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Income Tax Appellate Tribunal, “C” BENCH, AHMEDABAD
Before: SHRI RAJPAL YADAV & SHRI AMARJIT SINGH
PER RAJPAL YADAV, JUDICIAL MEMBER: Revenue and assessee are in cross appeals against order of the ld.CIT(A)-9 dated 30.1.2015 passed for the Asstt.Year 2010-11. First we take appeal of the Revenue i.e. ITA No.909/Ahd/2015.
In the first ground of appeal, the Revenue has pleaded that the ld.CIT(A) has erred in deleting addition of Rs.1,37,47,163/- which was added by the AO with the aid of section 69B of the Income Tax Act on account of
ITA No.638 and 909/Ahd/2015 2 difference between closing stock as per the books vis-à-vis stock statement given to the bank.
Brief facts of the case are that the assessee-company at the relevant time was engaged in manufacturing M.S.Seamless pipes. It has filed return of income on 29.9.2010 declaring total income at Rs.1,12,78,393/-. The case of the assessee was selected for scrutiny assessment and notice under section 143(2) was issued and served upon the assessee. On scrutiny of the accounts, ld.AO has observed that in the Asstt.Year 2009-10, the then AO had issued notice under section 133(6) to Canara Bank and sought details of stock statement submitted by the assessee to the bank for the quarter ending on 31.3.2009. He further observed a difference of more than Rs.10.39 crores in the Asstt.Year 2009-10 and this amount was added to the total income of the assessee under section 69B of the Income tax Act. With this analogy, he made inquiry in the present assessment year. He found that as per the stock statement given to the bank, the stock should be at 3186.621 MTs. whereas it was shown in the books at 3134.998. This difference in the stock between the one available in the books vis-à-vis one given to the bank have been treated as unexplained investment under section 69B of the Income Tax Act. The ld.AO accordingly made addition of Rs.1,37,47,163/-. On appeal, the ld.CIT(A) has deleted this addition by observing that identical addition was made in the Asstt.Year 2009-10, which was though confirmed by the ld.CIT(A), but deleted by the Tribunal. Order of the Tribunal has also been upheld by the Hon’ble High Court. Putting reliance upon order of the Tribunal as well as Hon’ble High Court, the ld.CIT(A) deleted the addition.
Before us, the ld.DR relied upon the order of the AO, whereas the ld.counsel for the assessee relied upon the order of the Hon’ble High Court in the Asstt.Year 2009-10. This order has been reported as CIT Vs. Riddhi Steel
ITA No.638 and 909/Ahd/2015 3 & Tubes P.Ltd., (2013) 40 taxmann.com 117 (Guj). Copy of the order has been placed in the paper book on page no.170 to 176. The ld.counsel for the assessee also pointed that there were four bills of first 10 days of April. Copies of bills are available at page nos.141-144 of the paper book. The bank statement was given in the month of April, and accountant mistakenly took into consideration these four bills, which were not meant for this assessment year. This was one of the reasons of the excess stock with the bank.
We have duly considered rival contentions and gone through the record carefully. We find that in the Asstt.Year 2009-10, the Tribunal has made a detailed analysis of this issue. The relevant finding of the Tribunal on this issue is worth to note, which reads a sunder:
“16(iii) On perusal of the decisions as referred above, it is gathered that Hon'ble Courts have laid down that additions cannot be made on account of difference arising in the quantity and value of stock shown in the books of accounts and the statement furnished to the banking authorities, admittedly to avail higher credit facilities. Courts have laid down the following guidelines while dealing with the issue: (a) The stock in quantity and value is inflated on estimate basis in the statement furnished to the banking authorities to avail higher financial credits ; (b) The inflated and estimated stock is hypothecated and not pledged; (c) No actual physical verification of stock is carried out by the officer of banking authorities during the year or as on date of valuation of stock; (d) The assessee has maintained stock register; (e) The assessee's books of accounts are not found to be defective or non-genuine by AO; (f) The books of accounts maintained by the assessee are accepted by the Central Excise and / or Sales Tax Department. Applying these tests to the facts of the present case, the following conclusions emerge:
ITA No.638 and 909/Ahd/2015 4 Applying test (a), we find that the stock details have been inflated purely on estimate basis in the statement furnished to bank to avail larger credit facilities. This aspect is duly supported by the fact that the Assessee had already borrowed an amount of Rs.11.03 Crores from Canara Bank as at 31/03/2009, and therefore, by making upward adjustment of 30% thereon for margin required to be maintained as per the loan agreement entered with the Bank, the value of stock was estimated and inflated to Rs.17.09 Croresso as to justify the amount already drawn from the Bank. Applying test (b), we further find that in the present case, stock is only hypothecated with the bank and not pledged. Unlike pledge, under hypothecation, the stock is not kept in lock and key of the bank. Therefore the submission of the assessee that the figure of closing stock was estimated and inflated with a view to meet the margin requirements of the bank can be accepted. Applying test (c), we also find that there was no physical verification of stock by the Bank authorities as on 31/03/2009. A perusal of CIT(A) order reveals that he has placed a great reliance on the godown visit of Bank Manager on 25/04/2009. However, the said reliance is completely misplaced in as much as firstly, this is not even the case of the assessing officer who made the addition. Secondly the said visit took place on 25/04/2009 i.e. much after the close of the year under consideration. Thirdly, the said visit was only a godown visit and not physical verification and counting of stock. Fourthly and most importantly, in the very inspection report the Bank Manager himself notes that in so far as 3000 tonnes of coil is concerned, the same was included in the stock of Month of March, 2009. Because of this inclusion, stock position of March shows increase. This aspect is conveniently overlooked and ignored by the CIT(A). Applying test (d),We further find that the assessee has maintained stock register giving complete quantitative details including month-wise details of Raw Materials, Finished Goods and Semi-finished goods. In fact these details have been placed on record before the AO (Pg. Nos.17 to 22 @ 18 & 20 of P/B), which is not controverted by the AO and books of accounts of the assessee has not been found to be defective or non-genuine by AO. Applying test (e),We further find that the assessee has been subjected to statutory audit under the Companies Act, 1956, also subjected to tax audit under the Income Tax Act, and none of these auditors have
ITA No.638 and 909/Ahd/2015 5 qualified their reports in any manner whatsoever. In fact the assessee has been filing regular returns since last 8 years and has been consistently following method of accounting as prescribed u/s 145 and valuing closing stock and inventories as prescribed u/s 145A of the Act. No such practices have been questioned or doubted or found to be erroneous by the AO. Applying test (f), we find that the assessee is subjected to excise and VAT and none of these authorities have noticed or for that matter taken any action against assessee for the alleged stock discrepancy. In fact on perusal of pg. nos.165-166 of paper book placed before us, we find Excise Audit Report for the period Jan'2009 to Dec'2009 which was carried out by Excise Revenue Audit team wherein the excise department, after detailed scrutiny of the books of accounts, stock registers, excise records, has accepted the books of accounts and other record maintained by the assessee to be true, correct and except few discrepancies in so far as inventory is concerned. We find that the I T A No . 1 32 9 /A h d/ 1 2 A. Y. 09- 1 0 Page 17 period of audit covers 31st March, 2009. If the assessee has in fact purchased and stored such unaccounted stock allegedly shown to the bank, it is impossible not to leave a single trail more so when the assessee is a manufacturer and not a trader. It is not possible to acquire unaccounted stock, carry out manufacturing activities, consume energy, remove the finished stock and sale away the same in the market. We therefore find considerable force in the submission of the counsel for the assessee that the books of accounts are found to be genuine and recorded appropriately and no such kind of discrepancies were found to be noted in the Excise Audit Report which could remotely suggest that the Assessee has invested in unexplained stock which is not recorded in books of accounts. 16(iv). If the discrepancies of stock at 3119.037 & 441.647 MT valued Rs.10.39 crore accepted as suppressed stock than same is to be included in closing stock of A.Y. 09-10 & opening stock of A.Y. 10-11 which would be again give distorted position of accounting result for A.Y. 10-11. The ld. AO had not brought on record any evidence of purchase and sale made outside the book in A.Y. 09-10. Therefore, the entire set of facts of the case falls within the parameters / guidelines framed by Hon'ble the High Courts, and we are of the view that merely relying on the statement furnished to the banking authorities to avail larger credit facilities, addition cannot be made on account of difference between the quantity and value of stock shown in the books of accounts and the statement furnished to the banking authorities.”
ITA No.638 and 909/Ahd/2015 6 6. This finding of the Tribunal has been upheld by the Hon’ble High Court. In the present assessment year, there is no independent finding at the end of the AO or CIT(A). There is no variation on facts that except the difference between the stock statements available in the books vis-à-vis given to the bank has been scaled down between A.Y.2009-10 to this assessment year. The ld.CIT(A) has observed that addition has been made on the basis of the finding recorded in the Asstt.Year 2009-10. Therefore, considering the fact that there is no disparity between the facts of both these years, we are of the view that the issue is squarely covered by the decision of jurisdictional High Court in the assessee’s own case for the Asstt.Year 2009-10. The ld.CIT(A) has rightly deleted the addition. This ground of appeal is rejected.
In the next ground of appeal, the grievance of the Revenue is that the ld.CIT(A) has erred in deleting the addition of Rs.16,10,707/- which was added by the AO with help of section 41(1) of the Act.
Brief facts of the case are that on perusal of the record, the ld.AO harboured a belief that credit against names of five parties had remained outstanding in the books of the assessee from the F.Y.2007-08. The ld.AO directed the assessee to explain as to why this liability should have not been considered as ceased. The assessee gave its explanation that on account of certain dispute with these parties, payments have not been made because in some of the cases, goods received was less in quantity, in some cases defect is there in the machinery and the dispute is pending. The ld.AO harboured a belief that liability to pay has ceased, and therefore, it deserves to be treated as income under section 41(1) of the Act. On appeal, the ld.CIT(A) deleted this addition by observing that the ld.AO failed to bring any evidence on record which can suggest these liabilities are not subsisting.
ITA No.638 and 909/Ahd/2015 7 9. With the assistance of the ld.representatives, we have gone through the record carefully. The section 41(1) applies where a trading liability was allowed as a deduction in an earlier year in computing the business income of the assessee and the assessee has obtained a benefit in respect of such trading liability in a later year by way of remission or cessation of the liability. In such a case the section says that whatever benefit has arisen to the assessee in the later year by way of remission or cessation of the liability will be brought to tax in that year. The principle behind the section is that the provision is intended to ensure that the assessee does not get away with a double benefit - once by way of deduction in an earlier assessment year and again by not being taxed on the benefit received by him in a later year with reference to the liability earlier allowed as a deduction. At this stage it is pertinent to take note of finding recorded by the Hon’ble Gujarat High Court in the case of CIT Vs. Bhoghilal Ramjibhai Atara, 43 taxmnan.com 55 (Guj). It reads as under: “8. We are in agreement with the view of the Tribunal. Section 41(1) of the Act as discussed in the above three decisions would apply in a case where there has been remission or cessation of liability during the year under consideration subject to the conditions contained in the statute being fulfilled. Additionally, such cessation or remission has to be during the previous year relevant to the assessment year under consideration. In the present case, both elements are missing. There was nothing on record to suggest there was remission or cessation of liability that too during the previous year relevant to the assessment year 2007-08 which was the year under consideration. It is undoubtedly a curious case. Even the liability itself seems under serious doubt. The Assessing Officer undertook the exercise to verify the records of the so called creditors. Many of them were not found at all in the given address. Some of them stated that they had no dealing with the assessee. In one or two cases, the response was that they had no dealing with the assessee nor did they know him. Of course, these inquiries were made ex parte and in that view of the matter, the assessee would be allowed to contest such findings. Nevertheless, even if such facts were established through bi-parte inquiries, the liability as it stands perhaps holds that there was no
ITA No.638 and 909/Ahd/2015 8 cessation or remission of liability and that therefore, the amount in question cannot be added back as a deemed income under section 41(c) of the Act. This is one of the strange cases where even if the debt itself is found to be non-genuine from the very inception, at least in terms of section 41(1) of the Act there is no cure for it. Be that as it may, insofar as the orders of the Revenue authorities are concerned, the Tribunal not having made any error, this Tax Appeal is dismissed.”
There is nothing in the possession of the Revenue to doubt the non existence of the liability, more so, if the facts are being examined in the light of Hon’ble High Court’s decision in the case of CIT Vs. Bhogilal Ranjibhai Atara (supra). On due consideration of the above facts, we do not find any merit in this ground of appeal of the Revenue. It is dismissed.
Now we take appeal of the assessee.
The assessee has raised six grounds of appeal, which are not in consonance with Rule 8 of the Income Tax (Appellate Tribunal) Rules. Its grievance revolves around a single issue which has been bifurcated in 2-3 folds. In brief grievance of the assessee is that the ld.CIT(A) has erred in confirming the disallowance of commission expenses amounting to Rs.53,56,535/-.
Brief facts of the case are that the assessee has paid commission to 18 parties amounting to Rs.53,56,535/-. Out of these 18 parties, there are 5 HUFs. The AO had issued a show cause notice inviting explanation of the assessee as to why this commission should not be disallowed, and more particularly, how can HUF be acted as an agent, and commission should be paid. In response to the query of the AO, the assessee has filed detailed reply. It contended that in the immediately preceding year, commission of Rs.23,92,462/- was paid to six individuals. A scrutiny assessment was made and no disallowance was made by the AO. Out those six parties, commission
ITA No.638 and 909/Ahd/2015 9 has been paid to 3-4 parties in this year also. Their role was not doubted by the AO in the earlier year. It was further contended that sales have been increased from Rs.67.92 crores to Rs.100.30 crores in this year; whereas increase in the payment of commission is from Rs.23.92 lakhs to Rs.53.56 lakhs. In terms of percentage, commission paid by the assessee is less than 0.60% of the sales. The assessee thereafter produced confirmation of the commission agents, details payment through account payee cheques, details of TDS deducted on such payment. It has also produced the details of parties to whom sales were made through a particular agent. It was contended that these agents have helped the assessee to achieve sales target. The ld.AO was not satisfied with the explanation of the assessee. He observed that most of the parties to whom commission was paid falls within the ambit of expression “related parties” employed in section 40A(2)(b) of the Act. He further observed that the assessee did not give confirmation from the parties to whom sales have been made, and also failed to produce the commission agents before the AO. On account of these three reasons, he disallowed the commission payment. Appeal to the ld.CIT(A) did not bring any relief to the assessee.
With the assistance of the ld.representatives, we have gone through the record carefully. It is pertinent to observe that in order to claim expenditure under section 37(1) of the Income Tax Act, the assessee requires to fulfill certain conditions viz. (a) there must be expenditure, (b) such expenditure must not be of the nature described in section 30 to 36, (c) expenditure must not be in the nature of capital expenditure, or personal expenditure of the assessee, and (d)expenditure must be laid out or expended wholly and exclusively for the purpose of the business. The expression “wholly” employed in section 37 refers to quantification of expenditure, while expression “exclusively” refers to motive, objects and purpose of the
ITA No.638 and 909/Ahd/2015 10 expenditure. In order to appraise ourselves as to how the concept of commercial expediency and business needs are to be appreciated while considering allowance or disallowance of the expenditure claimed by an assessee, we would like to make reference to the judgment of Hon’ble Gujarat High Court in the case of Voltamp Transformer P.Ltd., Vs. CIT, 129 ITR 105 (Guj) wherein it has held that – “So far as the questions of commercial expediency and business need of an organization are concerned, it is not the view point of a revenue officer which should count, but it should be the view of an ordinary businessman dealing with a situation like the one faced by the assessee.”
In a similar circumstance, the Hon’ble Delhi High Court had an occasion to examine aspect of commercial expediency considered by a businessman while incurring any expenditure. The Hon’ble Delhi High Court has made the following observations on this aspect in the decision of the CIT Vs. Dalmia Cement Ltd., 254 ITR 377. “An expenditure to which one cannot apply an empirical or subjective standard is to be judged from the point of view of a businessman and it is relevant to consider how the businessman himself treats a particular item of expenditure. The term "commercial expediency" is not a term of art. It means everything that serves to promote commerce and includes every means suitable to that end. In applying the test of commercial expediency, for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business the reasonableness of the expenditure has to be judged from the point of view of the businessman and not the Revenue (see CIT v. Walchand and Co. (P.) Ltd. ; J. K. Woollen Manufacturers v. CIT; Aluminium Corporation of India Ltd. v. CIT and CIT v. Panipat Woollen and General Mills Co. Ltd.”
In the light of the above, let us examine facts of the present case. Section 40A(2) has a direct bearing on the controversy, therefore, it is pertinent to take note of relevant part of section, which reads as under:
ITA No.638 and 909/Ahd/2015 11 40A(2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction….”
A bare perusal would indicate that provisions of section can be invoked mainly three situations; (a) of the expenditure is incurred is excessive or unreasonable considering fair market value, or (b) it is not incurred for the purpose of legitimate business need of the assessee, (c) it is excessive or unreasonable having regard to the benefits derived by the assessee. Sub- clause (b) of the section contemplates relationship of the persons to whom payment was made vis-à-vis the management of an assessee. In other words on account of their relationship with the management, they may not take undue advantage from the assessee. In other words, considering the payment made by an assessee to a particular person, who has an advantageous position on account of relationship with the assessee, then some undue advantage be not extended by the assessee to such person. That relationship has been explained in clause (b).
In the light of the above facts, let us examine facts of the present case. Though specifically, the ld.AO has not disallowed the commission payment under section 40A(2) on account of excess payment, he disbelieved incurrence of the expenditure at the threshold. The reasons assigned by him are that the confirmation from parties to whom sales were made not produced. Commission agents have not been produced and the assessee failed to establish the nexus between the reasons for incurrence of such expenditure vis-à-vis business objects. A perusal of the record would indicate that the AO
ITA No.638 and 909/Ahd/2015 12 has for the first time called the details emphatically on11.3.2013. He has passed the assessment order on 28.3.2013. He has observed that confirmation from purchaser of the goods is to be submitted. This was a short time period. Once the assessee has given details of purchasers, it is for the AO to issue notice and get the details. Under what circumstances, the assessee could ask its purchasers to give confirmation, through whom they have booked the goods. It is not only unprofessional, rather against the business needs of the assessee. It has to do business and not collect such type of details. If the AO has any doubt, he should have issued notice under section 133(6) to some of the purchasers, and get the details. The assessee has placed on record copy of the confirmation from the agents and to whom they have made sales. For example, confirmation from Shalini Anuj Mittal is available at page no.87 of the paper book. Copy of her income-tax return has also been placed on record. Through her, 928 MTs. steel was sold to three concerns, viz. Jay Ambe Steel Tubes, Indian Steel Corporation Ltd., and Raj Steel & Tube. A commission of Rs.3,02,350/- was paid to her. In the Asstt.year 2008-09, the commission of Rs.2 lakhs was paid to her. The assessee has given the details of commission agents, their confirmation, copy of income-tax returns and to whom goods were sold through them. The AO did not embark upon an inquiry from any one. He simply sought to produce commission agents or confirmation from the purchaser. He for first time investigated this issue on 11.3.2013 and expected the assessee to produce them before 31.3.2013 as and when he requires. Had he been so vigilant, he should have issued notice well in time, and three-four months thereafter he could issue summons to the agents, if they failed to appear on asking of the assessee. No such inquiry has been made. As far as allegations of commission paid to the HUF are concerned, HUF is a separate legal entity. The ld.CIT(A) did not dispute about the payment of commission to HUF, but recorded a finding against the assessee for statistical purpose, because this payment to HUF is also
ITA No.638 and 909/Ahd/2015 13 confirmed because it is part of total commission claim at Rs.53,56,535/- which has been disallowed by the AO and confirmed by the ld.CIT(A). Under these circumstances, the ld.CIT(A) did not deem it necessary to examine this aspect. This finding of the ld.CIT(A) recorded at page no.30 has not been challenged by the Revenue in its appeal. Services on behalf of the HUF could be rendered by Karta, and commission payment merely on account that it is juridical taxable entity, cannot be disallowed. Taking into consideration of overall facts and circumstances, we are of the view that the assessee has brought on record evidence justifying the payment of commission, which is just 0.60% on the total sales. The AO except suspecting incurrence of such expenditure did not make any inquiry. Therefore, we allow this ground of appeal, and delete disallowance of Rs.53,56,535/-.
In the result, appeal of the Revenue is dismissed and that of the assessee is allowed.
Order pronounced in the Court on 1st February, 2019 at Ahmedabad.
Sd/- Sd/- (AMARJIT SINGH) (RAJPAL YADAV) ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad; Dated 01/02/2019