R.R.PAPER PRODUCTS ,MUMBAI vs. JT. CIT. RANGE 24 (3), MUMBAI

PER RAVISH SOOD, JM

1. The Ld. CIT(A) erred in confirming and adding the genuine payment made to Sister Concern M/s Shree Agencies of Rs.1,71,324/- and added the same to the total income of the assessee in view of section 40(a)(ia) of the P a g e | M/s R.R. Paper Products Vs. Jt. CIT Range-24 (3) Income Tax Act, 1961 and erred in confirming the statement of the Ld. AO that No TDS has been deducted on the payment to Sister Concern M/S Shree Agencies.

on or before the date of hearing.”

2. Briefly stated, the assessee firm which is engaged in the business of trading in different kinds of papers had e-filed its return of income for A.Y. 2012-13 on 02.08.2012, disclosing its total income at Rs.1,34,87,199/-. The return of income filed by the assessee was processed as such under Sec. 143(1) of the Act. Subsequently, the case of the assessee firm was selected for scrutiny assessment under Sec. 143(2). The A.O while framing the assessment made the following additions/disallowances:

Sr. No. Particulars Amount 1. Disallowance under Sec.40(a)(ia) of impugned Rs.1,71,324/- commission payment to „sister concern‟. 2. Disallowance of commission on sales. Rs.38,73,644/-

3. Aggrieved, the assessee carried the matter in appeal before the CIT(A). The CIT(A) after deliberating on the contentions advanced by the assessee as regards the disallowance made by the A.O under Sec. 40(a)(ia) was not persuaded to subscribe to the same and upheld the view taken by the A.O. As regards the disallowance of the commission on sales, the CIT(A) after obtaining the „remand report‟ from the A.O deleted the disallowance in respect of 6 parties. Apart there from, in case of one of the party viz. M/s Chamber Packing the A.O was directed to restrict the disallowance to Rs.1,48,057/- as against P a g e | M/s R.R. Paper Products Vs. Jt. CIT Range-24 (3) Rs.4,46,163/- that was made by him. Accordingly, the CIT(A) partly allowed the appeal.

4. The assessee being aggrieved with the order of the CIT(A) has carried the matter in appeal before us. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as the judicial pronouncements relied upon by them. We find that our indulgence in the present appeal has been sought by the assessee as regards the sustainability of the order of the CIT(A) on two issues viz. (i) disallowance under Sec. 40(a)(ia): Rs.1,71,324/-; and (ii) disallowance of commission on sales: Rs.20,26,770/-. 5. We shall first advert to the disallowance made by the A.O under Sec. 40(a)(ia) of the Act. As is discernible from the orders of the lower authorities, the aforesaid disallowance was made for the reason that the assessee had failed to deduct tax at source on the amount of Rs.1,71,324/- that was paid by it to its „sister concern‟ viz. M/s Shree Agencies. It is the claim of the revenue that as the aforesaid payment made by the assessee was towards commission, therefore, it was obligatory on its part to have deducted tax at source on the same. On the contrary, it is the claim of the assessee that as the payment made to its „sister concern‟ was towards purchase consideration in lieu of high seas sales made by the latter, therefore, it was not obligated to have deducted any tax at source at the time of making of the payment towards such purchase consideration. The ld. A.R in order to fortify his aforesaid contention had taken us through certain documents viz. (i) copy of the high seas sales agreement executed between the assessee and its „sister concern‟ viz. M/s Shree Agencies; (ii) copies of the invoices raised by the overseas supplier on M/s Shree Agencies; (iii) copy of the invoices raised by M/s Shree Agencies on the P a g e | M/s R.R. Paper Products Vs. Jt. CIT Range-24 (3) assessee; (iv) copy of sales tax return of M/s Shree Agencies; and (v) copy of the sales tax audit report of M/s Shree Agencies. We have perused the aforesaid documents and find substantial force in the contention advanced by the ld. A.R that the assessee had made high seas purchases from M/s Shree Agencies (sister concern). As is discernible from a perusal of the high seas sales agreement, dated 22.03.2011, M/s Shree Agencies (sister concern) was to make sales on high seas to the assessee for a consideration of “C & F USD 620.00 pmt + 2%”. On a perusal of the copies of the „invoices‟ raised by the overseas supplier viz. M/s Fortex International, Sweden on M/s Shree Agencies, it stands established beyond doubt that the goods were originally purchased by the said concern from the aforementioned foreign party. Further, a perusal of the high seas sales „invoices‟ raised by M/s Shree Agencies on the assessee therein proves to the hilt that it was only pursuant to the said sale transactions that the „title‟ in the goods was thereafter transferred to the assessee. In sum and substance, the fact that the assessee had purchased the goods under consideration from M/s Shree Agencies (sister concern) stands proved on a perusal of the aforesaid documents. Also, the fact that the import of the goods had duly been reflected in the sales tax return of M/s Shree Agencies further substantiates the aforesaid factual position. In fact, a perusal of the sales tax audit report of M/s Shree Agencies clearly reveals that the aforesaid imports of Rs.1,75,29,051/- and the sales of Rs.1,78,79,654/- made to the assessee forms part of the purchases and sales of M/s Shree Agencies. Accordingly, in the backdrop of the aforesaid facts, we are of the considered view that the amount of Rs.1,78,79,636/- (inclusive of 2%) paid by the assessee to M/s Shree Agencies was towards the purchase consideration in respect of the aforestated high seas purchases. We thus finding ourselves to be in agreement with the contention advanced by the ld. P a g e | M/s R.R. Paper Products Vs. Jt. CIT Range-24 (3) A.R that as no obligation was cast upon the assessee to have deducted tax at source on the purchase consideration that was paid to M/s Shree agencies, therefore, no disallowance under Sec. 40(a)(ia) was called for in its hands, thus delete the addition of Rs.1,71,324/- made by the A.O on the said count. The Ground of appeal No. 1 is allowed.

6. We shall now advert to the sustaining of the disallowance of commission on sales of Rs.20,26,770/- by the CIT(A). Briefly stated, the assessee had during the year under consideration claimed deduction of commission on sales amounting to Rs.80,30,064/-. The A.O in order to verify as to whether any services had actually been rendered by the brokers issued summons to the buyers to whom sales were claimed to be have been made. On the basis of the details gathered, the A.O categorised the buyers into three parts, viz. (i) where the buyers had confirmed the involvement of the broker; (ii) where the buyers denied the involvement of any broker; (iii) where there was no response from the buyers. The details of the buyers who had either denied the involvement of any broker in respect of their transactions with the assessee and also those from whom no response was received, are culled out as under:

Sr. Party Name Broker as per Sale/Purchase Commission as Remarks No. assessee value as per per assessee assessee 1. J.S. Corrupack Pvt. Suplin S. 1,07,36,525 241880 Denied Ltd. Panchal 2. P.R. Packing Bipin K. Vora 21254802 385220 Denied 3. M/s Amigo Industries M.R. Textile 14417973 597418 Denied Corporation 4. M/s Chamber Packing Shree Salasar 6363317 446163 Denied Corporation 5. M/s Aries Paper Co. Shri Manish R. 36133606 767010 Denied Shah 6. M/s Shreeji Indl. Sandeep Traders 14633864 269150 Denied Engg. Pvt. Ltd.

7. M/s Mayur Packaging Shree Salasar 6336547 153959 No Corporation confirmation Received 8. M/s Vivala Cartoon Holash Kumar 8977130 215453 No Pvt. ltd. Verma confirmation Received 9. M/s Sigma Packaging Hitesh G. 6699061 160046 No Rajgour confirmation Received 10. Bhavesh Products Pvt. Arvind Kumar 4457002 38033 No ltd. Kashliwal confirmation P a g e | M/s R.R. Paper Products Vs. Jt. CIT Range-24 (3) Received 11. M/s M.K. Print Pack Hitesh G. 12375690 292194 No Pvt. Ltd. Rajgour confirmation received 12. M/s Bhilosa Arun Sales 16583925 307118 No Industries Pvt. Ltd. Corporation confirmation Received On the basis of the aforesaid details the A.O disallowed commission on sales aggregating to Rs. 38,73,644/-. In the course of the proceedings before the CIT(A) the assessee furnished the details along with the confirmations from certain buyers, bank statements and other relevant details in support of its aforesaid claim of expenses. The CIT(A) called for a „remand report‟, and after receiving the same restricted the addition to the extent of Rs.20,26,770/- in respect of the following transactions:

Sr. Party Name Broker as per Sale/Purchase Commission as Remarks No. assessee value as per per assessee assessee 1. J.S. Corrupack Pvt. Suplin S. 1,07,36,525 2,41,880 Denied Ltd. Panchal 2. P.R. Packing Bipin K. Vora 21254802 3,85.220 Denied 3. M/s Chamber Packing Shree Salasar 6363317 *1,48,057 Denied Corporation 4. M/s Aries Paper Co. Shri Manish R. 36133606 7,67,010 Denied Shah 5. M/s Shreeji Indl. Sandeep Traders 14633864 2,69,150 Denied Engg. Pvt. Ltd.

As observed by us hereinabove, the A.O in order to verify the genuineness of the claim of the commission expenses on sales had made necessary verifications from the buyers. The A.O had issued summons to the buyers and had called upon them to inter alia state the name of the intermediary through whom they had transacted with the assessee. On the basis of the details gathered, the A.O was of the view that the buyers who had denied the involvement of any broker/intermediary and had stated to have entered into a direct dealing with the assessee, the commission expenses claimed by the P a g e | M/s R.R. Paper Products Vs. Jt. CIT Range-24 (3) assessee in respect of such parties were to be held as bogus. On a similar footing the commission expenses in respect of the buyers from whom no reply was received by the A.O were also held by him to be ingenuine. Accordingly, it is in the backdrop of the aforesaid view that the CIT(A) had finally upheld the disallowance of commission on sales of Rs.20,26,770/-.

“W e h a v e c o n s i d e r e d t h e r i v a l s u b m i s s i o n s a n p e r u s e d t h e copies of various documents filed in the compilation by the assessee. We find that he assessee has filed confirmation from the payees of the commission amount and the amount of commission was paid per c h e q u e s o n l y . T h e p a y e e s o f t h e c o m m i s s i o n amount have complied with the summons issued by the Assessing Officer and has confirmed the payment of commission to them. PAN of all P a g e | M/s R.R. Paper Products Vs. Jt. CIT Range-24 (3) the payees of the commission amount was filed before the Assessing Officer. It is not unusual that the parties to whom the sales were made do not have knowledge of the person to whom the commission has been claimed by the assessee as having paid for the services rendered to the assessee company and this factor alone is not sufficient to hold that the commission payments earned by the assessee are not genuine. In such case the entirety of the facts and circumstances of the case has to be examined in order to decide the genuineness or otherwise of the commission payment claimed by the a s s e s s e e . A l l t h e p a y e e s o f t h e c o m m i s s i o n a g e n t s a r e e x i s t i n g i n c o m e t a x a s s e s s e s a n d h a v e c o n f i r m e d t h e p a y m e n t o f commission to them and the payments were made per cheques only. The payees of the commission amounts in their confirmation filed, before the assessing officer have deta iled the services ren d ered by them to the assessee company in the matter of sales made by the assessee company. One of the payees Shri Sachin D. Porwal in his confirmation letter mentioned the same payments of commission received by him through the assessee company in the past year. Likewise, Shri S. P. Gupta has confirmed that they are regularly organizing business on behalf of the assessee firm and have their business transaction in the past years as well as in the next year. M/s. G.L Bal Graphic (India) has confirmed that he has provided a package of services to the assessee firm to enable them to obtain the sales during the relevant period and a proprietor thereof is a science graduate with the 20 years of experience in the areas of surface coatings etc. M/s. R.M. Associates has also detailed the services rendered to the assessee firm during the relevant period and he has also confirmed that he is a science graduate with 20 years of experience in the surface coatings etc. The assessee has declared the return of income to Rs.1.41 crores during the year. The revenue could not produce any material on record to suggest that the commission payments claimed by the assessee are fictitious or not genuine. 19 these facts of the case, we hold that the assessee is entitled to deduction of the commission amount claimed by it and accordingly, the ground No. 1 of the assessee is allowed.” The aforesaid view was thereafter again followed by the Tribunal while disposing off the appeal in the case of the aforementioned assessee viz. C.H. Java & Co. (supra) for A.Y. 2003-04 in dated 06.08.2009. In sum and substance, we are of a strong conviction that in order to verify the authenticity of the claim of the assessee that it had availed the services of the respective brokers in order to facilitate its sale transactions, it was incumbent on the part of the A.O to have summoned the brokers and examined them at the first stance. As observed by us hereinabove, the A.O in the backdrop of the confirmations filed by the brokers wherein they had acknowledged receipt of commission from the assessee should have thereafter confronted them with the fact that the buyers had declined of having carried out any transaction with the assessee through them. In our considered view, it was only after obtaining the explanation of the brokers as regards the aforesaid claim of the buyers that the A.O could have fairly formed a view as regards the genuineness of the commission claimed by the assessee to have been paid to the said P a g e | M/s R.R. Paper Products Vs. Jt. CIT Range-24 (3) brokers. Our aforesaid view is all the more fortified by the confirmations of the brokers wherein the receipt of commission from the assessee was acknowledged by them. We are unable to subscribe to the summarily discarding of the confirmations of the brokers by the A.O, specifically when their complete details alongwith the income-tax credentials were available with him. Apart there from, we find that the heavy reliance placed by the A.O on the fact that the buyers had declined the involvement of any broker/intermediary also cannot be safely gathered from a perusal of the replies filed by them. For instance, one of the buyer viz. M/s J.S. Corrupacking Pvt. ltd. on in its letter addressed to the A.O in response to the information that was sought by him, had submitted, that they had not appointed any middleman/broker/intermediary and had directly approached the supplier for purchase of material. As is discernible from the aforesaid reply, the said party had stated two facts viz. (i) that, they had made purchases directly from the assessee without appointing any middleman/broker/intermediary; and (ii), they had not appointed any broker for purchase, and had directly approached the supplier for purchase of materials. We are unable to comprehend that in the backdrop of the aforesaid claim of the buyer party how the A.O could have conclusively concluded that the assessee would not have availed any services of the commission agent viz. Shri Suplin S. Panchal in respect of the sale transaction with the said party. In our considered view, though doubts as regards the veracity of the aforesaid claim of commission expense by the assessee might had surfaced, but then, we are of a strong conviction that the A.O ought to have made necessary verifications by summoning the commission agents and brought the issue to a logical end. In fact, we are of a strong conviction that the A.O should not have drawn adverse inferences as regards the authenticity of the claim of the assessee on the basis of premature P a g e | M/s R.R. Paper Products Vs. Jt. CIT Range-24 (3) observations. Be that as it may, in our considered view doubts or suspicions cannot lead to disallowance of an otherwise duly substantiated claim of expense raised by an assessee. As a matter of fact, we are of the considered view that nothing concrete emerges from the confirmations/letters of the other buyers also which could conclusively dislodge the veracity of claim of commission expenses (on sales) raised by the assessee in context of the aforementioned parties. In fact, we find from a perusal of financial accounts of the assessee for A.Y. 2010-11 and A.Y. 2011-12, which too as brought to our notice had been subjected to scrutiny assessment under Sec. 143(3), that certain brokers whose services had been doubted by the A.O/CIT(A) while framing the assessment for the year under consideration viz. A.Y. 2012-13 had also figured in the said years and had been accepted by the A.O, as under:

Assessment Year Assessment Year 2010-11 2011-12 (i) Shri Holash Kumar Verma (i)Shri Vipin Kumar Vora (ii) M/s Sandeep Traders (ii) Shri Suplin S. Panchal (iii) Shri Manish R. Shah (iv) M/s Sandeep Traders (v) Shri Salasar Corporation (vi) Shri Holash Kumar Verma Interestingly, we find that the claim of the assessee that it had paid commission to some of the aforementioned brokers in respect of sales made to the abovementioned buyers had after necessary deliberations also been accepted by the A.O in the assessment framed in the case of the assessee for A.Y 2013-14 under Sec.143(3), dated 28.01.2016, as under:

Sr. Party Name Broker as per Sale/purchase Commission on Remarks No. assessee value as per as per assessee assessee 1. J.S Corrupack Pvt. Suplin S. Panchal 2,74,64,370 5,07,008 Confirmed Ltd.

2. M/s Aries Paper Co. Shri Manish R. 8,12,93,633 6,88,340 Confirmed P a g e | M/s R.R. Paper Products Vs. Jt. CIT Range-24 (3) Rajkot Shah 3. M/s Chamber Shree Salasar 29,89,855 50,385 Confirmed Packing Corporation On the basis of our aforesaid observations, we are unable to persuade ourselves to subscribe to the disallowance of the assesses claim of commission expenses by the A.O, which we find is based on observations that had been arrived at on the basis of a half hearted approach adopted by him. In fact, we find that the confirmations filed by the brokers/intermediaries their substantiating the authenticity of the claim of commission expenses by the assessee, had not been disproved by the lower authorities on the basis of any irrefutable evidence. Apart there from, the fact that the commission paid by the assessee to some of the brokers/intermediaries in A.Y 2010-11, A.Y 2011-12 and A.Y 2013-14, had not been doubted by the A.O while framing of the assessments under Sec. 143(3) for the said respective years further adds to the credence of the aforesaid claim of the assessee. We thus being of the considered view that the lower authorities on the basis of unsubstantiated observations had erred in dislodging the claim of commission expenses raised by the assessee, therefore, vacate the disallowance of Rs.20,26,770/- as had been sustained by the CIT(A). Accordingly, the order of the CIT(A) in context of the aforesaid issue is set aside. The Ground of appeal No. 2 is allowed.