MODERN INSULATORS LIMITED ,ABU ROAD vs. ITO(TJ)O-O THE PR. CIT-2,JAIPUR, JAIPUR

PER GAGAN GOYAL, A.M:

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.

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Modern Insulators Limited

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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.

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Modern Insulators Limited preferred appeal before the Ld. CIT (A) who dismissed the appeal. Aggrieved by the said order, the assessee company is in appeal before us.
3. 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 5
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.
5. 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.
6. 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 6
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 juri iction 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).
7. 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.

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Modern Insulators Limited

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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.
10. 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.

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Modern Insulators Limited

Copy of the Order forwarded to:

BY ORDER,
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(Asstt.