RAGHANI TRADELINK,AHMEDABAD vs. INCOME TAX OFFICER, WARD 1(3)(1), AHMEDABAD, GUJARAT

6. For that the Ld. CIT(A) erred in confirming the disallowance of 10% of the total administrative expenses i.e. Rs 20,56,298/- on ad hoc basis on total suspicion and surmises without pin pointing specific items of expenses.

7. For that the additions and disallowances made by the AO and confirmed by the Ld. CIT(A) are nor in accordance with law and the same are liable to be deleted.”

3. A perusal of the aforesaid grounds of appeal would reveal that the assessee has mainly contested the action of the Ld. CIT(A) in confirming the disallowance of 10% of the sub-brokerage expenses and also 10% of the total administrative expenses which was made by the Assessing Officer (AO) purely on adhoc basis.

4.1. During the assessment proceedings, in response to the notice u/s 142(1) issued by the AO, the assessee made the following submissions:

"1. We are a Collection cum Commission agent for Sarees, suits & other ladies readymade items on Del-credere basis. We introduce buyers/purchasers of the above goods to the manufacturing / trading houses PAN India. Buyers place orders and the goods are dispatched to them by sellers on our goodwill with intimation to us. On due date, we pursue the buyers for payments. On such collection, we raise bills on suppliers as Collection cum Commission agent which ranges between @ 0.5% to 2%. We have branches in Kolkata, Varanasi and Ahmedabad.

4. While carrying out our business activities PAN India as stated above, we have also appointed three sub-agents for collection of orders, pursuing despatch of goods from suppliers, collection of payments from buyers and other sort of help as may be required by the buyers and/or suppliers. For these services, we pay them Sub- brokerage as has been debited in the P/L account. The details such as Name, PAN and address of the parties to whom sub- brokerage is paid is enclosed herewith.

4.1. On further queries by the AO, the assessee also explained as under: “Point no. 1 The sub-brokers assist in bringing in new customers for the suppliers, collection of orders, pursuing despatch of goods from suppliers, collection of payments from buyers and other sort of help as may be required by the buyers and/or suppliers. a. There are only three sub-brokers to whom sub-brokerage of Rs.25363362 has been paid during the year as given in the table format below: Sub-broker Sub-brokerage paid (Rs) Apama Mishra 469292 Deepam Silk Retail Pvt Ltd 22769336 Vijay V Amar 2124734 Raghani Tradelink vs. ITO Asst. Year : 2020-21 Total 25363362 b. The agreement has been made in writing. The copies of agreement with Deepam Silk Retail Pvt Ltd and Vijay V Amar were submitted to your honour earlier. of agreement with Aparna Mishra is enclosed herewith as Now, the copy required. c. They help in co-ordinating with the buyers and suppliers for dispatch of goods, collection of payments etc as stated above. d. The orders are placed by the customers with the suppliers either with an intimation to us or the suppliers intimate us about any supply made by them to the customers e. All the payment of sub-brokerage is paid by banking channel after deducting TDS the details of which has already been given to your honour. f. This is a regular business practice that the suppliers make sales and grow their business with the help of brokers and pay commission to them relying on the credibility and goodwill of the broker that the payment will be received. Similarly, we rely on the goodwill, credibility and past track record of the sub- brokers for assurance that the payment will be received. g. As already submitted, we are a broker i.e. middleman and we do not maintain and are not required to maintain the details of orders placed by the customers with the suppliers once the collection is completed and our bill is raised on the supplier. Your honour can get the details of the orders received from the suppliers, the details of which has already been given to in our earlier reply. h. Documentary evidence in support of TDS deducted i.e. Form 16A is enclosed herewith.

Point no. 3 The intention behind the clause in the sub-broker agreement that the sub- brokers will manage with our office is that the sub-broker shall co-ordinate with our office staff along with their own staff for facilitating the services to the suppliers as well as buyers. This does not imply that they will bear our office expenses. They are simply sub- brokers and charge us sub- brokerage for their services and do not bear our office expenses. They will simply ordination manage their orders with the suppliers from our office in co- with our office Raghani Tradelink vs. ITO Asst. Year : 2020-21 6 staff and it was to that extent the word "manage" was used. This does not mean that the said broker will manage our office.

Point no. 9 The copy of form 26AS is enclosed herewith.

Point no. 10 The copy of all the TDS returns filed by us for the relevant asst year are enclosed herewith along with the copy of Form 16 and 16A.

The remaining details and documents are under preparation and shall be submitted to your honour within 15 days. Kindly adjourn the hearing till then and oblige.”

4.2. The assessee also furnished details of addition to fixed assets, expenses debited in P/L account, details of loans and advances, details of sundry creditors, details of current liabilities and copy of partnership deed was furnished by the assessee.

5. However, the AO observed that though the assessee had claimed that the assessee had been consistently following the aforesaid business module for the last three years since its incorporation, however, the AO observed that there was no scrutiny assessment in earlier years and comparison of expenses cannot be made with previous years. He, though accepting that the assessee- firm had made business expenses during the year under consideration, however, was of the view that the same seem to be exaggerated. He, observed that though the assessee had earned commission income of Rs.10,39,21,921/- , whereas, the net profit was shown at Rs.88,13,803/- only. He observed that out of the total expenditure of Rs.9,56,05,747/-, the assessee had claimed a sum of Rs.2,53,63,362/- on sub-brokerage. He observed that the assessee had failed to furnish the documentary evidence as to how the sub-brokerage helped in coordinating with the buyers and suppliers for despatch of goods, Raghani Tradelink vs. ITO Asst. Year : 2020-21 collection of payment, etc. Further, no documentary evidence was provided regarding the intimation by the customers/suppliers; no documentary evidence regarding surety/assurance was provided by the assessee for receiving the payments/delivery of the goods/material promised by the sub- brokerage; no agreement with the suppliers was provided by the assessee. The AO considering the aforesaid discrepancies observed that the assessee had failed to prove the genuineness of the brokerage expenses and observing that the same was exaggerated, he disallowed 10% of the sub-brokerage expenses at Rs.25,36,336/- .

5.1. Further, in respect of administrative expenses, the AO observed that the assessee had claimed administrative expenditure of Rs.2,05,62,989/- and an amount of Rs.3,28,67,666/- on account of salary and remuneration. He observed that as per the agreement furnished by the assessee with the sub- broker, the sub-broker was supposed to manage the office and whereas the assessee itself had claimed such huge expenses. On being asked to explain in this respect, the assessee gave the bifurcation of the administrative expenses as under: Rs. Business Promotion 22,42,762/- Conveyance 41,22,996/- Office Maintenance 30,80,471/- Parking Expenses 57,204/- Printing & Stationery 4,33,635/- Rent 16,95,390/- Vehicle Upkeep 36,26,783/- Raghani Tradelink vs. ITO Asst. Year : 2020-21 Other Expenses 53,03,746/- Total 2,05,62,989/- 5.2. On being asked to produce bills and vouchers the assessee also produced the same. The AO, further observed that the assessee had provided bills/vouchers of business promotion amounting to Rs.22,42,762/-, however, on some of the bills, no GST number was mentioned. That two bills of the same person of different dates were bearing same bill number. He, therefore, noting that there were certain discrepancies in the bills and vouchers. The AO further observed that the assessee had also not furnished documentary evidence relating to conveyance expenses. He observed that such expenditure was exaggerated, disallowed 10% of the total administrative expenses claimed and made the addition of Rs.20,56,298/-.

5.3. He also observed that the assessee had claimed an amount of Rs.3,28,67,666/- on account of salary and remuneration expenses. He observing that the said salary and remuneration was also exaggerated, disallowed 10% of the same at Rs.32,86,766/-.

6. In appeal, the Ld. CIT(A) confirmed the adhoc disallowance made by the AO @10% of the expenditure claimed in respect of sub-brokerage expenses and administrative expenses. He, however, deleted the disallowance made by the AO relating to salary and remuneration expenses observing that the assessee had duly furnished the requisite documents to prove the incurring of the said expenditure. Raghani Tradelink vs. ITO Asst. Year : 2020-21

7. Being aggrieved by the aforesaid order of the Ld. CIT(A) confirming the adhoc disallowance @10 % of the total expenditure claimed on account of sub-brokerage and on account of administrative expenditure.

8. We have heard the Ld. Representatives of the parties and perused the material on record. We note that, in this case, the AO had asked the assessee to furnish various details relating to the claim of the expenditure which the assessee duly furnished. The assessee also explained the modus operandi of his business operations. It was explained that the assessee was not engaged in any trading activities; the assessee earns commission income on the basis of collection of sale proceeds of the sales made by the sellers to their customers through their persuasion; that there were 5000-6000 sellers with whom the assessee deals; the modus operandi was that the assessee collects the ledger copies of the buyers from the sellers on a periodic basis and accordingly pursue for collection of the outstanding dues. It was also explained that the assessee do not retain the details of sales made by the manufacturers after receipt of its commission. However, assessee duly furnished the names, addresses and PANs of the sellers along with the amount of collection made. It was also requested to the AO that he may verify the facts from the parties as per law. It was also explained that the sellers also deduct TDS on the payments wherever applicable as evident from 26AS on the portal. The assessee also furnished the entire details of the sub-brokerage paid along with the ledger copies of the sub-brokers and commission payments. TDS had been deducted on all payments made. The assessee also furnished the details such as Name, PAN and address of the parties to whom sub-brokerage was paid. The assessee also furnished the copy of agreements entered into with two of the above sub-brokers. The Raghani Tradelink vs. ITO Asst. Year : 2020-21 assessee also explained even before the Ld. CIT(A) that all the communication, such as, intimation by the customers/suppliers, etc. takes place over telephone and there was no documentary evidence maintained in this respect. Moreover, the goods were directly despatched by the sellers to the buyers and the assessee was not required to maintain any record in this respect. It was also submitted that the assessee’s gross commission earned was more than Rs.10.39 cores, whereas, the assessee had paid sub-brokerage of Rs.2.54 crores only. It was submitted that the disallowance !@ 10% on adhoc basis was not justified. We note that despite furnishing of the extensive details and evidence, the AO without pointing out any specific discrepancy in the same and by making general and vague observations held that the claim of sub-brokerage expenditure was exaggerated. The books of accounts of the assessee are duly audited. The assessee has duly mentioned the names, PANs and addresses, etc. not only of the sub-brokers but also of the sellers and also requested the AO to verify the transactions or other details from the concerned persons. In view of the above, we do not find justification on the part of the lower authorities in making/confirming the impugned disallowance @10% of the sub-brokerage paid purely on adhoc basis. The said action of the lower authorities is not sustainable in the eyes of law. The impugned disallowance made by the AO is ordered to be deleted.