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TMI Blog2012 (8) TMI 226X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,25,000/- made u/s.40A(2)(b) of the Act being interest on the amount of Rs. 50 lacs advance to Baroda Intermediates Pvt.Ltd. The ld. CIT(A) ought to have appreciated the fact that by advancing the amount of Rs.50 lacs without charging interest the assessee reduced its tax liability by virtue of its transaction of service contract. 2. On the facts and in the circumstances of the case and in law, the ld.CIT(Appeals) erred in deleting the addition of Rs. 1,50,853/- made u/s.40A(2)(b) of the Act being the difference of Rs. 32.40 lacs (interest of Rs.5.40 lacs on the amount of Rs.45 lacs deposited for service contract with Yujetide Industries Pvt. Ltd.[YIPL] together with the service charges of Rs.27 lacs) and cost of Labour including profit of YIPL of Rs. 30,89,147/-. The CIT(A) erred in not appreciating the fact that the payment attract the provisions of section 40A(2)(a) r.w.s. 40A(2)(b) of the Act. 3. The appellant craves leave to add to, amend or alter the above grounds as may be deemed necessary." 4. The effective grounds of ITA No. 716/A/2010 for A.Y. 2005-06 are as under:- "1. On the facts and in the circumstances of the case and in law, the ld.CIT(Appeals) erred in deletin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant details in this regard which were necessary to ascertain whether the payments made to M/s. BIPL was reasonable within the meaning of the provisions of section 40A(2)(a) r.w.s. 40A(2)(b), M/s. BIPL was during the relevant assessment year a persons specified under the provisions of section 40A(2)(b). It was also observed that the assessee company had given a deposit of Rs. 50 lacs to M/s. BIPL on which no interest was charged by the assessee company. It is therefore stated in this regard that while considering the out flow of resources from the assessee company in pursuance of the condition underlying the service contract towards discharge of its liability in respect of the service charges, cognizance of deposit of Rs. 50 lacs is also required to be taken particularly in view of the fact that no interest was charged by the assessee company from M./s. BIPL on such deposit. In this respect therefore the interest factor as well as the service charges paid by the assessee company to M/s. BIPL have to be considered in entirety to arrive at the factor of reasonableness of payment u/s. 40A(2)(b). During the previous year under assessment the assessee company had received 70 MT of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the submission of the assessee. However I do not agree with the contentions expressed therein. In the first place it is stated that the inquiry which is required to be made u/s. 40A(2)(a) is only with regard to the reasonableness of the payments made by the assessee company to persons specified u/s. 40A(2)(b). Therefore the particular of production values on comparative terms was to be taken as the basis for deciding whether service charges paid by the assessee company were reasonable or otherwise. This exercise having been done the issue of deposit given to BIPL was also centrally endemic to the issue of reasonableness as it represented the out flow of economic resources from the assessee company in connection with the service contract entered into between the assessee company and M/s. BIPL. i Since cost of interest not recovered by the - assessee from BIPL would indirectly add to the charges incurred by the assessee in connection with the service contract, its entering into the basis for deciding upon the reasonableness of payment would also be a natural corollary. In the circumstances and facts of the case rejecting the contention of the assessee a sum of Rs. 525000/- is disall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with YIPL amounted to Rs. 32.40 lacs (i.e. Rs. 27 lacs + Rs. 5.40 lacs) against the cost of labour including profit margin of YIPL which worked out to Rs. 3089147/-. The difference therefore represented excessive/ payment made by the assessee company to YIPL as per the postulates of section 40A(2)(a) r.w.s. 40A(2)(by. Recording a proposal was mooted to the authorized representative of the assessee company that the sum of Rs. 150853/- (3040000 - 3089147) would be treated as excessive payments made by the assessee company within the meaning of provisions of section 40A(2)(a) r.w.s. 40A(2)(b). The objection of the AR in this behalf was the same as that which was given to substantiate the reasonableness of payment in the case of M/s. BIPL. For the reasons mentioned in the case of BIPL the contention of the assessee is rejected and addition to the tune of Rs. 150853/- is made to the total income of the assessee. In view of the fact that the assessee has caused to reduce its IT liability by virtue of its transaction of service contract with its sister concern by paying excessively beyond reasonable limit it had cost to evade taxes for which I am satisfy to initiate proceeding of penalty ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sallowing the expenses or any notional interest on such advances. 5.6. In view of the above, it is held that the payment of service charges and interest-free advances to BIPL & YIPL was neither made to a specified person u/s 40A(2)(b) so as to be within the ambit of the section, nor was unreasonable or excessive. On the contrary the appellant has gained from the transactions. Accordingly, the additions of Rs. 5,25,000/- and Rs. 1,50,8537- are directed to be deleted." 7. On similar finding for A.Y. 2005-06 in ld. CIT (A) order dated 26.11.2009, was given for the ground no. 1 and 2 for the sake of brevity, the same are not mentioned in this order. 8. From the side of Revenue, ld. D.R. has vehemently argued that the excessive payment u/s 40A(2)(b) paid to the sister concern. Another side, ld. A.R. of the assessee draw the attention with the order of ld. CIT(A) and claimed that the ld. CIT(A) has rightly deleted the addition. The written reply before us, which is reproduced as under:- "1) Since defendant as well as M/s BIPL and M/s YIPL are companies explanation to Sec 40A(2) are relevant for determining applicability of the said section. These explanations stipulates, holding in e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... excessive profit in the hands of beneficiaries. As indicated above, leaving apart profit, beneficiaries in-fact have incurred loss in this assignment which also doesn't justify the disallowance U/s 40A(2)(b). 4) Both defendant as well as M/s BIPL, have manufactured the same product 4 NAP in their respective plants during the year. As per the facts, production cost in case of defendant is Rs. 41 per kg while job-work cost to the defendant is only Rs. 25 per kg. Thus, defendant has made cost saving and thereby earned higher profit by getting the work done through M/s BIPL. On this ground as well disallowance U/s 40A(2)(b) is not justified. In case of the product 4 CAP manufactured by M/s YIPL this product is not manufactured by the defendant in its own plant during the year. 5) Ld. A.O. has erroneously believed that defendant ought to have reduced notional interest on interest paid deposit, from the payment of job charges made to these companies. Defendant has broadly sought to reimburse the actual cost incurred by these companies and in the process 100% reimbursement has not been made as both the companies incurred loss as indicated in 3 above. Inclusion of notional interest wou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... years on ground nos. 1 & 2. 10. Ground no.3 is against the adjustment of Excise Duty on purchase, sales and closing stock u/s 145A of the Act. On page nos. 8 and 9 of assessment order some adjustment has been made by the AO on account of Excise Duty because the entry for Excise Duty was not made through P&L Account by the assessee. After considering the submission of the assessee, the A.O. found method of accounting "exclusive of excise duty". He, therefore, disallowed the assessee's claim. The claim of decrease in profit by Rs. 4,59,676/-. 11. Being aggrieved by this order, the assessee was in second appeal before ld. CIT(A)-1, Baroda. The ld. CIT(A) has observed as under:- "I have considered the submissions of the ld. A.R. and the facts of the case. The issue regarding inclusion of excise duty element in the closing stock of finished goods has been dealt with by the Madras High Court's decision in English Electric Co of India Ltd., 243 ITR 512. After discussing all aspects of the matter, the Court has held that the inclusion of excise duty element in the value of unsold finished goods lying in stock on the last date of the accounting period was not warranted. Following the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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