SUNIL VISHRAM CHAWDA,,HYDERABAD vs. INCOME TAX OFFICER, WARD-14(5),, HYDERABAD

PER S. RIFAUR RAHMAN, A.M.:

This appeal filed by the assessee is directed against the order dated 26/06/2017 of CIT(A) – 6, Hyderabad for AY 2014-15.

2.1 During the assessment proceeding, the Assessing Officer found that the assessee had debited a sum of Rs .11,19,750/- as commission expenses. The Assessing Officer observed that

2 ITA No. 1566/Hyd/17 Sunil Vishram Chawda commission agents to whom the assessee had shown to have paid the commission were the same persons who had been summoned u/s. 131 in the A.Y. 2011-12 and whose statements had been recorded on oath. It was established in A.Y. 2011-12 that the payments made by the assessee were not for the actual services rendered by those commission agents for his business but were made to reduce tax incidence. The claim of commission payment to those persons was rejected after a detailed discussion in the assessment order for A. Y. 2011-12 and the expenditure was added to the total income of the assessee for that year. In view of the similar circumstances and that the commission agents were same as in A.Y. 2011-12 and for the reasons elaborately discussed in the order for A.Y. 2011-12, and also for the reason that the assessee had riot brought on record any material to substantiate his claim, the Assessing Officer disallowed the amount of Rs.11,19,750/- shown as commission payment and added it to the total income of the assessee.

“1. The order of the learned Commissioner of Income Tax (A) is not correct either on facts or in law and in both.

3 ITA No. 1566/Hyd/17 Sunil Vishram Chawda through Banking Channels, the recipients are unrelated and assessed to tax.

10.1 Coming back to ld. CIT(A)’s observation that there is no contract in existence. It is not necessary that all agents should

4 ITA No. 1566/Hyd/17 Sunil Vishram Chawda have written agreement. Generally, these businesses are run on the basis of referral and prompt collection of sale proceeds. The agents refer the clients and collects the commission as soon as the sale proceeds are collected as per the contract terms. There is no question of breach in these type transactions, until the sale proceeds are realized, no agent is eligible to claim and as soon as sale proceeds are received, the due commissions are settled. It is clear from the record that assessee has not claimed any bad debts in these years under consideration.

10.2 With regard to genuineness, assessee has declared the profit and commission consistently over the years and the results are (refer financial results submitted by ld. AR) consistent. We also notice that assessee has not claimed any bad debts in the statement of accounts, it shows that the sales are genuine and the agents promptly collects the sale proceeds.

10.3 Further, ld. CIT(A) has brought on record that the agents have declared the commission as income in their return and all have claimed refund. We find it difficult to understand, on what way, it will decide the genuineness of transaction in the case of assessee, particularly, when there is no finding that the assessee has received back any commission or enjoyed any benefit out of this transaction except achieving targeted sales.

10.4 CIT(A) observed that assessee made the payment to certain persons ostensibly and has not established the services rendered by them. She further observed that it can be called gratuitous payments to persons known to assessee, but, she could not establish the relationship with the assessee but expressed that it is not clear whether they are relatives, but, they were not strangers either. Further, she held that there is a preponderance of probability to conclude that the payments did not constitute for remuneration for services of agency. At the same time, she allowed a random amount of Rs. 5 lakhs as commission without any basis.

10.5 She failed to consider the other aspects in this case, none of the agents are relatives to the assessee. No businessman will give payment to outsiders on gratuitous basis, particularly, the amount involved are huge. The agents have confirmed that they have received the commission and the other family members or subordinates have assisted them achieve the sales. This aspect cannot be ruled out that no businessman will distribute money on gratuitous basis without taking benefit from such payments. This is also preponderance of probability. Another aspect was also not considered by ld. CIT(A) that there is no proof that the assessee has received back the alleged

5 ITA No. 1566/Hyd/17 Sunil Vishram Chawda commission payment from the respective agents. It shows that the payments are genuine.

10.6 Let us analyse this aspect under judicial view. In the similar situation, the Hon’ble Rajasthan High Court in the case of Pinkcity Industries (supra), has adjudicated as below: “Taking into consideration that the business has gone almost all time and payment was made through account payee cheque, in our considered opinion, the business expenses is wrongly disallowed. Hence, the first issue is required to be answered in favour of the assessee and he ought to have been allowed the expenses which is arising out of the business exigency and in that view of the matter, the observations made in case of S.A. Builders Ltd. CIT(A) 288 ITR 0001Z (SC), the expenses are required to be allowed.”

In the given case, the assessee has maintained sales over the years and carried on the business with the help of only 2 persons to monitor the sales. It is not possible to achieve the volume of 24.52 crores without the services of salesmen or agents. Also all the payments are made through banking channels.

10.7 In the case of ITO Vs. Shyam Sunder Jajodia (supra), the Hon’be Delhi High Court held as under:

The assessee claimed a deduction on the ground that he had paid commission to 12 parties. The Assessing Officer rejected the claim of the assessee by observing that there was no agreement for the payment of commission. The Assessing Officer further observed that the assessee failed to prove that expenditure was incurred wholly and exclusively for the purpose of business. On appeal, the Commissioner (Appeals) re-appreciated the controversy and deleted the addition.

On revenue's appeal :

HELD

In order to claim any expenditure not being expenses described in sections 30 to 36 and not being in the nature of capital expenses or personal expenses laid out and spent wholly and exclusively for the purpose of business, one's claim has to be examined under the residuary provision of section 37. Hence, in order to be eligible for an expense under this section, one has to fulfil the conditions; (t) the expenditure must not be governed by

6 ITA No. 1566/Hyd/17 Sunil Vishram Chawda the provisions of sections 30 to 36, (ii) the expenditure must have been laid out wholly and exclusively for the purpose of the business of the assessee, (iii) the expenditure must not be personal in nature and (iv) the expenditure must not be capital in nature. The expression 'wholly' employed in section 37 refers to the quantum of expenditure, while the word 'exclusively' refers to the motive, objective and purpose of the expenditure.

In the instant case, the assessee had established that payment was made through banking channel. All the payees responded to the query of the Assessing Officer and some of them supplied the information about the services rendered by them. The commission had been allowed in the earlier years and in the subsequent years on similar lines. All the payees were assessed to tax. Their PANs had also been disclosed to the Assessing Officer. The objection of the Assessing Officer was that there was no agreement for payment of commission. It was for the assessee to carry out his business. If he had an understanding with certain person, then it might not be very much necessary to enter into an agreement. The assessee as well as the payees were withstanding to their stand. There was no variance in their conduct. As far as the allegation of failure to produce demonstrative evidence against the assessee was concerned, one had to see the nature of business. The assessee was in the business of sale of plastic dana. The agents were required to send customers for purchase of dana. They could be introduced on phone also. There might not be any demonstrative evidence in certain circumstances but that did not mean that expense was not incurred. The assessee had shown commission income on sale of plastic dana; it suggested that he had carried on business. Thus, all these circumstances were to be seen before making the disallowance. In such circumstances, the disallowance could not be made. The appellate authority had appreciated the facts and circumstances and deleted the disallowances correctly. There was no merit in the instant ground of appeal also. It was to be rejected.”

In this case, the assessee has issued appointment letters and the nature of the business is selling of chemicals. The assessee has submitted the agent-wise and chemical wise details before revenue authorities. It shows that the agents or their subordinates had contributed in selling the chemicals.

7 ITA No. 1566/Hyd/17 Sunil Vishram Chawda 10.8 In the case of CIT Vs. Printers House (P) Ltd. (supra), the Hon’ble Delhi High Court held as under: 1. The question that has been agitated before us pertains to a sum of Rs. 32 lakhs approximately paid as commission by the assessee to several parties. The impugned Order details 18 such persons and also expresses satisfaction that the payments were genuine. Ms. Bansal, learned counsel appearing for the revenue, contends that the payments of commission is not in issue. The argument is that there was no consideration or cause for payment of commission to those parties, since, no services had been rendered by the recipients of commission. This is completely belied by the detailed findings recorded by the Tribunal in paragraphs 7 to 7.13 of the impugned judgment. We note that the Tribunal has also recorded that there is no evidence that commission flowed back to the assessee or that the entries with respect to commission payments were just paper transaction. The following observations being relevant are extracted hereinafter:

" .. There is no evidence on record to show that the commission was paid to any near relative, family member or sister concern. There is no iota of evidence to show that the payment of commission represented only accommodation entry or was only a paper transaction. There is also no evidence to show that the amount of commission came back to the assessee in any form Since the assessee has given full details including the addresses of buyers and addresses of the agents as well as details of payment etc. the transactions of payment of commission as well as the aspect of rendering services by the commission agents were fully verifiable. However, neither the Assessing Officer nor the learned CIT (Appeals) made any attempt at their end to make probe into the matter for coming to the conclusion that the transactions were bogus, unfair and fraudulent. In our opinion, in absence of any such material on record and in absence of any inquiry conducted to prove the non- genuineness of the transactions the departmental authorities were not justified in disallowing the claim of the assessee which was fully supported by the documentary evidence on record.

8 ITA No. 1566/Hyd/17 Sunil Vishram Chawda turnover of the assessee was Rs. 68 crores before tax, inter alia of which included Rs. 25.68 crores of export turnover. The turnover we are concerned with is stated to be Rs. 3.74 crores on which the commission has been paid. It has been pointed out by Ms. Bansal that rather than the stated 0.05 per cent the commission, the commission works out to 1.5 per cent in relation to local sales and 7 per cent as far as export turnover is concerned. Even then according to us there remains no reason to doubt these payments. It has been laid down in several decisions of the Supreme Court that the ITAT is a final forum for findings of fact. The High Court would intervene only if a finding appears to be perverse, which we are unable to conclude in the / case in hand.”

10.9 In the case of CIT Vs. Siddhartha Trade Links Pvt. Ltd. (supra), the Hon’ble Delhi High Court held as under:

“17. We have heard the rival contentions and perused the records. We find that in view of the voluminous evidence submitted by the assessee in this regard, it cannot be said that assessee, as failed to establish that there was no evidence of rendering the corresponding services by such persons. We find that assessee has duly submitted various documents pertaining to ledger accounts, commission paid, bills raised and correspondences in this regard. The services provided have also been duly explained. It is a settled law that revenue authorities cannot sit into the shoe of the businessman. In this regard, we place reliance upon the decision of the Hon'ble Apex Court in the case of CIT, Bombay Vs. Walchand and Co. Private Ltd. in 65 ITR 381, wherein it was held that "in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively for business, the expenditure has to be adjudged from the point of view of the businessman and not of revenue". Accordingly, we hold that assessee has duly established that sufficient services were rendered for the payment of the commission involved in this regard. Accordingly, we set aside the orders of the authorities below on this issue and decide the issue in favour of the assessee."

In the given case also, assessee has produced the details of sales achieved by the agents by submitting item-wise, agent- wise details before revenue authorities. Further, assessee has filed the relevant books of account relating to agents, payment details, advance tax compliance before authorities. It shows that assessee knows the business he carries on and as per the

9 ITA No. 1566/Hyd/17 Sunil Vishram Chawda Hon’ble High Court’s observation, it is settled law that revenue authorities cannot sit into the shoe of the businessman. By referring to CIT Vs. Walchang and Co (supra), in applying the test of commercial expediency for determining whether an expenditure was wholly or exclusively for business, the expenditure has to be adjudged from the point of view of the businessman and not of revenue.

10.10 From the above discussion, it is clear that the assessee has submitted enough evidence in support of utilizing the services of agents in the business and also revenue authorities have not brought any cogent material to show that the payments were come back to assessee and these payments cannot be categorized as gratuitous payments. Therefore, we delete the addition made by the AO. Hence, grounds raised by the assessee are allowed”.

As the issue under consideration is materially identical to that of earlier AYs, following the decision therein, we set aside the order of CIT(A) and delete the addition of Rs. 8,73,200/- made on account of commission payment.

Sd/- Sd/- (P. MADHAVI DEVI) (S. RIFAUR RAHMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER

Hyderabad, Dated: 8th June, 2018 kv

Copy to:-

1) Shri Sunil Vishram Chawda, C/o Ch. Parthasarathy & Co., 1-1-298/2/B/3, 1st Floor, Sowbhagya Avenue, St. No. 1, Ashoknagar, Hyderabad – 500 020. 2) ITO, Ward – 14(5), 6th Floor, C-Block, IT Towers, AC Guards, Hyderabad – 500 004 3) CIT(A) –6, Hyderabad. 4) Pr. CIT - 6, Hyd. 5) The Departmental Representative, I.T.A.T., Hyderabad. 6) Guard File

10 ITA No. 1566/Hyd/17 Sunil Vishram Chawda

S.N0 Description Date Intls

3 Draft proposed & placed before the JM/AM second Member

4 Draft discussed/approved by second JM/AM Member

5 Approved Draft comes to the Sr.P.S./P.S Sr.P.S./PS