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Income Tax Appellate Tribunal, “B” BENCH : KOLKATA
Before: Hon’ble Sri N.V.Vasudevan, JM & Shri M.Balaganesh, AM]
Per N.V.Vasudevan, JM This is an appeal by the revenue against the order dated 08.09.2011 of CIT(A)- XXXVI, Kolkata, relating to AYr. 2007-08. 2. The grounds of appeal raised by the revenue read as follows :- “That on the facts and circumstances of the case the Ld. Commissioner of Income Tax (Appeals)-XXXVI, Kolkata erred in deleting the addition of Rs.3,19,76,907/-. The Ld. Commissioner of Income Tax (Appeals)-XXXVI, Kolkata has erred in not considering the facts and circumstances on various issues, i.e. under the head loss on derivatives Rs.3,19,76,907/-, under the head loss in shares in Securities Rs.37,95,959/-, under the head Commission paid Rs.66,00,000/-, and under the head Co-ordination charges Rs.51,00,000/-.” 3. In the grounds of appeal, the revenue has challenged the order of CIT(A) whereby the CIT(A) deleted four additions made by the AO. The revenue has raised one single ground of appeal in which it has questioned the correctness of the decision of the CIT(A) deleted four different additions made by the AO. The revenue was given opportunity to file revised grounds setting out the challenge to each one of the four additions deleted by the CIT(A) independently. The revenue has however failed to comply with the directions despite adequate opportunities. We therefore proceed to
2 ITA No.1677/Kol/2011 M/s. PKS Holdings A.Yr.2007-08 decide the appeal considering individually each one of the additions made by the AO that was deleted by the CIT(A). 4. We shall first consider the addition of Rs.3,19,76,907/- made by the AO which was deleted by the CIT(A). The Assessee is a partnership firm dealing in property and shares. The Assessee claimed that it had incurred a loss of Rs.3,19,76,907/- while trading in derivatives. The assessee has claimed loss on derivatives of Rs. 31976907/- arising from future option loss on transactions entered on NSE as appeared for from 10DB. In terms of Rule 20AB of the Income Tax Rules, 1962 (Rules), every Assessee who has entered purchased and sold securities in a recognised stock exchange has to furnish evidence of payment of security transaction tax for claiming deduction under section 88E of the Income Tax Act, 1961 (Act). The evidence of payment of securities transaction tax which is required to be furnished along with the return of income by the assessee under first proviso to section 88E, on value of transaction entered into by him in a recognised stock exchange, shall be in furnished in Form No. 10DB and shall be verified in the manner indicated therein. As per the content of form 10DB the sale value of the transaction was Rs., 99,25,12,859/- on which STT of Rs.1,68,727/- was paid. The assessee has set off the loss in trading in derivatives against the profit earned from the sale of land along with Development Right which was sold at a price of Rs. 30Crore. 5. The AO called upon the Assessee to substantiate the loss. In response to the query of the AO, the Assessee filed ledger copy of M/s Shilpa Stock Broker Pvt. Ltd., and From 10DB to substantiate the same. 6. The AO noticed that on 27.11.2006 the assessee sold its land and earned few crores of rupees as Profit on Sale. Immediately on receipt of the money i.e. 29/11/06 and 30/11/2006, the entire amount of sale proceed were transferred to partner or to their related concern. From 27/02/2007, the assessee started the transaction with Shilpa Stock Broker Pvt. Ltd. which ultimately led to the Derivatives Loss. The AO noticed the
3 ITA No.1677/Kol/2011 M/s. PKS Holdings A.Yr.2007-08 following peculiar features of the transactions in Derivatives which lead to the loss in question:- 1) The transaction of F&O started on 27/02/07 and ended on 31/03/07 which resulted in entire loss.
2) Each & every F&O transaction entered in these 30 days was purchased on the same day & sold on the same day.
3) Each and every transaction resulted in loss.
4) Margin requirement as per SEBI to be paid to Stock Broker was not followed and there rules were violated.
5) Losses were in the odd figures, however the assessee paid the broker in round figures as per ledger copy submitted by the assessee.
6) The Broker Ledger which was from 11/1/2000 to 15/04/2009 and for the entire period of 9 years it is seen that assessee has entered into the transactions only on 27/02/2007 to 31/03/2007 –
7) No. return of the Assessee was filed for Ass. Year 2008-09 & Ass. Year 2009- 10 .
The AO was of the view that from the above facts it was apparent that loss on Derivatives was an arranged affair, the transaction defy normal human behavior and human probability. This is because the assessee continues to enter loss in each and every transaction and still continued to transaction F&O and increased its loss. Such transactions stopped immediately after the end of Ass. Year 2007-08 because assess thereafter was not in need of any further Loss even prior to or post AY 2007-08. In the circumstances, the AO was of the view that the loss was a make belief affair arranged in manner to manufacture loss and thus the same being a sham transaction which lead to a bogus loss. 8. In coming to the above conclusion the AO referred to the Legal position vis-a-vis powers of income-tax authorities in relation to sham transactions, as emerging from various judicial authorities and summed upon the legal position as follows: 3
4 ITA No.1677/Kol/2011 M/s. PKS Holdings A.Yr.2007-08
(a) The taxing authority is entitled and is indeed bound to determine the true legal relation resulting from a transaction. Motive alone cannot make unlawful what the law allows but at the same time if there is presence of bad faith or fraud or lack of bona fide in the transaction. the taxing authorities are not bound to consider the legal effect of the transaction. If the assessee's acts are not bona fide but are ambiguous, sham Of make believe it is open to the taxing authorities to question and doubt the transaction and to find out the true, correct and real meaning and result thereof. The make believe transactions, though seemingly legal, are not free from judicial scrutiny.
(b) In the context of determining whether a transaction is sham or illusory or a device or a ruse or a make-believe, the taxing authorities arc entitled to penetrate the veil covering it and ascertain the truth. Taxing authorities are not required to put on blinkers while looking at the documents produced before them. They are entitled to look into the surrounding circumstances to find out the reality of the recitals made on the documents. It is the duty of the court in every case, where ingenuity is expended to avoid facing any welfare legislations, to get behind the smoke- screen and discover the true state of affairs. The court t is not to be satisfied with the form and leave alone the substance of the transactions.
(c) The transactions should not be seen in isolation but in consonance with each other. The matter may also be considered and decided upon in the light of human probabilities and the surrounding facts and circumstances.
(d) The principle 'what is apparent is real' is not sacrosanct and may be overlooked if surrounding circumstances so suggest.
(e) It is true that every person is entitled to so arrange his affairs as to avoid taxation but the arrangement must be real or bona fide and not. a sham or make- believe or colourable device. Tax planning may be legitimate provided it is within the frame- work of the law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax or to obtain any advantage or benefit for tax purpose by dubious method.
(f) A colourable transaction is one which is seemingly valid, but a feigned or counterfeit transaction entered into for some ulterior purposes. The transaction circumstances of each and every case.
(vii) The principle in the matter of tax evasion and tax avoidance as laid down by the 4
5 ITA No.1677/Kol/2011 M/s. PKS Holdings A.Yr.2007-08 (vii) The principle on the matter of tax evasion and tax avoidance as laid down by the Supreme Court in landmark judgment in the case of McDowell & co. Ltd. V. CTO (1985) 154 ITR 148/22 Taxman 11 (SC) can have its application only where colourable or artificial devices are adopted and not to the transactions which are otherwise legitimate and are undertaken bona fide in the ordinary course of business. In other words, McDowell & Co. Ltd's case (supa) can have its application where the devices though seemingly legal are adopted in collusion or where devices adopted are not genuine or bona fide but are sham, make- believe or camouflaged to escape the liability for tax or to obtain certain benefit for tax purpose.
The tax authorities are empowered to go behind the transaction to find out the real and if a transaction, on the basis of evidence and the surrounding circumstances of the case, appears to be non-genuine or bogus or a make believe or sham, with a view to avoid the tax liability or if it appears that the series of transactions effected by the assessee to achieve the desired result is sham or collusive or non-genuine, the tax authorities can ignore the transaction. Such power of tax authorities are legally recognized. From the decision of Hon'ble Supreme court in McDowell & Co. Ltd.'s case it is seen that the principles emerged from the decision is that the bona fide business arrangement with incidental fall out by way of tax benefit can be tolerated but tax avoidance or tax evasion by means of colourable device or make believe transaction and dubious means cannot be recognized. In other words, it can be said that where the transactions effected by the assessee are not bona fide or genuine but are sham, make believe, arranged one and are collusive they can be regarded as hollow and colourable device and are not to be accepted as such by the tax authorities.
The AO thus concluded the facts as set out above clearly revealed that the transactions with Broker M/s. Shilpa Stock Broker Pvt. Ltd. during the year under consideration are nothing but a make believe affairs and arranged one in collusion with the assessee for tax evasion or tax avoidance. On basis of the principle laid down by the Hon’ble Supreme Court in the case of McDowell & Co. Ltd. 154 ITR 148 (SC) and certain other judicial pronouncements referred to in the order of the AO that colorable devices to evade taxes can be disregarded by the Revenue, the AO held that the loss in question was not a genuine loss and disregarded the claim of the Assessee for set off the loss in question against the profit on sale of property.
6 ITA No.1677/Kol/2011 M/s. PKS Holdings A.Yr.2007-08 10. Aggrieved by the order of the AO, the Assessee preferred appeal before CIT(A) and submitted before CIT(A) that the AO disallowed the set off of loss in question not on the basis of any incriminating documents or bringing any adverse evidence on record, but with the observation that the transactions failed to satisfy the test of human probability and the objectives of the transactions was tax evasion. It was argued that the AO did not doubt the genuineness of the transactions carried out by the Assessee which resulted in the loss. The Assessee pointed out that even in the remand report filed before CIT(A), the AO accepted the veracity of the documents filed by the Assessee in support of the loss but has ignored the loss only on the ground the transactions were colourful and sham device to avoid tax payable on profit on sale of land. The Assessee also distinguished all the decisions relied upon by the AO in support of his conclusion that the revenue can ignore transactions which are intended to avoid payment of taxes.
The CIT(A) found that the decisions relied upon by the AO were not applicable to the facts of the Asssessee’s case. He held that decision rendered by the Hon’ble Supreme Court in the case of Mcdowell & Co. Ltd. (supra) was a case in which the issue was whether the liability to pay excise duty was that of the assessee. Even if the liability to pay excise duty was of the Assessee, whether the amount of excise duty, directly paid by the buyer, was includible in the turnover of the assessee for payment of sales tax? Referring to several earlier precedents wherein the concept of excise duty had been elaborated, the Constitution Bench held that the incidence of excise duty was directly relatable to manufacture and its payment is the primary and exclusive obligation of the manufacturer… but (only) its collection can be deferred to a later stage as a measure of convenience or expediency. As to the other issue relating to turnover also, the Supreme Court held that excise duty is a part of the consideration which a buyer pays to purchase liquor and is includible in the turnover of the assessee (manufacturer) although the buyer had directly paid it to the Excise Department. The Supreme Court held that the Assessee cannot indulge in a colorable device to evade tax
7 ITA No.1677/Kol/2011 M/s. PKS Holdings A.Yr.2007-08 by asking the buyer to direct pay excise duty to the Excise Department. According to the CIT(A) the above observations of the Hon’ble Supreme Court were rendered in a totally different context and cannot be applied to the facts of the case of the Assessee. Similarly the CIT(A) pointed out that in the case of CIT Vs. Durga Prasad More 82 ITR 540 (SC) was a case where the Hon’ble Supreme Court observed that Courts and Tribunals when testing the reliability fo evidence has to apply the test of human probabilities. The CIT(A) held that the aforesaid observations made in the context of an Assessee’s attempt to avoid tax by claiming that property belonged to a trust created by his wife, when the evidence showed that the property belonged to him and not to his wife. The CIT(A) was of the view that this decision was also rendered in a different context and not relevant to the case of the Assessee. The CIT(A) was also of the view that the decision in the case of Sumati Dayal Vs. CIT 214 ITR 801 (SC) was a case where the : The assessee had pleaded that she has earned income by winning from horse races, which was exempt from tax. But the income tax authorities proved that it was her unaccounted monies, mainly on the grounds that the Assessee had poor knowledge of racing, improbability that one person will win jackpot in three seasons continuously. The CIT(A) agreed with the Assessee’s submission that in the case of the Assessee had suffered losses on derivatives transactions in the National Stock Exchange and Bombay Stock Exchange. There is no scope to arrange the transactions after the event. The apparent is not real, as observed in the vase was based on surrounding circumstances such as the lack of knowledge of racing, no claim of expenditure of purchases of tickets and no disclosure of any losses suffered. These surrounding circumstances prevailed over the evidence of certificates from race courses. The CIT(A) held that in the case of the Assessee, apart from mere suspicion, there was no case made out by the assessing officer. 12. The CIT(A) also held that the decision by the Hon’ble Calcutta High Court in the case of CIT vs. L.N. Dalmia 207 ITR 89 (Cal), was a case where the Hon’ble Calcutta High court held that where the shares of a company were sold to another company by a 7
8 ITA No.1677/Kol/2011 M/s. PKS Holdings A.Yr.2007-08 individual, and when the purchasing company is floated and majority owned by the same individual, that aspect cannot be overlooked by the tax authorities. Further there was no change in control of the target company, hence there was no real change and the transfer claimed was a sham transfer. The aforesaid decision was therefore not applicable to the facts of the case of the Assessee. The CIT(A) held that the decision of the Hon’ble Bombay High Court in the case of Smt. Nayantara O. Agarwal vs. CIT 207 ITR 639 (Bom) and decision of the Hon’ble Calcutta High Court in the case of CIT Vs. Shekhawati Rajputana Trading Co (P) Ltd. 236 ITR 950 (Cal), were not applicable to the case of the Assessee, as the transactions in those cases were collusive in nature and not a real transaction with unrelated parties, as in the case of the Assessee. Similarly, the CIT(A) held that the decision of ITAT Mumbai in the case of Bombay Oil Industries Ltd. Vs. Dy. CIT [2002] 82 ITD 626 (Mum) was also a case of tax avoidance with collusion of a related party. 13. The final conclusion of the CIT(A) were as follows:
“4.4.3. In view of the forgoing, I find that the AO has not refuted any of the documents filed by the AR even during remand proceedings but disallowed loss on derivatives on the basis of doubts and suspiciousness However, the AO failed to substantiate and convert his doubts into a strong and foolproof case to deny the claim of the appellant. The doubt is a thought which needs to work upon and evaluated with strong reasoning based on findings to be a conviction. The AO has not brought in any evidence to establish that the loss booked by the appellant as alleged was received back by the appellant in some or other forms subsequently. In absence of same a mere doubt cannot be taken as fact. In view of the submissions filed by the AR of the appellant with evidences, I am of the opinion that the AO has not made out any case for such disallowance of loss, as his observations are based on mere suspicions and improper interpretation of certain judicial pronouncements. The AO is therefore, directed to allow loss from Future & Option transactions. The addition of Rs.3,19,76,907/- is therefore, deleted.”
Aggrieved by the order of the CIT(A), the revenue has preferred the present appeal before the Tribunal. We have heard the submissions of the learned DR who reiterated the stand of the AO as reflected in the order of assessment. The learned counsel for the
9 ITA No.1677/Kol/2011 M/s. PKS Holdings A.Yr.2007-08 Assessee reiterated submissions made before CIT(A) and relied on the order of the CIT(A). 15. We have given a very careful consideration to the rival submissions. The law as laid down by the Hon’ble Supreme Court in the case of Mc.Dowell & Co. (supra) has been explained in a later judgment in the case of Vodafone 341 ITR 1 (SC) and the ratio laid down therein is that all tax planning is not illegal/illegitimate/impermissible. It is only when colourable or dubious devices are employed or transactions are sham or when arrangements are a mere subterfuge, as part of tax planning can it be said that they are illegal, illegitimate, and impermissible. For ascertaining what the real intention of the parties was, it is permissible to “go behind” the documents. Generally one must proceed on the basis of the intention as expressed in the transaction or document. If that is challenged as not true on good grounds then the real intention can be looked into. If it is found that the arrangement is a make-believe affair, or a dubious device and the real intention was tax evasion then the arrangement need not be given effect to. In cases where transactions or arrangement are evidenced by written agreement/arrangement it is not possible to rewrite the agreement/arrangement. The right of the parties to enter into transactions according to their free will and choice has always been protected, the only rider being that both the professed intention and the real intention should be the same. Any transaction in which the professed intention and the intention gathered from the documentation are the same must be considered to be genuine. In the present case the AO disallowed the set off of loss in question not on the basis of any incriminating documents or bringing any adverse evidence on record, but with the observation that the transactions failed to satisfy the test of human probability and the objectives of the transactions was tax evasion. The AO did not doubt the genuineness of the transactions carried out by the Assessee which resulted in the loss. Even in the remand report filed before CIT(A), the AO accepted the veracity of the documents filed by the Assessee in support of the loss but has ignored the loss only on the ground the transactions were colourable and sham device to avoid tax payable on profit on sale of land. This 9
10 ITA No.1677/Kol/2011 M/s. PKS Holdings A.Yr.2007-08 conclusion in the light of the decision of the Hon’ble Supreme Court in the case of Vodafone (supra) cannot be sustained. Consequently, the CIT(A) was fully justified in deleting the addition made by the AO and directing the loss to be allowed to be set off as claimed by the Assessee. We find no grounds to interfere with the order of the CIT(A). Accordingly, this ground of appeal of the revenue is dismissed. 16. The next grievance projected by the Revenue in the grounds of appeal is against the action of the CIT(A) in treating the loss of Rs.37,95,659/- as genuine loss but speculative loss which was allowed to be carried forward for set off against speculative income in future as per law. The factual details with regard to this ground of appeal of the revenue are that the assessee had claimed a loss of Rs, 37, 95,659/- in share trading. The transactions of purchase and sale were entered into by the Assessee on the same date. No delivery of the shares were taken and these transactions were intra-day transactions which were speculative in nature. In view of above the trading the loss of Rs. 37,95,659/- was required to be treated as speculation loss u/s. 43(5) of the Act and as per provisions of section 73 of the Act, the set off of speculation business loss with non speculation loss could not be allowed. Therefore the loss of Rs. 37,95,659/- was required to be assessed as speculative loss. The plea of the Assessee that the loss in question was a business loss and not speculative loss was rejected by the AO. The AO also went on to hold that the transaction with M/s Shipa Stock Broker Private Limited (through whom the Assessee did the share trading) was held to be sham transactions in the context of loss in derivatives which was discussed in the earlier paragraphs of this order and in view of the reasons recorded under the head loss on derivatives, the loss of Rs. 3795659 on share trading was also treated as bogus by the AO. 17. Before CIT(A), the Assessee conceded that the loss in question was speculative in nature but challenged the finding of the AO that loss in question was arising out of sham transactions and the loss itself was to be disregarded. The CIT(A) agreed with the plea of the Assessee and he held as follows: “5.2. The submission of the Ld. AR of the appellant has been considered. The appellant claimed Rs.37,9.5,659/- as business loss from share transactions. However, the AO 10
11 ITA No.1677/Kol/2011 M/s. PKS Holdings A.Yr.2007-08 upon verification of the transactions treated the said loss as speculative loss as the transactions (both purchases and sales) were intra-day and no delivery of the shares was taken. The AR has admitted the said findings of the AO that the loss was speculative in nature .. In view of such, loss from share transactions at Rs.37,95,659/- is taken as speculative loss.”
Aggrieved by the order of the CIT(A), the Assessee has raised the aforesaid ground of appeal before the Tribunal. The learned DR relied on the order of the AO and the learned counsel for the Assessee relied on the order of the CIT(a).
We have considered the rival submissions. The transactions of purchase and sale of shares carried out by the Assesssee were genuine and real. The loss suffered by the Assessee in such trading was also genuine. The transactions were however speculative in nature in accordance with Sec.43(5) of the Act and the loss in question was speculative in nature requiring special treatment in view of Explanation to sec.73 of the Act. Since the transactions were genuine and proved as real by the assessee, the observation of the assessing officer that the same were Sham is bad in law and is contrary to facts. The assessee has suffered losses of Rs 37, 95,659 on transactions on shares entered into electronically screen based transaction in a recognized stock exchange, i.e. BSE and NSE. The particulars supporting and evidences were filed during the course of hearing before the assessing officer. The copy of letter dated 7th May, 2009 submitted to the assessing officer along with the copies of the above stated supporting(s) on the losses on shares, was duly filed by the Assessee before the CIT(A). These documents were neither disputed or disbelieved by the AO. In such circumstances the conclusions of the AO in our view were rightly held to be unsustainable by the CIT(A). The CIT(A) was fully justified in his conclusion that the loss cannot be regarded as sham and had to be regarded as real but treated as speculative loss deserving special treatment in terms of set off in accordance with Explanation to Sec.73 of the Act. We find no grounds to interfere with the order of the CIT(A) on this issue and the relevant ground of appeal of the Revenue is dismissed.
12 ITA No.1677/Kol/2011 M/s. PKS Holdings A.Yr.2007-08 20. The next grievance projected by the revenue in its grounds of appeal is against the order of the CIT(A) allowing the claim of the Assessee of deduction of Rs.66 lacs while computing total income. The Assessee as we have already seen is a partnership firm engaged in the business of trading in properties and shares. The assessee had paid of Rs. 33,00,000/-- to Mrs. Rupali K, Shah and Rs. 33,00,000/- Priya K. Shah as commission for purchase of Property in Mumbai. The AO called upon the Assessee to justify the expenditure. In support of the claim for deduction of the aforesaid sum the Assesssee filed a copy of bills and submitted that TDS has been deducted on same and expenditure are reasonable and it should be allowed. The bills for payment of commission was raised by the aforesaid two persons vide bills dated 05/05/2006. The husband of the aforesaid two persons became partner of the partnership firm only on 08/05/2006 and therefore the payment as on the date when services were claimed to have been rendered was not hit by the provisions of Sec.40A(2)(b) of the Act. According to the AO, except filing of copy of bill & TDS Certificates, the assessee had not discharged his onus to prove the services rendered for which commission was paid. He held that merely making payments or deduction of tax is not evidence enough to prove that the expense is deductible u/s. 37(1) of the Income Tax Act. He held that the law was well settled that the onus to prove the allowability of expenses is on the assessee. The AO also observed that:
1). There was no need of this expenditure as the assessee failed to explain the necessity of such expense.
2).The Commission agents do not hold any technical qualification or knowledge which can justify there capability of rendering such service.
3). On the perusal of the bank statement the payment to both the ladies were made on 23.05.2006, whereas their husband were inducted as partner on 08/05/2006. The two new partners had brought in capital on 21.05.2006 and the payment were made from the capital contributed by these partners. Hence the money was taken back by the partners through their respective wife. 12
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4) There was no agreement or documents except and save Bill and TDS Certificates to justify the nature and claim of such huge expenditure of Rs. 66,00,000/-
5). On the perusal of the computation and Profit & Loss of these commission agents filed by the assessee, it is observed that the above commission income were shown as Income from other source and they did not have any major income apart from above. Hence they have rendered service only the assessee, in which their husband are partner, and not to any other person during the said Ass.Year. Hence this expense appears to be intentionally manufactured in order to reduce the profit generated from sale of land. (reliance is placed on the judgments reported as CIT V Calcutta Agency Limited {19ITR 191 (SC)}, Gopinath Vir Bhan V CIT {6 ITR 242}, Vijay Kumar Mills Ltd. V CIT {50 ITR 332}, Vishnu Cotton Mills Ltd. V CIT {117 ITR 754}, Madurai Knitting Co. V CIT {30 ITR 764} and Hatz Trust, Simla V CIT {21 ITR 149}.
The AO held that the assessee has failed to prove rendering of services by the two ladies who are also wife of the partners. Hence in absence of evidences of rendering of services by the said brokers the expenses of Rs. 66 lakhs was not allowed as it failed to satisfy the test of section 37( 1). 21. On appeal by the Assessee, the CIT(A) deleted the addition made by the AO observing as follows: “6.4. I have carefully considered the submission of the AR of the appellant and seen the details/evidences filed. The appellant claimed to have paid Rs.33,00,000/- each to Mrs.Rupali K. Shah and Priya K. Shah as commission for purchase of the property. The record suggests that their husbands became partner in the firm on 08.05.2006, whereas the ladies rendered their service on 05/05/2006. Both the ladies, i.e. the property brokers are identified individual and assessed to tax. From the copy of the LT. records filed it is seen that both recipients have disclosed such commission in their respective returns and paid tax. There is no dispute on these issues. During the remand report, the AO obtained the confirmation from the vendor of the property namely Vadilal Dolatam & sons, Mumbai. The vendor confirmed that both M/S Priya K Shah and Mrs Rupali K.Shah acted as broker on behalf of the purchaser, (the appellant) with them for dealing in transferring their immovable property to the appellant. The 1'.0 objected to the claim of deduction mainly on the ground that these ladies are the wife of the two partners of the firm and .here was no need for making such payments. it appears that the AO treated the commission/brokerage payments to Mrs. Rupali Shah and Mrs. Priya Shah as sham, at par with the loss on derivatives, as discussed supra. 6.4.1. The AR has contended that the necessity of any expenditure is based on the nature of transactions, need thereof and the circumstances in which it is incurred for the purpose of business as think proper by the businessman. The income tax authorities 13
14 ITA No.1677/Kol/2011 M/s. PKS Holdings A.Yr.2007-08 cannot take over the mettle of businessman to judge his prudence, his decision makings and requirement of paying any outgo. No businessman would incur any cost till it is necessary for his business The AR further submitted that the appellant was offered a piece of land and property by these brokers. The appellant has no permanent establishment in the city of Mumbai and also not a regular dealer of properties in that city and there were no offer in public domain, such as newspapers, trade bulletins and or magazines. The offer seemed lucrative for the appellant to go ahead and procured the property through brokers. This deal could not have taken place unless there was intermediary in between . the appellant and the vendor. 6.4.2. Going by the facts of the case as well as in view of the confirmations filed by the recipients of commission -and the vendor, the deduction claimed by the appellant is admissible. Even if the husband of t.ie recipients joined the appellant firm on later date, it did not deter such admissibility, unless evidences are brought on record showing such expenditure was either bogus or excessive. The AO has not made any case to qualify such expenditure was bogus or excessive. Hence, the addition of Rs.66,00,000 is deleted.” 22. We have heard the rival submissions. The learned DR reiterated stand of the AO as contained in the order of assessment. The learned AR relied on the order of the CIT(A). We have considered the rival submissions. The law is well settled that any payment of commission should be for services rendered by the recipient of the commission. The Assessee to claim expenditure on account of commission has to prove that services were in fact rendered, by the recipient of the commission from the Assessee. The fact that the payment is made by account payee cheque or the fact that tax had been deducted and source or the fact that the recipient of commission has declared commission in his return of income and paid taxes thereon, are all irrelevant considerations. In the present case, evidence regarding the nature of services rendered by the recipient of commission has not been placed on record by the Assessee. The fact that the recipient of commission were wife of partners, the fact that the property that was purchased by the Assessee was in Mumbai are circumstances which go against the Assessee. As to how the property was identified by the recipient of commission, what is their expertise in the field of acting as intermediaries for purchase and sale of properties, whether the recipients have any past or future history of rendering similar services and earning income thereon are all relevant considerations, which ought to have been examined by the CIT(A) before 14
15 ITA No.1677/Kol/2011 M/s. PKS Holdings A.Yr.2007-08 allowing relief to the Assessee. In the given facts and circumstances of the case, we are of the view that it would be just and proper to set aside the order of CIT(A) on this issue and remand the issue to the AO for fresh consideration, with liberty to the Assessee to establish the ingredients necessary for claiming commission expense as allowable deduction. We make it clear that the burden to prove the ingredients necessary for claiming commission paid as allowable expense has to be established by the Assessee. The AO will afford opportunity of being heard to the Assessee before deciding the issue.
The next issue that arises for consideration is the co-ordination charges paid to M/S.Onkar Management Pvt.Ltd., which was disallowed by the AO for want of proof of rendering of services by the receipient of the co-ordination charges. The Assessee had claimed as deduction in computing its total income Co-ordination. charges of Rs. 51,00,000/- paid. to M/s Onkar Management Private Limited. It was explained that this Onkar Management Private Limited, a Company having its Registered office at Kolkata (no documentary evidence were filled to prove its establishment in Mumbai) has been paid this sum for Co-ordinating the sale of property. The AO noticed the following facts in respect of the said payment and disallowed the claim of the Assessee for deduction:-
1) As per assessee's ledger the payment was for sale of property as apparent from Debit made on 05/01/2007 in the assessee's book.
2) The bill issued by Onkar Management Private Limited dated 14/12/2006, is for (Co- ordination charges for procurement of property). This itself prove that the person rendering the service for the purchase of the property which was purchased by the Assessee much before than the service rendered by the said party .
3) The only evidence the assessee filed to justify the claim of expenditure was the copy of the Bill, TDS certificate. No evidence what so ever was brought on record to establish the rendering of service by the said party, Inspector reported that there was no such concern ever existed in the said premises. In absence of vital evidence regarding rendering of services, the expenditure claimed cannot be allowed, and thus the expenditure is disallowed. 15
16 ITA No.1677/Kol/2011 M/s. PKS Holdings A.Yr.2007-08
4) Without prejudice to above it is also found that the Assessee has violated provisions of section 40(a)(ia) in respect this payment as because the Assessee debited it: Books of A/c on 05/0112007 and was liable to deduct TDS @ 2% and cess as applicable. However assessee deducted only 0.10% based on certificate u/s 197 of the IT dated 09/0112007 which was after the date of debit it) the books of Accounts. It is settled law that certificate u/s 197 does not have retro respective effect and govern debit of expenditure made on or after the issue of certificate. In this case the certificate was issued on 09/0112007 and debit in the books was made on 05/0112007. Therefore the certificate does not cover or extend in the concession of lower deduction in respect of the debit note made on 05/0112007 Then this payment also is liable to be disallowed U/s 40 a (ia) which- has not been done because for the purpose of business.
5) In view of the same and without prejudice to the above that deduction cannot be allowed u/s 40a(ia) of the IT Act 1961.
However as the expenses has been already disallowed as it failed to satisfy the test of section 37(1) in case it any proceedings the AO held that the expenses is otherwise allowable then the said expenses shall be disallowable u/s 40(a)(ia) of the IT Act 1961.
Before CIT(A), the Assessee filed additional evidence, on which the AO filed the following remand report: “A letter dated 16-08-10 was also sent to Onkar management (P) Ltd, to verify the authenticity of the agreement submitted in the appellate proceedings first time. The letter was returned by the postal authorities. On being asked for, the AR filed a letter dated 10.09.2010 written by the appellant in which the complete postal address of Onkar management (p) Ltd was given. Then, another letter was issued to the said company to confirm the documents. In reply, the said company confirmed the payment of coordination charges. A letter dated 17,08.2010 was also send with inspector to the Sri P. K. Duta, Notary for confirmation of agreement. Inspector in his report confirm the entry in the register. However, I am also with the opinion of AO that these charges claimed by me appellant are bogus. This matter is thoroughly discussed by the AO in its assessment order that the assessee has failed to prove rendering of services by the this company. OA also discussed the payment to the Omkar management (p) Ltd by the assessee is not allowable u/s 40(a)(ia) of the I.T.Act.”
17 ITA No.1677/Kol/2011 M/s. PKS Holdings A.Yr.2007-08 25. Before CIT(A), the Assessee claimed that Onkar Management Private Limited, coordinated activities in making the property acquired as marketable. The CIT(A) allowed the claim of the Assessee, observing as follows:
“7.4.1. Having examined the documents submitted by the AR, I am inclined to accept AR's version that the payment of co-ordination charges to Onkar Management pvt.. Ltd. is an allowable deduction u/s. 37(1) of the Act. The said payment is also not disallowable u/s. 40(a)(ia) as there was no violation of section 194C of the Act. The AR tiled the documentary proof and a sworn affidavit of the said Onkar Management Pvt. Ltd. about its existence. The certificate u/s. 197 was issued by the ITO, TDS, Kolkata 011 0910112007 for deduction of 0.10% tax at source, which clearly mentioned the name .of the appellant and the period of validity was financial year 2006-07. The AR asserted that the payment to the Onkar be verified from the bank statement of the assessee. The AO has not disputed to this claim of the AR in his remand report. In view of such, I am of the opinion that the payment of Rs.51,00,000/- is neither disallowable u/s. 37(1) nor u/s. 40(a)(ia) of the Act. The allowability of such expenditure depends on the circumstances and the events of the business; on this the order of the AO is silent. The AO has not brought in any evidence to establish that the alleged payment to Onkar management Pvt. Ltd. was received back by the appellant in some or other forms subsequently. In absence of same a mere doubt cannot be taken as fact. In view of the submissions filed by the AR of the appellant with evidences, I am of the opinion that the AO has not made out any case for disallowance of co-ordination charges, as his observations are based on mere suspicions. The addition of Rs.51,00,000/- is therefore, deleted.”
Aggrieved by the order of the CIT(A), the Revenue is in appeal before the Tribunal. We have heard the rival submissions. The learned DR reiterated stand of the AO as contained in the order of assessment. The learned AR relied on the order of the CIT(A). We have considered the rival submissions.
The law is well settled that any payment of commission should be for services rendered by the recipient of the commission. The Assessee to claim expenditure on account of commission has to prove that services were in fact rendered, by the recipient of the commission from the Assessee. The fact that the payment is made by account payee cheque or the fact that tax had been deducted and source or the fact that the recipient of commission has declared commission in his return of income and paid taxes thereon, the fact that there is an agreement for rendering services are all irrelevant 17
18 ITA No.1677/Kol/2011 M/s. PKS Holdings A.Yr.2007-08 considerations. In the present case, evidence regarding the nature of services rendered by the recipient of commission has not been placed on record by the Assessee. The observations that we have made in paragraph 23 of this order will equally apply to this ground also. For the reasons stated therein and on the same lines as indicated therein the issue is set aside to the AO for fresh consideration. The AO will afford opportunity of being heard to the Assessee. The burden will be on the Assessee to prove the nature of services rendered and all observations in paragraph-23 of this order will apply to this ground of appeal of revenue also. 28. In the result, appeal of the Revenue is partly allowed for statistical purposes.
Order pronounced in the Court on 01.06.2016.
Sd/- Sd/- [M.Balaganesh] [ N.V.Vasudevan ] Accountant Member Judicial Member
Dated : 01.06.2016. [RG PS]
Copy of the order forwarded to:
1.M/s. PKS Holdings, 15, Chittaranjan Avenue, Kolkata-700072. 2. I.T.O., Ward-56(2), Kolkata. 3. CIT(A)-XXXVI, Kolkata 4. CIT-XXI, Kolkata. 5. CIT(DR), Kolkata Benches, Kolkata.