HINDUSTAN UNILIVER LTD ( AS SUCCESSOR TO BON LTD),MUMBAI vs. ITO 1(1)(2), MUMBAI

As per registry noting, it is observed that the appeal has been filed with a delay of 662 days. The Ld. Counsel stated that the issue in dispute originally arose in the case of concern M/s Bon Limited who got merged with M/s Hindustan Unilever Limited w.e.f. 01/04/2009 vide Bombay High Court order dated 16/04/2010 . As per said order, Hindustan Unilever Ltd. was to step into the shoes of Bon Limited in all its pending proceedings. The original appeal was filed within time on 09/04/2009 by M/s Bon Limited as but the same was dismissed by ITAT vide its order dated 19/01/2011, being not maintainable as assessee was not in existence at the time of hearing. Therefore, a new appeal was filed in the name of M/s Hindustan Unilever Ltd. vide ITA No. 1144/M/2011 within 9 days of receipt of Tribunal order. Further, there is actual delay of only 296 days and not 662 days as calculated by registry. With this background, the assessee has requested for condonation of delay by an affidavit dated 09/03/2011 as delay was attributed to bona fide impression that the name of the erstwhile assessee would be substituted with the new entity by operation of law in view of the order of Hon’ble Bombay High Court. A copy of Hon’ble Bombay High Court order dated 16/04/2010 sanctioning amalgamation between Bon Limited and Hindustan Unilever Ltd. has been placed before us. The Ld. DR raised no serious objections against the same and hence, under the circumstances, we are inclined to condone the same and proceed to decide the issue on merits.

Aggrieved, the assessee preferred appeal before CIT(A). Qua the first issue, CIT(A) noted that the assessee got license to manufacture and sell ‘Dalda’ from its Holding company M/s Hindustan Unilever Ltd. (HUL) in some states of south M/s Hindustan Unilever Ltd. (As successor to M/s Bon Ltd.) Assessment Year 2004-2005 India. As it did not have adequate facilities of manufacturing, it got manufacturing done from M/s HUL and paid amounts to use these facilities. The assessee contended that payments are made for goods & services procured from M/s HUL and the payments are reasonable vis-à-vis prevailing market conditions and therefore, adhoc disallowance made by AO is without any basis. CIT(A) noted that ‘Dalda’ being famous brand, but strangely no money was paid by assessee to obtain manufacturing/selling rights to M/s HUL. Further, whether such payments were reasonable keeping in view the quantity of goods manufactured and other services rendered is not subject to verifications. With this background, he affirmed the action of AO in disallowing impugned additions after providing for an allowance of Rs.27,31,452/- being sum paid by assessee towards reimbursement of excise duty. Similarly, he affirmed the action of AO in disallowing 20% of other expenditure tabulated above at serial no. 2&3, on the ground that the assessee could not substantiate the same.

Aggrieved, the assessee is in appeal before us. A paper-book containing inter-alia various submissions made before AO along-with final accounts and Tax Audit Report of the assessee has been placed before us. Qua 40A(2) disallowance, the Ld. Counsel for assessee has contended that the impugned payments were reasonable and fair keeping in view the prevailing market conditions. AO could not point out any basis on which adhoc disallowance has been made. Further, the payment has been made from one subsidiary to holding company and both being company assessee, falls under the same tax bracket and hence tax neutral. The CBDT vide circular number 6-P dated 06/07/1968 has stated that no disallowance is called for u/s 40A(2) in respect of payments made to relatives/sister concerns where there is no attempt to evade taxes. Reliance has been placed on the following judgments of jurisdictional Bombay High Court:-

We have heard the rival contentions and perused material available on record. The material facts are not in dispute. Qua addition u/s 40A(2), the bifurcation of amounts paid are as follows: Sl. No. Payments debited to Profit & Loss Account Rupees 1. Processing Cost 71,44,968/- 2. Common Cost 21,80,000/- 3. Service Charges 3,36,000/- 4. Excise Duty Reimbursed 27,31,452/- 5. Payment for raw material / packing material / chemicals 81,68,950/- TOTAL 2,05,61,370/- Admittedly, the assessee do not have any manufacturing facility as no investment in fixed assets have been made by it rather it availed manufacturing facility of its holding company and paid related costs. The complete details of cost incurred M/s Hindustan Unilever Ltd. (As successor to M/s Bon Ltd.) Assessment Year 2004-2005 item-wise were given in various submissions to AO during assessment proceedings. But AO failed to point out any discrepancies in the same and made adhoc disallowance of 20% without any sound basis. It appears that the same has been made on mere suspicion that excessive payment have been made so as to compensate for the royalties. The CIT(A) has already provided relief to the extent of Rs.27,31,452/- being reimbursement of excise duty and hence accepted the factual situation. In such a scenario, we are of the considered opinion that an adhoc disallowance cannot be made on mere suspicion rather the AO should have brought some cogent material in the form of comparables so as to justify that the impugned payments are excessive or unreasonable. Moreover, both entities being in the same tax bracket, hence the transactions are tax neutral and covered by CBDT circular rightly pointed by Ld. AR. Our view is further fortified by following observation of jurisdictional Hon’ble Bombay High Court in the case of CIT Vs. V.S.Dempo & Co. (P.) Ltd. (supra):- “In this connection, the fact that the assessee as well as its subsidiary which is the seller are in the same tax bracket and pay same rate of tax is a fact which assumes importance. Admittedly, it is not a case of tax evasion inasmuch as if the rate would have been less, the assessee’s profit would have been more, but the profits of the seller would have been less and both being taxable at the same rate, there would be no difference in the aggregate tax payable by the assessee and its subsidiary.

We have heard the rival contentions and perused material on record. The factual position is that although complete details were made available by the assessee before lower authorities but additions were made for want of verification of vouchers for 3 months on test check basis. There is nothing adverse on record with respect to expenditure in Tax Audit Report. Gujrat High court in CIT Vs. Vallbh Glass Works Ltd. (supra) has held that where audited accounts were available with regard to the expenses claimed by the assessee and there were no adverse comments by auditor, no disallowance of such expenses should be made unless there are cogent reasons to question the genuineness of such expenditure.

In nutshell, the appeal of the assessee is allowed.