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Income Tax Appellate Tribunal, RAIPUR BENCH, RAIPUR
Before: SHRI RAVISH SOOD & SHRI ARUN KHODPIA
आदेश / ORDER
PER RAVISH SOOD, JM:
The present appeal filed by the assessee is directed against the order passed by the CIT(Appeals)-II, Raipur dated 23.12.2019, which in turn arises from the order passed by the A.O under Sec.143(3) of the Income-Tax Act, 1961 (for short ‘the Act’) dated 30.03.2016 for assessment year 2013-14. The assessee has assailed before us the impugned order on the following grounds of appeal: “1. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in sustaining the addition of Rs.48,22,955/- on the account of ‘low GP’ without considering the explanation given by the assesee, more so, without rejecting the books of account and even without considering the past history of the assessee’s own case duly accepted in scrutiny assessments u/s.143(3) in AY 09-10, 10-11, 12-13 and 14-15.
2. On the facts and circumstances of the case and in law, the ld. CIT(A) has erred in sustaining the addition of Rs.18,83,719 on the count of commission paid to sister concerns merely on presumption and surmises, while similar expenses had been duly accepted in scrutiny assessments u/s.143(3) in earlier years and succeeding years.
3. The Appellant craves leave to add, urge, alter, modify or withdraw any grounds before or at the time of hearing.”
2. Succinctly stated, the assessee who is engaged in the business as a wholesale dealer/distributor of ITC products namely cigarettes & tobacco and other Fast Moving Consumption Products (FMCG) had e-filed his return of income for the assessment year 2013-14 on 26.03.2014, declaring an income of Rs.16,59,700/-. Subsequently, the case of the assessee was selected for scrutiny assessment u/s.143(2) of the Act.
During the course of the assessment proceedings, it was observed by the A.O that verification of books of account i.e. sales and purchase account of the assessee revealed that the different products were sold at different gross profit rates. The A.O on a perusal of the records observed by the A.O that the gross profit rates shown in the purchase entry bills was approximately 1.60% to 2.50% for tobacco products and 2.50% to 6% for FMCG products. However, it was observed by the A.O that the assessee had shown only gross profit of 1.53%. It was noticed by the A.O that only direct expenses that were shown in the trading account was a discount of Rs.13,47,914/- (0.21% of total sales). The assessee on being queried about the low gross profit as against that shown in the purchase entry bills came forth with two-fold contentions, viz. (i) that the assessee being a distributor of ITC products had to sell the products at the rates fixed by the company; and (ii) that the assessee had to give discount on sales to its customers from his gross margins to meet out the sales target given by the company. Although, it was the claim of the assessee that gross margin on tobacco products was 1.25% and other FMCG products (non-tobacco) was 3%, but the A.O did not find favor with the same. It was observed by the A.O that as per the records submitted by the assessee the average gross profit on tobacco products was 2% while for that on the FMCG products was 4% of its total sales. The A.O in order to verify the authenticity of the trading results shown by the assessee directed him to produce “agreement” of distributorship with ITC, which, however was not produced by the assessee for the reason that the same was not traceable. The A.O further observed that the purchase entry bills revealed that the assessee was using three rates i.e. CO RATE- Company Rate, W SL RT- Wholesale Rate, R SL RT- Retail seller Rate revealing the respective profit margins. The assessee on being confronted with the rates used in the purchase entry bills claimed that as the same were hypothetical rates, therefore, the same could not be taken as the actual sale rates which varied from place to place where the sales were carried out. On a perusal of the sale bills, it was observed by the A.O that the same referred to certain scheme (discount). The assessee on being queried submitted that the same were discounts which were provided around the year as per the different schemes which were provided by the company for its different products. It was observed by the A.O that though the schemes were more during the year for FMCG products as compared to cigarette and tobacco products but the bills produced by the assessee revealed a story the other way round. It was observed by the A.O that despite schemes the assesee had separately debited discount in his trading account of Rs.13,47,914/- i.e. @ 0.21% of the total sales. The A.O on a perusal of the aforesaid details observed, that if the discount percentage was reduced from the gross profit percentage then the gross profit percentage of the assessee would work out almost @ 1.98% for cigarette and tobacco products and @ 3.96% for other FMCG products. Considering the aforesaid facts the A.O was of the view that the assessee had shown low GP rate.
3.1. The A.O on the basis of his aforesaid observations reworked out the gross profit of the assessee at an amount of Rs.1,44,34,055/- and made a consequential addition of Rs.48,22,955/-, as under:-
Tobacco Rs.52,95,15,914/- GP @ Rs.1,04,84,415/- products 1.98% NBFC Rs.9,97,38,393/- GP @ Rs.39,49,640/- Products 3.96% Total sales Rs.62,92,54,306/- Total GP Rs.1,44,34,055/- Gross profit Rs.96,11,100/- shown by the assessee Difference Rs.48,22,955/- amount 3.2. The A.O on a perusal of the financial results of the assessee observed that the latter had claimed to have paid commission of Rs.18,83,719/- to two parties, viz. (i) Shri Krishna Commercial Co., Raipur (sister concern) : Rs.12,71,510/-; and (ii) Shri Varun Nathani, Raipur :Rs.6,12,209/-. It was observed by the A.O that now when the ITC products were in a high demand, therefore, there would be no justification for the assessee to have paid commission for facilitating the sale of the same. Also, the A.O was of the view that now when the company round the year comes up with schemes to boost its sales and also separate discounts were being provided by the assessee, therefore, it was difficult to comprehend the reason for payment of separate commission by the assessee to his related parties. Accordingly, the A.O on the basis of his aforesaid observations disallowed the assessee’s claim of commission expenses and made an addition of Rs.18,83,719/-. The A.O after, inter alia, making the aforesaid addition/disallowance vide his order passed u/s.143(3) dated 30.03.2016 determined the income of the assessee at Rs.84,28,790/-.
Aggrieved the assessee carried the matter in appeal before the CIT(Appeals) but without any success.
The assessee being aggrieved with the order of the CIT(Appeals) has carried the matter in appeal before us.
We have heard the ld. authorized representatives of both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements that have been pressed into service by them to drive home their respective contentions.
Ostensibly, the A.O had rejected the trading results of the assessee for the reason that it had failed to substantiate the same on the basis of purchase entry bills which revealed higher profit rates. Also, as the assessee had failed to produce the “agreement” of distributorship of ITC products, therefore, the aforesaid conviction of the A.O as regards suppression of gross profit rate by the assessee was further fortified. On the basis of his aforesaid deliberations the A.O had thereafter re-casted the gross profit rates as regards the various of products which were being traded by the assessee, viz. (i) cigarette & tobacco products: 1.98% ; (ii) FMCG products : 3.96%, and thus arrived at an addition towards suppressed gross profit of Rs.48,22,955/-.
Although, we find substance in the observations of the A.O that had prompted him to reject the trading results of the assessee, but are accept the manner in which he had determined the gross profit addition on the basis of an unsubstantiated; or in fact an ad-hoc application of gross profit rate of 1.98% of cigarette and tobacco products and 3.96% of other FMCG products. In our considered view, as stated by the Ld. AR and, rightly so, there was no justification on the part of the A.O to have adopted the aforesaid basis which as the same was not supported by any concrete basis. On the contrary, in our considered view the estimation of the assessee’s income for the year under consideration could have been safely done by taking cognizance of its disclosed gross profit rates for the immediately three preceding years [out of which two years had been subjected to scrutiny assessment u/s. 143(3) of the Act], as well as that of the immediately succeeding year which too have been subjected to a scrutiny assessment u/s.143(3) of the Act, as under:-
31-3-10 31-3-11 31-03-12 31-03-13 31-3-14 AY10-11 AY11-12 A.Y.12-13 AY13-14 AY14-15 Sales of 3,12,33,449 32,57,36,624 46,88,63,846 52,95,15,913 59,28,42,427 cigarette & tobacco Sales of 6,64,57,045 6,43,70,340 8,27,54,937 9,97,38,393 1,08,8,16,426 other products -Discount (4,09,223) 7,01,740 12,40,700 13,47,913 19,49,102 Total sales 37,83,81,271 38,94,05,225 55,03,78,083 62,79,06,393 69,97,09,751 Gross 58,97,879 60,02,818 83,43,446 96,11,100 1,06,75,021 profit GP rate % 1.56% 1.54% 1.52% 1.53% 1.53% Accepted by Accepted by Accepted by Under Accepted by revenue in revenue revenue in consideration revenue in scrutiny scrutiny scrutiny assessment assessment assessment u/s.143(3) u/s.143(3) u/s.143(3) dt.19-12-12 dt.20-2-15 dt.15-11-16 We, thus, on the basis of the aforesaid facts are of the considered view that the gross profit rate of the assessee could have safely been taken by the A.O at 1.54% i.e. average gross profit rate of the last three years i.e. A.Y. 2010-11 to 2012-13. Accordingly, in terms of our aforesaid observations the A.O is herein directed to restrict the addition by adopting the overall gross profit rate of the assessee @1.54% of its total sales of Rs.62,79,06,393/-. Thus, the ground of appeal No.1 is partly allowed in terms of our aforesaid observations.
9. We shall now deal with the grievance of the assessee that both the lower authorities had erred in declining its claim for deduction of commission expenses of Rs.18,83,719/-. As observed by us hereinabove, it is a matter of fact borne from record that the assesee had claimed to have paid commission of Rs.18,83,719/- to its related parties, viz. (i) Shri Krishna Commercial Co., Raipur (sister concern) : Rs. 12,71,510/-; and (ii) Shri Varun Nathani, Raipur : Rs.6,12,209/-. As the A.O was of the view that now when the products of the company i.e. ITC products were on high demand, therefore, there could have been no justification for the assessee to have paid commission in order to facilitate sales of the said products. Also, it was observed by the A.O that as the principal company was round the year coming up with schemes to boost up the sales of their products, therefore, there was no need for the assessee to have made payments to the aforementioned related parties in the garb of commission for pushing up its sales. Accordingly, the A.O declined the assessee’s claim of commission expenses of Rs.18,83,719/-(supra), which thereafter was been upheld by the CIT(Appeals).
We have given a thoughtful consideration to the aforesaid issue and are unable to persuade ourselves to subscribe to the same. At the very
10 Vivek Nathani Vs. ACIT-4(1) outset, we may herein observe that the litmus test for allowability of a claim of expenditure u/s. 37(1) of the Act primarily hinges around satisfaction of dual conditions, viz. (i). the expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee) is laid out or expended wholly and exclusively for the purposes of the business; and (ii). the expenditure incurred by the assessee should not be for any purpose which is an offence or which is prohibited by law. In our considered view the A.O for considering the allowability of the expenditure incurred by the present assessee before us, could not have been guided by the test of necessity, but by the fact that as to whether or not the expenditure had been laid out or expended wholly and exclusively for the purpose of the business of the assessee; and that the same is not in the nature of an expense which are specifically excluded as per the mandate of Sec. 37 of the Act. It is not the case of the A.O that the assessee had not incurred the aforesaid expenses wholly and exclusively for the purpose of his business, but for the reason that as per him there was no need for the assessee to have paid commission to the aforesaid parties. We are afraid that the aforesaid reasoning for dislodging the assessee’s claim for deduction of the commission expenses by the A.O cannot be accepted on our part.
11 Vivek Nathani Vs. ACIT-4(1)
Apart from that, we find substance in the claim of the Ld. AR that as the aforesaid commission expenses which were paid by the assessee to both the aforementioned parties, viz. (i) Shri Krishna Commercial CO., Raipur (sister concern) ; and (ii) Shri Varun Nathani, Raipur, had not only been allowed as a deduction in the preceding three years (in two years scrutiny assessments were framed), but in fact had also been allowed by the A.O while framing the scrutiny assessment in his case u/s.143(3), dated 15.11.2016 for the immediately succeeding year i.e. AY 2014-15. For the sake of clarity the details as regards the assessee’s claim of commission expenses a/w. percentage of commission expenditure as against sales for the said years is culled out as under:
AY10-11 AY11-12 A.Y.12-13 AY13-14 AY14-15 31-3-10 31-3-11 31-03-12 31-03-13 31-3-14 Sales of 3,12,33,449 32,57,36,624 46,88,63,846 52,95,15,913 59,28,42,427 cigarette & tobacco Sales of 6,64,57,045 6,43,70,340 8,27,54,937 9,97,38,393 10,88,16,426 other products -Discount 4,09,223 7,01,740 12,40,700 13,47,913 19,49,102 Total sales 37,83,81,271 38,94,05,225 55,03,78,083 62,79,06,393 69,97,09,751 Commission 15,13,525 12,65,564 17,88,729 18,83,719 17,42,085 expenses claimed % of 0.40% 0.32% 0.33% 0.30% 0.25% commission sales Accepted by Accepted by Accepted by Under Accepted by revenue in revenue revenue in consideration revenue in scrutiny scrutiny scrutiny assessment assessment assessment
12 Vivek Nathani Vs. ACIT-4(1) u/s.143(3) u/s.143(3) u/s.143(3) dt.19-12-12 dt.20-2-15 dt.15-11-16 Also, the Ld. AR had taken us through the bifurcated details of the respective commissions which were paid by the assessee to the aforementioned related parties, as under:
Party to whom AY10-11 AY11-12 A.Y.12-13 AY13-14 AY14-15 31-3-10 31-3-11 31-03-12 31-03-13 31-3-14 commission was paid Shri Krishna 9,45,953 8,54,258 12,07,392 12,71,510 11,75,907 Commercial CO. Varun Nathani 4,91,896 4,11,309 5,81,337 6,12,209 5,66,178 Total 14,37,849 12,65,567 17,88,729 18,83,719 17,42,085 Commission claimed in P & L a/c. Accepted by Accepted by Accepted by Under Accepted by revenue consideration revenue in revenue in revenue in scrutiny scrutiny scrutiny assessment assessment assessment u/s.143(3) u/s.143(3) u/s.143(3) dt.19-12-12 dt.20-2-15 dt.15-11-16 Our attention was also drawn by the Ld. AR to the copies of the respective returns of income of the aforementioned parties to whom commission had been paid by the assessee, viz. i) Shri Krishna Commercial Co., Raipur (sister concern) ; and (ii) Shri Varun Nathani, Raipur, Page 23 to 36 of APB.
We have given a thoughtful consideration to the facts involved as regards the aforesaid issue, and are of the considered view that the A.O
13 Vivek Nathani Vs. ACIT-4(1) had failed to give any justifiable reason as regards declining of the assessee’s claim for deduction of commission expenses that were paid to the aforementioned parties. Apart from that, we are of the considered view that considering the fact that payment of commission by the assessee to the aforesaid parties within the same parameters had not only been allowed by the department in his for the last three preceding years (for two years scrutiny assessment was framed), but also while framing assessment in his case for the immediately succeeding year i.e. AY 2014-15 vide order passed u/s.143(3), dated 15.11.2016, therefore, there was no justification on the part of the A.O in declining the assessee’s claim for deduction of the commission expenses during the year under consideration. We, thus, in terms of our aforesaid observations vacate the disallowance of Rs.18,83,719/- that was made by the A.O by declining the assessee’s claim for deduction of commission expenses. Thus, the ground of appeal No.2 is allowed in terms of our aforesaid observations.
Ground of appeal No.3 being general in nature is dismissed as not 13. pressed.
In the result, appeal of the assesee is partly allowed in terms of our aforesaid observations.
14 Vivek Nathani Vs. ACIT-4(1)
Order pronounced under rule 34(4) of the Appellate Tribunal Rules, 1963, by placing the details on the notice board.