TaxTMI 
TaxTMI 
2010 (3) TMI 1236
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.... orders dated 18.8.2009 of the ld. CIT(A)-II, Ahmedabad for the AY 2006-07, raise another set of common issues relating to disallowance u/s 40A(2)(a) of the Act. The appeal in ITA No.3019/Ahd/2009 is filed by the Revenue in the case of M/s Jivraj Tea Ltd for the AY 2006-07,raising grounds relating to disallowance of sales promotion expenses.. The three stay petitions filed by these assessees seek stay of demand raised in the respective assessment years. Since these appeals and stay petitions belong to the same group of assessees while issues are common, these were heard simultaneously for the sake of convenience and are being disposed of through this common order. ITA No.3003/Ahd/2009 - Jivraj Tea & Industries Ltd ITA No.3004/Ahd/2009 - Jivraj Tea Company ITA No.3006/Ahd/2009 - Jivraj Tea Ltd 2. In these three appeals, the assessees have raised grounds relating to their claim for deduction u/s 80IA(4) of the Income-tax Act, 1961 (hereinafter referred to as the 'Act').Facts, in brief, as per relevant orders in the case of M/s Jivraj Tea & Industries Ltd. are that return declaring income of Rs. 10,43,150/- was filed on 9.9.2005 for the AY 2005-06. Inter alia, the assessee....
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.... contention, the assessment order having been passed after issuing notices u/s 143(2) /142(1) of the Act and providing proper hearing. As regards merit of their claim, the assessee contended that apart from sales shown in the profit and loss account , the assessee earned income from sale of their entitlement for sales tax exemption to M/s Mahindra & Mahindra Ltd.. Thus, there was no discrepancy in the figure shown in form 10CCB. In the light of these submissions, the ld. CIT(A) held in the case of Jivraj Tea & Industries Ltd. in the following terms : "3.3 I have considered the facts and the submissions. I find that deduction claimed u/s 80IA cannot be disallowed for the reasons mentioned by the Assessing Officer. However, the deduction u/s 80IA is not allowable to the appellant for the following reasons: (a) I find that the wind mill costing Rs. 5 crores was installed on 29.03.2002. The total income earned from this wind mill in earlier years (as per details submitted by the appellant), is as under: AY Gross Income from the Windmill (Rs.) Expenses (excluding Depreciation) Net Income (Before depreciation (Rs.) 2002-03 962 33,031 -32,069 2....
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....ligible business even though they have been allowed set off against other income in earlier years." (d) The income from sale of entitlement of sales tax exemption is not derived from the eligible business but only incidental to the business hence, deduction u/s 80IA is not allowable on this income. (e) Even if the deduction cannot be disallowed by considering the reason given by the AO, it can be disallowed by considering other relevant reasons, because the CIT(A) has the same power as of the AO while deciding the appeal on a particular issue. Hence, the issue of appeal is allowability u/s 80IA and for this, sub section 80IA(5) has to be considered even if the same was not discussed by the AO. 3.4 In view of these facts of the case and the case laws discussed above, it is held that the appellant is not entitled for the deduction u/s 80IA of the Act. Hence, this ground is rejected." 3.1 Similar findings were recorded in the case of two other assessees. 4. These assessees are now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. AR on behalf of these assessees while inviting our attention to para 3.3 of the impugned orders and gr....
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....peaking, you cannot deny that there has been no administrative fair play. " 5.1. We notice that over the years by a process of judicial interpretation two rules have been evolved as representing the principles of natural justice in judicial process, including therein quasi judicial and administrative process. They constitute the basic elements of fair hearing, having their roots in the innate sense of man for fairplay and justice which is not the preserve of any particular race or country but is shared in common by all men. The first rule is nemo judex in causa sua' or nemo debet esse judex in propria causa sua' as stated in [1605] 12 Co. Rep. 114, that is, "no man shall be a judge in his own cause". The second rule and that is the rule with which we are concerned in this case is "audi alteram partem", that is, "hear the other side". At times and particularly in continental countries, the form "audietur at altera pars" is used, meaning very much the same thing. A corollary has been deduced from the above two rules and particularly the audi alteram partem rule, namely, "qui aliquid statuerit parte inaudita altera, aequam licet, dexerit, haud aequum facerit", that is, "he ....
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....erage price of Rs. 103.13/- per kg. of tea as excessive and unreasonable and devoid of commercial expediency on the ground that: "a. the conditions of purchase like payment schedules, credit facilities etc. are similar between outside parties as well as related concerns. Hence, no other special benefit has been derived by the Party from transaction with related concerns. b. The assertion that the quality of tea purchased from outside parties are different from those purchased from related concerns have been found to be unacceptable. c. There are no specific quality parameters mentioned on the purchase bills and the quality parameters mentioned are not standard and are not ascertainable nor verifiable from extant literature on tea quality. Hence, the quality differentia is not accepted as a valid argument on the facts of the case. d. Further, from the perusal of purchase bills, it has been found that the only possible differences which appear are as regards to source 'garden' and 'grade' (Dust/Leaf- Pekoe(OP/BP/BOP) etc). However, the prices variations in respect of source 'garden' as well as 'grade' are not consist....
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....ediency and reasonability and hence gets hit by the provisions of sec. 40A(2)(a) of the Act.Accordingly, the AO worked out the excessive payments made to sister concerns and made disallowance of Rs. 1,18,98,049/- u/s. 40A(2)(a) of the Act on account of excessive and unreasonable payments to related parties as under:- Sr. No. Name of specified concern Qty. Unit Rate Fair & Reasonable Rate Excessive Unit Payment Excessive Total Payment 1 M/s Surin Corporation 6888102 119.23 103.13 16.10 11079796 2 Jivraj Tea Limited 17980 148.64 103.13 45.51 818254 Totals 11898049 7.2 Like wise in the case of Jivraj Tea Limited, the AO worked out disallowance of Rs. 6,31,08,777 in the following manner: Sr. No. Name of specified concern Qty. Unit Rate Fair & Reasonable Rate Excessive Unit Payment Excessive Total Payment 1 Jivraj Tea Co(HO) 10774 111.7 97.60 14.1 152330 2 Jivraj Tea & Industries Limited 580727.3 126.2 97.60 28.6 16630078 3 M/s Surin Corporation 11061 106.4 97.60 8.....
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.... with the appellant's view for the following reasons: a) The appellant has maintained that indeed the quality of tea purchased from outside parties are different from those purchased from related concerns and therefore, the prices and rates are not comparable. Whereas the Assessing Officer held that the assertion of the appellant that the quality of tea purchased from outside parties are different from those purchased from related concerns are unacceptable. Thus, the basic issue in appeal is the existence or otherwise of verifiable and ascertainable quality differences in the purchases of tea made by the assessee as evident from the purchase bills, vouchers etc. received, maintained and produced by the assessee. From the perusal of purchase bills, it has been found that the only possible differences which appear are as regards to source garden or estate and grade (Dust or Leaf -Pekoe or Orange OP or Broken Pekoe, or Broken Orange Pekoe etc. etc). As per common knowledge tea grades are numerous numbering in excess of fifty and are not at all standardized, and may vary widely according to country or region of origin. Since numerous 'grades' of tea exist, a partic....
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....pted that the 'garden-wise' or 'grade-wise' quality difference is material to the business of the appellant. Further, the Assessing Officer argued that the 'garden-wise1 quality differentiation is only a plea to claim higher and greater purchase price in respect of purchases made from related concerns. I am inclined to agree with the Assessing Officer's view that the purchase vouchers do not contain sufficient details indicating the quality of tea purchased. d) The Assessing Officer has contended from the perusal and analysis of purchase bitts of related concerns that the seller related party has also made purchases from certain common agencies as those from which the appellant has purchased tea. Hence, it has been inferred by the Assessing Officer that similar tea has been procured from one and the same source, by both the appellant as well as the seller/supplier related concerns, viz. Jivraj Tea Limited and M/s. Surin Corporation. Further, it has been inferred that the price paid to the related concern for the same tea has been comparatively higher than the price paid to outside parties. The appellant has also not been able to rebut this argument ....
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....wance u/s.40A(2)(a) can be made by comparing the purchase price of goods with rates at which goods valued at year end. Here it is not the case. The ratio of the case laws relied on by the appellant in the case of Sanchita Marine Products Pvt.Ltd. vs DCIT 15 SOT 280, is not applicable to the appellant's case. In that case, it was held that there being no mention in the assessment order that the grade of fish supplied by all the vendors and sister concern was the same, addition was not justified. Here in this case, the A.O. has held that quality was not mentioned in the purchase voucher hence, quality was same, supplied by related and non related persons. The ratio of the case laws relied on by the appellant in the case of Pondy Metal & Roiling Mills Pvt.Ltd. vs DCIT 107 TTJ 336, is not applicable to the appellant's case. In that case, it was held that revenue has not compared the price of raw material paid by the assessee with the prices charged for the same material by other suppliers in the open market and the fact of bulk purchases has not been properly appreciated. Here it is not the case. The A.O. has compared the price for the same type of material an....
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....d upon. The relevant provisions of sec. 40A(2) of the Act stipulate that where an assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of the said sub-section, and the Assessing Officer is of the opinion that such expenditure is unreasonable or excessive having regard to the fair market value of the goods, services and the facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction. The scope of the section has been explained in the circular of CBDT No. 6P(LXXXVI-66) of 1968, dated 6th July, 1968 wherein in paras 72 and 74, it was stated thus: "Para 72 : The Finance Act, 1968, has introduced a new s. 4OA in the IT Act w.e.f. 1st April, 1968. Under sub-s. (2) of new s. 4OA, expenditure incurred in a business or profession for which payment has been or is to be made to the taxpayer's relatives or associate concerns is liable to be disallowed in computing the profits of the busines....
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.... generally sold in auction by various gardens and the market rates of a particular quality depends upon the best bidding. The price of dust is lower as compared to the price of leaf tea. In view of variety of factors affecting tea trade, there can be no standard for fixing the price of tea. The AO has compared average price of tea purchased from outside parties vis-à-vis purchase from sister concerns. No attempt has been made to ascertain the price prevailing in the market on the day when purchases are stated to have been made from the sister concerns, especially when the price prevailing on a particular day fluctuates even in respect of tea from the same garden and of the same grade. No finding has been recorded by the ld. CIT(A) on the plea on behalf of the assessee that purchases of tea from sister concerns have also been made at lower rates vis-à-vis purchases from outside parties. Hon'ble jurisdictional High Court in the case of Marghabhai Kishabhai Patel & Co. Vs. CIT,108 ITR 54(Guj) held that the average price of earlier purchases cannot be taken as the basis of determining cost of subsequent purchases. Besides, the AO/the ld. CIT(A) have not analysed the impac....
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.... and sister concerns where there is no attempt to evade tax. The assessees before us are stated to be paying tax at the maximum prevailing rates and there is no evidence on record nor there is any allegation regarding evasion of tax by any of these assessees . The ld. DR did not point out as to how the assessee evaded payment of tax by alleged payment of higher purchase price to its sister concern since the sister concerns were also paying tax at higher rates , as admitted before us by the ld. AR. 10.3 Moreover, it is nobody's case that the transactions of purchase from the sister concerns were not bona fide transactions nor is it the case of the Revenue that these were sham transactions or that the price paid in respect of each of these transactions by the assessee was other than the one set out in the books of account of the assessee. Under these circumstances it appears to us that the taxing authorities had no right to substitute the average price in place of the price or value agreed to between the parties to the transaction, since the transaction has not been shown to be a sham one nor has it been shown that the value was not the value in the books of account. 10.4 I....
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....rakh and Co. (India) Ltd. (1956) 29 ITR 661, the AO further observed that the burden of proving that a particular expenditure has been laid out or expended wholly and exclusively for the purposes of business was on the assessee. In the case of CIT vs. Chandravilas Hotel (1987) 164 ITR 102 (Guj), it has been held that if the expenditure is doubted by the assessing authority, it is the duty of the assessee to prove by leading evidence that the expenditure was in fact, incurred. No such burden having been discharged by the assessee in the instant case nor the assessee established the existence of any business connection of any payment made to claimed advertising parties, the AO disallowed the claim. As regards the payments of Rs. 30,25,280/- made under nomenclature of 'Discounts & Incentive Expenses', the AO disallowed payments on the ground that these were merely of the nature of transfers and not business expenditure and the assessee in the instant case failed to establish the business nexus. Inter alia, since net profit of the assessee declined from 4.56% during the preceding year A.Y. 2005-06 to 4.2% in the year under consideration and the assessee failed to explain the fa....
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....hat - "It is not open to the Department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best." Further, as per decision of Hon'ble Gujarat High Court in the case of Voltamp Transformers Private Limited V/s C1T (1981) 129 ITR 105 (Guj), it is held that - "It is well settled law that so far as the question of commercial expediency and business needs of an organization are concerned, it is not the view point of the Revenue Officer which should count but it should be a view point of an ordinary businessman dealing with the situation like the one faced by the particular assessee in question. It is, therefore, from that particular view point that the question has to be approached." Therefore, when the expenses are genuine and parties are not related concerns and not covered u/s.40A(2)(b), the reasonableness and magnitude of the expenses, cannot be questioned and decided by the Assessing Officer. e) The facts that there is sharp increase in expenses as compared to increase in sales from last year, may arose suspicion and may be the starti....
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.... expenditure has not been doubted and there is no material before us so as to enable us to take a different view in the matter, we are not inclined to interfere with the findings of the ld. CIT(A). This view of ours is supported by the decision in the case of Sassoon J. David And Co. Pvt. Limited.(supra), where in Hon'ble Apex Court observed: :It has to be observed here that the expression " wholly and exclusively " used in s. 10(2)(xv) of the Act does not mean " necessarily ". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of his or its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under s. 10(2)(xv) of the Act even though there was no compelling necessity to incur such expenditure. It is relevant to refer at this stage to the legislative history of s. 37 of the I.T. Act, 1961, which corresponds to s. 10(2)(xv) of the Act. An attempt was made in the I.T. Bill of 1961 to lay down the " necessity " of the expenditure as a condition for claiming deduction under s. 37. Section 37(1) in ....