Kemotex Corporation, Ahmedabad vs Assessee

The present appeal is directed at the instance of assessee against the order of Ld. CIT(A) dated 8th September, 2011 passed for assessment year 2008-09.

I.T.A No. 2690/Ahd/2011 A.Y. 2008-09 Page No 2 M/s. Kemotex Corporation vs. DCIT

2. The solitary grievance of assessee relates to disallowance of expenses amounting to Rs. 4,38,132/-, which was claimed by the assessee on account of commission payment to various dealers for achieving the sale targets.

3. The brief facts of the case are that assessee has filed its return of income on 29-09-2008 declaring an income of Rs.10,87,880/-. The case of assessee was selected for scrutiny assessment and a notice u/s. 143(2) of the Income Tax Act was issued and served upon the assessee. On scrutiny of the account it revealed to the AO that assessee had paid a commission of Rs. 4,38,192/- to seven parties. Ld AO has directed the assessee to submit the name, address of the persons to whom commission has been paid, their capacity to render such services, proof of rendering services and copy of their accounts. With full description of each entry is to be produced with supporting evidences. The assessee had filed the confirmation disclosing their PAN no. the amount of TDS deducted by assessee and complete residential address of the payee. Somehow, Ld. AO was not satisfied with the contentions of the assessee and disallowed the claim of assessee.

4. Appeal to the CIT(A) did not bring any relief to the assessee.

5. With the assistance of representative, we have gone through the record carefully. In order to claim any expenditure u/s. 37 of the Income Tax Act, 1961 the assessee should fulfill the conditions namely (a) there must be expenditure; (b) such expenditure must not be of the nature described in section 32 to 36, (c) the expenditure must not be in nature of capital expenditure or personal expenses of the assessee, (d) the expenditure must have been incurred "wholly" and exclusively for the I.T.A No. 2690/Ahd/2011 A.Y. 2008-09 Page No 3 M/s. Kemotex Corporation vs. DCIT purpose of business or profession. The expression, "wholly", refers to the quantum of expenditure while, the word "exclusively" refers to the motive, objective and purpose of the expenditure. On page 21 of the paper book, assessee has filed details in tabular form exhibiting the commission paid by it in A.Y. 2007-08, 2008-09, and 2009-10. The assessment in A.Y. 2007-08 was passed u/s. 143(3), commission paid to these very parties was allowed by the AO. In the present assessment year, somehow AO did not allow but in subsequent assessment year i.e. 2009-10 commission has not been disturbed by the revenue authorities. The return has been accepted u/s. 143(1) of the Income Tax Act. Apart from this one aspect, we find that assessee has filed all basic details. It has disclosed reason for making the payment of commission. According to the assessee, there is cut throat competition in the market and the sales could not have been achieved, if the commission was not offered. It has disclosed the details of payees, their PAN No., confirmation etc. The AO has summarized the zest of assessee's submission on page 5 of the assessment order which reads as under:-

"1. The assessee has to pay commission for sustaining in the cut throat competition which is absolutely in the interest of the business.

2. The sales could not have happened if the commission is not offered.

3. The payment of commission is normal feature in this line of trading due to intense competition between various players in this segment.

4. It is a prudent decision of the assessee purely on commercial aspects.

5. The asssessee has affected 60% of the sales through commission agents.

6. The assessee has earned overall more profit vis-à-vis earlier year if net profit and remuneration to partners of earlier year is considered."

I.T.A No. 2690/Ahd/2011 A.Y. 2008-09 Page No 4 M/s. Kemotex Corporation vs. DCIT

6. The AO is of the opinion that assessee is in the business from 35 years. It could have withstand the cut throat competition by virtue of its long standing in the market. He also made reference to the turn-over of the assessee from the last 10 years and observed that there is no necessity to pay such commission and, therefore, the genuineness of the transaction is doubtful. In our opinion, these observations are not based on any comparative study of the market at the end of the AO. The market conditions cannot be evaluated by simply analyzing the result of the asssesse from the last 5-10 years. The conditions could be analyzed by way of comparative study of similar entity in this line of business. The AO has no business to say, whether there is any justification to incur expenditure or not. It is the prerogative of the assessee. His duty to find out, whether assessee had actually incurred such expenditure or not, It had gained anything or not by incurrence of such expenditure. In other words, if the expenditure is incurred in connection with the business and no profit has resulted then also it cannot be disallowed. The approach of the AO is highly technical i.e. to except the assessee to produce the payees before him. In order to prove its claim, the assessee has submitted basic details, it is for the AO to call the payees by service of a notice. Quashi-judicial authority are not being respected on account of their powers to legalize injustice on technical grounds but because they are capable of removing injustice. The Ld. First Appellate Authority has simply concurred with the finding of the AO without making any reference to the explanation submitted by the assessee before the AO. On due consideration of the material available on record, we are satisfied that assessee has duly demonstrated on the record that commission was paid in the ordinary course of business and it is for the purpose of business, we allow this appeal and delete the disallowance.

I.T.A No. 2690/Ahd/2011 A.Y. 2008-09 Page No 5 M/s. Kemotex Corporation vs. DCIT

7. In the result, appeal of the assessee is allowed.

Order pronounced in the open court on 21-04-2015

Sd/- Sd/-

(G.D. AGRAWAL) (RAJPAL YADAV) VICE PRESIDENT JUDICIAL MEMBER Ahmedabad : Dated 21/04/2015 ak

आदे श क ूितिल प अमे षत / Copy of Order Forwarded to:-

1. Assessee

2. Revenue

3. Concerned CIT

4. CIT (A)

5. DR, ITAT, Ahmedabad

6. Guard file.

By order/आदे श से,

उप/सहायक पंजीकार आयकर अपीलीय अिधकरण, अहमदाबाद