Income Tax Appellate Tribunal - Jaipur
Mehru Electrical & Engg. Pvt. Ltd., ... vs Department Of Income Tax on 18 July, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL JAIPUR BENCH: JAIPUR (BEFORE SHRI R.P. TOLANI AND SHRI T.R. MEENA) I.T.A. No. 215/JP/2009 Asstt. Year- 2004-05 PAN No. AABCM2145G The A.C.I.T., M/s Mehru Electrical & Engg.
Circle-2, Alwar. Vrs. Pvt. Ltd., E-1247 RIICO Ind.
Area, Bhiwadi.
(Appellant) (Respondent)
Department by :- Shri D.C. Sharma.
Assessee by :- Shri P.C. Parwal.
Date of hearing : 15/07/2014
Date of pronouncement : 18/07/2014
O R D E R.
PER: T.R. MEENA, A.M.
This is an appeal filed by the Revenue against the order dated 30/12/2008 of the learned C.I.T.(A), Alwar for the A.Y. 2004-05. The effective grounds of appear are as under:-
"1. That the learned CIT(A) has erred in law as well as on the facts and circumstances of the case by deleting the disallowance of Rs. 46,46,867/- made on account of payment of commission to M/s Sadem India Ltd. ignoring the facts & material brought on record by the A.O.
2. That the learned CIT(A) has erred in law as well as on the facts and circumstances of the case in directing the A.O. to allow deduction u/s 801B on interest on Bank FDRs amounting to Rs. 2,75,187/- without appreciating the fact that interest income cannot be considered as derived from Industrial activity."2
2. The first ground of appeal is against deleting the disallowance of Rs. 46,46,867/- made on account of payment of commission to M/s Sadem India Ltd.. The assessee is engaged in the business of manufacturing of current and potential transformers & electrical control equipments from Bhiwadi industrial area. During the year under consideration, the assessee had paid commission to M/s Sadem India Ltd. at Rs. 46,46,867/-. The learned Assessing Officer gave reasonable opportunity of hearing on this issue and asked to prove the services rendered by M/s Sadem India Ltd.. The assessee filed reply vide letter dated 27/09/2007, which has been reproduced by the learned Assessing Officer on pages 6,7, and 8 of the assessment order. It was submitted by the assessee that the reasons recorded for reopening the case u/s 147 of the Income Tax Act, 1961 (in short the Act) were based on the assessment of M/s Sadem India Ltd.. The assessment of the learned Assessing Officer of M/s Sadem India Ltd. cannot be the valid base for reopening of a case for A.Y. 2004-05. Further, it was submitted that the commission paid to M/s Sadem India Ltd. on the basis of service rendered by it. There was an agreement between the assessee and M/s Sadem India Ltd. on every tender/order, which was procured with the assistance of M/s Sadem India Ltd.. One of the Director of M/s Sadem India Ltd. namely Shri Satish Kumar Dhanda was having good public and political relation and had been the Chairman of the Engineering Export Council of India from year 2000. Besides this, he was Member of Board of Trade constituted by the Ministry of Commerce, Govt. of India from 1998. 3 The contract had been approved by the Board of Director of the assessee company and approved by the share holder in annual general meeting. The commission was calculated on the basis of services rendered by M/s Sadem India Ltd. on tender wise. On which, TDS has been deducted and deposited with the Central Govt. The genuineness of the payment is not doubted as the assessee was paid through account payee cheques after deducting the TDS on it. He also relied upon in case of Indocane Ltd. Vs. ITI Ltd. 1989 34 TTJ Bombay 89, which was on secret commission, paid to the employee, which was allowed by the Hon'ble ITAT Bombay. The learned Assessing Officer did not accept the assessee's reply as tenable on the ground that the Assessing Officer of M/s Sadem India Ltd. gave the different finding in its assessment for A.Y. 2004-05. The Assessing Officer further held that M/s Sadem India Ltd. does not have any capability to provide or procure the orders to assist the procurement from the electricity Board. The assessee was not in position to explain the services rendered by M/s Sadem India Ltd. with evidences. The assessee had failed to prove any involvement justifying commission payment to it for procuring supply order through tender. The Assessing Officer also examined the copy of correspondence made between the assessee and M/s Sadem India Ltd. and concluded that no service was rendered by M/s Sadem India Ltd.. Thus, he made addition of Rs. 46,46,867/- in the income of the assessee.
4
3. Being aggrieved by the order of the learned Assessing Officer, the assessee carried the matter to the learned CIT(A). The learned CIT(A) observed as under:-
"4.3 The appellant has relied on the ratio of the cases decided by the learned ITAT in the matter of DCIT Vs. Vhanketeshwar Wires Pvt. Ltd., Vhanketeshwar Wires Pvt. Ltd. Vs. DCIT & ACIT Vs. Vhanketeshwar Wires Pvt. Ltd. in ITA No. 901/JP/2007, ITA No. 692/JP/2008 & ITA No. 996/JP/2008 dated 30/09/2008. It reveals from the order that M/s Sadem India Ltd. is doing business for other people also to procure order from BSNL. It is stated that Mr. Satish Kumar Dhanda is having good political and public relations and has been Chairman of Engineering Export Council of India from the year 2000 as well as Member of Board of Trade constituted by the Ministry of Commerce from 1998. Further it is stated that agreement for expenses incurred have been approved by the share holders in the AGM of the payer and recipient companies. Moreover, TDS has been deducted and deposited with the Central Govt.. The appellant has informed in his submission that services and guidance of a local party for updating about advertisements for purchase of transformers, for acquiring application forms, for properly and accurately completing them and submitting them in time, for quoting the correct rate, for getting drawings approved, for recovery of payments after delivery of goods etc. was needed because of cutthroat competition. It is stated that only after inspection by the customers regarding quality specification delivery of finished goods is done. Further it is informed that if the dispatch/delivery of finished goods does not take place in time, it could lead to problem of storage of goods and consequently delay in receipt of payments and breaking of turnover cycle. It is stated that it is not in the control of the appellant as to how much expenses have been made by the person receiving commission. The appellant is concerned only with the quantum and quality of services rendered. It is contended that M/s Sadem India Ltd. is the agent of the appellant and does not work on behalf of the customer. Accordingly, the name of the agent would not figure in the tender 5 acceptance form. Moreover, it is stated that no payment has been made in cash and that all payment have been made by cheque. In such a situation the appellant has pleaded for allowance of expenses of commission paid. In support of his claim that work was undertaken by M/s Sadem India Ltd. the appellant has furnished copies of communication with M/s Sadem India Ltd. and RRVPNL.
As is stated above, the appellant is in the business of manufacturing of current and potential transformers & electrical control equipments. The equipments specified by the appellant are manufacture of very specific nature as per the requirements of the customers. It is also true that procurement of orders is an activity that has to be gone through before the actual manufacturing, testing and finally delivery of goods is made to the customers. In this age of fierce competition when even international players are in the game, the successful businessmen have to obtain services of competent and knowledgeable advisers. Very many times, as it appears in the present case, successful businesses can be run only with the help of outsourcing of work relating to having knowledge of tenders, knowledge of correct specifications of products, knowledge of competitive rates, having smartness on behalf of the manufacturer to put the whole exercise of the described business activities through in a successful manner. It is not denied that the appellant has made cheque payments for services described in his submission. The provisions of Sec. 37(1) state as follows: Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head "Profits and gains of business or profession". The activities described by the appellant as having been undertaking during the course of business and interaction with M/s Sadem India Ltd. are of similar nature as are described in the order of Hon'ble ITAT dated 30/09/2008. The appellant's case is supported by the ratio of the cases decided by the Hon'ble ITAT in the matter of DCIT Vs. Vhanketeshwar Wires Pvt. 6
Ltd., Vhanketeshwar Wires Pvt. Ltd. Vs. DCIT & ACIT Vs. Vhanketeshwar Wires Pvt. Ltd. in ITA No. 901/JP/2007, ITA No. 692/JP/2008 & ITA No. 996/JP/2008 dated 30/09/2008. In view of the forgoing, respectfully following the decision of the Hon'ble ITAT as per their order dated 30/09/2008 specified above, the addition made after disallowance of commission to M/s Sadem India Ltd. at Rs. 4646867/- is hereby deleted."
Now the Revenue is in appeal before us.
4. In this case the Coordinate Bench of ITAT Jaipur in ITA No. 215/JP/2009 A.Y. 2004-05 vide order dated 26/02/2010 has allowed the Revenue's appeal ex parte by observing that:-
"The A.O. while passing the order in the case of M/s Sadem India Ltd. noticed the modus operandi to evading the tax by diverting the receipt to a loss company. In the case of M/s Sadem India Ltd., the contention of the company was that the commission was received on account of services of the director. However, the assessee company in the instant case is trying to submit that the commission has been paid as per the services rendered, preparation of tenders and other services. In the agreement, it is mentioned that M/s Sadem India Ltd. is to provide assistance in preparation of tender during the valuation process and has also to provide assistance during the performance of the contract. There is no material on record that the services as mentioned in the agreement have been provided by M/s Sadem India Ltd.. The assessment company was made aware that M/s Sadem India Ltd. has mentioned that it got commission on account of goodwill of the Director Shri Satish Dhanda. No expenses for providing services were there. The company which has provided so called services admitted of making no expenses or providing technical services then onus was on the assessee company to have adduced evidence. Briefly arguing that recipient of commission has provided services were not sufficient in view of submissions of recipient made in their own assessment. The onus is on the assessee to establish that expenditure has been made for the 7 purpose of business. The expenditure cannot be allowed only on the basis of the fact that the amount has been paid through cheque or there is an agreement for making any specific payment. The assessee has failed to adduce any evidence as to rendering services by M/s Sadem India Ltd.. Hence we fell that the A.O. was justified in disallowing the commission and the order of the learned CIT(A) on this issue is reversed. Thus ground No. 1 of the Revenue is allowed."
The assessee filed appeal before the Hon'ble Rajasthan High Court. The Hon'ble High Court has set aside the order of the ITAT ob observing as under:-
"9. In these circumstances, we are of the view that the Tribunal committed an illegality in rejecting the application for adjournment and in deciding the appeal, ex parte, without hearing the learned counsel for assessee, in the facts and circumstances of the present case and order of the Tribunal deserves to be set aside on this ground alone and substantial question of law, formulated above, is liable to be answered and is hereby answered in favour of the assessee.
10. Consequently, the appeal is allowed. Impugned order of the Tribunal dated 26/02/2010 is set aside and the case is remitted back to the Tribunal for decision on merits, afresh. However, cost of Rs. 21,000/- (Rs. Twenty one thousand) is imposed on the assessee. If the amount of cost is deposited in the Department within a period of four weeks and receipt thereof is furnished in the Tribunal, then the Tribunal will decide the matter afresh on merits, after hearing both the parties, otherwise this appeal will be deemed to have been dismissed and no further opportunity will be granted to the assessee.
11. Parties are directed to appear before the Income Tax Appellate Tribunal, jaipur Bench 'B', Jaipur on 28/05/2012. No fresh notice in this regard will be issued to the parties by the Tribunal."
This case as per direction of the Hon'ble High Court was refixed and heard. 8
5. The learned D.R. supported the order of the Assessing Officer and argued that there is no involvement directly or indirectly in the procurement of order from the Electricity Board, the Electricity Board float the tender public at large and it is open to everybody to make bid as per the tender. The business of M/s Sadem India Ltd. is also in different line of business. There is no experience of any of the Director of the company in getting the tender from the Electricity Board. The assessee got orders directly from the Electricity Board. The assessee had not discharged his burden of proving by any material, thus he requested to confirm the order of the learned Assessing Officer.
6. At the outset, the learned A.R. for the assessee supported the order of the learned CIT(A) and also drawn our attention on decision of Coordinate 'B' Bench of the ITAT, Jaipur in ITA No. 901/JP/2007 for A.Y. 2004-05 order dated 30/09/2008, which has been considered by the learned CIT(A) before allowing the appeal in favour of the assessee. The facts of the case is also identical wherein commission was claimed and allowed by the learned CIT(A) as well as by the Hon'ble ITAT. It is further argued that M/s Sadem India Ltd. Performing liaison work with Electricity Board, the Director of the company have good reputation in government department and also had engaged in the various councils/commissions of the Govt. of India as well as State Govt. as they have political relation as well as liaisoning with the various departments. The learned A.R. also drawn our attention on paper book filed before us and 9 submitted that this income has been accepted by the M/s Sadem India Ltd., the appellant had deducted TDS on it and payments were made through account payee cheques. There was correspondence between M/s Sadem India Ltd. and the assessee on page Nos. 39-194 of the paper book. The assessee made an agreement with M/s Sadem India Ltd. (in paper book page No. 202 to 217) wherein terms of contract has been defined. As per page No. 205 of paper book, M/s Sadem India Ltd. agreed to provide services in connection with tender for supply of current and potential transformers to M/s Haryana Vidyut Prasan Nigam Ltd.. The commission was fixed at the rate 6% of the order ex-work price exclusive of all taxes and duties, fate etc. on page No.
206. This agreement was effective for the period of five years. Similar agreements were made for supply made to Rajasthan Raj Vidyut Prasar Nigam Ltd. and Uttaranchal Power Corporation, North Delhi Power Ltd., therefore, M/s Sadem India Ltd. rendered services. The assessee benefited the assistant and expertise of M/s Sadem India Ltd. for procuring the orders through tenders. It is further argued that on increase income by not allowing the commission paid to M/s Sadem India Ltd., the learned Assessing Officer had not allowed 80IB deduction on it. As per law, this income is also part of the income from the industrial income, which has not been allowed by the Assessing Officer at the time of addition on account of commission payment. Alternatively, he argued that the assessee was getting benefit u/s 80IB of the Act on 30% of income of industrial income. It is further argued that the 10 assessee every year has been paying commission from A.Y. 2002-03 to A.Y. 2006-07. It varies from year to year on sales of the appellant consistently increasing. Thus, he requested to confirm the order of the learned CIT(A) The learned A.R. also placed reliance the following case laws:-
i. Mobile Communication (India) (P) Ltd. Vs. DCIT 125 ITD 309 (Del.) (Trib.) ii. V.I.P. Industries Ltd. Vs. IAC 36 ITD 70 (Bom)(Trib)(TM). iii. Anupam Synthetics (P) Ltd. Vs. JCIT 104 TTJ 119 (Del.(Trib.) iv. CIT Vs. Ishwar Prakash & Bros. 159 ITR 843 (P&H) (HC). v. CIT Vs. Gautam Creations (P) Ltd. 171 Taxman 271 (Del.) (HC). vi. CIT Vs. Shriram Pistons & Rings Ltd. (2012) 206 Taxman 41 (Del.)(HC) (Mag.) vii. J.K. Steel & Industries Ltd. Vs. CIT 112 ITR 285 (Cal.) (HC). viii. ITO Vs. Desh Rakshak Austhalaya (P) Ltd. 7 ITD 531 (Del.) (Trib.).
7. We have heard the rival contentions of both the parties and perused the material on record. The assessee is manufacturing of current and potential transformers & electrical control equipments. The appellant had been assisted by M/s Sadem India Ltd., Bhiwadi to execute the tender of various electricity boards. The genuineness of the payments in form of commission has not been doubted by the Revenue. The TDS has been deducted and paid to the government exchequer. The documents filed by the appellant before the lower authority supported that M/s Sadem India Ltd. has rendered service to the appellant by providing information of tender, attending the tender on behalf of the appellant, liaisoning with the various electricity boards, helping in recovering the payments, providing number of tenders, providing experience with the government department etc. The appellant had submitted all the 11 details before the Assessing Officer to prove the services rendered by M/s Sadem India Ltd., which has not been controverted by the Revenue. The case law cited by the appellant i.e. DCIT Vs. Vhanketeshwar Wires Pvt. Ltd. has been supported the assessee's claim. The finding of the Coordinate 'B' Bench of ITAT, Jaipur in ITA No. 901/JP/2007 is reproduced as under:-
"8. We have heard the rival contentions and perused the facts of the case. From the reply of the State Electricity Boards, the existence of commission agent is not disproved as well as non-rendering of services to the assessee has not been denied. No reply by Bihar State Electricity Board has been received. Moreover, this is an arrangement between the assessee and the commission agent and not the commission agent and the Electricity Boards. Even if the existence of the commission agent is denied by the Electricity Boards, then the services rendered by the agent cannot be straightway be denied. The other circumstances and the facts as to the services rendered have to be looked into. In the present case, the agents have rendered the services like procurement of orders, ascertaining the quality, timely payment etc. The recipient has declared the commission in his return of income and has confirmed to have rendered the services to the assessee. In the circumstances and facts of the case, we find no infirmity in the order of the ld. CIT(A) who has rightly deleted the addition made by the A.O. and has rightly directed to enhance the allowance of deduction u/s 80IB of the Act. Thus Ground No. 2 of the Revenue is dismissed."
Respectfully following the decision on identical issue by the Coordinate 'B' Bench of ITAT, Jaipur, we confirm the order of the learned CIT(A).
8. Ground No. 2 of the Revenue's appeal is against no allowing deduction u/s 80IB of the Act on interest on bank FDRs amounting to Rs. 2,75,187/-. The learned Assessing Officer observed that the assessee had claimed 80IB 12 deduction @ 30% on bank FDR interest of Rs. 2,75,187/- at Rs. 82,554/-. The learned Assessing Officer did not find this income from the industrial undertaking, thus, he disallowed 80IB deduction at Rs. 82,554/-. The learned CIT(A) held that these FDRs were taken for bank guarantee in favour of the Electricity Board and other customers. It was stated by the assessee that without providing bank guarantee as required by the customer, no income can be earned from the industrial income. When FDRs were made for the purposes of bank guarantee, utilized by placing it with the Electricity Boards, it directly computed with the industrial undertaking, therefore, the learned CIT(A) deleted the addition.
9. Now the Revenue is in appeal before us. The learned D.R. vehemently supported the order of the learned Assessing Officer.
10. At the outset, the learned A.R. for the assessee supported the order of the learned CIT(A) and it was argued that the Assessing Officer himself had admitted interest income under the head business and profession. The FDRs on which the interest is received, his made for deriving the income from business of industrial undertaking as without providing such FDRs. No sale could have been affected. These FDRs were made not out of surplus funds but by utilizing the working capital of the business. Interest paid on working capital loan is Rs. 10,84,020/-as against the interest received of Rs. 2,75,187/- thus in fact, there is no interest income. The assessee had rightly claimed 80IB deduction on it.
13
11. We have heard the rival contentions of both the parties and perused the material on record. The FDRs were made for providing bank guarantee to the Electricity Board. Apparently, the interest on FDRs directly connected with the industrial undertaking. Even the assessee's argument of netting of interest income is accepted. It automatically increased the profit of the assessee undertaking and the deduction U/s 80IB of the Act is also increases. We find that FDRs were made for business purposes and for getting the tender from the Electricity Board and income from interest income is directly connected with the industrial undertaking. Therefore, we confirm the order of the learned CIT(A). Accordingly, we dismiss the Revenue's appeal on this ground.
12. In the result, appeal of the Revenue is dismissed. Order pronounced in the open court on 18/07/2014.
Sd/- Sd/- (R.P. TOLANI) (T.R. MEENA) JUDICIAL MEMBER ACCOUNTANT MEMBER Jaipur, Dated : 18th July, 2014 * Ranjan Copy forwarded to :- 1. The ACIT, Circle-2, Alwar.
2. M/s Mehru Electrical & Engg. Pvt. Ltd., Bhiwadi.
3. The CIT (A)
4. The CIT
5. The D/R Guard file (I.T.A. No. 215/JP/2009) By Order, AR ITAT Jaipur.