Income Tax Appellate Tribunal - Kolkata
M/S. P.C. Chandra & Sons (India) Pvt. ... vs Jcit, Range-1, Kolkata, Kolkata on 6 September, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL "C" BENCH : KOLKATA
[Before Hon'ble Shri Aby. T. Varkey, JM & Shri M.Balaganesh, AM ]
I.T.A No. 150/Kol/2015
Assessment Year : 2008-09
M/s P.C. Chandra & Sons (India) Pvt. Ltd -vs- JCIT, Range-1, Kolkata
[PAN: AABCP 5796 L]
(Appellant) (Respondent)
For the Appellant : Shri S.K. Tulsiyan, Advocate
For the Respondent : Shri Goulen Hangshing, CIT DR
Date of Hearing : 22.08.2017
Date of Pronouncement : 06.09.2017
ORDER
Per M.Balaganesh, AM
1. This appeal is directed against the order passed by the Learned Commissioner Income Tax(Appeals)-1, Kolkata [in short the 'Ld. CIT(A)'] in appeal no. 378/CIT(A)-1/R- 1/2014-15 dated 31.12.2014 against the order passed by the JCIT, Range-1, Kolkata [in short the 'Ld. A.O.'] u/s 143(3) of the Income Tax Act, 1961 [in short the 'Act'] dated 27.03.2014.
2. The Ground No.1 , 4 & 5 raised by the assessee are general in nature and does not require any specific adjudication.
3. The first issue to be decided in this appeal is as to whether the ld CITA was justified in upholding the disallowance of commission paid to non-executive directors at an average rate of 0.023% as against different payments made by the assessee, in the facts and circumstances of the case.
2 ITA No.150/Kol/2015M/s P.C. Chandra & Sons (India) Ltd.
A.Yr.2011-12 3.1. The brief facts of this issue is that the assessee is a private limited company engaged in the business of manufacturing and selling of gold and silver ornaments. It has two branches one at Barasat and the other at Bangalore. The assessee for the Asst Year 2011-12 filed its return of income on 29.9.2011 declaring total income of Rs 25,93,57,748/-. The assessee company is a closely held company wherein the members of the Chandra family work together in the family business. The assessee stated that the Directors, both executive as well as non-executive, sit at different branches of the assessee company and guide the customers for making purchases. The ld AO observed that the assessee had paid commission to both its executive and non-executive directors. He also observed that it had paid salary to executive directors apart from commission. He treated the commission paid to executive directors as part and parcel of salary and allowed the same as deduction. However, with regard to commission paid to non- executive directors (to whom no salary was paid), he observed that it is impossible that all directors are involved in the sales of all the three shops and accordingly disallowed the entire commission paid to non-executive directors amounting to Rs 62,27,358/- in the assessment. The assessee pleaded that it had paid commission to these three non- executive directors as under:-
Mr Uday Kumar Chandra - Rs 28,46,299 - Commission rate @ 0.0825% of sales Mr Suvro Chandra - Rs 25,87,545 - Commission rate @ 0.0075% of sales Mr Prosenjit Chandra - Rs 7,93,514 - Commission rate @ 0.023% of sales
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Rs 62,27,358
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3.2. The ld AO examined the claim of deduction towards commission to non-executive directors and disallowed the same as not meant for the purpose of business u/s 37(1) of the Act. The assessee pleaded that the ld AO did not get into the details of the working of the commission paid to non-executive directors of the assessee company. It was 2 3 ITA No.150/Kol/2015 M/s P.C. Chandra & Sons (India) Ltd.
A.Yr.2011-12 submitted that the Chandra family has generations of experience in the jewellery business and the assessee company is a closely held company dealing in the same. The family members whether Executive Directors or Non-Executive Directors are involved in the company and contribute to the sales of the company. The customers have faith on the members of the Chandra family and thereby, consult them before purchasing jewellery. The assessee company had passed a resolution authorizing the payment fo commission to the directors for the services rendered by them. It is a small percentage of sales and the assessee has followed this practice since the past several years and the same was always allowed as a deduction in the earlier years under scrutiny assessments framed by the ld AO. In all the earlier years, the ld AO had accepted that the said commission payments to non-executive directors as directly related to the business of the assessee company. The revenue cannot change its stand or take up a different view in respect of different assessment years with respect to same facts. The assessee pleaded that the rule of consistency needs to be followed and placed reliance on the following decisions :-
a) Hon'ble Supreme Court in the case of Radhasoami Satsang vs CIT reported in (1992) 193 ITR 321 (SC)
b) Hon'ble Patna High Court in the case of Alok Nursing Home vs CIT reported in (2010) 322 ITR 171 (Pat)
c) Hon'ble Punjab & Haryana High Court in the case of CIT vs Sood Harvester reported in (2008) 304 ITR 279 (P&H) 3.3. With regard to the objection of the ld AO that the directors are paid a percentage computed on the entire sales, it was stated that it is a method adopted by the assessee company and is merely a small percentage. It is only a computational aspect and once it is accepted that non-executive directors are also involved in increasing the sales of the company, the computation cannot be a hindrance for the allowability of the expense. It 3 4 ITA No.150/Kol/2015 M/s P.C. Chandra & Sons (India) Ltd.
A.Yr.2011-12 is upon assessee to choose a method best suited for it for estimation of the value of services received by it from the Directors.
3.4. The ld CITA observed in his order as under :-
"6.2. The AO has made the disallowance of commission to non-executive directors of Rs. 62,27,358/- to three directors namely, Uday Kumar Chandra, Suvro Chandra and Prosenjit Chandra. It is seen from the details provided by the appellant that these three persons had been allowed commission @ 0.0825%, .075% and .075% respectively. It is, however, seen that the appellant has not been able to satisfactorily establish that the payment of commission at a higher rate to these non-executive directors was justifiable on the grounds of business expendiency, as it is seen that the Appellant was giving commission to the other executive directors at a lower rate. The jurisdiction given by the Appellant regarding payment of commission to the non-executive directors as above is that they had high technical knowledge and were directly involved in sales. However, these are found to be general arguments and the Appellant has not given any material evidence to establish its claim that these persons' contribution had resulted in higher sales. However, the AO has also not controverted the claim of the appellant these persons were available at the showroom of the appellant or that they were not involved in the sales transaction. Therefore, it is the reasonability of the Commission paid to them which has to be considered. In this regard, the commission payment to these persons is restricted to .023% being paid by the appellant to Amitava Chandra. The AO is accordingly directed to recompute the disallowance of commission payment to these three persons keeping in view the above rate of .023% and restrict the disallowance to this amount."
4. Aggrieved, the assessee is in appeal before us on the following grounds:-
2a) That the Ld. CIT(Appeals)erred in having directed the AO to compute the disallowance of commission paid to each of the three Non-Executive Directors at an average rate of .023% in spite of the fact that commission at small percentage of .0825%, .075% & .075%, aggregating to Rs. 62,27,358/-, on the total saels were paid keeping in view the services rendered by each of them, which was as well backed by resolution authorizing payment of such commission.
2b) That in one hand, the Ld. CIT(A) did not dispute the active involvement of the directors in the sales transaction and on the other hand he doubted the reasonability of the commission paid to them in spite of the fact that the assessee has been following this practice since past several years and duly accepted by the Department.4 5 ITA No.150/Kol/2015
M/s P.C. Chandra & Sons (India) Ltd.
A.Yr.2011-12
5. We have heard the rival submissions. The facts stated hereinabove remain undisputed and hence the same are not reiterated for the sake of brevity. We find that the ld CITA had reversed the finding of the ld AO that the commission paid to non- executive directors are meant only for the purpose of business of the assessee company. The only dispute which the ld CITA raised was with regard to the quantum of commission paid to non-executive directors. The ld CITA observed that three non- executive directors were paid different commission rates @ 0.0825% ,0.075% and 0.023% to Mr Uday Kumar Chandra , Mr Suvro Chandra and Mr Prosenjit Chandra respectively. We find that the ld CITA had taken the least of the percentage of commission paid to Mr Prosenjit Chandra @ 0.023% as a standard benchmark of commission to be paid to other non-executive directors also and restricted the allowability of commission paid @ 0.023% of sales for non-executive directors. The ld DR prayed before us that the ld CITA had estimated the percentage of commission. He stated that the issue of disallowance of commission to non-executive directors may be settled on some percentage of sales. This in our opinion, does not draw support from the statute. When the expenditure incurred towards commission to non-executive directors has been accepted to be for business purposes, the revenue cannot get into the computational aspect and disallow the same u/s 37(1) of the Act. However, the revenue , if aggrieved, could bring in comparable cases and sought to make some disallowance , if any, u/s 40A(2) of the Act. But that is not done in the instant case. The ld CITA had accepted the commission expenditure to non-executive directors as a business expenditure but had disputed the quantum thereon alone. Against the order of the ld CITA on the aspect of expenditure incurred for business purposes, the revenue had not preferred any appeal before us. It is well settled that the test of commercial expediency and reasonableness of an expenditure should be judged from the viewpoint of the businessman and not from the point of view of the revenue. Reliance in this regard is 5 6 ITA No.150/Kol/2015 M/s P.C. Chandra & Sons (India) Ltd.
A.Yr.2011-12 placed on the decision of the Hon'ble Supreme Court in the case of Hon'ble Supreme Court in the case of CIT vs Dhanraj Girji Raja Narasingherji (1973) 91 ITR 544 (SC). The fact of rendering of services by these non-executive directors are not disputed by the revenue. It is not in dispute that these non-executive directors are not paid any salary from the assessee company and hence the assessee chose to compensate them in the form of commission as a small percentage of sales. We do not find any infirmity in the action of the assessee in this regard.
5.1. We also find that similar payment of commission paid to non-executive directors were debited by the assessee since past several years and the same has been allowed as a deduction by the revenue in earlier years. Hence following the principle of consistency, the revenue ought not to have taken a different stand during the year under appeal when there is no change in the facts. Reliance in this regard has been rightly placed by the assessee on the decision of the Hon'ble Supreme Court in the case of Radhasoami Satsang vs CIT reported in (1992) 193 ITR 321 (SC).
5.2. In view of our findings and respectfully following the judicial precedents relied upon hereinabove, we have no hesitation in directing the ld AO to allow the entire payment of commission paid to non-executive directors as deduction. Accordingly the Grounds 2a) and 2b) raised by the assessee are allowed.
6. The next issue to be decided in this appeal is as to whether the ld CITA was justified in confirming the addition made in the sum of Rs 11,37,000/- representing advance received from customers for specific jewelleries as unexplained cash credit u/s 68 of the Act , in the facts and circumstances of the case.
6.1. The brief facts of this issue is that the assessee is in the jewellery making business , the modus operandi includes receipt of advances from the customers against purchase of 6 7 ITA No.150/Kol/2015 M/s P.C. Chandra & Sons (India) Ltd.
A.Yr.2011-12 gold and subsequent delivery / sale of jewellery. The customer chooses a design of his choice and makes advance against the said order. On the date of advance, the name / address and contact number of the customer is noted and requisite gold is booked in his name as per the rate of gold prevalent on the said date. Subsequently, when the sale is booked, the advance is adjusted against the invoice value. At the end of the year as on 31.3.2011, the advance against various orders stood at Rs 8,51,13,566/-. The ld AO issued notices u/s 133(6) of the Act to various customers on a test check basis. Of all the letters issued by him, 9 letters were returned unserved and one person denied making the advance. The total amount involved in respect of the unverified parties was Rs 11,37,000/-. The ld AO alleged that advance from the customers amounted to unexplained cash credit and hence he added the same u/s 68 of the Act.
6.2. The assessee pleaded before the ld CITA that the ld AO did not give the list of the names of the said parties to the assessee so as to show when the said advances have been booked as income. Also, while making the addition, he erroneously added Rs 11,57,000/- instead of Rs 11,37,000/-. It was explained that the assessee's nature of business is such that advance is received from a customer against order after he chooses a design. Thereafter, on completion of the work , the jewellery is delivered against balance payment. It was explained that customized jewellery cannot be manufactured / made by the assessee company until and unless it receives sufficient advances. While making sale of goods / accepting advance against sales, the assessee maintains a record of the basic details of a customer viz name, address and contact number. The assessee delivers jewellery according to the specifications on the payment of balance amount. It was also stated that the advances were received in the course of trade and that trade advances cannot be put on the same footing as cash credits. The assessee provided certain sample of advances against order which has been subsequently adjusted against sales and offered to tax. It was also pleaded that merely because certain parties from whom advances were received had not responded to notice issued u/s 133(6) of the Act, 7 8 ITA No.150/Kol/2015 M/s P.C. Chandra & Sons (India) Ltd.
A.Yr.2011-12 would not make the receipt of advance from customers as unexplained credit in the hands of the assessee. The ld CITA did not heed to the contentions of the assessee and confirmed the addition made by the ld AO and rectified the addition figure at Rs 11,37,000/- thereon. Aggrieved, the assessee is in appeal before us on the following grounds:-
3a) That the Ld. Revenue authorities grossly erred in having treated the trade advances from customers against purchase of ornaments as cash credit in spite of the fact that against such advances the assessee has supplied the ordered material as per details recorded in the books and hence addition of Rs.
11,37,000/- u/s 68 of the Act is unwarranted and bad in law.
3b) That the Ld. CIT(Appeals) while upholding the addition of Rs. 11,37,000/- erred in not having considered the modus operandi of the assessee's business and also the fact that list of the parties, whose advances have been added, had not been provided to enable the assessee to show that the sale proceeds against such advances have already been offered to tax.
6.3. We have heard the rival submissions. The ld DR prayed for setting aside of this issue to the file of the ld AO for verification as admittedly the notices u/s 133(6) of the Act were issued beyond the back of the assessee. We find from the records that admittedly the ld AO had issued notices u/s 133(6) of the Act to several parties and out of them, only 9 parties had not responded to the same and one party had even denied the payment of advance to the assessee. We find that the ld AR had argued that all the advances were subsequently converted into sales in the next financial year and offered to tax by the assessee. It is not the case of the revenue that the said advance is not adjusted against the sales in the subsequent year also. We also find that the explanation has been given by the assessee that it use to receive advances from customers in respect of certain jewellery to be made based on the actual specifications of the customers. This is the prevailing market practice in the jewellery industry and no jeweller would undertake to carry out the work of a new design or model of a jewellery without receiving advance from the said customer, as admittedly the said specification would 8 9 ITA No.150/Kol/2015 M/s P.C. Chandra & Sons (India) Ltd.
A.Yr.2011-12 not be suitable for the other customers as they are customized and hence the jeweller cannot afford to take any risk in this regard. Hence we are convinced of the fact that the said advances received from customers were received only during the course of trade which would be suitably adjusted with the sales booked in the subsequent year. In any case, it is undisputed that the said advances were received by the assessee in the normal course of its trade. We find that out of the total advance outstanding in the sum of Rs 8,51,13,566/-, the ld AO found only a meager sum of Rs 11,37,000/- as unverifiable due to difference in address. It is well settled that the assessee could be expected to give the address given by the customer at the time of booking the jewellery. There is no mechanism prevailing in the jewellery industry to verify or seek for the authenticity of the addresses mentioned by the customer. Actually it would be the other way round that the customer may choose to give wrong address in order to escape from the tax net on the premise that he / she should not be halled up from the tax department seeking for the source of purchase of jewellery. This cannot hamper the business model of the assessee and no adverse inference could be drawn against the assessee in this regard. In any case, the trade advances cannot be the subject matter of addition u/s 68 of the Act. Reliance in this regard is placed on the following decisions :-
a) Hon'ble Delhi High Court in the case of CIT vs Shri Vardhman Overseas Ltd in ITA No. 774/2009 dated 23.12.2011.
b) Co-ordinate Bench decision of Indore Tribunal in the case of ACIT vs Dewas Soya Ltd in ITA No. 336/Ind/2012 for Asst Year 2008-09 dated 31.10.2012.
6.3.1. In view of our aforesaid findings , we hold that the addition u/s 68 of the Act made towards advance received from customers in the sum of Rs 11,37,000/- does not stand the test of law and accordingly we direct the ld AO to delete the said addition. Accordingly, the Ground Nos. 3a) & 3b) raised by the assessee are allowed.
9 10 ITA No.150/Kol/2015M/s P.C. Chandra & Sons (India) Ltd.
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7. In the result, the appeal of the assessee is allowed.
Order pronounced in the Court on 06.09.2017
Sd/- Sd/-
[A.T. Varkey] [ M.Balaganesh ]
Judicial Member Accountant Member
Dated : 06.09.2017
SB, Sr. PS
Copy of the order forwarded to:
1. M/s P.C. Chandra & Sons (India) Pvt. Ltd., 127/A, B.B. Ganguly Street, Bowbazar, Kolkata-700012.
2. Joint Commissioner of Income Tax, Range-1, Aayakar Bhawan, P-7, Chowringhee Square, Kolkata-700069
3. C.I.T(A)-1, Kolkata 4. C.I.T.- Kolkata.
5. CIT(DR), Kolkata Benches, Kolkata.
True copy By Order Senior Private Secretary Head of Office/D.D.O., ITAT, Kolkata Benches 10