Income Tax Appellate Tribunal - Jaipur
Khetan Tiles P. Ltd. , Jaipur vs Department Of Income Tax on 10 April, 2015
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IN THE INCOME TAX APPELLATE TRIBUNAL, JAIPUR BENCHES, JAIPUR
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BEFORE: SHRI R.P. TOLANI, JM & SHRI T.R. MEENA, AM
vk;dj vihy la-@ITA No. 713/JP/2012
fu/kZkj.k o"kZ@Assessment Year : 2009-10
Assistant Commissioner of cuke M/s Khetan Tiles Pvt. Ltd.,
Income Tax, Circle-4, Vs. Road No. 5, VKI Area, Jaipur.
Jaipur.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AABCK 0431 H
vihykFkhZ@Appellant izR;FkhZ@Respondent
izR;k{[email protected]. No. 59/JP/2012
(Arising out of vk;dj vihy la-@ITA No. 713/JP/2012)
fu/kZkj.k o"kZ@Assessment Year : 2009-10
M/s Khetan Tiles Pvt. Ltd., cuke Assistant Commissioner of
Road No. 5, VKI Area, Vs. Income Tax, Circle-4,
Jaipur. Jaipur.
LFkk;h ys[kk la-@thvkbZvkj la-@PAN/GIR No.: AABCK 0431 H
izR;k{ksid@Objector izR;FkhZ@Respondent
jktLo dh vksj ls@ Revenue by : Mrs. Neena Jeph (JCIT).
fu/kZkfjrh dh vksj ls@ Assessee by : Shri P.C. Parwal (C.A.)
lquokbZ dh rkjh[k@ Date of Hearing : 18/03/2015
?kks"k.kk dh rkjh[k@ Date of Pronouncement : 10/04/2015
2 ITA 713/JP/2012 & C.O. 59/JP/2012_
ACIT Vs Khetan Tiles
vkns'k@ ORDER
PER: T.R. MEENA, A.M. The appeal by revenue and cross objection by assessee arise from the order dated 30/05/2012 of Ld. CIT (A)-II, Jaipur for A.Y. 2009-
10. Respective grounds of appeal as well as C.O. are as under:-
Grounds in Revenue Appeal.
"On the facts and in the circumstances of the case and in law, the Learned CIT(A) has erred in:-
(i) Deleting the addition of Rs. 2,11,29,247/- made by the A.O. on account of under valuation of closing stock without appreciating the fact that the assessee could not identify the defective stock and could not justify its valuation at reduced rate.
(ii) Restricting the addition to Rs. 1 lac in place of addition of Rs. 43,36,130/- made by the A.O. on account of disallowance of commission and dalali."
Grounds in Cross Objection "1. The learned Commissioner of Income Tax (Appeals) has erred on facts and in law in confirming ad hoc disallowance of Rs. 1 lacs out of Rs. 43,36,130/- made by the A.O. on account of commission paid.
2. The first ground of revenue's appeal is against deleting the addition of Rs. 2,11,29,247/- made by the Assessing Officer on account of under valuation of closing stock. The Ld. Assessing Officer observed that the assessee company is engaged in business of manufacturing and trading of Marble, slabs and blocks. It filed its return of income 3 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles declaring total income of Rs. 49,26,810/- on 29/09/2009 alongwith audit report. This case was scrutinized U/s 143(3) of the Act. He further observed that the assessee had declared undervalue of the closing stock as no identification was maintained for defective goods, which was also not reflected in the sales bill. Further on transfer of goods from one unit to another, no details of defective goods transferred was mentioned on it. The assessee had adopted this practice to reduce the tax liability, therefore, he gave the reasonable opportunity of being heard on this issue. The assessee has admitted that it followed weighted average for valuation of closing stock in the year under consideration. The assessee filed detailed reply on sale affected during the year and explanation of remaining material accumulated from year to year. The assessee filed reply before the Assessing Officer and explaining the sale process, consumer behavior, defects in lot of finished product, export out of India for better quality and inferior quality remained with the assessee. It also submitted some evidences before the Assessing Officer to show that how the assessee's closing stock of marble remained inferior quality with him. It further argued before the Assessing Officer that closing stock has been valued on the basis of cost price or market price whichever is low, which has been 4 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles done as per the guide note of accounting standard prescribed for the company. The company has followed the AS-1, disclosure of accounting policies and sale is on the basis of generally accepted accounting assumption. After considering the assessee's reply, the Assessing Officer held that there was no basis of defective goods claimed by the assessee and also not able to identify the sale of defective goods. On verification of sale, it has been found by him that it sold fresh goods.
Moreover, there was no defective stock, which was maintained in the books of account. The complete details of expenses, mines unit and others units had not been supported with the voucher. The consumption of raw material has not been filed before him particularly with reference to blade, segment, filling material, store and spare and others. The ld Assessing Officer recalculated the closing stock under the head mines, marble blocks at factory, polish tiles at factory, gangsaw slab at factory, gangsaw tiles at factory, slab purchases AG 4% VAT slab for job work at KSGH on the basis of extraction expenses, valuation average rate of purchases etc. Finally he made addition of Rs.
2,11,29,247/- on account of under valuation of closing stock.
3. Being aggrieved by the order of the Assessing Officer, assessee carried the matter before the learned CIT(A), who had allowed the 5 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles appeal by observing that in A.Y. 2008-09 and 2005-06, the assessee's book result were rejected U/s 145(3) of the Act on the basis of valuation of closing stock. The appellant was maintaining day to day books of account alongwith stock register and the method of valuation of closing stock (50% as fresh stock and 50% as inferior stock) was being consistently followed since last many years. However, the Hon'ble Jaipur Tribunal vide its order in ITA No. 32/JP/2009 dated 24/04/2009 held that this method of valuation of stock was consistently followed by the assessee and it could not be rejected in the absence of any specific defect. He reproduced the order of the Hon'ble ITAT on page No. 7-8 of its order wherein the ITAT has confirmed the order of the CIT(A) and deleted the addition made by the Assessing Officer. The ld CIT(A) further observed that there is no material change in the facts and circumstances relating to the current year. In his opinion, the Assessing Officer could not have changed the method of valuation of closing stock, which has been consistently followed by the assessee company since last many years. The ld Assessing Officer had valued the closing stock at cost by adopting the FIFO method (First In and First Out).
However, this method could not have been applied in the present case due to peculiar nature of marble business. In this line of business, the 6 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles customers always purchased the goods on selective basis and the best lot was always sold first. The unsold goods got accumulated and it was difficult to see it due to defective material, natural cracks, colour variation etc. This particular stock became obsolete and had low margin value. The ld. Assessing Officer had also valued this particular obsolete stock at cost which was totally unjustified. He further relied on the case of DCIT Vs. Mahesh Edible Oil Ind. Ltd. (2010-TIOL-479-ITAT-Delhi) on valuation of closing stock, ITO Vs. M/s Vaibhav gems (2010- TIOL-98- ITAT-Mumbai), Investment Ltd. vs. CIT (77 ITR 533), CIT Vs. Fazilka Co-operative Sugar Mills Ltd. (255 ITR 411), CIT Vs. Doom Dooma India Limited (200 ITR 496) on accounting method followed by the assessee, Concordia corporation Ltd. vs. CIT (22 ITR 344), ACIT Vs. Jagdish Chand (90 TTJ 943), KG Khosla & Co. Pvt. Ltd. Vs. CIT (99 ITR 574) and Ahmedabad ITAT decision in the case of ACIT Vs. Shree Krishan Salt Industries (60 TTJ 125). The appellant had maintained complete stock records, details of production, transfer of goods and receipt of material.. The quantitative details were also part of the annual income.
No discrepancy whatsoever was pointed out by the A.O. in these records/documents. The GP shown by the appellant in the current year 7 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles i.e. 37.45% was comparable with that of the preceding year. Therefore, he deleted the addition made by the Assessing Officer.
4. Now the Revenue is in appeal before us. The learned D.R. supported the order of the Assessing Officer.
5. At the outset, the learned A.R. for the assessee submitted as under:-
1. It is a fact on record that assessee has maintained day to day books of accounts including stock register. In assessment proceedings, assessee has filed month wise quantities details of each item of stock showing opening stock, purchases, production, transfer of goods, receipts on transfer, sales and closing stock vide letter dated 18.11.2011. The quantitative details are also part of the annual accounts. Therefore the observation of the AO at page 3 of his order that assessee has not maintained stock register is incorrect.
2. The assessee is regularly valuing finished stock at cost of production or net realizable value whichever is lower. In Schedule 21 to the accounts the method of valuation of the finished goods is stated as under:-
"Finished goods are valued at cost of production and net realizable value whichever is less, after giving effect of defective goods on estimated basis if any. Further the cost of production is considered according to the extent of manufacturing process as per estimate."
8 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles In this business goods are sold on selective basis and therefore the best quality goods are sold first and the remaining goods gets accumulated. Such accumulated stock has a lower realizable value and therefore stock of such goods are valued at lower than cost. Normally, considering the past experience, the assessee in respect of certain items like marble blocks/tiles/slab etc treat 50% of the stock as fresh and 50% as defective. The fresh stock is valued at weighted average cost and defective goods are valued at 25% of the weighted average cost. However, in some cases, this ratio is increased or decreased considering the actual position of the defective goods. This method of valuation of closing stock has been adopted by the assessee since last number of years. In earlier years, such method of valuation of stock has been accepted.
3. The AO has valued the closing stock at cost by adopting FIFO method. This is not justified. He ignored the fact that due to peculiar nature of the marble trade, the goods are sold on selective basis. From the total lot of production/purchase made by the assessee, customer selects the best piece/lot as per his requirement. Therefore, the goods which are procured/produced last are sold first being the latest. Any unsold goods out of it get accumulated and it is difficult to get a buyer for the same. Further due to natural cracks or defects or color variation in blocks, some of the productions from a lot have defective quantity, which have no value or very low value. These goods also get accumulated. With the passage of time such old/defective stock become obsolete and gets accumulated due to changing demand of customer from 9 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles time to time regarding color, quality etc. Therefore in such trade FIFO method of valuation of the stock is not justifiable. The assessee has filed a detailed explanation on the method of valuation of the closing stock vide letter dated 29-08-2011 & 12- 12-2011. AO has totally ignored the same and devised his own method of valuation which is not as per law. It is a settled law that the choice of adopting a particular method of valuation is on assessee. The only condition is that whatever method of valuation is adopted by the assessee, the same should be consistently followed. The assessee has also consistently followed the same method of valuation which was followed in earlier years. Therefore AO is not justified in devising his own method of valuation of the stock and making the addition. He relied on the following case laws:-
(i) DCIT Vs. MAHESH EDIBLE OIL IND. LTD [2010-TIOL-479- ITAT-DEL]
(ii) ITO vs. M/s VAIBHAV GEMS [2010-TIOL-98-ITAT-MUM]
(iii) Investment Ltd. vs. CIT (1970) 77 ITR 533 (SC)
(iv) CIT v. Fazilka Co-operatrive Sugar Mills Ltd. 255 ITR 411 (P & H)
(v) CIT V. Doom Dooma India Limited 200 ITR 496 (Gauhati)
(vi) Concordia Corpn. Ltd. v. CIT [1952] 22 ITR 344 (Trav.-
Coch.)
(vii) ITO V. Sree Padmanabha Jewellery Mart 19 ITD 816 (Cochin)
(viii) ACIT V. Jagdish Chand 90 TTJ 943 ( Chd.)
4. In A.Y. 2005-06 also similar issue was raised though in that year addition was made on the basis of electricity consumption. The CIT(A) vide order dated 14-10-2008 held that on account of
10 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles valuation method, section 145(3) has been wrongly invoked by the AO and deleted the addition by giving the following findings:-
"I have carefully considered the facts of the case. I find that the Ld. AO has invoked section 145(3) only on the ground that valuation of the defective stock is done on estimation basis. However, he has not made any addition in respect of the valuation of the stock. The AO has made the addition on the basis of the power consumption on the ground that the average power consumption for the preceding two years was 0.11 sq. meter of production per unit as compared to 0.074 sq. meter of production per unit in the year under consideration. Accordingly, he has estimated the suppressed production in making the addition. In doing so, the Ld. AO has ignored the fact that the method of valuation of the closing stock is the same as in earlier years and it is consistently followed. No adverse inference on the valuation is drawn by the AO in framing the assessment. On these facts, it is held that section 145(3) has been wrongly invoked by the Ld. AO. Further, in respect of the power consumption, the Ld. AO has not appreciated the claim of the assessee that in the year 2002-03, the production was totally of white marble of Andhi mines whereas the production during the year is totally of color marble of Bidasar mines, which is more hard, resulting into more power consumption. In support of this, the technical data of Andhi marble and Bidasar marble was filed. In addition, I find that in the immediately preceding year, the power consumption was .067 sq. meter of
11 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles production per unit as compared to .074 sq. meter of production per unit during the year. Hence, the average of the preceding two years (when facts of 2002-03 are not comparable to this year) taken by the AO is incorrect. However, the last year is comparable and it is seen that the G.P. rate and the N.P. rate of the assessee have gone up significantly in this year as compared to the last year. Further, no material for any unrecorded production or sale has been pointed out by the Ld. AO. Therefore, considering the entirety of the facts, neither the application of section 145(3) is justified nor any addition for the alleged sale of suppressed production is warranted. Hence, the addition made by the AO is not sustainable. Consequently, this ground of appeal is allowed." Against this order, department filed appeal before Hon'ble ITAT. The Hon'ble ITAT vide order dated 24/04/2009 in ITA No. 32/JP/09 also upheld the order of the CIT (A) and dismissed the appeal filed by the department by holding as under:-
"We concur with the views of the ld. CIT(A) that valuation of closing stock is being followed consistently as in the past years. As regards the variation of the production vis a vis power consumption, the explanation of the assessee in the preceding years is that there was total production of marble of M/s Andhi Mines whereas during the year the total production was of colour marbles of Bidasar mines which is more hard resulting into more power consumption. Therefore, in such circumstances and facts of the case and in the absence of any specific defect, we find no
12 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles infirmity in the order of the ld. CIT(A) who has rightly reversed the order of the AO."
5. In A.Y. 2008-09 also, AO made the similar observation regarding the method of valuation of closing stock added by the assessee and rejected the books of accounts. However, addition was made by applying g.p. rate of 40.79%. In appeal, CIT(A) deleted the addition made by AO by holding that the appellant was maintaining day to day books of account along with stock register and the method of valuation of stock was being consistently followed since last many years.
6. Even in the valuation as per AO, there are various defects which are summarized as under:-
(i) The stock of the assessee comprises of 41 type of items for which valuation is done. Out of it assessee has reduced the value of the stock on account of old, inferior or defective stock in 11 items only. The AO, however, made adjustment in stock valuation in seven items and has accepted the valuation in four items. No specific reason is given why the valuation is disturbed only in respect of few items.
(ii) The AO has accepted that stock is to be valued as per cost or market value whichever is lower. However, he has not considered any of the stock in respect of these seven items lying with the assessee as dead/obsolete/defective which is inherent in the marble industry.
13 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles
(iii) Out of the seven items considered by the AO, in six items weighted average rate has been considered for valuation whereas in one items i.e. Marble Block at Factory only purchase cost during the year is considered for valuation. If the Marble block at factory is also valued at weighted average cost as done by the AO in other items, the value of Marble Block at Factory would work out at Rs.1,20,07,625/- (6091.478*1971.217) as against value determined by the AO at Rs.1,86,60,938/- (6091.478 * 3063.45). Thus the addition to the extent of Rs.66,53,313/- (18660938 - 12007625) is incorrect.
(iv) The AO has increased the value of the closing stock without corresponding change in the value of the opening stock. If the opening stock of items is revalued on the same basis at which closing stock is valued than value of the opening stock would be increased by Rs.1,81,12,471/- (37732074 - 19619603) as per the following table:-
Value of the opening stock Particulars of items As per As per method assessee adopted by the AO (PB 43A) Marble block at Mines 757,602 757,602 Marble Block at Factory 8,734,263 21,319,278 Polish Tiles at Factory 4,059,746 6,495,594 Gangsaw Slab at Factory 3,754,518 6,007,229 Gangsaw Tiles at Factory 476,056 761,690 Slab purchase against 4% VAT 1,284,155 1,284,155 Slab from Job work at 553,263 1,106,527
14 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles Kishangarh 19,619,603 37,732,074 After considering this the net impact on the profit for the year would be only Rs.30,17,776/- (2,11,29,247 - 1,81,12,471). As per section 4 of the Income tax Act tax is charged in respect of the total income of the previous year. Therefore income of one year can't be taxed in other year. In the present case the AO changed the valuation of the closing stock only and made addition of Rs.2,11,29,247/-. If the value of the opening stock is considered on the same basis than the difference in the income for the year would be Rs.30,17,776./- only. Hence the addition made by the AO is otherwise incorrect. For this reliance is placed in the decision of ITAT Ahmadabad Bench in case of ACIT V. Shree Krishan Salt Industries 60 TTJ 125 wherein it was held that in order to arrive at the correct profit in any year same method should be followed both for opening and closing stock.
(v) It is a settled law that closing stock of one year becomes the opening stock of the next year. The AO simply increased the value of the closing stock of this year by Rs.2.11 crores without directing to correspondingly increase the value of the opening stock of next year. Hence in case the valuation of stock as done by AO is approved, he has to adopt the same as opening stock in next year. In next year i.e. AY 2010-11, the closing stock as valued by the assessee as per his consistent method has been accepted. Therefore, in the AY 2010-11, the 15 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles income would be reduced by the similar amount. The Supreme Court in case of CIT Vs. Excel Industries Ltd. 358 ITR 295 has held that where in several A.Y.'s, the Revenue accepted the order of the Tribunal in favour of the assessee and did not pursue the matter any further but in respect of some A.Y.'s, the matter was taken in appeal before the High Court but without any success, the Revenue cannot be allowed to flip- flop on the issue and it ought let the matter rest rather than spend the taxpayers' money in pursuing litigation for the sake of it. It further held that when the rate of tax remained the same in present A.Y. as well as in subsequent A.Y., the dispute raised by the Revenue is entirely academic or at best may have a minor tax effect. There was, therefore, no need for the Revenue to continue with the litigation when it was quite clear that not only was it fruitless (on merits) but also that it may not have added anything much to the public coffers.
(vi) It may be noted that the Punjab & Haryana High Court in case of CIT Vs. Satish Estate Pvt. Ltd. (2014) 226 Taxman 11 where addition of Rs.75 lakhs was made on account of undervaluation of closing stock of the land but the closing stock of land shown by the assessee is accepted by AO as opening stock for the subsequent year in the assessment made u/s 143(3) for the subsequent year deleted the addition made by the AO as no loss to the revenue has been caused. In the present case also for subsequent AY 2010-11 AO has 16 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles accepted the closing stock declared by the assessee as opening stock and also accepted the closing stock declared in that year. Therefore, also the addition made by him is legally not tenable.
7. The comparative position of the G.P. rate is tabulated as under:-
A.Y. Turnover Gross Profit G.P. Rate
2009-10 Rs.914.43 Rs.342.41 37.45%
2008-09 Rs.957.56 Rs.363.12 37.92%
2007-08 Rs.640.19 Rs.261.11 40.79%
2006-07 Rs.576.08 Rs.203.76 35.37%
From the above table it can be noted that g.p. rate during the year is comparable with the last year. If the addition as made by the AO is considered, the g.p. rate would become 60.50% which is unreasonable and unrealistic.
In view of the above, the CIT(A) has rightly appreciated the facts in deleting the addition of Rs.2,11,29,297/- made by the AO. Hence, the order of the CIT(A) be upheld by dismissing the ground of the department.
6. We have heard the rival contentions of both the parties and perused the material on record. The assessee had valued the closing stock consistently on the sale method as followed during the year i.e. 50% fresh material and 50% inferior material. In past, similar additions were made by the Assessing Officer, which has been deleted by the 17 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles Coordinate Bench in A.Y. 2008-09 and 2005-06. The assessee has maintained quantitative details and no specific defects has been pointed out by the ld Assessing Officer. The ld. DR has also not controverted the finding given by the ld CIT(A). Being identical issue decided by the Coordinate Bench in preceding year, we have no reason to intervene in the order of ld. CIT(A). Accordingly, we uphold the order of the ld.
CIT(A).
7. The second ground of revenue appeal and first ground of assessee's C.O. is against restricting the addition to Rs. 1 lacs in place of addition of Rs. 43,36,130/-. The ld. Assessing Officer observed that during the assessment proceedings, it was noticed that the assessee had debited commission and dalali expenses of Rs. 67,82,463/-. Vide ordersheet entry dated 18/11/2011, the assessee was asked to produce supporting evidence in support of expenses of commission and dalali. In response thereto, the assessee had filed confirmation of 40 parties out of 42. On verification of records, it is observed that the commission amount was also paid on the invoice which was not mentioned in the confirmation and not mentioned by the assessee to commission agent, for instance invoice No. 7A, 7B and 7C. He further observed that the Rajasthan is the biggest mandi of marble stone in the world. The buyer 18 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles needs knowledge of availability of the stones in market. There is business culture that commission to be paid to the person who brings the buyer or introduce the buyer or giver assistance in sale of the product. The assessee has paid Rs. 34,52,200/- as commission to the persons covered U/s 40A(2)(b) of the Act. The details of which is reproduced at page No. 12 and 13 of the assessment order. He further observed that the assessee has only diverting his income by giving commission to his relatives who are covered U/s 40A(2)(b) of the Act, further these persons have been paid commission only on the last day of the financial year. During A.Y. 2008-09, the assessee himself has turnover of Rs. 9,57,56,350/- and paid a commission of Rs. 42,92,450/-
while during the A.Y. 2009-10 on a turnover of Rs. 8,91,83,854/-
commission of Rs. 67,82,463/- had been paid, therefore, while the turnover was decreasing year to year payment of commission was increasing. He issued a show cause dated 18/11/2011 and 2/12/2011.
In response to the show cause notice, the appellant had replied, which has been reproduced at page No. 13 to 16 of the assessment order.
Therefore, the ld Assessing Officer disallowed Rs. 43,36,130/- and added back to the total income of the assessee.
19 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles
8. Being aggrieved by the order of the Assessing Officer, the assessee carried the matter before the ld CIT(A), who had restricted the addition to Rs. 1,00,000/- instead of addition of Rs. 43,36,130/- made by him by observing that commission of Rs. 43,36,130/- paid to various persons, the appellant has filed details of commission paid, tax deducted at source and PAN of each recipient vide letters dated 01/07/2011, 29/08/2011 and confirmations of commission recipient vide letters dated 01/07/2011 and 29/08/2011 and confirmations of commission recipients vide letter dated 18/11/2011 before the Assessing Officer during the course of assessment proceedings. There was no material on record brought by the Assessing Officer to substantiate his allegation that commission expenses were inflated or bogus. The ld CIT(A) restricted the addition of Rs. 1 lac instead of Rs.
43,36,130/- by relying on the decisions in the case of Friends Clearing Agency Pvt. Ltd. Vs. CIT (332 ITR 269) (Delhi), Syntexa Vs. ACIT (111 Taxman 47) and Dresser Valve India (Pvt.) Ltd. Vs. ACIT (30 SOT 495).
9. Now both the parties are in appeal as well as in C.O.. The ld DR supported the order of the Assessing Officer. At the outset, the ld AR for the assessee submitted as under:-
20 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles
1. In the assessee's business payment of commission and dalali is common feature. Commission is paid to the person who brings the buyer or introduces the buyer or gives assistance in sale of the product. Commission accrues only when the sale is materialized.
The commission paid is duly linked with the sales and in the commission voucher complete details of the sales made through commission agent is mentioned. In assessment proceeding, the assessee vide letter dated 01-07-2011 filed the complete name, address, PAN and TDS deducted on the commission. Further vide letter dated 29-08-2011 assessee explained the reasons and nature of services rendered by the commission agents. He has also filed the statement of old commission agent as well as new commission agents. The assessee vide letter dated 18-11-2011 also filed the confirmation of 40 persons. The commission agents mainly introduce the customer or influence the customer to purchase the goods of the assessee. For such introduction/persuasion, there can't be any documentary evidences for establishing the services rendered. Hence the disallowance made by the AO for this reason is misconceived.
2. The explanation in respect of each commission payment is given at. From the same it can be noted that commission payment is fully verifiable and incurred for the purpose of the business.
3. The various observations made by the AO are incorrect or not relevant as explained here under:-
(i) In respect of evidence of services rendered, the assessee has filed complete details of the persons linking with the sales. The 21 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles AO himself on the basis of these information accepted the commission payment to 25 parties. Hence on the similar evidences, rendering of services can't be ignored in respect of 17 parties.
(ii) The commission paid on the invoice no.7, 7A, 7B & 7C to Uma Agarwal are to same party and four bills are raised as the goods are dispatched in different containers. This fact was explained to the AO also vide letter dated 12-12-2011 (P.B.61-
71). The total commission paid to Uma Agarwal is on sales of Rs.49 lacs. This sale is in respect of the following bills:-
Bill No. Amount
6 18,52,077/-
7 5,36,484/-
7A 6,18,788/-
7B 1,99,715/-
7C 3,63,778/-
34 8,22,661/-
36 5,35,866/-
Total 49,29,369/-
Thus bill no. 7A, 7B & 7C are already considered.
(iii) The commission is not paid on the entire sales. It is paid only in respect of the sales which effected through the commission agent. The rate of commission is normally ranging between 10% to 15%. During the year sales through commission agent has increased as compared to the direct sales and therefore expenditure is more as compared to last year.
(iv) The AO has referred to the case of M/s Agarwal Marbles Private Limited. However no financial data about the g.p. rate 22 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles types of goods sold, area of sales i.e. local/export are provided. Therefore the assessee's case can't be compared with him.
(v) AO has considered 11 persons covered u/s 40A(2). However, out of these 11 persons only Shri Jagdish Prasad Khetan, Shri Banwari lal khetan, Shri Kamal Kishore Khetan, Shri Mukesh Khetan & Shri Dinesh Khetan are covered by the provisions of section 40A(2)(b). Detailed reply regarding the persons covered under this section was filed by assessee vide letter dated 12.12.2011, which was rejected by AO simply by stating that these are covered by the definition of relative given in section 40(a)(ia). Infact definition of relative given in section 40(a)(ia) can't be applied in section 40A(2)(b).
(vi) The Supreme Court in case of Upper India Publishing House (P). Limited V. CIT 117 ITR 569 (SC) held that for making any disallowance u/s 40A(2)(b), the AO is required to prove that the expenditure is excessive and unreasonable. In the present case the AO has not brought any evidence to prove that the payment of Rs.34,52,200/- made to the relatives is excessive or unreasonable. In earlier years payment of commission made to them was accepted
(vii) In assessment proceeding director of the M/s Tileco Land Developers Pvt. Ltd was appeared and his statement was recorded wherein he has accepted the fact of receipt of commission.
23 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles
(viii) AO has disallowed the commission expenses of 5 parties due to non compliance of summon issued u/s 131. In this regard we may point out that out of these 5 parties Anil Sharda (HUF), Uma Agarwal, Smt Sarita Kant, Smt Samriddhi Agarwal have duly submitted the documents required by the AO in compliance to the summons issued to them. Thus they have complied the summons issued. If the AO has any doubt in his mind he should have enforced their personal attendance. In view of the above, the observations of the AO are not sufficient to make the disallowance of the commission.
4. The assessee could not file the confirmation of Mahesh Kumar & Naresh Kumar Bhagwani as they are out of station and not in touch with the assessee. However, the assessee has filed the details of the sales made through them. TDS has been deducted on the commission. Payment is made by cheque. Copy of their account in the books of assessee indicating complete details of commission and payment thereof.
5. Reliance is placed on the following cases:-
(i) Syntexa vs. Asstt. CIT [2000] 111 Taxman 47 (Cal.) (Mag.) (Trib.)
(ii) Dresser Valve India (P.) Ltd vs. Asstt. CIT [2009] 30 SOT 495 (Mum.) In view of the above, the CIT(A) has rightly held that the commission paid by the assessee is allowable but at the same time has incorrectly confirmed the disallowance of Rs.1,00,000/ on estimate basis to plug the possible leakage of revenue. Hence, the ground of the department be dismissed and the cross objection of the assessee be allowed.
24 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles
10. We have heard the rival contentions of both the parties and perused the material available on the record. The assessee has filed complete name, address, PAN and TDS deducted on the commission and also explained the nature of service rendered by them. It also filed copy of account of the old commission old agent and new commission agent before the Assessing Officer. The assessee made payment through account payee cheque and recipients had been disclosed these commissions in their respective returns. The ld AR explained the discrepancy mentioned by the ld. Assessing Officer on service rendered and commission payment to 25 parties and particular invoice number mentioned in assessment order in case of commission paid to Uma Agarwal. The AR argued that during the year sale through the commission agent has increased and direct sale has been decreased.
The Ld. Assessing Officer had not provided the facts and figure of comparable case i.e. Agarwal Marble Pvt. Ltd. to the assessee. The case laws relied by the assessee squarely applicable in the case of the appellant. However, the assessee could not furnish the confirmation in case of commission payment of Rs. 95,707/- to Mahesh Kumar and Rs.
1,66,133/- paid to Naresh Bhawani before the lower authorities as well as before us. The ld. CIT(A) confirmed the addition of Rs. 1 lac on 25 ITA 713/JP/2012 & C.O. 59/JP/2012_ ACIT Vs Khetan Tiles estimated basis when commission payments are specified amount, the CIT(A) should have confirmed the whole commission payment of Rs.
2,61,840/-. Therefore, in absence of proper evidence with the assessee for claiming the expenditure as incurred wholly and exclusively for the business purposes, we confirm the addition of Rs. 2,61,840/-.
11. In the result, the revenue's appeal is partly allowed and C.O. of the assessee is dismissed.
Order pronounced in the open court on 10/04/2015.
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vkns'k dh izfrfyfi vxzsf'kr@Copy of the Order forwarded to:
1. vihykFkhZ@The Appellant- The ACIT, Circle-4, Jaipur.
2. izR;FkhZ@ The Respondent- M/s Khetan Tiles Pvt. Ltd., Jaipur.
3. vk;dj vk;qDr@ CIT
4. vk;dj vk;qDr¼vihy½@The CIT(A)
5. foHkkxh; izfrfuf/k] vk;dj vihyh; vf/kdj.k] t;iqj@DR, ITAT, Jaipur
6. xkMZ QkbZy@ Guard File (ITA No. 713/JP/2012 & C.O. 59/JP/2012) vkns'kkuqlkj@ By order, lgk;d iathdkj@Asst. Registrar