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Income Tax Appellate Tribunal, MUMBAI BENCHES “C”, MUMBAI
Before: Shri Joginder Singh, & Shri Ashwani Taneja
आदेश / O R D E R
Per Joginder Singh (Judicial Member) These three appeals are by the assessee against the impugned order dated 12/02/2015 for Assessment years 2003-04 to 2005-06 of the First Appellate Authority, Mumbai, challenging confirmation of penalty imposed u/s 271(1)(c) of the Income Tax Act, 1961 (hereinafter the Act).
During hearing of these appeals, at the outset, the ld. counsel for the assessee, Shri Ashwin Kashinath, contended that the quantum addition, on the basis of which penalty was imposed, has been deleted by the Tribunal in the case of the assessee itself (ITA No.7768 to 7770/Mum/2011) vide order dated 13/04/2016. Our attention was invited to variout paras of the aforesaid order. This factual matrix was not controverted by the ld. CIT-DR, Shri M. Dayasagar.
2.1. We have considered the rival submissions and perused the material available on record. In view of the above, we are reproducing hereunder the relevant portion from the aforesaid order dated 13/04/2016 for ready reference and analysis:-
“There are three appeals under consideration and the same are filed against the common order of the CIT (A)-II, Mumbai dated 29.9.2011 for the AYs 2003-04; 2004-05 and 2005-06. Since, the issues raised in all these appeals are identical, therefore, for the sake of convenience, they are clubbed, heard together and disposed off in this consolidated order. Appeal wise adjudication is given in the following paragraphs of this order.
2. Firstly, we shall take up the appeal for the AY 2003-2004. Grounds raised by the assessee in the appeal are as under:-
“1. The Ld CIT (A) erred in disallowing commission expenses of Rs. 10,13,10,879/- as not related to business.
2. The Ld CIT (A) has erred in disallowing depreciation of Rs. 1,54,54,737/- on account of bogus addition of Plant & Machinery during the year 1998-99.”
Briefly stated relevant facts of the case are that the assessee is engaged in the business of polyester textile. Assessee is having one unit in Murbad and another unit of polyester recycling facility at Nasik. Assessee is also engaged in the manufacturing of colour television and other electronic items. Assessee filed the returns of income for the AYs 2003-04; 2004- 05 and 2005-06 declaring the total loss of Rs. 7,37,22,259/-; loss of 7,79,30,116/- and los of Rs. 6,55,49,541/- respectively. Assessments were completed u/s 143(3) of the Act and the assessed income was determined at Rs. 5,61,83,751/- (AY 2003- 04); Nil income (AY 2004-05) and loss of Rs. 62,55,850/- (AY 2005-06) respectively. During the assessment proceedings, there was an inquiry by the AO into the arrangement of business between assessee and the EWTL and also on the issue of „payment of commission‟ to M/s. ESSAR World Trade Ltd (EWTL). Subsequently, this company was renamed as ESSAR Infrastructure Limited (EIL). There was a written agreement between the parties. Commission payment was made in cheque. TDS was deducted as per the TDS provisions. The details of TDS for all three years are Rs. 2,53,18,823/- for AY 2003- 04; Rs. 45,74,606/- for the AY 2004-05 and Rs. 1,28,19,324/- for the AY 2005-06. AO analysed the said agreement and found EWTL received the said commission in all the three years and not in the earlier AY 2002-2003. Assessee also received commission from three parties such as Sony, Samsung etc. In the assessment proceedings, AO examined the facts and concluded that the commission was paid to EIL even when the specified conditions with the reference to “sales target” were not met by the EIL and by the debtors. Shri N.B. Vyas, Company Secretary of ESSAR Steel Ltd and Shri Subodh Maskara, MD of the assessee company were examined on oath and analysed the services received by the EWTL. After examining the records of the assessee, AO came to the conclusion that the assessee did not provide the names of the customers in respect of whom the services were rendered by the EIL and the recipient companies. Assessee relied heaviliy on the debit note in this regard. Para 3.2 of the CIT (A)‟s order is relevant in this regard. In connection with the sales targets, AO also cross checked the sales with the customers viz M/s. Kalyani Sharp India Ltd; M/.s Barron Telecommunication (I) Ltd and M/s. Salora International Ltd. These customers have not given any conclusive evidence against the assessee. However, the Assessing Officer concluded that the claim on account of commission is not to be allowed. Thus, AO disallowed the said claim of commissionpayments in all these AYs under consideration. The brief summary of AO‟s reasoning for making disallowance is provided in para 3.4 of the impugned order and the relevant lines are extracted as under:- “3.4.......therefore, the AO disallowed the commission while recording the reasons as under:-
“1) The Essar World Trade Ltd was not in any way connected to electronic items now in any trading activity.
2) The huge commission payment is only in respect of services of so called “introduction” only.
3) The assessee has stated that payment of commission was released only after realization of payment from two parties referred to in the letter but simultaneously has failed to give the position of debtors before releasing the first payment of commission.
4) There are discrepancies in respect of sales made and commission claimed which have been worked out on the basis of details submitted by the assessee and M/s. Essar World Trade Ltd. 5) M/s. Essar World Trade Ltd had a claim of unabsorbed los of depreciation which was adjusted against the income and NIL tax was paid by M/s. Essar World Trade Ltd.”
Regarding the issue of payment of commission, during the proceedings before the CIT (A), assessee made elaborate submissions and demonstrated that the correctness of rendering of services by M/s. Essar World Trade Ltd / Essar Infrastructure Limited to the assessee. Narrating the infrastructural strengths relating to the marketing network of EWTL / Essar Infrastructure Limited, Ld Counsel for the assessee submitted that the Essar Group of companies has huge marketing network throughout PAN India and the EWTL reached out various customers and availed services of various nodal companies to reach the people, who want to buy colour Televisions and other electronic products or spares of the assesssee. Addressing to the assessee-company‟s strength, the assessee had a strong presence in the business of polyester textiles. He also had a polyester recycling facility at Nasik. Subsequently, assessee run into financial problems. At this stage, assessee wants to diversify its business activities and entered into the business of assembly of colour televisions of different sizes. For marketing and selling of products, assessee entered into an agreement with Essar Group of companies, which had a strong marketing network along the length and breadth of Nation. The agreement contains details of rate of payment of commission and other conditions. The commission becomes payable to the EWTL only if they render their services in marketing minimum sales of 75000 units. Commission is only paid after sale proceeds are completely recovered to the credit of the assessee. He also submitted that no commission was paid to EWTL in the first year of its operation ie 2002-2003 where inthe turnover is only 46.35 Crs. By the second year, the turnover reached around Rs. 155 Crs. Therefore, the commission became payable to the assessee as per the agreement. Assessee submitted that the huge profits were made and conducted huge business during the years under consideration. Assessee also submitted that the statements given by Shri N.B. Vyas, Company Secretary of Essar Steel Ltd and Shri Subodh Maskara, MD of the assessee company were wrongly and mistuously interpreted by the AO to the benefit of the Revenue and against the assesssee. Otherwise, the statements given by these two parties explains the existence of the agreement; requirement of commission payments; the fact of rendering of services for marketing of the products; mobilization of the customers towards purchase of the CCTVs, mobilization of various other brands like Sony, LG, Sharp etc. Thus, assessee demonstrated that the statements confirm the fact of payment of commission and the reasons thereof. Assessee relied on various E-mail correspondences in support of the above. Various statements were furnished to the CIT (A)
with regard to the said sales targets of 75000 units. Assessee objected to the AO‟s conclusion that the assessee paid commission only for introducing the customers. Unfortunately, AO is of the opinion that, only for introducing the customers, the commissions of such magnitude should not have been paid to EWTL. He also analyzed the mechanism of marketing, labour involved in bringing the customers to the shops for buying the product of the assessee. CIT (A) remanded these documents and other objections to the file of AO. During the remand proceedings before the AO, EWTL was to explain the fact of services rendered for getting the commission. AO conducted the necessary inquiries as directed by the CIT (A) in the remand letters and submitted the report to the CIT (A) that the EWTL did not reply to the AO‟s summons. However, both the assessee and the commission agent submitted the financials of the EWTL. From the same, AO noticed that the administrative expenses of the EWTL in all these three AYs vary in the range of Rs. 32 to Rs. 36 lakhs per year. The AO is of the opinion that with these meagre administrative expenses, EWTL could not have rendered services to the assessee. AO received the replies from the assessee on the remand report furnished by the AO. The contents of para 3.17 of the CIT (A)‟s order provide for the objections of the assessee. Eventually, after considering the above detailed submissions and statements, remand report of the AO etc., CIT (A) held that the commission should not have been allowed for all the three years. Contents of para 3.19 of the CIT (A)‟s order are relevant in this regard and the said para is extracted as under:-
3.19. I have examined the facts of the case and considered the submission of the assessee. The AR has not been able to rebut the finding of the AO. the AO has found several discrepancies in the submission of the assessee as follows:- i) The monthly sales chart to various customers as provided by the commission agent and as submitted by the assessee did not tally and the Ld AR was unable to reconcile the same. ii) It had been submitted that commission has been paid only after payments from the customers are fully realized. However, there is outstanding from two customers as on 31.3.2002 namely, M/s. Kalyani Sharp India Ltd – Rs. 9,81,797/- & M/s. Samsung India Electronic Ltd – Rs. 37,12,253/-. The AR has not been able to explain the same. Moreover, assessee has not given the position of debtors in books when commission was paid. iii) During the appeal proceedings also, the AR has not made way fresh submission on these account. By way of remand, the AO was asked to verify the services by commission agent. By way of remand report, the AO has examined the facts on the basis on facts on record. The commission agent did not respond the notice of the AO during the remand proceedings. From the assessment record of commission agent, the AO has further noted that the only income of commission agent is commission from the assessee. It means M/s. Essar World Trade Ltd is not in the business of marketing and selling of electronic equipments as claimed by the assessee. Further, marketing and selling expenses have not been debited in the account. Only expenses debited are very low as compared to the commission income and other contract receipts and they are general expenses not attributable to marketing and selling of colour TV sets. Therefore, the AR was unable to substantiate that the assessee has received any marketing and selling services. In fact, no services have been received by the assessee and no services could have been rendered by the commission agent. 3.20. Considering all the above, the order of the AO on this account is upheld and the first ground of appeal in three assessment years is dismissed.
5. Aggrieved with the above order of the CIT (A), assessee is in appeal before us on the issue of disallowance of commission expenses for all the three AYs 2003-04; 2004-05 and 2005-06.
During the proceedings before us, Ld Counsel for the assessee raised various arguments. In support of the same, he brought our attention to various documents filed before us in the form of paper books. The details of the said documents referred by him include (i) the agreement between the assessee and the EWTL; (ii) financials of both the parties; (iii) the details of the products sold by the assessee; (iv) details of schedule of payment of commission; (vi) debit notes raised by the EWTL in favour of the assessee; (vii) statements of Shri N.B. Vyas and Shri Subodh Maskara; (viii) remand report from the AO etc.
The case of the Ld Counsel for the assessee is that the commission payment was made strictly as per the provisions of various clauses of the agreement between the parties. The payments were made after the minimum sales target of 75000 was reached. The erroneous figures and calculations made out by the AO are required to be amended in this regard. The commission payments were made by the assessee through banking channels after requisite TDS was made. TDS was duly remitted to the Government account for three years. Assessee continuous to be a loss making company, even if the commission claimed is considered. The same is the case with EIL. Therefore, there are no tax implications so far as the assessee is concerned. Similar is the case so far as the EWTL is concerned, which is also in losses. EWTL has a wide presence across the country and reaching the customers. EWTL helped the assessee in conducting the meetings, seminars to reach out the customers with their commercial connections with established companies viz, Sony, LG, BPL, Sharp etc. The fact of making effective sales and recording the huge turnover of Rs. 155 Crs evidences the contribution of EWTL in the field of marketing and selling. The decision of the AO in disallowing the claim of the assessee is only based on the surmises. AO has not done his job of getting any evidence to demonstrate that the commission paid is received back by the assessee to prove that it is a bogus expenditure or inflated expenses. Therefore, Ld Counsel for the assessee submitted that the decisions of the AO and the CIT (A) are merely based on the debatable issues, which are not sustainable in law. They have no evidence to say that the commission paid is bogus and therefore, it should be disallowed. It is the argument of the Ld Counsel for the assessee that the expenses incurred by the assessee in accordance with the agreement, which is honoured by both the parties, cannot be disallowed. He also submitted that the AO cannot teach the assessee as to how to conduct the business and he cannot question the business model adopted by the assessee. For all these propositions, he relied on various decisions cited before the CIT (A) vide para 3.9 of the CIT (A)‟s order and before us as well.
Per contra, the case of the Revenue is that the claim of commission is not allowable as the statements Shri N.B. Vyas and Shri Subodh Maskara do not conclusively evidence the fact of rendering of services to the assessee by the EWTL. They also pointed out the mistakes in the debit note raised by the EWTL in connection with the commission paid by the assessee. The AO is of the opinion that some of the contacts made by the AO are not aware of this arrangement of payment of commission (para 3.4 of the CIT (A)‟s order is relevant). Otherwise, nocategorical and conclusive evidence placed on record by the AO about the payment of commission. There is no dispute on the fact that the said payment of commission was made in cheque, relevant TDS was made as per the procedure, no deficiency was noticed in the crucial documents for analysing the transactions to the commissions. Ld DR relied on the summary of the AO‟s conclusions given by the CIT (A) in para 3.4 of his order, which is extracted above. He also relied on the order of the ITAT, Hyderabad in the case of M/s. K.V. Minerals vs. Addl. CIT in dated 15.7.2013 for the proposition that the payment of commission to agents in the business of trading and minerals is not allowable deduction.
During the rebuttal time, Ld Counsel for the assessee compared the facts submitted by the assessee in this case to the facts of the said case of M/s. K.V. Minerals (supra) and mentioned that in the said case, the decision of the Tribunal was against the assessee for failure to furnish the relevant confirmations from the agents. Mentioning the fact that the EWTL confirmed the receipt of the commission in the present case, Ld Counsel for the assessee submitted that considering the same, assessee in all the three years under consideration should be allowed.
We have heard both the parties and perused the orders of the Revenue Authorities as well as the assessee‟s paper book and the written submissions made by both the parties. The stands of the assessee and the Revenue are already narrated in the preceding paragraphs of this order. We find that the assessee made a claim of debit to the P& L account on account of commission paid in all the AYs under consideration. As per the assessee the same was paid to Essar in response to the services rendered by the Essar. The Agreement details the list of services as well as the commission payments. There is a valid agreement in favour of accrual of payment of commission but also for demanding the services from Essar. There are document by way of Debit notes to support the payability of the commission to Essar. The alleged commission was actually paid involving the banking channels too. Assessee made the said payment of commission after deduction of TDS complying with the relevant provision. The details of the said TDS were given in the paragraphs above. Assessee remitted the said TDS to Government too. AO has not disputed any one of the above facts. From the orders of assessment. There isnothing on record to suggest that the assessee received the said commission back in cash or otherwise from the ESSAR. AO has not made out that the said agreement is fabricated for mala fide reasons.
Tax evasion / planning: Before us, Ld DR argued that the payment of said commission was part of Tax Planning to accommodate the ESSAR. We asked Ld DR the purpose of such accommodation when both the payer and payee declared losses in their returns, then, what is the purpose behind such allegation of tax planning / evasion. We find both assessee and Essar are undisputedly in losses and they claimed of huge and valid losses brought forwarded from the past years. On this fact, we find the allegations of the AO/ DR are not sustainable and therefore, they need to be dismissed.
Allegation of non-complying with the Agreement: Regarding the allegation of the DR relating to minimum sales targets of 75,000 and the absence of details of the customers on the debit notes, we find that they do not constitutes a valid and sustainable arguments. Assessee validly reconciled the figures before us. Regarding the absence of the dances of the customers, we know that it is the duty of the AO to prove that the assessee gave ring particulars, which was. It was done during the assessment or remand proceedings.
Regarding allegation of non compliance of Essar to the summons during the remand proceedings, we find that the AO of the Essar has duly taxed the commission received by that assessee. Department cannot take divergent views on this issue of commission. Revenue cannot make addition on account of disallowance of commission on one side in the name of assessee and tax the same on the other in case of Essar. There is a rule of consistency to be followed by AO with respect to any issue. Revenue cannot resort to tax both debit and credit of accounting entry without valid reason and valid support of law.
Other objections: Revenue made various other allegations relying on the sworn statements of Sri Maskara the MD of the company and Shri Vyas, Company Secretary of ESSAR. On perusal, we find the conclusions drawn by the AO are unfair and unsustainable. No MD shall give any statement against himself and hiscompany. Same is the case here. In a worst situation, the AO has to provide cross examination as per set procedure before any such statement is used against the assessee. It is not done by the AO in this case. As such, we don‟t find any incrimination in the said statements. Thus, the AO's conclusions in this regard are not well founded and are unsustainable in law. Accordingly, ground no.1 raised by the assessee for the AY 2003-04 is allowed.
Ground no.2 relates to the disallowance of depreciation on the alleged bogus Plant & Machinery. During the assessment proceedings, AO noted that the claim of depreciation was disturbed by the AO for the AY 1999-2000. Consequentially, there is a lesser depreciation allowed by the Department in the subsequent AYs. The same continued despite the decision of the Tribunal in favour of the assessee for the AY 1999-2000 on the denial of depreciation on certain Plant & Machinery claimed to be bogus. During the proceedings before us, Ld Counsel for the assessee demonstrated the above by filing copies of the orders of the Tribunal vide dated 17.1.2007 (Pages 28 to 37 of the paper book are relevant). In the said order (supra), the Tribunal held that purchase of Plant & Machinery was not bogus therefore, depreciation should be granted to the assessee as claimed. In subsequent assessment years 2000-2001 and 2001-2002, there was a related issue of interest on funds utilised for purchase of alleged purchases of Plant & Machinery. This issue was adjudicated by the Tribunal vide ITA No. 2085 and 2088/M/2006, dated 21.7.2008 (pages 165 to 170 are relevant in this regard). Assessing Officer actually allowed the depreciation claimed on the said bogus Plant & Machinery for the AY 2001-02. This issue was specially raised in the AY 2002-03 and the claim of the assessee was allowed. Revenue‟s appeal against such order of the CIT (A) for that AY 2002-2003 was also dismissed by the Tribunal vide ITA No.5233/M/2006, dated 26.8.2008 (Pages 171 and 172 of the paper book are relevant in this regard). Considering all these subsequent developments, the claim of the assessee with regard to depreciation on the alleged bogus Plant & Machinery should be allowed.
After hearing both the parties and on perusal of the said orders of the Tribunal (supra) and the decisions of the CIT (A), we are of the opinion that Ground no.2 raised by the assessee should be allowed. We order accordingly.
In the result, appeal of the assessee is allowed. II. (AY 2004-2005)
This appeal filed by the assessee on 17.11.2011 is against the order of the CIT (A)-11, Mumbai dated 29.9.2011 for the AY 2004-05. In this appeal, assessee raised 4 grounds in toto.
Ground no.1 relates to the disallowance of commission expenses of Rs. 9,43,69,350/-. This ground is similar to that of the ground raised by the assessee in its appeal for the AY 2003- 2004. We have decided the said issue in the above paragraphs of this order and allowed the ground in favour of the assessee. Considering the commonality of the issue, our decision given on identical issue for the AY 2003-04, squarely applies to the instant ground too. Accordingly, Ground no.1 raised by the assessee is allowed.
Ground no.2 relates to the disallowance of depreciation of Rs. 1,15,91,052/. This ground is identical to that of the ground no.2 decided by us in the above paragraphs of this order while dealing with the identical issue for the AY 2003-2004.
Considering the commonality of the issue, our decision given therein squarely applies to the instant ground no.2 too. Accordingly, ground no.2 raised by the assessee in the present appeal is allowed.
Ground no.3, which relates to the disallowance of software expenses of Rs. 7,64,000/- and Ground no.4, which relates to the disallowance of Rs. 4,90,290/- on account of business and personal expenses on ad-hoc basis are not pressed by the ld Counsel for the assessee. In this regard, after hearing the Ld DR, we dismissed the said ground nos. 3 and 4 as not pressed.
In the result, appeal of the assessee is partly allowed.
III. (AY 2005-06)
This appeal filed by the assessee on 17.11.2011 is against the order of the CIT (A)-11, Mumbai dated 29.9.2011 for the AY 2005-06.
In this appeal, assessee raised the two grounds. Ground no.1 relates to the disallowance of commission expenses of Rs. 5,51,06,439/-. This ground is similar to that of the ground raised by the assessee in its appeal for the AY 2003-2004. We have decided the said issue in the above paragraphs of this order and allowed the ground in favour of the assessee. Considering the commonality of the issue, our decision given on identical issue for the AY 2003-04, squarely applies to the instant ground too. Accordingly, Ground no.1 raised by the assessee is allowed.
Ground no.2 relates to the disallowance of depreciation of Rs. 41,77,798/- on account of temporary closure of PET units. This ground is identical to that of the ground no.2 decided by us in the above paragraphs of this order while dealing with the identical issue for the AY 2003-2004. Considering the commonality of the issue, our decision given therein squarely applies to the instant ground no.2 too. Accordingly, ground no.2 raised by the assessee in the present appeal is allowed.
In the result, appeal of the assessee is allowed.
Conclusively, appeals for the AYs 2003-04 and 2005-06 are allowed and the other appeal for the AY 2004-05 is partly allowed.”
In the aforesaid order on quantum addition, the Tribunal vide aforesaid order dated 13/04/2016 deleted the addition on the basis of which penalty was initiated/confirmed. In view of this factual matrix, we are of the view that penalty imposed u/s 271(1)(c) will not survive. Our view find support from the decision in K.C. Builders vs ACIT (2004) 265 ITR 562 (SC) and the ratio laid down in CIT vs S.P. Viz, 176 ITR 76 (Patna).
Even otherwise, when the quantum addition is deleted, there remains no basis at all for levying the penalty for concealment or furnishing inaccurate particulars. The penalty cannot stand on its legs when addition on the basis of which the penalty was imposed remains no more in existence, thus, all the appeals of the assessee are allowed and the ld. Assessing Officer is directed to delete the penalty.
Finally, all the appeals of the assessee are allowed.
This order was pronounced in the open court in the presence of ld. representative from both sides at the conclusion of the hearing on 05/05/2016.