Income Tax Appellate Tribunal - Delhi
Tehri Steels Ltd, vs Department Of Income Tax
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'H' NEW DELHI
BEFORE SHRI J. S. REDDY, ACCOUNTANT MEMBER
AND
SHRI C. M. GARG, JUDICIAL MEMBER
I.T.A. No. 2951/Del/2007
Assessment Year: 2003-04
ACIT Vs. M/s Tehri Steel Ltd.,
Circle, Dhalwala,
Hardwar Rishikesh.
(APPELLANT) (RESPONDENT)
Revenue by: Ms. Jyoti Legha, Sr.DR.
Assessee by: Shri. Ashwani Taneja, Adv. &
Sh. Somil Agarwal, CA.
ORDER
PER J. S. REDDY, AM:
This is an appeal filed by the revenue directed against the order of ld. CIT (A)-I, Dehradun, dated 28.03.2007 for the A.Y. 2003-04.
2. The facts as brought out at page 2 of the CIT (A) order are as follows.
"The brief facts of the case are that appellant, a company engaged in manufacture and sale of round steel bars, filed its return, declaring income of Rs.2,47,674/-. It was noticed by the AO that during the year under consideration, appellant company has shown to have received commission 2 I.T.A. No. 2951/Del/2007 of Rs.1,07,63,343/- from M/s Pharma Ventures International (P) Ltd. and that it also paid commission of Rs.49,97,266/- lakhs to M/s K.P. Steel Products (P) Ltd. The AO did not allow the amount of commission paid by treating the same as bogus and he further disallowed ISO audit fee of Rs.97,238/- as capital expenditure."
3. Aggrieved the assessee carried the matter in appeal. The first appellate authority deleted both the additions made by the AO for the reasons given in his order.
4. Aggrieved, the revenue is before us on the following grounds:
1. That the Ld. CIT (A) has erred in law and on facts and circumstances of the case by deleting the addition on account of commission paid to M/s K.P. Steels, Ltd. inspite of the facts that such payments made to procure contract through illegal means are clearly contrary to the explanation to the section 37(1) of the I.T. Act, 1961, and are liable to be added to the income of the assessee.
2. That the Ld. CIT (A) has erred in law and on facts and circumstances of the case by deleting the addition of expenses on account of ISO expenses inspite of the fact that such expenditure was capital in nature as the assessee will have 3 I.T.A. No. 2951/Del/2007 enduring benefit in all the coming years, though their may be various conditions attached to this ISO certificate like cancellation of certificate on breach of terms and conditions, nil surrender value and also their was no new assets generated to the assessee."
5. We have heard Ms. Jyoti Legha, the ld. Sr. DR on behalf of the revenue and Sh. Ashwani Taneja, the ld. counsel on behalf of the assessee.
6. The ld. DR submitted that the assessee received commission from M/s Pharma Ventures International (P) Ltd., for the job of managing to get a contract from Ministry of Health and Family Welfare, for supply of cotton bandages and that the assessee had inturn sublet the work to M/s K.P. Steel Products (P) Ltd. and paid a commission of 49.97 lakhs for this job. She submitted that the payment in question is illegal payment and hence the AO was right in disallowing the same. She pointed out that the AO has recorded that the assessee has not provided any details of the work/services rendered and has given some basic minimum details of the tender contract. She argued that the findings of the AO should be upheld she relied on the decision in the case of J. K. Panthaki & Co. Vs. ITO (Kar) 064 DTR 283.
7. On the second issue she submitted that the expenditure incurred on ISO certification is in the capital field.
4 I.T.A. No. 2951/Del/2007
8. The ld. counsel for the assessee on the other hand submitted that the nature of service has been explained to the revenue authorities with evidence and the details are mentioned in the letter dated 25.8.2001 written by Tehri Steel Ltd. to M/s K.P. Steel Pvt. Ltd, a copy of which is page 41 and 42 of the paper book. He submitted that the assessee got a contract for rendering of services and has received 28% commission and this income was taxed by accepting the fact that the assessee had rendered services and earned commission income. While so he submitted that the expenditure incurred for the very same services for which income is earned, is sought to be disallowed on illegal grounds.
9. The ld. counsel submitted that there is no proof that anything illegal was done, he referred to Para 3.2 and 3.3 of the order of the CIT (A) and the same relied on.
10. He relied on the judgment of the Supreme Court in the case of CIT, Patiala Vs. Piara Singh 124 ITR 40 for the proposition that even in an illegal business, the loss which sprang directly from the carrying on of the illegal business and which was incidental to such business has to be allowed as a deduction.
11. He also relied on the decision of the Hon'ble Supreme Court in the case of Dr. T.A.Quereshi Vs. CIT 287 ITR 547 that the Explanation-2 5 I.T.A. No. 2951/Del/2007 Section 37 has no relevance when it was not the case of business expenditure but was one of business loss and that cases cannot be decided on one's own moral views. He filed a paper book running into 176 pages while consist of 15 case laws and relied on the same.
12. On ground no. 2, he relied on the order of the ld. CIT (A).
13. Rival contentions heard. On a careful consideration of the facts and circumstances of the case and a perusal of the papers on record, we hold as follows:
14. The ld. CIT (A) has on Para 3.3. & 3.4 recorded as follows:
"3.3 I have gone through the order of the AO and the submissions of the AR very carefully. According to the appellant, M/s Pharma Ventures approached the appellant company in helping M/s Pharma Ventures in getting the contract from the Ministry of Health. M/s Pharma Ventures vide its letter dated 12.08.01 appointed M/s Tehri Steels Ltd. the appellant as the authorized liasioning agent to pursue its case in the tender of supplying of cotton bandages floated by Ministry of Health & Family Welfare through Hindustan Latex Ltd with following terms and conditions:-
1. You shall purchase the above tender documents in our name.
2. Assisting in preparation of bid.6 I.T.A. No. 2951/Del/2007
3. Shall attend tender opening.
4. Day to day follow-up on our behalf and intimating us the progress, arranging good share of business for us and other connected services till the order is finalized.
5. Help us in getting the inspection, release of dispatch clearance and collection of payments etc. COMMISSION As discussed and agreed, we shall pay you a commission @ 28% of the total order value. The commission shall be payable only after receipt the award of contract, supply of goods and collection of payments.
3.4 M/s K.P. Steels vide their letter dated 14.08.01 approached the appellant with the offer that because of the very good contacts in the Ministry of Health & Family Welfare, M/s K.P. Steels was in a position of getting the order in favour of M/s Pharma Ventures. M/s Tehri Steels vide their letter dated 25.08.01 appointed M/s K.P. Steels as authorized liaisoning agent to look after the interest of M/s Pharma Ventures on the following terms and conditions:-
i) M/s K.P. Steels shall purchase the tender
documents in M/s Pharma Ventures name.
7 I.T.A. No. 2951/Del/2007
ii) Assist in preparation of bid.
iii) Attend tender meeting.
iv) Will do day to day follow up on behalf of M/s
Pharma Ventures till the order is finalized.
V) Help the appellant in getting the inspection,
release of dispatch clearance and collection payments.
COMMISSION As discussed and agreed, we shall pay you a commission @ 13% of the total order value. The commission shall be payable only after receipt the award of contract, supply of goods and collection of payments."
15. Thereafter we observed at Para 3.6 as follows:
"3.6 The AO and the Addl. CIT have held that using 'contacts' to obtain the contract is an illegal activity and expenses on illegal activity can not be allowed as deduction. There is no merit in the observation made by the AO. Liaison work can not be said to be an illegal activity. Illegal activity is one which is prohibited by law. There is no infraction of any law and payments made for liaison work are considered legitimate business expenditure. Coming to the 8 I.T.A. No. 2951/Del/2007 merits of the case, there can be, in my opinion, three possibilities, taking into account the entire facts and circumstances of the case.
i) It was a genuine arrangement between M/s Pharma Ventures and M/s Tehri Steels Ltd.
ii) It was a genuine arrangement wherein entire services have been carried out by M/s K.P. Steels but M/s Tehri Steels Ltd. has been used as a conduit to share the commission.
iii) The entire arrangement is was eyewash so as to show commission as adjustment entry to help M/s Pharma Ventures.
In the first situation, the department has no case. In the second situation, the entire commission income should have been added in the hands of M/s K.P. Steels and assessment in the case of M/s Tehri Steels Ltd. should have made treating the commission shown by the appellant on protective basis. In the third situation, the detailed investigation was necessary to bring material on record which could show that this was merely an arrangement to suppress the profits of M/s Pharma Ventures and in turn to reduce the tax liability of M/s Pharma Ventures. Here also the right course would have been to disallow the commission expenditure in the case of M/s Pharma 9 I.T.A. No. 2951/Del/2007 Ventures and assess the income declared by M/s Tehri Steels Ltd. and M/s K.P. Steels on protective basis.
Thus, in either case M/s Tehri Steels Ltd, the appellant cannot be assessed on commission income more than what has been declared by it. From the material on record, it cannot be said that commission paid by M/s Tehri Steels Ltd to M/s K.P. Steels is bogus taking into account the correspondence placed by the appellant on record. The AO was, therefore, not right in making the disallowance of commission. The AO is directed to delete the addition of Rs.49,97,266/-. The relief granted here should not be construed as a finding as to the genuineness of the transaction stated to have been undertaken by the appellant. The Assessing Officers having jurisdiction over M/s Pharma Ventures and M/s K.P. Steels respectively are free to investigate the genuineness of the transaction at their respective ends if considered necessary."
16. The Delhi 'I' Bench of the Tribunal in the case of ACIT Vs. Jindal Saw Pipes Ltd. 118 TTJ 228 (Del) held as follows:
CBDT Circular No. 772, dt. 23rd Dec., 1998 clearly explains the legislative intent, purposes and object and targeted expenditure, covered under s. 37(1), Expln. The speech of the Finance Minister, also highlights the 10 I.T.A. No. 2951/Del/2007 legislative intent, for insertion of the said Explanation. The Revenue has failed to justify applicability of the said Explanation to the fact-situation of the case, by leading reliable, cogent and corroborative evidences. The clear and unambiguous language of the said Explanation rules out the applicability of the same, to the present case, as held by the CIT (A). The CIT (A) after considering assessment order and submissions made before him passed an speaking and detailed order and categorically held that the AO invoked the Explanation to s. 37(1), purely on surmises and suspicion and no cogent material was brought on record to justify the validity of such approach adopted in the assessment order. The CIT (A) specifically held that the AO failed to adduce material evidence to establish that the payment is prohibited by law. Mere assertion without any corroboration cannot be substitute for credible evidence leading to invocation of the said Explanation by the AO. It remains to be demonstrated by plausible justification that the payment of commission to identifiable parties, through account payee cheques who are assessed to tax, for the services rendered as defined in the agreement, in the absence of colorable or collusive nature of transactions, payments made for the purpose of business, cannot be termed as against public policy, as construed by the AO. No evidence has been placed by the Revenue before the CIT (A) or before the Bench establishing any violation of 11 I.T.A. No. 2951/Del/2007 public policy or provisions of any statute. It is well-settled legal proposition that Revenue cannot decide on an issue without proper facts supporting its decision. A decision based on the foundation of mere assertion or surmises or suspicion is liable to be quashed by higher Court. The decision must be supported by concrete facts and cogent evidences. This is a fundamental rule of justice. Thus, in the fact-situation of the instant case, the Revenue has failed to justify invocation of the said Explanation and consequent addition, as the parties to whom commission was paid, mode of payment through account payee cheques, quantum of commission, for the purpose of business and for the services rendered by the parties, remained undisputed." 16.1 The Delhi 'G' Bench of the Tribunal in the case of ACIT Vs. Sanjay Enterprises at Para 5 held as follows:
We have considered the facts of the case and rival submissions. The limited question before us is whether the impugned payments were deductible expenditure under s. 37(1), particularly in the light of the provision contained in the Explanation thereof. It was enacted that any expenditure incurred for any purpose which is an offence or which is prohibited by law shall not be allowed to be deducted in computing the income. The Explanation does not use the words "public policy". The words are "offence" and "prohibited by law". Nothing has been brought on record 12 I.T.A. No. 2951/Del/2007 that the activities of the agents of making representations and mobilizing public opinion for not exercising option under s. 5 of the Central Act was an offence or was prohibited by law. The State Governments were carrying on their respective lottery businesses and the purpose of the Central Act was to limit such activities within the territories of the States at the option of the States. Thus, there was nothing illegal about carrying on the lottery business or mobilizing opinion for continuation of sale of lottery tickets of other States within the State of Madhya Pradesh. Nothing has been brought on record to show that it was even against the public policy. Therefore, we do not find any infirmity in the order of the learned CIT (A). Accordingly, the ground is dismissed. It may be mentioned that the effect of setting aside the matter to the file of the learned CIT (A) by the Tribunal was that the ground taken by the assessee before the CIT (A) against the order of assessment stood revived before him, which had challenged the disallowance made by the AO. Therefore, it cannot be said that the learned CIT (A) had no jurisdiction to go into the disallowance made by the AO.
17. The Hon'ble M.P. High Court in the case of CIT Vs. Khemchand Motilal Jain, P. Ltd. 340 ITR 99 held as follows:
"Held, That section 364A of the Indian Penal Code provides that kidnapping a person for ransom is an offence and any person doing so 13 I.T.A. No. 2951/Del/2007 or compelling to pay, is liable to the punishment as provided in the Section, but nowhere is it provided that to save a life of the person if a ransom is paid, it will amount to an offence. There is no provision that the payment of ransom is prohibited by any law. In the absence of it, the Explanation to sub-section (1) of Section 37 would not be applicable. The Tribunal was justified in law in holding that the amount of Rs.5,50,000 paid as ransom money to the kidnappers of one of the directors was an allowable deduction under section 37(1)."
18. Applying the proposition laid down these cases laws to the facts of the case, we find no infirmity in the order of the ld. CIT (A). The payment is not an illegal payment and the services rendered have been demonstrated.
19. Coming to the case laws relied upon that the ld. DR, the Honorable Karnataka High Court in the case of J.K. Panthaki & Co. (Supra) came to a factual finding that illegal gratification was paid to the director's of the Co. and it was a secret commission. Hence the disallowance was upheld on the ground that the expenditure though not an offence. This decision is contrary to the judgment of the Hon'ble Supreme Court in the case of Jhai Narain Trades Vs. DCIT 63 TTJ 318,. As far as the other decision cited by the revenue the Cochin Bench was considering a case where there was no 14 I.T.A. No. 2951/Del/2007 evidence to prove that services were rendered by agents. The facts in this case are different. The services have been rendered and the same is demonstrated before the authorities. The ld. CIT (A) has noted the same when there is income received for the very same services, the connected expenditure is to be allowed to arrive at the real income.
20. In the result we uphold the same and dismiss ground no. 1 of the revenue.
21. Coming to ground no. 2, the ld. CIT (A) at Para 4.2 page 25 of his order held as follows:
"4.2 I have gone through the order of the AO and the submissions of the AR very carefully. On account of this expenditure, no new asset has come into existence. The ISO certificate has been obtained by the company for enhancing the goodwill. The ISO certificate is not transferable and it is liable to be withdrawn any time if the Certifying Agency decides that standards have not been maintained. The ISO certificate also does not have any surrender value. It was, therefore, not correct on the part of the AO to treat the expenditure as capital expenditure. The AO is directed to delete the addition of Rs.97,238/-."
The amount in question is incurred for ISO certification and it cannot be said that expenditure is in the capital fee. In result we uphold the order of the ld. 15 I.T.A. No. 2951/Del/2007 CIT (A) on this issue and dismiss this ground of the revenue. In result the appeal of the revenue is dismissed Order pronounced in the open Court on 31st /7/2013.
Sd/- Sd/-
(C. M. GARG ) (J. S. REDDY)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated: 31st/07/2013
*AK VERMA*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR