ACIT, NEW DELHI vs. SHRI PAVEL GARG, NEW DELHI

O R D E R PER SUDHANSHU SRIVASTAVA, J.M.

This appeal has been preferred by the department against order passed by the Ld. CIT (A)- XXVIII, New Delhi for assessment year 2008-

ACIT vs. Pavel Garg and dealing in shares. The business is carried out in the name of his sole proprietary concern M/s. Combitic Global. The assessee gets the pharmaceutical goods manufactured on job work and thereafter sells the same. In earlier assessment years the assessee was only making export sales and was paying commission on such export sales which was duly allowed by the AO in assessments framed u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred the Act). However, in the year under consideration, the assessee also made domestic sales of Rs. 20,95,92,795/- to M/s. Rhine & Raavi Holdings Ltd. and paid sales commission amounting to Rs. 1,59,97,994/- to M/s JB Exports Ltd and Mr. Satish Kumar Goel. This commission was disallowed by the AO.

2.1 Further, the AO also made disallowance of Rs. 5,000/- on account of vehicle and conveyance expenses, disallowance of telephone expenses amounting to Rs. 50,000/- and disallowance on account of TDS amounting to Rs. 9,791/-.

2.2 It is also seen that during the course of assessment proceedings, the assessee had filed revised computation of income whereby the assessee reduced his accrued interest income on insurance claim as well as income on account of insurance claim. However, the AO did not allow the claim raised by the assessee.

ACIT vs. Pavel Garg 2.3 Aggrieved, the assessee preferred an appeal before Ld. CIT(A) who deleted the addition of Rs. 1,59,97,994/- on account of sales commission and also deleted the disallowance on account of travelling and conveyance expenses, telephone expenses and business promotion and festival expenses.

2.4 The Ld. CIT (A) also directed the AO to reduce the income of the assessee by Rs. 7,16,60,712/- on account of insurance claim and notional interest thereon which the assessee had sought to be reduced from the total income by filing a revised computation.

2.5 Aggrieved, the department has now approached the ITAT and has challenged the action of the Ld. CIT(A) in deleting the addition on account of sales commission expenses amounting to Rs. 1,59,97,994/-, allowing the deduction of Rs. 1,73,77,580/- in respect of interest on insurance claim, allowing deduction of Rs. 5,42,83,132/- in respect of insurance claim and deleting the disallowances made on account of vehicle running , telephone expenses and business promotion and festival expenses.

ACIT vs. Pavel Garg compared to the earlier years and the assessee was also required to furnish information and proof regarding rendition of services by the commission agents. The Ld. Sr. DR also submitted that the assessee was asked to produce the commission agents by the AO but the same were not produced before the AO on the scheduled dates. Ld. Sr. DR also read out extensively from the assessment order and placed reliance on the observations and findings of the AO in respect of the sales commission and submitted that the addition was rightly made in this regard.

3.1 On the second issue regarding the action of the Ld. CIT (A) in allowing deduction of Rs. 1,73,77,580/- in respect of interest on insurance claim and allowing deduction of Rs. 5,42,83,132/- in respect of insurance claim it was submitted that the same were claimed by the assessee by simply filing revised computation of income and no revised return of income was filed. It was submitted that such a claim could only be made through filing of revised return of income. It was submitted that section 139(5) of the Act provides the procedure for curing bona fide mistakes. It was also submitted that the AO had no power to entertain the claim made before him by way of revised computation and further the assessee was not eligible for these deductions as the assessee had ACIT vs. Pavel Garg himself credited these amounts to the profit and loss account and the accounts had been duly audited.

3.2 On the issue of disallowance of expenses on account of vehicle and conveyance, telephone expenses, business promotion and festival expenses, it was submitted that the element of personal use in these expenses could not be ruled out as the necessary evidences were either not in possession of the assessee or they were not produced before the AO. It was submitted that these additions were wrongly deleted by the Ld. CIT (A) and they needed to be restored.

ACIT vs. Pavel Garg 20,95,92,795/– to M/s Rhine & Raavi Holdings Limited and has paid commission to one Mr. Satish Kumar Goel of Rs. 53,86,004/– and M/s JB Export Ltd of Rs. 1,06,11,990/-. Commission payments to these parties have been paid during the year and nothing is outstanding as on the closing of the assessment year as at 31st of March 2008.

Furthermore, the assessee has also made a sale of Rs. 3,13,24,67,902/- to M/s Paktiya Gold LLC and has also paid commission to M/s Patktiya Gold LLC of Rs. 3,78,15,338/–. Notably in case of sales to M/s Paktiya Gold LLC, the commission was also paid to the same party.

5.1 The commission paid to Mr. Satish Kumar Goel, M/s JB Export Ltd and M/s Paktiya Gold LLC amounting all to Rs. 5,38,13,332/– was examined by the Assessing Officer with respect to its allowability. Before the Assessing Officer, the assessee submitted copies of the agreement, copy of the invoice and confirmation of the parties and the TDS Certificates for tax deduction at source made thereon. The Assessing Officer asked the assessee to produce the commission agents as he doubted the rendition of the services by these commission agents to the assessee. The assessee could not produce the commission agent but requested the AO to issue summons to the parties. At the request of the assessee, the Assessing Officer also issued the summons to the parties.

ACIT vs. Pavel Garg However, neither did the assessee produce them nor did those parties presented themselves in response to the summons. The Assessing Officer noted that that assessee has failed to submit any evidence with respect to the rendition of the services by these parties to the assessee.

The reasons for the disallowance mentioned by the Assessing Officer are that the nature of business carried on by the assessee is pharmaceutical business whereas the source of income of Mr. Satish Kumar Aggarwal was salary income and he had suffered huge loss in share trading business. Therefore, according to the assessing officer, Mr. Satish Kumar Aggarwal did not have any experience of dealing in the pharmaceutical business and further he had not incurred any expenditure for earning the commission income to the magnitude of Rs. 53,86,004/–. With respect to the profit and loss account submitted by the assessee of Mr. Satish Kumar Goel, it was noted that no such income was recorded in his books of accounts and to reach this finding, the assessing officer mentioned that the total income declared by Mr. Satish Kumar Goel was only Rs. 6,89,687/- which was meagre compared to the commission allegedly paid by the assessee.

5.2 Further, with respect to the commission paid to M/s JB Exports Ltd, the assessing officer has noted that company was engaged in the ACIT vs. Pavel Garg business of yarn and textile, but did not have any business with respect to the pharmaceuticals. Similarly, on the commission income earned by the M/s JB Exports Ltd, the assessing officer also noted that the gross total income of the assessee was Nil and a refund of Rs. 34,53,150/– had been claimed by the assessee. It has been further noted by the AO that the gross total income offered by the company was nil, whereas the commission income earned by the company was Rs. 1,06,11,990/–.

5.3 Further with respect to the sales made to the Dubai party of Rs. 31.32 crores. The Assessing Officer noted that the commission was paid to the same party and that this issue of payment to the foreign commission has already been referred by the assessing officer to the Foreign Tax Division of the CBDT on 15/12/2010.

5.4 The Ld. CIT (A) has allowed the claim of the assessee vide Para No. 6 of the impugned order. The main reason for allowance of the claim is that the assessee submitted the copy of the commission agreement containing name and complete address of the parties outlining the services to be rendered by the agents, copy of the invoices which gave the brief description of the services rendered in the form of the name of the buyer and amount of sale facilitated by the agent. It is further supported by the copy of the confirmation and details of tax deducted at ACIT vs. Pavel Garg source by the assessee. It was further held by the Ld. CIT (A) that the above commission was also paid by account payee cheque in favour of the commission agents. The Ld. CIT (Appeals) further held that the commission agreement as well as the correspondence reveals that both the agents were del credere agents who were actively involved in settling the terms and conditions of the purchase orders between the assessee and the buyer. Thereafter, the Ld. CIT (A) has held that these commission agents have rendered several services as stated at page Nos. 26 and 27 of the order. It was further noted by the Ld. CIT (A) that the assessee has paid commission at the rate of 7 to 8% to the del credere commission agents during the year under consideration. It has been further noted that the rate of commission disallowed by the assessing officer on payment of commission in domestic sales is at the rate of 7.6% which is much less than the rate of commission allowed by the assessing officer at the rate of 12% on export sales. It has been further held that the assessee had entered into the domestic sales area for the first time in the year under consideration. The Ld. CIT (A) has further held that significant contributions have been made by the agents to increase the turnover by approximately four times from Rs. 13.63 crores to Rs. 52.41 crore during the year. Thereafter, by relying on some judicial precedents and by ultimately holding that the commission 9

ACIT vs. Pavel Garg expenditure of Rs. 1,59,97,994/– paid by the assessee was wholly and exclusively for the purpose of the business of the assessee, the Ld. CIT (A) deleted the disallowance.

5.5 On perusal of both the orders of the lower authorities, we note that the assessing officer has given a detailed reasoning for making the above disallowance. The main plank of the disallowance is that proof of the rendition of the services has not been given by the assessee before the assessing officer and that the commission agents have not at all been produced. Surprisingly, the commission has been paid for the purpose of selling of the pharmaceutical products, but has been paid to persons not having any experience in selling of pharmaceutical products.

Moreover, the assessee has also not demonstrated that how the commission agents have sold the pharmaceutical products by helping the assessee to increase its turnover. It is also to be noted that the Ld. CIT (A) has held that the assessee had obtained the services of the commission agent on del credere basis. However, we fail to understand as to how the payment of del credere agency commission is justified in absence of proof of rendition of services.

5.6 The Ld. CIT (A) has also noted that the AO had allowed commission on export sales in the earlier assessment years. However,

ACIT vs. Pavel Garg the fact that payment of commission on export sales was allowed in the preceding assessment years cannot be used as a justification for allowing the commission paid by the assessee for domestic sales by drawing a parallel of payment for export commission. In fact, the assessing officer has already referred the matter to the Foreign Tax Division of the Central Board of Direct Taxes. The assessee has given no proof of rendition of services by these two agents before the AO. Further, the Ld. CIT (A) has only extracted details from the copy of the agreement furnished by the assessee and has accepted it as a proof of rendition of services. We are of the considered opinion that the Ld. CIT (Appeals) has misdirected herself because the copy of agreement shows the rendition of the services ‘to be provided’ whereas the actual rendition of services is to be necessarily substantiated by credible evidence. The assessee has failed to produce any evidence with respect to the actual rendition of the services by these commission agents. Merely because the payments have been made through account payee cheques does not make the expenditure allowable in the hands of assessee under section 37 (1) of the Income Tax Act or under section 28 of the Income Tax Act, as the Act does not provide that if the payment is made through cheque, it proves the allowability of such expenditure. Furthermore, we do not find any new material brought before the Ld. CIT (A) by the assessee for 11

ACIT vs. Pavel Garg proof of rendition of the services, but the Ld. CIT (A) has been merely guided by the wordings in the agreement. Furthermore, there is no elaboration in the order of the Ld. CIT (Appeals) as to how pharmaceutical products were sold by these commission agents when they did not have any prior experience of selling these products.

5.7 Therefore, we do not concur with the view of the Ld. CIT (A) in deleting the disallowance made on account of commission payment.

Furthermore, the assessee has not produced the requisite details before the assessing officer and further, the Ld. CIT (Appeals) has also not taken a remand report from the assessing officer with respect to the observations made by the assessing officer while making the disallowance. Therefore, in view of above facts, and in interest of justice, we set aside the whole issue back to the file of the assessing officer with a direction to the assessee to produce the commission agents before the assessing officer for verification about the rendition of the services and, for production of any other information and details to prove the allowability of commission expenses. The assessing officer is also free to make necessary enquiries as he deems fit to decide the issue. Needless to say, proper opportunity of hearing will be granted to the assessee

ACIT vs. Pavel Garg before deciding the issue. Accordingly, ground no. 1 is allowed for statistical purposes.

5.8 Regarding ground Nos. 2 and 3 in which the department has challenged the deletion of addition on account of interest on insurance claim and deletion of income from insurance claim, it is seen that the assessee had filed insurance claim of Rs. 5,42,83,132/- on account of loss of stock during the course of export out of India. This amount of claim was credited by the assessee to his profit and loss account.

Subsequently, the claim was rejected in its entirety by the insurance company and the rejection letter was received by the assessee in April, 2007. Besides the amount of insurance claim, the assessee had also credited notional interest income of Rs. 1,73,77,580/- on such insurance claim to his profit and loss account. As the claim had been rejected and the interest was notional, the assessee filed revised computation of income claiming non-accrual of the insurance claim and interest thereon.

However, the AO rejected the claim because revised return of income was not filed within the stipulated time, as laid down in the Act, and the AO was of the opinion that such deduction was not permissible because the assessee himself had credited the amount to his profit and loss account. While submitting revised computation the assessee also ACIT vs. Pavel Garg submitted copies of letters from the insurance company intimating rejection of the claim and also demonstrated that they had reversed the amount of Rs. 5,42,83,132/- from the sundry debtors accounts. The assessee also demonstrated before the AO that he had approached the Consumer Court against the non receipt of the insurance claim. The assessee also submitted that Accounting Standard 29 (AS 29) issued by the Institute of Chartered Accountants of India clearly laid down that no contingent gain could be recognised as income until there was a certainty of realisation of income and since the claim was rejected by the insurance company, there was NIL certainty of realisation of this income. Similarly, for notional interest on the insurance claim the assessee submitted before the AO that since the principal was not receivable there was no question of interest accruing on the same.

However, the AO by placing reliance on the judgment of the Hon’ble Apex Court in the case of Goetz India Ltd., reported in 284 ITR 323 (SC) held that it was beyond the purview of his powers to allow such a claim as no revised return had been filed.

5.9 The Ld. CIT (A), while allowing the claim and directing the AO to delete the additions totalling to Rs. 7,16,60,712/-,referred to the aforesaid in judgment of the Hon’ble Apex Court in the case of Goetze

ACIT vs. Pavel Garg (India) Ltd. (supra) and noted that the aforesaid judgment of the Hon’ble Apex Court was limiting the power of the AO and did not impinge on the power of the ITAT u/s 254 of the Act. The Ld. CIT (A) also referred to the provisions of section 251(1)(c) of the Act and noted that as per the scheme of the Act, CIT(A) also has a similar power.

Thereafter, after relying on some other judicial precedents, the Ld. CIT (A) went on to hold that although the AO did not have the power to admit fresh claim of the assessee in absence of a revised return, CIT (A) did have the power to admit the claim. The Ld. CIT (A) also noted that the assessee was consistently following mercantile system of accounting and, therefore, it was mandatory for him to appropriately credit the said amounts in its profit and loss accounts initially but since nothing was actually receivable by the assessee, a mere accounting entry did not create any right in the hands of the assessee to receive the income as the same had neither accrued nor earned during the year under consideration.

5.10 On this issue, we agree with the interpretation of the Ld. CIT (A) that the judgement of the Hon’ble Apex Court in the case of Goetze (India) Ltd. vs. CIT (supra) does not limit the power of the appellate authority but only of the assessing authority. Further, the Hon’ble Apex

ACIT vs. Pavel Garg Court in the case of Jute Corporation of India vs. CIT reported in 187 ITR 688 has held that with reference to section 251 (1)(a) of the Act, the declaration of law was clear that the power of the AAC was co-terminus with Act of the ITO and, if that is so, then there is no reason as to why the appellate authority did not have the power to modify the assessment order on an additional ground even if it was not raised before the ITO.

The Hon’ble Apex Court in another judgment in the case of Anchor Pressings (P) Ltd. vs. CIT 161 ITR 159 held that where the assessee had omitted to claim deduction and if precise and clear material is available on record to the fact that the assessee is entitled to such relief, then the income tax authority is required to grant such relief.

5.11 Coming back to the issue before us, the facts are undisputed. It is settled law that income is said to be accrued when a person acquires the right to obtain that income and a mere claim to income without enforceable right cannot be regarded as accrual of income for the purpose of the Act. Thus, a mere filing of claim with insurance company will not be sufficient to make such income to be taxable on accrual basis, especially, when subsequent events show that such claim has not crystallised . Here, in the instant case there is no dispute to the fact that in spite of filing its claim with the insurance company, insurance

ACIT vs. Pavel Garg company did not accept the claim and nothing was paid to the assessee in form of compensation. Records also revealed that the matter was in already in litigation at the time of first appellate proceedings. In the case of Godhra Electricity Co. Ltd. vs. CIT 225 ITR 746 (SC), the Hon’ble Apex Court held that if the income does not result at all, it cannot be taxed even though in book keeping an entry has been made about the hypothetical income which does not materialise. Thus, we are of the considered opinion that mere filing of insurance claim did not give any right to the assessee to receive income as the claim was not accepted by the insurance company. Had there been any acceptance by the insurance company, then the income would have definitely accrued on the basis of the accounting entry. But in the instant case it is not so.

Even during the course of proceedings before us, the department could not produce any cogent evidence to the contrary in this regard.

Accordingly, we find no reason to interfere with the adjudication of the Ld. CIT (A) on this issue and dismiss ground Nos. 2 and 3 of the department appeal.

5.12 As far as ground No. 4 regarding the deletion of various disallowances is concerned, it is seen that although additions have been made on an ad hoc basis by holding that personal element in all these

ACIT vs. Pavel Garg expenses could not be ruled out. The Ld. CIT (A) also noted that relevant details were furnished before the AO but the AO had failed to point out specific instances of personal element in such expenses. While deleting the disallowances, Ld. CIT(A) has placed reliance on numerous orders of the ITAT Delhi Bench where the jurisdictional Tribunal for the assessee has held that where the expenditure was disallowed without pointing out any expenditure in the nature of personal expenses, there was no justification in making ad hoc disallowances. This adjudication of the Ld. CIT (A) could not be negated by the department by leading any evidence to the contrary even during the course of proceedings before us. Therefore, on this issue also we find no reason to interfere with the adjudication of the Ld. CIT (A) and we, accordingly, dismiss ground No. 4 of the departmental appeal.

Order pronounced in the open court on 1/11/2017.