Income Tax Appellate Tribunal - Hyderabad
Sun Infraa, Hyderabad, Hyderabad vs Assessee on 18 April, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH 'B', HYDERABAD
BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER and
SMT. ASHA VIJAYARAGHAVAN, JUDICIAL MEMBER
ITA No. 2117/Hyd/2011
Assessment year 2008-09
M/s. Sun Infraa Vs. The Addl. Commissioner of
Hyderabad Income-tax, Range 6
PAN: ABCFS2833A Hyderabad
Assessee Respondent
ITA No. 2116/Hyd/2011
Assessment year 2008-09
M/s. Sun Minerals Vs. The Addl. Commissioner of
Hyderabad Income-tax, Range 6
PAN: ABGFS5262D Hyderabad
Assessee Respondent
Assessee by: Shri V. Raghavendra Rao
Respondent by: Shri M.S. Rao
Date of hearing: 18.04.2012
Date of pronouncement: 18.05.2012
ORDER
PER CHANDRA POOJARI, AM:
These two appeals are by different assessees directed against different orders of the CIT(A)-IV, dated 27.9.2011 for assessment year 2008-09. Since the issue involved in these appeals is common in nature, these appeals are clubbed together, heard together and are being disposed of by this common order for the sake of convenience.
2. We will take up the appeal in I.T.A. No. 2117/Hyd/2011. Brief facts of the issue are that the assessee is engaged in screening, grading, processing and trading of minerals and hiring of machinery. It was noticed by the Assessing Officer that the 2 ITA Nos. 2116 & 2117/Hyd/2011 M/s. Sun Minerals & Anr.
======================== assessee had claimed having made commission payments to the following parties:
1. Smt. B. Bhagyalaxmi - Rs. 2,30,73,945
2. Sri S. Lava Kumar Reddy - Rs. 42,83,658
3. M/s. Vijay Mining P. Ltd. - Rs. 72,53,316
4. M/s. R.K. Marketing Services Rs. 1,15,36,974
5. Sri Chanda Parasarampuria Rs. 4,00,000
--------------------
Total Rs. 4,65,47,893
==============
2.1 The Assessing Officer required the assessee to justify the
above commission payments by furnishing the following
information:
a) Details of the services provided by the parties to whom commission payments were made.
b) Details of clients arranged by these parties.
c) Copies of agreements entered into with these parties.
d) Copies of correspondence made with these parties.
e) Basis of commission payment.
2.2 During the course of assessment proceedings, a statement under sec. 131 was recorded from Sri G. Ananth Sena Reddy, partner of the assessee firm, on 29.12.2010. Reproducing the excerpts from the said assessment, the Assessing Officer drew the following inferences:
1) there are no written agreement with the parties to whom commission was paid;
2) there is no written correspondence with these parties regarding the customers introduced by them and sales effected.
3) The assessee cannot identify party wise list of customers introduced by the said parties. It was giving a vague reply that all the customers were collectively introduced.
4) The assessee could not specify tonnage details of sales effected through each of the commission agent.
5) The assessee claimed that all its customers were 3 ITA Nos. 2116 & 2117/Hyd/2011 M/s. Sun Minerals & Anr.
======================== introduced by all the agents, whereas the list of customers furnished by Smt. Bhagyalaxmi was inconsistent with the claim ..
6) In a nutshell, the assessee could not produce any documentary evidence in support of the services rendered and could not also produce the basis for commission.
2.3 The Assessing Officer also noted that even the commission agents themselves could not pinpoint the sales procured by them. In this regard, he has reproduced the excerpts of the statements recorded from Smt. B. Bhagyalaxmi, wife of Sri B. Sri Ramulu (Minister in Karnataka Government), u/s 131 of the Act, besides the statement of Sri S. Lava Kumar Reddy, Sri C. Vijay Sekhar Reddy, Director of M/s. Vijay Mining P Ltd., and Sri Ravi Kalyan Reddy, Managing Partner of M/s. R K Marketing Services. The Assessing Officer noted that from the above statements of so called commission agents, the following further inference could be drawn:
(1) None of the commission agents was able to provide definitive list of customers, quantity of sales effected, working of commission. (2) In fact, M / s. R K Marketing services claimed that they did not know any customers (leave alone introducing them). They stated that they were only ensuring the quality of ore loaded into trucks.
(3) The agents received commission only from 3 parties, viz. M/ s. Sun Infra; M/s. Sun Minerals and M/s. K V Minerals and no one else, despite the fact that Bellary is a big centre for iron ore trading.
(4) These agents did not provide similar services to any other parties, despite boasting their expertise in iron ore trading.
(5) All the agents appeared to be disparate and the 4 ITA Nos. 2116 & 2117/Hyd/2011 M/s. Sun Minerals & Anr.
======================== assessee's claim that all its customers had been introduced by all those agents did not appear to be a reliable statement.
(6) Most glaring in consistency appeared In the statement of Smt. B. Bhagyalaxmi, who stated that she had introduced even M/ s. K V Minerals.
2.4 In view of the above inconsistencies, as also in the absence of any documentary evidence furnished by the assessee or the commission agents in support of services contentedly rendered, the assessee was required to show cause as to why the payments made to the agents should not be treated as expenditure not laid out or expended wholly or exclusively for the purpose of business. In reply, Sri G. Ananth Sena Reddy, in his statement stated that it was not possible to get customers and good price without paying sales commission. He also claimed that it is not a trade practice in that region to enter into agreements with commission agents. He averred that all the payments were made through an account payee cheque after deducting TDS and the payer has also confirmed the receipt thereof. It was pleaded that due to complexities in the iron trade, it is not possible to furnish exact details of sales procured by each agent. He maintained that all the correspondence happens in person only.
2.5 In view of the above facts, the Assessing Officer referred to the decision of the Delhi High Court in the case of Schneider Electric India Ltd. Vs. CIT (304 ITR 360), wherein the decision of the Supreme Court in the case of Lachminarayan Madan Lal Vs. CIT (86 ITR 439) was followed. He noted that the Supreme Court had held that even if there is an agreement between the assessee and its selling agents for payment of certain amounts as commission, assuming there was such payment, that does not bind the ITO to hold that the payment was made exclusively and 5 ITA Nos. 2116 & 2117/Hyd/2011 M/s. Sun Minerals & Anr.
======================== wholly for the purposes of the assessee's business. They held that although there might be some agreement in existence and the payments might have been made, it is still open to the ITO to consider the relevant factors and determine for himself whether the commission said to have been paid to the selling agents, or any part thereof, is properly deductible under sec. 37 of the Act.
2.6 The Assessing Officer noted that the facts of the assessee's case were similar, inasmuch as there was no agreement between the assessee and the commission agents, and there was no documents on whose basis it could be said that any commission was due and payable. He noted that, as held by the Supreme Court, even the agreement does not bind the Assessing Officer from enquiry into deductibility of commission. He noted that in the assessee's case there were no agreements, and there was no evidence of any correspondence or personal meetings between the assessee and the commission agents, so as to suggest that there was any relationship on whose basis the commission agents procured customers for the assessee and for which they were entitled to receive commission. He noted that the understanding between the parties was an oral understanding and it was doubtful that such an oral understanding could have been arrived without any long lasting relationship having been established between the assessee and the commission agent involving such huge amounts of money over a period of time. It was also noted that the assessee was unable to furnish the details of customers introduced by each agent, as also the exact working of commission payment. He concluded that mere payment of commission through account payee cheque, after deduction of TDS, did not absolve the assessee from discharging its burden regarding proving the business purpose of such payments. Accordingly, the commission payments made by the assessee were disallowed and 6 ITA Nos. 2116 & 2117/Hyd/2011 M/s. Sun Minerals & Anr.
======================== added back, holding that such expenditure had not been incurred wholly and exclusively for the purpose of business.
2.7 During the course of appellate proceedings, it is submitted by way of Statement of Facts that the above mentioned commission had been paid in connection with smooth carrying and promotion of assessee's business. The assessee contended that the nature of iron ore business is such that the same requires the assistance of commission agents/ middleman. It was averred that the assessee had produced the list of entities/persons to whom the payments were made, along with their addresses and PANs before the Assessing Officer. Besides, the amounts had been paid through account payee cheques, which were cleared through banking channels only. The assessee argued that all the business entities/individuals to whom commission was paid have the Permanent Account Numbers and TDS had been affected on all the payments made to them. The assessee had also filed the return of TDS showing the same. The authenticity of their PANs was also substantiated with soft copies downloaded from the NSDL site.
2.8 It was submitted that all the above information/details were furnished to establish (a) genuineness of payments; (b) identity of the recipient; (c) payment through banking channels by account payee cheques and (d) TDS made thereon. It was averred that such information provided good proof that the transactions were genuine and beyond doubt. The assessee claimed that there could be no better proof which a businessman could be called upon to adduce.
2.9 It was further added that on the basis of the details provided by the assessee, the Managing Partner of the firm and some commission agents were also summoned and statements were 7 ITA Nos. 2116 & 2117/Hyd/2011 M/s. Sun Minerals & Anr.
======================== recorded from them u/s 131 of the Act. Accordingly, all of them were departmental witnesses. The assessee submitted that the Managing Partner had explained the modus operandi of the business, naming the commission agents, type of work performed by them, mode of payments to them, rate etc. He averred that even the agents confirmed the transactions, receipt of consideration and gave out their assessment particulars.
2.10 The assessee submitted that the evidence utilised in the assessment order are ex-parte evidence and all the witnesses were departmental witnesses. It was contended that even a man with phenomenal memory cannot provide all the intricate details in a statement and there are bound to be some inconsistencies. It was argued that the adverse points noted by the Assessing Officer can give raise to suspicion but such suspicion cannot take the place of proof when the transactions were routed through bank and the amounts were paid through account payee cheques, besides the fact that most of them are assessed to Income tax. The assessee maintained that the evidences tendered by the Managing Partner and other witnesses were in the realm of documentary evidence, which on any account have precedence over oral evidence.
2.11 The assessee also tried to distinguish the facts of the case of Lachminarayan Madan Lal Vs. CIT (supra) contending that in the assessee's case commission agents were independent parties and transactions with them were routed at Arms Length, while in the above case, the selling agency firm had no genuine existence but the same was another manifestation of the assessee firm itself.
3. On appeal, the CIT(A) confirmed the order of the Assessing Officer. Aggrieved, the assessee is in appeal before us.
4. The learned AR submitted that in both the above cases, the assessment orders and the appellate orders are almost similar, if 8 ITA Nos. 2116 & 2117/Hyd/2011 M/s. Sun Minerals & Anr.
======================== not identical. The only point in dispute before the Tribunal is the Commission payments made to six/five persons. The expenditure disallowed on account of commission is Rs. 2,44,85,670 in the case of Sun Minerals and Rs. 4,65,47,893/- in the case of Sun Infraa. The assessees are sister concerns. A common statement covering both the assessees was recorded u/s. 131 of the IT Act from Sri G Anantha Sena Reddy, Partner on 29.12.2010. It is seen from the assessment orders that statements were recorded from the following persons who are the agents for marketing the ore.
1. Smt. B. Bhagya Lakshmi
2. Sri S. Lavakumar Reddy
3. Sri. Vijayasekhara Reddy of M/ s Vijaya Mining Pvt. Ltd
4. Sri Ravi Kalyan Reddy, Managing Partner of M/s R.K. Marketing Services 4.1 It was submitted that Lavakumara Reddy's statement was in regard to Sun Infraa while the statements of other three persons cover both the assessees. It appears from the statements recorded from the witnesses namely some of the recipients of the commissions that they affirmed the services rendered by them and the payments received by them. However the lower authorities have not gone by the affirmations made by them. The Addl. CIT disallowed the commission by making inferences from the statements of the Agents who are recipients of the commission as follows:
1. None of the commission agents is able to provide definitive list of customers, quantity of sales effected and working of commission.
2. In fact M/s. RK Marketing Services claims that it did not know any customers (leave alone introducing them). It states that it was only ensuring quality of ore loaded into trucks.
3. The agents received commission only from three parties namely M/s. Sun Infra, M/s. Sun Minerals and M/s. KV Minerals and no one else despite the fact that Bellary is a big centre for iron ore trading.9 ITA Nos. 2116 & 2117/Hyd/2011
M/s. Sun Minerals & Anr.
========================
4. These agents did not provide similar services to any other parties despite boasting their expertise in iron ore trading.
5. All the agents appear to be disparate and the assessee claim that all its customers were introduced by all these agents does not appear to be a reliable statement.
6. Most glaring inconsistency appears in the statement of Smt. B Bagya Lakshmi, who states that she introduced even M/s. K V Minerals.
4.2 In regard to the above observations the AR submitted as follows:
1. Smt. B Bhagya Lakshmi furnished the list. Others did not carry such lists at the time of oral evidence.
2. But the firm specified and affirmed that services were rendered by its staff who are well versed in examining the quality of the ores.
3. This is highly irrelevant because one need not necessarily have many principals for getting orders and commission
4. This is not correct because the work orders, the payments and the TDS clearly mark out the individual performance and earnings.
5. This is not apparent from the statement recorded and cited.
This is, in any case, really not material.
4.3 The lower authorities have then relied on the decision of the Supreme Court in the case of Lakshminarayan Madanlal Vs CIT (86 ITR 439) and also on the decision of the Delhi High court in the case of Schneider Electric India Ltd. Vs Commissioner of Income Tax 304 ITR 360 (Del) applying it. It is submitted that the lower authorities are not justified in making the above inferences and disallowing the expenditure incurred on that basis. Once the recipients of the commission have affirmed on oath about the services rendered by them and the receipt of commission by them, the onus of proof lying on the assessee stood discharged. The learned Assessing Officer (AO) has not been able to rebut the veracity of the statements. He merely drew adverse inferences without any valid proof. The lower authorities have not considered at all the following facts placed before them with evidence.
10 ITA Nos. 2116 & 2117/Hyd/2011M/s. Sun Minerals & Anr.
========================
1. During the previous year, the firm has actually paid commission to certain parties in connection with smooth carrying and promotion of its business.
2. The nature of iron ore business is such that the same requires the assistance of commission agents/middle men. As explained, the business is purchase and sale of iron ore. Considering the problems associated with the business, the commission is paid to the respective parties to enable the firm to carry on the business without any impediment.
3. In course of hearing the assessee produced the list of entities/persons to whom the payments were made with their addresses and their permanent account numbers to the AO.
4. The amounts were paid through account payee cheques; all the cheques were cleared through banking channels only.
5. All the business entities/individuals have their Permanent Account Numbers. From all such payments TDS was effected. The returns of TDS were filed before the department from time to time by disclosing the name and address of the business entity/person on whose name the payments were made and tax was deducted.
6. Further, soft copies of the permanent account number of all the respective parties downloaded from NSDL site was also filed so as to ensure their authenticity.
The lower authorities have simply brushed aside this vital evidence by holding that the above features are not material to decide the issue.
4.4 According to the AR, while drawing the inferences, the AO has erred in stating that the list of customers, quantity of sales affected and working of commission could not be provided by the deponents spontaneously from their memory as expected of them, by him. For instance in the case of Smt. B Bhagya Lakshmi, she enclosed a list of the customers arranged by her. She also enclosed the copies of the Debit notes. She furnished copies of the returns filed by her and also of the Bank accounts. She also clearly stated that she was arranging customers for the iron ore materials supplied by the assessee companies. Sri C Vijayasekhara Reddy, Director of M/s Vijay Mining Pvt. Ltd., produced the work orders issued by the above assessee firms vide 11 ITA Nos. 2116 & 2117/Hyd/2011 M/s. Sun Minerals & Anr.
======================== Answer to Question No. 3 (Page 7 of the assessment order). He gave the PAN of the Company and narrated its business activities. Sri Ravi Kalyan Reddy, Managing Partner of M/s RK Marketing Services stated that his firm was helping the customers introduced by M/s Vijay Mining Pvt. Ltd in getting good quality iron ore from the assessee firm vide Answer to Question No. 2 (Page 8 of the Assessment order). He also gave the PAN of the firm and stated that the firm was assessed to tax in Range 11, Hyderabad.
4.5 The AR submitted that the payment of commission for the purpose of marketing the iron ore is a trade practice which is not denied by the AO. Unless the commission is paid, the assessee cannot market the ore and cannot market it profitably. The payment of the commission is thus made out of commercial expediency. There can be no denying this widely prevalent trade practice. The learned lower authorities failed to notice that the transactions between the firms and the marketing agents were at an arm's length. There was no collusion to transfer funds from the assessee to the several agents. The whole transactions have been made openly and transparently. The lower authorities have not established any oblique or ulterior motive in incurring the expenditure. The recipients of the commission are themselves income tax assessees and the rate of tax for both the payers and the payees are at the same rates except for some small difference in the cases of individual agents.
4.6 The AR submitted that the reliance in the case of Lakshminarayan Madanlal (cited supra) is misplaced because in that case, the recipients of the Commission were immediately related to the assessee. The lower authorities failed to appreciate that the amounts paid were out of commercial expediency. If the commissions are not paid the assessee would not be able to make the optimum profits. It is also the trade practice to engage agents for marketing the ore.
4.7 The AR submitted there is a direct decision of ITAT Hyderabad Bench 'B' in the case of M/s Murari Trading Co., 12 ITA Nos. 2116 & 2117/Hyd/2011 M/s. Sun Minerals & Anr.
======================== Hyderabad vs ITO (ITA Nos. 458 & 459/Hyd/09), dated 23rd July 2009. The facts in that case are in pari materia with the facts in the instant case. The AR further relied on the following judgements:
4.8 In the case of Sassoon J. David & Co Pvt. Ltd vs CIT (118 ITR 261), the Supreme Court, quoting from their decision in CIT vs Chandulal Keshavlal & Co (38 ITR 601, 610) stated the principles of allowance of business expenditure as under:
"Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or way wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment of expenditure in incurred for the purpose of trade of the assessee it does not matter that the payment may insure to the benefit of a third party (Ushers Wiltshire Brewery Ltd V. Bruce 6 TC 399(HL)). Another test is whether the transaction is properly entered into as a part of the assessee legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby (Eastern Investments Ltd Vs CIT 20 ITR 1 (SC)). But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee".
4.9 The learned AR relied on in the case of Eastern Investments Ltd vs CIT (20 ITR 1), wherein the Supreme Court held as under :
"Most commercial transactions are entered into for the mutual benefit of both sides, or at any rate each side hopes to gain something for itself. The test for present purposes is not whether the other party benefited, nor indeed whether this was a prudent transaction which resulted in ultimate gain to the assessee, but whether it was properly entered into as a part of the appellants legitimate commercial undertakings in order directly to facilitate the carrying on of its business" (emphasis supplied).13 ITA Nos. 2116 & 2117/Hyd/2011
M/s. Sun Minerals & Anr.
======================== In the case of the assessee, the transactions are entered into as part of legitimate commercial interests. The lower authorities have failed to notice this aspect.
4.10 The AR further relied on in the case of CIT Vs Bombay Walchand & Co Pvt. Ltd (65 ITR 381), wherein the Supreme Court held as under :
"When a claim for allowance u/ s 10(2)(xv) of the Income Tax Act is made, the income tax authorities have to decide whether the expenditure claimed as an allowance was incurred voluntarily and on grounds of commercial expediency. In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively has to be adjudged from the point of view of the business and not of the revenue."
4.11 The learned AR further relied on in the case of J.K. Woollen Mfg. vs CIT (72 ITR 612), the Supreme Court held as under:
"As pointed out by this court in CIT Vs Walchand & Co Pvt. Ltd (65 ITR 381) (Se), in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be adjudged from the point of view of the business man and not of the income tax department. "
4.12 The AR also relied on in the case of Aluminium Corporation of India Vs CIT (86 ITR 11), the Supreme Court held as under :
"In the instant case, it is not the case of the revenue that the assessee did not pay the commission in question nor is its case that the expenditure in question was not incurred by the assessee in the character of a trader. Therefore the only question that remains to be considered is whether it was not expended wholly or exclusively for the purpose of the business of the assessee. "
In the instant case also it is not the case of the Department that the expenditure was not incurred or it was not incurred in the character of a trader.
14 ITA Nos. 2116 & 2117/Hyd/2011M/s. Sun Minerals & Anr.
======================== 4.13 The AR relied on in the case of Jamshedpur Motor Accessories Stores Vs CIT (95 ITR 664), wherein the Patna High Court made the following observations:
"Merely because there was no agreement in writing the arrangement between the parties, if otherwise it was fit to be believed and as it was evidenced by the entries in the books of accounts, could not be disbelieved. "
"The test of prudence by substituting its own view m place of the businessman's has not been approved by the Supreme Court in the decisions referred to above. "
In our case, the account entries in the books of both the assessee and the agents are corroborative and provide fool-proof evidence.
4.14 The Gauhati High Court in the case of Narsingdas Surajmal Properties (P) Ltd Vs CIT (127 ITR 221) observed as under:
" The learned Tribunal shall bear in mind the principles laid down by the Supreme Court in Eastern Investments Ltd Vs CIT (20 ITR l){SC), that in the absence of fraud, the question whether a transaction had the effect of reducing the assesses taxable income or whether it was a prudent or judicious transaction or whether it was indispensable or necessary for the assessee to enter into the transaction, are all irrelevant in determining whether the expenditure relating to that transaction should be allowed u/ s 37 of the Act."
4.15 The AR submitted that the ratio of the judgements in the above case law is applicable to the facts of the assessee's case and therefore the lower authorities are not at all justified either on facts or in law in disallowing the commissions paid by the above two assessees in the assessment year 2008-09. Accordingly, he prayed that the additions be deleted.
5. On the other hand, the learned DR submitted that the assessee sold the goods to 29 parties through various middlemen. However, no details regarding the services rendered by those commission agents were furnished. If the facts of the assessees' 15 ITA Nos. 2116 & 2117/Hyd/2011 M/s. Sun Minerals & Anr.
======================== case are examined, it can be seen despite contending that the assessee sold iron ore to 29 parties through them, the assessee categorically expressed its inability to furnish any details regarding services provided by the five commission agents. It could not provide any details of the clients contentedly arranged by them. While it was categorically admitted that there was no written agreements between the assessee and the said parties, it could not even produce any correspondence among them, which could have served as a contemporaneous circumstantial evidence. Finally, even the basis of commission payments could not be explained by giving party wise details of sales made through the alleged agents and the resultant working of commission, despite contending that the same had been paid @ Rs. 100/- per MT. In fact, the assessee gave a very vague reply only when it said that commission was shared by the agents depending on their involvement.
5.1 The DR submitted that in order to wriggle out of the situation, Sri Ananth Sena Reddy, partner of the assessee firm, came out with a stance that parties brought in by each of the alleged agents were not identifiable on account of the fact that all the customers had been introduced by the agents collectively. He therefore claimed that the commission was shared by the agents depending on their involvement. However, such stance is itself illogical and unacceptable. Obviously, such an approach of lobbying is beyond human probabilities and is not seen in cases of sales made through commission agents. Besides, this plea of the partner goes against the very claim of any services being rendered by the alleged agents in procuring the orders out of their individual efforts, so as to entitle them to any commission or so as to put an obligation on the assessee to make any payments to them as commission. If the plea of collective introduction of customers is accepted, it cannot be said that a certain tonnage of goods were sold by the assessee through any particular agent. In 16 ITA Nos. 2116 & 2117/Hyd/2011 M/s. Sun Minerals & Anr.
======================== such a situation, the very working of commission payable to each of them fails. It is for this reason that Sri Reddy in his statement admitted that since commission was shared by all agents, it is not possible to bifurcate the exact tonnage sold to each agent.
5.2 The DR further submitted that the falsity of the claim of the partner of the assessee firm regarding collective introduction of customers, while being unacceptable on the face of it, is further proved from the statement of Smt. Bhagyalaxmi, who, giving a different version, gave a list of customers. While Smt. Bhagyalaxmi claimed that even the assessee firm, M/s. K V Minerals, had been introduced by her, her statement indeed goes against the contention of the assessee that all the five agents had collectively introduced the clients. In fact, the alleged commission agents themselves, as could be seen from their statements reproduced by the Assessing Officer, could not provide any evidence or details regarding their specific services. They could not give even the list of customers, leave alone the quantities of sales effected through them in terms of tonnage, so as to demonstrate that they were entitled to any commission from the assessee firm. It is beyond human comprehension and business prudence that any person rendering any services for consideration would not keep even the minimum records to make a claim for payment towards such services. Besides, the very nature of services claimed to have been rendered by them was stated to be different by M/s. R K Marketing Services, who after categorically admitting that they did not know any customers at all, stated that they had only ensured the quality of iron ore loaded into trucks. However, no records or documentary evidence could be produced to support even such services, if at all rendered.
5.3 The DR submitted that another fact aptly noted by the Assessing Officer is that all the alleged agents of the assessee had 17 ITA Nos. 2116 & 2117/Hyd/2011 M/s. Sun Minerals & Anr.
======================== received commission from only three parties, viz. M/s. Sun Infra; M/s. Sun Minerals; and M/s. K V Minerals. It is logical to expect that if at all these parties had any expertise in the field of sale of iron ore etc., or if at all they were actually engaging .in the business of commission agents by interacting with other entities in the field, they could have been in a position to earn such a commission from other parties also. However , while they did not receive any further commission from any fourth party, no evidence could be produced to even substantiate that they had any net work or infrastructure to make any efforts for earning further commission in that line of business.
5.4 As regards the contention of the assessee that if the assessee firm could have done its business in Bellary while having its head office in Hyderabad, why the commission agents could not have done so, the DR submitted that even in the statements recorded from the agents, no details or evidence regarding their net work or infrastructure or set up for working as commission agents could be submitted. The said agents could not furnish any details of a single expenditure incurred by them towards this. Accordingly, it indeed remains questionable as to how the alleged commission agents, without having any set up in Bellary and without incurring any expenditure for the same, could have claimed organising any parties for the assessee.
5.5 As regards the contention that as a general practice, the DR submitted that no agreements are entered in this line of business or the contention that the rate of commission paid by the assessee was below the general market rate, it is clear that in the assessee's case the very claim of genuineness of commission expenditure could not be substantiated. Similarly, the argument that such expenditure was inevitable in the first year business of the firm is also devoid of any merit, as in the absence of any documentary 18 ITA Nos. 2116 & 2117/Hyd/2011 M/s. Sun Minerals & Anr.
======================== evidence or even circumstances justifying the claim of commission payments, the very claim of payment is not tenable. Accordingly, the case laws cited by the representative of the assessee also do not come to the rescue of the assessee.
5.6 The DR submitted that in the final analysis, it is clear that in the instant case neither the assessee nor the alleged agents could produce any documentary evidence to substantiate the scope of services expected to be rendered, nor could they furnish any evidence to establish that any such services were actually rendered. Besides, the parties could not put forth any secondary or circumstantial evidence also in support of such claim. The assessee therefore, grossly failed to discharge the onus of establishing its claim with evidence. Accordingly, it can be said that the facts and circumstances of the assessee's case are not such as can establish that the claimed expenditure of commission had been laid out or expended wholly and exclusively for the purpose of the assessee's business during the year. Therefore, such 'commission' or any part thereof cannot be said as deductible u/s. 37 of the Act.
6. We have heard both the parties and perused the material on record. It is settled law that if the assessee claimed deduction of any expenditure the burden of proof is on the assessee to establish that such expenditure was incurred wholly and exclusively for the purpose of assessee's business. In the present case it is an admitted fact that there is no written agreement between the assessee and the recipients of the 5 commission agents. Even if there is no written agreement, the assessee could claim deduction for the expenses provided if it is established with documentary and cogent evidence that such expenditure was incurred for the purpose of its business. Now in the assessee's case there is even an iota of evidence regarding render of any services to the assessee 19 ITA Nos. 2116 & 2117/Hyd/2011 M/s. Sun Minerals & Anr.
======================== to procure business to the assessee. The assessee could not even produce any correspondence between the parties which could have served as a contemporaneous circumstantial evidence. The assessee is not able to correlate the commission payments with reference to the sale. Though the assessee made a claim that the commission agents collectively introduced the parties there is no correspondence between the commission agents. As seen from paras 6.2 and 6.3 of the CIT(A)'s order, the statements given by the assessee are contradictory in nature. The parties herein have not given any evidence about the names of persons who were recommended by them.
7. Being so, it cannot be presumed that the parties whom the assessee made any sales were through these parties to whom the commission has been paid. As there is no evidence whatsoever to support the claim of the assessee that these impugned recipients of the payments rendered any service for which commission has been paid when they did not even know them. Therefore, it cannot be said that the assessee has discharged the onus to prove that the commission was paid wholly and exclusively for the purpose of assessee's business. The assessee relied on various judgements which cannot be applied to the assessee's case as these judgements are on their own facts. The question whether the assessee has established that the expenditure was incurred wholly and exclusively for the purpose of business is essentially a question of fact to be decided on merit of each case.
8. From the statements of the so called commission agents further inferences can be drawn that none of the commission agents is able to provide definitive list of customers, quantity of sales effected, and working of commission. In fact M/s. R K Marketing Services claims that it did not know any customers (leave alone introducing them). It states that it was only ensuring 20 ITA Nos. 2116 & 2117/Hyd/2011 M/s. Sun Minerals & Anr.
======================== quality of ore loaded into trucks. The agents received commission only from three parties namely, M/s. Sun lnfraa. M/s. Sun Minerals and M/s. K V Minerals and no one else despite the fact that Bellary is a big centre for iron ore trading. These agents did not provide similar services to any other parties despite boasting their expertise in iron ore trading. All the agents appear to be disparate and the assessee claim, that all its customers were introduced by all these agents, does not appear to be a reliable statement. The most glaring inconsistency appears in the statement of Smt. B. Bagya Lakshmi, who states that she introduced even M/s. K V Minerals.
9. There was no agreement between the assessee and the commission agents and there was no document on the basis of which it could be said that the commission was due and payable. As it has been already pointed out, even the agreements do not bind the Assessing Officer from enquiring into deductibility of commission. In this case there are no agreements and also there was no evidence of any correspondence or any personal meetings between the assessee and the commission agents to suggest that there was any relationship on the basis of which the commission agents procured customers for the assessee for which they were entitled to receive commission. The understanding between the parties was an oral understanding and it was doubtful that such an oral understanding could have been arrived at without any longstanding relationship having been established between the assessee and the commission agents involving such huge amounts of money over a period of time. Further, the assessee is unable to furnish the details of customers introduced by each agent and also the exact working of commission payment made to each of the agents. Mere payment of commission through account payee cheque after deduction of TDS does not absolve the assessee from 21 ITA Nos. 2116 & 2117/Hyd/2011 M/s. Sun Minerals & Anr.
======================== discharging its burden with regard to proving business purpose of the payments.
10. In the absence of any credible evidence for making such payments, we are inclined to disallow the same.
11. Reliance is placed on the decision of the Tribunal in the case of Davinder Singh v. ACIT (104 ITD 325) (ASR), CIT vs. Calcutta Agency Ltd. (19 ITR 191) (SC), Lakshmiratan Cotton Mills Co. Ltd. vs. CIT (73 ITR 634) (SC) and L.H. Sugar Factory & Oil Mills (P) Ltd. vs. CIT (19 CTR) (SC) 185 : (1980) 125 ITR 293 (SC).
12. Reliance is also placed on the decision of Delhi Bench of the ITAT in the case of Roger Enterprises (P) Ltd. vs. DCIT (88 ITD 95) held as under;
"51. Examining this matter from another angle, we feel that the onus of proof that the commission paid was genuine was on the assessee. The question that further arises is as to whether the assessee has discharged the onus and if yes then how. According to the assessee he has discharged the onus by proving that the payment has been made by cheque. Not only this, the name of the person to whom the payment by cheque is made is disclosed and therefore the payment is genuine.
52. This argument so raised by the assessee sounded well at the threshold but when we examined it further we found that it cannot hold water. Merely because payment is made by cheque may in some cases persuade the authorities to hold the payment to be genuine but in this case the situation is totally reverse as the person/party to whom the payment by cheque is alleged to have been made has his own story to tell and which story is believed by us. There is a complete black out on the nature of services rendered. There is no material placed on record nor has our attention been drawn to any material which would demonstrate without doubt the nature of services rendered by these three companies. Keeping in mind these facts, we feel that the assessee has miserably failed to demonstrate the services rendered and has thus failed to discharge the onus.22 ITA Nos. 2116 & 2117/Hyd/2011
M/s. Sun Minerals & Anr.
========================
53. As the assessee has failed to discharge the onus, he is not entitled to the claim of commission paid."
13. In the result, appeals of the assessees' are dismissed.
Order pronounced in the open court on 18th May, 2012.
Sd/- Sd/-
(ASHA VIJAYARAGHAVAN) (CHANDRA POOJARI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Hyderabad, dated the 18th May, 2012
Copy forwarded to:
1. M/s. Sun Infraa, c/o. M/s. P.R. Datla & Co., Chartered Accountants, 6-3-788/A/9, First Floor, Durga Nagar, Ameerpet, Hyderabad-500 016.
2. M/s. Sun Minerals, c/o. M/s. P.R. Datla & Co., Chartered Accountants, 6-3-788/A/9, First Floor, Durga Nagar, Ameerpet, Hyderabad-500 016.
2. The Addl. Commissioner of Income-tax, Range-6, Hyderabad.
3. The CIT(A)-IV, Hyderabad.
4. The CIT-III, Hyderabad
5. The DR - B Bench, ITAT, Hyderabad tprao