JCIT, BANGALORE vs. M/S BHUWALKA PIPES PVT. LTD.,, BANGALORE

IN THE INCOME TAX APPELLATE TRIBUNAL ‘C’ BENCH, BENGALURU

BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER and SHRI INTURI RAMA RAO, ACCOUNTANT MEMBER

ITA No.882/Bang/2016 (Assessment year: 2011-12)

Joint Commissioner of Income-tax (OSD), Circle 1(1)(2), Bengaluru. … Appellant Vs. M/s.Bhuwalka Pipes Pvt. Ltd. ‘Solus’, 8th Floor, E & G, No.2 1st Cross Road, JC Road, Bengaluru-560027. … Respondent PAN: AABCB 7778 E

Appellant by : Shri P.Dinesha, Advocate. Respondent by : Dr.Pradeep Kumar, Addl.CIT(DR)

Date of hearing : 28/01/2018 Date of pronouncement : 31/01/2018

O R D E R Per INTURI RAMA RAO, AM : This is an appeal filed by the revenue directed against the order of the learned Commissioner of Income-tax(Appeals)-1, Bengaluru, [ld.CIT(A)] dated 18/01/2016 for the assessment year 2011-12.

ITA No.882/Bang/2016 Page 2 of 9

After receipt of the assessment order, the respondent-assessee moved a petition under section 154 of the Act dated 03/04/2014 praying for rectification of the assessment order for deleting additions in the circumstances mentioned there-in. The Assessing Officer vide order dated 30/09/2014 deleted the addition in respect of unexplained

ITA No.882/Bang/2016 Page 3 of 9 investment of Rs.19,25,195/-, addition on account of WDV in factory shed of Rs.1,85,18,538/-. However, he sustained addition made on commission payment of Ra.5,77,510/- and also addition made u/s 14A.

On the other hand, learned AR of the assessee placed reliance on the order of the ld.CIT(A).

ITA No.882/Bang/2016 Page 4 of 9 and exclusively for the purpose of business. It is only during the course of proceedings under section 154 of the Act, the assessee-company filed copies of agreement governing commission payment and copies of bills raised by M/s. Jindal Pipes Ltd., to whom commission payment was made. Even during the course of proceedings under section 154, the assessee-company had merely filed agreement copy and no evidence in support of services rendered by selling agents was furnished. However on appeal before the ld.CIT(A), the ld.CIT(A) granted relief holding as under: “4. According to the appellant they make products for Jindal brand name only and M/s Jindal Pipes facilitate the entire sale and distribution to their marketing and dealer network. So the commission has necessary be paid as per contractual obligations. It is seen that in the earlier assessment year also there has been no disallowance on this ground. The addition of 50% disallowance u/s 37 is not justified. The appellant has furnished sufficient evidences in support of their claim. Accordingly, this addition is hereby deleted.” From the order of the ld.CIT(A) it is clear that the ld.CIT(A) was driven by the fact that in earlier years, no disallowance was made on this account. Though the ld.CIT(A) observed that the assessee has furnished sufficient evidence in support of the claim, the ld.CIT(A) had chosen not to discuss the evidence furnished by the assessee-company in support of the claim. Furthermore, the ld.CIT(A) has not met the objections raised by the Assessing Officer for making disallowance. Indisputedly, the Assessing Officer had not doubted genuineness of the commission payment. The disallowance was made only on the ground that there was no evidence in support of services rendered by the selling and distribution agents and there was no agreement etc. It is settled proposition of law that for allowance of commission payment as expenditure, the condition precedent is that there is proof in support of rendition of services. In this context, we can quote the observation made by this Tribunal in the case of M/s. M/s. 3M India Ltd., vs. Asst. CIT, LTU, in IT(TP)A 725/Bang/2011 dated 13/05/2016 :

“For allowability of this kind of expenditure, condition sine qua non is proof of actual services rendered. The co-ordinate bench of

ITA No.882/Bang/2016 Page 5 of 9 the Tribunal, to which one of us i.e. the Accountant Member is the author of the order, in the case of M/s.B Fouress Pvt. Ltd. vs. DCIT in ITA Nos.847 & 847/Bang/2014 dated 30/12/2015 held as follows: ............Thus, the assessee failed to discharge the burden of proving that the expenditure laid out were incurred wholly and exclusively for the purpose of business. We may further add that the Hon’ble Supreme Court in the case of CIT Vs Imperial Chemical Industries (Ind.) Pvt. Ltd (1969) 74 ITR 17 has unequivocally held that the burden of proving that a particular expenditure had been laid out or incurred wholly and exclusively for the purpose of business entirely lies on the assessee. The discharge of the burden had to be effective and meaningful and not to cover up by merely book entries and paper work. The mere fact of payment of commission by account payee cheques and compliances with the TDS provisions shall not alone enable the assessee to claim deduction unless and amount has been expended wholly and exclusively for the purpose of business. 11. A Co-ordinate Bench Tribunal of Delhi in the case of Kanu Kitchen Kulture (P)Ltd Vs DCIT (2013) 28 ITR (T) 49 (Del.- Trib.) held that whether the assessee failed to demonstrate the services rendered by the commission agent, the commission was disallowed. The relevant paras of the judgment are reproduced below; “22. Thus the assessee as utterly failed to demonstrate the nature and extent of service rendered by the agent and availed of by the assessee for its business of modular kitchen. In this scenario what appears on record is merely book entries coupled with TDS the amount which will be claimed as a refund by the recipient being a loss making concern. In our considered view the assessee has produced only skeletal paper work of the arrangement without any iota of evidence about actual business services rendered. 23. The assessee’s claim for allowing similar commission payment in subsequent year caries no merit inasmuch as the learned DR has rightly pleaded that each and every year of assessment is separate and independent unit and principles of resjudicata do not apply. The assessment for the assessment year 2009-10 is under section 143(1) and for the assessment year 2010-11 there is no mention of the commission at all. Therefore, we are unable to give evidenced to the facts whose record is not before us and not referred to before the lower authorities”.

ITA No.882/Bang/2016 Page 6 of 9 12. Similarly, the Hon’ble Delhi High Court in the case of Schneider Electric (Ind.) Ltd Vs CIT (21008) 304 ITR 360 (Del.) held that in the absence of material on record suggesting that the commission agents had procured the sale orders, no commission should be allowed. The relevant para of the judgment is reproduced below; “13. We agree with the Tribunal that there is absolutely no material on record to suggest that M/s Ram Agencies had procured any sale orders for the assessee. The production of a few bills or payment having been made by account payee cheques cannot by itself show that M/s Ram Agencies had procured sale orders for the assessee. Apart from an internal note, there is no evidence of any correspondence or any personal; meetings etc. between the assessee and M/s Ram Agencies to suggest that the was any relationship on the basis of which M/s Ram Agencies procured some orders for the assessee for which it was entitled to receive commission. Moreover, we find that the understanding between the parties was an oral understanding and it appears to be doubtful that such an oral understanding can be arrived at without any long standing relationship having been established between the assessee and M/s Ram Agencies. It seems a bit out of place that the parties entered into an oral business relationship involving such huge amounts of money over a period of time”. 13. The Co-ordinate Bench of Delhi in the case of Printer House Pvt .Ltd. Vs DCIT (Del.) authored by Accountant Member, after referring to the above precedence on this issue held as follows: “Thus, having regard to the ratio laid down in the above cases that in the absence of proof in support of the services rendered by the commission agent, no commission can be allowed as a deduction. Therefore, we dismiss the appeal filed by the assessee and allow the appeals filed by the revenue”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . In the present case, the assessee-company had not discharged the onus lying upon it to prove the services rendered by the commission agent and also failed to file copies of agreement. It is only during the course of proceedings u/s 154, the assessee had filed copies of agreement alone. The scope and ambit of the provisions of section 154 is clearly explained

ITA No.882/Bang/2016 Page 7 of 9 by the Hon’ble Apex Court in the case of ITO vs. Volkart Bros. (82 ITR 50) as follows:

“. . . . . . .It was not open to the Income-tax Officer to go into the true scope of the relevant provisions of the Act in a proceeding under section 154 of the Income-tax Act, 1961. A mistake apparent on the record must be an obvious and patent mistake and not something which can be established by a long drawn process of reasoning on points on which there may conceivably be two opinions. As seen earlier, the High Court of Bombay opined that the original assessments were in accordance with law though in our opinion the High Court was not justified in going into that question. In Satyanarayan Laxminarayan Hegde v. MallikarjunBhavanappa Tirumale [I960] 1 SCR 890, this court while spelling out the scope of the power of a High Court under article 226 of the Constitution ruled that an error which has to be established by a long drawn process of reasoning on points where there may conceivably be two opinions cannot be said to be an error apparent on the face of the record. A decision on a debatable point of law is not a mistake apparent from the record—see Sidhramappa AndannappaManvi v. Commissioner of Income-tax [1952] 21 ITR 333 (Bom.). The power of the officers mentioned in section 154 of the Income-tax Act, 1961, to correct "any mistake apparent from the record" is undoubtedly not more than that of the High Court to entertain a writ petition on the basis of an "error apparent on the face of the record.". . . . ” In the present case, the assessee-company had not pointed out any mistake which is apparent from record. The assessee-company merely submitted additional evidence in support of the claim made. Without going into the sufficiency or otherwise of evidence furnished in the proceedings u/s 154, it is suffice to say that it does not form part of record and therefore, question of rectifying mistake thereon does not arise. Furthermore, when a claim was made and it was disallowed by giving reasons, the claim cannot be allowed in the proceedings u/s 154. Reliance in this regard is placed on the decision of the Hon’ble Madhya Pradesh High Court in the case of Amolakchand Kewalchand vs. CIT (188 ITR 127), Parshuram Pottery Works Co. Ltd. vs. WTO (100 ITR 651)(Guj), Bhagwandas Kevaldas vs. N.D.Mehrotra (36 ITR 538)(Bom) and Standard Radiators vs. CIT (165 ITR 178)(Guj). In the case of

ITA No.882/Bang/2016 Page 8 of 9 Amolakchand Kewalchand (supra) the Hon’ble Madhya Pradesh High Court held as follows:

“Learned counsel for the assessee argued that when a claim for deduction under section 80J was made by the assessee in its returns, it was the duty of the Income-tax Officer to call upon the assessee to furnish requisite details so as to entitle it to the deduction under section 80 J of the Act. It was apparent on the face of the records of the assessment orders that the assessee was never called upon to furnish such details and, therefore, a case for rectification under section 154 of the Act was made out. We find no substance in the contention. If the assessee had furnished details as per the requirement of section 80J(4) of the Act besides making a claim for deduction under section 80 J, it could be argued that a case for rectification under section 154 of the Act was made out. But, in the present case, the details were not furnished and, therefore, it could not be said that any error was apparent from the assessment orders requiring rectification under section 154 of the Act. The failure of the Income-tax Officer to call upon the assessee to furnish the requisite details for satisfying the conditions laid down in section 80J(4) of the Act cannot be said to be an error justifying rectification under section 154. Assuming that such failure on the part of the Income-tax Officer amounted to an error on the face of the records of the assessment orders, the rectification orders do not disclose that the alleged defect was cured by calling upon the assessee to disclose the requisite details for purposes of section 80J(4) of the Act in rectification proceedings under section 154 of the Act. On the contrary, the rectification orders showed that the Income-tax Officer proceeded to make the rectification orders on the assumption that all the conditions laid down under section 80J(4) were fulfilled by the assessee. For all these reasons, we are of the view that the aforesaid question of law deserves to be answered in favour of the Revenue and against the assessee. Accordingly, we answer the question as follows: The Income-tax Officer was not right in law in granting relief to the assessee under section 80J of the Income-tax Act, 1961, in the rectification proceedings taken under section 154 of the Act.”

In the present case the Assessing Officer had rightly rejected the claim u/s 154. The ld.CIT(A), without considering the ambit and scope of the provisions of section 154 had granted relief without discussing any evidence filed in support of the claim and meeting the objections raised

ITA No.882/Bang/2016 Page 9 of 9 by the Assessing Officer at the time of original assessment. Therefore, we reverse the order of the ld.CIT(A) on this issue.

Order pronounced in the open court on 31st January, 2018

Sd/- sd/- (SUNIL KUMAR YADAV) (INTURI RAMA RAO) JUDICIAL MEMBER ACCOUNTANT MEMBER Place : Bengaluru. Dated : 31/01/2018 srinivasulu, sps Copy to : 1 Appellant 2 Respondent 3 CIT(A) 4 CIT 5 DR, ITAT, Bangalore. 6 Guard file By order

Senior Private Secretary Income-tax Appellate Tribunal Bangalore