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Income Tax Appellate Tribunal, “E” BENCH, MUMBAI
Before: SHRI ABY T. VARKEY, HONBLE & SHRI S. RIFAUR RAHMAN, HONBLEShri Sudhir Mahamunkar v. Shri B.K. Bagchi
O R D E R PER S. RIFAUR RAHMAN (AM)
This appeal is filed by the assessee against order of the Learned Commissioner of Income Tax (Appeals)-38, Mumbai [hereinafter in short “Ld.CIT(A)”] dated 24.06.2019 for the A.Y.2010-11.
Brief facts relating to case are, the assessment was completed u/s.143(3) r.w.s. 147 of Income-tax Act, 1961 (in short “Act”) on (A.Y. 2010-11) Shri Sudhir Mahamunkar 26.12.2017 determining the income at ₹.33,12,960/- as against the returned income of ₹.3,54,138/-. During the assessment proceedings Assessing Officer observed that assessee has declared turnover of ₹.3,97,91,862/- from his business activities. He further observed that assessee has not audited his Books of Accounts as per Section 44AB of the Act, every person carrying on business shall if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds forty lakhs rupees get his accounts audited by an accountant before the specified date. Since, the assessee’s turnover was ₹.3,97,91,862/- the assessee was required to get his accounts audited. However, assessee failed to do so. Accordingly, penalty proceedings u/s 271B of the Act was initiated.
In response to the above penalty notice issued u/s. 271B of the Act, assessee submitted reply vide letter dated 11.06.2018 as under: - “…..the assessee is Agent of Loop/BPL Mobile Communication. The same has been confirmed during the course of assessment proceedings. The BPL/Loop Communication supplied the products in prefixed lot sizes to the assessee to sell in the market on behalf of BPL/Loop Communication. The assessee is only distributing the products to the Retailers and Direct Customer on behalf of Loop/BPL Mobile Communication and is entitled to commission as % of Sale value of prepaid card /Recharge voucher........” .
(A.Y. 2010-11) Shri Sudhir Mahamunkar 4. The Assessing Officer rejected the submissions of the assessee and observed that the margin or commission enjoyed by the distributor represents its income in the form of normal business profits and not commission which accrues or arises only when it sells the right to avail services, through the SIM cards, to retailers or customers. The Assessing Officer observed that the case of the assessee falls under provisions of section 44AB of the Act, therefore, assessee has failed to get his accounts audited before the specified date. Accordingly, he levied the penalty u/s.271B of the Act by observing that assessee has not brought any documentary evidences on record which can prove that there was reasonable cause for the said failure. Accordingly, he levied the maximum penalty of ₹.1.5 lacs.
Aggrieved assessee preferred an appeal before the Ld.CIT(A)-38, Mumbai and filed detailed submissions which are reproduced below: - “6. The submissions of the appellant as per the statement of facts enclosed with Form No.35 reiterated during the appellate proceedings are summarized as under: 6.1 The Appellant is a proprietor of M/s. Balaji Enterprises & entered into agreement of distributorship with BPL mobile communication Ltd. (Loop Mobile) for selling the mobile prepaid sim cards & recharge vouchers on commission basis. The Appellant has filed the Return of Income on 10.05.2017 in response to notice u/s.148, declaring the total income of Rs.3,54,138/ comprising of Business income and other sources. The assessment has been completed u/s.143(3) r.w.s 147, assessing total income of (A.Y. 2010-11) Shri Sudhir Mahamunkar Rs.33,12,960/-. The only Ground of appeal is regarding unjustified levy of penalty of Rs.150,000/ u/s.271B of Income-tax Act, 1961. 6.2 Facts of the Case i) The Appellant is a proprietor of M/s. Balaji Enterprises & entered into agreement of distributorship with BPL mobile communication Ltd. (Loop Mobile) for selling the mobile prepaid sim cards & recharge vouchers on commission basis. ii) The Appellant has filed the Return of Income on 10/05/2017 in response to notice u/s 148, declaring the total income of Rs. 3,54,138/comprising of Business income and Other sources. Copy Enclosed on Page J_ to 3i iii) The computation of Income and copy of Balance sheet & P&L a/c is enclosed. Refer Page 8 to 12. iv) The Ld. A. O. computed Income u/s.143(3) r.w.s 147, assessing total income of Rs.33,12,960/- by making following additions to Business Income to the tune of Rs.32,98,146/-. v) The business activity of appellant comprises of sale of prepaid cards & recharge vouchers to various retail customers as well as to other small shop owners on daily basis. The business activity is that of a small time vendor in a highly unorganized retail sector which involves receipt of cash on daily basis in smaller denomination from customers. The said cash has been deposited regularly in a gap of 2 to 3 days, as the onward payment was to be made to BPL Mobile Co. Ltd. for issue of new prepaid card & recharge vouchers. vi) The Appellant is a small distributor of Loop Mobile Co. with limited means operating through a rented shop at Sakinaka, Andheri (East), Mumbai. The said business was closed down in 2-3 years. Further, the rented shop has been demolished under road working by BMC and all records were destroyed. vii) The Distributor Agency agreement between the Appellant and M/s BPL Mobile Co, (Loop Mobile) was filed on record with the A.O. Copy Enclosed on Page jjTto 2J? viii) The total sales value of cards/vouchers sold was Rs. 3,97,91,862/-, ix) The margin of distributor commission is range bound on prepaid card recharge vouchers as it differs based on different schemes offered by the company from time to time, The average gross margin as declared by the Appellant was 2.92% of total sales value i.e, Re, 11,60,236/
(A.Y. 2010-11) Shri Sudhir Mahamunkar x) The Ld, AO however held that the sales value of sim cards / vouchers of Rs. 3,97,91,862 to be the turnover of the appellant and since this turnover exceeded Rs. 40 lacs the appellant was required to get his accounts audited u/s 44AB. Since books were not audited, penalty u/s 271B for rs.1,50,000/is levied. xi) The Appellant submitted a detailed explanation vide letter dated 11/06/2018, that it is distributor agent and therefore it is his “gross commission” which will constitute as Turnover and not the sales value of the Sim card/ Voucher issued by the Mobile Company. 6.3 Contention of the A.O & our Rebutal : i) The AO has held that margin or commission enjoyed by the distributor is income in form of business profits, whereas commission accrues or arises when it sells the sim cards to customers / retailers and not when it purchases from mobile operator. ii) No responsibility upon the mobile operator to withhold tax u/s 194H. The amount received by assessee is not commission but income received during the year. 6.4 Submission of the Appellant: The appellant belongs to a very unorganized & uneducated backdrop in Business. The business is also about distributorship of Mobile prepaid sim cards & recharge vouchers, the denomination of which ranges from ₹.100 to Rs.500 each. The business is on commission basis whereby mostly monies are collected from outward sales of cards/vouchers in cash to various remitter/customer on a daily basis, which amount is immediately deposited in the Bank for making onward payment to telecom company for securing delivery of new cards/vouchers. The fact remains that all payments are made by account payee cheques to the Telecom Company. 6.4.1 The Appellant filed a detailed submission letter dated 19/6/2018 explaining that proposal of A. O. to levy penalty u/s. 271B was unjustified. This is because the income as earned by the Appellant was essentially a "Commission Income" on each sim card; prepaid voucher. It is the not the Gross Sale Value of each sim card / prepaid voucher, which is Income. The modus operandi of Business may seem to look it otherwise but the fact remain that Appellant is only concerned with his "Commission Income". The higher the sales value of sim card / prepaid voucher, the higher the commission turnover. The property in sim card / prepaid voucher remains with the Telecom operator (BPL Mobile) in this case and the appellant is (A.Y. 2010-11) Shri Sudhir Mahamunkar a mere distributor. The Agreement also clearly states the Appellant is "entitled to commission on face value of prepaid card and Recharge vouchers". The modus operandi is such that the appellant has to pay the face value of sim card / recharge voucher less his commission to take delivery. Consequently, when he sells, he collect the full face value from customers. Thus, the commission earned on sale is retained by him. The sim card / recharge voucher although in his possession is the property of Telecom operator, which needs validation from the telcom company, even after the sale to customer. The Appellant is a custodian agent of the Telecom operator, who does not make sale independently, However, to keep his accounts in an elaborate manner, and to record all receipts and payments, the appellant has recorded and disclosed all receipts and payments as sales and purchases respectively. Whereas, in the real substance the face value of voucher / sim card is not "Turnover" of the Appellant being the Agent but the sales of the principal i.e. Telecom Operator. Only the commission earned is the "Turnover" for the Appellant. The A. O. has simply gone by the form of presentation and not substance of the transaction. The form of presentation is only for the purpose of clarity in accounts and to facilitate in the Assessment Proceedings. This was more so required as the Appellant case was re-opened U/s. 148, in view of the fact that case was deposited in Bank Account. In order to justify the deposit of cash (which was obviously sourced out of receipt of salé value of cards / vouchers and then corresponding onward payment to telecom operator), the presentation in profit and loss account was made as purchases and sales. Had the appellant disclosed Commission Income of Rs.11,60,263/- as its "Turnover", then the cash deposit for sales value of more than 3 crores could not be explained. 6.4.2 Therefore, the recording of sales value and purchases in Profit and Loss Account was only for the purpose of presentation, which the A.O. viewed otherwise. Accordingly, to A.O, the sale value reflected for Rs.3.97 crores, which is more than limit of Rs.40 Lakhs as prescribed u/s. 44AB, Hence, the accounts were required to be audited. The A.O. failed to appreciate that in essence the commission of Rs.11.60 Lakhs, as accrued to appellant is the “Actual Turnover" u/s. 44AB in this case, which is much below the prescribed limit of 40 Lakh u/s. 44AB. Consequently, the no need to get the Books of Account audited. The Appellant acted under this Bona-fide Belief and hence penalty levied u/s. 271B of Rs.1,50,000/- is highly unjustified. 6.4.3 The Appellant relies upon circular No. 452 dated 17.03.1986 of the CBDT, clarifying the question of applicability of Section 44AB in case of Commission Agents. Although the circular is for arahtias operating in business, the principle applies to all commission agency business including the case of telecom distributors. The Appellant
(A.Y. 2010-11) Shri Sudhir Mahamunkar also relies in the recent case of Manoj S. Gugale v/s. 1.TO. Pune ITAT. ITA 417/PUN/2016, wherein the Principle of Income in case of an advertising Agents is the “Agency Commission" and not actual gross receipts. The Hon'ble ITAT has discussed the issue from Legal point of view and held that Penalty u/s. 271B is not eligible in case of Agents earning gross commission less than 40 Lakhs. The Hon'ble ITAT has also discussed the decision of jurisdictional Mumbai High Court in case of CIT v/s. Hero Publicity Services (2001) 248 ITR 256. 6.4.4 Further, appellant also relied on Supreme Court judgment in the case of Hindustan Steel Ltd. v/s. State of Orissa (1972) 83 ITR 26 wherein it is held as under: “Even if a minimum penalty is prescribed, the authority competent to impose the penalty will be justified in refusing to impose penalty when there is a technical or venial breach of the provisions of the Act or were the breach flows from a bona fide belief that the offender is not liable to act in the manner prescribed by the statute.” 6.5 In light of above submission and judicial pronouncement, appellant, submitted that penalty of Rs.1,50,000/- u/s. 271B may be deleted.”
Ld.CIT(A) after considering the submissions of the assessee dismissed the appeal filed by the assessee by sustaining the penalty levied by the Assessing Officer.
Aggrieved assessee is in appeal before us raising following grounds of appeal: -
1. On the facts and circumstances of the case the Ld. CIT (A) is not justified in confirming the levy of penalty of Rs.150,000/- U/s.271B of Income-tax Act, 1961.”
8. At the time of hearing, Ld. AR brought to our notice facts involved in this case and prayed that assessee has already explained reasonable
(A.Y. 2010-11) Shri Sudhir Mahamunkar cause for the failure to get accounts audited, before the Ld.CIT(A) and Assessing Officer, therefore he prayed that the penalty may be deleted.
On the other hand, Ld. DR relied on the orders passed by the lower authorities.
Considered the rival submissions and material placed on record, we observe from the record that assessee is a proprietor of M/s. Balaji Enterprises and entered into agreement of distributorship with BPL Mobile Communication Ltd., for selling the mobile sim cards and recharge vouchers on commission basis. BPL/Loop communication supplies the products in prefixed lot sizes to the assessee to sell in the market on behalf of them. The assessee is only distributing the products to the Retailers and Direct customers on behalf of Loop/BPL Mobile Communication and is entitled commission as % of sale value of prepaid cards. It was submitted that assessee records the “sale and purchases” to track the sales of the sim cards and settlement of the sold sim cards to the Principle BPL Communication and would earn the difference of sales and purchases recorded in the books as actual commission. This form of record and presentation adopted by the assessee is to control the agency business and assessee earned the actual commission only as per the (A.Y. 2010-11) Shri Sudhir Mahamunkar agency agreement, wherein the assessee is only entitled to commission income.
We observe that assessee has submitted along with the financial statement the agency agreement entered with BPL/ Loop communication with the tax authorities. As per the agreement, it clearly indicates that assessee is entered into only agency business and assessee is entitled to percentage of commission as per the agreement. The assessee has maintained Books of Accounts as per the form adopted by the assessee to follow up the sales as well as the payment towards such prepaid card to BPL/Loop Communication.
What is relevant is the actual income earned by the assessee not the method adopted by the assessee. As per the definition of section 44AB of the Act every person carrying on business shall if his total sales, turnover or gross receipts, as the case may be, in business exceed or exceeds forty lakhs rupees get his accounts audited by an accountant before the specified date. In the present case the actual income of the Agency is only the commission earned by the assessee and not the sales achieved by the assessee therefore the actual gross receipts are only ₹.11,60,263/- which is nothing but gross commission income earned by (A.Y. 2010-11) Shri Sudhir Mahamunkar the assessee. When the assessee has filed along with the financial statement a copy of the agency agreement before the Assessing Officer to explain the business of the assessee and also explained the reasons why the assessee has to follow the method of accounting adopted by the assessee for the convenience of doing business the tax authorities have also acknowledges that it is only Agency business, still it insist for the audit based on notional sales value. It is not relevant whether the assessee follows which method but what is relevant is Assessing Officer has to evaluate the actual business of the assessee and the actual receipts in the business.
As per the definition the Assessing Officer has to see whether the turnover or gross receipts exceeds ₹.40 lacs or not. In the given case the actual gross receipts is only ₹.11.6 lakhs, which is less than ₹.40 lacs of limit prescribed under the Act, in order to get his accounts audited. When the assessee submitted all the information before the Assessing Officer it clearly indicates that assessee has already explained the reasonable cause. Therefore, considering the peculiar facts on record, in our considered view the tax authorities has to check the actual form of business and the gross receipts of the assessee before levying any (A.Y. 2010-11) Shri Sudhir Mahamunkar penalty. Therefore, in this case considering the business of the assessee i.e. in agency business, the Assessing Officer has to consider only the gross receipt not the notional turnover for the purpose of levying penalty. Accordingly, penalty levied by the Assessing Officer is deleted.
In the result, appeal filed by the assessee is allowed.
Order pronounced in the open court on 21st June, 2022.