Case Law Details
Mangalya Ceramics Vs DCIT (ITAT Ahmedabad)
ITAT Ahmedabad held that disallowance of sales commission expenses justified as there was no basis and reason for paying the commission to these agents who even otherwise were closely related to the assesse.
Facts- During the course of assessment proceedings, the Assessing Officer made disallowance on account of sales commission of Rs. 33,92,430/-. The Assessing Officer observed that the assessee has claimed deduction of sales commission expenses of Rs. 33,92,430/- paid to Sonali Traders, which is a sister concern of the assessee firm and partners of the assessee firm are also the partners of Sonali Traders. The Assessing Officer after examination and verification held that the genuineness of the expenditure could not be ascertained hence the sales commission expenses of Rs. 33,92,430/- was disallowed.
CIT(A) dismissed the appeal of the assessee. Being aggrieved, the present appeal is filed by the assessee.
Conclusion- ITAT in assessee’s own case held that there was no basis and reason for paying the commission to these agents who even otherwise were closely related to the assessee, since the assessee was unable to demonstrate any service rendered by them as distributors.
Held that in light of the order of ITAT passed for A.Y. 2013-14 wherein on similar facts, sales commission expenses paid to Sonali Traders was disallowed, such commission expenses of Rs. 33,92,430/- are disallowed this year as well.
FULL TEXT OF THE ORDER OF ITAT AHMEDABAD
This appeal has been filed by the Assessee against the order passed by the Ld. CIT(Appeals)-2, Vadodara in Order No. ITBA/APL/S/250/2020-21/1028050546(1) vide order dated 24.09.2020 passed for Assessment Year 2014-15.
2. The assessee has taken the following grounds of appeals:-
“1. Ld. CIT(A) erred in law and on facts in confirming disallowance commission expenses of Rs. 33,92,430/- by invoking provision of section 40A(2)(b) of the Income Tax Act and treating same as non genuine without considering true substance of the transactions. Ld. CIT(A) ought to have considered the factual submission of the appellant and ought to have deleted the disallowance. It be so held now.
2. CIT(A) ought to have considered fact that there are no marketing expenses incurred by the appellant as commission agent appointed for marketing and other allied activities and ought to have deleted the disallowances. It be so held now.
3. Without prejudice to above and in alternative, It is submitted that payee to whom commission have been paid also paying tax at maximum marginal rate. Hence, there is no loss to the revenue. It be so held now.
4. CIT(A) erred in law and on facts in dismissing appeal by invoking section 249(3) of the Act and thereby relief granted of Rs. 20,08,563/- for addition u/s 40A(2)(b) has no effect in the assessed income of the appellant.
5. CIT(A) erred in law and on facts in dismissing appeal by invoking section 249(3) of the Act ignoring fact that appellant has filed appeal within statutory time limit and also submitted evidence for the same. Ld. CIT(A) ought to have accepted the appeal of the appellant. It be so held now.”
Ground Nos. 1 to 3: Disallowance as Commission Expenses of Rs. 33,92,430/-.
3. The brief facts in relation to the ground of appeals 1 to 3 are that the assessee filed return of income for the year under consideration on 30.09.2014 declaring total income of Rs. 1,69,14,010/-. During the course of assessment proceedings, the Assessing Officer made disallowance on account of sales commission of Rs. 33,92,430/-. The Assessing Officer observed that the assessee has claimed deduction of sales commission expenses of Rs. 33,92,430/- paid to Sonali Traders, which is a sister concern of the assessee firm and partners of the assessee firm are also the partners of Sonali Traders. The Assessing Officer after examination and verification held that the genuineness of the expenditure could not be ascertained hence the sales commission expenses of Rs. 33,92,430/- was disallowed.
4. The assessee filed appeal against the aforesaid order before CIT(A) and filed written submissions. The CIT(A) dismissing the appeal of the assessee on the ground that for the immediately preceding Assessment Year i.e. A.Y. 2013-14 Ld. CIT(A)-12, Ahmedabad has confirmed similar addition made on the same set of facts, vide order dated 18.12.2017 in the assessee’s own case. Accordingly, relying upon the same, Ld. CIT(A) dismissed the appeal of the assessee with the following observation:
“4.1 Ground No 1 relates to disallowance of sales commission expenses of Rs. 33,92,430/- part to Sonali Traders During the appellate proceedings, it is noticed in the office record that the Ld CIT (A)-12, Ahmedabad has confirmed the similar addition made under the same facts vide Order No. CIT (A)-12/1071/CC-1/15-16 for AY 2013-14 dated 18.12.2017 in the appellant’s own case. The decision portion of the order passed the CIT (A)-12, Ahmedabad Vide Appeal No. CIT (A)-12/1071/CC- 1/15-16 for A.Y. 2013-14 dated 18.12.2017 is reproduced as under:
“7.1 To begin with agree to the observation of the AO. Not only there are circumstantial evidences that there is no services in relation to sales & distributorship but also the appellant has not produced evidences as to requirement of alleged services and capacity of the service agent to render those services. It cannot be a defence of the appellant that the Department has been accepting the commission paid in earlier years.
7.2 From the details submitted before me as seen that the appellant in a manufacturer of high quality and precision ceramic insulators for use in various electric devices and that the almost all is job work of and supplies is to M/s Sud Chemie India Ltd. At the same time the appellant has a distributorship agreement with M/s Sonali Traders where under the distributor, M/s Sonali Traders is required to maintain efficient sale organization secure orders from customers collect payments from buyers, and devote time and attention to development of business and the manufacturer i.e. the appellant responsible for supplying goods for sale to take back any defective stock supplier and though entitled to sale directly within the territory but the distributor shall be entitled to commission on all sale made directly by the manufacturer. The distributor is entitled to a commission by way the remuneration for its services calculated @ 4% on all sales by the manufacturer. From the financial statement of M/s. Sonali Traders submitted it is also seen that M/s. Sonali Traders has commission income only and is filing retum showing profit which is chargeable at maximum marginal rate. M/s Sonali Traders has shown commission income of Rs. 34,88,977/- and payment to staff is of Rs 2,86,000/- and travelling expenses of Rs. 1,21,270/-. The Ld. AR has submitted various communications between M/s. Sonali Traders and M/s. Sud Chemie India Pvt. Ltd. which are relation to job work and payments. It has been submitted by the Ld AR that in the earlier years the Department has accepted the payment of commission to M/s Sonali Traders.
It is seen that the appellant has receipts of Rs. 8,72, 23,434/- from job work and Rs. 39,03,557/- from electric power sale on which its net profit is of Rs. 3,14,78,024/- and a payment of Rs. 39,20,215/-as sales commission. It has been stated by the Ld. AR that the appellant is not maintaining any staff and does not have any setup of its own to sale the products and to follow up payments and undertake related activities and documentation.
7.3 With due respect to various case laws relied upon the appellant the Ld. AR in the case has failed to prove that in case of appellant being manufacturer of electric insulator grade porcelain items solely for consumption of M/s Sud Chemie India and both the appellant and the customer having longstanding relationship and being located in Vadodara whether there was any need for the appellant to have a distributor. The Ld. AR has failed to prove that the distributor M/s Sonali Traders is in any way able to either expand the business of the appellant or to render services which the appellant itself might not have been able to do. As is clear from its financial statements that M/s Sonali Traders is incurring meager expenses of staff salary, travel expenses and salary to partners (even assuming that the partners are also doing the work as stipulated in the distributorship agreement).
7.4 I am also of the considered opinion that for the purpose of allowability of commissions on sales the appellant should be able to prove the stipulated services received, to prove that the service agent not only capable of rendering those services but also that the service agent has delivered those services. I am of further the considered opinion that in case of parties hit by section 40A(2)(b) the appellant is further required to prove that the commission/remuneration paid to such service agents was commensurate to the services received. And if these tests are not made by the assessee/appellant, the AO cannot be satisfied of the claim of the assessee and in absence thereof such expenses even if payments are evidenced and genuine cannot be allowed as business expenses.
7.5 The close relationship between the appellant manufacturer and the consumer does not justify any requirement as to any sales and distributorship requirement and that M/s Sonali Traders by virtue of the staffing and nature of expenses appears to be neither capable of rendering of those services nor having rendered those services on which it has received commission. At best the amount paid by the appellant is diversification of its income without any relationship with its business which cannot be allowed under any sections from S28 to S37.
7.6 Though there are various judgements of the Courts wherein commission paid to agents and hit by section 40A(2)(b) have been held allowable on the ground that relevant bills bore name of agents and purchases placed by them were allowed by the revenue and agents income already fell in the highest tax bracket. With due respect to those judgements it is seen from the agreements in the case that they provide for payment of overriding commission on all sales whereas there is no evidence and other material that the so called “distributors” are rendering any special services. The agreements appear to be more device to reduce incidence of tax and to arrange income to related persons (even if these persons may be paying taxes at the highest tax bracket). If the agreement to pay commission is not for commercial expediency, the expenditure cannot be allowed. The question whether an amount claimed as an expenditure was laid out or expended wholly and exclusively for the purpose of the business has to be decided on facts and circumstances of each case.
The more existence of an agreement between the assessee and its selling agents or payment of certain amounts as commission assuming there was such payment does not bind the AO to hold that the payment was made exclusively and wholly for the purpose of assessee’s business. Although there might be such an agreement in existence and the payment might have been made in the past, it is still open to the AO to consider the relevant factors and determine for himself whether commission said to have been paid is allowable. Mere identifying the commission agents and providing the payment made cannot discharge the onus of the assessee in context of allowability of commission paid as deductible business expense. The absence of service and no capacity to render these services by the distributors/agents rebuts the claim of the assessee.
8. During the appeal proceedings the Ld AR was specifically required to provide evidences in relation to each of the services required to be rendered by M/s Sonali Traders as per the agreement which I record that the appellant has failed to do. In absence of evidence from the appellant, I do not see any reason to interfere in the disallowance made by the AO
In view of these facts, there is no disparity in facts in the year under appeal and identical issue is involved hence following the order of CIT (A), thus the disallowance made try the AO is upheld and Ground no 1 is dismissed.”
5. The assessee is in appeal before us against the aforesaid order passed by the CIT(A) confirming the disallowance payment of Rs. 33,92,430/- made to M/s. Sonali Traders. We observe that in appeal filed by the assessee against the aforesaid order of Ld. CIT(A)-12, dated 18.12.2017 the ITAT in assessee’s own case in ITA Nos. 396 & 397/Ahd/2018 for A.Y. 2013-14 has dismissed the assessee’s appeal on this issue. While dismissing the appeal of the assessee the ITAT made the following observations:
“20. We have considered the contention of the ld. Counsel for assessee. No doubt the assessee has been paying commission for the past many years and which has never been disallowed in scrutiny assessment. But the assessment orders reveal that the issues were was never examined in those years and in Assessment Year 2014-15 where it was examined the A.O. disallowed the same for the same reason for lack of evidence of services rendered by the agents. Ld. CIT(A)’s order reveals that while deleting the disallowance he did not deal with the aspect of evidence for rendering service but deleted it on the ground that since the agents have paid taxes on the same it is a revenue neutral exercise. Therefore the fact that the assessee has been claiming and has been allowed the said claim in scrutiny assessment for the past many years, we find does not help the case of the assessee. More particularly when the detailed scrutiny in this year brought out facts revealing that there was no basis and reason for paying the commission to these agents who even otherwise were closely related to the assessee, since the assessee was unable to demonstrate any service rendered by them as distributors. The principle of res judicata does not apply to Income Tax proceedings and the facts of each year have to be considered and merely because the claim has been allowed all these years without being examined, does not make the claim legitimate despite evidences on record proving to the contrary. The case laws relied by the Ld. Counsel for the assessee in this regard, are all distinguishable on facts. Therefore, this contention of the ld. Counsel for the assessee that following the principle of consistency the claim ought to have been allowed in those years is also rejected.
21. As per the third contention that the disallowance in any case could not have been made u/s. 40A(2)(b) of the Act where the genuineness cannot be brought into question and only the fair market value of the transaction with specified persons can be determined and the excess paid over it be disallowed, we find merits no consideration also. For the reason that the A.O. has not invoked Section 40A(2)(b) for the purposes of making the disallowance. The A.O. we find has only referred to the Section for pointing out that the agents were closely related to the assessee qualifying as specified persons as per the said section and the disallowance has been made finding the claim to be ingenuine in terms of Section 37(1) of the Act. Therefore this contention of the assessee is also rejected.
22. As for the contention of the Ld.Counsel for the assessee that the disallowance even if made would be a tax neutral exercise since the commission agents have paid taxes on the same in their hands, the same merits no consideration since the expenses have been found to be in-genuine and no shelter under the tax neutrality principle can be given to such cases of claims found to be not genuine.
23. In view of the above, the disallowance of commission expenses amounting to Rs. 86.03 lakhs in the case of Ravikiran Ceramic Pvt. Ltd. in ITA No. 397/Ahd/2018 and Rs. 39,21,215/- in the case of Mangalya Ceramic in ITA No. 396/Ahd/2018 is upheld.
24. In the result, both the appeals in ITA Nos. 396 & 397/Ahd/2018 are dismissed.”
In light of the order of ITAT passed for A.Y. 2013-14 wherein on similar facts, sales commission expenses paid to Sonali Traders was disallowed, such commission expenses of Rs. 33,92,430/- are disallowed this year as well.
6. In result, Ground Nos. 1 to 3 of the assessee’s appeal are dismissed.
Ground Nos. 4 & 5:- “Relief granted of Rs. 20,08,563/- for addition under Section 40A(2)(b) disallowed by CIT(A) by invoking Section 249(3) of the Act.”
7. The brief facts in relation to these Grounds 4 & 5 of assessee’s appeal are that the Assessing Officer made disallowance of Rs. 20,08,563/- out of interest expenses on the ground that the assessee paid higher rate of interest to its partner and other relatives, which is covered under Section 40A(2)(b) of the Act. The Assessing Officer held that the assessee has not given any justification for excess interest payment @ 18% paid to related parties and hence disallowed interest paid of Rs. 20,08,563/- over and above 12% rate of interest, which is the normal interest which the banks charge.
8. The assessee filed appeal before the CIT(A) who allowed relief to the assessee on the ground that this issue has been decided in favour assessee in earlier assessment years by his predecessor CIT(A) and therefore, following the same the appeal of the assessee was allowed on this issue. While allowing relief to the assessee, the Ld. CIT(A) made following observations:
“4.2 Ground No. 2 relates to disallowance of Rs.20,08,563/- out of interest expenses. The AO has noted that the appellant paid higher rate of interest to the partner and the other relative, which is covered u/s 40A(2)(b) and during the assessment proceedings the assessee has not given any justification for excess interest paid @18%, hence disallowed interest paid Rs 20,08,563/- over and above 12% the normal interest bank rate. During the appellate proceedings the Ld. AR has brought to my notice that entire interest expenses paid @ 18% on deposits is fully allowed by Hon’ble CIT(A) in earlier assessment year for AY 2008-09 and 2012-13 in appellant’s own case. The decision portion of the order passed by the CHAT Ahmedabad Vide Appeal No CIT (A) 12/313/CC 1715 16 for AY 2012 13 dated 17 08 2017 is reproduced as under-
“3. From the perusal of the assessment order the submissions of the appellant and the decisions of the jurisdictional ITAT Ahmedabad, I find that the AO has not been able to make out any case for applying the provision of section 40A(2)(b) and has not brought out any reasons as to why the interest paid 18% is required to be restricted to 12%. The business purpose of loans taken and genuineness of interest paid/payable have not been doubted by the AO Further in view of the decisions of the Hon’ble ITAT Ahmedabad the disallowance of interest cannot be sustained. Accordingly the AO is directed to delete the addition made of Rs. 12,38,034/-.”
Since there is no disparity in facts in the year under appeal and identical issue is involved hence following the order of CIT (A) therefore the AO is directed to delete the addition on account of disallowance of interest of Rs 20,08,563/-. Thus the Ground no. 2 is allowed.
5. In the result, the appeal is dismissed u/s 249(3) of the Act.”
However, the Ld. CIT(A) dismissed the relief granted to the assessee on a technical ground that there is a delay in filing of appeal by the assessee and accordingly he dismissed the appeal of the assessee by invoking the provision of Section 249(3) of the Act.
9. Before us, the Counsel for the assessee submitted that there was no delay in filing of appeal by the assessee. As per the assessee, the correct date of receipt of the assessment order is 15.11.2016 and the actual date of filing of appeal was 14.12.2016. Therefore, as per the Counsel for the assessee the appeal of the assessee was filed within due date and there was no delay on the part of the assessee in filing of the present appeal. In response, Ld. D.R. held that assessee has itself submitted in the appeal form held before CIT(A) that the date of receipt of assessment order was 27.10.2016 and hence the assessee has not been able to substantiate the delay in filing of appeal.
10. We have heard the rival contentions and perused material on record. In the instant case, we observe that the assessment order was passed on 27.10.2016. Therefore, apparently the assessee seems to have incorrectly mentioned the date of communication of such order as 27.10.2016. There is nothing on record that the assessment order was served upon the assessee on the same date which was by way an e-mail communication. Further, looking into minor period of delay, in filing appeal before Ld. CIT(A) in the interest of justice, we think it is a fit case that such delay should have been condoned. Accordingly, we are dismissing the order of Ld. CIT(A) to the extent it has not afforded relief to the assessee on the ground that the appeal was filed beyond the due date by invoking the provision of Section 249(3) of the Act. In view of the above observations Ground Nos. 4 & 5 of the assessee’s appeal are allowed.
11. In the result, the appeal of the assessee is partly allowed.
This Order pronounced in Open Court on 24/03/2023
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