Analysis

 

Slump Sale – Whether breaking up of price permissible:-

1.1 The decision of the Calcutta High Court in the case of Kwality Ice Creams {I} Ltd [2011] 336 ITR 100 {Cal} may provide fodder for interesting appraisal by the readers. In this case, the assessee, an ice cream manufacturer, transferred its marketing undertaking for a price of Rs. 3 crores. There is nothing in the decision to suggest that the price of Rs. 3 crores was a composite price for transfer of individual assets of the marketing undertaking sold. On the contrary, from the facts of the case, it appears that the price was paid for a slump sale of the marketing undertaking as a whole. The decision related to Assessment Year 1996-97 i.e. before the slump sale provisions of section 50B were brought on the statute book.


In short, the decision of the Supreme Court in the Artex case never carried an authority that if the sale is factually a slump sale, it is permissible for the tax authority to break down the price – even on any scientific basis – and allocate the price over the assets. The finding of the Calcutta High Court that the Apex Court in Artex case permitted such breaking up of the slump price does not appear manifest from a reading of the Artex decision

The issues for consideration of the High Court was whether the price of Rs. 3 crores could be severed and allocated individually to the various assets of the marketing undertaking transferred – so that the capital gains relating to depreciable assets could be taxed separately u\s 50. The High Court here has held in affirmative. In coming to this conclusion, it was drawn support from the decision of the Supreme Court in the case of CIT vs. Artex Manufacturing Co [1997] 227 ITR 260 {SC}. According to the High Court, the Supreme Court has specifically held that if item wise allocation of the price is possible towards the assets of the business transferred, then capital gains should be determined vis-à-vis the individual assets.

1.2 According to me, the Supreme Court has not held in this manner in the Artex decision. In the Artex case, though it was stated in the transfer agreement that the business was transferred for a lump sum price, the Assessing Officer had found that the assessee had obtained a valuation report of the individual assets for the purpose of fixing the sale price of the business. This meant that the lump sum price in the agreement was, in reality, not a slump sale price for the business as a whole, but an aggregated price of the individual assets of the business sold. It was a composite price for the sale of a bunch of assets and not a single price for the business as a whole. The findings of the Apex Court are understandable because the real underlying agreement between the parties was to transfer itemized assets at a bunched price and this was not a case of slump sale simpliciter as made out in the written agreement.

In fact, in another decision of the same date of the Supreme Court in the case of CIT vs. Elecon Control Gear Mfg. Co. [1997] 227 ITR 278 {SC}, the Apex Court distinguishing its earlier decision in the Artex case, has held that the agreement of the assessee was for a slump sale of the business as a whole as there was nothing in the transfer agreement to suggest that there was itemized sale of the assets.

1.3 Whether a transfer agreement is of a slump sale of a business undertaking or a sale of a bunch of assets of the business undertaking for a composite price, should be discerned from the terms and conditions of the agreement. If the transfer agreement shows that the real intention of the parties was to effect a transfer of the business as a whole for a slump price, then it would not be permissible for the Court to read the agreement otherwise. The sale must then be assessed to tax as on slump sale basis only. The decision of the Supreme Court in Elecon Control Gear is a clear authority for this proposition.

On the other hand, if the real intention of the parties, as apparent from their conduct, was sell individual assets only, the fact that transfer agreement cites a slump sale should hardly matter. Here, it should definitely be permissible for the Court to come to the conclusion that the price mentioned in the agreement was merely a composite price for itemized sale of various assets and the Court should sever the sale consideration over the transferred assets as done by the Supreme Court in the Artex Case. After all, if the substance of an agreement is manifestly at variance from the form in which it is projected, nothing should preclude the Court from ignoring the form and assessing the transaction on the basis of this substance.

In short, the decision of the Supreme Court in the Artex case never carried an authority that if the sale is factually a slump sale, it is permissible for the tax authority to break down the price – even on any scientific basis – `and allocate the price over the assets. The finding of the Calcutta High Court that the Apex Court in Artex case permitted such breaking up of the slump price does not appear manifest from a reading of the Artex decision.

There is tangible difference between slump sale of a business for a unit price and composite sale of assets of the business at an aggregated price. Whereas in the former, it is not permissible for the tax authority to split the price over the assets transferred even on scientific basis, in the latter case it is permissible. This distinction, according to me, has been well maintained in a balanced manner by the Supreme Court in its Artex and Elecon Control decisions. Readers are invited to form their opinions on this issue.

Capital Gains on retirement of partner on assignment of his share.

The sum and substance of these decisions is that whenever an obligation to pay any income is created by way of a charge on the income, a superior title is created over the income in favour of the charge holder to the extent of the charge. Qua this income, the charge holder has a paramount or superior title over that of the assessee. The income, to the extent of the charge, is diverted in favour of the assessee before it reaches the assessee

2.1 The decision of the Mumbai Tribunal in the case of Sudhakar M. Shetty decision – [2011] 130 ITD 197 {Mum} makes a distinction between the tax incidents visiting a partner who merely realises his share due to him on retirement and a retiring partner who assigns his share to a continuing partner for lump sum consideration. Whereas the former mode has been held not to invite capital gains tax, the latter was held to be not so fortunate.

The Tribunal has observed that a partner' share' in the partnership is a `property' and its assignment would constitute a transfer of a capital asset giving rise to capital gains. The difference between consideration received on assignment and his capital account balance was held taxable as capital gains

According to the Tribunal, the assessee, Sudhakar Shetty's retirement was under the second mode – i.e. by assignment of share and hence, his retirement gave rise to taxable capital gains

2.2. It is pertinent that the issue in the decision concerns the normal capital gains' provisions of section 45 [1] i.e. between partners inter se in their individual capacities and has nothing to do with the provisions of section 45 [4], where the transfer contemplated is between the firm and a partner.

2.3 For analysing this decision, let us first understands as to what constitutes a partner's `share' in partnership?

As per the classical English partnership law cited by Lindsay and adopted by Indian Courts in Narayanappa vs. Bhaskara Krishnappa {AIR 1966 SC 1300}and Dewas Cine Corporation – 68 ITR 240 {SC}, a partner's monetary rights are two folds . Firstly, during his tenure as partner, whereas he has no specific right in any individual asset of the partnership, his right is only to receive his share of profit Secondly, on dissolution or retirement, he has a right to a share in the net estate of the firm {i.e. assets minus liabilities and winding up expenses- valued on the basis of a notional sale} as on date of the retirement or dissolution. This bundle of rights constitutes the `share `of the partner.

So, when a partner retires, the accounts of the firm are made up –valuing the assets on basis of a notional sale, the liabilities and notional winding up expenses are deducted – and the amount due to the retiring partner towards his share, as worked out by this arithmetic, is determined as payable to him.

It is pertinent that a partner's right to this share is not created on retirement. This right existed the moment he joined the partnership. It was a right in presenti , whose value was merely determinable at time of retirement and this right, the partner carried with him all along as `his property' from the time of his joining till he retires.

On retirement, the retiring partner takes away his own money due to him and the shares of the continuing partners remain intact without an enlargement. So, there is no `transfer" of any property from such retiring partner to the continuing partners. This logic can be found in the decision of the Gujarat High Court decision in the case of Mohanbhai Pamabhai as reported 91 ITR 393 {Guj} as approved by the Supreme Court in 165 ITR 166 {SC}

Even if the continuing partners bring in further capital to settle the retiring partner, the enlargement of the continuing partner's shares is due to their own `self –acts" of bringing in more funds and not due to anything done by the retiring partner. Hence, there is no act of `transfer' from the retiring partner to continuing partner.

The Gujarat High Court decision in the case of Mohanbhai Pamabhai – 91 ITR 393 {Guj} referred above was distinguished by the Bombay High Court in Tribhuvandas Patel case – 115 ITR 95 {Bom} . The Bombay High Court distinguished between two modes of retirement as under ;-

[a] Where a partner merely retires by taking away the money due on his share as per accounts – no transfer and capital gains – agreeing with Mohanbhai Pamabhai – 91 ITR 393 {Guj}.

[b] But, where the partner assign his share to a continuing partner for a lump sum consideration, the `share' is property in hands of the retirement partner and hence a capital asset. Its assignment is a transfer. On such assignment, there is a transfer of capital asset from retiring partner to continuing partner and hence, capital gains result.

In the case before the Bombay HC, there was dispute between the partners and under a court settlement agreement, it was cited that the retiring partner was `assigning' his share to the continuing partner for an amount of say – Rs. 4.71 lacs. It was held that there was transfer on such assignment resulting in capital gains. This Bombay High Court decision has also been followed by the same High Court in other decisions.

The Bombay High Court decision in Tribhuvandas Patel [115 ITR 95] came up for consideration before the Supreme Court in 236 ITR 515 {SC}. Here, it appears that a short question was put to the Supreme Court as to whether the amount of Rs. 4.71 lacs received on retirement attracted capital gains. The Supreme Court, probably appraising the issue as a case involving a retiring partner merely realising the money due towards his share on retirement, held that this amount was not taxable as capital gains following its earlier decision in Mohanbhai Pamabhai 165 ITR 166 {SC}.

The Mumbai Tribunal in Sudhakar Shetty's case has apparently taken the view that the issue about capital gains implications on assignment of share by partner had not been addressed as a question before the Apex Court in Tribhuvandas Patel case in 236 ITR 515 {SC} and therefore, the decision of the Bombay HC in Tribhuvandas Patel's case in 115 ITR 95 {Bom} remains not overruled and binding on it as a decision of jurisdictional High Court.

It is in this scenario that readers are invited to appraise the decision of the Mumbai Tribunal in Sudhakar Shetty`s case.

In order to do, let us firstly understand what is the general partnership law relating to assignment of share by partner?

Section 29 of the Indian Partnership Act cites the rights of an assignee of share by partner as under:-

Firstly, when a partner assigns his `share', the assignor continues to be the partner and the assignee can neither take part in the conduct of the partnership business nor has right to ask or inspect the accounts. He has only a right to receive the share of profit due to the assignor-partner, which accounts he must accept without demur. In short, it is not open to the assignee to challenge the correctness of the accounts and has to accept it as correct.

Secondly, when the assignor-partner ceases to be a partner, the assignee gets the right to demand the assignor-partner's share in the assets of the firm as due to him on such cessation and also a right to the accounts from the date of cessation onwards till he is fully settled.

So, on the issue of assignment of a partner's share, the following points emerge-

[a] It is not specified in the section 29 as to who can be an assignee. So, the assignee can be a rank outsider to the partnership or even a continuing partner.

[b] An assignee does not automatically become a partner in place of the assignor-partner. He remains only an assignee. This is even so if the other partners have consented to the assignment. This is because the consent operates only in respect of the `assignment'. They cannot be presumed to have agreed to his introduction as partner.

[c] The assignee cannot take part in the business of the partnership.

[d] The assignor-partner continues to remain the partner and is not relieved from his mutual obligations to the other partners under the partnership deed.

[e] The assignment does not take place under the auspices of the partnership deed, but is private deal between the assignor-partner and the assignee. This is in marked contrast to retirement, which takes places under the terms and conditions of the partnership deed.

Therefore, a possible view is that even if the assignment of the partner's share is done to a continuing partner, the continuing partner remains an `assignee' qua the share assigned and not a `partner'. No doubt, in his capacity as an existing partner, he can take part in the business of the partnership and access the accounts directly. But, it may be noted that this right is due to his natural right as an existing partner and has nothing to do with his acquiring the subsequent partnership share on assignment

The disability of the assignee-partner, in operating as a fully fledged partner qua the share assigned can be best understood by this example. Assume A, B & C are partners. As per the partnership deed, A is designated as Managing Partner and B is supposed to remain as dormant partner. An assignment by A of his share to B cannot make B the Managing Partner. This is because as per section 29 [1] of Partnership Act, a partner cannot assign his right to take part in the business to an assignee. So, the disability of the assignee remains.

In contrast to a retirement by a partner, an assignment by a partner of his `share' to a continuing partner results in enlargement of his property holdings. The assignee partner now has two properties – [a] his original share as partner and [b] his new share as assignee. The assignment also results in diluting of the assignor-partner's rights in the sense that he can no longer take home his share in profits or his share in the net asset on retirement or dissolution, since these rights he has given to the assignee.

If seen from the above angle, a transfer of property rights from the assignor partner to the assignee partner would be evident and the assignment transaction gets exposed to capital gains' tax. In contrast, a `transfer' is not existent when a partner merely realises his share on retirement as he is merely getting the money due to him from the firm.

2.12. More ever, when a partner retires, it become necessary to prepare the accounts in order to determine the share payable to the retiring partner. But, in an assignment, the question of preparing the accounts of the firm for the purpose of settling the assignee partner does not arise. The price is fixed between the assignor and assignor without reference to the accounts and that is why, I think, it was referred as `lump sum bases by the Bombay High Court decision in Tribhuvandas Patel's case.

It may be noted that the expression `lump sum' – does mean that amount due to a retiring partner cannot be determined at an agreed `rounded – up' figure by the continuing partners. After all, the rounded up figure is also agreed after a fair assessment of the accounts.

It is in this legal background that the decision of the Mumbai Tribunal in Sudhakar Shetty's case may be appraised by the readers now.

In Sudhakar Shetty's case, both the assessee and his wife were partners with a few others. His wife retired in the prior financial year and for settling her account, a revaluation [assumedly at market value on basis of a notional sale] was done of the assets and the surplus on revaluation was credited to all partners.

In the next financial year, within few months of his wife's retirement, the assessee also retired. No fresh revaluation was apparently done as a revaluation was done only a few months ago. On retirement, he received the amount due on his capital, which includes his share on revaluation surplus. A possible view is that this was a case of a normal retirement by a partner and did not involve any assignment. The assessee had apparently taken only the money due to him on retirement.

A citation in the retirement deed that the assessee would not have any right in the assets of the firm after retirement should not constitute an assignment. The cessation of the rights in the net assets of the partnership was a natural incidence of his retirement.

It may be noted that there is a significant difference between [a] an assignment of share by partner followed by retirement and [b] only retirement simpliciter. In the former case, the transfer event takes place because of a prior assignment and the subsequent retirement is only a consequential incident. On the other hand, when a partner retires, the nature of his right in his hands undergoes a transformation. His original contractual rights qua the other partners are not the same as he had when he was a partner. For example, he ceases to have the right to profits, right to take part in the business thereafter etc. What remains in his hands is only to seek the money worth of the net assets due to his share. In short, on retirement, he ceases to have the original rights of a partner and there can be obviously no assignment of rights which he longer has. Readers may thus note that whereas there can be an assignment before retirement. there cannot be an assignment of a partner's share after retirement . A citation in the retirement deed that the retiring partner would no longer have any right in the assets of the partnership cannot therefore amount to an assignment of a partnership share by the retiring partner to the continuing partner.

It is therefore a possible view that there was no assignment of share by the retiring partner to the continuing partner in the Sudhakar Shetty's case. Readers may therefore examine this decision carefully.

Income – Diversion vs. Application

3.1 The decision of the Mumbai Tribunal in the case of RSM and Co vs. Addl. CIT [2011] 10 ITR {Trib} 614 {Mumbai} is a thought provoking decision. In this case, partnership deed of the assessee chartered accountant firm, provided in its terms and conditions for payment to a retiring partner, who had completed fifty years of age, an amount [calculated at 25 % of the average earnings of the partner from the firm of three completed years prior to his retirement] payable in four quarterly instalments for a period of five years. The issue, before the Tribunal, was whether the payments made by the assessee to the retiring partners was a case of diversion of income at source by an overriding title or application of income after it accrued to the assessee.

3.2 The Tribunal firstly considered the decision of The Supreme Court in the case of CIT vs. Sitladas Tirathdas [1961] 41 ITR 367 {SC}. Here, the Apex Court had laid down the ground rules as to when a payment made under an obligation would constitute a diversion of income by overriding title and per contra, when such payment would otherwise be a mere application of income after it accrued to the assessee. The Apex Court had observed as under:-

"Obligations, no doubt, there are in every case, but it is the nature of the obligation which is the decisive fact. There is a difference between an amount which a person is obliged to apply out of his income and an amount which by the nature of the obligation cannot be said to be a part of the income of the assessee. Where by the obligation income is diverted before it reaches the assessee, it is deductible ; but where the income is required to be applied to discharge an obligation after such income reaches the assessee, the same consequence, in law does not follow. It is the first kind of payment which can truly be excused and not the second. The second payment is merely an obligation to pay another a portion of one's own income, which has been received and is since applied. The first is a case in which the income never reaches the assessee, who even if he were to collect it, does so, not as part of his income, but for and on behalf of the person to whom it is payable"

3.3 The Tribunal then dealt with various decision of the Bombay High Court where the issue of diversion of income by overriding charge was involved. These decisions were rendered after considering the decision of the Supreme Court in the case of Sitaldas Tirathdas cited above.

The decisions are:-

CIT vs. Patuck {C.N.}[1969] 71 ITR 713 {Bom}

CIT vs. Crawford Bayley and Co [1977] 106 ITR 884 {Bom}

CIT vs. Nariman B. Bharucha & Sons [1981] 130 ITR 863 {Bom}

The sum and substance of these decisions is that whenever an obligation to pay any income is created by way of a charge on the income, a superior title is created over the income in favour of the charge holder to the extent of the charge. Qua this income, the charge holder has a paramount or superior title over that of the assessee. The income, to the extent of the charge, is diverted in favour of the assessee before it reaches the assessee. Even if the income charged lands in the hands of the assessee, he is only its collector of the sum on behalf of the charge holder. The position of the assessee, as such collector, is that of a `cestui que' trustee, who holds the income in trust for the charge holder. The income belongs to the charge holder only and cannot be assessed in the hands of the assessee.

It is pertinent that the decisions in the cases of CIT vs. Crawford Bayley and Co [1977] 106 ITR 884 {Bom}and CIT vs. Nariman B. Bharucha & Sons [1981] 130 ITR 863 {Bom}directly involved cases where the payments, made by partnership firms to erstwhile partners or their heirs under obligations agreed in the partnership deeds, were held to be diversions of incomes not taxable in hands of the firms.

3.4. After considering the above precedents laid down by the Supreme Court and the Bombay High Court, the Mumbai Tribunal in the case of RSM and Co held that covenant in the partnership deed to make payment to the retired partner created an overriding charge on the income of the assessee in favour of the retired partner. By virtue of this charge, the income to the extent of the charge was diverted to the retiring partner before it reached the hands of the assessee. The Tribunal thus held that this income cannot be assessed in the hands of the assessee.

3.5. According to me, whereas the decision of the Mumbai Tribunal has been correctly laid, it is also possible support the decision from another angle. Some Courts have made a fine distinction between an obligation which attaches to the source of income and an obligation which attaches to the income itself According to these decisions, the diversion of income is only in the former case and in the later cases, it application of income. Without dwelling at length on these decisions, I would invite the attention of the readers to the decision of the Supreme Court in the case of CIT vs. Travancore Sugars and Chemicals Ltd [1973] 88 ITR 1 {SC}, which comes to my mind. Here, it appears that the Apex Court has made an observation to the effect that where the obligation is attached to the profit earning apparatus, the income can be said to be diverted at the source. On the other hand, if the obligation is attached to the profit earning process, the payment may have to be considered as to whether the same is allowable as expenditure from business profits.

From the facts of the case cited in the Mumbai Tribunal decision in the case of RSM & Co, it can be seen that there was a covenant in the partnership deed obliging the partnership firm to pay an assured amount to a retiring partner. When the partners sign such a deed, the covenant binds both the continuing partners and the retiring partners at the time of future retirement. The effect of this covenant is that the continuing partner would be entitled to continue the business of the partnership only under a pre-condition that the retiring partner would be paid this assured amount. In short, the profit earning apparatus of the partnership firm is released by retiring partner in to the hands of the continuing partners subject only to their commitment to this obligation. This is veritably a case, where the obligation to pay an income is attached to the very source of income i.e. the profit earning apparatus.

Therefore, even viewing from this angle, it is possible to also support the decision of that the Mumbai Tribunal in RSM & Co's case.

CA Anant PAi

Tax exemption limit should be Rs 2 lakh

Tax exemption limit should be Rs 2 lakh

This time around, the Budget will be presented amid heady inflationary winds and much jostling over the bills which are long pending before Parliament. The initiatives will be seen in the backdrop of the government making a desperate attempt to provide succour to the ululating common man. But apart from this, there are some banking-related issues waiting for some signals. These include a stand on domestic bank licences, capital gain tax on transition from a branch to a wholly-owned subsidiary of a foreign bank, besides a rollout of specific measures for mortgage and MFI sectors. As per RBI figures, aggregate deposits of scheduled commercial banks (SCBs) have increased from Rs 4,49,000 crore as of March 31, 2010, to Rs 4,97,000 crore as of December 10, 2010 —a growth of 10.6%. Also, bank loans have grown from Rs 3,24,000 crore to Rs 3,76,000 crore as of December 10, 2010 — a growth of 16% in the said period. This shows significant credit growth vis-a-vis deposit growth. In fact, it was in the third quarter of the current fiscal that the difference between deposit and credit growth peaked, thus putting pressure on liquidity. On the bright side, strong domestic demand and government capex in the financial year has provided a big boost to GDP growth, which has been more than 8.5% till date for the fiscal. The International Monetary Fund (IMF) projects India's GDP growth for FY11 at 8.8%, while the government has projected it at 8.6%. However, firmer crude oil prices and sectoral imbalances, particularly the supply-demand mismatch for non-cereal food items, has led to a consistently high inflation rate. Steps taken by the Reserve Rank of India (RBI) to maintain a balance between growth and inflation have produced muted results indicating that monetary measures to control inflation have their limitations.

Some of the key steps taken since the last budget impacting the banking sector are as follows:

1.) Statutory liquidity ratio (SLR) reduced to 24% from 25%.

2.) Repo rate increased by 175 bps (100 basis points is 1%), from 4.75% to 6.5% and reverse repo rate by 225 bps, from 3.25% to 5.5%. Also, cash reserve ratio (CRR) also increased by 50 bps from 5.5% to 6%.

3.) Base rate for banks introduced for lending purposes.

In view of the above-mentioned facts, some fiscal measures to help banks participate more substantially in infra-related sectors and continue their support to retail mortgages would be welcome. Also, giving infrastructure status to townships, providing tax breaks for housing development will act as growth catalysts. Further, extending tax holiday benefits for export-oriented units by another three years will be well received. Besides, tax-free status for fixed deposits up to three years and more would also be a welcome move. This will help banks manage their asset liability management (ALM) mismatches better. In addition, enhancing the tax exemption limit to Rs 2,00,000 in line with the proposed Direct Tax Code Bill (DTC) from April 2012,would provide immediate relief to the salaried class going by the present inflationary scenario. – www.financialexpress.com

Whether when assessee acquires a running cement plant in slump sale

 

Income tax - Whether when assessee acquires a running cement plant in slump sale, if price paid for assets is more than book value in hands of seller, excess is to be attributed to consideration for goodwill - NO, rules ITAT

MUMBAI, JAN 17, 2012: THE issues before the Bench are – Whether when assessee acquires a running cement plant in a slump sale, if the price paid for the assets is more than book value of assets in the hands of the seller, the excess is to be attributed to goodwill; Whether depreciation is to be allowed by taking WDV as per books of seller as cost of acquisition of assets in the hands of the assessee; Whether when the seller and the purchaser are not related parties, even then valuer's report is to be rejected alleging collusion in the deal and Whether the one time settlement premium paid to financial institutions in consideration for reduction in the interest rates is allowable as revenue expenditure in the year of expenditure. And the verdict partly goes agaisnt the assessee.

Facts of the case

A) Assessee company started its business operation w.e.f. 01/11/99, i.e., the date on which it acquired the cement business of the TISCO, as a going concern. During the current year it acquired cement manufacturing unit of Raymonds Ltd (RL). AO asked the assessee to furnish copy of the valuer's report, date of actual transfer of assets, written down value of each asset taken over in the books of previous owner, treatment of excess payments, i.e. written down value and amount capitalised in the books for I.T. purpose and treatment given by seller in their books in respect of this transaction and date of actual production of this unit along with documentary evidence after take over.

Assessee acquired the plant on "as and where" basis i.e., as a going concern. There was no change/alteration/ modification in the plant & machinery after purchase of the same, except few repairs, renovations & improvisation. The cement plants along with the land holding and all current assets, such as raw-material, semi-finished goods & finished goods, sundry debtors, spares & tools and other movable and immovable assets were acquired, lock, stock and barrels for a consolidated lumpsum consideration of Rs.751 crores. This consideration was allocated towards fixed assets and towards goodwill. Assessee incurred certain expenses towards further modification and improvisation and capitalized pre-operating expenses incurred by it and claimed depreciation on the same.

AO rejected the valuation report on the ground that the price of the plant and machineries were artificially jacked up in the report to the level of consideration paid by appellant, the valuer had adopted the `Net Replacement Cost' method which was nothing but the cost of brand new individual machinery or the cement plant, and the valuation report should have been prepared much prior to the date of Business Transfer Agreement. The survey was carried out subsequent to the date of the Business Transfer Agreement, the only purpose, for which the valuation report had been prepared, was to help and assist the assessee to appropriate the differential cost to its fixed assets in its books of accounts, thereby entitling the assessee to claim a larger chunk of depreciation. AO called for the information regarding the WDV of the assets transferred, directly from RL and substituted the same in place of the cost of acquisition assigned by the assessee. Since the said WDV of fixed assets as on the date of acquisition was less than the consideration paid, the excess was considered as goodwill by the AO.

CIT (A) allowed the appeal of the assessee stating that AO had not made out a case in any manner to show that the transaction of sale of the cement unit as a going concern was collusive or that there was any tacit understanding with the seller to attach a higher value to the cost of acquisition of capital assets. The deal was not between related parties. The cost had been assessed and worked out by an expert agency and unless the expert advice was proved to be manipulative or worked up with reference to some tangible piece of evidence, the AO could not disregard the veracity of the expert valuation. The observation of AO that valuation had been done at net replacement cost was not correct since depreciation had been duly deducted to arrive at market price of the plant and assets. Thus, depreciation was allowable to assessee with reference to the cost of acquisition as shown by the appellant duly supported by the Expert / Approved Valuer's report.

Revenue contended that the CIT (A) erred in holding that the assessee was entitled to claim depreciation with reference to the cost of acquisition of cement unit purchased from `RL' without appreciating the provision of Explanation 3 to section 43(1).

B) Assessee obtained loan funds from various financial institutions by way of term loans and issue of non-convertible debentures on which the company was required to pay interest in the range of 14.5% to 15%. The company claimed interest on such borrowings as deduction u/s 36(1)(iii). During the impugned financial year, assessee paid one time settlement premium to some financial institutions in consideration for reduction in the interest rates agreed upon by them. In the books of accounts the said premium was amortised over a period of 3 years. However, in the return of income, assessee claimed deduction in respect of the entire amount of settlement premium paid to the financial institutions. AO disallowed the assessee's claim stating that the assessee had not furnished the details and it was not justified for deduction of entire expenditure when it had itself amortised the said premium amount for a period of three years in the books.

CIT (A) allowed the appeal observing that the benefit secured by incurring expenditure, although for a longer duration, did not result in acquisition of any tangible or intangible assets and hence should be considered on revenue account and allowed as deduction. The settlement premium paid on restructuring of loan merits to be considered as a revenue expenditure and it has also been made to effect saving in future interest outgo of the assessee.

Assessee contended that payment in question was nothing but interest paid on money borrowed in terms of section 36(1)(iii) and allowable as revenue expenditure in the year of accrual. Revenue contended that the benefit in question is spread over the period of time and under the matching concept, only proportionate expenditure is allowable in this year.

C) Assessee acquired the cement unit of RL on a going concern basis with all its assets, tangible or intangibles, and liabilities vide the Business Transfer Agreement. Assessee carried out a valuation for the tangible assets acquired in course of acquisition and capitalized them at the value arrived at by the valuer in his valuation report. The excess payment made over and above the value of tangible assets acquired was claimed attributable to various intangibles transferred alongwith the undertaking such as licenses, know-how, trade marks, coal linkages, rail linkages, business rights, etc. For the sake of convenience and in accordance with the generally accepted accounting practices and provisions of Accountant Standard 14, the said payments were capitalized in the books as goodwill and depreciation was claimed.

AO rejected the claim stating that the definition of intangible assets as defined in Explanation 3(b) to section 32 does not leave any scope for goodwill and thus, the depreciation on goodwill was disallowed.

CIT (A) held that on perusal of the Business Transfer Agreement, the assessee had indeed acquired various intangible assets in course of the acquisition like mining rights, coal linkages, rail linkages, trade marks, other licenses, etc. which would be covered under the definition of intangible assets as trade marks/licenses and other business or other commercial rights in the nature of licesnes and hence would qualify for depreciation as per the Explanation 3(b) in section 32. On the part amount which is held to be on account of pure goodwill was not entitled to depreciation.

Assessee contended that merely because the assessee disclosed the total payment as goodwill, in the books of account, no adverse inference could be drawn against the assessee. Without prejudice, the assessee submitted that excess amount paid for acquisition of the unit, were towards factors like locational advantage, contacts with dealers and customers attached to the business etc. which was nothing but an advantage or right to carry on a business or commercial activity in a more efficient manner. Therefore, the term goodwill was covered by the expression `business or commercial right of similar nature' and eligible for depreciation.

After hearing both the parties, the ITAT held that,

A) ++ in the preceding year, the ITAT had considered a similar issue arising out of acquisition of cement unit of TISCO in which it held that as per section 43(1) that the actual cost to be considered for the purpose of section 32 should be the actual cost paid by the assessee. Since the cost has not been directly or indirectly met by any other person or authority, the cost paid by the assessee for acquisition of the assets of the units is the cost under section 43(1). However, Explanation (3) makes it clear that where the assets are used at any time by any other person for the purpose of his business or profession and the AO is satisfied that the main purpose of the transfer of such assets directly or indirectly to the assessee was reduction of liability to tax for claiming depreciation with reference to enhanced cost, the actual cost of the assets shall be such an amount as the AO may determine having regard to all the circumstances of the case. As rightly considered by the CIT(A) the parties are unrelated and the transaction is at arms length basis. The registered valuer also valued the assets as on 01.11.1999, the price of which was considered to be the cost of fixed asset acquired and the balance to the current assets including the current liabilities. In view of this, there is no reason to invoke Explanation (3) as the AO nowhere stated that the main purpose of such a valuation was for reduction of liability to tax. It is a direct acquisition by the assessee company from another public limited company in an open bid, being the highest bidder;

++ as per AS 10 para 35 the assessee was supposed to take the value on the fair basis as determined by competent valuers. The observations of the AO are not correct. Since the assets are acquired on slump sale basis and individual assets are not priced or purchased item-wise, the assessee as per the Accounting Standard 10 to be adopted for the purpose of maintaining the books of account, has obtained a valuation report which has taken the net replacement cost method and has adopted the value in the books of account. Thus, the AO's observation that the value adopted by the assessee is exactly tallying with the subsequent valuation by the surveyor is without any basis. AO has not analysed the actual WDV in the hands of the TISCO. What he has adopted is the book value in the books of TISCO which incidentally will be different from the actual WDV for the purpose of income tax. Even though the seller has shown the profit on sale of net assets of the cement Division and taken the income to the P & L Account, the said company adjusted the cost of sale in the WDV of the assets for the purpose of income tax and offered incomes only under section 115JA of the Income Tax Act on the book profits made. AO failed to consider the net consideration adopted by the TISCO for adjustments in the books of account and the values adopted for current assets. The computation in the hands of the TISCO is quite different from the computation to be made in the hands of the assessee. Thus, AO has not examined the facts and arrived at wrong conclusions without any basis;

++ the registered valuers are experts and value and reliability of their opinion would depend upon the material contained in their report. They are competent to fix value of properties for several earlier years. Even otherwise WTO in the wealth-tax purposes is required to determine in the present, the value of assets as on the valuation dates which may be five or seven years earlier. If this is not possible, then scheme of fixation of value of assets under the WT Act cannot work. Such a view would defeat the very purpose of the WT Act and, therefore, cannot be accepted as correct. Since the deal was at arms length price and since the parties are not related and there is no evidence that the transaction is a collusive one or done with an intention to reduce the tax liability and also further that there is no clause for payment of goodwill by the assessee in the Business Transfer Agreement, the AO's action in considering the price paid for acquiring the assets at more than the book value in the hands of the seller to be treated as goodwill has no basis at all;

B) ++ in the case of Overseas Sanmar Financial Ltd. (Chennai) similar issue was considered in which it was held that the reduction in the rate of interest for fresh loans to be advanced by the financial Institutions led the assessee-company to pay off the entire loan that carried the burden of higher rate of interest. The assessee apparently calculated the amount of interest, that would be paying over the years at the agreed rate of interest and compared it with the foreclosure premium together with the interest that it would pay on the revised rate basis and found it to be advantageous to the company by paying the foreclosure premium. This advantage that the company wanted to benefit from is clearly a well-judged business decision and, therefore, it is laid out wholly for the purposes of its business. This itself is sufficient for allowing the claim in full in the year in which it was incurred. Following the said decision, the expenditure is allowed in the impugned assessment year in full;

C) ++ it is true that the nature of payment has to be considered and terminology used in the books of account does not determine the allowability of claim. The assessee has made a vague claim. On the one hand it states the excess payment made, over and above the value of tangible asset acquired, is for licences, quotas, business rights etc. and whereas on the other hand it states the excess amount should be taken as that paid for factors like locational advantage, contracts with dealers and customers attached to the business etc. This second limb, cannot be a business or commercial right but only goodwill. While stating facts, alternate or without prejudice stand cannot be taken. The assessee is supposed to know exactly the purpose for which the amount is paid. While tangible assets were valued, intangible assets were not valued in this case. Contacts with the customers, with dealers, locational advantage, rail linkage etc. when valued, are goodwill and not business or commercial right of similar nature. A separate valuation, asset-wise has to be undertaken and appropriate conclusions drawn. CIT (A) had not given the AO an opportunity to examine the facts as presented before CIT(A). Assessee had not challenged the finding of CIT(A) that depreciation is not allowable on goodwill. Thus, this issue has attained finality. The only issue is, to determine the value of intangible assets other than goodwill. The issue is set aside to the file of the AO for fresh adjudication in accordance with law.

READING [Art of reading]

 

READING

INTRODUCTION:

Reading is inevitable for knowledge gaining. The main purpose behind our reading is to make connections between what we have already known and what we need to know. Knowledge is wide. Gaining knowledge or updating in particular subject is highly required for the present business world. There may be many reasons for reading-

Practical application;

To get an overview;
To locate specific information;
To identify the central idea of theme;
For pleasure and enjoyment.
FAST AND SLOW READING:

How to read. The style of reading may be of two types – fast reading and slow reading. Fast reading may be used for the following:

To gain an overview of the material;
To separate relevant from irrelevant material;
To locate specific information;
To identify the central theme or idea;
There are three effective fast reading styles which are scanning, key words spotting and skimming. The speed reading aims to improve reading skills by-

Increasing the number of words read in each block;
Reducing the length of time spent reading each block; and
Reducing the number of times your eyes skip back to a previous sentence.
Slow reading helps to gain a detailed understanding of the material and maintain your connection. A slow reading is useful to-

Evaluate what you have read;
Remember exactly what you have read;
Follow instructions or directions;
Understand difficult terms or ideas.
TECHNIQUES:

The following are the techniques of reading-

Reading for enjoyment – like reading a novel or magazine – it is involves light reading;
Exploratory reading – skimming through the book to get the gist of the topic. Skimming involves finding out what something is all about. In order to skim one is to formulate questions before begin to read. E.g., What is this all about. Does this article deal with the subject one is researching. Etc.,
Revision reading – skimming through a book which is familiar in order to confirm knowledge;
Search reading – scanning for a specific piece of information or to answer a specific question;
Proof reading – carefully focusing on spelling, punctuation and sentence structure and checking accuracy;
Reading for mastery – to get detailed information or understanding the topic; For this careful, slow and repeated reading is adopted;
Critical reading – reading for stimulus, for challenge, to assess values and ideas an in reading a book for review or critically analyzing a novel. The most important skill in critical reading is asking questions. Skim through the passage first read the passage more slowly keeping in mind certain questions like why does the author make this statement; how do you feel about this information; what opinions, feelings and attitudes are being expressed; are they facts or opinions; is the information logical; examine the choice of words used – what connotations are suggested; then re read silently and aloud for a number of times and finally form the opinion as derived from critical reading.
READING PURPOSE:

Reading is essential for success. It also means taking some risks. One cannot read everything. One cannot read everything in the same way. One has to decide why he is reading and he what he wants to get out of it and this means of selecting what to read and how much attention to give certain parts of his reading. Deciding the purpose of reading one is to decide the approach and the depth of reading-

For a set text or wider reading.
For a lecture
For a tutorial/seminar.
For an assignment
For an exam.
Before reading one has to look-

at the title, details about the author and work out how the work fits in with other texts in the subject;
scan the contents page and the index to gain an overview of the are covered by the work;
skim through the work, picking up key paragraphs and sentences, particularly the opening and closing sections of chapters or articles
and then read the whole carefully, nothing major points and ideas in one's one words as well as sections to which one may wish to return later.

For assignment or for research one may try the following steps:

start with a book from the reading list which gives an overview of the topic;
as you read, keep asking yourself exactly what you are looking for and write down those questions as a guide to reading;
keep doing the look, scan and skim procedure to make sure the material is both relevant to your needs, and that you are not duplicating information you have already found;
record the details of author, title, place of publication, publisher and date as you select each work so that you don't have the frustration of trying to find it again and preparing your reference list/bibliography. Record page numbers with any notes you take;
take notes from your reading as you would if you were reading for research purposes.
DIFFICULT READING:

When you find reading is difficult there are several strategies that you can try-

Be an active reader by asking yourself questions about what you are reading and how it relates to your research;
Prepare for reading by consulting your lecture, notes beforehand for guidance and an overview;
Turn section headings in the book or article into questions and answer them in your own words after you have read the section;
Break the reading into smaller sections and note one section at a time;
If the language or style used make the work too difficult to grasp, seek help from your tutor or lecture, who may be able to suggest a more straightforward introduction to the topic.
STRATEGIC READER:

Strategic readers actively construct meaning as they read, interacting with the text. They set purposes for reading, select method of accomplishing these purposes, monitor and repair their comprehension as they read and evaluate the completed task. A strategic reader constructs, examines and extends meaning before, during and after reading for a variety of texts. There are a number of differences between strategic readers and poor readers during all phases of the reading process.

By: Mr. M. GOVINDARAJAN

re-opening

 

Intimation under section 143(1) issued but not communicated to assessee - Whether reopening of assessment justified
Once the order under section 143(1) was passed, and no notice under section 143(2) had been issued, the AO can issue notice under section 147/148, if the pre-conditions are satisfied. -Vide Atsushi Yoshida & Others v. Assistant Commissioner of Income Tax (2012) 43 (I) ITCL 64 (Del-HC)

HUF cannot be a partner in firm but it is competent to the manager or karta acti

 

HUF cannot be a partner in firm but it is competent to the manager or karta acting on behalf of the HUF to enter into a valid partnership

Coal India Ltd. & Anr. Vs Continental & Eastern Agencies (Delhi HC)

In the case reported as (1967) 66 ITR 613 (SC) Ram Laxman Sugar Mills v,Commissioner of Income-Tax, U.P. & Ors. the Hon'ble Supreme Court has categorically held that it is open to the manager of a joint Hindu Family as representing the family to agree to become a partner with another person. The partnership agreement in that case is between the manager and the other person and by the partnership agreement no members of family, except the manager acquires a right or interest in the partnership. The junior members of the family may make a claim against the manager for treating the income or profits received from the partnership as a joint family asset, but they cannot claim to exercise the rights of partners nor be liable as partners.

The authority relied upon by the learned counsel for the appellants in the case reported as (1998) 2 SCC 49 Rashiklal & Co.V.Commissioner of Income Tax is not helpful to him. In this case R, the karta of a HUF, was a partner in a firm which was carrying on, inter alia, the business of mining. The Honble Supreme Court observed that a firm is a compendious way of describing the individuals constituting the firm. An HUF directly or indirectly cannot become a partner of a firm because the firm is an association of individuals. Even if a person nominated by the HUF joins a partnership, the partnership will be between the nominated person and the other partners of the firm. It further observed that if a karta or any other member of the HUF joins a partnership, he can do so only as an individual. His rights and obligations vis-à-vis other partners are determined by the Partnership Act and not by Hindu Law. Whatever may be the relationship between an HUF and its nominee partner, in a partnership, neither the HUF nor any member of the HUF can claim to be a partner or connected with the partnership through a nominee.

From the judgments cited above it stands established that an HUF as such cannot be a partner in a firm but it is competent to the manager or karta acting on behalf of the HUF to enter into a valid partnership with a stranger or with the karta of another family.

In the present case Mr.V.P.Verma had joined partnership with the respondent-firm as karta of HUF and there was no bar on him to join the partnership as karta of HUF.

HIGH COURT OF DELHI

Judgment delivered on: 14thDecember, 2011

RFA (OS)37/2003

COAL INDIA LTD. & ANR.

versus

CONTINENTAL & EASTERN AGENCIES

1. Appellants have filed the present appeal against the Judgment and decree dated 20.5.2003 passed by learned Single Judge whereby suit for recovery of Rs. 5,89,434/- filed by the respondent was decreed for a sum of Rs. 2,92,977.46 paisa only.

2. The respondent filed the suit for recovery of Rs. 5,89,434/- towards agent commission against the appellants claiming himself to be an agency of defendant No.3 (in the suit) an Italian Company, in India. Appellants floated a global tender for purchase of two hydraulic Crankshaft Grinding Machines on 24.09.1986. Respondent gave an offer dated 22.09.1986 for two machines. Earlier the respondent had supplied four similar machines to the appellants vide their order dated 05.02.1985. Later on the appellants sought some clarifications and amendment in terms if four machines were purchased instead of two.

3. The respondent had offered in the original offer that Agency commission would be 15% of FOB value of order. By letter dated 07.03.1987, respondent offered discount of 5% on commission if entire order was placed on him and 100% commission was paid on receipt of shipping documents.

4. Appellants wrote letter dated 10.08.1987 to the respondent that the requirement was raised to four Grinder Machines and the respondent should submit reduced price bid accordingly.

5. Respondent vide letter dated 14.08/1987 did the needful and informed the appellants that the price of machine would be the same and be multiplied by four in place of two and discount of 5% on agency commission of 15% would be valid if (i) entire order is placed on the respondent and (ii) 100% agency commission released on presentation of shipping documents. Vide letter dated 09.11.1987, defendant No.3 in the suit, informed the appellants that respondent would not accept any amount less than already offered by them as their work involved lot of expenditure.

6. Further case of the respondent before the learned Single Judge was that the appellants thereupon placed order dated 25.04.1988 addressed to defendant No.3 on the respondent at Delhi who in turn forwarded it to defendant No.3 in Italy only for two machines. An amendment dated 06.0.1985 was issued by appellants to this letter. In the order placed, appellants unilaterally reduced the commission payable to the respondent from 15% to 10% of FOB value, even though discount of 5% was offered only as to quantity discount on four machines and was not applicable to two machines only. Respondent protested against this unilateral action of the appellants as the appellants never consented to 5% discount for only two machines. By letter dated 17.05.1988 the respondent accepted the order at Delhi with the exception of the discount clause.

7. The appellants did not issue any amendment but acted on the respondent‟s letter allowing 5% discount and established Letter of Credit in favour of defendant No.3 in the suit. Two machines were shipped on 09.01.1989 by the foreign seller. The complete machinery was received by the appellants at site on or before 30.08.1989. The respondent repeatedly wrote to the appellants asking for readiness of site to enable him to commission the machine. Since there was no response, he served legal notice dated 08.04.1989 on the appellants demanding 15% commission.

8. The appellants contested the suit and pleaded that the respondent vide letter dated 22.09.1986 had offered to allow discount of 5% on the FOB price on placement of order for two machines. The appellants had specifically stated in the order dated 25.04.1988 the terms of the discount. There was no such condition that the said discount would be payable only if four machines were purchased. It was specifically mentioned to the respondent that agency commission would be payable after commissioning was completed by the respondent. Since the respondent had failed to commission the machines in time there was no occasion for the appellants to release 100% agency commission to him. In fact the appellants have been put to heavy losses because of the non-commissioning of the machines. The respondent was not entitled to any commission because he failed to perform his part of the contract.

9. Following issues were framed by the learned Trial Court on the basis of the pleadings of the parties:

(1) Whether this Court has the territorial jurisdiction to try and entertain the suit? OPP

(2) Whether the plaint has been instituted, signed and verified by a duly authorized person? OPP

(3) Whether the plaintiff is entitled to receive `4,39,466.20 being 15% agency commission or any lesser amount? OPP

(4) Whether the plaintiff is entitled to interest on `4,39,466.20 or any lesser amount and if so at what rate and period thereof? OPP

(5) Whether the plaintiff agreed to give discount of 5% and charge 10% commission payable after commissioning of machine? OPP

(6) Whether the discount of 5% was available only on conditions set out in the plaintiff‟s letter 07.03.1987 and 14.08.1987 being fulfilled? OPP

(7) Whether the plaintiff is not entitled to any commission due to its breaches and failure to perform its obligations as set out in para 3(c ) of the preliminary objection and 23 and 24 of the written statement on merits? OPP

(8) Whether the defendant Nos. 1 and 2 had the site ready for installation of the equipment/machinery in terms of amendment to the contract dated 06.05.1988? OPP

(9) Relief.

10. On recording evidence of the parties and considering the rival contentions, the learned Single Judge passed the impugned judgment and decree dated 20.05.2003. The learned Single Judge while deciding issue No.2 regarding maintainability of the suit filed by the respondent returned the findings that Mr.V.P.Verma had the authority to sign, verify and institute the suit.

11. Aggrieved by the said orders the appellants have come up in the present appeal.

12. Relevant issue for disposal of appeal before us is issue No.2 as during the course of arguments, the learned counsel for the appellants restricted his arguments only on two aspects i.e. the suit filed by the respondent was barred under Section 69(2) of Partnership Act alleging that the respondent was not a registered partnership firm on the date of filing of the suit. Secondly Mr.V.P.Verma who had instituted the suit on behalf of the respondent was not a partner in the said firm on the date of institution of the suit and also was not authorised to institute, sign and verify the plaint.

13. Contention of the learned counsel for the appellants is that the respondent failed to adduce any evidence on record before the court that the respondent-firm was a registered partnership firm on the date of institution of the suit and thus under Section 69(2) of the Partnership Act, it had no authority to institute the suit. The respondent did not file on record any document to show if Mr.V.P.Verma was a partner in the respondent-firm on the date of institution of the suit or that he was duly authorised to file the suit on behalf of the respondent firm. It was further urged that Ex.P-6, certificate of registration, filed on record by the respondent before the learned Single Judge did not depict Mr.V.P.Verma as a partner in the respondent-firm in his individual capacity. He has been shown as a partner only as „karta‟ of Hindu Undivided Family (HUF). Under Hindu Law a karta of HUF cannot enter into a partnership with any other association of persons.

14. Learned counsel for the appellants further pleaded that adverse inference is to be drawn against the respondent for not filing Form „A‟ along with plaint to show that Mr.V.P.Verma was a partner in the respondent-firm on the date of institution of the suit.

15. Learned counsel for the respondent has controverted all these arguments and has vehemently put reliance on Ex.P-6 whereof there is specific mention that Mr.V.P.Verma was a partner in the respondent-firm.

16. In the plaint filed in Court on 26.5.1993 the respondent-firm specifically pleaded that respondent-M/s Continental Eastern Agencies was a registered partnership firm and Mr.V.P.Verma was duly authorised and competent to file and prosecute the suit for and on behalf of the respondent-firm and to sign and verify the pleadings, swear affidavits, engage counsel and to do acts necessary and incidental to the filing of the suit. In the written statement the respondent merely denied this assertion of the appellants and simply pleaded that the plaint has not been instituted, signed and verified by an authorised person and the respondent-firm was not registered partnership firm. It also denied that Mr.V.P.Verma was authorised and competent to file and prosecute the suit. No reasons were disclosed by the appellants as to how Mr.V.P.Verma was not authorised or competent to file and prosecute the suit. Respondent did not specifically plead that Mr.V.P.Verma was not a partner in the respondent-firm and had no authority to file the suit.

17. The burden to prove issue No.2 was upon the respondent and the respondent examined Mr.Ved Prakash Verma to prove its case. In his evidence filed by way of affidavit Mr.Ved Prakash Verma testified on oath that respondent was a registered partnership firm and he was duly authorised and competent to file the suit for and on behalf of the respondent and to sign and verify the pleadings and to do all acts necessary and incidental thereto. He further testified that the form-A of certificate of registration (Ex.P-6) showed that the respondent was duly registered under the Indian Partnership Act and that he was a partner therein. Thus Mr.Ved Prakash Verma categorically claimed the respondent-firm to be a registered partnership firm and he being one of its partners. In the cross-examination, the witness reiterated that he was partner in the respondent-firm from 1973 till 30.11.1999. He further stated that it was not true that he was not a partner in the respondent-firm on the date of institution of the suit. He admitted that he was partner in the respondent- firm as the karta of HUF. He admitted it to be true that on the date of institution of the suit in his personal capacity, he was not a partner in the respondent-firm. He denied that he was not authorised to sign and verify the plaint and institute the suit on behalf of the respondent-firm.

18. Overall testimony of this evidence read as a whole shows that the witness categorically claimed himself to be a partner as karta of HUF in the respondent-firm. The appellants merely put suggestion to the witness in the cross-examination controverting these assertions. Nothing was suggested to this witness in the cross-examination if respondent-firm was not a registered partnership firm or that it had not continued its existence since the date of registration till the date of issuance of certificate of registration Ex.P-6. This witness specifically pleaded that he remained a partner in the respondent-firm till 30.11.1999. Nothing was suggested to this witness if he had ceased to be a partner on any specific date in the respondent-firm prior to the registration of the present suit.

19. Appellants examined one witness Mr.G.Chaudhary who also filed his evidence by way of affidavit. On perusal of affidavit filed on record by the sole witness of the appellants, it reveals that at nowhere he testified that the respondent was not a registered partnership firm or that Mr.V.P.Verma was not a partner in the said firm on the date of filing of the suit. This witness did not utter a word if Mr.V.P.Verma was not authorised to file the suit or to sign and verify the pleadings on behalf of the respondent-firm. Virtually there is no counter evidence adduced on record by the appellants to falsify the claim of Mr.V.P.Verma recording his status in the respondent-firm.

20. We have gone through Ex.P-6 (form-A) issued by Registrar of Firms under Section 69 of the Indian Partnership Act.

21. This document Ex.P-6 shows the date of registration of the respondent firm on 08.12.1986. Among others Mr.Ved Prakash Verma has been shown a partner as Karta (HUF). This document Ex.P-6 is a certified copy issued by the Registrar of Firms, Delhi on 18.06.1993. It does not contain if after registration of the firm on 08.12.1986 Mr.Ved Prakash Verma has ceased to be a partner in the respondent-firm at any time. There is mention of one Mr.Ashok Verma who was admitted as partner in the respondent-firm on 08.04.1991 vide notice dated 30.04.1991. It shows that whenever there was a change in the constitution of the respondent-firm, the said change was duly recorded with the Registrar of firms and the Registrar in turn carried out the changes in the form-A (Ex.P-6). No contrary evidence has been filed on record by the respondent to show that Mr.V.P.Verma had ceased to be a partner at any stage in the respondent-firm.

22. The present suit was filed on 26.5.1993. The certified copy Ex.P-6 showing the names of the partners has been issued on 18.06.1993. There is no substance in the plea of the learned counsel for the appellants that on the date of institution of the present suit Mr.V.P.Verma was not a partner in the respondent-firm. Under Section 69(2) of the Partnership Act there is no condition precedent where the respondent firm was under legal obligation to file on record the certified copy of Form-A along with plaint. The only requirement under the partnership Act is that the person filing the suit must be a partner as shown in Form-A of the Registrar of firm on the date of institution of the suit. Merely because Ex.P-6 was obtained after the filing of the suit, it did not affect the status of respondent-firm as on 26.5.1993. There is nothing unusual to get certified copy after some days of its applying for the same. Since the name of Mr.V.P.Verma finds mention as partner in the Form-A the certified copy of which has been issued on 18.06.1993, in the absence of any evidence to the contrary, it can safely be held that Mr.V.P.Verma was a partner in the respondent firm on the date of filing of the present suit and had continued to be a partner.

23. We do not subscribe to the argument of the learned counsel for the appellants that Mr.V.P.Verma was not authorised to file the present suit. Admittedly number of letters on record were exchanged between the parties during negotiation of contract. In all these documents Mr.V.P.Verma had correspondence with the appellants claiming himself to be a partner of the respondent-firm. At no stage the appellants challenged the authority of Mr.V.P.Verma to act on behalf of respondent-firm as its partner.

24. There is no substance in the plea of learned counsel for the appellants that Mr.V.P.Verma as karta of HUF could not have entered into any partnership with the respondent firm.

25. In the case of Commissioner of Income Tax, MP v.Sir Hukamchand Mannalal & Co. 1970 (2) SCC 352, which contains observation in Mayne‟s Hindu Law (9th Edition) at P.398 to the following effect:

"Where a managing member of a joint family enters into a partnership with a stranger the other members of the family do not ipso facto become partners in the business so as to clothe them with all the rights and obligations of a partner as defined by the Indian Contract Act, in such a case the family as a unit does not become partner but only such of its members has in fact enter into a contractual relation with the strangers, the partnership will be governed by the Act."

26. In the case reported as (1967) 66 ITR 613 (SC) Ram Laxman Sugar Mills v,Commissioner of Income-Tax, U.P. & Ors. the Hon'ble Supreme Court has categorically held that it is open to the manager of a joint Hindu Family as representing the family to agree to become a partner with another person. The partnership agreement in that case is between the manager and the other person and by the partnership agreement no members of family, except the manager acquires a right or interest in the partnership. The junior members of the family may make a claim against the manager for treating the income or profits received from the partnership as a joint family asset, but they cannot claim to exercise the rights of partners nor be liable as partners.

27. The authority relied upon by the learned counsel for the appellants in the case reported as (1998) 2 SCC 49 Rashiklal & Co.V.Commissioner of Income Tax is not helpful to him. In this case R, the karta of a HUF, was a partner in a firm which was carrying on, inter alia, the business of mining. The Honble Supreme Court observed that a firm is a compendious way of describing the individuals constituting the firm. An HUF directly or indirectly cannot become a partner of a firm because the firm is an association of individuals. Even if a person nominated by the HUF joins a partnership, the partnership will be between the nominated person and the other partners of the firm. It further observed that if a karta or any other member of the HUF joins a partnership, he can do so only as an individual. His rights and obligations vis-à-vis other partners are determined by the Partnership Act and not by Hindu Law. Whatever may be the relationship between an HUF and its nominee partner, in a partnership, neither the HUF nor any member of the HUF can claim to be a partner or connected with the partnership through a nominee.

28. From the judgments cited above it stands established that an HUF as such cannot be a partner in a firm but it is competent to the manager or karta acting on behalf of the HUF to enter into a valid partnership with a stranger or with the karta of another family.

29. In the present case Mr.V.P.Verma had joined partnership with the respondent-firm as karta of HUF and there was no bar on him to join the partnership as karta of HUF.

30. Thus there is no substance in the arguments of the appellants that the suit filed by the respondent-firm is barred under Section 69(2) of Partnership Act or that Mr.V.P.Verma was not duly authorized to file, sign and verify the pleadings.

31. As observed above, that learned counsel for the appellants did not opt to challenge the findings of the learned trial court on other issues.

32. We find no merit in the appeal filed by the appellants and the same is dismissed.

33. No order as to costs.

S. 72: Gains arising from “business assets” not eligible for set-off against B/fd business loss

S. 72: Gains arising from “business assets” not eligible for set-off against B/fd business loss


The assessee sold land & building used for business purposes. Though the gain was offered as capital gains, the assessee claimed, relying on Cocanada Radhaswami Bank Ltd 57 ITR 306 (SC) and other judgements, that as the assets were “business assets”, the gains there from were eligible for set-off against the brought forward business loss u/s 72. The issue was referred to a Special Bench. HELD by the Special Bench against the assessee:

S. 72 (1) allows brought forward business loss to be set-off against the “profits & gains of any business or profession” of the subsequent year. The expression “profits & gains of business” means income earned out of business carried on by the assessee and not just income connected in some way to the business or profession carried on by the assessee. The land & building were fixed & capital assets used by the assessee for its business purposes. The gains arising there from were assessable as capital gains and were not eligible for set-off against the brought forward business loss u/s 72 (Express Newspapers 53 ITR 250 (SC) followed; Cocanada Radhaswami Bank 55 ITR 17(SC) distinguished; Steelcon Industries reversed)

Transfer fees ***mutuality ?

 

INCOME TAX APPELLATE TRIBUNAL, MUMBAI
ITA No.5027/Mum/2010 – (Assessment Year: 2005-06)
Twinstar Jupiter Co-op. Hsg. Soc. Ltd.
Vs
ITO -12(2)(4)
Date of Pronouncement: 19.08.2011
O R D E R
PER R.S. PADVEKAR, JM:
In this appeal the assessee has challenged the impugned order of the Ld. CIT (A)-23, Mumbai dated 18.03.2010 for the A.Y. 2005-06.

2. In this case the assessee has filed an application for adjournment but same was rejected as apparently it was seen that the issues arising from the appeal are covered and hence, this appeal is disposed off after hearing the Ld. D.R.

3. The first issue is in respect of the addition of Rs. 3,50,000/- towards transfer fees received from the outgoing Members of the assessee-society.

4. The facts which revealed from the record are as under. The assessee is Co-operative Housing Society. The return filed by the assessee was selected for scrutiny and assessment was completed u/s.143(3). It was also noticed by the A.O. that the assessee has collected Rs. 7,50,000/- towards voluntary contribution on transfer of flats received from the outgoing Members and the aid amount was credited to the general reserves in the Balance-sheet and claimed exemption relying on the principles of mutuality. The A.O. had noted that as per the agreement with Members and purchasers of the flats, the transfer fee is to be borne 50-50%. The A.O., therefore, made the addition of Rs. 3,75,000/- that was in respect of the contribution fee received from the purchasers of the flat i.e. transferee. The assessee challenged the said addition before the Ld. CIT (A). The Ld. CIT (A) was not convinced with the plea of the assessee that though the assessee was relied on the decision of the Hon'ble jurisdictional High Court in the case of Sindh CHS Ltd. 317 ITR 47(Bom). In view of the Ld. CIT (A) the decision in the case of Sindh CHS Ltd.(supra) is not applicable to the assessee's case. The Ld. CIT (A) further observed that up to limit only, the transfer fee is exempt within the framework of the bye-laws. The Ld. CIT (A) further observes that the Hon'ble High Court has not considered the applicability of a Notification issued by the Govt. of Maharashtra as the assessment order in the said case was prior to the date of the Government notification dated 9.08.2001. He, therefore, held that upto the limit of Rs. 25,000/- received per transfer is deleted and any excess of Rs. 25,000/- the same is confirmed. Now, the assessee is in appeal before us.

5. The short controversy is rowing around whether the transfer fee received from the incoming Members is exempt on the principles of mutuality in the case of co-operative housing societies.

6. In the case of Sindh CHS Ltd (supra) the Hon'ble High Court made it clear that in the said case the bye-laws provide that the amount has to be paid by the transferor Member. In the present case, nowhere it is the case of the A.O. that there is a provision that only the transferor has to bear the amount of the transfer fees. We, further, find that nowhere it is the case of the A.O. that no commerciality is involved in the objects or activities of the assessee society as the assessee has credited the amount to the general reserve funds to be used for the repairs and maintenance of the society. Their Lordships have also considered the Notification given by the Government of Maharashtra and the reference made is to only to extent of argument of the parties to the on Govt notification dated 9.8.2001. As per the notification dated 10.12.1989 if the bye-laws are amended then only the society could not charge what was set out in the notification.

7. In the present case, ultimately, the transfer fee received from the Members has merged with the common pull of funds and there is no commercial motive. In our opinion, assessee's case is squarely covered by Sindh CHS Ltd. (supra). We, accordingly decide this issue in favour of the assessee and direct the A.O. to delete the entire addition. Accordingly, first issue in this appeal is allowed.

8. The next issue is regarding addition towards the penal interest of Rs. 35,000/-.

9. We find that the penal interest is collected from its Members only on account of delay in payment of the dues of the society. In our opinion, the said addition cannot be sustained as it is covered on the principles of mutuality and as per the ration laid down in the case of Sindh CHS Ltd. (supra). We accordingly, delete the same.

10. In the result, assessee's appeal is allowed.

Order pronounced in the open court on this day of 19th August 2011.

Transfer Pricing: Important Principles on scope, data & comparability set out

 

Genisys Integrating Systems vs. DCIT (ITAT Bangalore)

Transfer Pricing: Important Principles on scope, data & comparability set out

In a transfer pricing matter, the Tribunal had to consider the following issues (i) whether transfer pricing adjustments have to be restricted to AE transactions only, (ii) whether a turnover filter can be applied and only companies with turnover within the range can be considered for comparison; (iii) whether the TPO is entitled to collect information u/s 133(6) for determining the ALP or he is confined to data available in public domain on the specified date, (iv) Whether the +/-5% adjustment is a "standard deduction", (v) whether an adjustment to the ALP can be made for "low capacity utilization"? HELD by the Tribunal:

(i) Under Chapter X, only international transactions between AEs are required to be computed having regard to the ALP. Accordingly, the transfer pricing adjustments have to be restricted to the AE transactions by adopting the operating revenue and operating costs of only those transactions (Starlite 133 TTJ 425 (Mum) followed);

(ii) Though the Act & Rules does not provide for a turnover filter, there has to be an upper and lower limit because size does matter in business. A big company is in a position to bargain the price and attract more customers. It also has a broad base of skilled employees who are able to give better output. A small company may not have these benefits and the turnover would come down reducing profit margin. When are loss making companies are excluded from comparables, super-profit making companies should also be excluded. A reasonable classification of companies on the basis of net sales or turnover has to be made (Sony India 114 ITD 448 (Del), Indo American Jewellery 41 SOT 1 (Mum) & Philips Software 26 SOT 226 followed);

(iii) While Rule 10D(4) requires that the information should be "contemporaneous" and exist latest by the "specified date", there is no "cut-off date" upto which only the information available in public domain can be considered by the TPO. Even data that becomes available in the public domain after the specified date can be considered. If the TPO collects information u/s 133(6), he is not required to inform the assessee about the process used by him nor is he required to furnish the entire information to the assessee. However, the assessee must be given proper hearing if any information is proposed to be used against it;

(iv) The +/-5% adjustment is a "standard deduction" and not merely the range within which if the ALP falls that the ALP of the assessee is required to be accepted (Philips Software 26 SOT 226, Development Consultants 23 SOT 455 followed)

(v) All comparables have to be compared on similar standards and the assessee cannot be put in a disadvantageous position, when in the case of other companies adjustments for under utilization of manpower is given. The assessee should also be given adjustment for under utilization of its infrastructure.

__,_._,___

Purchase from grey market

 

IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "F", MUMBAI
BEFORE SHRI D.K. AGARWAL (J.M.) AND SHRI J. SUDHAKAR REDDY (A.M.)
ITA No. 3541 to 3144/Mum/2007
Assessment Years : 2001-02 to 2004-05
M/s Free India Assurance
Services Ltd.,
2nd
Floor, Prima Plaza,
J.V. Patel Compound,
B.M. Road, Elphinstone (W),
Mumbai 400 013.
PAN : AAACF 3879 K
Vs.
Dy. Commissioner of IncomeTax, Central Circle -7,
Old CGO Annexe,
M.K. Road,
Mumbai – 400 020.
(Appellant) (Respondent)
ITA No. 3661 & 3662/Mum/2007
Assessment Years : 2002-03 & 2003-04
Dy. Commissioner of IncomeTax, Central Circle -7,
8th
floor, Old CGO Annexe,
M.K. Road,
Mumbai – 400 020.
Vs.
M/s Free India Assurance
Services Ltd.,
2nd
Floor, Prima Plaza,
J.V. Patel Compound,
B.M. Road, Elphinstone (W),
Mumbai 400 013.
PAN : AAACF 3879 K
(Appellant) (Respondent)

O R D E R
PER D.K. AGARWAL, J.M.
These appeals by the assessee and Revenue are directed against
separate orders all dated 28.2.2007 passed by the ld. CIT(A) for A.Ys.
2001-02, 2002-03, 2003-04 and 2004-05. Since the facts are identical
and the issues involved are common, all these appeals were heard ITA No.3541 to 3244/M/07 & 2661 to
3662/M/07, M/s Free India Assurance Services Ltd.

together and are disposed of by this common order for the sake of

convenience.

ITA No. 3541/Mum/2007 for A.Y. 2001-02(Assessee's appeal)

2. Briefly stated facts of the case are that the assessee company is engaged in the business of multi level marketing under the name and style of Free India Concepts. A search and seizure action u/s 132 of the Income Tax Act, 1961 (the Act) was carried out on 25.6.2003. In response to notice u/s 153A, the assessee filed return declaring total income of ` 9,55,310/- for the A.Y. 2001-02. During the course of assessment proceeding, the A.O. observed that in the search, blank/written or unused vouchers for Diwali bonus, conveyance and unused bills of various restaurants were found and seized. The assessee was asked to explain as to why the expenses under these heads should not be disallowed on estimate basis. In reply, it was, inter alia, stated by the assessee that vouchers found were blank or unused which clearly shows that these vouchers were not used for booking of any expenses in the books of account. All these expenses were debited in the books of account and claimed in the P&L A/c are the genuine business expenses, hence, no disallowance on estimate basis can be made. However, the A.O. was of the view that the onus of proving that these vouchers had not been used for claiming bogus expenses was on the assessee which the assessee has clearly failed, therefore, he disallowed 20% of the expenses which have been debited under the head conveyance and staff welfare to P&L account by way of inflation by making use of the blank signed bills kept in the premises as and when it required. Thus he has estimated the disallowance at 20% of the each year as under (Page 3 of the assessment order) :-

3              Details A.Y. 01-02 A.Y. 02-03 A.Y. 03-04 A.Y. 04-05

Conveyance 7,21,955 12,25,457 14,48,312 11,25,033

Staff welfare 3,31,084 6,29,415 5,76,599 6,67,805

Total 10,53,039 18,54,872 20,24,911 17,92,838

¼ for A.Y.2004-05

from Apr to Jun 2005 4,48,210

20% of the above 2,10,608 3,70,974 4,04,982 1,12,052

Thus, for this A.Y. the A.O. disallowed ` 2,10,608/- being 20% of `10,53,039/-. On appeal, the ld. CIT(A) while agreeing with the views of the A.O., upheld the disallowance made by the A.O.

3. Being aggrieved by the order of the ld. CIT(A), the assessee is in appeal before us challenging in both the grounds the sustenance of disallowance of 20% out of conveyance and staff welfare expenses disallowed ` 2,10,608/-.

4. At the time of hearing, the learned counsel or the assessee while referring to the comparative chart of staff welfare and conveyance expenses in proportion to gross income and net income for the A.Ys. 2001-02, 2002-03, 2003-04 and 2004-05 appearing at page No. 107 of the assessee's paper book submits that in view of the percentage of the expenses to the gross income, the disallowance made by the A.O. and sustained by the ld. CIT(A) is highly excessive and therefore due relief may be allowed to the assessee.

5. On the other hand, the ld. D.R. supports the order of the A.O. and ld. CIT(A).

6. We have carefully considered the submissions of the rival parties and perused the relevant material available on record. We find that there is no dispute that the assessee has filed month-wise details of staff welfare and conveyance expenses. It is also not in dispute that the said expenses claimed by the assessee are for business purposes. However, in the absence of any material to show that the vouchers which were found at the time of search were not used by the assessee for booking of expenses under the head conveyance and staff welfare, we are of the view that some disallowance is called for. Considering the totality of the facts and circumstances of the case and the percentage of expenses, we are of the view that it would be reasonable to sustain the disallowance at 10% as against 20% made by the A.O. and confirmed by the ld. CIT(A). We hold and order accordingly. The assessee gets a relief of ` 1,05,304/- out of total addition of ` 2,10,608/-. The grounds taken by the assessee aretherefore partly allowed.

ITA NO. 3542/Mum/2007 for A.Y. 2002-03 (Assessee's appeal)

7. Ground No. 1 is against the sustenance of disallowance of expenditure ` 174829/-.

8. At the time of hearing, the ld. counsel for the assessee submits that he does not want to press the above ground which was not objected to by the ld. D.R.

9. That being so and in the absence of any supporting material placed on record by the ld. Counsel for the assessee, the ground taken by the assessee is, therefore, rejected being not pressed.ITA

No.3541 to 3244/M/07 & 2661 to  3662/M/07, M/s Free India Assurance Services Ltd.

10. Ground Nos. 2 & 3 are against sustenance of disallowance of 20% expenses of ` 3,70,974/- out of conveyance and staff welfare expenses.

11. At the time of hearing, both the parties have agreed that the facts of the above issue are similar to the facts of the case for the A.Y. 2001-02, therefore, the plea taken by them in the appeal for the A.Y. 2001-02 may be considered while deciding the above ground of appeal.

12. After carefully hearing the rival submissions and perusing the material available on record and keeping in view of our findings recorded in assessee's appeal for the A.Y. 2001-02 in paragraph No. 6 of this order, we direct the A.O. to restrict the disallowance to 10% as against 20% made by him. In other words, the assessee gets relief of `1,85,487/- out of total disallowance of ` 3,70,974/-. The ground taken by the assessee is, therefore, partly allowed.

13. Ground No. 4 is against the sustenance of disallowance of 20% `6,16,346/- out of cash purchases of ` 30,80,730/- u/s 40A(3) and ground No. 1(ii) in Revenue's appeal in ITA No. 3661/Mum/07 for A.Y. 2002-03 is against the relief allowed by the ld. CIT(A) of ` 24,65,384/- out of total disallowance of bogus purchases ` 30,80,730/-.

14. The facts of the above issue are that the A.O. found from page No. 140 of the seized documents of Annexure A-6 seized from Prime Plaza that the assessee had made purchases amounting to ` 30,80,730/- from Shri Deepak for which the assessee had issued a cheque of `30,80,730/- and in lieu thereof he received cash from Shri Deepak. Therefore, the A.O. issued show cause notice as to why the purchases of ` 30,80,730/- should not be disallowed. The assessee replied vide letter dated 8.3.2000 as under (Para 8 at page 12 of the assessment order) :- "In para 10, reference is made for page No. 140 of Annexure A-6 seized from Prime Plaza. The amount mentioned is ` 30,80,730/-. In the show cause notice, your honour have mentioned that these entries pertains to Deepak but these entries pertain to M/s Hira Cloth Agency and M/s Shreeram Sales & Synthetics which is already explained in the explanation to seized materials. Purchase bills were taken from these parties to cover up the purchase actually made in the grey markets. The cheques were issued to them against which cash was received and this very cash was in turn utilised for the payment of purchases made of fabrics from grey market. This fabric was purchased in the year 2001-02 (AY 2002-03) and was lying in stock as on 31.3.2002. the closing stock as on 31.3.2002 includes this fabric purchased and the amount of closing stock was shown in the trading account on the credit side and against which the expenses under the head purchases were shown on the debit side of the trading account. By showing the closing stock on the credit side and the expense i.e. purchases on the debit side of the trading there remains no effect on the profit of the year under consideration. It goes without saying that there cannot be a closing stock without its corresponding purchases. The effect of both these items considered collectively results into no effect on the taxable income. As such no disallowance is warranted on this count." However, the A.O. did not accept the assessee's explanation. According to the A.O. Shri Ashish Mehta himself accepted in the statement recorded u/s 132(4) on 26.06.2003 that the assessee made certain cheque payments and received the cash back and since assessee had clarified that the purchases were not made from Deepak Enterprises but from the Grey market it was established that the assessee did not purchase material from M/s Hira Cloth Agencies and M/s Shreeram Sales & Synthetics. Hence the A.O. concluded that assessee admitted bogus purchases amounting to ` 30,80,730/- from M/s Hira Cloth Agencies and M/s Shreeram Sales & Synthetics and accordingly added the same to the income of the assessee.

15. On appeal, the ld. CIT(A) while observing that as long as the stock is reflected in the books of account, to that extent of fabrics purchased by this firm, credit has to be given to the purchases made by the assessee and since it is an admitted fact that the assessee had made the purchases by way of cash from the Grey market held that the provisions of section 40A(3) are attracted and hence he disallowed ` 6,16,346/- being 20% of purchase of ` 30,80,730/- and thus allowed relief of `24,65,384/-.

16. At the time of hearing, the ld. Counsel for the assessee while reiterating the same submissions as submitted before the A.O. and ld. CIT(A) refers to page No. 145 to 152 of the assessee's paper book to show that cheques amounting to ` 15,50,730/- and ` 15,30,000/- aggregating to ` 30,80,730/- were issued to two parties M/s Hira Cloth Agencies and M/s Shreeram Sales & Synthetics respectively against the purchases of fabrics. He further submits that against the said cheques payments, the assessee received back the amount in cash from the said two parties and purchased the cloth of the same amount from Grey market. He further submits that the said cloth amounting to ` 30,80,730/- is lying in the closing stock as on 31.3.2002 onwards which may be verified from the details of closing stock as on 31.3.2003 appearing at page No. 147 of the assessee's paper book. In the light of the above, he submits that the A.O. was not justified in treating the above purchases as bogus purchases without verifying the fact that the assessee has shown the above purchases in the regular books of account and also shown the same in the closing stock in the regular return filed by the assessee. With regard to the disallowance made by the ld. CIT(A) u/s 40A(3), the ld. Counsel for the assessee submits that during the course of search, no such material was found to show that the assessee has made cash payments more than ` 20,000/- or the assessee has violated the provisions of section 40A(3).

8         therefore, the ld. CIT(A) was not justified in invoking the provisions of section 40A(3) and in making the disallowance of ` 6,16,346/- being 20% of the above purchases of ` 30,80,730/-. In support the reliance was also placed on the following decisions:-

1) Rajmal Lakhichand v. ACIT [2001] 79 ITD 84 (Pune)

2) Western India Bakers (P) Ltd. V. DCIT [2003] 87 ITD 607 (Mum)

3) Sharma Associates v. ACIT (1996) 217 ITR (AT) page 1

He, therefore, submits that the addition made by the A.O. and sustained by the ld. CIT(A) be deleted.

17. On the other hand, the ld. D.R. while relying on the order of the A.O. submits that the assessee has placed no material on record to show that the assessee has not made bogus purchases of ` 30,80,730/- and has made cash payments against the said purchases less than `20,000/-. He, therefore, submits that the A.O. was justified in treating the said purchases of ` 30,80,730/- as bogus purchases and the ld. CIT(A) was not justified in applying the provisions of section 40A(3) in sustaining the addition of ` 6,16,346/-. He, therefore, submits that the addition made by the A.O. be restored.

18. Having carefully heard the submissions of the rival parties and perusing the material available on record, we find that there is no dispute that the assessee has made payments of ` 30,80,730/- by cheques to M/s Hira Cloth Agencies and M/s Shreeram Sales & Synthetics. During the course of search, the statement was also recorded of Shri Ashish Mehta on 20.6.2003 wherein he has stated that against the cheque transactions, cash has been received which is found recorded at page No. 152 of the assessee's paper book. During the course of assessment proceeding, it was stated by the assessee that the said cash, against cheque payments was utilised to purchase cloth from the Grey market and in support, the assessee has also filed details of closing stock as on 31.3.03 appearing at page 143 of the assessee's paper book wherein fabric cloth totalling to ` 30,80,730/- is appearing as closing stock. In the absence of any material to show that no such cheque payments were made by the assessee or cash amount received by the assessee against the cheque payments was utilised by the assessee other than purchases or the entry recorded in the closing stock amounting to `30,80,730/- is found to be fictitious or false or no such closing stock was found during the course of search, we are of the view that the assessee has made cash purchases of ` 30,80,730/- which undisputedly found recorded in the inventory of closing stock, therefore, the A.O. was not justified in treating the said purchases of ` 30,80,730/- as bogus purchases.

19. As regards the application of provisions of section 40A(3) of the Act, we find that during the course of search, no such material was found to show that the assessee has made cash payments in violation of provisions of section 40A(3) of the Act. Disallowance cannot be made merely on presumption basis that the assessee had made the purchases by way of cash from the Grey market in violation of the provisions of section 40A(3) of the Act.

20. In the case of Rajmal Lakhichand v. ACIT [2001] 79 ITD 84 (Pune), it has been held ( Head note – page 86) :- "The provision of section 40A(3) is to be invoked when the department has evidence with itself that the assessee has made payments in cash exceeding the prescribed limits. Disallowance cannot be made merely on a presumption that the assessee must have made payments in cash and that too exceeding the prescribed limits. Hence, the impugned addition made by the Assessing Officer and sustained by the Commissioner (Appeals) was to be deleted."

21. In the case of Western India Bakers (P.) Ltd. V. DCIT [2003] 87 ITD 607 (Mum) it has been held (Head note page No. 609) :-

" When a provision of law is to be applied, it is to be seen that all the circumstances alliunde to the application of such provision did exist. If it is not possible to find out how the violation of the provision was done, addition cannot be made on the basis of inference and surmises. In the instant case, it was not known at what point of time and how assessee violated the provisions of section 40A(3). As such, no addition on that count was warranted. [para 29]."

22. In the absence of any distinguishing feature brought on record by the Revenue, we respectfully following the aforesaid decisions and for the reasons as discussed above hold that the ld. CIT(A) was not justified in sustaining the addition of ` 6,16,346/- being 20% of total purchase of `30,80,730/- and accordingly we delete the entire addition of `30,80,730/-. The ground taken by the assessee is therefore allowed and the ground taken by the Revenue is dismissed. 23. Ground No. 5 is against the sustenance of addition of ` 19,29,711/- incurred on renovation of office premises.

24. Briefly stated facts of the above issue are that the A.O. found that the assessee had debited ` 19,29,711/- under the head `office renovation expenses' which according to the A.O. to be capital in nature and hence he issued a show cause to the assessee as to why the same should not be disallowed as capital expenditure. The assessee vide its reply dated 8.3.2006 submitted that the assessee's office at Prima Plaza is a rented one. It was taken on leave and license in the financial year 2001-02 and after taking the possession, the company incurred expenses on furnishing the said rented office. Expenses for wooden partitions, cabins, cubicles & desks for staff persons were made and debited under the head office renovation. No additions/alterations to the basic structure of the unit were made nor any new capital assets was created and debited under this head. The assessee also filed details of the said expenses. It was further submitted that the expenses resulted in creation of no fixed assets and the partitions etc. have no realizable value and also are not in the nature of shifting to other places, therefore, the expenses incurred cannot be said to be in the capital nature and needs to be allowed as revenue expenditure. However, the A.O. did not accept the contention of the assessee for the following reasons:-

"(1) The expenditure had been incurred before the assessee started business in its office and these expenses were not of routine nature but of one time expenditure.

(2) The wooden partitions, cabins, cubicles, desks are in the nature of permanent furniture and fixtures for starting the business. The said premises was owned by the Directors of company Shri Gnan Chand Mehta and Shri Ashish Mehta and Shraddha Mehta, who had more than 50% of the shares of the company. Therefore, this premises was going to be with the assessee permanently for all practical purposes, thus it has resulted in enduring benefit of the Company. Hence, it is capital in nature.

(3) Once, they are capital in nature, only depreciation is allowable as per provisions of Explanation to Sec. 32(1). Hence, he disallowed the renovation expenditure of ` 19,29,711/- as capital expenditure, but allowed depreciation of ` 96,485/- on the said disallowed amount."

25. On appeal, the ld. CIT(A) while applying Explanation 1 to section 32 of the Act held that the value addition of ` 19,29,711/- to the value of the building taken on lease from the Directors of the company by way of making wooden partitions, creation of office cabins etc. are in the nature of `doing of any work' as improvement to the building as stated in the said Explanation and accordingly he confirmed the disallowance made by the A.O.

26. At the time of hearing, the ld. counsel for the assessee while reiterating the same submissions as submitted before the A.O. and ld. CIT(A) further submits that the assessee had taken office premises on leave and license agreement basis. The description of office premises taken on lease is as under:-

Sr,

No.

Description of premises Monthly

Rent

Area of

Gala

1 Gala No. 105, Prima Plaza, Ist

floor, J.V. Patel Compound,

Balaseth Madurkar Road,

Elphinstone Road (West),

Mumbai- 400013.

40,000 700 sq.ft.

2 Gala No. 106, Prima Plaza, Ist

floor, J.V. Patel Compound,

Balaseth Madurkar Road,

Elphinstone Road (West),

Mumbai- 400013.

40,000 700 sq.ft.

3 Gala No. 107, Prima Plaza, Ist

floor, J.V. Patel Compound,

Balaseth Madurkar Road,

Elphinstone Road (West),

Mumbai- 400013.

15,000 570 sq.ft.

4 Gala No. 108, Prima Plaza, Ist

floor, J.V. Patel Compound,

Balaseth Madurkar Road,

Elphinstone Road (West),

Mumbai- 400013.

25,000 560 sq.ft.

He further submits that the assessee has also filed details of the expenses incurred on office renovation appearing at page No. 164 to 166 of the assesse's paper book. The nature of expenses incurred by the assessee in this regard was wooden partitions, cabins, cubicles, desks etc. and no additions/alterations to the basic structure of the unit was  made. He, therefore, submits that all the expenses incurred by the assessee on renovation on leased premises cannot be treated as capital expenditure. Reliance was also placed on the decision in the case of DCIT vs. Smt. Geeta V. Mehta (2008) 26 SOT 455 (Mum). He, therefore, submits that the addition made by the A.O. and sustained by the ld. CIT(A) be deleted.

27. On the other hand, the ld. D.R. while relying on the order of A.O. and ld. CIT(A) distinguished the decision relied on by the ld. counsel for the assessee and further submits that the expenses incurred by the assessee are capital in nature and therefore the A.O. was fully justified in treating the same as capital expenditure.

28. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that there is no dispute that the assessee has taken the premises on lease owned by the Directors of the company Shri Gnan Chand Mehta and Shri Ashish Mehta and Shraddha Mehta who held more than 50% shares of the company. We further find that the period of lease was commenced from 16.10.2001 in respect of three properties and in respect of fourth property the lease period was commenced from 1.4.2002, relevant to the A.Y. 2003-04. We further find that the premises were taken on lease for three years subject to the condition that the rent shall be increased by 15% of the rent at the end of 11 months. We further find the assessee has incurred renovation expenses of ` 19,29,711/- on the renovation of office by providing wooden partitions, cabins, cubicles, desks etc. We further find that the assessee has started the above expenditure on repairs from 1.4.2001 i.e. prior to the property taken on lease. We further find that there is no material on record to show that the said expenses had been incurred by the assessee on the repairs of already existing wooden partitions, cabins, cubicles, desks etc. We further find that the A.O. has invoked Explanation 1 to section 32 of the Act which was inserted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 w.e.f. 1-4-1988 which reads as under:- "Explanation1. Where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of this clause shall apply as if the said structure or work is a building owned by the assessee".

On going through the above Explanation, it became explicitly clear that where the assessee carries out repairs on certain premises taken on lease or other right of occupancy and any capital expenditure is incurred by way of renovation or extension and improvement to the building, then section 32 shall apply as if the said structure or the building is owned by the assessee. The effect of this insertion is that any capital expenditure incurred by the assessee on any premises acquired otherwise than on ownership basis, has to be treated as a building owned by such person and depreciation is allowable on it under section 32 as if it is building owned by him.

29. In Ballimal Naval Kishore vs. CIT [1997] 224 ITR 414 (SC), the Hon'ble Supreme Court approved the test in the case of New Shorrock Spinning and Manufacturing Co. Ltd. V. CIT [1956] 30 ITR 338 (Bom) as to when the expenditure can be said to have been incurred on current repairs. In that case it was observed as follows (page 417) : "The simple test that must be constantly borne in mind is that as a result of the expenditure which is claimed as an expenditure for repairs what is really being done is to preserve and maintain an already existing asset. The object of the expenditure is not to bring a new asset into existence, nor is its object the obtaining of a new or fresh advantage. This can be the only definition of `repairs' because it is only by reason of this definition of repairs that the expenditure is a revenue expenditure. If the amount spent was for the purpose of bringing into existence a new asset or obtaining a new advantage, then obviously such an expenditure would not be an expenditure of a revenue nature but it would be a capital expenditure, and it is clear that the deduction which the Legislature has permitted under section 10(2)(v) is a deduction where the expenditure is a revenue expenditure and not a capital expenditure." 30. Applying to the Explanation 1 to section 32 of the Act in the light of the test laid down to the facts of the present case, we are of the view that since the assessee has incurred huge expenditure on purchase of plywood/furniture etc. for making wooden partitions, cabins, cubicles desks etc., the assessee has built an altogether new office premises, therefore, there is no doubt that these expenditure incurred by the assessee are for fixed capital asset and therefore capital in nature not allowable as revenue expenditure. This view also finds support from the judgment of Hon'ble Delhi High Court in the case of Bigjo's India Ltd. Vs. CIT [2007] 293 ITR 170 (Delhi) wherein expenditure incurred for acquiring new assets such as lift shaft and wooden counters etc. on the licensed premises was held to be capital in nature, not deductible as revenue expenses.

31. In DCIT vs. Smt. Geeta V. Mehta [2008] 26 SOT 455 (Mum) relied on by the learned counsel for the assessee, the facts of that case are that as per the assessee, the property to which the repairs were incurred was held by the assessee through a Franchise Agreement dated 1.1.2002. The assessee used the said property for running Mehta Institute of Technology and she was a Franshisee of Mehta Classes and Mehta College. The assessee was under obligation to incur expenditure on repairs of the premises as per the said Franchise Agreement which was ITA valid for one year at one time and it was not a case of a perpetual lease. The assessee undertook renovation of the leased licensed premises and during the year relevant to A.Y. 2003-04 the assessee incurred an expenditure of ` 8,27,276/-. The A.O. invoked the Explanation 1 to section 32(1) of the Act and held that assessee holds the `right of occupancy' in the property within the meaning of Explanation 1 to section 32(1) and accordingly disallowed the repair expenses. On appeal, the ld. CIT(A) deleted the addition made by the A.O. on the ground that the expenditure has been incurred by the assessee for the purpose of business allowable u/s 37(1) of the Act. On further appeal before the Tribunal, the Tribunal while observing that it is a settled law that every case has to be seen independently whether a particular expenditure is revenue or capital depending on the facts of each case held that expenditure incurred by the assessee by way of purchase of tiles, grills, electrical fittings, ply, plywood, granite and related labour charges incurred in this connection with keeping the classrooms fit for use is revenue in nature allowable u/s 37 of the Act.

32. Whereas in the case before us, the property was taken on lease for three years commencing from 16.10.2001 in respect of three properties and the fourth property was taken on lease from 1.4.2002 not relevant for the year under consideration. The assessee has starts repairs expenses from 1.4.2001 i.e. prior to the property taken on lease. The assessee has placed no material on record to show that there was any obligation to the assessee to incur expenditure on repairs of the premises taken on lease. Therefore, the decision relied on by the ld. Counsel for the assessee is distinguishable and not applicable to the facts of the present case.

33. In this view of the matter, we are of the view that the expenditure incurred by the assessee are capital in nature not allowable as revenue expenditure as claimed by the assessee. Accordingly, we are inclined to uphold the finding of the ld. CIT(A) in confirming the disallowance of expenditure of ` 19,29,711/- subject to allowance of depreciation. The ground taken by the assessee is, therefore, rejected. ITA NO. 3661/Mum/2007 A.Y.2002-03 (Revenue's Appeal)34. Ground No. 1(i) is against the deletion of addition of commission payment of ` 38,70,055/- to Shri Vinod Jaiswal. 35. Brief facts of the above issue are that during the course of search several documents were seized from which it was found by the Assessing Officer that the assessee had made payments to Shri Vinod Jaiswal and this expenditure was not accounted for in the regular books of accounts maintained by the assessee. This expenditure was claimed by the assessee only in the return filed in response to notice u/s.153A. Since this expenditure were not accounted in the regular books of accounts the A.O. required the assessee to show cause why it should not be disallowed and added to returned income. The assessee filed the written reply vide its letter dated 08.03.2006 in which it was submitted that the notings of these pages denote working of amount of incentive paid to Mr. Vinod Jaiswal and this income was included in the income of Shri Vinod Jaiswal in the return filed by him u/s. 153A for the A.Y. 2002-03 and 2003-04 and the assessee filed detailed explanation for this objection in the said assessment proceedings which was finalized by the same Assessing Officer. The assessee contented that these payments were made wholly and exclusively for the purpose of business and since neither it was in the nature of capital expenditure nor personal expenditure and since it was wholly and exclusively incurred for the purpose of business, it should be allowed. The Assessing Officer did not accept this contentions of the assessee. He has stated that (pages 17 to 19 of the order of the ld. CIT(A) :- 1. "Most of the payments have been made not by the assessee company but by the other parties. The assessee has claimed expenditure on the payments which was not made by it. 2. For Example: The payment were made by Asha Pura International, Bench Mark International, Jinneswar Trading, Himalaya Impex etc. These were the parties to whom the assessee had booked bogus printing and stationery and labour charges. The bogus expenses of these parties have already been admitted by the and therefore same Modus-Operandi is employed by the asssessee for making unaccounted payments to bogus parties. Assessing Officer observed that when these parties had been utilized by the assessee for claiming expenses under the head Printing & Stationery, how the same parties, which did not exist would make payments to Shri Vinod Jaiswal. The Assessing Officer also cited other examples in the books in the assessment order.

3. One such example was the entry of Sghri Santosh Jaiswal amounting to ` 2,50,000/- which was claimed to have paid to Shri Vinod Jaiswal. Since the amount was paid to Shri Santosh Jaiswal, it cannot be claimed to have been paid to Shri Vinod Jaiswal. In respect of another expenditure of a Cheque No.629581, the Assessing Officer had noted the entries which are as under :- ` 23,67,700-00

Vinod Jaiswal Cheque No.629581 ` 5,00,000-00` 28,67,700-00

(-) Cash to be received M.D. ` 5,00,000-00` 23,67,700-00

From the above entry Assessing Officer concluded that the assessee had paid ` 5,00,000.00 by way of Cheque and the same amount was received back by cash from the MD, who is none other than Shri Vinod Jaiswal and there are also other entries noted by the Assessing Officer, which were related to either for Mobile or for TV, each had no link that the services rendered by the said Shri Vinod Jaiswal to the company. Assessing Officer has also concluded that the services also were not established to have been rendered by Shri Vindo Jaiswal for the following reasons:_

a) There should be a written agreement for any incentive to be paid or any payment to be made, which is based on services rendered by the persons. In this case, the assessee has failed to produce any agreement or documentary evidence on the basis of which payment has been made to Shri Vindo Jaiswal on account of so called service rendered to the Company. b) If the services are rendered by Shri Vinod Jaiswal to the Company, then it is the duty of the Company to make the payment to him. However, the facts are contrary to this as the payments have been made by other parties and not by the assessee Company.

c) If the payments were made for services rendered by him, then the amount received in cheque should be retained by him. However, the department has seized the documentary evidence, which proves that cash has been received back from him against the cheque issued as discussed above.

d) Had the expenses been genuine, than, the assessee would have made these payments and booked the expenses in its regular books of accounts.

Therefore the assessing Officer concluded that the assessee had claimed these expenditure by shifting bogus expenses from head of Printing & Stationery to another head of incentive paid to Shri Vinod Jaiswal and since this expenditure was also not debited in the regular books of accounts, this could not be allowed as expenditure at all. The assessee's theory of commission by way of incentive payable to Managing Director, Shri Vinod Jaiswal was also not accepted by Assessing Officer who held that assessee had not proved the rendering of service by Shri Vinod Jaiswal to the Company but the assessee had tried to shift this expenditure of Printing & Stationery to incentive. Thus, in view of the above, the Assessing Officer has disallowed the entire expenditure of :-

- ` 38,70,055/- for A.Y. 2002-03

- ` 70,74,272/- for A.Y. 2003-04

Hence, he disallowed this ` 38,70,055/- and added back the same to the income returned."

36. During the course of appellate proceedings, Assessee's Representative submitted written submissions as follows (para 3.2 at page 19 of the order of the ld. CIT(A) :- "It is submitted that during the course of search the authorized officer seized diary maintained by Shri Ashish G. Mehta as per Annexure A-6. On page no.122-124 of this seized diary there were entries of incentive at the rate of ` 12.50 per member payable to Shri Vinod Jaiswal, the director of the company, which are as under :- Period No. of members Seized page no. of Annexure A-6

Page no. of

Paper book

Amount

payable to

Vinod

Jaiswal

April to 29.07.01 58739 122 126 7,34,238

30.07.01 to

02.09.01

22872 122 126

2,85,900

03.09.01 to

30.09.01

33370 122 126

4,17,130

01.10.01 to

29.10.01

42528 122 126

5,31,600

29.10.01 to

31.12.01

53635 123 127

6,70,438

01.01.02 to

03.03.02

52208 123 127

6,52,600

04.03.02 to

31.03.02

46252 124 128

5,78,150

Total 38,70,055

"On page no.122 of seized material there is evidence of payment of ` 13,60,000/- made to Vindo Jaiswal upto 27.09.01. On page No.122 & 123 there are evidences of further payment made to Vinod Jaiswal on account of incentives. It is submitted that during the course of assessment proceedings the appellant had filed before A.O. the details of incentive due to Vinod Jaiswal on the basis of seized material, which is placed page No. 135 of the paper book. It was contended before the A.O. that out of incentive amounting to ` 38,70,055/- payable to Vinod Jaiswal an aggregate amount of ` 12,00,000/ were paid by cheque toVinod Jaiswal and his wife and was claimed as expenditure in the Profit & Loss Account. Out of the balance amount an aggregate amount of ` 19,90,600/- was paid to Vinod Jaiswal by taking bogus bills for printing & stationery mainly through Ashapura International. The details of the payments made to Vinod Jaiswal are also placed at page No. 131 of the paper book. The appellant in its revised computation of total income for A.Y. 2002-03 has offered the entire purchases made from Ashapura International including G.P. at 4.22% amounting to ` 30,86,275/- as the undisclosed income, which has been accepted by the A.O. in the impugned order. The appellant also claimed the balance incentive paid/payable to Vinod Jaiswal, which either accounted by way of bogus printing & stationery bills of Ashapura International or paid in cash / remained outstanding in its return of income filed u/s. 153A. The copy of return of income filed u/s. 153A, computation thereof and the revised computation are placed at page No. 6-11 of the paper book. The A.O. having accepted the additional income of ` 30,88,275/- in respect of purchases made from Ashapura International was not justified in disallowing the appellant's claim of deduction amounting to ` 26,70,055/- being incentive paid / payable to Vinod Jaiswal, which are duly recorded in the seized material discussed above..........." It was further submitted that the A.O. while computing the total income in the impugned order has taken the starting point as the total income as per return filed on 31.10.2002 u/s. 139(1) amounting to ` 56,30,790/-. Therefore it was submitted that the AO's addition of ` 38,70,055/- in respect of payments to Vinod Jaiswal is totally unwarranted and incorrect and the same be deleted. 37. The learned CIT(A) after examining the matter found that the assessee's objection is correct, deleted the addition made by the learned AO. 38. At the time of hearing, the ld. D.R. while relying on the order of the A.O. submits that in view of the entries recorded in the seized material appearing at page No. 245 to 250 of the assesee's paper book, it is clear that the assessee has claimed bogus expenses of ` 38,70,055/- in the name of Shri Vinod Jaiswal. He further submits that since the assessee has failed to prove that the said payment was made for business purchases, the ld. CIT(A) was not justified in deleting the addition made by the A.O. He further submits that even otherwise the said expenditure is not allowable u/s 69 of the Act. Reliance was also placed on the decision of CIT vs. J.K. Panthaki & Co. [2009] 316 ITR 452 (Kar). He, therefore, submits that the addition made by the A.O. be restored. 39. On the other hand, the ld. Counsel for the assessee while reiterating the same submissions as submitted before the A.O. and ld. CIT(A) further submits that it is not a case of the A.O. that the expenditure is not allowable u/s 69 of the Act, therefore, the new plea taken by the ld. D.R. is devoid of any merit. He, therefore, submits that the assessee has explained through a chart appearing at page No. 20 of the order of the ld. CIT(A) that the above payment of ` 38,70,055/- was made by the assessee to Shri Vinod Jaiswal on the basis of entries of incentive @ ` 12.50 per member payable to Shri Vinod Jaiswal, the Director of the company. He further submits that since the A.O. has himself allowed the payment by cheques, therefore, the disallowance of cash payment for the same purpose is not justified. He further submits that in the Income Tax Return filed by Shri Vinod Jaiswal, he has disclosed the same amount as his income and the A.O. after considering in detail has also taxed the same. He, therefore, submits that the order passed by the ld. CIT(A) in deleting the disallowance be upheld. 40. We have carefully considered the submissions of the rival parties and perused the material available on record. We find that before the ld. CIT(A), the assessee has filed a complete chart appearing at page No. 20 of the order of the ld. CIT(A) showing the period, No. of members made/introduced by Shri Vinod Jaiswal, page No. of seized documents, page No. of assessee's paper book and amount paid to Shri Vinod Jaiswal ITA No.3541 to 3244/M/07 & 2661 to 3662/M/07, M/s Free India Assurance Services Ltd. l 23etc. We further find that the ld. CIT(A) after considering the assessee's submission has deleted the addition vide paras 3.3.0 and 3.3.01 of his order which are reproduced as under:-

"3.3.0: I have considered the submissions of the appellant. During the course of appellate proceedings the Assessee's Representative submitted that the Assessing Officer had proceeded ahead with the computation based upon the income returned in the Original return filed u/s.139 at ` 56,30,790/- instead of the income returned by the assessee as per the return filed u/s.153A, which was subsequently revised at ` 94,30,793/-. [In the original return filed u/s.153A on 23.02.2004 at ` 83,54,659/- (page 6 to 10 of Paper Book) which was subsequently revised to `94,30,793/-(page 7 of the paper book]. It is only in the return riled u/s.153A on 23.02.2004 the assessee had made this claim for the deduction of this expenditure at ` 26,70,055/-. Therefore, it was submitted that since the Assessing Officer has started the computation with the total income declared by the assessee as per the return filed u/s.139 on 31.10.2002 at ` 56,30,790/-, in which the assessee has not made any claim of ` 26,70,055/-, there was no need for disallowing thesaid expenditure. To put it in other words, the assessing Officer has disallowed the entire expenditure of :_

- ` 38,70,055/ – for A.Y. 2002-03

- ` 70,74,272/- for A.Y. 2003-04

Hence, he disallowed this ` 38,70,055 and added back the same to the income returned.

3.3.1: On verification of the return of income on the statement of total income filed along with the said return, I find that the assessee's objection is correct and therefore the disallowance made by the Assessing Officer to the extent of ` 38,70,055/- is deleted."

41. In the case of CIT vs. J.K. Panthaki And Co. [2009] 316 ITR 452 (Kar) Their Lordships have remanded the matter for reconsideration by the Tribunal on the ground that the Tribunal has failed to consider the case in the light of the Explanation to sub-section (1) of section 37 of the Act. Whereas in the present case, before us, it is not the case of the Revenue that the payment made by the assessee are not allowable in view of the Explanation to section 37(1) of the Act, therefore, the decision relied on by the ld. D.R. is distinguishable and not applicable to the present case.

42. In the absence of any contrary material placed on record by the Revenue to show that the chart prepared by the assessee appearing at page No. 20 of the order of the ld. CIT(A) is not correct or the entries recorded therein are not matching with the relevant seized material or the part of the amount was not paid by cheque or the same was not allowed as deduction or the payment has not been made to Shri Vinod Jaiswal to introduce the new members to carry on the business. This being so and in the absence of any finding recorded in respect of the application of the provisions of section 69 of the Act and TDS, we are of the view that the payment made by the assessee are allowable under Act as business expenditure and accordingly we decline to interfere with the order of the ld. CIT(A) on this account. The ground taken by the Revenue is, therefore, rejected.

43. Ground No. 1(ii) is against the deletion of addition of ` 24,65,384/- out of purchases of ` 30,80,730/-.

44. In view of our finding recorded in paras No 18 to 22 of this order, the ground taken by the Revenue is therefore rejected.

ITA No. 3543/Mum/2007 for A.Y. 2003-04 (Assessee's appeal).

45. Ground Nos. 1 & 2 are against sustenance of addition of ` 4,04,982/- being 20% disallowance out of conveyance and staff welfare expenses.

46. In the absence of any distinguishing feature brought on record by the parties and keeping in view of our finding recorded in para No. 6 of this order, the disallowance of ` 404982/- is reduced to ` 202491/-. The ground taken by the assessee is therefore partly allowed.

47. Ground No. 3 is against the sustenance of disallowance u/s 40A(3) ` 2,88,000/- being 20% of expenditure out of cash purchases of `14,40,000/-.

48. In the absence of any distinguishing feature brought on record by the ld. D.R. and keeping in view of our finding recorded in paras No. 18 to 22 of this order, the addition made by the A.O. and sustained by the ld. CIT(A) is deleted. The ground taken by the assessee is, therefore, allowed. ITA No. 3662/Mum/2007 for A.Y. 2003-04(Revenue's appeal).

49. Ground No. 1(i) is against the deletion of addition of ` 70,74,272/- being payments to Shri Vinod Jaiswal.

50. In the absence of any distinguishing feature brought on record by the ld. D.R. and keeping in view of our finding recorded in paras No. 40 to 42 of this order, we decline to interfere with the order passed by the ld. CIT(A) on this account. The ground taken by the Revenue is, therefore, rejected.

51. Ground No. 1(ii) is against the deletion of addition of ` 11,52,000/- out of purchases of ` 14,40,000/-.

52. In the absence of any distinguishing feature brought on record by the ld. D.R. and keeping in view of our finding recorded in para No. 18 to 22 of this order, the ground taken by the Revenue is therefore rejected.

ITA No. 3544/Mum/2007 for A.Y. 2004-05 (Assessee's appeal).

53. Ground Nos. 1 & 2 are against sustenance of addition of `4,48,210/- being 20% disallowance out of conveyance and staff welfare expenses.

54. In the absence of any distinguishing feature brought on record by the ld. D.R. and keeping in view of our finding recorded in para No. 6 of this order, the disallowance of ` 4,48,210/- is reduced to ` 2,24,105/-. The ground taken by the assessee is therefore partly allowed. 55. In the result, assessee's appeals stand partly allowed and the Revenue's appeals are dismissed.

Order pronounced on this 30thday of March, 2011.

Sd/-

(J. SUDHAKAR REDDY)

ACCOUNTANT MEMBER

Sd/-

(D.K. AGARWAL)

JUDICIAL MEMBER

Mumbai, Dated 30th

March, 2011.

RK ITA No.3541 to 3244/M/07 & 2661 to

3662/M/07, M/s Free India Assurance Services Ltd.

l

27

Copy to:

1. The Appellant

2. The Respondent

3. Commissioner of Income Tax (Appeals)- Concerned, Mumbai

4. DIT (International Taxation), Concerned, Mumbai

5. Departmental Representative, Bench `F', Mumbai

//TRUE COPY// BY ORDER

ASSTT. REGISTRAR, ITAT, MUMBAI ITA No.3541 to 3244/M/07 & 2661 to

3662/M/07, M/s Free India Assurance Services Ltd.

l

28

1 Draft dictated on 2.3.11 Sr PS

2 Draft placed before Author on 3.3.11 Sr PS

3 Draft proposed & Place before the

2nd

member

JM/AM

4 Draft discussed/approved by 2nd

Member

JM/AM

5 Approved draft comes to the Sr PS Sr.PS

6 Kept for pronouncement on Sr PS

7 File sent to the Bench Clerk Sr PS

8 Date on which file goes to the Head

Clerk

9 Date on which file goes to the AR

10 Date of despatch Sr PS