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Income Tax Appellate Tribunal, ‘’ B’’ BENCH, AHMEDABAD
Before: SHRI WASEEM AHMED
आयकर अपील�य अ�धकरण, अहमदाबाद �यायपीठ IN THE INCOME TAX APPELLATE TRIBUNAL, ‘’ B’’ BENCH, AHMEDABAD (CONDUCTED THROUGH VIRTUAL COURT AT AHMEDABAD) BEFORE SHRI WASEEM AHMED, ACCOUNTANT MEMBER And Ms MADHUMITA ROY, JUDICIAL MEMBER आयकर अपील सं./ITA No. 1397/AHD/2015 �नधा�रण वष�/Asstt. Year: 2011-2012 Asian Mills Pvt. Ltd., A.C.I.T., 104, Sakar III, Vs. Range-1, Opp. Old High Court, Ahmedabad. Ashram Road, Ahmedabad-380014. PAN: AABCA8236G And आयकर अपील सं./ITA No. 1531/AHD/2015 �नधा�रण वष�/Asstt. Year: 2011-2012 D.C.I.T., Asian Mills Pvt. Ltd., Circle-1(1)(1), Vs. 104, Sakar III, Ahmedabad. Opp. Old High Court, Ashram Road, Ahmedabad-380014. PAN: AABCA8236G
(Applicant) (Respondent) Assessee by : Shri S.N. Soparkar, Sr. Advocate with Shri Parin Shah, A.R Revenue by : Shri R.R. Makwana, Sr.D.R सुनवाई क� तार�ख/Date of Hearing : 08/01/2021 घोषणा क� तार�ख /Date of Pronouncement: 02/03/2021 आदेश/O R D E R PER WASEEM AHMED, ACCOUNTANT MEMBER: The captioned cross appeals have been filed at the instance of the Assessee and the Revenue against the order of the Learned Commissioner of Income
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Tax(Appeals)-6, Ahmedabad, dated 27/03/2015 arising in the matter of assessment order passed under s.143(3) of the Income Tax Act, 1961 (here-in-after referred to as "the Act") relevant to the Assessment Year 2011-2012.
First we take Revenue’s appeal bearing ITA No. 1531/Ahd/2015 for the purpose of adjudication. The Revenue has raised the following grounds of appeal:
The ld.CIT(A) has erred in law and on facts in deleting the disallowance made u/s.40(a)(ia) of Rs.2,59,03,812/- without considering the findings given by the AO in the assessment order. 2. The ld.CIT(A) has erred in law and on the facts in deleting the disallowance of Rs.5,48,921/- subject to verification without appreciating the fact that the additional discount given is by way of rent and TDS u/s.1941 is applicable in this case. 3. The ld.CIT(A) has erred in law and on facts in deleting the depreciation on car and car expenses of Rs.34,63,547/- without appreciating the fact that the basic condition required for claim of depreciation are not fulfilled in this case.
The first issue raised by the Revenue is that the learned CIT (A) erred in deleting the disallowances of Rs. 2,59,03,812/- made by the AO under section 40(a)(ia) of the Act.
The fact in brief is that, during the assessment proceeding, the AO found that the assessee has not deducted tax under section 194C of the Act on certain payment made to the transporter, freight inward charges and clearing & forwarding charges amounting to Rs. 2,22,48,327/-, Rs. 36,55,545/- and Rs. 138,350/- respectively.
4.1 The assessee with regard to the payment to transporter and freight inward charges claimed that in the TDS return in form 26Q for Quarter 3 and 4 it has reported PAN of all the parties to whom transportation charges and freight inward charges were paid. Thus, in view of the provision to sub-section (6) to section 194C it was not required to deduct the TDS. The assessee also claimed that by reporting the PAN detail of the transporter in form 26Q it has complied with the provision of sub-section 7 to section 194C of the Act.
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4.2 However the AO rejected the contention of the assessee by holding that provisions of subsection 6 and 7 to section 194(C) impose responsibility on the assessee to collect PAN detail and submit the same before the prescribed authority in prescribed form within prescribed time. But the assessee has not done so but only reported the PAN in the return in form 26Q. Thus the assessee has not complied with the provisions specified under sub-section (6) and (7) to section 194C of the Act to avail the benefit. Accordingly the AO held the assessee in default and made addition of Rs. 2,60,42,222/- (2,22,48,327 + 26,55,548 + 1,38,350) to the total income of the assessee under section 40(a)(ia) of the Act.
Aggrieved assessee carried the matter before the learned CIT (A) who deleted the addition to the extent of transportation and freight inward charges but confirmed the addition of Rs. 1,38,350/- paid for clearing forwarding charges to M/s Trishul Transport. The relevant findings of the ld. CIT-A stand as under: 4.5 I have considered the facts of the matter. Impugned disallowance consist of 3 components. My findings component wise are as under: (1) Payment to transporters (Rs.2,22,48,327/-) In accordance with section 194C(6), no deduction of tax shall be made from any sum paid to a transporter on furnishing of his PAN to the person paying such sum. In the instant case the PANs were obtained and the details were furnished in the TDS Returns and also to the A.O. Once the PANs are •obtained, the appellant was not liable to deduct tax on the payments and therefore the provisions of section 40(i)(ia) are not attracted. As contended by the AR the prescribed authority u/s 194C(7) has not been specified in the Act or the Rules. A.O.'s observation (that the commissioner of income tax of the appellant is the prescribed authority) has no basis. Therefore no failure can be attributed to the appellant. Even if there is a failure to comply with section 194C(7)» the provisions of section 40(i)(ia) cannot be invoked, since there was no liability to deduct tax. Disallowance of the said sum is not in accordance with law. It is deleted. (2) Freight charges (Rs. 36,55,541/-) Appellant had purchased goods from Essar Steel Ltd.. The seller of the goods arranged for the transport. It paid the transportation charges and collected the same amount from the appellant. As contended by the AR this amount was only reimbursement of the transportation charges and therefore not liable for deduction of tax. Hence I am of the view that the disallowance is not sustainable. It is deleted. (3) Payment to M/s Trishul Trasnport Co. (Rs. 1,38,350/-) The written submission filed by the appellant is silent on the disallowance.
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A.O.'s observations remain uncontroverted. Disallowance of the said sum is upheld.
Being aggrieved by the order of the ld. CIT-A, both the Revenue and the Assessee are in appeal before us. The Revenue is in appeal for the deletion of Rs. 2,59,03,812/- and assessee is in appeal against the confirmation of the addition of Rs. 1,38,350/- only. The Assessee in its appeal in ITA No. 1397/Ahd/2015 has raised the ground which reads as under: 1. The Ld.CIT Appeals 6 has erred in law and on facts in confirming the disallowance of Rs.138350/- on account of freight payment made. The disallowance was made by AO by invoking sec. 40(a)(ia).
The learned DR before us submitted that the assessee has not deducted the TDS on the expenses and therefore the same cannot be allowed as deduction while computing the income under the head business and profession.
On the other hand, the learned AR for the assessee before us filed a paper book running from pages 1 to 213 and submitted that the assessee is not liable for the deduction of TDS under section 194C of the Act and therefore there cannot be any disallowance for the expenses as discussed above.
Both the ld. DR and the AR before us relied on the order of the authorities below to the extent favorable to them.
We have heard the rival contentions of both the parties and perused the materials available on record. There is no ambiguity that the assessee is liable to deduct the TDS under the provisions of section 194C of the Act on the payment made to the transporters and freight inward charges. However, the assessee has been provided an immunity from the deduction of TDS under subsection 6 to section 194C of the Act if the assessee obtains PAN from the transporters. The relevant provisions of subsection 6 to section 194C of the Act reads as under: (6) No deduction shall be made from any sum credited or paid or likely to be credited or paid during the previous year to the account of a contractor during the course of business of plying, hiring or leasing goods carriages, where such contractor owns ten or less goods
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carriages at any time during the previous year and furnishes a declaration to that effect along with his Permanent Account Number, to the person paying or crediting such sum.
10.1 Admittedly there is no dispute to the fact that the assessee has obtained PAN from the transporters which were furnished in the TDS return. Thus, in our considered view the claim of the assessee cannot be denied on account of non- deduction of TDS on the payment made to the transporters/freight inwards under sub-section (6) to section 194C of the Act.
10.2 Before parting, it is also important to note that the assessee was also under the obligation, after obtaining the PAN from the transporters, to furnish the same in the prescribed form to the prescribed authority within the prescribed time as provided under sub-section (7) to section 194C of the Act. The relevant provision of sub-section (7) to section 194C of the Act reads as under: (7) The person responsible for paying or crediting any sum to the person referred to in sub- section (6) shall furnish, to the prescribed income-tax authority or the person authorised by it, such particulars, in such form and within such time as may be prescribed.
10.3 At the threshold, we find that though there is provisions under the Act to file the necessary details to the prescribed authority but such prescribed authority has not been nominated under the provisions of law. Thus in the absence of such prescribed authority no fault can be attributed to the assessee for not filing the necessary details as discussed above. In our considered view in the absence of prescribed authority, the details filed by the assessee along with form 26Q should be considered as sufficient compliance on the part of the assessee. Accordingly, we hold that the claim of the assessee cannot be denied in the absence of non-filing of necessary details to the prescribed authority as alleged by the AO.
10.4 It is also significant to note that the provisions as provided under sub-section 6 and 7 to section 194C of the Act are independent to each other and therefore they cannot be read in conjunction. In other words non-compliance of the provisions of sub-section 7 to section 194C of the Act the claim of the assessee cannot be denied
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as there was the compliance on the part of the assessee for the provisions as provided under subsection 6 to section 194C of the Act.
10.5 In holding so we draw support and guidance from the order Jaipur ITAT in ITA No. 1113/JP/2018 in case of ACIT vs. Arihant Tarding Co. reported in 104 taxmann.com 336 wherein it was held as under: In the instant case, once the assessee is in receipt of PAN and has not deducted TDS, it has complied with the first statutory obligation cast upon him and the assessee cannot be penalized for non-deduction of TDS. The provisions of section 40(a)(ia) which are deeming fiction relating to non-deduction of TDS have to be read in the limited context of non- deduction of TDS and the same cannot be extended to ensure that even where the assessee complies with his statutory obligation not to deduct TDS on receipt of PAN, merely because the subsequent obligation in terms of filing of prescribed forms has not been complied with, the assessee should suffer disallowance of the expenditure. [Para 8]
In view of the above we are of the opinion that the order of the ld. CIT-A does not require any interference as far as the appeal of the Revenue is concerned.
10.6 Coming to the next disallowance of Rs. 1,38,350/- on account of forwarding charges agitated by the assessee in its appeal, in this connection we find that the disallowance was confirmed by the learned CIT (A) for the reason that the assessee is silent on the issue. However, we find that the assessee has also furnished the copy of the PAN of such transporter which is placed on page 167 of the paper book. Thus what is inferred is that even the contention of the authorities below is assumed correct, then also there cannot be any disallowance on account of non-deduction of TDS as the assessee has complied the provisions of section 194C(6) of the Act which have been elaborately discussed in the preceding paragraph. Hence the ground of appeal of the revenue is dismissed and the ground of appeal of the assessee is allowed.
The next issue raised by the Revenue is that the learned CIT (A) erred in deleting the addition for Rs. 5,48,921/- made by the AO for the additional discount given on account of go-down rent and tax not deducted thereon under section 194I of the Act.
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During the assessment proceeding it was found that the assessee has given additional discount to 5 parties on account of go-down rent paid by such parties. The details of the parties and the rent stand as under:
SN Name of the concern Godown Rent paid (Rs.) 1 Shah Steel & Tubes, Mumbai 2,00,774 2 Puja Tube Corporation, 53,617 Mumbai 3 Digar tubes Ltd., Mumbai 30,956 4 Bombay Hardware Pvt. Ltd., `2,51,680 Mumbai 5 Vora Bros. & Co., Mumbai 5,48,921
12.1 The assessee’s contention was that usually its customer don’t take the delivery of the goods in their own go-down after the purchase but leave the good at the assessee’s go-down until and unless the customer further sold the good to other parties. Thereafter the customers instruct the assessee to deliver the goods directly to the premises of such other parties. However the above mentioned parties have taken the delivery of goods to their own go-downs hence it (the assessee) has given discount for go-down rent paid by them. By this practice it (the assessee) was able to receive early money by booking sale at earliest occasion.
12.2 However the AO rejected the contention of the assessee by holding that those parties were located in Mumbai and go-downs were owned by them. Hence there is no reason for the assessee to the bear the rent for which the assessee has no liability or responsibility. Hence such payment is not allowable. Further those discounts are for rent which require deduction of tax under section 194I of the Act. Thus in view of the above the AO disallowed the discount to the tune of Rs. 5,48,921/- and added the same to total income of the assessee.
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Aggrieved assessee carried the issue before learned CIT (A) who deleted the addition subject to certain verification by observing as under: 5.2 At para 4 of the assessment order A.O observed that the appellant had given discount @ 1% on the godown rent to 5 parties totaling to Rs.5,48,921/- since the payment was by way of rent tax should have been deducted u/s.1941 and since the appellant failed to deduct tax, said amount was being disallowed. The contentions of the Ld.AR are that the disallowance was made on factual inaccuracies; the amount paid was not towards godown rent; therefore there was no liability to deduct tax; since the sale was effected directly to the buyers the discount was given to the buyers and therefore the disallowance was unwarranted. A.O is directed to verify the contentions of the AR and modify the order. Subjection to verification disallowance of this amount is deleted.
Being aggrieved by the order of the ld. CIT-A, the revenue is in appeal before us.
The learned DR before us submitted that the assessee has not extended the discount to the parties in the course of business. Therefore the same cannot be allowed as deduction. Furthermore, there was no deduction of TDS under section 194-I of the Act.
On the other hand the learned AR before us submitted that the discount given to the parties were incurred in the regular course of business and the same was not subject to the provisions of TDS.
We have heard the rival contentions of both the parties and perused the materials available on record. From the foregoing discussion we find that the discount offered by the assessee to its parties has been disallowed on account of 2 reasons. Firstly, these parties own their own go-down in Mumbai and therefore there was no occasion/reason for the assessee to offer any discount for lifting the goods from the go-down of the assessee. Secondly, the assessee is paying the rent to those parties in the form of discounts extended to them and therefore such discount is subject to the provisions of section 194I of the Act being rent in the garb of discount.
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17.1 For the 1st reasons, we note that it was the decision of the assessee to extend the discount or not to the parties. Similarly, there was no doubt on the correctness of the claim made by the assessee. The AO has no power to seat on the armchair of the assessee and direct to carry out its business affairs in a particular manner. Therefore we are of the view that such discount extended by the assessee cannot be denied.
17.2 For the 2nd reason, we note that the provisions of section 194I of the Act cannot be attracted on the discount extended by the assessee to its customers/buyers. Similarly the assessee has claimed discount as deduction which cannot be equated with the rent. Furthermore, we also note that the learned CIT (A) has adjudicated the issue raised before him by allowing the appeal of the assessee but subject to the direction which has been discussed in the preceding paragraph. As such, we do not find any defect in the order of the learned CIT (A). Therefore we do not find any merit in the ground of appeal filed by the revenue. Hence the ground of appeal of the revenue is dismissed.
Next issue raised by the revenue is that the learned CIT (A) erred in deleting the disallowances of depreciation on car and expenses related to cars which were registered in the name of the directors.
The assessee in the year under consideration claimed depreciation on 3 cars which were registered in the name of the directors. Out of three cars, 2 cars were bought during the year under consideration. The assessee for claiming the depreciation contended that the cars were purchased and payment was made by the company. Indeed, the cars were registered in the name of the director but the same was used for the business purpose of the assesse company.
19.1 However the AO held that the assessee company and the director are two different person capable of holding assets in personnel capacity. Thus the car purchased and owned in the name of director are not the assets of company. Further
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the director being an individual may no longer be the director of the assessee or simultaneously may hold directorship with other company or holding stake in other business concern. Also the payment made by the company on behalf of director for purchase of car was not established that the car is owned by the company. Furthermore, the same is a financial transaction between two legal persons i.e. assessee company and its directors. There was no proof that the car was used for the business purpose and not used for personal benefit of the directors. The AO also observed that the depreciation was denied in the A.Y. 2010-11 as the assessee failed to establish based on documentary evidence that the car was used for business purpose.
19.2 In view of the above the AO held the car is neither owned by the assessee company nor used for the business purpose of the assessee company. Accordingly he disallowed the depreciation of Rs. 28,93,859/- RTO expenses for Rs. 1,37,210/- and insurance charges of Rs. 2,30,037/- on such 3 cars. The AO further disallowed car running expenses of 202441/- on proportionate basis.
Aggrieved assessee preferred an appeal before the learned CIT (A) who allowed the appeal of the assessee by observing as under:
Having considered the facts of the case I am inclined to accept the contentions of the Ld. A.R. As admitted by the A.O himself the funds for purchase of the cars were provided by the appellant. The Hon'ble Supreme Court in the case of Mysore Minerals Ltd. Vs. C.I.T. 239 ITR 775 (S.C) has held that the section of the I.T. Act, 1961, confers a benefit of the assessee. The provision should be so interpreted and the words used therein should be assigned such meaning as would enable the assessee to secure the benefit intended to be given by the Legislature to the assessee. It was further held by the Hon'ble Supreme Court that the term owned as occurring in section 32(1) of the Income-tax Act must be assigned a wider meaning. The Hon'ble Supreme Court has held as under: "It is well-settled that there cannot be two owners of the property simultaneously and in the same sense of the term. The intention of the Legislature in enacting section 32 of the Act would be best fulfilled by allowing deduction in respect of depreciation to the person in whom for the time being vests the dominion over the building and who is entitled to use it in his own right and is using the same
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for the purposes of his business or profession. Assigning any different meaning would not subserve the legislative intent. " 0
4.3.1 Further, the Ahmedabad I.T.A.T in the case of Ambuja Synthetics Mills Pvt. Ltd. Vs. The Dy. C.I.T., Range-1, Ahmedabad, on similar facts, decided the issue in favour of the assessee, by holding "It is not disputed that funds for purchases of the car -were provided by the assessee company which is also reflected in the accounts of the assessee company. In our opinion, when the car is actually used for the purpose of business of the company depreciation thereon cannot be denied." .
As regards the A.O's observation that the appellant failed to establish that the vehicles were used by the company, it is seen that there are various judicial pronouncements to the effect that use means kept ready for use and not actually use. The case laws cited at 123 ITR 404 ( Delhi), 170 Taxman 407 (MP), 187 Taxman 442 (Mad), 201 Taxman 666 (P & H), 198 Taxman 470 & 199 Taxman 273 are in favour of the appellant.
Being aggrieved by the order of the ld. CIT-A, the Revenue is appeal before us.
The learned DR before us vehemently supported the order of the AO.
On the other hand, the before us contended that the payment was made by the company for the purchase of the cars and therefore the assessee was the beneficial owner of these assets. The learned AR before us vehemently supported the order of the learned CIT (A).
We have heard the rival contentions of both the parties and perused the material available on record. Admittedly, it is necessary for the assessee to own the assets for claiming the depreciation on the assets. But the word ‘own’ has not been defined under the provisions of the Act whether the ownership refers to the legal ownership or the beneficial ownership. Undoubtedly, the assessee in the present case is not the legal owner of the vehicles but it has made the payment for the acquisition of the cars. Thus it can be inferred that the assessee owns the cars in the capacity of beneficial owner. Thus, in our considered view the assessee is entitled for the depreciation on the car. In holding so we draw support and guidance
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from the order of this Tribunal in case of ITO vs. Electro Ferro Alloys Ltd. in ITA no 2773/Ahd/2009 reported in 25 taxmann.com 458 where the relevant finding of the coordinate bench reads as under: 5. 2. On consideration of the facts of the appellant's case it is noticed that the motor car was purchased, though in the name of the appellant's director, it was purchased out of the funds of the appellant-company and it is also not in dispute that the motor car was purchased for the purpose of business of the appellant. Thus the motor car being, business asset of the appellant and purchased for the purpose of business and used as such by the appellant, in view of the decision in the case of Mysore Minerals Ltd. [1999] 239 ITR 775 (SC) referred to above and other decisions cited by the learned authorised representative, I hold that the disallowance made by the Assessing Officer on this ground is not justified and hence the same is directed to be deleted. 22. 2 In the present case it is not disputed that investment was made by the assessee in purchase of the motor car. It is shown as asset in the balance-sheet of the company. If expenditure for running the vehicle was incurred by the assessee, the assessee is de facto owner of the vehicle. It is not disputed that it was used for the purpose of business of the assessee company. The hon'ble Rajasthan High Court in the case of CIT v. Mohd. Bux Shokat Ali (No. 2) [2002] 256 ITR 357 (Raj) held that where vehicle was purchased by the firm used by it for the purpose of its business but it was registered in the name of one of the partners then the firm would be entitled to depreciation on vehicle. The hon'ble Delhi High Court in the case of CIT v. Basti Sugar Mills Co. Ltd. [2002] 257 ITR 88 (Delhi) held that where vehicle was owned and used by the assessee but no registration was done in its name then the assessee would still be entitled to depreciation on such vehicle. Therefore, the assessee has right to claim depreciation thereon. This ground of the Revenue is accordingly rejected. "
24.1 Regarding the other expenses of fuel and maintenance on such cars, we find that the AO has made the disallowance in adhoc manner which are not permitted under the provisions of law. As such, the AO was under the obligation to pinpoint the personal expenses incurred by the assessee but he has not done so.
24.2 It is also important to note that the dominion ownership of the car rest with the company. The company being a body corporate is different from the individuals. In other words in a body corporate there cannot be any element of personal expenses as alleged by the AO.
24.3 In view of the above and after considering the facts in totality, do not find any infirmity in the order of learned CIT (A). Hence the ground of appeal of the revenue is dismissed.
24.4 In the result the appeal of the Revenue is dismissed.
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Coming to the Assessee’s appeal bearing ITA No.1397/Ahd/2015 for A.Y. 2011-12.
The 1st ground raised by the assessee is that the learned CIT (A) erred in confirming the disallowance made by the AO amounting to Rs. 1,38,350/- representing the freight charges on account of non-deduction of TDS.
The issue raised by the assessee has already been adjudicated by us vide paragraph No.10 of this order along with the appeal filed by the Revenue bearing ITA No. 1531/Ahd/2015. As such the ground of appeal of the assessee has been allowed. For the detailed discussion, please refer the relevant paragraph. Hence the ground of appeal of the assessee is allowed.
The 2nd issue raised by the assessee is that the learned CIT (A) erred in confirming the order of the AO by sustaining the disallowance of the commission expenses amounting to Rs. 55,14,372/- only.
The assessee in the year under consideration has claimed an expense of Rs. 74,37,729/- under the head commission which were paid to 15 parties. Out of such 15 parties, one party namely M/s C.M. Smith & Sons Ltd was paid the commission by the assessee for an amount of Rs. 55,14,372/- only. The assessee to establish the genuineness of the commission paid to such party has filed the copy of the income tax return of the party, confirmation from party and the copy of agreement. The assessee also filed the details of the sales generated through the involvement of such commission agent namely M/s C.M. Smith & Sons Ltd.
28.1 However, the AO found certain defects in the agreement filed by the assessee. It was pointed out by the AO that this agreement was made dated 01st January 2010 but there was no sale made by it through the involvement of impugned commission agent in the financial year ending 31st March 2010. Similarly the copy of the agreement was neither notarized nor prepared on the stamp paper.
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Likewise there was no date mentioned by the parties who executed the agreement. Accordingly, the AO doubted on the genuineness of the agreement filed by the assessee.
28.2 The AO further found that the assessee has claimed to have made sales to certain parties through the impugned agent. The details of the party stand as under: 1. NTPC 2. Tata Project Ltd. 3. M/s Mukat Tanks & Vessel Pvt. Ltd. 4. M/s Surinder Engg. Co. Ltd. 28.3 As per the AO, the two parties namely NTPC and Tata Project Ltd are the old customer of the assessee. In other words the assessee was already supplying the goods to these parties. Therefore there was no reason/occasion for the assessee to hire the services of a commission agent as claimed by it.
28.4 Regarding the remaining two parties, the AO found that the assessee has offered discount to them which is usually given to the parties who are directly associated and have dealing with the assessee. Thus it is transpired that these two parties are of the assessee only. As such these parties were not referred by the agent as claimed by the assessee.
28.5 In view of the above, the AO disregarded the contention of the assessee by holding that the assessee failed to prove the services rendered by the commission agent. Thus the AO disallowed the same and added to the total income of the assessee.
Aggrieved assessee preferred an appeal to the learned CIT (A) who confirmed the action of the AO by observing as under:
6.2 At para 5 of the assessment order A.O. observed that the appellant had debited brokerage and commission of Rs. 74,37,729/-; out of the 15 parties to
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whom the commission was paid, the commission paid to M7s C.M. Smith and Sons Ltd. was Rs. 55,14,372/-; no commission was paid to this party in the preceding A.Y. 2010-11; appellant failed to establish the services rendered by the said party to earn the commission; the two parties namely NTPC and Tata Project Ltd. (to whom the sales were shown to have been made through Smith and Sons Ltd.) were old customers of the appellant; two other parties viz M/s Mukat Tanks & Vessels Pvt. Ltd. and M/s Surinder Engg. Co. Ltd were already known to the appellant and therefore the commission paid was being disallowed, as it was not for business purposes. As seen from the written submission filed appellant has not been able to demonstrate the nature and scale of services rendered by Smith and Sons Ltd. The submission is beside the point. Judicial Opinion is well settled that the payment of commission is allowable only on the assessee furnishing evidence in support of the services rendered. Therefore impugned disallowance of commission is upheld. This ground of appeal is dismissed.
Being aggrieved by the order of the learned CIT (A) the assessee is in appeal before us.
The learned AR before us submitted that the assessee has incurred commission expenses in the regular course of its business and therefore the same is eligible for deduction under section 37 (1) of the Act.
On the other hand the learned DR before us submitted that the services rendered by the commission agent have not been brought on record by the assessee. Therefore, it can be inferred that the commission expenses has not been incurred in the course of the business. The learned DR vehemently supported the order of the authorities below.
We have heard the rival contentions of both the parties and perused the materials available on record. Admittedly, the onus lies upon the assessee to furnish the necessary details for the services rendered by the commission agent. In the case on hand the assessee has filed certain details as detailed under: i. Details of sales made through the commission agent placed on page 170 of the Paper Book. ii. Copy of the agreement between the assessee and the commission agent placed on pages 168 to 169 of the paper book.
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iii. Audited financial statement of agent which are placed on pages 136 to 163 of the paper book. 33.1 It is also important to note that the details i.e. addresses of the parties to whom the assessee has made sales through the involvement of the commission agent were duly supplied by the assessee to the AO during the assessment proceedings.
33.2 However, the AO has not pointed out any flaw in the details filed by the assessee. As such the AO has proceeded to make the disallowance by pointing out procedural lapses in the agreement which have been discussed in the preceding paragraph. Assuming, there are certain lapses in the agreement as alleged by the AO but the question arises whether the disallowance of the expenses can be made by the AO on account of such lapses which have been discussed in the preceding paragraph. In this regard, we note that there is no provision under the Act which mandates for claiming the commission expenses to have an agreement with the party. In other words, the agreement is not a criteria for making the disallowance of the commission expenses claimed by the assessee, particularly, in a situation where the assessee has furnished other evidences which were not doubted by the AO. As such, the onus shifted upon the AO to arrive at a conclusion based on documents and after conducting the necessary enquiries from the respective parties that the agreement was just a piece of document to justify the commission expenses which were not actually incurred. The AO was well aware of the details of the commission agent and the parties to whom the assessee has made sales through the involvement of the commission agent but he chose not to make any enquiry before reaching to the conclusion that the commission expenses was bogus in nature despite having powers under the provisions of section 131/133(6) of the Act.
33.3 The provisions for allowing the deduction of the commission expenses are governed under the provisions of section 37 of the Act which requires the fulfilment of the following ingredients:
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i. Expenditure should not be covered under the specific sections, i.e., 30 to 36; ii. Expenditure should not be of capital nature; iii. Expenditure should have been incurred during the previous year; iv. Expenditure should not be of a personal nature; v. Expenditure should have been incurred wholly or exclusively for the purpose of the business or profession.
33.4 All of the five conditions mentioned above are to be satisfied before one can claim any expense as a deduction under this section. The last condition requires for allowing the claim of the expenses that the expenditure should have been incurred wholly or exclusively for the purpose of the business. This is a very vexed question, and a lot of litigation revolves around this issue. In fact, once the assessee has furnished the details for the deduction of commission expenses, the onus is shifted upon the AO to reject the contention of the assessee with valid reasoning and not on the basis of surmise and conjecture.
33.5 Indeed 2 of the parties were the old parties of the assessee yet the assessee hired services for the commission agent. Now the question arises commission paid by the assessee can be denied merely on the ground that these were old parties of the assessee. In our considered view, it cannot be a ground for rejecting the claim of the assessee in the given facts and circumstances. It is because the commission agent has shown turnover of Rs. 1685378746 in its financial statement for the year ending 31st March 2011 with the net profit at Rs. 115016371.00. In other words the commission agent cannot be categorized as a paper company. There can be a possibility for getting a better deal for the assessee from the parties who were the existing clients of the assessee through the involvement of the commission agent. To prove that the commission expenses has not been incurred in the course of the business, the onus is upon the AO which needs to be brought on record but the AO
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without conducting the necessary enquiries has made the disallowance based on surmise and conjecture.
33.6 Moving further, it was also pointed out by the AO that the discount is normally extended by the assessee to its own clients and not to the clients referred by the commission agent. In this connection, we note that the AO has not brought anything on record to substantiate his version. As such the finding of the AO is based on his surmise and conjecture which cannot be considered for disallowing the commission expenses.
33.7 It is also pertinent to note that it is the wisdom of the assessee to hire the services of the commission agent or not. Similarly, the AO cannot direct the assessee not to extend any commission to the agent for the sales made upon his reference to its (the assessee) existing parties. Indeed, the amount of commission paid in connection with the sales made to the existing parties of the assessee can create a doubt in the mind on the genuineness of the transactions but the doubt alone is not sufficient enough for disallowing the expenses. As such the AO on having doubt on the genuineness of the commission expenses was to conduct deeper enquiry on the payment of such commission expenses but he has not done so.
33.8 In holding so we draw support and guidance from the judgment of Hon’ble Gujarat High Court in the case of Voltamp Transformers Pvt. Ltd. Vs. CIT reported in 129 ITR 105 wherein it was held as under: “8. It is well-settled law that so far as the questions of commercial expediency and business need of an organisation are concerned, it is not the viewpoint of a revenue officer which should count but it should be the viewpoint of an ordinary business men dealing with a situation like the one faced by the particular assessee in question. It is, therefore, from that particular viewpoint that the question has to be approached.”
33.9 In view of the above and after considering the facts in totality, we are of the view that the commission paid by the assessee to the party was disallowed by the AO based on his surmise and conjecture which is unwarranted under the provisions of law. The AO has been empowered by the statute under the different sections
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including the provisions of section 131/133(6) of the Act which authorizes to conduct the investigation/enquiries in the claim made by the assessee before disallowing the same on finding procedural lapses. Thus we do not find any reason to uphold the order of the authorities below. Hence, we set aside the finding of the learned CIT (A) and direct the AO to delete the addition made by him. Thus the ground of appeal of the assessee is allowed.
33.10 In the result, the appeal of the assessee is allowed.
In the combined results the appeal of the Revenue bearing ITA No.1531/Ahd/2015 for A.Y 2011-12 is dismissed and the appeal of the Assessee bearing ITA No.1397/Ahd/2015 for A.Y.2011-12 is allowed.
Order pronounced in the Court on 02/03/2021 at Ahmedabad.
Sd/- Sd/-/-/- (MADHUMITA ROY) (WASEEM AHMED) JUDICIAL MEMBER ACCOUNTANT MEMBER (True Copy) Ahmedabad; Dated 02/03/2021 Manish