TaxTMI 
TaxTMI 
2021 (6) TMI 884
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....ets consisting of goodwill. Having regard to the facts and circumstances of the case and the provisions of law, the Appellant submits that the depreciation on such block of asset be allowed as claimed by the Appellant in its Return of Income. 2) The Assessing Officer and the learned DRP erred in making an adhoc disallowance of 5% of the total staff welfare expenses, aggregating to Rs. 2,45,259/-, incurred by the Appellant. Having regard to the facts and circumstances of the case, the Appellant submits that the disallowance is unwarranted and requires to be deleted. 3) The Assessing Officer and the learned DRP erred in disallowing commission payments, aggregating to Rs. 1,09,93,307/- on the ground that confirmations had not been filed by the Appellant before the Assessing Officer and that the confirmations filed before the DRP were not relevant or material. Having regard to the facts and circumstances of the case, the Appellant submits that the commission paid be allowed as a deduction as claimed by the Appellant in its Return of Income. 4) The Assessing Officer erred in observing that the process of amalgamation of the Appellant Company with Ingram Micro ....
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....rvey action under Sec. 132/133A were carried out on the assessee and its group entities on 06.09.2007. Offices of IMIL were also covered under Sec. 133A of the Act. Incriminating documents pointing out irregularities relating mainly to international tax had surfaced in the course of the search/survey action. Draft assessment order under Sec. 153A/143(3) r.w.s 144C(1), dated 30.12.2010 for A.Y 2005-06 was passed and the income of the assessee was proposed by the A.O to be assessed at an amount of Rs. 69,45,05,530/- after inter alia making the following additions/disallowances: Sr. No. Particulars Amount 1. Depreciation on goodwill Rs. 14,93,072/- 2. Disallowance of staff/other welfare expenses Rs. 4,90,518/- 3. Disallowance of commission payment Rs. 1,09,93,307/- 4. Aggrieved, the assessee objected to the draft assessment order passed by the A.O under Sec. 153A/143(3) r.w.s 144C(1), dated 30.12.2010 before the Dispute Resolution Panel-II, Mumbai (hereinafter referred to as DRP). The DRP Vide its order passed under Sec. 144C(5), dated 23.09.2011 disposed off the objections filed by the assessee. Insofar the disallowance of the assessee's clai....
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.... India and obtain the confirmations as were required by the A.O. It is claimed by the assessee that despite its aforesaid efforts only a few confirmations could be obtained by December 31, 2010 i.e the latest by which the draft assessment order was to be passed. It was thus submitted by the assessee that for the aforesaid reason the remaining confirmations could not be filed with the A.O. It is stated by the assessee that as after culmination of the assessment proceedings it was able to obtain some more confirmations from its dealers, the same, thus, were filed with the DRP. However, the DRP declined to take cognizance of the aforesaid confirmations for the reason that as those were not filed in the course of the assessment proceedings, the A.O, thus was precluded from verifying the same. Also, the DRP was of the view that the confirmations furnished by the assessee company were not relevant as they did not have any contemporaneous evidentiary value. It is stated by the assessee that after culmination of the proceedings before the DRP it was able to obtain certain more confirmations from the dealers to whom commission was paid during the year under consideration. Accordingly, the a....
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....l force in the claim of the assessee. As observed by the Hon'ble Supreme Court in the case of CIT, Kolkata Vs. Smifs Securities Limited (2012) 348 ITR 302(S.C) 'goodwill' is an asset under 'Explanation 3(b)' to Sec. 32(1) of the Act. It was observed by the Hon'ble Apex Court, that a reading of the words 'any other business or commercial rights of similar nature' in clause (b) of 'Explanation 3' indicates that 'goodwill' would fall under the expression 'any other business or commercial right of a similar nature'. It was observed by the Hon'ble Court that the principle of ejusdem generis would strictly apply while interpreting the aforesaid expression which finds place in 'Explanation 3(b)' to Sec. 32(1) of the Act. In the case before the Hon'ble Apex Court, pursuant to the scheme of amalgamation of M/s YSN Shares and Securities (P) Ltd. with M/s Smifs Securities Ltd. which was duly sanctioned by the Hon'ble High Courts of Bombay and Calcutta with retrospective affect from 01.04.1998, the assets and liabilities of M/s YSN Shares & Securities Pvt. Ltd. were transferred to and stood vested with M/s Smifs Securities Ltd. In the process 'goodwill' had arisen in the books of M/s Smifs Sec....
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....vacated. The Ground of appeal No. 1 is allowed in terms of our aforesaid observations. 13. Disallowance of Staff welfare expenses : We shall now advert to the grievance of the assessee that the A.O/DRP had erred in disallowing 5% of the staff welfare expenses. Observing that the assessee had neither furnished the full details of the expenses booked under the head staff welfare expenses nor supported the same on the basis of supporting documentary evidence, the A.O, thus, holding a conviction that the aforesaid claim for deduction was not fully verifiable disallowed on an ad hoc basis 10% of the said expenses amounting to Rs. 21,90,518/-. On objection filed by the assessee, the DRP observed that a similar disallowance that was made in the case of the assessee for A.Ys. 2002-03, 2003-04 and 2004-05 i.e @ 10% of the staff welfare expenses was on appeal restricted to 5% by the CIT(A), vide his orders dated 05.01.2011 and 26.08.2011. Accordingly, the DRP following the view taken by the CIT(A) in the assessee's own case for the preceding years directed the A.O to reduce the disallowance to 5%. Resultantly, the disallowance of staff welfare expenses was restricted by the A.O to a....
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....ny logical reasoning, had however, straightway transposed the view taken by the CIT(A) in the assesses own case for the preceding years and, restricted the disallowance to 5% of the total staff welfare expenses. Be that as it may, as the aforesaid disallowance made by the A.O/DRP falls short of a reasoned order, therefore, we are unable to persuade ourselves to accept the same. Accordingly, as the disallowance of 5% of the staff welfare expenses made by the A.O/DRP is devoid and bereft of any basis, therefore, the same cannot be sustained an dis vacated. The Ground of appeal No. 1 is allowed." We have given a thoughtful consideration to the aforesaid issue, and find, that the facts and the issue pertaining to the disallowance of the assessee's claim for deduction of staff welfare expenses remains the same as were there before us in the aforementioned appeal of the assessee in ITA No. 8793/Mum /2011. Admittedly, in the present case also, the A.O while resorting to an ad hoc disallowance out of the staff welfare expenses had not called upon the assessee to furnish the details in respect of the staff welfare expenses which as per him were not verifiable. As such, the assessee had s....
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.... was claimed to have been paid as well the nature of services which were rendered by them, thus, vide his draft assessment order proposed to disallow its claim for deduction of commission expenditure of Rs. 1,09,92,307/-. On objections filed by the assessee, the DRP did not find any infirmity in the view taken by the A.O and rejected the objection filed by the assessee. The DRP while concluding as hereinabove observed that in the earlier years too the disallowance of commission expenses was upheld by the CIT(A), on the ground, that the assessee had failed to furnish the confirmations of the parties to whom commission was claimed to have been paid. The assessee in the course of the proceedings before the DRP had filed by way of additional evidence confirmations of some of the parties which it was able to procure after the culmination of the assessment proceedings. Observing, that the aforesaid confirmations were filed by the assesee for the first time in the course of the proceedings before the panel in the month of September, 2011, thereby precluding the A.O from verifying the genuineness of its claim of expenditure, the DRP declined to take cognizance of the same. Accordingly, the....
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....s further submitted by the ld. A.R that confirmations of two main parties i.e M/s Omega Systems and M/s Micro Care Computer Pvt. Ltd. to whom commission aggregating to Rs. 49,87,539/- was paid were filed in the course of the assessment proceedings, Page 8-10 of APB. Ld. A.R drew our attention to the 'written submissions' that were filed with the DRP, wherein it was brought to the notice of the panel that the assessee in compliance to the directions of the A.O had furnished the requisite details to support its claim of commission expense, viz. names and addresses of the parties to whom commission was paid; the amount of commission paid; the amount of tax deducted at source; and nature of the services rendered by the parties. It was further submitted by the assessee that the nature of services rendered by the parties were similar to those rendered by them in the previous years. It was submitted by the ld. A.R that the assessee had submitted before the A.O that it was virtually impossible to obtain confirmations from all the dealers who were spread all over India after gap of so many years specifically when with some of such dealers the assessee had severed its relations. It was submi....
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....year and that there was no change in facts in the year under consideration. ii. No new material or evidence was found during the search/survey proceedings, showing that such payments are not genuine. ii. The impugned commission payments were made by way of overriding commission to the dealers of the assessee. iv. It was virtually impossible to obtain the confirmations after a gap of so many years from dealers spread all over India, some of whom may no longer be dealers for the assessee. v. There were no written agreements by and between the assessee company and those dealers as the commission was payable on case-to-case basis depending upon the product(s) sold and the year of operation. vi. The assessee did not want to create a situation whereby it would be legally liable to pay commission at a fixed rate irrespective of the prevailing market conditions at the time of entering into transactions. The Assessing Officer accepted the details and did not call for any further information from the assessee. vii. The tax was deducted at source while making the payments of commission. viii. The PAN details were not called for by....
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....as before us. There is substantial force in the claim of the ld. A.R that due to substantial lapse of time it was not possible for the assessee to have procured confirmations from all the parties, specifically when with some of the parties its relations were severed. On a perusal of the records, we find that the assessee had in the course of the proceedings before the DRP elaborated at length upon the reasons and justification for payment of commission, as well as rebutted the judicial pronouncements that were relied upon by the A.O, as under: "2. Reasons For Payment of Commission The main reasons for the payment of such commission are briefly enumerated hereunder: i. Appellant has paid commission to its dealers, as an overriding commission, on account of sales made directly by the Appellant, in respect of orders procured by the dealer. Since the direct sale is made by the Appellant, the dealer is compensated for the margin loss through the payment of commission. ii. Such commission is paid mainly to build and maintain dealer goodwill and to ensure that the dealers are compensated for all sales generated though their efforts and is subject to ded....
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....herefore be sold within a short span of time. ii. The Appellant is dependent on its dealers all over India to increase and sustain the sales of the Company. The services rendered by such dealers are to procure new orders for the Appellant from existing as well as new customers. Hence, the primary service for which the commission or incentive is paid to such dealers is for facilitating the business of the Appellant. iii. Such commission is paid to basically ensure that the dealers are compensated for their sales efforts and are actively involved in the selling and distribution of the Appellant Company's products. There is severe competition in this business and various competitors are ready to offer various inducements to the dealers to stock and sell competing products. Such incentives and commission payments are therefore a business necessity and custom to ensure the growth of the business. iv. The dealers are also independent third parties having no connection whatsoever with the Appellant Company or with any of the directors of the Company. Hence, the payment was made out of a pure business necessity and was not made to a group company or ....
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....to a closely related concern or to a concern of the same group. Similarly, in the case of Ess Ess Kay Engineering Co. P. Ltd., the payments were made by a company to a selling agency where the shareholders of the company and the partners of the selling agency were closely related. Similarly, in the third case, there was no evidence of my sales being procured by the agent and hence, the commission paid was disallowed. The Appellant submits that in case of the Appellant Company, all the dealers are independent unrelated, third parties and have no connection with the Appellant Company and are in no way related with the Appellant Company or the Directors. The services rendered by the dealers have been enumerated above. Thus, the basic facts on which the various courts have confirmed the disallowance of commission payments are itself absent in the case of the Appellant Company and have the ratio of such judgments cannot be applied to the facts of the Appellant Company's case. The Appellant respectfully submits that the issue of commission payments had come up before the learned CIT(A) - 40 in the case of Ingram Micro India Private Limited for the Assessment fears 2....
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.... multiple reasons viz. (i) that, the assessee had failed to furnish the confirmations from the concerned parties; (ii) that, the PAN Numbers of the parties were not furnished by the assessee; (iii) that, the assessee had failed to satisfy the nature of services rendered by the parties to the assessee ; (iv) that, no details regarding quantum of business procured by the said parties was furnished by the assessee; and (v) that, no details as to whether there was any written agreement between the assessee and the aforesaid parties on the basis of which commission was paid to them was provided by the assessee. Accordingly, the A.O not being satisfied with the aforesaid claim of commission expenditure raised by the assessee proposed to disallow the same in his draft assessment order passed under Sec. 153A/143(3) r.w.s 144C(1), dated 30.12.2010. On objections filed by the assessee, the DRP observed that there was no scope to make an adhoc disallowance of the commission expenditure, as was so done by the A.O. However, at the same time, the DRP directed the assessee to furnish with the A.O the confirmations from all the parties to whom commission of Rs. 1 lac and above was paid during the ....
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....iture was wholly and exclusively incurred by the assessee for the purpose of its business, therefore, the same was not liable to be disallowed. However, the DRP after so concluding, had directed the assessee to file with the A.O the confirmations from the parties to whom commission of Rs. 1 lac and above was paid during the year, failing which the same was to be disallowed by the A.O. We may herein observe, that the aforesaid observations of the DRP regarding the genuineness and allowability of the commission expenditure and, conclusion therein arrived at by him are not found to be befitting. In our considered view, the satisfaction recorded by the DRP that the commission expenditure was incurred by the assessee wholly and exclusively for the purpose of its business, was sufficient for allowing the assesses claim of the said expenditure. Be that as it may, we shall advert to the sustainability of the aforesaid disallowance made by the A.O/DRP on merits. As is discernible from the order of the DRP, the assessee in order to dispel any doubt as regards the authenticity of its claim of expenditure as regards commission exceeding Rs. 1 lac that was paid by it during the year, had thus, ....
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....a Complex, Nagarjuna Nagar, Ameerpet, Hyderabad-500 073 1,812,507 100,251 Omega Systems Sampat Nivas, Nr. Dongar Baba Mandir, Mumbai Agra Road, At Post Vilholi, Nasik 2,018,779 111,033 Quadra Systems 992, Diwanara Palaya, HMT Main Road, Gokul Extension, Bangalore- 560054 786,641 44,131 Radius Systems Pvt. Ltd. 245-A, I Floor, Sant Nagar, East of Kailash, New Delhi- 110 065 170,000 8,712 Satva Open Systems Ambika Complex-3 Floor, Arcot Road, Kodambakkam, Chennai-600 024 981,635 54,177 Simi Enterprises 103, B-104, Sagar Shopping Centre, 76, J.P. Road, Andheri (W), Mumbai- 400 024 158,000 8,690 System Tech Inc., "S.T House", D. N. Ramaiah Layout, R.M. Guttahalli, Bangalore- 560 020 1,576,555 86,298 Targus Technologies Pvt. ltd. J-107, South Extension Part-1, New Delhi- 110 049. 469,126 24,422 Tayal Software Consultancy Services Sushma Nikunj, O/S Surajpole Udaipur- 313 001 260, 110 14,292 Tricad Solutions B-3, Basement, 4/24 East Patel Nagar, New Delhi- 110008 237,120 13,302 Trident Enterprises 31, Mg Marg, Behind Roop Laxmi Garments, Civil Lines, Allahabad 123, 5....
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....,155/-, then there could have been no justifiable reason for the said authorities to have adopted a different yardstick for considering the allowability of the balance commission expenditure of Rs. 1,62,05,703/-. As a matter of fact, as can be gathered from the DRP order, though the assessee had furnished with it the PAN details of the parties to whom commission of Rs. one lac and above was paid during the year, however, no such details were ever filed as regards the remaining parties. Accordingly, we are of the considered view, that keeping in view the aforesaid facts, it would not have been permissible for the lower authorities to have adopted an inconsistent approach while considering the allowability of the commission paid by the assessee to various parties. Apart there from, our view that failure on the part of an assessee to file the confirmations of parties on account of substantial time gap that had lapsed since the date of transaction entered into by the assessee with them, cannot on the said stand alone basis justify drawing of adverse inferences as regards the veracity of such claim of expenditure raised by the assessee, is fortified by the judgment of the Hon'ble High C....
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....iew, that now when on the basis of similar details filed by the assessee the commission expenditure of less than Rs. 1 lac per party, aggregating to Rs. 62,91,155/-, had been accepted by the A.O/DRP, therefore, a different yardstick could not have been adopted by them for verifying the veracity of the balance commission expenditure of Rs. 1,62,05,703/-. On the basis of our aforesaid observations, we are of a strong conviction that now when the assessee had placed on record substantial material to substantiate the genuineness and veracity of the commission expenditure, which has already been accepted by the DRP while disposing off the objections of the assessee, therefore, there was no justifiable reason for disallowing the aforesaid commission expenditure of Rs. 1,62,05,703/-. Accordingly, we vacate the disallowance of commission expenditure of Rs, 1,62,05,703/- made by the A.O. The Ground of appeal No. 2 is allowed." In the backdrop of our aforesaid deliberations, we are of the considered view that in the totality of the facts involved in the case before us, viz. material placed on record by the assessee to substantiate the authenticity of the commission expenses; that confirma....
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.... The Grounds of appeal Nos. 7, 8 & 9 are allowed for statistical purposes. 23. The assessee has assailed the initiation of penalty proceedings u/s 271(1)(c) of the Act. As the said Ground of appeal No. 10 raised by the assessee is premature, the same, thus, is accordingly dismissed. 24. The appeal of the assessee is allowed in terms of our aforesaid observations. ITA No. 8794/Mum/2011 A.Y 2006-07 25. We shall now take up the appeal of the assessee for A.Y 2006-07. The impugned order passed by the CIT(A) has been assailed before us on the following grounds of appeal : "This Appeal is against the Order u/s.143(3) / 153A r.w.s.144C(13) of the Act dated October 31, 2011, of the Deputy Commissioner of Income Tax, Central Range 7, OSD II, Mumbai, in pursuance of the directions of the Hon'ble Dispute Resolution Panel II, Mumbai (DRP) and relates to the Assessment Year 2006-2007. (1) The Assessing Officer and the learned DRP erred in disallowing depreciation amounting to Rs. 11,19,804/-, claimed on the block of intangible assets consisting of goodwill. Having regard to the facts and circumstances of the case and the provisions of law, the Appellant subm....
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.... in calculating interest under Section 234B of the Act. Having regard to the facts and circumstances of the case, and the provisions of law, the Appellant submits that the Assessing Officer be directed to recalculate the said interest. (10) The appellant submits that the assessing officer erred in calculating interest under Sec. 234C of the Act. Having regard to the facts and circumstances of the case, and the provisions of law, the Appellant submits that the Assessing Officer be directed to recalculate the staid interest. (11). The appellant objects to the action of the Assessing Officer in initiating penalty proceedings under Sec. 271(1)(c) and 271B of the Act. The appellant craves leave to add to, alter or amend the above Grounds of appeal as and when advised." 26. Draft assessment order under Sec. 153A/143(3) r.w.s 144C(1), dated 30.12.2010 was passed and the income of the assessee was proposed to be assessed at a total income at Rs. 99,86,25,530/- after inter alia making the following additions/disallowances: Sr. No. Particulars Amount 1. Depreciation on goodwill Rs. 11,19,804/- 2. Disallowance of staff/other welfare expens....
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.... No. 8795/Mum/2011. 30. We have heard the authorized representatives for both the parties, perused the orders of the lower authorities and the material available on record, as well as considered the judicial pronouncements relied upon by them to drive home their respective contentions. Both the ld. Authorized representatives submitted that the facts and the issues pertaining to the Grounds of appeal Nos. 1 to 3 remains the same as were there before us in the assessee's appeal for A.Y 2005-06 in ITA No. 8795/Mum/2011. As the assesee's claim for, viz. (i) depreciation on goodwill; (ii). disallowance out of staff welfare expenses; and (iii). disallowance of commission expenses remains the same as were there before us in its appeal for A.Y 2005-06 in ITA No. 8795/Mum/2011, therefore, our order and reasoning therein adopted shall apply mutatis mutandis for the purpose of disposal of the said issues in the present appeal of the assessee for A.Y 2006-07 in ITA No. 8794/Mum/2011. Accordingly, on the same terms the disallowances made by the A.O, viz. (i). disallowance of assessee's claim for depreciation on goodwill :Rs. 11,19,804/- ; (ii). disallowance out of staff welfare expenses :....
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....at all expenses were not supported by documentary evidence. Nothing has been pointed out by the ld. D.R to dislodge the aforesaid factual position. On objection filed by the assessee, the DRP had wrongly observed that the disallowance was being restricted to 5% as against 10% made by the A.O, as the facts were never so. Be that as it may, the A.O in his impugned order passed u/s 153A/143(3) r.w.s 144C(1), dated 31.10.2011 though referred to the aforesaid mistake of the DRP but without pointing out as to what all expenses were not supported by documentary evidence, therein restricted the disallowance on an ad hoc basis to Rs. 5 lac. As neither of the lower authorities had pointed out as to what all expenses out of total miscellaneous expenses of Rs. 3,24,50,622/- were not supported by documentary evidence, therefore, no ad hoc disallowance under such circumstances could justifiably have been made. In our considered view a disallowance of an expense made by an A.O in the thin air can by no means be sustained. We, thus, in terms of our aforesaid observations vacate the disallowance of Rs. 5 lac made by the A.O/DRP w.r.t the miscellaneous expenses. The Ground of appeal No. 4 is allowed....
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....Officer and the learned DRP erred in making an adhoc disallowance of 5% of the total staff welfare expenses, aggregating to Rs. 16,16,772/-, incurred by the Appellant. Having regard to the facts and circumstances of the case, the Appellant submits that the disallowance is unwarranted and requires to be deleted. 3. The Assessing Officer and the learned DRP erred in disallowing commission payments, aggregating to Rs. 4,66,49,154/- on the ground that confirmations had not been filed by the Appellant before the Assessing Officer and that the confirmations filed before the DRP were not relevant or material. Having regard to the facts and circumstances of the case, the Appellant submits that the commission paid be allowed as a deduction as claimed by the Appellant in its Return of Income. 4. The Assessing Officer and the learned DRP erred in making an adhoc disallowance of 5% of the aggregate miscellaneous expenses, aggregating to Rs. 11,78,786/-, incurred by the Appellant Company for the year under consideration. Having regard to the facts and circumstances of the case, the Appellant submits that such expenditure requires to be allowed as claimed by the Appellant in it....
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....yments of Rs. 4,66,49,154/- were concerned, the panel rejected the objections of the assessee and upheld the view of the A.O. As regards the ad hoc disallowance of 10% of the staff welfare expenses of Rs. 32,33,543/- proposed by the A.O, the DRP restricted the same to 5% i.e to the extent of Rs. 16,16,772/-. As regards the disallowance out of misc expenses , it was observed by the DRP that the said inter alia comprised of an amount paid by the assessee towards income-tax penalty that was already disallowed by it while computing its income. As such, the DRP directed that the disallowance of income-tax penalty be vacated. As regards the balance amount of misc. expenditure the DRP considering the nature of expenses restricted the disallowance on an ad hoc basis to 5%. Accordingly, the disallowance pursuant to the directions of the DRP was restricted by the A.O to an amount of 11,78,786/-, i.e 5% of total misc. expenses. 44. After receiving the order passed by the DRP under Sec. 144C(5), dated 23.09.2011, the A.O vide his order passed under Sec. 153A/143(3) r.w.s 144C(13), dated 31.10.2011 assessed the income at Rs. 184,09,76,230/- 45. The assessee being aggrieved with the assess....
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....f Rs. 2,35,75,724/- that were booked by the assesse in its profit & loss account was disallowed. On objections filed by the assesse, the DRP taking cognizance of the fact that the aforesaid miscellaneous expenditure inter alia comprised of an amount of income-tax penalty that was already disallowed by the assessee in its computation of income, thus, vacated the said disallowance failing which the same would result to double addition in the hands of the assessee. As regards the balance amount of misc. expenditure, the DRP considering the nature of expenses restricted the disallowance on an ad hoc basis to 5% of total miscellaneous expenditure. A.O vide his order passed u/s 153A/143(3) r.w.s 144C(13), dated 31.10.2011 giving effect to the direction of the DRP worked out the disallowance out of miscellaneous expenditure at Rs. 11,78,786/- i.e @5% of total miscellaneous expenditure of Rs. 2,35,75,724/-. 48. Before us, it was submitted by the ld. A.R that no part out of the ad hoc disallowance out of the misc. expenses could be sustained. It was submitted by the ld. A.R that the lower authorities without pointing out the specific expenses which as per them was not allowable as a dedu....