TMI Blog2005 (6) TMI 549X X X X Extracts X X X X X X X X Extracts X X X X ..... and Kutch. Katha is a necessary ingredient in manufacture of Pan Masala. Katha is derived from the Khair tree. These trees are found in considerable numbers in the State of Himachal Pradesh. The assessee was a manufacturer of Katha. There was a trust by name Mehta Charitable Prajnalay Trust, hereinafter referred to as the Trust , which owned a factory premises. The factory premises along with machinery and land appurtenant thereto were given on lease to the assessee for manufacture of Katha. Originally under lease deed dated 14-7-1978 the trust had leased out the factory premises along with machinery and land to the assessee on a monthly rent of ₹ 25,000. The monthly rent was enhanced to ₹ 1,00,000 p.m. w.e.f. 1-4-1989. The trust later on, at the request of the assessee, carried out improvements to the Plant and Machinery with a view to modernize production and enhance production capacity by making substantial investments. A revised lease deed was entered into by the trust and the assessee whereby the monthly rent was enhanced to ₹ 6,75,000 w.e.f. 15-1-1992. The monthly rent was enhanced to ₹ 7,50,000 per month w.e.f. 1-4-1997 and thereafter the rent was s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tent of ₹ 69,00,000 (in assessment year 1994-95) was excessive and deserved to be disallowed. On this aspect the Tribunal in the aforesaid common order dated 25-2-2002 for assessment years 1994-95 to 1996-97, held as follows: Now, we come to the next argument of the assessee that since the Assessing Officer has not recorded a specific finding that the expenditure was excessive or unreasonable, having regard to:- (i) the market value of goods or service (ii) the legitimate business needs (iii) benefits derived by the assessee therefrom. Invocation of provisions of section 40A(2)(b) was not proper in this regard, we have carefully examined the judgments referred to by the assessee and its perusal, we find force in the contention of the assessee but this defect would not make the order of the Assessing Officer on this point invalid or illegal. Since the defect in the assessment order is curable the matter can be remanded back to Assessing Officer for removing the defects in the interest of justice. During the course of hearing, the ld. counsel for the assessee has placed the valuation report by way of additional evidence valuing the property comprising 5. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the assessee an advantage which has to be taken note of in judging the reasonableness of monthly rent paid by the assessee to the trust. The assessee also filed a copy of the lease deed between itself and H.P. Horticulture Produce Marketing and Processing Corporation Ltd. (HPMC), relevant to the financial year 1991-92 under which an area of 2000 sq.m. was leased out to the assessee on an annual rent of ₹ 38,00,000. The assessee pointed out that the area of land leased out by the trust to the assessee was 31,800 sq.m. and, therefore, the annual rent of ₹ 81,00,000 when compared to the lease rent paid to H.P.M.C. was reasonable. The Assessing Officer on consideration of the aforesaid submissions made by the Assessee-company as follows: In view of the facts and circumstances of the case and also the directions of the Hon ble ITAT for the period under consideration and the documents and submissions of the counsel, assets held by the lessor, yearly increase in the assets of the lessor, valuation report valuing the present market value as on 1-1-1992, benefits derived by the assessee-company especially depriving the lessor to do any business of Katha and in the substan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he sister concern which cannot be allowed. Reliance in this regard is placed on the decision of Hon ble Supreme Court in the case of McDowell Co. Ltd. v. CTO ( 154 ITR 148 ). In view of the above I consider that lease rental of ₹ 22,30,642 for assessment year 1994-95 is reasonable and the remaining amount of ₹ 58,69,358 is added to the income of the assessee being disallowable under section 40A(2)(b). This order is being passed only to give effect to the order of the Hon ble Tribunal. The Department is before the Hon ble Court against the decision of the Hon ble ITAT for assessment years 1994-95 to 1996-97 wherein they have treated the lease rental as revenue expenditure. 7. Aggrieved by the order of the Assessing Officer the assessee preferred appeal before the CIT(A) reiterating the submissions as were made before the Assessing Officer. The CIT(A) as follows: In the impugned order, the Assessing Officer has given good reasons for holding that the lease rent paid by the appellant was excessive and unreasonably high and that the provisions of section 40A(2) of the Income-tax Act, 1961, are attracted in this case. However, it is observed that the rent in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t agreeing not to carry on a competing business in Katha and Kutch and the money value attributable to the same which was part of the lease deed had not been taken into consideration by the revenue authorities. He also pointed out that in view of ban on setting up a new factory for manufacturing of Katha and Kutch in Oel (a place in H.P.) H.P. consequent to the order of the Hon ble Supreme Court, it only meant that the assessee had no choice but to take on rent the factory from the trust. He also submitted that the trust enjoyed benefits of various quotas/rights for acquiring of Khair wood granted by the Government and these were made available for the beneficial enjoyment by the assessee and such enjoyment was also part of the lease deed and that due weightage should be given to this factor also. It was also argued by him that valuation report was filed to substantiate the monthly rents paid which were totally ignored by the revenue authorities. It was contended that, if the opportunity cost to the assessee to set up a similar manufacturing facility, such cost would be much more than the monthly financial burden of ₹ 6,75,000 per month presently incurred by the Assessee. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount attributable as compensation paid by the assessee to the trust for not carry on competing business. According to the learned DR, this compensation cannot form part of rent received by the assessee. It was also submitted by the DR, that the Assessing Officer had not spelt out in so many words, as to why he had not considered the compensation for not carrying on competing business as forming part of rent. It was submitted by the learned DR that the issue should be remanded to the Assessing Officer to consider this issue afresh. The learned counsel for the assessee in reply submitted that the revenue should not be afforded another opportunity for improving its case and the Tribunal in its earlier order had given clear directions in this regard while remanding the issue. The Assessing Officer not having considered the directions as well as the provisions of law in proper perspective, should not be afforded another opportunity and such an action will cause prejudice to the interests of the assessee. It was submitted that the request for the DR for a remand of the issue to the Assessing Officer for fresh consideration should not be entertained. 11. We have considered the rival ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing Officer ought to have given a specific finding that the expenditure claimed by the assessee was excessive or unreasonable having regard to (a) the market value of goods or services (b) legitimate needs (c) benefits duly derived by the assessee therefrom. The Assessing Officer has not made any attempts to bring out the market value of the facility that the assessee derived by virtue of the lease. It was incumbent on the part of the Assessing Officer before invoking of section 40A(2)(a) of the Act to give a clear finding that the price paid by the assessee for availing services from the sister concern were more than the market prices. The onus in this regard has been spelt out by the Mumbai Benches ITAT the case of Batlivala and Karani v. CIT [2005] 2 SOT 379 as follows: Under section 40A(2) the emphasis is on the market value of the goods and not on the costs of such goods or services to the sister concern. In the instant case, the Assessing Officer, however, had only examined the costs of printing the material obtained from the sister concern. The first mistake was that the Assessing Officer was looking at the cost and not the fair market value, as is the mandate of the se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e at the relevant period of time. This deed of lease has been overlooked by the revenue authorities. The revenue authorities also overlooked the other aspects, which will be relevant in determining of correct value of the services that were available to the assessee. The only reason given by the Assessing Officer, which were endorsed by the CIT(A), was that in case of lease there is no periodic increase in the lease rents was possible and, therefore, the increase in the lease rents as claimed by the assessee cannot be accepted. Though these observations may be true to some extent, yet the fact remains that the enhancement of rent is evidenced by the terms of a written lease deed, which cannot be ignored. 13. It is also seen that the Assessing Officer in the remand proceedings had sought to invoke the principle laid down by the Hon ble Supreme Court in the case of McDowell Co. Ltd. v. CTO [1985] 154 ITR 148. This was clearly beyond the scope of the remand proceedings. In the original proceedings, it was never considered by the revenue authorities, that the assessee, by entering into the lease agreement, attempt to siphon its income in the grab of increased rental payments by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of appeal are that the Assessed claimed payment of commission to one Sat Pal and Dharminder Kaushal. The commission was claimed to have been paid in connection with purchase of Khair wood. The payment of commission was substantiated by a copy of agreement signed with the aforesaid parties. The Assessing Officer was of the view that since the assessee purchases Khair from H.P.S.T.C. as well as independent contractors on which no such payment of commission has been shown, there was no need to pay commission to the aforesaid two persons. The Assessing Officer also made an observation that the nature of services rendered by the aforesaid two persons had not been proved by the Assessed. The Assessing Officer, therefore, disallowed the claim for deduction of the aforesaid sum. 17. Before CIT(A), the assessee pointed out that the foresaid two persons were private contractors through whom the assessee purchased Khair. The aforesaid two persons had agreement with the zamindars and these agreements were registered with the Forest Department. Because of the high prices charged by these contractors for purchase of Khair, the assessee thought it fit to substitute its name in the agreement be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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