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Income Tax Appellate Tribunal, “SMC” BENCH, AHMEDABAD lnL; ds le{kA
Before: SHRI WASEEM AHMED & SHRI MAHAVIR PRASAD
आदेश / O R D E R
PER WASEEM AHMED, ACCOUNTANT MEMBER:
The captioned appeal has been filed at the instance of the assessee against the appellate order of the Commissioner of Income Tax(Appeals)-Gandhinagar, Ahmedabad [CIT(A) in short] vide appeal no.CIT(A)/GNR/452/2013-14 dated 09/01/2015 arising in the assessment order passed under s.143(3) of the Income Tax Act, 1961 (hereinafter referred to as "the Act") dated 07/02/2014 relevant to Assessment Year (AY) 2011-12.
ITA No.882/Ahd/2015 Shri Samir Trikamlal Prajapati vs. ITO A.Y. 2011-12 - 2 -
The assessee has raised the following grounds of appeal: “1.0 The learned Commissioner of Income-tax (Appeals) erred in law and on facts in partly confirming the Assessment Order. 2.0 The learned Commissioner of Income-tax (Appeals) erred in law and on facts in disallowing the payment of commission on sales amounting to Rs.33,62,000/-. 3.0 The learned Commissioner of Income-tax (Appeals) has further erred in law and on facts in invoking provisions of section 40A(2)(b) of the Income Tax Act, 1961 in respect of commission payments and upholding that Shri Vikrant Prajapati is a relative of the appellant. 4.0 The appellant may be allowed to add, amend, alter or raise additional grounds of appeal.”
The interconnected issue raised by the assessee in its all the grounds of appeal is that learned CIT(A) erred in confirming the order of AO by sustaining the disallowance of Rs. 33,62,000/- on account of payment of commission on sales.
Briefly stated facts are that the assessee is an individual and engaged in the trading business of machinery parts and consumable stores under the name and style of M/s. Vijay Metal & Engineering Corporation. The assessee during the year has incurred commission expenses on sales for Rs.33,62,000/- only. The relevant details of the commission expenses stand as under:
Relationship Sr. Name of the Party Service Amount Rate of rendered No. Rs. commission 1. Vikrant P. Prajapati Relative - 22,00,000 50% of profit on sale of goods 2. Dipika S. Prajapati Wife - 7,00,000 57% of profit on the sale of goods 3. Payal B Patel - - 4,62,000 43% of profit on sale of
ITA No.882/Ahd/2015 Shri Samir Trikamlal Prajapati vs. ITO A.Y. 2011-12 - 3 - goods Total 33,62,000
The assessee during the assessment proceedings in his reply dated 24th January 2014 justified that the commission was paid against the services rendered by the payees. Accordingly, it was possible to achieve the turnover of Rs.1,66,44,062/- during the year.
In the immediate preceding assessment year, the turnover of the assessee was Rs.1,29,56,552/- and expense of commission against such turnover was claimed for Rs.14,00,000/- only. However, the turnover during the year increased to Rs.1,66,44,062/-, which resulted in an increase in the gross profit from Rs.50,64,883/- to Rs. 55,50,976/- only.
The assessee being an individual was not in a position to achieve such huge turnover and handling its business activities right from the beginning, i.e. obtaining orders, taking steps till the execution of work to the level of client’s satisfaction and collecting the payments of bills. Therefore, the services of commission agents were hired for his business activities. The details of the commission paid to individual parties stand as under:
Commission to Vikrant P. Prajapati :-
i. The assessee was availing the services from Vikrant P. Prajapati in relation to supply, erection, technical guidance services, and procurement as well as the execution of clients order. ii. Shri Vikrant P. Prajapati used to provide the services with the help of his personnel involved in the execution of works.
ITA No.882/Ahd/2015 Shri Samir Trikamlal Prajapati vs. ITO A.Y. 2011-12 - 4 - iii. There is no relationship between the assessee and Shri Vikrant P. Prajapati therefore; there is no question of invoking the provision of Section 40A(2)(b) of the Act. iv. Shri Vikrant P. Prajapati had helped the assessee financially as and when there was the need of the fund to the assessee. v. The commission was paid to Shri Vikrant P. Prajapati on a regular basis and after deducting TDS. vi. Shri Vikrant P. Prajapati has duly confirmed the services rendered to the assessee vide his letter dated 12-12-2012. vii. The amount of commission of income received by Shri Vikrant P. Prajapati was duly disclosed in his income tax return.
Commission Payment to Payalben B. Patel:-
The commission was paid after deducting the TDS by the assessee. The Payalben B. Patel to the effect of service rendered by her to the assessee has furnished the confirmation letter.
Commission to Dipikaben S. Prajapati:-
The commission was paid to Dipikaben S. Prajapati throughout the year and after deducting the TDS. The payee has confirmed the services rendered by her to the assessee.
However, the AO during the assessment proceedings observed that
i. The assessee was supplying goods to the State Government organizations, and there was no need to pay such huge money by way of commission expenses. ii. The assessee has not furnished the details of the services rendered by these parties to the assessee.
ITA No.882/Ahd/2015 Shri Samir Trikamlal Prajapati vs. ITO A.Y. 2011-12 - 5 - iii. The mere payment to the commission agent cannot justify the business expediency for the commission expenses unless the same is supported with the evidence suggesting that it was paid for the business purposes. iv. As the goods were sold to the Government organization, there was no doubt for the recovery of money from such organization.
In view of above, the AO disregarded the contention of the assessee and confirmed the addition of Rs.33,62,000/- and added to the total income of the assessee.
Aggrieved, assessee preferred an appeal to learned CIT(A). The submission of the assessee before the learned CIT(A) are listed as under:
i. The assessee was an authorized dealer for the entire state of Gujarat of Alfa Laval India Limited, a unit of Alfa Laval Worldwide Organization having 28 major production units consisting of 15 in Europe, 8 in Asia, 4 in U.S and 1 in Latin America. M/s. Alfa Laval India Limited is one of the pioneers in the application of the heat exchange technology. ii. The assessee earns commission income from Alfa Laval India Limited as and when he makes sales on behalf of the company. But where the assessee procures orders from the buyers, then he purchases the goods from Alfa Laval India Limited and accordingly earns a profit on the sale of such equipment in addition to the commission income. iii. The assessee is also dealing with other suppliers of machinery from where he earns a commission as well as profit on sales.
ITA No.882/Ahd/2015 Shri Samir Trikamlal Prajapati vs. ITO A.Y. 2011-12 - 6 - iv. The business of the assessee is spread throughout the State of Gujarat; therefore, initially, the commission agents were deployed in the F.Y.2009-10. Subsequently, in the year under consideration one more commission agent namely Payalben B. Patel was added in the business of the assessee. v. Shri Vikrant P. Prajapati was not relative of the assessee. He had vast experience and contacts in the field of heat exchangers business. He was also doing the business of machinery parts and consumable stores under the name and style of M/s Samir Engineering Company. He also employed staffs for his business. He was competent enough to look after the requirements of the power plant and electricity companies. His staff was also available with the assessee. vi. Similarly, other two ladies were entrusted with the job of liaisoning with various agencies to ensure timely supply of machinery parts from the supplier to the companies. vii. They were arranging transport facilities for properly delivery of the goods. They were also looking after the proper installation, execution and after sale services from the supplier as well as realization of the sale proceeds.
iii. From the combined efforts of the assessee and commission agents, the turnover of the business has increased manifolds. The assessee in support of his claim filed a chart showing the turnover viz-a-viz profit and other expenses incurred by him, which is reproduced as under:
ITA No.882/Ahd/2015 Shri Samir Trikamlal Prajapati vs. ITO A.Y. 2011-12 - 7 - S.No. Particulars F.Yr. F.Yr. F.Yr. 2008-09 2009-10 2010-11 1 Turnover 44,62,016 1,29,56,552 1,66,44,062 (in Rs.) 2 Gross Profit 14,31,678 50,64,883 55,50,976 3 Commission 0 14,00,000 33,62,000 Payment 4 No. of 0 2 3 Agents 5 Expenses of 15,12,000 15,60,000 15,69,600 Salary and Wages
From the above, the assessee justified that he was able to achieve a sizable turnover of Rs.166.44 lacs from 44.62 lacs in two years.
iv. The observations of the AO that the assessee has made the payment of commission to the parties more than 50% of the profit on the sale is based on the wrong assumption of facts. The assessee was not only earning commission income, but also he was earning a profit on purchase and sale of goods. The assessee has shared commission earned by him with Shri Vikrant P. Prajapati to the tune of 50% as Shri Vikrant P. Prajapati was physically and financially involved in the deal since the beginning. The assessee further submitted that the amount of commission paid was less than 50% of the sales in the case where it earned a profit on the sale of goods. The assessee in support of his claim prepared a chart depicting the amount of commission expenses viz-a-viz sales achieved through the agent as detailed under:
Sr. Commission Invoice Invoice Commis Remarks No Agent No & Amount sion to
ITA No.882/Ahd/2015 Shri Samir Trikamlal Prajapati vs. ITO A.Y. 2011-12 - 8 - Date Agents 1 Shri Vikrant R 01 & Commission 7,50,000 Shri Vikrant Prajapati R 02 of and Physically commission Rs.15,00,000 and financially was recd. paid by Alfa involved in this From Alfa Laval deal since the Laval for beginning securing orders from Gujarat State Electricity Corp. Ltd. (GSECL, KLTPS) 14,50,000 About 2 Shri Vikrant R 05 80,93,320 18% Prajapati Commission Sale of paid GSECL, KLTPS 3 Smt. R 03 & 52,18,394 4,62,000 About 9% Payalben B. R 04 Patel Sale of GMDC, Nani Chher, Tal. Lakhpat 4 Smt R 07 & 25,37,160 7,00,000 About 27.50% Dipikaben S. T 01 Prajapati Sale of GSECL, Dhuvaran
ITA No.882/Ahd/2015 Shri Samir Trikamlal Prajapati vs. ITO A.Y. 2011-12 - 9 -
v. All the commission agents have duly furnished the confirmation for the amount received from the assessee, and the same was offered to tax. All the commissions were paid after deducting the TDS under the relevant provisions.
The commission agents were appointed by the assessee for obtaining orders from Government agencies and thereafter delivering, installing and executing the same. Subsequently, these commission agents were providing after sales service as well as realization of payments from the parties. However, learned CIT(A) disregarded the contention of the assessee and confirmed the order of AO by observing as under:
“After considering the entire facts, it is seen that appellant has paid commission to Shri Vikrant P. Prajapati, Dipika S. Prajapati who are relative of the appellant. On examination of details produced, it is seen that in the case of Shri Vikrant Prajapati, commission of Rs.15 lac was received by the appellant from Alfa Laval, out of which 50% i.e. Rs,7,50,000/- was paid to Shri Vikrant Prajapati, who is relative of the appellant. It is noticed that Shri Vikrant Prajapati had no such educational qualification i.e. specialization of marketing, Appellant has not brought on record of the undersigned any special qualification which could have increased the sales of the appellant With the help of Shri Vikrant Prajapati. The onus was on the appellant to prove before the AO regarding the genuineness of commission paid. Appellant has not brought on record of the undersigned any new evidences to prove that the commission payment of 50% was genuine and was for the services rendered by Shri Vikrant Prajapati. No details of services rendered by Shri Vikrant Prajapati was putforth. All the details produced before me during the appellate proceedings had already been gone through by the AO and nothing new has been brought. Similar is the case, with regard to the commission paid of Rs.14,50,000/- out of commission received of Rs.80,93,320/- which works out to 18% of
ITA No.882/Ahd/2015 Shri Samir Trikamlal Prajapati vs. ITO A.Y. 2011-12 - 10 - commission. No new evidences has been brought during the course of appellate proceedings. Therefore, the action of the AO is upheld and disallowance made of commission paid to Shri Vikrant Prajapati is confirmed.
Further with regard to the commission paid to Smt. Payalben B. Pate of Rs.4,62,000/- @ 9% of Invoice amount of Rs.52,18,394/-, appellant has again not brought any new evidences other than what was produced before the AO and scrutinized by him. No details like educational qualifications and services rendered by Smt. Payalben to effect sales has been brought before me during the appellate proceedings. The details produced have already been verified by the AO. No new evidences have been produced before me during the appellate proceedings. Therefore, the action of the AO in making disallowance of Rs.4,62,000/- is held justified and is confirmed.
Again in the case of Smt. Dipikaben S. Prajapati who has been paid Rs.7 lac as commission on total sale effected of Rs.25,37,160/-, no new evidences has been brought during the appellate proceedings. The details of her educational qualification or services rendered by her to the appellant is not put forth. Therefore, in absence of any new documentary evidences, other than what was produced before is AO is produced during the appellate proceedings. Claim of the appellant cannot be entertained without any documentary evidences. The onus was on the appellant to prove its claim of making payment @ 27.5%, which it has totally failed. Therefore, the action of the AO in making such disallowance is held justified and is hereby confirmed.
To sum up the issue, the only conclusion that can be drawn from the above observation is that the commission payments made by the appellant comes under the purview of section 40A(2)(b) of the Act and appellant has not proved by any instances/evidences that the commission receipts are for Technical or knowledgeable persons in their field. On the other side, the services are required to be done by highly technical person to procure orders on which commission is to be paid. Appellant has also failed to establish the services rendered by
ITA No.882/Ahd/2015 Shri Samir Trikamlal Prajapati vs. ITO A.Y. 2011-12 - 11 - the commission recipients by any correspondences, travel made, details of commission receipts/payments, confirmations etc. In absence of such facts, the claim of the appellant cannot be allowed.
Appellant has also relied on various rulings of ITAT including a decision of Gujarat High Court in the case of Swastic Textile Co. Pvt Ltd vs CIT in which the issue in question was regarding claim of deduction u/s 80I, as such the reliance is misplaced by the appellant. Similarly, other case laws relied upon by the appellant is clearly distinguishable and cannot be accepted.
In totality, the action of the AO in disallowing commission on sales paid by the appellant amounting to Rs.33,62,000/- is hereby held justified and the claim of the appellant rejected.”
Being aggrieved by the order of learned CIT(A) assessee is in the second appeal before us. Learned AR before us submitted a paper book which is running from pages 1 to 45 and also submitted as under:
“1. The appellant is a Commerce Graduate and engaged in the business of Machinery Parts for quite some time. During the financial year 2009-10 he secured orders from various Government Power Plants/Companies to supply "heat exchangers", being highly technical and with high profit margin. Being an Individual not technically sound, it was difficult for him to properly serve, cover and remain in touch with Power Plants and Companies (customers) spread throughout the state of Gujarat. As securing continuous orders for "heat exchangers' from Government Companies was not likely, therefore instead of 'recruiting' permanent staff on his roll, the appellant had preferred to appoint trusted commission agents as per the requirement of his business. A person, who is technically sound was mainly required to help him in technical aspects viz design, procurement of machinery, erection and timely services etc. Besides, another person for the purpose of liaison and follow up work viz. ensuring timely delivery of machines, erection, realization of
ITA No.882/Ahd/2015 Shri Samir Trikamlal Prajapati vs. ITO A.Y. 2011-12 - 12 - payments etc. Accordingly, the appellant had appointed initially two agents, Shri Vikrant Prajapati (to look after technical aspects), who is not a relative within meaning of section 2(41) and Smt. Dipika S. Prajapati, wife of the Appellant, to look after liaison and follow up work. As number of orders for supply from Power Plants/Companies had increased during the Financial Year 2010-11 (relevant to the assessment year under consideration), he appointed another lady Smt. Payalben B. Patel for liaison and follow up work.
The nature of services rendered by the Commission Agents were explained by the appellant in detail vide letter dated 27.01.2014 (Page No. 43 to 45 of the Paper Book) addressed to the ld. A.O. The copies of relevant bills issued to Power Plants/Companies containing the names, addresses, contact details, particulars of items and amount were also placed before the ld. A.O. The above commission was paid through account payee cheques and after deducting TDS. The TDS was also deposited with the Government. Moreover, confirmation of receipt of commission by all the three agents explaining their role were also filed before the lower authorities (Page No. 17 to 19 of the Paper Book) along-with copies of their returns of income accompanied with computation indicating the fact that commission income had been offered for taxation by the payees. The books of account of the appellant were duly audited under the provisions of section 44AB of the Income Tax Act, 1961 and the Id. A.O. had not rejected the same. Thus, the appellant had discharged ‘onus' casted on him. The ld. A.O. without conducting any enquiry or controverting the evidences placed before him merely on the basis of conjecture and surmise held that commission payment was 'concocted' because commission was not allowable unless it is established that it was paid for services other than services related to supply of goods to government agencies and payments government is guaranteed and disproportionate commissions was paid etc. 3. The ld. CIT(A) had upheld the finding of the ld. A.O. after emphasizing that Shri Vikrant Prajapati is 'relative' of the appellant, without bringing on any evidence or material on record though the appellant had specifically denied the above fact both before the ld. A.O. and him. He also pointed out that no details regarding educational 'qualification' of commission agents and documentary evidences regarding rendering of services were placed on record.
ITA No.882/Ahd/2015 Shri Samir Trikamlal Prajapati vs. ITO A.Y. 2011-12 - 13 - 4. Both the lower authorities had failed to consider the fact that in business world it always not possible to have documentary evidence on record, kindly se judgements in the case of CIT v/s Bharat Medical Store 308 ITR 373 (P&H), copy of above judgement is filed on 07.06.2018]. However, if they harbor any doubt regarding the rendering of service they ought to have conducted necessary enquire either with agents or Power Plants/Companies as complete details were furnished and onus is discharged by the appellant [CIT v/s Siddharth Trade Links P. Limited 206 Taxman 442 (Del)]. The ld. A.O. as well as the ld. CIT(A) had also ignored the fact that the Id. A.O. himself had allowed after detailed scrutiny u/s 143(3) the commission payment made by the appellant during the F.Yr.2009-10 to Shri Vikrar Prajapati and Smt. Dipika Prajapati. In above connection, a copy of the assessment order for the A.Yr.2010-11 dated 31.12.2012 was placed on record (kindly see Page No. 27 to 29 of the Paper Book). Rule of consistency demands allowance c commission payment to above two persons as no new adverse fact was brought o record.
The payment of commission was as per "business expediency" because commission was payable only on when quantum of 'sales' increased substantially. By making payment of 'commission', the appellant could stem expenditure under the head 'Salary & Wages' to Rs.15 lacs, while his turnover had quadrupled from Rs.44.62 lacs to Rs.166.44 lacs in span of mere two years. He had also reported more gross profit after even making payment of commission. It is held by the Hon'ble Supreme Court in the case of J. K. Woollen Manufacturer v/s CIT 72 ITR 612 (S.C) that reasonableness of commission has to be decided from the point of view o businessman. Further, if the amount of Rs.33,62,000/- is not deductible 35 "commission" the same is otherwise allowable u/s 37 of the Income Tax Act, 1961 being not a capital expenditure or personal expenses and laid out for the purpose of business. The Hon'ble ITAT, New Delhi has allowed the payment of commission in the case of JCIT v/s Vinitee Electronics Private Limited (2012) 34 CCH 120 Del Trib (copy of judgement is enclosed herewith), where almost similar facts were obtained on the following basis :-
“11. The AR relied on the judgment of Hon'ble Karnataka High Court in the case of Ritz Hotels Ltd. vs CIT 194 ITR
ITA No.882/Ahd/2015 Shri Samir Trikamlal Prajapati vs. ITO A.Y. 2011-12 - 14 - 614(Kar) wherein their Lordships held that the commission payable by the assessee therein was adjusted to a subsequent year by means of a resolution passed by the Board of Directors of the assessee company and disallowance of the commission made by the Assessing Officer was deleted by the Hon'ble High Court and held that the burden lay on the Revenue to establish that no services were rendered. In the present case, the Assessing Officer could have made inquiry from the parties on the names and addresses submitted by the assessee and details of payment made through account payee cheque but no efforts had been made by the Assessing Officer.
The assessee's representative also drew our attention towards judgment of Coordinate ITAT Bench at Indore in the case of ACIT vs Shree Sajjan Mills Ltd. 302 ITR (AT) 088 (Ind) wherein the Third Member Bench held that the assessee therein had placed all details with regard to commission payments including details of sales made to various parties before the Assessing Officer. Without making any inquiry that such payments are bogus, it was not open to the Assessing Officer to make a disallowance of the commission paid by the assessee. In the present case, the Assessing Officer did not make any inquiry to substantiate the fact that the commission payment claimed by the assessee was bogus.
In view of above, we observe that the Assessing Officer made disallowance on commission payment of sales on the basis of a superficial approach supported by surmises and conjectures without making any due inquiry in regard to the genuineness of the parties and services rendered by the recipients of commission to the assessee in lieu of commission. We also observe that the Assessing Officer did not consider all material and the evidence placed before him by the assessee. Per contra, we observe that the Id. Commissioner of Income Tax(A) followed a due procedure and admitted the additional evidence following Rule 46A of the Rules and after affording due opportunity to the Assessing Officer to confront the same. He called a remand report and also gave opportunity to the assessee to submit its rejoinder to the remand report.
ITA No.882/Ahd/2015 Shri Samir Trikamlal Prajapati vs. ITO A.Y. 2011-12 - 15 - 14. We also observe that the Id. Commissioner of Income Tax(A) rightly followed the rule of consistency which was earlier followed by the Assessing Officer in the preceding years of assessment allowing the payment of commission by the assessee on sales. Ld. Commissioner of Income Tax(A) rightly held that in the absence of any material to substantiate that the payment of commission as claimed by the assessee are bogus, the disallowance cannot be made and sustained. Therefore, he rightly deleted the disallowance on just and proper grounds. We are unable to see any infirmity or perversity in the impugned order. Therefore, we have no reason to interfere in the same.”
Copies of judgements which were already placed on record are as under:
(a) Swastik Textile Co. P. Ltd v/s CIT 150 ITR 155 (Guj) (b) CIT v/s Bharat Medical Store 308 ITR 373 (P&H) (c) ITO v/s Naval Technoplast Industries Ltd (ITA No.3004/Ahd/2008 dt.29.04.2011) (d) Bulk Explosives v/s DCIT ( ITA No. 1216/Del/2011 dt. 28.06.2013) and (e) Jt. CIT v/s Vinitee Electronics Pvt. Ltd. (ITA No.2835/Del/2011 dt. 31.07.2012)
As per the direction of the Hon'ble Bench, we are enclosing herewith a copy of PAN and Passport of Shri Vikrant Prajapati (besides ration card of father of the appellant) clearly indicating that the name of father of Shri Vikrant Prajapati is Prahaladbhai Rambhai Prajapati, while appellant's father's name is Shri Trikai Revabhai Prajapati. It means they are not relative in terms of provisions of sec 2(41) of the Income Tax Act, 1961. Moreover, a chart containing the detail: turnover, commission payments, Gross Profit and salary & wages etc. for five ye w.e.f financial year 2008-09 to 2012-13 is given hereunder:
ITA No.882/Ahd/2015 Shri Samir Trikamlal Prajapati vs. ITO A.Y. 2011-12 - 16 -
COMPARTIVE FIGURES OF TURNOVER, COMMISSION AND SALARY & WAGES (Amount in Lacs)
Particulars F. Yr. F. Yr. F. Yr. F. Yr. F. Yr
2008-09 2009-10 2010-11 2011-12 2012-13
Turnover 44.62 129.57 166.44 29.85 51.83
(in Rs.)
Gross Profit 14.31 50.65 55.51 13.36 21.90 (in Rs.)
Commission 0 14.00 33.62 0 0 Payment
(in Rs.)
No. of Agents 0 2 3 0 0
Expenses on 15.12 15.60 15.70 10.08 9.00 Salary &
Wages
(in Rs.)
Note :- (1) The appellant had failed to secure continuous supply orders from power plants, which results in significantly lower turnover for the F.Yrs.2011-12 and 2012 13, As the amount of sales drastically came down resulting in "nil' commission payment for the above years and also lower "salary and wages" amount as per copies of Balance Sheets and Profits & Loss Accounts accompanied with copies of returns of income for the A.Yrs.2012-13 & 2013-14.”
ITA No.882/Ahd/2015 Shri Samir Trikamlal Prajapati vs. ITO A.Y. 2011-12 - 17 - On the other hand, learned DR before us submitted that indeed the turnover of the assessee has increased, but that is not sufficient for allowing the commission expenses. The assessee needs to justify that the commission expenses have been incurred exclusively for the business.
The assessee has not brought on record any agreement with the commission agent to justify the commission expenses. The agreement for the commission is a very vital document for claiming the commission expenses.
The assessee has failed to provide any basis for computing the commission expenses to the agents. No satisfactory detail has been furnished by the assessee justifying the services rendered by the commission agents. The learned DR vehemently supported the order of the authorities below.
We have heard the rival contentions and perused the materials available on record. The issue in the instant case relates to the eligibility of commission expenses claimed by the assessee in relation to sales made to the Government agencies. The relevant dispute of the Revenue is that the assessee failed to justify the nature of services rendered by these commission agents to the assessee. Therefore, the addition was made by the AO, which was subsequently confirmed by the learned CIT(A).
There is no dispute that all the commission agents have disclosed the amount of commission in their income tax return. The commission was paid by the assessee after deducting the TDS under the relevant provision of law. There was commission expense which was paid by the assessee to three parties. The commission to each party is adjudicated as under:
ITA No.882/Ahd/2015 Shri Samir Trikamlal Prajapati vs. ITO A.Y. 2011-12 - 18 - Payment to Vikrant P. Prajapati
From the preceding discussion, we note that the payment to Vikrant P. Prajapati was treated as payment made to the relatives of the assessee. However, the assessee claimed before us that Vikrant P. Prajapati is not relative to the assessee. The learned AR for the assessee in support of his claim filed a copy of PAN, Passport and Ration Card of Vikrant P. Prajapati, which is placed on record. On perusal of the same, we note that the name of the father of Vikrant P Prajapati is reflecting as Prahaladbhai Rambhai Prajapati, whereas the father name of the assessee has reflected in the income tax return Shri Prajapati Trikamlal. Thus, from above we observe that the assessee and Vikrant P. Prajapati are not the relatives as specified u/s 40A(2)(b) of the Act. In this regard, the learned DR has not brought anything on record contrary to the argument advanced by the learned AR for the assessee. Thus, we hold that Shri Vikrant P. Prajapati is not relative to the assessee.
On perusal of the copy of the ledger of Vikrant P. Prajapati in the books of the assessee, it was observed that on many occasions the assessee had taken money from the Vikrant P. Prajapati as evident from the copy of the ledger which is placed on pages 15 and 16 of the Paper book. The assessee has shown closing credit balance of Rs.10,95,726/- in its books of accounts. Therefore, there remains no ambiguity that Shri Vikrant P. Prajapati has extended financial support to the assessee. However, we note that Shri Vikrant P. Prajapati received a commission by the assessee for two activities. In the first activity, the assessee has shared the commission income to the tune of 50% of profit earned by it. In this regard, we note that there was no requirement of the fund as far as for commission income earned by the assessee because as such the assessee has not made any purchase and sale of the goods in its books of accounts in relation to commission income. Therefore we
ITA No.882/Ahd/2015 Shri Samir Trikamlal Prajapati vs. ITO A.Y. 2011-12 - 19 - are of the view that there is no question of any fund deployment either by the assessee or by Shri Vikrant P. Prajapati. Therefore the argument of the assessee that the commission income was shared to the tune of 50% of the profit because money was invested by Shri Vikrant P. Prajapati in the business does not hold good. Similarly, the assessee had just taken the plea before us that Shri Vikrant P. Prajapati invested the money in the business of the assessee but failed to produce any concrete documentary evidence suggesting that the money was actively utilized for the business. On perusal of the ledger copy of Shri Vikrant P. Prajapati in the books of the assessee, it was observed that it was a running account i.e. money coming from Shri Vikrant P. Prajapati and money going to Shri Vikrant P. Prajapati. In our view, there should be direct evidence suggesting the active utilization of Shri Vikrant P. Prajapati money in the business. We also note that at the end of the financial year, there is a credit balance of Shri Vikrant P. Prajapati in the books of the assessee because the account of Shri Vikrant P. Prajapati was credited by the commission amount otherwise there would have been a debit balance. Similarly, we also note that the assessee has not produced any agreement either with the ALFA LAVAL INDIA LIMITED from where the purchases were made or Gujarat State Electricity Corporation Limited where the sales were made. As such, there is no clarity on the aspect of the services for which the assessee was liable to render either on behalf of Alfa Laval India Limited or Gujarat State Electricity Corporation Limited for the goods purchased/ sold. These services include commissioning, erection installation, and after sale services. The controversy which remains unanswered by the assessee what services assessee were liable to render for the goods sold by him on behalf of Alfa Laval India Limited. These services were liable to be rendered by the assessee to Alfa Laval India Limited as well as to Gujarat State Electricity Corporation Limited.
ITA No.882/Ahd/2015 Shri Samir Trikamlal Prajapati vs. ITO A.Y. 2011-12 - 20 - Therefore, we do not find force in the argument of learned AR that more amount of commission was paid to Shri Vikrant P. Prajapati because he extended financial support to the assessee.
We also note that the assessee has also claimed commission expenses in the immediate proceedings assessment year for Rs.14,00,000/- and the assessment order framed u/s 143(3) of the Act vide order dated 31/12/2012 without making any disallowance of commission expenses. The copy of assessment order is placed on Page 27 to 29 of the Paper book. But the ld. AR before us has not brought before us anything about the rate of commission paid to Shri Vikrant P. Prajapati in the earlier year viz a viz in the year under consideration.
In our view before commenting on the services rendered by Shri Vikrant P. Prajapati, which are placed on Pages 43 and 44 of the Paper Book, it is necessary to see the agreement made between the assessee and Alfa Laval India Limited. The similar agreement should also be there between the assessee and Gujarat State Electricity Corporation Limited. The reference to these agreements is necessary just to find the services rendered by Shri Vikrant P. Prajapati. The reference to these agreements also becomes important in view of the fact that there is no agreement between the assessee and Shri Vikrant P. Prajapati. Therefore we feel that the issue of the commission to Shri Vikrant P. Prajapati needs to be reexamined in accordance with the law and in the light of above discussion. Now coming to the commission paid to Mrs. Payalben B. Patel and Dipikaben S. Prajapati, we note that the learned Counsel for the assessee has not produced any documentary evidence suggesting that these agents were actively participating in the business of the assessee. However, in the interest of the justice, we restrict the disallowance of the commission paid to Dipikaben S. Prajapati to the tune of 50% whereas, the commission paid to Payalben B. Patel is
ITA No.882/Ahd/2015 Shri Samir Trikamlal Prajapati vs. ITO A.Y. 2011-12 - 21 - disallowed to the tune of 100%. The reason for restricting the disallowance to the tune of 50 % of the commission paid to Dipikaben S. Prajapati is that the similar commission was paid in the earlier year which was allowed by the AO in the assessment framed under section 143(3) of the Act In view of above, the appeal of the assessee is partly allowed for statistical purposes.
In the result, appeal filed by the assessee is partly allowed for statistical purposes.
This Order pronounced in Open Court on 03/07/2018
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