Income Tax Appellate Tribunal - Mumbai
Krishna R. Bhat, Mumbai vs Assessee on 2 November, 2012
आयकर अपील य अ धकरण "बी" यायपीठ मुंबई म।
IN THE INCOME TAX APPELLATE TRIBUNAL "B" BENCH, MUMBAI ी बी. आर. म तल, या यक सद य एवं ी संजय अरोड़ा,लेखा सद य के सम ।
BEFORE SHRI B. R. MITTAL, JM AND SHRI SANJAY ARORA, AM
आयकर अपील सं./I.T.A. No. 218/Mum/2013
( नधारण वष / Assessment Year: 2009-10)
Krishna R. Bhat Asst. CIT-23(1),
A-203, Anandraj Indl. Estate, C-10, Pratyakshkar Bhavan,
Sonapur Lane, LBS Marg, बनाम/ Bandra Kurla Complex,
Bhandup (W), Mumbai-400 078 Vs. Bandra (E), Mumbai-400 051
थायी ले खा सं . /जीआइआर सं . /PAN/GIR No. ACCPB 7606 H
(अपीलाथ /Appellant) : ( यथ / Respondent)
अपीलाथ ओर से / Appellant by : Shri Aditya Sharma
यथ क ओर से/Respondent by : Shri O. P. Singh
सनु वाई क तार ख / : 23.07.2013
Date of Hearing
घोषणा क तार ख /
: 09.10.2013
Date of Pronouncement
आदे श / O R D E R
Per Sanjay Arora, A. M.:
This is an Appeal by the Assessee directed against the Order by the Commissioner of Income Tax (Appeals)-33, Mumbai ('CIT(A)' for short) dated 02.11.2012, partly allowing the assessee's appeal contesting its assessment u/s.143(3) of the Income Tax Act, 1961 ('the Act' hereinafter) for the assessment year (A.Y.) 2009-10 vide order dated 29.12.2011.
2 ITA No.218/Mum/2013 (A.Y. 2009-10)2. The principal issue arising in the instant appeal by the assessee is as raised per its ground no. 2. A scrutiny of the assessee's, an individual engaged in the business of merchant export of pharmaceuticals raw materials and bulk drugs under the trade name M/s. Chempi Fine Chemicals, return of income for the year by the Assessing Officer (A.O.) under the verification procedure revealed claim of commission expenses in the sum of Rs.61.30 lacs, which was observed to be, at 5.30% of the turnover, more than double the ratio of such expenses for the preceding years. Party-wise details were called for, to verify which notices u/s. 133(6) of the Act were issued to several parties, besides summons u/s.131(1) to 18 parties to whom commission in an aggregate of Rs.45.76 lacs was paid/credited. 11 of them appeared, who were examined on oath and their statements recorded, while the balance 7 parties did not attend in response to the summons. Of the statements recorded, 5 find reproduction at pgs.3-9 of the assessment order, leading to the following findings by the A.O. (pg.9):
i. The parties have not contacted the purchases parties directly. They have just provided the names of the purchase parties to the assessee.
ii. They have no knowledge in the field of pharmaceuticals.
iii. There is no written agreement with the assessee regarding the commission.
iv. They have not done similar transactions with any other party except the assessee.
v. They have not done any work such as price comparison, price quoting, quality check, bargaining, etc. for which the commission is usually paid.
The claim appearing to be unmerited, besides being exaggerated, the assessee was show caused by him in the matter vide notice dated 19.12.2011. The assessee responded vide letter dated 26.12.2011. In view of his factual findings, which held, and given the law in the matter, he found the same to be of no avail, being only in the nature of generalized claims, so that addition in respect of the claim sought to be verified by him, i.e., for 3 ITA No.218/Mum/2013 (A.Y. 2009-10) Krishna R. Bhat vs. Asst. CIT Rs.45,76,492/-, stood disallowed, claiming it to be in fact a colorable device adopted to suppress book profit, relying on the decision by the apex court in the case of Sumati Dayal vs. CIT [1995] 214 ITR 801 (SC).
The same stood confirmed in appeal in view of the admitted facts, so that the so called agents had no knowledge of the assessee's business, with, in fact, even the referral work, claimed to have been undertaken, not evidenced. The ld. CIT(A) was, upon a detailed analysis of the facts of the case, of the considered view that no case for allowance stood made out, relying on the decisions, inter alia, in the case of Lachminarayan Madan Lal vs. CIT [1972] 86 ITR 439 (SC); Dy. CIT vs. McDowell & Co. Ltd. [2007] 291 ITR 107 (Kar); and Vishnu Agencies (P) Ltd. vs. CIT [1979] 117 ITR 754 (Cal). Aggrieved, the assessee is in second appeal.
3. We have heard the parties, and perused the material on record. 3.1 The issue at hand, we may clarify at the outset, is essentially and primary factual. The host of case law relied upon by both the parties, either confirming or deleting the disallowance of claim of expenditure u/s. 37(1) is, thus, of limited value, being rendered in the obtaining facts of the case. What though is of relevance is the ratio of these decisions, which being qua the law in the matter would continue to be relevant and guide us in the matter. The onus to establish its return of income and the claim/s preferred thereby is only on the assessee. The law does not prescribe any quantitative test as to whether the said onus has been discharged, and it all depends on the facts and circumstances of the case (CIT vs. Durga Prasad More [1971] 82 ITR 540 (SC) and Assam Pesticides and Agro Chemicals vs. CIT [1997] 227 ITR 846 (Gau)). The same, it may be appreciated, i.e., the satisfaction or discharge of the burden of proof, is a matter of fact to be decided upon the conspectus of the case. Further, no doubt, the assessee is a best judge of business expediency and the A.O. cannot sit in judgment over the business decisions (Sassoon J. David & Co. (P.) Ltd. vs. CIT [1979] 118 ITR 261 (SC)). However, the assessing authority has the right; rather, is duty bound to ascertain if the expenditure is incurred for business purpose or for extraneous considerations (Jaipur Electro (P) Ltd.
4 ITA No.218/Mum/2013 (A.Y. 2009-10)Krishna R. Bhat vs. Asst. CIT vs. CIT [1997] 223 ITR 535 (Raj)). In other words, the commercial consideration/s has to be proved (CIT vs. Transport Corporation of India Ltd. [2002] 256 ITR 701 (AP)). The decision of the A.O. is to be based on the entirety of the factual matrix of the case, and in issuing findings of fact he is not constrained not to pierce the corporate or documentary veil, which does not bind him; his obligation under law being to determine and reach to the truth of the matter, having regard also to the test of human probabilities and the other surrounding circumstances (Sumati Dayal vs. CIT (supra); Lachminarayan Madan Lal (supra) and Durga Prasad More (supra)). Though it may be said that an higher expenditure cannot itself be subject to disallowance, the same is, it may be realized, is only in the context and in view of the law that the Revenue cannot subject a genuine business decision to review, and it is for the assessee as a businessman to decide what is appropriate and desirable for his business. However, the Revenue is bound to consider the genuineness of the expenditure, so that where and to the extent the quantum is relevant factor, the same can definitely be taken into account inasmuch as the mandate of the Revenue is to examine and decide if the expenditure being claimed represents real expenditure (Ramanand Sagar vs. Dy. CIT [2002] 256 ITR 134 (Bom)). Inflation of expenditure is not unknown, and in fact most investigations begin on a preliminary finding of the expenditure being apparently higher or inordinate under the circumstances. Why, we see partial disallowances made by the Revenue all the time, which is only on the principle that the assessee had failed to prove that the expenditure as incurred wholly and exclusively for the purposes, as claimed. The test of section 37(1) is, in any case, to be satisfied, and which continues to be the litmus test (Ramanand Sagar (supra) and Ram Bahadur Thakur Ltd. vs. CIT [2003] 261 ITR 390 (Ker) (FB)).
3.2 Our first observation in the matter is that the findings of fact by both the authorities below remain uncontroverted. The assesse has, though impugned the same per its instant appeal, been completely unable to show or exhibit any infirmity therein. The assessee's claim being sans any material, therefore, warrants being dismissed at the 5 ITA No.218/Mum/2013 (A.Y. 2009-10) Krishna R. Bhat vs. Asst. CIT threshold. We shall though subject the said findings to scrutiny, to examine the same for their relevance and validity.
3.3 Our second observation in the matter is that the assessee has not provided any explanation at any stage, including before us, despite being specifically called upon to do so (per the ld. AR during hearing) for increase by over 1.25 times (over 125%) in the commission expenditure for the year vis-à-vis the immediately preceding year, and which is in line with the expenditure for the year prior thereto; the expenditure for the preceding three years being as under:
A.Y. Turnover Commission Percentage to the
(Rs.) total turnover
2007-08 69518647 1899767 2.61%
2008-09 77910165 1804246 2.31%
2009-10 115480535 6129629 5.30%
In fact, the expenditure, given the assessee's business model as explained, ought to have witnessed a decline over time. This is as the commission agents have admittedly provided only referral services, i.e., conveyed the name (and at the most address) of the proposed seller/supplier to the assessee-buyer. The entire post referral work, i.e., the product profile, quality, pricing, negotiations of other terms and conditions, are left to be decided between the parties on a principal to principal basis - so much for the individual limitations spoken of by the assessee in support of it adopting the said route, i.e., taking the services of a commission agent. Be that as it may, once, therefore, a particular seller becomes a regular vendor for the assessee, i.e., by spending the referral commission, no further commission would be required to be spent inasmuch as he becomes a part of the assessee's supplier base. There may be some dropouts necessitating continuing addition to the existing supplier base, adding thereto cautiously over time, so as to build a stable supplier base. In fact, the assessee itself claims to have a supplier base of 50 domestic suppliers. This (addition) could also be for the reason of an anticipated increase in the volume of the business - which in fact is good for the supplier's business as well, and which the present supplier base is not able to cope with. No such circumstances, 6 ITA No.218/Mum/2013 (A.Y. 2009-10) Krishna R. Bhat vs. Asst. CIT however, have been pointed out in the instant case. A turnover of vendors is neither good for the assessee or for its business; rather, is detrimental to its operations. In the normal course, therefore, the tendency would be to retain the existing suppliers, so that the expenditure on referral commission would only be where the addition to the vendor base becomes imperative on business considerations. In other words, a rising referral commission, which should thus be on a decline, is inconsistent with the normative behavior, particularly given the assessee's business model, while no exceptional circumstances have been explained.
3.4 Be that as it may, why we wonder is the commission paid on transaction-wise basis, i.e., the volume of the turnover achieved with a particular vendor? This is as the Agent's role is almost complete upon introduction, with all the work leading to the actual maturing of the transaction with the vendor being done by the assessee (or his staff), i.e., in house. Whether, therefore, the transaction with the particular vendor matures or not is not relevant insofar as the work actually done by the Agent, for which the commission is being paid to him, is concerned. Why would, in fact, the Agent agree to being paid or not so on the basis of result of work not done by him? He having introduced the potential supplier, his job is complete and he is entitled to his remuneration by way of referral commission. Why, again, would the assessee pay him on a transaction-wise basis? On the contrary, we can understand some basis for an agent being not paid any commission, i.e., despite the reference, where no transaction takes place. This is as the maturity of the transaction/s with the vendor reflects the quality of the potential supplier. This is as there is no point referring a supplier who is not in a position to supply, or whose product mix or profile or pricing is not compatible with the assessee's business; each trader having a market niche or catering to a particular segment of the market. As such, though technically speaking a reference may have been made, it is not valid or relevant from the assessee's stand-point. This, in fact, only suggests that some ground work for the same, i.e., a valid reference, is a prerequisite, while in the instant case, there has been admittedly no examination of the background of the vendor, his product range, pricing, 7 ITA No.218/Mum/2013 (A.Y. 2009-10) Krishna R. Bhat vs. Asst. CIT surplus capacity, etc. by the Agent. They, in fact, are incompetent to do so, having no knowledge of the pharmaceutical products, though these attributes or other trade factors have a bearing on the purchase decision. We can also understand a case where referral commission is paid at one uniform rate for referrals, followed by a (much) lower commission on regular transactions, which practice is almost universally followed and understandable where commission is paid for reference. This again is not the case.
3.5 The assessee speaks of benefit of better pricing and mediation in the case of a dispute as the principal advantage, i.e., apart from cost, that inures to it by adopting this module and practice of working through agents. How, we wonder, this is so when they (agents) are admittedly not aware of the prices nor engaged or involved in finalizing the business. It is only where the transaction is conducted through an agent/broker that he is aware of the product (including its quality), price, delivery, or other terms and conditions, to be able to meaningfully mediate. A good and sound understanding of the business practices and, further, relevant business experience, is in fact necessary, almost a precondition, to be able to purposefully intervene and resolve disputes, which could only be where both the parties have faith in and respect for the mediator. The statement is, therefore, contradictory.
The assessee speaks of variable commission rates in view of the differential role and responsibility of the agents, so that larger and higher the responsibility, the larger the commission, i.e., than that which is paid for just an introduction. That is fair enough, but the agents have admittedly no knowledge of the assessee's trade; it's products, much less of their technical specifications, pricing, market, etc. They are even, in some cases, not aware of the addresses or even the names of the concerned staff, i.e., those dealing with sales at the vendor's end, stating that only the proposed vendor's name is sufficient for the purpose of referral. What responsibility could possibly be assumed by them under such circumstances? No wonder the assessee's case is sans any explanation toward this, much less the said higher roles and responsibility being demonstrated or exhibited.
8 ITA No.218/Mum/2013 (A.Y. 2009-10)Krishna R. Bhat vs. Asst. CIT As regards the cost, again, we are afraid we are unable to appreciate the assessee's case. It is no doubt understandable when the assessee says that he would have to keep technical persons if it were to keep salaried staff instead, and which would increase the cost. However, if the non-technical persons as the Agents are able to render the required services, why should the assessee insist on technical persons for staff, which would be available on a full time basis? Further, as the assessee is already undertaking or performing the functional services toward pricing, quotation, quality checking, bargaining, etc. at his end, i.e., in house, as explained, he has already incurred the cost toward the same. The argument, therefore, is false.
3.6 In fact, given the scanty information at their command, it subjects one's imagination to incredulity to agree that a genuine referral work could be accomplished. Firstly, as also observed by the ld. CIT(A), there is nothing to exhibit the reference itself. This belies acceptance, as it is only on the basis of the reference - even though on subsequent maturity of the transaction - that the agent is entitled to his claim. He would, therefore, not only retain proper evidence toward the same (reference), which in fact would stand to be generated in the normal course of the business, but also track the developments and keep a record of the transactions, which the agents in the instant case are admittedly and blissfully unaware of. In fact, they did not even know the commission rates being paid to them! Secondly, a bridge between the buyer and the supplier implies a channel between the two, so that one who understands the business and the business requirements of the two could only act as a bridge. What is essential for a proper reference is a matching of the business requirements and needs of the two trading partners. This may or may not result or fructify in business, but in any case, it cannot be denied that at the minimum it is only on the basis of some information and data base that further negotiations could take place. In fact, a proper reference, so as to form part of the regular supplier base, would require much more complete and comprehensive information and experience than brokering or mediating a business transaction for supply of a consignment of goods, for which all that is required is specification of the product, of 9 ITA No.218/Mum/2013 (A.Y. 2009-10) Krishna R. Bhat vs. Asst. CIT its delivery and the payment in its respect, which is also absent. The services ostensibly provided, i.e., collecting the names from the public domain, and forwarding it to the assessee does not fit the bill or serve the purpose of either reference or for brokering a transaction. Finally, even downloading the required information from the public domain, as internet, would require knowledge of the product and its specification, so that even the same is not possible. The products in pharmaceutical industries are known or identified by their generic names and composition, as each business house would have a different names for its product/s. The assessee's claims therefore fail on all counts.
3.7 Next, we may consider the specific evidences on record. The same is in the form of the statements u/s.131 as recorded by A.O. from 11 parties (as listed at pgs.2-3 of the assessment order), 5 of which stand reproduced in the assessment order (at pgs.3-8), arriving at his conclusions at para 2 above. The same stand reproduced (at pgs.4-8 of the impugned order) as well as examined by the ld. CIT(A), commenting separately on each of them vide paras 3.3 to 3.8 (pgs.15-16) of his order, followed by his overall analysis at paras 3.11 to 3.16. His findings thereby, which are being impugned would, therefore, need to be considered, even as we may clarify at the outset that no specific argument in their respect, or otherwise showing any infirmity therein, much less per some materials, has been brought to our notice by or on behalf of the assessee.
(a) Ms. Shamala Patel, the first deponent, accepted to have no special knowledge of the products being dealt with by the assessee, and that she has traced the names of the party from the data base and given them to one Ms. Vivita, and for which she has got the commission. She, in fact, is working as an Accountant with the assessee-firm itself, having drawn salary in the sum of Rs.1.69 lacs for the relevant year and, further, admits to having done the accounting part only. As such, her work of checking of the bills and payments of the correct quantity is a part of her duties as an accountant. Though she speaks of some agreement having been entered into by the assessee, admits to have done no work toward the same, viz. the source of the manufacture, negotiations, competitive rate, follow-up for delivery, etc., i.e., in terms of the said agreement. Though she is aware of the names of the four parties introduced by her, but admits to have not followed up the purchase orders on which she has got commission and, in fact, is not aware of the rate of commission itself.
10 ITA No.218/Mum/2013 (A.Y. 2009-10)(b) The second deponent, Ms. Jayshree Kedar Shah, though having located a single party, M/s. Supharma Chem, was unable to furnish the address or names of the contact persons, much less the details of their company. Again, she has no knowledge of the pharmaceutical products, nor has done work for any other party, admitting to have only introduced the sole party by way of furnishing its name and telephone number, and that too from the internet (so that the same is in the public domain), collecting a commission of Rs.75,000/- for the same.
(c) Shri Kamaldeep Singh Banga, the third deponent, again admits to have neither any knowledge nor experience of the pharmaceutical business, being in fact engaged in the field of designing and offset printing. The only work done by him is of having introduced the party by the name M/s. Sharon Bio-Medical Ltd., having its office at Vashi, Navi Mumbai, though was unaware of its complete address, admitting to have never visited its premises or known any of its concerned persons, i.e., supervising the sales function, but knowing its accountant, Mr. Kaushik, whose full name though he did not know. He could not even specify the exact product/s purchased by the assessee from M/s. Sharon Bio-Medical Ltd., and neither the details of the order/s placed by the assessee-firm. He had also not worked with or for with any other firm.
(d) Shri Avni Anand Gantara, the fourth deponent, is a part time clerk with one, M/s. Om Traders at Parle (W), Mumbai. He admits to have no knowledge or experience in the said business, and of having received commission (of Rs.3.08 lacs), though could not even as much as furnish the name of the product for which he has received the same, nor the products which the supplier, M/s. Amishi Pharma, Ahmedabad, was dealing in.
(e) Shri Ketan Shantilal Gandhi, the fifth deponent, is a partner in M/s. Shree Jitronics. He agrees to have done no work with regard to the transactions, viz. negotiations, price quotation, follow up for delivery, etc, i.e., apart from introducing the supplier who he states to have located with the help of his friends and contacted over phone. However, he had no knowledge of the products being either dealt with by the said parties or supplied to the assessee, and for which he is claimed to have received commission. Also, he had done no such work for any other party.
The story obviously gets repeated over the other parties as well, which were also examined by the ld. CIT(A), as stated at paras 3.11 of his order. They have neither the educational background or knowledge or experience in the trade, even as each trade is a specialized one.
11 ITA No.218/Mum/2013 (A.Y. 2009-10)Krishna R. Bhat vs. Asst. CIT 3.8 Firstly, therefore, there is to begin with, no evidence of the work actually performed, which is limited only to introduction, and which (evidence) we have explained would stand to be generated in the normal course of business. They are all persons who are either involved in unrelated trades and/or have even remotely no connection with the assessee's trade or business or products. They are, therefore, most unlikely to be contacted by the assessee for the purpose. They have only collected the information which is not only readily available in the public domain, but also in the trade circles, as each supplier endeavours to increase his visibility by advertising in the trade journals, projection and participation in other forums, as well as through the net. They are not aware of the products being dealt with by them, not to speak of the parties themselves, or even of the assessee's requirements. In fact, most of them are also not aware of even the rate at which the commission stands paid to them. Our examination of the facts of the case (refer paras 3.1 to 3.7 of this order), including the modus operandi adopted, which we have also found to be inconsistent with the business model being followed, has led us to find that no brokering work could under the circumstances, which is also not the claim, could be made, much less genuine referral work, which requires a much more comprehensive data base, analysis and knowledge. The paper-book placed on record, which has also been carefully perused, only bears the accounting information, and qua which there is no dispute, though that by itself would be of no moment. The assessee's case, to which no improvement could be made by it before us, is thus without substance. The case law relied upon would be of little moment in view of the matter being factual and having been decided on facts. Under the circumstances, therefore, we have no hesitation in confirming the concurrent findings of the authorities below. We decide accordingly.
4. The second and the only other ground being agitated by the assessee in respect of the disallowance Rs.1,07,404/-, being 10% of the expenditure claimed by the assessee under the heads of conveyance, office expenses and sales promotion. The facts being the same, the three disallowances stand impugned per a single ground. The expenses were 12 ITA No.218/Mum/2013 (A.Y. 2009-10) Krishna R. Bhat vs. Asst. CIT disallowed by the A.O. principally on account of being incurred in cash and being not fully verifiable, at Rs.50,000/- for each of the three heads of expenditure, i.e., as against the total expenditure there-under, at Rs.3,95,091/-, Rs.3,56,855/- and Rs.3,58,103/- respectively. The ld. CIT(A) while agreeing in principle with the A.O. restricted the disallowance to 10% of the expenditure claimed, partly allowing the assessee's relevant grounds before him. So that, aggrieved, the assessee is in second appeal.
5. No improvement in its case stood made by the assessee before us, with in fact, even no arguments in respect of this ground being raised before us. Under the circumstances, we consider the disallowance as sustained by the first appellate authority as reasonable, and uphold the same. We decide accordingly.
6. In the result, the assessee's appeal is dismissed.
प रणामतः नधा रती क अपील खा रज क जाती है ।
Order pronounced in the open court on October 09, 2013
Sd/- Sd/-
(B. R. MITTAL) (SANJAY ARORA)
या यक सद य / JUDICIAL MEMBER लेखा सद य / ACCOUNTANT MEMBER
मुंबई Mumbai; दनांकDated : 09.10.2013
व. न.स./Roshani, Sr. PS
आदे श क त ल प अ े षत/Copy of the Order forwarded to :
1. अपीलाथ / The Appellant
2. यथ / The Respondent
3. आयकर आयु त(अपील) / The CIT(A)
4. आयकर आयु त / CIT - concerned
5. वभागीय त न ध, आयकर अपील य अ धकरण, मंब
ु ई / DR, ITAT, Mumbai
6. गाड फाईल / Guard File
आदे शानस
ु ार/ BY ORDER,
उप/सहायक पंजीकार (Dy./Asstt. Registrar)
आयकर अपील य अ धकरण, मंब
ु ई / ITAT, Mumbai