HARSHNA INTERNATIONAL,NEW DELHI vs. ITO, NEW DELHI

2. Following grounds have been raised in this appeal: “1. That the assessment order making an addition of Rs.24,27,721/- in the income of the appellant is contrary to the facts, erroneous, bad in law and the learned Commissioner of Income Tax (Appeals) grossly erred in upholding the same.

That the appellant reserves his right to make addition, alteration, modification and withdrawal of grounds of appeal at any stage of the appellate proceedings”

Facts of the case in brief are that the assessee filed the return of income on 30.09.2009 declaring an income of Rs.1,03,204/-. Subsequently, the case was selected for scrutiny. During the course of assessment proceedings, the AO noticed that the assessee had received a sum of Rs.24,27,721/- on which TDS of Rs.55,012/- was deducted by M/s Unifruitti India (P) Ltd., Sun City, Gurgaon and that Rs.3,80,666/- on which no TDS was deducted, was also received from the same party. He also observed that the assessee had shown commission income of Rs.25,92,444/- in its profit and loss account, on which TDS of Rs.2,63,832/- was deducted.

The AO asked the assessee to explain as to why the receipt of Rs.24,27,721/- was not shown as receipt in the profit and loss account. The assessee submitted that the said amount was on account of reimbursement of expenses incurred on behalf of M/s Unifruitti India (P) Ltd., which had been accounted for in the separate ledger account, “Uni Fruiti Reimbursement” (General Ledger), copy of the same was filed. The assessee also filed a certificate issued by M/s Unifruitti India (P) Ltd., in which it was certified as under:

That the certificate (undated) issued by M/s. Unifruitti India (P) Ltd, thereby later on clarifying the nature of payment of Rs.24,27,721/- on which TDS of Rs.55,012/- was deducted, bears no importance. Moreover, the certificate is undated; besides no reply regarding authenticity of the same was received from the tax deducting company even in spite of specific notice under section 133(6) of the Income-tax Act, 1961.”

The assessee is selling goods of M/s Unifruitti India (P) Ltd. on consignment basis for which a total commission of Rs.25,92,444/- was earned and M/s Unifruitti India (P) Ltd. deducted TDS amounting to Rs.2,63,832/- on the commission payments. For selling consignment goods, assessee firm also incurred various expenses on behalf of M/s Unifruitti India (P) Ltd. and the expenses so incurred were reimbursed by the said company on which a further TDS of Rs.55,012/- was deducted by the company u/s 194C of the Income Tax Act. Since the TDS was deducted u/s 194C of the Income Tax Act. Nature of payment was mentioned as 'Payment to Contractor' on the TDS certificate issued by the company in respect of reimbursed expenses of Rs.24,27,721/-. This has also been reiterated in the certificate received, from M's Unifruitti India (P) Ltd. which states that M/s Harshna International Harshna International was engaged by them for sale of fresh fruits. It no where states that the assessee firm was engaged for any contract work. It further states that the firm has incurred expenses such as freight, cartage, conveyance, etc. which have been reimbursed for which TDS of Rs. 55,012/- has been deducted. The words used in the certificate of M/s Unifruitti ‘in the nature of payment to contractors’ is only for the purpose of explaining the category of deduction of TDS which was u/s 194C and for which term used as per the said section is 'Payment to Contractors'. So using the term 'Payment to Contractors ' on the TDS certificate does not change the actual character of payment which is reimbursement of expenses incurred by the assessee on behalf of M/s Unifruitti India (P) Ltd. and is not a payment for any contract work undertaken for the company as has been misunderstood by the A.O. The assessee is maintaining a separate account of such expenses under the head “Unifruitti Reimbursement Account" and a detailed copy of ledger account of all these expenses and reimbursement thereof was filed during the assessment proceedings. Thus, there is no element of any income arising to the assessee in respect of reimbursement of expenses received and the payment is not liable to be credited in the Profit & Loss Account. This view has also been upheld by Courts in various cases as under:- a) Supreme Court in the case of CIT vs. Tejaji Farasram Kharwalla Ltd. 1967 SCR (3) 876 : "To the extent of the receipt representing reimbursement of expenses the same were not taxable. It is only when there was surplus that the same should be taxed.” b) Delhi High Court in the case of CIT vs. Industrial Engineering Projects (1993) 202 ITR 1014 Delhi: "in our opinion of the aforesaid judgment of the Supreme Court, reimbursement of expenses can, under no circumstances, be regarded as revenue receipt."

The observations of the ld. CIT(A), on the submissions of the assessee, in paras 8.3 & 8.3.1 of the impugned order were as under:

The assessee also submitted that there was only change in the presentation of the profit and loss account and that in the preceding year i.e. assessment year 2008-09, a total of Rs.2,52,73,629.34 worth of goods of M/s Unifruitti India (P) Ltd. were accounted for in the purchase as well as sales and that there were other purchase and sale during that year at Rs.3,17,640/- and Rs.3,22,320.50 resulting in gross profit of Rs.4,680.50 and that the total commission earned by the said party was Rs.6,90,000/-. It was claimed that during the current year i.e. the assessment year 2009- 10, the commission amounting to Rs.25,92,444/- on sales of Rs.7.1 crores was reflected in the profit and loss account and that there was no change in the basic nature of the business.

The ld. CIT(A) asked the assessee to explain the following: “1. It is seen that the Appellant has claimed two periods but actually there is a claim for 3 different periods i.e. F.Y. 07-08. April & May 08 and June 08 to March 09 in which there have been different business terms with M/s Unifruitti. Please give comparative details for these 3 periods. 2. Please explain why adverse view should not be drawn and the claims of the manner of conducting of Business and the results thereof should not be rejected as the Appellant claims that there were no written Agreements or Contract for the conducting of Business with M/s Unifrutti for each of the above 3 periods. 3. As it is claimed that the business with M/s Unifrutti was conducted on a verbal basis, please specify who was the person or persons who negotiated the business with M/s Unifrutti and who are persons actually conducting the business. Please give their complete names & addresses, relationship with the firm etc.”

In response to the above, the assessee submitted as under: "During this year, there was one period from 1/4/2008 to 31/5/2008 wherein expenses on consignment business were incurred by the assessee firm on its own a/c i.e. no Harshna International reimbursement of expenses was done by the Consignor - M/s Unifruitti India (P) Ltd. and the second one being the rest of the financial year i.e. from 1/6/2008 to 31/3/2009 wherein expenses on consignment business were reimbursed by the Consignor. The third period being referred by you actually relates to the preceding year i.e. A.Y. 2008-09 wherein also the expenses on Consignment business were reimbursed by the Consignor. Comparison with the period when no expenses were reimbursed and the period when the same were reimbursed is not possible as it is difficult to ascertain as to what additional expenses were incurred over & above the usual normal business expenses during such period i.e. Apr 2008 to May 2008 so as to compare the same with the other period. The comparison is also not relevant in the light of the issue involved in the present case."

The ld. CIT(A), however, was not satisfied and sustained the addition of Rs.24,27,721/- by observing in paras 8.8 to 8.11 of the impugned order as under: “8.8 It is seen that the Assessee Firm has not given any reason why there were different business terms for different periods or even the exact business terms & conditions for even any of the periods, with M/s Unifruitti India (P) Ltd. The Appellant had been required to give the complete comparative details including the different business terms for the three periods. However, neither the business terms for the different period were explained nor any details regarding the actual business and the expenditure claimed were given and it was claimed that the comparison with the period when no expenses were reimbursed and the period when the same were reimbursed is not possible. Further, it was also claimed that it is difficult to ascertain to what additional expenses were incurred during such period i.e. April 2008 to May 2008 so as to compare with the other periods. Thus it is clear that the Appellant is not disclosing the true facts of the business and is concealing the same. It has also been claimed that the comparison is not relevant in the light of the issue involved in the present case. In view of the fact that there is a discrepancy in the nature of receipts Harshna International of Rs.24,27,721/- from M/s Unifruitti India (P) Ltd. which as per the TDS Certificate is a contract receipt and as per the Assessee is a reimbursement of expenses and no reply having been given by M/s Unifruitti India (P) Ltd. u/s 133(6) to the Assessing Officer and it further being claimed that there was no written agreement or contract between these two parties, the entire nature of transactions between these two parties are required to be understood alongwith the entire documents to arrive at a decision regarding the nature of transactions between these two parties. However, it is seen that the Appellant is resorting to giving evasive replies and not coming out with the truth. 8.9 It has further been claimed in Para 1 in the abovementioned letter dated 18.12.12 that in the current year the sales were made to far reaching areas of nearby states whereas in earlier years relatively nearby areas were explored. However, no proper details or any documents or evidence in support of such claim was given and hence such claim for explaining the discrepancy in freight vis- a-vis the quantum of goods handled cannot be accepted. 8.10 It has been claimed that no adverse view should be drawn against the assessee Firm just because the business terms were in verbal mode and there was no written agreement between the parties. However, it is seen that not only there was no written agreement or contract between the parties, but the Assessee Firm has also not come out with the terms and conditions of the dealings with M/s Unifruitti India (P) Ltd. As already pointed out above there were three different periods in which it has been claimed that the mode of business was different. No reason for change in the mode of business nor any evidence in its support have been given. If the version of the Assessee is to be believed then during the months of April to May 2008 it was incurring expenditure on behalf of M/s Unifruitti India (P) Ltd. but was not entitled to and did not claim reimbursement for the same. It is further seen that the Assessee Firm claims that the person who verbally negotiated the business terms with M/s Unifruitti India (P) Ltd. was Sh. Naresh Kohli, one of the three partners of the Firm and the actual business was conducted by the all three partners of the Firm. However, the Assessee Firm has still not specified the exact terms and conditions with M/s Unifruitti India Harshna International (P) Ltd. Further, the Assessee Firm does not even have the details or even the item- wise segregation for the claimed expenses on which reimbursement is claimed, and it does not even have the bills for the expenditure for which it is claimed that reimbursement has been received. From the earlier discussion in the order it is seen that the Appellant Firm has evaded to give the true details regarding its business and the nature of transactions with M/s Unifruitti India (P) Ltd. The Assessee Firm was required to give the complete details of the expenses claimed to be incurred against receipts of Rs.24,27,721/- and to justify the genuineness of these expenses and also the relationship with the sale of Unifruitti items as per query no. 3 of Order Sheet entry dated 12.10.12 reproduced above in Para 8.2 above. However, as discussed above, it is seen that the Assessee has been unable to even show the genuineness of the claimed expenses for which it claims to have received reimbursement of Rs.24,27,721/- as neither it has the bills nor any proper details. The Assessee Firm was unable to justify the genuineness of these claimed expenses and was even unable to give the complete details and to justify the relationship with sale of Unifruitti items. It is clear that when the expenses themselves are not genuine, then it is obvious that their reimbursement cannot be genuine. Thus whatever may be the nature of receipt, whether it is contractual or it is an additional Commission or of any other nature, there is no evidence with the Assessee regarding expenditure being incurred against such receipts and in such a situation there is no doubt at all that these receipts of Rs.24,27,721/- are of the nature of Income in the hands of the Assessee Firm. 8.11 It is seen that the Appellant Finn has been unable to give any proper reply to the query raised vide Order Sheet entry no. 2 on 07.12.12 as to why adverse view should not be drawn and the claims of the manner of conducting of business and the results thereof should not be rejected, in view of the entire facts of the case it is hereby held that the Assessee Firm has not come out with the full terms of the manner of conducting of business and has evaded giving the correct details and documents regarding the business of the Assessee Firm, particularly its transactions with M/s Unifruitti India (P) Ltd. The Assessee Firm has been unable to show the genuineness of the claimed expenses of Rs.24,27,721/-.

Now the assessee is in appeal. The ld. Counsel for the assessee reiterated the submissions made before the authorities below and further submitted that the amount in question was the reimbursement of expenses which is evident from page nos. 5 to 38 of the assessee’s paper book. It was submitted that on the commission income, the TDS was deducted which was claimed by the assessee in the return of income and on reimbursement of expenses although no TDS was required to be deducted but on the safer side TDS u/s 194C of the Act was deducted by M/s Unifruitti India (P) Ltd. It was stated that the said amount of Rs.24,27,721/- was reimbursement of expenses which was also certified by the said company. Therefore, the AO was not justified in treating the reimbursement of expenses as income of the assessee and the ld. CIT(A) without appreciating the facts in right perspective wrongly sustained the arbitrary addition made by the AO. The reliance was placed on the following case laws: � CIT Vs Tejaji Farasram Kharwalla Ltd. (1968) 67 ITR 95 (SC) � CIT Vs Industrail Engineering Projects (1993) 202 ITR 1014 (Del.) � DIT(International Taxation) Vs Krupp Udhe GMBH Harshna International 15. In his rival submissions, the ld. Sr. DR reiterated the observations made by the authorities below and further submitted that the assessee did not furnish any copy of the agreement with M/s Unifruitti India (P.) Ltd. for incurring of expenses. Therefore, the expenses claimed to be reimbursed by the said company to the assessee were its income and rightly added by the AO in the hands of the assessee.

We have considered the submissions of both the parties and perused the material available on the record. In the present case, it is an admitted fact that the assessee earned the commission income from M/s Unifruitti India (P) Ltd. and also received the expenses which were incurred by it for the said company. In this regard, the company M/s Unifruitti India (P) Ltd. furnished a certificate (copy of which is placed at page no. 6 of the assessee’s paper book). The said certificate was not produced before the AO, however, the assessee furnished the same before the ld. CIT(A) who admitted the said fact in para 8.3 of the impugned order and also mentioned that the said certificate was undated but the facts mentioned in the said certificate resembled with the details furnished by the assessee. The figure of the Tax Deducted at source u/s 194C of the Act amounting to Rs.55,012/- on the said expenses was same which was in the TDS certificate and the amount of reimbursement of expenses was claimed to be on account of payment of freight, cartage, conveyance, telephone etc. The assessee also furnished the details of the expenses reimbursed by M/s Unifruitti India (P) Ltd. (copy of which is placed at page nos. 8 to 33 of the assessee’s Harshna International paper book). In our opinion, the reimbursement of expenses cannot be considered as the income of the assessee.

On a similar issue, the Hon’ble Jurisdictional High Court in the case of CIT Vs Industrail Engineering Projects (1993) 202 ITR 1014 (supra) held as under: “That reimbursement of expenses can, under no circumstances, be regarded as a revenue receipt and in the present case the Tribunal had found that the assessee received no sums in excess of expenses incurred. The Tribunal was, therefore, justified in deleting the disallowance under section 37(2A) of the Income-tax Act, 1961, and rule 6D of the Income-tax Rules, 1962.” In the aforesaid case, the Hon’ble Jurisdictional High Court applied the ratio laid down by the Hon’ble Supreme Court in the case of CIT Vs Tejaji Farasram Kharawalla Ltd. (1968) 67 ITR 95 (supra). Their lordships observed as under: “Our attention has been drawn to the judgment of the Supreme Court in the case of CIT Vs Tejaji Farasram Kharawalla Ltd. (1968) 67 ITR 95. In this case, part of the commission which was payable to the assessee was 5% which was in lieu of contingency expenses which the assessee had to meet such as commission to dyeing masters, agents, etc. This 5%, out of the total selling agency commission, was claimed to be exempt from tax. The Supreme Court, however, held that only that portion of 5% of the selling agency commission received by the respondent was exempt from tax which was wholly and necessarily incurred in the year of account in the performance of the duties of the respondent as selling agent. The Supreme Court clearly held that to the extent of the receipt representing reimbursement of the expenses the same were not taxable. It is only when there was surplus that the same should be taxed.”

In the present case also, the assessee was earning commission income as well as incurring the expenses on behalf of M/s Unifruitti India (P) Ltd. Those expenses incurred by the assessee were reimbursed by the said company, therefore, the reimbursed expenses cannot be considered as income of the assessee. In that view of the matter, we delete the impugned addition sustained by the ld. CIT(A).

In the result, the appeal of the assessee is allowed. (Order Pronounced in the Court on 10/12/2018)