DCIT, Sikar V. SHRI SHRAWAN KUMAR AGARWAL, Sikar

ITA 1401/JPR/2010

• Counselvise Citation: 140123114 RSA 2010
• Duration Of Justice: 10 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-10-2011
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: B
• Next Hearing Date: 22-09-2011
• Assessment Year: 2007-2008
• Appeal Filed On: 10-12-2010
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: VINOD JOHARI
• Keywords: Business income; Relationship of principal and agent; Assessment record
• Section: 194C

Judgement Text

1 ITA 1401(2)-10 IN THE INCOME TAX APPELLATE TRIBUNAL JAIPUR BENCH B JAIPUR. ( BEFORE SHRI R.K. GUPTA AND SHRI N.L. KALRA ) ITA NO. 1401/JP/2010 ASSTT. YEAR : 2007-08. THE DCIT, CIRCLE, VS. SHRI SHRAWAN KUMAR AGARWAL , SIKAR. S/O SHRI MURARI LAL AGARWAL, PROP. M/S. USHA AGENCIES, LAXMI MARKET, SIKAR. (APPELLANT) (RESPONDENT) C.O. NO. 6/JP/2011 ( ARISING OUT OF ITA NO. 1401/JP/2010 ) ASSTT. YEAR : 2007-08. SHRI SHRAWAN KUMAR AGARWAL, VS. THE DCIT, CIRCLE, SIKAR. SIKAR. (CROSS OBJECTOR) (RESPONDENT) APPELLANT BY : SHRI VINOD JOHARI RESPONDENT BY : SHRI MAHENDRA GARGIEYA DATE OF HEARING : 22.09.2011 DATE OF PRONOUNCEMENT : 21.10.2011. ORDER DATED : 21/10/2011. PER R.K. GUPTA, J.M. THIS IS AN APPEAL BY DEPARTMENT AND CROSS OBJECTIO N BY ASSESSEE AGAINST THE ORDER OF LD. CIT (A) RELATING TO ASSESSMENT YEAR 2007-08. 2 2. THE DEPARTMENT IS OBJECTING IN SUSTAINING ADDITI ON OF RS. 5,00,000/- AS AGAINST ADDITION OF RS. 30,87,080/- MADE BY AO ON ACCOUNT O F SUPPRESSED SALES, DELETING DISALLOWANCE OF RS. 10,00,000/- MADE BY AO ON ACCOU NT OF INDIRECT EXPENSES, DELETING ADDITION OF RS. 16,99,837/- MADE ON ACCOUNT OF NET PROFIT FROM SEPARATE ELECTRONICS AND ELECTRICAL BUSINESS AND DELETING DISALLOWANCE OF RS . 98,02,544 (91,83,554 + 6,18,990/-) MADE BY AO UNDER SECTION 40(A)(IA) OF THE ACT. 3. REGARDING FIRST THREE GROUNDS, THE LD. D/R HAS P LACED RELIANCE ON THE ORDER OF THE AO. HOWEVER, REGARDING DISALLOWANCE DELETED BY LD. CIT (A), LD. D/R HAS STATED THAT LD. CIT (A) WAS NOT CORRECT IN DELETING THE DISALLOWANC E AS THERE IS A DIRECT RELATION BETWEEN THE PRINCIPAL AND AGENT AS ASSESSEE IS AGENT OF BSN L. THEREFORE, PROVISIONS OF SECTION 40(A)(IA) IS CLEARLY ATTRACTED ON THE AMOUNT OF COM MISSION EARNED BY ASSESSEE FROM BSNL, AND ASSESSEE HAS FURTHER GOT WORK DONE FROM V ARIOUS TO WHOM THE COMMISSION EARNED BY ASSESSEE HAS BEEN SHARED. THEREFORE, ON T HAT AMOUNT ASSESSEE FAILED TO DEDUCT TDS AND AO WAS CORRECT IN MAKING ADDITION IN VIEW O F PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. RELEVANT PORTION OF THE ASSESSMENT ORDER W AS READ ALSO BY LD. D/R. 4. ON THE OTHER HAND, THE LD. COUNSEL OF THE ASSESS EE PLACED RELIANCE ON THE ORDER OF LD. CIT (A). FURTHER, THE RELATION BETWEEN PRINCIP AL BSNL AND ASSESSEE WAS EXPLAINED AND IT WAS SUBMITTED THAT IT IS NOT DISPUTED THAT A SSESSEE IS AN AGENT OF BSNL. BSNL HAS PAID COMMISSION @ 5% AND ON WHICH TDS HAS BEEN DEDU CTED BY BSNL AND THERE IS NO DISPUTE. IT IS FURTHER SUBMITTED THAT THERE WERE T WO OPTIONS LEFT WITH THE ASSESSEE (1) THAT ASSESSEE MAY HAVE RENDERED THE SERVICES DIRECT LY TO THE BSNL OR (2) MAY HAVE ENGAGED PERSONS FROM THE MARKET TO COMPLETE THE WOR K ASSIGNED BY BSNL. IF ASSESSEE WANTS TO DO THE WORK HIMSELF, HE HAS TO EMPLOYEE HU NDREDS OF EMPLOYEES WHICH WERE NOT 3 FEASIBLE FOR HIM. THEREFORE, HE DETERMINED TO HIRE PERSONS FROM THE MARKET AND GOT THE WORK DONE THROUGH THEM THROUGH SHARE THE COMMISSION EARNED FROM BSNL AND ON THIS BASIS PROVISIONS OF SECTION 194C ARE NOT ATTRACTED. THEREFORE, LD. CIT (A) WAS CORRECT IN HOLDING THAT DISALLOWANCE MADE UNDER SECTION 40(A)( IA) WAS NOT JUSTIFIED. BRIEF WRITTEN SUBMISSIONS WERE ALSO FILED BY LD. A/R IN SUPPORT O F THE CONTENTIONS MADE BY HIM. 5. REGARDING THE ADDITION SUSTAINED BY LD. CIT (A) AT RS. 5,00,000/-, RELIANCE WAS PLACED ON THE WRITTEN SUBMISSIONS FILED BY LD. A/R. 6. NOW THE APPEAL OF THE DEPARTMENT AS WELL AS CROS S OBJECTION OF THE ASSESSEE ARE BEING DISPOSED OFF IN THE FOLLOWING MANNER. 7. REGARDING SUSTAINING THE ADDITION OF RS. 5,00,00 0/- AGAINST RS. 30,87,080/-, THE BRIEF FACTS NOTED BY LD. CIT (A) ARE THAT ASSESSEE IS ENGAGED IN THE BUSINESS OF THE TRADING OF ELECTRONIC AND ELECTRICAL GOODS AND HAS FRANCHIS EESHIP OF BSNL CASH CARDS/ RECHARGE COUPONS ETC. THE RETURN OF INCOME WAS FILED ON 23/1 0/2007 DECLARING A TOTAL INCOME OF RS. 9,55,646/-. THE CASE WAS SELECTED FOR SCRUTINY. DURING THE ASSESSMENT PROCEEDINGS, THE AO OBSERVED THAT THE GP RATE AND THE NP RATE WE RE CONTINUOUSLY DECREASING FROM A.Y. 2004-05 THROUGH TO A.Y. 2007-08. FURTHER, THE AO ALSO NOTED VARIOUS DEFECTS / DEFICIENCIES IN THE ASSESSEES BOOKS OF ACCOUNT, WH ICH, BRIEFLY STATED, WERE AS UNDER: I) PERUSAL OF THE SALES VOUCHERS SHOWED THAT THE SALES OF RECHARGE COUPONS, ETC. WERE MOSTLY IN CASH AND NOT FULLY VERIFIABLE IN THE ABSE NCE OF COMPLETE NAME AND ADDRESS OF THE PURCHASER. II) THE ASSESSEE HAD SHOWN HIGHER COMMISSION / DISCOUNT TO THOSE PURCHASERS, WHO WERE NOT IDENTIFIABLE, AS COMPARED TO THOSE PURCHAS ERS, WHO WERE IDENTIFIABLE. III) THE ASSESSEE HAD ALLOWED COMMISSION ALMOST 5%, WHIC H WAS MUCH ABOVE THE NORMAL / AVERAGE COMMISSION PAYABLE @ 3%. 4 IV) THERE WAS A DIFFERENCE OF RS. 11,13,212/- IN THE FI GURE OF SALES OF JODHPUR BRANCH SHOWN AT RS. 16,44,01,149/- AS PER THE STOCK SUMMAR Y FILED AND THE FIGURE OF SALES OF JODHPUR BRANCH SHOWN AT RS. 16,32,87,937/- AS PE R THE P&L ACCOUNT. HENCE, THERE WAS A DIFFERENCE OF ABOUT 0.7% OF THE SALES. V) AS PER THE NOTES ON ACCOUNT ATTACHED TO THE AUDIT R EPORT (FORM NO. 3CB), THE ASSESSEE HAD NOT MAINTAINED ANY SALARY REGISTER AND THE VOUCHERS OF MISC. EXPENSES. VI) THE ASSESSEE HAD EMPLOYED A VERY LARGE NUMBER OF EM PLOYEES, WHICH APPEARED TO BE VERY HIGH AS COMPARED TO THE NUMBER OF EMPLOYEES , NORMALLY REQUIRED IN VIEW OF THE NATURE OF ASSESSEES BUSINESS. THE EXPENDITU RE CLAIMED ON SALARY WAS UNREASONABLY HIGH AND THE GENUINENESS OF THE SAME A ND EMPLOYMENT OF SUCH LARGE NUMBER OF EMPLOYEES WAS ALSO DOUBTFUL, IN THE ABSEN CE OF ANY INDEPENDENT CLINCHING EVIDENCE. 8. THEREFORE, THE AO PROPOSED TO REJECT THE BOOKS O F ACCOUNT U/S 145(3) OF THE I.T. ACT. IN RESPONSE, THE ASSESSEE FILED REPLY VIDE LET TER DATED 14/12/2009. HOWEVER, THE AO DID NOT FIND THAT REPLY ACCEPTABLE AND HENCE, THE A O REJECTED THE ASSESSEES BOOKS OF ACCOUNT. 9. FURTHER, AS PER DISCUSSION CONTAINED IN PARAS 4. 1 TO 4.4 OF THE ASSESSMENT ORDER, THE AO NOTED THAT ON AN AVERAGE, THE ASSESSEE HAD A LLOWED A COMMISSION OF 4% TO THE RETAILERS. THE AO FURTHER NOTED THAT, HOWEVER, AS P ER THE FRANCHISEESHIP AGREEMENT DATED 21/03/2005 FILED BY THE ASSESSEE, A COMMISSION OF 3 % ONLY WAS TO BE PASSED ON BY THE FRANCHISEE (THE ASSESSEE) TO THE RETAILERS, WHEREAS THE ASSESSEE HAD PASSED ON THE COMMISSION AT ABOUT 4% TO THE RETAILERS, WHICH TANT AMOUNTED TO SUPPRESSION OF SALES BY 1%. ACCORDINGLY, THE AO HELD THAT THE ASSESSEE HAD SUPPRESSED SALES TO THE EXTENT OF RS. 30,87,080/- (BEING 1% OF THE TOTAL SALES OF RS. 30, 87,08,049/-) AND MADE THE IMPUGNED ADDITION OF RS. 30,87,080/-. 5 10. DETAILED WRITTEN SUBMISSIONS WERE FILED BEFORE LD. CIT (A) ALONG WITH PAPER BOOK. AS PER ORDER OF LD. CIT (A), THE DETAILS FILED BEFO RE HIM CONTAINED CERTAIN CLARIFICATION AND SOME FRESH EVIDENCE WITH REFERENCE TO THE OBSER VATIONS MADE IN THE ASSESSMENT ORDER BY THE AO, A COPY OF THE SAID WRITTEN SUBMISSIONS A ND PAPER BOOK WAS SENT TO THE AO FOR HIS COMMENTS/REMAND REPORT IN TERMS OF RULE 46A. T HE AO FILED HIS COMMENTS/REMAND REPORT VIDE LETTER NO. 103 DATED 19.5.2010, A COPY OF THE SAME WAS PROVIDED TO THE LD. A/R FOR HIS COUNTER COMMENTS. IN RESPONSE, THE LD. COU NSEL OF THE ASSESSEE FILED COUNTER COMMENTS. THEREAFTER, THE SUBMISSIONS OF THE ASSE SSEE, REMAND REPORT OF THE AO AND COUNTER COMMENTS OF THE ASSESSEE WAS CONSIDERED. T HE CONTENTIONS AND ARGUMENTS OF THE LD. A/R WHICH WERE CONSIDERED BY LD. CIT (A) ARE TA BULATED IN HIS ORDER AT PAGES 3 TO 11. AFTER CONSIDERING THE REPLY AND THE ORDER OF THE AO , THE LD. CIT (A) FOUND THAT THE AO WAS NOT JUSTIFIED IN MAKING THE ADDITION OF RS. 30, 87,080/-. HOWEVER, HE FOUND THAT IF A LUMP SUM DISALLOWANCE IS MADE OF RS. 5,00,000/-, TH EN IT WILL MEET THE ENDS OF JUSTICE. ACCORDINGLY THE ISSUE WAS DECIDED PARTLY IN FAVOUR OF THE ASSESSEE. 11. AFTER CONSIDERING THE ORDERS OF THE AO AND LD. CIT (A), WE FIND THAT THERE IS NO SUBSTANCE IN THE GROUND OF THE DEPARTMENT. HOWEVER, ASSESSEE DESERVES TO SUCCEED IN ITS GROUND AS, IN OUR VIEW, THE DISALLOWANCE SUSTAINED BY LD. CIT (A) AT RS. 5,00,000/- IS ON HIGHER SIDE. COMPLETE DETAILS WERE GIVEN BEFORE HI M AND THEY WERE SENT TO THE AO ALSO. REMAND REPORT WAS SOUGHT AND AFTER OBTAINING THE RE MAND REPORT AND PERUSING OTHER MATERIALS ON RECORD, THE LD. CIT (A) WAS SATISFIED THAT AO WAS NOT CORRECT IN MAKING THE ADDITION. IT WAS OBSERVED BY LD. CIT (A) AT PAGE 1 3 THAT THE LD. A/R WAS ALSO ABLE TO EXPLAIN SATISFACTORILY THE DISCREPANCY NOTED BY THE AO RELATING TO THE DIFFERENCE IN SALES OF JODHPUR BRANCH. SIMILAR OBSERVATION HAS BEEN MA DE IN RESPECT TO THE EXPENDITURE 6 INCURRED BY THE ASSESSEE. FINDINGS OF LD. CIT (A) HAVE BEEN RECORDED IN PARA 3.3.1 TO 3.3.2 AT PAGES 11 TO 14 OF HIS ORDER ARE AS UNDER : - 3.3.1. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS OF LD. AR. I HAVE ALSO CAREFULLY GONE T HROUGH THE DETAILS / DOCUMENTS FILED BY THE LD. AR IN SUPPORT OF THIS GROUND OF APPEAL. HOWEVER, ON PERUSAL OF THE SAME, I FIND THA T THERE IS NO DISPUTE REGARDING THE FACT THAT MOST OF THE SALE OF THE RECHARGE COUPONS ETC. IS MADE BY THE ASSESSEE IN CASH AND AL SO THAT THE COMPLETE ADDRESS / DETAILS OF THE RETAILERS ARE NOT MAINTAINED BY THE ASSESSEE. IN THIS RESPECT, IT IS ALSO NOTED THAT TH E APPELLANT HAS MADE THE SALE OF THE RECHARGE COUPONS ETC. TO THE RETAIL ERS AT A PRICE, WHICH WAS LOWER THAN THE MRP THEREOF, AFTER PASSING ON A PART OF HIS COMMISSION TO THE RETAILERS. HOWEVER, APPELLANT S CLAIM IN THAT REGARD RELATING TO THE BENEFIT GIVEN TO THE RETAILE RS, AS TO HOW MUCH OF HIS COMMISSION WAS ACTUALLY PASSED ON TO THE RET AILERS, IS NOT FULLY VERIFIABLE IN THE ABSENCE OF COMPLETE DETAILS /ADDRESSES OF THE RETAILERS. THEREFORE, THE COMPLETE VERIFICATION OF THE ENTIRE SALES MADE BY THE ASSESSEE, AND PARTICULARLY OF THE COMMI SSION /DISCOUNT ALLOWED BY THE ASSESSEE TO THE RETAILERS, IS NOT PO SSIBLE. FURTHER, I FIND THAT THERE IS ALSO NO DISPUTE REGARDING THE FA CT THAT THE APPELLANT WAS NOT MAINTAINING VOUCHERS OF MISC. EXP ENSES, AND ACCORDING TO APPELLANTS OWN ADMISSION, MADE VIDE L ETTER DATED 05/08/2010, SUCH VOUCHERS NUMBERED TO 1385. IN ADDI TION, IT IS NOTED THAT THE AUDITORS HAVE ALSO MADE THE OBSERVAT ION IN THE AUDIT REPORT THAT THE ASSESSEE WAS NOT MAINTAINING ANY SALARY REGISTER AND VOUCHERS FOR MISC. EXPENSES. THEREFORE , ON THESE FACTS, IT IS HELD THAT LD. AO WAS FULLY JUSTIFIED IN REJEC TING THE APPELLANTS BOOKS OF ACCOUNT BY INVOKING THE PROVISIONS OF S.14 5(3) OF THE I.T. ACT AND HENCE, THE SAID ACTION OF THE LD. AO IS CON FIRMED. 3.3.2. HOWEVER, AS FAR AS THE IMPUGNED ADDITION OF RS.30,87,080/- MADE BY THE LD. AO, ON THE GROUND OF SUPPRESSION OF SALES BY THE ASSESSEE, IS CONCERNED, I FIND THAT THE LD. AO WAS NOT JUSTIFIED IN MAKING THAT ADDITION, BY IGNORING THE RELEVANT FACTS / DOCUMENTS ON RECORD. IN THIS REGARD, IT IS NOTED THAT THE APPELLANT HAD ENTERED INTO AN AGREEMENT ON 21/03/2005 WITH BS NL FOR FRANCHISEE-SHIP OF BSNL AND AS PER THAT AGREEMENT, THE APPELLANT WAS TO GET 5% COMMISSION AS FRANCHISEE FROM BSNL, O UT OF WHICH A MINIMUM OF 3% WAS TO BE PASSED ON TO THE RETAILER S. FROM THE LANGUAGE OF THE AGREEMENT, IT IS EVIDENT THAT THE A PPELLANT WAS TO NECESSARILY PASS ON A MINIMUM OF 3% COMMISSION TO T HE RETAILERS AND, THEREFORE, THE COMMISSION PAID COULD HAVE BEEN .3% OR MORE. FURTHER, IT IS OBSERVED THAT THE AFORESAID AGREEMEN T WAS AMENDED 7 ON 13/11/2006, WHEREBY THE APPELLANT WAS TO GET A C OMMISSION OF 6.5% AS FRANCHISEE FROM BSNL, OUT OF WHICH A MINIMU M OF 5% COMMISSION WAS NECESSARILY TO BE PASSED ON TO THE R ETAILERS. THEREFORE, AS PER THE AMENDED AGREEMENT DATED 13.11 .2006, THE APPELLANT WAS TO PASS ON 5% OR MORE COMMISSION TO T HE RETAILERS. THEREFORE, ON THESE FACTS, I FIND SUBSTANCE IN THE CONTENTION OF LD. AR THAT THE PAYMENT OF COMMISSION AT THE AVERAGE RA TE OF ABOUT 4% BY THE ASSESSEE TO THE RETAILERS WAS QUITE REASO NABLE. HOWEVER, AS MENTIONED EARLIER, IT IS NOT POSSIBLE TO VERIFY FROM THE RECORDS MAINTAINED BY THE ASSESSEE AS TO HOW MUCH COMMISSIO N WAS ACTUALLY PAID, IF ANY, BY THE APPELLANT TO THE RETA ILERS, OVER AND ABOVE THE AFOREMENTIONED MINIMUM COMMISSION OF 3% ( DURING THE PERIOD FROM 01/04/2006 TO 12/11/2006) AND 5% (FROM 13/11/2006 TO 31/03/2007), WHICH THE ASSESSEE WAS OBLIGED TO N ECESSARILY PASS ON TO THE RETAILERS, AS PER THE AFORESAID AGREEMENT S WITH BSNL. THEREFORE, THE APPELLANT WAS REQUIRED TO SUBMIT DET AILS OF SALES MADE TO THE RETAILERS FOR THE PERIOD 01/04/2006 TO 12/11/2006 AND FOR THE PERIOD 13/11/2006 TO 31/03/2007. FROM THE DETAILS FILED, IT IS NOTED THAT THE APPELLANT HAD M ADE SALES OF RS.16,86,91,274/-, DURING THE PERIOD FROM 01/04/200 6 TO 12/11/2006, WITH RESPECT TO WHICH A MINIMUM COMMISS ION OF 3% WAS NECESSARILY TO BE ALLOWED T THE RETAILERS, AND HAD MADE SALES OF RS.12,79,96,239/-, DURING THE PERIOD FROM 13/11/200 6 TO 31/03/2007, WITS RESPECT TO WHICH A MINIMUM COMMISS ION OF 5% WAS NECESSARILY TO BE ALLOWED TO THE RETAILERS. FUR THER, IT IS NOTED THAT THEREFORE, EVEN IF THE APPELLANT HAD ALLOWED O NLY THE MINIMUM COMMISSION OF 3% AND 5%, AS THE CASE MAY BE, THE AV ERAGE COMMISSION PAYMENT BY THE APPELLANT TO THE RETAILER S WOULD WORK OUT TO 3.86% OF THE ENTIRE SALES FOR THE F.Y. 2006- 07. HOWEVER, AS MENTIONED BEFORE, IT IS NOT VERIFIABLE FROM THE REC ORDS AS TO WHETHER THE APPELLANT PASSED ON ANY BENEFIT, OVER A ND ABOVE THE AFOREMENTIONED MINIMUM COMMISSION, TO THE RETAILERS , IT IS HELD THAT IT WILL BE REASONABLE TO PRESUME THAT THE APPE LLANT HAD PASSED ON THE MINIMUM COMMISSION TO THE RETAILERS (AS WAS REQUIRED TO BE NECESSARILY PASSED ON TO THE RETAILERS AS PER THE A GREEMENT BETWEEN THE ASSESSEE AND BSNL). ACCORDINGLY, IT IS HELD THA T IT WILL BE REASONABLE TO ALLOW TO THE APPELLANT, THE COMMISSIO N I DISCOUNT PASSED ON BY THE APPELLANT TO THE RETAILERS, ONLY T O THE EXTENT OF THE AFOREMENTIONED AVERAGE COMMISSION I DISCOUNT @ 3.86 % OF THE ENTIRE SALES, AGAINST THE CLAIM OF COMMISSION / DIS COUNT MADE AT AN AVERAGE RATE OF 4% BY THE ASSESSEE. THEREFORE, AS A RESULT, THE APPELLANTS CLAIM OF COMMISSION I DISCOUNT PAYMENT TO THE RETAILERS, TO THE EXTENT OF 0.14% (4% - 3.86%) OF T HE ENTIRE SALES MADE TO THE RETAILERS (OF RS.30,87,08,0491- AS WORK ED OUT BY THE LD. AO), WHICH WORKS OUT TO RS.4,32,192/- IS TO BE DISALLOWED. 8 FURTHER, AS NOTED EARLIER, THE APPELLANT IS NOT MAI NTAINING VOUCHERS FOR MISC. EXPENSES AND HENCE, THE CLAIMED MISC. EXP ENSES ARE NOT VERIFIABLE. HOWEVER, FIND THAT THE LD. AR HAS BEEN ABLE TO EXPLAIN SATISFACTORILY THE DISCREPANCY NOTED BY THE LD. AO RELATING TO THE DIFFERENCE OF RS.11,13,212/- IN THE FIGURE OF SALES OF JODHPUR BRANCH. IT IS ALSO NOTED THAT THE LD. AR WAS ALSO A BLE TO SATISFACTORILY EXPLAIN THE SALARY EXPENSES MADE IN THE JODHPUR BRANCH, AS COMPARED TO THE JAIPUR BRANCH. THEREFORE AFTER TAKING INTO ACCOUNT THE ENTIRE FACTS AND CIRCUMSTANCES OF THIS CASE, AS WELL AS CONSIDERING THE RELEVANT DETAILS / DOCUMENTS PLA CED ON RECORD. I FIND THAT IT WILL BE REASONABLE TO MAKE A LUMP SUM DISALLOWANCE OF RS. 5 LAC IN THE APPELLANTS CASE, TO COVER UP THE POSSIBILITY OF INFLATION IN THE CLAIMED COMMISSION/ DISCOUNT PAYM ENTS TO THE RETAILERS AND IN THE CLAIMED MISC. EXPENSES. ACCORD INGLY, THE ADDITION IS SUSTAINED TO THE EXTENT OF RS. 5 LAC, A GAINST THE ADDITION OF RS. 30,87,080/- MADE BY LD. AO CONSEQUENTLY, THI S GROUND OF APPEAL IS TREATED AS PARTLY ALLOWED. THESE FINDINGS OF LD. CIT (A) COULD NOT BE CONTROVE RTED BY LD. D/R AS HE HAS SIMPLY PLACED RELIANCE ON THE ORDER OF AO. HOWEVER, AS ST ATED ABOVE, THE ADHOC DISALLOWANCE SUSTAINED BY RS. 5,00,000/-, IN OUR VIEW IS NOT COR RECT. THEREFORE, KEEPING IN MIND ALL THE FACTS AND CIRCUMSTANCES, WE ARE OF THE VIEW THAT IF A TRADING ADDITION OF RS. 2.5 LACS IS SUSTAINED THAT WILL MEET THE ENDS OF JUSTICE. WE O RDER ACCORDINGLY. IN THIS WAY, THE GROUND OF THE DEPARTMENT IS REJECTED AND THE ONLY G ROUND TAKEN BY ASSESSEE IN ITS CROSS OBJECTION IS ALLOWED IN PART. 12. REGARDING DISALLOWANCE OF RS. 10,00,000/- DELET ED BY LD. CIT (A), THE FACTS NOTED BY LD. CIT (A) IN HIS ORDER IN PARA 4.1 ARE THAT AS SESSEE DERIVES INCOME FROM FRANCHISEESHIP OF BSNL FROM HIS THREE BRANCHES LOCA TED AT JAISALMER, SANGANER (JAIPUR) AND JODHAPUR . THE AO HAS ANALYZED THE COMPARATIVE GP AND NP RATES OF THE SAID THREE BRANCHES AS NOTED IN PARA 5.1 OF THE ASSESSMENT OR DER FROM THAT ANALYSIS, THE NOTED THAT THERE WAS LARGE DIFFERENCE BETWEEN THE GP RATE. NP RATE AND INDIRECT EXPENSES OF THOSE BRANCHES ON QUERY, THE ASSESSEE FILED THE REPLY VID E LETTER DATED 22.12.2009 WHICH HAS 9 BEEN REPRODUCED BY THE AO IN PARA 5.2 OF HIS ORDER FURTHER, THE AO COMPARED THE CASE OF THE ASSESSEE WITH THE CASE OF ANOTHER ASSESSEE I.E. M/S SUSHIL & COMPANY OF SIKAR, WHICH HAD DECLARED BETTER NP RATE OF 1.18% AS COMPA RED TO THE NP RATE OF 0.72% DECLARED BY THE ASSESSEE, AND SOUGHT ASSESSES EXPIA TION IN THAT REGARD. THE ASSESSEES REPLY HAS BEEN NOTED BY THE AO IN PARA 5.3 OF THE A SSESSMENT ORDER. HOWEVER , THE AO DID NOT ACCEPT THE AFOREMENTIONED REPLIES GIVEN BY THE ASSESSEE TO THE QUERIES RAISED AND THE AO MADE THE FOLLOWING OBSERVATIONS CONTAINED IN PARAS 5.4 AND 5.5 OF THE ASSESSMENT ORDER I ) THE ASSESSEE HAD SHOWN UNREASONABLY HIGH INDIR ECT EXPENSES IN RESPECT OF JODHPUR BRANCH AT RS.26,01,981/- AS COMPARED TO THE INDIRECT EXPENSES SHOWN AT RS. 10.47,943/- AND OF RS. 3,21,342/- FOR SANGANER AND JAISALMER BRANCHES RESPECTIVELY. II) THE NP/GP RATIO OF JODHPUR BRANCH WAS ALSO VERY LOW AT 30.6% AS COMPARED TO THE CORRESPONDING FIGURES OF 40.5% AND 45.4% FOR SA NGANER AND JAISELMER BRACHES RESPECTIVELY. III) THE OVERALL NP RATE OF 0.72% FOR ALL THE THREE BRANCHES WAS MUCH LOWER AS COMPARED TO THE NP RATE OF 1.18% SHOWN BY THE OTHER COMPARABLE ASSESSEE I.E. M/S SUSHIL & COMPANY OF SIKAR. IV) THE ASSESSEE HAS CLAIMED VERY HIGH EXPENSES ON SALARY AT RS. 8,78,625/- FOR JODHPUR BRANCH AS COMPARED TO THE SALARY EXPENDITUR E OF RS. 3,50,261/- FOR SANGANER BRANCH. V) IN SANGANER BRANCH SALES AMOUNTED TO RS. 10.43 C RORES AND IN JODHPUR BRANCH SALES AMOUNTED TO RS. 16.30 CRORES. HOWEVER, AS COM PARED TO THOSE SALES, THE EXPENDITURE ON SALARY IN JODHPUR WAS ALMOST 2.5 TIM ES OF THE SALARY EXPENDITURE IN SANGANER BRANCH. VI) THE OTHER EXPENSES SUCH AS ON ADVERTISEMENT, PR INTING & STATIONARY, SALES PROMOTION, SCHEME AND DISCOUNT, SHOP EXPENSES ETC. OF JODHPUR BRANCH WERE ALSO ABNORMALLY HIGH AS COMPARED TO THOSE EXPENSES IN OT HER BRANCHES. VII) THE ASSESSEE HAD INCURRED UNBELIEVABLY HIGH EX PENSES ON SALARY, AS AGAINST THE VERY LITTLE MAN POWER REQUIRED FOR ASSESSEES B USINESS. 10 VIII) THE SALES PROMOTION, PRINTING &STATIONARY, SA LARY, SCHEME& DISCOUNT , ADVERTISEMENT EXPENSES, IN THE CASE OF THE ASSESSEE WERE MUCH HIGHER, AS COMPARED TO THE CORRESPONDING EXPENSES IN THE COMPA RABLE CASE OF M/S SUSHIL & COMPANY. THEREFORE, THE AO OBSERVING THAT THE ASSESSEE HAD I NCURRED ABNORMAL INDIRECT EXPENSES IN JODHPUR BRANCH IN PARTICULAR AND IN ALL THE BRANCHE S IN GENERAL, DISALLOWED AN AMOUNT OF RS. 10 LAC, ON ESTIMATE BASIS, OUT OF THE CLAIMED I NDIRECT EXPENSES OF RS. 39,71,266/- DEBITED BY ASSESSEE IN THE AFORESAID THREE BRANCHES . 13. DETAILED SUBMISSIONS WERE FILED BEFORE LD. CIT (A). DETAILS OF EXPENDITURE INCURRED IN EARLIER YEAR AS WELL AS IN THIS YEAR WE RE ALSO FILED. THE DETAILED SUBMISSIONS FILED BEFORE LD. CIT (A) HAVE BEEN DISCUSSED IN PAR A 4.2 AT PAGES 15 TO 18 OF THE ORDER OF LD. CIT (A). THEREAFTER THE LD. CIT (A) FOUND THAT ADDITION MADE BY AO IS NOT CORRECT. ACCORDINGLY THE ADDITION WAS DELETED. FINDINGS OF LD. CIT (A) HAVE BEEN RECORDED IN PARA 4.3 AT PAGES 18 AND 19 ARE AS UNDER :- 4.3. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS OF LD. AR. HOWEVER, ON PERUSAL OF THE RELEVANT RECORDS , I FIND THAT THE LD. AO HAS MADE THE IMPUGNED DISALLOWANCE ON THE BASIS OF HIS GENERAL OBSERVATIONS. IN THIS REGARD, IT IS NOTED THAT THE LD. AO HAS MADE A COMPARATIVE ANALYSIS OF THE GP AND NP RATES AND THE NP / GP RATIO OF THE APPELLANTS THREE BRANCHES AT JODHPUR, JAIPUR AND J AISALMER AND FOUND VARIATIONS THEREIN. FURTHER, LD. AO HAS COMPARED TH E NP RATES AND SOME OF THE EXPENSES CLAIMED IN THE P&L A/C, AS DECLARED BY THE ASSESSEE AND M/S SUSHIL & COMPANY, SIKAR (COMPARABLE CASE) AND F OUND THAT THE ASSESSEE HAD DECLARED LOWER NP RATE AS COMPARED TO THE NP RATE DECLARED BY M/S SUSHIL & COMPANY AND ALSO THAT SOME OF THE E XPENSES CLAIMED IN THE P&L ACCOUNT BY THE ASSESSEE WERE COMPARATIVELY HIGHER THAN THE CORRESPONDING FIGURES OF THOSE EXPENSES SHOWN BY M/ S SUSHIL & 11 COMPANY. HOWEVER, IT IS OBSERVED THAT THE LD. AO HA S NOT MADE ANY ENQUIRY IN RESPECT OF ANY OF THE AFOREMENTIONED EXP ENSES CLAIMED BY THE ASSESSEE AND ALSO THAT LD. AO HAS NOT BROUGHT ANY M ATERIAL ON RECORD TO INDICATE THAT THE SAID EXPENSES CLAIMED WERE FALSE OR NOT GENUINE. IN THIS CONNECTION, IT IS ALSO NOTICED THAT THE APPELLANT H AD FURNISHED EXPLANATIONS REGARDING THE VARIATIONS IN THE GP & NP RATES OF TH E THREE BRANCHES, AS TO WHY THE SALARY EXPENSES OF JODHPUR BRANCH WERE HIGH ER THAN THAT OF JAIPUR BRANCH AND ALSO AS TO WHY THE ASSESSEES CASE WAS N OT COMPARABLE WITH THE CASE OF M/S SUSHIL & COMPANY. ON CAREFUL CONSID ERATION OF THOSE REPLIES, NOTED BY THE LD. AO ALSO IN THE ASSESSMENT ORDER, I FIND THAT THOSE EXPLANATIONS WERE PLAUSIBLE AND ACCEPTABLE. THEREFO RE, AFTER CONSIDERING THE ENTIRE FACTS AND CIRCUMSTANCES, I FIND THAT THE LD. AO WAS NOT JUSTIFIED IN MAKING THE DISALLOWANCE OF RS.10 LAC, OUT OF THE CLAIMED INDIRECT EXPENSES, WITHOUT FINDING ANY SPECIFIC DEFECTS IN A NY OF THOSE EXPENSES. HENCE, THE AO IS DIRECTED TO DELETE THE IMPUGNED DI SALLOWANCE. CONSEQUENTLY, THIS GROUND OF APPEAL IS ALLOWED. THE ABOVE FINDINGS OF LD. CIT (A) REMAINED UNCONTRO VERTED, THEREFORE, WE SEE NO REASON TO INTERFERE WITH THE FINDING OF LD. CIT (A). ACCO RDINGLY WE CONFIRM THE FINDING OF LD. CIT (A). 14. REGARDING THE DELETION OF DISALLOWANCE OF RS. 1 6,99,837/-, THE BRIEF FACTS OF THE CASE ARE THAT IN THE HEAD OFFICE AT SIKAR, ASSESSEE S BUSINESS IS ALMOST ENTIRELY THAT OF PURCHASE AND SALE OF ELECTRONIC AND ELECTRICAL GOOD S, WHEREAS IN THE BRANCHES, THE ASSESSEES BUSINESS IS EXCLUSIVELY OF BSNL FRANCHIS EESHIP. SEPARATE TRADING AND P&L ACCOUNT ARE CAST FOR ALL THOSE BUSINESSES, WITH CON SOLIDATED FIGURES MENTIONED AT THE END. THE ASSESSEE HAS CALCULATED NET PROFIT FROM EACH BU SINESS SEPARATELY AFTER DEBITING ALL EXPENSES RELATING TO EACH BUSINESS IN THE RESPECTIV E P&L ACCOUNT OF THAT BUSINESS. THE 12 AO OBSERVED THAT AS PER THE TRADING AND P&L ACCOUNT FOR THE BUSINESS OF ELECTRONICS AND ELECTRICALS AT SIKAR, THE ASSESSEE HAD SHOWN GROSS PROFIT OF RS. 6,43,074/- AGAINST THE GROSS SALES OF RS. 1,78,53,646/-. HOWEVER, AFTER DEDUCTIN G FURTHER INDIRECT EXPENSES OF RS. 22,50,919/-, THE ASSESSEE DECLARED A NET LOSS OF RS . 15,21,301/-. ON QUERY REGARDING THE SAID HUGE LOSS, THE ASSESSEE SUBMITTED THAT THE HEA D OFFICE AT SIKAR WAS AN ADMINISTRATIVE OFFICE OF ALL THE BUSINESS ENTITIES AND ALL THE BRA NCHES. IT WAS EXPLAINED THAT THUS, THERE WERE MANY EXPENSES WHICH COULD NOT BE SEPARATED, BU T A CHART WAS PREPARED TO CONSOLIDATE SUCH EXPENSES AS FAR AS IT WAS POSSIBLE . IT WAS SUBMITTED THAT FROM THE SAID CHART IT WAS CLEAR THAT THERE WAS ACTUALLY A NOMINA L PROFIT IN THE HEAD OFFICE AND, AS SUCH, THERE WAS NO LOSS IN THE HEAD OFFICE. IT WAS ALSO E XPLAINED THAT IN ELECTRONIC GOODS, SUCH AS, TV, FRIDGE, WISHING MACHINES, MOBILE HANDSETS E TC., THERE WAS GREAT COMPETITION IN THE MARKET AND THE MARGINS WERE VERY LOW. IT WAS AL SO POINTED OUT THAT DUE TO THAT FACT AND ON ACCOUNT OF LOSS, SOME OLD CONCERNS OF SIKAR DISCONTINUED THEIR BUSINESS, SUCH AS M/S KALPANA ELECTRONICS AND M/S K.B. ELECTRONICS, S TATION ROAD, SIKAR. HOWEVER, THE AC DID NOT FIRD THAT EXPLANATION ACCEPTABLE. THE AO , AS PER DISCUSSION CONTAINED IN PARAS 6.3 TO 6.5 OF THE ASSESSMENT ORDER, WAS OF THE VIEW THAT THE TRADING LOSS DECLARED BY THE ASSESSEE WAS NOT GENUINE. IN THIS REGARD, THE AC MA DE A COMPARATIVE ANALYSIS OF THE GP AND NP RATES DECLARED BY THE ASSESSEE FROM A.Y. 200 2-03 TO 2007-08, AND OBSERVED THAT TILL THE A.Y.2002-03, WHEN THE ASSESSEE HAD ONLY EL ECTRONICS/ELECTRICALS BUSINESS, THE ASSESSEE HAD DECLARED NORMAL GP & NP FROM THAT BUSI NESS. HOWEVER, THEREAFTER, WHEN THE ASSESSEE HAD COMMISSION RECEIPTS FROM BSNL FRAN CHISEESHIP, THE ELECTRONICS I ELECTRICALS BUSINESS STARTED RESULTING INTO REDUCED GP AND NET LOSS. THEREFORE, THE AO CAME TO THE CONCLUSION THAT THERE BEING WINDFALL TY PE OF PROFIT FROM BSNL FRANCHISEESHIP 13 COMMISSION, THE ASSESSEE HAD RESORTED TO ALL SORTS OF MEANS TO REDUCE HIS TAX LIABILITY AND THAT DECLARING LOSS FROM THE WELL ESTABLISHED BUSIN ESS OF ELECTRONICS / ELECTRICALS WAS ONE SUCH MEANS ADOPTED BY THE ASSESSEE. IN THIS RESPECT , THE AC ALSO NOTED THAT AS COMPARED TO THE LOSS OF RS. 15,21,301/- DECLARED BY THE ASSE SSEE FOR HIS ELECTRONICS /ELECTRICAL BUSINESS AT SIKAR, ANOTHER ASSESSEE OF SIKAR I.E. M /S SUSHIL SALES CORPORATION, WHICH WAS ALSO DEALING IN ELECTRONICS AND ELECTRICALS BUSINES S AT SIKAR, HAD DECLARED THE NET PROFIT OF RS. 3,87,278/- AGAINST THE GROSS SALES OF RS. 2,15, 79,594/- GIVING THE NP RATE OF 1.8% FOR THE A.Y. 2008-09. FURTHER, THE AO NOTED THAT THE AS SESSEE HAD CLAIMED MUCH HIGHER EXPENSES ON INTEREST AS COMPARED TO EARLIER YEARS, THE APPARENT REASONS FOR THAT COULD BE THAT THE ASSESSEE WAS CLAIMING INTEREST ON INTEREST AND ALSO FOR THE REASON THAT THE ASSESSEE WAS PAYING INTEREST TO THE RELATED PERSONS AT HIGHE R RATES. THE AC ALSO NOTED THAT AFTER COMPARING THE BOOK RESULTS OF THE ASSESSEE FOR A.Y. 2002-03 AND 2007-08, PARTICULARLY THE POSITION OF ASSESSEES OWN CAPITAL, THE CLOSING STOCK AND THE BUSINESS ASSETS, THERE APPEARED TO BE NO REASON FOR INCREASED EXPENDITURE ON INTEREST. HENCE, THE AO WAS OF THE VIEW THAT, UNDER THE SAID CIRCUMSTANCES, USE OF BOR ROWED CAPITAL AND ACCUMULATED INTEREST THEREON COULD NOT BE RULED OUT TO BE FOR PURPOSES O THER THAN THE BUSINESS OF THE ASSESSEE. THEREAFTER, THE AO ESTIMATED THE NET PROFIT, FROM A PPELLANTS ELECTRONICS AND ELECTRICALS BUSINESS, @ 1% OF THE GROSS SALES, AGAINST THE DECL ARED LOSS BY THE ASSESSEE, LEADING TO THE IMPUGNED ADDITION OF RS. 16,99,837/-, AS PER THE FO LLOWING CONCLUSION, GIVEN AT THE END OF PARA 6.5 OF HIS ORDER:- THUS, AFTER CONSIDERING THE ENTIRE FACTS OF THE CA SE, INCLUDING NET PROFIT DECLARED BY ASSESSEE FOR A.Y.2002-03, WHEN ASSESSEE WAS DOING ONLY ELECTRONICS / ELECTRICAL BUSINESS, NET PROFIT OF M/ S SUSHIL SALES CORPORATION FOR A.Y.2008-09 (ASSESSMENT RECORDS FOR A.Y.2007-08 BEING NOT TRACEABLE, RESULTS OF A.Y.2008-09 ARE CONSIDERED), NET PROFIT FROM 14 ELECTRONICS/ELECTRICAL BUSINESS IS ESTIMATED @ 1% O F THE GROSS SALES OF RS.1,78,53,646/- WHICH COMES TO RS. 1,78,536/- AS A GAINST DECLARED LOSS OF RS.15,21,301/-. THIS RESULTS IN ADDITION OF RS.16,9 9,837/-. 15. DETAILED WRITTEN SUBMISSIONS WERE FILED BEFORE LD. CIT (A) WHICH HAS BEEN TABULATED IN PARA 5.2 AT PAGES 21 TO 24 OF HIS ORDE R AND AFTER CONSIDERING THE SUBMISSIONS, THE LD. CIT (A) ALLOWED THIS ISSUE IN FAVOUR OF THE ASSESSEE GIVING HIS FINDING IN PARA 5.3 AT PAGES 24 AND 25 WHICH ARE AS UNDER :- 5.3. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS OF LD. AR. HOWEVER, ON PERUSAL OF THE RELEVANT MATERIA L AVAILABLE ON RECORDS, I FIND THAT THE LD. AO HAS MADE THE IMPUGNED ADDITI ON MERELY ON THE GROUND THAT THE GP RATE AND NP RATES WERE DECREASIN G IN THE APPELLANTS BUSINESS OF ELECTRONICS AND ELECTRICALS AT SIKAR, F ROM A.Y. 2003-04 TO A.Y. 2007-08 AND FURTHER ON THE BASIS OF THE SUSPICION T HAT, THEREFORE, THE ASSESSEE WAS DECLARING LOSS FROM HIS WELL ESTABLISH ED BUSINESS OF ELECTRONICS I ELECTRICALS, TO SET OFF THAT LOSS AGA INST THE WINDFALL TYPE OF PROFIT FROM BSNL FRANCHISEESHIP COMMISSION, WITH A VIEW TO REDUCE HIS TAX LIABILITY. IN THIS REGARD, THE AC HAS ALSO COMP ARED THE NP RATE OF 1.8% DECLARED BY M/S SUSHIL SALES CORPORATION OF SIKAR ( COMPARABLE CASE), AS AGAINST THE LOSS OF RS.15,21,3011- DECLARED BY THE ASSESSEE. HOWEVER, I FIND THAT LD. AO HAS NEITHER POINTED OUT BOOKS OF A CCOUNT MAINTAINED BY THE ASSESSEE, IN RESPECT OF HIS ELECTRONICS/ELECTRI CALS BUSINESS AT SIKAR, NOR BROUGHT ANY MATERIAL/EVIDENCE ON RECORD INDICATING THAT ANY PURCHASES / EXPENSES SHOWN BY THE ASSESSEE, FOR HIS SIKAR BUSIN ESS, WERE EITHER FALSE OR NOT GENUINE. FURTHER, IT IS OBSERVED THAT THE NA TURE OF ASSESSEES TOTAL BUSINESS, WHICH INCLUDED THE BUSINESS OF BSNL FRANC HISEESHIP, SPREAD OVER AT OTHER PLACES I.E. JODHPUR, JAIPUR AND JAISA LMER, BEING OTHER THAN SIKAR, INVOLVING SOME COMMON EXPENSES RELATING HEAD OFFICE AND THREE BRANCHES, WAS NOT COMPARABLE WITH THE CASE OF M/S S USHIL SALES CORPORATION, SIKAR, WHICH HAD ONLY ELECTRONICS/ELEC TRICALS BUSINESS AT 15 SIKAR. THEREFORE, ON THESE FACTS, IT IS HELD THAT T HE LD. AO WAS NOT JUSTIFIED IN MAKING THE IMPUGNED ADDITION OF RS.16,99,837/-, MERELY ON THE BASIS OF SUSPICION/DOUBT AND WITHOUT BRINGING ANY SPECIFIC A DVERSE MATERIAL/EVIDENCE ON RECORD RELATING TO ASSESSEES ELECTRONICS/ELECTRICALS BUSINESS AT SIKAR, ACCORDINGLY, THE AO IS DIRECTED TO DELETE THE IMPUGNED ADDITION. CONSEQUENTLY, THIS GROUND OF APPEAL IS AL LOWED. AGAIN THESE FINDINGS REMAINED UNCONTROVERTED AS THE LD. D/R HAS SIMPLY PLACED ON THE ORDER OF AO AND ON THE OTHER HAND THE LD. COUNSEL O F THE ASSESSEE PLACED RELIANCE ON THE ORDER OF LD. CIT (A). THEREFORE, WE SEE NO REASON TO INTERFERE WITH THE FINDINGS OF LD. CIT (A). ACCORDINGLY THE SAME ARE CONFIRMED. 16. REGARDING DELETION OF DISALLOWANCE OF RS. 98,02 ,544/- (RS. 91,83,554 + 6,18,990/-), THE LD. CIT (A) HAS DISCUSSED THIS ISS UE AT PAGES 25 TO 35. THE LD. CIT (A) HAS DISCUSSED FIRSTLY THE DISALLOWANCE OF RS. 91,83 ,554/- AND THEREAFTER THE DISALLOWANCE OF RS. 6,18,990/-. 17. REGARDING DELETION OF DISALLOWANCE OF RS. 91,83 ,554/-, THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE IS A FRANCHISEE OF BSNL AND IS DO ING THE MARKETING AND DISTRIBUTION OF BSNLS TELECOM SERVICES, WHICH IS DONE UNDER AN AGR EEMENT WITH BSNL. THE AGREEMENT PROVIDED FOR A FIXED PERCENTAGE OF COMMIS SION TO THE ASSESSEE FRANCHISEE AND AS PER THE TDS CERTIFICATE IN FORM NO.16A, THE BSNL HAD PAID COMMISSION TO THE ASSESSEE AND HAD DEDUCTED TAX AT SOURCE THEREON @ 5 .61% OF THE PAYMENT. FURTHER, AS PER THE SAID AGREEMENT, THE ASSESSEE FRANCHISEE WAS TO PASS ON A PART OF THAT COMMISSION TO THE RETAILERS, IN THIS REGARD, THE AO OBSERVED THAT THE ASSESSEE DID NOT ACCOUNT FOR THE AFORESAID COMMISSION FROM BSNL, AS COMMISSION RECEI PTS, BUT DEDUCTED THE ENTIRE AMOUNT OF COMMISSION FROM THE PURCHASES AND, ACCORD INGLY, THE ASSESSEE DECLARED THE NET 16 PURCHASES AFTER DEDUCTING THE BSNL COMMISSION RECEI VED OF RS.1,83,67,798/- THE AO ALSO OBSERVED THAT THE ASSESSEE PASSED ON A FIXED P ART OF THAT COMMISSION RECEIVED BY HIM TO HIS RETAILERS, BUT AGAIN, THE ASSESSEE DID NOT A CCOUNT FOR THE PAID COMMISSION (TO THE RETAILERS) SEPARATELY AND, INSTEAD, ACCOUNTED THE S ALES (TO THE RETAILERS) AT REDUCED RATES, WITHOUT SPECIFICALLY, MENTIONING THE COMMISSION AMO UNT IN EACH SALES VOUCHER. THEREFORE, THE AO REQUIRED THE ASSESSEE TO FILE PAY EE-WISE DETAILS OF COMMISSION PAID TO THE RETAILERS. HOWEVER, THE ASSESSEE; VIDE LETTER D ATED 14/12/2009, STATED THAT HIS TRADE PRACTICE WAS TO SELL THE GOODS BELOW NET RATES AND, THEREFORE, HE HAD NOT PAID ANY COMMISSION OR DISCOUNT ON BSNL COUPON PRODUCT TO T HE RETAILERS AND ALSO THAT, HENCE, NO TDS WAS DEDUCTED. THE ASSESSEE ALSO DID NOT FILE TH E REQUIRED DETAILS, ON THE PLEA THAT THE ASSESSEE HAD NOT ALLOWED OR PAID ANY COMMISSION OR DISCOUNT AND HENCE, PROVISIONS OF TDS WERE NOT APPLICABLE. HOWEVER, THE AO WAS OF THE VIEW, AS PER THE FOLLOWING DISCUSSION CONTAINED IN PARA 7.2 OF THE ASSESSMENT ORDER, THAT THE ASSESSEE WAS LIABLE TO DEDUCT TAX AT SOURCE U/S 194H OF THE ACT ON THE COM MISSION OR BROKERAGE ALLOWED BY HIM TO THE RETAILERS: 7.2. THE EXPLANATION FILED BY THE ASSESSEE IS CONS IDERED. THE PRICE OF THE BSNL PRODUCTS (RECHARGE COUPONS ETC.) IS FIXED BY T HE BSNL AND THE PRICE SO DETERMINED BY BSNL IS ULTIMATELY BORNE BY CONSUMER, THE END USER. THE FRANCHISEE AND THE RETAILERS ARE ONLY THE INTERMEDIARIES BETWEEN THE TWO, PROVIDING THEIR SERVICES OF FACILITATING T HE END USER TO AVAIL THE BSNLS TELECOMMUNICATION FACILITIES, IN LIEU OF WHI CH THEY GEL A FIXED PERCENTAGE OF PRICE AS THEIR CONSIDERATION. THE CON SIDERATION RECEIVED BY THEM AT A FIXED RATE OF THE PRICE OF PRODUCT QUALIF IES BY ANY MEANS TO BE A COMMISSION OR BROKERAGE AS MENTIONED IN S. 194-H OF THE ACT. IN FACT, THE FRANCHISEE AND THE RETAILERS ARE NOT SELLING OR PUR CHASING ANY GOODS, THEY ARE SIMPLY FACILITATING THE END CUSTOMER TO AVAIL / USE THE SERVICES PROVIDED BY BSNL. THE NATURE OF COMMISSION RECEIVED DIRECTLY OR IN DIRECTLY BY THE FRANCHISEE AND THE RETAILER IS SIMILAR, BEING PARTS OF THE SAME CAKE. THE BSNL HAS TREATED THE CONSIDERATION, AS COMMISSION A ND DEDUCTED TAX AT SOURCE BUT THE ASSESSEE FRANCHISEE HAS NOT DONE SO. THE ASSESSEE WAS THUS 17 LIABLE TO DEDUCT TAX AT SOURCE U/S 194H OF THE ACT ON THE COMMISSION OR BROKERAGE ALLOWED BY IT TO RETAILERS. 18. IN SUPPORT OF THE ABOVE OBSERVATION, LD. AO REL IED ON THE CASE OF AROUND THE WORLD TRAVELS AND TOURS (P) LTD. V/S UOL (2004), 14 1 TAXMAN 53 (MADRAS). FURTHER, THE AO NOTED THAT IN THE CASE OF THE ASSESSEE, THE PRIC E OF EACH COUPON CARD FOR THE END USER WAS FIXED BY THE BSNL AND THE INTERMEDIARIES I.E. T HE FRANCHISEE (ASSESSEE) AND THE RETAILERS (CUSTOMERS OF THE ASSESSEE) GOT THEIR PAR T OF THE SHARE IN THE COMMISSION FIXED BY THE BSNL AS PER THE AGREEMENT WITH THE FRANCHISEE. IT WAS ALSO NOTED THAT IN THE PRESENT CASE, THE BSNL ALLOWED 5% COMMISSION TO THE FRANCHI SEE ASSESSEE, WHO IN TURN ALLOWED 3% COMMISSION TO THE RETAILERS AND THEREFORE, THE M ARGIN OF PROFIT IN THE HANDS OF ASSESSEE AND THE RETAILERS WAS NOT PROFIT IN THE CU STOMARY USUAL SENSE, BUT WAS OF THE NATURE OF COMMISSION OR BROKERAGE IN TERMS OF THE P ROVISIONS OF S.194-H OF THE ACT. THEREFORE, IN THE ABSENCE OF THE DETAILS OF THE COM MISSION OR DISCOUNT, EXCEEDING RS. 2,500/-, PAID TO THE RETAILERS BY THE ASSESSEE, THE AO HELD THAT THE ENTIRE SUCH COMMISSION/BROKERAGE OF RS. 1,22,70,634/- PAID BY T HE ASSESSEE TO THE RETAILERS WAS NOT ALLOWABLE IN TERMS OF THE PROVISIONS OF S. 40(A)(IA ) OF THE I.T. ACT. HOWEVER, TAKING NOTE OF THE FACT THAT THE AO HAD ALREADY DISALLOWED AN A MOUNT OF RS. 30,87,080/-, TREATING THE SAID AMOUNT OF COMMISSION/ BROKERAGE AS NOT GENUINE (AS PER PARA 4.4 OF THE ASSESSMENT ORDER), THE AO RESTRICTED THE DISALLOWANCE U/S 40(A )(I) OF THE I.T. ACT TO RS. 91,83,554/- (RS.1,22,70,634 RS. 30,87,080/-), WHICH IS IN DIS PUTE IN THIS GROUND OF APPEAL. 19. DETAILED SUBMISSIONS WERE FILED BEFORE THE LD. CIT (A) WHICH HAS BEEN TABULATED IN THE ORDER OF LD. CIT (A) IN PARA 6.2 AT PAGES 27 TO32. THE EXPLANATION SUBMITTED BY LD. 18 A/R IS DETAILED ONE AND EXPLANATORY. THEREFORE, IT WILL BE USEFUL TO REPRODUCE HERE ALSO WHICH ARE AS UNDER :- THE LEARNED AO HAS ERRED IN MAKING ADDITION OF RS. 91,83,554/- IN THE INCOME OF THE ASSESSEE UNDER SECTION 40(A)(IA) OF I NCOME TAX ACT ALLEGING THAT THE ASSESSEE WAS DEFAULTER OF NOT MAKING TDS ON PAYMENT OF COMMISSION TO RETAILERS UNDER SECTION 194H OF INCOME TAX ACT. IN THIS REGARD THE FOLLOWING IS SUBMITTED: 1. THE LEARNED AO HAS MADE THIS ADDITION ON HIS UNDERS TANDING OF THE FACT THAT THE ASSESSEE WAS ACTING AS AGENT OF BSNL AS HE WAS IN RECEIPT OF COMMISSION FROM THE SAME. SIMILARLY, THE RETAILE RS WERE THE AGENTS OF THE ASSESSEE AND THE ASSESSEE HAD PASSED ON CERT AIN PERCENTAGE OF COMMISSION RECEIVED FROM BSNL TO THEM. SINCE BSNL H AS MADE DEDUCTION OF TAX ON PAYMENT OF COMMISSION/DISCOUNT MADE TO THE ASSESSEE, THE ASSESSEE WAS ALSO LIABLE TO MAKE TDS ON COMMISSION/DISCOUNT PASSED ON TO THE RETAILERS. 2. IN THIS REGARD IT IS SUBMITTED THAT NEITHER THE ASS ESSEE WAS THE AGENT OF BSNL NOR THE RETAILERS WERE THE AGENTS OF THE ASSES SEE. ALL THE THREE PARTIES WERE DOING BUSINESS INDEPENDENTLY ON PRINCI PAL TO PRINCIPAL BASIS. 3. IN THE SUBSEQUENT PARAGRAPHS OF THESE SUBMISSIONS, THE RELATIONSHIP BET WEEP THE BSNL, ASSESSEE AND THE RETAILERS IS DISCUS SED IN DETAIL. RELATION BETWEEN BSNL AND THE ASSESSEE (FRANCHISEE) 1. THE ASSESSEE WAS AN INDEPENDENT BUSINESSMAN IN H IS OWN RIGHT AND NOT ACTING AS AGENT OF BSNL. 2. THE ASSESSEE PURCHASED SIM CARDS AND RECHARGE CO UPONS FROM BSNL AGAINST FULL PAYMENT OF THE PRICE OF THE SAME TO BS NL. THE SIM CARDS AND RECHARGE COUPONS BECOME PROPERTY OF THE ASSESSEE. . AFTER THEIR PURCHASE, IT IS IRRELEVANT WHETHER THE SAME IS SOLD TO THE CU STOMER OR RETAINED BY THE ASSESSEE US OR IT IS LOST OR DESTROYED. FURTHER, TH E SIM CARDS AND RECHARGE COUPONS SO PURCHASED BY THE ASSESSEE WERE SOLD TO C USTOMERS AND THE ASSESSEE RECEIVED FULL CONSIDERATION FROM CUSTOMERS . IN OTHER WORDS, THE ASSESSEE WAS IN FACT ENGAGED IN PURCHASE AND SALE O F S/RN CARDS AND RECHARGE COUPONS. PHOTOCOPY OF SAMPLE PURCHASE BILL UNDER WHICH, S/RN CARDS AND RECHARGE COUPONS WERE PURCHASED FROM BSNL IS ENCLOSED HEREWITH. -LIKEWISE, SAMPLE PHOTOCOPY OF OUR SALE I NVOICE, UNDER WHICH, 19 SIM CARDS AND RECHARGE COUPONS WERE SOLD BY ASSESSE E IS ALSO ENCLOSED HEREWITH. 3. UNDER AGENCY AGREEMENT, AGENTS SIMPLY PROVIDE SE RVICES ON BEHALF OF THEIR PRINCIPALS AND RECEIVE COMMISSIONS FOR SUCH S ERVICES. GOODS ARE SOLD OR SERVICES ARE PROVIDED DIRECTLY TO THE CUSTOMERS AND AGENTS RECEIVE COMMISSION FOR BOOKING ORDERS. THEY NEITHER PURCHAS E NOR SALE GOODS IN THEIR NAMES. THE PROPERTY IN GOODS PASSES DIRECTLY IN FAVOUR OF THE CUSTOMERS FROM THE PRINCIPALS. IN THIS CASE, THE AS SESSEES OWN CAPITAL AND FUNDS WERE INVOLVED IN DOING THE BUSINESS. HE WAS H IS OWN MASTER AS FAR AS HIS BUSINESS WAS CONCERNED. THEREFORE, THE DISCO UNT GIVEN OUT OF SALE VALUE CANNOT BE CALLED COMMISSION. THE ASSESSEE WAS ACTUAL BUYER AND SELLER OF GOODS. 4. IT IS FURTHER EMPHASIZED THAT IT IS THE NATURE O F TRANSACTION WHICH IS DETERMINATIVE FACTOR AND NOT THE NOMENCLATURE. SINC E, IN THE PRESENT CASE, THE ASSESSEE PURCHASED THE GOODS FROM THE BSNL, THE REFORE, DISCOUNT GIVEN BY THEM UNDER THE NOMENCLATURE OF COMMISSION WILL NOT MAKE THE ASSESSEE AN AGENT OF BSNL. IN SUPPORT OF THE ABOVE, WE ARE ALSO ENCLOSING HERE WITH THE COPIES OF AGREEMENT ENTERED INTO BETWEEN THE ASSESSEE AND BSN L DATED 21/03/2005 (WHICH WAS OPERATIVE IN THE PERIOD 01/04/2006 TO 12 /11/2006) AND AGREEMENT DATED 13/11/2006 (WHICH WAS OPERATIVE FOR THE PERIOD 13/11/2006 TO 31/03/2007). READING OF VARIOUS CLAUSES OF THIS AGREEMENT FURTHE R CLEARS THAT THE ASSESSEE WAS MAKING DIRECT PURCHASE OF GOODS FROM B SNL AND AMOUNT OF DISCOUNT WAS PASSED ON TO HIM FROM BSNL IN THE NOME NCLATURE OF COMMISSION. IN THESE AGREEMENTS, THE ASSESSEE HAS B EEN REFERRED TO AS FRANCHISEE WHICH MEANS HE WAS NOT AN AGENT OF BSNL. A FRANCHISEE IS BUSINESSMAN IN HIS OWN RIGHT. THE SALE OF GOODS BY BSNL TO ASSESSEE WAS ON PRINCIPAL TO PRINCIPAL BASIS. WE ARE ALSO DISCUSSING THE VARIOUS CLAUSES OF THE A GREEMENTS TO KNOW AS TO WHAT WAS THE RELATIONSHIP BETWEEN BSNL AND THE ASSE SSEE: CLAUSE 8.1: - AS PER THIS CLAUSE BSNL GRANTED THE RIGHT TO FRANC HISEE FOR SALE AND DISTRIBUTION OF THE PRODUCT. THEREFORE THE ASSESSEE WAS PURCHASING GOODS FROM BSNL AND SELLING THEM TO RETAILERS. HAD THE ASSESSEE BEEN ACTING AS MERE AGENT OF BSNL, HE WOULD HAVE ACCOUNT ED FOR ONLY NET COMMISSION INCOME AND NOT FOR PURCHASE AND SALES. S INCE THE ASSESSEE HAS RECORDED COMPLETE PURCHASE AND SALES IN HIS BOOKS O F ACCOUNTS IT IS CLEAR THAT HE WAS NOT ACTING AS AGENT OF BSNL. 20 CLAUSE 9.1: - OF THE AGREEMENT THE ASSESSEE (FRANCHISEE) WAS REQ UIRED TO MAINTAIN SUITABLE ORGANIZATION FOR SALE AND DISTRIB UTION OF PRODUCTS AND SERVICES IN HIS TERRITORY. HAD THE ASSESSEE BEEN AC TING AS AGENT OF BSNL THIS WOULD HAVE BEEN DONE BY BSNL. AS PER THIS CLAUSE THE ASSESSEE COULD RECEIVE GOODS FROM BSNL ONLY AGAINST PAYMENT BY CHEQUE/PAY ORDER/CASH. HAD THE A SSESSEE BEEN AGENT OF BSNL HE WOULD NOT HAVE BEEN REQUIRED TO MAKE PRIOR PAYMENT BEFORE COLLECTION OF GOODS FROM BSNL. CLAUSE NO. 22 OF THE OLD AGREEMENT AND 9.16.3 OF THE NEW AGREEMENT: THIS MEANS THAT THE ASSESSEE WAS FULLY RESPONSIBLE FOR LOSS, PILFERAGE OR DAMAGES TO THE GOODS SOLD TO HIM, WHICH MEANS THAT OWNERSHIP OF GOODS WAS PASSED ON TO THE ASSESSEE AT THE TIME OF PURCHA SE ITSELF AND BSNL WAS NO LONGER OWNER OF THE GOODS WHEN SOLD TO THE ASSES SEE. CLAUSE 24: - THIS CLAUSE, WHICH IS THE MOST IMPORTANT ALSO, THE INDEPENDENT STATUS OF THE FRANCHISEE HAS BEEN A CCEPTED. IN CLAUSE 24.1 IT IS SPECIFICALLY MENTIONED THAT THE FRANCHISEE WI LL PROVIDES SERVICES AS AN INDEPENDENT ENTITY AND NOTHING CONTAINED IN THE A GREEMENT SHALL BE DEEMED TO CREATE ANY PARTNERSHIP, JOINT VENTURE, EM PLOYMENT OR RELATIONSHIP OF PRINCIPAL AND AGENT BETWEEN THE PAR TIES TO THE DEED. ABOVE TERMS OF THE AGREEMENT FULLY ESTABLISH THE FA CT THAT THERE WAS NO RELATIONSHIP OF PRINCIPAL AND AGENT BETWEEN BSNL AN D THE ASSESSEE. 5. THE ASSESSEE WAS GETTING DISCOUNT ON ITS PURCHA SES OF CASH CARD AND SIM CARDS FROM BSNL UNDER THE NOMENCLATURE OF COMMISSIO N. THE BSNL WAS DEDUCTION TAX ON THIS PAYMENT U/S 194H AND THE ASSE SSEE WAS CLAIMING THE SAME IN HIS RETURN OF INCOME. BUT THERE WAS NO RELA TIONSHIP OF PRINCIPAL AND AGENT BETWEEN THE ASSESSEE AND BSNL. THEREFORE THE ASSESSEE HAD REDUCED THE AMOUNT OF COMMISSION RECEIVED FROM BSNL FROM PURCHASES OF THE ASSESSEE. KINDLY SEE THE COPY OF PROFIT AND LOSS ACCOUNT OF THE ASSESSEE WHERE THE COMMISSION RECEIVED FROM BSNL RS . 1,83,67,798/- HAS BEEN REDUCED FROM THE FIGURE OF PURCHASES FOR THE Y EAR. THIS FACT WAS ACKNOWLEDGED BY THE LEARNED AO AND HE HAS REPORTED THIS FACT IN THE ASSESSMENT ORDER PARA 7.1. 6. SINCE BSNL WAS MAKING PAYMENT TO THE ASSESSEE UN DER THE NOMENCLATURE OF COMMISSION AND WAS MAKING TDS THEREON, THERE W AS NO OPTION LEFT WITH THE ASSESSEE TO ACCOUNT FOR THE SAME UNDER THE SAME HEAD OF ACCOUNT, SO THAT THE BOOKS OF BSNL AND ASSESSEE COULD TALLY. HOWEVER, THIS FACT ALONE IS NOT SUFFICIENT TO PROVE THAT THE ASSESSEE WAS AN AGENT OF BSNL. 7. IT IS FURTHER SUBMITTED THAT W.E.F. 31/5/2008, BSNL HAS ITSELF CHANGED THE NOMENCLATURE OF THIS PAYMENT FROM COMMISSION TO D ISCOUNT AND HAS ALSO 21 STOPPED DEDUCTION OF TDS ON THIS PAYMENT. WE ARE EN CLOSING HEREWITH A LETTER DATED 01/10/2009 RECEIVED FROM BSNL STATING THAT THIS OFFICE IS GIVING DISCOUNT (NAMED AS COMMISSION UPTO 31/05/200 8, THEREAFTER THE NOMENCLATURE HAS CHANGED FROM COMMISSION TO DISCOUN T BY ENTERING INTO AN AGREEMENT ON PRINCIPAL TO, PRINCIPAL BASIS TO CL ARIFY THE NATURE OF TRANSACTION) OUT OF PURCHASE PRICE. AFTER PURCHASE THE GOODS BECOME PROPERTY OF THE FRANCHISEE AND THAT THEY CAN DEAL W ITH THE SAME IN ANY WAY THEY LIKE. FROM THE ABOVE LETTER IT IS CLEAR THAT BSNL WAS ALW AYS GIVING DISCOUNT WHICH WAS NAMED AS COMMISSION UPTO 31/03/2008 AND T HAT THIS LETTER DATED 01/10/2009 WAS ONLY CLARIFICATORY IN NATURE T O DEFINE THE NATURE OF PAYMENTS MADE BY BSNL IN PERIOD EARLIER TO 31/05/20 08 ALSO. 8. WE ARE ALSO ENCLOSING HEREWITH A COPY OF ORDER OF CUSTOMS, EXCISE AND SERVICE TAX APPELLATE TRIBUNAL IN THE CASE OF SOME OTHER FRANCHISEE OF BSNL NAMELY M/S CHETAN TRADERS IN WHICH HONBLE ITA T HAS HELD THAT THE FRANCHISEE WAS NOT CARRYING ANY ACTIVITY OF BUS INESS AUXILIARY SERVICE, THEY PURCHASED BSAIL PRODUCTS AND SOLD THE SAME IN THE MARKET. THEY ONLY RECEIVED CERTAIN AMOUNT OF PROFIT WHICH IS ULT IMATELY A BUSINESS PRACTICE. THERE IS NO SERVICE CARRIED OUT BY THE AP PELLANTS BUT ACTUALLY THEY HAVE DONE THE ACTIVITY OF PURCHASE AND SALE. 9. IN THE FOLLOWING DECISIONS, IT HAS BEEN HELD TH AT DISCOUNT ALLOWED TO MARKET ASSOCIATES BY CELLULAR COMPANY CANNOT BE TRE ATED AS BROKERAGE OR COMMISSION AND THAT RELATIONSHIP OF PRINCIPAL AND A GENT IS MUST FOR FALLING IN THE NET OF SEC.194H.) 1) IDEA CELLULAR LTD. V/S DCIT 2009 121 TTJ (DEL) 3 52 ITAT DELHI A BENCH TDS - UNDER SECTION 194H- DISCOUNT TO MARKET ASSOC IATES ON SIM CARDS AND RECHARGE COUPONS-DISCOUNT ALLOWED ON TRANSACTIO NS RESULTING IN OUTRIGHT PURCHASES CANNOT BE TREATED AS BROKERAGES OR COMMISSION- THERE SHOULD BE IN EXISTENCE THE RELATIONSHIP OF PRINCIPA L AND AGENT IN ORDER TO BRING THE DISCOUNT IN THE AMBIT OF COMMISSION OR BR OKERAGE. 2) ASSTT. COMMISSIONER OF INCOME TAX V/S IDEA CELLU LAR LIMITED FEB. 26, 2009 (HYD-TRIB) CA JOURNAL DEC 2009 PAGE 896 IN CELLULAR TELEPHONE SERVICE PROVIDER ALLOWS SOME MARGIN TO DISTRIBUTORS IN FORM OF DISCOUNT/COMMISSION ON MARKET - PRICE OF PREPAID CELLULAR CONNECTION AND RECHARGE COUPONS, SUCH MARGIN CAN NO T BE TERMED AS COMMISSION ATTRACTING DEDUCTION OF TAX AT SOURCE UNDER SECTION 194H. 22 ABOVE TWO DECISIONS FULLY DEFINE THE RELATIONSHIP B ETWEEN CELLULAR COMPANY (BSNL) AND FRANCHISEE (ASSESSEE IN THIS CAS E). AS PER ABOVE DECISIONS THERE EXISTED NO RELATIONSHIP OF PRINCIPA L AND AGENT BETWEEN THESE TWO PARTIES. 3) AHMEDABAD STAMP VENDORS ASSOCIATION VS. UNION OF INDIA 176 CTR (GUJ) 193 TDS - UNDER S. 194H - DISCOUNT ALLOWED TO LICENSED STAMP VENDORS - DOES NOT FALL WITHIN THE EXPRESSION COMMISSION OR BROKERAGE UNDER S. 194H - STAMP VENDORS ARE REQUIRED TO PURCHASE THE S TAMP PAPERS FROM GOVERNMENT ON PAYMENT OF PRICE LESS DISCOUNT ON PRI NCIPAL TO PRINCIPAL BASIS AND THERE IS NO CONTRACT OF AGENCY AT ANY POI NT OF TIME - LIABILITY OF THE STAMP VENDOR TO PAY THE PRICE LESS DISCOUNT IS NOT DEPENDENT OR CONTINGENT UPON SALE OF STAMP PAPER BY THE VENDOR - STRINGENCY OF THE RESTRICTIONS CLAIMED IN THE GUJARAT STAMPS SUPPLY & SALES RULES IS NOT ACCOUNT OF THE FACT THAT THE OWNERSHIP OVER THE STA MP PAPERS IS NOT TRANSFERRED TO THE LICENSED VENDORS ON DELIVERY BUT IT IS ON ACCOUNT OF THE SENSITIVE NATURE OF THE STAMP PAPERS 4) AHMEDABAD STAMP VENDORS ASSOCIATION VS. UNION OF INDIA 257 ITR 202 (GUJ) DEDUCTION OF TAX AT SOURCE - COMMISSION OF BROKERAG E - MEANING OF COMMISSION OF BROKERAGE - ELEMENT OF AGENCY ESSENTI AL- DIFFERENCE BETWEEN AGENCY AND SALE - STAMP VENDORS - PURCHASE OF STAMP PAPERS AT DISCOUNT - RESTRICTION ON SALE AND PROVISION IN GUJ ARAT STAMPS SUPPLY AND SALES RULES, 1987, FOR SURRENDER OF STAMP PAPERS TO GOVERNMENT - PROVISION WOULD NOT RENDER STAMP VENDORS AGENTS - T RANSACTION AMOUNT TO SALE-DISCOUNT ON SALE OF STAMP PAPER DOES NOT AT TRACT SECTION 194H - INCOME TAX ACT, 1961, S. 194H THE LEARNED AO HAS RELIED UPON THE DECISION IN THE CASE OF AROUND THE WORLD TRAVELS & TOURS PVT. LTD. VS. UOI 141 TAXMAN 53 (MAD). THIS JUDGMENT WAS IN A DIFFERENT CONTEXT AND WAS ON VACA TION OF INTERIM INJECTION OBTAINED BY THE APPELLANT AGAINST RECOVER Y PROCEEDINGS INITIATED BY THE DEPTT. THEREFORE, IT IS NOT APPLICABLE IN TH IS CASE. THEREFORE, THE JUDGMENTS REFERRED ABOVE IN FAVOUR OF THE ASSESSEE WILL PREVAIL OVER THIS JUDGMENT. RELATIONSHIP BETWEEN ASSESSEE (FRANCHISEE) AND THE RETAILERS: 1. THE ASSESSEE WAS SELLING GOODS TO THE RETAILERS ON PRINCIPAL TO PRINCIPAL BASIS. THERE WAS NO ORAL OR WRITTEN AGREE MENT BETWEEN THE ASSESSEE AND RETAILER FOR SALE OF GOODS OF THE ASSE SSEE. THERE DID NOT EXIST ANY RELATIONSHIP OF PRINCIPAL AND AGENTS BETWEEN TH E ASSESSEE AND THE 23 RETAILERS WHICH IS SINE QUO NON FOR ESTABLISHING TH AT THE PAYMENT REQUIRED TDS U/S 194 H OF THE ACT. 2. BOTH THE ASSESSEE (FRANCHISEE) AND RETAILER ARE I NDEPENDENT BUSINESSMAN AND WERE LOOKING AFTER THEIR BUSINESSES WITHOUT ENTERING INTO ANY RELATIONSHIP OF PRINCIPAL AND AGENTS. THE ASSES SEE HAD NO CONTROL OVER POLICIES AND DECISION MAKING OF THE BUSINESS OF RET AILERS. THE ASSESSEE ALSO HAD NO CONTROL OVER PRICE CHARGED BY RETAILERS ON S ALE OF BSNL PRODUCTS. 3. THE ASSESSEE WAS MAKING SALES OF CASH CARD AND SI M CARDS TO RETAILERS AT A PRICE WHICH WAS NET OF DISCOUNTS. NO WHERE IN THE DOCUMENTATION VIZ THE SALE BILL ETC. ISSUED BY THE ASSESSEE TO THE RETAILERS, THE WORD COMMISSION HAS BEEN MENTIONED. NO COMMISSI ON WAS PAID BY THE ASSESSEE TO THE RETAILERS. THE ASSESSEE DID NOT ACCOUNT FOR DISCOUNT PAID TO R ETAILERS SEPARATELY BUT THE SAME HAS BEEN ACCOUNTED BY RECORDING THE SALES NET OF DISCOUNTS. THIS FACT HAS ALSO BEEN ACKNOWLEDGED BY THE LEARNED AO IN THE ASSESSMENT ORDER PARA 7.1. IN SUPPORT OF THIS THE ASSESSEE IS ALSO FILING SAMPLE COPIES OF PURCHASE AND SALES VOUCHERS OF VARIOUS BRANCHES OF THE ASSESSEE. 4. THE LEARNED AO WAS INSISTING TO GIVE THE DETAILS O F COMMISSION/DISCOUNT EXCEEDING RS. 2,500/- ALLOWED T O THE RETAILERS. SINCE NO SUCH DISCOUNT OR COMMISSION WAS GIVEN TO THEM, N O DETAILS COULD BE PROVIDED. THE ASSESSEE VIDE LETTER DATED 14/12/2009 INFORMED THE AO AS UNDER: OUR TRADE PRACTICE IS TO SALE THE GOODS BELOW MRP AT NET RATES. WE HAVE NOT PAID ANY COMMISSION OR DISCOUNT ON BSNL COUPONS /PRODUCTS, HENCE NO TDS WAS DEDUCTED/APPLICABLE. 5. AT THE COST OF REPETITION IT IS SUBMITTED THAT TH E RELATIONSHIP BETWEEN THE ASSESSEE AND THE RETAILERS WAS NOT THAT OF PRINCIPAL AND AGENTS AND THEY WERE DEALING ON PRINCIPAL TO PRINCIPAL BAS IS, IN VIEW OF FOLLOWING FACTS: A) THERE WAS NO ORAL OR WRITTEN AGREEMENT BETWEEN ASSESSEE AND RETAILERS. B) THE ASSESSEE HAD NO CONTROL OVER CONDUCT OF BUSI NESS BY THE RETAILERS. C) THE PROPERTY IN GOODS IMMEDIATELY PASSED ON TO RETAILERS ON SALE OF GOODS. D) THE ASSESSEE SOLD GOODS NET OF DISCOUNTS AND NO AMOUNT HAS BEEN PAID BY THE ASSESSEE TO RETAILERS AS COMMISSION. 24 6. THEREFORE IT IS SUBMITTED THAT WHATEVER PORTION O F COMMISSION/DISCOUNT AS RECEIVED BY THE ASSESSEE FRO M BSNL WAS PASSED ON TO THE RETAILERS BY THE ASSESSEE WAS ONLY IN THE NATURE OF UP FRONT DISCOUNT ON WHICH THERE WAS NO LIABILITY O F TDS TO BE MADE UNDER SECTION 194H OF INCOME TAX ACT. 7. RELIANCE IS PLACED ON TWO DECISIONS OF ITAT IN TH E CASE OF IDEA CELLULAR LTD. AND TWO DECISIONS OF GUJARAT HIGH COU RT, MENTIONED SUPRA, WHICH WILL ALSO GOVERN THE PAYMENT OF DISCOU NT FROM FRANCHISEE TO RETAILERS. 8. THE ASSESSEE HAS ALSO OBTAINED CONFIRMATION LETTE RS FROM SOME OF THE RETAILERS TO WHOM THE ASSESSEE MADE SALE OF BSN L PRODUCTS. (COPY ENCLOSED) IN THESE LETTERS THE RETAILERS HAV E CLEARLY STATED THAT THEY WERE NOT ACTING AS AGENTS OF THE ASSESSEE S. THEREFORE THE SALE OF RECHARGE COUPONS AND CASH CARD AND NEW SIM CARD TO THEM WAS ON PRINCIPAL TO PRINCIPAL BASIS. 9. WITHOUT PREJUDICE TO ABOVE SUBMISSIONS, AS AN ALT ERNATIVE SUBMISSION, WE SUBMIT THAT AT THE END OF THE YEAR N O COMMISSION/DISCOUNT WAS PAYABLE TO RETAILERS AS ALL THE SALE, BILLS ISSUED TO THEM WERE NET OF COMMISSION/DISCOUNT. WHE N NO AMOUNT WAS PAYABLE TO THEM, PROVISIONS OF SECTION 40(A)(IA ) ARE NOT APPLICABLE. THIS IS AS PER RATIO LAID DOWN BY JURIS DICTIONAL I TA T IN THE CASE OF JAIPUR VIDYUT VITRAN NIGAM LIMITED V /S DCIT 123 TTJ (JPR) 858. IN VIEW OF ABOVE DECISION, EVEN IF IT IS ACCEPTED T HAT THE AMOUNT PASSED ON TO RETAILER WAS LIABLE TO TDS, EVEN THEN NO DISALLO WANCE UNDER SECTION 40(A)(IA) CAN BE MADE AS NO AMOUNT WAS PAYABLE TO T HE RETAILERS AT THE END OF THE YEAR. 20. AFTER CONSIDERING THESE SUBMISSIONS AND PERUSIN G THE MATERIAL ON RECORD, THE LD. CIT (A) FOUND THAT PROVISIONS OF SECTION 194H ARE N OT APPLICABLE IN RESPECT TO THIS DISALLOWANCE AND, THEREFORE, HE DELETED THE DISALLO WANCE MADE BY AO UNDER SECTION 40(A)(IA) OF THE ACT. 20.1. THE LD. D/R AT THE TIME OF TIME OF HEARING ST ATED THAT THE AO WAS RIGHT IN MAKING THE DISALLOWANCE AND THE DECISION OF LD. CIT (A) IS NOT ACCEPTABLE AS THE SAME IS NOT IN 25 RIGHT PERSPECTIVE. IT WAS SUBMITTED THAT ASSESSEE RECEIVED COMMISSION/DISCOUNT FROM BSNL AND HAD PAID FURTHER. THEREFORE, ON THE COMMI SSION PAID BY ASSESSEE THE TDS WAS DEDUCTIBLE IN VIEW OF PROVISIONS OF SECTION 194H. THEREFORE, THE AO WAS JUSTIFIED IN INVOKING PROVISIONS OF SECTION 194H AND THEREAFTER MAKING ADDITION IN VIEW OF PROVISIONS OF SECTION 40(A)(IA) OF THE ACT. 21. ON THE OTHER HAND, THE LD. A/R PLACED RELIANCE ON THE ORDER OF LD. CIT (A). FURTHER, ATTENTION OF THE BENCH WAS DRAWN ON WRITTE N SUBMISSIONS PLACED ON RECORD. 22. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND HA VE PERUSED THE ORDERS OF THE AUTHORITIES BELOW. WRITTEN SUBMISSIONS FILED BY LD. COUNSEL OF THE ASSESSEE ARE SIMILAR TO THE WRITTEN SUBMISSIONS FILED BEFORE LD. CIT (A). WE HAVE ALREADY REPRODUCED THE WRITTEN SUBMISSIONS FILED BEFORE LD. CIT (A) SOMEWHERE ABOV E IN THIS ORDER, THEREFORE, THERE IS NO NEED TO MENTION THE ARGUMENTS OF LD. A/R IN DETAIL HERE ONCE AGAIN. IN FACT, THE ASSESSEE IS AN INDEPENDENT BUSINESSMAN AND NOT AN AGENT OF B SNL BUT HE HAS PURCHASED SIM CARD AND RECHARGE COUPON FROM BSNL AGAINST FULL PAYMENT OF PRICE OF THE SAME TO BSNL. IN THIS WAY IT CAN NOT BE TERMED THAT THE ASSESSEE IS AN AGENT OF BSNL. HOWEVER, THERE IS AN AGENCY AGREEMENT WITH BSNL AND IN THIS AGREEMENT IT HAS BEEN REFERRED TO AS FRANCHISEE, IT MEANS THAT ASSESSEE IS NOT AN AGENT OF BSNL. BY PURCHASING SIM CARD AND RECHARGE COUPON, THE ASSESSEE IS DOING SERVICE ON B EHALF OF THE BSNL AS FRANCHISEE. AS FRANCHISEE THE ASSESSEE IS DOING MARKETING AND DIST RIBUTION OF BSNL TELECOM SERVICE AND AS PER AGREEMENT THE BSNL DEDUCTING TAX AT SOUR CE @ 5.61% AND TDS CERTIFICATE HAS BEEN ISSUED IN FORM NO. 16A. THERE IS NO DISPUTE I N THESE FACTS. NOW THE ASSESSEE IS SELLING THESE SIM CARD AND RECHARGE COUPONS BY DOIN G MARKETING AND DISTRIBUTION OF BSNL TELECOM SERVICES. THE ASSESSEE IS DOING THIS BUSINESS BY ENGAGING SOME PERSONS 26 IN THE MARKET AND HAVE PARTED WITH SOME SHARE OF CO MMISSION EARNED BY HIM FROM BSNL. PARTING OF THE COMMISSION, THE AO HAS TREATED THAT ASSESSEE HAS ENGAGED HIS AGENTS AND, THEREFORE, IS LIABLE TO DEDUCT TAX IN VIEW OF PROVI SIONS OF SECTION 194H. IN FACT, THE ASSESSEE HAS NOT ENGAGED ANY DISTRIBUTOR BY APPOINT ING AGENTS BUT HAS USED THE SERVICES OF OTHER PERSONS IN THE MARKET TO DO THE MARKETING AND DISTRIBUTION WORK IN A LARGE SCALE ON BEHALF OF BSNL AND THIS ENGAGEMENTS CANNOT BE TERME D AS HIS AGENT OR HIS BROKER AS THERE IS NO INDEPENDENT AGREEMENT EITHER WITH THE S UB BROKERS OR SUB AGENTS WHO ARE SELLING SIM CARD OR RECHARGE COUPONS ON BEHALF OF T HE ASSESSEE. THE ASSESSEE WAS MAKING SALES OF CASH CARDS AND SIM CARDS TO RETAILE RS AT A PRICE WHICH WAS NET OF DISCOUNT. NO WHERE IN THE DOCUMENTS VIZ. THE SALE B ILLS ETC. ISSUED BY THE ASSESSEE TO THE RETAILERS THE WORD COMMISSION HAS BEEN MENTIONED. NO COMMISSION WAS PAID BY THE ASSESSEE TO THE RETAILERS. WHATEVER THE PRICE WAS PAID BY THE ASSESSEE TO BSNL, THE BSNL GAVE DISCOUNT/COMMISSION TO THE ASSESSEE AND A SSESSEE HAS REDUCED THE SAME IN THE PURCHASE PRICE AND HAS SOLD TO THE RETAILERS ON A DISCOUNTED FIGURE. IN THIS WAY THE ASSESSEE HAS PARTED SOME DISCOUNT AVAILED BY IT TO THE RETAILERS. BEING FRANCHISEE, A PERSON CANNOT BE TERMED AS AGENT AS HELD IN THE CAS E OF IDEA CELLULAR LTD.121 TTJ 352 (DEL.) WHEREIN IT IS HELD THAT UNDER SECTION 194H D ISCOUNT TO MARKET ASSOCIATES ON SIM CARDS AND RECHARGE COUPONS - DISCOUNT ALLOWED ON T RANSACTIONS RESULTING IN OUTRIGHT PURCHASES CANNOT BE TREATED AS BROKERAGES OR COMMIS SION. THERE SHOULD BE IN EXISTENCE THE RELATIONSHIP OF PRINCIPAL AND AGENT IN ORDER TO BRING THE DISCOUNT IN THE AMBIT OF COMMISSION OR BROKERAGE. SIMILAR VIEW HAS BEEN TAK EN IN CASE OF IDEA CELLULAR LTD. BY ITAT HYDERABAD BENCH ALSO. 27 22.1. IN CASE OF AHMEDABAD STAMP VENDORS ASSOCIATIO N VS. UNION OF INDIA, 176 CTR 193 (GUJ.), AGAIN SIMILAR VIEW HAS BEEN TAKEN BY HO NBLE GUJARAT HIGH COURT. IT IS ALSO A MATTER OF FACT THAT THE BSNL ITSELF HAS CHANGED TH E NOMENCLATURE OF THIS PAYMENT FROM WORD COMMISSION TO DISCOUNT WITH EFFECT FROM 31 .5.2008 AND COPY OF THIS CLARIFICATION WAS ISSUED. FROM THIS FACT, IT IS A MPLY PROVED THAT ASSESSEE IS NOT AN AGENT OR BSNL BUT A FRANCHISEE. THEREAFTER, THE ASSESSEE AFTER MAKING FULL PAYMENT OF SIM CARD/RESEARCH COUPONS HAD SOLD THE SAME TO THE RETA ILERS AND ON THE BASIS OF BILL ISSUED BY ASSESSEE THE FULL PAYMENT HAS BEEN CHARGED. THE RE IS NO WORD OF ANY DISCOUNT OR COMMISSION IN THE BILL ISSUED BY THE ASSESSEE. THE REFORE, THIS IS NOT THE CASE OF THE DEPARTMENT THAT ASSESSEE HAS DEPUTED ANY SUB AGENTS AND CHARGING COMMISSION FROM THEM. IT IS ALSO SEEN THAT THE ASSESSEE HAS PURCHA SED SIM CARD AND DISCOUNT COUPONS AND THEY HAVE BECOME THE PROPERTY OF THE ASSESSEE A S ASSESSEE IS LIABLE FOR DAMAGE/LOSS OF SIM CARD AND DISCOUNT COUPONS. THEREFORE, ALSO IT C ANNOT BE SAID THAT ASSESSEE WAS AN AGENT AND ASSESSEE HAS ENGAGED FURTHER SUB AGENTS. ALL THESE FACTS HAVE BEEN CONSIDERED BY LD. CIT (A) AND THEREAFTER HE HAS GIVEN HIS FIND INGS WHICH ARE RECORDED IN PARA 6.3 AT PAGES 32 TO 33, ARE ALSO REPRODUCED HERE AS UNDER : - 6.3. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS OF LD. AR. ON PERUSAL OF THE RELEVANT RECORDS, FIND TH AT THE NATURE OF THE RELATIONSHIP BETWEEN THE BSNL AND THE APPELLANT ASS ESSEE (FRANCHISEE OF BSNL) WAS DIFFERENT, AS COMPARED TO THE NATURE OF T HE RELATIONSHIP BETWEEN THE ASSESSEE AND HIS RETAILERS IN THIS REGA RD, IT IS OBSERVED THAT THE APPELLANT WAS APPOINTED A FRANCHISEE OF THE BSNL, A S PER THE DETAILED TERMS AND CONDITIONS OF FRANCHISEESHIP CONTAINED IN THE AGREEMENT DATED 21/03/2005, ENTERED INTO BETWEEN THE BSNL AND THE A PPELLANT, WHICH WAS 28 SUBSEQUENTLY MODIFIED, VIDE ANOTHER AGREEMENT DATED 13/11/2006. THEREFORE, THE APPELLANT WAS OBLIGED TO FULFILL AND CONDITIONS OF THAT AGREEMENT AND, IN A WAY, WAS UNDER THE SUPERVISION AND CONTROL OF BSNL, WHILE PERFORMING HIS DUTIES AS THE FRANCHISEE OF BS NL, IN RESPECT OF THE SALE OF RECHARGE COUPONS ETC. OF BSNL BY HIM. HENCE , THE RELATIONSHIP BETWEEN THE BSNL AND THE APPELLANT IS TO BE TREATED AS THAT OF A PRINCIPAL AND AGENT AND THUS, THE COMMISSION/DISCOUNT PAID BY THE BSNL TO THE APPELLANT FELL IN THE AMBIT OF THE PROVISIONS OF S. 194-H OF THE I.T. ACT. IN THIS REGARD, IT IS NOTICED THAT THE BSNL HAD ALSO T REATED THE AFORESAID COMMISSION/DISCOUNT GIVEN TO THE APPELLANT S COMMIS SION AND HAD ALSO MADE TDS THEREON U/S 194-H OF THE I.T. ACT. HOWEVER , ON GOING THROUGH THE RELEVANT MATERIAL PLACED ON RECORD, I FIND THAT THE RELATIONSHIP BETWEEN THE APPELLANT AND HIS NUMEROUS RETAILERS IS NOT THE SAME, AS IS BETWEEN THE BSNL AND THE APPELLANT. IN THIS REGARD, IT IS OBSER VED THAT THERE IS NO AGREEMENT OF ANY KIND BETWEEN THE APPELLANT AND HIS RETAILERS AND HENCE, THERE IS NO SUPERVISION OR CONTROL OF THE APPELLANT OVER THE RETAILERS, AFTER THE SALE OF THE RECHARGE COUPONS ETC. BY THE APPELL ANT TO THE RETAILERS. FURTHER, IT IS ALSO OBSERVED THAT MOST OF THE APPEL LANTS SALES OF RECHARGE COUPONS ETC. TO THE RETAILERS ARE IN CASH AND, THER EAFTER, THERE IS HARDLY ANY OBLIGATION OF THE RETAILERS TOWARDS THE APPELLANT. THEREFORE, ON THESE FACTS, THE RELATIONSHIP BETWEEN THE APPELLANT AND HIS RETA ILERS IS TO BE TREATED AS THAT OF PRINCIPAL TO PRINCIPAL AND NOT THAT OF A PR INCIPAL AND AGENT. HENCE, IT IS HELD THAT THOUGH THE APPELLANT SOLD THE BSNL PRODUCTS TO THE RETAILERS AT A PRICE, WHICH WAS LOWER THAN THE MRP (AFTER PAS SING ON A OF HIS COMMISSION AS A DISCOUNT TO THE RETAILERS), YET AS THE RELATIONSHIP BETWEEN THE APPELLANT AND HIS RETAILERS WAS THAT OF PRINCIP AL TO PRINCIPAL, THE PROVISIONS OF S.194-H OF THE I.T. ACT WERE NOT APPL ICABLE, IN RESPECT OF THE AFORESAID SALE OF THE BSNL PRODUCTS BY THE APPELLAN T TO HIS RETAILERS. THUS, IT IS HELD THAT AS THE APPELLANT WAS NOT LIABLE TO MAKE TDS, IN RESPECT OF THE SALE DISCOUNT GIVEN BY HIM TO HIS RETAILERS, THE IM PUGNED DISALLOWANCE OF RS. 91,83,554/- MADE BY THE LD. AO U/S 40(A)(IA) OF THE I.T. ACT IS NOT 29 SUSTAINABLE. ACCORDINGLY, THE AO IS DIRECTED TO DEL ETE THE IMPUGNED ADDITION AND CONSEQUENTLY, THIS GROUND OF APPEAL IS TREATED AS ALLOWED. 23. IN VIEW OF THE ABOVE FOREGOING DISCUSSIONS AND IN VIEW OF THE FINDINGS OF LD. CIT (A), WE CONFIRM HIS ORDER IN THIS RESPECT. 24. REMAINING AMOUNT OF RS. 6,18,900/-, THE FACTS I N THIS REGARD ARE DISCUSSED IN PARA 7.1 AT PAGE 34 OF ORDER OF LD. CIT (A) ARE AS UNDER :- 7.1. ON PERUSAL OF THE ASSESSMENT ORDER, IT IS SEEN TH AT THE IMPUGNED DISALLOWANCE HAS BEEN MADE BY THE LD. AO AS PER DIS CUSSION CONTAINED IN PARA 7.4 OF THE ASSESSMENT ORDER. IN THIS REGARD, I T IS OBSERVED THAT THE AC NOTICED THAT THE ASSESSEE HAD DEBITED RS. 4,84,372/ - IN THE P&L ACCOUNT OF JODHPUR BRANCH, ON ACCOUNT OF SCHEME AND DISCOUNT P AID, WHICH WAS IN THE NATURE OF COMMISSION/DISCOUNT. HOWEVER, THE ASS ESSEE EXPLAINED THAT THE RELATIONSHIP BETWEEN THE ASSESSEE AND THE RECEI VING PERSONS WAS THAT OF SELLER AND PURCHASER, AND NOT THAT OF PRINCIPAL AND AGENT, HENCE, THE PROVISIONS OF S.194-H AND 40(A)(IA) OF THE ACT WERE NOT APPLICABLE TO THOSE PAYMENTS. HOWEVER, THE EXPLANATION FILED BY T HE ASSESSEE WAS NOT FOUND TO BE CORRECT BECAUSE THE AO NOTICED FROM THE RETURN OF INCOME FILED IN ITR-4 BY THE ASSESSEE THAT IN COL. 23 OF P ART A-P&L ACCOUNT, OF THE ITR-4, THE ASSESSEE HAD SHOWN PAYMENT OF RS. 7, 28,009/- AS COMMISSION. FURTHER, ON GOING THROUGH THE DETAILS O F INDIRECT EXPENSES OF VARIOUS BRANCHES THE AO FOUND THAT THE AFORESAID AM OUNT OF COMMISSION OF RS. 7,28,009/- TALLIED WITH THE FOLLOWING AMOUNT S SHOWN AS UNDER: I) BANK COMMISSION RS. 1,09,019/- II) SCHEME AND DISCOUNT PAID RS. 6,18,990/- TOTAL - RS. 7,28,009/- THEREFORE, THE AO, WHILE HOLDING THAT THE BANK COMM ISSION WAS EXCLUDED FROM THE PURVIEW OF S.194-H OF THE ACT, DISALLOWED THE BALANCE AMOUNT OF 30 RS.6,L8R990/- U/S 40(A)(IA) OF THE I.T. ACT, AS THE ASSESSEE HAD NOT MADE TDS FROM THAT AMOUNT. 25. THE FOLLOWING SUBMISSIONS WERE MADE BEFORE LD. CIT (A) WHICH ARE RECORDED IN PARA 7.2 AS UNDER :- 7.2. ON THE OTHER HAND, LD. AR SUBMITTED THAT TH E NATURE OF THE AFORESAID EXPENSES, AMOUNTING TO RS. 6,18,990/- WAS THAT THE ASSESSEE HAD PAID INCENTIVE/SCHEME FOR REGULAR PURCHASES AND ON ACCOUNT OF RATE DIFFERENCE, TO VARIOUS RETAILERS OF BSNL PRODUCTS. THEREFORE, THOSE AMOUNTS WERE CREDITED IN THE ACCOUNT OF RETAILERS A ND AGAINST THOSE AMOUNTS FURTHER GOODS WERE SUPPLIED TO THEM. IT WAS EXPLAINED THAT NO PAYMENT WAS MADE TO ANY THIRD PARTY, WHICH MIGHT HA VE SOME COMMISSION ELEMENT IN IT AND THAT THERE WAS NO PAYMENT OF COMM ISSION/BROKERAGE TO THOSE DEALERS EVEN THOUGH THE ACCOUNT HEAD OPERATED IN THE BOOKS OF THE ASSESSEE, AT MANY PLACES, WAS COMMISSION. IT WAS SUBMITTED THAT, HOWEVER, THERE WAS NO RELATIONSHIP OF PRINCIPAL AND AGENT BETWEEN THE ASSESSEE AND THE SAID DEALERS AND HENCE, PROVISIONS OF S.194-H, REQUIRING MAKING OF THE TDS, WERE NOT APPLICABLE ON THOSE EXP ENSES. IT WAS ARGUED THAT THUS, THE LD. AO WAS NOT JUSTIFIED IN MAKING T HE IMPUGNED DISALLOWANCE U/S 40(A)(IA) OF THE I.T. ACT. FURTHER , LD. AR SUBMITTED, AS AN ALTERNATIVE ARGUMENT, THAT AS AT THE END OF THE YEA R, NO SCHEME/DISCOUNT WAS PAYABLE TO THE DEALERS, THE PROVISIONS OF S.40( A)(IA) WERE NOT APPLICABLE. IN THIS REGARD, LD. AR PLACED RELIANCE ON THE DECISION OF THE HONBLE ITAT. JAIPUR BENCH IN THE CASE OF JVVNL V/S DCIT, 123 TTJ 858. 26. THEREAFTER, THE LD. CIT (A) DELETED THE DISALLO WANCE BY GIVING FOLLOWING FINDING IN PARA 7.3 AS UNDER :- 31 7.3. I HAVE CAREFULLY CONSIDERED THE FACTS OF THE CASE AND SUBMISSIONS OF LD. AR. IT IS OBSERVED THAT THE EXPENSES OF RS.6,18 ,009/-, IN QUESTION, HAVE BEEN INCURRED BY THE ASSESSEE ON ACCOUNT OF IN CENTIVE I SCHEME PAYMENTS TO THE RETAILERS/DEALERS OF BSNL PRODUCTS. HOWEVER, AS DISCUSSED IN DETAIL IN PARA 6.3 ABOVE, IT HAS BEEN HELD THAT THERE WAS A RELATIONSHIP OF PRINCIPAL TO PRINCIPAL BETWEEN THE ASSESSEE AND THE RETAILER/DEALERS, AND NOT THAT OF A PRINCIPAL AND A N AGENT. THEREFORE, FOLLOWING THE SAME REASONING, IT IS HELD THAT THE A PPELLANT WAS NOT LIABLE TO MAKE TDS FROM THE AFORESAID PAYMENTS OF RS.618,009/ -. ACCORDINGLY, IT IS HELD THAT THE DISALLOWANCE OF THAT AMOUNT U/S 40(A) (IA) IS NOT SUSTAINABLE. FURTHER, AS THE MAIN ARGUMENT OF LD. AR HAS BEEN AC CEPTED, THE ALTERNATIVE ARGUMENT TAKEN BY THE LD. AR HAS BECOME IN-FRUCTUOUS AND HENCE, THE SAME IS DISMISSED. CONSEQUENTLY, THIS GR OUND OF APPEAL IS TREATED AS PARTLY ALLOWED. 27. THESE FINDINGS OF LD. CIT (A) REMAINED UNCONTRO VERTED AS LD. D/R HAS SIMPLY PLACED RELIANCE ON THE ORDER OF AO. THEREFORE, WE S EE NO REASON TO INTERFERE WITH THE FINDINGS OF LD. CIT (A). ACCORDINGLY THE FINDINGS OF LD. CIT (A) IN THIS RESPECT ARE CONFIRMED. 28. IN THE RESULT, APPEAL OF THE DEPARTMENT IS DISM ISSED AND THE CROSS OBJECTION OF THE ASSESSEE IS ALLOWED IN PART. 29. THE ORDER IS PRONOUNCED IN THE OPEN COURT ON 21 .10.2011. SD/- SD/- ( N.L. KALRA ) ( R.K. GUPTA ) ACCOUNTANT MEMBER JUDICIAL MEMBER JAIPUR, D/ 32 COPY FORWARDED TO :- THE DCIT, CIRCLE SIKAR. SHRI SHRAWAN KUMAR AGARWAL, SIKAR. THE CIT (A) THE CIT THE D/R GUARD FILE (ITA NO. 1401(2)/JP/2010) BY ORDER, AR ITAT JAIPUR.