TaxTMI 
TaxTMI 
2017 (12) TMI 424
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....nnected issue to be decided in this regard is as to whether the ld CITA was justified in upholding the disallowance of commission paid to three individuals in the sum of Rs. 10,81,079/- in the facts and circumstances of the case for which assessee had raised cross objection before us. 2.1. The brief facts of this issue is that the assessee is a partnership firm engaged in the business of manufacture of plastic pipes and fittings, sprinkler irrigation and drip irrigation system at the plant at Jaipur and also undertake the laying and jointing works of plastic pipes and fittings manufactured by them. The firm continued its business in the status of the partnership firm up to 19.1.2010 and w.e.f. 20.01.2010, it was converted into a limited company under the name and style of 'Nimbus Pipes Ltd' and all its assets and liabilities were transferred in the companies books and income tax return of the said company was filed independently for the period 20.1.2010 to 31.3.2010. The income tax return of the firm for the period 1.4.2009 to 19.1.2010 was electronically filed by the assessee on 28.9.2010 declaring total income of Rs. 11,26,840/- and refund was claimed at Rs. 1,34,694/- which w....
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....he business type and product profile of R.N.Forgings Pvt Ltd from the internet and concluded that the said company is engaged in the manufacture and supply of M.S.Ingots, Copper Ingots, Aluminium Alloy Ingots, Stainless Steel Ingots etc. He verified from the profit and loss account of M/s R.N.Forgings Pvt Ltd that it had received commission income only from M/s Nimbus Industries (assessee herein) amounting to Rs. 45,69,416/-. The ld AO observed that according to agreement, M/s R.N.Forgings Pvt Ltd was appointed to function from 1.4.2009. The responsibilities entrusted as per contract, clearly involves lot of travelling and communicating with prospective purchasers, dealers, customers etc. Certainly the said commission agent had to incur lot of expenses under the head travelling and telephone in addition to its established business of trading and supplyof iron and steel products. In this regard, he made the comparative chart of expenses incurred by R.N.Forgings Pvt Ltd as under:- AY 2010-11 AY 2009-10 Travelling 2,08,040 1,93,200 Telephone 1,58,352 1,99,091 Conveyance 23,100 1,04,655 Commission NIL 2,36,966 Courier 6,105 4....
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....id not have to incur any additional expenses for working as a commission agent for the assessee. The assessee clarified that M/s R.N.Forgings Pvt Ltd had raised its commission bill on 25.3.2010, but as the firm had converted into a company w.e..f. 19.1.2010 eventhough the same business was continued with the erstwhile partners as directors / shareholders, the bill component was bifurcated into two parts and the assessee firm has accounted for the portion of the work done upto 19.1.2010 only and the remaining portion has been accounted only in the books of the limited company i.e Nimbus Pipes Ltd. The assessee explained that due to business connections and market knowledge of M/s R.N.Forgings Pvt Ltd, the distributor of the assessee M/s NIPL was able to boost the sales of the products of the assessee from around Rs. 11 crores in Asst Year 2009-10 to Rs. 21 crores in Asst Year 2010-11 (being the year under appeal). The assessee argued that in hardware business, the same shopkeeper can sell M.S.Ingots and irrigation systems / fittings and the commission agent had adequate experience and connections locally. The assessee filed copies of the final accounts of R.N.Forgings Pvt Ltd to pro....
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....n done any payments have been made through account payee cheques. The AO could not refute that the sales of the assessee in its irrigation system & HDPE pipe has shown a marked improvement, both in quantitative and qualitative terms. While the sale through M/s. Nimbus Irrigation P Ltd. (NIPL) increased from Rs. 10.84 crores in A.Y. 2009-10 to Rs. 21.21 crores in A.Y. 2010-11, the assessee's sale through NIPL rose from 41% to 81% of the total sales in this segment. The following table explains it better:- Reasons for appointing Sales Agent M/s. R.N. Furging Pvt. Ltd. ACCT. YEAR SALE in lacs SALE TO NIPL in lacs % of Sale to NIPL % of Sale to others % INCREASE in Sales % INCREASE in Sales to NIPL 2007-08 1,175.44 879.09 0.75 0.25 2008-09 2,660.84 1,083.79 0.41 0.59 126.37 23.28 2009-10 2,632.92 2,121047 0.81 0.19 (1.05) 95.75 The AO had wrongly claimed that M/s. R.N. Forgings P. Ltd. has declared only Rs. 7,99,862/- as commission received by it. The AO wrongly took the figure for the earlier A.Y. 2009-10 and in the remand proceedings the same error has been made. The AO has n....
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....rcumstances of the case and in law, whether Ld. CIT(A) was justified in upholding assessee's contention of paying commission of Rs. 44,55,078/- to M/s R. N. Forgings Pvt. Ltd. for supplying to assessee's distributor M/s Nimbus Irrigation Pvt. Ltd. when the said M/s R.N. Forgings Pvt. Ltd. was appointed for the first time and had no previous experience in assessee's line of business and/or did not provide any specific service to earn such commission. 2. On the facts and circumstances of the case and in law, Ld. CIT(A) erred in not appreciating the fact brought on records by AO that M/s R.N. Forgings Pvt. Ltd. being manufactures & engaged in Iron & Steel related products, having no apparent experience to develop market for irrigation system and HDPE Pipes and that too without incurring expenses under the head travelling & telephone, conveyance commission and also without undertaking any activities towards identification of customer of plastic pipes/irrigation instruments and for procurement of order/realization of payment for the assessee. 3. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in passing an erroneous & perverse order disregar....
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....ount by setting off this commission income with expenditure. 2.7. The ld CITA upheld the disallowance of commission paid to these three parties by observing as under:- "The submissions of the assessee in these three cases above are difficult to accept. In these three cases above there are no agreements at all. These three persons had not been engaged in the earlier years and there is no appreciation in sales in the current year on account of payment of these commissions. It is not known as to what services were performed by them. The mere fact that the individuals have declared the commission income in their individual return is immaterial. The assessee is not able to dislodge the primary objection that there is no contract with the commission recipients at all. The assessee has not been able to file any document from the sellers also indicating the role of the commission recipients as it has done in the case of M/s R N Forgings P Ltd. In view of the above the disallowance of commission to these three persons is sustained. The AO shall however restrict the disallowance to the actual commission declared paid after correcting the figure in respect of Shri Mahendra Kumar B....
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....ciation and Audited A/c of R.N. Forgings (P) Ltd. 122 - 149 PAN Card of Numbus Industries & Nimbus Irrigation (P) Ltd. 150 Statement of Sales in Fin. Year 2010-11 by Nimbus Pipes Ltd. (3 parties). 151 Copy of letter dated 04.02.2013 issued by ITO in the course of hearing. 152 - 155 Copy of reply dated 07/21.02.2013 in response to letter dated 04.02.2013. 156 - 162 Copy of judgement of Lachminarayan Madan Lal vs. CIT (SC) reported in 86 ITR page 439 163 - 167 Copy of judgement of Kolkata High Court dated 14.03.2014 in the case of CIT vs. Inbuilt Merchant (P) Ltd. 168 - 170 2.9.1. We find that the ld CITA had given a finding that the assessee and NIPL are not associated concerns which is not controverted by the revenue before us with any cogent material. We find from the memorandum of association of M/s R.N.Forgings Pvt Ltd enclosed in page 122 of the paper book vide clause 3 of the main objects of the said company includes as under:- 3. To carry on business manufacturers, of designers, fabricators, assemblers, processors, exporters, importers, buyers, sellers, contractors, traders, distributors, agents, stockists, commission agents ....
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....ence the observation of the ld AO that no services were rendered by the commission agent stands nullified. It is to be noted that M/s R.N. Forgings Pvt. Ltd had acted as both purchase and selling agents to M/s NIPL which is evident from correspondences between them enclosed in pages A-2 to A-25 of the paper book. The assessee had explained the entire transactions of commission payment to M/s R.N. Forgings Pvt. Ltd in the form of a detailed note before the ld AO vide letter dated 7.2.2013 para 5. 2.9.6. It is well settled that the revenue cannot sit in the armchair of the businessman and direct how a businessman should conduct his business. The businessman knows his interest best. Whether the necessity of incurrence of an expenditure on the basis of commercial expediency of the business is to be viewed from the point of view of the businessman and not from the point of view of the revenue. 2.9.7. The ld AO relied on the decision of the Hon'ble Supreme Court in the case of Lachminarayan Madanlal vs CIT reported in (1972) 86 ITR 439 (SC) to justify his action of disallowing the commission. In the facts before the Hon'ble Apex Court, the assessee firm mad repayment of commission ....
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....tered into by the assessee with those said commission agents and moreover, on the count that single bill has been raised by those commission agents for the services rendered to the assessee in March 2010, whereas the assessee firm was no longer in existence from 20.1.2010. In this regard, we find from the evidences enclosed in the pages 97 to 110 of the paper book containing the commission bills raised by the agents, ledger account for the period 1.4.2009 to 19.1.2010 pertaining to the assessee firm and for the period 20.1.2010 to 31.3.2010 pertaining to Nimbus Pipes Ltd ( i.e. the company which had taken over the assessee firm on going concern basis), that due bifurcation of bill amount between 1.4.2009 - 19.1.2010 and 20.1.2010 - 31.3.2011 had been made and expenses booked accordingly in the respective books. There is no duplication of claim of bills. Apparently the commission agents are not aware of the conversion of the assessee firm into a private limited company. In any case, when the bills are duly bifurcated and no allegation of duplication of bills and claim of expenses thereon has been made by the revenue, this cannot be a ground on which the disallowance of expenses coul....
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....est was paid in Asst Year 2009-10 to the very same parties and the same were allowed by the ld AO. It was stated that the loans are old and carry forward from earlier years and rates paid are comparable to bank interest rates on loans at the respective periods. 4.2. The ld CITA deleted the disallowance by observing as under:- "The facts of the case are considered. The action of the AO is held unreasonable since the rate of interest @ 18% p.a. is not excessive by market or commercial standards and the AO had himself allowed the rate of interest in the immediately preceding assessment year. As the loans are carried forward from the earlier years, the AO has not been able to show any specific reason to deviate from the earlier position. The case laws cited by the assessee also declare the interest rate of 18% as reasonable. Therefore, the disallowance of Rs. 1,92, 313/- is deleted and the ground of appeal Nos. 5 & 6 are allowed." 4.3. Aggrieved, the revenue is in appeal before us on the following grounds :- 4. On the facts and circumstances of the case in law, whether the Ld. CIT(A) was justified in allowing excess interest amounting to Rs. 1,92,313/- [@18% to ....
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....he assessee claimed interest payment of Rs. 13,69,122/- to its loan creditors in the return of income as a deduction. The ld AO observed that parties are not responding to notices and the assessee has not produced any loan agreement or documents to prove the business activities of the loan creditors. The assessee explained that all the loan creditors under question were private limited companies and they all had filed letters dated 4.3.2013 in the office of the ld AO confirming the loan transactions and had filed bank statements, sources of the funds advanced, audited accounts, PAN details and ID proof of their directors. Further the assessee pointed out before the ld CITA that the ld AO had himself accepted the loan amounts and has not disputed the same. As regards the utilization of the loan amounts, the assessee explained that the immediate utilization of the funds was to purchase raw materials and some fittings. The assessee filed copies of its bank account of Jaipur branch evidencing receipt and disbursal of the sums received as loans. It was argued that once the loans have been accepted as genuine and had been accepted as being utilized for business purposes, there is no reas....