Associated Dyestuff Pvt.Ltd., Ahmedabad V. The DY.CIT.,Circle-1, Ahmedabad

ITA 1248/AHD/2009

• Counselvise Citation: [2011] 134 COUNSELVISE.COM (IT) 6629 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 23 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 13-05-2011
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: A
• Next Hearing Date: 31-03-2011
• Assessment Year: 2005-2006
• Appeal Filed On: 20-04-2009
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: S A BOHRA
• Keywords: Business income; Business expenditure; Bad and doubtful debts
• Section: 43B; 37(1); 28

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL A BENCH AHMEDABAD (BEFORE S/SHRI BHAVNESH SAINI, JM AND A. N. PAHUJA, AM) ITA NO.1248/AHD/2009 A. Y.: 2005-06 ASSOCIATED DYESTUFF PVT. LTD. PLOT NO.A- 1/5, GIDC ESTATE, PHASE-I, NR. SHAH TEXTILE, VATVA, AHMEDABAD VS THE D. C. I. T.,CIRCLE-1, AAYAKAR BHAVAN, AHMEDABAD PA NO. AACCA 4885 C (APPELLANT) (RESPONDENT) APPELLANT BY MS. URVASHI SHODHAN, AR RESPONDENT BY SHRI S. A. BOHRA, SR. DR O R D E R PER BHAVNESH SAINI: THIS APPEAL BY ASSESSEE IS DIRECTED AGAINST THE ORDER OF THE LEARNED CIT(A) VI, AHMEDA BAD DATED 1 ST JANUARY, 2009 FOR ASSESSMENT YEAR 2005-06. 2. WE HAVE HEARD THE LEARNED REPRESENTATIVES OF BOT H THE PARTIES, PERUSED THE FINDINGS OF THE AUTHORITIES BELOW AND C ONSIDERED THE MATERIAL AVAILABLE ON RECORD. 3. GROUND NO.4 IS WITH REGARD OF LEVY OF INTEREST U NDER DIFFERENT SECTIONS OF THE IT ACT WHICH IS CONSEQUENTIAL AND M ANDATORY IN NATURE AND GROUND NO.5 IS WITH REGARD TO INITIATION OF PEN ALTY PROCEEDINGS U/S 271 (1) ( C ) OF THE IT ACT WHICH IS SEPARATE PROCE EDINGS AND IS PREMATURE AT THIS STAGE. GROUNDS NO.4 AND 5 OF THE APPEAL OF THE ITA NO.1248/AHD/2009 ASSOCIATED DYESTUFF PVT. LTD. VS DCI&T, CIRCLE-1, A HMEDABAD 2 ASSESSEE ARE ACCORDINGLY DISMISSED AS WERE NOT ARGU ED BY THE ASSESSEE ALSO. 4. GROUND NO.1 OF THE APPEAL OF THE ASSESSEE READS AS UNDER: 1. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING ACTION OF THE AO IN DISALLOWING AMOUNT O F RS.2,25,931/- PAID TOWARDS EMPLOYERS CONTRIBUTION TO ESI. UNDER THE FACTS AND CIRCUMSTANCES OF THE CASE, THE LD. CIT(A) OUGHT TO HAVE ALLOWED THE SAID EXPENSE S INCE THE LIABILITY WAS INCURRED, CRYSTALLIZED AND PAID D URING THE PREVIOUS YEAR RELEVANT TO THE YEAR UNDER APPEAL. DURING THE COURSE OF THE ASSESSMENT PROCEEDINGS IT WAS NOTICED FROM THE PROFIT & LOSS ACCOUNT THAT THE ASSESSEE HAS DEB ITED RS.1,94,554/- AND RS.31,377/- AGAINST EMPLOYERS CONTRIBUTION OF ESI PERTAINING TO THE PERIOD FROM APRIL, 1998 TO MARCH, 1999 AND APRI L, 2001 TO MARCH, 2002 RESPECTIVELY WHICH IS NOT ALLOWABLE BECAUSE IT PERTAIN TO THE EARLIER YEARS AND HAVE NOT BEEN PAID BEFORE THE DUE DATE. IT WAS ALSO NOTICE THAT AUDIT INSPECTION WAS CARRIED OUT BY THE EMPLOYEES STATE INSURANCE CORPORATION AND DURING THE FINANCIAL YEAR 2004-05 RAISED OBJECTION THAT THE ASSESSEE HAS NOT PAID THE ABOVE AMOUNT BEFORE THE DUE DATE PRESCRIBED UNDER ESI LAW WHICH WAS VIO LATION OF THE PROVISIONS OF THE ACT. THE SAME AMOUNT WAS PAID BY THE ASSESSEE ON 10-1-2005 AND 13-10-2004 RESPECTIVELY. IT WAS ALSO NOTICED THAT THE ASSESSEE HAS MENTIONED THAT EVEN ACCORDING TO THE A CCOUNTING STANDARD ISSUED BY ICAI SUCH EXPENSES ARE INCURRED IN THE YEAR UNDER CONSIDERATION AS CRYSTALLIZED, THEREFORE, DED UCTION SHOULD BE ALLOWED. THE AO HOWEVER, DID NOT ACCEPT THE CONTENT ION OF THE ASSESSEE AND NOTED THAT THE PROVISIONS OF ESI ACT H AVE BEEN VIOLATED ITA NO.1248/AHD/2009 ASSOCIATED DYESTUFF PVT. LTD. VS DCI&T, CIRCLE-1, A HMEDABAD 3 AND ACCORDINGLY DISALLOWED A SUM OF RS.2,25,931/- T HE LEARNED CIT(A) CONSIDERING THE SUBMISSION OF THE ASSESSEE C ONFIRMED THE ADDITION BY HOLDING THAT THE PENALTY PAID IN VIOLA TION OF LAW CANNOT BE ALLOWED AS DEDUCTION. 5. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED T HAT THE AUDIT INSPECTION WAS CARRIED OUT BY THE EMPLOYEES STATE I NSURANCE CORPORATION IN FINANCIAL YEAR RELEVANT TO THE ASSES SMENT YEAR UNDER APPEAL AND THE ASSESSEE WAS DIRECTED TO PAY THE ABO VE AMOUNT WHICH HAS BEEN PAID DURING THE FINANCIAL YEAR RELEV ANT TO THE ASSESSMENT YEAR UNDER APPEAL. THE LEARNED COUNSEL F OR THE ASSESSEE ALSO SUBMITTED THAT SINCE THE LIABILITY IS CRYSTALLIZED DURING THE ASSESSMENT YEAR UNDER APPEAL ON THE BASIS OF TH E LETTERS RECEIVED FROM ESI CORPORATION COPIES OF WHICH ARE FILED IN T HE PAPER BOOK, THEREFORE, PAYMENT MADE ACTUALLY IN THE FINANCIAL Y EAR RELEVANT TO THE ASSESSMENT YEAR UNDER APPEAL, THE ASSESSEE WOULD BE ENTITLED FOR DEDUCTION. IT WAS ALSO STATED THAT EVEN ACCOUNTING STANDARD 5 ISSUED BY THE ICAI STATED THAT SUCH EXPENSES ARE THE EXPEN SES INCURRED IN THE YEAR IN WHICH LIABILITY IS CRYSTALLIZED THOUGH IT MAY PERTAIN TO EARLIER YEAR, DEDUCTION SHALL HAVE TO BE ALLOWED. SHE HAS R ELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE O F PRAKASH COTTON MILLS LTD. 201 ITR 684 IN WHICH IT WAS HELD THAT DEDUCTION SHALL HAVE TO BE ALLOWED WHERE AMOUNT INCURRED WERE WHOLLY COM PENSATORY IN NATURE AND WHEN COMPOSITE AMOUNT IS PAID ONLY WI TH PART WHICH IS COMPENSATORY TO BE ALLOWED. THE DEDUCTION SHALL HAVE TO BE ALLOWED U/S 37(1) OF THE IT ACT. SHE HAS REFERRED TO THE ITA NO.1248/AHD/2009 ASSOCIATED DYESTUFF PVT. LTD. VS DCI&T, CIRCLE-1, A HMEDABAD 4 DOCUMENTS FILED ON RECORD AT PAGE 5 TO 11. ON THE O THER HAND, THE LEARNED DR RELIED UPON THE ORDERS OF THE AUTHORITIE S BELOW. 6. WE HAVE CONSIDERED THE RIVAL SUBMISSION, PERUSED THE FINDINGS OF THE AUTHORITIES BELOW AND THE MATERIAL AVAILABLE ON RECORD. IT IS NOT IN DISPUTE THAT AUDIT INSPECTION WAS CARRIED OUT BY ESI CORPORATION DURING THE FINANCIAL YEAR RELEVANT TO THE ASSESSMEN T YEAR UNDER APPEAL AND OBJECTION WAS RAISED THAT THE ASSESSEE C OMPANY HAD NOT PAID EMPLOYERS CONTRIBUTION OF THE ABOVE AMOUNT BE FORE THE DUE DATE PRESCRIBED. DEMAND WAS ACCORDINGLY RAISED THOUGH IT PERTAINS TO THE EARLIER YEAR. THE ASSESSEE PAID THE AMOUNT IN QUEST ION IN THE FINANCIAL YEAR RELEVANT TO THE ASSESSMENT YEAR UNDE R APPEAL. THESE FACTS WOULD PROVE THAT LIABILITY TO PAY THE AMOUNT UNDER ESI LAW IS CRYSTALLIZED DURING THE YEAR UNDER APPEAL ON RAISIN G DEMAND BY ESI AUTHORITIES. COPIES OF SUCH CORRESPONDENCE ARE AVAI LABLE ON RECORD. EVEN, ACCORDING TO SECTION 43B OF THE IT ACT, DEDUC TION SHALL HAVE TO BE ALLOWED IRRESPECTIVE OF THE PREVIOUS YEAR IN WHI CH THE LIABILITY TO PAY THE SUM WAS INCURRED BY THE ASSESSEE ACCORDING TO METHOD OF ACCOUNTING REGULARLY FOLLOWED BY IT, ONLY IN COMPUT ING THE INCOME REFERRED TO IN SECTION 28 OF THE IT ACT OF THAT PRE VIOUS YEAR IN WHICH SUCH SUM IS ACTUALLY PAID BY THE ASSESSEE. ACCORDIN G TO ACCOUNTING STANDARD WHEN THE LIABILITY IS CRYSTALLIZED AND THE AMOUNT IS PAID, DEDUCTION SHALL HAVE TO BE ALLOWED IN FAVOUR OF THE ASSESSEE AS PER THE PROVISIONS OF LAW AND FURTHER THE CLAIM OF THE ASSESSEE SHOULD BE ALLOWED EVEN WITH THE HELP OF SECTION 43B OF THE IT ACT. SINCE NOTHING IS STATED IN THE LETTER OF ESI CORPORATION THAT THE AMOUNT WAS PENAL IN NATURE, THEREFORE, NO ADVERSE INFERENCE CAN BE DRAW N AGAINST THE ITA NO.1248/AHD/2009 ASSOCIATED DYESTUFF PVT. LTD. VS DCI&T, CIRCLE-1, A HMEDABAD 5 ASSESSEE. THE CORRESPONDENCE OF ESI CORPORATION SHO WS THAT THE ASSESSEE WAS REQUIRED TO PAY THE AMOUNT AS CONTRIBU TION IN RESPECT OF SOME EMPLOYEES WHICH WAS NOT PAID, THEREFORE, TH E AMOUNT AS WELL AS INTEREST FOR DELAYED PAYMENT WAS CHARGED. SINCE LIABILITY TO PAY THE AMOUNT IN QUESTION CRYSTALLIZED DURING THE ASSE SSMENT YEAR UNDER APPEAL AND PAID BY THE ASSESSEE ALSO, THEREFORE, TH E ASSESSEE WOULD BE ENTITLED FOR DEDUCTION. WE ACCORDINGLY, SET ASID E THE ORDERS OF THE AUTHORITIES BELOW AND DELETE THE ADDITION. IN THE R ESULT, GROUND NO.1 OF THE APPEAL OF THE ASSESSEE IS ALLOWED. 7. GROUND NO.2 OF THE APPEAL OF THE ASSESSEE READS AS UNDER: 2. THE LD. CIT(A) HAS ERRED IN LAW AND ON THE FACT S OF THE CASE IN CONFIRMING DISALLOWANCE OF RS.44,44,175 /- MADE BY AO OF BAD DEBTS WRITTEN OFF. BOTH THE LOWER AUTHORITIES HAVE FAILED TO APPRECIATE THE VOLUMINOU S DOCUMENTARY EVIDENCE ON RECORD TO PROVE THE AMOUNT OF EFFORTS PUT IN BY THE APPELLANT FOR RECOVERY OF THE EXPORT DUES FOR WHICH INTERVENTION OF RBI ALSO PROVED FUTI LE TO BRING ABOUT THE RECOVERY. THE AUTHORITIES HAVE WRON GLY INTERPRETED THE AMENDED PROVISIONS OF SECTION 36(1) (VII) VIS A VIS JUDGMENT OF THE HONBLE GUJARAT HIGH COUR T AND IGNORED THE FACTS OF THE CASE THAT JUSTIFIED WRITI NG OFF THE AMOUNT BY ANY PRUDENT BUSINESSMAN THAT HAS BECOME BAD AND NON RECOVERABLE. DURING THE ASSESSMENT PROCEEDINGS IT WAS NOTICED TH AT ASSESSEE HAS MADE EXPORT SALES TO KUCUKACALIC TAKSIL KIMYA SAVAS CAD. MESE SOK, 9/9, MERTER, ISTANBUL IN FINANCIAL YEAR 2003-0 4 AND DEBITED RS.44,44,175/- IN THE PROFIT & LOSS ACCOUNT AS BAD DEBT. ON BEING ASKED IN RESPECT OF THE WRITTEN OFF OF THE AMOUNT A S BAD DEBT AND FULFILLMENT OF CONDITIONS FOR BAD DEBT, THE ASSESSE E WAS ASKED TO ITA NO.1248/AHD/2009 ASSOCIATED DYESTUFF PVT. LTD. VS DCI&T, CIRCLE-1, A HMEDABAD 6 FURNISH THE NATURE OF TRANSACTIONS OF DEBTORS, COPY OF THE ACCOUNT OF THE DEBTORS, DETAILS OF THE TRANSACTIONS, FULL ADDR ESS OF THE DEBTORS AND PROOF/EVIDENCE OF EFFORTS MADE FOR RECOVERY OF THE DEBTS. THE ASSESSEE SUBMITTED THE REQUIRED DETAILS FROM WHICH IT WAS FOUND THAT THE ASSESSEE HAS MADE SALES TO THE AFORESAID PARTY IN A SUM OF RS.73,21,191/- DURING THE FINANCIAL YEAR 2003-04 AN D OUT OF THE SAME THE ASSESSEE HAS RECEIVED RS.25,17,424/- FROM ECGC AS CLAIMED AND RS.3,59,519/- AS EXCHANGE RATE DIFFERENCE. THE REMAINING AMOUNT OF RS.44,44,175/- WAS TREATED AS BAD DEBT. T HE AO NOTED THAT EFFORTS MADE BY THE ASSESSEE FOR RECOVERY OF T HE DUES HAVE NOT BEEN SUBSTANTIATED. THE AO CALLED FOR EXPLANATION O F THE ASSESSEE AND THE ASSESSEE EXPLAINED THAT THE ABOVE AMOUNT AG AINST THE AFORESAID PARTY HAS BEEN WRITTEN OFF AS BAD DEBT IN THE PROFIT & LOSS ACCOUNT, THE EXPORT SALES OF WHICH WERE CREDITED TO THE PROFIT & LOSS ACCOUNT. THEREFORE, CONDITIONS OF THE PROVISIONS OF LAW HAVE BEEN SATISFIED. THE ASSESSEE PRODUCED CERTAIN MATERIAL A ND DOCUMENTS IN SUPPORT OF THE CLAIM THAT IT WAS GENUINE BAD DEBT. THE AO HOWEVER, DID NOT ACCEPT THE CONTENTION OF THE ASSESSEE AND R EJECTED THE CLAIM OF THE ASSESSEE BECAUSE NO SPECIFIC DOCUMENTARY EVI DENCES HAVE BEEN FURNISHED OR ACTION INITIATED FOR RECOVERY OF THE AMOUNT IN QUESTION. THE AMOUNT IN QUESTION WAS ACCORDINGLY DISALLOWED. THE LEARNED C IT(A) ON THE SAME REASONS REJECTED THE CLAIM OF THE ASSESSEE . 8. THE LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED T HAT IT IS NOT IN DISPUTE THAT THE AMOUNT IN QUESTION HAS BEEN WRITTE N OFF AS BAD DEBT IN THE PROFIT & LOSS ACCOUNT OF THE ASSESSEE AS IRR ECOVERABLE, THEREFORE, CONDITIONS OF SECTION 36(1) (VII) OF THE IT ACT ARE SATISFIED IN ITA NO.1248/AHD/2009 ASSOCIATED DYESTUFF PVT. LTD. VS DCI&T, CIRCLE-1, A HMEDABAD 7 THIS CASE, THE ISSUE IS THEREFORE, COVERED IN FAVOU R OF THE ASSESSEE BY THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF T. R. F. LTD. 323 ITR 397 IN WHICH IT WAS HELD AS UNDER: THIS POSITION IN LAW IS WELL-SETTLED. AFTER 1 ST APRIL, 1989, IT IS NOT NECESSARY FOR THE ASSESSEE TO ESTABLISH THAT THE DEBT, IN FACT, HAS BECOME IRRECOVERABLE. IT IS ENOUGH IF THE BAD DEBT IS WRITTEN OFF AS IRRECOVERABLE IN THE ACCOUNTS OF THE ASSESSEE. HOWEVER, IN THE PRESENT CASE, THE ASSESSING OFFICER HAS NOT EXAMINED WHETHER THE DEBT HAS, IN FACT, BEEN WRITTEN OFF IN ACCOUNTS OF THE ASSESSEE. WHEN BAD DEBT OCCURS, THE BAD DEBT ACCOUNT IS DEBITED AND THE CUSTOMERS ACCOUNT IS CREDITED, THUS, CLOSING THE ACCOUNT OF THE CUSTOMER. IN THE CASE OF COMPANIES, THE PROVISION IS DEDUCTED FROM SUNDRY DEBTORS. AS STATED ABOVE, THE ASSESSING OFFICER HAS NOT EXAMINED WHETHER, IN FACT, THE BAD DEBT OR PART THEREOF IS WRITTEN OFF IN THE ACCOUNTS OF THE ASSESSEE. THIS EXERCISE HAS NOT BEEN UNDERTAKEN BY THE ASSESSING OFFICER. HENCE, THE MATTER IS REMITTED TO THE ASSESSING OFFICER FOR DE NOVO CONSIDERATION OF THE ABOVE-MENTIONED ASPECT ONLY AND THAT TOO ONLY TO THE EXTENT OF THE WRITE OFF. THE LEARNED DR DID NOT DISPUTE THE ABOVE FACTS. 9. ON CONSIDERATION OF THE ABOVE FACTS IN THE LIGHT OF THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF T. R. F . LTD. (SUPRA), WE DO NOT FIND ANY JUSTIFICATION TO SUSTAIN THE ADDITI ON. THE ASSESSEE HAS SATISFIED THE REQUIREMENTS OF SECTION 36(1) (VII) O F THE IT ACT ADMITTEDLY, THEREFORE, WE SET ASIDE THE ORDERS OF T HE AUTHORITIES BELOW ITA NO.1248/AHD/2009 ASSOCIATED DYESTUFF PVT. LTD. VS DCI&T, CIRCLE-1, A HMEDABAD 8 AND DELETE THE ADDITION. IN THE RESULT, GROUND NO.2 OF THE APPEAL OF THE ASSESSEE IS ALLOWED. 10. GROUND NO.3 OF THE APPEAL OF THE ASSESSEE READS AS UNDER: 3. THE LD. CIT(A) HAS ERRED IN LAW AND ON FACTS IN CONFIRMING DISALLOWANCE OF RS.39,81,648/- BY THE AO OF EXPENSES CLAIMED AS EXPORT COMMISSION THAT WAS BUT THE REIMBURSEMENT OF THE EXPENSES INCURRED BY THE OVERS EAS BUYER TO MEET THE INCREASING OPERATING COST. BOTH T HE LOWER AUTHORITIES HAVE FAILED TO APPRECIATE THE FAC T THAT THE APPELLANT HAD ATTAINED HIGHER VOLUME OF BUSINESS TH ROUGH THE OVERSEAS BUYER AND REIMBURSEMENT OF EXPENSES INCURRED TO AVAIL HIS VALUABLE SERVICES IS NOTHING BUT EXPENSE INCURRED WHOLLY AND EXCLUSIVELY FOR THE PUR POSE OF BUSINESS THAT WAS PAID THROUGH THE OFFICIAL BANK ING CHANNEL. LD. CIT(A) OUGHT TO HAVE ALLOWED THE COMMISSION EXPENSE THAT WAS INCURRED FOR PROMOTION OF BUSINESS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS NOTICED THAT THE ASSESSEE HAS CLAIMED COMMISSION OF RS.48,42,185/- O N THE TOTAL SALES OF RS.12,19,20,962/- WHEREAS IN THE PRECEDING YEAR THE ASSESSEE HAS CLAIMED COMMISSION OF RS.9,62,397/- ON THE TOTAL SALES OF RS.10,44,50,134/- WHICH IS 3.97% AND 0.92% RESPE CTIVELY. VIDE QUESTIONNAIRE DTD.28/L1/06 AND 05/02/07 THE ASSESSE E WAS ASKED FOR TO SUBMIT THE REASONS FOR SUCH DISPROPORTIONATE COM MISSION PAYMENTS AGAINST THE TURNOVER WITH SUPPORTING EVIDE NCES. THE DETAILS IN RESPECT OF TOTAL SALES EFFECTING COMMISSION PAYM ENTS AND RATE OF COMMISSION WAS ALSO CALLED FOR. IN RESPONSE TO THE ABOVE, THE ASSESSEE HAS SUBMITTED VIDE LETTER DATED 12/04/07 D ETAILS OF SALES COMMISSION AS UNDER: ITA NO.1248/AHD/2009 ASSOCIATED DYESTUFF PVT. LTD. VS DCI&T, CIRCLE-1, A HMEDABAD 9 SR. NO F.Y. 2004-05 RATE OF F.Y. 2004-05 F.Y.2003-04 RATE OF F.Y.2003- 04 SALES VALUE COMMISSION COMMISSION AMT. SALES VALUE COMMI SSION COMMISSI ON AMT. 1 73,41,256 4.50% 3,30,356 1,60,72,491 4.50% 7,23,262 2 22,31,081 30% 6,53,821 6,10,010 30% 1,98,608 3 19,53,565 30% 6,09,030 12,80,932 2% 24,025 4 18,19,962 30% 5,68,450 6,85,697 1% 6,504 ! 5 2,36,45,174 2.25% 5,32,016 6 35,84,491 30% 10,82,261 7 19,71,852 30% 5,59,289 LICENSE SALES 9,968 8 17,41,008 30% 5,08,797 ENTRY REVERSE OF M/S. MAMTA INTER. (1,835) 4,42,88,389 48,42,185 1,86,49,130 9,62,367 ON PERUSAL OF THE ABOVE DETAILS, IT WAS FOUND THAT SALES EFFECTING COMMISSION PAYMENTS ARE RS.4,42,88,389/- ON WHICH T HE COMMISSION PAYMENTS WERE RS.48,42,185/- WHICH IS 10.93%. WHERE AS, IN THE PRECEDING YEARS SALES EFFECTING COMMISSION PAYMENTS WERE RS.1,86,49,130/- ON WHICH COMMISSION PAYMENTS WERE RS.9,62,367/- WHICH WERE 5.16%. FURTHER PERUSAL OF THE DETAILS FU RNISHED BY THE ASSESSEE SHOWS THAT NO REASONS AS WELL AS DETAILS O F THE PARTIES TO WHOM THE COMMISSION HAVE BEEN PAID WERE OFFERED. TH EREFORE, A SHOW CAUSE NOTICE ISSUED ON 20/09/2007 PROPOSING TH E PROPORTIONATE ITA NO.1248/AHD/2009 ASSOCIATED DYESTUFF PVT. LTD. VS DCI&T, CIRCLE-1, A HMEDABAD 10 DISALLOWANCE ON ACCOUNT OF EXCESS CLAIM OF COMMISSI ON. IN RESPONSE TO THE ABOVE, THE ASSESSEE HAS SUBMITTED HIS REPL Y VIDE LETTER DATED 27/09/2007, WHICH IS REPRODUCED AS UNDER:- 'FROM THE TABLE GIVEN IN YOUR SHOW CAUSE NOTICE, IT MAY BE APPRECIATED THAT: - A) THE SALE VALUE EFFECTING COMMISSION PAYMENTS ARE RS.4,42,88,389/- IN F.Y.2004-05 AS AGAINST THE CORRESPONDING FIGURE OF SALE VALUE OF ONLY RS.1,86,49,130/-. THUS, THE SALE VALUE HAS INCREASE D BY 237% DURING THE YEAR UNDER QUESTION. B) SERIAL NO. 5 OF THE TABLE SHOWS SALE VALUE OF RS.2,36,45,174/- WHICH CONSTITUTES 53.40% OF TOTAL SALE VALUE OF RS.4,42,88,389/- EFFECTING COMMISSION PAYM ENTS DURING F.Y.2004-05 WHERE COMMISSION OF ONLY 2.25% AMOUNTING TO RS.5 F 32,016/- HAS BEEN PAID WHICH IS VERY REASONABLE AND NOT EXCESSIVE AT ALL. C) SERIAL NO. L OF THE TABLE SHOWS COMMISSION PERCENTAGE OF 4.50% AMOUNTING TO RS.3,30,356/- ON S ALE VALUE OF RS.73,41,256/- PAID TO MAMTA INTERMEDIATES LTD. DURING F.Y.2004-05. THE SAME PERCENTAGE OF COMMISSI ON AT 4.50% WAS PAID TO THE SAME PARTY ON SALE VALUE O F RS.1,60,72,491/- DURING F.Y.2003-04. IN THIS CASE A LSO, THE RATE OF COMMISSION @ 4.50% HAS REMAINED CONSTAN T FOR BOTH THE FINANCIAL YEARS FOR THE SAME PARTY. D) AS REGARDS EXPORT COMMISSION OF 30% IS CONCERNED , THE EXPORT SALES HAVE BEEN EFFECTED TO CHROCHEM>> E. FRAPAS AND CO., GREECE. THE LETTER OF THE OVERSEAS BUYER DATED 16-09-2004 IS ENCLOSED WHERE THEY HAVE REQUES TED US TO REIMBURSE 30% OF THE INVOICE VALUE TO MEET WI TH THEIR INCREASING COST OF BUSINESS AT THEIR END. THE SE REIMBURSEMENTS OF EXPENSES HAVE BEEN GIVEN / GRANTE D TO THEM BY NAMING IT AS COMMISSION. IN FACT, THE EX PORT SALE VALUE HAS OBVIOUSLY BEEN INFLATED SO AS TO ACCOMMODATE 30% REIMBURSEMENT OF EXPENSES SO THAT ITA NO.1248/AHD/2009 ASSOCIATED DYESTUFF PVT. LTD. VS DCI&T, CIRCLE-1, A HMEDABAD 11 WE DO NOT INCUR LOSS OR REDUCE OUR PROFIT IN SUCH E XPORT TRANSACTIONS. YOU CAN APPRECIATE FROM THE LETTER TH AT THESE FACTS HAVE BEEN NARRATED IN THE LETTER OF THE OVERS EAS BUYER. THE EXPORT COMMISSION HAS BEEN PAID THROUGH AUTHORIZED DEALER I.E., BANK OF BARODA. THUS, IN TERMS OF REVENUE, WE ARE NOT AT A LOSS AS THE SALE RATE OF OUR PRODUCTS COVERS SUCH REIMBURSEMENT OF EXPENSES. THI S SHOULD NOT BE COMPARED 'WITH IMMEDIATELY PRECEDING YEAR AS THERE WAS ONLY ONE INSTANCE IN F.Y.2003-04 AS AG AINST SIX INSTANCES IN F. Y. 2004-05 WHERE TOTAL EXPORT S ALE VALUE AMOUNTED TO RS.1,33,01,959/- AS AGAINST ONLY RS.6,10,010/- IN F. Y. 2003-04. CONSIDERING ALL THESE FACTS, IT MAY BE APPRECIATED THAT SALES VOLUME AND COMMISSION IN F.Y.2003-04 ARE NO W AY COMPARABLE TO SALE VALUE AND RATE OF COMMISSION IN F.Y.2004-05 FOR DRAWING ANY ADVERSE INFERENCES FOR REASONS STATED ABOVE. WE THEREFORE SAY THAT, COMMISSION PAYMENTS DEBITED IN THE ACCOUNTS, ARE REASONABLE AND NOT EXCESSIVE CONSIDERING SUBSTANTIA L INCREASE IN EXPORT SATES VOLUME AND ARE FULLY ALLOW ABLE AS BUSINESS EXPENDITURE. MERELY ON THE COMPARISON GROU ND, IT CANNOT BE DISALLOWED AS FACTS OF THE CASE IN ONE YEAR ARE DIFFERENT FROM THAT OF THE OTHER YEAR. THE ALLO WABILITY HAS TO BE DECIDED FROM THE STAND ALONE FACTS PREVAI LING IN THE YEAR UNDER QUESTION AND NOT OTHERWISE.' AS MENTIONED BY THE ASSESSEE IN THE AFORESA ID SUBMISSIONS THAT THE LETTER DTD.16/09/2007 OF T HE OVERSEAS BUYER IS ENCLOSED. THE SAME IS REPRODUCED AS UNDER:- CHROCHEM>> E. FRAPAS AND CO. DYESTUFFS AND CHEMICALS PRODUCTS FOR THE TEXTILE IN DUSTRY FACTORY/ OFFICE OREOKASTRO GREECE TEL. [phone]&682938/FAX-682315 DATE: 16/09/2004 ITA NO.1248/AHD/2009 ASSOCIATED DYESTUFF PVT. LTD. VS DCI&T, CIRCLE-1, A HMEDABAD 12 TO: MR. VISHAL SHAH (DIRECTOR OF ASSOCIATED INTERMEDIATES) WE HEREBY INFORM YOU THAT CONSUMPTION OF DYES PURCHASED FROM YOU HAS BECOME VERY ERRATIC AND UNPREDICTABLE, IN ORDER TO MAINTAIN CONTINUITY OF B USINESS WITH OUR COSTUMERS, WE HAVE TO MAINTAIN INVENTORY O F DIFFERENT DYES FOR A LONG PERIOD. FURTHER TEXTILE D YING & PRINTING UNITS ARE ALSO DEMANDING LARGER CREDIT PER IOD FROM US. ALL THESE FACTORS LEAD TO INCREASE, IN OUR BUSINESS OPERATING COST SUCH AS INTEREST COST, INVENTORY MANAGEMENT COST AS WELL AS CUSTOMER ENTERTAINMENT COST. CONSIDERING ALL THE ABOVE COSTS WE REQUEST YO U TO REIMBURSE TO US 30% OF OUR INVOICES THAT SHOULD BE TRANSFERRED TO BELOW MENTION ACCOUNT, ONCE THE INVO ICE IS PAID BY US TO YOU. SPARKASSE KREFELD (GERMANY) / P.L.Z. 320 500-00/K N O. 31 67 15 69 95 / FRAPA CLARA SD/- FOR CHROCHEM E. FRAPAS AND CO.,' FROM THE ABOVE SUBMISSION AND LETTER OF OVERSEAS BU YER, IT IS CLEAR THAT THE ASSESSEE HAS PAID THE COMMISSION @30% ON T HE SALES EFFECTING TO RS.1,33,01,959/- AS AGAINST THE SALES OF RS.6,10,010/- IN PRECEDING YEAR. THE COMMISSION PAID @ 2.25% AND 4.5 0% ON THE SALES EFFECTED RS.2,36,45,174/- AND RS.73,41,256/- RESPECTIVELY T O VARIOUS PARTIES SEEMS TO BE REASONABLE AFTER CONSID ERING THE SUBMISSION OF THE ASSESSEE. AS FAR AS COMMISSION PA ID @ 30% TO CHROCHEM E. FRAPAS AND CO., GREECE IS CONCERNED, IT IS STATED THAT THE ASSESSEE HIMSELF ADMITTED IN ITS SUBMISSION THA T THE OVERSEAS ITA NO.1248/AHD/2009 ASSOCIATED DYESTUFF PVT. LTD. VS DCI&T, CIRCLE-1, A HMEDABAD 13 BUYERS REQUESTED TO REIMBURSE 30% OF THE INCREASED INVOICE VALUE TO MEET WITH THEIR INCREASING COST OF BUSINESS AND THE SE REIMBURSEMENT OF EXPENSES GIVEN/GRANTED BY THE ASSESSEE TO THEM H AVE BEEN GIVEN THE NAME IT AS COMMISSION. THE SAME WAS DONE AT THE REQUEST OF THE OVERSEAS BUYER WHICH REQUIRES TO HIM TO MEET THE BU SINESS OPERATING COST SUCH AS INTEREST COST, INVENTORY MANAGEMENT CO ST AS WELL AS CUSTOMER ENTERTAINMENT COST ETC. IN THIS WAY, THE A SSESSEE HAD PAID RS.39,81,648/- AS COMMISSION ON THE SALES EFFECTED TO RS.1,33,01,959/- @ 30% DURING THE YEAR UNDER CONSID ERATION. CONSIDERING THE MANNER IN WHICH THE ASSESSEE HAD DO NE THE BUSINESS TRANSACTIONS AND QUANTUM OF COMMISSIONS PA ID ARE NOT ACCEPTABLE IN VIEW OF THE PROVISIONS OF LAW. THEREF ORE, AO DISALLOWED RS.39 81,648/- PAID AS COMMISSION TO OVERSEAS BUYER S INSTEAD OF PROPORTIONATE AS PROPOSED IN THE SHOW CAUSE NOTICE AND ADDED TO THE TOTAL INCOME. 11. THE LEARNED CIT(A) CONSIDERING THE SUBMISSION O F THE ASSESSEE IN THE LIGHT OF THE DEDUCTION CLAIMED ON ACCOUNT OF COMMISSION IN THE PRECEDING ASSESSMENT YEAR CONFIRMED THE ADDITION AN D DISMISSED THIS GROUND OF APPEAL OF THE ASSESSEE. 12. THE LEARNED COUNSEL FOR THE ASSESSEE REITERATED THE SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW AND R EFERRED TO THE DETAILS OF SALES COMMISSION FILED AT PB-93 TO 104 A ND SUBMITTED THAT THESE DOCUMENTS WERE FILED BEFORE THE AUTHORITIES B ELOW. THE LEARNED COUNSEL FOR THE ASSESSEE ALSO SUBMITTED THAT THE AF ORESAID SUM WAS PAID TO THE OVERSEAS BUYERS ON THE BASIS OF THEIR R EQUEST CONTAINED IN ITA NO.1248/AHD/2009 ASSOCIATED DYESTUFF PVT. LTD. VS DCI&T, CIRCLE-1, A HMEDABAD 14 THE LETTER DATED 16-9-2004 TO MEET WITH THEIR INCRE ASE IN OPERATING COST OF BUSINESS SUCH AS INTEREST COST, INVENTORY M ANAGEMENT COST AS WELL AS CUSTOMER ENTERTAINMENT COST @30% AND THE IN VOICE VALUE. SUCH EXPENSES BEING 30% OF THE INVOICE VALUE WERE R EIMBURSEMENT BY THE COMPANY BY DEBITING THE COMMISSION AMOUNT; T HEREFORE, IT IS ALLOWABLE DEDUCTION U/S 37(1) OF THE IT ACT. IT IS FURTHER EXPLAINED THROUGH THE PROFORMA INVOICES THAT EXPENSES WERE IN -BUILT BY INFLATING THE INVOICE VALUE SO THAT THE COMPANY DOES NOT INCU R LOSS OR REDUCE PROFIT TO SUCH EXPORT TRANSACTIONS. THE EXPORT COMM ISSION WAS PAID THROUGH OFFICIAL BANKING CHANNEL. IT IS ALSO EXPLAI NED THAT SINCE THE VALUE OF SALES HAS INCREASED BY ADDING TO 30% OF TH E COMMISSION, THEREFORE, THERE WAS LOSS IN THE CASE OF THE ASSESS EE OR TO INFLATE EXPENDITURE. THE LEARNED COUNSEL FOR THE ASSESSEE A LSO SUBMITTED THAT THE AUTHORITIES BELOW HAVE FAILED TO APPRECIAT E THE FACTS PROPERLY. THEREFORE, THE ASSESSEE WOULD BE ENTITLED FOR DEDUC TION. ON THE OTHER HAND, THE LEARNED DR RELIED UPON THE ORDERS OF THE AUTHORITIES BELOW. 13. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND MA TERIAL ON RECORD. WE HAVE GONE THROUGH THE CORRESPONDENCE ON RECORD FILED AT PB-93 TO 104 OF THE PAPER BOOK. WE FIND THAT THE AU THORITIES BELOW HAVE FAILED TO APPRECIATE THE FACTS OF THE CASE PRO PERLY. THE ASSESSEE CLAIMED THAT RECORD SALES HAVE BEEN MADE THROUGH TH E ABOVE PARTY AND THE FOREIGN PARTY HAS WRITTEN LETTER DATED 16-9 -2004 (PB-95) WHICH IS ALSO REPRODUCED ABOVE AND WOULD SHOW THAT THE PARTY HAS REQUESTED THE ASSESSEE TO REIMBURSE 30% OF THE INVO ICE VALUE TO MEET WITH THEIR INCREASING COST OF BUSINESS AT THEI R END. THIS REIMBURSEMENT OF EXPENSES HAS BEEN NAMED AS COMMISS ION. IN FACT, ITA NO.1248/AHD/2009 ASSOCIATED DYESTUFF PVT. LTD. VS DCI&T, CIRCLE-1, A HMEDABAD 15 THE EXPORT SALES VALUE HAS BEEN INFLATED SO AS TO A CCOMMODATE 30% OF THE REIMBURSEMENT OF THE EXPENSES IN ORDER TO AV OID LOSS IN THE EXPORT TRANSACTION. THE ASSESSEE ACCEPTED THE REQUI REMENT OF THE FOREIGN PARTY TO ADD 30% TO THE PRICE AGREED BETWEE N THEM AND PREPARED PROFORMA INVOICES. LETTER OF THE ASSESSEE IS FILED AT PB-99. LETTER OF THE FOREIGN BUYER IS FILED AT PB-100. VID E PB-101 THE ASSESSEE QUOTED THE LOWEST PRICE OF THE SALE OF THE GOODS AND VIDE PB-97 PROFORMA INVOICES WERE PREPARED THROUGH WHICH THE SALES VALUE HAS BEEN INFLATED IN THE INVOICE AS AGAINST R ATE OF THE PRODUCTS OFFERED BY THE ASSESSEE. THESE FACTS WOULD SHOW THA T SALE CONSIDERATION WAS INFLATED IN THE INVOICES AT THE I NSTANCE OF THE FOREIGN BUYER SO AS TO MEET OUT THE OPERATING COST OF THE BUSINESS. BUT THE NAME IS GIVEN AS COMMISSION. SINCE THE EXPE NSES REIMBURSED WERE VALUED BY INFLATING THE INVOICE VAL UE, THERE WAS NOTHING WRONG TO ALLOW THE CLAIM OF THE ASSESSEE BE CAUSE ULTIMATELY AS PER THE EXPLANATION OF THE ASSESSEE, THE ASSESSE E WAS NOT PUT TO ANY DISADVANTAGEOUS POSITION, BECAUSE THE ASSESSEE OBTAINED HIGHER VOLUME OF BUSINESS THROUGH THE FOREIGN BUYER AND TH E EXPENDITURE COULD BE CONSIDERED AS INCURRED WHOLLY AND EXCLUSIV ELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE. WE FIND FROM P B-93 I.E. DETAILS OF SALES COMMISSION THAT THE ASSESSEE EXPLAINED PRO PERLY THE REASONS FOR INFLATING THE COMMISSION WHICH WAS DUE TO MAINLY INFLATING THE PRICES IN THE INVOICES. THE AUTHORITIES BELOW M ERELY COMPARED THE COMMISSION WITH THE PRECEDING ASSESSMENT YEAR AND R EJECTED THE CLAIM OF THE ASSESSEE. THE LEARNED CIT(A) CONFIRMED THE ORDER OF THE AO WITHOUT GOING THROUGH THE CRUX OF THE MATTER IN ISSUE. SINCE THE ITA NO.1248/AHD/2009 ASSOCIATED DYESTUFF PVT. LTD. VS DCI&T, CIRCLE-1, A HMEDABAD 16 LEARNED CIT(A) HAS NOT GIVEN ANY FINDING ON THE MAT TER IN CONTROVERSY IN THE LIGHT OF THE SUBMISSIONS OF THE PARTIES AND DOCUMENTARY EVIDENCES AVAILABLE ON RECORD, WE ARE OF THE VIEW T HE MATTER REQUIRES RECONSIDERATION AT THE LEVEL OF THE LEARNED CIT(A). THE ABOVE FACTS SUGGEST THAT THE COMMISSION CANNOT BE DISALLOWED BY COMPARING WITH THE EARLIER YEARS DUE TO THE EXPLANATION OF THE ASS ESSEE SUPPORTED BY DOCUMENTS. WE, THEREFORE, SET ASIDE THE ORDER OF TH E LEARNED CIT(A) AND RESTORE THIS ISSUE TO THE FILE OF THE LEARNED C IT(A) WITH DIRECTION TO RE-DECIDE THIS ISSUE IN THE LIGHT OF THE SUBMISSION OF THE ASSESSEE AND THE DOCUMENTARY EVIDENCES AVAILABLE ON RECORD. THE LEARNED CIT(A) SHALL GIVE SPECIFIC FINDING ON THE MATTER IN ISSUE AS NOTED ABOVE BY GIVING REASONABLE SUFFICIENT OPPORTUNITY OF BEING H EARD TO THE ASSESSEE AS WELL AS THE AO. IN THE RESULT, GROUND NO.3 OF THE APPEAL OF THE ASSESSEE IS ALLOWED FOR STATISTICAL PURPOSES . 14. NO OTHER POINT IS ARGUED OR PRESSED. 15. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS PA RTLY ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 13-05-2011 SD/- SD/- (A. N. PAHUJA) ACCOUNTANT MEMBER (BHAVNESH SAINI) JUDICIAL MEMBER DATE : 13-05-2011 LAKSHMIKANT/- ITA NO.1248/AHD/2009 ASSOCIATED DYESTUFF PVT. LTD. VS DCI&T, CIRCLE-1, A HMEDABAD 17 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 D Y. REGISTRAR, ITAT, AHMEDABAD