SRI LALIT KUMAR RUPCHANDANI,KOLKATA vs. ITO, WD-33(3), KOLKATA, KOLKATA

Date of hearing: 27.12.2016 Date of pronouncement: 20.01.2017 For the Appellant: Shri Akash Bansal, CA For the Respondent: Sk. Z. H. Tanveer, JCIT, Sr. DR ORDER

Per Dr. A. L. Saini, AM:

“Further, in the case of Bhagat Construction Company Pvt. Ltd. vs. CIT (2001) 250 ITR 291 (Delhi). Hon'ble High Court at Delhi has held that a colourable transaction is one which is seemingly valid, but a feigned or counterfeittransaction entered into for ulterior purposes. In the case of the assessee, the entire commission payment transaction was arranged with the sole and only ulterior motive to evade taxes. The case of the assessee is truly and squarely covered by all the judgments of Hon'ble Supreme Court and Hon'ble High Courts cited above.

The entire transactions pertaining to so called commission is bogus, sham and a colourable device used to evade the taxes. The payment of so called commission was not incurred wholly and exclusively for the purpose of the business. In view of the above, the so-called commission expenses of Rs.13,01,300/·, aredisallowed and added to the assessee's income. Penalty proceedings u/s. 271(1)(c) of the Income-tax Act, 1961 read with explanation thereunder are initiated for furnishing inaccurate particulars of its income.”

which relates to disallowance of commission claimed to have been paid of Rs.13,01,300/-. The fact of the case is that the AO found that the appellant was a proprietor of M/s. Shree Vijay Trade Link and was engaged as Commission agent on sale of sarees. A sub-commission was claimed to have paid to Smt. Lata Rupchandani of Rs.6,25,500/- and to Smt. Dipa Rupchandani of Rs.6,75,800/- respectively. It was stated that the purchasers had placed their orders through the appellant with the suppliers, distributers, stockiest, whole sellers etc. for purchase of sarees as per their requirements. He was alsoresponsible for the payments to be made against the orders to be made to the sellers. He got commission @ 2% on the total sales of goods from the different persons. Notice U/s.133(6)were issued to both the sub-commission agents to verify the genuineness of the transaction but they could not furnish the details vis-a-vis bills/vouchers raised on the parties with whom they had transaction or business activity, names of the persons with whom they were in continuous contact, details of the correspondences/agreements they had with the parties from whom they received the commission /brokerages, nature/details of the services rendered by them to the appellant. But those details were not submitted before the A.O. The AO further recorded statement u/s. 131 of the I. T. Act of the appellant by which it was gathered that both the persons were his own uncle's wives. 'There was no agreement of the appellant with them to get any services. No expenditure on account of commission was shown to have been incurred in theearlier years. The entire commission was claimed to have been paid in the subsequent Financial Year. All these facts made it clear that there was no evidence available with the appellant to substantiate his claim that there was any services rendered by both the persons as mentioned above for which sub-commission was paid, Since, no nexus between payment of commission and services rendered was proved by the appellant the AO made disallowance of the same. He also relied upon the judgment of Hon'ble Supreme Court in the case of Kedarnath Jute Manufacturing Company Ltd. VS CIT (1971)

82. ITR 363(SC) and Sutlej Cotton Mill Ltd. VS CIT (1979) 116 TTR I (SC) in which the Hon’ble Apex Court has held that accounting entries alone are not determinative of the actual nature, character and scope of the transaction. He also relied upon the judgment of Hon'ble Supreme Court in the case of Mac Dowell Company. Ltd. VS CIT(1985) 154 ITR 148 in which the Hon’ble Apex Court has held that even if transaction is genuine and even if it is actually acted upon if the transaction is entered into with the intention to avoid taxes then the transaction is considered Colourable Devise. Further, reliance was also placed on the judgment of Delhi Court in the case of Bhagat Construction Company Pvt. Ltd. VS C1T(2001) 250 ITR 291(Delhi) in which the Hon'ble Court has held that a Colourable Transaction is one which is seemingly valid, but feigned or counter-feigned transaction entered into for ulterior purpose and in the case of the appellant, the entire commission payment transaction, was arranged with sole and only ulterior motive to evade tax. Therefore, he made disallowance accordingly. However, the appellantsubmitted that he had produced the Books of accounts, bills/vouchers as requisitioned by the AO to substantiate the veracity of Audited Statement of A/cs. The payment was made in the subsequent year on which TDS was deducted and deposited. The sub-commission agent forwarded theirassessment particulars together with statement of A/cs. Only reply to some of the queries were not furnished as the same was practically not related to services rendered by them. His statement was recorded by which it was the conclusion of the A.O. that the customers of provinces outside West Bengal who purchased sarees from the Textile Market in Kolkata through the appellant were in fact procured by his own staff, was not correct. The sub-commission agents were responsible to refer more parties who were in their direct contracts and to convince them for prompt payments of purchase value. By getting their services more Commission was earned during the year in comparison to the earlier years and thereby the expenditure was incurred wholly and exclusively for the purpose of business exigencies, He also referred the judgement of Hon'ble Supreme Court in the case of Dhakeswari Cotton Mills Ltd. VS CIT reported in 26 ITR 775(SC). After going through the facts and circumstances of the case, submission of the appellant and also perusal of the assessment order. I find that impugned sub-commission was claimed to have been paid in the subsequent assessment year. No sub-commission was paid in the earlier year as well as in the subsequent years, No details/vouchers in support of services rendered by the sub-commission agents was furnished for verification. It is worth-mentioning here that both the sub-commission agents were his own uncle's wives though the appellant tried to argue that the expenditure was incurred only for the purpose of business but no nexus between payment of sub-commission and services rendered was proved. Merely claiming that the amount was paid through account payee cheques on which tax was deducted and paid does not make the transaction to be genuine if the key-fact i.e. rendering service is missing, The appellant failed to brought any material on record to rebut the discussion made by the AO in the assessment order. Further, so far as the reliance of the appellant on the judgement of Supreme Court in the case of Dhakeswari Cotton Mills Ltd. is concerned, the facts are not identical with the facts of the present case. In the present case, the AO could place certain points on record which could establish that the claim of the sub-commission was not genuine. However, onus was on the appellant to substantiate his claim with the supporting documents/details but he failed to do so as no nexus was proved by the appellant between sub-commission vis-a-vis services rendered. In this regard reliance is also placed on the judgement of Sumati DoyaI Vs CIT (Supreme Court) 214 ITR 801 in which the Hon’ble Apex Court has discussed the issue of human probability and surrounding circumstances. In view of the above discussion, I find that the AO was justified to make the disallowance of Rs.13,01,300/-”

4.Not being satisfied with the order of the Ld. CIT(A) the assessee is in appeal before us and has taken the following grounds of appeal:

“1) For that the Ld. CIT(A) was quite unjustified in disposing of the Appeal in hurry confirming the disallowance of expenditure made by the ITO on account of commission of Rs.13,01,300/- paid to the sub-commission agents, without allowing a proper opportunity of being heard to the Appellant. 2) For that the Ld. CIT(A) was quite unjustified in contending that entire commission to sub-commission agents, was paid in the subsequent year and in confirming the disallowance of commission made by the ITO, even though not only the assessment records but also the order of assessment speaks for itself that commission of Rs. 3,00,000/- was paid to one of the sub- commission agents namely Smt. Latha Rupchandani, during the assessment year under consideration itself. 3) For that the Ld. CIT(A) was quite unjustified in ignoring the fact that commission was earned by the Appellant in the earlier assessment years by procuring customers through his staff only and not through any sub-commission agent necessitating payment of commission and for such modus operandi, percentage of expenditure incurred, with reference to total turnover, was more than 78% whereas in the instant assessment year, commission was earned by procuring customers through his staff as well as through sub-commission agents and thereby percentage of expenditure was slightly over 76%, that is percentage of expenditure was reduced by more than 2% and in confirming the disallowance of commission payment to sub-commission agents, on the ground that such payment of commission is a colourable device to evade payment of tax even though net profit rate for the assessment year was increased as compared to the net profit rate of the earlier assessment year. 4) For that the Ld. CIT(A) was quite unjustified in holding that no commission was paid in the assessment years prior to the assessment year under consideration overlooking the fact that in earlier assessment years, procurement of out-station customers was made entirely through his staff and for which, substantial amount of incentive was paid to staff besides salary payment to them whereas in the instant assessment year, payment of incentive to staff was reduced substantially as procurement of new outstation customers was made through sub-commission agents mainly and in confirming disallowance of commission payment made to the sub- commission agents, most arbitrarily. 5) For that the Ld. ITO was quite unjustified in taking adverse decision on the basis of statement of the appellant incorrectly recorded by him, in the deposition and in disallowing commission paid to the sub-commission agent even though it is evident from the Ground No. 3 above that commission was paid to the sub-commission agent for business exigencies as a prudent business man to reduce expenditures. The CIT(A) was equally unjustified in confirming the disallowance made by the ITO most arbitrarily. 6) For that the Ld. CIT(A) was quite unjustified in equating jurisdiction of the sub-commission agent to that of the Appellant being the commission agent and in asking questionnaires to the sub-commission agents even though such questionnaires were not coming under the purview of the services desired by the Appellant as per verbal agreement made with the sub-commission agents and in disallowing commission payment for non furnishing particulars even though those information were beyond their jurisdiction. The CIT(A) was equally unjustified in confirming the disallowance without appreciating the modus operandi of the business and also failed to understand that no written agreement is required in this line of business even for commission agents not to speak of sub-commission agents. 7) For that the Ld. CIT(A) was quite unjustified in not appreciating the fact that the Income Tax Act does not refrain an assessee from making payment even to a 'Relative' as defined in section 2(41) of the Act if such payment is made for business exigencies and is made in accordance with market rate, not to speak of payment to uncles's wives who are in fact, not a 'Relative' as per the said definition and in confirming disallowance of commission payment made by the ITO most arbitrarily. 8) For that the Ld. CIT(A) was not justified in contending that there was no nexus between payment of commission to sub-commission agents and the services rendered by them for such earnings and in confirming the disallowance of commission payment even though Ground No(s) 3 and 5 above, speaks for itself at services were infact, rendered by the sub-commission agents for which, commission was paid to them. 9) For that the Ld. CIT(A) was quite unjustified in over looking the fact that no material evidence was brought on record by the ITO to establish that the concerned customers were procured by the staff of the Appellant and in relation thereof, not only incentive was paid to his staff but also commission was paid to the sub-commission agents to evade payment of tax and in confirming the disallowance of commission of Rs. 13,01,300/- paid to sub commission agents

5 Lalit Kr. Rupchandani, AY. 2010-11 believing the incorrect statement put forward by the ITO in the order of assessment to substantiate the disallowance made by him most arbitrarily. 10) For that the Appellant craves the right to put additional ground/grounds and/or to alter/amend/modify the present grounds of appeal either before or at the time of hearing.”

5.1. Ld. AR for the assessee has submitted, before us that, the Ld. CIT(A) was in a hurry in disposing of the appeal of the assessee and he did not give enough opportunity to the assessee and confirmed the disallowance of commission of Rs.13,01,300/-. The Ld. AR for the assessee submitted that the entire commission was paid to sub-commission agents, even the assessment order passed by the AO clearly speaks that the commission of Rs.3 lacs was paid to the sub-commission agents. The Ld. AR for the assessee also submitted that the assessee earned the commission in earlier years by procuring customers through his staff members and not through sub-commission agents. The assessee started to use the services of sub-commission agents during the year under consideration and, therefore, the incentive given by the assessee to the staff was reduced substantially because the procurement of new outstation customers were done through sub-commission agents. The Ld. AR for the assessee, further submitted that the commission paid by the assessee to sub-commission agents is for the business purpose, business exigencies and to reduce the expenditure. He has submitted that the commission paid by the assessee suffered the taxation i.e. the proper TDS has been deducted while making payment of commission to the sub-commission agents. Not only that the commissions were paid through account payee cheques and tax deducted at source has been deposited to the government account. However, the assessee being a small trader does not make any agreement with the sub-commission agents. He used to pay the commission to the sub-commission agents based on the verbal agreement after deducting the TDS on such commission. The commission income has been shown in the Income Tax Return and proper TDS has been deducted. Therefore, there is no loss to the revenue. The Ld. AR for the assessee has also relied on the following two decisions: (i) ITO Vs. Shri Manoj Seth, AY 2009-10 dated 20.01.2016 (ii) ITA Nos. 662 to 668/JP/2012, Kamdhenu Ispat Ltd. Vs. ACIT, AY 2003-04 to 2009- 10 dated 21.11.2014.

5.2. In the Coordinate bench of this Tribunal, Kolkata Bench has held as under:

“6. We have heard rival contentions of both the parties and perused the materials available on record. Ld. DR vehemently relied on the order of Assessing Officer whereas Ld. AR relied on the order of Ld. CIT(A). We find that AO disallowed the commission of payment made to MVAPL on account of two reasons – (i) that assessee has defaulted in deducting TDS within stipulated time (ii) that assessee has not given justification for the services against the payment of commission to the party. However, Ld. CIT(A) has allowed the payment of commission on both counts i.e. (a) there is no default for deducting the TDS as specified under the TDS provision (b) the Ld. CIT(A) has allowed the commission expenses on merits as well. Ld. AR submitted that all the payments of commission were duly made after deducting the TDS at appropriate rate and all the payments were made through banking channel. MVAPL has also disclosed the amount received as commission in their books of account and offered to tax to the Revenue. Finally, Ld. AR prayed for allowance of the said expenses and relied on the order of Ld. CIT(A). From the aforesaid discussion, we find that payments were made after deducting TDS and there was no default in compliance of TDS provision. AO disallowed the commission expenses that TDS was not deducted or paid within stipulated time as specified under the I.T. Act. This ground does not hold any merit as the TDS was deposited on dated 27/08/2009 as noted from the order of the ld.CIT(A) and the return of income was submitted on dated 24/09/2009 as noted from the order of AO. The ld. DR has not brought anything on record to controvert the submission of the assessee. In view of this matter, even the assessee deducted the TDS and deposited the same after expiry of relevant financial year but before filing the return of income is within the purview of law. On this ground, we allow the commission expense as there was no default in compliance with TDS provision on the part of assessee. Now coming to second issue for allowability of expense on the basis of merit, we find that commission was paid to a Private Limited Company and which has disclosed in its books of account. The payment of commission has nowhere been doubted by the authorities below. Now, in the instant case, we find that the third party is not confirming the payment of commission for the services rendered to the assessee that alone should not be the ground for the disallowance. Since the amount of commission has been duly recorded and the recipient of commission has disclosed in its return of income so the disallowance is not called for. In this view of the matter, we find no reason to interfere with the order of Ld. CIT(A) and confirm. Therefore, ground raised by Revenue is dismissed.”

5.3. In to 668/JP/2012, the Coordinate bench of this Tribunal, Jaipur Bench has held as under:

“ITAT have heard the rival contentions of both the parties and perused the material on record. The Assessee has filed confirmations either before the Assessing Officer Assessing Officer or before the CIT(A). The learned CIT(A) had called remand report on additional

7 Lalit Kr. Rupchandani, AY. 2010-11 evidence furnished before him where Assessing Officer has accepted the commission paid either sale or purchase as genuine. It is a fact that in the line of business, mostly goods is being sold through brokers on which commission is paid. Purchase also made through brokers, therefore, it requires paying commission to the middle man who make available of goods from the market. The assessee has submitted confirmations, PAN number, copy of return in some case copy of bank account with confirmations. On verification of confirmations, in all the cases TDS has been deducted by theassessee on commission. The learned CIT(A) specifically mentioned commission paid to M/s SKT on purchase, who is dealing Tissue paper, craft paper, card board and other types of boards etc., in A. Y. 2008- 09. The A R submitted that details of commission paid to it on purchases made by the Assessee along with copy of bills, confirmations and bank statements of Assessee company evidencing the payment of commission has been filed before the learned CIT(A). He particularly drew our attention on page 137 to 151 of the paper book for A. Y. 2008-09, which is copy of confirmation with PA number, copy of bank account of the Assesseecompany, which shows that the commission payment was made through banking channel. 1t also filed copy of agreement dated 21.3.2007 between Assessee and M/s SKT. In this case also, the Assessee had deducted TDS at Rs.3,94,757/-. It is further revealed from the confirmation that the Assessee had paid this commission in subsequent year to M/s. SKT after deducting TDS. Therefore, ITAT are of the considered view that additions confirmed by the learned CIT(A) deserve to be deleted.”

5.4. On the other hand, the Ld. DR for the revenue has primarily reiterated the stand taken before the Ld. CIT(A), which we have already noted in earlier para and is not repeated again for the sake of brevity.

5.5. Having heard the rival submissions and perused the material available on record, we are of the view that there is merit on the submission of the assessee, as the proposition canvassed by the Ld. AR for the assessee are supported by the facts and the precedentsnarrated by him. As the Ld. AR for the assessee clearly stated before us that the commission has been paid to sub-commission agents through account payee cheque after deducting TDS, therefore, identity of the transaction cannot be denied. The assessee used to avail the services for his staff members in earlier years but in the year under consideration, the assessee started to use the services of sub-commission agents to enhance his business receipts. The commission was paid by the assessee for the purpose of business and is allowable u/s. 37 of the Act. The genuineness of the transaction has also been proved because the person who was getting commission has accepted that she got the commission from the assessee against the specified services provided by her. Therefore, the identity, Creditworthiness and genuineness of the transactions have been proved by the assessee and,

Order pronounced in the open court on 20.01.2017