TMI Blog2010 (3) TMI 1236X X X X Extracts X X X X X X X X Extracts X X X X ..... 006-07, 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/- u/s 80IA(4) of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f determination of the quantum of deduction under section 80IA of the Act has to be computed after deduction of the notional brought forward losses and depreciation of eligible business even though they have been allowed set off against other income in earlier years. (d) The income from sale of entitlement of sales tax exemption 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 aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion merely is, in all conscience have you been fair in dealing with that man ? If you have been arbitrary, absent-minded, unreasonable or unspeaking, you cannot deny that there has been no administrative fair play. 5.1. We notice that over the years by a process of judicial interpretation two rules have been 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 particular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rely an unsubstantiated claim, was not acceptable and accordingly, treated the portion of purchase price paid to related parties over and above the average price of ₹ 103.13/- per kg. of tea as excessive and unreasonable and devoid of commercial 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- Peko ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xpenditure made by the assessee over and above such unit rate to the specified concerns was bereft of commercial expediency and reasonability and hence gets hit by the provisions of sec. 40A(2)(a) of the Act.Accordingly, the AO worked out the excessive payments 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SOT 280(Mumbai) Pondy Metal Rolling Mills Pvt. Ltd. Vs. DCIT,107 TTJ(Del)336.Since the assessee also made purchases @ ₹ 132 and ₹ 140/- per kg also from outside parties and even at lower sale rates from related parties, comparison at average rates was not correct, the assessee argued. Since GP rate of 13.92 % has been accepted by the AO, no further addition was possible in view of decision in Upvan International Vs. ITO,15TTJ(Del.) 215. Since all the bills contain source garden and grade of tea in respect of purchases from outside parties while transportation cost is separately debited as against no transportation cost in purchases from sister concerns , apparently comparison was not proper, especially when no such disallowance had been made in the earlier years. After considering these submissions , the ld. CIT(A) upheld the disallowance in the following terms in the case of Jivraj Tea Company:- 2.4 I have considered the facts and the submissions. I do not agree with the appellant's view for the following reasons: a) The appellant has maintained that indeed the quality of tea purchased from outside parties are different from those purchased from related ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n does not alter the quality of the tea. Hence, clearly mere specification of source garden is not a definite quality indication and therefore, the quality in terms of 'garden1 or 'grade1 can not be accepted as a differentiating factor on the facts of the case. On facts of the case, the basic parameters of quality per se are not available on the bills, purchase vouchers etc. maintained and shown by the appellant. In summary, the arguments of the appellant in respect of rate difference due to difference in quality is neither verifiable nor tenable. c) It has been pointed out by the Assessing Officer that the final sale of tea has been made by the appellant in form of standardised packets in the name and style of Anokhi Tea, J9 Tea, Jivraj Tea, La Jawab Tea, Suryakiran Tea etc. without any 'garden-wise' or 'grade-wise' quality specification. Based upon this fact, it has been argued by the Assessing Officer that it can not be inferred or accepted that the 'garden-wise' or 'grade-wise' quality difference is material to the business of the appellant. Further, the Assessing Officer argued that the 'garden-wise1 quality differentiation is onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ister concern showing only the invoice amounts and not the basic details, let alone quality. Further, in the relied case, the prevailing market price of the product in question was furnished by the appellant. But, in the instant case the appellant failed establish the prevailing fair market value of the item in question, tea. In the relied case, the sister concern of the appellant made significant sales to other parties also. But in the case at hand, the specified concern Surin Corporation has made insignificant and very little sales to outside parties. Further, that case refers to the assessment year 1962-63 to 1965-66 when no specific provision of section 40A(2)(a) was there in the Statute which was introduced by the Finance Act, 1968 w.e.f. 01.04.1968. The ratio of the case laws relied on by the appellant of ITO vs Jai Sati Syntex Pvt. Ltd. 121 TTJ 376, is not applicable to appellant's case. In that case, it was held that no disallowance u/s.40A(2)(a) can be made by comparing the purchase price of goods with rates at which goods valued at year end. Here it is not the case. The ratio of the case laws relied on by the appellant in the case of Sanchita Marine Products Pvt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts, it is held that the action of the. Assessing Officer is justified and the addition is confirmed. Accordingly, this ground of appeal is rejected. 8.1 Like wise in the case of Jivraj Tea Limited, the ld. CIT(A) upheld the disallowance of ₹ 6,31,08,777/-. 9. 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 ld. CIT(A) and relying upon the decision of a co-ordinate Bench in the case of Jivraj tea Company Vs. JCIT in ITA no. 1859 630/Ahd./2003 as also decision in CIT vs. Indo Saudi Services(Travel) P Ltd.,219 CTR(Bom.) 562 contended that the ld. CIT(A) was not justified in upholding the disallowance .On the other hand, the ld. DR supported the findings of the ld. CIT(A). 10 We have heard both the parties and gone through the facts of the case as also the decisions relied upon. The relevant provisions of sec. 40A(2) of the Act stipulate that where an assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of the said sub-section, and the Assessing Officer is of the opinion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich will cause hardship in bona fide cases. 10.1 In the instant case, we find that the AO analysed the average tea prices on purchase of tea from outside parties vis-a-vis purchase price from the sister concerns like Jivraj Tea Industries Ltd. Surin Corporation and concluded that the assessee paid excessive purchase price to sister concerns. The yard stick adopted by the AO is average purchase price of tea from the other parties. Now the tea has large varieties and its price depends upon a number of factors depending upon its quality;quality will be better in ideal conditions of humidity and height of the garden and tea plucked from fresh bushes as against tea grown at lower altitudes and plucked from old bushes. The tea from a garden at higher altitudes will fetch higher price as compared to tea grown in gardens at lower altitudes. Fresh tea normally fetches higher prices as compared to old stock. Tea is generally sold in auction by various gardens and the market rates of a particular quality depends upon the best bidding. The price of dust is lower as compared to the price of leaf tea. In view of variety of factors affecting tea trade, there can be no standard for fixing th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssion of the assessee, would be the guiding factor in terms of section 40A(2) of the Act. In the case on hand, the assessee is purchasing from outside parties and sister concerns in the preceding assessment years also. As already observed, price of tea depends upon a number of factors even in respect tea from the same source garden and same grade depending upon the bid price during the course of day. There is no material on record as to what were the prices prevailing on a particular day when tea of a particular variety and quality was purchased from sister concern nor any attempt seems to have been made to compare the price paid to sister conscens with those prices. As pointed out in the case of Indo Saudi Travel Services(P) Ltd.(supra), CBDT Circular No. 6-P, dt. 6th July, 1968 stipulated that no disallowance can be made under s. 40A(2) of the Act in respect of the payments made to the relatives and sister concerns where there is no attempt to evade tax. The assessees before us are stated to be paying tax at the maximum prevailing rates and there is no evidence on record nor there is any allegation regarding evasion of tax by any of these assessees . The ld. DR did not point out ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2.68 10.48 11.1 To a query by the AO, the assessee explained that there was no direct or mathematical relationship between turnover and sales promotion expenses. Since all the expenses had been incurred through account payee cheques while stiff competition forced the assessee to undertake sales promotion expenses, no disallowance could be made. However, the AO did not agree with the reply of the assessee on the ground that the assessee failed to furnish any cogent and verifiable explanation for the excessive and unreasonable increase in sales promotion expenses nor the assessee established the business nexus and necessity of the expenditure. The AO further observed that mere payment through account payee cheques itself would not entitle the assessee to deduction of the said expenditure unless the same was proved to be paid for commercial considerations and that it was for the assessee to establish by evidence that a particular allowance was justified. In this connection, the AO relied upon decision in[ Nemi Chand Kothari v. CIT [2003] 264 ITR 254 (Gau)]. Relying upon the decisions of the Apex Court in CIT v. Calcutt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25314507 10465420 12. On appeal, the assessee contended that there was increase in expenditure of sales promotion expenses by 91% as was evident from the following details and not 351.54% as stated by the AO: Particulars Assessment Year 2006-07 (Rs.) Assessment Year 2005-06 (Rs.) Advertisement expenses 1,42,59,203 59,01,895 Discounts incentives expenses 30,25,280 0 Sales Promotion expenses 80,30,024 73,49,104 Total 2,53,14,507 1,32,50,999 Relying upon the decisions in the case of CIT vs. M K Brothers 163 ITR 249 (Guj),CIT vs. Dhanrajgiri Raja Narsinhgiri (1973) 91 ITR 544 (SC),Voltamp Transformers Pvt. Ltd. vs CIT (1981) 129 ITR 105 (Guj),CIT vs. Computer Graphics Ltd. (2006) 285 ITR 84 (Mad) andJ S R Enterprises vs CIT (1994) 49 TTJ 363 (Del), the assessee contended that expenditure had been incurred wholly and exc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... terial 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 are allowed. 13. The Revenue is now in appeal before us against the aforesaid findings of the ld. CIT(A). The ld. DR while supporting the order of the AO contended that there is no finding by the ld. CIT(A) regarding services rendered by the recipients of the aforesaid amounts on account of advertisement and sales promotion expenses.On the other hand, the ld. AR on behalf of the asssessee while supporting the findings of the ld. CIT(A) relied upon a decision in the case of Sassoon J. David And Co. Pvt. Limited. vs Commissioner Of IncomeTax, Bombay,118 ITR 261(SC). 14. We have heard both the parties and gone through the facts of the case. Undisputedly, payments for the expenses have been made through account payee cheques/bank drafts and none of the parties is related to the assessee company or its directors. The ld. CIT(A) found that all the details and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 page 48 ; 38 ITR 601, 610 (SC) : Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment of expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may inure to the benefit of a third party (Usher's Wiltshire Brewery Ltd. v. Bruce [1914) 6 TC 399 (HL). Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its b ..... X X X X Extracts X X X X X X X X Extracts X X X X
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