Grace Castings Pvt.Ltd.,, Ahmedabad vs Department Of Income Tax

.Income-tax Officer, Ward-4(1), Vs Grace Casting (P) Ltd., Ahmedabad. 3-6 Liberty Complex, Opp. St. Xavier's Ladies Hostel, Navrangpura, Ahmedabad- 380009 (Appellant) (Respondent) PA No. AAACG 5597K

Appellant by Shri Nimesh Yadav, Sr. DR Respondent by Shri Hitesh P. Shah, AR

Date of hearing: 20/5/2015 Date of pronouncement: 26/5/2015

ORDER

PER Shri Rajpal Yadav, Judicial Member.

Revenue is in appeal before us against the order of CIT(A)

dated 14th June, 2011 passed for Asst. Year 2008-09. Ground Nos. 3

& 4 are the general grounds of appeal which do not require any

specific finding to be recorded at the end of Tribunal, therefore, these

grounds are rejected.

ITA No.2182/Ahd/2011 2 Asst. Year 2008-09

2. Ground Nos. 1 & 2 are the substantial grounds of appeal. They

project the grievance of Revenue as under :-

1. The ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.21,82,772/- made by the AO on account of commission paid which was not incurred wholly and exclusively for the business purpose as per section 37.

2. The ld. CIT(A) has erred in law and on facts in deleting the addition of Rs.18,00,000/- made by the AO on account of rent paid which was not incurred wholly and exclusively for the business purpose as per section 37.

3. The ld. counsel for the assessee at the very outset submitted

that identical issues arose before the Tribunal in AY 2007-08. The

Tribunal has set aside the order of CIT(A) and restored these issues

to the file of AO for re-adjudication. He further pointed out that similar

issues had arisen in AY 2006-07 and these issues were restored to

the file of AO for readjudication. The CIT(A) in the impugned order

has based his finding on the order of his predecessor in AY 2006-07.

The Tribunal while setting aside the order in AY 2007-08 has relied

upon the order passed during AY 2006-07. Therefore, in all these

three years the issues are identical and in view of the order of the

Tribunal in earlier two years, these issues deserve to be set aside to

the file of AO for readjudication.

ITA No.2182/Ahd/2011 3 Asst. Year 2008-09

4. The ld. DR on the other hand, did not raise any objection to the

proposal of the ld. counsel for the assessee because in any case the

appeal of the Revenue would be allowed and the order of the CIT(A)

would be set aside.

5. The order of the Tribunal dated 10.4.2015 passed in ITA

No.313/Ahd/2011 in AY 2007-08 has been placed on record by the ld.

counsel for the assessee. We deem it appropriate to take note of this

order. It reads as under :-

"This appeal by the Revenue is directed against the order of the Ld.Commissioner of Income Tax(Appeals)-VIII, Ahmedabad ('CIT(A)' in short) dated 01/11/2010 pertaining to Assessment Year (AY) 2007-08. The Revenue has raised the following grounds of appeal:-

1. The Ld.CIT(A)-VIII, Ahmedabad has erred in law and on facts in deleting the disallowance of Rs.27,46,569/- made by the AO on account of disallowance of commission payment to M/s.Nakoda Enterprises, without properly appreciating the facts of the case and the material brought on record by the AO.

1.2. In doing so, the Ld.CIT(A) has erred in law and on facts in not appreciating that the order of the ld.CIT(A) for Asst.Year 2006-07 has not been accepted by the department and the matter is subjudice before the Hon'ble Tribunal.

2. The Ld.CIT(A) has erred in law and on facts in deleting the addition of Rs.18,00,00/- made by the AO on account of disallowance of lease rent of DG Set, without properly appreciating the facts of the case and the material brought on record by the AO.

ITA No.2182/Ahd/2011 4 Asst. Year 2008-09 2.2. In doing so, the Ld.CIT(A) has erred in law and on facts in not appreciating that the order of the ld.CIT(A) for Asst.Year 2006-07 has not been accepted by the department and the matter is sub-judice before the Hon'ble Tribunal.

3. On the facts and in the circumstances of the case, the Ld.CIT(A) ought to have upheld the order of the Assessing Officer.

2. Briefly stated facts are that the case of the assessee was picked up for scrutiny assessment and the assessment u/s.143(3) of the Income Tax Act,1961 (hereinafter referred to as "the Act") was framed vide order dated 30/12/2009, thereby the Assessing Officer (AO in short) made disallowance of commission payment of Rs.27,46,569/- and disallowance of rent on DG set of Rs.18 lacs. Against this, the assessee filed an appeal before the ld.CIT(A), who after considering the submissions of the assessee allowed the expenditure in respect of the commission paid to Smt.Roopam Mardia (Nakoda Enterprises) and expenditure related to lease rent on DG set.

Aggrieved by the order of the ld.CIT(A), now the Revenue is in appeal before us.

3. At the outset, ld.Sr.DR submitted that the identical issues have been decided by the Coordinate Bench in assessee's own case (ITAT 'C' Bench Ahmedabad) in ITA No.261/Ahd/2010-Revenue's appeal for AY 2006-07, vide order dated 12/10/2012. He drew our attention towards para-6 of the Tribunal's order and submitted that the ld.CIT(A) was not justified in deleting the addition by following earlier year order.

4. On the contrary, ld.counsel for the assessee did not controvert the fact that in earlier year, the identical issue came up for hearing before this Tribunal. However, ld.counsel for the assessee submitted that this Tribunal had made observation in para-6 of the order in ITA No.261/Ahd/2010 ITA No.2182/Ahd/2011 5 Asst. Year 2008-09 pertaining to AY 2006-07. Ld.counsel for the assessee submitted that all details are available on record that goes to demonstrate that the Assessing Officer was not justified in making the addition.

5. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. In respect of ground Nos.1 & 1.2 are against the deletion of disallowance of Rs.27,46,569/- made on account of commission payment to M/s.Nakoda Enterprises. We find that the ld.CIT(A) has decided this issue following his predecessor's order passed in AY 2006-07 by holding as under:-

"2.3. I have carefully considered the findings of the A.O. and submissions of the appellant and other material available on record. Grace Casting Pvt.Ltd. is a company incorporated under the Companies Act with the main object to manufacture and trade in the area of metal products. During the relevant previous year the appellant was engaged in manufacturing ingots and bars and filed its return of income declaring total income of Rs.26,81,770/-. The A.O finalized the assessment u/s. 143(3) on a total income of Rs.72,28,340/- by making total additions of Rs.4546,569/-. The A.O. has made disallowance of Rs.27,46,569/- on account of payment of commission to Nakoda Enterprises, whose proprietor is Smt. Roopam Mardia.

It is observed that in the assessment year 2006-07 also the appellant paid commission to the tune of Rs. 24,30,078/- to M/s. Nakoda Enterprises and the same was disallowed by the A.O. My predecessor Ld. CIT(A) vide order No. CIT(A)-VIII/ITO/4(1)/209/08-09 dtd. 29.9.2009 deleted the addition on identical facts giving the following findings:-

"I have considered the facts and the submissions of the Ld. A.R. carefully. There is no dispute about the fact that the appellant has paid commission to the tune of Rs.24,30,078/- to M/s. Nakoda Enterprise a proprietary of Smt. Roopam Mardia. The A. O. has disallowed the amount holding that Smt. Mardia has not rendered her services directly to the appellant. He has also observed that the contribution of Shri Rajiv Mardia in the business of Smt. Mardia shall not be taken any cognizance of. He has also observed that the other employees of Nakoda Enterprise had played minimum role in its business. He has held that under these circumstances the payment ITA No.2182/Ahd/2011 6 Asst. Year 2008-09 of commission was not wholly and exclusively for the purpose of business.

6.5 The A.O, however, by arriving at this conclusion has not brought on record any evidence to support such findings. On the contrary, it is found that Smt. Roopam Mardia in her statement recorded at the time of survey and subsequently has elaborately discussed her business connections with the appellant and the services rendered by her proprietary concern for earning the commission from the appellant under reference. The A.O has not brought on record any evidence to prove that the claims made by Mrs. Mardia was false and unsubstantiated. It is seen that the appellant has also filed copies of some purchasing parties who have confirmed that they made purchases from the appellant through Nakoda Enterprises. These evidences have also not been controverted by the A. O in the assessment order.

6.6 The appellant has made its entire sales through Nakoda Enterprise and has paid commission at the rate of 100 per metric tonne, the A.O without appreciating the facts correctly has alleged that the appellant has paid Rs. 50 per M. T to other commission agents. In fact the appellant has paid commission @ Rs. 50 per M. T to the parties from whom it has made purchases during the relevant period. Therefore under these circumstances I do not find any reason to disallow the commission paid by the appellant to Ms Nakoda Enterprise. In this regard reliance is placed on the decision of Hon 'ble ITAT Delhi in the case of ACIT v/s Associated Strips (P) Ltd. 1 SOT 338 (Del) where in the Hon'ble Tribunal has held that "

Once it had been held that the commission was paid against services rendered by the respective commission agent then without assigning any reason, disallowance of commission was not justified - Rendering of services by commission agent not being in dispute payment of commission through account payee cheques against bills raised could not be disallowed even partly ".

My Predecessor Ld. CIT(A) has discussed the issue in detail and after giving logical findings on the impugned issue has deleted the addition in the previous assessment year. The A.O. has not brought any additional evidence on record to substantiate the additions. In view of the facts mentioned above, there is no reason to interfere in the findings given by my predecessor Ld. CIT(A) as referred above. Therefore, in these circumstances, I do not find any reason to disallow the commission paid by ITA No.2182/Ahd/2011 7 Asst. Year 2008-09 the appellant to M/s. Nakoda Enterprises and therefore, addition made by the A.O. is deleted. As such the appellant gets relief of Rs.21,46,569/-."

5.1. The Revenue had filed an appeal against the order of ld.CIT(A) in AY 2006-07 in ITA No.261/Ahd/2010, wherein identicalground raised by the Revenue was allowed for statistical purposes by restoring the issue back to the file of AO for decision afresh. The facts are identical in this year as well and the ld.CIT(A) has followed the order of his predecessor which has been set aside by the Coordinate Bench. The Coordinate Bench in ITA No.261/Ahd/2010 pertaining to AY 2006-07 has observed as under:-

"6..... . In this regard, certain points are required to be established by the assessee who is claiming the genuineness of the commission payment:-

(i) That the amount in question has actually been expended.

(ii) That the mode of payment and the dates of payment are to be precisely informed.

(iii) That the basis of payment whether on daily basis, monthly basis or yearly basis and the calculation of commission on each claimed transaction is to be placed on record.

(iv) That whether the payment was made on the basis of credit notes or bills raised by the commission agent or that what was the basis of satisfaction before making of payment.

(v) That the Assessee is required to establish that ah agent has been appointed to look after the sales if not personally doing the marketing.

(vi) That the assessee is to establish the existence of commission agency between the two parties, i.e. the principal and the agent.

(vii) That the assessee is to establish the principle and agent relationship and for that all the ingredients as prescribed under the law has to be established.

(viii) That the agent is required to be produced, so that he can establish what efforts he has made and how the efforts were fruitful and what correspondence in this regard was made between the principle and the parties.

(ix) That the law is very clear that although the payment of commission might have been made through banking channel or could be in accordance with an agreement but still it is open to the Revenue ITA No.2182/Ahd/2011 8 Asst. Year 2008-09 Department to decide the deductibility and the genuineness of the expenditure.

(x) That the genuineness of the existence of the selling agency is required to be established and not to be based upon a make-belief document. The Hon'ble Courts have therefore held that mere existence of agreement do not bind the ITO to allow such deduction of payment of commission.

(xi) That the assessee is definitely under obligation to establish the necessity for incurring of- expenditure, because an expenditure should not be a gratuitous payment to near-ones.

(xii) That the allowability of expenditure depends upon the fact that it ought to be wholly and exclusively for the purpose of the business.

(xiii) That the rendering of services by the agent and the exact work done for procuring the business is the primary evidence to be placed on record to establish that the expenditure was exclusively for the business.

6.1. These are the few points which are required to be examined by the Revenue Department while investigating the genuineness of the transaction. We want to clarify that the points referred hereinabove are not exhaustive but merely suggestive depending upon case to case, therefore the Department is at liberty to investigate thoroughly as per law to examine the correctness of the claim. We have also noted that the Assessing Officer in the present case has started the proceedings by noting the fact that the genuineness of the commission was doubted because the said lady happened to be an interested party as defined u/s.40A(2)(b). The purpose of mentioning of this provision was placed on record that the said lady is not an outsider but having substantial interest in the assessee- company as also in a commanding position by holding majority shares to influence the business decisions of the assessee-company. Finally when the genuineness could not be conclusively established, then the provisions of section 37 was invoked and rightly so."

5.2. Therefore, this ground of Revenue's appeal is also restored to the file of AO to decide it afresh in the light of the direction given by the Coordinate Bench in ITA No.261/Ahd/2010(supra). Thus, ground Nos.1 & 1.2 of Revenue's appeal are allowed for statistical purposes.

ITA No.2182/Ahd/2011 9 Asst. Year 2008-09

6. Ground Nos.2 & 2.2 are inter-connected. The ld.Sr.DR submitted that the identical issue was also raised for adjudication in the AY 2006-07, wherein also the Hon'ble Tribunal has restored the ground to AO for decision afresh. This fact is not controverted by ld.counsel for the assessee.

6.1. We find that the ld.CIT(A) had followed the decision of his predecessor passed in AY 2006-07 and decided this issue by holding as under:-

"3.3 I have considered the findings of the A.O., submission of the appellant and other materials available on record. Here again, the identical addition was made by the A.O. in the preceding year and the same was deleted by my predecessor Ld CIT(A) vide order No. CIT(A)-VIII/ITO 4(1) /209/ 08-09 dtd. 29.9.2009 giving the following findings:

"7.5 I have considered the facts and the submissions of the Ld. A.R carefully. There is no dispute about the fact that the appellant has taken a D.G set on lease from Nakoda Enterprise. The appellant is using the D.G Set for the purpose of its business. It has furnished the lease agreement and details with regard to consumption of fuel and electricity to justify the hiring of D.G set. The A.O has not controverted these facts in the assessment order. It is a well settled proposition of law that once the expenses are held to be incurred during the course of business partial disallowance is not permissible. In this regard reliance is placed on the decision of Hon'ble Calcutta High court in the case of Ravi Marketing Pvt. Ltd. v/s CIT 280 ITR 519 wherein the Hon'ble Court has held

"The authorities under the Income-tax Act can examine the genuineness of the expenditure and the purpose for which it was expended. Once it is established that the amount was genuinely expended and it was expended for a particular purpose, the only discretions that is left to the authority under the Act is to apply the law on the basis of such established fact or finding. If the purpose for which it is expended is eligible for deduction under a particular head, no discretion is left to the authority either to surmise the quantum that ought to have been spent or to surmise or presume the purpose differently and convert the same to some other head."

ITA No.2182/Ahd/2011 10 Asst. Year 2008-09

7.6 Therefore, in view of the above, the disallowance made by the above cannot be sustained. Hence, the disallowance of Rs.18,00,000/- is hereby deleted".

The Ld. A.R. put up all the facts on record to justify the payment of lease rent on D.G. Set. He also brought on record that in what manner the use of D.G. set has been helpful in increasing the turnover and profitability of the appellate company. He emphasized with various facts and evidences that D.G. set was taken on lease for the purpose of business and the payment of lease rent is supported by the lease agreement etc. He also justified that the lease rent has been fixed on arm's length. The A.O. has not brought any extra evidence on record to substantiate the addition. In view of the above facts, there is no reason to deviate from the findings given by my predecessor Ld. CIT(A) in the previous year on the impugned issue. Therefore, the disallowance made by the A.O. is deleted. AS such the appellant gets relief of Rs. 18 lakhs."

6.2. The issue travelled upto the stage of the ITAT 'C' Bench Ahmedabad and the Tribunal in ITA No.261/Ahd/2010 for AY 2006-07 vide order dated 12/10/2012 was pleased to restore this issue as well to the file of the AO by observing as under:-

"8. Ground No.2 reads as under:-

The CIT(A) has erred in law and on facts in deleting the disallowance of rent on DG set amounting to Rs.18,00,000/-.

8.1. The AO has noted and show cause was issued in respect of lease-rent paid to Smt.Roopam at the rate of Rs.3 lacs per month in respect of the hiring of diesel generator. Facts have revealed that a generator which costed Rs.96 lacs was rented out by Smt.Roopam to the assessee-company in terms of an agreement dated 25.02.2004. The allegation of the AO was that the generator was taken on lease from the lady with an intention to pass on an undue benefit. The assessee's reply was that the decision of hiring of generator set was a commercial decision of the assessee-company. The lady has invested a huge amount towards purchase, therefore leased out the D.G.Set. The assessee-company has consumed substantial fuel to run the D.G.Set, hence the lease rent was claimed as an allowable expenditure. The AO has held that 50% of the expenditure could be meant for business purposes. Rest of the amount was disallowed by invoking section 37 of IT Act. In this connection, we have heard both the sides and perused the material placed on record. Our attention was drawn on page 142 of the compilation containing the agreement executed in respect of the lease of the D.G.Set. The ITA No.2182/Ahd/2011 11 Asst. Year 2008-09 assessee's contention is that the AO should not have partly disallowed the claim by invoking the provisions of section 37(1) of IT Act. It is true that the AO has invoked the provisions of section 37(1) of IT Act while disallowing 50% of the claim. We have noted that the lease rent at Rs.3 lacs p.m. was paid. The investment towards purchase of DG set was Rs.96 lacs. Due to this reason, the Assessing Officer had worked out that the return on the said investment was more than 3%. According to. Assessing Officer, even the return on the said investment was higher because the assessee-lady should have claimed the depreciation on DG set. In such a situation, when a high lease-rent is being paid by the assessee-

company to an interested party, then the fairness of the transaction should be properly placed on record by the assessee. The assessee-company was thus required to place on record the business need of the DG set. The onus is on the assessee to establish that the services of DG set were imminently required to run the business. Meaning thereby the assessee has to demonstrate the business necessity for hiring of the DG set. Therefore, it was expected that the assessee should place on record certain evidences, such as, the frequency of electricity failure causing business hardship, thus compelling the assessee-company to hire the generator set. The requirement of the generator set can be proved by placing such type of other evidences by the assessee. In a situation, when the Revenue Department is alleging a colourable device of diversion of funds, then a duty is casted upon the assessee to clear the smoke-screen and to demonstrate the transparency of the transaction. Basically, in this case the doubt was based upon the fact that a high rent; as per Assessing Officer was paid by the company to an interested person.

On one hand, the assessee has informed the Assessing Officer that the profits were going high and the turnover had also gone upto Rs.66 crores but on the other hand, the assessee-company has not demonstrated that why the generator set was not purchased by the assessee-company of its own having dual benefit, i.e. saving of lease-rent and also the benefit of deduction of depreciation. As far as the 50% disallowance is concerned, the action of the Assessing Officer can be said to be duly covered by the section 37 of the I.T.Act. He was not required to invoke the provisions of section 40A(2) as objected by Id.AR. Section 37 explicitly says that an expenditure has to be wholly for the purpose of the business. IF an expenditure is not wholly for the purpose of the business, but partly for the purpose of the business, then only that part is allowable. The words "wholly and exclusively", thus refer to the motive and the object behind the expenditure. The object has to be exclusively as also solely for running of the business. The expenditure has to be incurred in reality and there shall be ostensible reason for incurring of the expenditure.

The Assessing Officer has thought it proper to decide the percentage of disallowance on the basis of the expected annual return on such investment. We, however, clarify that in no circumstance the disallowance as made by the Assessing Officer should be enhanced while we are restoring this ground back to the stage of the Assessing Officer with the direction that the assessee shall place on record the basic requirement of business necessity for taking on hire the impugned DG set. With these remarks this ground is restored back to the file of Assessing Officer for De novo decision."

ITA No.2182/Ahd/2011 12 Asst. Year 2008-09

6.3. Therefore, for this year also, this issue is also restored to the file of AO for decision afresh. The AO is hereby directed to decide this issue in the light of the direction by the Coordinate Bench in ITA No.261/Ahd/2010(supra). Thus, ground Nos.2 & 2.2 of Revenue's appeal are allowed for statistical purposes.

7. Ground Nos.3 & 4 are general in nature which require no independent adjudication.

8. In the result, the appeal of the Revenue is allowed for statistical purposes.''

6. We do not find any disparity on facts between AY 2007-08 and

AY 2008-09. The ld. first appellate authority has based his decision

on AY 2006-07 which was also relied in AY 2007-08. Therefore,

considering the order of the Tribunal in AY 2007-08 we allow this

appeal of Revenue for statistical purposes and set aside the orders of

Revenue authorities below and remit these issues to the file of AO for

readjudication.

Order pronounced in the open Court on 26/5/2015

Sd/- Sd/- (Anil Chaturvedi) (Rajpal Yadav) Accountant Member Judicial Member ITA No.2182/Ahd/2011 13 Asst. Year 2008-09

Mahata/-

Copy of the order forwarded to: 1. The Appellant 2. The Respondent 3. The CIT concerned 4. The CIT(A) concerned 5. The DR, ITAT, Ahmedabad 6. Guard File BY ORDER

Dy. Registrar, ITAT, Ahmedabad

1. Date of dictation: 20/5/2015

2. Date on which the typed draft is placed before the Dictating Member: 21/5/2015 other Member:

3. Date on which approved draft comes to the Sr. P. S./P.S.:

4. Date on which the fair order is placed before the Dictating Member for pronouncement: __________

5. Date on which the fair order comes back to the Sr. P.S./P.S.:

6. Date on which the file goes to the Bench Clerk:

7. Date on which the file goes to the Head Clerk:

8. The date on which the file goes to the Assistant Registrar for signature on the order:

9. Date of Despatch of the Order: