Umakant B. Agarwal, Mumbai vs Assessee

Shri Umakant B. Agarwal, Asst. Commissioner of Income A-102, Raghav Building, Tax 9(1), Vasant Valley Complex, R.No.262, Second Floor, Vs. Film City Road, Aayakar Bhavan, Malad East, M.K. Road, Mumbai - 400 097 Mumbai - 400020 PAN: AAYPA7843D (Appellant) (Respondent)

Assessee by : Shri R.C. Jain, A.R. Revenue by : Shri Jeetendra Kumar, D.R.

Date of Hearing : 31.12.2014 Date of Pronouncement : 18.02.2015

ORDER

Per Sanjay Garg, Judicial Member:

The present appeal has been preferred by the assessee against the order dated 11.04.2012 of the Commissioner of Income Tax (Appeals) [(hereinafter referred to as CIT(A)] relevant to assessment year 2006-07.

2. The assessee in this appeal has agitated the levy of penalty under section 271(1)(c) of the Income Tax Act.

3. The brief facts of the case are that certain disallowance were made by the Assessing Officer (hereinafter referred to as the AO) in relation to expenditure of Rs.1,22,56,320/- paid as commission, difference in commission of Rs.3,85,516/- and difference in purchases amounting to Rs.7,860/- totaling Rs.1,26,49,696/-.

ITA No.3597/M/2012 2 Shri Umakant B. Agarwal

3.1 The said disallowance in respect of commission paid of Rs.1,22,56,320/- was deleted by the Ld. CIT(A). However, the disallowance relating to difference in commission and difference in purchases was upheld by the Ld. CIT(A). The Revenue preferred appeal against the said deletion of the disallowance of commission whereas the assessee agitated the disallowance of difference in commission and difference in purchases by way of cross objections before the Tribunal. The Tribunal vide order dated 27.10.10 reversed the findings of the Ld. CIT(A) in relation to commission and upheld the disallowance of commission made by the AO. The Tribunal also upheld the disallowance in relation to difference in commission and difference in purchases. In the penalty proceedings, the AO held that since the above disallowances had been confirmed by the Tribunal, hence it was a case of furnishing of inaccurate particulars of income and thereby concealment of income. He therefore levied the penalty at the rate of 100% of the tax amount sought to be evaded which was worked out at Rs.42,01,787/-.

4. The Ld. CIT(A) confirmed the said levy of penalty. The assessee has, thus, come in appeal before us.

5. We have heard the rival contentions of the Ld. Representatives of both the parties and have also gone through the records. So far as the disallowance of commission is concerned, the Ld. A.R. of the assessee has submitted that it cannot be said to be a case of furnishing of inaccurate particulars of income or concealment of income. The claim of the assessee was correct and bonafide and that is why the disallowance made by the AO in this respect was deleted by the Ld. CIT(A). The Ld. CIT(A) had agreed with the contentions of the assessee. Though the Tribunal has reversed the finding of the Ld. CIT(A), but it shows that the issue in respect of the disallowance was debatable and hence the penal provisions under section 271(1)(c) were not attracted in this case.

ITA No.3597/M/2012 3 Shri Umakant B. Agarwal

On the other hand, the Ld. D.R. has relied upon the findings of the lower authorities.

6. We find that during the assessment proceedings, the AO had disallowed the commission amount of Rs.1,22,56,320/- in relation to two concerns i.e. M/s. Panjon Pharma Ltd. and M/s. Suvidha Realtors & Constructions Pvt. Ltd. The AO had observed that the assessee had failed to furnish the requisite details regarding the commission payments and further that in response to notices issued under section 133(6) of the Act, the said parties had made only part compliance and that the assessee had failed to produce copy of written agreement with the said concerns vide which the assessee might have agreed to pay the commission to the said concerns and further that the assessee had failed to prove the rendering of the services and as well the business exigency of the expenditure claimed by it. He therefore made the above disallowances. The Ld. CIT(A), however, deleted the said disallowance on account of commission observing that in the case in hand, the orders had to be obtained from government department/big corporate, in which case, the names of the middlemen or reference to the middlemen would not be generally mentioned in the correspondence unless they are accredited agents. The findings of the CIT(A) as summed up in the order of the Tribunal dated 27.1. 2010 are reproduced as under:

"14.(a) Under section 37(1) of the Act, the assessee has to prove the fact of incurring the expenditure as also that it was incurred wholly and exclusively for the purpose of the business. This onus was discharged by the assessee by establishing the identity and genuineness of the payees of the commission (M/s Suvidha Realtors & Construction Pvt. Ltd. and M/s Panjon Pharma Ltd.)

(b) The details of services rendered by the agents have been e x pla ine d by t he as se ss ee (pa ra g ra ph 3. 5 of t he impugned order). (C) The agents have confirmed the receipt of commission fr om t he a ss es se e a nd ha v e s ubm it t e d copies of invoices, Income Tax returns, Balance Sheets, Service Tax returns, ledger accounts, bank statements, etc.

(d) The assessee and the commission agents are not related in any way.

ITA No.3597/M/2012 4 Shri Umakant B. Agarwal

(e)The names of agents never come on the record of either the principal of the assessee or his customers for the reason that "in the case of business with government agencies or large corporate houses, too many people cannot be accommodated on record due to sensitive nature of business".

(f) The assessee's agents perform their responsibilities and collected their commission.

(g) The Assessing Officer cannot apply his subjective standards but has to respect the point of view of the businessman. The test is not whether the assessee was prudent in incurring the expenses.

15. After recording the aforesaid conclusions I findings, the CIT(A) proceeded to make some general observations as to what happens when orders have to be obtained from Government departments or large Corporate entities. He noted that in such cases the names of middlemen or agents do not generally get mentioned in the correspondence unless they are accredited agents. With particular reference to the present case, he observed that though the cement was directly sold by the manufacturer, the assessee had paid commission to M/s Panjon Pharma Ltd. and M/s Suvidha Realtors & Construction Pvt. Ltd. for services rendered by them in procuring orders from Government and Semi- Government departments and large Corporates. There was no evidence, according to the CIT(A), to show that any part of the commission was paid for extra commercial consideration or that the payment was bogus or sham. No disallowance can be made merely on the basis of suspicion or surmises. He referred to the judgment of the Hon'ble Bombay High Court in CIT vs. Goodlass Nerolac Paints Ltd., 188 ITR 1 (Bom), in which it was held that where commission is paid wholly for the purpose of the business, it is an allowable deduction notwithstanding the failure of the assessee to furnish information regarding names and addresses of the recipients of the commission. Reference was also made to the decision of the Gujarat High Court in Swastik Textile Company Pvt. Ltd. vs. CIT, 150 ITR 155 (Guj), wherein it was held that commission paid to a person who is instrumental in bringing the supplier and the purchaser for negotiating a transaction, the same was an allowable deduction."

7. The Tribunal, however, allowed the appeal of the Revenue and confirmed the disallowance made by the AO observing that whenever a deduction is claimed by the assessee under section 37(1) of the Act, the onus of proving the claim in all aspects is on the assessee. It was therefore incumbent upon the assessee to establish its claim of payment of commission by proving the services rendered by the said concerns/agents. The Tribunal has also ITA No.3597/M/2012 5 Shri Umakant B. Agarwal

observed that the existence of a written agreement for payment of commission is not necessary. However, the assessee is required to clearly establish the rendering of services by the agents to justify the payment of commission and that the assessee could not establish that such services were actually rendered by the agents. The Tribunal also observed that the mere fact that the agents confirmed the receipt of commission and also proved the same by submitting their income tax and service tax returns, bank statements, copies of invoices etc. is not sufficient to establish their services especially when they have been specifically asked to prove the same. The fact that the moneys have not come back to the assessee was also not relevant for the above said disallowance made by the AO. The AO neither had questioned as to why the assessee had paid such a huge amount as commission nor that the payment of commission was unreasonable or excessive. In the present case, the AO had taken the stand that the assessee could not establish the rendering of services by the agents to justify the payment of commission. Since the assessee had failed to furnish evidence about the rendering of service, hence the disallowance of commission payment was held to be justified by the Tribunal.

7.1 We may notice that the Tribunal has not held that the claim made by the assessee was bogus or wrong. The assessee had proved the payment of commission by way of confirmations from the agents, their income tax and service tax returns, bank statements, copies of invoices etc. and further there was no evidence that moneys had come back to the assessee. The disallowance has been confirmed by the Tribunal in this case because the assessee could not prove the rendering of services by the agents by way of positive evidence. There is no finding of the Tribunal that it was a case of wrong or bogus claim especially in the light of positive evidence produced by the assessee regarding the payment of commission and such payment has not been disproved by the Revenue. The Hon'ble Bombay High Court, in the case of "CIT vs. Upendra ITA No.3597/M/2012 6 Shri Umakant B. Agarwal

V. Mithani" Income Tax Appeal (L) No.1860 of 2009 decided on 05.08.2009, has observed in the matter of levy of penalty under section 271(1)(c) of the Act that if the assessee gives an explanation which is unproved but not disproved i.e. it is not accepted but circumstances do not lead to the reasonable and positive inference that the assessee's case is false, then no penalty can be imposed in such cases. In the case in hand also the assessee has not only proved the payment of commission but his contention had also been accepted by the Ld. CIT(A). The Tribunal, however, held that the rendering of services by the assessee had not been proved but it is not a case where the payment of commission has been disproved. Under such circumstances, in view of the law laid down by the Hon'ble Bombay High Court in the case of "Upendra V. Mithani" (supra), the levy of penalty cannot be held to be justified in this case. Even, each and every case of confirmation of disallowance cannot be regarded as a case of furnishing of inaccurate particulars of income or concealment of income. The Hon'ble Supreme Court, in the case of "CIT vs. "CIT vs. Reliance Utilities and Power Ltd" (2009) 313 ITR 340 Petro Products Pvt. Ltd." 2010 322 ITR 158 SC, has held that simply for the reason that the AO did not find the claim of the assessee to be sustainable in law up to a certain extent, it cannot be a case for penalty under section 271(1)(c), more so when the particulars furnished by the assessee were not inaccurate. In view of our above discussion, the penalty levied in respect of disallowance of commission is ordered to be deleted.

8. The next issue is relating to the levy of penalty in respect of difference in commission and difference in purchases. The above stated disallowances were made in the quantum proceedings by the AO because the method of accounting of assessee had not been accepted by the AO. The assessee had followed the hybrid system of accounting vide which the receipt of commission was accounted on cash basis and the expenses were accounted on ITA No.3597/M/2012 7 Shri Umakant B. Agarwal

accrual/mercantile system of accounting. However, the receipts/differences were offered in the next assessment year. The claim in respect of difference in commission and difference in purchases had been disallowed by the lower authorities by way of invoking section 145(3) of the Act. It had been submitted by the assessee that the assessee had been following the said hybrid system of accounting for the last so many years. However, for this year the accounting method of the assessee was rejected. The disallowance was not because of furnishing of inaccurate particulars of income or for concealment of income and as such the levy of penalty under section 271(1)(c) in relation to difference in commission and difference in purchases is not attracted at all and the same is accordingly ordered to be deleted.

9. In the result, the penalty levied/confirmed by the lower authorities under section 271(1)(c) is hereby ordered to be deleted. The appeal of the assessee is thus allowed.

Order pronounced in the open court on 18.02.2015.

Sd/- Sd/- (R.C. Sharma) (Sanjay Garg) ACCOUNTANT MEMBER JUDICIAL MEMBER

Mumbai, Dated: 18.02.2015. * Kishore, Sr. P.S.

Copy to: The Appellant The Respondent The CIT, Concerned, Mumbai The CIT (A) Concerned, Mumbai The DR Concerned Bench //True Copy// [

By Order

Dy/Asstt. Registrar, ITAT, Mumbai.