Indian Kanoon - Search engine for Indian Law

3. The following grounds are raised by the revenue in its appeals, namely, on the facts and in the circumstances of the case, the C.I.T. (Appeals) erred in -

(i) allowing payment of consultancy fees to M/s Nonsuch Tea Estates for all the assessment years;

(ii) in. allowing payment of commission to M/s Tara Agencies @ 2% for the assessment years 1978-79 and 1979-80;

(iii) in allowing the claim Under Section 40A(5) for the assessment year 1980-81;

(iv) in allowing weighted deduction Under Section 35B in respect of E.C.G.C. premium for the assessment years 1978-79 to 1980-81.

11.3 The learned departmental representative, on the other hand, relied upon the, orders of the lower authorities.

11.4 We have carefully considered the rival submissions. Since this is used purely as guest house, irrespective of the user by the auditors, this claim is clearly disallowable under Section 37(5) of the Act.

12.1 The first ground taken by the revenue is regarding the payment of consultancy fees to M/s Nonsuch Tea Estate. This ground is raised by the revenue for all the assessment years. Consequent on the purchase of the estate by the assessee company from M/s Nonsuch Tea Estate, the latter was appointed as the assessee's technical consultants for a period of 10 years paying quarterly remuneration of Rs. 90,000. The income-tax Officer who made the assessment after going through the relevant details allowed an amount of Rs. 3,60,000 paid as consultancy fees as a revenue expenditure. The successor Income-tax Officer who re-heard and allowed the claim in the 1st year has however, changed his mind in the second year and felt that Nonsuch Tea Estate did not render any worthwhile service to the assessee company for earning that much consultancy fee. Besides, the successor I.T.O. who found that the appointment of M/s Nonsuch Tea Estate as a consultant on a quarterly payment of Rs. 90,000 was a part and parcel of the arrangement for purchase of the estate considered that such payment was nothing but a payment towards purchase price camouflaged as a technical fee. He was, therefore, of the view that no part of the consultancy fees should have been allowed as a revenue expenditure. The assessee has vehemently objected to the suggestion. The assessee's case is that the purchase consideration of Rs. 1,45,00,000 was itself quite high and the consultancy fee for rendering services by way of periodic inspection of the estates and recommendations for improving the quality of the plantation had nothing to do with the purchase price. It was also contended that M/s Nonsuch Tea Estate was paying tax on the entire amount as revenue receipt and had it been a part of purchase consideration the entire receipt would have been a capital receipt which would not have attracted capital gains-tax also. Yet another objection raised by the assessee is that the amount had been allowed as a deduction by the I.T.O. after full appreciation of the facts on proper directions by the Inspecting Assistant Commissioner Under Section 144B. After hearing the learned counsel for the assessee the CIT(A) confirmed the order of the I.T.O. and rejected the request for enhancement made by the successor I.T.O. As against this order of the CIT(A) the revenue is in appeal before us.

12.2 The learned departmental representative contended before us that there is no mention by the assessee of the nature of service rendered by M/s Nonsuch Tea Estate. He contended that the services rendered by M/s Nonsuch Tea Estate are routine and non-technical and could be offered by any other person who has at least a year experience in the tea producing factory. He, therefore, contended that the consultancy fees paid to M/s Nonsuch Tea Estate is nothing but sale consideration.

12.3 The learned counsel for the assessee, on the other hand, first took us through the agreement entered into between the assessee company and M/s Nonsuch Tea Estate which is at pages 143 to 145 of the Paper Book, Volume II, for the year 1978-79, in pursuance of which technical consultancy fee was paid by the assessee. He then drew our attention to clause 3 of the agreement wherein the nature of the services to be rendered by M/s Nonsuch Tea Estate have been mentioned. He further contended that the company was incorporated in the year 1976 and since the assessee company has invested Rs. 1,45,00,000 for the purchase of four estates and since the assessee company has no experience in agricultural operations it had to take the assistance of M/s Nonsuch Tea Estate to advise on different matters connected in effect of weather, climatic conditions, fertiliser, programme, type of fertiliser to be used, type of pruning, lichen wash, mossing, cleaning, spraying, type of drier equipments, nurseries, weeding, soil testing, etc. The assessee company, therefore, entered into an agreement with M/s Nonsuch Tea Estate agreeing to pay consultancy fee for the services rendered by it. He, further contended that the action of the assessee company in entering into an agreement with M/s Nonsuch Tea Estate is fully justified as the latter is the vendor and that it has the full knowledge of the estates sold by it. He then referred to copy of the report submitted by M/s Nonsuch Tea Estate which is at pages 266 to 269 of the Paper Book, Volume IV for the year 1978-79 which gives the details of the work to be done by M/s Nonsuch Tea Estate in each estate. The learned counsel further contended that the assessee's predecessor in title has bought four estates viz., Prospect, Liddellsdale, Seaforth and Highforest from Sterling company on 28-6-74 for which the RBI has fixed the market price at Rs. 1,12,40,000 after referring the matter to the Government of India which in turn had referred the matter for market valuation of Tea Board which had fixed at Rs. 1,12,40,000. As Highforest Estate and Bonaccord estates were sold by Nonsuch Tea Estate for Rs. 18,68,000 and Rs. 23,25,000 respectively, the market value of Prospect Liddellsdale, Seaforth and Bonaccord at that rate would come to Rs. 1,16,97,000 only whereas the assessee had paid only Rs. 1,45,00,000. As the present transaction is within a period of two years from the earlier transaction it cannot be said that the market rate of the four estates is more than Rs. 1,45,00,000 as contended by the I.T.O. He further contended that in the same matter in acquisition proceedings initiated by the department the sale consideration of Rs. 145 lakhs has been accepted by the department and the proceedings initiated were dropped after due consideration by an authority higher than that of the I.T.O. He, therefore, supported the order of the C.I.T.(A) in allowing deduction of the consultancy fees paid by the assessee company to M/s Nonsuch Tea Estate.

12.4 We have carefully considered the facts and circumstances of the case, the material on record and the arguments advanced by both the sides. As seen from the facts, the assessee company was incorporated in the year 1976. The assessee company for the first time landed itself in the enormous task of producing and marketing of the tea produced. As the company is new to this business it naturally requires the assistance of some agency to look after the affairs in the estate. The company immediately after its incorporation, therefore, entered into an agreement with M/s. Nonsuch Tea Estate for managing the entire affairs at the estates and for the services rendered by M/s Nonsuch Tea Estate the assessee company agreed to pay a technical consultancy fee of Rs. 3,60,000 per annum for 10 years. By virtue of clause 3 of the agreement M/s. Nonsuch Tea Estate agreed to render such advices or other assistance other than financing, as may be required by M/s Mahavir Plantations in the running of the four estates, from the reports submitted by M/s Nonsuch Tea Estate to the assessee company which is contained at pages 266 to 269 of the Paper Book, Vol. IV for the year 1978-79 it is revealed that all the operations to be conducted by M/s. Nonsuch Tea Estate for the improvement of the tea estate have been given in detail. Since this assessee company is new to this business and M/s. Nonsuch Tea Estate had experience in agricultural operations inasmuch as they were the previous owners of the four estates, the assessee company had entered into an agreement with M/s. Nonsuch Tea Estate who had the full knowledge of all the estates. Moreover after making an investment of Rs. 145 lakhs no prudent investor would grudge to make payment for consultancy services @ Rs. 90,000 per quarter for taking advice on matters connected with whether, climatic condition, fertiliser programme, type of fertiliser to be used, type of pruning, spraying, type of drier equipments, weeding, soil testing etc. As pointed out earlier, since the assessee company did not have experience in agricultural operations as this is the first year of its business, the assessee company is fully justified in entering into an agreement with M/s. Nonsuch Tea Estate in the matters connected with agricultural operations for the proper maintenance of the tea estates. These aspects, in our opinion, have not been considered by the ITO. The argument of the learned departmental representative that the consultancy fee paid by the assessee to M/s. Nonsuch Tea Estate is nothing but sale consideration cannot be accepted inasmuch as in the acquisition proceedings initiated by the same department, the sale consideration of Rs. 1,45,000 has been accepted by the department. In the same matter in the proceedings under the Stamp Act the sale consideration of Rs. 1,45,00,000 has been confirmed not only by the appellate authority but also by the High Court of Madras in C.R.P.No. 526 of 1979 dated 12-1-81 at pages 262 to 264 of Paper Book, Volume IV of 1978-79. Since the consultancy fees was paid by the assessee in pursuance of an agreement for the various services rendered by M/s. Nonsuch Tea Estate for the upkeep of the four estates, we are of the opinion that the sum paid by the assessee to M/s. Nonsuch Tea Estate should be allowed as deduction and we fully agree with the C.I.T.(A), Therefore, the appeal filed by the revenue on this count is dismissed.