M/S. METALLOYDS,ANGUL vs. ITO, ANGUL WARD, ANGUL

IN THE INCOME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK

BEFORE SHRI CHANDRA MOHAN GARG, JUDICIAL MEMBER AND LAXMI PRASAD SAHU, ACCOUNTANT MEMBER

ITA Nos.445 & 521/CTK/2017 Assessment Years : 2012-13 & 2013-14

M/s. Metalloyods, 1st floor, Vs. ITO, Angul Ward, M.R.Towers, Main Road, Angul. Angul. PAN/GIR No. AAHFM 9629 E (Appellant) .. ( Respondent)

Assessee by : Shri Binod Agarwal AR Revenue by : Shri Subhendu Dutta, DR

Date of Hearing : 16 /10/ 2019 Date of Pronouncement : 21/10/ 2019

O R D E R Per C.M.Garg,JM The above captioned appeals have been filed by the

assessee against the order of the CIT(A),12, Bhubaneswar dated

30.8.2017 for the assessment year 2012-13 and order dated

11.10.2017 for the assessment year 2013-14.

identical issue is involved in both the appeals. Hence, for the sake

of convenience for adjudication, we take up the appeal in ITA

No.445/Ctk/2017 for assessment year 2012-13 as a lead case,

wherein, Grounds of appeal raised are as under:

P a g e 1 | 8 “1. For that the learned Commissioner of Income Tax (Appeals) is wholly unjustified to hold that commission paid to HUF of two partners for services render is not allowable in the hands of the firm, is illegal, arbitrary and bad in law and commission so paid should be allowed in the facts and circumstances of the case.

CIT(A) is wholly unjustified in holding that the commission paid to

HUF of two partners for services render is not allowable in the

hands of the firm. Ld A.R. vehemently pointed out that the

commission of Rs.3 lakhs each paid to HUFs of two partners Shri

Bikram Agarwal and Vinay Agarwal for services rendered is an

allowable business expenditure and should be allowed in the

hands of the firm. Ld A.R. strenuously contended that the CIT(A)

has mis-interpreted the decision of Hon’ble Supreme Court in the

case of K.S.Subbiah Pallai vs CIT, 237 ITR 11 (SC). In this

judgement in para 2, Hon’ble Apex Court held that if the

remuneration has been paid to HUF because of the investment of

HUF funds in the business, then it was the income of HUF but if

the remuneration was compensation made for services rendered

P a g e 2 | 8 by the individual co-parcener, then it was the income of the

individual co-parcener. Ld A.R. submitted that the remuneration

is wide term which includes commission also. Therefore, the

commission paid by the assessee firm to the HUF should be

allowed keeping in view that there was investment by both HUF in

the appellant partnership firm in the form of unsecured loan which

gets support from the copies of the balance sheet for financial

year 2011-12 pertaining to assessment year 2012-13 filed by the

assessee firm as well as both HUF entities. Ld A.R. submitted that

the balance sheet of both HUFs as well as present assessee

partnership firm clearly reveal that there was investment of HUF

funds in the present partnership assessee firm. Therefore, the

commission paid by the assessee should be allowed as business

expenditure. Ld A.R. also submitted that even during financial

year 2012-13 pertinent to assessment year 2013-14, the

unsecured loan is further enhanced. Therefore, the commission

paid to both HUFs should be allowed.

HUF entities, the assessee partnership firm deducted TDS and the

commission earned by the recipient HUFs has been duly shown by

them in their income tax returns and same was offered for

taxation and credit for TDS was also claimed. Ld AR submitted

P a g e 3 | 8 that during assessment year 2012-13, the assessee paid

commission of Rs.20,93,204/- including impugned commission

paid to both HUFs and while the department has accepted the

commission paid to other persons/entities, then the part

commission paid to both HUFs cannot be denied or disbelieved.

Ld A.R., also pointed out that if disallowance of impugned

commission paid to both HUF is disallowed then it would

tantamount to double addition as the commission income has

been shown by the recipient HUFs and, their respective returns of

income has been offered to tax.

belonging to partners of assessee firm and it is not clear that

which services were rendered by them for which the commission

has been paid by the assessee partnership firm. Ld DR strongly

supported the assessment and first appellate order and submitted

that the AO was right in making the disallowance and the CIT(A)

was also correct in confirming the addition.

all, we respectfully take cognizance of judgment of Hon’ble

Supreme Court in the case of K.S.Subbiah Pillai (supra), wherein,

Their Lordships observed thus:

“ The judgment of the Andhra Pradesh High Court aforementioned was cited before the High Court at Madras in the reference proceedings out of

P a g e 4 | 8 which these appeals arise but the Madras High Court dissented therefrom. It dilated at length on Hindu Law but, with great respect, missed the point that the Tribunal is the final fact-finding authority and, as it has itself noticed in the judgment under challenge, the Tribunal had held that the remuneration and commission received by the Karta of the HUF were earned by him on account of his personal qualifications and exertions and not on account of the investment of the family funds in the company and, therefore, could not be treated as the income of the HUF. The High Court, having analysed the law, rightly concluded that the broad principle that emerged was whether the remuneration received by the coparcener was in substance one of the modes of return made to the family because of the investment of the family funds in the business or whether it was compensation made for services rendered by the individual coparcener. If it was the former, it was the income of the HUF; but if it was the latter, then it was the income of the individual coparcener. Applying this test, the High Court held, "There is absolutely no evidence to support the contention of the learned counsel for the assessee that the development of the business was due to any peculiar qualification or experience on the part of the assessee"

Emphasis respectfully supplied by us

appeal. It is not in dispute that the assessee has paid commission of

Rs.20,93,204/- to various persons/entities including Bikram Agarwal and

Vinay Agarwal, HUFs, to whom Rs.3,00,000/- each was paid by the

assessee partnership firm. The Assessing Officer has not disputed the

payment of commission by the firm except impugned commission paid to

HUFs. The bone of contention of ld DR is that same person cannot

contribute in two capacities simultaneously i.e. one in the capacity of

partnership firm and another in the capacity of Karta of HUF, which is a

separate entity and recipient of the impugned commission. Identical

controversy was placed for adjudication before the Hon’ble Supreme Court

in the case of K.S.Subbiah Pillai (supra), where in para 2 (supra) speaking

P a g e 5 | 8 for the Hon’ble Apex Court, Their Lordships of three Judges Bench held that

if the remuneration is paid because of investment of family funds in the

business then it was the income of the HUF and it was a compensation

made for services rendered by the individual co-parcener of the HUF then

same is to be treated as income of the individual co-parcener.

which includes commission also. As we have already noted above that

from the balance sheet of both recipients and the assessee partnership firm,

it reveals that Bikram Agarwal, HUF provided unsecured loan of

Rs.9,02,401.00 and Vinay Agarwal provided unsecured loan of Rs.13,08,151

during financial year 2011-12 pertaining to assessment year 2012-13 and

during subsequent assessment year 2012-13 relevant to assessment year

2013-14, the outstanding amount of unsecured loan as on 31.3.2003 was

Rs.10,68,102/- and Rs.12,00,171/-, respectively and these glaring facts

substantiate the factum that there was investment of HUF funds in the

assessee partnership firm. However, it has also been submitted by the

appellant-assessee that in addition to investment of funds of HUF in the

partnership firm, the Karta of HUF also contributed to support the business

of the firm in the form of canvas sales, liaison and procure orders and

these investments made by two HUFs greatly support the firm financially

and to further develop its business and payment of commission was one of

P a g e 6 | 8 the mode of return and acknowledgement of their financial support to the

firm.

D.R. that the rendering of services of contribution of an individual cannot be

segregated into two parts, one in the capacity of partner of the assessee

firm and secondly in the capacity of Karta of HUF firm but in view of

proposition rendered by Hon’ble Supreme Court in the case of K.S.Subbiah

Pillai (supra), the claim of the assessee firm gets support in the facts and

circumstances of the present case. This fact cannot be controverted that

both HUF have provided unsecured loan to the assessee partnership firm,

which substantiate that the family funds of HUF has been used by the

assessee’s partnership firm to financially support and enhance its business.

Therefore, in a peculiar situation when the contribution of an individual,

who helps the firm in two capacities viz; first in the capacity of partner and

secondly as Karta of HUF cannot be segregated satisfying and clearly

establishing the factum of the services rendered towards payment of

commission to the HUF but the factum of use of HUF funds by the

partnership firm in the form of secured loan in the business of assessee

firm, bring home the support of the proposition rendered by Hon’ble

Supreme Court in the case of K.S.Subbiah Pillai (supra). Therefore, in view

of foregoing discussion, we reached to a logical conclusion that the

commission paid by the assessee firm to HUFs is allowable and thus, we

P a g e 7 | 8 direct the Assessing Officer to delete the addition of Rs.3 lakhs each to both

HUF and allow the grounds of appeal of the assessee.

2013-14 being facts are identical. Hence, we direct the delete the addition

of Rs.7,00,000/- and allow the grounds of appeal of the assessee.

Order pronounced on 21 /10/2019.

Sd/- sd/- (Laxmi Prasad Sahu) (Chandra Mohan Garg) ACCOUNTANT MEMBER JUDICIAL MEMBER

Cuttack; Dated 21 /10/209 B.K.Parida, SPS Copy of the Order forwarded to : 1. The Appellant : M/s. Metalloyods, 1st floor, M.R.Towers, Main Road, Angul

By order

Sr.Pvt.secretary ITAT, Cuttack

P a g e 8 | 8