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Income Tax Appellate Tribunal, DELHI BENCH ‘F’, NEW DELHI
Before: SH. BHAVNESH SAINI & SH. L. P. SAHU
PER BHAVNESH SAINI, JM:
This appeal by the assessee has been directed against the order of Ld. CIT(Appeals)-XXVIII, New Delhi dated 09.10.2014 for A. Y. 2011-12.
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We have heard the Ld. Representatives of both the parties and perused the material available on record.
On ground No.1, the assessee challenged addition of Rs.8,23,964/-on account of deemed dividend u/s 2 (22) (e) of the IT Act.
During the assessment proceedings, the assessee was asked to provide the details of unsecured loan for the current year. Only one unsecured loan from M/s. Ramsan Communication Limited was shown in which the assessee has substantial interest. The loan outstanding as on 31.03.2011 was Rs.1,12,95,724/- and accumulated profit on the same date was Rs.8,23,964/-. The assessee submitted that he has entered into an agreement to sell with M/s Ramsan Communication Limited who finds it difficult to operate from Shimla and intends to purchase an industrial land in Delhi to shift its operation from there to here, M/s. S.L. Enterprises (proprietary ship concern of assessee) made an agreement with the said company for sale of industrial plot at Mangolpuri, New Delhi. Thus, the company advanced of Rs.1.12 crores to the assessee for the purchase of industrial plot. The Assessing Officer, however, noted that the balance sheet of the assessee shows there was unsecured loan from the said company was outstanding and similarly in the books of the said company this amount is outstanding under the schedule of loans and advances. The assessee has also claimed to have paid interest on the outstanding loan. Hence, the argument of the assessee was rejected. As this loan have been taken from the said company in which the assessee has substantial interest, therefore, an amount of Rs.8,23,964/- was treated as deemed dividend assessable in hand of assessee u/s 2 (22) (e) of the IT Act. The addition was accordingly made. The Ld. CIT (A) noted that the assessee do not produce any evidence or the documents on the basis of which the assessee claimed it was a transaction between two persons, the addition accordingly confirmed.
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The Ld. Counsel for the assessee reiterated the submissions made before the authorities below.
The Ld. Counsel for the assessee submitted that assessee has been carrying on business on a works contract for Government Departments under partnership concern M/s S.L. Enterprises. The assessee holds share holding more than 10% in M/s Ramsan Communication Limited. During the year there were commercial transactions between the assessee and the said company which is clear from ledger account of the said company in the books of the assessee. It would show the amount paid by assessee to said company and the amount received by the assessee for the said company. Copy of which is filed at page 54 of the paper book. The credit amount comes to Rs.1,36,95,724/- and debit amount is of Rs.24,00,000/-, thus the balance outstanding was Rs.1,12,95,724/-. Since it was a commercial transaction, the assessee has paid interest of Rs.1,06,360/- and has deducted TDS of Rs.10,636/- (PB-95). The interest paid has been claimed as deduction and assessed to tax in the hands of the said company. The Ld. Counsel for assessee submitted that identical issue was considered by ITAT, Delhi Bench in the case Shri Deven Chachra Vs. DCIT in ITA No.4209-4210/D/2017 dated 02.11.2017 in which the assessee submitted the chart pointing out the interest income received by the company in assessment year under appeal as well as in the preceding and subsequent years and, held as under :-
“From the above, it is evident that M/s. Superior Films (P) Ltd. is receiving substantial interest from the group concerns as well as others right from assessment year 2007-08 to 2016-17. From page 6 onwards of the written submissions, the assessee has given the transactions between M/s Superior Films (P) Ltd. and other group concerns, from which, it is evident that there were several transactions of the payment and receipt of the money during the years under appeal. Considering the totality of above
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facts, we have no hesitation to hold that M/s Superior Films (P) Ltd. used to advance the money for earning interest income to various concerns which included group concerns also. The advancing of money was a regular course of business for M/s Superior Films (P) Ltd., not only in the years under appeal but also in the preceding as well as subsequent years. In view of the above, we have no hesitation to hold that advancing of money by M/s Superior Films (P) Ltd. to the group concerns was during the course of normal course of advancing money for the purpose of earning interest.
In the case of Praaip Kumar Malhotra (supra), Hon'ble High Court of Calcutta has held as under :-
"Held, allowing the appeal, that for retaining the benefit of loan availed of from the bank if decision was taken to give advance to the assessee such decision was not to give gratuitous advance to its shareholder but to protect the business interest of the company. The sum of Rs.20,75, OOO could not be treated as deemed dividend"
In Circular No.19/2017, paragraph 3, the CBDT has also held that trade advances, which are in the nature of commercial transactions would not fall within the ambit of the word ‘advance’ in Section 2 (22)(e) of the Act. No contrary decision was brought to our knowledge.
In the case under consideration, the addition u/s 2(22)(e) is made in the case of an assessee who is an individual. Admittedly, no advance or borrowed money is received by the assessee from the concerns in which the assessee is a shareholder. There is a transaction of advancing of money by M/s Superior Films (P) Ltd. to the group concerns in the normal course of business. In view of the above decision of Hon'ble High Court of Calcutta as well as CBDT's Circular, Section 2(22)(e) is not applicable in the facts of the case under appeal before us. We, therefore, respectfully following the above decision of Hon’ble High Court of Calcutta as well as CBDT’s Circular, delete the edition made u/s 2(22)(e) of the Act.
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He has refer to page No. 94 of the paper book which is ledger account of interest received and paper book page No.98, the details of interest paid from A. Y. 2006-07 to A. Y. 2014-15. The Ld. Counsel for assessee submitted that similar amount was advanced in earlier years as well as in subsequent years on which no addition have been made. Copy of the ledger account is also file in 117 of the paper book. Ld. Counsel for the assessee, therefore, submitted that it has been consistency held that a transaction on which interest had been received and taxed as income, the said transaction is a commercial transaction between assessee and the said company and therefore, such sum cannot be regarded deemed dividend u/s 2 (22) (e) of the IT Act. In the written submission he has relied upon the decision of ITAT Kolkata Bench in the case of Smt. Sangita vs. ITO in ITA No.1817/Del/2009 for A. Y. 2006-07 dated 11.03.2016 in which judgment of the Calcutta High Court in the case of Pradip Kumar Malhotra Vs. CIT reported in 338 ITR 538 have been followed, it was held :-
“5. We have heard the arguments of both the sides and perused the relevant material available on record. One of the main contentions raised by the ld. counsel for the assessee at the time of hearing before us is that the loan in question treated as deemed dividend under section 2 (22) (e) by authorities below was taken by the assessee from M/s. Surya Business Pvt. Limited on interest and since the said Company was compensated by way of interest paid by the assessee on loan, the assessee in real sense did not derive any benefit from the funds of the Company so as to attract the provisions of section 2 (22) (e). Although the ld. D. R. has vehemently opposed this contention of the ld. counsel for the assessee by submitting that the payment of interest alone cannot be considered from the benefit angle as envisaged under section 2 (22) (e), it is observed that the judicial pronouncements cited by the ld. counsel for the assessee clearly support the case of the assessee.”
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The Ld. Counsel for the assessee submitted that since loan was given to the assessee for further extension of business, therefore, transaction was outside the purview of section 2 (22) (e) of the IT Act. He has submitted that rule of consistency apply to the income tax proceedings and relied to the decision of Hon’ble Supreme Court in the case of CIT Vs. Excel Industries Limited 358 ITR 295. On the other hand, Ld. DR relied on orders of authorities below.
8.1 We have considered the rival contentions and perused the material on record. The Ld. Counsel for assessee submitted that since it was a commercial transaction and similar transactions were entered into in earlier and subsequent assessment year and no addition have been made on account of deemed dividend against the assessee, therefore, rule of consistency do apply. The assessee further claimed that the assessee has entered into an agreement to sell with M/s. Ramsan Communication Limited for sale of the industrial land in Delhi. They wanted to shift their business to Delhi, therefore, advance of Rs.1.12 crores was treated against the purchase of industrial plot. The assessee deducted TDS on the interest paid (PB-95), therefore, it was a commercial transaction entered into between into between assessee and M/s. Ramsan Communication Limited. Section 2 (22) (e) of the IT Act was inserted to bring within the purview of taxation all those amounts which are actually a distribution of profits but are disbursed as loan. Further it is pertinent to note, when dividends are declared by a company, it is solely the shareholders, who benefit from the transaction, thus section 2 (22) (e) of the Act, covers only such situation where the shareholder alone benefits from the loan transaction, whereas if the company receives some benefits, it would termed as a commercial transaction. In the instant case, the loan was given to the assessee for further expansion of business as the said company intended to take over the business of the assessee hence would be an indirect beneficiary from such transaction. Further the assessee had paid interest on the said
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amount which has benefited the said company. Thus, it was a commercial transaction between the parties. Similar transaction was accepted as commercial transaction between the parties in earlier as well as subsequent years in which interest has also been paid and no adverse inference have been drawn against the assessee, therefore, rule of consistency do apply with the income proceedings and the Assessing Officer without bringing any further evidence against the assessee should not have taken a different view against the assessee. The decisions relied upon by Ld. Counsel for the assessee squarely apply to the facts and the circumstances of the case. The assessee produce sufficient evidence on the record to justify that it was a commercial transaction between the parties not only in assessment year under appeal but in preceding and subsequent years, therefore, the authorities below were not justified in invoking provision of section 2 (22) (e) of the IT Act against the assessee for making the addition. In view of the above discussion, we set aside the orders of the authorities below and delete the addition of Rs.8,23,964/-. This ground of appeal of the assessee is allowed.
On ground No.2, the assessee challenged the disallowance of Rs.3,00,000/- on account of labour charges.
The assessee furnished the details of month wise labour charges incurred by him. From the details it was observed that expenditure has suddenly increased many fold in the month of March, 2011. The assessee explained that he is in business of electrification of Government department. For this, the assessee receives contracts/ tender from Government and because of this kind of business, there are quite variations in amount received from them/ sale-proceeds and the labour and contract staff expenses. It is difficult to correlate the expenses from one month to another. Also, in this kind of industry in which the assessee works, involves a lot of contractual work with the people working under unorganized sector.
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The assessee makes advance payments to the contractors on a monthly basis and deducts TDS. However, the expenses can only be booked when the invoice is received by the assessee. The Assessing Officer, however, in the absence of documentary evidence such as invoices or bills raised by the said contractor disallowed Rs.3,00,000/-. The Ld. CIT (A) on the same reasoning confirmed the addition because most of the payments are made in cash and there are discrepancy like non availability of names, address and signatures on the receipts.
The Ld. Counsel for assessee submitted that it is an ad-hoc addition, without brining any material against the assessee. No disallowance have been made in earlier order as well in subsequent year. Rs.1,50,000/- was only disallowed in preceding assessment year 2010-11 which is under challenge in appeal separately.
On the other hand Ld. DR heavily relied on the orders of the authorities below.
After considering the rival submissions, we are of the opinion that addition is ad-hoc in nature and cannot be sustained. The Tribunal in A. Y. 2010-11 in ITA No.5594/2014 deleted similar addition vide order of even date. The assessee explained the reasons for variations, we, therefore delete the addition of Rs.3,00,000/-. This ground of appeal of assessee is allowed.
On ground No.3, assessee challenged the disallowance of Rs.29,34,000/- on account of commission u/s 37 (1) of the IT Act. The Assessing Officer observed from the P & L account that an amount of Rs.29,34,000/- has been debited under the head commission. The assessee was required to file details of such commission paid i.e. name, address with PAN number and also justification for the payment of commission. The assessee submitted that the details of the commission before the Assessing
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Officer and submitted he has paid the amount as commission for representing him before certain parties to get the tender. The copy of the confirmations received from them alongwith TDS certificates issued to them were filed alongwith details explaining as to how the commission agents represented before the concerned authorities with bills and the purpose for which the commission have been paid. The Assessing Officer asked the assessee to show-cause why the amount paid as commission for procuring work orders from the agencies should not be disallowed as being illegal in nature as no middle man is allowed in Government tendering process. The assessee explained that said amount was paid as commission for representing him before certain parties to get the tender. These parties gave presentation on behalf of the assessee as to the electric supply system in a building. The presentation include the specifications that should be included in the electric supply system of a building like the inclusion of Sub-Station Equipments, Transformers, HT Panels, Earthing System, Safety Equipments, Emergency M. V. Panel etc. The Assessing Officer, however, did not accept explanation of assessee. The Assessing Officer noted that assessee has not been able to justify the payments on the basis of any services rendered by the persons to whom commission is being paid. The presentation is routine function. There is no agreement between the parties. It is not explained such services have been rendered and same is not supported by any evidence. Further commission is paid to the commission agents for procuring orders from Government agency which is not allowable as per explanation to section 37 (1) of the IT Act. The Assessing Officer accordingly disallowed the entire amount of the commission paid. The Ld. CIT (A) on the same reasoning also confirm the addition.
The Counsel for the assessee reiterated the submission made before the authorities below and submitted that the details of payment to the commission agents were filed and explained that there is no relation
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between assessee and the commission agents. The similar commission payment was paid in earlier year as well as in subsequent years which has not been disputed by the Assessing Officer. The assessee deducted the TDS on the amount paid and issued TDS certificate. The assessee works for the Government Departments, therefore, the commission agents represent the assessee before the agencies on behalf of the assessee and in lieu thereof the commission have been paid. Confirmation and TDS certificate have been filed. The assessee explained the reasons for payment of commission. If Assessing Officer was not satisfied with the explanation of assessee, he could have summoned the commission agents u/s 131 to verify the transaction. The assessee had discharged the burden of proving genuineness of payment made to commission agents. No enquiry made by the Assessing Officer on the documentary evidence filed by the assessee. He has relied upon the order of Tribunal in the case of Mobile Communication (India) P. Ltd. Vs. DCIT, 125/ITD /309 (Delhi) in para 10.1 in which the Tribunal referred to its decision in the case of Nestor Pharmaceuticals Ltd. V. DCIT [IT Nos. 2535 and 2536 (Delhi) of 2006] etc. in which it was held as under :-
"12. Here, we find that the Assessing Officer has in regard to the commission payment to the agents who had assisted the assessee to deal with the Government agencies have been specifically earmarked and disallowed on the ground that there was no necessity of an agent while dealing with the Government. Though, it is very much true that the Government does not deal with the middleman, it does not mean that there is no role for an agent to play when an assessee is dealing-with the Government. The transactions and the dealings with the Government obviously cannot be done through an agent but the agent can assist an assessee in obtaining supply and facilitating of information which are required for the assessee. The explanation of the assessee that the agents assisted the assessee in the pre-tender and the post-tender activities is clearly borne out of the evidences which are part of the seized material.
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This being so, it cannot be said that no services have been rendered by the agents to the assessee. In the circumstances, we are of the view that the learned CIT(A) was right in deleting the disallowance of the commission as made by the Assessing Officer. His impugned orders on this issue for all the seven years under consideration are, therefore, upheld and these appeals of the revenue are dismissed."
On the other hand DR heavily relied on the orders of the authorities 16. below.
We have considered the rival submissions and perused the material available on record. It is a settled law that disallowance of expenses would not be made on assumption and presumptions. The burden is upon assessee to prove the fact that services have been rendered by the commission agents in the course of business of the assessee. In the instant case, there is no dispute that the assessee worked with the various government agencies. The assessee is an individual and carrying on business of electric, contractor in the name of M/s. S. L. Enterprises prop. concern. The assessee has shown better GP and NP in assessment year under appeal as compared to earlier year. The Assessing Officer considering the same accepted the financial results of the assessee. The assessee explained that in the nature of the business of the assessee, commission agent to represent him before various agencies for getting the work and to complete the work by giving presentation before the different agencies of the government. The assessee explained that the commission was paid to various parties to represent the assessee before various agencies for completion of the work taken on behalf of the assessee. The assessee explained actual services have been rendered by the commission agent in the course of business of the assessee. It has also not been disputed that the agents had confirmed the rendering of services. It is also not in dispute that commission expenses incurred and paid by assessee. The commission agents are not related to assessee. The nature of business of assessee is
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same as was in earlier years as well as in subsequent years. The Assessing Officer has accepted the similar payment of commission in earlier year as well as in subsequent years and no disallowance have been made. Thus, the rules of consistency do apply in the facts and circumstances of the case. If the Assessing Officer had any doubt on the explanation of the assessee, he could have verified the facts by summoning the commission agents but Assessing Officer did not make any enquiry from the commission agents. The Assessing Officer disallowed the commission because of explanation to section 37 (1) of the IT Act. This section prohibits the incurring of expenditure by an assessee when it is an offence or prohibited by law. The Assessing Officer further has not brought anything on record if by making the payment of commission to the agents what offence have been committed by the assessee and under which law commission payment made by assessee was prohibited by law. Since assessee is an individual, therefore, it may not be possible for him to represent before various agencies for procuring tender or for completion of the work, therefore, if the assessee has assigned this job to the commission agents to represent him before the Government agency there is no offence committed by him. The decision of the Delhi Tribunal in the case of Mobile Communications (India) P. Ltd. Vs. DCIT (supra) apply to the facts and circumstances of the case.
The above discussion and material available on record clearly establish that the assessee has incurred above expenses wholly and exclusively for the purpose of business, same is allowable deduction. The financial results of the assessee are better as compared to earlier years and subsequent years, therefore, there were no reason for assessee to inflate the expenses. Considering the totality of the facts and circumstances of the case, we do not find any justification to sustain the addition. We, accordingly, set aside the orders of the authorities below and delete the addition. This ground of the assessee is allowed.
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In the result, the appeal of the assessee is allowed.
Pronounced in the open court on 01.08.2018.
Sd/- Sd/- (L. P. SAHU) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER *NEHA* Date:- 01.08.2018 Copy forwarded to: 1. Appellant 2. Respondent 3. CIT 4. CIT(Appeals) 5. DR: ITAT
ASSISTANT REGISTRAR ITAT NEW DELHI
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Date of dictation 23.07.2018 Date on which the typed draft is placed 25.07.2018 before the dictating Member Date on which the typed draft is placed before the Other member Date on which the approved draft comes to the Sr.PS/PS Date on which the fair order is placed before the Dictating Member for Pronouncement 1/8/2018 Date on which the fair order comes back to the Sr. PS/ PS Date on which the final order is uploaded on the website of ITAT Date on which the file goes to the Bench Clerk Date on which file goes to the Head Clerk. The date on which file goes to the Assistant Registrar for signature on the order Date of dispatch of the Order