TaxTMI 
TaxTMI 
2026 (7) TMI 1087
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....of law. Disallowance of expenditure of Rs. 50,00,000/- claimed u/s. 57 4. For that the Commissioner of Income Tax (Appeals) erred in upholding the disallowance of expenditure of Rs. 50,00,000/- claimed u/s. 57 of Income Tax Act made by the Assessing Officer. 5. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the expenditure of Rs. 50,00,000/- claimed u/s. 57 of the Income Tax Act was incurred wholly and exclusively for the purpose of earning the commission income of Rs. 57,81,990/- which was offered under the head Income from Other Sources. 6. For that the Commissioner of Income Tax (Appeals) failed to appreciate that the expenditure of Rs. 50,00,000/- being commission paid to M/s. Triveni Chem Trade was in respect of its facilitation role played by coordinating between the appellant and the end customers for supply of starch by M/s.Nanny Starch Corporation Pte Ltd. 7. For that the Commissioner of Income Tax (Appeals) failed to appreciate that M/s. Triveni Chem Trade had the expertise, industry networks and necessary resources for carrying out the facilitation role for transactions between the appellant and the end cus....
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....aimed u/s. 57. During the assessment proceedings, the Assessing Officer (AO) called upon the assessee to substantiate the claim of expenditure by furnishing documentary evidence including agreements, correspondence and details explaining the basis of payment of Rs. 50 lakhs to the partnership firm. The assessee submitted that the payment had been made through banking channels and reflected in the bank statements. It was further explained that the firm rendered various coordination and facilitation services in relation to the supplies made by the Singapore company. However, the assessee could not produce any formal agreement or memorandum of understanding among himself, M/s. Nanny Starch Corporation Pte. Ltd. and M/s. Triveni Chem Trade evidencing the role of the partnership firm in the impugned transactions. Consequently, the AO disallowed the entire claim of Rs. 50,00,000/- u/s. 57 of the Act. The AO disallowed the claim u/s. 57 mainly on the following grounds: i. The agreement for earning commission was exclusively between the assessee and M/s. Nanny Starch Corporation Pte. Ltd. The partnership firm was not a party to the agreement. ii. A partnership firm is onl....
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....to establish that: * M/s. Triveni Chem Trade was regularly engaged in the business of trading in starch; * ITC Limited and West Coast Paper Mills Limited were longstanding customers of the partnership firm; * the products dealt with by the firm and supplied by M/s. Nanny Starch Corporation Pte. Ltd. were substantially identical, namely cationic starch/T-135 starch; and * the commission paid represented the firm's legitimate share for rendering facilitation services in a competing line of business. The additional evidences are as under: Sr. No. Page Reference in Additional Evidence Petition Remarks 1 Page 4 Partnership Firm dealing in sale of starch 2 Page 14 Customer Name: ITC Limited - Customer of partnership firm in AY 2016-17 3 Page 17 Customer Name: ITC Limited - Customer of partnership firm in AY 2017-18 4 Page 23 Customer Name: ITC Limited - Customer of partnership firm in AY 2018-19 (Sale of starch during this year) 5 Page 36 Customer Name: The West Coast Paper Mills Ltd. - Customer of partnership firm in AY 2016-17 6 Page 53 Customer Name: The West Coast Paper Mills Ltd....
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....ace the above to show that the appellant was in fact carrying on competing business with that of the partnership firm in which he is a partner. On perusal of the above documents, it may be noted that the purchase orders relate to supply of Cationic Starch. At this juncture, it would be relevant to reiterate that the partnership firm M/s. Triveni Chem Trade is in the business of trading of tapioca starch, T-135 starch and various other products used in the paper industry. It is submitted that T-135 starch is not a different category of starch but is the brand or commercial name for a specific premium-grade cationic tapioca starch. Cationic starches represent a unique class of high performance starch derivatives which have gained commercial acceptance because of their affinity towards negatively charged substrate such as cellulose, aqueous suspensions of minerals and slimes and biologically active macromolecules. In simple words, it may be noted that because T-135 starch is a variant of Cationic Starch, comparing them is not about two different products, but rather comparing a specific commercial formulation versus the broad category of cationic starches. In essence....
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....d to the elementary rule that if a partner, without the consent of the other partners, tarries on any business of the same nature as, and competing with, that of the firm, he must account for and pay over to the firm all profits made by him in such business, and be must also make compensation to the firm for any loss occasioned thereby. This obligation is formulated in Section 259 of the Indian Contract Act and has long been recognised as a fundamental rule in the law of partnership: Aas v. Benham (1891) 2 Ch. 244: 65 L.T. 25, Trimble v. Goldberg (1908) A.C. 494: 75 L.J.P.C. 92: 93 L.T. 163: 22 T.L.R. 717, Glamington v. Thwaites (1823) 1 Sim. & St. 121 1LJ. Ch. 118:24 R.R. 153: 57 E.R. 50......" (Emphasis supplied) From the above decision, it can be seen that the fundamental rules of partnership is that if a partner, without the consent of the other partners, carries on any business of the same nature as, and competing with, that of the firm, he must account for and pay over to the firm all profits made by him in such business. It is submitted that in light of the above stated rule that the appellant has similarly in the instant case parted with the firm ....
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....ly a premium variant of cationic starch; and * Therefore, the transactions facilitated by the assessee were directly connected with the firm's existing business. The assessee further submitted that the commission income actually represented profits arising from a competing business undertaken by him individually. Reliance was placed upon the judgment of the Calcutta High Court in Pulin Bihari Roy & Ors. v. Mahendra Chandra Ghosal & Ors., 67 Ind Cas 10, wherein it was held that if a partner carries on a competing business without the consent of other partners, he is bound to account for the profits earned therefrom to the partnership firm. Applying the above principle, it was argued that the assessee rightly transferred substantial commission income to the partnership firm. It was further submitted that the firm had duly credited the amount in its books. The receipt had been offered to tax by the firm. Therefore, there was no revenue loss whatsoever. The payment was genuine, fully accounted for and supported by banking channels and the deduction was allowable u/s. 57 as expenditure incurred wholly and exclusively for earning the commission income. The assessee accord....