Income Tax Appellate Tribunal - Indore
Ghanshyamdas & Co., Indore vs Assessee on 12 February, 2008
IN THE INCOME TAX APPELLATE TRIBUNAL
INDORE BENCH : INDORE
BEFORE SHRI JOGINDER SINGH, JUDICIAL MEMBER
AND SHRI R.C.SHARMA, ACCOUNTANT MEMBER
PAN NO. : AAAFG-9479-K
I.T.A.Nos.560, 512, 513/Ind/2009 & 178/Ind/2010
A.Ys.: 2004-05, 2005-06, 2006-07 & 2007-08
M/s.Ghanshyamdas & Co., Dy. CIT, 4(1)/Addl. CIT,
34, Siyaganj, vs Range 4,
Indore. Indore.
(Assessee) (Respondent)
PAN NO. : AAAFG-9479-K
I.T.A.Nos.42/Ind/2010, 561 & 562/Ind/2009 and
251/Ind/2010
A.Ys.: 2004-05, 2005-06, 2006-07 & 2007-08
ACIT, M/s.Ghanshyam Das &
Co.,
4(1), vs 34, Siyaganj,
Indore. Indore
(Assessee) (Respondent)
PAN NO. :AADFS7696F
I.T.A.No. 179/Ind/2010
A.Ys.: 2004-05
M/s. Sangam Tea Centre, ACIT,
34, Siyaganj, vs Circle 4(1),
Indore. Indore.
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(Assessee) (Respondent)
PAN NO. :AADFS7696F
I.T.A.No. 252/Ind/2010
A.Ys.: 2004-05
ACIT, M/s. Sangam Tea Centre,
Circle 4(1), vs 34, Siyaganj,
Indore. Indore.
(Assessee) (Respondent)
Assessee by : S/Shri P.N. Dixit &
Shri . S. S. Sheetal,
Adv.
Respondent by : Shri S.K. Anand, CIT
DR
ORDER
PER R. C. SHARMA, A.M.
These are the cross appeals filed by the assessee and Revenue against the order of CIT(A) for the assessment years 2004-05 to 2007-08 in the matter of order passed u/s 143(3) of the Income-tax Act, 1961.
2. Rival contentions have been heard and records perused.
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3. Facts in brief are that the assessee is a partnership firm deriving income from wholesale trading of tea. It deals in tea, partly of Goodricke make, which is purchased in packed form the consignee agent of M/s. Sangam Tea Centre, Indore, which is a sister concern of the assessee firm. Further, loose tea is purchased from the above agent as also from other parties which is packed and marketed under the trade mark 'Camel'. During the course of scrutiny assessment, the AO made addition of Rs. 51,83,185/- towards undisclosed commission income and also disallowed following expenses :-
Sales promotion expenses:
(i) (a) Distribution of Cello Products Rs.20,00,000
b) Distribution of Gold Coins Rs.89,65,000
c) Distribution of glassware
(i) M/s. Mahavir & Co. Rs.78,73,842
(ii) M/s. Kamini Industries Rs.43,23,701 Rs.2,31,62,543/-
(ii) Rs.95,19,975 out of packing expenses claimed by the assessee at Rs.1,81,03,850.
(iii) Shortage of goods of Rs.59,88,050. 3
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(iv) Advertisement expenses to the tune of Rs.30,00,000.
(v) Brokerage expenses to the following persons:
(a) Shri Mannubhai Shah Rs.49,020
(b) Shri Sanjay Jaiswal Rs.49,020 Rs.98,040
(vi) Depreciation on machinery to the tine of Rs.2,08,985.
4. Contention of the assessee before the CIT(A) was that proper opportunity was not given by the Assessing Officer to substantiate the claim of various expenditure. Accordingly, the additional evidences were filed under rule 46A(1) of Income-tax Rules, 1962. Simultaneously, the assessee also filed the written submissions challenging the various additions/disallowances made by the AO. The matter was remanded to the AO u/s 250(4) of the I.T. Act, 1961 to verify the facts as submitted by the assessee in the written submissions and in the application made U/R 46A of Rules. In reply to same, a remand report was submitted by the AO per letter dated 12.2.2008 in which the AO has not 4
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raised any objections to the request of the assessee for admitting the Additional Evidences, but incorporated detailed finding after making inquiry u/s 133(6) in respect of various expenses disallowed by the Assessing Officer and income on account of commission added by him. After considering the remand report, the disallowances so made by the Assessing Officer was partly deleted by the ld. CIT(A). Addition made on account of alleged commission income from Goodrick Group was also deleted by the ld. CIT(A). Both assessee and Revenue are in appeal before us. Following grounds have been taken in the assessment year 2004-05, grounds taken in the other years are also common.
1) On the facts and in the circumstances of the case , the Hon'ble CIT(A)II, Indore, erred -
(a) in confirming the addition of Rs. 6 lakhs out of the addition of Rs. 89,65,000/- made by the Assessing Officer on account of gold 5
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coins under the head "Sales Promotion Expenses."
(b) in confirming the addition of Rs. 20.50 lakhs being 25% of the net claim of Rs.
81,49,972/- out of the addition of Rs.
1,21,97,542/- made by the Assessing
Officer on account of purchases of
Glassware from M/s. Kamini Industries and M/s. Mahavir & Co. under the head "Sales Promotion Expenses".
2) On the facts and in the circumstances of the case , the Hon'ble CIT(A), Indore, erred in upholding the addition of Rs.
14,15,000/- out of the addition of Rs.
95,19,975/- made to the returned income, by adopting the rate of labour charges at Rs. 0.80 per kg. as against actually paid @ 6
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Rs. 2.00/1.50 per kg. in Packing Expenses A/c.
3) On the facts and in the circumstances of the case , the Hon'ble CIT(A), Indore, erred in upholding the addition of Rs. 9,87,000/-
out of the addition of Rs. 59,88,050/- made to the returned income on account of claim of shortage, by accepting the shortage at 1.5 % as against the actual claim of the assessee @ 1.803 %.
4) On the facts and in the circumstances of the case , the Hon'ble CIT(A), Indore, erred in upholding the addition of Rs. 3,50,000/- out of the addition of Rs. 30 lakhs made to the returned income on account of claim of advertisement expense.
5) The appellate order being not based on facts is illegal & wrong.
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5. We have considered the rival contentions, carefully gone through the orders of lower authorities. From the record, we found that during the course of scrutiny assessment, the assessee was asked to furnish a copy of the agreement between the assessee firm and M/s. Goodrick Group Limited, or between Sangam Tea Centre or M/s. Goodrick Group Limited. Agreement so furnished was dated 1.4.2005 and was operated for the period May 2002 to 31.3.2003. This agreement was between the Goodrick Group Ltd on the one hand and one Shri Ghanshyam Ludhyani, Shri Mohanlal Ludhyani and Smt Draupadidevi Ludhyani, who were partners of M/s. Ghyanshyam & Co. The area assigned to them was of entire state of Madhya Pradesh and Chhattisgarh. The AO thereafter referred to various clauses of this agreement and finally held that since the agreement was between the Goodrick Group Ltd and the assessee firm, the 8
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commission earned thereon was not disclosed and hence he estimated the same at Rs. 51,83,185/- which was added to the income of the assessee. In the course of scrutiny assessment the AO observed that it is necessary to examine the nature of business. It is seen that the assessee has shown purchase of tea of brand name Goodricke from M/s Sangam Tea Center, Indore which is a sister concern of the assessee. M/s. Sangam Tea Center is stated to be consignee agent on behalf M/s. Gooddricke Group Ltd. getting 2% commission on sales made by the agent and are shown accordingly in their return of income. The assessee has not disclosed any commission in its return of income. The assessee was requested to furnish a copy of agreement, if any, between assessee and M/s. Gooddrick group Ltd. or between M/s. Sangam Tea Center and Goodricke Group Ltd. for earning 2% agency commission on sales of Goodricke brand tea. The assessee kept on avoiding to furnish copy of any agreement for the financial year 2003- 04 relevant to assessment year 2004-05. However, finally he 9
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furnished a copy of agreement dated 1.4.2005 which was operative for the period May, 2002 to 31.03.2003. First thing which is supporting is that this agreement is written after a period of two years and the said agreement is between "Goodricke group Ltd." on one hand and 1) Shri Ghanshyam Ludhyani, Shri Mohanlal Ludhyani and Smt. Draupadidevi Ludhyanmi who are partners of M/s Ghanshyam and Co. 4, Fafati Line, Raipur who will be collectively and severally called the "consignee " or "Agent". The area assigned to them is entire states of Madhya Pradesh and Chattisgrah. The aforesaid firm is the Branch of M/s Ghanshyamdas and Co., Indore.
6. The relevant clauses of the said agreement was reproduced by the Assessing Officer in his order, which reads as under :-
"(3) the consignee is entitled to be reimbursed all expenses incurred by them on behalf of the Principal in respect of fright, Insurance, storage clearing charges, handing charges and any other incidental charges in 10
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respect of teas dispatched to them. In case the teas are damaged or lost in transit for any reason whatsoever including acts of God and the consignee has not covered such loss by adequate insurance policy and or principal suffers any loss, the consignee under takes to keep the principal adequately indemnified on this account.
4) The principal shall pay to the consignee a consolidated commission including delcredere commission at the rate of 2% of the sale value of the teas so supplied to the consignee. The sale value will be arrived at by deducting all expenses, cost, freight, storage, clearing and insurance charges.
5) The consignee shall be entitled to deduct all charges mentioned in clause 3 (as well as the commission of 2% mentioned in clause 4 out of the sale proceeds and shall remit/pay at Calcutta office of the principal, the balance to the principal following each sale. The consignee shall also be bound to render to the 11
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principal true account of sale in respect of each and every transaction.
6) The Consignee shall keep proper account of stock and shall render to the principal a monthly statement of stock and sale transaction showing the goods received by them from the principal during the previous month ending with the last day of the month in question according to English Calendar. The statement should also show the stock of goods in the hand on the date of the return.
16) this agreement is made to run for the period commencing from 3rd May 2002 to 31-3-2003 liable however to be terminated earlier ipsofacto in the event of bankruptcy or dissolution of the Consignee at the expiry of a notice of a fortnight served or delivered to the consignee at their address aforementioned or sent by registered post to them at the address in case of default or breach committed by '" consignee in respect of any terms of this agreement. The consignee may also 12
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terminate this agreement, after giving one months notice to the Principal should the Principal fail to comply with or commit a breach of terms of this agreement. The consignee shall always carry out principal's instruction up to the full satisfaction of the Principal, failing which the Agreement shall be terminated by the Principal by giving a fortnight notice. The agreement, if not renewed, shall continue to be operative on the same terms and conditions by any of parties giving 2 months notice in writing, till such time fresh Agreement is signed. "
On going through clause 4 of the agreement, the AO observed that the commission on sales is payable only to M/s Ghanshyamdas & Co. and not to M/s Sangam Tea Center. The assessee has not furnished any other agreement for showing that the commission is to be received by M/s Sangam Tea Center. In view of the facts discussed in preceding 13
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paras the AO held that the 2% commission is payable to M/s Sangam Tea Center.
On going through clause 16 of the agreement it is clear that since the
agreement is not renewed till date of this assessment order, therefore, in view of the provision made in clause 16, the agreement shall continue to be in operation on the same terms and conditions for the subsequent financial years also relevant to A Y 2004-05, 2005-06, 2006-07 and 2007-
08. In view of the above facts the AO held that commission @ 2% on sales of Goodrick tea shall be payable to the assessee and accordingly the same is liable to be added to the total income of the assessee. The AO further observed that the assessee has maintained quantitative details of 14
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purchases but the same are not maintained Quality wise or brand wise. The rate of tea purchased from M/s Goodrick Group Ltd. is the costliest and randing from Rs. 107/, Rs. 109/ Rs. 140/ and Rs. 145/. Thus the average rate of the tea purchased is Rs. 125.25 per kg. The assessee has purchased total 2069136 kg of Goodrick tea. Applying the above rate per kg the total addition on this account was worked out by AO at Rs. 51,83,185/- (2069136 x 125.25 x 2%). "
7. By the impugned order, the ld. CIT(A) deleted the addition made on account of commission after having following observations :-
"The issue is considered. The relevant copy of the agreement filed by the assessee and relied upon by the AO for making this 15
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addition has also been examined. Further, it is noted that the assessee claimed of trading of tea of Goodrick brand and hence the profit earned thereon has been declared in the income for the year under consideration and hence the addition made by the AO on estimating the commission which would have been earned by the assessee on sale of tea of Goodrick brand is not logical and that amounts to double addition, one in the form of profit on trading of tea of 'Goodrick' brand earned and declared and another addition of the estimated commission made by the AO. It is also worth mentioning that the commission earned on sale of tea of Goodrick brand was declared by M/s. Sangam Tea centre which was also accepted by the Department. This fact has been acknowledged by the Assessing Officer in his remand report and also in the 16
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assessment of the next year of the assessee made by JCIT, Range 4, Indore. In view of the facts discussed above, the addition made by the Assessing Officer on this account cannot be sustained and is hereby deleted.
8. With regard to the addition made on account of commission alleged to be earned form M/s. Goodricke Group Limited, we found that the assessee company operated as a wholesaler of tea in M.P. and Chhattisgarh and is selling "Goodrick" brand of tea and "Camel" brand of tea. Goodrick tea was purchased from Sangam Tea Centre whereas Camel is the assessee's own brand. For Chhatisgarh region, the assessee firm is the consignee agent of M/s. Goodrick Group Ltd., Kolkata.. As per the remand report dated 12.2.2008 the AO has commented that the commission from Goodrick Group Ltd. Kolkatta has already been shown in the return of income filed by M/s. Ghanshyamdas & Co.(for Chhatisgarh Region) and M/s. Sangam Tea Centre (for M.P. Region). Thus, the addition made on account of estimation of Commission income 17
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in the hands of the assessee firm was not justified. We also found that the assessee's case for AY 05-06 has been completed in the month of December 2007 by the JCIT Range- 4, Indore and after all scrutiny & verifications, no such addition/estimations have been made in the hands of assessee firm on account of any commission income from Goodricke Group. Accordingly, we do not find any infirmity in the order of the CIT(A) for deleting addition on account of alleged commission, which neither accrued nor received by the assessee during the year under consideration.
9. In the course of assessment, addition of Rs. 2,31,62,543/- was made by the Assessing Officer on account of expenses incurred on gifts to its customers. The CIT(A) deleted the same.
10. We have carefully considered the rival contentions and found that the assessee incurred expenses on purchase of various gifts as per the scheme carried out to encourage the sale of its products. A sum of Rs. 3,55,00,467/- was reimbursed partly by the Goodrick India Limited and by the various distributors. The assessee finally claimed a sum of Rs. 18
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1,71,14,9602/- on this account. The AO however made an addition of Rs. 2,31,62,543/-. The assessee as such challenged the addition made by the Assessing Officer on this account at Rs. 2,31,62,543/- as against the expenses claimed on this account was Rs. 1,71,14,972/-. The plea of the assessee was correct as disallowance cannot be more than the expenses claimed on that account. Accordingly, we do not find any infirmity in the order of CIT(A) in directing the AO to consider for disallowance the net expenditure claimed by the assessee in its profit and loss account.
11. With regard to disallowance of expenditure incurred on distribution of gold coins, we found that in the remand report, the AO has confirmed receipt of gold coins by all the parties except M/s. Ramesh Kumar Babulal, Damoh . The ld. CIT(A) deleted the addition except in respect of gold coins given to M/s. Ramesh Kumar Babulal. Both the assessee and Revenue are in appeal before us. Contention of the ld. Authorized Representative was that due to dispute with the said party, no confirmation was sent by it. We found that no where purchases of gold coins and incurring of expenditure is 19
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under doubt, merely because the party, who has received the gold coins under sales promotion scheme did not furnish the confirmation due to the dispute existing between the parties, the same cannot be disallowed light heartedly. For this purpose, the AO is required to verify the sale transaction to these parties to ascertain whether the gold coins given to this party was as per the sales effected to this party and if the AO found that in terms of scheme, the assessee has also undertaken required sales to this party and accounted for income on account of such sales, the corresponding expenditure incurred for giving the gold coins as per scheme cannot be disallowed. In the interest of justice, we modify the order of CIT(A) and restore the issue with regard to disallowance of expenses of gold coins attributable to M/s. Ramesh Kumar Babulal to the file of AO for deciding afresh in terms of our above observations. We direct accordingly.
12. With regard to addition on account of distribution of sale of products amounting to Rs. 20 lakhs, we found that the assessee had claimed purchase of product of Cello World for Rs.20 lakhs for distribution as per the scheme launched 20
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during the year. The AO disallowed this claim of expenditure on the ground that no record could be produced by the assessee for distribution of cello products and stock left. However, we found that no expenditure on this account was claimed in the books of accounts and the same was reimbursed by Goodrick India Limited to the assessee firm and hence no addition is called for on this account in the hands of the assessee firm. Accordingly, CIT(A) was justified in his action for deleting disallowance in the hands of the assessee firm.
13. The assessee has incurred expenditure of Rs. 89,20,000/- on distribution of gold coins to its customers, same was disallowed by the Assessing Officer after having the following observations :-
"The scheme of gold coins is again a matter of surprise at this juncture. The scheme is claimed as that of Goodrick on the other hand there is no trace of any reimbursement from the said company on this count or for that matter from the Consignee 21
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agent. The assessee claimed purchase of bullion to the extent of Rs. 89,20,000/- on the dates ranging from 12.3.2004 to 30.3.2004 surprisingly delivered at Ahmedabad. This bullion has been purchased from Ravi Bullion, Indore having a branch at Ahmedabad. It is not intelligible as to how the assessee could get the bullion converted into coins after receiving the same at Ahmedabad on the above dates and finally disburse the entire lot to all nooks and corners of Madhya Pradesh and Chhattisgarh. It is humanly not possible for every dealer to collect the coins at the last day of the financial year from the doorstep of the assessee and it is next to impossible that the assessee's representative could rush to all parts of the state on the last day of the year and disburse the items on the same day. It may be pointed out that the distance range from few kilometers to more than 1000 KM. By no mode, such journey is possible in a short period. The assessee has not produced a 22
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single evidence to show that how the either bullion or coins were transported from Ahmedabad to Indore. Above all there is no evidence of disbursement of gold coins, which was requisitioned repeatedly on difference date so hearing during assessment proceedings. Thus the story of disbursement of gold coins has turned out to be a concocted one, hence the same is brushed aside.
6. Without prejudice to the above, another aspect in the above context is the receipt part. There is no trace of any receipt under the above head from Goodrick except the surplus of Rs. 36,19,469/- left from out of Rs. 85,37,149/- worth credit note referred in the preceding paras. If the expenditure is the liability of the company, the entire expenditure should be debited to the said company but nothing of this sort has been done by the assessee casting undue charge on assessee's P&L account. Theory of probability clearly suggest that there is no 23
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reliability as regards disbursement from the angle of time factor, mechanical process of conversion of bullion into coins and above all business viability per prudent businessmen attitude. I have analyzed the trading part associated with the scheme as claimed. The scheme was launched for a limited period of November and December 2003. Analysis of the trade for this period indicate the cost of Goodricke product per kg at Rs. 130/- to Rs. 132/- as against which, sale price works out to just Rs. 2/- to Rs. 3/- per kg above the cost of purchase. Thus the profit on 24 kg. pack will be hardly Rs. 50/- to Rs. 60/-, with a further charge of administrative expenditure thereon. No prudent businessman will afford to incur a loss of more than Rs. 550/- by way of disbursement of a gold coins worth Rs. 600/- on the above piece of trade. In this connection, the assessee has not furnished any explanation. Accordingly, since the assessee has not 24
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produced any documentary evidence either regarding transportation of bullion I coins nor has produced any evidence to show that it has distributed the gold coins as per the scheme, I am left with no alternative except to consider that no such expenditure was incurred in this account for the purposes of business, the expenditure is not acceptable in the light of observation made in the preceding paras. As such, the expenditure booked under the above head is disallowed as under:
Expenditure on purchase of bullion Rs.89,20,000/-
Add: Making charges Rs. 45,000/-
Total Rs.89,65,000/-
14. We have considered the rival contentions and find from record that the assessee had also incurred expenditure of Rs. 89,20,000/- on distribution of gold coins to the distributors as per the scheme. The bullion was purchased from 25
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Ahmedabad and the gold coins was got converted at Indore. The AO therefore raised doubt that how the assessee could get the bullion converted into coins after receiving the same at Ahmedabad. Since the bullion was purchased and was got converted into gold coins between 12.3.04 to 30.3.04 and hence it was impossible for every dealer to get the coins on the last day of the financial year from the assessee. It was also not possible to distribute the gold coins even by the representative of the assessee. The AO further observed that nothing was reimbursed by the Goodrick Co., though the entire expenditure should be debited to the said company. The AO further worked out the viability of distribution of gold coins in para 7 of his order and finally disallowed the entire expenditure of Rs.89,65,000/- claimed on this account.
15. As the assessee did not get full opportunity to substantiate its claim, he called a remand report form the AO. 26
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The remand report of the AO with reference to this issue has confirmed all the parties, except one namely, Ramesh Kumar Babulal Damoh, has confirmed receipt of gold coins aggregating 13837 coins. The CIT(A) called for the counter comments from the assessee, which are as under :-
"The Assessing Officer has issued Notices u/s 133(6) of the I.T. Act 1961 and almost all the parties to whom the notices have been issued have confirmed the receipt of the Sales Promotion items except the party mentioned at S.No. 1 on page 3 of the Remand Report (Ramesh Kumar Babulal, Damoh) to whom 109 coins have been given. Confirmation in the said case could not be received because there is a dispute going on with the said party regarding recovery of amount for which Suit has been filed in the court in Damoh. Necessary Evidences in this matter are enclosed herewith. Thus in the circumstances when all the other parties have confirmed the similar 27
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transactions,. this may also be treated as confirmed."
4.3.3.4 The AO mainly disallowed the expenditure claimed on purchase of bullion and to get them converted into gold coins for distribution among the distributors as per the scheme on the following grounds:
a. The entire expenses should have been borne by M/s. Goodrick Ltd..
b. No justification to purchase the bullion from Ahmedabad ;and c. It was not feasible to distribute the same in the year itself.
16. After considering the remand report and assessee's comments thereon, the CIT(A) restricted the disallowance to the extent of Rs. 6 lakhs. Following was his observation :-
"The issue is considered. In view of the fact that distribution of gold coin was confirmed by the Distributor in response to notice issued by the AO u/s. 133(6) of the Act, except in one case for which the, assessee submitted that due to dispute going on with that party in the Civil Court for recovery of 28
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amount and hence that party did not respond to the letter of the AO and also enclosed relevant papers in support of this contention. The addition made by the AO on this account cannot be sustained in its entirety because neither the factum of acquisition of gold coins in pursuance to the scheme plotted by the assessee can be disputed nor the distribution of the same. The assessee as per Paper book on page 263 and 264 has furnished details of distribution of gold coins numbering 14964 coins. However, the AO In his remand report has referred to confirmation to the extent of 13,837 coins only. Further, as per bills for purchase of gold coins appearing in paper book as 250-252, the assessee purchased gold weighing 5 kg @ Rs. 588/-, other 5 kg @ Rs. 590/- and another 5 kg @ Rs. 606/- per gm. Thus, against total purchase of 15 kg of gold, the gold coins of 1 gm would be 15,000 coins 29
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against which the AO has reported
confirmation about the distribution to the
extent of 13837 against 14,964 claimed to be distribution by the assessee (Paper Book page 263-264). Hence, on overall consideration of facts and circumstances of the case, the assessee's claim is allowed to the extent of distribution of gold coins for 14 kg of gold with making charges and disallowance is confirmed to the extent of Rs.6 Lakhs."
17. We have considered the rival contentions and the remand report sent by the Assessing Officer and assessee's comments thereon.
18. With regard to disallowance of expenditure incurred on distribution of gold coins, we found that in the remand report, the AO has confirmed receipt of gold coins by all the parties except M/s. Ramesh Kumar Babulal, Damoh . The ld. CIT(A) deleted the addition except in respect of gold coins given to M/s. Ramesh Kumar Babulal. Both the assessee and Revenue are in appeal before us. Contention of the ld. 30
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Authorized Representative was that due to dispute with the said party, no confirmation was sent by it. We found that no where purchases of gold coins and incurring of expenditure is under doubt, merely because the party, who has received the gold coins under sales promotion scheme did not furnish the confirmation due to the dispute existing between the parties, the same cannot be disallowed light heartedly. For this purpose, the AO is required to verify the sale transaction to these parties to ascertain whether the gold coins given to this party was as per the sales effected to this party and if the AO found that in terms of scheme, the assessee has also undertaken required sales to this party and accounted for income on account of such sales, the corresponding expenditure incurred for giving the gold coins as per scheme cannot be disallowed. In the interest of justice, we modify the order of CIT(A) and restore the issue with regard to disallowance of expenses of gold coins attributable to M/s. Ramesh Kumar Babulal to the file of AO for deciding afresh in terms of our above observations. We direct accordingly. 31
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19. 4.3.4. Next issue to be considered out of disallowance of sales promotion expenses made by AO, is the claim of expenses on distribution of glassware. The assessee has acquired glassware from two parties which are as under:
M/s. Mahaveer & Co Rs.78,73,842
M/s. Kamini Ind. Rs. 43,23,701
Rs.l,21,97,543
20. The assessee as per details submitted
regarding reimbursement of sales promotion
expenses had, got reimbursement of part of
expenses and the net claim on this count after considering the reimbursement amounted to Rs. 81,49,972.
21. Assessee's submission on this issue before the CIT(A) was as under:
"The scheme of Glass items was launched whereby the customers were to be given Glass Items as per the quantity of tea purchased by them. The relevant scheme is given at PB- . The Ld. A.O 32
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doubted the purchase of Glass items purchased from two concerns ;_
a) M/s Mahavir & Co. 78,73,842/-
b) M/s Kamini Industries 43,23,701/-
The Ld. A.O therefore disallowed the said purchases amounting to RS.1,21,97,543/-.
The total amount expended for purchase of Glassware was Rs.2,62,70,310/- and on the other hand Rs. 2,69,63,318/- was recovered/reimbursed from/by M/s Goodrick Group Limited and other Dealers. Thus there can be no disallowance under this head and the addition made thus deserves to be deleted.
On merits the Ld. A.O disallowed the same on the following Grounds:
a) The burden of this expenditure should go to Goodricke and not on the Assessee. The Ld. A.O has 33
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on page 5 in point 4 at second line stated as follows:-
The scheme is claimed as that of Goodricke. On the other hand there is no trace of any reimbursement from the said company on this count or for that matter from the consignee agent.
The assessee submits that these findings of the Ld. A.O are baseless and seems to be based merely on bias that the Assessee is a consignee agent of M/s Goodricke Group getting commission. The Ld. A.O did not look into the aspect that the assessee is a distributor of tea and bears the Risk & return of the business. The Assessee himself also ,deals in its own Brand. Promotion of Sales are therefore important for the assessee.
b) The Ld.A.O on page 6 para 8 has discussed the reasons for disallowing the expenditure relating to glassware. The Ld.A.O. states that the letters sent to the two parties were 34
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returned back and the two parties turned to be non-entity. The Assessee could not therefore prove the Expenditure. The bills for the purchases are placed at PB 266-293. Both the parties are registered with the Sales Tax Department. The Sales Tax Registration Nos. are :-
FD 153517 dtd. 12/08/1998 FD 0171855 dtd. 19/01/2003 The Payments to those parties have been made through Account Payee Demand Drafts and thus there exists no doubt that these parties were in existence when the Assessee made purchases. The A. O. himself inquired from Bank whereof it was informed that the payment was made through Demand Drafts in their accounts. The A.O. did not bring this evidence on record in the Assessment Order. Simply because the parties turned hostile, no addition could be made in the hands of the Assessee. The AO did not ask the concerned AO at Firozabad to conduct inquiry in their case. Reliance was placed in the case of Smt. Bhavna Thanawala v/s ITO, (2007)15 SOT 377 (Mum) 35
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wherein it was held that the onus to prove purchases as bogus is on A.O. Once the Assessee has discharged its burden, non-furnishing of confirmation simply because the said concern was not found available at the given address, A.O is not entitled to treat purchases as bogus when payment is made by Account Payee Cheque and party is registered with Sales Tax Department.
c) The Ld. A.O. doubted the transportation of goods to the Assessee.
In respect of the transportation, the bills itself mention the details of delivery of goods. The goods were received on F.O.R.basis. The Truck No.is mentioned. Since the Assessee was not required to pay any charges, the Assessee was not required to pay any transportation. The terms and conditions of delivery vary from party to party and does not remain the same for all the parties. The other parties at Firozabad were requiring the Assessee to pay the freight and thus the Assessee negotiated that the transportation be paid by them. Thus the transportation was paid by them. Since the party has stopped doing business subsequently out of its own 36
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reason, no addition can be made on Assessee who made genuine purchases and distributed the same to the dealers. The subsequent delivery of goods to the dealers itself goes to prove the very fact that the goods were received by the Assessee.
d) The Ld A.O. further doubted the disbursement of the Glass items to the dealers.
As already stated, the glass items were to be delivered as per the scheme. During Assessment Proceedings, all the books along with vouchers, the various Sale bills indicated the eligibility of glass items to the dealers were produced before the A.O.The Ld AO however, required the Assessee to establish the delivery of the glass items to the dealers. The Assessee furnished party wise list of the glass items delivered. However, since the glass items were delivered at the cost of dealers and not at the cost of the Assessee, compilation of billwise delivery along with LRs would have required time, for which the Ld. AO denied and since the details were time consuming, details for one month have been filed (PB 312 - 415). Details for the remaining period would be furnished if your honour so desires. 37
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However, the partwise details for the complete year has been prepared and filed at PB 416-541. The parties to whom the goods were delivered have also confirmed that the goods were delivered to them. Confirmation of some of the parties is filed on record (PB 123 to 194)
e) The Ld. AO stated that the Last Invoice/Journal Entry of the above parties is dtd. 31/03/2004.
The Assessee submits that the Assessee is following mercantile system of accounting. Under this system the liability is booked as and when accrued. The liability to deliver glass items accrues as and when the tea is invoiced and the eligibility of dealers arises. The receipt of glass items and the delivery of the same is for discharge of the liablity. It is submitted that only an amount of Rs. 4,90,778/- of M/s Mahaveer & Co. (PB 265) and of Rs. 458946/- of M/s Kamini Industries (PB 282) was accounted for on 31/03/2004. The goods received on 31/03/2004 may have been delivered subsequently. The same was treated as expenditure and not as liability because the liability had already accrued when the tea was sold. It was only the 38
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execution of the existing liability since the expenditure was incurred and thus the same is to be allowed under mercantile system of accounting. In the case of Addl. CIT Vis Rajasthan Spinning & Weaving Mills Ltd. (2004) 137 Taxman 367 (Raj.) though related to contribution made to a fund but in Principle it has been held that If the Expense is motivated by his own Interest and there is nexus between the expenses incurred and his business Interest, he has spent the money for his own business exclusively & wholly. It was further held that it is well established that any contribution made by the assessee which is directly connected or related with the carrying on of the assessee's business or which results in benefit to the assessee's business has to be regarded as an allowable deduction u/s 37 (1) of the I.T. Act In the case of CIT vs. Associated Electrical Agencies (2004) 135 Taxman 12 / 266 ITR 63 (Mad.) it has been held that payments made, having regard to the commercial expediency, need not necessarily have their origin in 39
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contractual obligations. If an assessee who carries on a business finds that it is commercially expedient to incur certain expenditure directly or indirectly, it would be open to such an assessee to do so notwithstanding the fact that a formal Deed does not precede the incurring of such expenditure. It was further held that while it was no doubt true that there was no legal compulsion on the assessee to agree to pay the sums, THERE WAS ALSO NO LEGAL BAR ON THEIR AGREEING TO PAY HIGHER PRICES IF THEY FELT IT WAS IN THEIR LONG TERM INTEREST. It was also open for them to agree to bear a part of Advertising & marketing costs, as THESE COSTS WERE INCURRED WITH A VIEW TO ENLARGE THE MARKET AND TO IMPROVE THE SALES. In the case of Ajay Singh Deol v/s JCIT (2004) 91 ITD 196 (Mum.) it was held that as long as expenses are incurred wholly & exclusively for the purposes of earning the income from business or profession, merely because some of the expenses are incurred voluntarily those expenses do not cease to be deductible in nature.
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22. We have considered rival contentions and remand report sent by the Assessing Officer vis-à-vis assessee's submission before CIT(A).
23. With regard to disallowance of expenditure incurred on glass ware in respect of payments made to M/s. Mahavir & Co. and M/s. Kamini Industries, we found that till the AO has sent the remand report, these parties have not confirmed the transactions with the assessee. However, the CIT(A) has observed that confirmations were sent by both the parties to the AO and copies whereof were also endorsed to the assessee, which has been produced by the assessee in the course of appellate proceedings before the CIT(A). However, the CIT(A) has confirmed the addition to the extent of 25% of expenditure incurred on account of sales promotion both in respect of distribution of gold coins and glass ware items. By observing that net expenditure incurred by the assessee after giving set off of expenditure reimbursed by M/s. Goodrick, the net claim of expenditure works out at Rs. 81.50 lakhs. Thus, 25 % of this net amount was disallowed by the ld. CIT(A) amounting to Rs. 20.38 lakhs, out of which Rs. 6 lakhs was attributable for 41
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gold coins and the remaining amount of Rs. 20.50 lakhs pertains to glasswares. Keeping in view the finding recorded by the ld. CIT(A) that both these parties from whom purchases of glasswares were claimed have sent their confirmations and copy of which was also furnished to the CIT(A) during course of appellate proceedings and also keeping in view that these were not examined by the Assessing Officer, we restore the disallowance so confirmed by the ld. CIT(A) to the extent of Rs. 20.56 lakhs to the file of the AO. The AO is directed to have a fresh examination of the confirmations so sent by these parties. Since these confirmations could not be sent to the AO even during course of remand proceedings, the AO has no occasion to examine the same to verify their genuineness. In the interest of justice, we restore entire purchase made from both these parties i.e. M/s. Mahavir and Co. and M/s. Kamini Industries to the file of the AO for examining them afresh and re-decide the issue with regard to disallowance of Rs. 20.50 lakhs as retained by the ld. CIT(A). We direct accordingly. 42
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24. Next issue relates to disallowance of packing expenses. The AO has examined this issue in detail on page 7 to 10 of the assessment order. Crux of his findings are that the assessee has claimed packing expenses at Rs.1.81 crores against Rs.1.01 crores in the immediately preceding F.Y., whereas, increase in turnover was hardly Rs.1 crore as turnover during the year stood at Rs.39.88 crores against turnover of Rs. 38.80 crores in the preceding year. The AO has also recorded finding to the effect that packing charges being payment for labour was being made to M/ s. Concorde Tea Packaging Co., (in short M/s. Concorde), a sister concern, attracting provisions of section 40A(2)(b) of the Act to whom packing machineries were supplied by the assessee for which no-lease rent was being charged and such 43
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packing activities were carried out by M/s. Concorde in the godown that belonged to M/ s. Concorde but for which godown rent was being paid by the assessee. The AO thus, held that assessee was paying more than the market rate to M/ s. Concorde, charges which was being paid at Rs. 1.50 per kg. He also held that packing expenses at Rs. I0.70 per kg was very excessive and unreasonable as according to him the market surveys indicated that packing expenditure excluding packing per kg., would hardly cost 80 ps. per kg and material used for assorted size is about Rs.3.25 per kg and the total expenditure would thus be Rs.4 per kg approximately. The AO with these findings has allowed the packing expenses at Rs.5 per kg resulting in disallowance of the amount of Rs. 95,19,975/-.
25. Before the CIT(A), the assessee has filed detailed written submissions wherein he has emphasized that AO has misappreciated the facts 44
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of the assessee's case as he has made wrong comparison for the purpose of packing expenses with the gross turnover of the two years. It was clarified and emphasized that packing expenses were incurred only for assessee's own brand of tea i.e. the 'Camel Brand' and the quantity of tea sold during immediately preceding year stood at 127926S kg compared to the quantity packed during the year at IS1S2S1 kg and thus there was nearly 45% increase in the quantity of packed tea sold during the year where the AO has wrongly considered the increase in turnover of Rs.l crore vis-a-vis last year which works out to 2.5% only. It was further emphasized that the packing expenses claimed in the preceding year at Rs. l.0l crores for 12.79 lakh kg. sold would give the packing cost per kg. at about Rs.8/- per kg., whereas during the year under consideration, it increased to approximately Rs. 10 per kg on quantity sold at 18.02 lakh kgs (Paper book page 253). It was 45
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highlighted that AO has adopted the arbitrary figure of Rs. 4 per kg being packing charges without giving the comparative rates and packing material and packing charges would vary according the quality of packing material used and unless the packing materials used in the comparable cases are similar, there would be no purpose in comparing two cases. In course of discussion, it was also emphasized that in the competitive market to sell the product of assessee's own brand vis-a-vis brand of multinationals, the assessee had to necessarily incur higher expenses on packaging using the best material available so as to attract customers. It was also emphasized that in the remand report, the AO has confirmed entire packaging expenses incurred to the extent of Rs.1,50,95,349/-. The assessee has also relied on the comparative figures given for packing expenses (labour charges) incurred by other tea packers at Kolkata.
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26. In the facts of the record, the AO's finding to the extent the payment of packaging expenses being paid to M/ s. Concorde and M/ s. Tiwari Tea Packaging at Rs.1.50 / Rs.2 per kg were excessive, has definite merit as being discussed hereinafter. But it has to be first of all noted that the AO's finding in the matter of disallowance of huge packaging expenses at Rs.95.20 lakhs are entirely vitiated by wrong appreciation of facts. First of all, he has failed to take into consideration, the most important fact that packing expenses would be incurred only for assessee's own brand where the quantity of packaged tea sold during the year vis- a-vis earlier year increased to 45% and thus he misdirected himself by considering the increase in gross turnover at Rs.1 crore and which has resulted in total distortion of the findings arrived. Secondly, the AO has referred to the market survey but he has nowhere mentioned the name of the agency and its credentials who had conducted 47
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such market survey and hence in absence of the credential of the market agency, no reliance can be placed on such figure of Rs. 4 per kg, more so when the packing material used by the assessee is. not established to be comparable or similar to the other cases. In the assessee's case, it is an admitted position of record that labour expenses were Rs.1.50 / Rs.2 per kg and the rest amount of Rs. 8.50 app. per kg. was spent for packing materials used. Subsequently, AO in the remand report has confirmed the procurement of entire packing material including the labour payments made.
27. A broad analysis of packaging expenses incurred, gives the following picture:
i. Expenses on laminate pouch Rs.116.06Iakhs ii. Jute Bag Rs. 29.101akhs iii. Plastic Bag Rs. 7.961akhs iv. Labour payments Rs. 27.81 lakhs Rs.180.95 lakhs 48
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28. The basic material used in packaging is that of laminate pouch; and if the total amount spent on the same at Rs.116.06 lakhs is divided by the actual quantity of tea packed during the year i.e. 17.17 lakhs kgs(paper book pg.546), it gives the cost per kg at Rs.6.25 (app.) per kg only and Rs.1.5/ Rs.2 per kg are spent for labour charges and the balance amount of app. Rs.2 per kg is incurred on jute bags and plastic bags i.e. bulk packaging for supply to these tea packs in large quantities to customers. It appears that while considering the cost of packing of Rs.4 per kg., the AO altogether lost sight of the subsequent expenses incurred for bulk packaging.
29. By the impugned order, the ld. CIT(A) had allowed packing expenses at Rs. 0.80 ps. Per kg. Following was the observation of CIT(A) :-
" In view of the above analysis and 49
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looking at the past history and the subsequent assessment of the assessee's own case where the procurement of packing material has never been in dispute, the AO's action in disallowing the huge amount based on an arbitrary packing rate of Rs.5 per kg cannot be sustained. It is, however, true that the assessee has not been able to establish his claim about packing charges being paid to sister concern, M/s. Concorde and M/s. Tiwari Tea Packaging @ Rs.1.5 and Rs.2 per kg., with even the machinery owned by the assessee and the premises for which rent was separately being paid were used to M/s. Concorde for this packing purposes and thus the transactions also are not at arm's length. No material has been brought on record by the assessee to establish that packing 50
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expenses were being incurred by other tea packers @ Rs.1.5 / Rs.2 per kg when even the entire material and assessee's own premises were being used for the purpose as paid to M/s. Concorde and M/s. Tiwari Tea Packaging. This issue has also been examined in necessary detail in appeal order passed in assessee's own case for A.Y. 2005-06."
30. After considering all the aspects, the CIT(A) held that packing charges of Rs. 0.80 per kg. is reasonable, in so far as all packing materials were supplied by the assessee and only labour charges were paid by sister concern M/s. Concord Tea Packing Limited. Being aggrieved by above order of CIT(A) both assessee and Revenue are in appeal before us.
31. With regard to the disallowance of packing expenses of Rs. 95,19,975/-, on the plea of lower expenditure having 51
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been incurred in the immediately preceding financial year, we found that packing was got done by the assessee with its sister concern. All the packing materials were supplied by the assessee firm and the payment made to the sister concern M/s. Concord Tea Packaging Limited was only in respect of the labour charges put for undertaking the packing which was @ Rs.1.50 per kg. After having detailed observation, the ld. CIT(A) found that expenditure of 0.80 ps. per kg. of the only tea packed during the year was a reasonable expenditure, which can be allowed. Reasonableness of the expenditure so incurred on account of labour charges for packing at 0.80 ps. per kg. was not controverted by the Department by brining any positive material on record, we, therefore, uphold the action of the ld. CIT(A) for retaining disallowances to the extent of Rs. 14.50 lakhs on account of such packing expenses. Accordingly, action of CIT(A) is confirmed.
32. The matter of disallowance of shortage of goods at Rs. 59,88,050/- as per finding recorded by the Assessing Officer on page 10 of the assessment order. The CIT(A) observed that this issue was 52
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examined in detail in the case of the assessee for A.Y. 2005-06 and 2006-07 in appeal no. IT-187, 118/07-08 dated 11.9.2009, wherein detailed findings have been recorded as under:-
"4.4 Now coming to the last issue of shortage claimed, it is seen that the assessee furnished detailed explanation to the AO explaining the nature of assessee's business and the various stages in the entire business process i.e. transportation, loading, unloading and packing in small packets and large packets which resulted in shortage claimed. The AO rejected such contentions by simply stating that the arguments advanced by the assessee were not supported by any evidence although simultaneously admitting that there would be some shortage in a business where the process involves re-packing, but merely for want of primary evidence rejected the entire claim of 53
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shortage at 61260 kgs resulting in addition of Rs.59,23,202/- @Rs.90.16 per kg., the average rate of purchases supplied by the assessee. It was also observed by the AO that this issue was subjective and is not proved by the assessee by any factual cross-verification and hence this amount was to be disallowed.
4.4.1 The assessee has furnished a statement of shortages from A.Y. 2002-03 to 2006-07 which is reproduced hereunder:
A.Y. Sales (in kg.) Shortage % shortage Packing in kg. 2002-03 27,57,758 41,027 1.487 18,02,381 2003-04 36,84,991 57,859 1.570 17,16,775 2004-05 40,48,163 73,025 1.803 18,42,620 2005-06 40,04,224 61,260 1.529% 18,42,620 2006-07 40,74,739 61,058 1.498% 18,75,553 4.4.2 It was also emphasized that upto A.Y. 2003- 04 even in regular assessment completed u/s. l43(3), the shortages claimed were allowed fully. The AO's approach in the year under consideration 54
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is found to be self- contradictory and lacks conviction. On one hand, the AO notes that there is bound to be some shortage involved in a business involving re-packing processes, but no finding have been recorded by the AO to the effect that he shortages claimed were excessive or unreasonable either looking to the past history of the assessee's case or with reference to the comparable case(s) or standard laid down by any statutory/ trade body or the usual practice prevalent in the line of trade. On analysis of the statement of shortage claimed, such figures being verifiable from the Audit report, it is seen that broadly the claim of shortages has been 1.5% approximately for most of the years except in respect of A.Y. 2004-05, where it has been claimed at 1.8 %. In the year under consideration, the shortages claimed worked out to 1.529% which appears to be reasonable considering the past history of the case as well the various stages 55
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involved in the nature of assessee's business in particular, the process of re-packing from large packs to smaller packs of different sizes, as small as to 250 gms. Thus, the disallowance made by the AO on this count is found to be totally unwarranted and is accordingly directed to be deleted. "
33. We have considered the rival contentions and orders of lower authorities on this issue.
34. With regard to the claim of shortage of goods, we found that keeping in view the assessee's nature of business, which consisted of transportation, loading, unloading and packing in small packets and large packets, essentially envisage shortage of goods. However, the AO has rejected the assessee's argument by stating that the same is not supported by any evidence. However, we found that the AO himself has agreed that in the business where process involves repacking, some shortage is bound to occur. After giving detailed finding with regard to the process and the shortage actually claimed 56
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in the earlier years, the ld. CIT(A) reached to the finding that shortage to the extent of 1.5 % was justified, accordingly, he upheld the disallowance to the extent of 1.5 % as against claim of the assessee to the extent of 1.80 % during the year under consideration. We do not find any infirmity in the conclusion of the CIT(A) for allowing shortage at 1.5 %.
35. Last issue relates to disallowance of advertisement expenses of Rs. 30.00 lakhs. The CIT(A) called for remand report from AO.
36. The AO in his remand report dated 12.2.08 after issue of notice u/s.133(6) and considering he compliance made by different parties, has noted that out of 23 parties / items pertaining to Advertisement expenses, no confirmation were received in respect of the following parties / items:
a.Basra Advertisement 16,800
b.Gram Sanskriti 49,000
c.Novem Packaging 57,616
d.Glowsing Board Light 3,093
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37. The CIT(A) called for counter comments from the assessee. The assessee in the counter- comments on the issue has submitted as under:
"The Assessing Officer has issued Notices u/s 133(6) of the I.T.Act 1961 and allmost all the parties to whom the notices have been issued have confirmed the expenses incurred on Advertisement except the parties mentioned at S.No. 7, 10, 15 & 23 as stated by the A.D. Regarding Party mentioned at S. No. 7 (Gram Sanskrati) and party mentioned at S.No. 15 (Novum Packers) it is to be brought on record that the said parties had complied with to the Notices u/s 133(6) issued to them by the A.D. and had accordingly filed the confirmation in the Office of the A.O.on 25/01/2008 RECEIPTED COPIES OF WHICH ARE OBTAINED AND ARE ENCLOSED HEREWITH for ready reference.
The confirmations filed in the office might have been misplaced.
In the case of party mentioned at S.No. 10 (Mass Media) it is submitted that the office of the said party is closed and is thus not traceable.
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In the case of party mentioned at S.No. 23 ( Glow Shine Board Light) it is humbly submitted that this is not the name of any party but it is the head of expenditure and the said expenses was incurred for making of a Glow Shine Board.
Thus looking to the totality of the circumstances & evidences and facts brought on record these expenses are submitted to be kindly considered as confirmed as and the addition deserves to be deleted.
Similarly in the case of M/s Bakliwal Traders, Indore summons u/s 131 have been issued by the Assessing Officer and in the Statement recorded has confirmed the Transactions with the Assessee Firm. The Assessee Firm has already furnished all the details including copy of A/c of M/s Bakliwal Traders, Copy of Purchase Bills and even the payments have been made by A/c Payee Cheques. The disallowances was made due to reasons that M/s. Bakliwal Traders have shown Rs.9,84,549/- as due from the Assessee Firm as on 31.3.2004 as against Rs. 19,84,549/- shown by the Assessee Firm.
The Assessee submits that the account of M/s. Bakliwal Traders 59
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was settled and all the payments to them or to parties on their direction have been made by Account Payee Cheques. The copy of A/cs already enclosed reveal that the total payments have been made by A/c Payee cheques in the name of M/s Bakliwal Traders & Infinity Industries Pvt. Ltd. on behalf of M/s Bakliwal Traders and have been cleared in their Bank A/c with Dena Bank, Sitlamata Branch,Indore and ICICI Bank, M.G.Road Br. Indore respectively. Thus it is impressed upon Your Honour that if all the payments have been made by A/c Payee Cheques by the Assessee Firm and the other party has realised those Cheques through their Bank a/cs, there is no mistake on the part of the Assessee Firm and the a/cs and Balance-Sheet of the Assessee Firm are true & correct. May it further be appreciated that during the course of Assessment Proceedings for A.Yr. 2005-06, summons were issued to M/s. Bakliwal Traders, Indore. The said party was asked to reconcile the Balances as shown by the Assessee Firm and as shown by him. IN THE SAID STATEMENT THE SAID PERSON ACCEPTED THAT THE CASH CREDITED IN HIS BOOKS OF A/Cs IN THE NAME OF MIS GHANSHYAMDAS & CO. WAS PROBABLY NOT GIVEN BY THE ASSESSEE FIRM AND HE COULD NOT REMEMBER THE SOURCE OF THE SAID CASH CREDITED IN HIS BOOKS~THE SAID PARTY EVEN FAILED TO PRODUCE HIS BOOKS OF A/Cs WHEREAS THE 60
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ASSESSEE FIRM HAD PRODUCED ALL THE DETAILS & EVIDENCES TO PROVE THE BALANCE AS SHOWN. Thus the burden which was on the Assessee Firm to prove the credit has been discharged by the Assessee Firm. Copy of the Statement recorded during the course of Assessment Proceedings for A.Yr.2005-06 is enclosed herewith which speaks for itself.
The Assessee Firm also relies on the comments of the Assessing Officer made in the Assessment Order passed for A.Yr. 05-06 which reads as under (Page 4 of 14) ;_ " However there is no primary evidence produced by M/s.
Bakliwal Traders that the amount reflected in the A/c of M/s Bakliwal Traders is correct. The Assessee on the other hand, has given Bank Statements showing the Balance as appearing in its Books of A/cs have been cleared in the following year and the account eventually is squared up. All the payments made by the Assessee are by cheque and confirmed by Mr. Ramesh Kumar Bakliwal,Prop. of M/s Bakliwal Traders in the Statement recorded on 31/12/2007.
Further Mr. Ramesh Kumar Bakliwal says :_ "As the issue relates to three years 61
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back he could not recollect all the details. "
And the Assessing Officer Comments :_ " However M/s Bakliwal Traders have not produced any evidence proving that the Balance shown by it is correct."
In the circumstances the Balance as shown in the Assessee Books deserves to be accepted and the addition may kindly be deleted. "
38. By the impugned order, the CIT(A) confirmed disallowance of Rs. 3.50 lakhs after having the following observations :
"The AO in making huge disallowance of Rs. 30 lakhs out of total amount claimed for Advertisement expenses at Rs. 67.74 lakhs has mainly banked on the fact that a transaction with 62
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M/s. Bakliwal Traders were not genuine and cannot be treated as transaction entered for business purposes. So also, he has expressed his views about non-verifiability of amount spent on Advertisement expenses incurred by the assessee and in respect of parties from whom no confirmation has been received by the Assessing Officer. The assessee has furnished necessary clarification. The gross amount in respect of which the AO failed to obtained confirmation do not exceed Rs.1.5 lakhs. It was further emphasized in the course of appeal hearing that expenses on Advertisement was a must in the line of the assessee's business looking to the highly competitive nature of business to keep its own brand in public knowledge and domain. It was also emphasized that similar amount of advertisement expenses have been incurred in the later years also on which the assessee has further paid substantial amount by way of Fringe 63
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Benefit Tax. Thus, on overall consideration of facts and circumstances of the case, disallowance of Rs.3.5 lakhs i.e. 5% of the total amount of expenses claimed, is confirmed keeping in view the findings of the AO in the matter of lack of verifiability of certain expenses. The assessee would be entitled to consequential relief. "
39. We have considered the rival contentions.
40. The last issue relates to disallowance of expenditure of Rs. 30 lakhs on account of advertisement. We found that the AO has doubted the genuineness of the expenditure so incurred as the assessee could not furnish the confirmation of the expenditure so incurred, to the AO at the time of original assessment. However, during remand proceedings, the AO issued notice u/s 133(6) to all the parties, who were paid advertisement expenses during the year under consideration. We find that as per the chart appended at page 5 of the remand report the parties mentioned at serial nos. 7,10, 15 and 23 had not filed the confirmation. However, in respect of 64
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parties mentioned at serial no. 16 M/s. Palkiwalla Traders, the AO stated that Shri Manoj Kumar S/o Shri Ramesh Chandra attended the AO in compliance to summon issued u/s 131, wherein he admitted in his statement on oath that his firm has made transaction with the assessee firm. However, the plea was that its records were burnt in fire, therefore, the same were not available with him. Keeping in view totality of facts and circumstances, vis-à-vis the findings recorded by the ld. CIT(A) and the observations made by the Assessing Officer in his remand report, we restore this matter back to the file of AO with regard to the expenditure incurred and paid to M/s. Gram Sanskriti, M/s. Mass Media, M/s. Navon Packers, M/s. Palkiwalla Traders and M/s. Glow Sign Board Light Branch. The AO is directed to examine these parties afresh and decide the issue of disallowance of expenditure incurred on account of payment to these parties afresh. We direct accordingly.
41. The next ground of appeal is directed against disallowance of brokerage expenses at Rs.98040/- paid to Shri Manubhai Shah and Shri Sanjay Agrawal. The AO has recorded his finding on 65
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the issue at page 13 of the assessment order. This disallowance came to be made by the AO for two reasons. First, being that the assessee failed to give justification for such payment and contribution and efforts made by these persons/parties cannot be explained and further the Inspector deputed by AO to make inquiries reported to the AO that such persons were not doing the business of brokerage and such amount remained outstanding till the date of passing of assessment order.
A.Y. 2005-06
42. With regard to the assessment year 2005-06, in terms of our above observation in assessment year 2004-05, we direct the AO, to allow shortage at 1.5 % as discussed hereinabove.
43. The grounds taken by the Revenue with regard to deletion of addition of Rs. 65,451/- on account of difference in the account of Palkiwalla Traders, keeping in to view our observation in the assessment year 2004-05, where matter 66
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was restored to the file of the AO for examining afresh the payment made to M/s. Palkiwalla Traders, the ground no.2 of the Revenue's appeal with regard to deletion of addition of Rs. 65,451/- is also restored to the file of the AO for deciding afresh.
A.Y. 2006-07
44. In the assessment year 2006-07, both assessee and Revenue have taken the ground with regard to disallowance of claim of shortage. In terms of our above observation in the assessment year 2004-05, we direct the AO to allow the shortage to the extent of 1.5 % as discussed hereinabove.
45. We found that during this year, there was survey at assessee's business premises on 6.1.2006. During the course of survey, inventory of stock and cash was taken. The assessee surrendered Rs. 55,09,236/- on account of excess cash and stock. However, in the return, the assessee has disclosed only excess cash of Rs. 4,24,019/-. During the course of assessment, the AO again checked the valuation of stock of inventory prepared at the time of survey and found that contention of the assessee with regard to valuation was 67
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correct. There was totaling mistake at the time of survey and excess stock was taken at Rs. 56,08,392/- in place of Rs. 10,38,350/-. However, the AO found that there was shortage in stock of Rs. 5,23,175/-. He computed profit at the gross profit rate of 9.78 % on such shortage of stock and made the addition of Rs. 51,166/-. However, the CIT(A) has deleted the same by observing that keeping in view huge stock, there might be error of marginal amount. Following was the precise observation of the CIT(A) :-
"Coming to the first issue of addition of Rs.51,166/- on shortage in stock found in course of survey operation at Rs.5,23,175/- against overall stock as per books at Rs.3.15 crores approximately, it is seen that the AO has made separate GP addition of Rs.4,07,083/- also. The assessee's case is that the shortage was determined on the basis of GP rate of earlier year at 9.78% against the GP rate in the year under consideration @9.69% and such was just a tentative figure and if the stock on the day of survey was worked out shortage arrived on the basis 68
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of GP rate of 9.69%, the shortage would get reduced to Rs.1,74,465/- only and such difference was marginal and may be on account of rounding of weight etc. and for such insignificant difference in stock when shortage in any business process was a normal and regular feature, there was no case for the AO to infer that the assessee was indulging in unrecorded sales, when no evidences to that effect were found in course of survey operation or in course of assessment proceedings of the assessee for the year under consideration as well as in earlier years."
46. Being aggrieved by the CIT(A)'s order, Revenue is in further appeal before us. Keeping in view the final shortage of stock as worked out by the ld. CIT(A) at Rs. 1,74,465/-, we direct the AO to retain addition by applying gross profit rate of 9.69 % on such shortage of stock. We direct accordingly.
47. Keeping in view discrepancy in the stock, the AO has also rejected book result and by applying the gross profit rate of 9.78 % a trading addition of Rs. 4,07,083/- was made. By 69
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the impugned order, the ld. CIT(A) restricted the trading addition to the extent of Rs.2 lakhs against which both the assessee and Revenue are in appeal before us. We found that in the earlier assessment year, the assessee had shown gross profit at 9.78 % on the sales of Rs. 46.52 crores. However, during the year under consideration, on the sales of Rs. 46.67 crores, the assessee had shown gross profit of 9.69 %. By accepting the assessee's contention with regard to increase in freight and labour charges during the year under consideration, the CIT(A) restricted the gross profit addition to the extent of Rs. 2 lakhs, after having the following observations :-
"Coming to the issue of GP addition, the findings given by the AO has been already noticed above and assessee's submission has also been extracted above. It is an admitted position that in survey operation, excess cash of Rs.4,24,000/- was found which was surrendered for taxation. Thus, it cannot be said that the books of accounts maintained by the assessee were fully reliable. Simultaneously it has to 70
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be noted that the fall in GP rate vis-à-vis the earlier year was not very significant and was to be extent of 0.09% only that too on huge turnover of Rs.46.68 crores against 46.53 crores in immediately preceding year. Further still, the GP rate disclosed at 9.69% was higher compared to GP rate of 9.41% on lower turnover of Rs.39.88 crores in the A.Y. 2003-04. The assessee contention that a significantly higher quantity of tea was purchased from outside at 8.44 lakhs kg as against 4.60 kg in immediately preceding year leading to increase in freight and labour charges is also required to be given due consideration. Hence on overall consideration of the facts and circumstances of case, the GP addition made by the AO at 4.07 lakhs is directed to be restricted to Rs.2 lakhs. "
48. The findings recorded by the ld. CIT(A) has not been controverted with regard to increase in freight and labour charges during the year resulting in marginal decline in gross 71
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profit rate. Accordingly, we confirm the action of the CIT(A) for restricting the gross profit addition of Rs. 2 lakhs.
49. With regard to the shortage claimed at 61,558 kgs. on total sales of 40,74,739 kgs. resulting into shortage at 1.498 % only. As this shortage was within the norms as discussed hereinabove i.e. 1.5 %, we do not find any infirmity in the order of CIT(A) for deleting the disallowance on account of shortage.
50. With regard to disallowance of packing expenses as discussed by us hereinabove in the assessment year 2004-05, we direct the AO to allow packing expenses at Rs. 0.80 per kg. We direct accordingly.
A.Y. 2007-08
51. In the assessment year 2007-08, common ground raised by the assessee with regard to disallowance of shortage and packing expenses, keeping in view our detailed observation made in the assessment year 2004-05, we direct the AO to allow packing expenses @ 0.80 ps per kg. and shortage at 1.5 %. We direct accordingly. 72
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52. In the result, the appeal of the assessee and Revenue is allowed in part in terms indicated above. I.T.A.Nos. 179 & 252/Ind/2010 :
53. Assessee in the instant case is sister concern of M/s. Ghanshyamdas & Co. During the year, the only grievance of both the assessee and Revenue relates to disallowance of brokerage payment to M/s. Anil Enterprises.
54. The facts, in brief, are that during the relevant period the assessee was a consignee agent of M/s. Goodrick Group Ltd. and few other companies and received commission from these companies. It was also explained that goods received on consignment are unloaded at the godown of M/s. Ghanshyamdas & Co. which is its sister concern. It was also stated that the firm did not have any godown of its own and it solely works for M/s. Ghamshyamdas & Co. and all its consignment sales were made to M/s. Ghanshyamdas 73
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& Co., only and it also received debtors interest and other interest from M/s. Ghanshyamdas & Co.
55. In course of assessment proceedings, the AO noticed that commission amount reflected in P & L A/c at Rs.48,58,448/- included the amount of Rs.39,04,966/- as commission from Goodrick Group Ltd. The AO further noticed that an amount of Rs.18,22,728/- was debited on account of brokerage paid to M/s. Anil Enterprises, Kolkata. The assessee was accordingly required to substantiate the claim explaining the business expediency of such payment as assessee was admittedly working as consignee agent of M/s. Goodrick Group Ltd. The assessee was also required to produce the copy of agreement of M/s. Goodrick Group Ltd. with other companies and M/s. Anil Enterprises. The AO has further noticed that the assessee failed to give copy of requisite documents and 74
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only filed a copy of Agency Agreement which was stated to be made on 2.4.04 per letter dated 22.12.06. The AO has noted that such agreement was not properly executed and in any case was not relevant for the AY under consideration having been executed after the close of relevant financial year. To verify the correctness of the assessee's claim the AO issued letter u/s 133(6) dated 19.12.06 to M/s. Anil Enterprises, Kolkata requiring it to file details of brokerage, copy of accounts, agreement and details of income tax assessment. No reply was received by the Assessing Officer directly and only copy of reply faxed by the aforesaid party to assessee bearing dated 23.12.06 was filed before AO in which address and PAN were given but according to AO no other details called for him were furnished. The assessee also filed a photocopy of undated letter from the said party raising 75
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bill of the amount of Rs. 18,22,708/- for supply and servicing and Goodricke Tea including receipt of TDS certificate with cheques on account of Sangam Tea Centre. The AO further noted that no brokerage was paid to the aforesaid party till the date of finalization of assessment which was admitted by the assessee. He also noticed that the entire amount of brokerage was credited to the account of the aforesaid party by single entry on 31.3.04.
56. In view of the above discussion, the AO disallowed commission payment of Rs. 18.22 lakhs to M/s. Anil Enterprises.
57. In the course of appellate proceedings, the assessee filed detailed written submissions dated 29.2.08 together with copy of partnership deed, audited accounts, audit report for the year under consideration and letter dated 1.4.01 addressed by M/s. Anil Enterprises to the assessee. 76
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58. By the impugned order, the ld. CIT(A) restricted the disallowance to the extent of 50 % after having the following observations :-
4.1 The broad facts are that the assessee has claimed deduction for commission payment of Rs.18,22,708/- to M/s. Anil Enterprises being commission payment arrived at @1% of the purchase consideration paid by the assessee to Goodricke Group Ltd. out of 2% commission received. It is also not disputed that such amount was not paid till December 2006 i.e. till the date of finalization of the assessment by the AO and has been paid subsequently only. But the AO's finding that assessee only filed a copy of commission dated 2.4.04 in support of such commission payment is not correct as the letter dated 1.4.01 addressed by M/s.
Anil Enterprises to the assessee
incorporating broad details about such
commission payment and supply related 77
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services and commitments agreed by M/s. Anil Enterprises was very much filed before the AO together with the fax copy of the letter received from M/s. Anil Enterprises as evident from assessment records. In the fax letter, M/s. Anil Enterprises categorically stated that they have raised a commission bill for year ending 2003-04 on 31.3.04 for Rs.18,22,728/- for supply and servicing of M/s. Goodricke Tea and assisting the assessee in selling the commodities in the market and also acknowledging the receipt of TDS certificate of Rs.91,136/-. Copy of both these documents together with letter dated 22.12.06 whereby such letters were filed before AO are enclosed with the appeal order and collectively marked as Annexure A, A1 and A2. The assessee also explained before the AO per subsequent letter dated 27.12.06 that in subsequent year no such commission was paid as the commission received by the assessee from 78
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Goodricke Group Ltd. on purchase was reduced from 2% to 1%.
4.1.1 Thus in these facts, it cannot be denied that assessee was under obligation to pay commission @1% to M/s. Anil Enterprises for the services to be rendered as specified in letter dated 1.4.01. The main services undertaken by M/s. Anil Enterprises was rendering assistance in marketing activities and pursuing clients pertaining to quality, shortage and other related maters with company and ensure proper receipt of drafts and other documents and instruments sent by the assessee, collection of TDS certificate etc. The assessee has also deducted TDS of Rs.91,536/- from such commission payment. In these facts, the AO's action in disallowing total commission payment claimed merely for non-payment of the same till the time of assessment and credit of the same amount at the end of the year cannot be said to be justifiable in any 79
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manner.
4.1.2 However, the issue remains whether the entire commission so claimed at Rs.18.23 lakhs against returned income of Rs.16,60,924/- can be said to be wholly and exclusively incurred for the purpose of business keeping in view the fact that such payment was itself discontinued in subsequent years, which in a way signifies that the assessee was able to carry out his business activities without the services and assistance of M/s. Anil Enterprises in subsequent years. In the agreement / letter dated 1.4.05, the broad services undertaken were related to liason of the assessee firm with Goodricke Group Ltd and pursuing with Goodricke Tea for the issues pertaining to payment and dispatch of goods etc. No evidence have been brought on record by the assessee to establish the fact that any significant help was rendered by M/s. Anil Enterprises in the marketing of product for the area of operation of the 80
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assessee firm i.e. M.P. Further, no evidence have been brought on record to the effect that M/s. Anil Enterprises had any infrastructure or set-up in MP so as to be of any assistance to the assessee in marketing of its product in M.P. The correspondence of the assessee firm with M/s. Anil Enterprises produced on record also relate mainly to dispatch of goods and payments and there is no correspondence or evidence in support of any assistance in marketing.
4.1.3 In these circumstances, the entire sizeable commission of Rs.18.23 lakhs which was in fact more than the net profit earned by the assessee as per return income at Rs.16.61 lakhs cannot be said to be wholly and exclusively incurred for the purposes of business. In any case, it is settled position of law that the onus lies on the assessee to establish that the amount of expenses claimed were fully justified and were admissible as business 81
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expenses having been incurred wholly and exclusively for the purposes of business. In view of the above factual position discussed, the assessee cannot draw any support from the various decisions cited in written submissions as the facts of the present case are clearly distinguishable to the facts noticed in such reported decisions. It is also not being held in any manner that the entire commission payment was not admissible as deduction. The issue involved is whether the entire amount was paid can be said to be wholly and exclusively incurred for the purposes of business."
4.1.4 Now coming to the decision of Hon'ble ITAT in the case of M/s. Shiv Supari Stores, it is again noticed that the facts are clearly distinguishable as there was substantial jump in the turnover from Rs.8 crores to Rs.18 crores in the case of the assessee before Tribunal and the agent was mainly needed for helping them in keeping check 82
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on quality of goods procured from Mangalore and the commission payment was found to be nominal. In the case of the assessee, the agent M/s. Anil Enterprises had no role in quality checking of goods procured as the assessee was dealing in branded products. So also there is nothing on record to establish that on account of such commission payment there was substantial increase in the turnover of the assessee nor it can be said that such commission payment was nominal as it even exceeded the net profit returned by the assessee and the assessee parted with 50% of the commission received from Goodricke Group Ltd., though the entire marketing infrastructure was set up by the assessee firm itself.
4.1.5 Hence, on overall consideration of the fact and circumstances of the case, 83
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in view of the above discussion, it is held that entire commission payment cannot be held to be admissible deduction as wholly and exclusively incurred for the purpose of business and on overall consideration, 50% of such amount is directed to be allowed at Rs.9,11,364 and balance disallowance is confirmed, being not wholly and exclusively incurred for the purpose of business. "
59. We have considered the rival contentions, carefully gone through the orders of the authorities below and found from record that the assessee was earning commission income from Goodricke Group Limited in respect of sales effected through its sister concerns M/s. Ghanshyamdas & Company. During the year, the assessee has claimed a sum of Rs. 18,22,728/- on account of brokerage/commission payable to M/s. Anil Enterprises. Contention of the assessee was that commission was paid in the normal course of business. 84
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However, the AO found that since the assessee was undertaking sales only to its sister concern and was having already an agency agreement with m/s. Goodricke Group Limited, there is no reason for incurring any of such expenditure on account of brokerage/commission. No agreement with regard to the services rendered during the year by M/s. Anil Enterprises could be furnished. Even to verify the correctness of assessee's claim, the AO also issued notice u/s 133(6) to M/s. Anil Enterprises requiring it to file copy of brokerage accounts, agreement and details of income tax assessment. However, no reply was received by the Assessing Officer from M/s. Anil Enterprises. However, the assessee has filed a photocopy of letter alleged to be faxed by M/s. Anil Enterprises. As per AO, even in this faxed letter, which was alleged by the assessee to have directly been sent to him, there was only mention of address and PAN No. of M/s. Anil Enterprises, no other details were furnished as asked by the Assessing Officer in his letter u/s 133(6). It was also found that actually no brokerage was paid to M/s. Anil Enterprises till the date of finalization of assessment and that entire 85
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amount of brokerage was credited to the account of M/s.Anil Enterprises by way of single entry on 31.3.2004. Accordingly, claim of commission expenditure was found to be bogus consequently addition was made by the Assessing Officer by disallowing commission payable. However, the ld. CIT(A) deleted 50 % of the disallowance just by stating that some of the services were rendered by Anil Enterprises. However, no material was referred by the ld. CIT(A) for arriving to such conclusion. Even various finding recorded by the Assessing Officer with regard to genuineness of claim of commission expenditure has been controverted by the ld. CIT(A). It appears that entire transaction of payment of commission/brokerage was found to be non-genuine, insofar as no services was required by the assessee in question, since it was having direct agency agreement with M/s. Goodricke Group, which was supplying the goods and entire goods were directly sold through sister concern. Keeping into view totality of facts and circumstances of the case and in the interest of justice, we restore the matter back to the file of AO for deciding afresh and assessee is directed to furnish full details 86
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of the services rendered by agent and co-operate with the AO for determining the genuineness of the transaction vis-à-vis services rendered by M/s. Anil Enterprises for earning such commission income. A.O. to also verify actual payment of commission to Anil Enterprises. We direct accordingly.
60. In the result, both the appeals of the assessee and Revenue are allowed in part for statistical purposes.
This order has been pronounced in the open court on 29th March, 2011.
Sd/- Sd/-
(JOGINDER SINGH) ( R.C.SHARMA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 29th March, 2011.
CPU*
9.283
87