C I T JAIPUR III vs. M/S GENUS OVERSEAS ELECTRONIC

By way of these appeals, the department has challenged the judgment and order of the Income Tax Appellate Tribunal(for short, ‘the Tribunal), whereby the Tribunal has dismissed the appeals preferred by the department and partly allowed the appeal preferred by the assessee.

This Court on 04.01.2010 admitted the D.B. Income Tax Appeal No.640/2009 on the following substantial questions of law:- “1. Whether in the facts and circumstances of the case the ITAT was justified in law and acted perversely in allowing claim of commission and brokerage u/s 37 of [4 ] DBITA NO.327/2005 the Act without any proper material on record specially when the purchasers categorically informed that there was no agent involved in the contract?

Whether in the facts and circumstances of the case the ITAT was justified in law and acted perversely in allowing claim of depreciation and additional depreciation u/s 32 on pick and place machine despite of the fact that the same was not solely used for in- house research and development facility but was simultaneously used for the purpose of business?

Whether in the facts and circumstances of the cased the ITAT was justified in directing to treat the sales tax incentive as a capital receipt despite of the fact that the same was a constructive payment for the purpose of section 43B of the IT Act?

Whether in the facts and circumstances of the case the ITAT was justified in law and acted perversely in allowing the claim of the assessee u/s 80JJAA without considering the facts of the case, particularly when no such claim had been made in the return?

The facts of the case are that the assessee company is engaged in design, manufacturing and sale of electronic energy meters invertors hybrid micro circuits printed circuit boards and contract assembly of SMT Board assemblies. The main products of the company are single phase and three phase electronic energy meters. About 84% of the total sale of the company is from EEMs. The main customers of these products are various State Electricity Boards or Electricity Companies. During the year the company has started manufacturing of inverters and the turnover of this has been declared at Rs. 1.70 crore.

The turnover of the company has increased from Rs.

33 Crore in F.Y. 2003-04 to Rs. 152.00 Crore F.Y.2004-05, relevant to the A.Y. 5087 crore to Rs. 11.02 crore during this period (before depreciation). The net profit has been declared as [5 ] DBITA NO.327/2005 Rs. 8.98 crore as against Rs.5.57 crore in the preceding year.

The main question common in all appeals is regarding commission and brokerage which is paid under Section 37 of the Income Tax Act. Counsel for the department has taken us to the provisions of Section 37 which reads as under:- “37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". [Explanation 1.]—For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. [Explanation 2.—For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities relating to corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure incurred by the assessee for the purposes of the business or profession.] (2) [* * *] (2B) Notwithstanding anything contained in sub- section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.”

He submitted that the amount which was paid was after 06.03.2003 which is the last month of the accounting year. In that view of the matter, the Assessing Officer while considering the same has rightly not allowed the commission which is paid and the same was affirmed by the CIT(Appeals) and the Tribunal only for the first time has reversed the same.

Counsel for the department has also taken us to the paragraphs 48 and 51 of the judgment of the Tribunal in D.B. Income Tax Appeal No.327/2005, which read as under:- “48. From the facts discussed above, it is obvious dthat in the result it would be diffucult to conclude as has been done by the Revenue Authorities that no service were rendered by the commission agents to the assessee. Assessee’s sales/ supplies have shown enormous increase and there is substantial and asbnormal increase in income of the assessee. There is documentary evidence to show that the assessee and various parties/commission agents had agreed on some terms and conditions on the basis of which payments of commission is claimed by the assessee. All the parties/ commission agents are existing income tax assessees and they are identifiable and verifiable and they have confirmed the payments received by them through cheques and nature of services rendered. In the earlier years similar payments were made. There is no material change in the facts of the case for the assessment year under consideration where the facts, circumstances & mode are identical. The findings of the CIT(A) that the assessee might have spent certain amount, which is prohibited under the law for securing purchase orders through so called commission agents is not based on any evidence.

We are, therefore, of the opinion that in the ultimate analysis, the assessee is able to show that it has paid brokerage &b commission to the commission agents for the purpose of the business of the assessee and is entitled to deduction. Thus considering the entirety of the facts and the alternative ground No. 5 of the assessee and the possible leakage disallowance of Rs. 25.00 lacs is sustained out of total disallowance of Rs. 4,56,22,058/- and the balance disallowance of Rs. 4,31,22,058/- is directed to be deleted.”

Counsel has contended that in view of the explanation to Section 37 of the Act and more particularly the finding of the Assessing Officer at page 7 which are quoted below, the view taken by the Tribunal is required to be reversed:-

The learned ITAT further referred to the Judgments of the Hon'ble Apex Court, in the Case of Commissioner of Income Tax,West Bengal-II Vs. Durga Prasad More (1971)82 ITR 540 (SC) and of Sumati Dayal Vs.CIT (1995)214 ITR 801 (SC). Thus, all the three lower Authorities came to the conclusion that no services were rendered by the Sub-brokers, there was no necessity to engage 8 services of Brokers/Sub-brokers in the light of the agreement with the Principal Company, and further not a single penny was paid to the Subbrokers for years together. One is required to arrive at the conclusion on the basis of human probability. Human probability cannot be ignored for persons like Sub-brokers or men of no means who render services to some but do not receive any amount for years together. None would leave hard earned money, for their day to day needs if actual services have been rendered by the said persons. It was upon the appellant to discharge the onus which heavily lay on him and he miserably failed for the reasons stated herein before. The Hon'ble Apex Court,in the Case of CIT Vs.Durga Prasad More (Supra), has observed as under:- “Now coming to the question of onus,the law does not prescribe any quantitative test to find out whether the onus on a particular case has been discharged or not. It all depends on the facts and circumstances of each case. In some

The Hon'ble Supreme Court in yet another case, of has observed as under:- “ In our opinion the majority opinion after considering the surrounding circumstances and applying the test of human probabilities has rightly concluded that the claim about the amount being winnings from races is not genuine. It cannot be said that explanation offered by the assessee in respect of the said amount has been rejected unreasonably and that finding that the said amounts are income of the assessee from other sources is not based on evidence.” 11. required to be reversed:-

A reading of the questions initially framed and subsequently reframed show that what was done by [9 ] DBITA NO.327/2005 the High Court is to retain three out of twelve questions, as initially framed, while discarding the rest. Some of the questions discarded by the High Court were actually more proximate to the question of perversity of the findings of fact recorded by the learned Tribunal, than the questions retained. From a reading of the Order of the High Court it is clear that the High Court examined the entitlement of the appellant assessee to deduction/disallowance by accepting the agreements executed by the assessee with the commission agents; the affidavits filed by C. (supra) : “The mere existence of an agreement between the assessee and its selling agents or payment of certain amounts as commission, assuming there was such payment, does not bind the Income Tax Officer to hold that the payment was made exclusively and wholly for the purpose of the assessee’s business. Although there might be such an agreement in existence and the payments might have been made. It is still open to the Income tax Officer to consider the relevant facts and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under Section 37 of the Act.”

There were certain Government Circulars which regulated, if not prohibited, liaisoning with the government corporations by the manufacturers for the purpose of obtaining supply orders. The true effect of the Government Circulars along with the agreements between the assessee and the commission agents and the details of payments made by the assessee to the commission agents as well as the affidavits filed by the [10 ] DBITA NO.327/2005 husbands of the partners of M/s. R.J. Associates were considered by the High Court. The statement of the Managing Director of Tamil Nadu State Marketing Corporation Ltd. (TASMAC Ltd.), to whom summons were issued under Section 131 of the Act, to the effect that M/s. Golden Enterprises had not done any liaisoning work with TASMAC Ltd. was also taken into account. The basis of the doubts regarding the very existence of R.J. Associates, as entertained by the Assessing Officer, was also weighed by the High Court to determine the entitlement of the assessee for deduction under Section 37 of the Act. In performing the said exercise the High Court did not disturb or reverse the primary facts as found by the learned Tribunal. Rather, the exercise performed is one of the correct legal inferences that should be drawn on the facts already recorded by the learned Tribunal. The questions reframed were to the said effect. The legal Page 17 inference that should be drawn from the primary facts, as consistently held by this Court, is eminently a question of law. No question of perversity was required to be framed or gone into to answer the issues arising. In fact, as already held by us, the questions relatable to perversity were consciously discarded by the High Court. We, therefore, cannot find any fault with the questions reframed by the High Court or the answers provided.”

Counsel for the appellant has further contended that the benefits as provided under Section 43B of the Act, the sales tax was neither collected nor deposited. Section 43B reads as under:- “43B. Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of— (a) any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, or (b) any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, or (c) any sum referred to in clause (ii) of sub-section (1) of section 36, or (d) any sum payable by the assessee as interest on any loan or borrowing from any public financial institution or a State financial corporation or a State industrial

Relying on Section 43B of the Act, he has contended that the incentives have been wrongly allowed by the Tribunal and the same is also required to be reversed.

Counsel for the department insofar as claim under Section 80JJAA of the Act is concerned, has contended that the amount which has been claimed by the assessee under this section, the expenses of employment were not permanent and 10% increase was not there and the Tribunal has given the benefit of 300 days, which is wrongly granted.

Counsel for the respondent has relied upon the decision of the Gujarat High Court in Commissioner of Income Tax-III Vs. Nirma Ltd., in Tax Appeal No.226/2010, dated 08.06.2016, for the purpose of benefit under Section 43B of the Act, more particularly para 8, 9 and 10 of the judgment which are quoted hereunder, and also the judgment of Delhi High Court in [14 ] DBITA NO.327/2005 Commissioner of Income Tax Vs. Ram Pistons & Rings Ltd., reported in (2012) 80 CCH 0055 Delhi HC, in particular para 9, which reads as under:- Para 8, 9 and 10 of the judgment in Commissioner of Income Tax-III Vs. Nirma Ltd.(supra):

Per contra, the learned D.R. Supported the orders passed by the Assessing Officer and the learned CIT (A). Referring to the judgment in Sahney Steel and Press Works Limited v. CIT, 228 ITR 253 (SC), he submitted that the impugned sales tax exemption increased the profits of the assessee by eliminating the expenses which the assessee would have had to incur later and therefore the impugned receipts were in the revenue field. He also referred to Explanation

We have heard both the parties and considered their rival submissions. Perusal of the scheme extending the aforesaid incentives to "prestigious"

He further contended that in view of decisions of this Court in Commissioner of Income-tax v. Birla VXL Ltd. reported in (2013) 32 Taxmann.com 330 (Gujarat) and in Deputy Commissioner of Income- tax v. Munjal Auto Industries Ltd. reported in (2013) 37 Taxmann.com 115 (Gujarat) the issue is squarely covered and the decisions which are sought to be relied upon by learned advocate for the appellant are not applicable in the facts of the present

It can thus be straightaway seen that the benefit, though computed in terms of the Sales Tax liability in the hands of the recipient, the same was not mean to give any benefit on day-to-day functioning of the business, or for making the industry more profitable. The principle aim of the scheme was to cover the capital outlay already made by the assessee in undertaking special modernization of its existing industry.

In a recent decision dated 28th January 2013 in Tax Appeal No. 450 of 2012 and connected appeals, we had an occasion to examine the nature of incentives received by the assessee from the State Government in the form of entertaining tax waiver for setting up multiplexes. In such context, we had in wake of the revenues contention that the receipt was revenue in nature, held and observed as under: "From the provisions of the said scheme, it clearly emerges that the subsidy though computed in terms of sales tax deferment or waiver, in essence it was meant for capital

In the result, we do not find that the Tribunal has committed any error. No question of law, therefore, arises. Tax Appeals are therefore dismissed."

In the case of Deputy Commissioner of Income-tax v. Munjal Auto Industries Ltd. (supra), this Court has observed as under:-- "

From the provisions of the said scheme, it clearly emerges that the subsidy though computed in terms of sales tax deferment or waiver, in essence it was meant for capital outlay expended by the assessee for set up of the unit in case of a new industrial unit and for expansion and diversification of an existing unit. As noted, such subsidy was available only to a new industrial unit or a unit undertaking expansion or diversification. Fixed capital investment has been defined as to include various investments in land

It is undoubtedly true that such subsidy was computed in terms of sales tax deferment and necessarily therefore, would accrue to an industry only once the commercial production commences. However, this by itself would not be either a sole or concluding factor. In case of Sahney Steel and Press Works Ltd. and others v. Commissioner of Income- tax reported in 228 ITR 253, the Apex Court held and observed that the character of the subsidy in the hands of the recipient whether revenue or capital will have to be determined, having regard to the purpose for which the subsidy is given. The source of find is quite immaterial. If the purpose is to help the assessee to set up its business or complete a project the monies must be treated as having been received for capital purposes. Such But if monies are given to the assessee for assisting him in carrying out the business operations and given after the satisfaction of the conditions of commencement of production, such subsidy must be treated as assistance for the purpose of the trade." Para 9 of the judgment in Commissioner of Income Tax Vs. Ram Pistons & Rings Ltd.(supra):- “9. The conclusion reached by the tribunal is a finding of fact. The tribunal weighed the evidence before them and on preponderance of possibilities has accepted the claim/contention of the respondent-assessee. The contention of the Revenue is that the existence of the agency agreement, payment to thew agent did not prove and establish that the commission paid was an allowable expense under Section 37 of the Act. However, the contention does not notice that the tribunal has not merely relied on the agreement and the actual payment, but has accepted and agreed that evidence exists to show and establish nature of services actually rendered by various agents at different places throughout India. The order dated 25.2.2001 refers to a paper book filed by the respondent-assessee in support of his contention that the agents were interacting with the State Road/Municipal Transport Corporation/ Undertakings. It was observed that there was no evidence or material, except suspicion or a surmise that the commission payment, in fact, represents illegal gratification paid to unknown officers and therefore, should not be allowed as a deduction. A factual decision is perverse if the authority has acted without any evidence or on a view of facts cannot be reasonably

We have heard the counsel for the parties.

The contentions which are raised by the department is required to be considered and the same has been considered at length. The basic contention is that the Tribunal while discussing the matter has observed that in the previous year the department itself has accepted it and was not challenged. Apart from that, the commission which has been paid was paid by account payee and the same was verified. The commission which has been paid from accounts was also verified by the department. In that view of the matter, we are of the opinion that books of account are not rejected and the same is accepted. Thus the view taken by the Tribunal is just and proper and the first issue is required to be answered in favour of the assesseee and against the department.

Regarding Section 43B of the Act, in our opinion, in view of para 9 of the judgment of Delhi High Court in Commissioner of Income Tax Vs. Ram Pistons & Rings Ltd. (supra), the view taken by the Tribunal is just and proper and this issue is also required to be answered in favour of the assessee

As regards Section 80JJAA of the Act, in our opinion, permanency is not there and increase is there. The Tribunal while considering the same has taken into consideration the provisions of that Section and rightly granted the benefit in favour of the assessee. Therefore that issue is also required to be answered in favour of the assessee and against the department.

The fourth issue is regarding Section 43B of the Act, establishment and research is always for the purpose of benefit of the business. In that view of the matter, the said issue is also required to be answered in favour of the assessee and against the department.

Consequently, all the appeals except D.B. Income Tax Appeal No.238/2016, are dismissed. D.B. Income Tax Appeal No.238/2016:-

Since the main issues are decided in favour of the assessee, the present appeal need not be admitted and the same is hereby dismissed.

A copy of this judgment be placed in each of the connected file. (MAHENDRA MAHESHWARI),J. (K.S. JHAVERI)ACTING C.J. KKC/8-17