence as regards excessiveness or unreasonableness. Marghabhai Kishanbhai Patel and Co. v. CIT [1977] 108 ITR 54 (Guj) followed. In the instant case the A.O mechanically disallowed 2% of expenditure holding to be unreasonable without making any enquiry despite the fact that the works were undertaken with the relatives at a lower rates in comparisons to the rates charged by non-relatives. In this context reliance is also placed on the decision of Hon'ble Punjab & Haryana High court vide the decision of CIT v/s Brij Pal Sharma 333 ITR 229 wherein it has been held that as per section 40A(2) if the payment to relatives are unreasonable, only then disallowance can be made. If the payment to relative for service or goods is lower than amount paid to other parties for service or goods, the payment to relatives cannot be said to be unreasonable. It is also submitted that the Assessing Officer further failed to appreciate that all the companies ....
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....tion without any basis (Reliance is placed on M/s Vinod Kumar Vs. JCIT 22 Taxmann.com 249 ((Chd). Further a disallowance under section 40 (A) (2) (b) on adhoc basis, as percentage of total expenditure is incurred inherently bad in law because such disallowance can never have reasonable nexus with the market price of services for which the payment is made. Reliance is placed on Emersons Process Management India Pvt. Ltd. Addl.CIT 13 Taxmann.com 149 (Mum). The foundation of disallowance thus must rest on categorical findings that the payment for the services are indeed excessive or unreasonable vis-a-vis fair market value of the services. So far as, expenditure being excessive or unreasonable having regard to the fair market value of the services is concerned, that the fair market value of such services is to be determined first. Unless this benchmark is set, there cannot be any question of resorting to disallowance under section 40A(2)(b). The disallowance based on quantum of expenditure incurred rather than the fair market value of services for which expenditure was incurred was contraiy to the scheme of the company as held in the case of Orchard Advertising Pvt. Ltd. v Ad....
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.... Rajeev Grinding Mills) In view of the aforesaid factual as well as legal submission, it is respectfully prayed that the appeal of the revenue may kindly be dismissed." 10. He further referred to the paper book containing 138 pages for above disallowances. He referred to page No. 15 of the paper book where the comparative chart of nature of work, rate charged by the sister concern as well as the market rate is mentioned. He further referred to various quotations given therein. In the end he submitted that the ld Assessing Officer has made the addition wrongly and same has been deleted by the ld CIT(A). Reasons and Decision 11. We have carefully considered the rival contentions and also perused the orders of the lower authorities as well as the paper books and written submission submitted by the assessee. 12. With respect to ground No.1 of disallowance of subscription deposit scheme expenses, it is apparent that assessee is inviting interest free deposit from various customers for certain period and in lieu of this deposit magazines are supplied to them. For supply of such magazine assessee incur certain cost and same is claimed as deduction. It is undisputed th....
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....isallowed payment pertaining to 33 parties out of 34 parties @2% of such expenditure holding it in excess of the prevailing market rate. The ld CIT(A) deleted the above disallowance on the basis of the judicial precedent as well as accepting the contention of the assessee that the companies to whom payment have been made are assessed to tax and has shown profit. He further held that the payment made to such associated concerned was already allowed in AY 2007-08. 14. The chart submitted by the assessee at page No. 16 of the paper book showed as under:- Sl No. Name of the company Nature of work done Rate charge Market Rate (rs.) 1. VV Media Pvt. Ltd. Printing charges Rs. 360 thousand per Rs. 600 per thousand 2. Vinapar Pvt. Ltd Printing charges Rs. 540 thousand per Rs. 600 per thousand 3. PSPC Press Pvt. Ltd Printing charges Rs. 360 thousand per Rs. 600 per thousand 4. Woman‟s Era Media Pvt. Ltd. Printing charges Rs. 360 thousand per Rs. 600 per thousand 5. Media Services Data processing charge Rs. 20/10 per page 22/11 per page 6. Sankhiya Sanchar Sahyog Pvt. Ltd, ....
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....ruing to the assessee Then the Assessing Officer shall not allow the deduction of so much of the expenditure as is considered by the Assessing Officer to be excessive or unreasonable. Therefore, it is apparent that assessee is required to demonstrate the nature of services performed by or goods supplied by the sister concern, the fair market value of such goods, the legitimate needs of the business and benefit derived by the assessee. In the present case when the assessee has not given the details about the nature of services performed by the related parties it is irrelevant to consider the market value of such services. Further the market value has to be contemporaneous. The quotation for plate making charges, printing charges etc submitted by the assessee placed at page No. 33 of the paper book are dated 24.11.2010 whereas the impugned assessment before us is Assessment Year 2009-10. Furthermore, the bills of the related parties except in case of Delhi Press Samachar Patra Pvt. Ltd were also not provided. Even in that bill too the details of quantity and the rates are not mentioned. Further, in many cases the nature of services rendered are also not mentioned ex. Page No. 54 w....
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.... Act. 20. In view of the above facts and circumstances we set aside the whole issue back to the file of the ld Assessing Officer to examine the payment made to the related parties after considering the nature and rate of services provided by them to the assessee and then compare their fair market value, legitimate need of the assessee and benefit derived by the assessee and then if there is any amount found to be unreasonable or excessive then only disallow to that extent. The assessee is further directed to submit before the Assessing Officer above details. The AO is further directed to examine the matter in a fair and reasonable manner bearing in mind that the provision is intended to check, evasion of tax through excessive and unreasonable payment to related parties. In the result ground No. 2 of the appeal of the revenue is allowed with above direction. 21. In the result appeal of the revenue ITA No.1061/Del/2013 for Assessment Year: 2009-10 is partly allowed with above direction for statistical purposes. ITA No.1433/Del/2013 (Assessment Year: 2008-09) 22. In this appeal similar grounds as in Assessment Year 2009-10 were raised. The parties before us submitted....