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Income Tax Appellate Tribunal, “C” BENCH, MUMBAI
Before: SHRI MAHAVIR SINGH & SHRI RAMIT KOCHAR
PER RAMIT KOCHAR, Accountant Member
This appeal, filed by the assessee, being 2011-12 is directed against the appellate order dated 31.12.2015 passed by learned Commissioner of Income-tax (Appeals)-2, Thane (hereinafter called “the CIT(A)”) for assessment year 2011-12, appellate proceedings had arisen before learned CIT(A) from the assessment order dated 11-03-2014 passed by learned Assessing Officer (hereinafter called “the AO”) u/s 143(3) of the Income-tax Act, 1961 (hereinafter called “the Act”).
The grounds of appeal
raised by the assessee in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under:- “
1. On the facts and in the circumstances of case and in law, the Ld. Assessing Officer ("AO") has erred in adding the outstanding balance of creditor M/s Badar Al Safran of Rs. 34,90,058/- to the total income.
2. On the facts and in the circumstances of case and in law, the Ld. AO has erred in disallowing Rs. 2,64,062/- u/s 14A. The appellant craves leave to add, amend, supplement, alter and/or delete any of the above Grounds of Appeal.”
3. The brief facts of the case are that assessee is an engineering and designing services company . On perusal of the details of sundry creditors called for by the AO during the course of assessment proceedings u/s 143(3) r.w.s. 143(2), it was observed by the A.O. that no address was given of one sundry creditors namely Badar Al Safran . The total outstanding payable was Rs. 34,90,058/- to the said creditor which was outstanding for more than 1460 days. The assessee was asked by the AO whether the said creditor has made any request for clearance of the outstanding payment and if yes then to furnish the proof of the same. The assessee could not submit any proof of the creditor making any request to the assessee for clearance of the outstanding payment and hence the A.O. treated that the said liability has ceased to exist and the additions were made to the income of the assessee u/s. 41(1) under the head cessation of liability, vide assessment order dated 11.03.2014 passed by the AO u/s 143(3).
4. Aggrieved by the assessment order dated 11-03-2014 passed by the AO u/s 143(3), the assessee carried the matter in appeal before the learned CIT- A and following submissions were made by the assessee as under:- “ Appellant Company was procuring business in Kuwait through its commission agent M/s Bader Al Safran. Commission was payable at the rate of 25% subject to realisation/remittance from the respective customers procured through commission agent. Through Al-Safran, appellant company got the business of M/s Finesco International, M/s Mushriff Trading & Constrution co., M/s Dar Consulting Engineers, M/s Gulf Leighton LLC, M/s Integral Services Co., Petrochemical Industries Co. and M/s Arabi Entertech. Total outstanding amount receivable from the above debtors were Rs.1,38,36,345/- as at 31.03.2011. Copy of Agreement is enclosed. Total commission due to M/s Al. Safran from F.Y 2004-05 till F.Y 2010- 11 was Rs. 1,31,61,824/- out of which appellant company has paid Rs. 96,71,766/- Copy of ledger account of M/s. Al Safran is enclosed. Commission to M/s. Al-Safran was dependent upon the remittance/realization of the sales procured through agent, commission of Rs. 34,90,058/- was held back and shown as outstanding in the books the appellant company. However, Ld. A.O written back entire credit balance of Rs. 34,90,058/- without considering the fact that, it was payable subject to realisation of sale proceeds. Thus, if credit balance is to be written back then proportionate debit balance of debtors should also be set off against the same, as both the transactions are interrelated and it can't be viewed in isolation. Moreover, provisions of section 41 (1), where deduction has been taken in respect of expenditure or trading liability incurred by the assessee and subsequently, assessee receives any benefit/amount whatsoever in respect of trading liability or expenditure, by way remission or cessation thereof the amount or value of benefit obtained by assessee, shall be deemed to be chargeable to income tax as income of the previous year. From the plain reading of the above provision it is clear that for invoking provisions of section 41 (1) following two conditions should be fulfilled: 1- There has to be remission or cessation of liability and 2-Remission or cessation has to be during the previous year under consideration. In the appellant company's case both the above elements were missing, as there was no evidence to prove that there was a remission or cessation of liability and that too during the previous year relevant to the assessment year. The above view is also supported by the decision of Hon'ble Gujarat High Court in the case of C1T vs. Bhogilal Ramjibhai Atara(2014) 43 taxmann.com 55 (Gujarat) where it was held that "Where assessee in return of income had shown certain amount by way of his debts and Assessing Officer applying provisions of section 41 (1) added back said amount in income of assessee as deemed income, since there was nothing on record to suggest that there was remission or cessation of liability that too during assessment year relevant to the previous year under consideration, above amount could not be added back in income of assessee. " We also rely on the decision in case of Nitin C. Desai Vs. Asst. Commissioner of Income Tax-11(1), Mumbai (ITA. No. 3298/Mum/2010), where it was held that, "when the A.O. allowed the expenditure claim in profit and loss account as genuine, outstanding balance cannot be added back to the income." Copy of decision is enclosed.
In the case of the appellant company, there was no evidence or any specific communication from the creditor that he had foregone the claim, and in case the claimant comes forward to lodge claim, appellant has to honour the debt and in that case it cannot be said to be remission or cessation of liability. The same view was held in the case of M/s Nash Machines & Electronics Pvt. Ltd. Vs JCIT. Range-II, Nashik (ITA no.163/PN/2008). Copy of the order is enclosed”.
The learned CIT-A, after considering the submissions of the assessee rejected the claim of the assessee by holding as under, vide appellate order dated 31- 12-2015:- “ I have carefully considered facts of the case, finding of the A.O in the assessment order, submission of the Ld. DR and material on record. From the facts of the case, it is noticed that the appellant company had paid commission @ 25% to Mr Al Badran Safran against various services claimed to had been rendered by him, in Kuwait, on behalf of the appellant. As per details submitted, the appellant claimed to had not received the payments of Rs. 1,38,36,345/-, as on 31.3.2011 from the customers, therefore, the above payment of Rs. 34,90,058/-. had not been made to the commission agents. In support of its above claim the Ld AR filed a copy of agreement (MOU), on plain paper, which had purportedly been signed by the appellant and the above commission agent. The relevant part of the said agreement (MOU) is reproduced, here as under: In consideration of the associate services, mentioned in clause 2 above, the associate shall be entitled to the following commissions: i. Twenty Five percent (25%) commission on total value of any contract awarded to the principal by any company in Kuwait- ii. The fee would become payable in 30 days upon receipt by the principal of any amount due from the customers on the basis of contract awarded. ASSOCIATE'S SERVICES AND RESPONSIBILITIES I. Establish office for the principal in Kuwait. II. Provide general information in the areas of business activity of principal's interest from time to time in Kuwait. Associate shall provide report on visits and outcome of various meetings to Principal every two weeks. III. Use its best endeavours to promote the interest of the principal with the concerned parties in Kuwait and keep the principal informed about the project / tenders in Kuwait on continuous basis. IV Obtain approvals, visas, registrations as may be required by the principal for visiting Kuwait and other middle east countries. The associated cost shall be reimbursed by the principal.
V Provide postal address, telephone and fax contact for principal to establish local office in Kuwait. VI. If necessary, personally submit on time i.e. on or before submission date, the principals bid(s) / Qualification(s) to the customer and shall be present, if needed during the opening of bid(s) / qualification(s) and shall report to the principal the results. VII. Support the activity of Principal's Representative and Delegates, joining them in the negotiations with the customers where and when required by the principal VIII. Respond promptly to information received from the principal and shall provide the principal with such back up information date which the principal might require. IX Make necessary arrangements for assisting principal for collecting the considerations from customers. Associates shall also develop the necessary infrastructure for making such collection. X Provide information on Government regulations, Commercial Law, Constitutional changes etc as may be required by the principal for successfully conducting business in Kuwait. XI. Associate shall not enter into any agreement with other companies providing similar services as the principal. Associate shall also keep principal informed about his dealings with any other companies, whether association, employments, agency etc. I have carefully gone through the contents of the above MOU and noticed that the same has been prepared on plain paper (not even on stamp paper) and not registered with the appropriate authority, hence not enforceable, in the eye of law, before any court. In view of these facts, the signature mentioned in the above MOU, actually belongs to Mr Badar A Safran, It is further noticed that the rate of commission i.e. 25% appears to be very high and nature of services rendered by the above party does not match with the rate of commission, claimed to had been provided. It is further noticed that the appellant could not produce, any documents/correspondence from the above party, to whom the above commission claimed to had been payable, for such a longer time (almost 8 years). Moreover, the above party has not written a single letter to the appellant for release of above payment, if any, till date. In view of these facts, it is seen that the above liability does not belong to above party and the appellant has provided excess provision against the commission, which in my considered opinion, appears not to be payable. In-spite of clear cut requirement, the Ld AR could not file any confirmation/correspondence, from the said party to justify the genuineness of the liability and the same is liable to be paid to the above party. In the absence of required details, it is not possible to ascertain whether the above liability is actually accrued and payable to the above party or not. As regard the claim of set off, of the above liability against sundry debtor of Rs 1,38,36,345/-, at this stage cannot be entertained, as the same can be claimed as bad debt, by writing off the same from the books. The case laws relied by the Ld AR are also not comparable to the facts of the case, as the appellant could not establish, with credible documents, the genuineness of the above MOU, working of the commission, genuineness of the liability and existence to the said. Considering these facts, in my considered opinion, the appellant has failed to establish the genuineness of the liability, therefore the disallowance of Rs. 34,90,058/- made by the A.O is hereby sustained. This ground of appeal is dismissed.”
5. Aggrieved by the appellate order dated 31-12-2015 passed by learned CIT(A), the assessee has come in an appeal before the tribunal . Ld. Counsel for the assessee submitted that assessee is in the business of oil & gas industry rendering design and engineering services. It was submitted that the services were rendered outside India to the overseas parties in the field of Oil and gas sector. It was submitted that Badar Al Safran was appointed as an agent to procure business for the assessee in Kuwait. A copy of MoU with said Badar Al Safran is placed on record in paper book filed with the tribunal which stipulates payment of commission @ 25% on the businesses which the said agent generated in favour of the assessee which is to be paid on realisation of proceed from debtors. It was submitted that complete details such as copy of ledger account of Badar Al Safran as well copy of MOU was placed before the authorities below also. It is submitted that there is payment recovery of Rs. 1,38,36,345/- outstanding as on 31.03.2011 from the parties from whom the Al Badran Safran generated the business in favour of the assessee in Kuwait. It was submitted that the total commission due to be paid to Badar Al Safran from F.Y. 2004- 05 till 2010-11 was Rs. 1,31,61,824/- , out of which assessee had paid Rs. 96,71,766/- to said Badar Al Safran and the balance is still payable as on 31-03-2011 because the principle debtors had not paid their outstanding amount which was to be paid to the assessee . It was submitted by learned counsel for the assessee that the assessee got business of M/s Finesco International, M/s Mushriff Trading & Constrution Co., M/s Dar Consulting Engineers, M/s. Gulf Leighton LLC, M/s Integral Services Co., Petrochemical Industries Co. and M/s Arabi Entertech . The copy of MOU entered into by the assessee with said Badar Al Safran is placed on record in the paper book filed with the tribunal along with list of debtors from whom amount was recoverable as on 31-03-2011 . It is submitted that complete ledger account of Badar Al Safran is also placed on record from F.Y 2004-05 to 2010-11. It is submitted that there has been disputes of the assessee with certain 6 buyers and the said dispute has been referred to the Court at Kuwait and certain communication with the debtors are also placed on record with tribunal in a separate paper book wherein the assessee was reminding these debtors for clearing outstanding dues, which is produced as an additional evidences before the tribunal. It is claimed that these additional evidences are filed at the oral instruction of the Bench in the last hearing of the Bench ( not the same combination of the members who are signatory to this order ). It is submitted that if the cessation of the liability payable to the said agent is to be brought to tax u/s. 41(1) , then the amount receivable from debtors to the tune of Rs. 1.38 crores which is relatable to these commission payable should also be allowed as bad debts. It is also submitted by learned counsel for the assessee that the assessee has reflected these amounts payable to the creditor in its books of accounts and hence same cannot be added to the income of the assessee. The assessee relied upon the decision of Hon’ble Madras High Court in Swarna Paper Cutting Works v. Indian Express ( Madurai ) , 1999 (3) CTC 167(Mad. HC) and decision of Hon’ble Supreme Court in the case of Bombay Dyeing & Manufacturing Company Ltd. v. State of Bombay 1958 AIR 328 . It was submitted that there is an acknowledgment of liability in books of accounts of the assessee that the liability is outstanding for payment and hence it cannot be added u/s. 41(1) and there is no cessation of liability . The assessee also relied upon decision of Hon’ble Bombay High Court in the case of CIT v. Chase Bright Steel Limited (1989) 42 Taxman 146(Bom) and decision of Hon’ble Supreme Court of India in the case of Bombay Dyeing and Manufacturing v. The State of Bombay & Ors. 1958 AIR 328. The Ld. DR on the other hand submitted that no evidence is available for both debit and credit amount payable as well receivable as it could not be linked that the said commission is payable for these outstanding recoveries receivable by the assessee. It was submitted that certain evidences are produced before tribunal for the first time as additional evidences and the matter can go back to the A.O. for verification.
6. We have considered rival contentions and perused the material on record. We have observed that the assessee is engaged in the business of engineering and design services with respect to the oil & gas industry. The assessee had entered into MOU with Badar Al Safran for procuring business in Kuwait for the assessee. As per this MOU said agent is to be paid commission @ 25% during the period for the business generated in favour of the assessee and the said sum is payable on realisation by the assessee from the debtors from whom this agent has procured business in favour of the assessee. This MOU was before the AO as well learned CIT(A) as well the ledger account of Badar Al Safran from financial year 2004-05 to financial year 2010-11 was also before the authorities below. It is claimed that the said agent was generating the business from various parties in Kuwait in favour of the assessee from year to year for which commission expenses of Rs. 1,31,61,824/- is stated to payable to the said agent Badar Al Safran for the financial year 2004-05 to 2010-11, which in fact was allowed by Revenue from year to year . The Revenue has not brought on record any evidence to prove that this MOU was not genuine or no commission was payable to the said Badar Al Safran for the business he generated in favour of the assessee in the earlier years. Merely making bald statement by Revenue that MOU is not on stamp paper or is not genuine is not sufficient. The said commission expenses as per MOU is payable by the assessee to the agent Badar Al Safran on realisation of proceeds from debtors . It is claimed that the outstanding recoverable from the debtors is to the tune of Rs. 1.38 crores w.r.t. the debtors whose business was generated by Badar Al Safran and correspondingly an amount of Rs. 34.90 lacs is still outstanding to be payable to the said agent which the assessee has claimed shall be payable on actual recovery of sale proceed from debtors. The assessee is undisputedly also reflecting this liability of commission payable to Badar AL Safran in its books of accounts as also it is reflecting the outstanding debtors from whom sale proceeds are recoverable and as per terms of MOU, this commission is payable only on actual recovery of sale proceeds. These facts were before the AO as well learned CIT(A) . The power of learned CIT(A) is co-terminus with powers of the AO. It is claimed by the assessee that the revenue has allowed this commission payable to Badar Al Safran in the earlier years as an expense as well as no material is brought on record by Revenue that the said commission was disallowed by the revenue in preceding years. There is no evidence on record brought by Revenue to disprove this contention of the assessee .The assessee by withholding of the commission payments of its agent Badar AL Safran on overdue payment from its debtors has acted in a manner which is consistent with principles of commercial expediency in accordance with the terms of MOU and Revenue cannot direct assessee to act in a manner in defiance to the principles of commercial expediency and in turn to damage its own business interest. The assessee’s payment for whatever reasons got struck overseas for services rendered to Oil & Gas industry and in order to protect its interest and in consistent with MOU with its agent , it withheld the corresponding payment of commission payable to its agent as it has not realised its payments from customers whose business this agent Badar Al Safran generated as claimed by the assessee. It was incumbent on the learned AO as well learned CIT(A) to have gone into greater scrutiny and examination to disprove the contentions of the assessee and merely making bald statement is not sufficient. The assessee has also produced details of court cases at Kuwait and correspondences with its overseas buyers/agents w.r.t. its efforts for making recovery etc to justify that these payments are still due from the customers albeit the same was produced before the tribunal for the first time. The Revenue has not brought on record any incriminating material to support its stand despite having sufficient opportunity to had made necessary enquiries and verification at level of AO as well learned CIT(A) whose powers are coterminous with that of the AO which unfortunately the Revenue did not do so while the assessee placed all the facts before the authorities below. We do not find any justification in sustaining/confirming additions made by the AO /learned CIT(A) under the factual matrix of the case which we hereby ordered to be deleted. We order accordingly.
7. The A.O observed that the assessee has taken large sum of loan from private parties as well from institutions on which interest has been paid but the same was applied in share application money and other investment on which no income is generated or accounted for. The average value of investment in shares was Rs. 65,96,124/- while average value of total assets in the Balance Sheet was Rs. 9,50,68,212/- . The amount of expenditure directly related to the income which does not form part of the total income was Rs. 33,30,517/- and prorate disallowance of interest was worked out at Rs. 2,31,081/- as under:- Expenses X Average of Investments 3330517 X 6596124 Average of Assets 9,50,68,212/- 2,31,081/-(A)
0.5% of average investment (0.5% of 6596124) 32,981/- (B) Thus, the AO made disallowance of Rs. 2,64,062/- u/s 14A of the 1961 Act, vide assessment order dated 11-03-2014 passed by the AO u/s 143(3) of the 1961 Act.
Aggrieved by the assessment order dated 11-03-2014 passed by the AO u/s 143(3), the assessee carried the matter in appeal before the learned CIT-A , wherein the assessee admitted before the learned CIT-A to said addition of Rs. 2,64,062/- u/s. 14A r.w.r. 8D and submitted that the assessee does not want to persue this ground of appeal
and since this ground of appeal was not pressed , learned CIT(A) dismissed this ground and sustained the additions as were made by the AO, vide appellate order dated 31-12-2015 passed by learned CIT(A). 9.The assessee has now raised this ground before the tribunal and it is contended that there was no exempt dividend income received by the assessee during relevant previous year and hence keeping in view ratio of decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd. v. CIT (2105) 378 ITR 33(Del) and Joint Investments Private Ltd. v. CIT (2015) 372 ITR 694(Del) , no addition is sustainable in the hands of the assessee. Ld. DR submitted it is not clear from the order of the authorities below whether any dividend income was received by the assessee or not and assessee has also admitted to the sais additions before learned CIT(A) and hence same should be upheld and the assessee be not allowed to agitate the issue once again.
10. We have considered rival contentions and have perused material on record. We have observed that the assessee has raised certain interest bearing funds which were stated to be invested in the securities/share application money . The average investment in the shares is Rs. 65,96,124/- and average of the total value of assets in the balance sheet is Rs. 9,50,68,212/- and the amount of expenditure directly related to the income which does not from part of total income was Rs. 33,30,517/- which led to the disallowance of interest of Rs. 2,31,081/- as also disallowance of 0.5% of average investment which comes to Rs. 32,981/- , which were made by the AO which was later confirmed by learned CIT(A) as the assessee had admitted to such additions before learned CIT(A). The assessee has now raised legal grounds that since there is no exempt income earned by the assessee during relevant previous year, it is claimed that no disallowance can be made keeping in view ratio of decision of Hon’ble Delhi High Court in the case of Cheminvest Ltd. v. CIT (2105) 378 ITR 33(Del) and Joint Investments Private Ltd. v. CIT (2015) 372 ITR 694(Del) . It is not discernible from the orders of the authorities below as to the quantum of exempt income earned by the assessee during relevant period but perusal of the statement of facts filed before learned CIT(A)/audited balance sheet revealed that the assessee has investment of Rs. 25,000/- in shares of Saraswat Co-op Bank Limited wherein in the SOF filed before learned CIT(A) the assessee has stated that dividend income from this investment in Saraswat Co-op Bank Limited is taxable, while as per SOF/Audited Balance Sheet Rs. 40,513/- is invested in shares of Pyramid Engineering & Consulting Limited , UK (510 shares of GBP 1) , while Rs. 65,30,611/- stood invested in share application money invested with Pyramid Engineering & Consulting Limited , UK. The assessee has however not provided with copy of Profit and Loss account although Balance Sheet along with schedules are placed in paper book /page no. 6 to 8 . Thus, there is no evidence on record that the assessee has not received any exempt dividend income during relevant previous year as also the taxability of dividend income receivable from foreign company namely Pyramid Engineering & Consulting Limited , UK in which assessee has claimed to have invested is also required to be gone through as these aspects are not been gone through by the authorities below. It is settled principle of law that tax can only be levied by or under the authority of law which is also the mandate of the Constitution of India under Article 365. Merely acquiescence to pay tax on the income which is not subjected to tax under the provisions of law will not make that income chargeable to tax which is certainly not the mandate of law. Thus, keeping in view factual matrix of the case, this matter need to be set aside and restored to the file of the AO for de-novo determination of the issue on merits in accordance with the law. Needless to say that the AO shall grant proper and adequate opportunity of being heard to the assessee in accordance with law in accordance with principles of natural justice. We order accordingly.