9911796707
TMI Blog1989 (9) TMI 167X X X X Extracts X X X X X X X X Extracts X X X X ..... July, 1981, with its head office atNew Delhiand, the company carries on the activity of developing of exposed colour film rolls and then printing of colour photographs on special paper. The company had required agents who were to be responsible for collection of exposed films from customers, deliver them to the assessee, for being developed in its developing laboratory, collect them after they have been developed and printed, pay the charges for printing paper, development, etc., and then supply the developed films to the customers. He submitted that the assessee-company had to necessarily seek the co-operation of several shops spread all overBombayfor the purposes of developing of films and to get their prints from it. Realizing that it would be too much of a bother to maintain a centre for collection, delivery etc., as it involved additional office accommodation, additional labour force and many other recurring expenses attached to it, and considering the industrial problems and many other factors, the company decided not a venture into the centre for collection, delivery, etc. Mrs. Parvin Nandrajog, one of the three directors, took up on hereself of establishing the collection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... effect that the activity could have been conveniently carried on by the company and rejected the reasoning provided by the assessee of commercial viability, expediency and also the problem that may arise under various labour laws, as all frivolous. He submitted that IAC made reference to a Supreme Court judgment in Workmen of Associated Rubber Industry Ltd. vs. Associated Rubber Industry Ltd. Anr. (1985) 48 CTR (SC) 353 : (1986) 157 ITR 77 (SC), which was unnecessary for in that case the workmen of that company had agitated the formation of another company to be its subsidiary company with the sole purpose of earning dividend with a view to divert the profit, on which profit, the workers would have otherwise been entitled to. In the instant case, there is no diversion of income at all and that it is also not the case of the Department that the activity of collection, delivery and related matters was done by the assessee-company, except by way of doubting the transition. He also pleaded that the Department has every right to go behind any transaction and if it had evidence to suggest that the transaction or the activity belonged to the assessee, the Department s action would be f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bility of the transaction not being genuine is insufficient to come to the conclusion that the transaction was benami; to the Madras, High Court ruling in Madura Knitting Co. vs. CIT (1956) 30 ITR 764 (Mad) and to the Supreme Court ruling in Shree Meenakshi Mills Ltd vs. CIT (1957) 31 ITR 28 (SC) at pages 51 52, for the proposition that, for the purposes of arriving at any conclusion, the facts as a whole need to be examined and not merely by attaching weight to a single factor in isolation of the other factors. 3. The argument of the learned Departmental Representative Sh. T.K. Shah was that, the fact that the assessee-company was a closely-kint one, cannot be over looked for the three shareholders were Sh. G.M. Singh, Smt. Parvin Nandrajog who is the wife of Sh. G.M. Singh and the father of Shri G.M. Singh. His further plea was that the lady stayed all along inNew Delhiand therefore, could not have controlled the business at all. He laid great stress on the observations made by the IAC and the CIT(A) in regard to such colourable activities and that in the circumstances of the case, the conclusion arrived at by the authorities below was proper. 4. We have given our very care ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng period of QSS Services ended on31st Dec., 1982. We also enclose the photocopy of the assessment order of Mrs. Parveen Nandrajog the sole proprietor of QSS Services. Observation of the IAC in the assessment order Smt. Parveen Nandrajog is the wife of Sh. G.M. Singh Nindrajog and both these persons alongwith Sh. M.M. Singh who is the father of Sh. G.M. Singh are the only shareholders of this company. The work done by QSS Services and the profit earned by them can hardly be distinguished from that of the assessee, and the total commission paid cannot be treated anything else except the income of the company. QSS is functioning from the same premises as that of the assessee and has no separate existence in fact. The total capital of the proprietor is Rs. 3,500. A similar question arose before the Supreme Court in the case of workmen of Associated Rubber Industries Ltd. s. Associated Rubber Industries Ltd. (1985) 48 CTR (SC) 355 : (1986) 157 ITR 77 (SC). The Supreme Court Observed "It is the duty of the Court, in every case where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke-screen and discover the true state of affairs. The Court is n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the services entrusted to her. The choice of QQS Services by the appellant company was only for purpose of reduce the incidence of taxation in its own hands. 4.2 The facts as emerge out of the records are that the assessee-company s registered office is atNew Delhiand its business activity is carried on atBombay, at No. 214, T.V. Industrial Estate, Worli,Bombay. The business of the assessee-company consisted of developing of exposed colour films and printing of colour photographs. Shri G.M. Singh, a non-resident Indian, after staying inIranfor more than a decade formed this company and after formation of the said company had settled down inIndia. His wife Smt. Parvin Nandrajog, who was a partner in a firm inDelhi, also started her business venture as a proprietorship concern in the accounting year relevant to the asst. yr. 1983-84, having the only objective of providing the necessary service of liaison between several photographic shops spread all overBombayand the assessee-company. For this activity, she had the initial capital of Rs. 3,500. She had her office at 19, T.V. Industrial Estate, Worli,Bombay, for which she had paid a rental of Rs. 1,200 per month, the confirmation i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Nandrajog was a mere recipient of 10 per cent commission with no establishment expenses then, decidedly, the transaction would be staring on the face of its as a method of avoidance. If the finding had been that she had no establishment of her own and that the whole of the establishment expenses were really incurred by the company, but shown to have been incurred by her, the ratio of the Supreme Court would be positively attracted. In the instant case, the Revenue s effort to come to the conclusion that Mrs. Nandrajog is the benami of the assessee-company has been based on two factors. First, the lady happens to be the wife of the Director and one of the three shareholders of the assessee-company and the second, the service could have been comfortably carried on by the company itself. There can be no two opinions about the fact that the close relationship does create a suspicion, which necessarily calls for microscopic examination. The Revenue did not feel the necessity of carrying out this miscroscopic examination for the reason that it was convinced, that, the closeness of the relationship was by itself sufficient evidence and no other evidence either direct or circumstantial w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... per cent, commission, she had to have a whole gamut of the establishment and finally, for the effort put in by her to earn her commission, the net profit she could make was just about Rs. 27,830 in the first year and little over Rs. 78,000 in the second year. 4.4. When we examine the present issue before us in the light of the above factors, we could come to the only conclusion that the Revenue has no evidence on record at all to enable us to hold that the business did not belong to the lady, but to the assessee-company. As observed above, the fact of the lady being the shareholder and also the wife of one of the directors though she is said to have done some business in the past, does cast a doubt but by mere doubt, it could not be concluded that the lady was incapable of carrying on any business or that she did not do business or that the business really belonged to the assessee-company. It has been accepted by Revenue that the establishment expenses as shown by the assessee as necessary and reasonable, though not specifically, but indirectly, for they had proposed to add the net income from the liaison in the assessee-company s hand. It is also not the case of the Revenue tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arning that commission, the expenditure that was necessary was substantial and that too to the extent of 98 per cent. Thus, applying the ruling of the Supreme Court in Meenakshi Mills, i.e., by evaluating the evidence on record and assessing the cumulative effect of all the facts in their setting as a whole, we have the lease hesitation in coming to the conclusion that the assessee-company is not the real owner of the business of QSS Services, but Smt. Parvin is its proprietor, and therefore, including her income in the hands of the company is wholly improper, the same is excluded from the total income of the assessee-company. 5. The next in line which issue is common to both the assessment years is the claim of investment allowance on the ground that it was carrying a manufacturing activity and that it is not producing any article or thing covered by the Eleventh Schedule to the IT Act, 1961. The alternative claim is that the company should be treated as a small scale industrial undertaking. The learned counsel for the assessee Sh. Agarwal, submitted that the claim of the assessee-company for investment allowance had been negatived on the reasoning that the article dealt in by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alternative was that it should be considered as a small scale industrial undertaking, on the reasoning that its cost of machinery and plant was much below Rs. 20 lakhs. The learned Departmental Representative placed reliance on the Kerala High Court ruling in CIT vs. Casino (P) Ltd. (1973) 91 ITR 289 (Ker) for the proposition that processing does not have the same meaning as manufacturing and therefore, the assessee is not entitled to investment allowance. He also placed reliance on certain Tribunal decisions to emphasise on the point that processing and manufacturing are two different terms. 5.1. We have given our very careful considerations to the rival submissions. It is not in dispute that the initial article, viz., exposed films and the developed films are entirely two different items and have no similar features except that the former was the base for the latter. Similarly the exposed film and the final print obtained are totally different items with no similar properties at all. The term manufacture means production of any article quite different from its raw material, and having totally different properties from its raw material. It is well known feature that all manufact ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... These are items which can be easily exchanged from one hand to another in the sense of purchase and sale. The exposed films, which is developed by the assessee would have no marketable value as far as the assessee in concerned, for the assessee job is limited to its processing and then handing the same to the owner. In case the assessee has its own wing of photographers, who are asked to take different photographs of several times, which are being developed and printed are sold in the market as any other material, then perhaps the objection of the Revenue could be said to be justified. In the strict sense of the terms of photographic goods, the developing of exposed films and printing them would not fall for the reason that it would have no resale value as far the assessee is concerned, nor it would have any saleable value for the customer even, as most of them preserve these for the sake of remembrance only. We are therefore of the view that the claim of the assessee that it is not caught by the mischief of the Eleventh Schedule of the It Act, 1961, is fully justified. We have held that the activity of the assessee results in the manufacture of article or thing and further since ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ovided to him. He submitted that the CIT(A) had restricted the disallowance to Rs. 10,000 on adhoc basis for the mere reason that the details contained conveyance and petrol bills. He made reference to pages 32 33 of the paper book and submitted that the details clearly show the places of travel, the daily allowance and expenses under the head postage, telegram, etc. He pleaded that the details also show the amount of daily allowance which are in excess of the limits prescribed under r. 6D. He pleaded that, the statement itself, according to which, the amount disallowable cannot exceed Rs. 4,606 and Rs. 777 respectively. The learned Departmental Representative fairly submitted that as per the details, the working of the excess amounts disallowable appear to be proper. On this issue, after careful considerations of the submissions of the parties and the details at pages 32 33, we are of the view that the expenses under the head postage, telegram cannot form part of travelling expenditure and the limitation has to apply only with reference to the daily allowance and, on this basis, the excess allowance worked out by the assessee, appear to be proper and, therefore, the amount o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th Nov., 1981and as per the order, the investment in the machinery upto a value of Rs. 8.03 lakhs was permitted, which was the invoice value of the machinery. He pleaded that for the purpose of import, Mr. Singh had to undertake trips abroad and had to incur expenditure of Rs. 47,000. This amount incurred by him was added to the face value of the machinery and the cost as was made over to the company was Rs. 8.50 lakhs, against which, he was allotted shares for the like amount. His plea was that the Revenue s objection is that since Mr. Singh did not provide the details of the expenditure of Rs. 47,000, which according to him could not be the basis for not treating the amount as part of the capital cost of the machinery. His plea was that the machinery having been imported specifically for the purposes of the company, the expenses as incurred by him in that connection as promoter of the company, compensated to him by the company by allotment of shares, the Revenue cannot raise any questions about it. For this proposition, he placed reliance on the Supreme Court s ruling in Kaluram Govindram vs. CIT (1965) 57 ITR 335 (SC). The learned Departmental Representative placed reliance on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommencement the business but to set it up only and he drew our attention to pages 51 52 of the paper book, where the details are filed. The learned Departmental Representative supported the orders of the authorities below and submitted that, not all expenditure could be said to relate to installation and setting up of the plant and for this proposition, he placed reliance on Madras High court rulings in CIT vs. Simco Meters Ltd. (1978) 111 ITR 113 (Mad). On this issue, our considered view is that there are certain administrative expenses which have to be incurred by the company, which has no relation to the installation activity. Such expenses cannot be capitalised. The perusal of the details at page 51 indicates that the assessee had claimed capitalisation of expenditure under the heads car maintenance, travelling, conveyance, brokerage, advertisement, printing stationery, postage telegrams, salary, medical, miscellaneous, ameneities, legal expenses, director s remuneration, rent, entertainment and insurance. The AO had allowed in the first three 25 per cent, next three at 10 per cent, out of salary 25 per cent and out of directors remuneration 33.33 per cent. Though we woul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but was shy of allowing the claim of the travel expenses and gave an observation that the assessee had not produced any correspondence and that no material was brought by the Directors when they returned from U.K. The plea raised was that the assessee-company s directors had carried out the survey of the market in regard to the availability of the materials and on this basis had placed orders on the party May Baker located atU.K., from whom the goods have been purchased. Therefore, the claim of the assessee had been justifiably established. He pleaded that the visit toJapanandSingaporewas also for the same purpose. he pleaded that while the expenditure incurred for going to Japan had been allowed, the expenditure for going to Sinagpore was disallowed for the same reason as was done for theU.K.trips. The learned Departmental Representative pointed cut that the CIT(A) had after examining the details and other factors came to disallow the claim of the assessee in the absence of there being any evidence indicate, the claim should not be allowed. 12.2 We have given our careful considerations to the rival submissions. The CIT(A) had observed in her order that the assessee did import ..... X X X X Extracts X X X X X X X X Extracts X X X X
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