Income Tax Appellate Tribunal - Mumbai
Arco Electro Technologies P. Ltd, ... vs Assessee on 7 February, 2013
आयकर अपीलीय अिधकरण
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCHES "A" MUMBAI
सव[ौी डȣ. मुमोहन, उपाÚय¢ /एवं
BEFORE SHRI D. MANMOHAN, VICE PRESIDENT /AND
ौी राजेÛि, ले.स.
SHRI RAJENDRA, ACCOUNTANT MEMBER
आयकर अपील सं. / ITA No. 7250/Mum/2010
िनधा[रण वष[ /Assessment Year 2007-08
M/s. Arco Electro Asst. Commissioner of
Technologies Pvt. Ltd., Income Tax,
MIDC, Marol, Vs. Range 8(1), 2nd Floor,
Andheri (E), Aayakar Bhavan,
MUMBAI-400 093. M.K. Road,
MUMBAI-20.
PAN: AAACA 4336 L
(अपीलाथȸ /Appellant) (ू×यथȸ / Respondent)
अपीलाथȸ ओर से / Appellant by : Shri Dhirendra M. Shah
ू×यथȸ कȧ ओर से/Respondent by : Shri Manoj Kumar
Date of Hearing : 07-02-2013
Date of Pronouncement : 15-02-2013
आदे श / O R D E R
PER RAJENDRA, A.M.
Following Grounds of Appeal have been filed by the appellant against the Order dt. 13-08-2010 of the CIT(A)-16, Mumbai :
1.(a)On the facts and in the circumstances of the case, the learned CIT(A) erred in confirming the disallowance made ofRs.42,09,552/- being the commission payment made which be deleted.
(b)The learned CIT(A) erred in stating that, the payment is made against public policy and erred in stating that, explanation to section 37(1) is applicable and that the payments made are in the nature of illegal gratification.
(c)The learned CIT(A) and the assessing officer erred in observing that, no details as to services rendered were filed.
(d)The appellant prays that the amount of Rs.42,09,552/- paid being business expenditure incurred in course of the business be allowed in full and addition deleted.
2. The appellant craves leave to add amend or alter any or all of the ground of appeal.
2 ITA No. 7250/Mum/2010M/s. Arco Electro Technologies Pvt. Ltd.,
2. Assessee-company, engaged in the business of manufacturing of Brush Holder, Rocker ring assembly and lead wire, filed its return of income on 31.10.2007 declaring total income at Rs. 3.56 Crores. Initially, the return was processed u/s. 143(1) of the Income Tax Act, 1961(Act). Later on the case was selected for scrutiny and assessment was finalised by the Assessing Officer (AO) u/s. 143(3) of the Act on 30-10-2009 determining income of the assessee at Rs. 4.03 Crores.
3. During the assessment proceedings, AO found that assessee had claimed expenditure amounting to Rs. 42.09 Lakhs as commission payment. He directed the appellant-company to submit details of commission paid with purpose of payment, nature of services rendered and copy of the agreement entered into. After considering the submissions of the assessee, AO held that assessee had not submitted any details of commission, except the names and address of the person to whom it was paid, that assessee was supplying his entire products to Indian Railways, that assessee had claimed to have paid commission to various persons for procuring tender forms and for the liaison work, that explanation offered by the assessee was not acceptable, that for attending liaison work what was payable was liaison fee and not commission, that generally the purchaser i.e., Railways published in the news papers, that no middle- men are entertained in the tender process. Relying upon the cases of Calcutta Agency Ltd., (19 ITR 19) & Transport Corporation of India Ltd., (256 ITR 701) delivered by the Hon'ble Supreme Court and Hon'ble High Court of Andhra Pradesh respectively disallowed the claim made by the assessee-company.
4. Assessee preferred an appeal before the First Appellate Authority (FAA). He held that any payment made by the assessee-company was against public policy and hence was not allowable expenditure. He relied upon the cases of Bangalore Arrack Co., (201 ITR 25) and Maddi Venkataraman & Co. P.Ltd., (229 ITR 534) delivered by the Hon'ble High Court of Karnataka and Hon'ble Supreme Court. He further held that in view of the explanations inserted to Section 37(1) with retrospective effect from 01-04-1962, expenditure incurred by the assessee was not allowable. He further held that so-called commission was not actually legal expenditure but was the bribe/illegal gratification which was routed through the Books of Accounts of the appellant company in the form of commission paid to the certain persons. He further referred to the matter of Indraprastha Agencies delivered by the Hon'ble High Court of Jharkhand (266 ITR 320). Finally, he confirmed the order of the AO and dismissed the appeal filed by the assessee.
5. Before us, Authorised Representative (AR) submitted that assessee was engaged in the business of manufacturing electrical items, that the assessee company was supplying material to Railways and Bharat Heavy Electricals Ltd (BHEL), that it maintained office only at Mumbai, that for procuring orders it had engaged services of certain agents in other cities, that the agents were informing the assessee-company about the orders placed, that they were helping in collecting the bills, that the commission was paid to the agents through proper banking channels, that the agents were regularly assessed to the tax, that correspondence with the agents clearly proved that it was a normal business transaction, that TDS was collected from the commission paid to the agents. He referred to page Nos. 24 to 30; 31 to 36, 37 to 39 of the Paper Book. He submitted that these papers were the copies of the correspondence with his agents namely M/s. Gyaneshwar Corporation at Jabalpur, Om Trade Agencies and Ms. Aruna at Hyderabad. He further referred to Page Nos.
3 ITA No. 7250/Mum/2010M/s. Arco Electro Technologies Pvt. Ltd., 45 to 109 of the Paper Book which provided the details of debit note issued by Om Trading Agencies for orders from BHEL. He also relied upon the Page Nos. 151 to 168 of the Paper Book. These papers provide details with debit notes by M/s. Gospel Marketing Associates, Patiala for orders from Indian Railways, Diesel Modernisation Works along with copies of Purchase Orders.
5.1. Departmental Representative (DR) submitted that expenditure was not incurred for business and hence was not allowable, that assessee had supplying goods to the Indian Railways and BHEL, that Government agency did not entertain middle- men, that actual nature of services rendered was not explained by the assessee.
6. We have heard the rival submissions and perused the material put before us. Following un-disputed facts emerge from the order of the Revenue Authorities:
i) Assessee is engaged in business of manufacturing electrical goods;
ii) Indian Railways and BHEL are two main purchasers to whom company supplied goods;
iii) Assessee gets orders to supply his goods as well as payment of bills through a few persons located in different cities of country,
iv) Assessee is making payment to such persons for helping it in carrying out its business.
7. Considering the above facts, question arises as whether the said payments are allowable u/s. 37(1) of the Act or same cannot be allowed as per the provisions of Explanation to Section 37(1) of the Act. As per the settled principals of taxation jurisprudence for claiming an expenditure, assessee has to prove that expenses in question were incurred wholly and exclusively for business purposes. Concept of 'wholly and exclusively' has been discussed in various judgment of courts. Judicial pronouncement are unanimous that in such cases, assessee has to prove that expenditure incurred was not for any ulterior/non-business consideration. How to run his business is the exclusive domain of the assessee. So, while carrying out its business, assessee-company had availed services of certain persons and made payment to them it cannot be held that expenditure incurred was not for business. Documents referred to by the AR clearly indicate that assessee was getting orders/payments/ pieces of information from the persons payments have been made. Getting information about the material required by Indian Railways/BHEL was one of the activities of the agents and they were paid for it. Assessee is situated at Mumbai and for procuring orders, if he avails services of agents instead of opening branch offices at different places, it can easily be termed a prudent decision. One cannot forget that advertisement for procuring the orders are not always published in national news papers. When goods are required in smaller quantities, tenders are floated in local news papers only. Assessee-company can have access to such tenders through local agents only. In these circumstances, if agents have been paid commission, it has to be held an allowable expenditure. The FAA has disallowed the said expenditure as he was of the opinion that payment made by the assessee-company was against the public policy. We are of the opinion that transactions entered into by the assessee- company and the agents were not against any public policy. Passing on/receiving information about requirement of any organization is a pure business deal. We cannot forget that for an assessee who is sitting hundreds of kilometers away from that place, such an arrangement is a beneficial and a wise business decision. Such an 4 ITA No. 7250/Mum/2010 M/s. Arco Electro Technologies Pvt. Ltd., arrangement allows assessee to concentrate on his area of strengths i.e., manufacturing.
8. Now, we would like to discuss the cases relied upon by the FAA. In the case of Bangalore Arrack Co., (supra), assessee had paid Rs. 5 Lakhs to a person, so that he would not compete as bidder in the auction whereby the Government of Karnataka was selling the right to vend arrack in certain shops. It was held that payment resulted in monopoly and elimination of rival in a business carried out on business of State Government was against the Public Policy. In that case Hon'ble Apex Court had held as under :
"Public policy is the principle which declares that no man can lawfully do that which has a tendency to be injurious to public welfare and public policy comprehends only the protection and promotion of public welfare. The question whether elimination of competition in trading is opposed to public policy cannot be considered in isolation de hors the nature of the trade, privilege or the right with respect to which an auction is held. If the subject-matter involved is a trade which could be normally considered as a lawful trade and the individual has a fundamental right to carry on such a trade, eliminating a rival trader from operating in the same field will be incidental to the exercise of that fundamental right. On the other hand, if the subject-matter is loosely referred to as trade or business but actually is not recognised as trade or business in respect of which no fundamental right exists and only the State has the exclusive privilege in indulging in such a trade or business, different considerations should prevail. In the latter case, the State may engage in this trade of a pernicious character only because it is inevitable to do so having regard to the public interest such as the absolute need to raise revenue for the State which in turn is utilised for the public welfare. It may also be a case where the State engages itself in such a business or trade to minimise the public harm, which otherwise would result to the public, if the trade or business is carried on by the citizens at large. It is now quite firmly established that none has a fundamental right to carry on trade in vending liquor. The right given to trade in this regard is actually a privilege conferred by the State and normally these privileges are conferred by auctioning the right to vend. It is of the utmost importance that there should be as many bidders as possible in such an auction, so that maximum revenue could be obtained by the State. Purchasing of rival bidders, therefore, on the face of it, will be harmful to public interest and the very object of conducting the auction gets defeated or diluted when intending bidders are sought to be kept away by one of the bidders.
....on the admitted facts in the instant case, the assessee had purchased a rival bidder so that he would not come forward to participate in the public auction to vend arrack. This was contrary to the public interest as well as public welfare and, therefore, opposed to public policy. It could not be regarded as a valid payment for purposes of the Income-tax Act."
Facts of the case under consideration are totally different from the facts of Bangalore Arrack Co.,(supra). No monopoly was achieved by the assessee through the payments made to the agents. Secondly, business of arrack run by State Government cannot be compared with Indian Railways and BHEL. In the case of Maddi Venkataman (supra), assessee had carried out business in violation of provisions of Foreign Exchange (Regulation) Act. Hon'ble Supreme Court held that "..assessee was expected to carry on the business in accordance with law. If the assessee contravened the provisions of the Foreign Exchange (Regulation) Act to cut down its losses or to make larger profits while carrying on the business, it was only to be expected that proceedings would be taken against the assessee for violation of that Act. The expenditure incurred for evading the provisions of the Act and also the penalty levied for such evasion could not be allowed as deduction."
5 ITA No. 7250/Mum/2010M/s. Arco Electro Technologies Pvt. Ltd., In the case of Indraprastha Agency (supra), question was about alleged bribes paid by the assessee to the officers of the Animal Husbandry Department in fodder Scam related cases. In our opinion, facts of the matter under consideration are not at all comparable with that of Indraprastha Agencies (supra). Assessee had made payment to agents in normal course of its business.
9. Considering the facts and circumstances of the case and legal provisions of the Act, we are of the opinion that payments made by the assessee to agents were not against public policy rather same were pure business transactions. Assessee did not make any payment in contravention of law of the land and hence cannot be treated as expenditure incurred against public Policy. In our opinion, expenditure amounting to Rs.42.09 Lakhs is allowable as business expenditure. Therefore, both the Grounds of Appeal are decided in favour of the assessee.
As a result, appeal filed by the assessee stands allowed.
पǐरणामःवǾप िनधा[ǐरती Ʈारा दाǔख़ल कȧ गई अपील मंज़ूर कȧ जाती है .
Order pronounced in the open court on 15th February, 2013 आदे श कȧ घोषणा खुले Ûयायालय मɅ Ǒदनांक 15 फरवरȣ, 2013 को कȧ गई ।
Sd/- Sd/-
(डȣ. मुमोहन / D. MANMOHAN) (राजेÛि / RAJENDRA)
उपाÚय¢ /VICE PRESIDENT लेखा सदःय / ACCOUNTANT MEMBER
मुंबई Mumbai,
Ǒदनांक Date: 15-02-2013
TNMM
आदे श कȧ ूितिलǒप अमेǒषत/
षत Copy of the Order forwarded to :
1. Appellant
2. Respondent
3. The concerned CIT (A)
4. The concerned CIT
5. DR "A" Bench, ITAT, Mumbai
6. Guard File
स×याǒपत ूित //True Copy//
/ BY ORDER,
आदे शानुसार
उप सहायक पंजीकार Dy./Asst.
उप/सहायक Registrar
आयकर अपीलीय अिधकरण,
अिधकरण मुंबई / ITAT, Mumbai