2022 (8) TMI 1594 - AT - Income Tax

Commission on exports taxable only on full realization; additions for unsecured loans and assumed commission deleted on evidence

ITAT LUCKNOW - AT upheld CIT(A)'s findings that commission on exports relating to earlier-year sales is payable only upon full realization of sale ... Commission paid on sales pertaining to previous year - Prior Period Item - Commission pertain to sales (export) made during the earlier years but consideration realized during the year - HELD THAT:-We find that similar issue arose in the case of the assessee itself in [2022 (4) TMI 1669 - ITAT LUCKNOW] test for determining as to whether an income has accrued or arisen or whether the corresponding expenditure has been incurred, is not merely the rendering of the services but one has also to find out as to whether the payee had acquired the right to enforce the payment of the said, amount. Till this right crystallise, it would not be possible to say that the expenditure in question has been incurred or that the liability to pay it has accrued and arisen. CIT(A) has correctly appreciated the agreement between the assessee and foreign agents wherein vide clause (6) of the agreement, it has been agreed between the parties that irrespective of time of rendering the services, the commission will be payable to the agents only on full realization of sale proceeds. The learned CIT(A) held that by implication of this sub clause, if by chance the sale proceeds do not come in full, the commission would not have become payable to the agents even though the agent had rendered his services and even when he had no role to play in the realisation of the payment for the exported goods. CIT(A) has correctly held that the question as to whether or not liability in question has arisen would in such a case be determined with reference to the terms of the contract between the parties irrespective of whenever the services in question might have been rendered. Even in mercantile system the liability to pay commission will arise only in the year in which the sales are realized irrespective of the fact the sales are made in earlier year. These are correct findings, therefore, we do not find any infirmity in the order of CIT(A) in this respect and hence ground No. 1 of Revenue’s appeal is also dismissed. Bogus unsecured loans and on account of assumed commission paid thereon - AO has made this addition on the basis of a statement recorded by DCIT, Kanpur from the assessee - CIT(A) has deleted such addition - HELD THAT:- As assessee has filed complete documentary evidences before the Assessing Officer which we have noted in earlier part of the order but for the sake of completeness we again refer to the paper book pages where such evidences are placed and where no adverse comments have been made either by AO nor the Revenue has challenged such documentary evidences. Decided in favour of assessee. ISSUES PRESENTED AND CONSIDERED 1. Whether commission paid to foreign agents, debited in the year under consideration though relating to export sales of an earlier year, is deductible under section 37 read with mercantile system of accounting when the agency agreement conditions liability on realization of sale proceeds. 2. Whether sums credited as unsecured loans (cash credits) can be brought to tax under section 68 where the Assessing Officer treats the lenders as non-existent or the loans as bogus on the basis of statements recorded during survey and investigation reports, despite documentary confirmations, lender ITRs, bank statements and other evidences produced by the assessee. 3. Consequential: Whether an addition of commission alleged to have been paid for arranging alleged bogus loans can be sustained where the primary addition under section 68 is deleted. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Deductibility of commission paid to foreign agents in the year when commission bills were raised though sales and shipments were in an earlier year Legal framework: Under the mercantile (accrual) system an expenditure is ordinarily deductible when liability accrues; however, contractual terms can determine the point of accrual. Section 37(1) (general business expenditure principles) and principles governing accrual under mercantile accounting apply. Precedent treatment: The Tribunal followed earlier authoritative decisions analyzing accrual vis-à-vis contractual contingencies (including the principle in F. D. Sassoon & Co. and subsequent High Court/Supreme Court pronouncements) and applied a prior Tribunal bench decision in the assessee's own case on similar facts. Interpretation and reasoning: The Court examined the agency agreement clause that made the agent's right to commission contingent upon full realization of sale proceeds. It held that such a clause affects not only payability but also accrual of liability; hence, liability does not arise merely on rendering of services if the contract conditions a right on realization. The Tribunal found that commission bills were raised in the year under consideration by agents pursuant to the agreement and realization, and the assessee had not claimed double benefit. It rejected the Assessing Officer's factual premise that invoices/shipments related to a different period than claimed. Ratio vs. Obiter: Ratio - where an agreement conditions commission on realization, accrual (and hence deduction) occurs only when contractual condition is satisfied, notwithstanding the accrual basis of accounting. Obiter - observations on departmental practices and policy (e.g., comments from Nagri Mills) as to undesirability of year-to-year disputes. Conclusion: The disallowance of commission was not sustainable; the expenditure was correctly debited in the year in which the commission bills (and contractual conditions) crystallized the liability. Ground on commission dismissed. Issue 2 - Treatment of unsecured loans under section 68 where Assessing Officer relies on survey statements and investigation reports to characterize loans as bogus Legal framework: Section 68 places initial onus on the assessee to explain nature and source of credited sums (identity, genuineness, creditworthiness). Once the assessee produces documentary evidence (confirmations, ITRs, bank statements, audited accounts), the onus shifts to the revenue to disprove genuineness. Principles of natural justice (audi alteram partem) and evidentiary rules applicable to service of summons/survey material and reliance on statements recorded during survey (sections 133A, 131) are relevant. CBDT instructions restraining sole reliance on survey confessions were applied. Precedent treatment: The Tribunal relied on settled decisions holding that a retracted confession or statement recorded during survey cannot, by itself, sustain addition unless corroborated by independent material (citing S. Khader Khan Son and related authorities). It applied authorities on burden/shift of proof under sections 68/69 and on validity of service and inspector reports (including Ramendra Nath Ghosh principle on affixture/service deficiencies). Interpretation and reasoning: The Tribunal undertook detailed fact-finding: assessee produced confirmations, lender ITRs, bank statements, audited financials and assessment order of the lender showing no adverse finding. The Assessing Officer relied primarily on a survey statement allegedly admitting loans were bogus and on a DDIT (Inv.)/Inspector report which had been prepared on old addresses, lacked particulars, did not follow prescribed procedures (e.g., service by affixture formalities, affidavits by the inspector), and was vague as to postal return reasons. The Tribunal held that material gathered at the back of the assessee must be confronted and the assessee afforded opportunity; failure to do so violates natural justice. It further held that retracted statements require substantial independent corroboration and the revenue bears burden to prove voluntariness and genuineness where retraction is claimed. Where the assessee had discharged initial onus under section 68 by documentary evidence and the AO failed to bring cogent evidence to discredit those documents, additions could not be sustained. Ratio vs. Obiter: Ratio - additions under section 68 cannot rest solely on survey/confessional statements or vague investigation reports; where the assessee discharges the initial onus by documentary evidence, the AO must produce cogent rebuttal and follow due procedure (including proper service, confrontation and opportunity to rebut). Reliance on improperly served or procedurally deficient investigator reports is impermissible. Obiter - procedural guidance on commissioning enquiries and practical suggestions concerning postal remarks and inspector affidavit requirements. Conclusions: The addition of Rs.8,18,00,000 (unsecured loan) was not sustainable in absence of proper corroborative evidence and in light of documentary proof produced by the assessee and defects in the investigative process; the Tribunal upheld deletion. The Tribunal also held that the related addition of commission (estimated @5%) being consequential, fell with the primary deletion. Issue 3 - Consequential addition of commission on alleged bogus unsecured loan Legal framework and reasoning: A consequential addition based on an initial (section 68) finding cannot stand if the primary addition is struck down on merits. The Tribunal treated the commission addition as consequential to the disallowed loan entry and therefore unsustainable where the principal addition failed. Ratio vs. Obiter: Ratio - consequential estimations of commission fall when the foundational characterization of loan as undisclosed income is unsustainable. Obiter - discussion on lack of independent evidence proving payment of such commission to specified persons. Conclusion: The consequential addition for commission was deleted. Cross-references and administrative points * The Tribunal applied and followed prior decisions in the assessee's own cases on identical issues; reliance on such precedents informed the outcome (see Issue 1 and Issue 2 analyses). * The Tribunal emphasized adherence to procedural safeguards: confrontation of adverse material, valid service under General Clauses Act/affixture rules and exercise of reasonable inquiries by AO before reaching subjective satisfaction under section 68. Overall Disposition The Tribunal dismissed the Revenue's appeals on the contested grounds: commission disallowance and additions under section 68 (and consequential commission) were deleted for the reasons stated above. The Tribunal's conclusions rest on contractual interpretation of accrual, the assessee's discharge of onus under section 68 by documentary evidence, procedural infirmities in investigative reports, and settled legal principles regarding reliance on survey statements and retracted confessions.