Karnataka High Court
Recon Machine Tools (P) Ltd. ... vs The Commissioner Of Income Tax on 30 May, 2006
Equivalent citations: (2006)204CTR(KAR)184, ILR2006KAR2459, [2006]286ITR637(KAR), [2006]286ITR637(KARN)
Bench: R. Gururajan, Jawad Rahim
JUDGMENT
1. The assessee by name M/s Recon Machine Tools (P) Limited is before us aggrieved by the orders of the assessing authority, appellate authority and also the order passed by the Tribunal.
2. The appellant company is engaged in manufacturing machinery equipments. They are being used by the tin-container manufacturers and canning industries. An agreement for royalty was entered into between the appellant and M/s Results Engineers and Consultants in the matter of providing necessary technical advice to the company and the Company has agreed to pay royalty towards the service rendered by the Consultants.
3. The assessing authority disallowed the claim of the royalty in terms of the orders passed by him. Aggrieved by the same, an appeal was filed before the Appellate Commissioner. The Appellate Commissioner reversed the findings of the assessing authority in so far as sham transactions in his order. However, the Appellate Commissioner has chosen to provide 2 per cent relief as against 5 per cent as claimed by the assessee. Revenue accepted the order of the Appellate Commissioner. However, the assessee filed a second appeal before the Tribunal. The Tribunal dismissed the appeal. Aggrieved by the order of the Appellate Commissioner, confirmed by the Tribunal in so far as reduction of royalty to 2 per cent as against 5 per cent is concerned, the appellant has filed the present appeal.
4. For the assessment year 1989-90, an addition was made by the assessing authority in the light of variation of closing stock declared by the appellant in its return of income and the stock statement given to the Bank as on the last date of the accounting year relating to the assessment year 1989-90. The said addition was also challenged by way of an appeal before the Appellate Commissioner. He has filed another appeal in so far as addition of closing stock challenged by way of an appeal before the Appellate Commissioner. The assessee while so doing has also challenged the royalty issue before the Appellate Commissioner. The Appellate Commissioner dismissed the appeal. Aggrieved by the same, the appellant filed a second appeal before the Appellate Tribunal. The Tribunal dismissed the appeal. It is in these circumstances, the appellant is before us challenging the impugned orders by way of this appeal.
5. The appellant has raised the following questions, as stated in para-4 of the appeal memorandum, which we have accepted as question of law involved in this appeal.
(1) Whether on the facts, the Tribunal was justified in holding the arbitrary fixation of royalty payment by the lower authority by invoking the provisions of Section 40A(2) of the Act when the transaction was held to be genuine and there was no material to establish the market value of the services rendered, especially when the agreed royalty had been paid to the contracting party by the Appellant?
(2) Whether the Tribunal was justified in ignoring the closing stock as shown by the Appellant which was subjected to audit under Section 44AB of the Act to support the value of closing stock declared to the bank?
(3) Whether the Tribunal was justified in upholding the impugned addition of account of variation in the value of closing stock between the value declared in the accounts and the value declared to the bank as made by the assessing authority when the assessing authority did not either follow the value shown in the accounts in full or the value as shown in the bank statement in full?
6. Sri Parthasarathi, learned Counsel for the appellant took us through the material on record to say that the findings of the assessing officer with regard to the transaction being sham is uncalled for and is also unsustainable on the facts and circumstances of the case. He would say that the Commissioner has rightly chosen to set aside the findings on 'sham' issue. But, however, the learned Counsel complains that having come to the conclusion that the appellate Commissioner committed serious error in restricting the claim to 2 per cent as against 5 per cent. This finding, according to him is arbitrary and is unsustainable. Learned Counsel further would argue that the Tribunal without applying its mind has chosen to blindly accept the order of the Appellate Tribunal.
7. Per contra, Sri Seshachala, learned Counsel for the Revenue would argue that the order impugned in this case is supportable in law on the facts of this case. He would say that the material on record would show that the so-called transaction is nothing but a sham transaction and it is only with a view to benefit a Partner or a Director, as rightly held by the assessing officer. In so far as reduction is concerned, he would support the orders of both the Appellate Commissioner as well as the Tribunal. In so far as closing stock is concerned, learned Counsel would argue that both the authorities on facts have chosen to hold the issue against the assessee, and, therefore, no question of law arises since all these orders are passed on facts. He would support all these orders in so far as the finding on closing stock is concerned.
8. After hearing, we have carefully perused the material on record.
9. Admitted facts would reveal of an agreement between the appellant and M/s Results Engineers and Consultants. The admitted facts would further reveal of payment of royalty towards the services rendered by the said Results Engineers and Consultants. The Assessing Authority in his order has noticed that the agreement is only sham to take the funds of the company in the garb of royalty payment. To come to this conclusion, he has noticed the partners so also the Directors in the appellant Company. When an appeal was filed against this order, the appellate authority by a detailed order has chosen to hold that the theory of 'sham' finding is not available on the facts and circumstances of this case. The appellate authority has noticed that the said Results Engineers and Consultants rendered not only services to the appellant but also to others. The appellate authority also notices that the firm has a separate and independent status on its own, and that even if the firm was not in existence, the concerned Directors in their individual capacity would have claimed royalty from the Company if they had passed on any technical know-how to the Company. The appellate authority has come to the conclusion on facts that a sham finding is unsustainable in law. This finding has been accepted by the Department. We are therefore of the view that a finding of the appellate authority with regard to the transaction being genuine has to be accepted in the light of the details. finding given in its order at Annexure-D to this appeal.
10. The only question for consideration is as to whether the authorities are justified in reducing the royalty from 5 per cent to 2 per cent, as has been done in the case on hand.
11. Admitted facts would reveal, as mentioned earlier, that an agreement was entered into between M/s Results Engineers and Consultants and the appellant Company. They are rendering professional service, and there cannot be any yardstick in the matter of professional or technical services. It all would depend upon the facts of each case. In the case on hand, only the Consultants charged 5 per cent in the light of technical know-how being provided to the manufacturing machine tool unit. In our view, 5 per cent as claimed by the assessee cannot be termed as arbitrary or unreasonable, particularly taking into consideration the professional expertise being provided to the appellant company by the Consultants. In the circumstances, reduction from 5 per cent to 2 per cent is an arbitrary reduction and therefore the same requires to be set aside by this Court. In the circumstances, we accept the arguments of Sri Parthasarathi, learned Counsel for the appellant that the appellant company is entitled for 5 per cent royalty as rightly claimed in the returns filed.
12. In so far as closing stock is concerned, we have carefully perused the material on record. Material on record would reveal of a different figure shown in the bank statement and also the figure shown in the return filed by the appellant before the assessing authority. No acceptable evidence was placed to disbelieve the bank statement as rightly held by the authorities in the case on hand. In fact, the entire amount shown pertains only to the raw materials. In so far as the raw materials are concerned, same are required to be supported by various statutory registers as ruled by all the authorities. In the circumstances, despite a strong plea made by Sri Parthasarathi, learned Counsel for the appellant, we are unable to accept the argument in this regard. In the circumstances, in the absence of acceptable material, it is not possible for this Court to dislodge the findings on facts particularly in the light of the bank statement which is undisputed by the assessing authority. Hence, we accept the findings in so far as closing stock in terms of the orders of all the authorities.
13. In the circumstances, we allow this appeal in part, and answer the first question in favour of the assessee. We further answer questions 2 and 3 in favour of the Revenue.
14. Before concluding, we deem it proper to say that if there is any grievance with regard to any other item relating to the case on hand, liberty is reserved to the appellate is to work out its grievance in a manner known to law and in accordance with law.
15. In the circumstances, this appeal stands disposed in the above manner. Parties are to bear their own costs.