Tax Case Appeals under Section 260A of the Income Tax Act, 1961 against the orders of the Income Tax Appellate Tribunal, Madras 'B' Bench, Chennai, dated 11.03.03 in I.T.A.Nos.785 & 2322(Mds)/91, 2512(Mds)/91, 1552 and 1553 (Mds)/95 & 1614(Mds)/96 relating to the assessment years 1987-88, 1988-89, 1990-91, 1991-92 and 1992-93 respectively.
For Appellant : Mr.J.Ravi Kumar For Respondent : Mr.R.Venkatanarayanan for M/s.Subbaraya Aiyer.
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C O M M O N J U D G M E N T (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 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 assessees 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 made by Mr.O.Thomas, as the Chief Executive of the company. In respect of such auction, the Assessing Officer found that the payment made as per the agreement was excessive in nature and by applying
Section 40A(2)(a) of the Income Tax Act, disallowed those payments made to the company for the assessment year 1987-88 to the tune of Rs.9,92,496/-. Similar disallowance of Rs.10,50,000/-, Rs.1161,844/-, Rs.6,54,484/- and Rs.2,89,460/- were made for the assessment years 1988-89, 1990-91, 1991-92 and 1992-93 respectively.
6. Aggrieved against such assessment orders made by the Assessing Officer, the assessee filed appeals before the Commissioner of Income Tax (Appeals). Before the CIT (Appeals), the assessee contested the disallowance made under
Section 40A(2) of the Act. It was contended that Mr.O.Thomas, though an Agent-cum-Chief Executive of the assessee firm, is also a Director of the company and the travelling allowance claimed by him and the service rendered by him to the company are as per the agreement.
7. The CIT(Appeals) felt that the Coimbatore Firm could be regarded only as a branch office of the Cochin company and not an independent unit de hors the Cochin company. The CIT (Appeals) came to the conclusion that the Coimbatore Firm was not doing any independent business but was only attending to a part of the business of the Cochin company. He also found that if the income of the Coimbatore Firm was taxed in the 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 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. Aggrieved against the same, the Revenue has preferred the above appeals by raising the following substantive question of law viz., Whether on the facts and in the circumstances of the case the Income Tax Appellate Tribunal was right in holding that the disallowance made under
Section 40A(2) in respect of services charges paid by the assessee to M/s.Forbes Ewart & Figgis (P) Ltd., Cochin could not be disallowed u/s 40A(2) of the Income Tax Act for the assessment years 1987-88, 1988-89, 1990-91, 1991-92 and 1992-93 ?
11. The issue involved in all these cases, the issue of liability of service charges paid by the assessee firm to M/s.Forbes Ewart & Figgis (P) Ltd., Cochin. The arrangement between the assessee and the Company viz., M/s.Forbes Ewart & Figgis (P) Ltd., Cochin was to the effect that on such service provided by the said company, 30% of the gross earnings of the firm shall be paid to the company. The assessee firm comprises of 12 persons of whom two are private limited companies. The individual partners are close relatives of the directors of M/s.Forbes Ewart & Figgis (P) Ltd., Cochin. In fact the Assessing Officer has made a note that Mr.O.Thomas who is the Agent-cum-Chief Executive of the assessees Firm is also the Director of M/s.Forbes Ewart & Figgis (P) Ltd., Cochin and partner of M/s.Forbes Tea Brokers, Coimbatore and he also found that the partners are the close relatives of the Directors 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 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, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction.
(b) The persons referred to in clause (a) are the following, namely:-
(i) Where the assessee is an individual -- Any relative of the assessee.
(ii) Where the assessee is a company, firm, association of persons or Hindu un-divided family --- any director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member.
(iii) any individual who has a substantial interest in the business or profession of the assessee, or any relative of such individual;
(iv) a company, firm, association of persons or Hindu undivided family having a substantial interest in the business or profession of the assessee or any director, partner or member of such company, firm, association or family, or any relative of such director, partner or member;
(v) a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member;
(vi) any person who carries on a business or profession,-
(A) where the assessee being an individual, or any relative of such assessee, has a 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 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 only question which deserves consideration was whether such expenditure is excessive or unreasonable having regard to the fair market value of the goods as found in
Section 40A(2)(a) of the Act. It is worthwhile to refer to the explanation offered by the assessee firm before the Assessing Officer in the year 1991, which is as follows:
The firm is constituted under the Partnership Act and a valid partnership deed exists. It is also seen that all the partners are assessed to Income-tax and many of them are in the higher income brackets. Two companies are also holding about 40% interest in this partnership firm. The profit earned by the firm has been apportioned to the partners in the ratio laid down in the Partnership deed. It is also seen that the partners have been withdrawing their share of the profits more or less regularly. In view of these facts, the genuineness of the firm is not in doubt.
Regarding the consideration paid by the assessee to M/s.Forbes Ewart and Figgis Pvt. Ltd. for the services rendered by it, against the assessee's claim of Rs.24,33,914/-, a sum of Rs.8,15,370/- only was allowed as reasonable expenditure. Since the assessee's representative was unable to furnish the basis for the payment to the company. Hence, on the conclusion that the business was actually run by the firm with only assistance from the company in the day today running of the business, 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 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 not reasonable to value such services rendered by the Company to the firm merely on the basis of the physical costs incurred by such services.
The Commissioner of Appeals has taken a view in respect of Asstt. Years 1987-88 and 1988-89 that since part of the work of the firm was conducted by the Company (Forbes Ewart & Figgis Pvt. Ltd.) the entire profit of the firm is to be assessed in the hands of the company. We have filed an appeal before the Appellate Tribunal against the order of the Commissioner of Appeals highlighting the following facts:-
1. The firm is a separate legal entity governed by a Deed of Partnership. The partnership has been registered with the Income-Tax Department and has been granted registration from time to time. All the partners have contributed to the capital of the firm.
2. The services rendered by the company are of professional nature and the amount paid by the firm to the company towards the services rendered is as per the terms of agreement and by account payee cheques.
3. For conducting auction a licence has to be obtained from the Tea Board under the Tea Marketing Control order. The Coimbatore firm has obtained a licence for conducting tea auctions in Coimbatore which is renewed every year.
4. Cochin company is not holding a licence from the Tea Board to conduct tea auctions in Coimbatore. The licence issued to the Cochin 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 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 accounts at Coimbatore and Cochin for receiving tea auctions proceeds. The net proceeds are disbursed to the clients from the above accounts.
10. The auctions are conducted every week on Thursdays in Coimbatore and Forbes Tea Brokers (Coimbatore) are particpating in all the auctions. This fact can be verified from the office of the Tea Trade Association of Coimbatore from any ten buyers operating in Coimbatore auction. On behalf of Forbes Tea Brokers (Coimbatore) a professional tea taster or Forbes Ewart & Figgis Pvt. Ltd., Cochin is conducting auction at Coimbatore. He used to travel by car owned by the company from Cochin a day before the auction and return to Cochin on the auction day or on the subsequent day. As in Government Department we have no system of preparing TA bill and claiming TA for each and every travel. Some times the Executives produce vouchers for actual expenses and claim reimbursements according to their connivence. There is no system of keeping the Attendance Register in the auction hall marking attendance of the participants of the auction.
11. It is not economically viable for the Coimbatore firm to engage a set of professionally qualified technical staff like tea tasters, tea manufacturing experts, quality control experts, taxation experts, etc. and the firm thought it prudent to have the services of the qualified experts of 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 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:
2The 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 operating at Coimbatore auction centre, but nearly 1/3 of the total volume of business is handled by the appellant firm only. The main reason for this is stated to be the confidence reposed by the various clients in the expertise of the officials of the company, Forbes Ewart and Figgis Pvt. Ltd., Cochin whose services have been utilised by the firm in the conduct of the auction and in providing the correct technical advice for improving the qualify of the tea auctioned.
3. Quite apart from the above facts, I have called for and obtained the assessment particulars regarding the Company at Cochin. The ledger accounts of that Company were also made available to me for my inspection. Copies of their Profit and Loss Account and Balance-Sheet and the account copies of the appellant in their books of accounts have also been filed before me. M/s. FEFPL, Cochin is an assessee on the Files of the Deputy Commissioner of Income Tax (Assessment), special Range-I, Ernakulam. From the income tax assessment orders of the Company dt. 8.2.93 and 3.1.94 for the asst. Years 1990-91 and 1991-92 respectively, I find that the entire amounts shown as paid to them as service charges by the appellant firm have been duly offered as income in the Company's hands and brought to tax also. The rate of tax for the asst. Year 1990-91 comes to 60% + Surcharge of 8% and for the 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 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 reference to the sale price of the tea determined which may have an impact on the commission income of the assessee sometimes the volume of turnover may have rendered the increase in commission or vice versa. Further, the reasonability of the service charges has to be seen with reference to what are the facility the company has and offers to the assessee. These services on their own should not be available in the company or may be available on a limited sense which may be considered inadequate. The order of the assessment in the instant case does not touch upon this point. However, the Assessing Officer has proceeded on the basis that the service charges paid are excessive and is trying to limit to the expenses incurred by the company and that too direct expenses. The income of the company as assessed for example for assessment year 1987-88 is in the range of Rs.26.15 lakhs, that is after allowing part of the service charges. Likewise the income assessed for assessment year 1988-89 is in the range of Rs.30.60 lakhs. The income assessed for assessment year 1990-91 is in the range of Rs.42 lakhs approximately and 1991-92 and 1992-93 are of Rs.44.89 lakhs and Rs.31 lakhs respectively. The issue has been magnified by the Assessing Officer by considering the quantum of the service charges with reference to the net income though he had noted in his 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 1988-89. 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 Honble Court reported in (2006) 285 ITR 84 (CIT Vs. Computer Graphics Ltd.) where this Honble Court has categorically held at page 90 as follows:
....What the officer had done was that he had only alleged invoking
section 40A(2) and had totally ignored the merits of the assessee against resulting in increased sales by the assessee, further resulting in increased income in the hands of the assessee. He also further brought to our notice that the potential competitors of the assessee-company felt it necessary to market its products through the firms which were established fully and accordingly entered into agreements with the above three firms. The reasonableness of the expenditure for the purpose of business had to be adjusted from the view point of a businessman and not that of the Revenue, even while invoking
section 40A(2). The Tribunal had given a finding that the expenditure incurred was reasonable expenses towards its sole selling agency having its own working force and also outlets as agents throughout India, which had undoubtedly resulted in the assessee's gaining business and on a consideration of all the facts it was held that the disallowance made by the Assessing Officer was unjustified. Also, there was no proof of excessive unreasonable payment and hence, no disallowance could be made under
section 40A(2) of the Act. The reasons recorded by the Tribunal 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 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 assessees 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, the company had given a specific detail that payment was only 30% of the gross income and that the turnover increased because of the input of the company. When such basis has been made for such payment, the ruling which has been cited by the revenue will not be applicable to the facts of this case.
25. Similarly, in another ruling cited by the revenue reported in (2008) 303 ITR 271 (Commissioner of Income Tax Vs. NEPC India Ltd.) also do not apply to the facts of this case, where the finding recorded was during the relevant period, the sales of similar goods made by its sister concern 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 (Appeals) and the Tribunal, nor before this Court. On the other hand, the approach of the Tribunal in arriving at the finding that the Assessing Officer had committed an error in disallowing the expenditure incurred by the assessee as excessive and unreasonable without any specific finding on that aspect. That was not accepted and therefore the matter was remanded. Even in that case they had relied upon the Judgment of this Court reported in (2002) 256 ITR 82 (Mad) (CIT Vs. T.T.Krishnamachary and Co.). The relevant para 8 is extracted below:
"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 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 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 the same cannot be allowed or deducted, certainly would become purely a question of fact.
27. If that is the case, when on facts it has been decided that the expenditure made by the assessee firm was allowable both by the CIT (Appeals) for the assessment year 1999-2000 and by the Tribunal, there is no reason for this Court to interfere in respect of the finding of fact and also in respect of the finding that it was a reasonable one.
28. The revenue has not made out any case to substantiate their case that the expenditure is either unreasonable or excessive and hence we do not find any reason to interfere with the order of the Tribunal and by relying upon the judgements of this Court (cited supra), we dismiss the appeals.
kk To
1. The Commissioner of Income Tax-I, Coimbatore.
2. The Income Tax Appellate Tribunal, Madras 'B' Bench, Chennai