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TMI Blog2010 (12) TMI 286X X X X Extracts X X X X X X X X Extracts X X X X ..... he appellant was not required to deduct tax at source on reimbursement of expenses. TDS on transportation charges recovered from customers - Since, this transportation is recovered, it is not claimed as expenses in P&L account as debit is set off by credit in sales. - When they are not claimed as deduction, there can not be any disallowance u/.s 40(a)(ia). The disallowance can come into picture only when allowance is claimed. Depreciation on car - car in the name of partner - since the funds for purchase of car was gone out of the coffer of the firm it is undoubtedly proved that the assessee firm is the owner of the case - Depreciation allowed in the hands of firm. - The appeal filed by the revenue is dismissed - IT APPEAL NO. 274 (RJT.) OF 2008 - - - Dated:- 23-12-2010 - A.L. GEHLOT, ACCOUNTANT MEMBER J, AND D.T. GARASIA, JUDICIAL MEMBE J, J.M. Sahay for the Appellant. Vimal Desai for the Respondent. ORDER D.T Garasia, Judicial Member. - This appeal by the revenue is directed against the order of CIT(A)-III, Rajkot dated 19-02-2008for the assessment year 2005-06. The following grounds are taken by the revenue: ( i ) The Ld.CIT(A)-III, Raj ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f S.80-IB prohibits the use of second hand plant and machinery in the formation of the industrial undertaking. An industrial undertaking can be said to have been formed when it starts production. Assessee purchased a second hand platter machine to meet the additional requirement of its major customer after it had started production. It is not the intention of the legislature to prohibit purchase of any second hand machinery even after the formation of the industrial undertaking. Only prohibition is against the formation of the industrial undertaking using second hand machinery. Therefore, CIT(A) was justified in holding that the assessee s claim for deduction under S.80-IB cannot be disallowed. Aggrieved, the revenue agitates the issue before the Tribunal. 4. The ld. DR submitted that the CIT(A) was not justified in granting the deduction. The assessee used second hand machinery for the purpose of manufacturing. Section 80IB prohibits usage of second hand machinery for the purpose of claiming deduction u/s 80IB. Though the assessee has used second hand plant and machinery of a non-eligible unit, which have been obtained on lease for a period of 36 months, has not maintained ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India) P Ltd . 181 ITR 518 (Kar.). Though this decision is rendered in the context of section 80J(4)(ii) the same contained same provision in respect of plant machinery. The Hon ble High Court in this judgment has held as below: Transfer to the new business of machinery or plant previously used as contemplated by section 80J(4)(ii) is one at the time of formation of the new undertaking. ( iii ) ITO v. Laxmi Packers (14 SOT 303 (Mum.). This decision has been followed by the CIT(A) in his decision. ( iv ) Pembril Indl Engg Co (P) Ltd. v. Dy. CIT 30 SOT 340 (Mum.) where the assessee set up a new industrial unit and some old machineries were also taken on hire for running the new undertaking and the 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 under s. 80IA / 80IB cannot be denied. The ld. AR therefore, pleaded that the CIT(A) was justified in his action and his order on the issue may be upheld. 6. We have considered the rival submissions and perused the material placed before us. There is no dispute that the assessee firm was established in the year 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of a business already in existence: Provided ** ** ** ( ii ) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; ( iii ) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part ofIndia: Provided ** ** ** Clause (ii) to sub section (2) of section 80IB is very much relevant to decide the issue under consideration. It states that it is not formed by the transfer to a new business of machinery or plant previously used for any purpose . In the case on hand, the assessee firm was already in existence since 1990 and was availing deduction u/s 80IB since then. Therefore, it cannot be said that it is not formed by the transfer to a new business of machinery or plant previously used for any purpose . It can also not be said that by acquiring some of the assets on lease for a fixed period, which were used by the sister concerns, the assessee has taken over the business of the assessee s sister concern. As such, the question of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to its sister concern to avoid taxes. On appeal, the CIT(A) deleted the disallowance. 9. We have considered the rival submissions and perused the material placed on record. The undisputed fact is that the assessee hired the land, building and plant machinery of M/s Arison Ceramics Pvt. Ltd. under a conducting agreement entered into with them for a consideration of Rs. 22 lakhs per annum and the same were used for the purposes of business of the assessee. The objection of the assessing officer revolves around a narrow compass that by use of these assets, the incremental production, sales and the gross profit was not commensurate. Therefore, the assessee being a related concern, he invoked provisions of section 40A(2)(b) of the Act and disallowed 80% of the expenditure so claimed. So, here we have to see whether under the above facts and circumstances, whether or not in consonance with provisions of section 40A(2)(b) authorized the assessing officer was justified in action of restricting the expenditure to only 20%, which was authenticated by a valid contracting agreement entered into between the assessee and M/s Arison Ceramics Pvt. Ltd., the sister concern. Provisions of se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a chart of incremental production, incremental sales and incremental gross profit and comparison thereof with consideration paid to the sister concern for usage of its factory premises and plant machinery. Since the premises and plant machinery were used in a combined manner, the assessee could not furnish separate production data in respect of production obtained from own plant machinery and production obtained from lease plant machinery. The Assessing Officer while disallowing the major portion of the expenditure merely on the basis of observation that there was a nominal increase in production failed to look into the other aspects of the matter. Provisions of section provides for three different circumstances as enumerated above from (i) to (iii). The reason of disallowance resorted to by the Assessing Officer only, in sour considered opinion, at the most, satisfies the third circumstance as there is no negative finding recorded by the Assessing Officer with regard to the other two circumstances, i.e. (i) and (ii) above. There is no finding that the assessee has not leased the land, building and plant machinery from the sister concern; there is also no finding that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e business or profession of the assessee for which the payment is made; and such expenditure is excessive or unreasonable having regard to the benefit derived by or accruing to him therefrom for which the payment is made. 12. In view of the above, we uphold the following findings recorded by the CIT(A): 7.5 In view of the above, I hold that the various contentions of the A.O. for the impugned disallowance are unjustified and invalid. The disallowance made by the A.O. is not in accordance with section 40A(2) as per which the disallowance of payments which is excessive or unreasonable as compared to fair market value can only be made. The A.O. has not made any single attempt to find out fair market value of the subject-matter of the agreement. Without this, no disallowance u/s 40A(2) can be made as held by the Apex Court in the case of Upper India Publishing House Ltd. (117 ITR 569) relied upon by the appellant. It is found improper that the scheme of the section 40A(2) and Apex court decision having been submitted and relied upon by the appellant before the A.O., the A.O. without bothering to work out the fair market value and comparing them with the consideration paid by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nses claimed by the C F agent. Relying on the question and answer No. 30 of Board s circular No.715 the Assessing Officer held that the assessee was required to deduct tax on the reimbursement of expenses as well. The submissions of the assessee that - (i) the C F agent recovered principle amount of agency commission and reimbursement of expenses by two separate invoices, one of which was principal invoice and the other was debit note for reimbursement of expenses and that since the principal amount i.e. agency commission and reimbursement of expenses were not covered by single bill, the assessee s liability to deduct at source applies only in respect of agency commission and it does not extend to reimbursement of various expenses in respect of individual items of expenses which are reimbursed; (ii) export freight, terminal handling charges and documentation charges are covered by Board Circular No. 723 and therefore they are not liable to TDS; (ii) part of the transportation expenses were recovered from the overseas customers and to that extend they are not claimed as expenses in the P L Account and therefore they cannot be disallowed u/s 40(a)(ii) were not found acceptable to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 15, dt. 8 th Aug., 1995, relied upon by the A.O. in support of his case on this issue was applicable only in the cases where bills are raised for the gross amount inclusive of professional fees as well as reimbursement of actual expenses and the same, therefore, was not applicable to the facts of the present case, where bills were raised separately by the consultants for reimbursement of actual expenses incurred by them. As such, considering all the facts of the case, we are of the view that the provisions of S.194J were not applicable to the reimbursement of actual expenses and the assessee-company was not liable to deduct tax at source from such reimbursement. In that view of the matter, we uphold the impugned order of learned CIT(A) on this issue and dismiss the relevant grounds of the revenue s appeal. Thus, it is clear that the question and answer No.30 of Board Circular No.715 applies to a case of combined bill wherein principle amount as well as reimbursement of expenses are included. The said question and answer do not apply in a situation where principle amount and reimbursement of expenses are separately recovered. 8.3 Now coming to the appellant s case, it is seen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the A.O. had any doubts, he could have made further inquiries to the appellant or to the C F agent. Instead of that he chose to ignore the submissions and evidences of the appellant. 8.4 On careful consideration of the facts of the case and evidences and case laws, I hold that since the agency commission and reimbursement of expenses are separately charged and recovered, the appellant was not required to deduct tax at source on reimbursement of expenses as held by the Hon ble ITAT in the decision discussed supra. The disallowance of Rs. 64,78,719/- is therefore not tenable and hence hereby deleted. 8.5 The appellant has raised alternative plea in respect of export freight, terminal handling charges, documentation charges and transportation expenses. Out of this, the A.O. has accepted the plea regarding to export freight in view of Board circular NO. 723. The AR of the appellant submitted submitted that the A.O. accepted appellant s submission with regard to the export freight that in view of Board Circular No. 723, the appellant was not required to deduct tax at source on export freight while reimbursing the same to the C F agent. The appellant also submitted that terminal han ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of that while reaching to the conclusion of disallowance. The submission of the appellant is convincing. The transportation to the extent recovered from customers can not be said to have been claimed as expense. When they are not claimed as deduction, there can not be any disallowance u/.s 40(a)(ia). The disallowance can come into picture only when allowance is claimed. I, therefore, hold that transportation expenses to the extent it is recovered by the appellant from its customers can not be disallowed u/s 40(a)(ia). 8.7 Thus, the alternative plea of the appellant with regard to terminal handling charges, documentation charges and transportation charges are accepted. However, since I have deleted entire disallowance, the acceptance of alternative plea does not require any further adjustment in the computation of total income while giving effect to this order. 15. We have considered the rival submissions and gone through the material placed before us. The ld. DR relied upon the order of the assessing officer whereas the ld. AR relied upon the order of the CIT(A). We find that the main objections of the Assessing Officer in making the disallowance are that as per CBDT circula ..... 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