DCIT, CIR-49, KOLKATA, KOLKATA vs. M/S NIMBUS INDUSTRIES, KOLKATA

ORDER Per M.Balaganesh, AM

2. The first issue to be decided in the appeal of the revenue is as to whether the ld CITA was justified in deleting the disallowance of commission paid to M/s R.N.Forgings Pvt Ltd in the sum of Rs 44,55,078/- in the facts and circumstances of the case. The interconnected issue to be decided in this regard is as to whether the ld CITA was justified in upholding the disallowance of commission paid to three individuals in the sum of Rs 10,81,079/- in the facts and circumstances of the case for which assessee had raised cross objection before us.

2.1. The brief facts of this issue is that the assessee is a partnership firm engaged in the business of manufacture of plastic pipes and fittings, sprinkler irrigation and drip irrigation system at the plant at Jaipur and also undertake the laying and jointing works of plastic pipes and fittings manufactured by them. The firm continued its business in the status of the partnership firm up to 19.1.2010 and w.e.f. 20.01.2010, it was converted into a limited company under the name and style of ‘Nimbus Pipes Ltd’ and all its assets and liabilities were transferred in the companies books and income tax return of the said company was filed independently for the period 20.1.2010 to 31.3.2010. The income tax return of the firm for the period 1.4.2009 to 19.1.2010 was electronically filed by the assessee on 28.9.2010 declaring total income of Rs 11,26,840/- and refund was claimed at Rs 1,34,694/- which was on account of excess tax deducted at source by the party.

2.2. The ld AO observed that the assessee had debited expenditure towards payment of commission to the tune of Rs 58,87,339/- against the disclosed turnover of Rs 26.33 crores. The assessee submitted copies of commission bills and summary of commission payment party wise as under:- 2 Aqueous Solution 3,28,372 R.N.Forgings Pvt Ltd 44,55,078 Rajendra Kumar Bharatia 3,02,196 Mahendra Kumar Bharatia 1,49,989 Omprakash Sharma 6,28,894 The ld AO compared these parties with those parties to whom commission was paid in the Asst Year 2009-10 and came to a conclusion that except Aqueous Solution, all other parties to whom commission was paid in Asst Year 2010-11 were new. He also observed that the commission paid in the year under appeal had increased substantially as compared to that of Asst Year 2009-10.

2.2.1. Commission paid to R.N.Forgings Pvt Ltd – Rs 44,55,078/- The assessee provided a copy of contractual agreement dated 18.3.2009 in connection with payment of commission to R.N.Forgings Pvt Ltd in respect of sales made by the assessee company to M/s Nimbus Irrigation Pvt Ltd [ in short NIPL] . The assessee claimed that M/s NIPL was the distributor of assessee’s products i.e HDPE pipes and Irrigation Systems and had been acting as wholesale distributor of assessee’s products for several preceding years including the year under consideration. The ld AO observed that the assessee had allowed Nimbus Irrigation to use its own trade / brand name ‘Nimbus’. This clearly indicate that NIPL was an associate company of assessee firm. The ld AO questioned the necessity of making payment of commission to R.N.Forgings Pvt Ltd for effecting sales to NIPL who is already acting as a trusted distributor for the assessee. He observed that no prudent businessman would like to pay an agent for selling to its own distributor. He mentioned that there is no written agreement between assessee firm and NIPL. What is the nature of services rendered by R.N.Forgings Pvt Ltd for improving the sales of the assessee firm had not been proved by the assessee. 3

4 C.O. No. 34/Kol/2015 M/s Nimbus Industries A.Yr.2010-11 The ld AO observed that M/s R.N.Forgings Pvt Ltd does not possess the requisite expertise in the field of HDPE Pipes and Irrigation Systems and hence they cannot act as a selling agent for selling the assessee’s products. He verified the business type and product profile of R.N.Forgings Pvt Ltd from the internet and concluded that the said company is engaged in the manufacture and supply of M.S.Ingots, Copper Ingots, Aluminium Alloy Ingots , Stainless Steel Ingots etc. He verified from the profit and loss account of M/s R.N.Forgings Pvt Ltd that it had received commission income only from M/s Nimbus Industries (assessee herein) amounting to Rs 45,69,416/- . The ld AO observed that according to agreement, M/s R.N.Forgings Pvt Ltd was appointed to function from 1.4.2009. The responsibilities entrusted as per contract, clearly involves lot of travelling and communicating with prospective purchasers, dealers, customers etc. Certainly the said commission agent had to incur lot of expenses under the head travelling and telephone in addition to its established business of trading and supplyof iron and steel products. In this regard, he made the comparative chart of expenses incurred by R.N.Forgings Pvt Ltd as under:-

AY 2010-11 AY 2009-10 Travelling 2,08,040 1,93,200 Telephone 1,58,352 1,99,091 Conveyance 23,100 1,04,655 Commission NIL 2,36,966 Courier 6,105 4,995 The ld AO came to a conclusion from the aforesaid table that R.N.Forgings Pvt Ltd did not undertake any activities towards identification of customers of plastic pipes and irrigation instruments, procurement of order, realization of payments etc and accordingly disbelieved the services rendered by the said agent to the assessee 2.2.2. Commission paid to Mahendra Kumar Bharatia, Rajendra Kumar Bharatia and Omprakash Sharma The ld AO observed that the commission paid to aforesaid parties were in respect of sales made to Anjana Sprinkler and Savitri Enterprises. The ld AO observed that sales were made to these parties in Asst Year 2009-10 for which no commission has been paid by the assessee and hence there is no reason for the assessee to engage the services of these three commission agents for effecting sales to aforesaid two enterprises during the year. He concluded that these agents do not possess requisite expertise to render the agency services to the assessee. Moroever , the sales made to these two enterprises had reduced as compared to Asst Year 2009-10. The ld AO observed that there is no written agreement between the assessee and these three commission agents . Accordingly he concluded that the assessee had failed to establish the rendering of services by these agents for effecting payment of commission and accordingly disallowed the commission payments made to them.

2.3. Before the ld CITA, it was submitted that at the outset, M/s NIPL is not an associate concern of the assessee firm. There is no relationship between assessee and M/s NIPL. There is no question of using of assessee’s brand / trade name ‘Nimbus’ by M/s NIPL as admittedly M/s NIPL was incorporated on 13.9.1995 , whereas the assessee firm was started only on 6.6.2001, which is evident from PAN allotted to these two entities. The term ‘ Nimbus’ being used by both the entities is only a coincidence. The ld AO concluded that M/s R.N. Forgings Pvt Ltd’s terms of agreement with the assessee were too general and the party’s main output is only of M.S.Ingots and it is not clear how this party can assist in the sale of irrigation systems and HDPE pipes. The ld AO also examined the profit and loss account of R.N.Forgings Pvt Ltd to conclude that 5

6 C.O. No. 34/Kol/2015 M/s Nimbus Industries A.Yr.2010-11 this commission recipient did not have to incur any additional expenses for working as a commission agent for the assessee. The assessee clarified that M/s R.N.Forgings Pvt Ltd had raised its commission bill on 25.3.2010 , but as the firm had converted into a company w.e..f. 19.1.2010 eventhough the same business was continued with the erstwhile partners as directors / shareholders , the bill component was bifurcated into two parts and the assessee firm has accounted for the portion of the work done upto 19.1.2010 only and the remaining portion has been accounted only in the books of the limited company i.e Nimbus Pipes Ltd. The assessee explained that due to business connections and market knowledge of M/s R.N.Forgings Pvt Ltd, the distributor of the assessee M/s NIPL was able to boost the sales of the products of the assessee from around Rs 11 crores in Asst Year 2009-10 to Rs 21 crores in Asst Year 2010-11 (being the year under appeal). The assessee argued that in hardware business, the same shopkeeper can sell M.S.Ingots and irrigation systems / fittings and the commission agent had adequate experience and connections locally. The assessee filed copies of the final accounts of R.N.Forgings Pvt Ltd to prove that it had duly declared commission income of Rs 45,69,418/- for the year. The assessee also refuted the assertion of the ld AO that it had passed the bills of commission amounting to Rs 49,13,951/- but had debited only Rs 44,55,078/- to its profit and loss account, the balance portion representing service tax component and similarly the commission income has been shown by R.N.Forgings Pvt Ltd net of service tax. It was stated that the entire commission payment was made by account payee cheques after due deduction of tax at source and the TDS thereon had been duly remitted to the account of the Central Government and TDS returns filed accordingly. The ld AO in the remand report again reiterated that R.N.Forgings Pvt Ltd had reported commission income only to the tune of Rs 7,99,862/- in its profit and loss account. This figure has been clarified by the assessee as being represented for the immediately preceding financial year i.e FY 2008- 09 relevant to AY 2009-10. The assessee explained that earlier its sale of ‘project work’ used to account for 48.33% of its total turnover but in AY 2010-11 its project 6

7 C.O. No. 34/Kol/2015 M/s Nimbus Industries A.Yr.2010-11 work business had declined and in AY 2010-11 the sale of irrigation system & HDPE pipes account for 95.15% of its total turnover and this is possible only due to special emphasis placed on increasing the sale of irrigation system & HDPE pipes whose sales increased from Rs 13.61 crores to Rs 25.05 crores with the bulk of the increase coming through the work of M/s R.N.Forgings Pvt Ltd.

2.4. The ld CITA deleted the disallowance in respect of commission paid to R.N.Forgings Pvt Ltd in the sum of Rs 44,55,078/- by observing as under :- “After considering the above, it is noted that the whole set of arguments of the AO are seen to be based only on an assumption that M/s. R.N. Forgings P. Ltd. may not have done any business of commission agent. There is no field enquiry done by the AO and no statement has been recorded of the commission agents. In an armchair the AO has simply refused to accept the contentions of the assessee without assigning any reason backed by evidence. The AO accepts that there is an agreement for payment of commission and all the formalities of the transactions are followed. The commission recipient has duly raised its bill, the Firm has acknowledged liability to pay for the period of its own existence, the TDS has been done any payments have been made through account payee cheques. The AO could not refute that the sales of the assessee in its irrigation system & HDPE pipe has shown a marked improvement, both in quantitative and qualitative terms. While the sale through M/s. Nimbus Irrigation P Ltd. (NIPL) increased from Rs. 10.84 crores in A.Y. 2009-10 to Rs. 21.21 crores in A.Y. 2010-11, the assessee’s sale through NIPL rose from 41% to 81% of the total sales in this segment. The following table explains it better:-

Reasons for appointing Sales Agent M/s. R.N. Furging Pvt. Ltd.

ACCT. SALE in lacs SALE TO % of Sale % of Sale to % % YEAR NIPL in to NIPL others INCREASE INCREASE lacs in Sales in Sales to NIPL 2007-08 1,175.44 879.09 0.75 0.25 2008-09 2,660.84 1,083.79 0.41 0.59 126.37 23.28 2009-10 2,632.92 2,121047 0.81 0.19 (1.05) 95.75

The AO had wrongly claimed that M/s. R.N. Forgings P. Ltd. has declared only Rs. 7,99,862/- as commission received by it. The AO wrongly took the figure for the earlier A.Y. 2009-10 and in the remand proceedings the same error has been made. The AO has not disputed that the commission recipient’s office is located at Jaipur and that it is engaged hardware business in Rajasthan. As such the commission agent had business contacts on the ground in this field. M/s. NIPL has also reported back to the 8 C.O. No. 34/Kol/2015 M/s Nimbus Industries A.Yr.2010-11 commission agent in respect of the sales effected by it on a monthly basis. The claim of the AO that M/s. NIPL was already known to the assessee is not relevant because the AO cannot step into the shoes of the businessman and decide how the business is to be carried out. Further the AO by reporting the commission income of the Commission Agent for A.Y. 2009-10 indirectly accepts that the commission agent had commission income in earlier years also even when on the internet there is no mention that – M/s. R.N. Forgings P. Ltd. is engaged in the business of commission work. The AO has disbelieved the books of the assessee without any evidence. This is not as per law. In the case of CIT v. M/s. Inbuilt Merchant P. Ltd. the Hon’ble High Court of Kolkata in ITA No. 225 of 2013 G.A. NO. 3825 of 2013 has rejected a similar approach of the Revenue and has held with reference to Section 32(2) of the Indian Evidence Act, 1872, that the AO cannot overlook the importance of the books of account maintained in the ordinary course of business. The Court held that the books of account maintained in the ordinary course of business are relevant and they cannot be discarded in the absence of appropriate reasons. In the instant case the AO has not brought any evidence on record that the commission payments were bogus. The AO has not been able to dislodge the claim of the assessee that the sales of M/s. NIPL rose from Rs. 11 crores in A.Y. 2009- 10 to Rs. 21 crores in A.Y. 2010-11 only due to the instructions of M/s. R.N. Forgings P. Ltd. and that the turnover fell in the next A.Y. 2011-12 when the services of M/s. R.N. Forgings P. Ltd. were discontinued. All the facts mentioned above and the argument of the assessee indicate that the disallowance has been made on a suspicion only and even here the AO has not been able to refute the contention of the assessee. In view of the same the disallowance of Rs. 44,55,078/- paid as commission to M/s. R.N. Forgings P. Ltd. is deleted and this part of the grounds of appeal is allowed”.

2.5. Aggrieved, the revenue is in appeal before us on the following grounds :- 1. On the facts and circumstances of the case and in law, whether Ld. CIT(A) was justified in upholding assessee’s contention of paying commission of Rs. 44,55,078/- to M/s R. N. Forgings Pvt. Ltd. for supplying to assessee’s distributor M/s Nimbus Irrigation Pvt. Ltd. when the said M/s R.N. Forgings Pvt. Ltd. was appointed for the first time and had no previous experience in assessee’s line of business and/or did not provide any specific service to earn such commission.

2. On the facts and circumstances of the case and in law, Ld. CIT(A) erred in not appreciating the fact brought on records by AO that M/s R.N. Forgings Pvt. Ltd. being manufactures & engaged in Iron & Steel related products, having no apparent experience to develop market for irrigation system and HDPE Pipes and that too without incurring expenses under the head travelling & telephone, conveyance commission and also without undertaking any activities towards identification of customer of plastic pipes/irrigation instruments and for procurement of order/realization of payment for the assessee.

9 C.O. No. 34/Kol/2015 M/s Nimbus Industries A.Yr.2010-11 3. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in passing an erroneous & perverse order disregarding the judgment of Hon'ble Supreme Court on definition of colorable device in Mc Dowell & Co. Ltd.

2.6. With regard to the commission paid to three other parties viz Omprakash Sharma, Mahendra Kumar Bharatia and Rajendra Kumar Bharatia, the assessee explained party wise as under:- a) In the case of Shri Omprakash Sharma, the ld AO found that the commission recipient had been paid the commission of Rs 6,28,894/- in respect of sales to Savitri Enterprises. The ld AO observed that in Asst Year 2009-10, the assessee had made sales of Rs 2,61,92,343/- to M/s Savitri Enterprises without payment of any commission , but in Asst Year 2010-11, the sale to M/s Savitri Enterprises had reduced to Rs 1,83,82,006/- and assessee further claimed that commission of Rs 6,28,894/- was paid in respect of these sales. The assessee claimed that the party was not keen on carrying on the business with the assessee and it was only the said commission agent (i.e omprakash sharma) who ensured that some business could be carried out. The ld AO however disbelieved this argument as there was no agreement entered into with the said commission agent by the assessee. b) Similarly the assessee had claimed payment of commission of Rs 1,49,989/- to Shri Mahendra Kumar Bharatia for sales of Rs 16,64,605/- made to M/s Anjana Sprinkler & Supplier. The assessee also claimed that commission had been paid in respect of sales made to M/s Deep Construction Company and M/s Lucky Traders also in addition to the sales made to M/s Anjana Sprinkler & Supplier. The ld AO however disbelieved this argument as there was no agreement entered into with the said commission agent by the assessee.

10 C.O. No. 34/Kol/2015 M/s Nimbus Industries A.Yr.2010-11 c) Similarly the assessee had claimed payment of Rs 3,02,196/- to Shri Rajendra Kumar Bharatia in respect of sales made to M/s Jain Enterprises and M/s Shiva Sales Corporation totaling Rs 43.85 lacs and Rs 19.36 lacs respectively. The ld AO however disbelieved this argument as there was no agreement entered into with the said commission agent by the assessee.

The assessee furnished the income tax returns of all these commission recipients to prove that they had duly disclosed the commission income in their returns and paid taxes thereon. The assessee also proved that these commission agents had not booked bogus expenditure for reducing their tax liability in their personal account by setting off this commission income with expenditure.

2.7. The ld CITA upheld the disallowance of commission paid to these three parties by observing as under:- “The submissions of the assessee in these three cases above are difficult to accept. In these three cases above there are no agreements at all. These three persons had not been engaged in the earlier years and there is no appreciation in sales in the current year on account of payment of these commissions. It is not known as to what services were performed by them. The mere fact that the individuals have declared the commission income in their individual return is immaterial. The assessee is not able to dislodge the primary objection that there is no contract with the commission recipients at all. The assessee has not been able to file any document from the sellers also indicating the role of the commission recipients as it has done in the case of M/s R N Forgings P Ltd. In view of the above the disallowance of commission to these three persons is sustained. The AO shall however restrict the disallowance to the actual commission declared paid after correcting the figure in respect of Shri Mahendra Kumar Bhartia. As a result, in respect of ground of appeal Nos. 2,3,& 4 the assessee gets a relief of Rs. 44,55,078/- and the balance sum of Rs. 6,28,894/-, Rs. 1,49,989/- & Rs. 3,02,196/- totaling Rs. 10,81,079/- is confirmed. The assessee gets partial relief.”

2.8. Aggrieved, the assessee is in cross objection before us on the following grounds:- 1. Because that the Ld. Commissioner of Income Tax (Appeals) was erred in law as well as in facts in confirming the disallowance made by the Ld. AO on account of commission paid to Omprakash Sharma of Rs. 6,28,894/-, Shri Mahendra 10

11 C.O. No. 34/Kol/2015 M/s Nimbus Industries A.Yr.2010-11 Kumar Bhartia of Rs. 1,49,989/- and Shri Rajendra Kumar Bhartia of Rs. 3,02,196/-, totaling to Rs. 10,81,079/- on the alleged ground that the appellant did not file any evidence and there was no services and/or to prove that any services were rendered by the said commission agents, and his such conclusions are based on his surmises and conjectures and hence not good in law and are grossly unjustified, erroneous and unsustainable, and are contrary to the facts and material on record.

3. The appellant craves leave to add further grounds of appeal at the time of hearing.

2.9. We have heard the rival submissions and perused the materials available on record including the paper book of the assessee . The paper book comprises of the following documents with regard to this commission issue :-

Description Paper Book pages filed before us Audited A/c & Tax Audit Report u/s 44AB of Nimbus Industries 20 - 67 as on 19.01.2010. Computation of Total Income. 68 - 69 Audited A/c & Tax Audit Report of Nimbus Pipes Ltd. for the 70 - 90 period 20.01.2010 to 31.03.2010. Computation of Total Income of Nimbus Pipes Ltd. for 91 - 93 31.03.2010. Statement of Commission paid by Nimbus Industries. 94 Copies of Commission Bills received from agents. 95 – 101 Ledger copy of the A/c of Commission payable as on 102 – 103 19.01.2010. Ledger copy of the A/c of Commission agents from 20.01.2010 104 – 109 to 31.03.2010. Photo copy of the Bank Statement showing payment to 110 – 121 Commission agents. Memorandum of Association and Audited A/c of R.N. Forgings 122 – 149 (P) Ltd. PAN Card of Numbus Industries & Nimbus Irrigation (P) Ltd. 150 Statement of Sales in Fin. Year 2010-11 by Nimbus Pipes Ltd. 151 (3 parties). 11

12 C.O. No. 34/Kol/2015 M/s Nimbus Industries A.Yr.2010-11 Copy of letter dated 04.02.2013 issued by ITO in the course of 152 – 155 hearing. Copy of reply dated 07/21.02.2013 in response to letter dated 156 – 162 04.02.2013. Copy of judgement of Lachminarayan Madan Lal vs. CIT (SC) 163 – 167 reported in 86 ITR page 439 Copy of judgement of Kolkata High Court dated 14.03.2014 in 168 – 170 the case of CIT vs. Inbuilt Merchant (P) Ltd.

2.9.1. We find that the ld CITA had given a finding that the assessee and NIPL are not associated concerns which is not controverted by the revenue before us with any cogent material. We find from the memorandum of association of M/s R.N.Forgings Pvt Ltd enclosed in page 122 of the paper book vide clause 3 of the main objects of the said company includes as under:-

2.9.2. From the perusal of the balance sheet of M/s R.N.Forgings Pvt Ltd enclosed in paper book, we find that it had offered commission income even in Asst Year 2009-10 to the tune of Rs 7,99,862/-. This goes to prove that they are in commission agency business even in the earlier year.

2.9.3. The ld AO prepared a tabulation of expenses incurred by R.N.Forgings Pvt Ltd and came to a conclusion that they were incurred only for their routine business activities and no expenses were incurred by commission agent for deriving commission income. These observations are totally baseless and conclusions in this regard are drawn by the ld AO only on surmises and conjectures. The ld AO of the assessee herein admittedly had not made any assessment on M/s R.N.Forgings Pvt Ltd in the instant 12

13 C.O. No. 34/Kol/2015 M/s Nimbus Industries A.Yr.2010-11 case and what type of expenses were incurred by the commission agent is definitely not the look out of the ld AO of the assessee herein. It is in the domain of the AO assessing the commission agent.

2.9.4. It is pertinent to note that the ld AO had not made any enquiry with the commission agent M/s R.N.Forgings Pvt Ltd either u/s 133(6) or u/s 131 of the Act . No cross verification of the commission transactions were even made with the AO of the commission agent despite the entire details were placed before him on record.

2.9.5. It is a fact that the turnover of the assessee company had increased from Rs 11 crores to Rs 21 crores approximately during the year under appeal and had drastically come down in the immediately succeeding year, the moment the services of R.N.Forgings Pvt ltd had been discontinued by the assessee. This goes to prove that the services of R.N.Forgings Pvt Ltd were indispensible to the assessee during the year under appeal. We also find from pages A-2 to A-25 of the paper book , the month wise correspondences between Nimbus Irrigation Pvt Ltd (NIPL in short) and R.N. Forgings Pvt Ltd , wherein NIPL had duly intimated the month wise details of purchases made through them together with the respective values. Hence the services rendered by R.N. Forgings Pvt. Ltd had been duly acknowledged by the ultimate customer M/s NIPL on a monthly basis and hence the observation of the ld AO that no services were rendered by the commission agent stands nullified. It is to be noted that M/s R.N. Forgings Pvt. Ltd had acted as both purchase and selling agents to M/s NIPL which is evident from correspondences between them enclosed in pages A-2 to A-25 of the paper book. The assessee had explained the entire transactions of commission payment to M/s R.N. Forgings Pvt. Ltd in the form of a detailed note before the ld AO vide letter dated 7.2.2013 para 5.

14 C.O. No. 34/Kol/2015 M/s Nimbus Industries A.Yr.2010-11 2.9.6. It is well settled that the revenue cannot sit in the armchair of the businessman and direct how a businessman should conduct his business. The businessman knows his interest best. Whether the necessity of incurrence of an expenditure on the basis of commercial expediency of the business is to be viewed from the point of view of the businessman and not from the point of view of the revenue.

2.9.7. The ld AO relied on the decision of the Hon’ble Supreme Court in the case of Lachminarayan Madanlal vs CIT reported in (1972) 86 ITR 439 (SC) to justify his action of disallowing the commission. In the facts before the Hon’ble Apex Court, the assessee firm mad repayment of commission to another firm which was not at all in existence when the commission agreement was entered into. Moreover, in the payee firm , the minor children and spouse of the partners of the payer firm (ie assessee firm) were partners . These facts were duly appreciated by the Hon’ble Apex Court and was held that the commission agreement is only a device to shift the profits from the payer firm to payee firm and accordingly upheld the disallowance of commission payment. In the instant case, there is no such finding recorded by the ld AO in his order. The revenue had not brought any material on record to prove that M/s R.N. Forgings Pvt. Ltd is a related concern of the assessee . The ld AO himself in the instant case had acknowledged the agreement for commission has been entered into on 18.3.2009 and the services are expected to be rendered by R.N. Forgings Pvt. ltd effective from 1.4.2009 onwards. Hence the reliance on the decision of the Apex Court by the revenue is totally misplaced and is not applicable to the facts of the instant case before us.

2.9.8. With regard to the usage of brand name ‘Nimbus’ by NIPL as observed by the ld AO, it would be relevant to note that M/s NIPL was incorporated on 13.9.95 and whereas the assessee firm was started on 6.6.2001 and the usage of the name ‘Nimbus’ by both the parties is just a coincidence. If at all, any usage of brand name is alleged, it

15 C.O. No. 34/Kol/2015 M/s Nimbus Industries A.Yr.2010-11 is actually the other way round i.e. the assessee firm had used the brand of Nimbus from NIPL and not as stated by the ld AO.

2.9.9. The ld AR stated that the entire payments of commission to R.N. Forgings Pvt. Ltd had suffered service tax and were made by account payee cheques after due deduction of tax at source and TDS returns were duly filed with the income tax department. These facts are not disputed by the ld DR before us.

2.9.10. In view of our aforesaid findings in the facts and circumstances of the case, we hold that the ld CITA had rightly deleted the disallowance of commission paid to R.N. Forgings Pvt. Ltd and no interference in the said order is called for. Accordingly, the Grounds 1 to 3 raised by the revenue are dismissed.

3. With regard to the disallowance of commission paid to three other individuals namely Mahendra Kumar Bharatia, Rajendra Kumar Bharatia in the total sum of Rs 10,81,079/-, the disallowance has been mainly made for want of written agreements entered into by the assessee with those said commission agents and moreover, on the count that single bill has been raised by those commission agents for the services rendered to the assessee in March 2010, whereas the assessee firm was no longer in existence from 20.1.2010. In this regard, we find from the evidences enclosed in the pages 97 to 110 of the paper book containing the commission bills raised by the agents, ledger account for the period 1.4.2009 to 19.1.2010 pertaining to the assessee firm and for the period 20.1.2010 to 31.3.2010 pertaining to Nimbus Pipes Ltd ( i.e. the company which had taken over the assessee firm on going concern basis), that due bifurcation of bill amount between 1.4.2009 – 19.1.2010 and 20.1.2010 – 31.3.2011 had been made and expenses booked accordingly in the respective books. There is no duplication of claim of bills. Apparently the commission agents are not aware of the conversion of the assessee firm into a private limited company. In any case, when the bills are duly bifurcated and no 15

16 C.O. No. 34/Kol/2015 M/s Nimbus Industries A.Yr.2010-11 allegation of duplication of bills and claim of expenses thereon has been made by the revenue, this cannot be a ground on which the disallowance of expenses could be sustained. We find that the assessee had duly informed the assessee in writing that the commission has been paid to these parties for sales effected to certain parties which were given in its reply letter filed before the ld AO. The sales made to those parties had not been disputed by the revenue. We find that all these three commission agents had duly accounted for the commission received from the assessee in their respective income tax returns and paid taxes thereon. The business expediency of these commission payments also stands proved in as much as the assessee could achieve some reasonable turnover with the respective customers only due to the indulgence of these commission agents and services rendered by them during the year under appeal. These facts were submitted in writing before the ld AO. This goes to prove that the services of these commission agents were indispensible to the assessee during the year under appeal. No verification has been carried out by the ld AO with the AO of these commission agents to understand the nature of services rendered by these parties to the assessee and the genuinity of the claims made by the assessee. In these circumstances, we hold that the lower authorities had erred in disallowing the commission payments to these three parties. Accordingly, the grounds raised in the cross objections of the assessee are allowed.

4.1. The brief facts of this issue is that the assessee firm had taken unsecured loans from various parties and the loans stood at Rs 5,16,85,429/- as at 19.1.2010. The ld AO 16

17 C.O. No. 34/Kol/2015 M/s Nimbus Industries A.Yr.2010-11 found that bulk of the loans carried an interest rate of 15% p.a. but in respect of the persons covered u/s 40A(2)(b) of the act, the assessee had claimed interest payments at 18% p.a.. The assessee submitted that the loans from related parties carry a higher rate of interest because these are for longer periods and are not required to be paid on demand. The ld AO however treated the rate of interest as excessive and restricted it to 15% p.a. leading to disallowance of Rs 1,92,313/-. Before the ld CITA , the assessee pleaded that similar rate of interest was paid in Asst Year 2009-10 to the very same parties and the same were allowed by the ld AO. It was stated that the loans are old and carry forward from earlier years and rates paid are comparable to bank interest rates on loans at the respective periods.

4.2. The ld CITA deleted the disallowance by observing as under:-

“The facts of the case are considered. The action of the AO is held unreasonable since the rate of interest @ 18% p.a. is not excessive by market or commercial standards and the AO had himself allowed the rate of interest in the immediately preceding assessment year. As the loans are carried forward from the earlier years, the AO has not been able to show any specific reason to deviate from the earlier position. The case laws cited by the assessee also declare the interest rate of 18% as reasonable. Therefore, the disallowance of Rs. 1,92, 313/- is deleted and the ground of appeal Nos. 5 & 6 are allowed.”

4.3. Aggrieved, the revenue is in appeal before us on the following grounds :-

4. On the facts and circumstances of the case in law, whether the Ld. CIT(A) was justified in allowing excess interest amounting to Rs. 1,92,313/- [@18% to persons covered u/s 40A(2)(b)] against AO’s contention that payment of interest is excessive and unreasonable.

4.4. We have heard the rival submissions and perused the materials available on record including the paper book containing the following papers :-

18 C.O. No. 34/Kol/2015 M/s Nimbus Industries A.Yr.2010-11 Description Paper Book pages filed before us Statement of Unsecured Loan with rate of interest paid to loan 171 – 175 parties and related parties Statement of Standard Chartered Bank & Barclays Bank 176 – 177 (interest rate charged at 18.4995% & 17& p.a.) Comparative statement of interest paid to related parties in 178 FY 07-08, 08-09 & 09-10 (interest paid @ 18% P.A.)

We find that the genuinity of the expenditure towards interest on unsecured loans is not disputed by the ld AO. It is always understood that the assessee had borrowed secured loans as well as unsecured loans and interest paid on secured loans would normally be lesser than the unsecured loans. Moreover, even on secured loans, the assessee had paid interest at the rate of 18.4995% and 17% p.a. to Standard Chartered Bank and Barclays Bank respectively. In any case, it is not in dispute that these unsecured loans are brought forward from earlier years and terms and conditions of interest had been understood in those relevant years. Hence the same cannot be made comparable with the rates prevailing in this year. We find that the assessee had paid interest at the rate of 18% p.a. on unsecured loans received from persons covered u/s 40A(2)(b) of the Act which is less than interest paid even on secured loans. As long as the borrowed funds had been used for business purposes, merely because interest is paid to parties covered u/s 40A(2)(b) of the Act, the same cannot be disallowed on the ground it being excessive. In the instant case, in our opinion, the interest paid on unsecured loans at the rate of 18% per annum is not at all excessive compared to the other secured loans availed by the assessee. Hence we do not deem it fit to interfere with the order of the ld CITA in this regard. Accordingly, the Ground No. 4 raised by the revenue is dismissed.

19 C.O. No. 34/Kol/2015 M/s Nimbus Industries A.Yr.2010-11 5.1. The brief facts of this issue is that the assessee claimed interest payment of Rs 13,69,122/- to its loan creditors in the return of income as a deduction. The ld AO observed that parties are not responding to notices and the assessee has not produced any loan agreement or documents to prove the business activities of the loan creditors. The assessee explained that all the loan creditors under question were private limited companies and they all had filed letters dated 4.3.2013 in the office of the ld AO confirming the loan transactions and had filed bank statements, sources of the funds advanced, audited accounts, PAN details and ID proof of their directors. Further the assessee pointed out before the ld CITA that the ld AO had himself accepted the loan amounts and has not disputed the same. As regards the utilization of the loan amounts, the assessee explained that the immediate utilization of the funds was to purchase raw materials and some fittings. The assessee filed copies of its bank account of Jaipur branch evidencing receipt and disbursal of the sums received as loans. It was argued that once the loans have been accepted as genuine and had been accepted as being utilized for business purposes, there is no reason to disallow the interest paid thereon in the assessment.

5.2. The ld CITA deleted the disallowance of interest amounting to Rs 13,69,122/- by observing as under:- “In the remand proceedings the AO further raised an issue that the Bhiwani Branch of the assessee had Sundry debtor of Rs. 64 lakhs but no business activity was being carried out there. The AO hinted that the assessee favoured its debtors with free funds. However, the loans under consideration were utilized by the Jaipur Branch of the assessee and not by the Bhiwani Branch. Further the AO claimed that the utilization of the loan funds is not proved and the assessee has only given details of utilization. These contentions of the AO are frivolous. The assessee has duly discharged its onus and indicated the utilization of the funds giving the names of the parties to whom the payments have been given and the dates thereof. Further the AO has accepted the loan amounts as genuine and had not made any addition on that account. The AO has only disallowed the interest. Therefore, the disallowance of Rs. 13,69,122/- is held to be improper and is deleted. The ground of appeal

Nos. 8 & 9 are allowed.” 19 5.3. Aggrieved, the revenue is in appeal before us on the following grounds :-

5. On the facts and circumstances of the case and in law, whether the Ld. CIT(A) was justified in allowing interest payment of Rs. 13,69,122/- wherein the existence of loan itself was questionable as no adequate and sufficient documentary evidence were furnished before the AO to prove the genuineness of the loans and creditworthiness of loan creditors.

5.4. We have heard the rival submissions and perused the materials available on record including the paper book containing the following papers :-

Description Paper Book pages filed before us Loan Confirmation of 4 loan creditors for the period 01.04.2009 211-245 to 19.01.2010, 20.01.2010 to 31.03.2010, 01.04.2010 to 31.03.2011 & 01.04.2011 to 31.03.2012 with photo copy of Bank statement of Jaipur Branch on the date of receiving loan. Photo copy of Bank Statement of Jaipur Branch showing 246-250 repayment of loan amount. Statement of utilization of loan fund on the date of receiving loan 251 from loan creditors.

We find from page 251 of the paper book the assessee had duly submitted the complete utilization statement of the loans availed. From the same it could be evidenced that the loans have been utilized only for business purposes by the assessee. The entire details of loan creditors were duly placed on record before the ld AO regarding their identity, creditworthiness and genuineness of the transactions. In any case, we find that no addition has been made towards the loan amounts in the assessment. Once the loan amounts have been accepted as genuine and its utilization thereon for business purposes is proved, the allowability of interest thereon u/s 36(1)(iii) of the Act is automatic. Hence we hold that the ld CITA had rightly deleted the disallowance of interest in the sum of Rs 13,69,122/- in the instant case. Accordingly, the Ground No. 5 raised by the revenue is dismissed.

Order pronounced in the Court on 01.12.2017