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Income Tax Appellate Tribunal, ‘SMC’ ‘A’ BENCH, CHENNAI
Before: Shri A. Mohan Alankamony
आदेश / O R D E R
This appeal by the assessee is directed against the order passed by the Ld. Commissioner of Income Tax (Appeals)- 3, Chennai dated 30.11.2016 in for the assessment year 2008-09 passed u/s.250(6) r.w.s.143(3) of the Act.
The assessee has raised several grounds in its appeal, however the crux of the issue is that the assessee is aggrieved by the order of the Ld.CIT(A) who had upheld the order of the Ld.AO, wherein the Ld.AO estimated the income of the assessee at 5% of the expenses of Rs.85,85,735/- which works out to Rs.4,29,286/-.
The brief facts of the case are that the assessee is a 100% subsidy of Singapore base company M/s. OSG Asia Pte. Limited, filed its return of income for the assessment year 2008-09 on 26.08.2008 declaring loss of Rs.40,38,366/-. The case was selected for scrutiny and finally assessment order was passed U/s.143(3) of the Act on 22.12.2010, wherein the Ld.AO rejected the claim of loss made by the company and estimated the income of the company at 5% of the aggregate expenditure incurred by the company which worked out to Rs.4,29,286/-.
The Ld.AO arrived at the above decision because he opined that the assessee company had artificially arrived at the loss by adjusting the commission income receivable from the parent company.
On appeal, the Ld.CIT(A) confirmed the order of the Ld.AO by observing as under:
“I have considered the submissions of the Ld.AR and findings of the AO. The sum and substance of the ld.AR’s arguments are that AO has not invoked Sec.145(1) and not rejected the books of account, estimated the income@ 5% of the expenditure incurred without rejecting the books of account, AO has not found it as a sham transaction, etc, etc.
On the other hand, AO had examined the appellant’s books of account, Commission Agreement, after which, an opportunity of being was given by way of issue of show-cause notice to the appellant. In the show-cause notice, it was clearly mentioned as to why net profit @ 5% of the expenses should not be taken, etc., etc. It means that AO was not satisfied about the correctness of completeness of the accounts of the appellant. It is the fact finding of the AO that the transactions related to the parent company are collusive in nature so as to create artificial loss. It is also the finding of the AO that appellant company is a commission agent and receives commission @ 15% on the sale price of the business developed by it and @ 5% on the sale price of the business carried out by others including parent company. In view of the facts, AO has held that commission income should be brought to tax and also worked out at Rs.4,29,286/-.
On consideration of the facts and circumstances of the case, I am inclined to agree with the findings of the AO. On the other hand, I found the arguments of the ld. AR are devoid of merits. Therefore, I have no hesitation to uphold the action of the Assessing Officer. Accordingly, the addition made by the AO amounting to Rs.4,29,286/- is confirmed and all the grounds taken in this appeal are dismissed.”
Before us the Ld.AR submitted that the Ld.Revenue Authorities had grossly erred in estimating the income of the assessee @ 5% of expenditure. He further submitted that the assessee company was in its initial years of business and therefore incurred substantial expenditure which could not be recouped due to poor sales. He further argued by stating that the assessee company had made profits in the subsequent years and therefore it had not arranged in a manner to incur loss by showing poor receipts from the parent company. It was therefore pleaded that the loss made by the assessee company may be accepted as genuine loss. The Ld.DR on the other hand pleaded for sustaining the order of the Ld.Revenue Authorities.
6. I have heard the rival submissions and carefully perused the materials on record. On examining the profit and loss account of the assessee, I find that the assessee company had received income from operations to the tune of Rs.79,30,230/- during the relevant assessment year. However, since there was huge expenditure by way of remuneration to employees of Rs.47,21,303/- and administrative expenses of Rs.38,29,706/-, the assessee was not able to generate profit from its operations.
I am of the view that the Ld.AO ought to have examined the genuineness of these expenditures before arriving at such conclusion. Further from the facts of the case, it is apparent that the Ld.AO has not rejected the books of accounts instead he had 5 simply estimated the income based on the expenses which I’m of the opinion is not appropriate. The Ld.CIT(A) has also simply followed the decision of the Ld.AO. Considering these facts, in the interest of justice I hereby remit back the matter to the file of Ld.AO to consider the issue afresh based on the financial activities of the assessee and also the credibility of the agreements between the assessee and its parent company.
In the result, appeal of the assessee is allowed for statistical purposes.
Order pronounced on the 04th October, 2017 at Chennai.