DCIT, ROURKELA vs. INDRANI PATNAIK, ROURKELA

IN THE INCOME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK

BEFORE S/SHRI N.S SAINI, ACCOUNTANT MEMBER AND PAVAN KUMAR GADALE, JUDICIAL MEMBER

ITA No. 142/CTK/2015 Assessment Year : 2010-2011

DCIT, Rourkela Circle, Vs. Smt. Indrani Patnaik,A-6, Rourkela Commercial Estate, Civil Township, Rourkela. PAN/GIR No.ACCPP 6164 E (Appellant) .. ( Respondent)

Assessee by : Shri D.Pati, AR Revenue by : Shri Kunal Singh, CIT DR

Date of Hearing : 29/08/ 2017 Date of Pronouncement : 31/08/ 2017

O R D E R Per N.S.Saini, AM This is an appeal filed by the assessee against the order of the CIT(A)-2,

Bhubaneswar dated 28.1.2015 for the assessment year 2010-2011.

deleting the entire addition 7,09,10,967/- under the head “brokerage and

commission” .

during the year under consideration, the assessee has shown turnover of

Rs.458,16,44,870/- as against turnover shown in the preceding year at

Rs.260,77,44,068/. He also observed that the gross profit for the year under

consideration was shown at 54.18% and the net profit at 45.94%. He observed

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that on verification of audited P & L A/a, it is observed that the assessee has

debited an amount of Rs.14,13,86,450/- under the head 'Brokerage &

Commission” as against claim of Rs.6,35,61,976/- made in the preceding year .

The Assessing Officer required the assessee to furnish details of expenses. In

reply, assessee furnished the copy of bills raised by the commission agents. The

Assessing Officer made correspondence with the commission agents and required

them to furnish name and address of buyers for whom they have executed

commissioning work alongwith nature of services rendered and the basis of claim

of commission. In some of the cases, commission agents in reply only furnished

the name of the buyer without the address. In some other cases, letters issued to

commission agents u/s. 133(6) of IT.Act, 1961 were returned unserved by the

postal authorities with remark “not known/left/addressee refused.” In some

cases, commission agents did not mention anything about the agents and only

pleaded that they have executed work only for Indrani Patnaik. Thereafter, the

Assessing Officer observed that it is seen that while making payment towards

commission, assessee has deducted tax at source as required u/s.194H of the Act.

He observed that mere deduction of tax at source does not establish that the

claim of expenses is genuine. By making provision of TDS, the assessee only

looses 10% of the expenses, whereas claim of expenses gives the benefit of 90%

to the assessee. He further observed that commission agents against whom tax

has been deducted at source are bifurcating the commission income and reflecting

the same in their individual capacity as well as in the capacity of HUF and also in

the name of family members to keep the income below taxable limit. Lastly, he

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observed that the commission agents are generating refund through this TDS

amount. Further, the Assessing Officer observed that during the course of

assessment proceedings, the situation was also confronted to the assessee in

response to which the assessee stated that all the commission agents are regular

assessee and their respective status has no relevance with the assessee’s

business. The Assessing Officer observed that it is further seen that the assesse

has paid commission to corporate assessee who are loss making and

self/assessment tax defaulter. The assessee has made TDS and service tax and

then also it is beneficial for the commission agents as they have never rendered

any services and consuming TDS components. Therefore, he held that it is

established fact that commission agents have never rendered any services to the

assessee and simply raised bills in regard to commission on which mere provision

of TDS was made to sustain the claim of commission expenses. The commission

agents are providing accommodation entry to the assessee by which, the assessee

could able to inflate the expenses by way of commission. Accordingly, he made

category wise disallowance as under:

i) Category -1 (Buyers have denied) : Rs.5,08,01,314 ii) Category -II (letters sent to buyers unserved) : Rs. 55,56,819 iii) Category-III (buyers not complied though served) Rs. 69,14,054 iv) Category -IV(agent not furnished buyers name) : Rs. 29,21,476 v) Category -V (HUF concerns) : Rs. 47,17,304 Rs.7,09,10,967

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“1. Commission on Sales: Rs. 7,09,10,967/- have been disallowed under this head, on various grounds, as under: Rs. 5,08,01,314/- have been disallowed on the ground that some a. buyers stated that they made direct purchase from the assessee. As submitted by the assessee during assessment proceedings, the assessee had engaged the agents to look after its interest with a view to smoothen the whole process of supply of materials to various parties. On the other hand, the buyers had not appointed the agents, nor they paid to them, as such their denial as regards involvement of agents, without any financial involvement on their part, it is humbly submitted, can’t negate the expenditure incurred by the assessee.

b. Rs.55,56,819/- have been disallowed on the ground that some letters issued by the department were returned unserved. The assessee had provided addresses of the agents and buyers, as available with it. It also provided copies of the acknowledgements of returns submitted by the agents, which carry their addresses, PAN., details of Jurisdictional assessing officers etc. If due to some reason, the letters were returned unserved, it is submitted, the appellant was not at fault. c. Rs.69,14,054/- have been disallowed on the ground that the department didn’t receive any communication from the agents/buyers.

The assessee reiterates its stand that it provided all necessary details of the agents and buyers and it may not be treated to be at fault for their failure to respond to the departmental notices.

Rs.29,21,476/- have been disallowed on the ground that the agents failed to furnish names of buyers.

It is humbly submitted that the assessee submitted all details before the ld AO including bills raised by the gents, copies of their returns, details of service tax paid, wherever applicable, details of tax deducted at source , details of buyers etc and as such it discharged its onus as regard the genuinity of the expenditure incurred by it.”

addition.

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justified the order of the CIT(A).

and materials available on record. We find that the CIT(A) deleted the

disallowance of Rs.7,09,10,967/- out of total commission payment of

Rs.14,13,86,450/- by observing as under”

“I have considered the content and substance of the impugned assessment order and the Grounds of Appeal preferred and the additional submissions filed by the Appellant, and accordingly decide as under:

a) It is clear from the outset that the AO has not correctly understood the meaning and import of the term “agent”. It is not necessary that an agent receiving Commission payments has to always be a physical go-between between the principal (the Appellant in the instant case) and his/her/its customers being buyers. An agent can carry out the business of prospecting for client-buyers which would mean that many of the intended targets may not transform into buyers or may decide to purchase the items directly from the principal instead of through the agent or even without informing the agent. An advertising agent, likewise, has only a generic target segment and no customers can be asked of such agent to be specifically identified. A procurement agent, on the contrary, may have a set of sellers from whom he/she routinely contracts for purchases. b)The Cambridge dictionary defines an agent as “someone who sells a company's products and receives a part of the money paid for the goods for doing this", which would mean that it would be unfair and unreasonable in many cases and circumstances to expect such agent to remember and provide the names of the multitude of buyers. c) It is also clear from the definition that an agent is dependent for his/her/its incomes on his/her, Its principals and the sales that he/she/it helps facilitate for the latter. A commission agent derives compensation from actual sales, usually expressed as a percentage of sales. In many cases, they may facilitate in locating buyers for goods/services, providing information about the product, making the actual sale, and ensuring delivery and follow-up service. However, the precise nature and details of the facilitations engaged in by the

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agents depends upon the facts and circumstances of the arrangement/agreement entered into with the principal, the nature of the products/goods sold, relevant business factors, etc. Benefits from the agency arrangement accrue to both the principal and agent. Principals can extend market reach without incurring major fixed personnel costs, and agents can earn compensation based on their productivity. Some agents may represent more than one principal. All of the above mean that the agent is more reactively dependent on the principal being part of a direct arrangement than with the clients/buyers/customer which relationship is more proactive and hence independent. While, commission agents depend on customers in generating their compensation, the compensation itself is paid by the principal after the customer/buyer pays the principal the proceeds of the sale or other transaction. While some agents may be aggressive, they also depend on satisfied customers for repeat business and are motivated to that end; it is in this connection that some of them may keep track of buyers/customers in their own interests. Such tracking and retrieval of customer details upon demand, as the AO has insisted upon, is not. part of a mandatory or statutorily stipulated nature of duties of all agents. d) There are Commission agents who arrange and participate in the sales and arrange outbound- movement-and-packing, transport and logistics in the interests of the principal, and there are agents who do not. The law of agency is an area of commercial law dealing with a set of contractual, quasi-contractual and non-contractual fiduciary relationships that involve a person (the agent), who is authorized to act on behalf of another (the principal) to create legal relations with a third party. Succinctly, it may be referred to as a more-or-less equal relationship between a principal and an agent whereby the principal, expressly or implicitly, authorizes the agent to work under his or her or its control and on his or her or its behalf. The agent is, thus, required to negotiate on behalf of the principal or bring him or her and third parties into a contractual relationship. The reciprocal rights and liabilities between a principal and an agent reflect commercial and legal realities. A business owner often relies on an employee or another person to conduct a business. The principal is bound by the contract entered into by the agent, so long as the agent performs within the scope of the agency. Importantly, a third party may rely in good faith on the representation by a person who identifies himself as an agent for another. It is not always cost effective to check whether someone who is represented having the authority to act for another actually has such authority. If it is subsequently found that the alleged agent was acting without necessary authority, the gent will generally he held liable.

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e) In the instant case, the agents were relatively small and unknown players. Also, as per the terms of the agreements/understanding with the Appellant, they did not appear to have any authority to attract or enlist buyers for the Appellant. Their range of duties was limited to facilitating smooth supply of goods to the buyers.' This would mean that they were in most cases interacting with buyers who were in direct transactional and interactive relationship with the Appellant. The buyers therefore had no cause to regard the agents as purchase intermediaries (they being supply facilitators temporarily visible at a given point in time in respect of the transactions operational at that time) and the agents had no reasons to prepare iron-clad lists and details of the buyers. Therefore, there was little reason for the buyers to make enquiries about the agents and certify the genuineness or veracity of the latter in the matter of supplies of materials. I All the buyers were concerned with was the timely delivery of quality-tested goods/products as specified by them. All the Appellant expected from the agents was total adherence to the terms of the agreement/arrangement between them.

f) Therefore, the express non-remembrance of the agents in the creative-proactive awarenesses of the buyers alone will not negate the fact of the impugned transactions and the truth and character of the Commission payments. The AO has not carried out any investigations or inquires, on unearthed/discovered any evidences that suggest that the transactions and payments were not what they seemed to be. The decision to disallow has been made on presumption, surmise, conjecture, supposition, and a summary and unilateral conclusion based on rudimentary facts (of the buyers being presumably non-existent or apparently unaware of the agents and the agents being unable to list the buyers) taken in prejudiced isolation and based on a spurious implied “transcendental” principle that seeks to cover/fill the schism between flimsy foundations and meretricious arguments on one side and a tendentious decision on the other. This is not a scientific, professional and responsible exercise carried out by the AO. Much more homework was required to be done by the AO in discharge of his responsibilities, which he plainly failed to carry out.

g) How to go about doing one’s business sis the prerogative of the business man, as are the related matters like incurring expenses,

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making investments, obtaining loans and providing advances, etc. The decision of Hon’ble Supreme Court in the case of S.A. Builders Limited vs CIT, 288 ITR 1 (SC) is relevant. The Hon’ble Court held in the above ratio reiterated the settled position in the past that no businessman can be compelled to maximize his profit. While considering the claim of deduction of any expenditure, income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. Once it was established that there was nexus between the expenditure and purpose of the business, revenue cannot justifiably claim to put itself in the arm chair of the businessman or in the position of the board of directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. The authorities must look at the matter not from their own point view but that of a prudent businessman.

h) Consequently, whether to engage the services of a Commission agent or not in respect of her sales is the business prerogative of the Appellant, and even if such agents do are not able to bring in a single customer, the expenses made of the nature of Commission payments to the agents would not be ineligible.

i) In harmony with the principles of economic neutrality, what is to be verified is whether the agents are creating economic value for the Appellant through the functions carried out, risks absorbed and assets being time and effort invested in by it, and is therefore entitled to be compensated for the same in the form of receipts of Commissions. Compensation can be denied or disallowed only if it is proved that the apparent arrangement is not germane or related to the business and/or is non-genuine and no economic value is being generated by the agent for the principal. The Appellant is free to enter into agreements with and appoint as many agents, as it seeks to, in line with its business needs and commercial practices. If the agreements and appointments are wholly and exclusively for the purpose of business, and the payments made in the said regard are fully billed/vouched, accounted for and audited, then there is little scope for Revenue to take a prejudicial view. j) The AO has not been able to show that the payments have not been made to the purported agents and that these payments are not relatable to the carrying out the business and for other

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business purposes. The AO has merely leaped to conclusions (in the cases of Categories II, III and IV) that the seeming absence of buyers (as ostensibly evidenced by letters addressed to them returning unserved), or the negations or disavowals by such buyers of any knowledge or nexus with the agents or the inability of the Commission agents to list the actual buyers would automatically disentitle the agents of their status and rights to receive Commission payments. In the scheme set in place by the Appellant, the buyers directly transacted with her; the agents did not enroll them and therefore in most cases would not know them. The agents would be able to only provide some names of buyers in respect of whom/which the agent would have facilitated the supply after the sales were made. Likewise, sworn depositions from the buyers that they did not know the agents would not make for adverse finding because in the minds of these buyers, they had transacted directly with the Appellant, and the person referred to as an agent would have appeared in their eyes like an employee of the Appellant or other individual engaged in facilitating the movement of the goods, and not in a formal position of engagement as an ‘agent’. k) What was needed for the AO was to prove any of the following: a) the impugned agents did not exist or were not genuine agents; b) the agents had not carried out any facilitation work for the Appellant; and c) the agents had not actually received the stated Commission moneys. He has instead proceeded on presumptions and concluded on unproven inanities that the absence of information about the buyers meant that the Commission agents did not exist or were not genuine participants in the Appellants business. In respect of Category I, the buyers confirming at they had carried out direct transactions with the Appellant is well within the general and accepted scheme of things. It is not part of the role of the agent to always act as a physical intermediary between the buyers and the appellant being the sellers. Purchases were directly made from the appellant with the agent remaining in the background. The buyer is interested only in effecting the purchases; he is not duty bound to keep tax on the appellant -seller’s agents and prepare lists when called for. Buyers also interact with several agents of the same nature employed by their respective competing principals participating in the suppliers of material supplies. Such lack of awareness alone 'does not take away the character of the payments made being that of commissions or the truth and genuineness of the principal- agent transactions. The part of the order that deals with the enhancements of Commission payments appears to have framed

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on suspicion and presumption, and as held by the Hon’ble Supreme Court in the case of State of Kerala vs. M.M. Mathew 42 STC (1978), however strong such suspicion or presumption it could not replace legal proof. l) In the matter of the disallowance of the Commission amounts paid to the HUFs totaling Rs. 47,17,304/- (Category V), the simple issue was whether the payments were made to the HUFs concerned. Whether the payments were assessable as incomes in the hands of the kartas or in the hands of the HUFs themselves is a separate matter. The AO’s ground that an HUF could not seemingly ‘physically’ receive the commission amounts is not one that automatically disallows the expense in the hands of the payer. Separately, the conclusion of the AO that HUFs are not “physical entities” display a lack of understanding/appreciation of the plain meanings of the word “physical” which inclusively connotes a corporeal, material, phenomenal and temporal existence or state of being. When there is no technical meaning defined of a word employed in the statute, the general meaning of the same in a plain and inclusive sense needs to be employed.

m) The word “physical” does not lend itself to easy definition or connotation. It means different things to different people. When undoubtedly ‘physical’ man inhabits a ‘physical’ world, it stands to deductive reason that groups of such men such as Associations of Persons (AoPs) and Bodies of Individuals (Bols) too are ‘physical’ in essence. Employing the canonic principle of noscitur a sociis (a word is known by the company it keeps), it can be readily seen that an HUF as defined u/s 2(15) of the Income-tax Act is accompanied by other persons that include “individual”. It obviously cannot be the AO’s case that an ‘individual’ is not a ‘physical entity’, and it follows therefore that an HUF, and all the other persons mentioned therein are “physical entities” under the statute.

n) The word “physical” itself is derived from the Latin word “physis” which meant matter in its indivisibly elemental form. However, the physical world is both tangible and intangible. The human mind inhabits the physical world and there are philosophies that hold that mind is made up of an intangible physical substance. The corpus of human knowledge as it exists today is indeed regarded as a “physically substantive” entity by such philosophers. In any event, the statement of the AO that an HUF is not a “physical entity” has been made without laying any

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factual foundation or logical discursive, deductive or inductive process and calls for a sweeping and baseless conclusion. Even if the word “physical” is interpreted in its most limited definition of “relating to a body”, it cannot be stated that the HUF as defined in the Income-tax Act does not have a body and is therefore “non-physical”. For, HUFs are made up of eminently “physical” human beings. Next, even if an HUF is not “physical”, nowhere is the word “physical” defined in the Income-tax Act or it mentioned anywhere therein that Commission payments are to be made only to “physical” entities. Under this argument, a registered firm or a limited company would also not be “physical” entities, as they are defined and exist only in law. O) HUFS exist as entities under law which is a creation of corporeal-physical man to fulfill and facilitate his life’s needs and objectives. HUFs exist in physical form as manifested through. their Kartas and in such form, and as, defined “persons” under the Income-tax Act u/s 2(15) are / perfectly capable of carrying out business and/or commercial transactions. There are no physical/legal infirmities in this regard. In the case of Ram Laxman Sugar Mills-v-CIT 66 ITR 613 SC, it has been held that A Hindu undivided family is undoubtedly a "person" within the meaning of the Indian Income-tax Act. In various cases that indicate that the Honourable Courts have upheld that HUFs can earn commission income, the following may be considered. Where the karta is a partner representing the HUF in a firm and salary or commission is paid to such partner, the issue arises whether such salary or commission should be assessed in the hands of HUF or as personal income of the karta. The test laid down by the Honourable Supreme Court in Kumar Singh Hukam Singhji 78 ITR 33 (1970) (SC) is whether such payment has been made because of investment in the firm or as a compensation for the services rendered. In case of the former, it will be assessed as income of the HUF while in case of the latter, it will be assessed as the personal income of the karta. This proposition of law has been reiterated in Prem Nath-vs-CIT 78 ITR 319 (1970)(SC) and has been followed in CIT-vs-Lachliman Dass Bhatia 162 Taxmann 118 (Del). These decisions mean that HUFs can earn commission incomes that are assessable in its hands (as against those of the karta) under certain conditions. In any event, in this case, the payment has been made and whether the same is to be assessed in the hands of the HUFs or their respective kartas is a decision to be taken by the respective AOs possessed of the jurisdiction of those cases.

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p) The AO’s pejorative statements in the assessment order that ‘7/ may also be recalled that an expenditure is an expenditure when the payer and the payee are two different hands and two different beings. Here it is the services which are being paid for and these services could only be provided by flesh and blood. Such income cannot be attributed to an entity like HUF as the HUF cannot perform functions of an individual being because of not existing in physical form ” is to be seen against the fact that the Appellant and the receivers (the HUFs) are two different hands and two different beings. Also and in particular, no fair and reasonable opportunity has been provided to the Appellant to argue the point of the ‘physicality’ or otherwise of an HUF. q) In consequence of all the above, it is held that the AO’s action in disallowing the impugned expenses totaling Rs. 7,09,10,967 have been made on extremely thin and specious grounds that the buyers were not found or did not respond or disclaimed any knowledge of the agents or that the agents were not able to remember the buyers or were not able to furnish detailed particulars about them or for the reason that the Commission agents were HUFs. All of them are reasons that do not show any clear understanding about the reasons for and the manner in which the agents have been employed and engaged by the Appellant. The Appellant is seen to have made the necessary deductions of I DS, maintained the necessary bills, receipts certificates and other documentation, made the necessary entries in books of accounts that have been duly audited and also furnished the Income-tax particulars of the agents before the AO. Copies of some of the communications made by the Appellant to the AO in this regard have been provided on record by the Appellant. r) The inverse argument of the AO that the TDS deductions were part of a grand income- concealment-tax-evasion-or-escapement scam operated by the Appellant in a manner that the latter was enabled to legally decamp with 90% of unaccounted money diversions at a cost of 10% of the same towards TDS, is not borne out by factual evidences or the diligent results of rigorous inquiry. The statement of the AO that the Commission agents were proved to have rendered no services to the Appellant too is seen to be one that calls for a conclusion without due foundation. Recording sworn statements from the buyers and not obtaining these from the Commission agents themselves is an asymmetric exercise, and the latter would have revealed the k- true picture to the AO.

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s) The enhancement made of Rs. 7,09,10,967/- on the said count is consequently deleted and the Appeal allowed.” 8. Ld D.R. could not point out any specific error in the findings of the CIT(A)

that at times commission agent when approaches the purchasers, he does not

identify himself as an agent of the seller and merely identifying himself as

representative of the seller, in such circumstances, the buyer cannot be aware

that the person who has approached is employee of the seller or agent of the

seller. Further, the CIT(A) observed that the commission may be paid to an agent

for facilitating the trade even when the orders are directly given to the sellers by

the purchasers. Further, non-service of letters to the buyers or non-compliance of

the letters by the buyers does not show that the payment of commission was not

genuine when the relative sale was considered genuine. Further, non-furnishing

of the name of the buyers by agent in compliance to the notice does not

necessarily mean that the agent is not aware of the buyers. Further, to hold that

in no situation commission can be earned by a person like HUF is also not tenable.

We find that no material could be brought before us to show that the person to

whom commission was paid were accommodation/entry provider and the money

which was paid through banking channel to them came back to the assessee. In

the circumstances, in the absence of any specific defect being pointed out in the

order of the CIT(A), we find no good reason to interfere with the order of the

CIT(A), which is hereby confirmed and the ground of appeal of the revenue is

dismissed.

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Order pronounced in the open court on 31 /08/2017.

Sd/- sd/- (Pavan Kumar Gadale) (N.S Saini) JUDICIALMEMBER ACCOUNTANT MEMBER Cuttack; Dated 31/08/2017 B.K.Parida, SPS Copy of the Order forwarded to : 1. The Appellant : DCIT, Rourkela Circle, Rourkela 2. The Respondent. Smt. Indrani Patnaik,A-6, Commercial Estate, Civil Township, Rourkela 3. The CIT(A)-2, Bhubaneswar 4. Pr.CIT-2, Bhubaneswar BY ORDER, 5. DR, ITAT, Cuttack 6. Guard file. //True Copy// SR.PRIVATE SECRETARY ITAT, Cuttack