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NaraIn Motors Vs. Commissioner of Income-tax - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtPunjab and Haryana High Court
Decided On
Case NumberIncome-tax Case No. 22 of 1975 and 50 of 1976
Judge
Reported in[1979]120ITR106(P& H)
ActsIncome Tax Act, 1961 - Sections 40A(2) and 256(2)
AppellantNaraIn Motors
RespondentCommissioner of Income-tax
Appellant Advocate Bhagirath Dass,; S.S. Mahajan,; Hirajee and;
Respondent Advocate D.N. Awasthy and; B.K. Jhingan, Advs.
Excerpt:
.....case in view of the close relationship of the partners of the firm m/s. ' 10. the reading of the above-mentioned findings would clearly suggest that the tribunal, on the basis of the material on the record, which was quite sufficient, came to the conclusion that the amount paid by the assessee to m/s. narain sales corporation was definitely higher than the actual market value of the free services rendered and these findings having been arrived at, the learned counsel for the petitioner could not successfully point out as to what precisely was the error of law committed by the tribunal in recording the above-mentioned findings......its profit and loss account a sum of rs. 42,865 on account of service charges paid to m/s. narain sales corporation. the case of the assessee was that it closed down its workshop with effect from 1st january, 1969, and handed over the service job to m/s. narain sales corporation, a sister concern, under a deed of agreement dated 3rd january, 1969.3. similarly, for the assessment year 1970-71, the assessee debited a sum of rs. 1,22,030, to its profit and loss account on account of service charges paid to m/s. narain sales corporation for servicing the tractors and motor cycles sold by the assessee. the ito found that the provisions of section 40a(2) of the i.t. act, 1961 (hereinafter referred to as 'the act'), were applicable and consequently he disallowed the claim of rs. 20,498, for.....
Judgment:

1. This order will dispose of Income-tax Cases Nos. 22 of 1975 and 50 of 1976.

2. The assessee is an authorised dealer of Messrs. Escorts Ltd., Faridabad, and deals in the sale of Rajdoot motor cycles, tractors, implements and spare parts. During the proceedings for the assessment year 1969-70, the assessee debited to its profit and loss account a sum of Rs. 42,865 on account of service charges paid to M/s. Narain Sales Corporation. The case of the assessee was that it closed down its workshop with effect from 1st January, 1969, and handed over the service job to M/s. Narain Sales Corporation, a sister concern, under a deed of agreement dated 3rd January, 1969.

3. Similarly, for the assessment year 1970-71, the assessee debited a sum of Rs. 1,22,030, to its profit and loss account on account of service charges paid to M/s. Narain Sales Corporation for servicing the tractors and motor cycles sold by the assessee. The ITO found that the provisions of Section 40A(2) of the I.T. Act, 1961 (hereinafter referred to as 'the Act'), were applicable and consequently he disallowed the claim of Rs. 20,498, for the assessment year 1969-70, and a sum of Rs. 61,015 for the assessment year 1970-71. In appeal, the AAC, after examining the evidence produced on the record, agreed with the ITO that the provisions of Section 40A(2) of the Act were applicable and concluded that it could reasonably be inferred that 50% of the gross payment made to M/s. Narain Sales Corporation was for considerations other than business and was in excess of the fair market value of the services rendered by M/s. Narain Sales Corporation. He, therefore, upheld the disallowance of Rs. 20,498 for the assessment year 1969-70 and a sum of Rs. 61,015 for the assessment year 1970-71. In appeal, the finding of the AAC was upheld by the Income-tax Appellate Tribunal, Amritsar Bench (hereinafter referred to as ' the Tribunal').

4. The assessee moved the Tribunal for referring the following questions of law for the opinion of this court, vide application under Section 256(1) of the Act, out of which Income-tax Case No. 22 of 1975 arises, which relates to the assessment year 1969-70:

'(1) Whether, in view of the facts and under the circumstances of the case, the Tribunal was legally justified in disallowing Rs. 20,498 out of service charges paid by the assessee to M/s. Narain Sales Corporation ?

(2) Whether there was any material before the Tribunal on the basis of which it was held that the payment of service charges made by the assessee to M/s. Narain Sales Corporation was excessive having regard to the fair market value of the services rendered by the latter to the assessee ?

(3) Whether the finding of the Tribunal holding that provisions of Section 40A(2) are applicable in the case of the assessee is not illegal and unjustified ?'

5. Similarly, vide another application under Section 256(1) of the Act, out ofwhich Income-tax Case No. 50 of 1976 arises, which relates to the assessment year 1970-71, the assessee moved the Tribunal for referring thefollowing questions of law for the opinion of this court :

'(1) Whether, in view of the facts and under the circumstances of the case, the Tribunal was legally justified in disallowing Rs. 61,015 out of service charges paid by the assessee to M/s. Narain Sales Corporation?

(2) Whether there was any material before the Tribunal on the basis of which it has held that the payment of service charges made by the assessee to M/s. Narain Sales Corporation was excessive having regard to the fair market value of the services rendered by the latter to the assessee ?

(3) Whether the finding of the Tribunal holding that provisions of Section 40A(2) are applicable in the case of the assessee is not illegal and unjustified?'

6. The Tribunal having come to the conclusion that no questions of law arise in both the cases, dismissed the applications of the assessee. The assessee has now approached this court in these Income-tax Cases and has prayed that the questions of law referred to in the earlier part of the judgment, do arise on the facts and circumstances of the cases, and that the Tribunal be directed to refer the same to this court for its opinion.

7. After hearing the learned counsel for the parties, we are of the opinion that there is no merit in both these cases. It has not been contended before us by the learned counsel for the petitioners that the provisions of Section 40A of the Act are not attracted to the facts and circumstances of the present cases. It is not disputed that the partners of M/s. Narain Sales Corporation are near relations of the partners of the assessee-firm. While considering the contentions raised by the petitioner in the case relating to the assessment year 1969-70, the Tribunal observed in its order dated 23rd April, 1974, as under :

'From the constitution of the above two firms indicated above, it would appear that the partners of M/s. Narain Sales Corporation are close relations of the partners of the assessee-firm. The payment made by the assessee to M/s. Narain Sales Corporation can, therefore, be said to be an indirect payment to the relatives of the partners of M/s. Narain Sales Corporation as under:

Rs.Shri Harvinder Singh 1,200Smt. Harkirat Kaur 900Smt. Manmohan Kaur 1,000_____3,1008. Against the above contribution of capital, the net profit earned by the firm, M/s. Narain Sales Corporation, in the very first assessment year, i.e., 1970-71, amounts to Rs. 62,706 against the gross receipt of Rs. 1,05,473 in respect of services rendered by it during the relevant year. It would thus appear that the net profit of the firm, M/s. Narain Sales Corporation, amounted to 60% of the gross receipts for the services allegedly rendered during the year. Another aspect which is worth mentioning here is that before 1st January, 1969, the assessee was itself running the workshop and rendering free services and the warranty services as per agreement with its principals in respect of the tractors and motor cycles sold by it. With effect from 1st January, 1969, the assessee decided to transfer the workshop to M/s. Narain Sales Corporation and agreed to make an ad hoc payment in respect of the unexpired period of warranty for each tractor sold during the period of six months immediately preceding, i.e., 1st July, 1968, to 31st December, 1968, at Rs. 750 per tractor and for each motor cycle sold during the period of three months immediately preceding, i.e., 1st October, 1968, to 31st December, 1968, at the rate of Rs. 15 per motor cycle. The service charges which the assessee decided to pass on to M/s. Narain Sales Corporation appear to have been based on the amount of discount which the principals retained on each tractor and motor cycle for free services to be reimbursed after the completion of the services. This amount was defini-igher than the actual market value of the free services rendered in to make it attractive and profitable for the agent to complete the free services on behalf of the principals as per terms of the agreement. Thus, the amount passed on by the assessee to M/s. Narain Sales Corporation was definitely excessive as compared to the market value of the services which M/s. Narain Sales Corporation rendered on behalf of the assessee. '

9. 10. From the facts stated above, there is no doubt in our mind that the provisions of Section 40A are clearly applicable in this case in view of the close relationship of the partners of the firm M/s. Narain Sales Corporation with the partners of the assessee firm and also in view of the payment made by the assessee to M/s. Narain Sales Corporation being excessive having regard to the fair market value of the services rendered by the latter to the assessee. Of the three partners in M/s. Narain Sales Corporation only Shri Harvinder Singh was devoting his full personal attention to this business and the other two partners are ladies. Thus the diversion of a profit of Rs. 40,995 to the firm, M/s. Narain Sales Corporation by the assessee cannot in the circumstances of the case, be said to be wholly and exclusively for the purposes of the assessee's business. Considering the contribution by way of skill and labour utilised by Shri Harvinder Singh in the business of the allied concern, M/s. Narain Sales Corporation, the Appellate Assistant Commissioner was justified in holding that 50% of the payment made bythe assessee to the above-mentioned firm was for the purposes of business and the other 50% was for considerations other than business. In view of the clear applicability of the provisions of Section 40A(2) in this case and after the appraisal of the entire evidence on record, we are of the opinion that the Appellate Assistant Commissioner was justified in disallowing a sum of Rs. 20,498 being 50% of the service charges paid by the assessee to M/s. Narain Sales Corporation. Accordingly, we uphold the above disallowance made by the Appellate Assistant Commissioner.'

10. The reading of the above-mentioned findings would clearly suggest that the Tribunal, on the basis of the material on the record, which was quite sufficient, came to the conclusion that the amount paid by the assessee to M/s. Narain Sales Corporation was definitely higher than the actual market value of the free services rendered and these findings having been arrived at, the learned counsel for the petitioner could not successfully point out as to what precisely was the error of law committed by the Tribunal in recording the above-mentioned findings. The question as to whether the amount paid was in excess of the actual market value of the free services rendered, is essentially a question of fact which has been determined by the authorities keeping in view the available material on record and thus the questions sought to be referred to this court, cannot in any case, be termed as involving the questions of law.

11. For the reasons recorded above, there is no merit in both these cases, i.e., I. T. Cases Nos. 22 of 1975 and 50 of 1976, and the same are hereby dismissed. However, there will be no order as to costs.


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