Income Tax Appellate Tribunal - Ahmedabad
P.D. Cotton Pvt. Ltd.,, Ahmedabad vs The Addl. Cit, Range-5, ( Now Acit, ... on 23 March, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL
AHMEDABAD "D" BENCH AHMEDABAD
BEFORE, SHRI N. K. BILLAIYA, ACCOUNTANT MEMBER
AND SHRI S. S. GODARA, JUDICIAL MEMBER
ITA No. 1453/Ahd/2015
(Assessment Year : 2011-12)
P.D.Cotton Pvt. Ltd.,
30, Adarsh Society, Swastik Char
Rasta, C. G. Road, Navarangpura,
Ahmedabad-380009 Appellant
Vs.
ACIT,
Circle 3(1)(1), Ahmedabad Respondent
PAN: AAECP4051B
आवेदक क ओर से / By Assessee : Shri Pritesh Shah, A.R.
राज
व क ओर से / By Revenue : Shri Mahesh Jiwade, Sr. D.R.
सन
ु वाई क तार ख/Date of Hearing : 15.03.2018
घोषणा क तार ख/Date of
Pronouncement : 23.03.2018
ORDER
PER S. S. GODARA, JUDICIAL MEMBER
This assessee's appeal for assessment year 2011-12 arises against the CIT(A)-9, Ahmedabad's order dated 11.03.2015, in case no. CIT(A)- XI/441/Addl.CITR-5/13-14, in proceedings u/s. 143(3) of the Income Tax Act, 1961; in short "the Act".
ITA No. 1453/Ahd/15 [P.D.Cotton Pvt. Ltd. vs. ACIT ]A.Y. 2011-12 -2- Heard both the parties. Case file perused.
2. The assessee's first substantive ground seeks to reverse both the lower authorities' action disallowing its commission expenditure of Rs.14 lacs for purchase of cotton bales since it trades in cotton bales and commission business. The assessee had paid Rs.2lacs and Rs.4lacs each to four HUFs Ashish R. Trivedi, Daxshesh J. Patel, Jayantilal N. Patel and Bhavesh J. Patel; respectively. It therefore raised the impugned revenue expenditure claim qua all four sums totaling to 14lacs. The Assessing Officer observed in assessment order that that the assessee first of all could not furnish any cogent reply the relevant service rendered. He thereafter doubted genuineness of the impugned claim on the ground that it is not understandable as to how an HUF could render such commission services. The CIT(A) affirmed the impugned disallowance as follows:
"2.2 I have carefully considered the contentions as well as the case laws relied upon by the appellant. I am unable to convince myself about the allowability of commission expenditure. Apparently there were no written -agreement with the commission agents, none of the agents were produced before the assessing officer. Except for procuring purchase of cotton 'bales as per appellant plea this year, the agents have not rendered any services to the appellant and more importantly, no evidence whatsoever has been produced before AO in this regard. Before me also, the appellant could neither produce any written agreement nor were the commission agents produced before me. Even the proof of any services being rendered by the agents to the appellant was not produced before me. Under the circumstances, the appellant is unable to establish that the commission expenditure is incurred wholly and exclusively for the purposes of the business of the appellant. Apparently there is no reasonabiiity of paying so much commission unlike last years . In the similar circumstances different courts have upheld the addition, Reliance is placed on the case as discussed herebelow:-
In the case of Lachrninarayan Madan Lal v. CIT [1972] 86 ITR 439 (SC), Hon'ble Apex Court has held as under:-
"... ITO can examine whether commission is properly deductible, even If it is paid under agreement - The mere existence of an agreement between the assessee and its selling agents or payment of certain amounts as commission, does not bind the ITO to hold that the payment was made exclusively and wholly for the purpose of the assessee's business. It is still open to the ITO to consider the relevant facts.and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under section 37(1) of the Act...."ITA No. 1453/Ahd/15 [P.D.Cotton Pvt. Ltd. vs. ACIT ]
A.Y. 2011-12 -3- However, in the instant case there are no written agreements between appellant and other parties. In the similar circumstances the Hon'ble Delhi High Court, In the case of Schneider Electric India Ltd, vs. CIT - 304 ITR 360 (Del.), has held that -
"On the other hand, the material against the assessee was that there were, absolutely no details of any services rendered by 'R' in the form of sale orders, etc. There was no confirmation of any arrangement between the parties and there was considerable doubt that in the normal course of business dealings, such a transaction could be entered into on the basis of an oral understanding, particularly when there was nothing to suggest that the assessee and 'R' had any long standing relationship. [Para 10] The Tribunal was right in holding that there was absolutely no material on record to suggest that 'R' had procured any sale orders for the assessee. The production, of a few bills or payments having been made by account- payee cheques could not, by itself, show that 'JR' had procured sale orders for the assessee. Apart from an internal note, there was no evidence of arty correspondence or any personal meetings, etc., between the assessee and 'R' to suggest that there was any relationship on the basis of which 'R' procured, some orders for the assessee for which it was entitled to receive commission. Moreover, the understanding between the parties was an oral understanding and it appeared to be doubtful that such an oral understanding could be arrived at without any long standing relationship having been established between the assessee and 'R', It seemed to be a bit out of place that the parties had entered into an oral business relationship involving such huge amounts of money over a period of time, [Para 13] Therefore, the Tribunal was justified in disallowing the assessee's claim, [Para 14]..."
In the case of appellant, the appellant has paid commission to related parties without having any written, agreement and has miserably failed to produce any evidence to corroborate the same with any cogent evidence. The Hon'ble Gauhati High Court in the case of Assam Pesticides & Agro Chemicals vs. CIT - 145 CTR 213 (Gau), has held that -
"...the Tribunal took into consideration the finding of the Assessing Officer that no services were ever rendered by the sister concern or by its partners constituting the firm which remained, undisturbed in the order of the Commissioner (Appeals). Mere payment by itself would not entitle an assessee for deduction of the said expenditure unless the same was proved to be paid for commercial consideration. The onus of proof at all relevant time rested upon the assessee. In the absence of any services rendered by the agent, there could not be any valid reason from commercial point of view in making such payment of commission/discount. The increase of the volume of business by itself without anything more did not ipso facto lead to the conclusion that the said increase was relatable to the service rendered by sister concern. The concerned authority on appraisal of fact reached its conclusion which could not be said to be perverse. The law does ITA No. 1453/Ahd/15 [P.D.Cotton Pvt. Ltd. vs. ACIT ] A.Y. 2011-12 -4- not prescribe any quantitative test to find out whether the onus in a particular case has been duly discharged. It all depends on the facts and. situations of the case. A decision of the final fact finding authority is conclusive and binding. Therefore, the discount /commission paid by the assessee to its sister concern was without any commercial consideration or business expediency and without any services rendered by the sister concern and- the agreement in question was sham and only a device to reduce the income of the family by applying to the other members of \ family..." (emphasisprovided).
In the case of CIT v. Calcutta Agency Limited - 19 ITR 191 (SC.), the Hon'ble Supreme Court has held that in order to claim, that an expenditure falls u/s.37(l), the burden of proving the necessary facts in that connection is on the assessee.
In the case of CIT vs. Chandravilas Hotel - 164 ITR 102 (Guj.), the Hon'ble Court has held that -
"... The ITO had, in the course of assessment proceedings, doubted the genuineness of the payment of commission to R. The only evidence which could establish the claim of the assessee was the statement of R and if his statement was to he disbelieved, there was no evidence on record to prove payment of commission to him, mere production of vouchers signed by him would not prove claim made by the assessee. It was its duty to prove payment to R specially when the, ITO doubted genuineness thereof. But since the assessee did not lead any evidence to prove such payment and the statement made by R went unchallenged, there was no reason to disbelieve R. Thus the Tribunal was not justified in allowing such deduction of the amount of commission claimed as business expenditure..."
In view of the facts of the case and judicial pronouncements, I am of the opinion that the A.O has rightly made the addition and his action is upheld, Accordingly, this ground of appeal is dismissed."
3. Heard rival contentions. Learned Authorized Representative vehemently contends that the assessee has not paid impugned purchase commission. He takes us to the relevant commission payment details in paper book to submit that both the lower authorities have erred in law as well as on facts in disallowing the impugned commission expenses. He makes it clear that all the payment transactions have taken place through banking channel. The payees / four HUFs already stand assessed qua the same. It highlights the fact to have deducted TDS upon the impugned payment as well. Mr. Shah submits that this tribunal's co-ordinate bench's decision have already held that an HUF can perform such commission ITA No. 1453/Ahd/15 [P.D.Cotton Pvt. Ltd. vs. ACIT ] A.Y. 2011-12 -5- services as well. He further emphasizes that the assessee had made similar payments in preceding assessment year as well wherein no disallowance was made. The Revenue strongly supports both the lower authorities' action disallowing the impugned commission expenditure. We have given our thoughtful consideration to above rival contention. We find no reason to agree with the assessee's preceding arguments. It has come on record that both the lower authorities have made the impugned disallowance on account of assessee's failure in proving the four HUFs in question to have rendered alleged commission services. The assessee has admittedly not produced karta of any such HUFs to buttress its commission payment case. We rather find that there were two payee HUFs in preceding assessment year which are different from the four before us in the impugned assessment year. We therefore conclude that it is a case of not proving services rendered by these four HUFs than a case of a legal dispute as alleged by the assessee. We accordingly affirm both the lower authorities' action in making the impugned disallowance of commission payment of Rs.14lacs.
4. The assessee's second substantive ground is that the Assessing Officer as well as CIT(A) have erred in law as well as on facts in disallowing its loss claim of Rs.8,86,470/- by invoking Section 43(5) of the Act thereby concluding that the loss is speculative in nature. Learned counsel takes us to assessment findings that the assessee was engaged in derivative transactions of commodity than in speculative one. We find that there is no discussion as to whether the said transactions are entered in F&O segment (forward and option). Learned counsel himself is very fair in submitting that larger interest of justice would be met in case the issue is remitted back to the Assessing Officer for relevant factual verification. The Revenue is fair enough in not opposing the same. We therefore restore the instant second substantive issue back to the Assessing Officer for carrying out necessary factual verification as per law after affording adequate opportunity of hearing to the assessee.
ITA No. 1453/Ahd/15 [P.D.Cotton Pvt. Ltd. vs. ACIT ]A.Y. 2011-12 -6-
5. The assessee's third substantive ground challenges correctness of both the lower authorities' action disallowing interest expenses of Rs.8,78,982/-. The CIT(A)'s findings under challenge discuss at length entire facts whilst granting part relief as under:
"4.2 I have carefully considered the contention of the appellant. I am not inclined to agree with the contention of A.O for the disallowance of interest on the payment of flat. The appellant has given advance of Rs. 91,00,000/- for flat during the year, the title of which remained yet to be acquired during the year. The Ld. A.O. has allowed interest at the rate of 12% of Rs.1,55,802/-. I am in agreement with the contention of the appellant with regard to addition on the advance given on flat. Considering the case laws relied upon by the appellant, the initial payment on account of interest at the rate of 12% on the advance given for flat is deleted.
However, I am not convinced with the contention of the appellant on the disallowance on account of Interest Disallowance Rs.8,78,982/- on the advance given to Godiji Realty Pvt. Ltd. which is the sister concern of the appellant company. The appellant company has given amount of Rs. 12,50,40,980/- Godiji Reality Private Limited on which it has charged interest at the rate of 6 % only. I find no infirmity in the action of id. A.O in charging interest at the rate of 12%. There is no force in the contention of appellant with regard to the addition on account of charging interest at the rate of 12%. The burden of proving, that the moneys borrowed has not been utilized for non business purpose and the lending has all ingredients of "commercial expediency", is on the assessee. There are various case laws which supports this contention viz. CIT Vs. Coimbatore Salem Transport P. Ltd.61 ITR 480 (Mad), Indian Metals & Ferro Alloys Ltd. Vs. CIT.193 ITR 344 (Ori), CIT Vs Abhishek Ind (P&H) 286 ITR 1. In the case of R. Dalmia Vs. CIT 133 ITR 169 (Dei.) the Hon'ble High Court decided that "where the interest paid concerns the borrowed money for business as well as non business purposes, the claim may be disallowed in its entirety if no adequate material is adduced by the assessee to determine that portion of interest which pertains to business purposes".
The law on this issue is settled, after the Hon'ble Supreme Court judgment in the case of S. A. Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1 (SC), in which the concept of "commercial expediency" was used. Thus, where the funds of the business, are diverted for interest free loans the main criteria for interest free loans the main criteria for permissibility of interest, on those funds are based on whether it was for commercial expediency or not. The issue has been discussed in the case Punjab Stainless Steel Ltd. 324 ITR. 396 (Delhi High Court). In this case the Hon'ble High Court has given a finding which is in favour of revenue and has clearly distinguished Munjal Sales Corp Vs CiT (SC) 298 ITR 298. In fact, the Ahmedabad Bench of ITAT has also followed this principle in Inamulhaq S. Iraki Vs. Addl. CIT, Range-2, Ahmedabad in ITA No. 243/Ahd/2011 for A.Y. 2007-08 dated 31.01.2012. In this judgment the Hon'ble ITAT has squarely followed Hon'ble Delhi High Court decision Punjab Stainless Steel Ltd. 324 ITR 396, the relevant para (11) is reproduced below for the sake of ready reference.
ITA No. 1453/Ahd/15 [P.D.Cotton Pvt. Ltd. vs. ACIT ]A.Y. 2011-12 -7- "We find that as per this judgment of Hon'ble Delhi High Court, where mixed funds are used for the purpose of giving interest free advances, the only relevant test is as to whether such interest free advances are due to commercial expediency or not. In the present case a/so, the funds are mixed funds and the assesses could not establish any commercial expediency and hence, in our considered opinion, this issue is squarely covered against the assesses by this judgment of Hon'ble Delhi High Court and respectfully following the same, this issue is decided against the assesses."
In the case of appellant the A.O has also observed that the assessee has failed to prove any business expediency and has rightly held that the funds of assessee have been diverted to non business activities. I am of the opinion that the assessee has also failed to prove that the investment was out of interest free funds. In view of this, disallowance of Rs.8,78,982/- is ordered to be confirmed. This ground of appeal is partly allowed."
6. We have given our thoughtful consideration to rival submissions. There is no dispute about the assessee having advance amount of Rs.12,50,40,980/- to its sister concerned M/s. Godiji Realty Pvt. Ltd. A perusal of the case file suggests that the assessee was having total interest free funds of Rs.36,89,66,462/- in the nature of share capital, reserves and surplus and unsecured loan of Rs.10crore, Rs.2,00,21,514/-, Rs.33,89,44,948/-; respectively whereas its advance funds are only Rs.13,41,40,980/-. The same is sufficient for us to conclude that a safe presumption can be drawn that the assessee had given the impugned advance from its non interest bearing funds only as per hon'ble Bombay high court's judgment in CIT vs. Reliance Utilities and Power Ltd. (2009) 313 ITR 340 (Bom.). We thus accept assessee's instant substantive ground in principle. All its factual arguments qua the instant issue are therefore rendered academic.
7. The assessee's last substantive ground is that both the lower authorities have erred in invoking Section 14A disallowance of Rs.4,01,089/- even in absence of any such corresponding exempt income. We afforded ample opportunity to the department to pinpoint any such exempt income. It fails to take us to such an exempt income derived in the impugned assessment year. We thus draw support from hon'ble jurisdictional high court's judgment in CIT vs. Corrtech Energy (P.) Ltd. (2015) 372 ITR 97 (Guj) that the impugned Section 14A disallowance is only ITA No. 1453/Ahd/15 [P.D.Cotton Pvt. Ltd. vs. ACIT ] A.Y. 2011-12 -8- in relation to any exempt income derived in a particular assessment year than in its absence. We therefore accept assessee's instant last substantive grievance.
8. This assessee's appeal is partly allowed.
[Pronounced in the open Court on this the 23rd day of March, 2018.] Sd/- Sd/-
(N. K. BILLAIYA) (S. S. GODARA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Ahmedabad: Dated 23/03/2018
True Copy
S.K.SINHA
आदे श क त ल
प अ े
षत / Copy of Order Forwarded to:-
1. राज
व / Revenue
2. आवेदक / Assessee
3. संबं धत आयकर आयु!त / Concerned CIT
4. आयकर आयु!त- अपील / CIT (A)
5. )वभागीय ,-त-न ध, आयकर अपील य अ धकरण, अहमदाबाद /
DR, ITAT, Ahmedabad
6. गाड3 फाइल / Guard file.
By order/आदे श से,
उप/सहायक पंजीकार
आयकर अपील य अ धकरण, अहमदाबाद ।