BABU LAL JAJOO HUF,MUMBAI vs. ITO 24(3)(4), MUMBAI

The first issue in the appeal of the assessee is against order of Ld.CIT(A) confirming the disallowance of commission paid to (Assessment Year : 2007-08) M/s.Kwality Chemicals, Proprietor Shri Kalpesh Jajoo HUF. Briefly stated facts are that the assssee is carrying on the business of distribution of chemicals manufactured by M/s.Auchtel Products Ltd. in the State of Rajasthan in the last two decades. The Assessing Officer during the course of assessment proceedings noticed from the audited accounts i.e. audited report filed alongwith the return of income that the assessee has made payment to M/s. Kwality Chemicals, whose proprietor Shri Kalpesh Jajoo HUF is the employee of the assessee being paid salary to the tune of Rs.1,04,000/-. According to Assessing Officer, these payments fall under section 40A(2)(b) of the Act. The Assessing Officer also required the assessee to furnish the details of nature of services rendered, quantum of business yield for which commission is paid alongwith evidences. The assessee field reply vide letter dated 11/08/2009 giving reasons for payment of commission to M/s. Kwality Chemicals. The Assessing Officer during the course of assessment proceedings issued notices under section. 133(6) of the Act to the principal of the assessee, i.e. M/s. Auchtel Products Ltd. and also to the parties to whom assessee have supplied material through the agent. The details noted by Assessing Officer in his order at page – 3 read as under:- S.No. Name of the party Notice Date of Remarks under compliance section. received 133(6) issue on 1. Auchtel Products Ltd. 27-07-2009 27-08-2009 We have not made any purchase/ sales to, through broker/agent, with the aforesaid party during the F.Y 2006-07 2. Bansware Syntex Ltd. 27-07-2008 12-08-2009 For our requirement we used to final the commercial deal with Mr. B.L.Jajoo and Mr.

The CIT(A) also confirmed the action of Assessing Officer for the reason that no evidence was produced before the Assessing Officer or before him regarding services rendered by Shri Kalpaesh Jajoo HUF, Proprietor of M/s. Kwality Chemicals. He also noted that , “The AO had clearly brought out that 3 companies to which M/s. Kwality Chemicals acted as commission agent have categorically stated that either they have not made any purchase or sales through broker/agent and it was claimed that they had deal with Mr. B.L.Jajoo and Mr. Kalpesh Jajoo who visited the mill and take care of requirements. None of them have confirmed that either Proprietor of M/s. Kwality Chemicals or its employees were rendering services such as ensuring timely deliveries, helping in payments, sorting out disputes etc. The above

We have heard the rival contentions and gone through the facts and circumstances of the case. The assessee before us filed a Paper Book consisting of pages 1 to 76, wherein assessee has filed evidences in respect of nature of services rendered in respect to supply of chemicals to Bansware Syntex Ltd, BMD Private Ltd. & BSL Limited. The assessee has also filed the details of supply made to M/s. Kwality Chemicals in term of product and quantity and commission paid on the same. The relevant details are given at pages 5 to 13 of the assessee’s Paper Book. The assessee has also filed copies of debit notes and confirmations of purchases made at pages 14 to 30 of the assessee’s Paper Book. It was explained by the Ld. Counsel for the assessee that this commission is paid to M/s. Kwality Chemicals’ for services rendered by them for the reason of Bansware and Bhiwadi Rajasthan. Ld. Counsel for the assessee stated that the TDS is deducted on this commission and the same is paid to the Government. Ld. Counsel for the assessee also stated that in earlier assessment years as well as succeeding assessment years the same commission was paid and allowed by Revenue except in this assessment year. Ld. Counsel for the assessee also pointed out that the AO has not understood the issue for (Assessment Year : 2007-08) the reason that while dealing with replies in response to notice under section 133(6) of the Act the AO in remarks column has mentioned that no sales or purchases were made from Auchtel Products Ltd. But according to Ld. Counsel this party is actually the principal of the assessee and there cannot be any sales made to this part, rather the assessee is purchasing from this party. In view of the above facts and circumstances, we agree with the submissions of Ld. Counsel that M/s. Kwality Chemicals is acting as an agent of the assessee and rendered services for sale of assessee’s products i.e. different type of chemicals. Even the Revenue could not point out either at the lower stage or before us that how the payment of commission to M/s. Kwality Chemicals by assessee is unreasonable or not according to market practice. In view of these facts, we allow the claim of the assessee and this issue of assessee’s appeal is allowed.

The next issue in this appeal of the assessee is against the order of the CIT(A) confirming the disallowance of interest paid to the persons covered under section 40A(2)(b) of the Act in respect to loans given to (1) Shri P.A.Narayan, (employee) and (2) Shri Krishnamachari Iyengar (ex-employee).

Briefly stated facts are that the Assessing Officer noticed from the balance sheet of the assessee that it has given loans and advances to the tune of Rs.1,14,12,945/- to various persons. According to him the assessee is not charging any interest on loans and advances given to Shri P.A.Narayan and Shri Krishnamachari Iyengar despite the fact that it is paying interest to the tune of Rs.3,33,620/- on loans received from family members to the tune of Rs.20,80,461/-. The Assessing Officer

The CIT(A) after considering the submissions of the assessee confirmed the action of the Assessing Officer by stating that even in financial year 2000-01 interest @18% has been debited to the account of Shri Krishnamachari Iyengar and according to him transactions appears to be either of business or loan transaction, which was later converted into interest free advance by the assessee. He also observed that the contention of the assessee that Shri Krishnamachari Iyengar siphoned all the money fraudulently is far from truth. According to CIT(A) in respect to Shri P.A.Narayan no specific submission were mare and no break-up details was furnished as to indicate loans and advances to these persons. Accordingly, he confirmed the action of the Assessing Officer. Aggrieved, assessee preferred second appeal before the Tribunal.

We have heard rival contentions and perused the facts and circumstances of the case. Before us Ld. Counsel for the assessee argued that the loans and advances given to employees is for smooth functioning of assessee’s business for the reason that its employees are (Assessment Year : 2007-08) kept in healthy, secured and satisfied mind set. It ensures loyalty and stability of its employees. In respect to loan given to Shri P.A. Narayan, who was in-charge of accounts and loan was given to him for his housing needs and accordingly no interest was charged on the same. In respect to loan advances to Shri Krishnamachari Iyengar, Ld. Counsel for the assessee explained that he was branch Manager for more than 15 years and he misused his position by withdrawing firm’s money for his personal used. It was explained that no loan was given to him but this money of Rs.10.00 lacs fraudulently withdrawn from assessee’s bank account was treated as loan using business prudence and common sense to recover the same Shri Krishnamachari Iyengar later shifted from Mumbai to South India after selling his residential property and left the employment. According to Ld. Counsel, as per last settlement, he agreed to pay the principal amount without interest and finally he paid the principal amount fraudulently withdrawn by him. We are of the view that this fraudulent withdrawal of money cannot be treated as loans or advance and finally assessee recovered the same without interest. We also find that the loan given to Shri P.A. Narayan is also for the genuine business reasons. In view of these facts and circumstances we delete the disallowance made by AO and confirmed by CIT(A). This issue of assessee’s appeal is allowed.