ACIT CIR 12(3), MUMBAI vs. STELMET MARKETING, MUMBAI

सुनवाई क" तार"ख /Date of Hearing : 25-2-2016 घोषणा क" तार"ख /Date of Pronouncement : 11-5-2016 आदेश / O R D E R

PER RAMIT KOCHAR, Accountant Member

ITA 6168/Mum/2012 2

raised by the Revenue in the memo of appeal filed with the Income Tax Appellate Tribunal, Mumbai (hereinafter called “the Tribunal”) reads as under “1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) is right in holding that the order passed by the AO u/s.271(1)(c ) of the I.T. Act, 1961 is incorrect, without appreciating the fact that the assessee had filed inaccurate particulars during the assessment proceedings."

2. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) failed to appreciate the fact that the A.O in a detailed order has categorically brought out the fact that income has accrued to the assessee in the relevant assessment year itself and assessee had failed to declare the same. This clearly amounts to willful concealment of income and hence, penalty levied by the A.O is good in law.

3. The appellant prays that the order of the A.O should be restored and order of the CIT(A) should be set aside. "

During the course of assessment proceedings u/s 143(3) read with Section 143(2) of the Act, the A.O. observed from the Balance Sheet that the assessee firm is showing advance from suppliers of Rs. 1.62 crores. These advances ITA 6168/Mum/2012 3 were commission payments for indenting services provided by the assessee firm to the foreign clients. On perusal of the agency agreements signed with the foreign clients , it was observed by the AO that the commission will become due and payable after the clients receives the full sale price for the products sold by it to the customers in the territory. As the commission payments were already received by the assessee firm, it was concluded by the A.O. that the assessee firm has completed its assignments as per agency agreements and the income has already accrued to the assessee firm. To prove that the commission payment received by the assessee firm from foreign principals is no longer a liability but already accrued to the assessee firm as income, the A.O. critically examined the agreement with foreign principal namely Ascometal France and proved that the commission income has already accrued to the assessee firm. The analysis of the agreement by the AO of the afore-stated agreement is reproduced below:-

“The agency agreement signed by the assessee firm with Ascometal France can be analysed in detail to prove that the contention of the assessee is wrong. The assessee is showing an advance commission receipt from Ascometal France of Rs.43,01,925/-. The agreement between the parties was 09.10.2000. The terms of agreement are as follows: a) the assessee firm shall exert its best endeavors to procure orders for the sale of the products in the territory. Ascometal shall send to assessee its quotations against the enquiries transmitted by assessee firm and the quotation shall include the terms and conditions on which order should be procured by assessee from the customers in the territory. b) The assessee firm shall procure orders from customers in the territory in respect of the products at the prices mentioned in Ascometal quotations and upon the terms and condition previously mentioned by Ascometal in its quotations. c) On receipt of such orders, assessee firm shall promptly transmit the orders procured by it to Ascometal in France.

ITA 6168/Mum/2012 4 d) Upon receipt of the orders transmitted to them by assessee firm as provided in clause (c) above, Ascometal is entitled to accept or refuse orders in France and shall intimate its decision to assessee firm, unless the order is placed within the validity period on the terms and conditions of the offer made by Ascometal. e) It is hereby expressly agreed and declared that assessee firm has no authority to accept or reject any orders from customers in the territory, the right to accept or reject such orders coming exclusively from Ascometal and assessee firm has no authority to enter into any contract for or on behalf of Ascometal, unless otherwise authorised by Ascometal in writing to do so on its behalf.

Commission: a) A commission will become due and payable after Ascometal has received the full sale price for the products sold by it to the customers in the territory. b) A commission is 3% (three percent) calculated on the FOB prices, shall be paid by Ascometal to assessee firm for all orders from the territory which have been received either directly or through assessee firm, unless the customer in India prefers to deduct this commission from the invoice value and pay it directly to assessee firm. This commission amount can be increased or decreased by initial agreement and in exceptional cases where the customer prefers a claim on use for the rejection of goods supplied by us on account of quality on quantity and accepted by us the amount of commission already paid by us will be recovered from assessee firm."

Thus it is evident from the above agreement that the commission is paid to the assessee firm only when it has done its job of procuring the orders and the company Ascometal France has received the full sale price for the products sold by it to the customers in the territory. The only ground on which the assessee has based his contention is the clause in the agency agreement which says that- 'the commission amount can be increased or decreased by initial agreement and in exceptional cases where the customer prefers a claim the amount of commission already paid will be recovered'. But this contention of the assessee is completely against the principles of accounting.

ITA 6168/Mum/2012 5 Since the income has already accrued to the assessee it should have accounted for the same. Just because there is a scope of an increase or decrease in the total commission receipts on the basis of something unknown, the income that has already accrued to the assessee cannot be carried down as advance and not offered to tax in the year in which it has accrued.”

The assessee firm had entered into similar agreements with the following three foreign parties and received commission income as under:

M/s Asco Forge France Rs.3,67,229/- M/s Cruesot Forge France Rs.85,0l,052/- M/s Industeel Cruesot France Rs.43,0l,925/- Thus , the assessee firm received total of Rs. 1,61,97,030/- as commission income from the four foreign principals and under all the four agreements, the commission income will become due and payable after the afore-stated foreign concern have received the full sale price for the products sold to the Indian customers. Thus, the advance received from the suppliers of Rs. 1,61,97,030/- was treated by the A.O. as business income of the assessee firm and added to the total income of the assessee firm vide assessment order dated 26.12.2008 passed u/s 143(3) of the Act keeping in view the concept of accrual of income and as the income has accrued to the assessee firm the same was brought to tax as per Section 5 of the Act .

Consequently, the penalty proceedings were initiated u/s 271(1)(c) of the Act against the assessee firm for concealment of income by the assessee firm.

In the quantum proceedings, the CIT(A) upheld the advance commission income receipt of Rs.1,61,97,030/- as accrued income for the impugned assessment year under the Act as the assessee firm is following mercantile ITA 6168/Mum/2012 6 system of accounting vide orders dated 01-02-2010.The assessee firm did not filed any appeal with the Tribunal against the orders dated 01-02-2010 of the CIT(A) with respect to quantum additions and the same attained finality.

The assessee firm in the penalty proceedings initiated u/s 271(1)(c) of the Act submitted that the assessee firm has not concealed any income with deliberate intention to deprive the revenue of its legitimate taxes.

The contentions of the assessee firm were rejected by the A.O. on the ground that the assessee firm has not proved that the amount shown in the balance sheet is only an advance receipt. As per the agency agreement signed by the assessee firm, the commission income will become due and payable to the assessee firm after the foreign clients received full sale price of the products sold to its customers in the territory and it cannot be claimed by the assessee firm that there is unfulfilled contracts to show the accrued receipt as advance. The AO held that it is clearly established that the commission income has accrued to the assessee firm during the year and assessable to tax in the year under consideration u/s 5 of the Act, as the assessee firm follows mercantile system of accounting. It was also noted by the A.O. that the assessee firm has not filed any appeal with the Tribunal against the order of the CIT(A) in the quantum assessment which means that the assessee firm has accepted the additions made by the Revenue. The AO relied upon the judgment of the Hon’ble Supreme Court in the case of UOI v. Dharmendra Textile Processors, 306 ITR 277 (SC) and held that assessee firm has deliberately failed to disclose the correct and true particulars of its income and thereby tried to postpone the taxability of the correct income. The AO thereby held that the assessee firm has filed inaccurate particulars of income and hence concealed the income. The penalty of Rs. 54,51,920/- was levied by the AO on the assessee firm u/s 271(1)(c) of the Act read with explanation 1 , vide penalty orders dated 28-03-2011. ITA 6168/Mum/2012 7

The CIT(A) considered the submission of the assessee firm and the orders of the A.O. . The CIT(A) observed that the A.O. had totally relied upon the findings given in the assessment order in quantum proceedings while passing the penalty order u/s. 271(1)(c) of the Act and has not brought on record any material to justify that there were concealment of income or furnishing of inaccurate particulars of income by the assessee. The quantum addition does not automatically lead to the concealment of income making it exigible to penalty u/s 271(1)(c) of the Act. The additions have been made due to difference in opinion and perception on the same issue. The assessee firm had disclosed the receipts as advance in the year and treated them as income in the subsequent year. Method of accounting is consistently followed by the assessee firm. The assessee firm has submitted bona fide explanations as to the method of accounting. The CIT(A) held that penalty cannot be levied on mere rejection of an explanation furnished by the assessee firm. The A.O. while framing the penalty order failed to establish that the explanation given by the assessee firm was not bona fide. The mere fact that the assessee firm has not filed appeal with the Tribunal against the orders of the CIT(A) in quantum proceedings will not render the provisions of section 271(1)(c) of the Act applicable to the case. In view of the above observation, the CIT(A) cancelled the penalty of Rs.54,51,920/- levied by the AO u/s 271(1)(c) of the Act vide orders dated 27.07.2012. 7.Aggrieved by the orders dated 27.07.2012 of the CIT(A), the Revenue is in appeal before the Tribunal.

ITA 6168/Mum/2012 10

(2013) 38 taxmann.com 448(SC) and the decision’s of Hon’ble Delhi High Court in the case of CIT v. Escorts Finance Limited (2009) 328 ITR 44(Del HC) and CIT v. Zoom Communication Private Limited (2010) 191 Taxman 179(Delhi).Thus, the ld. DR submitted that there is a strict liability for furnishing of inaccurate particulars of income or concealment of income and hence the assessee firm was rightly subjected to the penalty u/s. 271(1)(c) of the Act by the AO . The ld DR relied upon the orders of the AO and submitted that the CIT(A) erred in deleting penalty.

ITA 6168/Mum/2012 11

The method of accounting consistently followed by the assessee firm has not found favour with the Revenue which in our considered view keeping in view the factual matrix as set out above does not call for penalty u/s 271(1)(c) of the Act as no particulars of income are concealed nor there is any furnishing of in-accurate particulars of income before the Revenue. The assessee firm has in an open and transparent manner disclosed all information connected with the earning of the said commission income. No penalty has been levied by the revenue for the assessment year 2005-06 and 2007-08 while the same method of accounting was consistently followed by the assessee firm. In fact for the assessment year 2007-08, the penalty proceedings were initiated by the Revenue on the similar ground but was later dropped by the AO vide orders dated 15-03-2012 which are placed in paper book page 1. In our considered view, no penalty is leviable in the instant case keeping in view peculiar facts and circumstances of the case as set out above, as there is no ITA 6168/Mum/2012 13 deliberate attempt or positive act on the part of the assessee firm to conceal income or furnish in-accurate particulars of income. The bona-fide claim was made by the assessee firm based on the terms and condition of the agency agreement and the method of accounting was consistently followed based on the bona-fide belief that the commission income will become due to the assessee firm and right to receive will be vested in favour of the assessee firm only when the foreign principals have got their payments from Indian Buyers for products supplied by the foreign principals to the Indian Buyers and any deductions by the Indian Buyers in the payments due to the foreign principals will lead simultaneously deduction in the commission income of the assessee firm as per terms of agency agreement, But the said explanation did not found favour with the Revenue as in their view , the commission has already accrued to the assessee in terms of provisions of the Act and the same is exigible to tax . Thus, the assessee came out with an bona-fide explanation for substantiating the claim made by it in the return of income filed with the Revenue which was not accepted by the Revenue but it did not made the assessee firm liable for penalty u/s 271(1)(c) of the Act. There is a difference of opinion between the assessee firm and A.O. and the claim of the assessee firm was not accepted by the A.O. Mere non-acceptance of the bona-fide claim of the tax-payer by the Revenue does not call for imposition of penalty within the ambit of provisions of Section 271(1)(c) of the Act , more-so the assessee firm came forward with a bona-fide explanation to substantiate its claim and hence the case of the assessee is not hit by explanation 1 to Section 271(1)(c) of the Act. We have observed that the CIT(A) has passed a well reasoned and detailed order and we do not find any infirmity in the orders of the CIT(A). Hence, in our considered view penalty of Rs. 54,51,920/- levied by the A.O. is not sustainable in law. The case laws relied upon by the Revenue is clearly distinguishable as no attempt is made by the assessee firm to defraud the revenue or evade taxes by concealing income or furnishing of in-accurate particulars of income, the tax effect is revenue ITA 6168/Mum/2012 14 neutral as the Revenue has got all due taxes albeit in the immediately succeeding assessment year . The decision of Hon’ble Supreme Court in the case of CIT v. Reliance Petroproducts Private Limited(2010) 189 taxman 322 (SC) is clearly applicable to the facts of the instant case. Accordingly, we confirm the orders of the CIT(A) deleting the penalty of Rs. 54,51,920/- levied by the A.O. u/s 271(1)(c) of the Act.We order accordingly.