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Income Tax Appellate Tribunal, “I” BENCH, MUMBAI
Before: SHRI SAKTIJIT DEY & SHRI RAMIT KOCHAR
Date of Hearing – 19.12.2016 Date of Order – 21.12.2016 2 M/s. Tegh Cables Pvt. Ltd. O R D E R PER SAKTIJIT DEY, J.M.
These cross appeals are directed against the order dated 2nd May 2014, passed by the learned Commissioner (Appeals)–8, Mumbai, for assessment year 2010–11.
2. Grounds raised by the assessee are as under:– “1. The learned Commissioner (Appeals) grossly erred in relying merely on inquiries made by the Assessing Officer in respect of five parties to whom commissions / brokerage have been paid and has further erred in extrapolating the same by applying the formula of randomly disallowing entire commission / brokerage to the extent of 25% without appreciating the fact of the case in the right perspective.
The learned CIT(A) erred in not giving reasonable opportunity to the appellant’s representative Mr. Snehal Shah to pled the case of appellant on the schedule date of hearing.
3. The learned CIT(A) has erred in disallowing the claim of depreciation amounting to ` 2,43,084 without appreciating the fact of the case in the right perspective.”
Grounds raised by the Revenue are as under:–
1. On the facts and in circumstances of the case and in law, the CIT(A) erred in directing the AG. to restrict 25% of total commission/brokerage payment against 90% disallowed by the assessing officer as bogus claim of commission/unexplained expenditure u/s 69 of Income-Tax Act
2. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) erred in directing to A.O. restricting the disallowances upto 25% without cogent reason. He summarized that it would be proper in his opinion that commission/brokerage payment made by appellant should be restricted upto 25% only without any basis".
3 M/s. Tegh Cables Pvt. Ltd.
3. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) allowed relief to the assessee, however he himself mentioned that it cannot be denied that the appellant has inflated commission/brokerage expenses (vide para–2.7 of the appellate order)".
4. On the facts and in the circumstances of the case and in law, the Ld.CIT(A) has ignored the facts narrated in the Assessment Order. The facts as per assessment folder are clear that Party No.1- Ms. Anjali R Nvani, Party No.2- Shri Sunil A Rohra, Party No.3- Ms.Nitu Lakhani, Party No.4- Ms Shubhalaxmi P. Mishra have clearly indicated that no commission was paid to them by the assessee. Discrepancies were also noted in the other confirmations. The allowance of 10% commission under these circumstances only reflects the judicious decision of the officer. Penalty u/s 271(1)(c) has specifically been initiated on this issue."
As could be seen, grounds no.1 and 2 raised by the assessee corresponding to grounds raised by the Department are on the common issue of addition made by the Assessing Officer and sustained by the learned Commissioner (Appeals) on account of commission and brokerage payment. As these issues are common in both the appeals, they are taken up for adjudication herein after.
Brief facts are, the assessee a company is engaged in the business of distribution and trading in various types of wires and cables. For the assessment year under consideration, assessee filed its return of income on 29th September 2010 declaring total income of ` 60,70,809. In the course of assessment proceedings, the Assessing Officer noticing that the assessee had debited an amount of ` 77,13,856 to the Profit & Loss account towards brokerage /
4 M/s. Tegh Cables Pvt. Ltd. commission called upon the assessee to furnish party–wise details of brokerage / commission paid with confirmation. He also called upon the assessee to explain the reason for increase in commission and brokerage paid. In response, the assessee furnished the party–wise details of brokerage / commission paid along with confirmation. It was also explained that in the relevant financial year the turnover of the assessee has increased substantially from ` 12.53 crore on the earlier assessment year to ` 39.80 crore. It was also submitted, the commission paid works out to 1.93% of the sales turnover as compared to 8.46% in the preceding assessment year. Thus, it was explained, the commission paid is reasonable. The Assessing Officer after verifying the details, however, was not convinced with the explanation of the assessee. The Assessing Officer for the purpose of enquiry picked up five parties to whom the assessee had paid brokerage and commission by issuing summons under section 131 of the Act and statements were recorded from them. After examining the statements recorded from the concerned parties, the Assessing Officer observed, in case of Shri Sunil Rohra, though, the assessee is paying annual commission of less than ` 10,000, however, in the TDS certificate in Form no.16A, the amount of commission paid is mentioned at ` 2,00,990. Further, the concerned person is not actually working for the assessee company and has no idea about the basis of 5 M/s. Tegh Cables Pvt. Ltd. commission. Similarly, in respect of Ms. Anjali Navani, it was found that she has no idea about the work done, who files her return of income and what is her commission income. She also stated, she is a house wife and her name is being used. It was also found that Ms. Saanjhi Laxmi, to whom the assessee claimed to have paid commission, as per statement of her mother she is pursuing her graduation in U.S.A. for the last one year. As far as commission received by Ms. Nitu Lakshmi, the Assessing Officer observed, she could not explain anything about her transaction with the assessee company and she had no idea about the money going and coming out of her account. As far as Ms. Shubha Laxmi Mishra, to whom the assessee claimed to have paid commission, it was found that she stated that her father manages her account and she does not know anything. Thus, on the basis of the statements recorded from the aforesaid parties, the Assessing Officer concluded that the assessee without actually paying the commission / brokerage to the concerned parties has inflated the expenditure. Accordingly, he observed, considering the nature of business, 10% of the commission / brokerage is allowable to the assessee and consequently, added back balance 90% amounting to ` 69,42,471 to the income of the assessee. Being aggrieved of such addition, assessee preferred appeal before the first appellate authority.
6 M/s. Tegh Cables Pvt. Ltd.
The learned Commissioner (Appeals), after considering the materials available on record and submissions of the assessee, though, agreed with the Assessing Officer that the assessee has inflated the expenditure on account of commission / brokerage to some extent, however, he did not agree on the quantum of disallowance made by the Assessing Officer. He observed, out of 37 parties to whom the assessee claimed to have paid commission / brokerage, the Assessing Officer has conducted enquiries in respect of five parties and as far as remaining parties are concerned, the Assessing Officer has not recorded any finding. He noted, the commission paid to these five parties enquired into by the Assessing Officer amounted to ` 11,06,549. Taking this into account, the learned Commissioner (Appeals) observed, disallowance made by the Assessing Officer is highly excessive. Accordingly, he restricted the disallowance to 25% of the total commission / brokerage payment made by the assessee which worked out to ` 19,28,464. Being aggrieved of the aforesaid decision of the learned Commissioner (Appeals), both the assessee and the Department are in appeal before us.
Learned Authorised Representative submitted, during the assessment proceedings, the assessee had furnished confirmation in relation to all the 37 parties to whom commission was paid and also 7 M/s. Tegh Cables Pvt. Ltd.
furnished all other necessary details relating to payment of commission. He submitted, out of 37 parties, the Assessing Officer examined only five persons by issuing summons under section 131 and as far as rest of the parties are concerned, the Assessing Officer has not made any adverse inference. He submitted, even in respect of five parties examined by the Assessing Officer, it was submitted, the assessee was never confronted the statements recorded from them nor was given opportunity to cross examine them. He submitted, the Assessing Officer in the course of assessment proceedings not even disclosed a single information about the enquiry conducted by him with the concerned party. Only after completion of assessment, the assessee could come to know from the assessment order the enquiry conducted by the Assessing Officer with the five persons. The learned Authorised Representative submitted, before the learned Commissioner (Appeals), though, a assessee has raised A specific ground challenging the action of the Assessing Officer in not allowing the assessee an opportunity of cross examining the parties, the learned Commissioner (Appeals) failed to adjudicate the ground. He, therefore, submitted, the addition made on the basis of statements recorded without confronting them to assessee or allowing opportunity to the assessee to cross examine is invalid.
8 M/s. Tegh Cables Pvt. Ltd.
Learned Departmental Representative on the other hand relying upon the observations of the Assessing Officer submitted to verify authenticity of assessee’s claim, the Assessing Officer had issued summons to five parties on random basis who in statements recorded from them revealed complete ignorance about the commission earning activity. Therefore, the Assessing Officer was justified in making disallowance of commission payment on some reasonable basis. He submitted, learned Commissioner (Appeals), therefore, was not justified in restricting the disallowance to 25% of the commission paid.
We have considered the submissions of the parties and perused the material available on record. Undisputed facts are, during the relevant previous year, assessee had paid commission amounting to ` 77,13,856 to 37 parties. It is evident from the assessment order itself in the course of assessment proceedings in response to query raised by the Assessing Officer, assessee not only furnished party–wise details of brokerage / commission paid but also submitted confirmations from all the persons to whom commission was paid. Even, assessee explained reason for increase in commission payment which, according to the assessee, was due to almost three fold increase in the turnover of the assessee from the preceding assessment year. As it appears, the Assessing Officer chose to conduct enquiry on random basis selecting five parties to whom summons were 9 M/s. Tegh Cables Pvt. Ltd.
issued under section 131 of the Act. As it appears, these summons were issued to the concerned parties at the fag end of the proceeding and these parties were examined and statements were recorded from them. On the basis of statements recorded from these five parties, the Assessing Officer concluded that the assessee has made bogus claim of commission payment and accordingly, disallowed 90% of the commission claimed to have been paid by the assessee. It is the specific pleading of the assessee that in the course of assessment proceedings, the Assessing Officer never disclosed to the assessee any information relating to the enquiry conducted by him in relation to commission payment by either confronting the statements recorded from five parties or allowing the assessee an opportunity to cross examine the concerned parties. These contentions of the assessee have remained uncontroverted. No material has been brought before us by the learned Departmental Representative to demonstrate that before completion of assessment, the Assessing Officer either confronted the statements recorded from the five parties to the assessee or allowed opportunity of cross examination. That being the case, there is clear violation of rules of natural justice as the assessee has been denied a fair opportunity of hearing by the Assessing Officer. Though, the assessee has raised a specific ground on this issue before the learned Commissioner (Appeals), he has failed to adjudicate the 10 M/s. Tegh Cables Pvt. Ltd. same. It is a fact on record that the Assessing Officer has not made any adverse comment in respect of any party other than the five parties examined by him. It is also evident, in respect of rest of the parties the Assessing Officer has not made any enquiry. Therefore, without making any enquiry in respect of other parties, it is totally unjustified on the part of the Assessing Officer to disallow 90% of the commission payment on the basis of enquiry conducted by him in respect of five persons to whom aggregate amount of commission paid is only ` 11,06,549. More so, when the Assessing Officer has allowed 10% of the commission paid thereby agreeing that some amount of commission paid by the assessee is genuine. However, on what basis, he has quantified such payment to 10% of the amount paid by the assessee is unknown. Under these circumstances, we are inclined to set aside the impugned order of the learned Commissioner (Appeals) on this issue and restore the matter back to the file of the Assessing Officer for deciding assessee’s claim of commission payment afresh after considering the facts and material on record. We make it clear, the Assessing Officer must confront to the assessee any adverse material collected by him in pursuance to enquiry conducted and provide opportunity to the assessee to cross examine the parties whose statements he proposes to utilise against the assessee. Only after providing fair and reasonable opportunity to the assessee to have 11 M/s. Tegh Cables Pvt. Ltd. his say on such adverse material, the Assessing Officer shall proceed to decide the issue with proper reasoning after considering the submissions of the assessee. Thus, grounds no.1 and 2 are allowed for statistical purposes. In view of our above decision, grounds raised by the Department in its appeal have become infructuous, hence, dismissed.
In ground no.3, assessee has challenged the disallowance of depreciation claimed on motor car of ` 2,43,084.
Brief facts are, during the assessment proceedings, the Assessing Officer noticing that the assessee has claimed depreciation on purchase of motor car called for necessary details from the assessee. On examining the details furnished by the assessee, the Assessing Officer noticed that the motor car is registered in the name of the director of the company during the financial year 2009–10. The Assessing Officer observed, though, the motor car is purchased from the funds of the company, however, the company is not the legal owner of the vehicle as the vehicle stands registered in the name of the director. Accordingly, he disallowed assessee’s claim of depreciation for an amount of ` 2,43,084.
Though, the assessee challenged the disallowance before the learned Commissioner (Appeals), he also confirmed the same.
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Learned Authorised Representative submitted, though, motor car was registered in the name of one of the directors, however, it was purchased with the funds of the company and it is shown as an asset in the books of account of the assessee. He submitted, the motor car is wholly and exclusively used for assessee’s business. Therefore, merely because it was registered in the name of one of the directors, depreciation claimed cannot be disallowed. In support of such contention, learned Authorised Representative relied upon the decision of the Tribunal, Mumbai Bench, in Edwise Consultants Pvt. Ltd. v/s DCIT, ITA no.5376/Mum./2011 and ITA no.594/Mum./2013.
Learned Departmental Representative relied upon the observation of the learned Commissioner (Appeals) and the Assessing Officer.
We have considered the submissions of the parties and perused the material available on record. As could be seen from the orders of the Departmental Authorities, only reason on which assessee’s claim of depreciation was disallowed is, the motor car is registered in the name of one of the directors. However, undisputed facts are, the motor car was purchased with the funds of the assessee. It appears, as an “asset” in the books of account of the assessee. There is also no dispute that motor car is wholly and exclusively used for the business
13 M/s. Tegh Cables Pvt. Ltd. of the assessee. Therefore, merely because the motor car was registered in the name of one of the directors under the Motor Vehicles Act, it cannot be said that the assessee is not the owner of the vehicle. For the purpose of claiming deprecation under section 32 of the Act. The decision relied upon by the learned Authorised Representative supports this view. Accordingly, we allow assessee’s claim of depreciation. Ground no.3 is allowed.
In the result, assessee’s appeal is partly allowed and Department’s appeal is dismissed. Order pronounced in the open Court on 21.12.2016