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TMI Blog2011 (1) TMI 1498X X X X Extracts X X X X X X X X Extracts X X X X ..... s u/s 37(1) of the Income Tax Act, 1961 and be allowed as claimed. Hence the same is deleted now. 4. The Hon'ble CIT(A) has erred in confirming the addition of ₹ 4,55,759/- by invoking provisions of section 40A(2)(a) of the Act without considering the full facts of the case. Your appellant submits that job work charges paid are neither excessive nor unreasonable. Your appellant craves for leave to add/alter/amend/withdraw/modify any of the above grounds before hearing. 2 Adverting first to ground no.2 in the appeal, facts, in brief, as per relevant orders are that return declaring income of ₹ 5,39,660/- filed on 23-12-2006 by the assessee, after being processed u/s 143(1)(a) of the Income-tax Act, 1961 [hereinafter referred to as the Act ], was selected for scrutiny with the service of a notice u/s 143(2) of the Act issued on 10-10-2007. During the course of the assessment proceedings, the Assessing Officer[AO in short] noticed that the assessee debited net prior period expenses of ₹ 57,091/- in its profit and loss account. To a query by the AO, the assessee submitted a copy of the ledger account, which revealed that the expenses related to sal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relevant statute. The quantification or ascertainment cannot postpone its accrual to the extent of admitted liability. On the other hand, contractual liability accrues when the basis for its quantification is settled by an agreement or otherwise. As held by the Hon ble jurisdictional High Court in their decision in Saurashtra Cement Chemical Industries Ltd.(supra), merely because an expense relates to a transaction of an earlier year it does not become a liability payable in the earlier year unless it can be said that the liability was determined and crystallized in the year in question on the basis of maintaining accounts on the mercantile basis. In each case where the accounts are maintained on the mercantile basis it has to be found in respect of any claim, whether such liability was crystallized and quantified during the previous year so as to be required to be adjusted in the books of account of that previous year. If any liability, though relating to the earlier year, depends upon making a demand and its acceptance by the assessee and such liability has been actually claimed and paid in the later previous years it cannot be disallowed as deduction merely on the basis the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not accept submissions of the assessee on the ground that the wife of the director was neither a director nor an employee of the assessee company nor the assessee placed on record any documentary evidence to show the work done by Mrs. Sheth for the assessee company during her tour abroad with Mr. Sheth. Moreover she was running her own consultation firm. Accordingly, the AO disallowed the claim for deduction of ₹ 51,269/-. 7. On appeal, the learned CIT(A) upheld the findings of the AO in the following terms:. 2.5 I have considered the submissions of the appellant I do not find enough justification for the claim. Smt.Hema Sheth is running her own consultancy business, The traveling expenditure incurred on the wife of a Director is not for the purpose of business. The arguments given for the claim is extremely generalized and can be applied to any expenditure incurred. There are no evidences in support of the claim. These are self serving arguments. This ground is dismissed. 8. The assessee is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. AR on behalf of the assessee while reiterating their submissions before the learned CIT( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 17,318/- [b] Vaishvanar Organics Pvt. Ltd.[VOPL] Rs.22,78,795/- To a query by the AO, the assessee explained that they manufactured the product POA during the year under consideration. While explaining the process, the assesssee submitted that for every KG of product sold, they need to recover 4 KG of solvent. and cost of 1 kg. of inputs worked as under::- [1] Cost of fuel Rs.3.33 [2] cost of power Rs.0.25 [3] Cost of labour Rs.0.20 [4] Cost of cooling water Rs.0.05 [5] Loading/unloading/handling Rs.0.10 Total direct cost Rs.3.93 [6] Indirect cost and profit (25%) Rs.1.00 Total job charges Rs.4.93 Since Agriguard was under the same management, overhead and profit were not allowed and job at ₹ 4.00/kg. was agreed upon while VOPL was allowed to recover overhead and profit and so was paid ₹ 5 per kg. Howeve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the market price nor established ₹ 5/- per Kg. paid to VOPL was in excess of prevailing market price. In fact ₹ 5/- per kg. was the correct market price inasmuch as VOPL has been charging ₹ 4.75 as early as in 1999 and no disallowance had ever been made in any scrutiny assessment of the assessee company. Since there was no attempt to evade or avoid tax and the AO has not able to show how ₹ 5/- is excess as per market value, no addition could be made in terms of the decision in the case of CIT vs. Indo Saudi Services(Travel) (P) Ltd.,219 CTR(Bom.)562 and decision dated 17.4.2009 in the case of New Vision Laser Centre(Rajkot) Ltd. vs. ITO in ITA no.1301/Ahd./2006. of Ahmedabad ITAT. The learned DR, on the other hand, supported the findings of the learned CIT(A). 13. We have heard both the parties and gone through the facts of the case. The issue before us is as to whether or not the rate of job work charged from VOPL at ₹ 5 per kg was excessive in terms of the provisions of section 40A(2)(a) of the Act? For this matter, we may refer to the provisions of section 40A(2) (a) of the Act, the relevant portion of which reads as follows 40A(2)(a). Where ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be invoked and applied, if the facts so warrant. Thus, only so much of the expenses, if paid to a person referred to in clause (b), are allowable which are found to be not excessive and unreasonable and the excessive or unreasonable portion has to be disallowed. It is well settled that the provisions of section. 40A(2)(a) of the Act cannot have any application unless it is first concluded that the expenditure was excessive or unreasonable, as held in the case of Upper India Steel Manufacturing And Engineering Co. Private Limited, 117 ITR 569(SC). The provisions of section 40A(2)(a) came up for consideration before the Hon ble Karnataka High Court in T. T. Pvt. Ltd. v. ITO [1980] 121 ITR 551, and Venkataramaiah J., at pages 567 to 570 of the reported judgment, considered the scope of the aforesaid provision in the light of the extant provisions of section 40 and observed that the goods, services and facilities referred to in section 40A(2) (a) are those which have a market value and which are commercial in character. In the instant case, the AO concluded that payment made to VOPL @Rs. 5 per kg. of the product was excessive vis- vis price paid to another associate concern M/s Agrigu ..... X X X X Extracts X X X X X X X X Extracts X X X X
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