Income Tax Appellate Tribunal - Mumbai
Dilip S. Podar, Mumbai vs Department Of Income Tax on 19 December, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES " D ", MUMBAI
BEFORE SHRI D. MANMOHAN, V. P. AND SHRI SANJAY ARORA, A.M.
ITA No. 6853/Mum/2011
Assessment Year: 2008-09
Dy. C.I.T. - 17(2), Dilip S. Podar
Room No. 217, Podar House, 2nd floor,
2nd Floor, Piramal Chambers, R. A. Kidwai Road,
Parel, Mumbai-12 Wadala (West),
Vs.
Mumbai-400 031
[ PAN: AAAPP 6107 B ]
(Appellant) (Respondent)
Appellant by : Shri O. P. Meena
Respondent by : Shri Pradip Kedia
Date of hearing : 19.12.2012
Date of Pronouncement : 15.03.2013
ORDER
Per Sanjay Arora, A.M. :
This is an appeal by the Revenue agitating the Order by the Commissioner of Income Tax (Appeals)-29, Mumbai ('CIT(A)' for short) dated 14.07.2011, 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.) 2008-09, vide order dated 20.12.2010.
2.1 The Revenue's appeal raises two issues, which we shall take up in seriatim. The first is in relation to disallowance of premium paid under Keyman Insurance in the sum of Rs.19,21,149/- , taken by the assessee as an employer in respect of life of his son, Shri Gaurav Podar. The basis of the A.O.'s denial for its claim was that Shri Gaurav Podar 2 ITA No. 6853/Mum/2011 Dy. CIT vs. Dilip S. Podar (A.Y. 2008-09) was paid only a nominal salary of Rs.1.17 lakhs during the relevant year. He was, thus, only one of the employees and, rather, it was not wrong to infer that the said salary had been paid only to make the payment of Keyman Insurance eligible for deduction. In other words, the said payment was considered by him as not for the purposes of assessee's business.
2.2 The assessee found favour with the ld. CIT(A) in appeal, on the basis that the relevant test is not the quantum of remuneration being allowed to the concerned employee, but whether he is an important person to the business, so that it would stand to be adversely impacted in the event of his death. In any case, the policy had been surrendered by the insurer, Shri Gaurav Podar, in a later year, offering the assignment amount received to tax for the said year.
3. Before us, while the ld. DR relied on the order by the A.O., the ld. AR would submit that the salary paid to Mr. Gaurav Podar, though meagre in absolute terms, constitutes above 20% of the total salary bill, which amounts to Rs.5.75 lakhs. It could, thus, be incorrect and misleading to be guided by the amount of salary taken in isolation. The assessee is in a business of intending agent and manufactures representative as well as a trader in industrial products and believes in paying only a nominal amount as salary to his staff, whom he remunerates by way of commission, so that it is linked to performance. The same cannot be faulted with, or the adverse inference be drawn there from in the least. In fact, the Hon'ble Jurisdictional High Court as in the case of CIT vs. B. N. Exports (2010) 323 ITR 178 (Bom.) even clarified that there may not be a contract of employment between the subscriber/payer and the person on whose life the policy has been taken, adverting to the circular issued by the CBDT in the matter.
4. We have heard the parties, and perused the material on record, giving a careful consideration to the matter.
3 ITA No. 6853/Mum/2011Dy. CIT vs. Dilip S. Podar (A.Y. 2008-09) 4.1 The Revenue has proceeded on a wrong premise, questioning the decision of the assessee as a business man in taking out the policy on the life of Shri Gaurav Podar, his son, who is claimed to be an important person for the assessee's business. To what extent he is so, is a decision which only a businessman can take, and for which he may factor or take into account the future developments or business plans, and the Revenue can not step into his shoes (refer: Sassoon J. David & Co. (P.) Ltd. v. CIT (1979) 118 ITR 261 (SC)). Shri Gaurav Podar is not a stranger to the assessee's business, and the mere look would convince one of his cruciality of the business, inasmuch as he is contributing in no small measure to the assessee's business, having been paid about 30% of the total commission of Rs.60.29 lakhs allowed by the assessee and his salary also accounting for substantial part of salary bill. Rather, what would also be relevant is his past experience in the firm, to which we find no reference. In fact, the Keyman Insurance is provided by the insurance company only after satisfying itself in this regard, i.e., of the concerned employee being a key-man for the business. As such, the Revenue's concerns and doubts in the matter; the matter being factual, would be largely misplaced.
4.2 So, however, what could not to be ascertained, and on which we surprisingly find no finding/observation, is as to who holds the insurable interest in the said policy taken by the assessee. This becomes all the more relevant as the policy has been assigned to the insurer subsequently. In fact this, i.e., the assignment of the policy in favour of the insured not much later in time, changes the whole complexion of the case. If the policy was taken as a measure to protect his business interest by providing for a financial insurance against the financial injury or loss that could or is expected to inure on the death of the keyman, the assessee would hold the insurable interest therein, rather than assigning the same in favour of the insured. Further, even if it were to be subsequently assigned, considering that the facts and circumstances change with time, what is the transfer consideration for the assignment; the property in the policy vesting with the assignor-assessee. If there is no such consideration, the assessee becomes only a financier, paying for an employee's policy, so that the expenditure assumes the nature of 4 ITA No. 6853/Mum/2011 Dy. CIT vs. Dilip S. Podar (A.Y. 2008-09) a salary expenditure, deductible u/s.37(1), rather than u/s.36(1)(ib). Further, it would also attract section 40A(2)(a); the beneficiary being a close relative, specified u/s.40A(2)(b). Rather, as we see, there is no reason to exclude payments u/s.36(1)(ib) from the purview of section 40A(2)(a). Further, this lends credence to the A.O.'s charge of the policy on the son being taken by the assessee for tax arbitrage, and not as a measure of commercial expediency. The separate and expanding business of the insured, which would only engage him no less, if not primarily, also comes to fore as a contradicting and controverting fact to the claim of the concerned employee as being a keyman for the assessee's business whose commitment to and interest in the assessee's business is not questionable. In fact, the said business being in the same trade, he is, in effect, a competitor to the assessee's business. When it is said that the decisions of a business man are to be respected by the Revenue, what is implied are his bona fide decisions in his capacity as a businessman, so that they are untainted with an other consideration or motive, except that of business.
4.3 The question, therefore, that would arise for consideration is whether the offer to tax the amount received by the insured on the surrender of policy in a subsequent year u/s.17(3) of the Act, would or ought to be a relevant consideration in accepting the assessee's claim. A tax advantage is a prime ingredient for application of section 40A(2)(a), which may not obtain provided the tax receipt for a different year is also to be taken into account. At the same time, the surrender may not have occurred, with the assignee-insured preferring to continue to service the policy on his own, so that the question of whether this is a relevant consideration, as assumed by the ld.CIT(A), and without confronting this fact to the A.O. , would require consideration and adjudication.
4.4 Under the given circumstances, we only consider it fit and proper that the matter is restored back to the file of the A.O. for a consideration afresh, and a decision on merits in accordance with law, issuing definite findings of fact, and after allowing proper opportunity to the assessee to state its case. We decide accordingly.
5 ITA No. 6853/Mum/2011Dy. CIT vs. Dilip S. Podar (A.Y. 2008-09) 5.1 The second issue arising in the instant appeal is per the Revenue's ground no. 3 and concerns the deletion of the disallowance in the sum of Rs.24.31 lakhs, paid to 10 different persons, listed at 4.1 of the impugned order, out of the assessee's total claim of commission payments at Rs.60.29 lakhs. The A.O. summoned all these persons u/s.131 of the Act, reproducing the relevant parts of the statements of those who appeared before him (five in number) in the assessment order. On the basis thereof, he found that none of them was able to establish the fact that of having rendered services to the assessee for earning the commission, which is a primary condition, and for which only the payment thereto has been ostensibly made, drawing upon the decision by the hon'ble apex court in the case of Lachminarayan Madan Lal vs. CIT [1972] 86 ITR 439 (SC), wherein it clarified that the mere existence of the agreement would be itself of non consequence, and not bind the A.O. 5.2 The ld. CIT(A), in appeal, again examined the relevant facts, to find that it could not be said that the payees had not rendered the services. Aggrieved the Revenue is in appeal, alleging the ld. CIT(A) to have erred in allowing the commission of Rs.2,41,063/- u/s.37(1) of the Act.
6. We have heard the parties, and perused the material on record.
6.1 The basis of the A.O.'s disallowance is that the factum of rendering of services could not be established by the assessee. The first appellate authority, however, was of the view that the appellant had furnished enough evidence for allowability of these expenses. Further, the reasons advanced by the A.O. in disallowing the expenses were found by him as not convincing or valid enough to warrant denial of deduction, as the assessee had advanced suitable expenditure to meet the same.
6.2 Now, the onus to prove its return and, therefore, the expenses being claimed thereby, is only on the assessee. It is only when the assessee had furnished evidence, discharging the burden of proof that lies on it, that the same (onus) shifts to the Revenue 6 ITA No. 6853/Mum/2011 Dy. CIT vs. Dilip S. Podar (A.Y. 2008-09) in case it wishes to repudiate the same. The law in the matter is trite and the case law on the same, legion, for which we may refer to the decisions in the case of CIT vs. Calcutta Agency Ltd. (1951) 19 ITR 191 (SC) and CIT vs. Imperial Chemical Industries (India) (P.) Ltd. (1969) 74 ITR 17 (SC), and a recent decision in the case of Munjal Sales Corporation vs. CIT (2008) 298 ITR 298 (SC), besides the two decisions in the context of commission expenses itself, viz., Lakshmiratan Cotton Mills Co. Ltd. [1969] 73 ITR 634 (SC) and Lachminarayan Madan Lal (supra), being relied upon by the A.O. 6.3 The law in the matter having been set out, we may proceed to examine the facts of the case. The only evidence the assessee has in its possession is the debit notes raised on it by the payee-agents, apart from the fact that the payment had been made by cheque and duly responded by them (payees). Further, the five payees, who were summoned u/s.131, have on examination on oath by the A.O. confirmed the payments, and claimed to have duly returned the same for the relevant year. As would be apparent from the decisions cited, the fact of payment itself does not lead to establishment of having incurred an expenditure for the purpose of business. As such, the payment of commission being by cheque and of the payees confirming the receipt thereof, which is only consequential, by itself cannot constitute evidence as to the fact of rendering the services, which is the sub- stratum of the Revenue's case. Apart from the absence of any positive findings to this effect, the A.O. found as a matter of fact that none of the payees could furnish the exact location of the offices of the buyers; the names of the persons who were contacted for the purpose, even though the orders were finalised only after product negotiations over time, and this despite the fact that the A.O. had recorded all the names of such persons in its reply to the show cause notice (refer para 7.8 of the assessment order).
6.4 All this propels us to examine the facts mere closely; the first appellate authority having found the assessee to have adduced enough evidence to establish the rendering of services. Toward this, we find that the none of the payees had defined the scope of the services to be rendered, describing it in broad and vague terms, as 'booking of orders' 7 ITA No. 6853/Mum/2011 Dy. CIT vs. Dilip S. Podar (A.Y. 2008-09) and 'support services', either on examination or in the replies u/s.133(6). If not by way of an agreement binding the two parties, at least a memo of understanding, providing for the contours of the responsibilities and obligations cast, is definitely expected. The firms to which the supplies are made are mostly reputed concerns, with strong and well laid down procedures for procurement. This is more so considering that the products are specialised products. They would, thus, not normally entertain people except those authorised for the purpose and, then, would formalise and documents each stage of progression, yielding sufficient material to exhibit the involvement of the sub-agents. This is, as this would only eliminate or at least reduce the scope of any confusion, and bring out on record the various conditions agreed upon between them, including the technical specifications of the products. This is even otherwise imperative where the decision making involves persons from different disciplines, viz. purchase, production, finance, accounts, etc., at the end of the vendee-buyer and the assessee and its agent on the other. In fact, the buyer would be simultaneously, or in parallel, also negotiating with other vendors, so that documentation becomes integral to the procurement process, while here we find not even a iota of such evidence, with the A.O.'s specific question on examination, i.e., of any documents in the form of correspondences, etc. being replied uniformly in the negative. In fact, the most simple format of procurement involves obtaining a quotation, which includes technical specifications and warranties from the proposed suppliers. Even this elementary documentation, which also has not been provided, would bear out the particulars of the person/s representing the assessee, who has been duly authorised by it for the purpose. Finally, all these processes culminate in the issue of the supply order, which again would necessarily bear out the particulars of the assessee's representative/agent. This is also crucial from the stand point of the sub-agent, as it is only on that basis that it could claim commission from the assessee. In fact, there would be documentation with regard to the subsequent follow up on the order as well, and whereat again the sub-agent would be kept in loop by both the assessee and the vendee, besides being in the interest of sub-agent himself, as commission to it would arise only on the order being successfully executed. In the instant case, we find the details of the 8 ITA No. 6853/Mum/2011 Dy. CIT vs. Dilip S. Podar (A.Y. 2008-09) services stated to be provided by the sub-agent are again furnished for the first time only before the first appellate authority, and by the assessee himself (refer para 4.2 of the impugned order). The same, as well as the time frame involved, again only bear out what is stated hereinabove; both leading to an irresistible inference of the need for existence of suitable/adequate documentation, while the instant case is de hors any such, including the copies of the relevant purchase orders exhibiting of the orders being procured by the sub- agents. The products being specialized, only persons adequately experienced and competent to market it could do so, while we find that almost all the agents are dealing with the assessee for the first time. As is common knowledge, most companies employ technical personnel to market such products in a competitive environment. No material to establish their credentials has been placed on record at any stage. We have already noted the answers by the sub-agents to be vague, and replies (to notice u/s.133(6)) as incomplete, emphasizing in the main to confirming the payment, and of having returned it, as well as of the deduction of tax thereon.
6.5 Coming, next, to the argument of the payment being by cheque and having been both confirmed and returned by the payees, i.e., on its merits. We find that hardly to be of significance in the facts and circumstances of the case. No agreement/MOU either between the assessee and the sub-agent or between the buyer and the assessee, whom the sub-agent represents, indicating his role in the transaction, or even any collateral material to this effect, has been brought on record. In fact, where such an agreement/document exists, the assessing authority (as well as the appellate authority), including the Tribunal as the final fact finding authority, is not bound by of such agreement and can go behind the same to unveil the truth [refer: CIT v. Durga Prasad More (1971) 82 ITR 540 (SC) and Sumati Dayal v. CIT (1995) 214 ITR 801 (SC)]. Why, we wonder, even a simple letter from the buyer/s, stating of the concerned agent as having represented the assessee being involved in the finalization and formalizing the order could not be produced? Though the same may not be said to be conclusive, but then it would definitely be a third party evidence, which would be so only on the strength of some material, and it could be 9 ITA No. 6853/Mum/2011 Dy. CIT vs. Dilip S. Podar (A.Y. 2008-09) said that some material has been adduced by the assessee in this regard. The fact of 'payment' is as such by itself of no consequence, i.e., unless shown to be in relation to the services rendered, which are, thus, completely un-evidenced. The confirmation of the payees, consequently, would also be of little moment, considering that the Revenue views it as a collusive transaction. The returning or even the assessment of the income in the hands of the wrong person again is no bar for it to be brought to tax in the hands of the right person. This is as there is no estoppel against law. In view of the foregoing, we do not find much merit in the reversal of the findings by the A.O. by the ld. CIT(A) and, reversing the same, confirm the impugned disallowance of the assessee's claim for commission expenditure in the sum of Rs.24,31,063/-. We decide accordingly.
7. In the result, the appeal by the Revenue is partly allowed and partly allowed for statistical purposes.
Order pronounced on this15th day of March, 2013.
Sd/- - Sd/-
( D. MANMOHAN ) ( SANJAY ARORA)
VICE PRESIDENT ACCOUNTANT MEMBER
MUMBAI, Dated : 15.03.2013
Copy forwarded to:
1. The Appellant
2. The Respondent
3. The C.I.T. concerned
4. CIT (A)
5. The DR, D - Bench, ITAT, Mumbai
BY ORDER
ASSISTANT REGISTRAR
ITAT, Mumbai Benches, Mumbai
Roshani