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Income Tax Appellate Tribunal, “D” BENCH : KOLKATA
Before: Hon’ble Shri M.Balaganesh, AM & Shri S.S.Viswanethra Ravi, JM]
ORDER Per M.Balaganesh, AM
This appeal by the Revenue and the Cross Objection by the assessee arise out of the order of the Learned Commissioner of Income Tax(Appeals)-9, Kolkata [in short the ld CIT(A)] in Appeal No.52/CIT(A)-9/Wd-31(1)/2015-16/Kol dated 09.12.2015 against the order passed by the ITO, Ward-31(1), Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short “the Act”) dated 18.03.2015 for the Assessment Year 2012-13.
2 & C.O. No. 11/Kol/2016 Madhusudan Rungta & Sons (HUF) A.Yr.2012-13 2. The first issue to be decided in this appeal is as to whether the Ld. CIT(A) was justified in deleting the disallowance of commission payment of Rs. 15,95,650/- in the facts and circumstances of the case.
The brief facts of this issue is that the assessee is a HUF engaged in trading of chemicals and minerals. The Ld. AO during the course of scrutiny proceedings called for various details by issuing notice u/s 142(1) of the Act dated 25.10.2013 which included details of purchase and sales above 50,000/-, details of commission paid, details of sale promotion expenses, details of bad debts, details of carriage outwards and details of loading and unloading charges. The assessee vide its reply letter dated 06.11.2013 furnished the details in respect of purchases, sales and commission paid. From the said details, the Ld. AO observed that the assessee paid commission to the following three parties:
(i) Ambootia Organic Plantations Pvt. Ltd. Rs. 6,44,858/- (ii) IDA Organic Pvt. Ltd. Rs. 6,51,860/- (iii) Pankaj Kapoor HUF Rs. 2,98,932/- Total Rs. 15,95,650/- The assessee stated that this commission payments for sales made by the assessee to various parties introduced by these three commission agents. The assessee also furnished the bill raised by these parties on the assessee clearly mentioning the amount of sales made to each party and the commission percentage thereon as aggrieved by the assessee. The bill of these commission agents included the PAN and address of the commission agents. The assessee further gave details of these commission agents being assessed to income tax and also gave details of their income tax returns acknowledgement. In other words, the assessee pleaded that the commission paid by it had been duly offered to tax by the recipient of such commission in their respective 2
3 & C.O. No. 11/Kol/2016 Madhusudan Rungta & Sons (HUF) A.Yr.2012-13 returns. The assessee also stated that these commission payments were duly subjected to deduction of tax at source and the payments were made by account payee cheques. The Ld. AO issued notice u/s 133(6) of the Act to these three commissions agents asking for various details. All the three parties responded independently by way of reply letter explaining the transaction they had with the assessee. The Ld. AO observed that the assessee had not proved the services rendered by these three commission agents to justify the payment of commission by the assessee. He directed the assessee to produce these three parties for his examination in person which could not be complied with by the assessee. The Ld. AO later on issued summons to these three parties u/s 131 of the Act seeking their personal appearance. This summon has been responded by two commission agents namely Ambootia Organic Plantation Pvt. Ltd. and IDA Organic Pvt. Ltd. by stating that the concerned officer is out of station and hence, they could not appear before the Ld. AO on the appointed date. After this, there was no compliance by those parties for these summons issued by the Ld. AO. Accordingly, the Ld. AO observed that the assessee has failed to produce the parties and prove the genuineness of the claim and services rendered by those parties to the assessee justifying the payment of commission by the assessee. Accordingly, he disallowed the entire commission payment of Rs. 15,95,650/- in the assessment.
Before the Ld. CIT(A), the assessee reiterated the submissions made before the Ld. AO by drawing the attention of the Ld. CIT(A) to the relevant details filed before the Ld. AO which clearly proved the services rendered by those commission agents. It was also submitted before the Ld. CIT(A) that in some of the sale invoices, the name of the commission agent was also mentioned which clearly proved that these commission agents were indeed responsible for identifying that particular customer to the assessee for effecting sales thereon. It was further pointed out that the Ld. AO in order to understand this transaction could have cross verified the same with the concerned customers of the assessee to understand the truth as to whether these commission agents 3
4 & C.O. No. 11/Kol/2016 Madhusudan Rungta & Sons (HUF) A.Yr.2012-13 were indeed employed by the assessee for rendering services. All the documents produced before the Ld. AO had been conveniently ignored by him. The Ld. CIT(A) deleted the disallowance by observing as under :
4.2 In ground nos. 2.2 the appellant has disputed the payment of commission. I find that the commission was paid by account payee cheque, tax was duly deducted, confirmation letter from the commissions agents were filed, summons u/s 131 were issued to the commissions agents to which confirmation of the payment of commission was received, the commission agents also informed the names of parties with regard to the goods sold by them, addresses of the parties were available with the AO since the assessee duly filed the details of sales in response to the notice u/s 142(1) which details included the names and addresses of the said parties. It is not the case of the AO that the commission agents have not included the commission receipts in their return, or that the commission was not actually paid to them. In the judgment of the Hon’ble Kolkata High Court in the case of ALPHA HYDRONICS LTD. in of 2004 dated 10th November, 2014 it has been held that “Before us the revenue could not demonstrate either the money was not paid or the money was paid and routed back to the assessee.
In view of the facts of the case the addition of Rs. 15,95,650/- on account of payment of commission is deleted.”
Aggrieved the revenue is in appeal before us on the following grounds:
2. For that the Ld. CIT(A) erred in deleting the disallowance of expenses on account of commission payment of Rs. 15,95,650/-.
3. In the Para No. 3.3. of the order of the Ld. CIT(A), it has been mentioned that “The purchase order from M/s. Seacem Paints (I) Pvt. Ltd. specifically named that the samples of the goods were supplied on behalf of the assessee by Mr. Pankaj Kapoor.” But the fact is that there were no such Purchase Order was produced by the assessee before the AO during the course of assessment. Thus, an additional evidence was produced before the Ld. CIT(A), which was not even remanded to the AO as prescribed in Rule 46A of the I.T. Rules, 1962.
4. In the Para No. 3.3 of the Order of the Ld. CIT(A), it has been mentioned that “The parties also on notice u/s 131 confirmed having received the Commission”. But the fact is that Pankaj Kapoor (HUF) did not even respond to notice u/s 131 and M/s Ambootia Organic Plantation Pvt. Ltd. and I.D.A. Organic Pvt. Ltd. replied that Director of the company is currently out of station and hence, he will not be attending the hearing. Thus, the assessee has misrepresented the fact before the Ld. CIT(A). 4
We have heard the rival submissions. We find that the primary reason for disallowance of this commission by the Ld. AO is due to the fact that the Ld. AO was of the opinion that the assessee had not proved the nature and factum of services rendered by these three commission agents to the assessee. Hence, according to the Ld. AO, the payment of commission, though subjected to deduction of tax at source is merely a book entry to reduce the taxable profit of the assessee. But we find that the assessee had duly furnished the bill raised by those commission agents on the assessee which clearly contained the list of parties i.e. customers of the assessee, to whom sales were made by the assessee. This clearly proves that these parties were introduced to the assessee by the concerned commission agents. We also find that the assessee had furnished the details of sales above Rs 50,000/- before the Ld. AO for the whole year which admittedly contained sales made to the various parties mentioned in the commission bill raised by commission agents. We have also cross verified from the details of sales furnished by the assessee before the Ld. AO with the commission bill raised by commission agents wherein the total sales made to these parties also tally. We also find that the said commission agents even though did not respond to the summons issued by the Ld. AO by making their personal appearance, but had furnished the requisite details to the Ld. AO and had also given confirmation that they had indeed included the subject mentioned commission in their returns and paid taxes thereon. All these facts clearly proved the services rendered by the commission to the assessee achieving the payment of commission. There could be more than one justifiable reason for commission agents for not appearing before the Ld. AO in response to the summons issued thereon. The Ld. AO is empowered under the law to take necessary action against these commission agents for non-compliance to the summons issued to Section 131 of the Act. The Statute provides for relevant remedial measures thereon. The ld AO without resorting to such measures, cannot proceed to disbelieve the claim of commission paid by the assessee when the same are supported by various documents and confirmed by the said parties. 5
6 & C.O. No. 11/Kol/2016 Madhusudan Rungta & Sons (HUF) A.Yr.2012-13 In the instant case, the primary onus has been duly discharged by the assessee proving the claim of commission payments made by the assessee. There is absolutely no reason for the ld AO to doubt the veracity of the said transactions. Admittedly none of the commission agents were relatives of the assessee or interested parties with the assessee so as to allege some mala fide on the part of the assessee. Hence, in our considered opinion, there is no case made out by the ld AO to treat the commission transactions as ingenuine transactions in these facts and circumstances. We hold that mere non- appearance of the said commission agents in person before the Ld. AO would not make the transaction of payment of commission as ingenuine. Hence, we hold that the Ld. CIT(A) had rightly deleted the disallowance of commission made by the Ld. AO. Accordingly, ground nos. 2 to 4 raised by the Revenue are dismissed.
The next ground to be decided in this appeal is as to whether the Ld. CIT(A) was justified in deleting the disallowance of sales promotion expenses in the sum of Rs. 10,30,488/- in the facts and circumstances of the case.
The brief facts of this issue is that the assessee during the course of assessment proceedings furnished the details of sales promotion expenses together with copy of bills and vouchers thereon. The assessee purchased several pieces of assorted gold coins of 1 gm each from M/s Concept Images Pvt. Ltd. , Camac Street, ‘Azimganj House’, 4th Floor, Kolkata-700017 and payments for the same were made by way of account payee cheque by the assessee as under: Date Party Bill No. Cheque No. Drawn on Amount 13.03.2012 472/11-12 000117 Standard 2,50,284/- Chartered Bank (SCB) 13.03.2012 469/11-12 000118 Standard 2,49,590/- Chartered Bank 6
7 & C.O. No. 11/Kol/2016 Madhusudan Rungta & Sons (HUF) A.Yr.2012-13 (SCB) 21.03.2012 489/11-12 000149 Standard 2,59,690/- Chartered Bank (SCB) 21.03.2012 487/11-12 000150 Standard 2,51,750/- Chartered Bank (SCB)
The Ld. AO disallowed the sales promotion expenses of Rs. 10,30,488/- on the ground that genuineness of the claim and services rendered were not proved and also as to what type of promotion these persons have made to the business of the assessee were not proved. The assessee stated that it had incurred sales promotion expenses of Rs. 10,11,323/- towards purchase of small denomination of gold coins for distribution to the persons who had helped in achieving the business targets and Rs. 19,665/- towards payments made to clubs. The Ld. AO observed that the payments to clubs were personal expenses of proprietor and as regards distribution of gold coins, he observed that the assessee failed to give the details of persons to whom such gold coins were distributed. The assessee’s explanation that the payment made to clubs is allowable as decided by the Hon’ble Calcutta High Court in the case of Ashoka Marketing reported in 181 ITR 493 among others was not accepted by the Ld. AO. Similarly the assessee’s explanation that the small denomination of gold coins were distributed to various persons who have been marketing for the business of the assessee in promptly executing the orders in the course of sales and purchase of goods among other services were not accepted by the Ld. AO. It was also submitted that the turnover had increased substantially during the year which has warranted incurrence of these sales promotion expenses to incentivize the concerned parties. The Ld. AO did not heed to the contentions of the assessee and disallowed the entire sales promotion of Rs. 10,30,488/- in the assessment. Before the Ld. CIT(A) the assessee reiterated the same submissions as were made before the Ld. 7 AO with the relevant bills and vouchers and also relied on various case laws. The Ld. CIT(A) deleted the disallowance by observing as under: “4.3 In ground No. 2.3 the appellant has disputed the disallowance out of sales promotion expenses. I find that the amount paid to club was not for membership fee but was on account of enjoying club facilities for meeting business customers and were therefore incurred for business purposes. With regard to the distribution of gold coins, I find that the sales of the assessee has gone up from about 7 crores to about 11 crores maintaining better margin of Gross Profit and maintaining the more or less the same percentage of net profit. The net profit has also gone up. Moreover, the purchase of the coins is not in dispute. Considering the totality of the facts and circumstances of the case, the addition made by the AO from sales promotion expenses is deleted.”
Aggrieved the revenue is in appeal before us on the following ground: 5. For that the Ld. CIT(A) erred in deleting the disallowance of expenses on account of Sale Promotion of Rs. 10,30,488/-.
We have heard the rival submissions and perused the details of sales promotion expenses together with the relevant bills and vouchers enclosed in pages 9 to 18 of the paper book. In support of payments to clubs, it is now well settled that the payments to club is allowable as revenue expenditure by the following decisions: (i) CIT vs. Samtel Colors Limited reported in 326 ITR 425 (Del) (ii) decision of Hon'ble Supreme Court in the case of CIT vs. United Glass Manufacturing Company Ltd. in Civil Appeal No. 30146/2008 dated 13.09.2012.
Respectfully following the aforesaid decisions we hold that the payment of Rs. 19,165/- to clubs towards usage charges is allowable as deduction. With regard to sales promotion expenses of Rs.10,11,323/- representing purchase of small denomination of assorted gold coins, we hold that the explanation given by the assessee is bona fide and reasonable and the same has been given to various parties for maintaining cordial
9 & C.O. No. 11/Kol/2016 Madhusudan Rungta & Sons (HUF) A.Yr.2012-13 relationship with the concerned sales executives who contributed for substantial increase in turnover of the assessee. We find that the Ld. CIT(A) had categorically mentioned that the turnover of the assessee had increased from 7 crores to 11 crores during the year which fact remain uncontroverted before us. This goes to prove the services rendered by those persons who are at the realm of affairs of improving the sales of the company and this also proves the business expediency and incurrence of such sales promotion expenses. Admittedly, these gold coins which were purchased were given as gifts to customers of the assessee and hence, becomes allowable deduction thereon. In this regard, the reliance placed by the Ld. AR on the following decisions are well founded: (i) CIT vs. Avery Cycle Industries Ltd. reported in 296 ITR 393 (P & H) (ii) CIT vs. Tirrihannah Co. Ltd. reported in 195 ITR 393 (Cal)
In view of the aforesaid facts and findings given thereon and respectfully following the aforesaid judicial precedents, we did not find any justifiable reason to interfere with the order of the Ld. CIT(A) in this regard. Accordingly, the ground no. 5 raised by the revenue is dismissed.
The revenue has raised further grounds with regard to disallowance of bad debts written off to the tune of Rs. 1,49,011/-; carriage outward expenses of Rs. 9,01,333/-; loading and unloading expenses of Rs. 3,85,892/-; Motor car expenses to the tune of Rs. 1,10,148/- and telephone expenses of Rs. 16,236/-. The Ld. DR at the time of hearing did not advance any argument and placed reliance on the order of the Ld. AO. In response to this, the Ld. AR stated that as far as the disallowance of various expenses such as carriage outward, loading and unloading, motor car expenses, and telephone expenses, the same were made by the Ld. AO on an estimate basis. The Ld. CIT(A) had deleted the same in view of the fact that the books of accounts produced by the assessee 9
10 & C.O. No. 11/Kol/2016 Madhusudan Rungta & Sons (HUF) A.Yr.2012-13 were not rejected by the Ld. AO and hence, there is no scope of making any disallowance on estimate basis. We find that the Ld. CIT(A) also had given a categorical finding that all these expenses were incurred for the purpose of business of the assessee. These facts and findings were not controverted by the revenue before us. Accordingly, we do not find any justifiable reason to interfere in the order of the Ld. CIT(A) as far as these issues are concerned. Accordingly, grounds no. 7 to 9 raised by the revenue are dismissed.
With regard to disallowance of bad debts written off to the tune of Rs. 1,49,011/-, we find that the Ld. AO had disallowed the same on the ground that mere making of provision for bad and doubtful debt does not amount to writing off of the debt and further the assessee has not produced any evidence from which it could be established that he has accounted for the sales in computing the income of the previous year in terms of Section 36(2) of the Act. In response to this, we find that the assessee submitted that the debt of Rs. 14,90,113/- became bad as back in the year 2005-06. From that year onwards, the assessee has been consistently writing off 10% of the balance as bad debt in his books of accounts every year, so that there is no constraint on the net profit of the business of each year. It was also seen that such bad debts has been consistently allowed by the revenue commencing from assessment year 2005-06 to assessment year 2011-12. Hence, there is no reason for the revenue to take a different stand during this year when same facts and circumstances are permeating. The Ld. CIT(A) had appreciated this fact and by placing reliance on the decision of the Hon'ble Supreme Court in the case of TRF Limited reported in 323 ITR 397, and also on the decision of Hon'ble Supreme Court in the case of Madras Industrial Investment Corporation Ltd. reported in 225 ITR 802 allowed the claim of the assessee. We do not find any justifiable reason to interfere in the order of the Ld. CIT(A). Accordingly, the ground no. 6 raised by the Revenue is dismissed.
Ground no. 1 and 10 raised by the revenue are general in nature and does not require any specific adjudication.
During the course of hearing, the Ld. AR submitted that the Cross objection preferred by the assessee are only supportive of the order of the Ld. CIT(A).
In the result, the appeal of the Revenue is dismissed and the Cross Objection of the Assessee is allowed.
Order pronounced in the Court on 15.11.2017