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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 ..... 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 payment of Rs.9,99,996/- to the company per annum, which is equivalent to 30% of the gross turnover of the partnership firm. 4. An agreement has been entered into by the assessee firm with M/s. Forbes Ewart & Figgis (P) Ltd., Cochin and pursuant to the agreement, the assessee was paying Rs.83,333/- per month to the company at Cochin. The Assessing Officer had come to the conclusion that the services rendered was vague in nature, it is not explained and it was also difficult to verify whether actually such service was rendered. The Assessing Officer also made a note that the concerns viz., the Company as well as the Firm were managed by the members of the same family and in the assessee's Firm out of the 12 partners there were two limited companies also and all the other members are very close relatives of Mr. O. Thomas. 5. The department pointed out that only 13 trips were made by the company employee and these trips have been m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 allowable. Therefore, there was two set of years viz., for the one set of years, the deduction was not allowed and it was remanded and assessed to tax. For the other two years, it was totally allowed. 9. Aggrieved against the orders of the CIT (Appeals), the revenue as well as the assessee filed appeals before the Tribunal for all the above assessment years. The two sets of appeals related to assessment years 1987-88 and 1988-89 by the assessee and for the years 1990-91, 1991-92 & 1992-93 by the revenue. The Tribunal passed a consolidated order in ITA Nos. 785 and 2322(Mds)/1991 and ITA 2512(Mds)/1991 dated 16.02.1999. After a careful consideration of the rival submissions, the Tribunal upheld the findings of the CIT (Appeals) holding that the income of the assessee Firm should not be assessed in the hands of the Cochin company for all the years. Thus allowed the appeal filed by the assessee and dismissed the appeal filed by the revenue. 10. A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es 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 are all close relatives and the excess amount which is paid out from the Firm to the Company which is exactly 30% of the gross earnings apart from the salary given to the Chief Executive Mr. O. Thomas is grossly excessive and unreasonable and therefore such an expenses claimed by the Firm is not eligible especially when it is squarely covered under Section 40A(2). Section 40A(2) is extracted as under: "Section 40A. Expenses or payments not deductible in certain circumstances: (1)…... (2) (a) Where the 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 this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable 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 of the assessee or the benefit derived by or accruing to him therefrom, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty 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 is closely related or otherwise substantially interested in the holding of the company which is not directly proportionate either to the services rendered or goods offered, definitely the Department can invoke those provisions and find out whether such expenditure was reasonable, correct or good. 14. On this first point of invoking Section 40A(2) there can be no second thought because as rightly pointed out by the learned counsel for the Department, Mr.O.Thomas and his relatives were all inter-linked in all these companies. It is pertinent to point out here that out of the 12 partners Mr. O. Thomas as Director of the company is also a partner of M/s. Forbes Tea Brokers, Coimbatore which is admittedly having 40% shares in the assessee firm. Therefore, there is no infirmity in respect of invoking Section 40A(2) of the Act in coming to the conclusion that whether such expenses incurred by virtue of agreement or otherwise by the assessee firm and the company could be invoked? 15. The onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany, 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 gross earnings of the firm was paid to the company for the specialised services rendered by the company which we feel is reasonable. The firm, Forbes Tea Brokers (Coimbatore) is one amongst the six tea brokers operating at Coimbatore auction centre. Though most of the six tea brokers commenced their operations at Coimbatore at about the same time, the volume of tea handles by the firm Forbes Tea Brokers (Coimbatore) is substantially in excess of that handled by any other broker. In fct the firm, Forbes Tea Brokers (Coimbatore) handles in excess of 30% of tea offered in Coimbatore and the other five broking firms share only the balance quantity of 60%. The main reason for this is the confidence reposed by the various clients in the expertise of the officials of the company, Forbes Ewart & Figgis (P) Limited whose services are utilised by the firm in the conduct of the auctions and in providing the correct technical advice for improving the quality of the tea auctioned. In the circumstances it is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 of his business to Coimbatore as mentioned in the orders. 8. When part of tea auctions was diverted to Coimbatore by the seller estates, a new firm by name Forbes Tea Brokers (Coimbatore) was registered in Coimbatore and opened its office in Coimbatore. They registered themselves under the TNGST Act and also applied for membership of the Tea Trade Association of Coimbatore. They also obtained a licence from Tea Board for conducting regular auction in Coimbatore. Since the Coimbatore firm was not having sufficient technical staff to conduct tea auctions in Coimbatore, they sought the assistance of the Cochin company to held them in tea tasting, valuing, conducting auction, etc., at Coimbatore. The company was also entrusted the work of tax administration of the Coimbatore firm. For the above services a lumpsum amount was fixed as remuneration on an yearly basis. This was fixed at the beginning of the year considering the anticipated revenue of the firm for the year. 9. The firm is maintaining separate bank ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtise 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 from and out of the expert service got from the company. When that being so, the payment was quite reasonable when not only the turnover has increased due to such expertise service, but also the agreement which specifies the basis for payment viz., 30% of the gross receipts. Unfortunately, such correct details in respect of the payment that was forwarded by the assessee even before the Assessing Officer have failed to be taken into consideration in the proper perspective by the CIT (Appeals) in resolving the issue for the assessment years 1987-88 and 1988-89. 17. At the same time for the assessment years 1990-91 and 1991-92 another Bench of CIT(Appeals) has categorically recorded a cogent and clear finding which reads as under: 2. The appellant had enlisted the services of this company since it had expert tea tasters, valuers, auctioneers, qualified Accountants and general and administrative staff etc., for the conduct of tea broking and auctioning business. It is also to be noted that there are six tea brokers o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 our opinion on the facts available on our record and as placed before us it is more on a suspicion than anything else because there are no evidence as we have felt necessary. Further the claim of the Department also is that to the extent of the direct expenses incurred by the company as such could be allowed in the hands of the firm. This further goes to suggest that that the Department had placed the theory of benami only to restrict the claim of the assessee for which there is no basis. 7. Coming to the question of reasonableness of the payment, as observed above it is necessary to examine that part of the service charges with reference to total turnover. The adequacy of the service charges as observed earlier has to be seen with reference to the increase in turnover that the firm enjoyed consequent to utilising the services of the limited company. It is quite likely that because of the auction price of the tea having fallen the income from commission for conducting the auction may have also come down. But this is with refer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inding 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 1988-89. They have simply stated that the amount of payment will not be totally allowed especially with regard to two payments viz., the salary as well as the commission. As rightly pointed out by the 2nd Tribunal has given a cogent and correct reason that salary was paid to the individual and commission was paid to the company that is in consonance with the turnover which also increased substantially due to the input given by the company. 21. Therefore, the department is not able to establish that the expenditure incurred is either excess or unreasonable, having regard to the fair market value of the goods or service rendered as stated supra, the service rendered was of a specific nature especially when tea tasting is a different kind of service which is to be paid definitely at a higher rate. Here the rate paid cannot be construed as higher rate which could be termed as only reasonable as rightly held by the Tribunal. 22. In this context, we are also fortified by the judgment of this Hon'ble Court reported in (2006) 285 ITR 84 (CIT Vs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the excess of Rs.100/- charged by the company in respect of delivery of vehicles to the customers at their place of business where two of the directors were spouse and son of another director. In this case though the partners of the firm were directors and disallowance was rejected on the ground that Rs.100/- was added to the original commission and was disallowed by 50% and the Assessing Officer came to the conclusion and held that Section 40A(2)(b) of the Act, was attracted to the assessment of the assessee's income as the 100 per cent increase in the transport charges paid to the firm consisting of a director and other relatives, was excessive and unreasonable having regard to the value of the service rendered by that firm to the company which is a clear case of finding of fact and even in the judgment though 100 per cent was reduced to 50%. Per contra, in the case on hand, no finding at all in respect of the payment made is reasonable or unreasonable which was made as stated by us supra. There was no excess payment. The department has not given any comparison with any other company or found out any details to come to the conclusion that there was really excess payment. Whereas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in which event, the finding or decision arrived at stating that the expenditure is excessive or unreasonable and the same cannot be allowed or deducted, certainly would become purely a question of fact, which the court cannot interfere, in view of the ratio laid down in CIT Vs. T.T.Krishnamachary and Co. (2002) 256 ITR 82 (mad), whereunder it is held that the finding that the payment was not excessive, as another party has also purchased at increased price, is one of the facts. But, the situation in the case on hand is not on the same footing, as relevant materials to establish that the expenditure incurred by the assessee for purchase of the impugned goods was not excessive and reasonable qua the sales of similar goods made by M/s. Standard Engineering to any third party during the relevant period were neither produced by the assessee before any of the authorities below, viz., the Assessing Officer, the Commissioner of Income Tax (Appeals) and the Tribunal, nor before this Court." 26. A reading of these cases clearly indicates that the decision of the Assessing Officer should be made for allowing or disallowing such expenditure incurred as excessive or unreasonable and such dec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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