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Income Tax Appellate Tribunal, “J”, BENCH MUMBAI
Before: SHRI R.C.SHARMA, AM & SHRI SANDEEP GOSAIN, JM
आदेश / O R D E R PER R.C.SHARMA (A.M):
ITA No.6474/Mum/2011 M/s. Jaya Marketing These are the appeals filed by the assessee against the order of CIT(A)-23, Mumbai dated25/03/2011 for the A.Y.2003-04, 2004-2005 and 2005-06 in the matter of order passed u/s.143(3) / 143(3) r.w.s.147 of the IT Act. The lead appeal is for A.Y.2005-06 and other two appeals for assessment year 2003-04 and 2004-05 are from reopened assessment based on the assessment for A.Y.2005-06. We, therefore, deal herewith lead appeal for the A.Y.2005-06.
Rival contentions have been heard and record perused.
The brief background of the case are that, these appeals were earlier heard and disposed of by the Tribunal by its order dated 25.06.2014. Since the said order so passed had certain mistakes apparent from the record, with respect to findings, the assessee had filed a miscellaneous application urging re-call of the said order. The Tribunal by its order dated 14.10.2016 allowed the assessee’s Miscellaneous Application and re- called its order 25.06.2014 directing the Registry to fix the matter before the regular Bench for hearing de novo.
The order passed by the Tribunal dated 14/10/2016 recalling its earlier order dated 25/06/2014 reads as under:- Vide its application, dated 30.06.2015, the assessee-company has stated that there were certain mistakes in the order of the Tribunal, that same were to be rectified as per provisions of section 254(2) of the Act. In its application, the assessee contended that it had entered into a distributorship agreement (24.7.02) with BDA Ltd.(BDAL),that as per the Agreement it had to purchase the IMFL products from BDAL at rates charged by the suppliers, that it had to sell the said products at sale price decided by BDAL, that as per the Agreement the assessee was entitled to get distribution charges and certain reimbursement charges, that excess of sale price-over purchase price of IMFL products purchased from BDAL and sold to the ITA No.6474/Mum/2011 M/s. Jaya Marketing distributors-did not belong to the assessee, that the goods belonged to BDAL as per Cl.7(d) of the Agreement, that the special auditor, in his report, had accepted that position of the assessee was that of the a distributor, that the assessee had furnished confirmation, dt. 30. 11.12,from BDAL wherein it was confirmed that BDAL had received marketing service charges/royalty from the assessee, that BDAL had reflected the royalty receipt in its books of account, that the Tribunal had held that the assessee had to prove that the royalty paid by it to BDAL had been offered to tax by the recipients, that the addition made by the AO and upheld by the Tribunal was a mistake apparent from record, that non consideration of such a crucial evidence resulted in dismissing the appeal of the assessee, that while upholding the rejection of books of account as per the provisions of section 145(3) of the Act, the Tribunal had observed that the assessee had not maintained any stock register, that treatment given to royalty amount received by BDAL in its books of account was not available on record, that AO had to give the reasons for rejecting the books of account, that the FAA had supplemented the reasons for invoking the provisions of section 145(3) of the Act and the Tribunal had upheld the order, that the Tribunal had mistakenly held that payment of royalty to BDAL by the assessee was not supported by any material or was not confirmed by BDAL, that it had maintained a detailed stock register as required by the excise regulation on daily basis (Form-FLR-1) and monthly basis (Form FLR-2),that those documents contained the information regarding opening stock, purchases, sales and closing stock, that the special auditor had scrutinised the stock registers, that the Tribunal vide order sheet noting dt.09. 05. 12 had directed the assessee to produce details of licence procured alongwith details with TCS collected by BDAL and the copy of assessment order in case of BDAL, that the assessee had filed the copy of licence procured by it for marketing the IMFL products, that the details of TCS collected by BDAL from the assessee were filed by the CIT-(DR) before the Tribunal on 29. 06.12,that the assessee could not file the assessment order of BDAL, that it had no access to the same, that there was no known compliance on behalf of the assessee with regard to the directions given by the Tribunal on 09.05.12,that the Tribunal had held that distribution charges were not as per the Distributorship Agreement and that in earlier years the assessee had accepted distributorship charges at 27% of interest free deposit placed by it with BDAL, that there was no mis-match between the figures appearing as per the distribution agreement and the books of account maintained by it with regard to royalty payment, that it had purchased and sold the IMFL Products and had complied with the regulatory requirements of sales tax law, that the assessee was only entitled to distributorship charges as well as reimbursement of specified expenses, that the agreement stipulated that excess of sale price realized by the assessee from the sale of IMFL products were to be passed on to them and same was referred to as royalty, that distribution charges ITA No.6474/Mum/2011 M/s. Jaya Marketing received by the assessee from BDAL were not the deciding factor for allowing the royalty, that it had received distribution charges of Rs.2.49 crores for the year under consideration, that the said amount was reflected in the return of income, that the revenue authorities had not alleged that it had received more than Rs.2.49crores or had a right to receive an amount in excess of the said amount, that the Tribunal had wrongly held that distribution charges were not in conformity with the agreement. 2.During the course of hearing before us, the Authorised Representative (AR), reiterated the submissions made in the application. He further argued that BDAL had shown the amount received from the assessee in the books of account for the relevant AY.s, that the ledger account of the assessee as well as BDAL were available on the file of the Tribunal, that it had received certain amounts for reimbursement and supply by BDAL, that there was no discrepancy in the books of account of the assessee and the BDAL with regard to royalty payment/ distribution charges received, that it was a case of double taxation. He referred to party-wise details of marketing services income of BDAL, annual report of BDAL and stated that Tribunal had ignored the basic fact of offering income by BDAL. The Departmental Representative (DR) left the issue to the discretion of the Bench. 3.Considering the fact that the assessee had argued that BDAL had offered the amount in question for taxation and it was a case of double taxation it was decided to find out the factual report from the AO. Vide its letter dt.21.9.16, the AO had informed that it had called for the details with respect to payments made/receipts to/from BDAL with reference to royalty for the period 2003-04 to 2005-06,that BDAL was also directed to furnish copies of the Income tax return,computation of income and audit report for the above mentioned 3 AY.s, that the perusal of the details revealed that the assessee had made payment of Rs.7.31 crores (AY.2003- 04),Rs.10.33 crores(AY. 2004-05) and Rs.7.80 crores (AY.2005-06) respectively to BADL, that the above figures were reflected in the ledger account of the assessee as appearing in the books of BDAL, that BDAL had received royalty of Rs.98.46 crores (AY.2004-05)and Rs.78.69 crores (AY.2005-06) respectivley,that in support of the payment received from the assessee BDAL had furnished copy of the ledger account of the assessee in its books of account showing the receipt of royalty. 4.We find that, while deciding the issue, the Tribunal had upheld the disallowance of royalty payment made by the applicant to BDAL ,that it was also held that there was no evidence of payment of royalty to BDAL, that at the time of passing the order the details of payment made to the assessee under the head royalty were not made available, that the assessee at the time of hearing of the original ITA No.6474/Mum/2011 M/s. Jaya Marketing appeal had argued that the royalty payment and distribution charges received were different transactions. Considering the fact-that the assessee had shown distribution charges in its return of income and the AO had stated that BDAL had offered the royalty receipt for taxation-we are of the opinion that matter needs to be reheard afresh. The report of the AO supports the contentions raised by the assessee in its application. Therefore, we are of the opinion that it is a fit case to re-call our order for the above mentioned three AY.s. Registry is directed to fix the matter to be heard de-novo by the regular bench. As a result, Miscellaneous Applications filed by the assessee stand allowed.
In view of the above order of Tribunal, we are hearing the matter de- novo for deciding the appeals as per the direction of the Tribunal. Common grounds have been taken by the assessee in all the years under consideration. We are dealing herewith grounds in the A.Y.2005-06 as a lead year in which survey took place in assessee’s premises.
Ground No. 1 & 2 challenge validity of reference made by the Assessing Officer (the AO) directing conduct of special audit under section 142 (2 A) of the Income-tax Act (the Act) and consequential extension of time for passing the assessment order under section 153 of the Act. If it is held that the said reference is invalid, then, as a consequence thereof, it should be held that the assessment order has been passed beyond the period of limitation prescribed under section 153 of the Act, and hence, would be illegal and bad in law.
In Ground No.3 assessee has alleged action of the AO rejecting the books of account maintained by the assessee by invoking the provisions of section 145(3) of the Act and held that he is not satisfied about the ITA No.6474/Mum/2011 M/s. Jaya Marketing correctness or completeness of the assessee’s accounts. The conclusion reached by the AO on this issue is in paragraph 5.1 at pages 41 and 42 of the assessment order.
Ground No.4 relates to decline assessee’s claim of deduction of royalty of Rs.5,02,03,083/-. In this regard the AO has re-casted assessee’s Trading Account and determined its gross profit at Rs.5,03,47,619. Consequent thereto, he has effectively denied the assessee’s claim of deduction of royalty of Rs.5,02,03,083.17. The difference of Rs.1,44,536.33 (being Rs.5,03,47,619.50 - Rs.5,02,03,083.17) has mainly arisen on account of the sales taken by the AO based on Sales Tax return at Rs.54,18,61,003 and such sales being taken by the assessee as per its books of account at Rs.54,17,16,466.67 and other minor difference.
We have heard rival contentions and carefully gone through the orders of the authorities below and the order passed by the Tribunal in miscellaneous application dated 14/10/2016. Facts in brief are that the assessee is a partnership firm engaged in the business of distribution of Indian Manufactured Foreign Liquor in short IMFL of M/s BDA Ltd. The assessee had entered into a distribution arrangement and was appointed as a super-distributor by M/s BDA Ltd w.e.f 10.05.2002 for the territory of Mumbai/Maharashtra for sale of IMFL product of M/s BDA Ltd. The assessee had no activity or arrangement other than this. A survey was undertaken at the premises of the assessee u/s 133A of the Income Tax Act on 30.11.2004. During the course of survey the statement of Shri ITA No.6474/Mum/2011 M/s. Jaya Marketing Yogendra Kumar Jaiswal partner of the assessee firm was recorded wherein the said partner had admitted certain income. Certain documents and loose papers were found and impounded during the course of survey proceedings. The assessee filed its return of income for the A.Y. 2005-06 on 5.12.2005 disclosing net profit of Rs. 1,24,35,660/- The return of income was filed along with Audited Financial statements and Tax Audit Report. For the A.Y. 2003-04 and 2004-05, the assessee filed revised return offering the additional income of Rs. 50 lac and Rs.10 lac respectively as disclosed during statement recorded at the time of survey. The assessments for A.Y. 2003-04 and 2004-05 were completed by accepting additional income declared by the assessee without making any other additions. During the course of assessment for the assessment year AY 2005-06 the Assessing officer examined the books of accounts, other records, bills and vouchers and also the impounded material. The Assessing Officer noted that no stock register was maintained by the assessee. The Assessing officer found certain discrepancies in documents impounded during survey and issued a show cause notice dated 10.12.2007 to the assessee asking him to explain as to why the case should not be referred to special audit u/s.142(2A) of the Income Tax Act. In response the assessee vide letter dated 14.12.2007 has submitted that its account have been duly audited u/s 44AB and that each and every entry is fully vouched recorded in the accounts and that the excise registers regarding stocks have been duly maintained. Ultimately ITA No.6474/Mum/2011 M/s. Jaya Marketing after alleging the nature and complexity of the accounts of the assessee, the Assessing Officer referred the case of the assessee for A.Y. 2005-06 for special audit u/s 142(2A) of the Tax Act vide letter dated 20.12.2007. The date for completion of the special audit was extended by the Assessing Officer upto 31st May 2008. Special audit was conducted by M/s Sharp & Tannon, Mumbai and special audit report dated 30.5.2008 was submitted. After receiving the special audit report, the Assessing Officer framed the assessment by making various additions and disallowances and computed total income on the basis of estimated income.
The assessee challenged the reference to special audit before CIT(A) and contended that the reference is unjustified, illegal, and uncalled for and it was only a devise to extend the limitation to complete the assessment but could not succeed. The CIT (A) dismissed the same on the ground that he has no power to adjudicate the validity of reference to special audit u/s 142(2A).
As per the material placed on record, the assessee’s sole business activity is to purchase and sale of Indian made Foreign Liquor (IMPL) as superdistributor of M/s BDA Ltd in the State of Maharashtra. As per the distributorship agreement dated 24.7.2002, the products were to be sold/supplied to the assessee at the price to be decided and notified by M/s BDA Ltd. In turn the assessee would supply IMFL product to the buyers nominated by M/s BDA Ltd at the price to be approved by M/s ITA No.6474/Mum/2011 M/s. Jaya Marketing BDA Ltd. The assessee was entitled to a distribution charges of Rs.25 per case on the entire sale estimated at 8 lakh cases per annum. In case of any variation in the sales quantities achieved, the annual distribution charges were fixed at Rs.2,02,50,000/-. The assessee was required to deposit interest free/ trade advance of Rs.7.5 crore during the tenure of distributor ship. It was also agreed upon that the assessee shall be entitled for reimbursement of expenses covering excise, license fee, godown rent, supervision charges on actual basis. Further if any marketing campaigning/ advertisement or brand building exercise was carried out as per the requirement of M/s BDA Ltd then the cost of such exercise will be reimbursed to the assessee. It was also the term of agreement that the assessee was required to settle the dues to M/s BDA Ltd. just after receipt of the amount from the distributors against the sale of IMFL products. To ensure the instant settlement of dues, the assessee was required to maintain and operate the bank account in the same branch where M/s BDA Ltd., has its bank account. From the terms and conditions of the agreement between the parties, it is clear that the assessee was entitled only for distribution charges on the sale of IMFL product of M/s BDA Ltd. to be supplied to the distributors nominated by M/s BDA Ltd plus reimbursement of expenses incurred by the assessee on license fee, godown rent, supervisions charges as well as marketing, campaigning / advertisement or brand building exercise on actual cost basis. The assessee has maintained its accounts in the manner which ITA No.6474/Mum/2011 M/s. Jaya Marketing reflects the purchase and sale of goods as trading activity. The assessee is maintaining trading and P&L account in which the purchase and sale are coexisted, expenditure is debited and differential as royalty to M/s BDA Ltd. It is this nature of the books of accounts maintained by the assessee which led the Assessing Officer to consider the same as complexed in nature. Further the assessee is paying sales tax by filing sales tax return on sale of IMFL. At the first look of the sales tax return, it gives an impression that the purchase and sale activities are in the nature of trade and in the capacity of dealer. Though the assessee is maintaining the details of stock for the purpose of excise duty, however, tax audit report commented otherwise. For the purpose of reference u/s.142(2A) nature and complexity of the accounts as well as specialized nature of the assessee are the relevant factors, considering the same we uphold the reference so made by AO for special audit u/s.142 (2A).
After receiving the Special audit report, the Assessing Officer proceeded to reject the Books of Accounts of the assessee by invoking the provisions of Section 145(3). The major objections raised by the assessing officer were a) From the documents it can be concluded that the assessee is involved in trading of IMFL though the arrangement of super distributor and principal, as per arrangement, is not a reality. b) The documents for distribution charges maintained were improper.
ITA No.6474/Mum/2011 M/s. Jaya Marketing c) The real basis of payment of distribution charges by BDA to the assessee is 27% of the security deposit which is deduced from certain loose papers impounded for the AY 2003-04 during the course of survey. d) The special auditor has not given true and fair view as various expenses amounting to Rs 16,99,445/- were not supported by proper evidences. e) No return of Jaya Consultancy has been filed and the transactions relating to Jaya consultancy are dubious. f) Certain non-trade interest free advances were given to four parties and considering that the assessee has paid interest to bank interest to the same was disallowable. g) No TDS has been deducted by the assessee on Royalty payable by it and by Jaya Consultancy and the same are mere adjustments.
Before the Assessing Officer, the assessee strongly objected to the application of section of Section 145(3)-- However the Assessing Officer by placing reliance on the special audit report rejected the Books of Accounts of the assessee and estimated the income of the assessee by recasting the trading/P&L account. On appeal, CIT(A) has confirmed the action of Assessing Officer in rejecting the Books of Accounts by invoking the provisions of section 145(3). The CIT(A) on page 21 of his order has stated ITA No.6475/Mum/2011 M/s. Jaya Marketing that “as has also been pointed by the Assessing officer in his report dated 26/10/2010, the existence is doubtful: further, a majority of the expenses were found to be paid in cash and unsupported by proper evidence, this again has been pointed out by special auditors”
During the course of hearing the following synopsis of written submissions were given by the counsel of the assessee. 1) In the assessment order, the AO has rejected the books of account maintained by the Appellant by invoking the provisions of section 145(3) of Ac Act and held that he is not satisfied about the correctness or completeness of the Appellant's accounts. The conclusion reached by the AO on this issue is in paragraph 5.1 at pages 41 and 42 of the assessment order. Therein, he has relied upon the following factors: a. Special Auditor in his audit report given under section 142(2 A) of the Act has stated that a true and fair view on the Appellant's Balance sheet and Profit and loss account cannot be given; b. Various adverse remarks have been made by the Special Auditor in his audit report as referred to more elaborately in paragraph 3 of the assessment order, in respect of which, according to the AO, the appellant has not been able to controvert the findings. Paragraph 3 in the assessment order starts from page 5 and goes upto page 38. The issues which have been considered therein are concerned with: i. Certain expenses debited in the Profit and Loss account are not supported with third party vouchers (see pages 1O to 14 and 25 to 30 of the assessment order) ii. Purchases as reflected by the Appellant in its Trading account includes royalty paid by it to BDA Limited, which according to the AO, is unjustified (see pages 14 to 18 of the assessment order); iii. Distribution charges being the Appellant's income as reflected in its Profit and loss account has been disputed as incorrect on the ground that it is not in accordance with the Distributorship agreement dated 24.07.2002 and the basis on which such distribution charges was quantified for the year under consideration is different from the manner adopted for quantifying such charge for assessment years 2003-04 and 2004-05 (see pages 18 to 25 of the assessment order); iv. Doubts have been expressed with respect to existence of Jaya Consultancy which is Appellant's sole proprietorship concern carrying out the distribution function in a certain region. The donate conclusion reached by the AO in the assessment ITA No.6475/Mum/2011 M/s. Jaya Marketing order with respect to Jaya Consultancy is that the Appellant should not be allowed credit for TDS pertaining to the said concern (see 31 to 35 of the assessment order); and v. AO has identified four parties, which according to him, are reflected as debtors in the Appellant's books of account and which have no business transactions with the Appellant. According to the AO, the amount receivable by the Appellant from the said parties represents interest free advances given by the Appellant to them without any business purpose. In view thereof, part of the interest expenditure incurred towards its borrowing should be disallowed as it has been utilised towards giving interest free non-business advances (see pages 35 to 37 of the assessment order).
It also relevant that after rejecting the assessee's books of account, the AO has estimated the assessee's gross profit by re-casting its Trading account. The Trading account for the year ended 31.03.2005 as per the assessee is at page 22 of Paper Book-l (PB-l) which shows Nil gross profit. The Trading account as drawn up by the AO after rejecting its books of account is at page 43 of the assessment order, according to which, the assessee has been assessed based on profit for the year of Rs.5,03,47,619.50. Basically AO has declined deduction of royalty and thereby computed gross profit on sales. This royalty payment was actually accounted for as income by BDA Ltd., therefore decline of such deduction amount to double taxation once in the hands of recipient of royalty again in the hands of assessee by declining the deduction.
In reply to the reasons given by the AO for rejection of books of accounts, as referred to in paragraphs 4(a), 4(b)(i) & (iii) to (v), the ITA No.6475/Mum/2011 M/s. Jaya Marketing assessee found that assessee’s Books of account were subjected to audit for the year under consideration under section 44AB of the Act. It’s Auditor has opined that the assessee’s Balance Sheet and Profit and Loss account reflects a true and fair view. Further, as per section 145(3) of the Act finding with respect to correctness and completeness of the accounts have to be given by the AO and not by the Special Auditor. The assessee’s books of account cannot be rejected on the ground that the Special Auditor appointed under section 142 (2A) of the Act has not been able to express a true and fair view with respect to its accounts. 17. With regard to the allegation of AO in para 4(b)(i), that certain expenses are not supported by third party vouchers, we found that the said expenses have been claimed as deduction in the Profit and Loss account and not Trading account. Therefore, they have no relevance for the rejection of books of account and estimation of income by recasting of Trading Account. Further, based on lack of documentation, the AO had made a partial disallowance of such expenditure while computing its income. Since a separate disallowance has been made in respect of such expenditure, which is a subject matter of dispute in ground no. 7 of the Grounds of Appeal
before the Tribunal, it could not be a valid reason for rejection of the assessee’s books of account.
18. With regard to assessing the income of Jaya Consultancy in assessee’s hands, the AO cannot be permitted to simultaneously assess the income of Jaya Consultancy in assessee’s hands and plead that such ITA No.6474/Mum/2011 M/s. Jaya Marketing proprietorship concern does not exist. Further, the only effect for tax purposes as given by the AO is that, the assessee has been denied credit in respect of TDS pertaining to Jaya Consultancy. Therefore, the said factor also cannot be relevant for rejection of the assessee’s books of account.
19. With regard to the allegation of the AO in para 4(b)(v), regarding interest free advance to the non-trade parties, we found that a separate disallowance has been made by the AO in respect of interest expenditure paid on borrowings relatable to the said advances. This factor has also no relevance with respect to the assessee’s Trading account. Accordingly, this factor also ought not to be considered as relevant for the purpose of rejection of the assessee’s books of account.
20. With regard to the allegation of the AO in para 4(b)(iii), to the effect that distribution charges being assessee’s income as reflected in its profit and loss account has been alleged as incorrect on the ground that it is not in accordance with the distribution agreement dated 24/07/2002 and basis of which such distribution charges was quantified for the year under consideration as different from the manner adopted for quantifying such charges for A.Y.2003-04 and 2004-05. We found that distribution charges represents a flow of income from BDA Limited to the assessee for rendering of distribution services to them. This amount is reflected as an income in the Profit and loss account and has no relevance to the Trading Account. Further, not satisfied with the distribution charges as reflected by ITA No.6474/Mum/2011 M/s. Jaya Marketing the assessee in its books of account, the AO has made an independent addition to its total income. Therefore, this also could not be a factor relevant for rejection of its books of account.
With regard to the doubts of the AO as per para 4(b)(iv), for existence of Jaya Consultancy which is assessee’s sole proprietorship concern carrying out the distribution function in a certain region, the ultimate conclusion reached by the AO in the assessment order with respect to Jaya Consultancy is that the assessee should not be allowed credit for TDS pertaining to the said concern. From the record we found that the sole proprietorship concern by the name of Jaya Consultancy has been carried on by the assessee, its receipts and expenditure have been merged with the assessee’s receipts and expenditure in the Trading and Profit and Loss Account. AO has accepted the income arising from the activities of Jaya Consultancy. Under these facts and circumstances AO was not justified in rejecting the books of account as a whole.
Further since part of the expense have been allowed and part disallowed by the AO indicate that the same cannot be a bonafide reason for rejection of accounts. In no case the Ld AO has come to the conclusion that the assessee has either made certain bogus or unverifiable sales, bogus or unverifiable purchases or bogus or unverifiable expenses either in the trading or profit and loss account. No discrepancy was pointed out as regards the quantitative details of stocks i.e opening stocks, purchases, sales or closing stocks. In fact the ITA No.6474/Mum/2011 ITA No.6475/Mum/2011 M/s. Jaya Marketing assessee was not engaged in sales and purchases but acted as a distributor for BDA ltd and thus the entire exercise was done at the behest of the principal at the rates notified by the principal.
In support of the fact that no discrepancy emanates out of the trading account, the rejection of books of accounts was not justified. Learned AR has relied on the following judicial pronouncements. Dhakeshwari Cotton Mills Ltd Vs CIT (SC) 26 ITR 775 Omar Salay Mohd SaitVs CIT (SC) 37 ITR 151 Md. Umer Vs. Commissioner of Income-tax 101ITR 525 (Patna) Commissioner of Income-tax Vs. Metro Shoes Ltd 306 ITR 130 (High Court of Bombay) Commissioner of Income-tax V s. Paradise Holidays 325 ITR 13 (High Court of Delhi) Commissioner of Income-tax Vs. Bindals Apparels 332ITR410 42-47 (High Court of Delhi) LaljiHaridas Vs. Income-tax Officer & Am 43 ITR 387 (Supreme Court India) Commissioner of Income-tax Vs. Om Overseas 315 ITR 185 (High Court of Punjab and Haryana)
The only issue which survives now is narrated by AO in para 4(b)(ii) i.e., whether assessee was justified in debiting its trading account by Rs.5,02,03,203.17 referred to as royalty in its books of account and forming part of its purchases. While recasting assessee’s trading account AO had declined the expenses debited by assessee in its Trading account amounting to Rs.5,02,03,203.17 referred to as royalty in its books of account and forming part of its purchases.
With regard to the debiting the royalty expenses in its books, we found that The assessee has been providing distribution services to BDA Limited in the region of Mumbai and Maharashtra. BDA Limited is ITA No.6475/Mum/2011 M/s. Jaya Marketing engaged in the business of manufacture of liquor. For this purpose, an agreement dated 24.07.2002 was entered into between the assessee and BDA Limited. As per the said agreement, the assessee agreed to obtain the necessary FL-I License in Aurangabad and, if required, at other places in Maharashtra, As per clause 1 of the said Agreement, it was the assessee’s responsibility to arrange for duty paid purchase orders/indents to be received from distributors nominated by BDA Limited to be sent to its unit at Aurangabad or to any other unit as specified alongwith full details of the products to be despatched along with the place, date and mode of such despatch. Further, clause 2 of the said Agreement mandates that, IMFL Products shall be sold by the assessee at a price to be decided and notified by BDA Limited directly or through the manufacturing unit that will be supplying the material. As per Clause 3 of the said agreement, the assessee shall be responsible to comply with all necessary excise requirements including obtaining permits, excise verification certificate wherever necessary under the excise rules etc. As per clause 7 of the said agreement, it was agreed that the consideration to be received by the assessee for rendering distribution services shall be Rs.25 per case with sales estimated at 8 lakh cases per annum. Minimum distribution charge was fixed at Rs.2,02,50,000 per annum. In this regard, the assessee was also required to place an interest free security deposit of Rs.7,50,00,000 with BDA Limited. Apart from distribution charges, the assessee was also entitled to reimbursement of bond expenses covering ITA No.6474/Mum/2011 M/s. Jaya Marketing excise license fees, godown rent, supervision charges, marketing campaign/advertisement or brand-building cost on actual basis. It was specifically agreed that except for the said remuneration and reimbursement, the assessee would not be entitled to any other amount. Therefore, as per the Distributorship agreement, the assessee has to act as a distributor. Assessee was under an obligation to obtain the necessary licenses and comply with the requirement under the excise rules. It had to purchase the goods from BDA Limited at an agreed price and sale the same to the customers of BDA Limited at a price to be notified by BDA Limited. It’s remuneration was only by way of distribution charges and certain reimbursement of cost.
In view of the above arrangement, the assessee was under an obligation to pay excess of sale price over the purchase price to BDA Limited. Therefore, if a product which was purchased by the assessee for say Rs.100, was sold for say Rs.120, the assessee had to pay back Rs. 20 (being Rs.120- Rs.100) to BDA Limited. This was because the only remuneration to which the assessee was entitled to was distribution charges and reimbursement of certain costs on actual basis. Such payment to BDA Ltd. has been reflected by the assessee in its books of account as a royalty paid to them. Even though the nomenclature given by it to the said payment as royalty may not be correct, nevertheless, the said amount did not represent assessee’s income, but it belongs to BDA Limited. In the Trading Account prepared for the year under consideration, ITA No.6474/Mum/2011 M/s. Jaya Marketing the said royalty amount was clubbed by the assessee along with purchases. Therefore, the Trading Account of the assessee showed Nil gross profit. We do not find anything wrong with regarding to debiting of royalty payment to trading account in terms of agreement so entered by assessee with BDA Limited.
From the record, we found that even as per the Special Audit Report also, determination of selling price was the sole prerogative of BDA Limited and the assessee had no role to play in such determination as it was only acting as a Distributor. Assessee’s nature of business in the context of the distribution services provided to BDA Ltd. has also been analysed even by the Special Auditor which confirms that the assessee was to act only as a distributor. The Trading Account prepared by the assessee has been analysed by the Special Auditor wherein, he agrees that as per the terms of Distribution Agreement, the assessee was entitled to receive only the distribution charges and it ought not to account for the purchases and sales. According to Special Auditor, the assessee should have accounted only for the distribution charges as its income. Therefore, according to the special auditor also, the excess of sale price over the purchase price did not belong to the assessee.
As per letter dated 30/11/2012, BDA Limited has also confirmed that it has received royalty/marketing service charges from Jaya Marketing which includes the amount of Rs.5,02,03,083.17 clubbed by the assessee in its purchases as royalty. Even letter dated 30/11/2013, from Assistant ITA No.6474/Mum/2011 M/s. Jaya Marketing Commissioner of Income-tax Circle 12(3), Mumbai to the CIT (DR) confirming that BDA Limited has shown receipt by way of royalty/ marketing service income from the assessee. The said fact has been confirmed by the AO by invoking the provisions of sections 131 and 133(6) of the Act. We also found that assessee’s Ledger Account in the books of BDA Limited was also filed by Revenue before the Tribunal and the same is placed at pages 303 to 317 of PB-
1. 1.
29. Furthermore, the assessee has separately handed over a statement in the course of hearing pointing out month-wise payment of royalty by the assessee to BDA Limited and income as reflected by them in their books of account. In the said statement, the assessee has referred to the relevant page numbers in the paper book where the royalty income was reflected by BDA Limited in the Ledger account.
30. Even the profit and loss account of BDA Limited as on 30/03/2005 as filed by the assessee reflects royalty income of Rs.78,69,41,000. Break- up of the said royalty income zone-wise was also filed before lower authorities. Assessee falls in the western Zone in respect of which party- wise details were also filed as placed in paper-book at page 359 of PB-2. This also shows the real arrangement between the assessee and BDA Limited and the fact that amount of royalty paid by the assessee to them has been reflected by them as their income.
31. From the record, we found that even during the course of hearing of the Miscellaneous Application, Tribunal had directed the assessee’s AO ITA No.6474/Mum/2011 M/s. Jaya Marketing to confirm the factual position as to whether the royalty payment as made by the assessee to BDA Limited had been reflected by them as their income. In response to the same, the AO by its letter dated 21.09.2016 addressed to the Registrar of the Tribunal confirmed that BDA Limited had reflected marketing service income from Jaya Marketing which has been reflected as royalty income in the Annual Accounts of BDA Limited. On the basis of this factual scenario, the Tribunal in its Order dated 14.10.2016 on the assessee’s Miscellaneous Application re-called its earlier order dated 25/06/2014.
Considering the remand report filed by AO dated 21/09/2016 and 5/10/2016, vis-à-vis other and the material placed on record, we can safely conclude that the assessee has been rendering distribution services to BDA Limited for which its remuneration is by way of distribution charges and certain reimbursement of actual cost. Since the assessee is only acting as a distributor and sales of goods are made as per the directions of BDA Limited, the excess of sale price over the purchase price of the goods does not belong to the assessee but to BDA Limited. The assessee has been reflecting the purchase and sale transactions in its books of account only in order to comply with the Excise and Sale Tax requirements. This arrangement is supported by the fact that excess of sale price over the purchase price referred to as royalty in the assessee’s books of account has been paid over by the assessee to BDA Limited. BDA Limited has reflected the said receipt as its income, in ITA No.6474/Mum/2011 M/s. Jaya Marketing its books of account as well as in its Profit and Loss Account. The aforesaid facts have been confirmed by the Assessing Officer by way of remand report and we found the same to be correct.
In view of the above observation and considering the documentary evidences and also the remand reports placed on record, the assessee was justified in showing royalty payment which is excess of sales realization over purchase, as an expenditure in its trading account. Consequently, it is also justified in reflecting Nil gross profit in its Trading Account. Consequently, the AO was not justified in rejecting the trading account and the P & L account which has duly shown the distribution charges as its income.
With regard to disallowance of royalty expenses claimed by the assessee, we found that disallowance of royalty payment made to BDA Limited is not justified in the facts and circumstance of the present case. Since, the estimation of income in the present case effectively tantamount to disallowance of royalty payment, the estimation of income is deleted. From the record, we found that that BDA Limited has reflected the amounts received by them from the assessee as their income. This position has been accepted by the Revenue. If the said payment is disallowed in the assessee’s hand, then, it would tantamount to charging tax on the said amount twice over i.e., once in the hands of BDA Limited as their income and again in the hands of the assessee by disallowing the royalty payment, which is contrary to law. It is also fundamental principle ITA No.6474/Mum/2011 M/s. Jaya Marketing in law that, if BDA Limited has accepted as having received income from the assessee, the Revenue cannot be permitted to simultaneously state that the assessee has not made any deductible payment.
We also found that vide its letter dated 30.11.2012, BDA Limited has confirmed that it has received royalty/ marketing service charges from Jaya Marketing which includes the amount of Rs.5,02,03,083.17 included by the assessee in its purchases as royalty. Vide letter dated 30.10.2013 from Assistant Commissioner of Income-tax Circle 12(3), Mumbai to the CIT (DR) confirming that BDA Limited has shown receipt by way of royalty/ marketing service income from the assessee. The said fact has been confirmed by the AO by invoking the provisions of sections 131 and 133(6) of the Act. Assessee’s Ledger Account in the books of BDA Limited was filed by the Revenue before the Tribunal. The assessee has separately handed over a statement in the course of hearing pointing out month-wise payment of royalty by the assessee to BDA Limited and income as reflected by them in their books of account. In the said statement, the assessee has referred to the relevant page numbers in the paper book where the royalty income was reflected by BDA Limited in the Ledger account. Profit and Loss Account as of 30.03.2005 of BDA Limited reflects royalty income of Rs.78,69,41,521. Break-up of the said royalty income zone-wise was also filed. Assessee falls in the Western Zone in respect of which party-wise details were also filed. This also shows the real arrangement between the assessee and BDA Limited and the fact ITA No.6474/Mum/2011 ITA No.6475/Mum/2011 M/s. Jaya Marketing that amount of royalty paid by the assessee to them has been reflected by them as their income.
The assessee was also having a proprietorship concern in the name of Jaya Consultancy which was also operating the marketing schemes of BDA Ltd., and was getting certain receipts as marketing fee for the same from the market. The entire such amount was also transferred to the BDA Ltd. by the assessee. As regards the books of the assessee we found that the receipts and expenses relating to Jaya Consultancy were merged in the Profit and Loss of the assessee (being the proprietor of that concern) and a consolidated Profit and Loss account was made. Thus the receipts of Jaya Consultancy were set off from royalty expense and the net amount, thereof was debited as Royalty Expenses to the Trading account. Thus entire receipts either in respect of difference in selling price or market fees etc. received by the assessee in any form was transferred by way of Royalty to BDA Ltd and the assessee was entitled only to fixed distribution charges as reiterated above.
However, assessee’s trading account shows a net credit Rs. 8,53,850 in AY 2003-04 and at Rs. 12,80,409/- in AY 2004-05. This is the amount of difference in reconciliation between of taxes schemes received from market in respect of certain year which either related to the same year or subsequent year. The reconciliation difference, being a credit balance was shown as income by the assessee. The same had no relation with the income in respect of margin earned or schemes excess of received from ITA No.6475/Mum/2011 M/s. Jaya Marketing BDA Ltd. The assessee received and was entitled to receive only distribution charges as per the agreement. The above small amounts, being reconciliation differences, do not form part of regular trading results is evident from the fact that during the respective years the assessee had done a turnover of Rs. 81 crores for AY 2003-04 and Rs. 91 crores in AY 2004-05 respectively. Thus by no stretch of imagination these negligible amounts would either form part of turnover or trading receipts. Thus the assessee had no Gross Profit or trading Profit from the business in the AY's 2003-04 and AY 2004-05.
Assessee’s business activities for AY 2003-04 and 2004-05 were exactly same as in AY 2005-06, which is the main case on the basis of which the cases for earlier years were reopened. Further after reopening a so called GP rate arrived by the Ld AO for AY 2005-06 was applied for the years AY 2003-04 and 2004-05. There was no occasion, during the entire activity, for the assessee to earn any trading profit and thus the Gross Profit was Nil. Once the same conclusion is arrived for the AY 2005-06, the same will apply to the earlier years also. Accordingly, decline of royalty payment to BDA Ltd., thereby rejecting the books of account for these assessment years i.e., 2003-04 & 2004-05 was not justified.
At the cost of repetition, we observe that in the course of hearing of the Miscellaneous Application, Tribunal had directed the assessee’s AO to confirm the factual position as to whether the royalty payment as made ITA No.6475/Mum/2011 M/s. Jaya Marketing by the assessee to BDA Limited had been reflected by them as their income. In response to the same, the AO by its letter dated 21.09.2016 and 05/10/2016 addressed to the Registrar of the Tribunal confirmed that BDA Limited had reflected marketing service income from Jaya Marketing which has been reflected as royalty income in the Annual Accounts of BDA Limited.
In view of the above, it is clear and categorical that the payment of amount stated as Royalty was actually due to be and paid by the assessee in terms of the agreement between BDA Ltd and the assessee, the same was duly paid as a business expenditure and was duly accounted for as business income by BDA Ltd as part of its revenue and all these facts have also been duly examined and accepted by the Department, during the course of proceedings before the Hon’ble Bench itself, thus there arises no question of disallowance of such payment, thereby rejecting assessee’s books of accounts. 41. In view of above discussion we do not find any merit in AO’s action in rejecting assessee’s trading account for the A.Y. 2003-04 to 2005-06, by declining the payment of royalty, we direct accordingly. 42. In the A.Y.2005-06 the assessee has received distribution charges of Rs.2,24,30,874 which has been reflected as its income in the Profit and Loss Account. The AO has observed that such charges were received for the previous years relevant to assessment years 2003-04 and 2004-05 at the rate of 27% of its security deposit placed with BDA Limited. He ITA No.6474/Mum/2011 M/s. Jaya Marketing therefore concluded that, for the year under consideration also, the assessee ought to have received distribution charges at the rate of 27% of security deposit which would work out to Rs.3,37,50,000. He thereby made an addition of Rs.1,13,19,126 (Rs.3,37,50,000 - Rs. 2,24,30,874) to the assessee’s income.
We observe that as per the terms of the agreement entered by assessee with its principal BDA Limited, the assessee is not entitled to 27% of its security deposit as distribution charges. The distribution charges, in any agreement, are based primarily on the materials sold and cannot relate to the amount of security deposit. Further there may be slight variations by way of certain negotiations between both the parties. The assumption of AO that as the same were equivalent to some percentage in an earlier year the same should be applied in the current year. It is just a conjecture and surmise when a clear and categorical agreement is in place and the AO has not rejected the agreement or its sanctity, nor the agreement was found to be bogus.
From the record we found that for the year under consideration, the assessee had sold 2,51,715/- cases of liquor. Based on its Distribution Agreement dated 24.07.2002, assessee would be entitled to distribution charges at the rate of Rs.25 per case being Rs. 62,92,875 or minimum distribution charge of Rs.2,02,50,000. On account of negotiation with BDA Limited assessee has been able to realize an amount of Rs.2,24,30,874 which is more than the stipulation in the Agreement and has reflected the ITA No.6474/Mum/2011 M/s. Jaya Marketing same as its income in the Profit and Loss Account. However, for the previous year relevant to assessment years 2003-04 and 2004- 05, the assessee could bargain and negotiate distribution charges which worked out to 27% of the security deposit. The said distribution charges had been reflected as income in the assessee’s Profit and Loss account and offered for tax for the respective years. In the A.Y.2005-06, the assessee has been able to realize only Rs.2,24,30,874 as its distribution charges. It is not the case of Revenue that, the assessee has received a single rupee in excess of that reflected in its books of account. Perusal of the assessment order and the appellate order passed by the CIT(A) shows that the entire addition is based on a conjecture that what the assessee ought to have received and not its actual receipts or amount receivable as per the arrangement between the parties.
It is a fundamental principle of law that, the assessee could be charged to tax only in respect of income accruing, arising or received by an assessee. The expression “accruing” or “arising” means that the assessee should have a right to receive that amount and “received” means actual receipt. In view thereof, the assessee could be assessed only on the amount actually received or in respect of which it has a right to receive. It cannot be assessed on income, which according to Revenue, the assessee ought to have earned. In the present case, addition of Rs. 1,13,19,126/- is only based on income which, according to the AO, the assessee should have negotiated like earlier years and thus ought to ITA No.6474/Mum/2011 M/s. Jaya Marketing have earned. The tax on income is only in respect of real income and not notional income. Once an income is neither due nor received nor receivable the same cannot be brought to tax. Further as regards the margins of each year may not be constant as they depend on several circumstances and the same cannot be presumed in absence of any evidence or agreement. Thus the addition so made, is merely on conjectures and surmises without any evidence and is bad both on facts and in law. Once the assessee has received and shown as part of his income what was receivable to him on the basis of an agreement, not controverted by the AO, the same has to be accepted by the AO. Accordingly, addition of Rs.1,13,19,126/- so made by the AO is liable to be deleted. We direct accordingly.
The AO has added an amount of Rs.24,00,00,000 on account of receipt of bond charges which has been upheld by the CIT(A). The Tribunal in its order dated 25.06.2014 has referred to the assessee’s submission in this regard in paragraph 6.1 at pages 34 and 35 and its conclusion is in paragraph 6.3 and 6.4 at pages 35 and 36 of the said Order, wherein, the said addition has been deleted. The submission made by assessee us are same, accordingly the basis taken by the Hon’ble bench in its original order be taken and the addition of Rs.24,00,000/- on account of bond charges is deleted.
On an ad-hoc basis the AO has made disallowance of expenditure under different heads at Rs.16,99,445. This disallowance has been ITA No.6474/Mum/2011 ITA No.6475/Mum/2011 M/s. Jaya Marketing upheld by the CIT(A). The Tribunal in its order dated 25.06.2014 has dealt with each of the disallowances in paragraphs 7 to 7.5 at pages 36 to 43 of its order partly allowing the ground. After considering the contentions of the AR and learned DR, we reconfirm the finding of the Tribunal given in its order dated 25/06/2014.
In respect of the non-trade parties identified by the AO, he had made disallowance of interest expenditure of Rs.10,82,122 on the ground that the assessee had placed borrowed funds with them on an interest free basis. This has been upheld by the CIT(A). Tribunal in its order 25/06/2014 has deleted the said disallowance. In this regard, after considering the contention of the learned AR and DR, we confirm the order of the Tribunal in this regard and reiterate the findings of the Tribunal.
In the A.Y. 2003-04 and 2004-05 AO had after reopening the assessment and rejected the books of accounts and made trading addition based on the assessment framed for A.Y. 2005-06 by applying the same G.P. rate as worked out by him for the A.Y.2005-06. Following the reasoning given hereinabove, we do not find any justification for rejection of books of accounts and the addition so made by applying the G.P. rate so arrived at in A.Y.2005-06. Accordingly additions made in both the years are deleted.
ITA No.6474/Mum/2011 M/s. Jaya Marketing
In the result, appeal of the assessee for A.Y. 2005-06 is allowed in part, whereas appeals for A.Y. 2003-04 & 2004-05 are allowed. Order pronounced in the open court on this 24/08/2017 Sd/- Sd/- (SANDEEP GOSAIN) (R.C.SHARMA) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai; Dated 24/08/2017 Karuna Sr.PS Copy of the Order forwarded to : The Appellant 1. The Respondent. 2. The CIT(A), Mumbai. 3. CIT 4. DR, ITAT, Mumbai 5. Guard file. 6. सत्यापित प्रतत //True Copy// BY ORDER,