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TMI Blog2010 (3) TMI 1236X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 10,43,150/- was filed on 9.9.2005 for the AY 2005-06. Inter alia, the assessee claimed deduction of ₹ 97,41,412 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices 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 ₹ 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 2003-04 1,40,60,480 21,33,867 1,19,26,613 2004-05 1,34,80,655 47,12,888 87,67,767 2005-06 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 ground nos. 1 & 2 of the appeal, submitted that the ld. CIT(A) was not justified in rejecting their claim for deduction claimed u/s 80IA of the Act on a ground totally different from th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en 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 who shall decide anything without the other side having been heard, although he may have said what is right, will no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cial 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 consistent or apparent. Therefore, the quality in terms of 'garden' or 'grade' can not be accepted as a differen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ments made to sister concerns and made disallowance of ₹ 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 ₹ 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 8.8 97799 4 M/s Surin Corporation 2107932.9 119.5 97.60 21.9 46228570 Totals 63108777 8 On appeal, the assessee while relying upon the decisions in the case of CIT vs. Indo Saudi Services(Travel) P Ltd.,219 CTR(Bom.) 562,DCIT vs. Microtex Separators Ltd.,293 ITR 451(Kar),ACIT vs. Ram & Co(Inter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 particular 'grade' itself may not unambiguously indicate 'quality'. On the same line of notion, it has been inferred by the Assessing Officer, on the facts of the case, that the price variations in respect of source 'garden' as well as 'grade' are not consistent or apparent. The appellant has not been able to successfully negate and counter this argument of the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chers 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 and therefore, I tend to agree with the Assessing Officer that payments for similar inputs (tea) have been made to related parties by making higher payments than those compared to outside parties selling at fair market value. e) The Assessing Officer has pointed out that from the perusal and analysis of the books of accounts and sale register of the related sister concern M/s. Surin Corporation, it has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 and quantity of purchases is also comparable. In view of the fact that the difference in quality as claimed by the appellant is nebulous and non-emergent from the bills of purchase, and given the fact that majority of the sale of the specified sister concern has been made to appellant group only, the use of "weighted average1 (With quantities working as the weights) price of the product will give a fair and rational view, g) The appellan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness 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 business or profession to the extent the expenditure is considered to be excessive or unreasonable. The reasonableness of any expenditure is to be judged having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession or the benefit derived by, or accruing to, the taxpayer from the expenditure. Such portion of the expenditure, which, in the opinion of the ITO, is excessive or un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 impact of transportation cost on purchase of tea from outside parties and have altogether ignored the plea on behalf of the assessees that heavy transportation cost was incurred on purchase of tea from the outside parties. The provisions of section 40A(2)(a) 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. vs Commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted 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 In view of the foregoing, we are not inclined to agree with the reasons of the ld. CIT(A) and therefore, delete the disallowance made by the AO. Accordingly, ground nos. 1 to 3 in these two appeals are allowed. ITA No. 3019/Ahd/2009[ Revenue] in the case of Jivraj Tea Ltd., Surat 11. In this appeal, the Revenue have raised ground nos. 1 to 4 relating to disallowance of ₹ 1,04,65,420/- on account of sales promotion expenses. The AO noticed that there was increase o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 ₹ 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 fall in NP , the AO on the basis of claim of similar expenditure in the AY 2005-06, worked out the disallowance of ₹ 1,04,65,420/- as under: Disallowance from claimed S&D Expenses Particular 2005-06 (In Rs.) 2006-07 (In Rs.) 2006-07 (In Rs.) 2006-07 (In Rs.) Allowable %age to Sales Claimed Expenditures Allowable Expenditure Disallowance Sales 571198752 Advertisement 1.19 % 14259203 6819063 7440140 Expenses Discounts & Incentives Expenses 0.00 % 3025280 0 3025280 Sales Promotion Expenses 1.49 % 8030024 8491171 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar 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 starting point of investigation and scrutiny by the Assessing Officer but it alone cannot be the basis for the disallowance. As per the decision of Hon'ble Gujarat High Court in the case of CIT V/s M. K. Brothers 163 ITR 249 (Guj), it was held that - "wherein it is held that "when an item of expenditure payment is made through cheque / draft to the recipient and the Assessing Officer is unable to bring on record any evidence / material indicating of the fact that the amounts paid by cheque / draft came back to the assessee in the form of cash, the relevant expenditure cannot be disallowed." In view of these facts and the case laws discussed above, the disallowances cannot be sustained. Accordingly, additions made are deleted and both the grounds a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee 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 the Bill read " any expenditure laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed " The introduction of the word " necessarily " in the above section resulted in public protest. Consequently, when s. 37 was finally enacted into law, the word " necessarily " came to be dropped. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under s.10(2)(xv) of the Act if it satisfies otherwise the tests laid down by law. This view is in accord with the following observations made by this court in CIT v. Chandulal Keshavlal & Co. [1960] 3 SCR 38 at ..... X X X X Extracts X X X X X X X X Extracts X X X X
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