Case Law Details
ITAT AGRA BENCH
Assistant Commissioner of Income-tax-3, Mathura
versus
Brijbasi Hi-tech Udyog Ltd.
IT Appeal No. 188 (Agra) of 2010
[ASSESSMENT YEAR 2005-06]
JANUARY 18, 2013
ORDER
A.L. Gehlot, Accountant Member
This is an appeal filed by the Revenue against the order dated 17.02.2010 passed by the ld. CIT(A)-I, Agra for the Assessment Year 2005-06.
2. The grounds raised by the Revenue in its appeal are as under :-
“1. That the CIT(A)-I, Agra has erred in law and on the facts of the case in deleting the addition of Rs. 33,69,903/- made on account of commission paid to Shri Sheikh Shafat Ahmed when the person concerned himself prove that he was actually providing any sort of service to the assessee company related to its business activities.
1(a) By doing so, the ld. CIT(A)-I, Agra has erred in holding that the claim of the commission if genuine when the payment is not disputed and TDS was made on the said payment, inspite of the fact that the rendering of services, related to the business of the assessee was not proved conclusively.
2. That the CIT(A)-I, Agra has erred in law and on the facts of the case in deleting the addition of Rs. 73,365/- made on account of traveling expenditure, inspite of the fact that the rendering of services, related to the business of the assessee was not proved conclusively.
3. That the order of the CIT(A)-I, Agra is erroneous in law and on the facts of the case and that the order of the A.O. be restored.
4. That the appellant craves leave to add or delete or alter or modify any ground during appeal proceedings.”
3. The brief facts of the case are that the assessee-company is engaged in the business of manufacturing of Fire Fighting vehicles and equipments. Main customers are Ministry of Defence, Indian Air Force, Ordnance Factory, Indian Oil Corporation, Gas Authority of India Ltd., Oil & Natural Gas Corporation, Steel Authority of India, various fertilizers, Unite State Government and other Government/semi-Government organizations and other private companies. During the course of assessment proceedings the A.O. noticed that the assessee has debited sum of Rs. 33,69,903/- in Profit & Loss Account under the head commission. The assessee has shown the payment of commission made to Shri Sheikh Shafat Ahmad Prop. M/s. S&S Traders, New Colony, Batamlloo, Srinagar (J&K) during the year @ 10% of sales effected through him to the Director of Fire & Emergency Services, J&K. The A.O. further noticed that supply of vehicles were made through tenders in which role of intermediary agent is very remote. Therefore, the A.O. made enquiries through Commissioner of Income Tax, Jammu. In response thereto the Income Tax Officer, Ward-1, Srinagar reported vide his letter No.ITO/W-1/SGR/2007-08/1517 dated 09-08-2007 that M/s. S&S Traders, New Colony, Batamlloo, Srinagar is not an existing assessee with the said ward, holding alphabetical jurisdiction over the assessee. It was further stated that he in the capacity as ITO, Ward-I, Srinagar, holding jurisdiction over new assessee, also certify that the case is not an existing one with this ward as per available record of this office. The A.O. further noticed that the ITO, Ward-1, Srinagar on the basis of Inspector’s report who was deputed to make spot enquiry about the whereabouts of the party, has reported that no such assessee is available in the locality of New Colony, Batamalloo. The ITO also made enquiry from the Directorate of Fire & Emergency Services, Srinagar to whom supply are reported through this agent and find that no such person is known in the Directorate of Fire & Emergency Services, Srinagar.
4. The A.O. asked the assessees to furnish required information and details by issuing summon under section 131 of the Income Tax Act, 1961 dated 16.08.2007 to furnish entire correspondence made with M/s. S&S Traders, Srinagar with details of payments made, mode of dispatch/delivery of Fire Fighting vehicles & equipments etc. In response thereto, the assessee-company vide reply dated 20.08.2007 explained that correspondence with M/s. S&S Traders, Srinagar is not available on record. However, copy of agreement & details of payments were furnished. Details revealed that payment were made w.e.f. 15.06.2004 to 06.08.2004 but TDS was made @ 5.25% on Rs. 32,01,808/- amounting to Rs. 1,68,095/- and it was explained that these payments were made by their Delhi Office.
5. The A.O. also recorded statement on oath of Shri Suresh Chand Agrawal, Joint Managing Director of assessee-company on 21.08.2007 in which it was affirmed that there is nothing in the record of the company except copy of agreement with M/s. S&S Traders, Srinagar. The correspondence with this party is not available. The A.O. noticed that the document of agreement did not bear the signature of any witness as it was a confidential document. Original copy of agreement was not available with him. Shri Shaukat Ahmad worked as liaison officer for them for seeking orders for supply and to get payment released from Fire & Emergency Services, Srinagar. Shri S.C. Agrawal further explained that commission paid to Shri Shaukat Ahmad during the financial year 2004-05 was for the services rendered during the financial year 2003-04. The Director of assessee’s company also explained in its reply dated 21.08.2007 that Shri Shaukat Ahmad was dealing person and he did not know in what capacity he was working in his firm whether partner or manager. No correspondence made with him was available. All dealings were made verbally by meeting or on telephone by Shri M.C. Agrawal from Delhi Office. Father’s name of Shri Shaukat Ahmad is not mentioned in the agreement. No other address of Shri Shaukat Ahmad is known to him.
6. Statement of Shri Sunil Kaul, S/o. Shri Subendra Kumar, Manager Sales and services of assessee-company posted in companies Delhi office was also recorded on oath on 30.08.2007. During statement, Shri Kaul explained that he visited J&K and looked after work of obtaining tender from the Directorate of Fire & Emergency Services, Srinagar and depositing there and attended on the date of opening of tenders, & obtained orders for supply of Fire Fighting vehicles etc. and demonstration of vehicles after sales services were being attended by him. Shri Sunil Kaul further stated that for the service rendered for company he was getting salary, traveling allowance, tour expenses, bonus etc. from assessee-company. His father was residing at Srinagar and family at Delhi. The assessee-company has no dealing in J&K except Directorate of Fire & Emergency Services. He visited Srinagar so many times for company’s work. He further stated that he first time met with Shri Shaukat Ahmad at company’s office at Delhi. He did not know the father’s name of Shri Shaukat Ahmad, his family details & residential address, telephone numbers etc. He never visited office of Shri Shaukat Ahmad at J&K and never talked with him on phone. It was brought to his knowledge from Shri M.C. Agrawal, Director of the company that Shri Shaukat Ahmad was doing liaison work of the company at J&K.
7. The A.O. also made enquiries from Director Fire & Emergency Services (J&K) Jammu vide his office letter dated 31.08.2007 u/s. 133(6) of the I.T. Act, 1961. In response thereto, the Director General, Fire & Emergency Services, J&K, Srinagar has informed that as per records Shri Sunil Kaul, Service Engineer of Company was attending the meetings and other works on behalf of M/s. Brijwasi Hi-tech Udyog Ltd. and no person named Shri S. Ahmad/Shri Shaukat Ahmad/Proprietor/partner/employee of M/s. S&S Traders has been attending on behalf of/agent of BHUL. Full text of letter is reproduced by the A.O. in his order as under: –
“Government of Jammu and Kashmir Directorate General Fire &. Emergency Service, J&K, Sri nagar
Asstt. Commissioner of Income Tax-3,
Mathura (U.P.)
Dated: 29-09-2007
Sub:- Furnishing of information u/s 133(6) of LT. Act, 1961 in case M/s. Brijbasi Hi-tech Udyog Ltd. (BHUL), Delhi-Agra Bye-Pass Road, Mathura (Delhi office at A-28, Hauz Khas, New Delhi-110016) for the A.Y. 2005-06 Reg.
Sir,
Kindly refer your letter No.ACIT-3/MTR/Scrutiny/BHUL/2007-08/206 dated 31.8.007 regarding the subject cited above. n this connection the requisite information is detailed as under: –
(1) Details of supplies made by M/s. BHUL to this Directorate and subsequent payments released from 2003-04 onwards are shown in Annexure “A”.
(2) As per records available in the direction Office Shri Sunil Kaul, service engineer of the company, was attending the meeting and other works on behalf of M/s. BHUL from the year 2004-05 to 2005-06.
(3) Not pertaining to the Department.
(4) As per records, no person by name of Shri S. Ahmad/Shri Showkat Ahmad/Proprietor/Partner/Employee of M/s. S&S Traders has been attending on behalf of/agent of M/s. BHUL.
Yours faithfully
S/D-
Directorate General
Fire & Emergency Services
J&K, Srinagar.”
8. The A.O. asked the assessee to produce M/s. Shaukat Ahmad personally for evidence but the assessee-company failed to produce him in spite of several opportunity given to the assessee. The A.O. noticed that the company merely filed an affidavit of alleged Agent Shri Shaukat Ahmad. The A.O. was of the view that such affidavit has no evidential value until & unless it is certified by the deponent by attending in person that it was actually deposed by him. Information were also required directly from Shri Shaukat Ahmad u/s. 133(6) by the A.O. but nothing was received from M/s. Shaukat Ahmad.
9. The A.O. noted that during assessment proceedings the assessee-company has furnished on 07.12.2007 a copy of acknowledgement of Income-tax return which shows that Shri Ahmad has filed his return of income on 04.10.2007 only for the A.Y. 2005-06 vide receipt No.2492 with ITO, ward-4, showing income from house property at Rs. 3,55,017/- and claiming refund of TDS. The A.O. noticed that the said acknowledgement did not bear the clear seal of the Department and is filed beyond the date. The A.O. was of the view that it was not a valid return and cannot be accepted as an evidence for receipt of commission by Shri Ahmad from assessee-company. The A.O. observed that it was actually arranged by the assessee on being enquired to create evidence for assessee’s claim. The A.O. noticed that the return was filed by Shri Shaukat Ahmad in October, 2007 while the assessee earlier stated that Shri Ahmad is assessed to Income-tax in J&K with ITO-4 but as per the report of the ITO from Srinagar as discussed above that no such return was filed by Shri Ahmad for the A.Y. 2005-06 with ITO Ward-4, Srinagar before Oct 2007. Thus, it is clear that the assessee wanted to create an evidence by filing the return of income in the name of Shri Shaukat Ahmad.
10. Under the facts and circumstances, the A.O. found that it is apparent from the letter of Directorate of Fire & Emergency Services, J&K, statement of Shri Sunil Kaul and Shri S.C. Agrawal, report of ITO, ward-1, Srinagar that the assessee-company has shown payment of commission of Rs. 33,69,903/- to a hidden person named Shri Shaukat Ahmad not for the services rendered by him for the assessee’s business but to reduce its tax incidences. Services to assessee client Directorate of Fire & Emergency Services, J&K were provided, actually by Shri Sunil Kaul as an employee of the assessee since obtaining tender form to after sales services and thus payment of commission is not allowable expenditure and deserve to be disallowed. The A.O. further observed that it is duty of the assessee to prove the genuineness of the expenditure claimed by him. Burden lies on the assessee to furnish all the supporting evidence regarding the genuineness of the any expenditure. The A.O. relied upon a judgment in the case of Laxmi Ratan Cotton Mills Co. Ltd. v. CIT [1967] 37 ITR 755 (SC) wherein it was held that “The burden of proving that service were rendered by the managing agents to justify the allowances of his remuneration as an expenditure incurred wholly and exclusively for the purpose of the business was on the assessee. If no reliable evidence was forth coming, the Tribunal was competent to reach the conclusion that it was not allowable. The recitals in the managing agency agreement could not be substitute for such evidence and did not discharged the burden placed on the assessee. Similarly in another case reported L.H. Sugar Factory and Oil Mills (P) Ltd. v. CIT [1980] 125 ITR 293 held that where an assessee claim a deduction the onus is on him to bring all material facts on records to substantial his claim”.
11. Apart from above facts, it has also been noticed by the A.O. that the amount of commission relates to the Financial Year 2003-04 relevant to the A.Y. 2004-05 and further no TDS were made during the year at the time of its credit. TDS at the time of its payment was also not made & paid in time as per provisions of section 194H read with section 200 of the I.T. Act, 1961. The A.O. noticed that the assessee has given full response in respect of other two Agents but no information in respect of this Agent is available with the assessee.
12. The A.O. held that payment of commission to Shri Shaukat Ahmad was not for the business needs of the assessee nor was it for the services actually rendered by the alleged recipient of commission who cannot but be a name lender for the assessee-company. Therefore, the A.O. disallowed and a sum of Rs. 33,69,903/- has been added to the income of the assessee-company.
13. The CIT(A) deleted the addition on the ground that there is no evidence to prove that the payee Shri Sheikh Shafat Ahmed had not rendered any services to the appellant, thereby warranting disallowance of the commission of Rs. 33,69,903/-. Let us see how CIT(A) reached to this conclusion. The CIT (A) from pages numbers 1 to 3 reproduced the grounds raised by the assessee in its appeal before the CIT(A). In Pages 3 to 9 reproduced assessee’s submissions. Comments on assessee’s submissions – Pages 9 to 12. Rejoinder of the assessee- Pages 12 to 14. The CIT(A) directed the A.O. to record the statement of Shri Sheikh Shafat Ahmad which were recorded by the A.O. and copied the statement from page no 15 to 27. The report submitted by the A.O. has been reproduced at page nos.28 & 29 which is under:-
“3.8 A report dated 12.05.2009 was submitted by the AO in compliance of directions issued u/s.250(4) of the Act, stating therein as reproduced below:-
“As per your directions the assessee company was asked to produce the witness Sri Shafat Ahmed for examination and recording his statement with direction to ensure that he must bring proof of his identification, particulars of bank account statements, particulars of assessment, proof of filing his returns of income and his books of accounts for the F.Y. 2004-05 (a copy of letter dated 23.03.09). It is regretted to note that the witness was produced by the assessee on 11.05.09 after taking three opportunities/adjournments. The witness Sri Sheikh Safat Ahemd was examined on oath on the issues related to the assessment under appeal. A copy of his statement, running into 13 pages is enclosed herewith for kind perusal.
A perusal of the statement, it is evident that in spite of taking three opportunities and sufficient time of about two months the witness could not support his affirmations and replies conclusively and with corroborative evidences. Resultantly, the conclusions and inferences drawn by the then A.O., in the assessment order, after examining the facts material of the case in details, could not be contradicted. The salient pointed emerging from the statement of the witness are summarized as under:
1. Credentials of the witness being a consultant of fire fighting equipments on the basis of his having some technical qualifications is not supported with any valid Diploma or certificate. (Ref. Q.No.5 & 6).
2. He did not produce any bank account details, books of accounts, head wise computation of income, final accounts from which his claim of commission receipt from the assessee and its accounting could be verified. Rather the witness has categorically admitted that no books of accounts were maintained by him. (Ref. Q.No.3,4,5,8 & 10).
3. Returns of income for the three A. Yrs. i.e. 2005-06, 2006-07 and 2007-08 claimed to have been filed on 4.10.2008 (on one day after due dates) and even their original acknowledgements were not produced for verification. The photocopies produced are not having legible stamps of the receiving ward etc. (Ref.Q.No.2)
4. He was not aware as to on which basis he had declared his income when no books of account were maintained. He could not substantiate as to how the alleged receipt of commission of Rs.33,69,903/- reduced to Rs.3,55,017/- (declared income for A.Y. 2005-06). (Ref. Q.No.10,34 & 35).
5. He could not produce any agreement between him and the company. (Ref. Q.No.13).
6. He has stated that he was having correspondence with the company and he was appointed a representative for J&K only on his request letter, however, he could not produced any such correspondence. Interestingly the Director of the company, Shri Suresh Agarwal had deposed during the assessment proceedings that there was no correspondence with the alleged agent with the company. It is evident from the body of the assessment order itself.
7. He claimed that company has also deputed Shri Sunil Kaul and Mr. Malhotra its employees for company’s business activities at Kashmir and they also assisted him. But when he was asked about the denial of Shri Sunil Kaul of not knowing him and rather he himself used to look after the business interests of the company in J&K he could not give satisfactory reply. (Ref.Q.No.22 & 25).
8. When he was confronted with the denial of the Director of Fire and Emergency (J&K) about the company being represented by Mr. Safar Ahmed he could not refute the said report. Neither he could produce any correspondence or documentary evidence about his involvement over there on behalf of the assessee company. (Ref. Q.No.29,30 & 31).
9. The witness could not explain satisfactorily as to why he did not file his returns in time for the subject years and for preceding assessment years and why no advance etc. was paid even in respect of his other income. In respect of almost all important and crucial issues which were uncomfortable to him he took shelter of prevailing conditions of Kashmir at that time. (Ref. Q. No.37).
In view of the above, it is clear that the claim of the assessee about alleged commission is not genuine. It has not been proved that the alleged person was providing any sort of service to the assessee company related to its business activities. Hence, the claim of the commission in the name of this person is framed and concocted one and is liable to be rejected.”
14. The report dated 12.05.2009 of the A.O. was forwarded for rejoinder to the appellant. Vide letter dated 19.08.2009, the appellant furnished counter-comments which have been reproduced by the CIT(A) in his order as under:- (pages 29 to 32)
“As directed by your honour, the assessee company has produced Sh Shafat Ahmed Prop of M/s. S & S Traders Sri Nagar Jammu & Kashmir on 11/05/2009 before the assessing officer at Income Tax Office Mathura.
The assessing officer recorded the statement of Sh Shafat Ahmed on that day. The assessing officer gave his report which is totally unjustified and did not present the true picture of the statement recorded. However our para wise reply to the assessing officer report is as under:-
1. Credential of the Witness:- The witness has clearly stated that he is 10+2 Pass from J&K and has undergone training programme conducted by J&K Fire & Rescue Deptt in Srinagar. It may be mentioned here that Fire and Rescue Deptt is handled by the State Government which generally run by the Police Deptt of the respective State. There is no college in India which impart the Fire Fighting training or engineering except one in Nagpur which has already been closed. For doing the business of agency or commission agent, no qualification is required. There are so many businessman who are not educated and hence doing remarkable business.
2. Production of Bank Pass Book etc.:- The witness did not produce his bank pass book and his books of accounts before the assessing officer. However he told that he is maintaining his bank account with Punjab National Bank Batmalu Sri Nagar (J&K). So far as books of accounts and basis of computation is concerned he stated that his consultant might be knowing the same and who has filed his return of income.
3. Returns of Income:- It is true that the witness had filed his return of income for AY 05-06, 06-07 & 07-08 on 04/10/2007 with wd-4 range KASHMIR (CIT Jammu) vide receipt no 2492, 2493 & 2491. Self certified copies of the acknowledgement of returns were filed before the assessing officer. He could not produce the original of the photo copies. Photo copies are legible and properly readable.
4. The witness clearly stated that his accounts and returns were prepared by his consultants.
5. Agreement:- The witness confirm that there is a written agreement between him and the company. He also confirmed that the said agreement was ‘executed either in 2003 or in 2004.
6. The witness also confirmed that he has correspondence with the company but could not produce the same as he has not brought the same. The witness also confirmed that his main dealing is with M C Agrawal Managing Director of the company who looks after the sale and service at the Delhi office of the company and not with Sh S C Agrawal.
7. He confirm that he knows Mr. Sunil Koul, the service engineer of the company.
8. The witness also confirm that his authority letter (as given by the company) was filed with the Fire & Rescue Deptt J & K in the year 2003-2004. He clearly stated that he used to go there on behalf of the company. For collecting tender documents, depositing tender documents, processing of payments.
9. The witness told that due to disturbances in Jammu & Kashmir, he could not file his return of income within the time allowed.
SUBMISSIONS BY THE COMPANY:-
In the body of assessment order, the assessing officer has given two citations of Hon’ble Supreme Court of India which are as under:-
1. Laxmi Ratan Cotton Mills Co. Ltd. v. CIT (SC) reported in 37 ITR 634 page.
2. L H Sugar Factory & Oil Mills (P) Ltd. v. CIT reported in 125 ITR 293 (S.C.)
In Laxmi Ratan Cotton case the apex court held that “The burden of proving that services were rendered by the managing agents to justify the allowances of his remuneration as an expenditure incurred wholly and exclusively for the purpose of the business was on the assessee. If no reliable evidence was forth coming, the Tribunal was competent to reach the conclusion that it was not allowable. The recitals in the managing agency agreement could not be substitute for such evidence and did not discharge the burden placed on the assessee.
In L.H. Sugar case the apex court held that where an assessee claim a deduction, the onus is on him to bring all the material facts on records to substantiate his claim.
From the above and to claim the expenditure, the following is must:-
1. That the assessee in fact has received the services of commission agent for which payment has been made.
2. That all the materials which proves the claim of the assessee should be brought before the assessing officer.
1. Providing of Services:- It is a fact that Sh Shafat Ahmed Prop S & S Traders has provided his services to the assessee in respect of sales of fire fighting vehicle/equipment to Fire & Rescue Deptt J & K State. Mr Shafat Ahmed is residing there. The company has appointed his representative for J & K Region vide agreement dated 01/04/2003. (copy already furnished).
He is providing all the logistic services to the company since 01/04/2003. He is still providing services to the company and the company is paying commission to him in lieu of these services. It is impossible for the company to either open a office there or send the persons from Delhi/Mathura as the J & K is a disturbed and terrorist prone area. A local man can handle the local authorities very well.
In his statement, Sh Shafat Ahmed has also confirmed that he is providing services to the company from 2003-2004. Sh Shafat Ahmed in his statement confirmed that he is providing repairs and maintenance services after sale on behalf of the company during warranty period of the equipment supplied by the assessee company. These vehicles are placed/stationed in the different hilly districts of J & K State. It is very difficult or impossible for the assessee company to provide after sale services in the hilly area of J & K State.
2. Evidence/Material:- The assessee has furnished the following evidences/materials for proving its claim before the assessing officer:-
1. Copy of the agreement.
2. Affidavit of Safat Ahmed duly sworn before the authorities and further confirmed by him before the assessing officer on 11/05/2009 in his statement.
3. Assessment particulars of Safat Ahmed.
4. Copy of Election card/Pan Card/Driving license.
5. Personal appearance of Shafat Ahmed.
6. Copy of bank account of the assessee company from which payment has been made.
7. Statement of supplies made to J & K Fire Deptt.
8. TDS Certificate issued to Shafat Ahmed.
All the above materials have been placed before the assessing officer. The above material is sufficient to justify that the commission has been paid by the assessee company to Shafat Ahmed.
In his deposition before the assessing officer, Sh Shafat Ahmed confirmed that he has provided the services and in lieu of services he has received the commission from the assessee. The identity of Shafat Ahmed is also established before the assessing officer. He has also produced the self certified copies of the acknowledgement of filing of his returns before the assessing officer ward-4 Kashmir Range. He has also confirmed the affidavit filed during the course of asst.
The assessee company has provided all the material and details to the assessing officer in support of its claim of payment of commission. These materials/evidences are sufficient to claim the expenditure.
In view of the submissions as stated above and in view of the statement of Shafat Ahmed, it is established that the report of the assessing officer is unjustified, unwarranted and bad in the eye of law and hence liable to be rejected.
Your kind attention is also drawn towards the case decided by Honorable Gujarat Court in VOLTAMP vs. CIT 129 ITR 105 in which the court justified the payment of commission as per the agreement.
In view of the submissions as given above and above earlier submissions give from time to time and statement of Shafat Ahmed recorded by the assessing officer, it is established that the assessee company has paid the commission for the purpose of business which is justified. The addition made on this account by the assessing officer is unjustified and bad in law.
It is therefore humbly requested to delete the addition of Rs.3369903.00″
15. The CIT(A) observed in respect of details filed by the assessee that the A.O. has not disputed the fact that the payments of Rs.33,69,903/- through 7 DDs. of Central Bank of India, Defence Colony, New Delhi were made to the appellant’s agent Shri Sheikh Shafat Ahmed, Prop. of M/s. S&S. Traders. It is not the A.O.’s case that the impugned payments were never made or that they were not made to Shri Sheikh Shafat Ahmed. TDS from the impugned commission payments was made by the appellant which has not been doubted by the AO. The CIT(A) further observed that in the written submissions dated 18.12.2008, the appellant has argued that the fact that Shri Sheikh Shafat Ahmad came to Delhi and Mathura in respect of the supplies made is evident from the booking of the air ticket by the assessee company in respect of traveling made by Shri Sheikh Shafat Ahmad frequently. The travelling expenses incurred on Shri Sheikh Shafat Ahmad has also been disallowed by the A.O. This fact has not been controverted by the A.O. The CIT(A) observed regarding assessee’s submissions that when the customer is located at far flung area, there is a need for local agent for day to day liaisoning with the Government Department though tender is issued in the name of the main party. The local agent regularly remained in touch with the master and with the Department. The CIT(A) further observed that it is true that Government does not recognize the agent in between but the party has to appoint such local agent for smooth supplying of the order. The alleged commission agent filed his return for A.Y. 2005-06 on 04.10.2007 in ward-4, Srinagar after enquiries were conducted by the A.O. with ITD, Ward-1, Srinagar and ITD Ward-1 Srinagar furnished his report dated 09.08.2007. Thus evidently, the said person filed his return on detection of his taxable income. Thus, there was a default on the part of the said person and not the appellant who had claimed the impugned expenditure in its return and done TDS there from, which was duly filed with the return of income. The CIT(A) also noted certain facts and observations thereon which are as under:-
“that in the course of appellate proceedings, the appellant was directed to produce Shri Shafat Ahmed before the AO for his examination. The statement of Shri Shafat Ahmed was recorded by the AO, on 11.05.2009. In answer to Q.1, Shri Shafat Ahmed has stated as under:-
“Ans. I am Sheikh Safat Ahmed 510 Sheikh Ahmed resident of Aribagh Colony, Manohwat, P.O. Nati Par, P.S. Chadora, Sri Nagar (J&K). I am the Proprietor of M/s. S&S Traders, located at Batamaloo, Srinagar. I am carrying on business of liaisoning of and after sale service of fire fitting equipments and other allied items under the proprietorship concern since last 10 years. I am also the proprietor of M/s. Rex Electronics, Batmaloo which is engaged in the trading of electronics goods. I am assessed to tax and my PAN is AGIPA0222A. I am filing my return of income under ITO Wd.-4, Srinagar. I am submitting photocopies (self attested) of acknowledgements of filing of return of income for the A. Y. 2005-06, 2006-07 and 2007-08.”
However, the witness did not produce books of accounts, head-wise computation of income, bank account details, agreement & correspondence with the appellant company, etc. On this basis the AO observed in the remand report dated 12.05.2009 as under :-
“In view of the above, it is clear that the claim of the assessee about alleged commission is not genuine. It has not been proved that the alleged person was providing any sort of service to the assessee company related to its business activities. Hence, the claim of the commission in the name of this person is framed and concocted one and is liable to be rejected.”
However, the failure of Shri Shafat Ahmed to furnish books of account, details of income etc. is probably to avoid scrutiny of his accounts as he has shown taxable income of Rs.3,55,017/- only against the impugned commission receipts of Rs.33,69,903/- from the appellant. However, no adverse inference arises in the appellant’s case on this count.
– The appellant has disclosed substantial commission receipts in A.Y. 2006-07, 2007-08 and 2008-09 as detailed in para 3.14 above. Thus receipt and payment of commission appears to be a practice in this line of business.
– At the assessment stage, the existence of Shri Shafat Ahmed had been doubted by the AO as apparent from the following observations:-
“In view of above facts and circumstances, it is apparent from the letter of Directorate of Fire & Emergency Services, J&K, statement of Shri Sunil Kaul and Shri S.C. Agarwal, report of the ITO Ward-l, Srinagar that the assessee company has shown payment of commission of Rs. 33,69,903/- to a hidden person named Mr. Shaukat Ahmed not for the services rendered by him for the assessee’s business but to reduce its tax incidences…….”
However, this doubt has been cleared due to the attendance of Shri Shafat Ahmed before the AO.
In the assessment order as well as in the remand report the AO has held that there is no evidence to prove that Shri Shafat Ahmed rendered services warranting payment of 10% commission of sales. The appellant has argued that it has establishments only in Delhi and Mathura. To take and execute the contracts in Jammu & Kashmir, continuous pursuit and follow-up was required locally. Vide submission dated 12.01.2010, the appellant has stated that apart from Sheikh Shafat Ahmed only Sunil Kaul visited Jammu & Kashmir in connection with the contracts. Shri Sunil Kaul traveled 6 times to Jammu & Kashmir and his total traveling expenses were Rs.69,708/- in A.Y. 2005-06. In A.Y. 2006-07, he travelled 9 times to Jammu & Kashmir and his travelling expenses were Rs.56,477/-. It would be unrealistic to say that the entire contract could have been obtained and concluded merely by the said trips of Shri Sunil Kaul who is essentially in-charge of commissioning, testing, operations, use and after – sales service though he was also deputed for filing tender, attending meetings etc. on behalf of the appellant company.
In the letter dated 29.09.2007, the Director General, Fire & Emergency Services, J&K, Srinagar has stated as under:-
“2. As per records available in the direction office Shri Sunil Koul, service engineer of the company, was attending the meeting and other works on behalf of M/s. BHUL for the year 2004-05 to 2005-06.
3** ** **
4. As per records, no person by name of Shri S. Ahmad/Shri Showkat Ahmad/Proprietor/Partner/Employee of M/s. S&S Traders has been attending on behalf of/agent of M/s. BHUL.”
Thus, evidently Shri Sunil Kaul represented the appellant company in the official dealings as its representative. Therefore, his name appears in the official records of the said Govt. Department. The appellant has consistently maintained that Sheikh Shafat Ahmed was its local liasoning agent and not its official representative. The appellant has filed photocopies of letters and relevant bids as under :-
07.01.2009 D.G., Fire & Emergency Services, Govt. of J&K, Gandhi Nagar, Jammu Multipurpose Fire with Accessories.
19.04.2006 D.G., Fire & Emergency Services, Govt. of J&K, Gandhi Nagar, Jammu Hazmat Rescue Vehicles (2 Disaster Response Vehicles).
17.02.2009 D.G., Fire & Emergency Services, Govt. of J&K, Gandhi Nagar, Jammu Multipurpose Fire Tender with Accessories.
22.09.2008 D.G., Fire & Emergency Services, Govt. of J&K, Gandhi Nagar, Jammu Fabrication of water Tender on (20 nos.) Tata Model.
06.08.2009 D.G., Fire & Emergency Services, Govt. of J&K, Gandhi Nagar, Jammu Fabrication of water Tender on (20 nos.) Tata Model.
In the letters addressed to the above mentioned Govt. Authority, it is stated as under :-
“It is in reference to the above mentioned subject tender, we hereby authorise our authorized agent Mr. Shokat Ahmed in Jammu can submit/attend the tender opening on behalf of our company.”
This also corroborates the statement of D.G., Fire & Emergency Services, J&K, Srinagar in which it is stated that for the year 2004-05 to 2005-06 Shri Sunil Kaul was attending. Apparently, M/s. S.S. Traders was authorized by the appellant company as its agent from 2006-07 and onwards.
The existence and role of liaison in business is well known and recognised. The appellant has itself apparently gained commission income in the subsequent years as detailed in para 3.14 hereinabove.”
Finally the CIT(A) held as under :-
“3.16 In view of the foregoing, I find that there is no evidence to prove that the payee Sheikh Shafat Ahmed had not rendered any services to the appellant, thereby warranting disallowance of the commission of Rs.33,69,903/-. Hence, the disallowance of Rs. 33,69,903/- is hereby deleted.”
16. We have heard the ld. Representatives of the parties and records perused. The issue to be examined in the case under consideration is whether commission of Rs.33,69,903/- was paid against services rendered. Whether under the facts and circumstances the assessee has discharged its burden in this regard. To examine these issues, we would like to refer he relevant provision and scheme of the Act.
17. Business expenditures incurred for the purpose of business are allowable under section 37 of the Act. The said section 37 reads as under:-
37. (1)- “Any expenditure (not being expenditure of the nature described in sections 30 to 36 [***] and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”.
[Explanation. – For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.]
(2) 17** ** **
(2B) Notwithstanding anything contained in sub-section (1), no allowance shall be made in respect of expenditure incurred by an assessee on advertisement in any souvenir, brochure, tract, pamphlet or the like published by a political party.
18. In order to claim deduction of expenditure under section 37(1) of the Act, following conditions should be satisfied:-
(i) The expenditure in question should not be of the nature described under the specific provisions of sections 30 to 36 and 80VV (section 80VV was omitted with effect from April 1, 1986);
(ii) The expenditure should not be of the nature of capital expenditure;
(iii) It should not be a personal expenditure; and
(iv) The expenditure should have been laid out or expended wholly and exclusively for the purposes of the business or profession.
(v) That any expenditure should not be incurred for any purpose which is an offence or which is prohibited by law.
19. It is thus clear that conditions at (i), (ii) and (iii) above are negative conditions whereas the condition at (iv) above is a positive condition. If the expenditure satisfies the negative conditions, it has to satisfy the positive condition in order to be eligible for deduction under section 37(1) of the Act. The condition No.(v) is overriding to all other conditions number (i) to (iv) stated above. Thus, section 37(1) allows deduction of any “expenditure” subject to conditions noticed above. The burden of proving that a particular expenditure has been laid out or expended wholly and exclusively for the purposes of business is on the assessee. This position is well settled by the judgments of the apex court in CIT v. Calcutta Agency Ltd. [1951] 19 ITR 191 and CIT v. Imperial Chemical Industries (India) (P.) Ltd. [1969] 74 ITR 17 (SC). The mere object of incurring expenditure is not decisive whether it is of a capital nature or revenue nature. Therefore, the onus is on the assessee to prove, inter alia, that the item of expenditure in question for admissibility to deduction is not disqualified under section 37(1) of the Act. Further, mere payment by itself would not entitle the assessee to deduction of the said expenditure unless the same was proved to be incurred in accordance with section 37(1) of the Act. The onus of proof is upon the assessee. It is for the taxpayer to establish by evidence that a particular allowance is justified. Therefore, if the assessee fails to place sufficient material, he is not entitled to claim this allowance under section 37(1) of the Act. In CIT v. Chandravilas Hotel [1987] 164 ITR 102, it is held that if the expenditure is doubted by the assessing authority, it is the duty of the assessee to prove by leading evidence that the expenditure was in fact, incurred.
20. In the light of above discussion, if we consider the facts of the case, we find that the assessee company is engaged in the business of manufacturing of Fire Fighting Vehicles and Equipments. Main customers are of Defence, Indian Air Force, Ordnance Factory, Indian Oil Corporation, Gas Authority of India Limited, Oil and Natural Gas Corporation, Steel Authority of India, Unite State Government and other Government and Semi- Government organizations and other private companies. The assessee claimed 10% commission on sale of fire fighting vehicles to Director of Fire & Emergency Services, J&K which is an undertaking of Government of Jammu & Kashmir (J&K), Srinagar. The commission was paid to Shri Shaikh Shafat Ahmad, Prop of M/s. S&S. Traders, New Colony Batamlloo, Srinagar (J&K). The A.O. disallowed the claim of assessee on the ground that commission was not paid for the purpose of business. The commission was not paid against actual services rendered. The recipient of commission is name lender of Assessee Company. Under the facts and circumstances of the case, whether the assessee has discharged the burden that commission expenditure has been laid out or expenditure was wholly or exclusively for the purpose of business, so that the assessee may be entitled for claiming deduction of business expenditure of the assessee. In the case under consideration, in order to examine services rendered against payment of commission, the A.O. asked assessee to furnish correspondence with M/s. S&S Traders, recipient of commission but the assessee failed to furnish the same on the ground that correspondence with M/s. S&S Traders is not available. The Managing Director of the assessee company admitted on oath, statement recorded on 21.08.2007 that there is nothing on record to support the facts that commission was paid against services to the assessee company. The Director of the assessee company also stated in his statement that same thing which was stated by the Managing Director of the assessee company. Manager Sales & Services of assessee company also did not have knowledge of such commission Agent. On direct enquiry from purchasers, Directorate General Fire & Emergency Service vide letter dated 29.09.2007 wherein it is clearly replied that Shri Shaikh Shafat Ahmad or any other person of M/s. S&S Traders did not attend their office on behalf of the assessee company. The relevant abstract of the letter is reproduced in above paragraph no.7of this order. In the remand report dated 12.05.2009 the A.O. submitted before the CIT(A) that even at the second time when opportunity was given to the assessee during examination for remand report the recipient alleged to provide consultant of fire fighting equipments but the recipient and assessee both failed to furnish any documents regarding technical qualifications or experience etc. The recipient was not aware about his books of account and basis on which return was filed by him. The recipient also did not furnish any correspondence or material to justify the commission received. The A.O. found that the assessee failed to furnish any evidence in support of the claim that commission was paid against the services rendered.
21. The CIT(A) deleted the addition on the basis of certain irrelevant facts brought to the notice by the assessee that amount is paid by cheques, The assessee claimed traveling expenses claimed to be incurred for traveling of Commission Agent Shri Ahmad came to Delhi and Mathura. Such material in the shape of evidence can be created by the assessee after taking in to confidence of other person. Such evidence cannot said to be in support of the fact that services were rendered against commission payments. Contrary to that, we noticed certain things which were created by the assessee subsequently in support of the claim. The recipient has filed return subsequent to enquiry started by the A.O. An earlier contention of the assessee that Shri Shaikh Shafat Ahmad is assessed to tax was found false. Let us see how CIT(A) satisfied regarding services rendered and how this objection of the A.O. has met out by the CIT(A). To better appreciate this aspect, we would like to refer the relevant abstract of the order of CIT(A) from page nos.37 & 38 of her order which has been reproduced in paragraph no.15 of this order. The CIT(A) on the basis of his own assumption and presumption tried to justify that services were rendered against commission paid. On carefully going through the entire order of CIT(A) particularly above abstract of order of CIT(A), we find that the assessee as well as recipient both failed to furnish any evidence to support that the commission was paid against services rendered. As discussed above that in this regard burden of proving is on the assessee as the law laid down by the Apex Court in the case of Calcutta Agency Ltd. (supra), whereas the CIT(A) in paragraph no.3.16 page no.38 held “I find that there is no evidence to prove that payee Shri Shaikh Shafat Ahmad had not rendered any service to appellant”. The finding of CIT(A) is contrary to the law laid down by the Apex Court in the case of Calcutta Agency Ltd. (supra) that the burden in this regard is on the assessee. Whereas the CIT(A) shifted this onus on the A.O. There is no finding of CIT(A) that the assessee has furnished sufficient evidence to prove that the payee rendered service to the assessee against commission payment. There is no such material on record nor the assessee furnished any material basis on which it can be held that the payee rendered services to the assessee against commission payment. The CIT(A) cast negative burden on the A.O. which is not in accordance with law. Therefore, the order of CIT(A) is not sustainable in the eyes of law. Further it is also settled law that mere payment itself would not entitle the assessee to deduction of such commission unless the same is proved to be paid for commercial consideration and expended wholly and exclusively for the purpose of business. The onus of proof is always on the assessee. It cannot be said that even if the assessee does not produce any evidence in support of the claim for deduction, the A.O. himself independently is to collect evidence and decide that the deductions claimed is baseless having regard to the legitimate business need of the assessee. The finding recorded by the CIT(A) is solely based on surmises and conjectures. The whole approach of CIT(A) is erroneous. It is the admitted fact of the case that the assessee failed to furnish evidence to support the claim that commission was paid against services rendered. Whatever details filed by the assessee and considered by the CIT(A), such routine details can be submitted in a number of cases to demonstrate false payment of commission. When an assessee is manufacturing fire fighting vehicle and equipment and sale is made to a unit of State Government, service of Agent, if any, must be accordingly to that level. The commission agent must have the technical knowledge of product, having capacity of salesmanship, having capacity or to provide services in realizing sale consideration etc. But in the case under consideration, the supply was made to Government Department. We do not think that recovery of sale consideration was in doubtful condition. So, any service is required for realization of sale consideration. Further, supply to Government Department is also not required any middleman or Agent as the Government Department itself is having sufficient infra-structure in this regard. Thus, the assessee has completely failed to furnish any evidence or material based on which it can be said that the commission was paid against services rendered.
22. It is not the case of the assessee that payment of such commission is as per prevailing practice of the trade. When supply of goods is made to Government Departments, commission is not allowable unless it is established that commission was paid for services other than services related to supply of goods to Government Department. As regards working of Government Department, we are of the view that public officials are expected to discharge their duties dispassionately, and decide on the merits of each case. Therefore, the so-called commission expenditure in respect of goods supplied to Government Department can not be said to be an expenditure laid out wholly and exclusively for the purpose of business and secondly it would be disqualified under explanation to section 37(1) as being opposed to public policy.
23. Second ground of appeal pertains to addition of Rs.73,365/- on account of traveling expenditure. This ground of appeal is consequential to first ground. The traveling expenses claimed by the assessee pertained to Commission Agent. Since the commission payment itself is disallowed as non-genuine, therefore, there is no question of allowing traveling expenses on Commission Agent since the expenditures were not incurred wholly and exclusively for the purpose of business.
24. In the light of above discussion on both the grounds of appeal pertaining to additions of Rs.33,69,903 & Rs.73,365/-, both the additions are confirmed. Therefore, order of the CIT(A) is set aside and order of the A.O. is restored.
25. In the result, appeal of the Revenue is allowed.
