Mudita Marketing, New Delhi vs Department Of Income Tax

Date of hearing : 04/02/2015 Date of Pronouncement : 13/ 02/2015

ORDER . 2 ITA No. 4028/Del/2013

PER N.K.SAINI, A.M. :

The appeal by the department is directed against the order dated 29/04/2013 of C.I.T.(A) - XXIII, New Delhi. The only effective ground raised in this appeal reads as under :

"On the facts and circumstances of the case, the Ld. CIT(A) has erred in deleting disallowance of Rs. 83,20,174/- as the AO was justified in making disallowance of 20% of the discount and credit notes allowed by the assessee to his clients, without any material basis."

2. Facts of the case in brief of that the assesssee was engaged in the business of Cargo Agency of various Airlines and the received commission as per freight booked. The assessee filed the return of income on 29.9.2008 declaring total income at Rs. 3,99,37,890/-. Later on the case was selected for scrutiny. During the course of assessment proceedings the AO noticed that the total receipts from commission as per TDS Certificate was at Rs. 55,80,92,528/-, but the commission disclosed by the assessee was at Rs. 10,72,32,586/-. The assessee explained to the AO that the clients had deducted tax on the amount of freight collected by the assessee on their behalf. It was, further, stated that the CBDT Circular no. 452 dated 17.3.1986 clarified that for the purposes of Section 44 AB of on I.T.Act 1961 (here in after referred as the "Act" in short) in the case of commission agents, the turn over does not include the sales effected on behalf of the principals. The AO noted that the amount of credit notes / discounts was not commensurate with the business provided by each party and that the credit notes were issued on only during the last few days of the previous year and were not accounted in chronological order. The AO . 3 ITA No. 4028/Del/2013

disallowed 20% of the claim of the credit notes / discounts which worked out to Rs. 83,20,174/- and made the addition in the hands of the assessee.

3. Being aggrieved the assessee carried the matter to the Ld. CIT(A) and submitted as under : -

"1. The Ld. A.O. has merely based his findings on hypothetical grounds and has not given any basis for such estimations. The Ld. A.O. simply ignored the submissions of the assessee, wherein nature of expenditure was explained as also various documents were submitted.

2. It is pertinent to note that the assessee has generated business of more than Rs. 50 crores during the year and have earned gross income of Rs. 14.88 Crores. To generate such income, it has passed on credit notes and discounts to its dealers amounting to only Rs. 4.16 Crores, which can't be termed unreasonable from any perspective.

3. Moreover, against such gross income, it has claimed two direct expenditure namely credit notes and discount given to parties of Rs. 4.16 crores and cargo booking and direct expenses of Rs. 3.90 crores. It implies that assessee has offered gross profit of Rs. 6.82 Crores i.e. 45.83%, whereas net profit percentage is also as high as 29.50%.

4. It is also worthwhile to mention here that we are following the same practice since last many years. Further, one scrutiny assessment was also completed for the A.Y. 2005-06, wherein the same expenses were duly allowed and no major additions were done by the Ld. A.O. The copy of assessment order is enclosed herewith for your perusal. (page no. 35-37 of paper book-I) In the immediate previous year also, we have earned gross income of Rs. 11.79 Crores and have given discounts and credit notes of Rs. 2.60 Crores. (page no. 81 of paper book).

5. Further, addition made by the Ld. A.O. is merely based on surmises and conjectures and he has not given any concrete findings to prove that such expenditures are bogus or illegitimate. He has totally overlooked the details and submissions filed by the assessee. This fact is proved by following two instances :-

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a. The Ld. A.O. has alleged that credit notes allowed by you to various are not issued in a proper and sequential manner. In this regard, we have clearly mentioned in point no. 5 of our reply dated 31/12/2010 (page no. 46-49 of paper book-I) that different booklets have been issued to marketing people region wise or client wise and the system of issuing credit note is not centralized, therefore, sequence of s.no. shall not match.

Despite the above submissions, the Ld. A.O. has not considered the same and without verifying the facts, made the addition on the basis of the same observations.

b. Similarly, the Ld. A.O. has alleged that the discounts/credit notes given to party are not commensurate with the business generated by them. To support this observation, he has pointed out that 'gross receipt by the party from M/s Kasturi & Sons amounted to Rs. 2,69, 28,427/-, no credit note or discount was allowed to it' In this regard, we would again like to bring your honor's attention to our reply dated 31/12/2010 (page no. 46049 of paper book-I), wherein in para 2, assessee has clarified that "details enclosed with our letter dt. 7/12/2010 mentions the names of parties as appearing in Form 16A of TDS issued, which happens to be the name as appearing in their Tan or PAN particulars. Whereas, in our books of accounts we are sometimes maintaining the ledger accounts for a particular group alongwith their associate concern in one account. Also sometimes the ledger account has been maintained for consigner or agent whereas TDS has been deducted on principal's account."

We are enclosing herewith both the above lists on page no. 69-70 & 74-75 respectively of paper book, wherein we can observe that the name M/s Kasturi & Sons is appearing in first list (pg.69) with Gross Amount of Rs. 2,69,28,427/- , whereas in the second list, the same amount has been mentioned against the name "The Hindu"(pg. 75), to whom assessee has given discount & credit note of Rs. 8,09,553/- (which can be verified from the list of credit notes given as appearing on pg. no. 77-78 of paper book). From this clarification, it is evident that the facts on the basis of which addition has been made by the Ld. A.O. are wrongly understood by the Ld. A.O. If at all, he had verified the lists in the context of the above submission of the assessee . 5 ITA No. 4028/Del/2013

or have asked the assessee the reason of such disparity, the same could have been cleared at the time of assessment proceedings itself.

c. Further, the Ld. A.O. has also alleged that most of the credit notes were issued during the last few days of the previous year. In this regard, we would like to bring your honor's attention to monthly summary of discount and credit notes (page no. 76 of paper book-I), wherein it may be observed that amount is evenly distributed through out the year and the Ld. A.O. is not correct in alleging that the credit notes are issued only during the last few days. In the reply dated 31.03.2010 also we have submitted that "Further, it is not true that credit notes have been issued in last few days of the previous year as credit notes are being issued from time to time on the basis of targets being achieved."

6. Before making such a huge estimated addition, the Ld. A.O. has merely relied on above three observations, which are wrong in view of the above submissions. Therefore, it is proved that Ld. A.O. has made the additions without properly verifying the facts. Neither, he has tried to confront the assessee or the related parties to verify the facts nor he has called for any confirmations of the parties.

7. As far as, allowing different rates of commission or discount to different parties is concerned, it was clarified during assessment proceedings itself that decision of allowing discounts/credit notes to customers depend on many criterion apart from the turnover generated from them.

8. Further, it is the businessman himself, who can determine the commercial expediency of any expenditure and can take decision as to whether such expenditure is necessary for the overall growth of the business or not. Apart from that, we are looking only the financial expediency of the expenditure, whereas there may be many other factor, which a businessman will take into consideration before incurring any expenditure like long term benefit to the business, development of relationships with dealer, establishing good image in the market etc. The decision of incurring such huge expenses was taken by the assessee after taking so many points into consideration and has even earned profit of Rs. 439.30 lacs @ 29.50% of gross receipts. In these circumstances, the Ld. A.O. is not justified in questioning the genuineness of expenses and disallowing the same.

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9. It is also pertinent to mention that expenses are incurred purely for business purposes and are fully allowable u/s 37(1) of the act."

3. Reliance was placed on the following cases :-

1. India Marketing (P) Limited Vs. Assessing Officer 10 Taxmann 18.

2. Udaipur Distillery Co. Ltd. 224 CTR 32 (SC)

3. CIT Vs. Dhanrajgirji Raja Narasingirji (1973) 91 ITR 544(SC).

4. Nebhomal Sons Vs. CIT [2005] 146 Taxman 345/278 ITR 345 (MP).

5. Ravi Marketing (P) Ltd. V. CIT [2006] 280 ITR 519 (Cal)."

4. The Ld. CIT(A) asked the remand report from the AO who submitted the report on 15.3.2013 which has been reproduced by the Ld. CIT(A) at page no. 19 to 29 of the impugned order, for the cost of repetition, the same is not reproduced herein. The Ld. CIT(A) also asked the comment of the assessee on the remand report of the AO. In response, the assessee furnished comments vide reply dated 14.2.2013 which has been discussed by the Ld. CIT(A) at page no. 29 to 35 of the impugned order, for the cost of repetition, the same is not reproduced herein. The Ld. CIT(A) after considering the submission of the assessee, remand report of the AO and the comments on the remand report by the assessee deleted the addition made by the AO by observing made in para 4 & 4.1 of the impugned order as under :-

"4. The above written submissions have been carefully considered. Grounds of appeal nos. 1,2,3 and 6 are general in nature and do not require any separate adjudication. At ground of appeal no. 4, the appellant has contested the disallowance of 20% of credit notes/discounts allowed, of an amount of Rs. 83,20,174/-. The allegation of the Assessing Officer is that the credit notes and discounts have not been allowed proportionate to the business generated by the various parties, . 7 ITA No. 4028/Del/2013

and that the credit notes issued are not in sequence. The appellant has filed the details of credit notes issued to the various parties, and explained that credit notes have been issued as per the volume of business, but also depending upon variables such as whether the cargo booking is at peak times, place and sector of booking, urgency of delivery, etc. The counsel for the appellant has vehemently argued that the books of account have been audited, and the practice of allowing credit notes/discounts to their clients has been its regular business practice over the years. It is also argued that the expenditure fulfils all the conditions laid down in section 37(1) of the Income Tax Act for alowability of business expenditure, and no payment has been made to any related party as would attract the provisions of section 40A(2)(b). It is submitted that as against discounts allowed to its dealers of Rs. 4.16 crores out of gross income of Rs. 14.88 crores in the year under consideration, it had allowed discounts of Rs. 2.60 crores out of gross income of Rs. 11.79 crores in the immediately preceding year. It is also argued with reference to a number of case laws that commercial expediency is a matter to be left to the judgement of the assessee, and it is not for the Revenue to question the expediency of expenditure. As held by the Calcutta High Court in the case of Ravi Marketing Pvt. Ltd. Vs. CIT(2006) 280 ITR 519, whether an expenditure is expedient for the purpose of business is to be looked at by the income tax authorities or the Court from the view point of the assessee, not from its armchair. It is not for the Court or the income tax authorities to suggest or advise, to presume or surmise as to the expedience. The Bombay High Court held in the case of CIT Vs. Sales Magnesite Pvt. Ltd. (1995) 214 ITR 1 that the question whether expenditure was necessary or commercially expedients is not to be decided by the subjective standard of reasonableness of the Revenue, but from the point of view of the businessman.

4.1 The Assessing Officer has observed that no credit note or discount was allowed to M/s Kasturi & Sons Ltd. on business of Rs. 2,69,28,427/- whereas discount of Rs. 5,38,586/- was allowed to M/s Quick N Save Services Pvt. Ltd. who had provided business of only Rs. 87,58,395/-. The appellant has explained that M/s Kasturi & Sons ltd. is the owner of the Hindu newspaper, and details of discounts and credit notes submitted shows discount of Rs. 8,09,553/-

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allowed to 'The Hindu'. The Assessing Officer has also observed that the credit notes were mainly issued during the last few days of the previous year. However, the appellant has submitted a monthly summary of credit notes and discounts allowed which shows that discounts of Rs. 46,20,867/- have been accounted for in March 2008, out of the total discounts and credit notes claimed of Rs. 4,16,00,621/-. Credit notes and discounts have been allowed in each of the months of the Financial Year, with the highest debit of Rs. 75,29,113/- in the month of October 2007. There are monthwise variations, but no surge in expenditure at the end of the year. Further the Assessing Officer has alleged that the credit notes appear suspicious because the serial nos. of the credit notes have not been issued in chronological or sequential order. The appellant has explained that the credit notes have been issued by the various branch offices and there is no centralized system for issue of credit notes, hence the sequence of serial nos. is not chronological. This contention has also been verified with relation to the various credit notes mentioned by the Assessing Officer, which are issued from different booklets pertaining to different regions and different clients. Hence the reasons stated by the Assessing Officer for making an adhoc disallowance of 20% of the discounts and credit notes allowed by the appellant are found to be without any material basis. In the remand proceedings, no comments have been offered by the Assessing Officer on the written submissions filed in this connection, or with relation to the ledger accounts of customers to whom credit notes/discounts of over Rs. 10,00,000/- had been allowed. After careful consideration, the disallowance made of Rs. 83,20,174/- is deleted."

5. Now, the department is in appeal. The Ld. D.R. for the revenue reiterated the observations of the AO made in the assessment order dated 31/12/2010 and the remand report dated 15.3.2013. In his rival submissions, the Ld. Counsel for the assessee reiterated the submissions made before the authorities below and strongly supported the impugned order passed by the Ld. CIT(A).

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6. We have considered the submissions of both the parties and carefully gone through the material available on the record. In the present case, it is an admitted fact that the assessee was receiving the commission from various Airlines. The AO noted the discrepancy in the amount shown in P & L Account vis-à-vis the amount mentioned in the TDS certificates. The assessee also gave credit notes and discount to the parties through whom Cargo bookings were done. In the instant case, the AO did not point out any specific instance were the expenses incurred by the assessee were not for the business purposes or those were not incurred in regular course of business. The AO doubted the credit notes issued by the assessee only on this basis that those were not issued in chronological or sequential order but nowhere he stated that the claim of the assessee was not genuineness. Even in the remand report sought by the Ld. CIT(A), the AO did not offer any comments with regard to the submissions filed by the assessee in connection or with relation to the ledger accounts of the customers to whom credit notes / discounts had been given. The AO also did not reject the books of account by invoking the provisions of Section 145 (3) of the Act, he made ad hoc disallowance @ 20% but without any basis. On the other hand, the assessee produced the books of accounts which had been duly audited and the practice to allow in credit notes / discounts to the clients had been the regular business practice of the assessee over the years.

In the present case since the AO had accepted the books of accounts maintained by the assessee in regular course of business and also did not bring any material on record to substantiate that the expenses on account of credit notes / discounts were not related to the business of . 10 ITA No. 4028/Del/2013

the assessee. Therefore, the ad hoc disallowance made by the AO was not justified and the Ld. CIT(A) rightly deleted the same. In that view of the matter and by considering the totality of the facts as discussed hereinabove, we do not see any merit in this appeal of the department.

7. In the result appeal of the department is dismissed.

Order pronounced in the open court on 13 /02/2015.

Sd/- Sd/- (A.T.Varkey) (N.K.Saini) JUDICIAL MEMBER ACCOUNTANT MEMBER

Dated 13 Feb. 2015 B.Rukhaiyar Copy forwarded to: - 1. Appellant 2. Respondent 3. CIT 4. CIT(A) 5. CIT (ITAT), New Delhi