DCIT, NEW DELHI vs. M/S. NIKHIL FOOTWEARS PVT. LTD., NEW DELHI

Brief facts of case shows that assessee is a private limited company engaged in business of manufacturing of footwear and footwear components. It filed its return of income on 6/10/2010 declaring an income of INR 47056850/–. Case of assessee was picked up for scrutiny and it was found that assessee has claimed expenditure on account of payment of commission to various parties. It claimed it as an expenditure incurred for purposes of business. In fact it paid INR 7010500/- to A S Marketing, INR 1 1264515/– to M/s Action Udyog and INR 500,000 to Sri Chakravarty. On questioned by AO that to whom sales were made and commission was paid to which party for that, assessee submitted name and address of parties to whom sales have been made. Learned assessing officer enquired from these parties and received reply from 36 parties. Based on these replies, assessee was issued a show cause notice on 22/3/2013 along with replies received from various buyers of assessee. Assessee replied to same on 28/03/2013. Assessee explained method of working of agents and submitted that when actual and potential customers are spread all over country, no manufacturer can afford to give large workforce exclusively of its own employees to identify customer and therefore to procure orders and to follow up on execution of orders and Page | 2 settling their grievances along with collection of payment, hence, agents are appointed. Assessee further submitted that Assessee Company has paid less than 2% of its turnover as a commission on a turnover of more than Rs 100 crores. With respect to various customers from whom replies have been received assessee explained about existence of agent. Assessee also furnished confirmation letters from recipient of commission in respect of 2 parties and however Shri Narayan Chakravarty was not available; no confirmation of that agent was submitted. Assessee also submitted confirmation to prove genuineness of payment. Therefore assessee submitted that payment of commission to various parties made by assessee is wholly and exclusively incurred by assessee for purposes of business. Assessee also submitted that it has paid commission to various parties through proper cheques/ accounts and they exist and are genuine. Assessee also submitted purchase orders pertaining to 13 companies and highlighted portion to indicate that there is some reference to either name of employee of agent, email or cell phone number to prove existence of agent as acknowledged by customer. learned AO examined claim of assessee and rejected same for following reasons:- a. Those customers did not acknowledge existence of agents and their involvement in any part of negotiation or purchase and sale. In fact in one of customers it was found that AS Marketing is only providing services from 2011 and there was no agent involved with respect to ITC during financial year 2009 – 10. b. No confirmation were provided by assessee except some purchase order wherein some names, emails and telephone numbers are mentioned without adducing any proof as to who or what they are pertained. c. Merely making payment through proper channel does not allow assessee to claim these expenses without proving that services have been rendered.

Therefore he disallowed commission expenditure of INR 1 8775015/–.

During course of assessment proceedings, learned assessing officer further noted that assessee has investment of Rs 14,79,00,000, out of which exempt income of INR 195658/- was earned. Assessee has failed to declare any disallowance on that account. Assessee was also noted to have made a payment of expenditure on interest of INR 37,600,000 out of which interest on unsecured loan is INR 19,700,000. Therefore learned AO asked assessee to show cause as to why expenditure should not be estimated for disallowance u/s 14 A read with rule 8D of income tax rules. Learned AO noted that undoubtedly assessee has incurred expenditure on its investment including time of employees, infrastructure and other expenses on investment to earn exempt income. Therefore he applied provisions of rule 8D of income tax act and disallowed a sum of INR 739792/– under rule 8D (2) (iii) being 0.5% of average value of investments towards other expenditure. Learned AO did not disallow any direct expenditure related to income which does not form part of total income as well as expenditure by way of interest.

Accordingly assessment order u/s 143 (3) of act was passed on 28/3/2013 wherein disallowance of commission expenditure of INR 18775015/– was made along with another addition/disallowance u/s 14 A of INR 739792/– and total income of assessee was assessed at RS. 66571660/– against returned income of INR 47056850/-.

Assessee aggrieved with order of learned AO preferred an appeal before learned Commissioner Of Income Tax (Appeals) – 42, New Delhi who passed an order dated 26/8/2015 wherein he partly allowed payment of commission. Learned CIT – A allowed commission paid to M/s A S Marketing and Action Udyog and confirmed disallowance to extent of INR 500,000 on account of commission paid to Sri Narayan Chakravarty. Further disallowance u/s 14 A of income tax act made by learned assessing officer was also deleted for reason that that majority of investment made by appellant were in its closely held family group companies and only one investment made in a public limited company. Assessee has only earned Dividend income of INR 1579/- and statement of learned assessing officer that assessee has earned dividend income of INR 1 95658/– was a factual error. Assessee also submitted that it has not even treated amount of INR 1579/– as exempt income but has offered for taxation and paid tax thereon. learned CIT – A also examined computation of total income and profit and loss account produced before him which confirmed statement made by assessee before him. Learned CIT – A deleted addition as dividend income of INR 1579 was only earned by assessee and further other investments are made in sister concern, therefore according to him no disallowance is sustainable under section 14 A of income tax act. Therefore revenue aggrieved with order of learned CIT – A has preferred an appeal before us.

Adverting to ground number 1 – 3 of appeal which is related to disallowance of commission expenditure deleted by CIT – A, learned departmental representative referred to facts stated by learned assessing officer in assessment order. He reiterated reasons recorded by learned AO for making disallowance and submitted that learned CIT – A has deleted disallowance without verifying facts in a proper perspective. He submitted that learned CIT has considered only a part of replies filed by these customers. He further stated that learned CIT – A has also ignored fact that purchases were directly made from assessee and not to commission agent. He further submitted that when customers have denied existence of any commission agent of assessee and have confirmed making direct purchases, deletion of disallowance by learned CIT – A is without any reason. He further referred to various observations made by learned assessing officer with respect to enquiries made by assessing officer u/s 133 (6) of act and stated that learned CIT – A did not consider finding of fact and credible evidence as provided by customers of assessee as recorded by assessing officer in assessment order but choose to mislead himself by false claim of assessee which were proved to be incorrect. Therefore it was submitted that material and relevant evidences which were recorded in assessment order were not considered by learned CIT – A while making disallowance, and he deleted disallowance merely on basis of submission of assessee. He also extensively referred to website extract of actions Shoes, and agreement made by assessee with Action Udyog for purpose of making payment of commission expenditure. He therefore submitted that disallowance made by learned assessing officer of commission payments made by assessee which is partly upheld by learned CIT – A should have been upheld by him in Toto. 08. learned authorised representative vehemently supported order of learned CIT – A and stated that assessee has incurred expenditure on commission for purpose of business of assessee and these expenditure have been incurred wholly and exclusively for purpose of business and therefore same should be allowed. He further referred to various submissions made before assessing officer as well as before learned CIT – A and submitted that institutional orders and other orders do mention name of commission agent or their employees, therefore it cannot be stated that there were no commission agent and no services have been rendered by these parties to assessee. He further referred to various percentages of commission expenditure paid to total turnover of assessee and submitted that it is a minuscule percentage of total turnover. He further submitted a detailed chart wherein assessee is paying commission from assessment year 2008 – 09 till assessment year 2017 – 18 wherein similar commission amount has been disallowed by assessing officer for some years, however, same has been allowed by learned CIT – A for assessment year 2010 – 11, 2011 – 12, 2012 – 13. Subsequently all these disallowances have not been contested by revenue. He further submitted that merely for assessment year 2010 – 11 these appeals have been filed and in all other AYS disallowance deleted by learned CIT – A has been accepted by revenue. He also submitted that commission paid to A S marketing is also accepted as allowable by the ld AO as stated in the chart. Therefore for reason of consistency and having accepted decision in one assessment year, learned AO should not have agitated this issue.

We have carefully considered rival contention and perused orders of lower authorities. During year assessee has achieved turnover of INR 1 001398163/– and has made a total payment of commission of INR 1 8414515/–. Out of which commission in dispute is a commission paid to AS marketing of INR 7 150000/- and of Rs. 11264515 to Action Udyog. Claim of assessee before AO was that it has engaged agents for obtaining purchase order, their employees were given reference card and letter pad of appellant company to procure orders. They also rendered services relating to such procurement of orders. Confirmation letters in this regard were also filed. Learned assessing officer further acknowledged that on purchase orders from 13 customers’ names of employees of agent or their email or telephone numbers were mentioned. Therefore learned assessing officer accepted identity and existence of such entities, but was not satisfied with services rendered by these agents and therefore learned AO noted that there is no evidences placed by assessee before AO that these agents have rendered any services to assessee for which commission expenses has been paid to them. When matter reached to learned Commissioner of income tax appeals, after considering inquiries carried out by learned assessing officer and submission made by assessee, he examined proprietor of A S marketing on oath under section 131 of income tax act and noted that he was responsible for making sales to 36 parties which has furnished replies to assessing officer in response to notice u/s 133 (6) of income tax act. For verification of allegation made by learned assessing officer, that there was no evidence for rendering of services by these parties on which such commission claimed to have been paid, he referred to letter dated 28/3/2013 submitted by assessee before AO and he further noted that in support of communication by assessee several purchase orders issued by various customers was stated and brought to knowledge of learned assessing officer in which name and mobile number of agents or its employees were clearly mentioned. He also verified same purchase orders where he found that name of proprietor of recipient of commission was mentioned. He further noted that evidences in form of emails exchanged between customers and certain specific employees of recipient of commission in which various customers have communicated for placing purchase orders, for resolving supply and payment issues by referring to earlier meeting and communication with such persons. He noted that such evidences were also produced before learned assessing officer however those were ignored. Assessee also submitted name of employees and supported it with copies of salary slips of various employees of recipient of commission. Further telephone number mentioned in various purchase orders were also matched with telephone number of commission recipient. In para number 6.2.5 of order, ld CIT A referred to various evidences furnished by assessee to support that services have in fact been rendered by these parties to assessee for which payment of commission has been made. He further referred to query letter issued by learned assessing officer u/s 133 (6) of act dated 12/3/2013 to various buyers and noted that that questions at serial number 2 and 3 found by assessing officer in those query letters are leading questions such as (i) whether buyers are aware of any letter appointing agent on behalf of assessee and further (ii) whether such order was placed to enter or was any negotiation in order, whether an agent was involved in any negotiation of purchases. He further noted that proprietor of recipient of commission and his employees were representing appellant before customers for last several years prior to disallowance and after disallowance. Therefore he noted that it is clear that customers had undoubtedly interacted with commission agent over years without necessarily being aware of their actual legal relationship with appellant and by treating them as representative of appellant. He further referred to various evidences in form of email exchange with customer and commission agent which clearly proves that services have been rendered by them. As a proof of rendition of services, he also examined proprietor of commission agent and found that he has conducted market survey, which included showing samples to clients, to procure orders, to forward orders to factory to arrange dispatch of Material, in collecting payment from them and finally provide after sales services to all clients. He further referred that there is an agreement dated 01/04/2009 by which commission recipient was entitled for charging of commission, monthly bills were raised according to that agreement and same were settled by assessee after deduction of tax at source. Similar affidavit was also filed by appellant before him. On basis of evidences, that were produced by commission agent, and his employees as well as by assessee and on examination of various details such as email and correspondence with buyers of assessee company, learned CIT – A held that commission agent has contacted customers on behalf of appellant by using advertisement material etc. He further noted that such services were being provided since financial year 2007 – 08 and learned assessing officer has accepted these payments. He further noted that commission agent has also declared income of INR 2756850/– during year and therefore, he deleted disallowance with respect to payment made to A S marketing.

With respect to payment of commission made to M/s Action Udyog, learned CIT – A noted that that these party is actually acted as a trader which purchased shoes from appellant and for which payment made to appellant by it. Such items were sold by this entity to customers at same price for which it was paid fixed profit at rate of 8% of turnover in terms of agreement dated 1/4/2009. Further he verified relevant sales bills and purchase bill with respect to same. He further noted that AO has not examined these details in respect of sales made to this party. He further noted that evidences placed by assessee for commission paid to A S Marketing have been considered by assessing officer for making disallowance with respect to payment of commission to this party. Therefore it is submitted that it is not a payment of commission to commission agent but sale of goods at fixed percentage of profit. It was further noted by him that commission recipient has shown sales of INR 356,700,000 on which profit of INR 71,200,000 have been shown which includes a taxable income of INR 51,500,000. He further noted that this party is not at all related party to assessee and therefore he deleted disallowance with respect to above payment.

Further before us, assessee has submitted a detailed chart which shows history of payment of commission from assessment year 2008 – 09 till 2018 – 19. On basis of chart, it was found that assessee is paying commission to A S Marketing since assessment year 2008 – 09. For that year assessee claimed a commission payment of INR 4 044960/- to that party and same has been allowed as deduction by learned assessing officer. Further for assessment year 2009 – 10, commission of INR 5 602240/– was paid by assessee which was also allowed by learned assessing officer without any dispute. Further from assessment year 2010 – 11 assessee also started paying commission to M/s Action Udyog which continued up to assessment year 2012 – 13. For all these years learned assessing officer disallowed claim of assessee, however learned CIT – A has deleted disallowance, learned departmental representative could not controvert that when learned CIT – A has deleted disallowance, whether those have been contested before higher forum or not. Even otherwise looking to disallowance deleted by learned CIT – A on standalone basis for assessment year 2010 – 11, no infirmity have been pointed out by learned departmental representative. We also found that learned CIT – A has deleted disallowance after considering facts of case placed before him by assessee as well as reasons recorded by assessing Officer in making disallowances. Learned CIT – A further made certain enquiries and based on which he deleted disallowance. Therefore we do not find any infirmity in order of learned CIT – A in deleting disallowance of INR 18275015/– with respect to commission paid to A S Marketing and Action Udyog. Accordingly ground numbers 1 – 3 of appeal are dismissed.

AO has challenged deletion of disallowance u/s 14 A of income tax act vide ground number 4 – 7 of appeal. With respect to disallowance u/s 14 A of income tax act of INR 739792 /- it is stated that there cannot be any reason to not to make any disallowance u/s 14 A of income tax act even if investment has been made with associated concerns. He further stated that there is no provision under income tax act which speaks that exempt income should have been earned by assessee during year. He further stated that even otherwise disallowances are made by assessing officer by invoking rule 8D of income tax rules 1962 and therefore same is required to be upheld.

With respect to disallowance u/s 14 A of income tax act learned authorised representative submitted that assessee has only earned dividend income of INR 1759/- which has also not been considered as exempt income in computation of total income which has been verified by learned CIT – A with respect to computation of total income and annual accounts of assessee and therefore no exempt income has been claimed by assessee in computation of income, therefore no disallowance should have been made by learned assessing officer. He further submitted that even otherwise disallowance cannot exceed exempt income. 14. We have carefully considered rival contention and perused orders of lower authorities. In present case exempt income is 1759/– which has also not been claimed by assessee as an exempt income. Therefore now it is apparent that figures mentioned by learned assessing officer in assessment order showing that assessee has earned exempt income of INR 1 95658/– is incorrect. Therefore now whole issue is required to be examined from aspect of exempt income of only INR 1 759/- and whether disallowance is required to be made u/s 14 A of income tax act with respect to earning of exempt income. It is not at all relevant to fact that whether assessee claimed that income as an exempt income, inadvertently or advertently, pays tax on that. In all circumstances provisions of section 14 A applies as soon as Page | 10 assessee earns an exempt income. It is an altogether a different aspect that whether assessee has incurred any expenditure or not, which is required to be tested subsequently, but provisions of section 14 A triggers as and when assessee earns exempt income. As it is a fact that disallowance cannot exceed exempt income, therefore without going into merits of fact whether assessing officer has recorded satisfaction or not, we direct learned assessing officer to restrict disallowance u/s 14 A of income tax act to extent of INR 1 759/– only. To his proposition, ld AR also agreed. Accordingly ground number 4 – 7 of appeal of AO is partly allowed. 15. Ground number 7 of appeal is general in nature, no arguments were advanced before us, and therefore same is dismissed. Accordingly appeal of learned assessing officer is partly allowed.