TaxTMI 
TaxTMI 
2018 (11) TMI 788
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.... and on facts and in circumstances of the case erred in confirming on ad hoc basis the repairs and maintenance expenses totaling to Rs. 61,51,749 as capital in nature. 2.0 Ground No. 2 On the facts and circumstances of the case and in law, the Ld. CIT(A) has erred in confirming the disallowance of commission expenses of Rs. 61,18,000 incurred through banking channels in the course of business and further made enhancement of Rs. 90,82,000 on the premise that genuineness of the expense is not established. Your Appellants craves leave to add to and/or to amend and/or modify and/or to cancel any one or more grounds of appeal any time before or at the time of hearing." 3. The assessee is engaged in the business of manufacturing of plastic processing machinery and looms . During the course of assessment proceedings u/s 143(3) read with Section 143(2) , it was observed by the AO that the assessee has debited Rs. 41,33,290/- for factory building of Chattral Unit and Rs. 41,79,155/- for factory building of Vatva Unit as repairing expenses. In the opinion of the AO, this large amount of expenditure towards repairs vis-a-vis value of building comes to the tune of 40% of the value o....
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....maintenance of wash room, washbasins and toilets at factories and canteen expenses, expenses on cleaning of premise etc. 1.1.2 The Appellant submits before Your Honour that above expenses are recurring expenses and not one time expenses. The appellant has not derived any enduring benefit from the expenses. The expenses are required for the smooth functioning of the business manufacturing process. Since the expenses are recurring expenses, die Appellant has claimed it as revenue expenses. 1.1.3 ..... Based on the above, the Appellant submits before Your Honour that the repairs and maintenance expenses are revenue expenses incurred in the course of business and the same should be allowed as revenue expenditure. 1.1.4 In support of the contention, the appellant relies on the following judicial pronouncements: * In the case of CIT v. Saravana Spinning Mills (P.) Ltd.(2007) 293 ITR 201, (SC), the Hon'ble court has held that repairs expenditure incurred to "preserve and maintain" an already existing asset, and not with the object of the expenditure to bring a new asset into existence or to obtain a new advantage is an allowable revenue expenses. The relevant para of die obser....
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....f the assessee and rejected the same by holding as under:- " 6. I have carefully considered the facts of the case, findings of the Ld. AO, submissions of the Ld. AR, case laws relied by the Ld AR and material placed on record. From the facts of the case it is noticed that, the appellant company had incurred expenditure amounting to Rs. 83,12,445/-, under the head "renovation / repairs and maintenance" and claimed the same as revenue expense. The AO, keeping in mind the nature and quantum of expenses incurred, as compared to the earlier years, treated the above expenses, as capital expenditure, therefore, disallowed the same. However, the depreciation @10% was allowed en the same. Accordingly, the AO after allowing the depreciation @ 10%, i.e. Rs. 8,31,244/- , disallowed the balance expenditure of Rs. 74,81,201/- (83,12,445/- [-] Rs. 8,31,244/-) and added to its income. 6.1 During the course of appellate proceedings, the Ld A.R. had claimed that in the financial year 2008-09, the appellant's factory buildings, located in Gujarat, were heavily damaged because of unseasonal cyclonic rain and were in dilapidated condition. The appellant had incurred huge one-time expenses in p....
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....ed to allow 15% against factory buildings (Rs.36.,29,237/-), 20% against gate, doors and windows(Rs.9,47,382/-) and 15% against furniture and fixtures (Rs.27,16.154/-), and 100% expenditures against canteen/guest house/underground water tank repairs, as revenue expenditure and balance may be treated as capital expenditures, and further requested that the depreciation @10% may also be allowed. After examining the details of expenditures and bills produced by the ld. AR, the contention of the Ld. AR appears to be logical therefore, liable to be accepted. On perusal of the bills it is noticed that the appellant had incurred huge expenses on plywood, on bricks, on cement, on glass doors, glasses, pavers, renovation, etc. .Considering the facts in entirety, and ld. AR's above request, ie. Rs. 5,44,385/-(15%) against factory building, Rs. 1,89,476/-(20%) against doors / gates and windows and Rs. 4,07,468/- (15%) against furniture and fixtures, Rs. 6,29,044/- against canteen repairs, Rs. 2,10,912/- against GH repair and Rs. 1,79,416/- against underground water tank repairs, totalling to Rs. 21,60,696/- are allowed as repairing expenditures and balance amount of R.s.30.84,857/- plus Rs....
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....allowance Rs. 55,36,574/- was confirmed by learned CIT(A), as against disallowance of Rs. 74,81,021/- made by the AO. 9. We have considered rival contentions and have perused the material on record . We have observed that the assessee is engaged in the business of manufacturing of plastic processing machineries and looms. The assessee was running an industrial unit's one at Vatva and other at Chatral in Gujarat . These factory buildings owned by the assessee were more than 2 decades old. There was a cyclone in Gujarat in financial year 2008-09 and the assessee factory buildings at Chattral and Vatva , Gujarat were damaged in the said cyclonic storm . The assessee undertook repairing of the said factory buildings which were damaged in cyclonic storm which led to the expenses to the tune of Rs. 83,12,445/-. The Ld. AO was of the view that these expenses are on the higher side vis-a-vis book value of the factory building as is appearing in the books. The assessee was claiming depreciation on these factory buildings. These expenses were in the nature of repairs and maintenance such as plastering and painting of external and internal walls, painting , water proofing, floor surfacing , ....
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.... share holding of M/s. Maitry Exports P. Ltd. and party wise details for which commission was paid to these two aforesaid parties. The assessee was asked by the AO to submit details of these commission expenses along with shareholding of M/s. Maitry Exports P. Ltd.. The assessee did not submitted copy of agreement with M/s. Maitry Exports P. Ltd., and Mr. Pubba Upendra Gupta . The AO observed that the assessee appointed M/s. Maitry Exports P Ltd. as marketing consultant with effect from 01.04.2009 for the gross consultant fees of Rs. 60,00,000/- per annum for which payments were to be made on monthly basis to M/s. Maitry Exports P. Ltd. and they were to ensure additional annual turnover of Rs. 5 crores though their efforts. It was also observed by the AO that wife and the daughter of the Director Shri Prakash Kundlia of the assessee company are having 80% of the share holding in M/s. Maitry Exports P. Ltd. . The AO observed commission of Rs. 60 lakh vis-a-vis additional new turnover of Rs. 5 crores lead to commission @ 12% which is on the higher side as against prevailing rate of 1 to 2% . It was also observed by the AO that the total turnover of assessee is Rs. 206 crore and commi....
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....ommission of Rs. 66.18 lacs (inclusive of service tax). The commission was paid as per the terms and understanding of the appointment letter. 2 .1 5. The Learned AO has re-calculated and allowed commission payment at 1% on the sales of Rs. 5 crores to Maitry and disallowed the balance amount of Rs. 61,18,000/-( Rs. 66,18,000/- - Rs. 5,00,000/-). 2.1.6 The Appellant humbly submits before your goodself that the commission and brokerage expenses are incurred wholly und exclusively in the course of business. 2.1.7 The Appellant had appointed Maitry Exports Pvt. Ltd. as a marketing consultant for developing marketing strategy of the products and other related services. Basically Maitry's scope of work was not restricted to sales hut included gathering data research on competitor and analysing their prices and method of marketing and distribution thereby leading in increase in the sales of the Appellant. As mentioned above , the strategy developed had helped to procure substantial orders from the new and existing Clients for the Appellant. 2.1.8 The Appellant humbly submits before your Honor that the commission expenses has incurred under the normal trade parlance and looking....
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.... - [1% on Rs. 5 crores]) and added to the total income of the appellant. 9.1 Before me, Ld AR has claimed that the company had appointed Maitry Exports Pvt. Ltd., as a marketing consultant for developing marketing strategy of the products and other related services. !t is further claimed that the scope of work of M/s. Maitry Exports Pvt. Ltd was not restricted to sales only but also included the gathering of data, research on competitors, analyzing their prices and method of marketing and distribution. Accordingly, it is claimed that the strategy developed by M/s Maitry Exports Pvt. Ltd had helped to procure substantial orders from the new and existing Clients for the appellant and the appellant's sales have increased substantially in comparison to the last year (i.e. from Rs. 121 crs to Rs. 206 crs). It is further claimed that rate of commission differs under various circumstances and arbitrary rate of commission cannot be applied to all levels of the transaction. 9.2 In view of above arguments and in order to ascertain the genuineness of appellant's claim, during the course of appellate proceedings, the Ld. AR was requested to furnish credible documents, i.e. nature....
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....hese details it is seen that the payments to these parties have been made, in lump sum without any basis and without establishing the nature of services rendered by them in procuring the order from the respective parties. The perusal of the list further reveals that in most of the cases, the huge amount of commission i.e. Rs. 10,75,000/- to Saroopanmi. Rs. 7,10,000/- to Pabba Anitha, Rs. 15,00,000/- to Sarita Soni, Rs. 21,100,000/- to Pabba Guptha Rs. 4,45,000/- to Mrs. Ginnidevi, Rs. 2,13,581/- to Mrs Kavitha, mainly to ladies had been paid. In addition to above, it is further noticed that the payment of commission of Rs. 7,95,000/- @ 20% to P Sirkantbabu, Rs. 15,00,000/- @ 9.32% to Smt. Sarita Soni, Rs. 7,10,000/- @ 8.39% to Pabba Anitha and Rs. 21,10,000/- @ 12.47% to Pabba Puender Gupta, is also not commensurate with the rate prevailing in the market vis-a-vis nature of business and appears to have been given for other than business needs, for which the appellant could not offer any valid explanation. 9.4 On perusal of details submitted by the Ld. AR in support of above payments, it is noticed that in most of the cases, the stereo type of confirmation letters i.e. "kindly re....
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.... justification for increase in the turnover, etc., I would like to place the reliance on finding of the Hon'ble Supreme Court, in the case of Lachminarayan Madan Lal v. CIT (1972)86 ITR 439 (SC) wherein it is held that even if there is an agreement, between the assessee and its agents for payments of certain amounts as commission, assuming there was such payments, that does not bind the Income-tax Officer to hold that the payment was made exclusively and wholly for the purposes of the assessee's business. In this case, the Supreme Court observed as under :- "Although there might be such an agreement in existence and the payments might have been made, it is still open to the Income-Tax Officer to consider the relevant factors and determine for himself whether the commission said to have been paid is properly deductible. In this case absolutely no material on record has been brought by the assessee to suggest that the commission agents had procured any orders for the assessee. The production of bills or payments having been made by account-payee cheques cannot by itself show that the commission agents had procured any order for the assessee. No correspondence..................
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....gly, all such payments of commission, totalling to Rs. 1,52,00,000/- as against Rs. 61,18,000/- disallowed by the AO, is liable to be disallowed and balance amount of Rs. 57,31,005/- which is almost 2% (Rs 57,27,486/-) of the total commission sales paid lo the parties other than above parties, is allowed. This appeal, is decided accordingly. Thus, the learned CIT(A) rejected the contentions of the assessee by disallowing commission expenses to the tune of Rs. 1,52,00,000/- . As could be seen , Ld. CIT(A) had issued notice of enhancement which ultimately led to disallowance of Rs. 1,52,00,000/- as against disallowance of Rs. 61.18 lakhs made by the AO, vide appellate order dated 29.08.2016 passed by learned CIT(A). 13. The matter has now reached the doors of the tribunal at the behest of the assessee who has filed second appeal with the tribunal. The learned counsel for the assessee at the outset submitted that total commission expenses paid were Rs. 2.09 crores as against total turnover of the assessee of Rs. 206.57 crores. It was submitted that preceding year turnover was Rs. 121 crores and there has been an substantial increase of turnover in the year under consideration vis-a....
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....s made to foreign agents. It was submitted that the AO did not issue summons u/s 131 of the 1961 Act nor any notice were issued u/s 133(6) of the 1961 Act to Maitry Exports Private Limited and other commission agents. It was submitted that disallowance of commission paid to Maitry Exports Private Limited was upheld by learned CIT(A). It was submitted that total commissions actually paid were to the tune of Rs. 2.09 crores on the sale of Rs. 28.64 crores generated through these marketing agents/consultants which comes to 7.31%. It was submitted that income-tax was not deducted at source on commissions paid to foreign agents owing to CBDT circular of 1969 but it was fairly admitted by learned counsel for the assessee that the said circular number 23 dated 23.07.1969 stood withdrawn by another CBDT circular number 7/2009 dated 22.10.2009 concerning provisions of Section 9 of the 1961 Act. The assessment year under consideration before us is AY 2010-11 and the CBDT circular of 1969 was withdrawn on 22.10.2009. It was submitted that no proceedings were initiated against the assessee u/s 201 read with Section 195 of the 1961 Act . It was submitted that complete details of the commission/....
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....le. The learned DR drew our attention to para 9.5 of learned CIT(A) order. The learned DR would rely on decision of Hon'ble Supreme Court in the case of Lachminarayan Madan Lal v.CIT (1972) 86 ITR 439(SC). It was submitted that learned CIT(A) vide enhancement notice dated 24.08.2016 issued u/s 251(2) asked the assessee to produce these parties to whom commission expenses were paid but the assessee did not produce these parties. 14. We have carefully considered rival contentions and perused the material on record including cited case laws , relevant orders of authorities and paper book filed before the tribunal. We have observed that the assessee is engaged in the business of manufacturing of plastic processing machineries and looms. The assessee has claimed to have engaged services of marketing agents/consultants for giving support services for generating sale orders, day to day co-ordination / liaison with buyers, successful conclusion of the orders leading to supplies of machineries by the assessee to its customer and collection of payments for which commission payments were made. The assessee's industrial units for manufacturing of plastic processing machineries and looms are l....
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....assessee company is majority shareholder in the said company holding 80% shares. There is no material on record brought by the assessee as to the background and relevant experience of the personnel who were incharge of the affairs of said Maitry Exports Private Limited to generate fresh orders in favour of the assessee as well to discharge other contractual obligations per agreement to prove their competency to render these contractual marketing services. It is also not brought on record by the assessee that these parties claimed to be brought in by Maitry Exports Private Limited are new customers who placed orders with the assessee for the first time with the efforts and initiative of Maitry Exports Private Limited. The terms of the agreement with Maitry Exports Private Ltd is in variance with the terms and conditions agreed with the other agents/consultants as in the cases of other agents/consultants, they claimed their payment for commission after realisation of sale proceed by the assessee , while only in the case of Maitry Exports Private Limited, the payments were made to the tune of Rs. 60 lacs per annum + service tax payable on monthly basis based on the assurance that atle....
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....y another CBDT circular 7/2009 dated 22.10.2009 which is not noticed by both the parties while passing impugned orders. The year under consideration is AY 2010-11. This aspect of withdrawal of CBDT circular of 1969 by another CBDT circular of October 2009 was inadvertently skipped the attention of both the rival parties. There is no estoppels against law. The learned CIT(A) asked assessee to produce various persons before him vide notice of enhancement dated 24.08.2016. The assessee did not produce these parties before learned CIT(A). The powers of learned CIT(A) are coterminous with powers of the AO. The commission expenses were claimed by the assessee as deduction for expenses from income and these expenses were appearing in assessee's books of accounts. The primary burden/onus is on the assessee to place all relevant records and cogent material before the authorities below in order to prove that these expenses are genuine and were incurred wholly and exclusively for the purposes of business of the assessee satisfying the mandate of Section 37(1). Once the assessee discharges its primary burden, then the burden/onus will shift to the Revenue to bring on record cogent material to ....