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2012 (5) TMI 713
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....2,30,73,945 2. Sri S. Lava Kumar Reddy Rs. 42,83,658 3. M/s. Vijay Mining P. Ltd. Rs. 72,53,316 4. M/s. R.K. Marketing Services Rs. 1,15,36,974 5. Sri Chanda Parasarampuria Rs. 4,00,000 Total Rs. 4,65,47,893 2.1 The Assessing Officer required the assessee to justify the above commission payments by furnishing the following information: a) Details of the services provided by the parties to whom commission payments were made. b) Details of clients arranged by these parties. c) Copies of agreements entered into with these parties. d) Copies of correspondence made with these parties. e) Basis of commission payment. 2.2 During the course of assessment proceedings, a statement under sec. 131 was recorded from Sri G. Ananth Sena Reddy, partner of the assessee firm, on 29.12.2010. Reproducing the excerpts from the said assessment, the Assessing Officer drew the following inferences: 1) there are no written agreement with the parties to whom commission was paid; 2) there is no written correspondence with these parties regarding the customers introduc....
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....ve inconsistencies, as also in the absence of any documentary evidence furnished by the assessee or the commission agents in support of services contentedly rendered, the assessee was required to show cause as to why the payments made to the agents should not be treated as expenditure not laid out or expended wholly or exclusively for the purpose of business. In reply, Sri G. Ananth Sena Reddy, in his statement stated that it was not possible to get customers and good price without paying sales commission. He also claimed that it is not a trade practice in that region to enter into agreements with commission agents. He averred that all the payments were made through an account payee cheque after deducting TDS and the payer has also confirmed the receipt thereof. It was pleaded that due to complexities in the iron trade, it is not possible to furnish exact details of sales procured by each agent. He maintained that all the correspondence happens in person only. 2.5 In view of the above facts, the Assessing Officer referred to the decision of the Delhi High Court in the case of Schneider Electric India Ltd. Vs. CIT (304 ITR 360), wherein the decision of the Supreme Court in the ca....
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.... 2.7 During the course of appellate proceedings, it is submitted by way of Statement of Facts that the above mentioned commission had been paid in connection with smooth carrying and promotion of assessee's business. The assessee contended that the nature of iron ore business is such that the same requires the assistance of commission agents/ middleman. It was averred that the assessee had produced the list of entities/persons to whom the payments were made, along with their addresses and PANs before the Assessing Officer. Besides, the amounts had been paid through account payee cheques, which were cleared through banking channels only. The assessee argued that all the business entities/individuals to whom commission was paid have the Permanent Account Numbers and TDS had been affected on all the payments made to them. The assessee had also filed the return of TDS showing the same. The authenticity of their PANs was also substantiated with soft copies downloaded from the NSDL site. 2.8 It was submitted that all the above information/details were furnished to establish (a) genuineness of payments; (b) identity of the recipient; (c) payment through banking channels by account....
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.... the Commission payments made to six/five persons. The expenditure disallowed on account of commission is Rs. 2,44,85,670 in the case of Sun Minerals and Rs. 4,65,47,893/- in the case of Sun Infraa. The assessees are sister concerns. A common statement covering both the assessees was recorded u/s. 131 of the IT Act from Sri G Anantha Sena Reddy, Partner on 29.12.2010. It is seen from the assessment orders that statements were recorded from the following persons who are the agents for marketing the ore. 1. Smt. B. Bhagya Lakshmi 2. Sri S. Lavakumar Reddy 3. Sri. Vijayasekhara Reddy of M/ s Vijaya Mining Pvt. Ltd 4. Sri Ravi Kalyan Reddy, Managing Partner of M/s R.K. Marketing Services 4.1 It was submitted that Lavakumara Reddy's statement was in regard to Sun Infraa while the statements of other three persons cover both the assessees. It appears from the statements recorded from the witnesses namely some of the recipients of the commissions that they affirmed the services rendered by them and the payments received by them. However the lower authorities have not gone by the affirmations made by them. The Addl. CIT disallowed the commission b....
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...., the onus of proof lying on the assessee stood discharged. The learned Assessing Officer (AO) has not been able to rebut the veracity of the statements. He merely drew adverse inferences without any valid proof. The lower authorities have not considered at all the following facts placed before them with evidence. 1. During the previous year, the firm has actually paid commission to certain parties in connection with smooth carrying and promotion of its business. 2. The nature of iron ore business is such that the same requires the assistance of commission agents/middle men. As explained, the business is purchase and sale of iron ore. Considering the problems associated with the business, the commission is paid to the respective parties to enable the firm to carry on the business without any impediment. 3. In course of hearing the assessee produced the list of entities/persons to whom the payments were made with their addresses and their permanent account numbers to the AO. 4. The amounts were paid through account payee cheques; all the cheques were cleared through banking channels only. 5. All the business entities/individuals have thei....
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....ds from the assessee to the several agents. The whole transactions have been made openly and transparently. The lower authorities have not established any oblique or ulterior motive in incurring the expenditure. The recipients of the commission are themselves income tax assessees and the rate of tax for both the payers and the payees are at the same rates except for some small difference in the cases of individual agents. 4.6 The AR submitted that the reliance in the case of Lakshminarayan Madanlal (cited supra) is misplaced because in that case, the recipients of the Commission were immediately related to the assessee. The lower authorities failed to appreciate that the amounts paid were out of commercial expediency. If the commissions are not paid the assessee would not be able to make the optimum profits. It is also the trade practice to engage agents for marketing the ore. 4.7 The AR submitted there is a direct decision of ITAT Hyderabad Bench 'B' in the case of M/s Murari Trading Co., Hyderabad vs ITO (ITA Nos. 458 & 459/Hyd/09), dated 23rd July 2009. The facts in that case are in pari materia with the facts in the instant case. The AR further relied on the follo....
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....m for allowance u/ s 10(2)(xv) of the Income Tax Act is made, the income tax authorities have to decide whether the expenditure claimed as an allowance was incurred voluntarily and on grounds of commercial expediency. In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively has to be adjudged from the point of view of the business and not of the revenue." 4.11 The learned AR further relied on in the case of J.K. Woollen Mfg. vs CIT (72 ITR 612), the Supreme Court held as under: "As pointed out by this court in CIT Vs Walchand & Co Pvt. Ltd (65 ITR 381) (Se), in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be adjudged from the point of view of the business man and not of the income tax department. " 4.12 The AR also relied on in the case of Aluminium Corporation of India Vs CIT (86 ITR 11), the Supreme Court held as under : "In the instant case, it is not the case of the revenue that the assessee did not pay the commission in question nor is its case that the expe....
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....ned, it can be seen despite contending that the assessee sold iron ore to 29 parties through them, the assessee categorically expressed its inability to furnish any details regarding services provided by the five commission agents. It could not provide any details of the clients contentedly arranged by them. While it was categorically admitted that there was no written agreements between the assessee and the said parties, it could not even produce any correspondence among them, which could have served as a contemporaneous circumstantial evidence. Finally, even the basis of commission payments could not be explained by giving party wise details of sales made through the alleged agents and the resultant working of commission, despite contending that the same had been paid @ Rs. 100/- per MT. In fact, the assessee gave a very vague reply only when it said that commission was shared by the agents depending on their involvement. 5.1 The DR submitted that in order to wriggle out of the situation, Sri Ananth Sena Reddy, partner of the assessee firm, came out with a stance that parties brought in by each of the alleged agents were not identifiable on account of the fact that all the cus....
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....orically admitting that they did not know any customers at all, stated that they had only ensured the quality of iron ore loaded into trucks. However, no records or documentary evidence could be produced to support even such services, if at all rendered. 5.3 The DR submitted that another fact aptly noted by the Assessing Officer is that all the alleged agents of the assessee had received commission from only three parties, viz. M/s. Sun Infra; M/s. Sun Minerals; and M/s. K V Minerals. It is logical to expect that if at all these parties had any expertise in the field of sale of iron ore etc., or if at all they were actually engaging .in the business of commission agents by interacting with other entities in the field, they could have been in a position to earn such a commission from other parties also. However , while they did not receive any further commission from any fourth party, no evidence could be produced to even substantiate that they had any net work or infrastructure to make any efforts for earning further commission in that line of business. 5.4 As regards the contention of the assessee that if the assessee firm could have done its business in Bellary while having....
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....law that if the assessee claimed deduction of any expenditure the burden of proof is on the assessee to establish that such expenditure was incurred wholly and exclusively for the purpose of assessee's business. In the present case it is an admitted fact that there is no written agreement between the assessee and the recipients of the 5 commission agents. Even if there is no written agreement, the assessee could claim deduction for the expenses provided if it is established with documentary and cogent evidence that such expenditure was incurred for the purpose of its business. Now in the assessee's case there is even an iota of evidence regarding render of any services to the assessee to procure business to the assessee. The assessee could not even produce any correspondence between the parties which could have served as a contemporaneous circumstantial evidence. The assessee is not able to correlate the commission payments with reference to the sale. Though the assessee made a claim that the commission agents collectively introduced the parties there is no correspondence between the commission agents. As seen from paras 6.2 and 6.3 of the CIT(A)'s order, the statements....
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....n this case there are no agreements and also there was no evidence of any correspondence or any personal meetings between the assessee and the commission agents to suggest that there was any relationship on the basis of which the commission agents procured customers for the assessee for which they were entitled to receive commission. The understanding between the parties was an oral understanding and it was doubtful that such an oral understanding could have been arrived at without any longstanding relationship having been established between the assessee and the commission agents involving such huge amounts of money over a period of time. Further, the assessee is unable to furnish the details of customers introduced by each agent and also the exact working of commission payment made to each of the agents. Mere payment of commission through account payee cheque after deduction of TDS does not absolve the assessee from discharging its burden with regard to proving business purpose of the payments. 10. In the absence of any credible evidence for making such payments, we are inclined to disallow the same. 11. Reliance is placed on the decision of the Tribunal in the case of Davi....