Assessee needs to discharge initial onus in case of Commission to Related Party

Yogendra Khandelwal Vs ACIT (ITAT Jaipur)

FACTS –

COMMISSION OF SALE AND PURCHASE TO RELATED PARTIES –

During assessment proceeding, AO observed that assessee had paid commission on sale of INR 8,04,234 to Smt. Pushpa, prop. of M/s. Steel Corporation who is wife of the assessee and commission on purchase of INR 7,78,597 to Shri Arpit who is son of the assessee. Notice was issued to the assessee to show cause as to why the commission should not be treated as bogus commission and added to the total income.

With regard to commission on sales paid to Smt. Pusha, assessee submitted that commission was paid on supplies of goods through M/s. Steel Corporation. Audit report mentioned business of M/s Steel as trading in iron and steel does not mean only own purchase and sale, it also covers supplies of iron and steel goods through other parties on commission basis. Payment to relative could not be presumed without any evidences that payment is bogus.

With regard to commission on purchase paid to Shri Arpit assessee submitted that he was actively involved in purchase of goods from Essar Steel and because of him they were able to purchase goods from Essar at competitive rate. Assessee submitted that there was no written agreement between them, however, confirmed that Shri Arpit had paid 22 to 25% tax on commission in his return.

LOAN AND ADVANCES –

Assessee had taken unsecured loan of INR 1,35,66,991 and has paid interest of INR 1,58,28,017. Assessee had advanced INR 42,21,000 to its sister concern without any interest. Notice was issued as to why interest @12% amounting to INR 5,06,520 do not be added to the total income. Assessee submitted that there is a prop. capital of INR 2,52,33,263 and the same is much more than the advance given and since the advance is given sister concern, interest is not charged by us.

HELD –

COMMISSION ON SALE AND PURCHASE TO RELATED PARTIES –

Initial onus is on the assessee to prove the genuineness of the transaction. Assessee had to discharge its initial onus by producing necessary verifiable evidence.

Mere fact that the basis of payment has been specified in payment voucher and payment has been effected during the year or fact that income has been offered in return of recipient doesn’t by itself hold that services have been rendered and expenditure is allowed.

LOAN AND ADVANCES –

Interest free funds available with the assessee is in excess of amount advanced to sister concern. There is no nexus between the interest bearing funds and the money so advanced to sister concern which has been established by AO. In view of the same, a presumption will arise in favour of assessee that interest free funds have been utilized for advancing such advance to sister concern. 

Deduction under section 80E for Interest on loan taken in Joint Names for higher education of relative

 So long as the loan had been taken in the name of the assessee, even if he happened to be co-applicant and co-borrower, and so long as payment of interest was made by the assessee, he was eligible for deduction under section 80E.

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. 906/3P/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. 882/3P/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 Smt. 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 o f 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 stee l 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% i f 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. Mumbai. 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:

• Hon’ble Bombay High Court in the case of Indo Saudi Services (Travel) (P.) Ltd [2008] 310 ITR 306
• Hon’ble Gujarat High Court in the case of Gujarat Gas Financial Services Ltd. (2015) 233 TAXMAN 0532 (Gujarat)
• ITAT Jaipur Bench in the case of Bajrang Wire Products (India) Pvt. Ltd. vs. ACIT (ITA No. 138/JP/2014)

15. It was further submitted that in the line of the business in which assessee is engaged, the payment of commission on sales and purchase is accepted even by ld. CIT(A) herself as payment of commission to other parties is allowed in the appeal by CIT(A) which is evident from the table above. In such a situation disallowance of commission paid to Smt. Pushpa Khandelwal, just because she is wife of the assessee, has no merits.

16. The ld AR further requested for admission of the following additional evidences:

It was submitted that the assessee was under bonafide belief that no such evidences are necessary as during the assessment proceedings no such details were asked to be submitted by ld. AO. The assessee during the appellate proceedings submitted before ld. CIT(A) that names and address of persons to whom sales were made through Pushpa Khandelwar were not asked by ld. AO. However, ld CIT(A) again disallowed the commission by stating that no evidence in this regard was submitted. Thus, the assessee is now submitting the said evidences. It was submitted that all the evidences mentioned above are vital and go to the root of the matter which is before the ITAT for adjudication and the same may kindly be taken on record.

17. The ld. DR supported the order of the lower authorities and also relied on following decisions:-

• DCIT vs. Mcdowell & Co. Ltd. 291 ITR 0107 (KAR)
• Onam Agarbathi Co. vs. DCIT 310 ITR 0056 (KAR)
• ACIT vs. Mehru Electrical & Engg. (P) Ltd. [2011] 128 ITD 247 (JP)

18. We have heard the rival contentions and purused the material available on record. The assessee has claimed commission expenditure of Rs 804,234 while filing his return of income. During the course of assessment proceedings, the assessee was given a specific show-cause by the Assessing officer as to why such commission payment made to his wife shouldn’t be treated as bogus commission. Further, the AO has invoked the provisions of section 40A(2)(b) of the Act. The onus is therefore clearly on the assessee to demonstrate through verifiable evidence that such expenditure has been incurred wholly and exclusively for his business purposes and secondly, the same is commensurate with the services so availed. In other words, the assessee has to demonstrate that such commission payment has been made for availing services of his wife in effecting the sales and such services have actually been rendered and availed during the year. The question is how would the assessee demonstrate that such services have been rendered and availed by him and have been adequately compensated for. It can be demonstrated through producing for necessary verification by the AO any understanding, arrangement, or an agreement that has been entered into between the two parties in terms of scope of services, nature of product, area of operations, rate of commission, etc. Even where such an understanding/arrangement has not been entered in writing and there is a verbal understanding/arrangement, the details of such an understanding/arrangement can be brought on record by way of filing an affidavit and/or producing the commission agent for necessary verification before the AO. Further, where the sale are effected through the commission agent’s efforts during the year, the documentation in support of such sale efforts and involvement of the commission agent in effecting the sales in form of communication, confirmation from the customers, and the products, the price and the customers to whom such products have been sold through such commission agent. Once the assessee discharge the initial onus by producing the necessary verifiable evidence, the onus will then shift on the AO to prove otherwise. In the instant case, we, therefore, don’t agree with the contention of the ld AR that the assessee was never asked the name and address of persons to whom the sales were effected during the year. Once a specific show-cause has been issued by the AO, it is incumbent on the assessee to provide all relevant details and documentation in support of his claim of expenditure and that includes, the name and address of persons to whom the sale were effected during the year. In the instant case, even if we were to allow the admittance of additional evidence in form of ledger of Bharat Trading Co. ltd and copy of voucher of commission payment to Pushpa Khandelwal at this stage, the same by itself will not help the assessee in discharging the initial onus cast on it. How would one determine that the sales to Bharat Trading Co. ltd were effected through the efforts of Pusha Khandelwal in absence of any communication with Bharat Trading Co. ltd showing the involvement of Pushpa Khandelwal in effecting such sales and there is also no confirmation from Bharat Trading Co. ltd as well which confirm the fact that she was involved and facilitated the sales so claimed to have been effected through her. Secondly, merely the fact that the basis of payment has been specified in the payment voucher and the payment has been effected during the year or the fact that the latter has offered the same in her return of income doesn’t by itself is sufficient to hold that the services have been rendered and the expenditure is allowable. What is of relevance is the actual rendering of services and facilitation of sales through the efforts of Pusha Khandelwal and the evidence so produced doesn’t inspire any confidence in us in accepting the same in support of assessee’s contention. In the entirety of facts and circumstances, we are unable to accede to the contentions so raised by the ld AR. We have also gone through the legal authorities which has been brought to our notice and we don’t find the same would be of any assistance to the assessee in the instant case. In the result, the sole ground taken by the assessee is dismissed.

ITA No. 882/JP/12

19. We now come to the appeal filed by the Revenue. In ground No. 1, the Revenue has challenged the deletion of disallowance of commission on purchases to Arpit Khandelwal amounting to Rs. 7,40,521/-. The facts of the case are that during the year under consideration, the Assessing Officer observed that the assessee has made commission payment on purchase to Shri Arpit Khandelwal amounting to Rs. 7,78,597/- . The assessee was asked to file details regarding purchases made through him along a copy of the agreement executed with him. However, assessee failed to furnish any explanation or file any information/documentation. A show cause notice was accordingly issued as to why the commission paid to Shri Arpit Khandelwal should not be treated as bogus commission on purchases and be added to the total income of the assessee.

20. In response, the assessee submitted that the commission was paid to Arpit Khandelwal for liasioning with Essar Steel Ltd. for purchase of goods. It was submitted that he was actively involved in purchase of goods from Essar Steel Ltd and because of his active efforts, the assessee was able to make purchase from Essar Steel Ltd at competitive rate and with his efforts, the turnover of the assessee also increased by 19.46 % from the previous year. It was submitted that he was overall in charge of business. Although there is no written agreement with him, a copy of confirmation of account of Shri Arpit Khandelwal and the fact that he has paid tax of 22 to 25% on said commission income was submitted before the AO. It was submitted that there is no intention of evasion of tax. It was also submitted that there is no evidence to show that commission was bogus.

21. The reply of the assessee was considered but not found acceptable by the Assessing officer. As per the Assessing Officer, commission was paid by the assessee on purchases for the first time in this year and in the past 15 to 20 years, the assessee has never shown to have paid any commission on purchase. It was accordingly held that the assessee has failed to prove the genuineness regarding the commission payment. It was further observed by the AO that Shri Arpit Khandelwal happens to be son of the assessee and he is also drawing the salary besides the commission payment so made during year. It was further observed by the AO that the assessee is making purchases from Essar Steel Ltd earlier as well and there is no new things which has been done by Shri Arpit Khandelwal in respect of the purchase made during the year. It was held that it was merely book entry which has been made on the last day of the financial year. It was further observed that there is neither any agreement nor any correspondence with Shri Arpit Khandelwal regarding the commission payment for liasioning with Essar Steel Ltd. It was observed by the AO that Shri Arpit Khandelwal is the employee of the assessee and for which he is getting the salary and by stating that he was overall in charge of the assessee’s business a commission payment was shown which is totally contradictory as for the involvement in the assessee’s business, he was getting the salary payment. It was further held by the AO that the assessee was making purchases from Essar Steel Ltd in earlier years also without making any commission payment. It was finally observed by the AO that the payment of commission to Shri Arpit Khandelwal of Rs. 7,78,597/- is not for the business expediency and the same was treated as bogus and unreasonable and disallowed in the hands of the assessee.

22. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A). It was submitted by the assessee that previously assessee was mainly dealing with SAIL products and all the purchases were made by him. Accordingly, no commission was paid on purchases. It was submitted that during the year under consideration, the assessee has started dealing with Essar Steel Ltd and JSW Ltd. It was submitted that Shri Arpit Khendelwal was given separate responsibility for liasioning with Essar Steel Ltd. for purchase of goods. It was submitted that because of his active efforts, the assessee was able to make the purchase at competitive rate and the business of the assessee also increased by 19.46%. It was submitted that merely because he is son of the assessee, it does not mean he could not charge for actual service rendered by him. There is no prohibition in law to give commission to relative. It was submitted that although he is employee but for purchase of goods, separate charge was given on commission basis. It was submitted that a written agreement for payment of commission is not necessary and one has to look into surrounding circumstances i.e. actual services rendered, whether the necessary for business and whether the payments were actuated for commercial expediency. It was submitted that if the payment is made for actual services rendered and it was necessary for business, it is allowable even if no agreement is made. It was further submitted that in precious 3 years, the assessee was not having any dealing with Esssar Steel Ltd, Hazira and Arpit Khandelwal with his efforts break the deadlock and restart dealing during the year and copies of correspondence between Arpit Khandelwal and Essar Steel Ltd were submitted. It was submitted that the commission was paid for actual services and it was not merely a book entry. It was submitted that employee can be given separate commission for purchase of goods other than salary and it is not necessary that an employee is duty bound to do all the work without any extra benefit. It was submitted that all the reasons given by the Assessing Officer for disallowance of commission is baseless and on suspicious basis without taking into account commercial expediency.

23. The ld. CIT(A) taking into consideration the submission of the assessee deleted the disallowance to the extent of Rs. 7,40,521/- out of total commission of Rs 778,597 against which the revenue is in appeal before us. The ld. DR relied on the order of the Assessing Officer.

24. The ld. AR submitted that during the year under consideration, commission on purchase was paid to Mr. Arpit Khandelwal who is son of the assessee. Mr. Arpit Khandelwal is Bachelor of Science (with Honours) in Mathematics, Operational Research, Statistics and Economics from University of Senate. After completing his studies, Mr. Arpirt Khandewal joined the business of the assessee during the relevant previous year. Mr. Arpit Khandewal was engaged in liaison with Essar Steel Limited and due to his efforts the purchases were made from the said Company and that too at competitive rates. He also contributed to increase the turnover by 19.46% as compared to earlier A.Y. Before ld. CIT(A) the assessee submitted the copy of correspondence of Arpit Khandelwal with Essar Steels and his confirmation. Further a copy of ITR of Arpit Khandelwal was also submitted with proved that the amount of commission was offered for tax by him and there was no intention of tax evasion. The Ld. CIT (A) appreciating the facts in correct manner observed that the commission paid to Arpit Khandelwal was not bogus and unreasonable and, therefore, partially allowed the ground of appeal by giving elaborate findings in his order which may be confirmed.

25. We now refer to the relevant finding of the CIT(A) which are under challenge before us:

“1.3 I have carefully perused the order of the AO and the submissions of the AR and concur with the submission of the AR on the following grounds:

1. On perusal of the evidence brought on record it is seen that Shri Arpit Khandelwal did liaison with Essar Steel Ltd. during the year for purchase of goods. Photostat copies of his correspondence with the company were placed on record. This was the first year in which purchases were made from Essar Steel Ltd.

2. The business improved by 19.46% from previous year.

3. A copy of the income tax return filed by the Shri Arpit Khandelwa l declaring commission received from the assessee was filed. Receiving a salary from an employer does not bar a person from also received commission and there is no requirement that there should be a written document for the same.

The commission paid could have been disallowed u/s 40A(2)(a) and (b) Two factors required to be established for making a disallowance under this section are namely.-

(a) The AO is of the opinion that such expenditure is excessive or unreasonable having regard to the FMV of the services of facilities for which the payment is made or,

(b)The payment was not made for the legitimate needs of the business of the profession of the assessee.

From the facts of the case of the assessee it is seen that the AO has not brought on record any evidence that this payment o f commission was not for the legitimate needs of the business of the assessee. No evidence has been brought on record to disprove the claim of the assessee that there was an increase in the business o f the assessee by 19.46% from the previous year. On the other hand the assessee has brought on record the correspondence by Arpit Khandelwal with Essar Steel to establish that he actually worked to earn this commission.

Regarding the FMV of the services, as per the submissions of the AR commission was paid @ Rs. 1000/- per ton on purchases to Hare Rama Hare Krishna Corals Pvt. Ltd. whereas the rate of payment o f

commission to Shri Arpit Khandelwal was Rs. 1,050/- per ton. Thus commission paid by the assessee to his son was more than the FMV by Rs. 50/- per ton. The total quantity purchased by the assessee through the services of Shri Arpit Khandelwal was 740.521 tons during this AY. Therefore a disallowance of Rs. 38,076/- u/s 40A (2) is confirmed from the commission paid to Arpit Khandelwal. ”

26. We have heard the rival contentions and purused the material available on record. Firstly, regarding the commission on purchases paid for the first time by the assessee, the ld AR submitted that in this line of business and at the relevant point in time, the access to the products of Essar Steel was very difficult and it is not that anyone who wants to deal in Essar Steel products will get access to these products. It’s was a very competitive market space and with great efforts of Arpit Khandelwal, the assessee was able to get access to Essar Steel products during the year. Typically, we have observed that the companies dealing in such products appoint distributors/dealers for a specific geographic location/area and further, these distributors then connect with retail dealers to supply the goods or the latter approached the former for procurement of goods for subsequent sale to retail customers. Appointment a person as commission agent for purchase of such goods is something that we haven’t heard. Having said that, in the instant case, given the fact that the assessee has made a specific claim of appointment of an agent for purchase of goods who happens to be his son and also his employee, the assessee carries an onerous duty which he has to discharge by bringing on record necessary verifiable evidence in support of such an arrangement which he claims to have put in place in interest of his business.

27. As we have discussed in Para 17 above in context of payment of sales commission, applying the similar analogy in the instant case, the assessee has to demonstrate through verifiable evidence that such expenditure has been incurred wholly and exclusively for his business purposes and secondly, the same is commensurate with the services so availed. In other words, the assessee has to demonstrate that such commission payment has been made for availing services of his son in effecting the purchases and such services have actually been rendered and availed during the year. The question is how would the assessee demonstrate that such services have been rendered and availed by him and have been adequately compensated for. It can be demonstrated through producing for necessary verification before the AO any understanding, arrangement, or an agreement that has been entered into between the two parties in terms of scope of services, nature of product, area of operations, rate of commission, etc. Even where such an understanding/arrangement has not been entered in writing and there is a verbal understanding/arrangement, the details of such an understanding/arrangement can be brought on record by way of filing an affidavit and/or producing the commission agent for necessary verification before the AO. Further, where the purchases are effected through the commission agent’s efforts during the year, the documentation in support of such purchase efforts and involvement of the commission agent in effecting the purchases in form of communication, confirmation from the customers, and the products, the price and the customers to whom such products have been purchased through such commission agent. Once the assessee discharge the initial onus by producing the necessary verifiable evidence, the onus will then shift on the AO to prove otherwise.

28. In the instant case, what we find is that there is nothing that has been brought on record except certain correspondence of Arpit Khandelwal with Essar Steels and a copy of voucher signed by Arpit Khandelwal. The ld CIT(A) has returned a finding that on perusal of the evidence brought on record, it is seen that Shri Arpit Khandelwal did liaison with Essar Steel Ltd. during the year for purchase of goods and this was the first year in which purchases were made from Essar Steel Ltd. and further, Arpit Khandelwal has reported the said commission payment in his return of income and has paid taxes thereon. In our view, the same is not sufficient enough to discharge the initial onus placed on the assessee. Given that Arpit Khandelwal also happens to be an employee of the assessee, the latter has to demonstrate that the former’s involvement in the purchase activity is in addition to his regular activity for which he has been compensated by way of regular salary. We are not suggesting that an employee cannot be paid compensation by way of commission in addition to his regular salary but the said arrangement has to be mutually agreed and reflected clearly and brought on record which has apparently not happened in the instant case. Further, merely the fact that the basis of payment has been specified in the payment voucher and the payment has been effected during the year or the fact that the latter has offered the same in his return of income doesn’t by itself is sufficient to hold that the services have been rendered and the expenditure is allowable. What is of relevance is the actual rendering of services and facilitation of purchase through the efforts of Arpit Khandelwal and the evidence so produced doesn’t inspire any confidence in us in accepting the same in support of assessee’s contention. In the entirety of facts and circumstances, we are unable to accede to the contentions so raised by the ld AR. In the result, we set-aside the findings of the ld CIT(A) and confirmed the order of the AO whereby he has disallowed the commission expenditure of Rs 7,78,597.

29. In ground No. 01, the Revenue has also challenged the deletion of commission on purchase to Hare Rama Hare Krishna Corals Pvt. Limited amounting to Rs. 8,43,160/-. The facts of the case are that during the course of assessment proceeding, the assessee was issued a show cause regarding the payment on purchase to M/s Hare Rama Hare Krishna Corals Pvt. Ltd. In response, the assessee submitted that this company has done laisioning work on their behalf with JSW Steel Limited from whom the assessee has made purchases during the year. It was submitted that previously the assessee was not having any dealings with JSW Steel Ltd. and because of the efforts of M/s Hare Rama Hare Krishna Corals, the assessee was able to purchase steel from JSW at competitive rates. It was submitted that the market of JSW Steel products is very good and because of the efforts of M/s Hare Rama Hare Krishna Corals Pvt. Ltd., the assessee has added new product in their business and in future, it would be highly beneficial to them. It was submitted that even though they do not have any agreement with them but does not mean that they cannot be paid any commission for services rendered by them. It was submitted that commission was paid for actual services rendered to them and it was not bogus and the basis of calculation of commission has been given in the confirmation and copy of memorandum of association of the payee company was enclosed.

30. The submission was however not found acceptable to the Assessing Officer. The Assessing Officer, after looking at main objects of M/s Hare Rama Hare Krishna Corals Pvt. Ltd. as per its memorandum, observed that the payee company is expert in the field of ornaments, jewellery articles, gold, silver, platinum etc. and it has no knowledge about the field of iron & steel. It was observed by the AO that the assessee has advanced an amount of Rs. 15,00,000/- to M/s JSW Steel Ltd., Jaipur and thereafter the goods have been delivered to the assessee. It proves there is no role of mediator or agent with the transactions from JSW Steel Limited. It was further observed by the Assessing Officer that there is neither agreement nor any written correspondence with between the assessee and M/s Hare Rama Hare Krishna Corals Pvt. Ltd. regarding rate of commission, mode of payment, delivery etc. It was observed by the AO that although the assessee is doing this business for the last 15-20 years and has never shown before this year commission on purchase so made by it. It was further observed by the AO that assessee has passed book entry on the last year of the financial year and with all these observations, the AO held that the payment made to Hare Ram Hare Krishna Corals Pvt. Ltd. regarding commission is not for business expediency and it was held as bogus and unreasonable and was therefore disallowed.

31. Being aggrieved, the assessee carried the matter in appeal before the ld. CIT(A) and it was submitted that the Assessing Officer has concentrated on main objects clause of the payee company whereas in subsidiary clauses, it was mentioned that business of Iron & Steel Trading or on Commission basis and assessee has submitted that the company can do business not just according to main object clause but also in accordance with subsidiary clause so mentioned in the memorandum of association. Regarding AO’s observation that company has no knowledge in the field of Iron & Steel, it was submitted that company knowledge is not necessary as the Director of the Company has the requisite knowledge in the field of Iron & Steel and for doing business of branded product does not require any depth knowledge. Regarding advance payment to JSW Steel, It was submitted that mere advance payment does not prove that there is no role of mediator or agent. Regarding no payment of commission on purchases made in the past, it was submitted that the same cannot be basis for disallowance of commission on purchases made during the year. It was submitted that the commission was paid for actual services rendered to the assessee and in support, the confirmation of accounts of Hare Rama Hare Krishna Corals Pvt. Ltd. was filed. It was submitted that the payee company is the income tax assessee and commission income has been shown in the return of income. It was accordingly submitted that in the absence of any incriminating material with Revenue and in face of positive evidence adduced by the assessee, regarding payment of commission, no disallowance could be made. After considering the assessee’s submission, the ld CIT(A) deleted the disallowance so made by the AO and now, the Revenue is in appeal before us.

32. The ld. AR submitted that the assessee has paid commission on purchase to Hara Rama Hare Krishna Coral (P) Ltd @ 1,000 per ton. The Company did liaison with JSW Steel Ltd and because of their efforts a new product was added to the business of the assessee in the relevant previous year. During the course of appellate proceedings it was submitted that the Company was authorized by subsidiary clause of its Memorandum of Association to carry out business of Iron and Steel on commission basis. Further confirmation of the Company along with details of PAN were submitted before ld. CIT(A). It was submitted that ld. CIT(A) correctly, keeping in view the surrounding circumstances and facts of the case allowed the commission paid on purchase to Hare Rama Hare Krishna Coral (P) Ltd. amounting to Rs. 8,43,160/-.

33. The relevant finding of the CIT(A) is reproduced as under:

“2.3 I have carefully perused the order of the AO and the submissions of the AR and concur with the submissions of the AR on the following grounds:-

Time and again it has been held by the various High Courts that the AO cannot step into the shoes of the assessee to decide how he has to conduct his business. The facts of the case are:-

1. During the year, the assessee paid commission to M/s HRHK Corals Pvt. Ltd. who is not related or a sister concern of the assessee.

2. These receipts were declared by Hare Rama Hare Krishna Corals Pvt. Ltd. in its return of income.

3. The assessee had submitted that the said company had facilitated purchases from JSW Steel Ltd. where the assessee did not have any prior access.

4. There is no ban on Hare Rama Hare Krishna Corals Pvt. Ltd. from conducting business as per the subsidiary clauses in the Memorandum of Association.

Given the above facts the payment of commission cannot be disallowed merely on surmises or stepping into the shoes of the assessee and trying to run his business. Therefore, the disallowance of Rs. 8,43.160/- on account of commission paid to HRHK Corals Pvt. Ltd. is deleted.”

34. We have heard the rival contentions and purused the material available on record. Firstly, regarding the commission on purchases paid for the first time by the assessee, the ld AR reiterated the submission as made in context of payment to Arpit Khandelwal that in this line of business and at the relevant point in time, the access to the products of JSW Steel was very difficult and it is not that anyone who wants to deal in JSW Steel products will get access to these products. It’s was a very competitive market space and with great efforts of Hare Rama Hare Krishna Corals Pvt. Ltd., the assessee was able to get access to JSW Steel products during the year. Regarding actual rendering of services and involvement of Hare Rama Hare Krishna Corals Pvt. Ltd. in facilitating the purchase from JSW Steel, we find that the ld CIT(A) has merely reiterated the assessee’s submission that the said company had facilitated purchases from JSW Steel Ltd. where the assessee did not have any prior access. The question is how such contention is substantiated and is there any verifiable evidence on record to substantiate such involvement and facilitation by Hare Rama Hare Krishna Corals Pvt. Ltd which help discharge the initial onus placed on the assessee basis our reasoning as provided in the context of Arpit Khandelwal which applies equally in the instant case. We find that there is no iota of evidence on record that has been submitted either during the assessement or appellate proceedings in the instant case. Further, it is no doubt true that a company can carry out activities in furtherance of not just the main objects but also in accordance with its subsidiary object clause. At the same time, on a pointed question raised by the AO to demonstrate the expertise of the company in the business of Iron and steel given that it was mainly involved in gems and jewellery business, the assessee has stated, though in the appellate proceedings, that the director of the company has the necessary knowledge and for doing business of branded product, no depth knowledge is needed. The question is if no depth knowledge of the industry is required, how the Director of the company has facilitated such purchases from JSW Steel and for that matter, what was the necessity of hiring the services of the company. In any case, there is nothing on record to demonstrate the particulars of the director, his age and experience in handling similar kind of purchase transactions in the past. There is no evidence on record in form of correspondence/communication etc which demonstrate the involvement of the director of Hare Rama Hare Krishna Corals Pvt. Ltd in facilitating such purchases. The test of rendering of services for which the commission expenditure has been claimed to have been incurred has thus not been satisfied in the instant case. In the result, we set aside the findings of the ld CIT(A) and the finding of the AO is hereby confirmed where he has disallowed the commission expenditure of Rs 8,43,160.

35. In ground No. 1, the Revenue has also challenged the disallowance of commission on sales to various persons amounting to Rs. 8,16,953/-. During the course of hearing, the ld. AR submitted that during the year under consideration the assessee also paid commission on sales to various parties and the AO has made an ad-hoc disallowance of 10% of the said expense claimed by the assessee in his P & L. It was submitted that during the appellate proceedings, ld. CIT(A) correctly appreciated the contentions of the assessee and allowed the ground of appeal to the assessee by deleting the said disallowance by observing as under:-

“Ld. AO failed to bring on record any evidence to establish that payment of commission was bogus, inflated or was diverted for the personal use of the assessee. ”

36. Without prejudice to above, it was submitted that the nature of commission payment is different from that of expenditure incurred on travelling, staff welfare or office expenses. Such expenses comprise of number of expenses, part of which may or may not be supported by proper evidences or part of which may be incurred for personal use. Therefore, the mechanism of ad-hoc disallowance usually adopted by Assessing Officer is not relevant for commission payment expenditure. Further, disallowance cannot be made when it is not paid to related party or part of it is not held to be unreasonable. Thus, the commission expense can either be allowed fully or disallowed fully and, therefore, approach of part disallowance is not possible.

37. It was further submitted that ad-hoc disallowance of 10% in an arbitrary manner without pinpointing the specific defects mere on the basis of surmise and conjecture has no legal force. Reliance was placed on the decision of Hon’ble ITAT, Jaipur Bench in the case of the ACIT vs. M/s Bhatia Corporation Pvt. Ltd., (ITA No. 417/JP/2012) (Jaipur-Trib.) wherein it was held as under:-

“ After considering the assessment order as well as finding given by the learned CIT(A) we hold that no specific defects had been pointed out by the lower authorities except holding that they were claimed on self made vouchers. The assessee had incurred these expenses on staf f welfare, which are required to maintain the cordial relation with the staff, so that the company’s target can be achieved. We find that these expenses were incurred wholly and exclusively for the business purposes, therefore we delete the addition confirmed by the learned CIT(A) on this ground. Accordingly, this ground of assessee’s C.O. is allowed…”

38. We have heard the rival contentions and purused the material available on record. The AO while disallowing the amount of commission has recorded a finding that “looking into the facts and the nature of business, the commission is necessary to pay at the time of sales but the assessee has failed to give the details and other things. Considering the same, he disallowed 10% of commission of Rs 81,69,526.” We find that said disallowance is purely on an adhoc basis and the same cannot be sustained in the eyes of law. In the result, the findings of the ld CIT(A) is confirmed and findings of the AO are set-aside.

39. In the result, we hereby confirm the disallowance of commission on purchases to Arpit Khandelwal and Hare Rama Hare Krishana and adhoc disallowance of commission to other parties is deleted. In the result, ground no.1 of the Revenue’s appeal is partly allowed.

40. In ground No. 2, the Revenue has challenged the deletion of addition of Rs. 6,000/- on account of donation made by the AO. The assessee has made the said donation to Hare Krishna Movement, Jaipur which is registered u/s 80G and the payment has been made through cheque dated 12.09.2008 and receipt thereof submitted during the appellate proceedings. In light of the same, we do not see any infirmity in the order of ld. CIT(A) who has considered the relevant facts which have been brought on record by the assessee during the appellate proceedings and deduction u/s 80G was allowed. In the result, the ground no. 2 of Revenue’s appeal is dismissed.

41. In ground no. 3 of the Revenue’s appeal, the Revenue has challenged the allowance of deduction u/s 80E of Rs. 1,70,008/-. During the course of assessment proceedings, the AO observed that the loan has been taken in the name Shri Arpit Khandelwal who happens to be an assessee and himself, and since loan not repaid by the assessee, the assessee did not fulfill the necessary conditions for claiming deduction u/s 80E of the Act and deduction so claimed was disallowed. During the appellate proceedings, the assessee filed copy of the loan account statement and the repayment made during the year. The ld. CIT(A) taking the same into consideration and also the amendment which has been brought in section 80E of the Act which talks about allowance of deduction of any amount paid for the purpose of higher education of assessee’s relative, allowed the deduction claim by the assessee amounting to Rs. 170,008/-.

42. On perusal of section 80E, it provides for deduction in respect of interest on loan taken by the assessee from any financial institutions for the purpose of higher education of his relative. Therefore, the emphasis is on payment of interest on loan taken by the assessee. There is no bar that the loan cannot be taken in the joint name of the assessee and his relative. So long as the loan has been taken in the name of the assessee, even if he happens to be co-applicant and co-borrower, and so long as payment of interest is made by the assessee, we don’t see any specific bar in terms of section 80E which can disallow such claim of the assessee. Further, there is no finding that Shri Arpit Khandelwal has made a similar claim in his return of income. So long as the payment of interest is effected by the assessee on loan taken by him, he stands eligible for deduction under section 80E of the Act. In the result, ground no.3 of the Revenue’s appeal is dismissed.

43. Regarding ground No. 4 of the Revenue’s appeal, the facts of the case are that during the course of assessment proceedings, the AO observed that the assessee has taken unsecured loan of Rs. 13,56,69,991/- and has paid interest amounting to Rs. 1,58,28,017/-. It was further observed by the AO that assessee has advanced an amount of Rs. 42,21,000/- to his sister concern M/s Arpan Infin Pvt. Ltd., without any interest. A show cause notice was accordingly issued by the AO as to why interest @ 12% which comes to Rs. 5,06,520/- be not added to the total income. In response, the assessee submitted that the proprietor capital is of Rs. 2,52,33,263/-which is more than the advance given by us and because of family/sister concern, no interest was charged. The response of the assessee was however not found satisfactory and interest of Rs. 5,06,520/- was disallowed and brought to tax in the hands of the assessee.

44. Being aggrieved, the assessee carried the matter in appeal before ld. CIT(A) and submitted that the Assessing Officer has not stated as to why his response submitted during the assessment proceedings was not found satisfactory. It was further submitted that the Assessing Officer has not established any nexus between the advance given to the sister concern and the interest bearing loan taken by the assessee. It was further submitted that the assessee has reported profit of Rs. 74,32,235/- during the year and the capital of the assessee as on 31.03.2009 was of Rs. 2,52,33,263/-. It was accordingly submitted that interest free advance were not given from interest bearing loan taken by the assessee. It was further submitted that assessee has also received interest free loan of Rs. 44,62,700/- on which no interest was paid by the assessee.

45. The ld. CIT(A) deleted the addition of interest so made by the AO observing that cash profit along with capital of the assessee during the year was more than the interest free advance given to the sister concern. It was further observed by the ld. CIT(A) that the assessee has received interest free loan of Rs. 44,62,700/- whereas interest free advance were given only of Rs. 42,21,000/-.

46. Now the Revenue is in appeal before us. The ld. DR relied on the order of the Assessing Officer.

47. The ld. AR submitted that it is settled legal proposition that when the capital or interest free fund available with the assessee is higher than interest free loan/advance given, it shall be presumed that interest free loan is given out of own funds. In support, reliance was placed on the decision of Hon’ble Bombay High Court in case of Reliance Utilities & Power Ltd [2009] 313 ITR 340 and decision of Hon’ble Gujarat High Court in case CIT vs. Gujarat Narmada Valley Fertilizers Co. Ltd. [2014] 221 Taxman 479.

48. We have heard the rival contentions and perused the material available on record. Undisputedly, the interest free funds available with the assessee is far in excess of amount advanced to Arpan Infin (P) ltd. Further, there is no nexus between the interest bearing funds and the money so advanced to the said sister concern which has been established by the AO. In view of the same, a presumption will arise in favour of the assessee that the interest free funds have been utilized for advancing such advances to the sister concern. The decision of Hon’ble Bombay and Gujarat High Courts supports the case of the assessee. In view of the same, we donot see any infirmity in the order of the ld CIT(A) and the same is hereby confirmed. In the result, ground no. 4 of the revenue’s appeal is dismissed.

In the result, the appeal of the assessee is dismissed and appeal of the Revenue is partly allowed.

Order pronounced in the open court on 17/01/2018