Late Authority Was Not Justified In Deletingthe Addition Made By The Assessing Officer Disallowing The Hire v. V. S. Dempo And Co. (P) Ltd., And 213 Taxation 235 Inthe Case Of Cit Vs. Indo Saudi Service Travel (P) Ltd. Thelearned Senior Counsel As Such Points Out That Th

IN THE HIGH COURT OF BOMBAY AT GOA TAX APPEAL NOS. 26 OF 2009 & 1 OF 2010 The Commissioner of Income Tax, having office at Aayakar BhavanPatto Plaza, Panaji Goa. ….Appellant V e r s u s M/s. Goa Minerals Pvt. Ltd., Salgaocar House,Opp. F.L. Gomes road,Vasco-da-Gama, Goa. Opp. F.L. Gomes road, ….Respondent Ms. A. Razaq, Advocate for the appellant. Mr. P. J. Pardiwalla, Senior Advocate with Mr. A. F. Diniz, Advocate for the respondent. -Coram: F. M. REIS & NUTAN D. SARDESSAI, JJ. Date:- 11th April, 2017 ORAL JUDGMENT( Per F. M. Reis, J ) Heard Ms. A. Razaq, learned counsel appearing for the appellant and Mr. P. J. Pardiwalla, learned Senior Counsel appearing for the respondent. 2. The above appeals under Section 260-A of the Income Tax Act came to be admitted by an order dated 12.12.2011 on thefollowing substantial question of law. “Whether the Income Tax Appellate Tribunal was right in deleting the additionmade by the A.O., disallowing the charterhire charges of Barges as being excessiveunder Section 40A(ii)(a) of the Income TaxAct ? 3. Ms. A. Razaq, learned counsel appearing for the appellant points out that though the hire charges have beenassessed in the hands of HUF, the amounts were duly received bythe individual members of the HUF. The learned counsel as suchpoints out that the impugned order passed by the Income TaxAppellate Tribunal on this count alone deserves to be quashedand set aside. The learned counsel further pointed out that as suchamounts were allegedly paid in terms of the provisions of Section40A(2)(a) of the said Act which payments are excessive andconsequently the appellate authority was not justified in deletingthe addition made by the Assessing Officer disallowing the hire charges of the barges as being excessive. The learned counselfurther submits that the authorities below have erroneously foundthat the amounts were not excessive and as such the substantialquestion of law framed by this Court is to be answered in favourof the appellant. 4. On the other hand, Mr. Pardiwalla, learned SeniorCounsel appearing for the respondent has submitted that thequestion of examining whether the amounts are received by theHUF or the members would be irrelevant as according to him thefact finding authorities below have concurrently found that theamounts charged were not in excessive as they were based on therates quoted by the Barge Owners Association. The learnedSenior Counsel further pointed out that in such circumstances, asthe findings of the fact finding authorities are based on thematerial on record, this Court in the present appeals underSection 260A of the Income Tax Act cannot reappreciate theevidence to come to any contrary findings. The learned SeniorCounsel thereafter has taken us through the order passed by the Income Tax Appellate Tribunal to point out that the Tribunal hasrightly deleted the addition made by the Assessing Officer and assuch the above appeals deserve to be rejected. In support of hissubmissions, the learned Senior Counsel has relied upon thejudgments of this Court reported in 244 CTR 102 in the case ofCIT vs. V. S. Dempo and Co. (P) Ltd., and 213 Taxation 235 inthe case of CIT vs. Indo Saudi Service Travel (P) Ltd. Thelearned Senior Counsel as such points out that there is nosubstance in the above appeals. 5. We have duly considered the rival contentions and we have also gone through the records. Section 40A(2)(a) of theIncome Tax Act reads thus : “(2)(a) Where the assessee incurs anyexpenditure in respect of which payment hasbeen or is to be made to any person referredto in clause (b) of this sub- section, and the[Assessing] Officer is of opinion that suchexpenditure is excessive or unreasonablehaving regard to the fair market value of thegoods, services or facilities for which the 5. We have duly considered the rival contentions and we have also gone through the records. Section 40A(2)(a) of theIncome Tax Act reads thus : “(2)(a) Where the assessee incurs anyexpenditure in respect of which payment hasbeen or is to be made to any person referredto in clause (b) of this sub- section, and the[Assessing] Officer is of opinion that suchexpenditure is excessive or unreasonablehaving regard to the fair market value of thegoods, services or facilities for which the payment is made or the legitimate needs ofthe business or profession of the assessee orthe benefit derived by or accruing to himtherefrom, so much of the expenditure as isso considered by him to be excessive orunreasonable shall not be allowed as adeduction” 6.On going through the said provisions, it clearlyprovides that in case the first part of the Section is satisfied, thequestion of refusing such charges when such amounts are notexcessive would not at all arise. In the present case, theauthorities below have concurrently found that the chargesclaimed by the respondent were not excessive as they were basedon the charges fixed by the Barge Owners Association. As thefindings of fact have been arrived at based on the documentaryevidence on record whose authenticity has not been disputed bythe appellant, we find that such findings cannot be said to beperverse. The learned counsel appearing for the appellant wasunable to point out that the finding rendered by the authoritiesbelow is on the basis of misreading of the evidence or that any relevant document has been over-looked while arriving at such findings of fact. As already pointed out herein above, the findingsof fact are based on the documentary evidence and consequently,this Court in the present appeals under Section 260 of the IncomeTax Act cannot reappreciate the evidence to come to any contraryfindings. As the appellant have failed to produce any evidence ormaterial to show that the amount of charges were excessive, weare of the opinion that there is no infirmity committed by theTribunal while coming to the conclusion that the amount chargedare not excessive and as such do not come within the four cornersof Section 40A(2)(a) of the Income Tax Act. 7.In fact, this Court in the judgment in the case of V.S. Dempo & Co. (P) Ltd., ( supra ) has observed at paras 6, 9 and10 thus : “6. In our view, in a business of export consistency of supply as well asquality of supply is important. In orderto assure a consistent supply ofmaterial of the same quality the purchaser of a commodity may pay toa seller bound under a contract a littlehigher than the current rate.Furthermore, in case of yearlycontracts by agreeing to bye goods at aspecified rate the exporter is insulatedfrom vagaries of any seasonal rise inthe market rate. Therefore, unless therate agreed is so very much excessiveor unreasonable as to doubt theobjective behind the agreement, itcannot be said that the rate, a littlehigher than the seasonal market rate isunjustified or amounts to diversion ofprofit. In this connection, the fact thatthe assessee as well as its subsidiarywhich is the seller are in the same taxbracket and pay same rate of tax is afact which assumes importance.Admittedly, it is not a case of taxevasion inasmuch as if the rate wouldhave been less, the assessee's profitwould have been more, but the profitsof the seller would have been less andboth being taxable at the same rate, there would be no difference in theaggregate tax payable by the assesseeand its subsidiary. there would be no difference in theaggregate tax payable by the assesseeand its subsidiary. 9. Clause (a) of sub-section (2) ofSection 40A of the Act provides thatwhere the assessee incurs anyexpenditure in respect of whichpayment has been or is to be made toany person referred to in clause (b) ofthe sub-section and the AssessingOfficer is of the opinion that suchexpenditureisexcessiveorunreasonable having regard to the fairmarket value of the goods, services orfacilities for which the payment ismade or the legitimate needs of thebusiness or profession of the assesseeor the benefit derived by or accruing tohim therefrom, so much of theexpenditure as it so considered by himto be excessive or unreasonable, shallnot be allowed as a deduction. Theobject of Section 40A(2) is to preventdiversion of income. An assessee who has large income and is liable to paytax at the highest rate prescribed underthe Act often seeks to transfer a part ofhis income to a related person who isnot liable to pay tax at all or liable topay tax at a rate lower than the rate atwhich the assessee pays the tax. Inorder to curb such tendency ofdiversion of income and therebyreducing the tax liability by illegitimatemeans, Section 40-A was added to theAct by an amendment made by theFinance Act, 1968. Clause (b) ofSection 40A(2) gives the list of relatedpersons. It is only where the payment ismade by the assessee to the relatedpersons mentioned in clause (b) ofSection 40A(2) of the Act that theAssessing Officer gets jurisdiction todisallow the expenditure or a part ofthe expenditure which he considersexcessive or unreasonable. Clause (b)of Section 40A(2) reads as under : “40A(2)(b) The persons referred to inclause (a) are the following, namely:— (i) where the assessee is an individualany relative of the assessee; (ii) where the assessee is a company,firm, association of persons or Hinduundivided family, any director of thecompany, partner of the firm, ormember of the association or family, orany relative of such director, partner ormember; (iii) any individual who has asubstantial interest in the business orprofession of the assessee, or anyrelative of such individual; (iv) a company, firm, association ofpersons or Hindu undivided familyhaving a substantial interest in thebusiness or profession of the assesseeor any director, partner or member ofsuch company, firm, association orfamily, or any relative of such director,partner or member; (v) a company, firm, association ofpersons or Hindu undivided family ofwhich a director, partner or member, asthe case may be, has a substantial interest in the business or profession ofthe assessee; or any director, partner ormember of such company, firm,association or family or any relative ofsuch director, partner or member; (vi) any person who carries on a business or profession,— (A) where the assessee being anindividual, or any relative of suchassessee, has a substantial interest inthe business or profession of thatperson; or (B) where the assessee being acompany, firm, association of personsor Hindu undivided family, or anydirector of such company, partner ofsuch firm or member of the associationor family, or any relative of suchdirector, partner, or member, has asubstantial interest in the business orprofession of that person. Explanation.—For the purposes of thissub-section, a person shall be deemedto have a substantial interest in abusiness or profession, if,— (a) in a case where the business orprofession is carried on by a company,such person is, at any time during theprevious year, the beneficial owner ofshares (not being shares entitled to afixed rate of dividend whether with orwithout a right to participate in profit)carrying not less than twenty per centof the voting power; and (B) where the assessee being acompany, firm, association of personsor Hindu undivided family, or anydirector of such company, partner ofsuch firm or member of the associationor family, or any relative of suchdirector, partner, or member, has asubstantial interest in the business orprofession of that person. Explanation.—For the purposes of thissub-section, a person shall be deemedto have a substantial interest in abusiness or profession, if,— (a) in a case where the business orprofession is carried on by a company,such person is, at any time during theprevious year, the beneficial owner ofshares (not being shares entitled to afixed rate of dividend whether with orwithout a right to participate in profit)carrying not less than twenty per centof the voting power; and (b) in any other case, such person is, atany time during the previous year,beneficially entitled to not less thantwenty per cent of the profits of suchbusiness or profession.” 10. Learned Counsel for the appellantsubmitted that the present case fallsunder sub-clause (ii) or sub-clause (iv)of clause (b) of Section 40A(2). Sub-clause (ii) provides that where theassessee is a company, firm,association of persons or Hinduundivided family, any director of thecompany, partner of the firm, ormember of the association or family, or any relative of such director, partner ormember would be a related person. Inthe present case, the assessee is acompany and the seller is its subsidiarycompany. The seller i.e. the subsidiarycompany does not fall in any of thecapacities mentioned under sub-clause(ii) of clause (b). Only a director of thecompany, partner of the firm, ormember of the association or family orany relative of such director, partner ormember is a related person, under sub-clause (ii) of clause (b) of sub-section(2). Another company, even if it is asubsidiary of the assessee , is not arelated person within the meaning ofsub-clause (ii) of clause (b) of Section40A(2). Sub-clause (iv) of clause (b) ofSection 40A(2) provides that in case ofa company, firm, association ofpersons or Hindu undivided familyhaving a substantial interest in thebusiness or profession of the assesseeor any director, partner or member ofsuch company, firm, association or family, or any relative of such director,partner or member is a related person.Again a subsidiary company does notfall in any of the class of personsmentioned in sub-clause (iv) of clause(b) of Section 40A(2). In law, aholding company is a member ofsubsidiary company and holds morethan 50% equity share capital of thesubsidiary company (except in caseswhere it controls the composition ofthe board of directors without holdingmajority of the shares). While theholding company is a member of itssubsidiary company, the subsidiarycompany is not a member of theholding company. As, the subsidiarycompany was not a member of theassessee sub-clause (iv) of clause (b) ofSection 40A(2) of the Act is also notattracted in the present case.” 8.Taking note of the said observations, we find that inthe present case, the learned Tribunal has found in the impugnedorder dated 18.02.2009 for the Assessment Years 2003-2004 that 8.Taking note of the said observations, we find that inthe present case, the learned Tribunal has found in the impugnedorder dated 18.02.2009 for the Assessment Years 2003-2004 that there is no evidence brought on record to show that the paymentitself was excessive and it had enriched the individual Directors.It is also noted that the records reveal that there is no undueadvantage by the Directors by the arrangement and there is noloss to the Revenue as the subject amount has already been taxedin the hands of the HUF. It is further noted that the case of theHUFs has not been reopened and there is no reopening of theassessment of the individual Directors. It is also pointed out thatthe records reveal that the barges were taken on payment of timecharter charges of income earned from the transportation of ironore on the basis of per tonne rate as prescribed by the Goa BargeOwners Association. Considering the said factual position, thelearned Tribunal observed that in the absence of any comparativecase that the payments were excessive and unreasonable, theorders of the Revenue Authorities are liable to be set aside. Thelearned Tribunal also took note of the Circular dated 06.07.1968,particularly para 74 thereof and noted that there is nothing onrecord to show that either of the parties enriched by getting afixed sum of money as charter hire charges and the tax due by the Assessee has been reduced by this arrangement. The learned Tribunal also found that as far as the other appeal being I.T.A. No. 48/PANJ/2006, the issues involved are identical andconsequently, the appeal filed by the respondents came to beallowed. 9.In the present case, we find that the factual findingsare that there is no excessive payment or that the arrangement hasin any way enriched the respondents which cannot be faulted asthey are based on the appreciation of evidence by the learnedTribunal and no perversity has been shown to such findings bythe appellant. 10.In such circumstances and for the aforesaid reasons,we find that the substantial question of law framed is answeredagainst the Revenue/appellant. Both the appeals standaccordingly rejected. In such circumstances and for the aforesaid reasons, NUTAN D. SARDESSAI, J. F. M. REIS, J. at*