Income Tax Appellate Tribunal - Delhi
Transceiver India Pvt., Delhi vs Assessee
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'H' DELHI
BEFORE SHRI RAJPAL YADAV AND SHRI K.G. BANSAL
ITA No. 196(Del)/2007
Assessment year: 2001-02
Assistant Commissioner of M/s Transceivers India Ltd.,
Income-tax, Circle 16(1), Vs. 249, Level-II, Okhla Industrial Area,
New Delhi. Phase-III, New Delhi-110020.
C.O. No.4(Del)/2008
(Arising out of ITA No. 196(Del)/2007)
Assessment year: 2001-02
M/s Transceivers India Ltd., Assistant Commissioner of Income
249, Level-II, Okhla Indl. Vs. tax, Circle 16(1), New Delhi.
Area, Phase-III, New Delhi.
(Appellant) (Respondent)
Department by : Shri N.K. Chand &
Shri Amrendra Kumar, Sr. DR
Assessee by : Shri Raj Kumar &
Shri Saurav Rohatgi,C.As
ORDER
PER K.G. BANSAL: AM The assessee had filed its return on 19.10.2001 declaring total income of Rs. 1,05,53,310/-. The return was processed u/s 143(1) on 25.1.2002. Subsequently, the case was taken up for scrutiny by issuing notice u/s 143(2) on 22.10.2002.
2 ITA No.196(Del)/2007 &
C.O. No. 4(Del)/2008 1.1 In the course of assessment proceedings, it was found that the assessee company is engaged in the business of dealing in radio (wireless) equipments, which are supplied to Government departments, State Police, para-military forces, railways etc. under DGS&D rate contract. It was further found that it paid commission of Rs. 69,67,886/- and professional and technical fees of Rs. 2,65,32,114/- to Simoco Telecommunication (South Asia) Ltd. ("Simoco" forshort). Commission of Rs. 20,59,154/- was also paid to some other parties. Thus, the total commission paid amounted to Rs. 90,27,060/-. Similarly total professional and technical fees paid amounted to Rs. 2,83,42,914/-. It was submitted that the commission was paid to Simoco for procurement of orders from the railways. In this connection, notice u/s 133(6) was forwarded to the railways to ascertain whether-(i) any official of Simoco ever met the railway officers for procurement of orders; (ii) any official of Simoco made any demonstration of wireless sets before them; (iii) any correspondence was made with Simoco; and (iv) any person from the assessee was there with them for supply of wireless sets, and if yes, the name. Similar information was sought to be obtained from other parties. However, no response was obtained except from CRPF and S.P, Simla. The CRPF informed that none visited their office for 3 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 procurement of orders or demonstration of wireless sets. It appears that Suprintendent of Police, Simla affirmed that Mr. J.S. Sekhon had been visiting them for sales promotion and to attend to the technical matters. In these circumstances, the assessee was required to furnish documentary evidence and confirmation from railways that Simoco had been interacting with them for procurement of orders or demonstration of wireless sets. It was submitted that the assessee had been conducting the business of trading in telecommunication equipments. As the competition grew with the entry of multi-nationals from the year 1999- 00, it became difficult for it to procure orders as a trader. The assessee created a small assembly infrastructure at Calcutta to show that it was a manufacturer. However, it was not possible for the assessee to compete with the multi-nationals in procuring orders from the Government departments. In this year, the assessee failed to secure any important order from railways for the reason of being a trader. In order to get over this difficulty, it became necessary to enter into technical and selling agreement with a party who had strong technical and sales departments. The assessee identified Simoco for this purpose. An agreement was entered into with them.
4 ITA No.196(Del)/2007 &
C.O. No. 4(Del)/2008 1.2 Coming to professional and technical fees, it was submitted that its buyers are located all over India and require life time support as per purchased guidelines issued by Government of India. The Simoco was able to provide such assistance, which led to increase in sales by 50% in one year.
1.3 The AO made direct enquiries from Simoco, who confirmed the payments received by it and furnished the details of services rendered to the assessee. The AO was not satisfied with the aforesaid explanation, especially because no correspondence between the assessee and Simoco or between Simoco and buyers could be brought on record. Therefore, he disallowed the claim of commission as well as professional and technical fees paid to Simoco. The total income was computed at Rs. 4,79,23,280/-. Penalty proceedings were also initiated u/s 271(1)(c) of the Act. The additions were confirmed by the ld. CIT(Appeals) in quantum appeal. The additions were also confirmed by the Tribunal in so far as those related to Simoco. The findings of the Tribunal in respect of commission are contained in paragraph no. 3(vi), which is reproduced below:-
"(vi) We have carefully considered the rival submissions.
The question for consideration is as to whether the expenditure 5 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 was factually expended for the purpose of business of the assessee. The fact that there was an agreement to pay commission is not final and conclusive. The question whether factually any services were in fact rendered by the recipient or not is, therefore, relevant and has to be established before claiming deduction as a business expenditure. It is in that context the two questions posed by the CIT(A) were relevant and was the right line of enquiry. The onus to prove the nature of services rendered by STSAL was on the assessee. The onus was much greater especially when the assessee was an approved rate contractor and there was no necessity or justification for payment of a higher percentage of commission merely for procuring orders when the rate at which supplies were to be effected is already fixed. The reason for appointing STSAL as business associate under agreement dated 3.4.00 is the letter of South Eastern Railways dated 2.9.1999. The issue raised in the letter dated 2.9.1999 was the absence of life time support from the manufacturer of the equipments supplied by the assessee. This had nothing to do with appointment of STSAL as agent for procuring orders from the various government departments, on behalf of the assessee. There was therefore a contradiction in the case pleaded by the assessee. Apart from the above, there was no evidence produced to show that the orders in respect of which commission was paid were in fact secured only through the efforts of STSAL. The fact that the AO called for information from the persons who placed orders as to whether STSAL was instrumental in procuring orders for the assessee by issue of notice u/s 133(6) and the fact that no negative reply was received by the AO from these persons does not prove that STSAL was in fact responsible for getting orders for the assessee. The onus was on the assessee to establish the nature of services rendered and the assessee cannot rely on these circumstances to justify his claim. When it is held that the services rendered were not proved, the fact that there were payments actually made by the assessee to STSAL was not of much significance. We, therefore, uphold the conclusions of the revenue authorities that the expenditure viz., payment of commission to STSAL 6 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 was not for the purpose of business of the assessee and, therefore, not allowable as deduction."
1.4 The findings of the Tribunal in so far as payment of professional and technical fees is concerned are contained in paragraph no. 7, which is reproduced below:-
"7. Before us, the ld. counsel for the assessee reiterated the plea as was made before the revenue authorities. The ld. DR relied on the orders of revenue authorities. We have considered the rival submissions. Here again the discussion made while disallowing commission payment to STSAL will equally apply. Though there is an agreement to render technical services, a payment for such services having been utilized by the assessee and also a deduction of tax at source on such payment, yet there is no evidence with regard to the nature of services rendered. As already discussed while dealing with disallowance of commission, the requirement of the Railways for technical support for life was only with reference to the support for the product manufactured overseas for which the assessee was rate contract supplier. The requirement of a general technical support is not substantiated by any evidence. On the other hand, the letter of the South Eastern Railway dated 2.9.1999 is again sought to be used as a mandate to the assessee to have a technical support, which we have already observed does not emanate from the records. The factum of take over of controlling interest in STSAL by the assessee and the fact that they were loss making unit and, therefore, the present arrangement by which the consideration for acquiring controlling interest was being passed on in the form of commission/technical fee is one line of thought which seems to have agitated the minds of the revenue authorities. The case of the revenue stands more on the premise that there has been no evidence led in by the assessee to prove the nature of services it received from STSAL except a 7 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 self-serving assertion by the assessee which is seconded by STSAL. The conclusions of the CIT(A), in our view, are just and proper and calls for no interference. The 5th and 6th grounds of appeal of the assessee are, therefore, dismissed."
1.5 The Hon'ble High Court also confirmed the findings of the Tribunal by making following observations in paragraph nos. 11 and 12 of the judgment:-
"11. We are unable to accept the aforesaid submission. It was rightly contended by the learned counsel for the Revenue the letter dated 1.2.2003 written by Simoco was a self-serving letter as by that time Simoco had already been acquired by the assessee. Apart from this letter, there is nothing on record to show any services provided. It is a huge amount of commission paid by the assessee to Simoco. We fail to understand that how the agreement for providing various services entailing payment of this magnitude was in fact acted upon in the absence of not even a single document between the assessee and Simoco. The assessee has failed to produce a single bill raised by Simoco for providing the services. On our pertinent query, Mr. Vohra was candid that no such document exists. Further, if Simoco was representing the assessee before the Railways or other authorities, there should have been at least an authority letter by the assessee in favour of Simoco to represent the assessee. This coupled with the fact that none of the aforesaid parties, who made supplies, came forward and made any positive statement to the effect that Simoco was representing the assessee, at least for after sale services, which negates the plea of the assessee. Human probabilities would clearly show that in the absence of even an iota of documents, such vast services could not have been rendered against huge amount paid in the form of commission. In this behalf, we may refer to the following observations made in the case of Sumati Dayal V. 8 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 Commissioner of Income-tax, Bangalore, 214 ITR 801 (page
808):-
'12. This, in our opinion, is a superficial approach to the problem. The matter has to be considered in the light of human probabilities. The Chairman of the Settlement Commission has emphasized that the appellant did possess the winning ticket which was surrendered to the Race Club and in return a crossed cheque was obtained. It is, in our view, a neutral circumstance, because if the appellant had purchased the winning ticket after the event she would be having the winning ticket with her which she could surrender to the Race Club. The observation by the Chairman of the Settlement Commission that "fraudulent sale of winning ticket is not an usual practice but is very much of an unusual practice" ignores the prevalent malpractice that was noticed by the Direct Taxes Enquiry Committee and the recommendations made by the said Committee which led to the amendment of the Act by the Finance Act of 1972, whereby the exemption from tax that was available in respect of winnings from lotteries, crossword, puzzles, races, etc. was withdrawn. Similarly, the observation by the Chairman that if it is alleged that these tickets were obtained through fraudulent means, it is upon the alleger to prove that it is so, ignores the reality. The transaction about purchase of winning ticket takes place in secret and direct evidence about such purchase would be rarely available. An inference about such a purchase has to be drawn on the basis of the circumstances available on the record. Having regard to the conduct of the appellant as disclosed in her own statement as well as other material on the record an inference could reasonably be drawn that the winning tickets were purchased by the appellant after the event. We are, therefore, unable to agree with the view of the Chairman in his dissenting opinion. In our opinion, the majority opinion after considering surrounding 9 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 circumstances and applying the test of human probabilities has rightly concluded that the appellant's claim about the amount being her winning from races is not genuine. It cannot be said that the explanation offered by the appellant in respect of the said amounts has been rejected unreasonably and that the finding that the said amounts are income of the appellant from other sources is not based on evidence (emphasis supplied).'
12. We are, thus, of the opinion that concurrent findings of facts recorded by all the authorities below do not warrant any interference as no perversity therein is found. They are based on cogent reasoning and having regard to the material and circumstances of the case brought on record. Thus, no question of law, much less substantial question of law, arises for consideration."
1.6 As mentioned earlier, the AO had initiated penalty proceedings. These proceedings were finalized on 29.3.2006, in which minimum penalty of Rs. 1,32,49,250/- was imposed.
1.7 Penalty was deleted by the CIT(Appeals)-XXIX, New Delhi in order dated 29.9.2006 in appeal no. 51/2006-07. The findings are contained in paragraph nos. 6, 6.1 and 6.2 of his order, which are reproduced below:-
"6. I have very carefully gone through the whole issue along with the submissions of the ld. AR. It is a case where 10 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 payments of Rs. 69,67,886/- and Rs. 2,65,32,114/- have been made to STSAL for commission and as technical fees, respectively. During the course of assessment proceedings, in respect of commissions claimed, the appellant had pointed out that on account of these services rendered by STSAL, it could successfully procure the orders which brought profits to the company and it is out of such profits that the commission had been parted with. The appellant has also tried to explain the reasons of obtaining services of STSAL as it was a big supplier of its various products to the Railways, for which reason it was easy for the appellant to get their products accepted by the Railways, though on merits of the products. It has been further submitted that but for these services, the orders would not have been procured and thus the justification of incurrence of these expenses has been explained. I further find that the appellant furnished large number of documents, including the copy of appointment letter as well as the confirmation from the payee i.e. STSAL. It also cannot be over looked that STSAL was a MNC at that point of time and this transaction stands confirmed by them. Thus, I find that the appellant has furnished prima facie justifiable explanation which stands supported by various documentary evidences as mentioned in the penalty order as well as in the submissions made by the ld. AR, as incorporated above. All these facts show that it is a case where a prima facie explanation has been given and all relevant facts and other information has been brought on record by the appellant. Thus, although additions may be sustained in quantum proceedings, it is not a fit case for invoking provisions of section 271(1)(c). Similarly, on the issue of payment of technical fees of Rs. 2,65,32,114/- to STSAL, the facts and circumstances are more or less similar. While commission has been claimed to have been paid for availing the services of STSAL for procuring the orders, the reason for paying that technical fees to STSAL is different. It is that STSAL was a MNC, being in the line of manufacturing of products of the same family in which the appellant was trading. As claimed by the appellant, for maturing the sales of these sophisticated items being telecommunication products including wireless sets and other 11 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 similar products to para-military forces, state police, Government of India, Central Water Commission and authorized department etc., it was not possible to conduct the business in the absence of availability of this infrastructure. It has also been explained that it is on account of the tie-up with STSAL that the appellant could conduct his business in a better way and more effectively. It has also been submitted that the turnover increased tremendously after this tie-up with STSAL. I also find that the appellant has substantiated his claim by filing various documentary evidences including agreement with the payee and the confirmation was sent directly by the payee to the AO u/s 133(6) of the I.T. Act. Thus, I find that for this expenditure, the appellant has furnished all relevant information and details, has given prima facie plausible explanation justifying the said claim, has duly furnished necessary documentary evidences to support his explanation; therefore, on these facts, although the additions may have been sustained, I am of the considered opinion that these facts and circumstances do not invite the provisions of section 271(1)(c) of the I.T. Act.
6.1 The appellant has placed reliance on the decision of the jurisdictional Delhi High Court in Additional CIT vs. Delhi Cloth & General Mills Co. Ltd. (157 ITR 822), wherein it has been held that penalty for concealment of income can be imposed only if there is conscious and deliberate concealment on the part of the appellant. It has also been held by the Hon'ble Court that the mere fact that a claim for expenditure stands disallowed does not by itself lead to an inference that the appellant had furnished inaccurate particulars in regard to that item and penalty can be imposed only if there is a conscious and deliberate concealment on the part of the appellant. Based on the facts of the instant case as discussed herein above, I find sufficient merit in the claim of the appellant that it is a case of mere disallowance of an expenditure claimed in the year under consideration, which does not lead to the inference that inaccurate particulars in regard to the said claim had been furnished. There is also force in the contention of the 12 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 appellant that if an addition involves a matter of debate, no penalty u/s 271(1)(c) is leviable; this view finds support from the decision of Hon'ble Punjab & Haryana High Court in the case of CIT Vs. Ajaib Singh & Co. (253 ITR 630). The facts further show that it is not the case of the AO that the claim of deduction in respect of expenses was made in a mala fide manner; the disallowance, therefore, of such a claim made in a bona fide manner would not amount to concealment for the purposes of levy of penalty u/s 271(1)(c) of the Act, as is the view expressed in the case of CIT Vs. Haryana Education Society (251 ITR 846). The appellant's case is also supported by the decision of the Hon'ble Madras High Court in the case of CIT Vs. Inden Bislers (240 ITR
943), wherein it was held that mere disallowance of an expenditure cannot be visited with a penalty for concealment.
Similar is the view expressed by the Hon'ble Rajasthan High Court in the case of CIT Vs. Harshvardhan Chemicals & Mineral Ltd. (259 ITR 212), wherein penalty was cancelled in a case where an arguable, controversial or debatable deduction was claimed. It was held by the Hon'ble Madras High Court in the case of CIT Vs. Sivananda Steels Ltd. (256 ITR 683) that there was no justification for levy of penalty u/s 271(1)(c) where the claim of deduction made was bona fide. Further, in the case of CIT Vs. Hotel Sabar (P) Ltd. (264 ITR 381), the Hon'ble Gujarat High Court held that where the facts were disclosed to the Assessing Officer, there was no concealment of income or furnishing of inaccurate particulars. In the case of National Textiles [249 ITR 125 (Guj)], it has been held that it is not enough for the purpose of penalty that the amount has been assessed as income; the circumstances must show that there was animus i.e., conscious concealment or act of furnishing inaccurate particulars on the part of the assessee. In the case of Chetan Dass Laxman Dass [214 ITR 726 (Del)], it has been held that penalty proceedings are distinct from assessment proceedings; findings in assessment proceedings are not conclusive in penalty proceedings. Similarly, in the case of Pawan Kumar Dalmia [168 ITR 1 (Ker.)] and Banaras Textorium [169 ITR 782 (All)], it has been held that findings and conclusions drawn in deciding the quantum appeal are 13 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 neither conclusive nor binding for penalty proceedings u/s 271(1)(c).
6.2 I find that it is a case where the claim of the appellant is that he has incurred bona fide business expenses which claim stands supported, as per the appellant, by various documents filed by it, however, the said explanation did not find favour with the AO. I find that in the present case, there is no case for invoking provisions of section 271(1)(c). In the result, I hold that no penalty u/s 271(1)(c) can be levied."
1.8 Aggrieved by this order, the revenue is in appeal before us. Only one ground has been taken in appeal that on the facts and in the circumstances of the case, the ld. CIT(Appeals) has erred in cancelling the penalty imposed u/s 271(1)(c) amounting to Rs. 1,32,49,250/-. The assessee has also filed the cross objection, in which three grounds have been taken. Ground nos. 1 and 2 relate to non-recording of satisfaction note in the assessment order, and the order being passed after expiry of limitation period. These grounds were not pressed by the ld. counsel before us. Ground no. 3 is in support of the order of the ld. CIT(Appeals), which will get disposed off on passing the order on the appeal of the revenue.
2. Before us, the ld. DR submitted that the question before us is regarding the levy of penalty on disallowance of two sums-(i) about Rs. 14 ITA No.196(Del)/2007 &
C.O. No. 4(Del)/2008 69.00 lakh paid to Simoco as commission; and (ii) about Rs. 2.65 crore being payment of technical fees to Simoco.
2.1 In this connection, he has drawn our attention towards the findings of the ITAT. In respect of commission, it has been held that mere payment of commission based on the agreement is not conclusive of the matter. What is to be seen is whether factually any service was rendered by Simoco. The onus of establishing the rendering of services is on the assessee. There is no evidence on record that any service was rendered by Simoco for procurement of orders. Therefore, the disallowance of commission was upheld. In regard to second payment regarding rendering technical services, it has been held that the position is more or less similar as in the case of payment of commission. The payments have been made in pursuance of an agreement for rendering technical services to the assessee. Tax has been deducted at source from the payments. However, there is no evidence about the actual of services rendered by Simoco. The requirement of the railways for technical support during the life period of the goods was only in respect of imported goods. The requirement of general technical support has not been substantiated by the assessee. The assessee has also taken over the Simoco, which was a 15 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 loss making unit. Therefore, the payment was made for acquiring controlling interest in the form of technical fees or commission. In any case, there is no evidence regarding rendering of technical services by Simoco. Therefore, this payment was also disallowed. It may be mentioned here that relevant portions of this order have already been reproduced by us earlier. The argument of the ld. DR on the basis of this order is that there was no need of any agreement as no service was rendered by Simoco to the assessee.
2.2 Further, our attention has been drawn towards the decision of Hon'ble Delhi High Court, in which it has been held that apart from letter dated 1.2.2003 written by Simoco, which is a self-serving letter as by this time Simoco was taken over by the assessee company, there is no record to show that it rendered any service to the assessee. It is beyond comprehension that there is no correspondence in respect of this magnitude of payment. The Hon'ble Court referred to the observations of the Hon'ble Supreme Court in the case of Sumati Dayal Vs. CIT, 214 ITR 801, and mentioned that human probabilities have to be taken into account while deciding such a case. Accordingly, it has been held that there was no perversity in the order of the Tribunal, which is based 16 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 upon material and circumstances brought on record. Therefore, it has been held that no question of law arise out of the order of the Tribunal. 2.3 Our attention has also been drawn towards the communication between Simoco and the assessee, in which the former submitted that it had provided various services including the follow up services to the assessee with the help of equipments, experienced technical personnel, expertise, quality analyses, research and development, software support developed for the last 25 years. He also referred to page no. 66 of the paper book, being recital to the agreement dated 12.5.2000, which shows that Simoco has world wide set up for research etc. and it has world class infrastructure and experience in India for last 25 years. He also referred to page nos. 60 to 62 of the paper book, which show that in the next year the total income of Simoco was negative figure. The other evidences are that payments of technical fees were made by way of cheques on which tax was deducted at source. Similar is the position with respect to commission.
2.4 On the basis of these evidences and orders, it has been submitted that the facts found by various authorities, including Hon'ble High Court in quantum appeals, have not been disputed or supplemented by the 17 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 assessee. These orders show that the transactions were colourable in nature. In fact, Simoco was a competitor of the assessee and possibly could not have acted as agent for procuring orders for it or rendered services of technical nature to it.
2.5 Coming to the legal issues, it is submitted that the provision contained in Explanation-I to section 271(1)(c) is applicable to the facts of the case. In view of the decision of Hon'ble Supreme Court in the case of Union of India & Others Vs. Dharmendra Textile Processors & Others, (2008) 306 ITR 277, the liability is civil in nature and question has to be decided on the basis of statutory provisions contained in section 271(1)(c) and the Explanations thereunder. Finally, it is submitted that -(i) no business purpose has been established for making the payments and all the authorities have held that the transactions are colourable in nature; (ii) there is no debate possible against disallowance in view of the decision of Hon'ble Supreme Court in the case of Swadeshi Cotton Mills Ltd. Vs. CIT, (1967) 63 ITR 57; (iii) the cases cited by the assessee before lower authorities regarding proof of mens rea are no longer applicable, in view of the decision in the case of Dharmendra Textile Processors & Others (supra), and (iv) the penalty is leviable in 18 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 view of the decision of Hon'ble Delhi High Court in the case of Electrical Agencies Corporation Vs. CIT, (2001) 119 Taxman 369; CIT Vs. Har Prasad & Company, (2010) 328 ITR 53 and Escorts Finance Ltd., (2010) 328 ITR 44.
3. In reply, the ld. counsel for the assessee furnished brief background of the case that the assessee is a trader in wireless equipments, which are being supplied to Government departments, including railways. The railways had written a letter dated 2.9.1999 to the assessee pointing out inter-alia that the assessee is a trader and not the manufacturer of equipments. Equipments are imported from Chief Tek Electronics Co. in SKD kits, the address etc. of the foreign supplier has not been furnished. The commitment from the supplier for life time support of the equipments in India has also not been furnished. This is important for railways to know on whom to depend for the life time services in case the assessee company is liquidated. Such certificates have been procured from all other suppliers including Motorolla and Simoco. The latter company was earlier owned by the Government of West Bengal and at the relevant point of time was taken over by Philipps group of companies, U.K., having office in India at Kolkata. Simoco was 19 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 a big supplier of railways and had infrastructure and technical expertise in the line of the business. Therefore, it was appointed as business associates on 3.4.2000 to satisfy the needs of the railways. The letter dated 3.4.2000 in this regard has been placed in the paper book on page nos. 8 to 10. By virtue of services rendered by this company, orders worth Rs. 5.80 crores were received in this year, on which commission @ 12% was paid. Our attention was drawn towards the explanation regarding need to appoint Simoco as business associates contained in the agreement dated 3.4.2000. The AO had made direct enquiries with the Simoco, which confirmed the receipt of commissions to it. It will be seen from the letter that the payment was made by cheque on which tax was deducted at source. The tax was deposited to the credit of the Government on 27.6.2001. The AO also verified the payment directly from the bank.
3.1 Coming to the facts regarding payment of technical fees, it is submitted that the assessee was earlier having similar arrangement with Linkers Technology Pvt. Ltd. ('Linkers" for short), an independent third party. However, in the year under consideration, they were not providing proper services and, therefore, the assessee gradually 20 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 discontinued their services and instead appointed Simoco to render similar services, for which an agreement was entered into on 12.5.2000 for consideration of payment of Rs. 25.00 lakh per month. Our attention is drawn to page nos. 63 to 65 of the paper book regarding requirement for appointment of technical consultant, agreement dated 12.5.2000, which also shows their capacity to render the services. The AO had undertaken correspondence with this party, who confirmed the receipt of payments as seen from page no. 61 of the paper book. All the payments were made in this very year and tax was deducted on 22.2.2001, which was deposited with the Government on 27.6.2001. The payments were also verified by the AO independently from the bank.
3.2 The case of the ld. counsel is that the Tribunal denied deduction of expenditure primarily on the ground that no correspondence could be shown for rendering of the services. This conclusion was upheld by the Hon'ble High Court, which mentioned that no question of law arises for its consideration. It is his case that assessment proceedings and penalty proceedings are two independent proceedings, which stand separate and apart. While the assessment can be based on probabilities, the levy of penalty has to be seen in the light and provisions contained in section 21 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 271(1)(c) including Explanation thereto. The assessee has furnished a reasonable plausible explanation for incurring both the expenses. The payments have been made to a totally unrelated party, which are based on agreement concluded with it. All the facts regarding both the payments available with the assessee have been disclosed in the return of income. No falsity etc. has been found in the evidence tendered by the assessee. In fact, the payee has independently confirmed to the AO that the services had been rendered. All the payments have been made by cheques and there is not even an averment in any of the orders that the whole or part of the payment was returned to the assessee in cash. The fact of the matter is that earlier the assessee was availing of similar services from the Linkers. The agreement with it was terminated and Simoco was taken as the service provider. The turnover of the assessee has substantially increased from Rs. 13.26 crore in this year to Rs. 20.61 crore in the immediately succeeding year. In the year under consideration, Simoco was an independent party and, therefore, its take over by the assessee in subsequent year cannot raise any doubt on the agreements and payments made in this year. Therefore, it is contended that the case is squarely covered by the decision in the case of CIT Vs. Reliance Petro Products (P) Ltd., 322 ITR 158 (SC); CIT Vs. Sidhartha Enterprises, 228 CTR 22 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 (P&H) 579. It is also submitted that the import of the term "colourable devise" has not been explained by the ld. DR on the facts of assessee's case.
4. In the rejoinder, the ld. DR submitted that all the supplies were made under DGS&D rate contract. The Ministry of Railways had requested the assessee to furnish the names and addresses of the foreign suppliers, which was routinely required from all other parties, including Simoco. The assessee informed the railways on 29.9.1999 that assemblers of the equipments are treated as manufacturers and servicing and technical support is the responsibility of the assessee company. The Tribunal cannot take a diametrically opposite view as held in the case of CIT Vs. Premier Breweries Ltd., (2000) 110 Taxman 408 (Ker.). Therefore, the assessee has failed to substantiate the explanation and penalty is leviable on the assessee.
5. We have considered the facts of the case and submissions made before us. The facts are that the assessee has been supplying Radio (wireless) equipments to various Government organizations under DGS&D rate contract. In this year, the assessee inter-alia debited sale 23 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 commission of Rs. 90,27,060/- and professional and technical fees of Rs. 2,83,42,914/- in the profit and loss account as direct cost and other expenses, aggregating to Rs. 19,49,70,167/-. Schedule 9 gives the details of these expenses where sales commission and professional and technical fees expenses have been shown separately. Out of these expenses, two amounts are in respect of Simoco, being Rs. 69,67,886/- as commission and Rs. 2,65,32,114/- as professional and technical fees. The assessee has filed agreements with Simoco to justify the deduction of expenditure. It has also filed confirmed accounts from Simoco, from which it is seen that the payments have been made in this very year, and tax has been deducted at source and paid to the credit of the Government. In this year, Simoco was a company belonging to Phillips group, U.K. Thus, at the time of incurring the expenditure and payment thereof, there was no connection between the assessee and the payee. Simoco also furnished details of orders procured and services rendered in response to the notice issued by the AO. However, at the time of furnishing the reply, Simoco had been taken over by the assessee company. Simoco had also been carrying on the business similar to the business of the assessee. Both the payments made to the Simoco were disallowed by the AO. The disallowance has been confirmed even by 24 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 Hon'ble Delhi High Court. The main reason for disallowance is that the assessee could not produce any correspondence between it and Simoco or Simoco and the buyers in regard to procuring sales orders or rendering services to the buyers. The test of human probabilities has been invoked for making the disallowance.
5.1 The AO has also levied penalty in respect of these disallowances. The penalty has been deleted by the ld. CIT(Appeals). The case of the ld. DR is that no further evidence has been adduced by the assessee in the course of penalty proceedings. Therefore, there is no further advancement after the receipt of the decision of Hon'ble Delhi High Court in quantum appeal. The explanation furnished by the assessee that the expenditure has been incurred in the course of business has not been substantiated. Therefore, penalty is leviable on the facts and in the circumstances of the case. On the other hand, the case of the ld. counsel is that for deduction of an expenditure in computing the total income, the assessee has to prove that it has been incurred wholly and exclusively for the purpose of business. The assessee is not required to show that it was necessary for him to incur expenditure either under an agreement or in law. Nonetheless, in this case, expenditure has been incurred under 25 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 the agreement. Assessment and penalty proceedings have to be viewed differently. Confirmation of the addition does not per se lead to levy of penalty. In penalty proceedings, it has to be seen as to whether the explanation of the assessee is bona fide or not, and all facts relating to assessment have been disclosed to the AO. The assessee has disclosed all facts in the return of income, which was accompanied by annual accounts, in which the expenditure has been shown clearly and separately in schedule-9. The expenditure has been incurred under agreements. The services rendered by Simoco have led to nearly doubling of the turnover in the immediately succeeding year. Further, the expenditure was incurred in the course of business because the Railways wanted life time warranty of imported goods. Similar expenses were incurred in past by engaging the services of Linkers. Thus, the explanation of the assessee is bona fide. 5.2 We may now examine the case laws relied upon by the rival parties. The ld. DR relied on the decision in the case of Dharmendra Textile Processors (supra), in which it has been held that the levy of penalty is a civil liability, which has to be decided on the basis of the provision contained in section 271(1)(c) and Explanations thereto. This 26 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 decision is a binding precedent. In view of this decision, the revenue is not required to establish mens rea and what is to be seen is whether the explanation furnished by the assessee is bona fide or not. For the sake of ready reference, the relevant portion of the judgment is reproduced below:-
"It is of significance to note that the conceptual and contextual difference between section 271(1)(c) and section 276C of the Income-tax Act was lost sight of in Dilip N. Shroff's case [2007] 8 Scale 304 (SC).
The Explanations appended to section 271(1)(c) of the Income-tax Act entirely indicate the element of strict liability on the assessee for concealment or for giving inaccurate particulars while filing the return. The judgment in Dilip N. Shroff's case [2007] 8 Scale 304 (SC) has not considered the effect and relevance of section 276C of the Income-tax Act. The object behind the enactment of section 271(1)(c) read with the Explanations indicates that the said section has been enacted to provide for a remedy for loss of revenue. The penalty under that provision is a civil liability. Willful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under section 276C of the Income-tax Act."
5.3 In the case of Electrical Agencies Corporation (supra), the facts are that the AO included a sum of Rs. 49,985/- in the total income on the ground that commission paid to sub-agents has not been substantiated. The AAC reduced the amount. The Tribunal confirmed the order of the AAC by mentioning that it was unable to accept that the payment was 27 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 genuine. Thereafter, penalty of Rs. 22,800/- was levied. The Tribunal took the view that it could not be said that the claim did not arise from any fraud or willful negligence. Considering extraneous circumstances, the Tribunal restricted the levy to the minimum penalty. The Hon'ble Delhi High Court mentioned that the Tribunal has taken note of factual aspect that the claim is untenable and non-genuine. Therefore, the assessee could not be said to have rebutted the presumption made against it under the Explanation.
5.4 In the case of ACIT Vs. TVS Finance & Services Ltd., 2009- TIOL-710-ITAT-MAD, the facts are that the assessee claimed depreciation on the basis of fabricated documents although no machine was installed. The Hon'ble Tribunal confirmed the levy of penalty by mentioning that the assessee furnished wrong and inaccurate particulars of income by claiming depreciation. Therefore, penalty was leviable. 5.5 In the case of ACIT Vs. Smt. Aarthi A. Lad, 2009-TIOL-755-ITAT- Bangalore, additions were made to the total income in respect of ore raising contract receipts, amounts credited in the current account of the assessee and interest accrued on fixed deposits. The penalty was also 28 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 levied. The Hon'ble Tribunal confirmed the levy of penalty in respect of the sums of Rs. 4,48,837/- and Rs. 35,355/- by mentioning that the assessee was unable to substantiate the explanation about the credits and non-exclusion of interest was not bona fide.
5.6 In the case of Har Prasad & Co. Ltd. (supra), the facts are that a claim was made regarding payment of commission to Mrs. Ritu Nanda, which was held to be bogus and payment of which could not be substantiated. The Hon'ble Delhi High Court referred to the decision in the case of Dharmendra Textile Processors. It has been mentioned that there is no evidence of any service being rendered by her at all. Therefore, the Tribunal erred in recording a finding that when a part of the commission has been allowed, the claim cannot be said to be bogus. This finding is contrary to facts on record as Jupiter Trading Corporation had rendered services, for which part allowance was made. 5.7 The case of Escorts Finance Ltd. (supra), the Hon'ble Delhi High Court confirmed the levy of penalty by mentioning that the claim of deduction u/s 35D is ex-facie bogus as the deduction is not admissible in 29 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 the case of a finance company. Therefore, this is a case of filing inaccurate particulars deliberately.
5.8 We may now examine the cases relied upon by the ld. counsel. He relied on the decision of Pune Bench of the Tribunal in the case of Coca- cola India Ltd. Vs. JCIT (2010) 102 ITD 134 to argue that the assessee need not prove that the expenditure was necessitated and what is to be proved is that the expenditure has been incurred in the course of business. In that case, the assessee had made certain payments to Supreme Industries Ltd., manufacturer and supplier of plastic crates to the bottlers of Coca Cola, and claimed certain damages for not lifting the crates. The deduction was allowed in part. It has been held that while it is necessary to establish that the expenditure has been incurred wholly and exclusively for the purpose of business, the necessity of incurring expenditure need not be shown. For this purpose, reliance was placed on a number of decisions including Sasoon J. David & Company (P) Ltd. Vs. CIT (1979) 118 ITR 261 (SC).
5.9 In the case of Reliance Petro Products Pvt. Ltd. (supra), the facts were that the expenditure of Rs. 26,54,554/- was reduced to determine 30 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 the total income at Rs. 2,22,688/-. Penalty was also levied. The Hon'ble Supreme Court referred to the meaning of the word "inaccurate", mentioned in Webster's dictionary as under:-
"not accurate, not exact or correct; not according to truth;
erroneous; as an inaccurate statement, copy or transcript."
It is mentioned that the assessee had furnished all details of the expenditure by way of interest, which were not found to be inaccurate. In such circumstances, it was up to the authorities to accept the claim or to reject it. Merely because the assessee claimed the expenditure, which was not accepted, that by itself would not attract penalty u/s 271(1)(c). 5.10 In the case of Sidhartha Enterprises (supra), the facts are that the assessee claimed set off on account of capital loss against profits of the business, which was disallowed and penalty proceedings were initiated. The penalty was levied for furnishing inaccurate particulars. The Hon'ble Court considered the decision in the case of Dharmendra Textile Processors & Others (supra). It is mentioned that the assessee had incurred the loss. The question whether it could be adjusted against profits of business has to be determined with reference to the provisions 31 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 of the Act. The assessee had shown all the facts and when confronted with the legal position, accepted the decision of the AO regarding disallowance of the loss. It has been held that the facts and circumstances do not justify the levy of penalty.
5.11 We may initially examine whether the assessee has furnished any inaccurate particulars in the return of income. From the discussion above, it is clear that the expenditure has been shown in the accounts separately, thus, there is no suppression of facts. The assessee proved factum of incurring the expenditure when confirmations were filed by the payee before the AO. All the payments have been made in this very year and tax has been deducted at source and paid to the credit of the government. In this year, there was no connection between the assessee and the Simoco. Therefore, it is held that no inaccurate particulars have been furnished by the assessee before the AO.
5.12 The payments have been disallowed on the ground that the fact of rendering the services has not been established by producing any correspondence between the assessee and Simoco and Simoco and the buyers. This failure does not lead to a conclusion that the facts have not 32 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 been fully and truly disclosed in the return of income. Further, the claim is not ex-facie bogus or untenable in law. The decision in the case of Electrical Agencies Corporation was render ex-parte the assessee. The Hon'ble Court proceeded on the basis of findings furnished by the Tribunal. The Tribunal had given a finding that the claim was clearly untenable and non-genuine. Such is not the finding in this case as human probabilities have been taken into account while deciding the case against the assessee. The facts of the case of TVS Finance & Services Ltd. are completely distinguishable, as in that case the assessee had fabricated documents regarding purchase of machinery. There is no such fabrication of documents in this case. The facts of Smt. Aarthi A. Lad are also distinguishable. In that case, interest income was not shown and there was no explanation regarding credits in the current account. The penalty was substantiated in respect of credits by mentioning that there is no evidence to substantiate them and the plea of non-disclosure of interest being bona fide mistake was also not accepted as genuine. In this case, the evidence of payment is there, which has not been refuted by any authority. The only deficiency in the case is that the assessee is not in a position to produce the correspondence. That does not mean that the payment has not been made. 33 ITA No.196(Del)/2007 &
C.O. No. 4(Del)/2008 There could have been no reason to make a payment to an unrelated party except in the course of business. It is not for the assessee to establish the necessity of making the payment. The facts of the case of Escorts Finance Ltd. (supra) are also distinguishable as that was a case of ex-facie bogus claim. Thus, we are of the view that the cases cited by the ld. DR do not advance the case of the revenue for levy of penalty. In the case of Reliance Petro Products, the Hon'ble Supreme Court mentioned that all facts had been disclosed regarding payment of interest. Whether the whole or any part was disallowable u/s 14A is a matter of law. Once all the facts have been shown in the return, a charge of furnishing inaccurate particulars is not sustainable. We are of the view that this decision supports the case of the ld. counsel. All facts have been disclosed and confirmations have been filed from the payee. The question whether the amount is deductible or not is an altogether different matter particularly when the claim is not ex-facie bogus. In the case of Sidhardha Enterprises (supra), the assessee had shown loss occurring on sale of fixed assets. The Hon'ble Court held that the question whether this loss can be set-off against business profits is a matter of inference of law to be drawn on the basis of facts. Therefore, the penalty was deleted. We are of the view that this case also advances 34 ITA No.196(Del)/2007 & C.O. No. 4(Del)/2008 the case of the assessee, in as much as the question whether expenditure was deductible or not had to be decided u/s 37(1) while all facts had been correctly submitted by the assessee. In the case of Premier Breweries Ltd. (supra), the question before the Hon'ble High Court was whether diametrically opposite views could be taken in assessment and penalty proceedings. The court came to the conclusion that this cannot be done if any perversity is involved. However, the case before us is not one of taking diametrically opposite view. Facts remain the same and on the facts there is no contradiction when it is held that while the expenditure is not allowable in computing the total income, the assessee is not liable to pay penalty because of such disallowance. 5.13 In a nutshell, it is held that the assessee had disclosed all facts correctly in the return of income, in which no inaccuracy has been found. Therefore, the claim of expenditure, which is not ex-facie bogus, does not lead to inference of penalty in the context of fact that the payee, an independent party, confirmed the receipt and rendering of services. 35 ITA No.196(Del)/2007 &
C.O. No. 4(Del)/2008 5.14 In view of the aforesaid finding, the cross objection supporting the order of the ld. CIT(Appeals), has become infructuous.
6. In the result, the appeal of the revenue is dismissed and the cross objection of the assessee is dismissed as infructuous. 6.1 This order was pronounced in the open court on 11 February, 2011.
Sd/- sd/- (Rajpal Yadav) (K.G.Bansal) Judicial Member Accountant Member Date of order: 11th February, 2011. SP Satia Copy of the order forwarded to:- M/s Transceivers India Ltd., New Delhi. ACIT, 16(1), New Delhi. CIT(A) CIT The DR, ITAT, New Delhi. Assistant Registrar.