M/S STEEL KRAFT INDIA,BATALA vs. INCOME TAX OFFICER, WARD-2, BATALA

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH, AMRITSAR (SMC) BEFORE SH. SANJAY ARORA, ACCOUNTANT MEMBER I.T.A. No. 615/Asr/2017 Assessment Year: 2014-15

Steel Craft India, vs. Income Tax Officer, Kutbi Nangal, Ward 2, G.T. Road, Batala Batala [PAN: ABAFS 1276R] (Appellant) (Respondent)

Appellant by : None Respondent by: Sh. Charan Dass (D.R.) Date of Hearing: 01.05.2019 Date of Pronouncement: 29.07.2019

ORDER Per Sanjay Arora, AM: This is an Appeal by the Assessee arising out of the Order by the Commissioner of Income Tax (Appeals)-1, Amritsar ('CIT (A)' for short) dated 02.06.2017, dismissing the assessee’s appeal contesting its assessment u/s. 143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) dated 21.9.2016 for the Assessment Year (AY) 2014-15.

2 ITA No. 615/Asr/2017 (AY 2014-15) Steel Craft India v. ITO 3. The issue involved in the instant case is the deduction of commission expenses allowed at Rs.3,69,427 by the assessee-firm to one, Sh. Jaspreet Singh, son of one of the partners, S. Amarjit Singh, and claimed in the computation of its’ business income for the relevant year, disallowed by the Revenue.

The assessee is a contractor for Railway Coach Factory, Kapurthala, supplying it different parts. The contract with the Railways provides for the assessee to employ one technical person for maintaining liaison with the Railway authorities. The commission to Gurpreet Singh, a qualified engineer, was accordingly allowed. Payment to Gurmukh Singh, stated to be for marketing services, was also allowed on the strength of sale bills. Commission to Jaspreet Singh was stated to be for purchased related services. The same did not find favour with the Revenue; the ld. CIT(A) confirming the disallowance by holding as under:

‘6. I have gone through the grounds of appeal, submissions of the appellant and the assessment order of the AO. Jaspreet Singh is son of one of the partner of M/s. Steel Craft India. It is clear that Commission is excessive as trade practice is 10% only. Jaspreet Singh is not qualified for this kind of work. His diploma is for financial accounting and not mechanical engineering. Products bought are technical in nature. Most of the purchases are from SAIL for which no services of Jaspreet Singh is needed. Hence it is obvious that commission has been paid to reduce taxes. So it is clear that Jaspreet Singh has no competence in the field of purchases

3 ITA No. 615/Asr/2017 (AY 2014-15) Steel Craft India v. ITO done. He buys steel & some precision tools which can be sourced by any one. It is also apparent that the MOU given is an after-thought to give credibility to the claim made. Hence commission is not justified.’ Aggrieved, the assessee is in second appeal.

I have heard the parties, and perused the material on record. 5. 5.1 My first observation in the matter is that the impugned disallowance is not u/s. 40A(2)(a), but u/s. 37(1). This is clarified as there is reference by the AO to s. 40A(2)(b) and, further, to the rate of commission (to Sh. Jaspreet Singh at 10 %) by the ld CIT(A). The question is not as to the rate, whether 10% (as stated in the impugned order), or 2.5% (as stated in the memorandum of understanding dated 01.4.2013 / PB pgs. 14-15), at which the commission is allowed, in which a case the disallowance would have been at ¾ of the claimed expenditure of Rs.3.6 lacs, and not the total. Even for the other two commission payments, though covered u/s. 40A(2)(a), there is no whisper of the rate/s at which the commission is paid. It would therefore wrong to say that the disallowance is u/s. 40A(2)(a). The fact of the claim for commission being at 2.5% would thus be of no consequence. The principal reason for the disallowance, as well as it’s confirmation in first appeal, as a reading of their orders by the Revenue authorities show, is of the impugned expenditure being wholly un-evidenced i.e., qua the service rendered. The factum of the services rendered, which needs to be established, has not been. It is for these services that the expenditure has purportedly been incurred, so that, where so shown, would provide the legal basis for the allowance of a claim in its respect inasmuch as the same renders it being regarded as incurred ‘wholly and exclusively for business purposes’, qualifying it as deductible u/s. 37(1). 5.2 I may next advert to the law in the matter. In Lakshmiratan Cotton Mills Co. Ltd. v. CIT [1969] 73 ITR 634 (SC), it stood held that the burden of proving that services were rendered by the managing agents for earning the remuneration lay

4 ITA No. 615/Asr/2017 (AY 2014-15) Steel Craft India v. ITO upon the company and if no reliable evidence was forthcoming, the Tribunal was competent to reach the conclusion that it did. The recitals in the managing agency agreement which authorized the managing agents to do certain acts could not be a substitute for evidence that those acts were done by the managing agents. That it is permissible for the assessing authority to go behind the written documents is trite law, for which reference may be made to Swadeshi Cotton Mills Co. Ltd. v. CIT [1967] 63 ITR 57 (SC). In Lachminarayan Madan Lal v. CIT [1972] 86 ITR 0439 (SC), where, again, the issue involved was the allowance of claim for commission expenditure, the Tribunal came to the conclusion that the so-called selling agency agreement between the assessee-firm and the selling agency firm was only a make-believe arrangement. It was merely a device to minimise the tax liability of the assessee- firm and it was not a genuine business arrangement. The findings by the tribunal being findings of fact, not shown to be perverse or vitiated, were declined to be interfered with by the Hon’ble Court, stating that the mere existence of an agreement or payment of commission does not bind the ITO to allow such deduction. The Hon’ble Court made an extensive review of the case law in so deciding. Reference to some of its’ observations in this regard would be apposite: ‘In CIT vs. A. Raman & Co. [1968] 67 ITR 11 (SC) this Court restated the well- accepted proposition that the law does not oblige a trader to make the maximum profit that he can out of his trading transactions. Income which accrues to a trader is taxable in his hands but income which he could have, but has not earned, is not made taxable as income accrued to him. Avoidance of tax liability by so arranging commercial affairs that charge of tax is distributed is not prohibited. A taxpayer may resort to a device to divert the income before it accrues or arises to him. Effectiveness of the device depends not upon considerations of morality but on the operation of the Income Tax Act. But, this Court in the same case further observed that by adopting a device, if it is made to appear that the income which belonged to the assessee had been earned by some other person, that income may be brought to tax in the hands of the assessee.’

5 ITA No. 615/Asr/2017 (AY 2014-15) Steel Craft India v. ITO ‘In our opinion, the facts of this case come within the rule laid down by this Court in Swadeshi Cotton Mills Co. Ltd. vs. CIT [1967] 63 ITR 57 (SC). The question whether an amount claimed as an expenditure was laid out or expended wholly and exclusively for the purpose of the business has to be decided on the facts and in the light of the circumstances in each case. 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 ITO 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 ITO to consider the relevant factors and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under s. 37 of the Act.’

5.3 In the facts of the instant case, the disallowance stands effected, despite reference to the fact of the payment being to a person specified u/s. 40A(2)(a), u/s. 37(1), for want of evidence, i.e., qua the services rendered. There is no improvement in the assessee’s case before the Tribunal. It needs to be appreciated that the primary burden to prove his return and the claims preferred thereby is on the assessee (CIT v. Calcutta Agency Ltd. [1951] 19 ITR 191 (SC); CIT v. R. Venkataswamy Naidu [1956] 29 ITR 529 (SC)). It is only when the assessee furnishes some evidence in support of his claim that the same could be subject to verification or investigation by the Revenue authorities. The payee is stated, without showing, of having 15 years experience in the trade. He is in fact a working partner in another firm by the name ‘Steel Cut Engineering’ (refer his return of income at PB pgs. 1-4). Continuing further, most of the parties to whom the payments are made appear to be regular parties (PB pgs. 5-13) and, in any case, there is nothing to show that they are not, nor are claimed to be not so. It is then stated, again without showing, that the product purchases are not of standardized products. There is no demonstration thereof, as by producing sale bills (or mention of the items listed

6 ITA No. 615/Asr/2017 (AY 2014-15) Steel Craft India v. ITO therein), at any stage of the proceedings, so that it is again a bald claim. A difference in the product dimension and size would not, in any case, make it a different product. The parts produced would surely be as per the specifications in their respect. It is the production processes that are in fact standardized, and on which basis, given the product specifications, costs are estimated and rates quoted. Rather, the assessee being engaged in the said business, as stated, for a number of years, would be producing the same (type or genre of) goods for regular supplies. It is in fact in its’ own interest as well as competitiveness that it does so. There is nothing on record to exhibit the competitive bidding, as claimed, entered into each time a purchase is to be made. On the contrary, there is no mention of the different items purchased, i.e., different from those purchased from year to year, i.e., in the main. There is further no expenditure incurred by the payee toward earning commission even as his work profile, as stated, lists many jobs, including travel. It is in fact very surprising indeed that in all the three cases the commission paid for different services, and with reference to different, objectively defined criteria, work to the same amount.

7 ITA No. 615/Asr/2017 (AY 2014-15) Steel Craft India v. ITO Copy of the order forwarded to: (1) The Appellant: Steel Craft India, Kutbi Nangal, G.T. Road, Batala (2) The Respondent: Income Tax Officer, Ward 2, Batala (3) The CIT(Appeals)-1, Amritsar (4) The CIT concerned (5) The Sr. DR, I.T.A.T