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Income Tax Appellate Tribunal - Ahmedabad

Canton Laboratories, Baroda vs Assessee on 7 November, 2007

IN THE INCOME_TAX APPELLATE TRIBUNAL"D"BENCH, AHMEDABAD

           BEFORE SHRI N. S. SAINI AND SHRI MAHAVIR SINGH

                       ITA No.136 /Ahd/2008
                    (Assessment Year:2004-05 )

M/s. Canton Laboratories            Vs.   Assistant Commissioner of
110/B, G.I.D.C. Estate,                   Income Tax, Circle-2 (OSD)
Makarpura,                                Aayakar Bhavan,
Vadodara.                                 Nr.Race Course Circle,
                                          Vadodara.
      (Appellant)                               (Respondent)

                           PAN: AABFC 6438 M

       Appellant by : Shri M. K. Patel.
      Respondent by : Shri Rohit Mehra, D.R.


                              ORDER

PER: SHRI N. S. SAINI, ACCOUNTANT MEMBER.

This appeal is filed by the assessee against order of the Ld. C.I.T. (Appeals)'s order dated 07-11-2007 for the Assessment Year 2004-05.

2. The ground No.1 of appeal of the Assessee reads as under:-

"1. The Appellant paid commission of Rs.10,38,159/- on export sales of Rs.1,03,81,590/- to the M/s. Canton Chem Inc. covered u/s. 40A(2)(b). The Learned Assessing Officer had disallowed Rs.6,22,895/- being 60% of the total commission paid to M/s. Canton Chem Inc. being persons covered u/s. 40A(2)(b) of the Act on the count that it is excessive in nature. The Hon. C.I.T. (A)-II, allowed the total commissioner to the said party @ 4.26% of the turnover, as it was in last year. The above payment is reasonable as compared to the market price and the type of services rendered. The export business growth is solely to the credit of the party to use who has been procuring orders for us."

3. The brief facts of the case are that during the course of the assessment the Learned Assessing Officer observed that assessee paid commission on sale of Rs.12,95,995/-. Out of the said commission commission of RS.10,38,159 was paid to M/s/. Canton Chem Inc. at the rate 10% on sales of Rs.1,03,81,590/- to M/s.

Canton Chem Inc. The Learned Assessing Officer observed that total export sales of the assessee was Rs.3,44,97,602/- and total commission paid on export sale was Rs.12,95,995/- only which works out to 3.7% of the total sales. He also observed that M/s. Canton Chem Inc. was covered under section 40(A(2)(b) of the Act and as an Associate Concern and therefore, he disallowed 60% of the total commission paid to M/s. Canton Chem Inc which worked out to RS.6,22,895/- and added the same to the income of the assessee.

4. In appeal before the Learned Commissioner of Income Tax (Appeals) the assessee argued that commission at the rate 10% of the export turnover was paid to M/s. Canton Chem Inc. as profitability ratio on export sales was much more than local sales. The assessee achieved a good growth in the export business which was possible with the help of Canton Chem Inc. The assessee achieved export sales turnover of `.4.27 crores as against `.2.03 crores in earlier year. The increase in export business was because of orders procured by M/s. Canton Chem Inc. an entity in USA which was in the business of canvassing chemical; business and securing orders on behalf of other party and the assessee paid commission to the said party of `.10,38,159/- for securing business. He further submitted that percentage of commission paid on export sales to Canton Chem Inc. was 10.69% whereas in case of export sales to certain parties in Philippines commission was paid to Philippines was paid party as well as to local party at Mumbai total commission to other parties together was 19.58% of export sale to Philippine. Thus, the commission paid to M/s. Canton Chem Inc. an entity covered under section 40A (2)(b) of the Act was much lower.

5. The Learned Commissioner of Income Tax (Appeals) after considering the submissions of the assessee observed that in the last year commission paid was 4% and in the current year the same increased to 10% and the only reason for this could be that the M/s. Canton Chem Inc. was an Associate concern of the assessee. When sale was decreasing which was `.1,08,72,730/- in the year under appeal as against `.1,17,57,048/- in the 3 ITA.No.136/Ahd/08 immediately preceding year the assessee paid more commission which was not justified. The nature of services provided remains the same and in view of the fact the payment of commission more than 10% was excessive and unreasonable considering the fair value. Therefore, he confirmed the disallowance of commission made by the Assessing Officer.

6. The Learned Authorised Representative of the assessee argued that in the immediately preceding year the commission payment was 4.26% to M/s. Canton Chem Inc. which was allowed to the assessee. The Learned Commissioner of Income Tax (Appeals) allowed commission at the very same rate which was allowed in the immediately preceding year and thereby sustained disallowance of commission of `.5,95,884/-out of the total disallowance made by the Learned Assessing Officer of Rs. 6,22,895/-. He further submitted that the Learned Commissioner of Income Tax (Appeals) should have allowed commission at a higher percentage of 7% and therefore, prayed that the commission should be allowed at the rate 7% of total export sales made by M/s. Canton Chem Inc

7. The Learned Departmental Representative on the other hand supported the order of the Learned Commissioner of Income Tax (Appeals).

8. We have heard the rival submissions and perused the materials available on record. In the instant case the assessee paid commission @ 10% of export sales to Associate Concern Canton Chem Inc., for procuring export orders. The Learned Assessing Officer observed that total commission paid during the year on total export sales was 3.7% He therefore, considered commission @ 4% as reasonable and therefore, disallowed Rs.6,22,895/- as excessive by invoking provisions of section 40A(2)(b) of the Act. On appeal, Learned Commissioner of Income Tax (Appeals) observed that commission paid in the immediately preceding year was 4.26% in respect of export sales. He therefore, considered 4.26% as also reasonable for the year under consideration. Consequently he allowed relief of `. 27,011/- and 4 ITA.No.136/Ahd/08 sustained remaining disallowance of Rs.5,95,884/-. Before us the Learned Authorised Representative of the assessee submitted that the genuineness of commission payment is not in doubt. He submitted that disallowance was unwarranted and excessive. On the other hand the Learned Departmental Representative supported the order of the Learned Commissioner of Income Tax(Appeals). We find that commission in question was paid to a relative within the meaning of section 40A (2)(b) of the Act. It is also not in dispute that the rate of commission was increased from 4.26% in the immediately preceding to 10.69% in the current year. Whereas the export orders procured through the associate concern during the current year is lesser than such orders procured in the immediately preceding year. The Learned Commissioner of Income Tax (Appeals) considered the commission rate paid in respect of export sales in the immediately preceding year at 4.26% as also reasonable rate of commission for the year under consideration. We find that no material was brought on record by the assessee to show that there was any change in the nature or scope of services rendered by the associate concern in the current year from the immediately preceding year. Further, no material was brought before us to show that there was any increase in the rate of commission paid to other parties during the year under consideration in respect of purchase orders procured through them. In absence of any such material brought on record to show that there was in general any increase in commission rate, any extra services were received by the assessee during the year under consideration, in our considered opinion the Learned Commissioner of Income Tax (Appeals) was justified in considering the commission rate of immediately preceding year as the market value of commission rate of the year under consideration also. Thus we do not find any good reason to interfere with the order of the Learned Commissioner of Income Tax (Appeals) it is confirmed and the ground of appeal of the assessee is dismissed.

9. Ground No.2 reads as under:-

"2. The Hon. Commissioner of Income Tax (Appeals) had confirmed the action of the Learned Assessing Officer who disallowed insurance premium under the Employees' Group Gratuity Policy of LIC. The Learned Assessing Officer had treated this as an item of expense covered u/s. 36(1)(v) and disallowed the same on the ground that there is no approved gratuity fund. The payment of LIC for the period captioned policy is not hit by 36(1)(v), but it is an allowable item u/s. 37(1) ."

10. The brief facts of the case are that the assessee debited `. 92,536/- towards contribution for employees group gratuity scheme of LIC. The Learned Assessing Officer disallowed the deduction for the same on the ground that the assessee has not created the gratuity within the meaning part-C of Schedule IB of the I. T. Act where the assessee paid the amount directly to LIC of the employees group gratuity fund. The Learned Assessing Officer held that any contribution made to a gratuity fund not approved is hit by the provisions of section 36(1)(v)of the I. T. Act. He relying on the following decisions made the disallowance.

1. CIT vs. Chandanmal Sarawgi and Co. 146 CTR (Guh.)774.

2. CIT vs. Ganambigai Mills 238 ITR 783 (Mad.)

3. CIT vs. Coimbatore Premier Corporation. Pvt. Ltd. 244 ITR 753(Mad.) and

4. Shri Sajjan Mills Ltd. vs. CIT 156 ITR 585 (SC.).

11. In appeal before the Learned Commissioner of Income Tax (Appeals) the assessee contended that the said payment was squarely covered by section 36(1)(v) and is supported by the decision of the Hon'ble Madras High Court in the case of CIT vs. Textool Co. Ltd., 257 ITR 39.

12. The Learned Commissioner of Income Tax (Appeals) confirmed the action of the Learned Assessing Officer observing that the decision in the case of Textool Co. Ltd., (supra) was not applicable to the assessee as in that case the group gratuity fund duly approved and from that payment was made to LIC. Whereas in the case of the assessee the fund is not6 approved and therefore, the claim cannot be allowed.

13. The Learned Authorised Representative of the assessee submitted that the assessee had filed an application to the CIT for approval of the gratuity fund and the approval has not been granted to the assessee. Therefore, the Learned Commissioner of Income Tax (Appeals) was not justified in confirming the disallowance made by the Learned Assessing Officer. He submitted that the issue is squarely covered by the order of Ahmedabad D-Bench of the Tribunal in the case of ACIT Baroda Circle-1 vs. Advanced Spectra Tek Pvt. Ltd., in ITA No.193/Ahd/2002 for Assessment Year 1998-99 order dated 1-2-2008.

14. We have heard the rival submissions and perused the materials available on record. We find that the Tribunal in the case of Advanced Spectra Tek Pvt. Ltd. (supra) has held as under:-

"6. The second issue of Revenue's appeal is as regards to deletion of addition of `.91,189/- on account of payment of unproved gratuity fund. From the facts of the case, it is noticed that for the payment of gratuity is not doubted. Only issue is whether the gratuity fund is approved by CIT or not. The Assessing Officer has disallowed under the premise that the gratuity fund is not approved by the CIT till the date of passing of this order. The assessee has paid gratuity from time to time to LIC for group gratuity. Once the assessee has paid the group gratuity from time to LIC, whether the CIT has approved or not the claim of gratuity is not material. It is a fact that LIC has filed the scheme before the CIT for approval and the CIT is yet to decide on the same. In view of these facts, we fairly feel that Learned Commissioner of Income Tax (Appeals) has rightly allowed the claim and confirm the same."

15. We find that in the instant case, the assessee has paid `.92,536/- as premium to LIC for employees' group gratuity scheme which was disallowed by the Learned Assessing Officer on the ground that the gratuity fund was not approved by the CIT and the same was confirmed by the Learned Commissioner of Income Tax (Appeals) in appeal,. We find that Learned Authorised Representative of the assessee has submitted before us that application for approval of the gratuity fund was made to the CIT but the approval was not granted till date. We find that this submission was not made by 7 ITA.No.136/Ahd/08 the assessee before the lower authorities. It shall be in the interest of justice to remand the matter back to the file of the Learned Assessing Officer for verification whether the assessee has applied for approval of the Gratuity fund to the CIT or not. If the assessee has applied for approval of the gratuity fund to the CIT and approval was not granted to the assessee till date, then the case of the assessee is squarely covered by the above quoted decision of the Tribunal. The Learned Assessing Officer shall on finding that the approval sought for by the assessee was not granted by the CIT till date then to allow deduction to the assessee and if he finds that no application was made for approval by the assessee then not to allow the deduction to the assessee. Thus, this ground of appeal of the assessee is allowed for statistical purposes.

16. In the result, appeal of the assessee is partly allowed for statistical purposes.

Order pronounced in the Court on 10th December, 2010.

                  Sd/-                               Sd/-
           (MAHAVIR SINGH)                       (N. S. SAINI)
           JUDICIAL MEMBER.                  ACCOUNTANT MEMBER.

Ahmedabad Dated 10th December, 2010.

S.A.Patki.

Copy of the Order forwarded to:-

1.      The Appellant.
2.      The Respondent.
3.      The CIT (Appeals)-II,Baroda.
4.      The CIT concerned.
5.      The DR., ITAT, Ahmedabad.
6.      Guard File.
                                                            By ORDER


                                                Deputy/Asstt.Registrar
                                                   ITAT,Ahmedabad.