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TMI Blog2009 (6) TMI 50X X X X Extracts X X X X X X X X Extracts X X X X ..... Mr. J. Ravi Kumar, for the Appellant. Mr. R. Venkatanarayanan for M/s. Subbaraya Aiyer, for the Respondent. JUDGMENT The Judgment of the Court was delivered by B. RAJENDRAN, J. - The revenue is the appellant in all these appeals. As against the orders of the Income Tax Appellate Tribunal Chennai 'B' Bench, Chennai dated 11.08.03, the revenue has filed these appeals. 2. The short facts that are necessary for the disposal of these appeals are that the assessee is a partnership firm purportedly doing business as tea brokers. For the assessment years 1987-88, 1988-89, 1990-91, 1991-92 and 1992-93, the assessee claimed deductions for various amounts on account of remuneration paid to a company called M/s. Forbes Ewart Figgis (P) Ltd., functioning at Cochin for attending auction of tea, tasting and evaluating the samples, managing the affairs of the assessee, etc., 3. The Chief Executive of the assessee firm is one Mr. O. Thomas, who is stationed in Cochin and goes to Coimbatore frequently to attend the auction etc., The Assessing Officer found that in addition to the salary of Rs.90,000/- per annum paid to Mr. O. Thomas, the assessee has also made a further p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he hands of the Cochin Company, the tax incidents would be much more. In fact, the CIT (Appeals) has held that the Coimbatore Firm was merely a legal fagade created. The CIT (Appeals) directed that the assessment made on the Coimbatore Firm be cancelled and the income of the firm be assessed in the hands of the Private Limited Company based at Cochin. 8. Further for the assessment years 1990-91, 1991-92 and 1992-1993, the successor CIT (Appeals) took a different view. It was contended by the assessee that it was not correct to hold that only the direct expenses incurred by the Cochin Company in respect of services rendered by it to the assessee should be allowed. It was urged that indirect expenses like the salary of supporting staff etc., also should be considered. It was also pointed out that the company had the professional expertise in the conducting of auctions etc., After consideration, the CIT (Appeals) examined the assessment records of the company for those years and found that the company was offering the service charges as its income and paying tax thereon. He therefore held that for those three assessment years viz., 1990-91, 1991-92 and 1992-93 services were fully ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctors of M/s. Forbes Ewart Figgis (P) Ltd., Cochin. As per the agreement entered into between the assessee firm and the Company, the following services will be rendered by the company viz., (i) Auction of tea every week (ii) Tasting and evaluation of samples and distribution of valuation report to all buyer. (iii) Providing testing report to sellers. (iv) Estate visit and giving advice. (v) Testing and reporting of advance sample. (vi) Compilation of statistics and weekly market report and its distribution. (vii) Attend all income-tax matter. As per clause No.8 of the agreement for the above services M/s. Forbes Tea Brokers, Coimbatore will pay Rs.83,333/- per month to M/s.Forbes Ewart Figgis (P) Ltd., Cochin. As per clause 9 of the agreement for the above service apart from Rs.83,333/- per month all travelling expenses incurred by the personnel of M/s. Forbes Ewart Figgis (P) Ltd., in connection with the conduct of the business of M/s. Forbes Tea Brokers, Coimbatore will be borne by M/s. Forbes Tea Brokers, Coimbatore. 12. The only question which the Department is now contending is as the partners of the firm which has engaged the services of the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substantial interest in the business or profession of that person; or (B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person. Explanation - For the purpose of this sub-section, a person shall be deemed to have a substantial interest in a business or profession, if,-- (a) in a case where the business or profession is carried on by a company, such person is, at any time during the previous year, the beneficial owner of shares (not being shares entitled to a fixed rate of dividend whether with or without a right to participate in profits) carrying not less than twenty per cent of the voting power; and (b) in any other case, such person is, at any time during the previous year, beneficially entitled to not less than twenty per cent of the profits of such business or profession." 13. A reading of the above section clearly indicate that when the expenses is incurred by the firm or a company in respect of a person who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness, the reasonableness of the compensation paid to the company was ascertained with reference to the actual expenditure incurred by the company in rendering the services to the firm. Similarly, for this year also, it is seen from the agreement entered into between the assessee and M/s. Forbes Ewart and Figgis Pvt. Ltd. a sum of Rs.16,41,359/- has been paid as consideration to the company by the assessee. On calling for explanation as to why major portions of amount paid to the company, should not be held as excessive u/s.40A(2), the assessee vide letter dated 4.12.1992 has replied as follows:- "Amount paid to Forbes Eward and Figgis Pvt. Ltd., Cochin-3 for services rendered for tasting and evaluation and conducting auctions : During the Asst. Year, an amount of Rs.16,41,359.00 was paid to Forbes Ewart Figgis Pvt. Ltd., as remuneration for the services rendered. The remuneration payable to the Company was fixed on the basis of the terms of an agreement signed between the Firm and the Company, agreement was reached on an year to year basis after considering the budgeted income of the firm on the basis of anticipated tea corp. tea arrivals and tea market. About 30% of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... company is only for conducting tea auctions in Cochin Auction Centre. 5. The tea auctions conducted in Coimbatore is controlled by the Tea Trade Association of Coimbatore. Forbes Tea Brokers (Coimbatore) (firm) is a member of the Tea Trade Association of Coimbatore. Forbew Ewart Figgis Pvt. Ltd., (Company) is not a member of the Tea Trade Association of Coimbatore. 6. As per the rules of the Tea Trade Association of Coimbatore, for conducting auction in Coimbatore the broker member should be a registered dealer under the Tamil Nadu Sales-Tax Act (TNGST). Forbes Tea Brokers (Coimbatore) (Firm) is a registered dealer under the TNGST Act. Forbes Ewart Figgis Pvt. Ltd. is not a registered dealer under the TNGST Act. 7. As per the Tea Marketing Control Order, 75% of tea produced by the estate will have to be sold in public auction conducted in India. The producer is at liberty to sell his produce through any auction centre like Cochin/ Coimbatore/ Coonoor in South India or through auction centres like Calcutta, Siliguri, Gauhati, etc. in North India. He is also at liberty to entrust his tea to the broker of his choice. So the Cochin broker has no authority to divert any part o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Cochin company by entering into an agreement with them." and also gave 13 reasons why the payment which has been made to the company could not be treated as excessive or unreasonable. 16. Though the assessee has given a detailed explanation, such detailed explanation were not taken into consideration for arriving at any conclusion to pin point how the payment of Rs.83,333/- or 30% of the gross receipts which was paid to the company was unreasonable. In fact, the assessee also has made it very clear that the income of the company is exactly for rendering of the services apart from the fact that in tea business, the tea taster is a vital person, here the said Mr.O.Thomas who is the Chief Executive is not only the Chief Executive but also the tea taster who has to verify the quality of the tea for the purpose of sale which is mandatory and which is the ultimate reason for getting a good price in respect of the quality of the tea. Therefore, the service as rendered is not only technical but is also an expertise service. The company is also in the field of auctioning of tea business from 1947. Such expertise has been utilized for the services of the firm which is benefited f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... asst. Year 1991-92 it was 50% + Surcharge of 5%. Obviously, there was no motive for any evasion of tax, or no dubious method has been resorted to for avoidance of tax also. Therefore, when there is no dispute that the Company at Cochin has rendered assistance to the assesee in its business and there is no case for the assessing authority that the company at Cochin was a benami concern of the assessee, the claim of service charges paid to that company will have to be allowed as a deduction especially when such receipts have been taxed as income in the recipient's hands. This view also draws support from the Bombay High Court decision in C.I.T. Vs. Bharat Barrel Drum Manufacturing Company (P) Ltd. reported in 182 ITR 21. I therefore direct the assessing authority to allow the claim of service charges in full as claimed by the assessee for both the years." 18. The appellate Tribunal has given a cogent and correct finding that the scheme of 30% of the gross turnover as service charge paid to the Limited Company would be for the facilities that the company provide for conducting the auction and the expertise. The Tribunal has given a finding to the following effect: "6. In o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is order that the limited company is paid 30% of the total turnover of the assessee. This was appreciated by the CIT (A) in his order for assessment years 1990-91 to 1992-93 and it was for this purpose that he had compared the rate of tax of the firm and that of the company and that the company pays higher tax than the firm. When this is all looked up from that point of view, in our opinion the order of the CIT(A) for 1990-91 to 1993-94 deserves to be upheld which we do………… 19. We find both the CIT (Appeals) as well as the Tribunal has been very clear that the services rendered by the company for the expertise service and that the sale of the assessee firm has increased pursuant to the service rendered by the company and apart from all these things, the company has also shown all these amounts in their accounts and as correctly paid the tax on higher percentage will all go to clearly show that there was no intention to deceive or evade any tax. 20. The CIT (Appeals) for the assessment year 1991-92 has categorically given a finding in respect of the actual amount paid. There was no reason or rhyme given by other CIT(Appeal) which which dealt for the years 1987-88 and 1988-8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are based on material evidence and not require interference." and yet another ruling reported in (2006) 285 ITR 337 (Mad) ( CIT Vs. Print Systems and Products ) at para 5 it has been held as under: "5. The findings given by the Tribunal were based on the records and evidence. The Tribunal after considering the relevant materials came to the conclusion that the commission payment was not found to be unreasonable and further found that the commission payment when compared with the commission offered by other assessee in similar business at 5 per cent. could not be said to be excessive. No further evidence or material was produced by the Revenue that the order of the Tribunal is unreasonable and unjust." 23. Applying the principles of the above said rulings, we are of the firm opinion that the findings of the Tribunal is cogent and correct. 24. At this point of time, the learned counsel appearing for the Department also brought to our notice a ruling reported in 260 ITR 440 ( V.S.T. Motors Ltd., Vs. Commissioner of Income Tax ) and contended that the excess of Rs.100/- charged by the company in respect of delivery of vehicles to the customers at their place of busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "8. Now, let us analyse the power and jurisdiction conferred on the Assessing Officer under section 40A(2)(a) of the Act, which revolves on the discretion conferred on him in the context of the "Assessing Officer is of opinion". The words "is of opinion" indicate that the opinion must be formed by the Assessing Officer and it is of course, implicit that the opinion must be an honest opinion, having been formed based on the circumstances available before him. In other words, what all, therefore, section 40A(2)(a) of the Act contemplates is that there should be some material available before the Assessing Officer for invoking section 40A(2)(a) of the Act to initiate action to disallow or refuse to deduct the excessive or unreasonable expenditure mentioned thereunder. But, at the same time, before taking any final decision by invoking the power under section 40A(2)(a) of the Act, either allowing or disallowing such expenditure as excessive or unreasonable, such decision of the Assessing Officer should be based on reasons well-founded, which are judiciously acceptable and in which event, the finding or decision arrived at stating that the expenditure is excessive or unreasonable and th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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