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Income Tax Appellate Tribunal, DELHI BENCH ‘F’ NEW DLEHI
Before: SHRI ANIL CHATURVEDI & SHRI N.K. CHOUDHRY
This appeal has been preferred by the Assessee against the order dated 30.11.2018, impugned herein, passed by the learned Commissioner of Income-tax (Appeals)-9, New Delhi (in short “Ld. Commissioner”), u/s. 250 of the Income-tax Act, 1961 (in short ‘the Act’) for the assessment year 2014-15.
The brief facts, relevant for adjudication of the instant appeal, are that the Assessee had declared its return of income to the tune of Rs.8,48,88,601/- by filing its return of income electronically on dated 29.11.2014, which was taken into consideration for limited scrutiny through CASS for the following issues :
(i). Large other expenses claimed in the Profit & Loss Account; (ii). Mismatch in the sale turnover reported in audit report and ITR; (iii). Mismatch in amount paid to related persons u/s. 40A(2)(b) reported in audit report and ITR.
The Assessing Officer taken into consideration the aforesaid issues and on noticing that an amount of Rs.1,85,69,038/- has been paid as commission expenses to Mr. D.N. Pandey and Malya Engineering Services Pvt. Ltd., show caused the Assessee to submit the project-wise details of the commission paid and justification for payment of commission. The Assessee was also asked to produce Mr. D.N. Pandey. In response to the said show cause, the Assessee submitted the agreement with Mr. D.N. Pandey and also furnished project-wise details of commission paid. The Assessing Officer after perusing the said agreement and details of commission submitted, noticed that the commission payable is not fixed but varies from agreement to agreement. Further, the agreements submitted do not provide the specific scope of services to be rendered by Mr. D.N. Pandey. The Assessee has submitted few email interactions between the Assessee and Mr. D.N. Pandey wherein discussion for travel at certain destinations is informed or discussed between the Assessee and Mr. D.N. Pandey. The Assessee has not submitted any documentary evidence in support of the nature of the services rendered.Where an Assessee seeks to deduct from its business profits certain items of expenditure, the onus of proving whether such deductions are permissible in law is on the Assessee. The Assessee was asked to produce Shri D.N. Pandey for verification. Also, the Assessee had submitted copy of return and financials of Mr. D.N. Pandey for A.Y. 2012-13 to justify the expenses claimed in A.Y. 2014- 15. However, there is no correlation of the supporting documents for A.Y. 2012-13 to claim the expenses incurred in A.Y. 2014-15. The Assesseehas also not submitted copy of service tax return or any related document of Mr. D.N. Pandey to support the claim made. Accordingly, the commission paid for Rs.1,85,69,038/- to procure the government contracts is not allowable u/s. 37 of the Act.
Ultimately, the Assessing Officer made the addition of said amount being the disallowance u/s. 37 of the Act, in the income of the Assessee.
The Assessee being aggrieved against the addition under consideration along with other additions which are not subject matter before us, challenged before the ld. Commissioner. Before the Ld. Commissioner, theAssessee at the outset contended that the proceedings of the Assessee were initiated with CASS for 03 issues including of “large other expenses” claimed in the profit and loss account. The commission expense is not part of and under the purview of such ‘other expenses’ and therefore, the Assessing Officer is not allowed to disallow the same.
4.1 The ld. Commissioner though considered the contentions of the Assessee, however rejected the same by holding as under:
“4.3 On considering the contention of the appellant, I don’t find any merit in the same. This is so because of the very fact that the term “Other Expenses” does not merely include all the expenditure, which an Assessee, according to its whims and fancies, considers to be eligible for clubbing under such head. Rather, this term seeks to include in itself, a gamut of all the expenditures, which are otherwise not manufacturing or production related or related to employee welfare or financing charges etc. Simply because the appellant considered the commission expenses to be a separate expenditure, and not to be clubbed under the head “other Expenses”, it does not change the necessary common notion that the term “Other Expenses” is all expenses, which are not manufacturing, employee benefit related, financing related etc. Therefore, the AO is very well in its powers to review such expenses, including commission expenses, and hence, the ground of appeal is rejected.”
5. With regard to the merits of the case, it was observed by the ld. Commissioner that the Assessee did not furnish any new facts but it stated that the scope of services was clearly defined in the agreement with Mr. D.N. Pandey and that the Assessing Officer has made arbitrary disallowance in the hands of the Assessee. Further, the same expenditure has been allowed by the Assessing Officer in the previous years and hence, the addition ought to be deleted.
5.1 The ld. Commissioner further observed that the commission expenses paid by the Assessee are simply on adhoc percentage which does not have any variance or connection with the efforts put up by such commission agent and the quality of services offered by it. Further, the payments of such commission appear to be merely a method, to smokescreen the real nature of it being illegal payments. The very fact that the commission agent is an employee with the Indian Railway goes to the root of the fact that the expenditure is an illegal payment, simply gaping up the liaisoningcharges. The services not being verifiable to the performance or the efforts of such commission agents, goes in depth to prove that the said expenditures claimed to have been paid as liaising expenditures are in any way not in relation to business purposes.The ld. Commissioner while coming to the conclusion in holding the addition as not allowable business expenditure u/s. 37 of the Act, also relied upon the order passed by the ld. DRP in the Assessee’s own case for the assessment year 2013-14 wherein the similar issue was decided against the Assessee. For ready reference, we are reproducing the same.
The law does not permit expenses that are illegal. The payment of commission is one such payment in government contracts. The Assessee claimed that it was actually service charges paid for services rendered by M/s D. M. Panday. Copy of agreement entered by the Assessee with M/s D.N. Pandey was also filed. It was also mentioned that Mr. D.N. Pandey was ex Railway officer and was capable of rendering services. In this connection, the contention of the Assessee has been offered. The Assessee s claim that the payments were service charge is incorrect. The agreement starts as- This agency agreement entred on 6th day of September 2004 between M/s BeekayEngg.& Castings Ltd., 27/28, light industrial area, Bhilai, here after called ‘'Principal" and Liaison agent M/s D.N. Pandey ..." The title of the agreement itself defines Ms D.N. Pandey as liaison agent. The work expected from liaison agent also clearly indicates that he was actually a liaison agent. The work expected from him included 1. To generate enquires, give feedback on pre-tender information for competitive pricing.
2. To arrange for release of payments expeditiously on submission of bills. The nature of work itself creates doubt on their legality. The term liaison agent indicates certain element of facilitation action by the agent to arrange release of payments from Railway authorities. Further payment terms clearly state- "Commission shall be payable to the agent as per mutually agreed terms and conditions on case to case basis." This commission was to cover all cost incurred by the agent and nothing was payable over and above commission on actual basis. Further, as per the details submitted commission as payable as a percentage of receipts which varied from 3.5% in one project to 2.25% of receipts in another project. Receipts are fixed in every project as per the terms of tender and scope of work given in the tender. This means that it is a lump , sum payment and is not dependent on actual effort/actual expenditure of the agent. Hence this is a commission paid to an agent for liaison work. As mentioned above, commission is not payable on Govt. contracts and the scope of work mentioned in agreement clearly indicates that the work was not always legal. In absence of documentary evidence to prove the contention of the Assessee to counter the above, the panel is unable to concur with the submission of the Ld. AR. The Ld. AR was asked but could not furnish any documents etc to establish the basis of and extent of business usage of such payments to the person receiving so called commission. The legality of the payments is also not established per the submissions by the Assessee. The contentions of the Assessee in this respect are not tenable in view of the foregoing. The objection is hence dismissed."
Being aggrieved, the Assessee has preferred the instant appeal.
At the outset, the Assessee emphasised that the case of the Assessee was selected for scrutiny for three issues which include“Large other expenses claimed in the Profit & Loss account” whereas the Assessee by filing its return of income for the year under consideration, in column No. 22 has clearly disclosed the amount of Rs.1,85,69,038/- as commission charges paid. The Agreementsexecuted on 04.10.2012 ( page No. 190 – 194 of the paper book) anddated 05.06.2013 (pages No. 195 to 203 of PB) with Shri D.N. Pandeyfurther strengthen the claim of the Assessee qua commission paid to Shri D.N. Pandey.
7.1 The Assessee further contended that three issues were identified under limited scrutiny and therefore, the details sought by the Assessing Officer were limited to the aforesaid three issues. As per various instructions issued by the CBDT in case of scrutiny cases, particular procedure is required to be followed and the Assessing Officer has limited jurisdiction for limited scrutiny on the basis of AIR returns. If the Assessing Officer realizes that there can be escapement of tax/income and the issue is above Rs.10 lacs in metro cities, he can take up such issue only with the approval of the Assistant Commissioner of Income-tax, but not otherwise, as done by the Assessing Officer in the instant case. The ld. Commissioner also ignored the adjudication on primary legal issue on jurisdiction that undertaking scrutiny on aspect other than those identified for limited scrutiny is specifically debarred in terms of CBDT repetitive instructions and it is just illegal to conduct any proceeding on an issue in excess of jurisdiction conferred upon the Assessing Officer.
7.2 The Assessee further contended that the ld. Commissioner declined to accept the claim of the Assessee qua other expenses by giving an extended meaning to the term “other expenses”, which is grossly inappropriate and unlawful for the reasons that the terms and underlying expenses have been specifically picked up from the profit & loss account/details furnished as part of the ITR submitted and based upon which, specific item has been chosen for conducing limited scrutiny. Such item titled as “other expenses” as appearing in the profit & loss account included in the ITR also carries sub heads down under the ITR itself.
On the contrary the Ld. DR vehemently supported the impugned order and submitted that the order under challenge is neither perverse nor suffer from impropriety or illegality and hence no interference is warranted.
Heard the parties and perused the material available on record and given thoughtful consideration to the conclusion drawn by the ld. Commissioner on the issue with regard to incurring of commission expense paid by the Assessee to Shri D.N. Pandey and other under the head “other expenses”. We observe that the ld. Commissioner categorically held that the term “other expense” does not merely include all the expenses which an Assesseeaccording to its whims and fancies, considers to be eligible for clubbing under such head. Rather, this term seeks to include in itself, a gamut of all the expenditures, which are otherwise not manufacturing or production related or related to employee welfare or financing charges etc. Ld. Commissioner further held that simply because the Assessee considered the commission expenses to be a separate expenditure, and not to be clubbed under the head “other expenses”, it does not change the necessary common notion that the term “other expenses” is all expenses, which are not manufacturing, employee benefit related, financing related etc. We have given thoughtful consideration to the contention made by the ld. AR and the conclusion drawn by the ld. Commissioner and are of the considered view that the ld. Commissioner correctly held the commission expenses under the head “other expenses”, as the same does not pertain to manufacturing or production related or employees welfare related or financing charges etc. Consequently, the contention raised by the Assessee on this aspect under consideration is untenable, as the issue qua commission expense considered under the head “other expenses” cannot be treated as to be covered under the complete scrutiny.
9.1 Coming to the merits of the case, it was submitted by the ld. AR that the ld. Commissioner while sustaining the addition on merits, blindly relied upon the order of the ld. DRP pertaining to the preceding year. Further, as per Hon’ble Delhi High Court judgment in the case of CIT vs. Conimeters Electricals Pvt. Ltd. (2010) 2 taxmann.com 302 (Delhi) and of the coordinate Bench of Tribunal in the case of ACIT vs. Jindal Saw Pipes Ltd. (ITA No. 3879/Del/2005) decided on 04.07.2008 (2009) 118 TTJ 228(ITAT Delhi) the commission expenses for liaisoning services for the Govt. Supplies are allowable expenditure. Further, the authorities below have taken the stand that Shri D.N. Pandey was not produced in the assessment proceedings, whereas the Assessing Officer is empowered to proceed u/s. 133(6) of the Act to procure the attendance of a person and therefore, no adverse inference is liable to be drawn against the Assessee.
9.2 We observe the judgments referred by the ld. AR are factually dissimilar, hence, not applicable to the facts of the instant case. The authorities below have made and sustained the addition under challenge on the ground that the Assesseehas not submitted any documentary evidence in support of the nature of the services rendered, as the onus of proving whether such deductions are permissible in law is on the Assessee. Though the Assessee has submitted the copy of returns and financials of Shri D.N. Pandey for the assessment year 2012-13 for justification of expenditure for A.Y. 2014-15 however, there is no correlation of the supporting documents for A.Y. 2012-13 to claim expenses in A.Y. 2014-15. Even the Assessee has also not submitted any copy of service tax return of Shri D.N. Pandey to support the claim made. Further, the Assessee has not submitted any new facts but only claimed that scope of services was clearly defined in the agreement with Shri D.N. Pandey. It is a fact that the commission agent was an employee of Indian Railways which goes to the root of the fact that the expenditure was an illegal payment simply gapping up the liaisoning charges. The services not being verifiable to the performance of the efforts of the commission agent goes to prove that such expenses claimed to have been paid as liaisoning expenditure are in any way not relating to the business purposes. We observe that the ld. Commissioner while coming to the conclusion for sustaining the addition under challenge not only analysed the facts independently, but also relied upon the order passed by the ld. DRP referred above in the Assessee’s own case for the assessment year 2013-14 qua payment made to Shri D.N. Pandey as liaisoning commission. We further observe that coordinate Bench of the Tribunal in the Assessee’s own case for the assessment year 2013-14 (ITA No. 5618/Del/2017 decided on 18.02.2020) has also considered the order of ld. DRP and the assessment order dated 30.06.2017 passed by the ACIT, Circle 26(2), New Delhi, in pursuance to the directions of the ld. DRP and analysed the facts and circumstances in detail and minutely and dismissed the appeal of the Assessee by observing as under :
“4. The Ground Nos. 4 to 5 of the appeal are related to disallowance of commission expenses of Rs. 49,54,459/-.
4.1 The brief facts qua the issue in dispute that the Assessee claimed commission expenses of Rs. 49,54,459/-, which were paid to Mr. D.N. Pandey and his proprietary firm M/s. New Global Impex. The Assessee filed details of project-wise commission paid along with the copy of the agreement. The Assessing Officer observed that commission was paid to Mr. D.N. Pandey for procuring government contracts of Indian Railways. The Assessing Officer observed that agreement submitted did not provide any specific scope of services to be rendered by Mr.Pandy. The Assessing Officer asked supporting documents like project reports, email, correspondence etc., however, the Assessee submitted few email interaction between the Assessee and Sh. Pandey, which according to the Assessing Officer was not sufficient to explain the nature of the services rendered by him. The learned Assessing Officer pointed out that as per the authorities issuing the tender, there was no requirement of any commission agent and if so required the government prescribed persons were only eligible to act as agent for rendering the services, which was not the situation in the instant case.
4.2 The learned AO relied on the decision of the Hon’ble Calcutta High Court in the case of Standipack (P) Ltd Vs CIT (2012) 211 Taxmann 144 (Calcutta), wherein it is held that expenditure towards commission paid for providing expertise to apply for tender and follow up action for acceptance of tender, being from officer impermissibly law, is not allowable as business expenditure.
4.3 Before the learned DRP, the Assessee claimed that actually service charges were paid for services rendered by Mr. D.N. Pandey. The learned DRP, however, observed that as per title of the agreement Mr.Pandey was liasion agent for the Assessee. The learned DRP further observed that a lump-sum payment was made, which was not dependent on actual efforts or expenditure of the agent. The learned DRP also concurred with the Assessing Officer that commission was not payable on government contract and scope the work mentioned in the agreement clearly indicated that work was not of the legal nature. As no further documentary evidence were filed by the Assessee to support its claim, the learned DRP upheld the finding of the Assessing Officer.
4.4 Before us, the learned counsel of the Assessee referred to agreement dated 06/09/2004, a copy of which is available on page 136 of the paper-book, which was claimed by him as a master agreement. He further referred to agreement dated 15/07/2012 in respect of the year under consideration, a copy of which is available on page 141 of the paper-book. The learned counsel of the Assessee relied on the decision of the Hon’ble Delhi High Court in the case of CIT VsConimeters Electricals (P) Ltd in ITA 1401 of 2008 to support that service charges incurred in relation to tender work of the government authorities is allowable as business expenditure. The learner Consul submitted that no addition has been made on this account on earlier years.
4.5 The learned Departmental Representative, on the other hand, relied on the order of the lower authorities and submitted that Mr. D.N. Pandey was an employee of the railway and no other qualification or technical expertise of Mr.Pandey in the field of the work of the Assessee, had been brought to the notice of the lower authorities. He further submitted that such commission expenses claimed in subsequent years have also been disallowed. The learned DR submitted that no documentary evidence of any services rendered by Mr. D.N. Pandey has been produced, which could establish that Mr.Pandey interacted with railway official on behalf of the Assessee in relation to contract for which he has been allowed commission expenses. He submitted that the agreement has been printed on the plane paper and only signed at the last Page. According to him, the agreement has not been registered or signed before the notary, which raises doubts on the authenticity of the agreement.
4.6 We have heard rival submission of the parties and perused the relevant material on record. We find that the Assessee has failed to produce documentary evidence to support that Mr.Pandey provided any kind of services to the Assessee. Merely providing some email exchange between him and the Assessee is not sufficient to support that Mr.Pandey provided any kind of services in relation to the contracts for which he has been paid commission expenses. Further during the course of the hearing, the learned counsel of the Assessee was asked whether similar commissions have been given in case of the contracts received from private parties, he clearly admitted that no such commission expenses have been paid for executing the contract of the private parties. This fact also support the finding of the Assessing Officer that the commission was given only for procuring contracts from the railway and such kind of commission for procuring contracts from government is not permissible as per the government rules. In view of no documentary evidences to support the service rendered by Mr.Pandey, the reliance placed on the decision in the case of CIT Vs. Conimeters Electricals (P) Ltd. is of no help to the Assessee.
4.7 In view of the above facts and circumstances, we uphold the finding of the lower authorities on the issue in dispute. The ground Nos. 4 and 5 of the appeal of the Assessee are accordingly dismissed
In the result, the appeal of the Assessee is partly allowed.”
9.3 We have again given thoughtful consideration to the peculiar facts and circumstances, as enumerated above and the contentions raised by the Assessee and are of the considered view that the facts as involved in the instant case are exactly similar to the facts in for the assessment year 2013- 14 in which identical addition has been sustained and therefore, squarely covered by the judgment of the coordinate Bench of the Tribunal. Even otherwise the impugned order does not suffer from any perversity, impropriety or illegality, consequently, the appeal filed by the Assessee is liable to be dismissed.
In the result, the appeal filed by the Assessee stands dismissed.