Yogendra Khandelwal Vs ACIT (ITAT Jaipur)
Undisputedly, interest-free funds available with assessee were far in excess of amount advanced to sister concern and a presumption would arise in favour of the assessee that interest-free funds had been utilized for advancing interest free loan to the sister cocnern, therefore, disallowance of deduction under section 36(1)(iii) was not justified.
FULL TEXT OF THE ITAT JUDGMENT
These are cross appeals filed by the assessee and the revenue against the order of ld. CIT (A)-1, Jaipur dated 21.09.2012 for A.Y. 2009-10 wherein the respective grounds of the appeal are as under:-
Assessee’s grounds of appeal (ITA No. 906/JP/12)
“That the ld. CIT(A) has erred in maintaining addition of Rs. 804234/- being commission paid to Steel Corporation of India Prop. Smt. Puspha Khandelwal.”
Revenue’s grounds of appeal (ITA No. 882/JP/12)
“Whether on the facts and in the circumstances of the case and in law the ld. CIT(A) is justified in deleting:
1. Addition of Rs. 7,78,597/-, Rs. 8,43,160/- and Rs. 8,16,953/- on account of commission payment.
2. Addition of Rs. 6,000/- on account of donation.
3. Disallowance of Rs. 1,70,008/- on account of deduction u/s 80E.
4. Addition of Rs. 5,06.520/- on account of interest.”
2. Firstly, we take up the assessee’s appeal. In its sole ground of appeal, the assessee has challenged the sustenance of disallowance of commission on sales paid to Smt. Pushpa Khandelwal amounting to Rs. 8,04,234/-.
3. The facts of the case are that during the course of the assessment proceedings, the AO observed that the assessee has shown commission payment on sale of Rs. 8,04,234/- to Smt. Pushpa Khandelwal, who is the proprietor of M/s Steel Corporation of India, Jaipur and filing her return of income with ACIT, Circle-3, Jaipur. The nature of business mentioned in the audit report in respect of her business was shown as “trading in iron & steel” and is a covered person u/s 40A(2)(b) of the IT Act, 1961. A show cause was issued as to why commission paid to Smt. Pushpa Khandelwal should not be treated as bogus commission on sales and be added to the total income of the assessee.
4. In response, the assessee submitted that commission was paid on supplies of goods through Steel Corporation of India. In audit report mentioning of trading in iron and steel does not mean only own purchases and sale, it also covers supplies of iron & steel goods through other parties on commission basis. Firm is doing business since last 15- 20 years. Proprietor has vast experience in business of iron and steel. Earning of commission on sale of goods is part and parcel of dealing in Iron and steel. Although proprietor of steel corporation is assessee’s wife and payment is covered u/s 40A(2b) of the IT Act, 1961 but it does not mean that payment is bogus. Payment to relative could not be presumed without any evidence that payment is bogus. Commission was paid for actual services rendered by her in sale of goods. She is income tax assessee under PAN-ADRPK7184R and has paid income tax on such income. There is no intention of evasion of tax.
5. The submission so filed by the assessee was considered by the AO but was not found acceptable. The AO observed that Smt. Pushpa Khandelwal who is the wife of the assessee also runs business in the trade of iron & steel in the same line of business, at the same time, she is receiving commission from her husband Sh. Yogendra Khandelwal, who is also the proprietor of Steel Syndicate of India and the proprietary concern is dealing with the same line of business i.e. iron & steel. Then, how it is possible that in the same lines of business, the assessee showing the payment of commission to his competitor. Secondly, there is a relationship between both the assesses i.e. husband and wife. In this way, in the field of business, they are the competitors because they are dealing with same parties, same things and same staffs so how one competitor gives the commission to another counterpart. It proves that it is only paper entry. This contention also proves that there is neither any agreement nor any written correspondence with Smt. Pushpa Khandelwal and the assessee for commission. The assessee failed to give the name and address of the person to whom sales were made through Smt. Pushpa Khandelwal.
6. It was further held by the AO that in the earlier years also, no commission was given to Smt. Pushpa Khandelwal. Although she is doing the same business at the same place. It proves that assessee divert his income by paying the commission to Smt. Pushpa Khandelwal. It was further held by the AO that in the audit report also, in the case of Smt. Pushpa Khandelwal, the auditor not mentioned the nature of commission agent.
7. It was accordingly held by the AO that the assessee failed to prove the business expediency with regard to commission payment to Pushpa Khandelwal. So considering the above facts and findings, he treated that payment made to Smt. Pushpa Khandelwal of Rs. 8,04,234/- as not genuine and unreasonable and disallowed the same and added to the total income of the assessee.
8. Being aggrieved, the assessee carried the matter in appeal before the ld CIT(A) who has confirmed the said disallowance. The relevant findings of the CIT(A) is reproduced as under :-
“6.2 The AR of the assessee Shri P.C. Jain attended & filed the following submissions:-
“As regards Commission of Rs. 804234/- paid to Steel Corporation of India Prop. Smt Puspha Khandelwal, we submit that commission was paid for actual services rendered. Although Steel Corporation is engaged in business of Iron & steel but they are not competitor. Business of Steel syndicate mainly deal in SAIL product but steel corporation deal in other product. They have provided customer to steel syndicate of India in consideration of Commission. It was not paper entry. She is in this line from 25 years. She has paid Income tax on such income @ about 25%. It was not with intension of evasion of tax. No agreement is necessary for allowance of any expenditure. We have produced voucher for services rendered. Assessing Officer feel that it was diversion of income. Nobody paid Income Tax @ about 25% if intension is diversion of income. The assessing officer is wrong to say that they are dealing same parties and same staff. No details of name and address of persons to whom sales were through Smt. Pushpa Khandelwal was required by us. Payment to relative could not be treated as bogus without any evidence In audit report generally main business is require to be mentioned. Earning some Commission during the course of business is part of main business and separate mentioning of Commission business is not necessary and merely on that basis doubt on actual commission paid should not be made. We therefore, request please to delete the addition of Rs. 8,04,234/- made by Learned additional Commissioner of Income Tax.”
6.3 I have carefully perused the order of the AO and submissions of the AR. Payment of commission could be disallowed u/s 40A(2) if the AO records his satisfaction that the payment was not for the legitimate needs of the business or was more than the FMV for services rendered.
The AO has observed in the order that during the course of assessment proceedings the assessee failed to give the name and addresses of the persons to whom sales were made through Smt. Pushpa Khandelwal. There was also no correspondence that she had done any work for the assessee. Moreover, the assessee was already making sales to the said party in earlier years. No new purchasers were introduced by her. To this extent the payment of commission to Smt. Puspha Khandelwal was different from the commission paid to Arpit Khandelwal his son and the AO has recorded the satisfaction that the payment of commission to Smt. Pushpa Khandelwal was not for the legitimate needs of the business. I tend to agree with the AO since there is no record or evidence available to show that Smt. Pushpa Khandelwal has in anyway contributed towards the sales as claimed. Therefore, the disallowance of Rs. 8,04,234/- of commission paid by the assessee is confirmed u/s 40 A(2).”
9. During the course of hearing, the ld. AR submitted that the assessee is engaged in the trading of heavy items of iron and steel. The assessee majorly trades in the products of SAIL and JWS Steel. The assessee has paid sales commission to Smt. Pushpa Khandelwal who is engaged in the trading of medium and light items of Iron and Steel and majorly trades in the products of Rastriya Ispath Nigam. Thus, although they were engaged in trading of iron and steel but were not competitors since their line of business was different.
10. It was submitted that the ld. CIT(A) upheld the addition made by ld. AO by stating that assessee failed to give the names and address of the persons to whom sale were made through Pushpa Khandelwal. In this regard it is submitted that as already submitted before ld. CIT(A), the assessee was never asked to furnish details of name and address of persons to whom sales were made through Pushpa Khandelwal. The assessee made sales of various items to Bharat Trading Co. Ltd. The said fact can be verified from the ledger of the said Company in the books of assessee and Journal Voucher of commission to Pushpa Khandelwal which are submitted as additional evidences and a prayer for which is separately moved.
11. It was further submitted that the ld. CIT(A) further upheld the disallowance by making a note that the assessee failed to give the names and address of the persons to whom sale were made through Pushpa Khandelwal on one hand and simultaneously on the other hand observed that no new purchasers were introduced by Smt. Pushpa Khandelwal as the assessee already made sales to the said parties in the current year. Both the statements are contradictory to each other and show a preconceived notion of ld. CIT(A).
12. It was further submitted that the ld. CIT(A) also held that no record or evidence was available to show that Smt. Pushpa Khandelwal in anyway contributed towards the sales as claimed. In this regard it is submitted that the submissions made above makes it clear that all the possible evidences were placed on record and, therefore, is lawfully eligible for claiming the expenditure of commission.
13. It was further submitted that the commission paid to Smt. Pushpa Khandelwal is genuine because she had offered the commission income in her return of income. For the year under consideration, she has paid tax of Rs. 3,90,379/- on income of Rs. 14,75,184/-. Both the assessee and Smt. Pushpa Khandelwal were assessable at maximum marginal rate of 30%. Thus there cannot be any motive of evasion of tax by paying higher rate of Interest to such parties.
14. In support, the ld AR placed reliance on the following decisions:
