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Facts
The assessee company's assessment for AY 2010-11 was reopened based on search proceedings that uncovered alleged commission expenses to a third-party company. The CIT(A) confirmed the disallowance, and the assessee appealed.
Held
The Tribunal held that the reassessment proceedings were initiated without proper application of mind and on borrowed satisfaction, relying on information from an investigation wing without independent verification. The original assessment period did not align with the alleged accommodation entries, rendering the reopening illegal.
Key Issues
Whether the reopening of assessment under Section 147 was validly initiated based on the information available and the AO's independent application of mind. Whether the disallowance of commission expenses was justified on merits.
Sections Cited
147, 148, 250, 143(3), 133A
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Income Tax Appellate Tribunal, JAIPUR BENCH “B”, JAIPUR
Before: Dr. S. SEETHALAKSHMI & SHRI GAGAN GOYAL
This appeal by assessee is directed against the order of CIT(A)-4, Jaipur dated 26/03/2024 passed u/s. 250 of the Income Tax Act, 1961 (in short ‘the Act’). The assessee has raised the following grounds of appeal: -
1) That the learned CIT-'A' has erred in confirming disallowance of Rs. 1,93,35,522/-out of commission expenses. The disallowance confirmed is illegal, unjustified & excessive.
2. That the learned CIT-'A' has erred in holding that the appellant has raised contentions on the merits of the additions made in the original or the initial assessment order in the present appeal whereas the present appeal is against the order passed in the reassessment proceedings. There is no arithmetical or illegal error in the order under appeal wherein the assessed income as per the initial assessment order has been taken. The said finding is illegal & unjustified.
3. That the learned CIT-'A' has erred in not appreciating the fact that an order under section 250 of the Income Tax Act has been passed on 08.08.2014 and the Assessing officer could not have taken income as per order under section 143 (3)/250 dated 24.07.2014 while passing order under section 148/143(3) on 25.03.2015. The action of CIT-A in confirming the assessed income as per order dated 24.07.2014 is illegal & unjustified.
That the learned Assessing officer has erred in taking the income as per the order under section 143(3)/250 dated 24.07.2014 at Rs. 18,75,00,916/-whereas as per the order under section 250 dated 08.08.2014 the normal income had been taken at NIL and the sum of Rs. 18,75,00,916/- was determined on protective basis. The said action is illegal & unjustified.
5. That the learned Assessing officer has erred in charging interest.
6. That the learned CIT-A has erred in holding that the Assessing officer had new material before him for formation of reasonable belief of escapement which had live nexus with the material in his possession for assuming the valid jurisdiction for reopening under section 147. The Assessing Officer examined the information received and then arrived at prima-facie finding that the income had escaped assessment. The said finding is illegal & unjustified.
7. That the initiation of proceedings under section 147 & order passed under section 148 is illegal & unjustified & deserves to be cancelled.
That the learned CIT-'A' has erred in holding that the addition in the assessment order is not based solely on the statement of Shri Praveen Agarwal but also based on various other evidences including the evidences gathered during the survey on the premises of the appellant itself and the statement is a mere collateral evidence. The said finding is illegal and unjustified.
That the learned CIT-'A' has erred in relying on various decisions/judgements without disclosing the same to assessee & without providing any opportunity to the assessee. The said action is against the principles of natural justice and order deserves to be cancelled.
Modern Insulators Limited 10 That the learned CIT-'A' has erred in holding that the appellant is required to produce Shri Praveen Agarwal, Director of M/s Tuticorin Trexim Pvt. Ltd. (M/s Makes worth Project Developers Pvt. Ltd.) before the learned Assessing officer to substantiate its claim of the genuineness and bonafide of the commission expenditure. The said finding is illegal & unjustified.
11 That the learned CIT-'A' has erred in holding that the appellant has not discharged the onus to prove the genuineness and bonafide of the deduction of the commission expenditure claimed by it in the computation of income and at the same time the appellant company evaded and thus obstructed the enquiry during the assessment proceedings and also at the same time further that there is significant amount of evidence gathered by the learned Assessing Officer against the appellant on the issue. The said finding is illegal & unjustified.
Brief facts of the case are that the Assessee Company is a public limited company incorporated under the provisions of the Companies Act 1956/2013. It is engaged in the business of manufacturing and supply of porcelain insulators which are used for electrical insulation and mechanical supports. The Company is in this business since 1987. The Company has its manufacturing facilities situated at Abu Road, district Sirohi, Rajasthan. Its registered office is situated at A-4, Vijay path, Tilak Nagar, Jaipur. The sales department is also situated at the factory site at Abu Road. The Return of Income for Assessment Year 2010-11 was filed on 03.02.2012. The assessment under section 143(3) was completed on 06.03.2013. Thereafter, case of the Assessee Company was reopened based on search proceedings at the business and residential premises of Shri Praveen Agarwal and his group companies at Kolkata on 13.09.2012. The reassessment was completed vide order under section 143(3)/148 dated 25.03.2015, wherein sales commission amounting to Rs. 1,93,35,552/- was disallowed out of the total sales commission payment of Rs. 540.08 lacs. Against the order of the AO, Assessee Company
Assessee company has taken as many as eleven grounds of appeal
. When the matter was called up for hearing the ld. AR of the assessee company submitted at the bar that he did not wish to press ground number Ground Nos. 2, 3, 4 &
5. Accordingly, these grounds are dismissed as not pressed. Ground Nos. 6, 7, 8 & 9 are challenging the action of reopening the assessment. Ground Nos. 1, 9, 10 & 11 are pertaining to disallowance of commission expenses amounting to Rs. 1,93,35,522/-. Therefore, the appeal of the Assessee Company involves two main issues; First- Reopening of the assessment under Section 147 and Second- disallowance of commission expenses. Both the issues are adjudicated hereunder.
4. Ground Nos. 6, 7, 8 & 9: Reopening of assessment Assessment under section 143(3) for Assessment Year 2010-11 was completed vide order under section 143(3) dated 06.03.2013. Six months prior to completion of this assessment, search operations were carried out against Shri Praveen Agarwal and his group Companies on 13.09.2012 at the business and residential premises in Kolkata. Seven days after the completion of assessment, survey operations under section 133A of the Act were carried out at business premises of the Assessee Company on 13.03.2013 in Jaipur. The case has been reopened by the AO on account of findings in the search operations of Shri Praveen Agarwal carried out at Kolkata. During the course of search it came to the notice of Department that M/s. Tuticorin Traxim Pvt. Ltd. (later changed name as M/s. Makesworth Project and Developers Pvt. Ltd.) was one of the group companies of Modern Insulators Limited Shri Praveen Agarwal. This Company was also found to be engaged in providing accommodation entries. It was also found that the said company was hardly engaged in any of the business activities. It was found that during the Financial Year 2009-10, the above mentioned company had raised bills amounting to Rs. 1,93,35,522/- of commission expenses to M/s. Modern Insulators Ltd.
Therefore, considering this amount of Rs. 1,93,35,522/- as income escaping assessment within the meaning of Section 147 of the Income Tax Act, 1961, Notice under section 148 for Assessment Year 2010-11 was issued on 29.11.2013. Ld. AR of the Assessee Company has contended before us that search was conducted six months prior to the completion of assessment under section 143(3) of the Act. The information of the search outcome was available with the AO during the course of assessment proceedings. Ld. AR of the assessee drew our attention to page 6 of the Assessment Order wherein it is mentioned that information was passed on by the DIT (Inv.) Kolkata to this office for conducting necessary enquiries in the case of M/s. Modern Insulators Ltd, Jaipur. Ld. AR further contended that case is reopened to cover up lapse during original assessment proceedings. Reliance was placed by the ld. AR of the assessee on the judgment of Hon’ble Supreme Court in the case of Gemini Leather Stores v. ITO (1975) 100 ITR 1 wherein the Hon’ble Supreme Court had held that AO cannot take recourse to reassessment proceedings to remedy the error resulting from his own oversight.
Per Contra ld. DR could not submit any evidence regarding the exact date when the information was received from DIT (Inv.) Kolkata. Ld. DR sought time to obtain this information but in spite of allowing time such information was Modern Insulators Limited submitted. We have heard the rival contentions and perused the material available on record. We are in agreement that in the present case, particularly with reference to chronology of events and a factual mention in the Assessment Order, the information was available with the AO during the course of assessment proceedings, which was not controverted by the ld. DR. Therefore, assumption of reassessment jurisdiction to correct his own lapse is not permissible in view of the judgment of the Hon’ble Supreme Court in the case of Gemini Leather Stores (supra).
Ld. AR also submitted that the reopening has been done without application of mind and on borrowed satisfaction based merely on the information received from investigation wing Kolkata. He drew our attention to Question No. 11 of Praveen Agarwal’s statements. Ld. AR submitted that the period during which Shri Praveen Agarwal admitted having provided accommodation entries pertained to the years 01.04.2005 to 31.03.2008, whereas the commission paid by the Assessee Company pertained to the Financial Year 2009-10. Ld. AR further submitted that AO was guided by the narrative set out in the purported investigation report and heavily relied on the same. The reasons recorded by AO are in the nature of conclusion without showing the process of formation of belief and rationale connection of material and information with such conclusion. The AO, himself has not taken any position on the nature of evidences collected. No definitive link has been shown between so called material and formation of belief towards escapement qua the Assessee Company.
Modern Insulators Limited 8. Ld. AR further submitted that it is paramount that the belief entertained by the AO to invoke the provisions of Section 147 must spring from the reasons i.e. some tangible material of prima facie nature. Such formation of belief cannot be relegated to Investigation Wing or other Authority. Ld. AR also submitted that it is clearly discernible from the reasons recorded that the ld. AO has merely acted on so-called information from Investigation Wing on dotted line without showing as to how AO convinced himself that contents of the so-called information are worthy of being acted upon, more so when the assessment was already completed under section 143(3) of the Income Tax Act, 1961.
Ld. AR placed reliance on the following judicial pronouncements: � CIT us. SFIL Stock Broking Ltd. (2010) 233 CTR (Del) 69: (2010) 41 DTR (Del) 98 (2010) 325 ITR 285 (Del) � Principal CIT vs. RMG Polyvinyl (P) Ltd. (2017) 156 DTR (Del) 79: (2017) 396 ITR (Del) � Kavya Satija vs. DCIT (2025) 235 TTJ (Del) 217 9. Per Contra ld. DR submitted that reasons recorded do reflect application of mind. We are in agreement with the contentions of ld. AR. We have also gone through the Reasons Recorded. The Reasons Recorded would make it evidently clear that the AO has acted in a mechanical manner based on so-called Investigation Wing Report and without own application of mind and without objectively ascertaining the facts before recording reasons towards alleged escapement. AO has not at all, in his reasons recorded, and mentioned how the period of payment of commission by the Assessee Company i.e. financial year 2009-10 is related to period of accommodation entry admitted by Shri Praveen Agarwal i.e. the period 01.04.2005 to 31.03.2008. Essentially, the assessment has been reopened on the basis of borrowed satisfaction of the Investigation Wing Modern Insulators Limited without his own independent application of mind and thus consequential action and proceedings under section 147 are illegal and bad in law. For this reason also the reopening deserves to be quashed. In view of the above, the reopening of the assessment is hereby quashed.
GROUND Nos. 1, 9. 10 & 11: Disallowance of commission expenses amounting to Rs. 1, 93, 35,522/- Next we take up the issue on merits in relation to disallowance of commission expenses amounting to Rs. 1,93,35,522/-. Assessee Company is in the business of manufacturing porcelain insulators. The buyers of the product include: i. Manufacturers of electrical equipment, such as transformers and switchgear ii. Electric utilities and power transmission companies iii. Government and private infrastructure project developers. It was submitted by the ld. AR that the Company has a long history of having sales agents who work for the Company on commission basis. In the past such commission payments have been accepted by the Department in the assessment proceedings under Section 143(3) of the Act for Assessment Year 2009-10, copy of the order has been placed before us as part of Paper Book. Even during the year total commission paid by the Company was to the tune of Rs. 540.08 lacs (Insulator and Yarn division) and out of this disallowance of Rs. 1, 93, 35,552/- is made. Remaining amount of Rs. 3, 46, 72,448/- has been accepted by the Department as genuine. The Comparative statistics of commission payment vis-a- vis turnover has also been placed before us by the ld. AR of the assessee company for reference.
We have gone through the financial statistics produced by the assessee for the year under consideration as well as the previous years and the same is found to be in normal range. Hence, on quantum/merits also there is no perversity found and the same is allowed.
In the result, the appeal of the assessee is allowed.
Order pronounced in the open court on 10th day of September 2025. Sd/- Sd/- (Dr. S. SEETHALAKSHMI) (GAGAN GOYAL) JUDICIAL MEMBER ACCOUNTANT MEMBER Jaipur, िदनांक/Dated: 10/09/2025 Copy of the Order forwarded to: 1. अपीलाथ�/The Appellant , 2. �ितवादी/ The Respondent. आयकर आयु� CIT 3. 4. िवभागीय �ितिनिध, आय.अपी.अिध., Sr.DR., ITAT, 5. गाड� फाइल/Guard file.