Income Tax Appellate Tribunal - Delhi
Ito, New Delhi vs M/S Singhania Alu Foil Containers ... on 12 April, 2018
In the Income-Tax Appellate Tribunal,
Delhi Bench 'G', New Delhi
Before : Shri Bhavnesh Saini, Judicial Member And
Shri L.P. Sahu, Accountant Member
ITA No. 6510/Del./2014
Assessment Year: 2010-11
Singhania Alu Foil Containers Manufacturing vs. Income-tax Officer,
Co., C/co M/s. RRA Tax India, D-28, South Ward 30(2), New Delhi.
Extension, Part-I, New Delhi.
PAN - ABGFS1788Q
(Appellant) (Respondent)
ITA No. 635/Del./2015
Assessment Year: 2010-11
Income-tax Officer, vs. Singhania Alu Foil Containers
Ward 30(2), New Delhi. Manufacturing Co., C/co M/s. RRA Tax India,
D-28, South Extension, Part-I, New Delhi.
(Appellant) (Respondent)
Revenue by Shri Ashwani Taneja and
Shri Shantanu Jain, Advocates
Assessee by Shri Kaushlendra Tiwari, Sr. DR
Date of Hearing 19.03.2018
Date of Pronouncement 12.04.2018
ORDER
Per L.P. Sahu, A.M.:
These two appeals filed by the Revenue and assessee are directed against the order of ld. CIT(A)-XXV, New Delhi dated 05.09.2014 for the assessment year 2010-11 on the following grounds :
Grounds raised in Revenue's appeal:
On the facts and circumstances of the case and in law the Ld. CIT (A) erred in-ITA Nos. 6510/Del/14 & 635/Del/14 2
1. Whether the LD. CIT(A) has erred in deleting addition amounting to Rs.40,73,592/-disallowance under the head rebate & discount u/s 40(A)(2)(a) given to M/s Vrinda International, a sister concern.
2. Whether the Ld. CIT(A) has erred in deleting addition amounting to Rs.20,00,000/-disallowance made on account under duty clearance and freight paid to the customs department for infringement of law.
3. Whether the Ld. CIT(A) has erred in deleting addition amounting to Rs.8,50,000/- out of Rs.12,74,800/- on account of disallowances under the head Commissioner paid by the assessee to M/s Vrinda International, a sister concern.
Grounds raised in assessee's appeal:
1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in not deleting disallowance of Rs.12,74,800/-
fully as made by Ld. AO on account of commission paid to M/s Vrinda International u/s 40(A)(2)(a) and has further erred in sustaining the disallowance to the extent of Rs.4,24,800/-.
2. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in enhancing the income of the appellant by Rs. 3,28,073.257- (i.e. 5% of Rs.65,61,465/-) on account of sale of imported raw material by treating the same as out of the books of appellant that too without giving opportunity as per law and impugned enhancement is beyond jurisdiction and contrary to law and facts.
3. That having regard to the facts and circumstances of the case, Ld. CIT (A) has erred in law and on facts in confirming the action of Ld. AO in making disallowance of Rs. 64,112/- under the head telephone and vehicle expenses.
4. That in any case and any view of the matter, action of Ld. CIT(A) in not reversing the action of Ld. AO in making the impugned disallowances and enhancing the income of appellant and framing the impugned assessment order which is contrary to law and facts, void ab initio, beyond jurisdiction, and without giving adequate opportunity of hearing, by recording incorrect facts and findings and the same is not sustainable on various legal and factual grounds.
2. The brief facts of the case are that the assessee filed return of income on 21.09.2010 declaring income of Rs.16,84,480/- the case was selected for scrutiny ITA Nos. 6510/Del/14 & 635/Del/14 3 and statutory notices were issued to the assessee. The assessee is a partnership firm constituted on 01.08.2006 by three partners, namely Laxman Singhania, Himanshu Singhania and Ankur having their share at 40%, 30% & 30% respectively. All the partners belong to one family. Assessment was completed u/s. 143(3) at total income of Rs.90,96,984/- after making various additions, which were challenged in appeal of the ld. CIT(A), who partly allowed the appeal of the assessee vide impugned order. The Revenue has challenged the deletion of some of the additions and the assessee has challenged the sustenance of certain additions, by way of these cross appeals before the ITAT.
3. Since, both the appeals of the Revenue and the assessee challenge the same order of ld. CIT(A) and were heard together, both the appeals are being disposed of by this consolidated order.
4. The facts relating to first issue involved in appeal of the Revenue are that in the assessment proceedings, the Assessing Officer noticed that the assessee in profit and loss account claimed deduction of Rs.60,14,022/- under the head "Rebate & Discount", which included the rebate and discount allowed to M/s. Vrinda International, the proprietorship concern of Shri Himanshu Singhania, who is one of the partners of the assessee firm. Vide notice u/s. 142(1) dated 10.12.2012, the assessee was asked to justify the said claim by supporting evidences and party-wise details of such discounts, which stood uncomplied with. Again the Assessing Officer issued another notice u/s. 142(1) on 13.03.2013 specifically asking the assessee to justify the basis of giving rebate & discount to M/s. Vrinda International with documentary evidence.
ITA Nos. 6510/Del/14 & 635/Del/14 44.1 In response, the assessee submitted that M/s. Vrinda International has been allowed the rebate and discount on the same basis as given to other consignees. It was further pleaded that the assessee transferred the goods worth Rs.4,65,66,935/- against Form-F for sale, but owing to tough market competition and recession, the entire material could be sold for Rs.4,24,93,343/- on behalf of the assessee with its due permission. Therefore, the balance amount of Rs.40,73,592/- was credited to the account of M/s. Vrinda International under the head "rebate & Discount".
4.2 The Assessing Officer was not convinced with the with the reply of assessee and disallowed the claim of the assessee u/s. 40-A(2)(a) of the IT Act on the following premise :
(i). M/s. Vrinda International is not an Agent of the assessee for the reason -
(a). that M/s. Vrinda International engaged in the trading business of Alluminium Foil Containers etc., as specifically mentioned its audit report;
(b). that assessee has shown sales to Vrinda International and M/s.
Vrinda International has been showing purchase from assessee in their books of account;
(c). that M/s. Vrinda International has been showing purchases from other parties, maintaining stock and showing opening and closing stocks in its profit & loss account and balance sheet; and
(d). that on search of the Custom Department, Shri Himanshu Singhania, prop. Of M/s. Vrinda International was found to have made clandestine receipt of goods imported from Dubai, UAE by under- invoicing the cost thereof through Bill of Entry dated 27.10.2008 and ITA Nos. 6510/Del/14 & 635/Del/14 5 admitted to have paid the concealed Excise duty plus interest of Rs.2,20,200/-, which was paid through cheque.
(ii). The reply of assessee regarding recession in the market was not substantiated by any evidence and the GP rate shown by the assessee during the disputed year is better than the previous years.
(iii). There was no justification to adjust the alleged losses by allowing rebate and discounts to assessee's group concern, M/s. Vrinda International.
(iv). The expenditure has been claimed with respect to payment made to the proprietorship concern of one of the partners of the firm, which have not been incurred for any legitimate business need, as no services or facilities have been obtained by assessee in return of such expenditure.
4.3 In appeal before the ld. CIT(A), the claim of the assessee was accepted after examining and considering the following evidences filed before him as under :
(i). The assessment orders of assessee for A.Yrs. 2008-09 and 2009-10 accepting the similar claim of assessee;
(ii). Accounts of all the consignment agents, showing the parity in rebates & discounts allowed by assessee as per its business trend;
(iii). Accounts regarding consignment sales made for past three years against Forms-F;
(iv). VAT assessment orders of assessee;
(v). Account of M/s. Vrinda International, which according to CIT(A) showed the sales of goods as per letter of assessee ITA Nos. 6510/Del/14 & 635/Del/14 6
(vi). A detailed chart prepared by assessee on the basis of sample bills, showing selling unit price and effective unit price, i.e., net price realized on sales.
4.4 The learned CIT(A) has made a specific consideration on the rebates and discounts given to M/s. Vrinda International with reference to the detailed chart given by the assessee before him. He observed that a comparative study of two columns of the chart containing the selling price per unit and effective price per unit showed it reveals that the margin of profit was the maximum in the case of sales made through M/s. Vrinda International as compared to other consignment agents. It was also observed that the selling price per unit and effective price per unit realized on the sale made through M/s. Vrinda International was on the highest side and even after giving amount of rebate and Discount the net selling price was in the top three bracket.
5. The learned DR submitted that the ld. CIT(A) was not justified in disregarding the objections made by the Assessing Officer, as mentioned above, on the issue under consideration. It was submitted that the rebate and discount allowed to the proprietorship concern of one of the partners, M/s. Vrinda International, was given at the highest rate as compared to other consignment agents. It was also submitted that the ld. CIT(A) while deleting the addition u/s. 40A(2)(a) has failed to consider that undue expenditure has been paid by the assessee to the proprietary concern of one of its partner Shri Himanshu Singhania, which were disallowable as contemplated u/s. 40A(2)(a) of the IT Act. The comparison of rebate and discounts made by the ld. CIT(A) also does not stand on any recognized standard. He, therefore, supporting the order of the Assessing Officer, urged for its restoration.
ITA Nos. 6510/Del/14 & 635/Del/14 76. The learned AR, on the other hand, relying on the submissions made before the ld. CIT (A), vehemently supported the impugned order. He also referred to a small written synopsis submitted before us and a chart of rebate and discounts given to all the consignment agents without any discrimination. It was submitted that substantial part of sales was made through the consignment agent, M/s. Vrinda International, and therefore, there is no abnormality if he is given the rebate and discount that too on the same basis as given to other consignment agents as considered by the ld. CIT(A). He further submitted that the provisions of section 40A(2)(a) are not applicable in the instant case in view of the decision of ITAT Delhi Bench in DCIT vs. Fourth Dimension Media Pvt. Ltd. dated 23.05.2014 (ITA No. 2628/Del./2012) and of Hon'ble Delhi High Court in United Exports vs. CIT, 330 ITR 549(Del.).
7. We have considered the rival submissions and have gone through the entire material on record. As far as the objection of the Assessing Officer that M/s. Vrinda International was not the consignment agent of the assessee is concerned, we do not find any substance in this statement of the Assessing Officer. It is notable that the assessee had furnished an agreement with M/s. Vrinda International whereby he has been appointed as consignment agent of assessee. We also do not find any justification to discard the finding of the ld. CIT(A) that there is no embargo on a person acting in dual capacities, i.e., one as partner of the assessee firm and other as proprietor of his independent firm. There is also no material on record to suggest that a person engaged in independent trading business in his proprietary concern, cannot act as a consignment agent of the assessee company, in which he has also been a partner. Moreover, all the transfers shown to have been made by the assessee company to M/s. Vrinda International ITA Nos. 6510/Del/14 & 635/Del/14 8 are against Form-F for sale by it in the territory of Delhi. There are also other evidences on record such as accounts of the consignee agents, VAT assessment orders of the assessee showing stock transfers for consignment sales etc. Therefore, in our opinion, the objection of the Assessing Officer that M/s. Vrinda International was not the agent of assessee, has rightly been discarded by the ld. CIT(A).
8. A perusal of the impugned order further reveals that the ld. CIT(A) has also considered the assessment orders of assessee for preceding A.Yrs. 2008-09 & 2009-10 for deleting the impugned addition of Rs.40,73,592/-. We have gone through these assessment orders and we find that the issue relating to rebate and discounts given to M/s. Vrinda International is neither addressed in those assessment orders nor is there any finding reached by the Assessing Officer on this issue. Therefore, the assessment orders of preceding years, as referred to by the ld. CIT(A) cannot be taken as valid ground for deleting the impugned addition in the instant case, as in this case, the Assessing Officer has specifically objected to the authenticity of rebates and discounts allowed to proprietary concern of one of the assessee's partners.
9. We, however, find that the ld. CIT(A) has deleted the entire addition after considering the detailed chart of Rebate and Discounts allowed to various consignment Agents, prepared by the assessee on the basis of sample bills. The ld. CIT(A) after making comparison of rebates and discounts has categorically recorded a finding that rebate and discounts had been granted by the assessee to all the consignment agents without any discrimination. He has also compared the rebates and discounts given to M/s. Vrinda International with other consignment agents and found that the net sale price realized on the sales made through M/s.
ITA Nos. 6510/Del/14 & 635/Del/14 9Vrinda International was far more than the sale price realized on the sales made through other consignment agents. We have also examined the chart of rebate and discounts referred to above and we find that the assessee in this chart has given 'Selling unit price per box' and 'effective unit price per box' of different weights. Considering these two columns, the ld. CIT(A) has observed that M/s. Vrinda International has shown effective price more than those shown by other consignment agents. The assessee has stated before the Assessing Officer that there is no disparity in the basis of rebates allowed to various consignment agents. The most crucial aspect of the case is that the ld. CIT(A) has compared the discounts allowed to M/s. Vrinda International with the discounts allowed to other consignment agents located in the States other than Delhi. In the written submissions of the assessee made before the ld. CIT(A), the assessee has categorically mentioned that M/s. Vrinda International was appointed as consignment Agent at Delhi because the assessee did not have any other consignment sale agent in Delhi. However, from the Chart given, we find that one more consignment sale agent of assessee, viz., Devoir Deals, 6562/1, Chameleon Road, Near Eid Gah Road, New Delhi also finds place in the said chart, to whom the assessee has shown to have transferred the goods worth Rs.1,13,67,316/-, but no Rebate & Discount is shown to have been given to this consignment agent on sale of this much of goods made through it. The ld. CIT(A), in our opinion, should have compared the rebate and discount allowed to M/s. Vrinda International with this agent, as both these agents are based in Delhi, where the market conditions would be identical to both the consignment agents. It is also notable that the assessee has not shown any selling unit price or effective unit price against this consignment agent of Delhi to compare the ratio of selling price realized by both these consignment agents of Delhi. There is no material on record, or any explanation of the assessee or finding of the ld. CIT(A) as to why the assessee did ITA Nos. 6510/Del/14 & 635/Del/14 10 not mention the selling unit price and effective unit price against the name of the consignment agent, Devoir Deals, based in Delhi. The assessee has also failed to explain as to why no discount or rebate was given to this consignment agent to whom substantial amount of stock is shown to have been transferred for sale. We, therefore, no substance in the contention of assessee that there was no disparity in the basis of discounts given to all the consignment agents. Therefore, once no discount is admitted to have been allowed to this similarly based consignment agent, there remains no justification to accept such a huge discount given to proprietary concern of one of the assessee's partner as done in the instant case. We, therefore, are not inclined to endorse the conclusion reached by the ld. CIT(A) in the impugned order on this count.
10. The decisions relied by the assessee are found not applicable to the present case as in the reported cases, the matter under consideration was relating to trade discounts allowed to the purchasers of good on the sales made by the assessee. The trade discount is given on the sale of the goods and net amount of sale is accounted for in the books of account. In the instant case, the matter is altogether different, inasmuch as the difference between the assessee's sale value and actual selling price realized by M/s. Vrinda International, has been credited to the account of the consignment agent as rebate and discounts on quarterly basis.
11. The ld. Assessing Officer has made the disallowance u/s. 40A(2)(a) of the IT Act. The provisions of this section read as under :
(2)(a) Where the assessee incurs any expenditure in respect of which payment has been or is to be made to any person referred to in clause (b) of this sub-
section, and the Assessing Officer is of opinion that such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of ITA Nos. 6510/Del/14 & 635/Del/14 11 the business or profession of the assessee or the benefit derived by or accruing to him therefrom, so much of the expenditure as is so considered by him to be excessive or unreasonable shall not be allowed as a deduction :
Provided that for an assessment year commencing on or before the 1st day of April, 2016 no disallowance, on account of any expenditure being excessive or unreasonable having regard to the fair market value, shall be made in respect of a specified domestic transaction referred to in section 92BA, if such transaction is at arm's length price as defined in clause (ii) of section 92F.
12. Since the assessee has credited the amounts as noted above into the account of the consignment agent, M/s. Vrinda International, the proprietary concern of one of the assessee's partners, as rebate and discounts and has claimed this expenditure to have been made for the purpose of business, in our opinion, the Assessing Officer was justified to observe that the assessee has made such payments of expenditure claimed which are disallowable under the provisions of section 40A(2)(a) of the Act. In view of all these facts, we find force in ground No. 1 raised by the Revenue and the same deserves to be allowed.
13. The facts relating to second issue involved in appeal of the Revenue are that the assessee claimed deduction of expenditure of Rs.20,00,000/- deposited as custom duties with the Custom Department under the head "duty clearance and freight". These payments have been claimed as expenses in the profit and loss account. The Assessing Officer observed that the above payments cannot be termed as revenue expenses allowable as per provisions of the Act, as the said payment was made on account of infringement of law including the provisions of Foreign Trade (Development & Regular Act, 1992). The Assessing Officer further observed that any expense incurred by the assessee for any purpose which is an offence or prohibited by law is not allowable u/s. 37 of the IT Act. He, therefore, disallowed these expenditure of Rs.20,00,000/- claimed by the assessee.
ITA Nos. 6510/Del/14 & 635/Del/14 1213.1 In appeal, the ld. CIT(A) deleted this addition observing as under :
On Grounds no. 5(a) & (b) agitating the addition of Rs 20,00,000/- the Assessing Officer submitted as under in its remand report:-
(i) The payment of Rs. 20,00,000/- was not towards custom duty as the appellant was guilty of selling the dutiable goods in the open market without using the same in the manufacture of exported goods.
(ii) Infringement of law and hence cannot be termed as revenue expenses.
(iii) The payments were part of advance paid to the Customs Department for any future liability and were not on account of demand created on finalization of the proceedings under the Customs Act.
(iv) The demand was created on 24.01.2012 where as the payments were made on 29/1/2010 & 12/2/2010.
(v) The order raising the demand was not only contested but also got stayed by the appellant till the disposal of appeal.
The above objections of the AO were carefully considered by me in the light of the evidence filed by the appellant in the course of appellate proceedings. The paper book forwarded to the AO for his comments in the remand proceedings contained the proof of creation of demand by the customs department by order No. 01/ADC/AG/01/2011 dated 24/1/2012 r.w.C. no. VIII(SB)54/Gr.II/001/2010/Pt. I Dated 1/11/2013. Though the orders creating the demand were passed subsequently, the challans placed at page nos.318 & 319 of the paper book showed that the payments were made towards customs duty by TR-6 challans for Rs 20,00,000/- against outstanding government dues as raised under a certificate of claim by the Customs Department though raised in 2012 on 28/1/2010 & 12/2/2010 i.e. AY 2010-11. By means of the subsequent orders and certificates the appellant succeeded in establishing its claim that the payment of Rs 20,00,000/- was towards an already incurred liability. Therefore, the apprehension of the AO in not allowing the payment on the pretext that it was an advance and that there were no contemporary evidence / order of the Customs Department raising such demand has no leg to stand on. At the cost of repetition it is held that the appellant was liable to pay customs duty in the impugned AY which is apparent from the fore-referred orders & challans of the customs department.
In view of the fact that the documentary evidence filed in the paper book in the form of orders of the customs department at pages mentioned above, the payment of Rs 20 lacs is held to be payable towards customs duty u/s 28 of the Customs Act, 1962 and not towards any infringement or infraction of law or fine u/s 114A of Customs Act 1962, ITA Nos. 6510/Del/14 & 635/Del/14 13 dealing with penalty under the Customs Act. In this regard the relevant lines of the orders of the Commissioner of Customs are extracted below:-
I hereby confirm customs duty of Rs 41,43,066/- in terms of the proviso to sub section (2) of the Customs Act, 1962 along with interest in terms of section 28AB upon M/s Singhania al Foil Containers Manufacturing Co. I further appropriate the amount of Rs 20 lacs already paid (Rs 15 lacs vide TR-6 challan dated 29/1/2010 and Rs 5 thousand vide TR-6 challan dated 12/2/2010) by the party towards this confirmed demand, /further order that the bank guarantee of Rs 10 lakhs should also be encashed towards payment of this confirmed demand.'' In the above view of the matter, I am of the considered view that the amount of Rs 20 lacs was not towards the payment of penalty but in fact towards customs duty.
The reliance placed by the appellant on the judgments rendered by various courts of the country in the cases of Dy. Cit vs. Glaxo Smithkline Consumer Healthcare Ltd. 107ITD 343 (CHD.)(SB), CIT v. Modipon Lid. (No. 2) 334 ITR 106 (Delhi), Paharpur Cooling Towers Ltd. vs. CIT 61 DTK 309 (Cal), CIT vs Zaverchand Gaekwad (P) Ltd - 202 CTR 94 (Guj), CIT vs. Dharampal Satyapal Sons (P) Ltd. 50 DTR 287 (Del), even in cases were duties were paid in advance compels me to accord consent to the claim made by the appellant for Rs 20 lacs on account of payment of outstanding customs duty.
Business disallowance - Certain deductions to be allowed only on actual payment - Assessment year 2001-02 - Whether for claiming deduction under section 43B, in respect of payment of excise duty, it is not necessary that liability to pay duty must be incurred first and only thereafter, payment of such duty is made - Held, yes - Whether therefore, deduction for tax, excise duty, etc. is allowable under section*43B on payment basis before incurring liability to pay such amounts - Held, yes.
Deduction only on actual payment--Excise duty paid in advance--Assessing Officer holding that deduction can be claimed only on removal of goods from factories--Not proper--Assessee entitled to deduction--Income-tax act, 1961, s. 43B--
Disallowance under s. 43B--Excise duty paid during relevant year--Assessee cannot be deprived of the benefit of deduction of excise duty actually paid by him during the previous year, although in advance, according to the method of accounting followed by him--Sec. 43B(a) r/w Expln. 2 allows deduction in such cases.--
Sales-tax liability-Unpaid sales-tax liability, if paid before the due date of filing the return under s. 139(1) cannot be disallowed under s. 43B, Disallowance under s. 43B--Payment of pre-deposit by the assessee on the direction of CESTAT--Assessee was entitled to claim the deduction of amount paid as per the direction of CESTAT pre-deposit since the direction was given keeping in view of the total excise duty demand raised by the adjudicating authority under the excise law and therefore, it was a statutory liability on that part, which fulfilled the conditions stipulated in s. 43B-- passed by Hon'ble Delhi High Court in the case of CIT vs. M/s Vikas Chemical in 1TA No. 11/2002 ITA Nos. 6510/Del/14 & 635/Del/14 14 dated 07-08-2014 in which it was held that amount paid by authorities on account of redemption fine is an allowable expenditure.'' The case of the appellant is held to be squarely covered by the above judgments. Accordingly objections (iii) to (v) of the AO are not held as maintainable in law.
As regards the argument of the AO that the appellant obtained stay against the operation of the order of demand raised by the customs department, it is worth stating that stays do not wipe out the effect of an order. It merely puts the order in a state of suspended animation. Going by this settled principle of law the demand of customs duty raised against the appellant cannot be held to have been obliterated. Accordingly, the said objection of the AO is held to be devoid of merit.
Accordingly, ground no. 5(a) & (b) are allowed and the addition of Rs 20 lacs is deleted."
14. The learned DR relying on the assessment order, submitted that the ld. CIT(A) was not justified in deleting the addition without considering the fact that the custom duty paid by the assessee with the Custom Authorities was not permissible u/s. 37 of the Act because the assessee did not follow the Rules and regulations for importing and exporting the material. It was also not made clear whether the amount of Rs.15 lacs and Rs.5 lacs was paid exclusively for custom duties or includes interest, fine or penalty. Therefore, the Assessing Officer was justified to disallow these expenditures.
15. On the other hand, the ld. Counsel for the assessee, relied on the order of the ld. CIT(A), deleting the addition for good reasons.
16. We have considered the rival submissions and have gone through the entire material available on record and we find that the ld. CIT(A) while giving relief to the assessee has considered the facts of the issue in right perspective. He has made an elaborate discussion in the impugned order and has also relied on various decisions on the subject, against which no counter case is laid before us ITA Nos. 6510/Del/14 & 635/Del/14 15 on behalf of the Revenue. The ld. CIT(A) has properly rebutted all the objections raised by the Assessing Officer and after verification has found that the amount paid by assessee was towards custom duties paid and not with respect to any fine or penalty. In our opinion, the ld. CIT(A) has passed a reasoned order which needs no interference at this stage. Accordingly, this ground No. 2 of Revenue's appeal deserves to be dismissed.
17. Ground No. 3 in revenue's appeal challenges the deletion of addition of Rs.8,50,000/- and ground No.1 of assessee's appeal challenges the sustenance of disallowance of Rs.4,24,800/- made u/s. 40A(2)(a) of the Act on account of commission paid to M/s. Vrinda International.
18. The brief facts of the issue are that the assessee claimed commission expense of Rs. 22,76,991/-. From the details furnished, the Assessing Officer noticed that out of the above expense, the amount of Rs. 12,74,800/- was paid to M/s Vrinda International, the proprietorship firm of one of the partners, Shri Himanshu Singhania. In response to the notices issued by the Assessing Officer, the assessee furnished a chart showing the party wise commission paid to various parties. Further, on perusal of the above referred chart the Assessing Officer observed that the commission has been paid to these parties at a rate ranging from from 0.27% to 2.74% and almost all the parties to whom commission has been paid are outstation parties. However, apart from M/s Vrinda International, there is only one party located in Delhi, namely M/s Devoir Deals, 6562/1, Chameleon Road, Near Eid Gah Road, New Delhi 110006 to whom commission has been paid @ 0.27%. The Assessing Officer also noticed that M/s. Vrinda International was operating from the same premises as that of the assessee and the proprietor of the said concern, Mr. Himanshu Singhania was also a working ITA Nos. 6510/Del/14 & 635/Del/14 16 partner in the assessee firm and was duly drawing Partners remuneration from the assessee firm. The Assessing Officer, therefore, observed that the assessee has failed to prove any justification for giving commission to the said concern at such a higher rate. It was, therefore, concluded that since no services were rendered by M/s Vrinda International, being a trader and not the commission agent of assessee, for which commission expense can be termed as justified and allowable to the said concern. He accordingly, disallowed the expenditure on account of commission paid to M/s. Vrinda International amounting to Rs. 12,74,800/-.
18.1 However, in alternative, it is observed by the Assessing Officer that even if the Appellate Authorities are intended to allow commission to Vrinda International, the same cannot be allowed exceeding to 0.27% as allowed by assessee to another party of Delhi, namely, M/s Devoir Deals, Delhi.
18.2 In appeal, the ld. CIT(A) restricted the disallowance to Rs.4,24,800/- representing to 2% of the sales made through M/s. Vrinda International and deleted the disallowance of Rs.8,50,000/-.
19. The ld. DR relied on the order of the Assessing Officer while the ld. AR of the assessee reiterating the submissions made before the ld. CIT(A), further submitted small synopsis stating that the ld. CIT(A) has committed a factual error in observing that commission paid to Vrinda International was 3% which was actually 2.74%. He also committed another error that other parties were paid commission @ 2% whereas, it was 2.5%. Even if these mistakes are rectified, the disallowance could at the most be made @ 0.24% amounting to Rs.1,11,661/- even if the stand of ld. CIT(A) is accepted. It was also submitted that the net sale price realized through M/s. Vrinda International was at higher side.
ITA Nos. 6510/Del/14 & 635/Del/14 1720. After hearing the submissions of both the parties and going through the material on record, we find that the assessee has shown to have paid commission to its different consignment agents based on different locations at different rates. The assessee has not been able to explain the basis of this disparity in the rates of commission paid. While deciding the ground No. 1 of Revenue's appeal, we have observed in the similar circumstances that best comparison of M/s. Vrinda International can be made from other party of Delhi, M/s. Devoire Deals, Delhi. Since, as per Chart given by the assessee, M/s. Devoir Deals, Delhi has been allowed commission at the rate of 0.27% on goods worth Rs.1,13,67,316/- sold through this agent, therefore, there is no justification to claim commission paid to M/s. Vrinda International @ 2.74% on the goods worth Rs.4,65,97,061/-. It is no doubt true that the ld. CIT(A) has committed an error to observe that the Assessing Officer has disallowed commission paid to M/s. Vrinda International @ 3% which is 2.74% instead, but the ld. CIT(A) has, however, restricted the disallowance @ 2% without any good reason. We also do not find any substance in the finding of the ld. CIT(A) that the commission paid to M/s. Vrinda was on supply of raw material, as the assessee himself is a manufacturer. Moreover, no such plea is found on record while deciding ground No. 1 of the Revenue's appeal. No mention is found in Form-F to establish that the assessee had supplied raw material to Vrinda International for sale. Therefore, in view of our findings given in this decision while deciding ground No. 1 of Revenue's appeal, that best comparison of M/s. Vrinda International can be made with M/s. Devoire Deals, Delhi, we find that it will be appropriate in the interest of justice that the commission expenditure claimed by assessee to have been paid to M/s. Vrinda International in excess to 0.27% as given to M/s. Devoir Deals, Delhi, deserves to be disallowed u/s. 40A(2)(a), as the assessee has not been able to satisfactorily ITA Nos. 6510/Del/14 & 635/Del/14 18 explain as to why there was such a huge difference in payment of commission made to the parties based on same location at Delhi. Accordingly, ground No. 3 of Revenue's appeal and ground No. 1 of assessee's appeal deserve to be partly allowed.
Since, no other point is raised in Revenue's appeal, therefore, the appeal of the Department deserves to be partly allowed.
21. In appeal of assessee, ground No. 2 challenges the enhancement of income by Rs.3,28,073/- (5% of Rs.65,61,465/-) on account of sale of imported raw material by treating it as sale out of books of account. The contention of the assessee has been that no opportunity of being heard was given by the ld. CIT(A) before enhancing the income and hence, the action of the ld. CIT(A) is not sustainable in the interest of natural justice and under the provisions of law. The ld. DR could not controvert the plea of the assessee. We find that as per section 251(1)(a), the ld. CIT(A) has power to enhance income of the assessee, but as per section 251(2), the ld. CIT(A) has to give reasonable opportunity to the assessee before such enhancement of income. On perusal of the impugned order, we find that the ld. CIT(A) has mentioned that income of the assessee is enhanced by Rs.3,28,073.25 after hearing the objections of the appellant. However, no fact regarding issuance of any notice to the assessee by the ld. CIT(A) or any objection of the assessee on it or finding of the ld. CIT(A) on any such objection is found recorded in the impugned order. Therefore, the plea of the assessee that enhancement in income has been made without affording any opportunity of hearing is found acceptable and thus, the action of the ld. CIT(A) being in violation of section 251(2) of the Act cannot be approved. Accordingly, this ground of assessee is allowed.
ITA Nos. 6510/Del/14 & 635/Del/14 1922. As far as the last ground raised by the assessee regarding adhoc disallowance of expenditure of Rs.64,112/- under different heads is concerned, we find from the assessment order that the assessee failed to furnish any supporting evidence with respect to these expenditure. For want of any vouchers etc. the adhoc disallowance made to the extent of 10% of the total expenditure claimed, cannot be said to be unjustified, as in such cases, element of personal use cannot be ruled out in the expenditure incurred on vehicles and telephone etc. In presence of these facts, the decisions relied by the assessee are found not applicable. We, therefore, do not find any justification to interfere with the impugned order on this count. Accordingly, this ground of assessee's appeal also deserves to fail.
23. In the result, the appeal of the Revenue and that of assessee both are partly allowed.
Order pronounced in the open court on 12th April, 2018.
Sd/- Sd/-
(Bhavnesh Saini) (L.P. Sahu)
Judicial member Accountant Member
Dated: 12th April, 2018
*aks*
Copy of order forwarded to:
(1) The appellant (2) The respondent
(3) Commissioner (4) CIT(A)
(5) Departmental Representative (6) Guard File
By order
Assistant Registrar
Income Tax Appellate Tribunal
Delhi Benches, New Delhi