Income Tax Appellate Tribunal - Ahmedabad
Innosearch Limited vs Assistant Commissioner Of Income-Tax on 4 November, 1997
ORDER
Gopal Chowdhury, J.M.
1. The appeal has been filed by the assessee against the order passed by CIT under s. 263 of the IT Act for the asst. yr. 1985-86. In the present appeal, the assessee has challenged the jurisdiction to pass order under s. 263 by the CIT. At the time of assessment under s. 143(3), the AO found that in the tax audit report there is some details of payment in cash exceeding Rs. 2,500 has been mentioned. The assessee by letter dt. 30th March, 1988, explained satisfactorily and the AO found that the payment was made to M/s. Sarabhai Chemicals amounting to Rs. 2,15,97,829 as payment made to field staff posted at various stations all over India. No disallowance under s. 40A(3) was called for by the AO in respect of the aforesaid payments.
2. By issuance of notice dt. 6th March, 1990, the CIT sought to revise the said order and by the impugned order passed under s. 263 of the Act, the CIT by the impugned order held that the order passed by the ITO is erroneous and prejudicial to the interest of Revenue. Hence, he directed to decide the issue afresh after giving a reasonable opportunity of being heard to the assessee against which the assessee is in appeal before us.
3. The learned counsel on behalf of the assessee has submitted that the assessee has been appointed as sales and service agents by Sarabhai Chemicals and the appellant's division is known as SC operations. The assessee was appointed as sales and service agent by Sarabhai Chemicals by letter dt. 1st April, 1983, which has been brought on record on behalf of the assessee, according to which the assessee has to render different kinds of services, inter alia, to maintain premises, to complete accounts of stocks and other properties, to render general office services, e.g., receiving, storing and accounting of the stocks, execution of customers' orders, preparation of sales invoices, packing, forwarding, etc., to collect the proceeds of the cash bills or invoices from the parties and deposit such moneys into company's bank account. According to the said agreement, the assessee was to effect payment of remittance to the company's officers and others as per the directions of the company. The learned counsel on behalf of the assessee has submitted that the payments in question representing Rs. 2,15,97,829 in fact is not payment to M/s Sarabhai Chemicals, but the said amount represented payments made to different officers and field staff posted at various stations all over India pursuant to the agreement. The payment was made by the assessee on behalf of M/s. Sarabhai Chemicals. It was submitted that the assessee after having withdrawn the cash from SC operations division utilised the same for obtaining bank drafts for the purpose of payment to different staffs and officers of M/s Sarabhai Chemicals. It was further submitted that the aforesaid expenditure was not incurred by the assessee-company, but the same had been debited to the accounts of M/s Sarabhai Chemicals in the appellant's books. Therefore, it cannot be said that the expenditure was incurred by the assessee for its business. Our attention was drawn to various clauses of the letter dt. 1st April, 1983, by which the assessee was engaged as sales service agents of M/s Sarabhai Chemicals. The learned counsel on behalf of the assessee has filed paper book containing the notice issued under s. 263 by the CIT. It has been submitted on behalf of the assessee that both the CIT as well as the AO have wrongly recorded a finding that the payments were made by the assessee to M/s Sarabhai Chemicals. In fact the payments were made by the assessee on behalf of Sarabhai Chemicals which has been noticed by the CIT while passing the order under s. 263. It was submitted that the CIT has accepted the fact in his order that the assessee made payments to different staffs and officers of M/s Sarabhai Chemicals after withdrawing cash from the bank and purchasing drafts. Details of the same was furnished before the CIT. In view of the aforesaid materials, the CIT should not have held that the order passed by the ITO is erroneous and prejudicial to the interest of Revenue. It was submitted that the AO before passing the order had enquired about the issue under s. 40A(3) of IT Act which is apparent from the order passed by the AO because a portion of the payment has also been disallowed by the AO under s. 40A(3). Hence, the finding of the CIT that the ITO has not scrutinised the nature of payment made on behalf of Sarabhai Chemicals is not correct. It was submitted that the CIT was not justified in holding that if the assessee contends that the payments were made on behalf of M/s Sarabhai Chemicals and such payment do not represent any expenditure of the assessee, it would be as dubious method of tax planning to defraud the Revenue. The contention of the learned counsel on behalf of the assessee that while the CIT sending the issue back to the AO after setting aside the aforesaid finding recorded by the CIT was unwarranted and should not have been made without any basis. The learned counsel on behalf of the assessee relied on the decisions reported in CIT v. Smt. Minalben S. Partho (1994) 215 ITR 81 (Guj), 22 ITD 155, Balwant Singh v. ITO (1996) 54 TTJ (JP) 560 : (1995) 55 ITD 363 (JP). The learned counsel on behalf of the assessee has further relied on the order passed by the Tribunal in ITA No. 1057/A/90 in the case of M/s. Khemchand & Sons.
4. On the other hand, the learned Departmental Representative supported the order passed under s. 263 and submitted that the ITO did not make any enquiry with regard to the nature of payment. Hence, the CIT was justified in setting aside the order holding the same as erroneous and prejudicial to the interest of revenue. The learned Departmental Representative supported the order passed under s. 263 and relied on the following decisions : Gee Vee Enterprises v. Addl. CIT (1975) 99 ITR 375 (Del), CIT v. Pushpa Devi (1987) 164 ITR 639 (Pat), Rampyari Devi Saraogi v. CIT & Ors. (1968) 67 ITR 84 (SC), Smt. Tara Devi Aggarwal v. CIT (1973) 88 ITR 323 (SC), Addl. CIT v. Mukur Corpn. (1978) 111 ITR 312 (Guj), Tejinder S. Makkar v. Asstt. CIT (1997) 58 TTJ (Mumbai)(TM) 416 : (1997) 61 ITD 57 (Mumbai) (TM).
5. We have heard both the sides and perused the materials brought on record. It appears that the assessee is a private limited company and was appointed by Sarabhai Chemicals as service agents. The letter of appointment dt. 1st April, 1983, has been brought on record which shows that the assessee-company had to perform and carry out different types of sales and service functions on behalf of M/s Sarabhai Chemicals. As it appears from cl. 8 of said letter, the assessee-company agreed to effect payment of remittance to the company's officers and others as per the directions of the company. These expenses are to be reimbursed by the Sarabhai Chemicals to the assessee-company. According to the assessee, pursuant to the said agreement such payments were made to field staffs, posted in different stations all over India employed by M/s Sarabhai Chemicals. From the assessment order, it appears that the assessee was asked by the ITO as to why the amount should not be taxed under s. 40A(3) of the Act. By letter dt. 30th March, 1988, the assessee explained the situation and the AO recorded a finding that the assessee-company has satisfactorily explained the amount paid to M/s Sarabhai Chemicals as payment made to field staff posted at various stations all over India. Hence according to the AO the payments were not to be disallowed under s. 40A(3). In the notice issued under s. 263 similarly the CIT mentioned that the impugned payment was made to M/s Sarabhai Chemicals has been wrongly allowed by the ITO without applying the provision of s. 40A(3). The contention recorded in the notice by the CIT is not correct because the payment was not made to M/s Sarabhai Chemicals but the assessee made payments to different field staffs of M/s Sarabhai Chemicals on behalf of Sarabhai Chemicals as its agent. The further contention of the assessee is that the expenditure incurred for making payment by Sarabhai Chemicals are not by the assessee and the aforesaid amount was debited in the accounts of M/s Sarabhai Chemicals.
As such the disallowance under s. 40A(3) cannot be made in the hands of the assessee. It appears that the assessee filed a detailed reply pursuant to the notice under s. 263 before the CIT. The relevant portion of the said reply is as follows :
"(g) The payments aggregating to Rs. 2,15,97,829 in respect of which the s. 263 is now proposed were made by our aforesaid division and debited to the aforesaid two accounts of Sarabhai Chemicals. These payments in reality were made by us on behalf of Sarabhai Chemicals towards their field staff salaries, travelling expenses, liability arising from deductions from their salaries, etc.
(j) It needs to be specifically pointed out to your Honour that it is not that this company had merely addressed its letter dt. 30th March, 1988 in order to explain how s. 40A(3) could not be invoked in so far as payments aggregating to Rs. 2,15,97,829 debited to the account of Sarabhai Chemicals were concerned. What this company had also done during the assessment proceedings was to make out a 22 page list of all the payment vouchers aggregating to Rs. 2,22,78,271. That list along with the relevant voucher files containing vouchers of the same types as the three specimen attached herewith were produced before the ITO and the same had been verified by him before arriving at his satisfaction as envisaged by s. 6DD(j). For your Honour's immediate reference, we attach herewith a xerox copy of the said list (Annexure-C) from which it will be seen that it contains the following columns :
(1) Voucher No. (2) Date (3) Amount This list was prepared in order to facilitate prompt reference to the relevant vouchers so that location of the vouchers in the files can be facilitated at the time of verification by the ITO. As pointed out above, the ITO had actually carried out this verification during the assessment proceedings.
6. From the narration of facts given above, your honour would kindly appreciate :
(a) that the payments in question represented withdrawals of cash from our bank accounts and its utilisation for obtaining demand drafts in favour of the field staff of Sarabhai Chemicals or co-operative credit societies or similar persons. Since the payments were made on behalf of Sarabhai Chemicals, they were debited to their account. Thus it is not correct to say that they represented cash payments.
(b) that all the payments aggregating to Rs. 2,15,97,829 were debited to the accounts of Sarabhai Chemicals and none of them represented incurrence of expenditure by this company. That this was so can be verified not only from the summarised accounts of Sarabhai Chemicals given hereinabove but also from the xerox copies of the audited accounts of our SC-operations division attached herewith because that clearly shows that following.
(i) The profit and loss account shows that the total expenditure other than depreciation was Rs. 33,69,587.52
(ii) The fuller details of the above expenditure are contained in Schedule B, a perusal whereof shows that the expenditure represents salaries and wages, rent and similar other administrative expenses none representing payments to Sarabhai Chemicals.
(c) That s. 40A(3) can apply only if an assessee incurs any expenditure in respect of which payment is made in a sum exceeding Rs. 2,500 otherwise than by a crossed cheque or a crossed bank draft. However, where the payment does not represent any such expenditure, the very question for invoking s. 40A(3) cannot arise.
(d) That your impression that we had not indicated to the ITO the facts and circumstances justifying applicability of r. 6DD(j) is entirely misplaced.
(e) That similarly, your impression that the ITO had failed to invoke s. 40A(3) in respect of Rs. 2,15,97,829 is also entirely misplaced".
It appears from the order passed under s. 263, the CIT noticed the relationship between the assessee and Sarabhai Chemicals considering the agreement subsisting between them. Different clauses of the agreement under which the assessee rendered services has been mentioned in the said order by the CIT. The CIT has also noticed the fact that all the expenses incurred by the assessee will be reimbursed by Sarabhai Chemicals and over and above 5 per cent of such expenses will be paid to the assessee-company as service charges. The assessee brought to the notice of the CIT that before the AO the assessee filed written submission vide letter dt. 22nd March, 1990. The said submission of the assessee has been recorded at para. 4 of the impugned order. While recording his finding at para. 5, it has been admitted by the CIT that the amounts of vouchers were debited to the account of Sarabhai Chemicals on account of the cash utilised for obtaining demand drafts in favour of various Employees Co-operative Credit Society. The CIT has also found and referred in his order that the assessee is a sales services agent of Sarabhai Chemicals and rendering services to the business of Sarabhai Chemicals. Sarabhai Chemicals advances money to the assessee for payments on their behalf but some times the assessee itself makes payment on behalf of Sarabhai Chemicals and then gets reimbursement of such payments from Sarabhai Chemicals. Thereafter the CIT mentioned in his order that if the assessee contends that the payments were made on behalf of Sarabhai Chemicals and such payments did not represent the expenditure incurred by the assessee-company in that event it would be treated as a dubious method of tax planning to defraud the Revenue. After recording such finding, the CIT directed the AO to decide the issue afresh giving opportunity of hearing to the assessee. From the discussion made above, it is clear that in one hand the CIT was satisfied about the fact that the assessee-company was engaged in rendering services on behalf of Sarabhai Chemicals. The CIT has recorded finding to the effect that the assessee was making payments on behalf of Sarabhai Chemicals. Some time the assessee itself was making payments on behalf of Sarabhai Chemicals and thereafter the payments were being reimbursed to the assessee-company by Sarabhai Chemicals. After recording such finding again the CIT is recording a finding that in case the assessee contends that the payments were made on behalf of Sarabhai Chemicals, it would be treated as a dubious method of tax planning adopted by the assessee. Thereafter, the CIT is setting aside the order to the AO for making a thorough enquiry regarding the cash payments in excess of Rs. 2,500. In our opinion, once the CIT has come to the conclusion that the payments made by the assessee-company were representing the payments made on behalf of Sarabhai Chemicals in that event the finding recorded by CIT that such contention if raised by the assessee would amount to dubious method of tax planning stands no justification, more so while the CIT himself is sending the matter to the ITO for thorough enquiry. In the decision relied on by the Departmental Representative reported in (1978) 111 ITR 312 (Guj), in the case of Addl. CIT v. Mukul Corpn. (supra) jurisdictional High Court has observed that since the CIT by passing order under s. 263 did not settle the assessment finally, but preferred to direct the ITO to make an order for fresh assessment, the only proper course for the CIT was not to express any final opinion as regards the controversial points. On examination of the records filed before us, we are satisfied about the fact that the assessee-company made the payments on behalf of M/s Sarabhai Chemicals. Hence, the expenses were incurred for making payments by Sarabhai Chemicals and not by the assessee-company. The expenditure has been debited in the accounts of Sarabhai Chemicals. The learned counsel on behalf of the assessee brought to our notice the order of the Tribunal in ITA No. 1057/A/90 wherein disallowance was made in the hands of a commission agent and the Tribunal held that the commission agent was making payment in the capacity of an agent. Hence, disallowance under s. 40A(3) was not warranted. In the present case also, we find that the CIT himself found after examining the record that the assessee was rendering services on behalf of Sarabhai Chemicals and payments were made on behalf of Sarabhai Chemicals. In such circumstances, in our opinion, no disallowance under s. 40A(3) is called for at the hands of the assessee-company. It is a settled principle of law that for the purpose of invoking the jurisdiction under s. 263 both the requirements has to be fulfilled, that firstly the order should be erroneous and secondly it should be prejudicial to the interest of Revenue. Reliance can be placed on (1995) 215 ITR 81 (Guj) (supra) and CIT v. Annayappa & Sons (1994) 206 ITR 509 (Kar). Considering the facts and circumstances of the case, in our opinion, the AO in the present case has passed the order after making necessary enquiry with regard to the applicability of s. 40A(3). Hence, the said order cannot be said to be erroneous and prejudicial to the interest of Revenue.
6. In the result, the order passed under s. 263 is set aside and the appeal is allowed.
ITA No. 4368/Ahd/19911. The appeal has been filed by the Revenue against the order passed by CIT for the asst. yr. 1983-84 by which the order passed by ITO, under s. 104 of the Act for payment of additional tax was cancelled. According to the ITO, the assessee-company had not declared any dividend during the present assessment year. Pursuant to the notice to show cause issued to the assessee no reply was filed on behalf of the assessee. Hence, the ITO levied additional tax of Rs. 2,77,130 under s. 104 of the IT Act.
2. When the issue came up before the first appellate authority, CIT(A) held as follows :
"I find that the ITO has computed the distributable income on the basis that the total income of the appellant for the previous year was Rs. 22,44,180. However, as a consequence of an order under s. 154 passed on 29th July, 1988 the total income of the appellant for this year was reduced to Rs. 2,16,366. Therefore, the very basis on which the order under s. 104 was passed appears to be invalid. I find from the copy of the balance sheet as on 31st December, 1982, that as against a share capital of Rs. 10,00,000 (ten lacs) the reserves and surpluses amounted to Rs. 73,955. This amount of Rs. 73,955 was arrived at after adjusting the debit balance in P&L a/c against the reserve for gratuity. In fact, for the calendar year 1982, the appellant earned a net profit of Rs. 22,05,931 and against that there was a brought forward loss, as per books of accounts, amounting to Rs. 25,90,360. Thus, the total profit of the year, after adjusting earlier years losses showed a negative figure of Rs. 3,84,429. If we also take into account the note of the auditors that the gratuity liability not provided in the accounts amounted to Rs. 11,928, it becomes clear that the appellant company was hardly in a position to declare any dividend. In view of the fact that after adjustment of the earlier years' losses, the appellant company had no profits to declare dividend from, I accept the contention of the appellant that there was no commercial profits from which the dividends could be declared. I, therefore, hold that the case of the assessee would be covered by cl. (i) of sub-s. (2) of s. 104. Therefore, the ITO was not justified in making the order under s. 104 of the Act."
3. The learned Departmental Representative supported the order passed by the AO by which additional tax was levied.
4. The learned counsel on behalf of the assessee, on the other hand, relied on the order passed by the CIT(A) and submitted that the issue is now covered by the different orders passed by the Tribunal, copies of which have been annexed along with the paper book.
5. After hearing both the sides, we find that the order under s. 104 was passed by the ITO ex parte because the assessee did not respond pursuant to the notice to show cause. However, before the first appellate authority, the assessee explained the situation and CIT(A) was satisfied about the fact that the total income was computed by the AO at Rs. 22,44,180. Thereafter, pursuant to an order passed under s. 154 the order of assessment was rectified and the income was reduced to Rs. 2,16,366. Further, it was found that there was a brought forward loss of earlier years as per books of accounts amounting to Rs. 25,90,360. After adjusting the loss of earlier years, there was a negative balance of Rs. 3,84,429. Hence, there was no profit from which the dividend could be declared. Considering the circumstances of the case, in our opinion, CIT(A) was justified in cancelling the order passed under s. 104 of the Act.
6. In the result, the appeal is dismissed.