SUNIL VISHRAM CHAWDA,HYDERABAD vs. ASST. COMMISSIONER OF INCOME TAX, CIRCLE-14(1), HYDERABAD

PER Smt. P. MADHAVI DEVI, J.M. : This is assessee’s appeal for the AY.2013-14, directed against the order of the Commissioner of Income Tax (Appeals)-6, Hyderabad, dated 01-03-2018.

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3.1. Aggrieved by the order of AO, the assessee preferred an appeal before the CIT(A), who also relied upon the findings of his predecessor for the AY.2011-12 to confirm the disallowance and has restricted the disallowance only to 50% of the commission expenses claimed by the assessee. Further aggrieved by the order of Ld.CIT(A), assessee is in second appeal before us.

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“8. Ld. AR of the assessee submitted that the assessee is engaged in sale of various chemicals and most of the chemicals are imported material. There is sever competition for this business. He submitted that the assessee being an individual (proprietor) had to necessarily depend upon somebody to achieve higher sales to survive in the market. He submitted that there is an increase in turnover and in fact the commission claim at Rs. 52,57,750/- in this AY 2011-12 is much less than the commission of Rs. 64,76,842/- paid in earlier AY 2010- 11. The gross profit and net profit reflect steady progress.

8.1 Ld. AR submitted that the Profit & Loss a/c (page 3 of paper book) shows the salary claim at Rs.18,02,100 for Asst.year 2011-12. The details placed at Page 67 of the paper book shows that there are only 2 employees on sales to monitor sales. Hence the assesse has to necessarily depend upon outside agencies for the marketing job. (These two emplyees also coordinate the sales bookings done by agents). Therefore he had appointed the agents, through proper appointment letters right at the starting stages of his business. Copies of some of the appointment letters are placed at pages 60 to 64 of the paper book.

8.2 Ld. AR submitted that it is an undisputed fact that the assessments of the assesse for Asst. years 200809, 2009-10 & 2010-11 were completed u/s 143(3) after detailed examination. In all the years the assessee paid the commission to all the agents. In all the years the commission was paid through Banking channel and tax was deducted at source. All the agents were assessed to tax and in some cases the tax is paid at highest slab. He submitted that before the Assessing Officer, the assesse had filed complete details of

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commission payments. The said details placed at page 15 of paper book show the commission payment agent wise, date wise and the details of deductee of tax. The statement itself indicates the PAN of the agents. Further commodity wise, date-wise, quantity-wise and agent wise commission workings were filed and placed at pages 16 to 30 of the paper book. Statement of TDS, section-wise, filed before Assessing Officer is placed at page 31 of the paper book. He submitted that copies of the Income tax return acknowledgement and computation of the commission agents filed before Assessing Officer are placed at pages 33 to 59 and pages 89 to 92 of the Paper book respectively. All the evidences thus filed before the Assessing officer prove beyond doubt the genuineness of claim of commission to agents. The assessee had duly complied with all the procedures required, to establish and substantiate his claim.

8.3 Ld. AR contended that in spite of this heavily loaded evidences, and confirmations in favour of the assessee, the Assessing Officer resorted to disallowance simply on presumptions and assumptions. In doing so, the Assessing Officer overlooked the vital facts that:

i) Such commission was allowed in earlier years. ii) the salary claim for a turnover of Rs.24.52 crores is only 18 lakhs that too mostly for the administration staff only. There is minimum claim of salaries for the field staff. Kind attention is invited to the details of salary payments (Page 67 of Paper Book). iii) The whole presumption of the Assessing Officer is that the assessee had resorted to this claim to reduce or evade the taxes. The Assessing Officer grossly failed to appreciate the fact that the assessee is constantly offering substantial income to tax. For the Asst.Year 2011-12 the assessee admitted income at Rs.77.95 lakhs on a turnover of Rs.24.52 crores. Considering the fact that this is a trading business of a proprietor to achieve that much turnover and admit such a high income is not an easy task. iv) The whole approach of the Assessing Officer is as if the assessee had for the first time resorted to claim such expenses. He failed to appreciate the fact that payment of such commission is one of the main expenditure claimed year after year in this line of business. v) The most important aspect is that based on these findings, the assessment for Asst.Year 2008-09 which was earlier completed u/s 143(3) on 25.09.2010 was reopened u/s 148 and out of the total amount of Rs.24,47,000 claimed as commission payment, the Assessing Officer in his order u/s 143(3) r.w.s.148 disallowed Rs.21,21,000 accepting the payment of Rs.3,26,000 (copy of the order u/s 143(3) r.w.s.148) dt.26.07.2014 is enclosed as annexure). Again for Asst.Year 2009-10 the Assessing Officer in an order u/s 143(3) r.w.s. 148 allowed commission of Rs.3,07,000. similarly for

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Asst.year 2010-11 in the order u/s 143(3) r.w.s.147 an amount of Rs.16,32,955 was allowed on the similar set of facts. This shows that the Assessing Officer even in his reassessment order is satisfied with a portion of the commission payment. The evidences available for allowing such expenditure, not once but twice, once at the time of 143(3) and for the second time at in the course of 143(3) r.w.s.147, are same and equally applicable and available in other cases also. Hence allowing some payments and disallowing others on similar and identical set of facts is unjustified and arbitrary. This establishes the fact that the disallowance is only on presumptions and not based on any concrete evidences.

vi. The theory of the Assessing Officer that assessee resorted to agency commission payments only to reduce profit is also not correct. All the recipients have offered the said commission to tax. Some of the agents are in the 20% tax bracket and hence the theory of the evasion / reduction also has no basis.

vii). Another glaring instance is that the Assessing Officer in his over enthusiasm to disallow the commission on sales, disallowed even the commission paid by the assessee to the customs clearance agent on the purchases made. S.No.16 page 2 of the asst. order is the payment of Rs.1,10,000 for Asst. Year 2011-12 to Sridhar clearing service Pvt Ltd. This party is the customs clearing agent at Chennai Port. He renders the service in this regard. The purchases made by the assessee outside India was shipped to India and at the Chennai port the goods were got delivered through the services of this authorized agent. This party charges commission for each shipment. Relevant documents placed at pages 73 to 88 show the service rendered by this party in respect of one shipment. the Agency commission claim is supported by the bill placed at page 78 of the paper book. Details of goods received and cleared are indicated in the relevant invoices placed at page 84 of the paper book. Details of purchases made cleared by this agent and commission paid are placed at page 66 of the paper book. Appellants ledger Ale in the books of Sreedhar agency shows the service charges claimed from the appellant. Agency commission of Rs.3,000 at page 76 is duly reflected as part of Rs.13,677 at page 72 of the paper book. Thus the Assessing Officer is totally unjustified in disallowing even the commission paid to the clearing agents.

viii. The Assessing Officer in his order at para 6 makes an observation that the assessee had not taken the offer of cross examination. Since none of the agents have denied the receipt of commission and all of them have in fact confirmed the receipt of such commission, the assessee did not find it necessary to cross examine

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and this can by no stretch of imagination be an issue against the assessee's claim of commission payment to agents.

ix. It is pertinent to submit that none of the agents examined by the Assessing Officer are related to the appellant.

x. It is not, in any case, the allegation of the Assessing Officer that the commission paid to the agents had flown back to the assessee. Hence in such circumstances disbelieving the commission payment is not proper.

xi. In this regard kind attention of the Hon'ble Commissioner of Income Tax is invited to the relevant observations of the Hon'ble member in the case of Sachin B Desai Vs ITO ITA NO.2280/KOI/2013 dt.07.08.15 (Copy enclosed).

"It is quite possible that the company has various types of activities and working as commission agent is also a part and such companies work for many types of clients. Quite possible a director might not be aware of names and details of all the clients of the company. The Assessing Officer should have enquired through the sales man of the commission agent or through the buyers of the products of the assessee in order to verify the actual commission given to M/s. Wide Angle Packaging System (P) Ltd for doing the sales on behalf of the assessee against commission. The assessee has paid commission by account payee cheque. Due TDS paid, identity of the commission agent is verifiable which are sufficient evidence on record to prove the genuineness of the transaction and creditworthiness and identity of the so called commission agent. In view of the above I am of the view that the entire commission is allowable. This ground of appeal is allowed". (emphasis supplied).

8.5 In the light of the above submissions, the ld. AR submitted that the revenue authorities have not justified to disallow the claim of commission payment simply/based on the presumptions and assumptions especially when each one of the agents have categorically confirmed the receipt of agency commission. He, therefore, pleaded the bench to delete the addition made on this count. He relied on the following decisions:

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10.1 Coming back to ld. CIT(A)’s observation that there is no contract in existence. It is not necessary that all agents should have written agreement. Generally, these businesses are run on the basis of referral and prompt collection of sale proceeds. The agents refer the clients and collects the commission as soon as the sale proceeds are collected as per the contract terms. There is no question of breach in these type transactions, until the sale proceeds are realized, no agent is eligible to claim and as soon as sale proceeds are received, the due commissions are settled. It is clear from the record that assessee has not claimed any bad debts in these years under consideration.

10.2 With regard to genuineness, assessee has declared the profit and commission consistently over the years and the results are (refer financial results submitted by ld. AR) consistent. We also notice that assessee has not claimed any bad debts in the statement of accounts, it shows that the sales are genuine and the agents promptly collects the sale proceeds.

10.3 Further, ld. CIT(A) has brought on record that the agents have declared the commission as income in their return and all have claimed refund. We find it difficult to understand, on what way, it will decide the genuineness of transaction in the case of assessee, particularly, when there is no finding that the assessee has received

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back any commission or enjoyed any benefit out of this transaction except achieving targeted sales.

10.4 CIT(A) observed that assessee made the payment to certain persons ostensibly and has not established the services rendered by them. She further observed that it can be called gratuitous payments to persons known to assessee, but, she could not establish the relationship with the assessee but expressed that it is not clear whether they are relatives, but, they were not strangers either. Further, she held that there is a preponderance of probability to conclude that the payments did not constitute for remuneration for services of agency. At the same time, she allowed a random amount of Rs. 5 lakhs as commission without any basis.

10.5 She failed to consider the other aspects in this case, none of the agents are relatives to the assessee. No businessman will give payment to outsiders on gratuitous basis, particularly, the amount involved are huge. The agents have confirmed that they have received the commission and the other family members or subordinates have assisted them achieve the sales. This aspect cannot be ruled out that no businessman will distribute money on gratuitous basis without taking benefit from such payments. This is also preponderance of probability. Another aspect was also not considered by ld. CIT(A) that there is no proof that the assessee has received back the alleged commission payment from the respective agents. It shows that the payments are genuine.

10.6 Let us analyse this aspect under judicial view. In the similar situation, the Hon’ble Rajasthan High Court in the case of Pinkcity Industries (supra), has adjudicated as below: “Taking into consideration that the business has gone almost all time and payment was made through account payee cheque, in our considered opinion, the business expenses is wrongly disallowed. Hence, the first issue is required to be answered in favour of the assessee and he ought to have been allowed the expenses which is arising out of the business exigency and in that view of the matter, the observations made in case of S.A. Builders Ltd. CIT(A) 288 ITR 0001Z (SC), the expenses are required to be allowed.”

In the given case, the assessee has maintained sales over the years and carried on the business with the help of only 2 persons to monitor the sales. It is not possible to achieve the volume of 24.52 crores without the services of salesmen or agents. Also all the payments are made through banking channels.

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10.7 In the case of ITO Vs. Shyam Sunder Jajodia (supra), the Hon’be Delhi High Court held as under:

The assessee claimed a deduction on the ground that he had paid commission to 12 parties. The Assessing Officer rejected the claim of the assessee by observing that there was no agreement for the payment of commission. The Assessing Officer further observed that the assessee failed to prove that expenditure was incurred wholly and exclusively for the purpose of business. On appeal, the Commissioner (Appeals) re-appreciated the controversy and deleted the addition.

On revenue's appeal :

HELD

In order to claim any expenditure not being expenses described in sections 30 to 36 and not being in the nature of capital expenses or personal expenses laid out and spent wholly and exclusively for the purpose of business, one's claim has to be examined under the residuary provision of section 37. Hence, in order to be eligible for an expense under this section, one has to fulfil the conditions; (t) the expenditure must not be governed by the provisions of sections 30 to 36, (ii) the expenditure must have been laid out wholly and exclusively for the purpose of the business of the assessee, (iii) the expenditure must not be personal in nature and (iv) the expenditure must not be capital in nature. The expression 'wholly' employed in section 37 refers to the quantum of expenditure, while the word 'exclusively' refers to the motive, objective and purpose of the expenditure.

In the instant case, the assessee had established that payment was made through banking channel. All the payees responded to the query of the Assessing Officer and some of them supplied the information about the services rendered by them. The commission had been allowed in the earlier years and in the subsequent years on similar lines. All the payees were assessed to tax. Their PANs had also been disclosed to the Assessing Officer. The objection of the Assessing Officer was that there was no agreement for payment of commission. It was for the assessee to carry out his business. If he had an understanding with certain person, then it might not be very much necessary to enter into an agreement. The assessee as well as the payees were withstanding to their stand. There was no variance in their conduct. As far as the allegation of failure to produce demonstrative evidence against the assessee was concerned, one had to see the nature of business. The assessee was in the business of sale of plastic dana. The agents were required to send customers for purchase of dana. They could be introduced on phone also. There might not be any demonstrative evidence in certain circumstances but that did not mean that expense was not incurred. The assessee had shown commission income on sale of plastic dana; it suggested that he had carried on business. Thus, all these circumstances were to be seen before making the disallowance. In such circumstances, the disallowance could not be made. The appellate authority had

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appreciated the facts and circumstances and deleted the disallowances correctly. There was no merit in the instant ground of appeal also. It was to be rejected.”

In this case, the assessee has issued appointment letters and the nature of the business is selling of chemicals. The assessee has submitted the agent-wise and chemical wise details before revenue authorities. It shows that the agents or their subordinates had contributed in selling the chemicals.

10.8 In the case of CIT Vs. Printers House (P) Ltd. (supra), the Hon’ble Delhi High Court held as under:

" .. There is no evidence on record to show that the commission was paid to any near relative, family member or sister concern. There is no iota of evidence to show that the payment of commission represented only accommodation entry or was only a paper transaction. There is also no evidence to show that the amount of commission came back to the assessee in any form Since the assessee has given full details including the addresses of buyers and addresses of the agents as well as details of payment etc. the transactions of payment of commission as well as the aspect of rendering services by the commission agents were fully verifiable. However, neither the Assessing Officer nor the learned CIT (Appeals) made any attempt at their end to make probe into the matter for coming to the conclusion that the transactions were bogus, unfair and fraudulent. In our opinion, in absence of any such material on record and in absence of any inquiry conducted to prove the non-genuineness of the transactions the departmental authorities were not justified in disallowing the claim of the assessee which was fully supported by the documentary evidence on record.

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tax, inter alia of which included Rs. 25.68 crores of export turnover. The turnover we are concerned with is stated to be Rs. 3.74 crores on which the commission has been paid. It has been pointed out by Ms. Bansal that rather than the stated 0.05 per cent the commission, the commission works out to 1.5 per cent in relation to local sales and 7 per cent as far as export turnover is concerned. Even then according to us there remains no reason to doubt these payments. It has been laid down in several decisions of the Supreme Court that the ITAT is a final forum for findings of fact. The High Court would intervene only if a finding appears to be perverse, which we are unable to conclude in the / case in hand.”

10.9 In the case of CIT Vs. Siddhartha Trade Links Pvt. Ltd. (supra), the Hon’ble Delhi High Court held as under:

“17. We have heard the rival contentions and perused the records. We find that in view of the voluminous evidence submitted by the assessee in this regard, it cannot be said that assessee, as failed to establish that there was no evidence of rendering the corresponding services by such persons. We find that assessee has duly submitted various documents pertaining to ledger accounts, commission paid, bills raised and correspondences in this regard. The services provided have also been duly explained. It is a settled law that revenue authorities cannot sit into the shoe of the businessman. In this regard, we place reliance upon the decision of the Hon'ble Apex Court in the case of CIT, Bombay Vs. Walchand and Co. Private Ltd. in 65 ITR 381, wherein it was held that "in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively for business, the expenditure has to be adjudged from the point of view of the businessman and not of revenue". Accordingly, we hold that assessee has duly established that sufficient services were rendered for the payment of the commission involved in this regard. Accordingly, we set aside the orders of the authorities below on this issue and decide the issue in favour of the assessee."

In the given case also, assessee has produced the details of sales achieved by the agents by submitting item-wise, agent- wise details before revenue authorities. Further, assessee has filed the relevant books of account relating to agents, payment details, advance tax compliance before authorities. It shows that assessee knows the business he carries on and as per the Hon’ble High Court’s observation, it is settled law that revenue authorities cannot sit into the shoe of the businessman. By referring to CIT Vs. Walchang and Co

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(supra), in applying the test of commercial expediency for determining whether an expenditure was wholly or exclusively for business, the expenditure has to be adjudged from the point of view of the businessman and not of revenue.

10.10 From the above discussion, it is clear that the assessee has submitted enough evidence in support of utilizing the services of agents in the business and also revenue authorities have not brought any cogent material to show that the payments were come back to assessee and these payments cannot be categorized as gratuitous payments. Therefore, we delete the addition made by the AO. Hence, grounds raised by the assessee are allowed”.

6.1. Respectfully following the above order, the appeal filed by assessee for the AY.2013-14 is also allowed.

Order pronounced in the open court on 15th November, 2019

Sd/- Sd/- ( A. MOHAN ALANKAMONY ) ( P. MADHAVI DEVI ) ACCOUNTANT MEMBER JUDICIAL MEMBER Hyderabad, Dated: 15-11-2019 TNMM

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