2021 (4) TMI 767 - AT - Income Tax

Appellate Tribunal decision: Commission disallowed, compensation loss allowed.

Income-tax Officer, Ward – 16 (2), Hyderabad. Versus M/s Pushpa Ispat Pvt. Ltd.

The Appellate Tribunal set aside the CIT(A)'s decision to allow commission payments of Rs. 2,45,40,000, restoring the AO's disallowance due to lack of ... Disallowance of compensation paid - CIT-A deleted addition - HELD THAT:- We observe that in the remand report the AO stated all the replies from the commission recipients are stereo-typed, they have not done any such business either before or after this transaction. The important aspect the CIT(A) missed while directing the AO to delete the addition is that he ignored the remand report submitted by the AO which is based on the statements of beneficiaries recorded and evidences gathered during the course of remand proceedings. As relying on DURGA PRASAD MORE [1968 (8) TMI 17 - SUPREME COURT] we set aside the order of the CIT(A) and restore that of the AO wherein his categorical finding is that the claim is far from truth and concluded that the assessee failed to produce any evidence that the commission agents rendered any services in course of business. It also failed to produce that any agreement entered into between the parties regarding nature of works to be done, rates of commission, terms & conditions for payments, etc. We also observe from the quarterly TDS returns that all the commissions have been debited only on 31/03/2009. It is also not clear that when the actual payments were made. From the details filed by the assessee in the paper book which contain 55 payees amounting to ₹ 2,45,40,000/-. It is also beyond our understanding that after discharging his/her work, they do not know how much commission they are going to get, but only they come to know the same on 31/03/2009 when the entries were passed in the books of account of the assessee. - Decided in favour of revenue Disallowance of compensation loss claimed - CIT(A) directed the AO to allow the compensation loss claimed - HELD THAT:- As during the financial year relevant to the assessment year 2009-10, the assessee has entered into number of transactions for supply of MS flats, MS angles, etc., with M/s. Shalini Steels (P) Ltd and Vijay Iron Foundry (P) Ltd. The transaction was for supply of steel products in the month of December, 2008 at the agreed price. The transactions entered into are contended by the assessee to be in the nature of hedging transactions in order to safe-guard the company and as a precautionary measure, in the course of business carried on by it and, therefore, they fall proviso in clause (a) to sub-section (5) to Sec.43 of I.T. Act. From the purchase orders given to Shalini Steels (P) Ltd & Vijay Iron Foundry (P) Ltd, ,it can be found that they are for purchase of MS angles, MS flats, etc., there is no description and specification of the material required by the assessee company which do not match the requirement of CPDCL. In view of the above, the transactions with M/s. Shalini Steels (P) Ltd and M/s. Vijay Iron Foundry (P) Ltd cannot be compared with the transactions in the invoices/bills furnished as additional evidence. As submitted by the ld. AR in his written submissions in respect of any hedging transaction, the same should be backed by adequate availability of raw material/the material required under contract in the hands of the supplier so that the contract can be fulfilled in case delivery is required. This condition has not been met because it has been categorically stated by the Managing Directors of Shalini Steels {P} Ltd & Vijay Iron Foundry {P} Ltd in their sworn depositions that the supplier companies did not have the stock in the required quantities as on the date of cancellation. Nor at any other time within the contract period, was the material manufactured by the companies and informed to the Central Excise Authorities of the existence of the goods to be supplied. In such a situation, the ingredients of the hedging transactions are not fulfilled, therefore, on this count also, it has to be held that the loss incurred by the assessee is only in the nature of speculative loss. CIT(A) before directing the AO to allow the compensation loss claimed by the assessee held that “I am not inclined to accept the view of the Assessing Officer that the cancellation of the work orders by the appellant and consequently paying compensation is an arranged transaction with a view to reduce profits or for the matter a speculative transaction.” No infirmity in the order of the CIT(A) - Decided against revenue. Issues Involved:1. Disallowance of commission payments of Rs. 2,45,40,000.2. Disallowance of compensation claimed of Rs. 3,05,10,500.Issue-wise Detailed Analysis:1. Disallowance of Commission Payments of Rs. 2,45,40,000Background: The assessee company, engaged in trading iron and steel, claimed a commission expense of Rs. 2,45,40,000. The AO disallowed this expense, concluding that the commission agents, who were family members of the company's director, did not render any services. The AO's conclusion was based on the lack of evidence of services rendered and the absence of TDS deductions.CIT(A) Decision: The assessee provided detailed addresses and evidence of TDS deductions before the CIT(A). These were forwarded to the AO for comments. The AO's remand report stated that the replies from commission recipients were stereotyped and lacked evidence of business activities. Despite this, the CIT(A) directed the AO to delete the disallowance, finding the commission payments genuine.Appellate Tribunal Decision: The Tribunal observed that the CIT(A) ignored the remand report and the significant evidence gathered by the AO. Citing the Supreme Court judgments in CIT Vs. Durga Prasad More and Sumathi Dayal Vs. CIT, the Tribunal concluded that the CIT(A) erred in accepting the commission payments as genuine. The Tribunal set aside the CIT(A)'s order and restored the AO's disallowance, emphasizing the lack of evidence for services rendered and the suspicious timing of commission entries.2. Disallowance of Compensation Claimed of Rs. 3,05,10,500Background: The assessee claimed a compensation expense of Rs. 3,05,10,500 paid to suppliers due to the cancellation of orders amidst a steep fall in iron prices. The AO disallowed this expense, considering the transaction speculative and not genuine. The AO's conclusion was based on discrepancies in the correspondence and the suppliers' admission that no actual purchases were made.CIT(A) Decision: The CIT(A) accepted the assessee's explanation, noting that the compensation was a commercial decision to avoid legal consequences. The CIT(A) found the procedural deficiencies in the correspondence insufficient to conclude the transaction as bogus and directed the AO to allow the compensation loss.Appellate Tribunal Decision: The Tribunal upheld the CIT(A)'s decision, agreeing that the compensation payment was a commercial decision. The Tribunal found no infirmity in the CIT(A)'s order and dismissed the revenue's appeal on this issue.Conclusion:The Tribunal partly allowed the revenue's appeal, restoring the AO's disallowance of commission payments while upholding the CIT(A)'s decision to allow the compensation loss. The judgment emphasized the importance of substantial evidence and the application of legal principles from higher judiciary precedents.