Income Tax Appellate Tribunal - Mumbai
Ito 2(3)(2), Mumbai vs Ssj Commodities P. Ltd, Mumbai on 27 November, 2018
IN THE INCOME TAX APPELLATE TRIBUNAL "F" BENCH, MUMBAI
BEFORE SHRI SHAMIM YAHYA, AM AND SHRI PAWAN SINGH, JM
ITA No. 5658/Mum/2016
(Assessment Year: 2013-14)
The Income Tax Officer-2(30(2), M/s. SSJ Commodities Pvt. Ltd.
Room No. 581A, Aayakar Bhavan, 1st Floor, merchant Chamber,
Vs.
Mumbai-400 020 41, New Marine Lines,
Mumbai-400 020
PAN/GIR No. AAHCS 5863 M
(Appellant) : (Respondent)
Appellant by : Shri Rajiv Gubgotra
Respondent by : Shri Rakesh Joshi
Date of Hearing : 06.09.2018
Date of Pronouncement : 27.11.2018
ORDER
Per Shamim Yahya, A. M.:
This appeal by the Revenue is directed against the order of the learned Commissioner of Income Tax (Appeals)-6, Mumbai ('ld.CIT(A) for short) dated 27.06.2016 and pertains to the assessment year (A.Y.) 2013-14.
2. The grounds of appeal read as under:
1. " Whether, on the facts and in the circumstances of the case and in law the Ld. CIT(A) was correct in allowing the transaction with M/s Sujali Vyapar Pvt Ltd as non speculative transaction and allowing Rs. 3,85,65,900/- as bad debt and the expenses, ignoring the facts brought on records by the AO, including the details of criminal case filled by the assessee on seller/purchaser of cardamon establishing that same to have all the ingredients of speculative transactions
2. " Whether, on the facts and in the circumstances of the case and in law, the Ld. CIT(A) was right in adopting only those payments of brokerage not exceeding Rs. 1 lakh alone, when the Assessing Officer has disallowed the entire payment towards increase in sub brokerage charges after due and proper verification ?"
3. " Whether, on facts and in the circumstances of the case and in law the CIT(A) was right in concluding that the reimbursement are outside the preview of the section 40A(2)(b), when the AO found that the assessee has not disclosed such facts in return of Income ?"
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4. " For these and other grounds that may be urged at the time of hearing, the decision of the GT(A) may be set aside and that of the AO restored."
3. The assessee is engaged in the business of trading and broking in commodities and commodity futures. It filed its e-return of income for A.Y.2012-13 on 29.09.2013 declaring total income of Rs.4,98,436/- under the head business income. Book profit u/s.115B of the Act was shown at Rs.4,62,721/-. The case was selected for scrutiny and accordingly, notices u/s.143(2) and 142(1) were issued and duly served on the assessee. The AO completed the assessment u/s.143(3) of the Act determining total income at Rs.6,27,59,760Y- and book profit U/S.115JB at Rs.4,62,721/-. He made disallowances of Rs.3,85,65,900/- on account of speculation loss, Rs.1,98,89,657/- towards excessive sub- brokerage expenditure and Rs.38,05,765/-u/s.40A(2)(b) towards reimbursement expenses considered as excessive and unreasonable.
Apropos ground no.1:
4. Brief facts on this issue are as under:
The assessee company was regularly dealing with SVPL (supplier) since the previous year relevant to assessment year 2011-12. During the year under consideration, the appellant has recorded transactions with SVPL and claimed bad debt of Rs.5,38,69,578/- on account of non-recovery of dues from SVPL. During the course of assessment proceedings, the AO show caused the appellant as to why the bad debt should not be disallowed. In response, the assessee submitted that the bad debt is due to non- recovery of compensation agreed to by SVPL due to its failure to supply cardamom as per the agreement. However, the AO was not satisfied with the explanation of the assessee. Further, the assessee also failed to prove the efforts made by it to recover the 3 I TA No .5 6 5 8 / Mu m /2 0 1 6 M/s. SSJ Commodities Pvt. Ltd.
dues from SVPL. The appellant invoked provisions of section 144A of the Act and approached the JCIT for issuing direction to the AO as he was not considering the decision of the Hon'ble Supreme Court in case of TRF Ltd. v. CIT, 323 ITR 397 (SC) as well as the facts of the case, where there are ample evidences to prove that the debt become non recoverable. After hearing the assessee, the JCIT issued direction to the AO to allow claim of bad debt subject to fulfillment of conditions stipulated in section 36(1)(vii) r.w.s. 36(2) and follow the ration of the decision in TRF Ltd. (supra). At the same time, he also directed the AO to examine whether the transactions between assessee and SVPL constitute "speculation business" as partial transaction of purchases and sale are settled otherwise then by taking delivery of goods. He also directed to verify the increase in brokerage expenses over the last year. He also directed to reject books of account if the result shown therein is not reliable and insufficient to assess the total income by indicating specific defects.
5. The AO noticed that the assessee had claimed total bad debts of Rs.6,95,29,071/- including Rs.5,38,69,578/- from SVPL. The assessee company was regularly dealing with SVPL since A.Y.2011-12. SVPL (supplier) had agreed that it would supply cardamom as per quality specification of the designated warehouse, Multi Commodity Exchange (MCX) to the assessee at the agreed date. Upon purchase from the supplier, the supplier would send trade confirmation cum debit note with the terms and conditions as mentioned therein and on the basis of such trade confirmation cum debit note, the assessee had paid Rs.5,72,69,600/- for 84,200 kg of cardamom. The assessee stated that the sales to SVPL were offered to tax in A.Y. 2012-13 and 2013-14. SVPL had supplied 32,800 kg and 5,000 kg of cardamom till 32.03.2012. The balance of 46,400 kg was the 4 I TA No .5 6 5 8 / Mu m /2 0 1 6 M/s. SSJ Commodities Pvt. Ltd.
closing stock as on 31.03.2012. In F.Y. 2012-13 (A.Y. 2013-14), SVPL issued trade confirmation cum credit notes for sale of 6,400 kg of cardamom leaving 40,000 kg of cardamom pending delivery. Despite assessee's effort, SVPL did not deliver the balance 40,000 kg of cardamom held by it on behalf of the assessee to MCX. Hence, the assessee debited Rs.5,38,69,578/- (including Rs.7,15,054/- towards legal charges) to the supplier's account on 15-17705/2012 treating the same as sales to the supplier at the then prevailing price at MCX. Subsequently, the supplier issued credit note of Rs.4 crore on 09.06.2012 only instead of Rs. 5.33 crore. The supplier issued several post-dated cheques against the above sales. However, the bankers of supplier could not honor the cheques. As the sale consideration was not received, Rs.5,38,69,578/- was finally written off as bad debt in the books of the assessee. During the course of assessment proceedings, the AO asked the assessee as to why the transaction with SVPL should not be treated as speculative transaction and the resultant bad debt should not be treated as "speculation bad debts^'. The appellant submitted before the AO that the transaction was not a speculation transaction as it was not engaged in any speculation business and the supplier had also confirmed holding of stock on behalf of the appellant as on 31.03.2012. It was also submitted that in earlier year, the same was shown as stock-in-trade and the AO, in the order passed u/s 143(3), had accepted the same. Further, in this case, there was no settlement of contract and such breach of contract does not fall under the definition of speculation income. The appellant relied on the Hon'ble Supreme Court decision in the case of CIT v. Shantilal Pvt. Ltd. 144 ITR 57 (SC) in support of its contention.
6. The AO, however, did not agree with the submission of the assessee and treated the transaction as speculation transaction. He stated that the purchase and sale of 55,000 5 I TA No .5 6 5 8 / Mu m /2 0 1 6 M/s. SSJ Commodities Pvt. Ltd.
kg of cardamom was without actual delivery of goods, out of which sale of 45,000 kg was during the subject previous year. Both purchase and sale was made to SVPL. The assessee itself had accepted that SVPL did not give delivery of 45,000 kg of cardamom but had recorded both purchase and sale of 45,000 kg of cardamom in its books. The Trade Confirmation cum Credit Note' brought on record in respect of sale of such cardamom of 45,000 Kg did not show any actual delivery of goods. The assessee did not bring out any evidence on record to show actual delivery or transfer of goods. The purchase and sale of cardamom from SVPL recorded in the books of account are settled without actual delivery. The assessee had in the course of assessment proceedings as well as in the FIR and criminal complaint filed against SVPL unequivocally stated that no goods were actually delivered. Also, there is no dispute about the settlement of contract of purchase and sale as the assessee had recorded these transactions in the books and recognized the profit on it. The AO, therefore, held that all the conditions stipulated in section 43(5) have been satisfied. As regards assessee's contention that it had entered into transactions with SVPL with the intention to take and give the delivery, the AO observed that the intention at the time of entering into contract is immaterial. The assessee did not bring any evidence on record indicating specific term or condition of the agreement between the assessee and SVPL to show transfer of property in the goods. The AR further pointed out that the assessee took delivery of 34,200 kg goods to indicate that part of the contract was settled with delivery. The AO held that part-delivery of goods would not convert non-delivery of goods into 'Non-speculative transaction; He relied on the decision in the case of CIT Vs. Aditya Mills Ltd. 209 ITR 933 (Raj.). The AR had further argued that assessee had made full payment for the goods whereas speculative transaction 6 I TA No .5 6 5 8 / Mu m /2 0 1 6 M/s. SSJ Commodities Pvt. Ltd.
requires only keeping of margin money. In this respect, the AO observed that mode and quantum of payment is not a material test to decide speculative or non-speculative nature of the transactions. The assessee also did not file any evidence of payment of VAT or sales tax in respect of sale of cardamom affected through SVPL. If the assessee claims that it was a delivery-based transaction, then it was bound to collect the VAT/Sales tax. On being confronted by the AO, the AR submitted that the assessee had appointed SVPL as its billing agent for VAT purposes. As per terms agreed between the parties, the assessee would refund to the billing agent any VAT credit received by the assessee on its sale of cardamom goods. It was, therefore, the obligation of the billing agent to ensure proper accounting and payment of VAT with the relevant authorities. The AO did not agree with the submission of the assessee. He held that SVPL had sold the goods on behalf of the assessee. There was profit of Rs.2,56,98,442/- on sale of cardamom. Even if the credit for VAT on purchases were allowed, the assessee would still be liable to pay VAT/Sales tax. He relied on the Hon'ble Supreme Court decisions in the case of Davenport & Co. (P) Ltd. Vs. CIT 100 ITR 715 ,SC), Nirmal Trading Co. Vs. CIT 121 ITR 54 (SC), Jute Investment Co. Ltd. Vs. CIT 121 ITR 56 (SC) and held that since the contract for sale and purchase of cardamom from SVPL were ultimately settled otherwise than by actual delivery of goods, all such transactions are treated as speculative transaction u/s.43(5) of the Act. Consequently, he treated the profit/loss from such speculative transactions as speculation profit/loss. Similarly, he also treated the bad debts relating to speculative transaction as speculative loss.
7. Having held the transaction as speculative, the AO asked the assessee to allocate direct/indirect expenses between the three main business activities i.e. trading in 7 I TA No .5 6 5 8 / Mu m /2 0 1 6 M/s. SSJ Commodities Pvt. Ltd.
commodities, broking business and trading in commodity futures. In response, the AR submitted that all three businesses are carried out by the assessee and only one set of books of account has been maintained for its entire business operations. As the assessee company had not maintained its accounts business wise, it was not possible to submit the same. In the P&L Account, the assessee had debited indirect expenses aggregating to Rs.5,62,77,830/-. Assessee had credited 'sale of commodities' of Rs.17,07,47,909/-, brokerage and other client charges of Rs.12, 55,66,595/- and income from trading in commodities futures of Rs.1,96,71,117/-. Therefore, expenses attributable to 'sale of commodities' in the ratio of gross receipts came to Rs.3,04,10,630/-. The 'sale of commodities' of Rs.17,07,47,909/- included sales of Rs.5,83,63,942/- shown to SVPL. Accordingly, in the ratio of turnover, the total expenses attributable to speculation sale to SVPL came to Rs.1,03,94,764/-. In view of the above, the AO attributed total indirect expenses of Rs.1 ,03,94,764/- to the speculation business. Though there was gross profit of Rs.2,56,98,442/- in the speculation transaction with SVPL but after allocating indirect expenses of Rs.1,03,94,764/- and disallowing bad debt of Rs.5,38,69,578/-, the AO determined speculation loss of Rs.3,85,65,900/-. He did not allow the set-off of the same with business income of the assessee.
8. Before the ld. CIT(A), the assessee made elaborate submissions. The ld. CIT(A) reproduced the submissions in his order. Thereafter, he noted that the only question that arose in this case was whether the transaction carried out with SPPL by the assessee is in the nature of the speculation transaction as per the provisions of section 43(5) of the Act or not. In this regard, he referred to the provision of the concerned section. He referred to case laws from few high courts. Thereafter, he examined the facts on this case on the 8 I TA No .5 6 5 8 / Mu m /2 0 1 6 M/s. SSJ Commodities Pvt. Ltd.
touch stone of the case laws referred by him and found that the impugned transactions could not be treated as speculation within the meaning of section 43(5). In this regard, we may refer to the order of the ld. CIT(A) which reads as under:
4.8 Let us examine the facts of the present case in the light of the above legal authorities. SVPL (supplier) was to deliver 84,200 kgs. of cardamom by February, 2012 for which the appellant had paid the full amount of Rs.6,72,69,600/-. As the appellant wanted to sell the above cardamom on Multi Commodity Exchange (MCX), the entire quantity of cardamom purchased was duly sold/hedged by selling the same quantity on the MCX. However, SVPL did not deliver all the goods on time and delayed the same. It has, however, confirmed that as on 31.3.2012, the said goods were lying with it on behalf of appellant. The appellant requested SVPL to deliver the goods or make payment of the same as per the prevailing market price on MCX. As the supplier did not deliver 40,00 kg of cardamom held by it on Lenalf rrf the appellant to MCX warehouse, the appellant debited Rs. 5.33 crore to SVPL's account on 15-17/-Q5/2012, by treating the same as sale to SVPL at the prevailing market rate. Subsequently, SVPL issued lesser credit notes of Rs. 4 crore for sale of 40,000 Kgs. of cardamom on behalf of the appellant. SVPL also issued 34 post-dated cheques of Rs. 10 lakh each (totaling Rs. 3.40 crore) in part payment to appellant, which could not be realized upon presentation on 1.11.2012 and 19.11.2012 due to insufficient funds in its account. The appellant has thereafter filed criminal complaints against SVPL for cheating, recovery, cheque bouncing, etc. with the Economic Offence Wing, Mumbai, Hon'ble Bombay High Court and Calcutta High Court. The important fact emerging out of the events narrated above is that the amount received by the party is not for the settlement of the contract but compensation for breach of contract. The contract was broken when SVPL failed to deliver the goods on time. The subsequent acts of debiting the account of the supplier (SVPL), receipt of credit notes and post-dated cheques from SVPL, criminal complaints etc. were towards settlement of the breach of contract. Once a contract is broken, there can be no cause of action based on such contract itself, which only is capable of settlement. After the breach of a contract, what can be settled is only the right to damages resulting from the breach itself, though, undoubtedly, the breach, in the ultimate analysis, must arise from the contract. On a breach of contract occurring, the rights of the parties are crystallized as on the date of the breach, and it is only those rights that can thereafter be the subject matter of a settlement. Therefore, as per the principle as laid down by the Hon'ble Supreme Court in Shantilal Private Ltd. (supra) and jurisdiction High Court in case of Indian Commercial Co. P Ltd. (supra), the impugned transaction cannot be treated as speculative within the meaning of section 43(5) of the Act and, accordingly, the resultant profit (loss) is assessable as normal business income (loss) of the appellant.
9. He also allowed the alternate plea of the assessee that the single transaction cannot be treated as a speculative business. He held in this regard as under:
4.9 The alternate plea of the appellant is that a single transaction cannot be treated as speculation business within the meaning of Explanation 2 to Sec. 28 so as to attract the provisions of Sec. 73(1) of the Act. There are a number of decisions on the concept of the word "business" in income-tax law. It is sufficient for the purpose of the instant case to refer to only two decisions of the Hon'ble Supreme Court, i.e., Narain Swadeshi Weaving Mills /s. CEPT (1954) 26 ITR 765 (SC) and CIT v. Distributors (Baroda) Pvt. Ltd., 83 ITR 377 i^SC) where the Hon'ble Court laid down the proposition that the term "business" connotes some real, substantial and systematic or organised course of activity or conduct with a set purpose; that whether a particular source of income is business or not must be decided according to the ordinary notions as to what a business is ; and that each case must be decided on its own circumstances according to ordinary commonsense principles. It is true that there are also authorities for the proposition that even a single or isolated transaction can, in a conceivable case, amount to "business", provided that it bears the clear indicia of trade. But, that question cannot arise in the present case, in view of the 9 I TA No .5 6 5 8 / Mu m /2 0 1 6 M/s. SSJ Commodities Pvt. Ltd.
fact that use of the plural "speculative transactions" in Explanation 2 to Sec. 28 clearly shows that in order to constitute "speculation business" within the terms of that Explanation, a single transaction would not be sufficient. More importantly, there is nothing on record to show that it was a systematic or organized course of activity or conduct on the part of the assessee-company not to fulfill its contracts and to settle the same with the other parties thereto, with the result that, even according to ordinary notions and common sense principles, it cannot be said that a transaction of the nature in the present case amounts to speculation business. Even if a contrary view were taken that the said transaction was a speculative' transaction within the meaning of Sec. 43(5), still it does not amount to "speculation business" within the meaning of Explanation 2 to Sec. 28, and that Sec. 73(1) of the Act is, therefore, not attracted in the present case. Accordingly, this alternative ground of assessee is liable to succeed and AO is directed not to treat the loss as "loss in speculation business" and allow set off of the same with other business income.
4.10 Since the transaction with SPVL is treated as non-speculative transaction, the issues of allocation of expenses and allowability of bad debt become only academic in nature and hence there is no need to adjudicate them. Be that as it may, since the appellant has actually written off the bad debt in respect of SVPL, the claim is to be allowed in view of the decision in TRF Ltd. (supra).
10. We have carefully considered the submissions and perused the records. We find that in this case originally the assessee has made a claim of bad debt. The sum actually represented the amount not recovered from the supplier (SUPL) party. It was actually the amount paid by the assessee to the above party for supply and delivery of the cardamom. The assessee had already paid the amount for purchase earlier. When the said party did not supply the cardamom the assessee made an entry for sale of the commodity to that party itself. Hence, a claim of bad debt was made including the legal charges of Rs.7,15,544/- involved in this case. It has also been noted that the concerned party has issued post dated cheques which were not honored. Subsequently, cases were also filed. In these circumstances, the A.O. proposed to disallow bad debt which was rejected by the Joint Commissioner. However, he suggested to examine the issue as to whether the transaction was speculative or not.
11. Thereafter, as per the direction of the Joint Commissioner, after examination the A.O. came to the conclusion that it was a speculative transaction as it was without delivery. Accordingly, he made the disallowance as under:
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5.11 In view of the above discussion, since the contract for sale and purchase of cardamom from M/s. Sujali Vyapaar were ultimately settled otherwise than by actual delivery of goods, all such transactions are treated as 'Speculative' u/s.
43(5) of the act. consequently, the profit/loss from such 'Speculative' transactions is also treated as 'Speculation' profit/loss. Similarly, bad debts relating to the speculative transaction is also held to be speculative loss. Furthermore, the A.O. allocated Rs.1,03,94,764/- out of the indirect expenses to the speculative business and disallowed the same. The A.O. concluded that the only result under speculative business is loss of Rs.3,85,65,900/-.
Upon the assessee's appeal, the ld. CIT(A) found the transaction to be not of a speculative in nature and decided the issue in favour of the assessee. Accordingly, he allowed the claim of bad debt by the assessee.
Here we note that the authorities below have failed to appreciate the nature and substance of the transaction. We find that actually it is not at all a sale transaction in substance. The transaction, in fact, is that of a purchase for which payment has been done but the supply has not been done and the amount so advanced has become unrecoverable. Hence, the ld. Counsel of the assessee has made a submission that it was actually a business loss which needed to be allowed.
12. Upon careful consideration, we find that the A.O. has made it to be a speculative transaction, i.e., sale and purchase without delivery. The ld. CIT(A) has allowed the issue by holding that the transaction is not speculative in nature. However, we find that it is settled law that it is the substance that counts and not the nomenclature given to it. The ld. Counsel of the assessee has also accepted this by submitting that actually it was a business loss to the assessee inasmuch as the sum paid 11 I TA No .5 6 5 8 / Mu m /2 0 1 6 M/s. SSJ Commodities Pvt. Ltd.
for purchase of trading item have not been returned by the supplier when the supply did not take place. We find that it has been accepted by the Revenue that the amount is not recoverable by the assessee from the said supplier. Hence, the nomenclature of bad debt given by the assessee to the transaction will not change substance of the transaction. The substance remains to be sum advanced for purchase, i.e., a trading item, which has become unrecoverable. Hence, we are of the considered opinion that the amount of loss to the assessee in this case deserves to be allowed as a business loss, though not as bad debt. This view is supported by the decision of the Hon'ble Apex Court in the case of Ramchandar Shivnarayan v. CIT [1978] 111 ITR 263 (SC) wherein it was held after a very elaborate discussion that if there is a direct and proximate nexus between the business operation and the loss or it is incidental to it, then the loss is deductible, as without the business operation and doing all that is incidental to it, no profit can be earned. It is in that sense that from a commercial standard such a loss is considered to be a trading one and becomes deductible from the total income.
Examining the present case on the touch stone of the above exposition by the Hon'ble Apex Court, we are of the opinion that the claim of the assessee is allowable as business loss. Hence, the ground raised by the Revenue is dismissed. Apropos ground no.2:
13. Brief facts of the case on this issue are as under:
The assessee being a member of MCX and NCEDX, was carrying on broking activity on behalf of its clients directly or through various sub-brokers. During the year under consideration, the assessee claimed sub-brokerage expenses of Rs.6,07,71,397/-. The corresponding figure for A.Y.2012-13 was Rs.4,08,81,740/-. The AO noticed that on 12 I TA No .5 6 5 8 / Mu m /2 0 1 6 M/s. SSJ Commodities Pvt. Ltd.
the income side, there was fall in brokerage income from Rs.13,65,15,021/- in F.Y.2011- 12to Rs.12,55,65,595/-in the current year. Thus, there was substantial increase of Rs.1,98,89,657/- in sub-brokerage expenses despite fall in brokerage income by Rs.1,09,48,426/-. Sub-brokerage was paid to 695 sub-brokers. To test check the genuineness of sub-brokerage expenditure, the AO asked the assessee to file confirmations from the sub-brokers to whom brokerage was paid in excess of Rs. 5 lakhs. The AO also asked the assessee to file details of clients and transactions details in respect of which the brokerage was paid. The AR filed five confirmations from the self-selected sub-brokers. As regards confirmation in respect of other brokers, the AR submitted that it was not possible to furnish the confirmations in such short time. It was requested that notice u/s.133(6) be issued to collect the details of the brokers. The AO issued notice u/s.133(6) to ten randomly selected sub-brokers. However, barring one sub-broker, Shri Shivratan Bhattar, the notices sent to the rest of the sub-brokers were either returned un- served or there was no compliance. The AO, therefore, asked the AR to show cause as to why sub-brokerage expenditure should not be disallowed proportionately. In response, the assessee submitted that it had filed all the details viz. name, address, PAN, amount and TDS and hence the primary onus cast upon it has been discharged. It was further stated that as regards the issue of sub-brokerage, the assessee company under the head brokerage inextricably links the expenses to the earning of income. The assessee also submitted copy of assessment order for A.Y.2012-13 wherein the said expenses had been allowed. Regarding non-submission of details by sundry debtors in response to notice u/s.133(6), the assessee relied on the Apex Court judgment in the case of CIT vs. Orissa Corporation Pvt. Ltd. 159 ITR 78. In view of the above, the assessee submitted that it had 13 I TA No .5 6 5 8 / Mu m /2 0 1 6 M/s. SSJ Commodities Pvt. Ltd.
provided all the relevant details and consequently the onus cast on the assessee stands discharged. The AO, however, did not agree with the submission of the assessee. According to the AO, mere furnishing of PAN, name and addresses is not sufficient to prove genuineness of the expenditure. The f.ssessee is also bound to state the reason for such abnormal increase in sub-brokerage expenditure despite fall in the corresponding income. It becomes all the more necessary to investigate the claim of expenditure. It is also the responsibility of the assessee to give full details of transactions on which sub- brokerage is paid and names of client referred etc. The primary onus cast on the assessee is completely discharged only when the assessee fully satisfies the AO particularly in the case of abnormal claim. When the requisite details could not even be collected through notices u/s.133(6) due to non-responses, the onus shifts on the assessee to explain for the same. The AO further stated that that AR's argument of allowing claim on the basis of earlier years assessment is also incorrect as it fails to explain the increase in the expenditure in the current year. The case law relied upon by the assessee was stated to be distinguishable on facts. In view of the above, the AO held that the assessee had failed to justify the abnormal increase in the brokerage expenses. Accordingly, he disallowed the amount of Rs.1,98,89,657/- being increase in sub-brokerage expenditure as compared to last year and added the same to the total income of the assessee.
14. Upon the assessee's appeal, the ld. CIT(A) granted part relief to the assessee. He noted that the assessee has given all the details and the disallowance by the A.O. has no basis. The ld. CIT(A) in this regard has held as under:
I have carefully considered the facts of the case and submission made by the Ld. AR. I have also gone through the decisions relied on by the appellant. The AO has added the entire increase in brokerage expenses as compared to the expenses of 14 I TA No .5 6 5 8 / Mu m /2 0 1 6 M/s. SSJ Commodities Pvt. Ltd.
last year. He has started with the enquiry from the beneficiaries and because some of them could not reply to the notices issued u/s.133(6), he reached the conclusion that expenses claimed under the head sub-brokerage are not genuine. Finally, he has disallowed excess of expenses over the previous year. There is no clear nexus between the disallowance made and enquiry conducted during the assessment proceedings. Further, the assessee has clearly demonstrated that there is no substantial increase in the claim of the expenses in comparison to last year. There is a decrease in brokerage income from direct clients which has no connection with sub-brokerage paid. In fact, brokerage income through sub-brokers has increased to Rs.8,87,34,645/-form Rs.7,99,47,761/- in the preceding year. The ratio of sub-brokerage expenses paid against sub-brokerage income has gone up marginally to 68.4 percent from 64.60 percent in the last year. Even otherwise, expenses cannot be disallowed for the sole reason that they are higher in this year, There may be various reasons for the increase but once it is established that it was wholly and exclusively for the purpose of business and it was not of capital or personal in nature, the same cannot be disallowed. The AO has made good start for verification of expenses by calling for information from the beneficiary parties but did not complete the enquiry and disallowed the entire increase on the sole criteria that the expenses are higher in this year. Therefore, the addition made by the AO cannot be sustained.
5.3 However, at the same time one cannot lose sight of the fact that some of the parties have not responded to the notices send u/s. 133(6) of the Act. Though assessee has submitted confirmation of the parties to whom payment of sub-
brokerage is more than Rs.1,00,000/- but there are 530 parties to whom payment of brokerage is less than Rs.1,00,000/- and total amount paid to these parties are Rs.1,13,83,034/-. No confirmation was filed for a single party in this group. Therefore, considering the facts of the case, I restrict disallowance to the extent of 20 per cent of Rs.1,13,83,034/-, i.e., Rs.22,76,606/- as assessee failed to substantiate the same with supporting evidences.
15. We have heard both the counsel and perused the records. We find that assessing officer on this issue has noted that there has been a decrease in brokerage income but there is an increase in sub brokerage fee paid. The assessing officer has also noted that on sample basis he has issued notices to the brokers under section 133 (6). However only one out of 10 notices was responded and the rest 9 were returned as unserved or not complied with. In these circumstances he proceeded to make the disallowance for the amount incurred in excess of that which was incurred in the previous year. The ld. CIT(A), on the other hand, has given a finding that there has not been any decrease in 15 I TA No .5 6 5 8 / Mu m /2 0 1 6 M/s. SSJ Commodities Pvt. Ltd.
brokerage income which is related to sub brokerage fee paid. This view is cogent in view of the factual data observed in this case. It is noted that the expenditure percentage was appreciating 68% this year as compared to 64% last year. Hence, the change is not material.
We note that the ld. CIT(A) has noted that assessee has discharged its onus by giving the relevant details. Hence, he has sustained part of the disallowance. Here we note that all the relevant details were given to the A.O. Hence, the assessee has discharged its onus. It is also noted that no disallowance in this regard was made in the earlier years. Hence, just because on sample basis some notices issued u/s. 133(6) of the Act were not responded the same cannot become a basis for the adhoc disallowance made by the A.O. In absolute term the A.O. disbelieved the veracity of 695 sub brokers only on the basis of 9 non complaint notices issued u/s. 133(6). The disallowance made by the A.O. is the amount which has been incurred in excess as compared to last year. We do not find any reason whatsoever as to why the expenditure should be kept at the same level of last year. In our considered opinion, there is no infirmity in the well reasoned order of the ld. CIT(A). Hence, this ground raised by the Revenue is dismissed. Apropos ground no.3:
16. Brief facts on this issue are as under:
On perusal of the details of expenses, the AO noticed that the assessee had paid total expenses of Rs.1,82,23,063/- to a sister concern, M/s.SSJ Finance and Securities Pvt. Ltd. (SSJFSPL). However, in the Tax Audit Report under clause 18 in relation to disclosure u/s.40A(2)(b), the assessee only disclosed rent payment of Rs.30,00,000/-. On being confronted about the non-disclosure of the remaining payment to M/s.SSJFSPL, 16 I TA No .5 6 5 8 / Mu m /2 0 1 6 M/s. SSJ Commodities Pvt. Ltd.
the assessee submitted that only rent expenses of Rs.30,00,000/- is covered by the provisions of section 40A(2)(b). When expenses other than rent have also been paid to M/s.SSJ Finance & Securities Pvt. Ltd., only expenditure relating to those transactions which have been undertaken by the assessee with its related party should be reported in the tax audit report and not those which have been paid by the related party on behalf of the assessee to the other parties. In view of the above, it was requested that the tax audit report be accepted, as the same has been prepared in accordance with the provisions of Income tax Act, 1961. The AO however did not agree with the contention of the assessee. According to the AO, assessee had debited alleged reimbursed expenses of Rs.1,82,23,063/- in its profit & loss account. There was no dispute that the payment was to a person specified u/s.40A(2)(b) of the Act. Thus, assessee should have disclosed the balance transaction of Rs.1,52,23,063/- in the Tax Audit Report. Assessee had deducted tax of Rs.3,44,382/- u/s.194C of the Act. The AO held that the very act of deducting tax showed that it was not mere reimbursement but included income component as well. He relied on the judicial pronouncements in the cases of Mofussil Warehousing & Trading Co. Ltd. Vs. CIT 238 ITR 867 and Hon'ble ITAT, Mumbai's decision in the case of M/s.Global Innovsource Search Solutions (P.) Ltd. v. ITO in ITA Nos.7478 & 9425. Accordingly, he held that the provisions of section 40A(2)(b) also covered the balance transactions of Rs.1,52,23,063/-.
17. The AO perused the Memorandum of Understanding (MOD) dated 07.04.2010 and found that it did not spell out the specific assets and facilities to be shared. It also did not spell out the basis of fixing the cost of shared assets/facility/resources. The AO held that such MOD has no value in the eyes of law, as it is not definitive. The specific details 17 I TA No .5 6 5 8 / Mu m /2 0 1 6 M/s. SSJ Commodities Pvt. Ltd.
about the shared resources/assets/facility are not mentioned. The assessee and the SSJFSPL have designed the terms and conditions of the MOD in such a manner that it was open for them to shift expense from one concern to another as per the need. Such open ended MOU has no admittance value. During the course of hearing, the AO specifically asked the AR to justify that the payments made to SSJFSPL are at arm's length. Since the very basis of cost allocation was not available, it was not possible for the revenue to verify independently as to whether the price paid by the assessee was at arm's length. In view of the above, owing to failure on the part of the assessee to justify the arm's length price of the transactions with the SSJFSPL, the AO disallowed 25% of the expenses amounting to Rs.38,05,765/- u/s.40A(2)(b) treating the same as excessive and unreasonable.
18. Upon the assessee's appeal, the ld. CIT(A) granted relief to the assessee that there was no cogent basis for the A.O. to come to the opinion that the impugned payment were unreasonable or excessive. He held as under:
6.3 ' I have carefully considered the facts of the case and submission made by the Ld. AR. I have also gone through the decisions relied on by the Ld. AR. As per appellant, these payments are outside the preview of section 40(A)(2)(b) of the Act as -there is no profit element in these payments and the same were shared on cost-to-cost basis. There is merit in the submission of the appellant, as merely sharing common expenses and making payment of expenses which was paid by the related party on behalf of the appellant cannot be treated as payment u/s.40(A)(2)(b) of the Act. The Hon'ble Supreme Court in the case of Upper India Publishing House Pvt. Ltd. v, CIT, 117 ITR 569 (SC) held that unless it is determined that the expenditure was excessive or unreasonable, section 40A(2) would not apply to the case. In this case, the AO has not established as to how and to what extent the reimbursement was excessive and unreasonable. The appellant has relied on the decision in case of Modi Xerox Ltd. (supra) where the Hon'ble High Court held that reimbursement of actual expenditure to sister concern, cannot be disallowed u/s.40A(2). The Hon'ble Gauhati High Court in Shree Construction & Investment Co. v. ACIT held that merely because a payment is made to a related person, it cannot be understood as being non-genuine or that it is excessive 18 I TA No .5 6 5 8 / Mu m /2 0 1 6 M/s. SSJ Commodities Pvt. Ltd.
or unreasonable. In absence of such a finding in this regard, the payment could not be disallowed. Even otherwise, the said payment is tax ,ioutral as reduction of reimbursement of expenses in the hands of associate concern would reduce its tax liability and since both are corporate entity, they are liable for tax at the same rate. The Honourable Supreme Court in case of CIT v. Excel Industries Ltd (358 ITR
295)(SC) has observed that there is no need for the revenue to continue with the litigation when it was quite clear that not only was it fruitless but also that it may not have added anything much to the public coffers. In view of the above authorities and facts, the addition made to the extent of 25% of the total payment towards reimbursement is deleted.
Accordingly, this ground is allowed.
19. Against the above order, the Revenue is in appeal before us.
20. We have heard both the counsel and perused the records. We find that the ld. CIT(A) is correct in holding that there is no basis given by the A.O. to arrive at the conclusion that the payment was unreasonable or excessive. Without pointing out as to what should be the arm's length payment, the A.O. has proceeded to make adhoc disallowance. This approach is not at all sustainable. The decision of the Hon'ble Gauhati High Court in the case of Modi Xerox Ltd. (supra) duly supports the proposition. We find that the disallowance has rightly been held by the ld. CIT(A) to be not sustainable. Hence, we confirm the order passed by the ld. CIT(A).
21. In the result, the appeal filed by the Revenue is dismissed.
Order pronounced in the open court on 27.11.2018
Sd/- Sd/-
(Pawan Singh) (Shamim Yahya)
Judicial Member Accountant Member
Mumbai; Dated : 27.11.2018
Roshani, Sr. PS
19
I TA No .5 6 5 8 / Mu m /2 0 1 6
M/s. SSJ Commodities Pvt. Ltd.
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT(A)
4. CIT - concerned
5. DR, ITAT, Mumbai
6. Guard File
BY ORDER,
(Dy./Asstt. Registrar)
ITAT, Mumbai