2018 (1) TMI 930 - AT - Income Tax

ITAT Upholds Deletions of Disallowances & Additions for AY 2004-07

Deputy Commissioner of Income Tax Versus Sopariwala Exports And Sopariwala Exports Versus Assistant Commissioner of Income Tax

The ITAT dismissed the revenue's appeals for AY 2004-05, 2005-06, and 2006-07, upholding the CIT(A)'s deletion of disallowances for commission and ... Commission paid to overseas agent - assessee was unable to prove the need for commission @25% paid to M/s.Khadlaj Perfumes LLC, whereas commission incurred with other parties was @0.5% to 5.85% - addition u/s 153A - Held that:- No addition can be made in respect of assessments which have become final if no incriminating material is found during search or during 153A proceedings. See CIT Vs. Kabul Chawla [2015 (9) TMI 80 - DELHI HIGH COURT] Issues Involved:1. Disallowance of commission paid to overseas agent.2. Addition in respect of loan advanced to associated enterprises.3. Legal basis for additions under Section 153A in absence of incriminating material.Issue-wise Detailed Analysis:1. Disallowance of Commission Paid to Overseas Agent:The revenue contested the allowance of commission paid to M/s Khadlaj Perfumes LLC at a rate of 25%, arguing that the assessee failed to justify the high commission rate compared to other parties. The Ld. CIT(A) allowed the commission, noting that the commission payments were genuine, supported by evidence such as emails, actions against copyright infringement, and confirmation from the commission agent. The CIT(A) observed that the commission was necessary due to the decline in sales and the need to combat spurious products. The AO's insistence on the production of the foreign agent before the AO and other financial details was deemed unreasonable. The CIT(A) held that the disallowance was not tenable on merits, as the commission agent was an independent third party, and there was no evidence of money being siphoned off.2. Addition in Respect of Loan Advanced to Associated Enterprises:The revenue argued that the loan advanced to M/s Mellow Commodities SDN.BHD should be adjusted to arm’s length price under Section 92 of the I.T. Act. The CIT(A) deleted the disallowance, noting that the advances were subsequently converted into share capital with RBI approval. The CIT(A) highlighted that the AO did not carefully examine the nature of the transaction, which was for equity investment, not a commercial loan. The CIT(A) referred to the ITAT Ahmedabad Bench decision in Micro Inks Ltd., which distinguished similar facts and concluded that no ALP adjustment was warranted. The CIT(A) held that the transaction was in the nature of quasi-equity, and therefore, the adjustment made by the AO was not justified.3. Legal Basis for Additions Under Section 153A in Absence of Incriminating Material:The CIT(A) and the ITAT upheld that no additions could be made under Section 153A for completed assessments unless based on incriminating material found during the search. The original assessment for AY 2004-05 was completed before the search, and no incriminating material was found. The ITAT cited the jurisdictional Bombay High Court decision in CIT Vs. Continental Warehousing Corporation and the Delhi High Court in CIT Vs. Kabul Chawla, which held that completed assessments could only be interfered with based on incriminating material found during the search. The ITAT dismissed the revenue's appeals, following the binding judicial precedents.Conclusion:The ITAT dismissed the revenue's appeals for AY 2004-05, 2005-06, and 2006-07, upholding the CIT(A)'s deletion of disallowances for commission and interest. The ITAT allowed the assessee's appeal for AY 2006-07, deleting the addition for charitable expenses, as no incriminating material was found during the search. The ITAT emphasized that additions under Section 153A must be based on incriminating material found during the search, following the binding judicial precedents.