ITO 19(3)(3), MUMBAI vs. MINAXI R SOBTI, MUMBAI

First of all, we will take the appeal file by the assessee. The only issue raised in this appeal of assessee is against the order of ld.CIT(A) confirming the action of the AO in disallowing the payment of export commission paid to assessee’s husband in pursuance to agency agreement amounting to Rs.12,57,388/- by invoking the provisions of section 40A(2)(b)of the Income Tax Act, 1961 (the Act).

Briefly stated facts are that the assessee is a exporter of M/s Minar Enterprises since 1993 which is engaged in the business of export of sanitary articles, bathroom fittings and other builder hardware mainly to Saudi Arabia, 3 2644/Mum/2012 And other two appels Hongkong, China, UAE and European countries. Admittedly, no local sales made by the assessee. During the course of assessment proceedings, the AO noticed that the assessee has paid commission against export income at Rs.12,57,388/-. The AO required the assessee to explain the payment of overseas commission and also filed details relating to the same. The assessee explained that the said commission has been paid to her husband Shri Rajiv Kumar Sobti in view of Agency commission agreement entered into with him at fixed rate of 3%. According to the assessee, her husband Shri Rajiv Kumar Sobti looks after the entire export business including the sales, maintenance of labour work, and receipt of payment etc. According to the assessee the entire responsibility of the export business is on her husband and this is a part of agency agreement. But the AO was not convinced with the explanation tendered by the assessee and accordingly he disallowed the commission payment paid to her husband by invoking the provisions of section 40A(2)(b) of the Act. Aggrieved, by the order of the AO, the assessee preferred an appeal before the ld. CIT(A) who also confirmed the action of the AO by observing and holding as under : “5. Decision: 5.1 I have duly considered the above submissions of the appellant. Grounds of appeal no. 1 to 6, 8 and 10 are against the addition of Rs.12,57,388/- by way of disallowance of export commission paid to husband of the appellant. The appellant's submissions on the above grounds of appeal are that there is a legally enforceable agency agreement between the appellant and "her' husband, and payment of the commission has been made through proper' 'banking- channels and M/s 4 2644/Mum/2012 And other two appels Al-Dawamah Establishment with whom, appellant's husband is working, has also confirmed the receipt of export commission. The appellant's further submission is that the commission has been paid for various services, viz. marketing, negotiating prices, procuring orders etc and in the assessment years 2004-05 and 2005-06, the CIT(Al has allowed the above commission payments. The appellant has, however, not furnished any proof to show that during the course of assessment proceedings, she furnished details of the orders procured by her husband and the parties with whom he negotiated prices and marketing of goods, sending indent and also the handling of export documents, as well as following up for payments etc. I am, therefore, inclined to agree with the finding given by the assessing officer that the appellant has diverted a good chunk of profit to her husband employed in Saudi Arabia, where the said income is not taxable, and confirm the disallowance of payment of the alleged overseas commission of Rs. 12,57388/ - and dismiss the above grounds of appeal

The ld. Counsel for the assessee submitted that in the earlier years no such disallowances were made by the revenue. The ld. AR argued that the AO has invoked the provisions of section 40A(2)(b) of the Act for making the business disallowance. The intention and purpose of the section 40A(2)(b) is clear that the disallowance could be made only in the eventuality if the payments are made to relatives/friends/associate concerns, wherein the transactions is sham one or the value shown on the books of account was not really paid and the value of transactions is not a bonafide to the transactions and to show this the onus is cast on the revenue. The ld. counsel for the assessee referred to the crucial provisions of section 40A(2)(b) in which it has been enumerated the fair market value of the goods, services or facilities. The goods, services and facilities are those which have market value which are commercial in nature. The revenue has to show the payments made are not reasonable and not according to market value in that eventuality the disallowance can be made.

On the other hand, the ld.DR supported the orders of the authorities below.

We have considered the rival contentions and perused the records placed before us. We have considered the facts that the assessee is paying the commission to her husband who is a commission agent for her business of sanitary ware and exporting the same to the countries mentioned above. The commission is being paid in lieu of various services rendered by him like booking orders, issuing indent in-the name of the company and also permitting him to receive the Indenting Agent commission on his personal name for & on behalf of the assessee’s company and also follow up the payment etc. We also find that there is no finding recorded by the AO and the ld.CIT(A) that the payment made by the assessee to her husband is excessive or unreasonable in terms of section 40A(2)(b) of the Act. Even otherwise the revenue has constantly allowed this commission in the earlier years i.e. AYs 2003-04, 2004-05 and 2005-06 and even under scrutiny assessment , the revenue has allowed this commission in the assessment year 2004-05 and 2005-06. This is only assessment year in which the revenue has disputed the commission payment made to the husband of 7 2644/Mum/2012 And other two appels assessee. In terms of the above discussions, we are of the view that this addition deserves to be deleted. Accordingly, we delete the same.

Now, we will take up the appeals of the revenue.

The revenue has filed these two appeals for the assessment years 2004- 05 and 2005-06 challenging the separate order of ld.CIT(A) dated 9.1.2012. The assessee filed her return of income on 1.11.2004 and 22.3.2006 declaring total income at Rs. 1477,770 and Rs.6,62,720/- for the assessment years 2004-05 and 2005-06 respectively.

The AO completed the assessment u/s 143(3) at an amount of Rs. Rs.37,08,980/- and Rs.31.78,380 for the assessment years 2004-05 and 2005- 06 respectively. Aggrieved by the order of AO the assessee challenged this addition before the ld.CIT(A), who in turn deleted the addition of Rs.26,26,304/- Rs.20,57,631/-Respectively for both the assessment years in question by following the decision rendered in the case of assessee herself for the assessment year 2004-05. Aggrieved by the decision of ld. CIT(A), the revenue is in appeal before us.

At the outset, the ld.AR submitted before us that in both the cases, the tax effect involved is less than Rs.10 lakhs. The ld. AR submitted that recently, the CBDT has issued a Circular issued bearing No.21/2015 dated 10.12.2015 prescribing new monetary limit of Rs.10.00 lakhs for preferring appeal against the orders passed by Ld CIT(A) before the Tribunal and provided that the said