DCIT, CIR. 7(1), KOLKATA vs. M/S AVADH RAIL INFRA LTD.(PREVIOUSLY KNOWN AS M/S MADRAS ELASTOMERS LTD.), KOLKATA

In the appellate proceedings, the ld. CIT(A) allowed the claim of the assessee by following the appellate order passed by the predecessor ld. CIT(A) for AY 2009-10 and A.Y.2010-11 and also by the Co-ordinate Bench, wherein the claim of the assessee was allowed and thus, allowed the appeal of the assessee. 5. After hearing rival contentions and perusing the material on record, we find that assessee’s case is squarely covered in its favour in own cases in ITA No. 48/Kol/2015 AY 2009-10 and in ITA no. 1247/Kol/2014 A.Y. 2010- 11 by the decisions of the coordinate benches wherein similar issue has been decided in favour of the assessee. The ld. CIT(A) allowed the appeal of the assessee after following the above decisions of the coordinate benches. The facts in the instant assessment year are materially same and, therefore, respectfully following the same, we uphold the order passed by the ld. CIT(A) and dismiss Ground No. 1 raised by the revenue. 6. Ground No. 2, relates to deletion of disallowance of Rs.11,24,310/- by the ld. CIT(A) as made by the ld. AO for non-deduction of TDS.

The AO during the course of assessment proceedings observed that the assessee has failed to deduct TDS from rent paid, consultancy charges and commission as noted in para 2.1 of the assessment order. Accordingly disallowed and added the expenses to the tune of Rs.11,24,310/- to the income of the assessee for non-deduction of tax u/s 40(a)(ia) of the Act. In the appellate proceedings, the ld. CIT(A) allowed the appeal by observing as under:-

After hearing rival contentions and perusing the order of the ld. CIT(A), we observe that the ld. CIT(A) has passed a speaking and reasoned order giving substantive findings as to how the disallowance is not called for. We note that ld CIT(A) has analysed each and every item of expense and came to a conclusion that provisions of tax deduction at source are not applicable in some cases whereas in some instances in view of the decision of the apex court in the case of Hindustan Coca Cola Beverages P. Ltd. Vs CIT 293 JTR 226 (SC) , the provisions of section 40(a)(ia) are not applicable as the payees have returned the said payments in their return of income and paid due Assessment Year: 2011-12 Assessment Year: 2012-13 M/s. Avadh Rail Infra Ltd. [Previously known as M/s. Madras Elastomers Ltd.] 7 taxes. Consequently, we do not find any reason to disturb the findings of the ld. CIT(A) and accordingly Ground No. 2 of the revenue is dismissed.

Ground No. 3 is against the deletion of disallowance of Rs. 4,50,028/- by the ld. CIT(A) as made by the AO on account of payments made in cash in violation to provisions of Section 40A(3) of the Act.

During the assessment proceedings, the AO noticed that the assessee has made certain payments exceeding Rs.20,000/- in cash violating provisions of Section 40A(3) of the Act. The details of the said payments are given in para 3.1. of the assessment order. The AO disallowed the same and added the income of the assessee on the ground that the said payments are in violation of section 40A(3) of the Act.

The ld. CIT(A) allowed the appeal after taking into consideration the submissions made by the assessee in the appellate procedings. The ld. CIT(A) observed that none of the payments exceeded Rs.20,000/- in fact. The ld CIT(A) observed that in a single day, where the payment exceeded Rs.20,000/-, the same was made by way of account payee cheque or account payee demand draft. The ld. CIT(A) observed that the said Section applies to payments made to a single party on a single day. The ld. CIT(A) have recorded a finding of fact that the single day payments to single individual, never exceeded Rs.20,000/- by way of cash and, therefore, provisions of Section 40A(3) of the Act cannot be applied and accordingly deleted the disallowance.

Having considered the above factors and taking into account the reasoning and finding of facts given by the ld. CIT(A) and of course the rival contentions and facts on recrods, we do not find any reason to interfere with the reasoned order passed by ld CIT(A) which is in accordance with I.T.A. No. 238/Kol/2022 Assessment Year: 2011-12 I.T.A. No. 580/Kol/2020 Assessment Year: 2012-13 M/s. Avadh Rail Infra Ltd. [Previously known as M/s. Madras Elastomers Ltd.] 8 the provisions of the Act. Accordingly, Ground No. 3 raised by the revenue is dismissed.

The issue raised in Ground No. 4, is against the deletion of disallowance of Rs.1,92,60,483/- by the ld. CIT(A) as made by the AO on account of non-payment of dues in terms of provisions of Section 43B of the Act. The AO observed from the details filed by the assessee on 14/06/2012 that duties & taxes, sales tax, service tax, excise duty, bonus payable etc., were not paid in terms of provisions of section 43B of the Act and the total outstanding credit of Rs.1,92,60,843/- and accordingly added the same to the income of the assessee.

In the appellate proceedings, the ld. CIT(A) allowed the appeal of the assessee after taking into account the contentions and observation of the assessee by observing and holding as under:- “7.2. I have considered the facts of the case, assessment order and appellant's written submissions. The AO made the disallowance of Rs. 1,92,60,483/- holding that the assessee company failed to make payments which were outstanding and thus, hit by the provisions of sec. 43B of the Act the appellant claimed that in respect of outstanding payments enumerated in the table above from Sr. Nos. 1 to 7 which aggregated to Rs. 10,6,42,159/-, it paid total payment of Rs. 2,61,99,924/- and hence there was no question of non- payment of statutory liabilities. Upon considering the details and evidences by the appellant in support of its claim, I find that the AO failed to take note of the fact that the appellant had already made extra payment of Rs 2,61,99,924/- against total liability of Rs. 1,06,42,159/-. He might have got confused by the treatment given in the books of accounts. Nevertheless once it is established that the appellant company had in fact paid total sum of Rs. 2,61,99,924/- against liability of Rs. 1,06,42,159/-, then provisions of sec. 43B cannot be invoked. Similarly, regarding balance payments mentioned at Sr. No. 8 to 14 of the above table, the appellant company has satisfactorily explained that it had made statutory payments on or before the due date of filing of return of income. Considering the facts of the case and appellant's submissions, I am inclined to agree with the appellant's claim. Section 43B is Assessment Year: 2011-12 Assessment Year: 2012-13 M/s. Avadh Rail Infra Ltd. [Previously known as M/s. Madras Elastomers Ltd.] 9 reproduced hereunder for the sake of clarity:- "43B. Certain deductions to be only on actual payment.- Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of-

After hearing rival contentions and perusing the material available on record, we observe that none of the cases of outstanding payments/dues were paid beyond the due date of filing of return. We observe from the submissions made and evidences furnished by the assessee and also from the findings given by the ld. CIT(A) in respect all these payments that they were paid within the due date. Since the issue is a factual one, we do not deem it fit to delve further into the issue as all these payments were made before the due date of filing of the return as noted by the ld CIT(A) in his appellate order. Consequently ground no. 4 is dismissed.

Ground No. 5 is against the direction of the ld. CIT(A) to allow the claim of deduction u/s 80G of the Act in respect of donations made to three trusts, namely, Sidhvinaya Yatras, Shree Giri Raj Seva Trust and Bodhayan amounting to Rs.70,089/-. 17. We observe that the Assessing Officer in the assessment proceedings noted that the assessee has made donation of Rs.4,22,828/- for which assessee has not offered any explanation and accordingly the same was disallowed by the Assessing Officer. The ld. CIT(A) in the appellate proceedings observed that these donations were made to the Assessment Year: 2011-12 Assessment Year: 2012-13 M/s. Avadh Rail Infra Ltd. [Previously known as M/s. Madras Elastomers Ltd.] 11 trust/institutions which are eligible for deduction u/s 80G of the Act and accordingly restored the issue to the file of the Assessing Officer and directed the Assessing Officer to allow the statutory deduction as per statutory limit prescribed u/s 80G of the Act. We do not find any reason to interfere with this finding of the ld. CIT(A) and accordingly uphold the order of ld CIT(A) on this issue. Hence, Ground No. 5 is dismissed. 18. The issue raised in Ground No. 6 is against the deletion of disallowance of Rs.15,60,000/- by the ld. CIT(A) as made by the Assessing Officer on account of consultancy charges paid to three directors of the assessee company over and above the remuneration. 19. In the assessment proceedings, the AO observed that the assessee has paid consultancy charges to three directors over and above regular remuneration. The ld. Assessing Officer observed that the assessee has not explained the nature of services rendered by the directors and further held that the payments made appear to be in the nature of remuneration and not consultancy. The ld. Assessing Officer also noted that all these directors held more than 10% of the shares of the company. The Assessing Officer disallowed the said payment on the ground that the assessee could not prove the nature of the services rendered by the directors. 20. During the appellate proceedings, the ld. CIT(A) allowed the appeal of the assessee by holding as follows:- “9.2. I have considered the facts of the case, assessment order and appellant's written submissions. The AO disallowed Rs. 15,60,000/- by observing that consultancy charges paid to three Directors of assessee company are not uniform looking to their age, qualification and experience and no exceptional services rendered these directors. On the contrary, the appellant has stated that all these three directors played their role in the company and had rendered their services for betterment of company. The appellant has further stated that Sri Subhash Chandra Saraf is aged about 65 years and is the promoter of the company he has I.T.A. No. 238/Kol/2022 Assessment Year: 2011-12 I.T.A. No. 580/Kol/2020 Assessment Year: 2012-13 M/s. Avadh Rail Infra Ltd. [Previously known as M/s. Madras Elastomers Ltd.] 12 management and administrative experience since incorporation till date, Sri Abhishek Saraf, the other director, is an MBA from foreign university, he is responsible for overall control of business carried on through four factory units at different places and the lady director is also an MBA and she looks after Haridwar factory unit. The appellant has also pointed out that the company had duly deducted TDS from consultancy charges paid to Directors and the directors are assessed to tax separately wherein remuneration as well as consultancy charged disclosed in their personal file. Considering the facts of the case and appellant's written submissions, I am inclined to agree with its claim. The appellant by highlighting qualification and work done by these three Directors, satisfactorily established that the consultancy charges paid to them cannot be said to be excessive or unreasonable. Moreover, these persons are separately assessed to tax and duly declared consultancy charges received from the appellant company and paid due taxes thereon. Hence, there is no loss of revenue. Under these facts and circumstances, I find no justifiable reason to sustain the addition of Rs. 15,60,000/- . Accordingly, the AO is directed to delete the addition of Rs. 15,60,000/-. The ground no. 7 raised by the appellant regarding this issue is allowed.”

We have heard rival contentions and perused the facts on records. We have also noted the findings of the ld. CIT(A) that these payments were made to the directors for rendering services to the assessee company who were qualified in their respective fields. The ld. CIT(A) also noted that while making the payment, the TDS was duly deducted from consultancy charges and these directors were assessed to tax in their personal capacities also. The ld. CIT(A) specifically noted that this is not the case of the assessee that the payments made to the directors is excessive and unreasonable. Besides we note that these directors are separately assessed to tax and have duly declared the consultancy charges received from the assessee company and paid due taxes thereon. The finding to this effect has been given by the ld. CIT(A) in his order also. Accordingly, we are inclined to uphold the order of the ld. CIT(A) and consequently Ground No. 6 of the revenue is dismissed.

Ground No. 7 is against the direction of the ld. CIT(A) to allow commission payments amounting to Rs.6,61,83,867/- to various entities Assessment Year: 2011-12 Assessment Year: 2012-13 M/s. Avadh Rail Infra Ltd. [Previously known as M/s. Madras Elastomers Ltd.] 13 which has been disallowed by the Assessing Officer on account of being bogus and non-genuine.

During the course of assessment proceedings, the Assessing Officer observed that the assessee has made payments of commission to various agents/parties aggregating to Rs.6,61,83,867/-. The ld. Assessing Officer further observed from the evidences furnished by the assessee in the form of agreements with these agents to whom commission was paid that assessee has failed to substantiate as to how these persons were rendering their services to the assessee. The ld. Assessing Officer noticed that the assessee was supplying goods to Indian Railways, which is a Central Government concern which has its own system of tendering, issue of work/supply orders, inspection of final products, quality control and final payments etc. The Assessing Officer also noted that the major part of payments were shown outstanding at the year end and creditors were booked to circumvent and reduce tax liability. The ld AO thus observed that these commissions were paid out of non-business consideration and not for business purposes and, therefore, held the payments to be non-genuine. The ld. Assessing Officer also noted that in the past also similar payments made by the assessee by way of commission to different parties were disbelieved and disallowed. The ld. Assessing Officer on the basis of assessment made in Assessment Year 2009-10 and 2010-11 disallowed the said payments and added to the income of the assesse in the assessment framed.

In the appellate proceedings, the ld. CIT(A) allowed the appeal of the assessee after taking into consideration the submissions and contentions of the assessee. The ld. CIT(A) noted that the five parties who helped the assessee for procuring the orders and doing liaisoning work on behalf of the I.T.A. No. 238/Kol/2022 Assessment Year: 2011-12 I.T.A. No. 580/Kol/2020 Assessment Year: 2012-13 M/s. Avadh Rail Infra Ltd. [Previously known as M/s. Madras Elastomers Ltd.] 14 assesse with India Railways. It was also observed that the Assessing Officer doubted the genuineness of these payments by stating that there was no need for mediation for applying to the tenders/bids floated by Indian Railway and thus, the assessee has failed to prove that the expenditure was wholly and exclusively incurred for the purpose of business.

The ld. CIT(A) recorded a finding of fact that all the evidences were filed before the Assessing Officer as well as in the appellate proceedings which proved the business expediency and genuineness of these expenses. The ld. CIT(A) while allowing the appeal noted that the assessee is a manufacturer of solid cushion tyres, rubber, P.U. moulded goods etc. and it was not possible for the assessee to recruit its own personnel for carrying out services/activities which were outsourced to these agents. The ld. CIT(A) observed that the assessee has proved the services provided by these agents by furnishing copies of agreements with them and these commission agents were hired not only for procuring the orders but also for providing pre & post supply services. The ld. CIT(A) also referred to the provisions of Section 40A(2)(b) of the Act and noted that there was no violation of this Section also. Finally, the ld. CIT(A) following various case-laws, at para 10.3. of the impugned order, arrived at the conclusion that the payments of commission made by the assessee were genuine and wholly and exclusively for the purpose of business and therefore, deleted the addition.

The ld. D/R submitted that the order passed by the ld. CIT(A) against the facts on record as the assessee is supplying its products to the Indian Railways which is a Government owned entity and it has its own system of tendering, issue of work orders, inspection of final products, quality control and final payments etc and there was no need for hiring the agents for I.T.A. No. 238/Kol/2022 Assessment Year: 2011-12 I.T.A. No. 580/Kol/2020 Assessment Year: 2012-13 M/s. Avadh Rail Infra Ltd. [Previously known as M/s. Madras Elastomers Ltd.] 15 carrying out these activities. The ld. D/R submitted that the assessee has failed before the Assessing Officer to prove the services which were rendered by the agents and, hence the Assessing Officer doubted the genuineness of these commission agents. The ld. D/R finally prayed that the order of the ld. CIT(A) may be reversed and the commission payments be disallowed as being bogus and non-genuine.

The ld. A/R on the other hand, supported the order of the ld. CIT(A) and submitted before the Bench that the payment of commission is a regular phenomenon in the business of the assessee and it is practically not possible to pursue the tendering process and pre & post tender services to a Government Department and it is very difficult to do business without the services of specialist agents for rendering these services. The ld. A/R submitted that the assessee has been paying the commissions over the years to procure and keep track of the tenders and after the tenders are awarded to ensure that work orders are issued and goods are supplied in terms of the work orders to Indian Railways. The ld. A/R, therefore, prayed that the order of the ld. CIT(A) being very speaking and reasoned is confirmed.

We have heard the rival submissions and perused the material available on record. We observe that the assessee is engaged in manufacturing and supplying goods to Indian Railways. We note that the assessee has hired services of commission agents for keeping track of the tenders, applying for the tenders, and after the tenders are successfully obtained ,the obtaining of supply orders , supply of goods and finally pursuing and receiving payments. We have perused the order of the ld. CIT(A) and observed that the services of these agents are indispensable to do business with Indian Railways. The ld CIT(A) has gone into the I.T.A. No. 238/Kol/2022 Assessment Year: 2011-12 I.T.A. No. 580/Kol/2020 Assessment Year: 2012-13 M/s. Avadh Rail Infra Ltd. [Previously known as M/s. Madras Elastomers Ltd.] 16 commercial angle of these expenses and held that these were incurred for the purpose of business wholly and exclusively. The mere fact that these expenses were outstanding at the year end would not colour them with taint that these expenses are non genuine and bogus. The ld. CIT(A) has taken into account all these aspects while allowing the appeal and passed a very detailed and reasoned order explaining each and every aspect of the issue by noting that similar commission has been paid in the preceding assessment years and was allowed. The ld CIT(A) has noted that these agents are experts in their field and that the assesse has duly explained the services rendered by these agents to the assesse. The ld CIT(A) relied on a series of decisions to justify his conclusion. In para 10.3 of the appellate order the ld. CIT(A) relied on the decision of coordinate bench in the case of Dresser Valve India (Pvt) Ltd Vs ACIT (2009)30SOT 495(Mumbai) wherein the facts are quite similar. In that case the assessee paid commission to commission agent “P” for obtaining orders from NTPC and UPSEB. The AO disallowed the commission paid @10% on the ground that the assesse had failed to discharge the onus which was upheld by the first appellate authority. The tribunal allowed the appeal of the assesse by holding that it is not the case of the revenue that payments were in violation of laws such Prevention of Corruption Act and the assesse has entered into agreements with the agents which outlines the services to be rendered to generate demand and to find out the requirements for the products of the assesse from such corporates such as NTPC and UPSEB and to procure orders from them. The ld CIT(A) also relied on the decision of Delhi High Court Decision in the case of CIT Vs Siddartha Trade Links (P) ltd (2012) taxmann.com199 wherein it has been held that where the assesse has I.T.A. No. 238/Kol/2022 Assessment Year: 2011-12 I.T.A. No. 580/Kol/2020 Assessment Year: 2012-13 M/s. Avadh Rail Infra Ltd. [Previously known as M/s. Madras Elastomers Ltd.] 17 adduced sufficient evidences to prove the payment of commission , there can not be any disallowance u/s 37 of the Act. Further the ld CIT(A) followed the decision of the coordinate bench in its own case in A.Y. 2010-11 in ITA No. 1257/kol/2014 where similar issue is decided in favour of the assesse. Considering all these facts and circumstances, we are of the view that there is no infirmity in the order of the ld. CIT(A) and accordingly, we dismiss Ground No. 7 raised by the revenue.

Ground No. 8 is general in nature.

In the result, appeal of the assessee is allowed.

Now, we take up the assessee’s appeal in for Assessment Year 2012-13.

At the time of hearing, the ld. Counsel for the assessee submitted that it is not pressing Ground Nos. 1,2,5,6 & 7. 33. The issue raised in Ground No. 3 & 4 is against the confirmation of addition of Rs.3,78,84,669/- by the ld. CIT(A) as made by the Assessing Officer on account of disallowance of commission. 34. The facts in brief are that the assessee has paid a sum of Rs.6,60,32,650/- towards commission to four parties. The Assessing Officer disallowed the commission on the ground that India Railways is purely a Government Concern and they have their own system of tender, issue of work/supply orders, inspection of final products, quality control and final payments etc and also that the Government of India does not promote any middle men in the matter of procuring materials for its organization. The Assessing Officer also noted that a substantial part of the commission has been shown as outstanding at the year end, though these were paid in the Assessment Year: 2011-12 I.T.A. No. 580/Kol/2020 Assessment Year: 2012-13 M/s. Avadh Rail Infra Ltd. [Previously known as M/s. Madras Elastomers Ltd.] 18 subsequent period and thus doubted the genuineness of these expenses and added the same to the income of the assessee by passing a very cryptic order. 35. In the appellate proceedings, the ld. CIT(A) partly allowed the appeal of the assessee after taking into consideration the submissions made by the assessee. The ld. CIT(A) noted that on the basis of Profit and loss account and Form 10CCB that out of the total commission of Rs. 6,60,32,650/-, commission amounting to Rs. 2,21,47,981/- relates to Dehradun Unit which is eligible for claim u/s 80IC of the Act and the remaining commission of Rs.3,78,84,669/- relates to units which were not eligible for deduction u/s 80IC of the Act. The ld. CIT(A) also noted that the Tribunal in the assessee’s own case for Assessment Year 2010-11 had not commented on the genuineness of the commission payments but only held that these commission payments even if disallowed would enhance the claim u/s 80IC of the Act and will not have any impact on the tax liability of the assessee. The ld. CIT(A) noted that the payment of commission if disallowed in respect Dehradun Unit would only enhance the claim u/s 80IC of the Act and not in respect of other units where the claim u/s 80IC of the Act is not there. The ld CIT(A) observed that Rs. 2,21,47,981/- relates to Dehradun Unit whereas the remaining amount of Rs. 3,78,84,669/- relates of other units. Consequently after following the decision of the Tribunal in the assessee’s own case restricted the disallowance to Rs.3,78,84,669/-. 36. The ld. Counsel for the assessee at the outset submitted the commission payments are a regular phenomenon in the assessee’s business for making supplies to Indian Railways and has been allowed over the years. In Assessment Year 2010-11, even the Tribunal has allowed the I.T.A. No. 238/Kol/2022 Assessment Year: 2011-12 I.T.A. No. 580/Kol/2020 Assessment Year: 2012-13 M/s. Avadh Rail Infra Ltd. [Previously known as M/s. Madras Elastomers Ltd.] 19 commission as being incurred wholly and exclusively for the purpose of business of the assessee. The ld. A/R while assailing the order of the ld. CIT(A) submitted that the commission to the extent of Rs.3,78,84,669/- disallowed being the commission related to the units which are not eligible for deduction u/s 80IC of the Act. The ld. A/R pointed out that the ld. CIT(A) failed to mention or pin-point as to how these commission is liable to be disallowed on account of non genuine. The ld. A/R mentioned that the ld. CIT(A) has apportioned the commission on the basis of sales/turnover and disallowed the said amount. The ld. A/R contended that the ld. CIT(A) has grossly failed to take into account as to how one part of the commission can be genuine and another part is non-genuine between the eligible units and not eligible units when the services of the agents are taken in respect of all the units operated by the assessee. The ld. A/R submitted that these payments were made to the commission agents under specific agreements entered into with them for rendering special services and, therefore, these commission payments were wholly and exclusively rendered for the purpose of business of the assessee. It is not the case of the revenue that the assessee own money is siphoned off out of the books by way of paying commission. The ld. A/R finally submitted that keeping in view the consistency and also the decision of the Tribunal in the assessee’s own case for Assessment Year 2010-11 and also the fact that the said payment was never bifurcated between genuine and non-genuine payments, payments being made by cheques after deduction of TDS ,the order of the ld. CIT(A) may be set aside by the directing the Assessing Officer to delete the disallowance.

The ld DR on the other hand relied on the order of authorities below though candidly admitting that the no such disallowance was ever made in the preceding assessments by bifurcating the commission between eligible and non eligible units.

We have heard the rival submissions and perused the material available on record. We note that this issue is similar to ones as decided by us in ITA No. 238/Kol/2022 AY 2011-12 (supra) where the appeal of the revenue was dismissed by us upholding the order of ld CIT(A) in which the commission payments were similar in nature and were allowed. The facts are same and have been discussed in that appeal above with the difference in amount of commission paid during the year only and therefore are not being reiterated. Needless to state that assessee is engaged in manufacturing and supplying goods to Indian Railways and has hired services of commission agents for keeping track of the tenders, applying for the tenders, and after the tenders are successfully obtained ,the obtaining of supply orders , supply of goods and finally pursuing and receiving payments. We have also noted that these payments are made under agreements with these agents for rendering the services. It has also been held that the services of these agents are indispensable to do business with Indian Railways and even the commercial angle of these expenses has been examined and analysed. We are unable to understand as to how the commission is allowed in respect of Dehradun Unit on the ground that even if the payments were disallowed in would only increase the claim u/s 80IC of the Act and disallowed in respect other units not claiming such deduction as being non Assessment Year: 2011-12 I.T.A. No. 580/Kol/2020 Assessment Year: 2012-13 M/s. Avadh Rail Infra Ltd. [Previously known as M/s. Madras Elastomers Ltd.] 21 genuine. In view of these facts the order of ld. CIT(A) disallowing part of the commission in respect of non-eligible units cannot be sustained. Accordingly, we allow Ground Nos. 3 & 4 raised by the assessee.

In the result the appeal the revenue is dismissed and appeal of the assesse is allowed.