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Income Tax Appellate Tribunal, MUMBAI ‘D’ BENCH, MUMBAI
Appearances: None for the appellant T. Shankar for the respondent Date of concluding the hearing : May 04, 2022 Date of pronouncement the order : August 03, 2022
O R D E R Per Pramod Kumar, VP:
By way of this appeal, the Assessing Officer has challenged the correctness of the order dated 22nd January 2019, passed by the learned CIT(A) in the matter of the processing of income tax returns u/s. 143 (3) of the Income Tax Act, 1961 for the assessment year 2013-14.
Grievances raised by the appellant are as follows:-
1. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in not appreciating the fact that party M/s. Dhwaja Commodity Services Pvt Ltd has set off the income received against the current year losses during the year resulting in NIL tax liability which clearly indicates that it is an arranged transaction."
Assessment Year: 2013-14 Page 2 of 8 2. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate the fact that the Director of M/s. Dhwaja Commodity Services Pvt Ltd had admitted on oath that he and his company had not rendered any services to the assessee and an affidavit denying the averment is merely a self-supporting document which was furnished during the course of assessment and the fact that the MOU between the assessee and M/s Dhwaja Commodity Services Put Ltd was entered into on 23/04/2012 and 25/10/2013 which notorized on indicates a contrived transaction.” 3. “On the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate the fact that Smt. Shweta Uday Zope has not filed the Return of Income therefore not offered this income to tax nor is the reason for the payment of fees of Rs.9,00,000/ justified as explained by the Assessing Officer”. 4. “The appellant prays that the order of the Ld. CIT(A) on the above grounds be set aside and that of the Assessing Officer be restored.
We have heard the learned Departmental Representative, but none appeared for the assessee despite several opportunities having been attended to the assessee. We have also perused the material on record and duly considered facts of the case in the light of the applicable legal position.
So far as the first and second grounds of appeal are concerned, relevant material facts are like this. During, the course of scrutiny assessment proceedings, the Assessing Officer noticed that the assessee has claimed a deduction of Rs. 5 crores towards consultancy fees to one Dhwaja Commodity Services Pvt. Ltd. when he probed the matter, it was explained by the assessee that this amount was paid for introduction to Mr Cosme Menzes, Chairman of Cosme, and as a part of fee sharing arrangement for fee of Rs. 7 crores received from Cosme. The Assessing Officer, however, noted that there is no evidence of services rendered by Dhwaja Commodity Services Pvt. Ltd. or it’s Managing Director Mr Hemal D. Shah. When Mr Shah was called for examination on oath, he stated he had introduced Mr Cosme Menzes, whom he had met in a casino, to the assessee. It was also stated that the amount was in the “nature of a referral commission”. It was, inter alia, in this backdrop that the Assessing Officer disallowed the consultancy fee by observing as follows:-
From all the facts mentioned, the following clear picture emerges:- a) The whole facts mentioned and the way transaction has been carried out is nothing but a story of events, in which events have been shown moving not actually happened but are in nature of pre-scripted one alike script of any movie. Shri Hemal D. Shah acted in his personal capacity and not in the capacity as Director of Dhwaja Commodity Services Pvt. Ltd. Shri Hemal D. Shah has confirmed that he has not rendered any services in personal capacity or on behalf of the company to you or to the company you represent in the said business deal of Adcock Ingram acquiring Come Farma Laboratories Ltd.
Assessment Year: 2013-14 Page 3 of 8 b) No study was done for the deal and the consultancy fee paid by you had nothing to do with "rendering of any kind of services" c) Payment was taken by him for the interest of his company and not for rendering of any kind of services. d) Payment made by you was accepted by him for the interest of his company only. e) No study of whatsover nature was conducted by him. Not only that he was not even involved in the negotiations of the transaction involved. f) The stated receipt as "Consultancy Fee" was not for rendering any services but the receipt was taken for reducing the losses of Dhwaja Commodity Services Pvt. Ltd. g) One basic question arises: Can anyone will pay Rs. 5 Crore, a huge amount of Consultancy Fee, to a person who met the main person of seller company in a Casino on a leisure trip only for introducing to assessee and without getting any valuable services? Answer will be: NO and only NO.
The assessee and Dhvaja Commodity Services Pvt. Ltd. in connivance with each other have very smartly reduced each other tax liability, At one end the assessee has reduced substantial and huge tax liability by claiming "cooked up" expenditure of Rs. 5 Crore and at other end Dhwaja Commodity Services Pvt. Ltd has adjusted the aforesaid income and reduced only loss and thereby escaping any tax payment, Hence the assessee has adopted colorful device to avoid huge and actual tax liability. The same being not allowable in any statute. It is worth mentioning of the fact that as stated in the statement u/s. 131 of the Act of Shri Hemal D. Shah that the company had not rendered any services which entails payment of Consultancy Fee by the assessee. The aforesaid statement is also supported and backed up by the facts of audited accounts of Dhwaja Commodity Services Pvt. Ltd, which again speaks about it itself i.e. the receipt side of P & L A/C. for several Financial Years i.e F.Y. 08-09 to 11-12 of the aforesaid company has not shown any Consultancy Fee receipt in the said years. Therefore, it is crystal clear even from the fact that Dhwaja Commodity Services Pvt. Ltd. even did not have proficiency in the field for which it received a huge Consultancy Fee. It is also worth mentioning that assessee has not incurred any expenditure essential for running any business like: Mobile/tel., electricity, transportation.
Aggrieved, assessee carried the matter in appeal before the CIT(A) who deleted the above disallowance, and, while doing so, observed as follows:-
3.4 I have considered the assessment order, the Remand Report and the submissions of the appellant. The prime reason for disallowance of Rs. 5 crs was the statement recorded from Shri Hemal Shah, the Director of Dhwaja Commodities Service (P) Ltd on 09-02-2018. Answers to Q nos 1 to 15 in which Mr. Hemal Shah very clearly mentioned the nature of services rendered by Assessment Year: 2013-14 Page 4 of 8 his Company Dhwaja for which it received Rs. 5 crs which was duly declared as income in the return of income filed. In answers to Q nos 16 to 18, Shri. Hemal Shah stated that that his company was running into losses because of certain transactions done for certain clients. The same clients gave an opportunity to compensate the losses suffered by the company by giving the leads to the transaction. He then received exclusive authority over deal of Cosme. He was introduced to the assessee and asked the assessee to work on the deal. He accepted he commission from Shri Maheshprasad Kalasapura in the interest of the company at the instance of my clients. Based on this part of the statement, the AO came to the conclusion that the company Dhwaja has actually had not given any services to the assessee and the payment to the Dhwaja Commodities Service (P) Ltd is an arrangement to reduce tax in company. However, as already mentioned there was a failure in observing the principles of natural iustice and the AO was asked to give opportunity to the assessee to cross examine Shri. Hemal Shah whose replies to the questions were used by the AO against the assessee. AO gave an opportunity to the assessee following the ground raised in appeal on violation of principles of natural justice.
3.5 After obtaining a copy of statement recorded on 09.02.2016, Sh. Hemal Shah filed a notarized Affidavit dated 09.05.2018 before the AO retracting answers given by him to questions 16 to 18 of the statement dated 09.02.2016. Cross examination of Sh. Hemal Shah was conducted by the assessee before the AO on 12.07.2018. AO re-examined Sh. Hemal Shah after cross examination. AO submitted the Remand Report along with copy of affidavit filed and copies of statements recorded in cross examination and re-examination through the Range Head. In the remand report, the AO opposed the cross examination opportunity demanded by the assessee and the additional evidence filed with regard to payment of Rs.9,00,000 to Ms Shweta Zope. I have considered the objections raised by the AO. In ground no.3 the appellant contested that he was not given opportunity to cross examine Mr. Hemal Shah whose statement was sought to be used against him. He further argued that Mr. Hemal Shah was witness of the department and the department has to call Mr. Hemal Shah and give opportunity of cross examination. Assessee relied on certain case laws including the Apex Court order in Andaman Timber Industries 127 DTR 241 (SC). Not giving of cross examination opportunity of the third party to the appellant is against the principles of natural justice and against the law laid down by the Apex Court. Further the additional evidence of proof of payment of fees to Ms. Shweta Zope was not called for and examined by the AO. Therefore the objections of the AO are not well founded and the additional evidence filed is admitted.
3.6 There is no ambiguity regarding the payment of Rs.5.00 crores by the assessee to Dhwaja as the same is evident from demand notice sent by Dhwaja, payment made by the assessee and the bank transactions of payment and receipt brought on record. Sh. Hemal Shah also in his statement recorded on 09.02.2016 accepted that the payment was received by Dhwaja from the appellant. Even in the answer to question No. 18 which the AO relied to disallow the payment, Sh. Hernal Shah confirmed that Dhwaja received the amount as commission for the deal from the assessee. AO only doubted allowability of the amount paid on two grounds. One that Sh. Hemal Shah met Mr. Cosme Menzes in personal capacity during a leisure trip and two that the company Dhwaja had no role in the transaction of sale of Cosme Pharma to Adcock. It is Assessment Year: 2013-14 Page 5 of 8 true that a person can work for himself or for the company he is heading or employed. In this case it is seen from the record that Sh. Hemal Shah is Executive Director of Dhwaja and receives salary from the company. It is also seen that Sh. Hemal Shah does not conduct any other business other than business of his company Dhwaja and he cares for his company. It is admitted on record that some clients of the company Dhwaja gave the leads to Sh. Hemal Shah, to support Dhwaja come out of losses incurred. In view of the above facts, if Sh. Hemal Shah met Mr. Cosme Menzes, it has to be considered that he met him in the capacity as MD of the company, because he had no other interest other than the company which he is heading, works for. Therefore the deduction of the AO that Sh. Hemal Shah met Mr. Cosme Menzes in his personal capacity is an assumption not supported by any evidence. The direct and circumstantial evidence, the statement given proves that Sh. Hemal Shah works for his company and not otherwise.
3.7 Sh. Hemal Shah filed an affidavit before the AO in which he retracted the statement given by him on 09.02.2016. He justified the delay in filing the retraction in his statement recorded by the AO during the reexamination on which the AO has not adversely commented. The argument of the AO that Sh Hemal Shah worked in his individual capacity for the deal is an assumption made by the AO which is rebutted by the retraction, that he only worked for the company and that the company received the commission on the deal which is supported by evidence. Therefore the addition made by the AO based on assumption should give way to the fact which is supported by the evidence, affidavit filed and result of cross examination and re-examination.
3.8 In the Affidavit filed before the AO, Sh. Hemal Shah mentioned that the business of Dhwaja is that of trading in commodities and arbitrage of commodities etc. Hemal added that Company's directors meet and deal with many corporate and High Net Worth Individuals and Company continues to strive for other opportunities for earning additional income. Sh. Hemal clearly mentioned that in FY 2012-13 Dhwaja got exclusive mandate from Come Pharma for Mr. Mahesh Prasad in the matter of sale of business of Cosme Pharma. This proves that Sh. Hemal has acted for his company Dhwaja and not for himself. Sh. Hemal mentioned in the affidavit how he made efforts to build Company and bring profits to the company. For AY 2014-15, immediately succeeding year to the year of appeal there was profit before tax of Rs.1.06 crs. Thereafter in FY 2015-16 his profit before tax was Rs.6.70 crs. Even in the FY 2011-12 in the immediately preceding year, the profit before tax amounted to Rs.1.13 crs with tax liability of Rs.23.59 lakhs. In Financial year 2017-18, the figures of turnover and profitability of Company rose to 31.23 crs and profit before tax (PBT) of Rs.8.80 crs after providing remuneration of Rs. 9 crs to Hemal Shah. These figures speak volumes about the able management of Company by Sh. Hemal Shah. The figures of profitability and tax thereon clearly show that Dhwaja has bona fide business profits on which it pays tax. Further there is no doubt about the loss in the books of the Dhwaja which was eligible for carry forward to later years. If income of Rs. 5 crs was not received from Appellant, Dhwaja would have set-off the carried forward loss of AY 2013-14 in subsequent AYs and there would not have been any tax in later years of AY 2014-15 to 2017-18. Dhwaja paid tax in AY 2014-15 and later years on account of reduction of eligible loss because of Assessment Year: 2013-14 Page 6 of 8 Commission received from the assessee. Therefore there is no loss to the revenue on account of payment of commission by the assessee to Dhwaja as sought to be portrayed by the AO.
3.9 Sh. Hemal Shah clearly mentioned the circumstances under which he gave the answers to Questions No. 16 to 18 before the AO on 09.02.2016. Hemal unequivocally stated the facts that Company had rendered the services and received referral fees which said Company had duly declared as income. Sh. Hemal stated that no prudent man in his senses could have given such incorrect, self-damaging and self-incriminating answers and accordingly he had retracted, clarified and corrected his earlier answers. Amount of Rs. 5 crs was received by Dhwaja for services rendered by Dhwaja for getting exclusive mandate favouring the Appellant. In the cross- examination statement Sh. Hemal has fully explained other matters. CA Shailesh Raichura introduced Hemal to the Appellant. Sh. P.Ramchandra Hegde, the then MD of Cosme Pharma was aware that he had introduced Appellant to Mr.Cosme. Mr. Hegde has also given confirmation to this effect. Thereafter the AO recorded the statement of sh. Hemal, wherein he reaffirmed the answers given in cross-examination. It is also clearly noticed in the Remand report while forwarding the affidavit, the cross examination statement and reexamination statement, the AO did not make any adverse comment on the matter post cross-examination.
3.10 The following documents were submitted by Appellant during the course of assessment proceeding to prove genuineness of the transaction:- a) Confirmation of Mr. P. Ramachandra Hegde, the then Managing Director of Cosme Pharma (P) Ltd [CPPL], who was also the MD of M/s Cosme Pharma stating that Sh Hemal Shah introduced Appellant to Mr. Cosme, chairman of CPPL. b) Copy of agreement dated 17.10.2011 between CPPL and Appellant giving exclusive mandate to Appellant. c) Copy of Bill raised for services rendered to CPPL. d) Copy of Service tax challan paid by Dhwaja. e) Relevant extract of bank statement of Dhwaja for the period 01.04.2012 to 31.03.2013 reflecting payment received from Appellant. f) Copy of ITR Acknowledgement of Dhwaja for AY 2013-14. 3.11 All the above facts clearly show that the transaction of payment commission is genuine. For getting an exclusive mandate in favour of the assessee and receiving a referral commission, there need not be any study by Dhwaja on the subject. Dhwaja has been a regular tax payer and it has shown substantial income and paid tax thereon. As against these documentary evidence, affidavit and the statements in cross examination and reexamination, the AO has brought nothing on record which controverts documents submitted by the Appellant, which contradicts the evidence that the said transaction was a bona fide one and which contradicts the evidence that Dhwaja was carrying on bonafide business. In view of the above discussions, the disallowance of Assessment Year: 2013-14 Page 7 of 8 commission paid by the assessee to M/s Dhwaja Commodity Services (P) Ltd. is deleted. Assessee gets relief. Ground No.1 is allowed. 6. The Assessing Officer is aggrieved, and is in appeal before us.
Having heard the learned Departmental Representative and having perused the material on record, we find that there is no evidence for any services rendered by the entity to which the referral commissions of Rs. 5 crores is paid. The mere fact that someone states that he introduced a potential buyer of services to the assessee and declared the referral fee in his income tax return does not establish the claim of the assessee. It is inconceivable that for merely introducing a potential customer, without any corroborative material for rendition of any service or without any services whatsoever, a consideration of Rs. 5 crores will be paid by the assessee. There is nothing more than bland statement of the assessee, and it’s corroboration by the recipient of money, which evidences that any services were rendered by the recipient of referral fee. In the absence of evidence about rendition of services the payment for consultancy services cannot be held to be admissible for deduction. It is also important to bear in mind the fact that the onus is on the assessee to establish that the expenditure is incurred wholly and exclusively for the purpose of business. Nothing, therefore, turns on finding faults in the statement of Hemal Shah, as recorded by the Assessing Officer. The onus of furnishing reasonable evidence, as may be acceptable to a fact finding authority, has not been discharged by the assessee. As there has been no appearance by the assessee before us, despite several opportunities having been granted to the assessee, we also do not have the benefit of perusing any material to evidence the rendition of services. We, therefore, deem it fit and proper to remit the matter to the file of the learned CIT(A) for his recording specific findings about rendition of services. If there are reasonable evidences of services, such a claim is to be considered but in the absence of any evidence about rendition of services, the claim will be clearly inadmissible. With these observations, the matter stands remitted to the file of the learned CIT(A).
Ground no 1 & 2 are thus allowed in the terms indicated above.
So far as third ground of appeal is concerned, the Assessing Officer disallowed the claim of the assessee on the ground that the fee of Rs. 9 lakhs was paid to one Smt. Sweta Uday Zope without any TDS, without any evidence of services and without even a proper bill. In appeal, however, learned CIT(A) deleted the said disallowance as TDS certificate, proper bill and evidence of confidential reports was placed on record. The details so submitted have been taken to record, and no specific defects have been pointed out in the same. In view of this position, we see no need to disturb the conclusion so arrived at by the learned CIT(A) and decline to interfere in this aspect of the matter.
10. Ground no 3 is thus dismissed.
Assessment Year: 2013-14 Page 8 of 8
In the result, the appeal is partly allowed in the terms indicated above. Pronounced in the open court today on the 03rd day of August 2022.