DCIT, Rourkela V. Indrani Patnaik, Rourkela

ITA 142/CTK/2015

• Counselvise Citation: [2017] 127 COUNSELVISE.COM (IT) 5419 (ITAT-CUTTACK)
• Duration Of Justice: 2 year(s) 4 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-08-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 29-06-2017
• Assessment Year: 2010-2011
• Appeal Filed On: 06-04-2015
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: KUNAL SINGH
• Assessee Lawyers: D PATI
• Section: 133(6)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, CUTTACK BENCH, CUTTACK BEFORE S/SHRI N.S SAINI, ACCOUNTANT MEMBER AND PAVAN KUMAR GADALE, JUDICIAL MEMBER ITA NO. 142/CTK/2015 ASSESSMENT YEAR : 2010 - 2011 DCIT, ROURKELA CIRCLE, ROURKELA VS. SMT. INDRANI PATNAIK,A - 6, COMMERCIAL ESTATE, CIVIL TOWNSHIP, ROURKELA. PAN/GIR NO. ACCPP 6164 E (APPELLANT ) .. ( RESPONDENT ) ASSESSEE BY : SHRI D.PATI, AR REVENUE BY : SHRI KUNAL SINGH, CIT DR DATE OF HEARING : 29 /08/ 2017 DATE OF PRONOUNCEMENT : 31 /08/ 2017 O R D E R PER N.S.SAINI, AM THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST THE ORDER OF THE CIT(A) - 2, BHUBANESWAR DATED 28.1.2015 FOR THE ASSESSMENT YEAR 2010 - 2011. 2. THE SOLE ISSUE INVOLVED IN THIS APPEAL IS THAT THE CIT(A) IS NOT CORRECT IN DELETING THE ENTIRE ADDITION 7,09,10,967/ - UNDER THE HEAD BROKERAGE AND COMMISSION . 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSING OFFICER OBSERVED THAT DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE HAS SHOWN TURNOVER OF RS .4 58,16,44,870/ - AS AGAINST TURNOVER SHOWN IN THE PRECEDING YEAR AT RS.260,77,44,068/. HE ALSO OBSERVED THAT THE GROSS PROFIT FOR THE YEAR UNDER CONSIDERATION WAS SHOWN AT 54.18% AND THE NET PROFIT AT 45.94%. HE OBSERVED 2 ITA NO. 142/CTK/2015 ASSESSMENT YEAR : 2010 - 2011 THAT ON VERIFICATION OF AUDITED P & L A/A, IT IS OBSERVED THAT THE ASSESSEE HAS DEBITED AN AMOUNT OF RS. 14,13,86,450 / - UNDER THE HEAD 'BROKERAGE & COMMISSION AS AGAINST CLAIM OF RS.6,35,61,976 / - MADE IN THE PRECEDING YEAR . THE ASSESSING OFFICER REQUIRED THE ASSESSEE TO FURNISH DETAILS OF EXPENSES. IN REPLY, ASSESSEE FURNISHED THE COPY OF BILLS RAISED BY THE COMMISSION AGENTS. THE ASSESSING OFFICER MADE CORRESPONDENCE WITH THE COMMISSION AGENTS AND REQUIRED THEM TO FURNISH NAME AND ADDRESS OF BUYERS FOR WHOM THEY HAVE E X ECUTED COMMISSIONING WORK ALONGWITH NATURE OF SERVICES RENDERED AND THE BASIS OF CLAIM OF COMMISSION. IN SOME OF THE CASES, COMMISSION AGENTS IN REPLY ONLY FURNISHED THE NAME OF THE BUYER WITHO UT THE ADDRESS. IN SOME OTHER CASES, LETTERS ISSUED TO COMM ISSION AGENTS U/S. 133(6) OF IT.ACT, 196 1 WERE RETURNED UNSERVED BY THE P OSTAL AUTHORITIES WITH REMARK NOT KNOWN/LEFT/ADDRESSEE REFUSED. IN SOME CASES, COMMISSION AGENTS DID NOT MENTION ANYTHING ABOUT THE AGENTS AND ONLY PLEADE D THAT THEY HAVE EXECUTED WORK ONLY FOR INDRANI PATNAIK. THEREAFTER, THE ASSESSING OFFICER OBSERVED THAT IT IS SEEN THAT WHILE MAKING PAYMENT TOWARDS COMMISSION, ASSESSEE HAS DEDUCTED TAX AT SOURCE AS REQUIRED U/S.194H OF THE ACT . HE OBSERVED THAT MERE DEDUCTION OF TAX AT SOURCE DOES NOT ESTABLISH THAT THE CLAIM OF EXPENSES IS GENUINE. BY MAKING PROVISION OF TDS, THE ASSESSEE ONLY LOOSES 10% OF THE EXPENSES, WHEREAS CLAIM OF EXPENSES GIVES THE BENEFIT OF 90% TO THE ASSESSEE. HE FURTHER OBSERVED THAT COMMISSION AGENTS AGAINST WHO M TAX HAS BEEN DEDUCTED AT SOURCE ARE BIFURCATING THE COMMISSION INCOME AND REFLECTING THE SAME IN THEIR INDIVIDUAL CAPACITY AS WELL AS IN THE CAPACITY OF HUF AND ALSO IN THE NAME OF FAMILY MEMBERS TO KEEP THE INCOME BELOW TAXABLE LIMIT. LASTLY, HE 3 ITA NO. 142/CTK/2015 ASSESSMENT YEAR : 2010 - 2011 OBSERV ED THAT THE COMMISSION AGENTS ARE GENERATING REFUND THROUGH THIS TDS AMOUNT. FURTHER, THE ASSESSING OFFICER OBSERVED THAT DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE SITUATION WAS ALSO CONFRONTED TO THE ASSESSEE IN RESPONSE TO WHICH THE ASSESSEE STATED THAT ALL THE COMMISSION AGENTS ARE REGULAR ASSESSEE AND THEIR RESPECTIVE STATUS HAS NO RELEVANCE WITH THE ASSESSEES BUSINESS. THE ASSESSING OFFICER OBSERVED THAT IT IS FURTHER SEEN THAT THE ASSESSE HAS PAID COMMISSION TO CORPORATE ASSESSEE WHO AR E LOSS MAKING AND SELF/ASSESSMENT TAX DEFAULTER. THE ASSESSEE HAS MADE TDS AND SERVICE TAX AND THEN ALSO IT IS BENEFICIAL FOR THE COMMISSION AGENTS AS THEY HAVE NEVER RENDERED ANY SERVICES AND CONSUMING TDS COMPONENTS. THEREFORE, HE HELD THAT IT IS ESTAB LISHED FACT THAT COMMISSION AGENTS HAVE NEVER RENDERED ANY SERVICES TO THE ASSESSEE AND SIMPLY RAISED BILLS IN REGARD TO COMMISSION ON WHICH MERE PROVISION OF TDS WAS MADE TO SUSTAIN THE CLAIM OF COMMISSION EXPENSES. THE COMMISSION AGENTS ARE PROVIDING AC COMMODATION ENTRY TO THE ASSESSEE BY WHICH, THE ASSESSEE COULD ABLE TO INFLATE THE EXPENSES BY WAY OF COMMISSION. ACCORDINGLY, HE MADE CATEGORY WISE DISALLOWANCE AS UNDER: I) CATEGORY - 1 (BUYERS HAVE DENIED) : RS.5,08,01,314 II) CATEGORY - II (LETTERS S ENT TO BUYERS UNSERVED ) : RS. 55,56,819 III) CATEGORY - III (BUYERS NOT COMPLIED THOUGH SERVED) RS. 69,14,054 IV) CATEGORY - IV(AGENT NOT FURNISHED BUYERS NAME) : RS. 29,21,476 V) CATEGORY - V (HUF CONCERNS) : RS. 47,17,304 RS.7,09,10,967 4. ON APPEAL BEFORE THE CIT(A), THE ASSESSEE SUBMITTED AS UNDER: 4 ITA NO. 142/CTK/2015 ASSESSMENT YEAR : 2010 - 2011 1. COMMISSION ON SALES: RS. 7,09,10,967/ - HAVE BEEN DISALLOWED UNDER THIS HEAD, ON VARIOUS GROUNDS, AS UNDER: A. RS. 5,08,01,314/ - HAVE BEEN DISALLOWED ON THE GROUND THAT SOM E BUYERS STATED THAT THEY MADE DIRECT PURCHASE FROM THE ASSESSEE. AS SUBMITTED BY THE ASSESSEE DURING ASSESSMENT PROCEEDINGS, THE ASSESSEE HAD ENGAGED THE AGENTS TO LOOK AFTER ITS INTEREST WITH A VIEW TO SMOOTHEN THE WHOLE PROCESS OF SUPPLY OF MATERIALS TO VARIOUS PARTIES. ON THE OTHER HAND, THE BUYERS HAD NOT APPOINTED THE AGENTS, NOR THEY PAID TO THEM, AS SUCH THEIR DENIAL AS REGARDS INVOLVEMENT OF AGENTS, WITHOUT ANY FINANCIAL INVOLVEMENT ON THEIR PART, IT IS HUMBLY SUBMITTED, CANT NEGATE THE EXPENDITUR E INCURRED BY THE ASSESSEE. B. RS.55,56,819/ - HAVE BEEN DISALLOWED ON THE GROUND THAT SOME LETTERS ISSUED BY THE DEPARTMENT WERE RETURNED UNSERVED. THE ASSESSEE HAD PROVIDED ADDRESSES OF THE AGENTS AND BUYERS, AS AVAILABLE WITH IT. IT ALSO PROVIDED COPIES OF THE ACKNOWLEDGEMENTS OF RETURNS SUBMITTED BY THE AGENTS, WHICH CARRY THEIR ADDRESSES, PAN., DETAILS OF JURISDICTIONAL ASSESSING OFFICERS ETC. IF DUE TO SOME REASON, THE LETTERS WERE RETURNED UNSERVED, IT IS SUBMITTED, THE APPELLANT WAS NOT AT FAULT. C. RS.69,14,054/ - HAVE BEEN DISALLOWED ON THE GROUND THAT THE DEPARTMENT DIDNT RECEIVE ANY COMMUNICATION FROM THE AGENTS/BUYERS. THE ASSESSEE REITERATES ITS STAND THAT IT PROVIDED ALL NECESSARY DETAILS OF THE AGENTS AND BUYERS AND IT MAY NOT BE TREATED TO BE AT FAULT FOR THEIR FAILURE TO RESPOND TO THE DEPARTMENTAL NOTICES. RS.29,21,476/ - HAVE BEEN DISALLOWED ON THE GROUND THAT THE AGENTS FAILED TO FURNISH NAMES OF BUYERS. IT IS HUMBLY SUBMITTED THAT THE ASSESSEE SUBMITTED ALL DETAILS BEFORE THE LD AO INCLUDING BILLS RAISED BY THE GENTS, COPIES OF THEIR RETURNS, DETAILS OF SERVICE TAX PAID, WHEREVER APPLICABLE, DETAILS OF TAX DEDUCTED AT SOURCE , DETAILS OF BUYERS ETC AND AS SUCH IT DISCHARGED ITS ONUS AS REGARD THE GENUINITY OF THE EXPENDITURE INCU RRED BY IT. 5. THE CIT(A) AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE DELETED THE ADDITION. 5 ITA NO. 142/CTK/2015 ASSESSMENT YEAR : 2010 - 2011 6. LD D.R. SUPPORTED THE ORDER OF THE ASSESSING OFFICER WHEREAS LD A.R. FULLY JUSTIFIED THE ORDER OF THE CIT(A). 7. WE HAVE HEARD RIVAL SUBMISSIONS, PERUSE D THE ORDERS OF LOWER AUTHORITIES AND MATERIALS AVAILABLE ON RECORD. WE FIND THAT THE CIT(A) DELETED THE DISALLOWANCE OF RS.7,09,10,96 7/ - OUT OF TOTAL COMMISSION PAYMENT OF RS.14,13,86,450/ - BY OBSERVING AS UNDER I HAVE CONSIDERED THE CONTENT AND SUBSTA NCE OF THE IMPUGNED ASSESSMENT ORDER AND THE GROUNDS OF APPEAL PREFERRED AND THE ADDITIONAL SUBMISSIONS FILED BY THE APPELLANT, AND ACCORDINGLY DECIDE AS UNDER: A) IT IS CLEAR FROM THE OUTSET THAT THE AO HAS NOT CORRECTLY UNDERSTOOD THE MEANING AND IMPORT OF THE TERM AGENT. IT IS NOT NECESSARY THAT AN AGENT RECEIVING COMMISSION PAYMENTS HAS TO ALWAYS BE A PHYSICAL GO - BETWEEN BETWEEN THE PRINCIPAL (THE APPELLANT IN THE INSTANT CASE) AND HIS/HER/ITS CUSTOMERS BEING BUYERS. AN AGENT CAN CARRY OUT THE BUSINE SS OF PROSPECTING FOR CLIENT - BUYERS WHICH WOULD MEAN THAT MANY OF THE INTENDED TARGETS MAY NOT TRANSFORM INTO BUYERS OR MAY DECIDE TO PURCHASE THE ITEMS DIRECTLY FROM THE PRINCIPAL INSTEAD OF THROUGH THE AGENT OR EVEN WITHOUT INFORMING THE AGENT. AN ADVERT ISING AGENT, LIKEWISE, HAS ONLY A GENERIC TARGET SEGMENT AND NO CUSTOMERS CAN BE ASKED OF SUCH AGENT TO BE SPECIFICALLY IDENTIFIED. A PROCUREMENT AGENT, ON THE CONTRARY, MAY HAVE A SET OF SELLERS FROM WHOM HE/SHE ROUTINELY CONTRACTS FOR PURCHASES. B) THE CA MBRIDGE DICTIONARY DEFINES AN AGENT AS SOMEONE WHO SELLS A COMPANY'S PRODUCTS AND RECEIVES A PART OF THE MONEY PAID FOR THE GOODS FOR DOING THIS', WHICH WOULD MEAN THAT IT WOULD BE UNFAIR AND UNREASONABLE IN MANY CASES AND CIRCUMSTANCES TO EXPECT SUCH AGE NT TO REMEMBER AND PROVIDE THE NAMES OF THE MULTITUDE OF BUYERS. C) IT IS ALSO CLEAR FROM THE DEFINITION THAT AN AGENT IS DEPENDENT FOR HIS/HER/ITS INCOMES ON HIS/HER, ITS PRINCIPALS AND THE SALES THAT HE/SHE/IT HELPS FACILITATE FOR THE LATTER. A COMMISSION AGENT DERIVES COMPENSATION FROM ACTUAL SALES, USUALLY EXPRESSED AS A PERCENTAGE OF SALES. IN MANY CASES, THEY MAY FACILITATE IN LOCATING BUYERS FOR GOODS/SERVICES, PROVI DING INFORMATION ABOUT THE PRODUCT, MAKING THE ACTUAL SALE, AND ENSURING DELIVERY AND FOLLOW - UP SERVICE. HOWEVER, THE PRECISE NATURE AND DETAILS OF THE FACILITATIONS ENGAGED IN BY THE 6 ITA NO. 142/CTK/2015 ASSESSMENT YEAR : 2010 - 2011 AGENTS DEPENDS UPON THE FACTS AND CIRCUMSTANCES OF THE ARRANGEMENT/AGREE MENT ENTERED INTO WITH THE PRINCIPAL, THE NATURE OF THE PRODUCTS/GOODS SOLD, RELEVANT BUSINESS FACTORS, ETC. BENEFITS FROM THE AGENCY ARRANGEMENT ACCRUE TO BOTH THE PRINCIPAL AND AGENT. PRINCIPALS CAN EXTEND MARKET REACH WITHOUT INCURRING MAJOR FIXED PERSO NNEL COSTS, AND AGENTS CAN EARN COMPENSATION BASED ON THEIR PRODUCTIVITY. SOME AGENTS MAY REPRESENT MORE THAN ONE PRINCIPAL. ALL OF THE ABOVE MEAN THAT THE AGENT IS MORE REACTIVELY DEPENDENT ON THE PRINCIPAL BEING PART OF A DIRECT ARRANGEMENT THAN WITH THE CLIENTS/BUYERS/CUSTOMER WHICH RELATIONSHIP IS MORE PROACTIVE AND HENCE INDEPENDENT. WHILE, COMMISSION AGENTS DEPEND ON CUSTOMERS IN GENERATING THEIR COMPENSATION, THE COMPENSATION ITSELF IS PAID BY THE PRINCIPAL AFTER THE CUSTOMER/BUYER PAYS THE PRINCIPAL THE PROCEEDS OF THE SALE OR OTHER TRANSACTION. WHILE SOME AGENTS MAY BE AGGRESSIVE, THEY ALSO DEPEND ON SATISFIED CUSTOMERS FOR REPEAT BUSINESS AND ARE MOTIVATED TO THAT END; IT IS IN THIS CONNECTION THAT SOME OF THEM MAY KEEP TRACK OF BUYERS/CUSTOMERS IN THEIR OWN INTERESTS. SUCH TRACKING AND RETRIEVAL OF CUSTOMER DETAILS UPON DEMAND, AS THE AO HAS INSISTED UPON, IS NOT. PART OF A MANDATORY OR STATUTORILY STIPULATED NATURE OF DUTIES OF ALL AGENTS. D) THERE ARE COMMISSION AGENTS WHO ARRANGE AND PARTICIPATE IN THE SALES AND ARRANGE OUTBOUND - MOVEMENT - AND - PACKING, TRANSPORT AND LOGISTICS IN THE INTERESTS OF THE PRINCIPAL, AND THERE ARE AGENTS WHO DO NOT. THE LAW OF AGENCY IS AN AREA OF COMMERCIAL LAW DEAL ING WITH A SET OF CONTRACTUAL, QUASI - CONTRACTUAL AND NON - CONTRACTUAL FIDUCIARY RELATIONSHIPS THAT INVOLVE A PERSON (THE AGENT), WHO IS AUTHORIZED TO ACT ON BEHALF OF ANOTHER (THE PRINCIPAL) TO CREATE LEGAL RELATIONS WITH A THIRD PARTY. SUCCINCTLY, IT MAY B E REFERRED TO AS A MORE - OR - LESS EQUAL RELATIONSHIP BETWEEN A PRINCIPAL AND AN AGENT WHEREBY THE PRINCIPAL, EXPRESSLY OR IMPLICITLY, AUTHORIZES THE AGENT TO WORK UNDER HIS OR HER OR ITS CONTROL AND ON HIS OR HER OR ITS BEHALF. THE AGENT IS, THUS, REQUIRED T O NEGOTIATE ON BEHALF OF THE PRINCIPAL OR BRING HIM OR HER AND THIRD PARTIES INTO A CONTRACTUAL RELATIONSHIP. THE RECIPROCAL RIGHTS AND LIABILITIES BETWEEN A PRINCIPAL AND AN AGENT REFLECT COMMERCIAL AND LEGAL REALITIES. A BUSINESS OWNER OFTEN RELIES ON AN EMPLOYEE OR ANOTHER PERSON TO CONDUCT A BUSINESS. THE PRINCIPAL IS BOUND BY THE CONTRACT ENTERED INTO BY THE AGENT, SO LONG AS THE AGENT PERFORMS WITHIN THE SCOPE OF THE AGENCY. IMPORTANTLY, A THIRD PARTY MAY RELY IN GOOD FAITH ON THE REPRESENTATION BY A PERSON WHO IDENTIFIES HIMSELF AS AN AGENT FOR ANOTHER. IT IS NOT ALWAYS COST EFFECTIVE TO CHECK WHETHER SOMEONE WHO IS REPRESENTED HAVING THE AUTHORITY TO ACT FOR ANOTHER ACTUALLY HAS SUCH AUTHORITY. IF IT IS SUBSEQUENTLY FOUND THAT THE ALLEGED AGENT WAS ACTING WITHOUT NECESSARY AUTHORITY, THE GENT WILL GENERALLY HE HELD LIABLE. 7 ITA NO. 142/CTK/2015 ASSESSMENT YEAR : 2010 - 2011 E) IN THE INSTANT CASE, THE AGENTS WERE RELATIVELY SMALL AND UNKNOWN PLAYERS. ALSO, AS PER THE TERMS OF THE AGREEMENTS/UNDERSTANDING WITH THE APPELLANT, THEY DID NOT APPEAR TO HAVE ANY AUTHORITY TO ATTRACT OR ENLIST BUYERS FOR THE APPELLANT. THEIR RANGE OF DUTIES WAS LIMITED TO FACILITATING SMOOTH SUPPLY OF GOODS TO THE BUYERS.' THIS WOULD MEAN THAT THEY WERE IN MOST CASES INTERACTING WITH BUYERS WHO WERE IN DIRECT TRANSACTIONAL AND INTERACTIVE RELATIONSHIP WITH THE APPELLANT. THE BUYERS THEREFORE HAD NO CAUSE TO REGARD THE AGENTS AS PURCHASE INTERMEDIARIES (THEY BEING SUPPLY FACILITATORS TEMPORARILY VISIBLE AT A GIVEN POINT IN TIME IN RESPECT OF THE TRANSACTIONS OPERATIONAL AT THAT TIME) AND THE AGENTS HAD NO REASONS TO PREPARE IRON - CLAD LISTS AND DETAILS OF THE BUYERS. THEREFORE, THERE WAS LITTLE REASON FOR THE BUYERS TO MAKE ENQUIRIES ABOUT THE AGENTS AND CERTIFY THE GENUINENESS OR VERACITY OF THE LATTER IN THE MATTER OF SUPPLIES O F MATERIALS. I ALL THE BUYERS WERE CONCERNED WITH WAS THE TIMELY DELIVERY OF QUALITY - TESTED GOODS/PRODUCTS AS SPECIFIED BY THEM. ALL THE APPELLANT EXPECTED FROM THE AGENTS WAS TOTAL ADHERENCE TO THE TERMS OF THE AGREEMENT/ARRANGEMENT BETWEEN THEM. F) THEREFOR E, THE EXPRESS NON - REMEMBRANCE OF THE AGENTS IN THE CREATIVE - PROACTIVE AWARE NESSES OF THE BUYERS ALONE WILL NOT NEGATE THE FACT OF THE IMPUGNED TRANSACTIONS AND THE TRUTH AND CHARACTER OF THE COMMISSION PAYMENTS. THE AO HAS NOT CARRIED OUT ANY INVESTIGATIO NS OR INQUIRES, ON UNEARTHED/DISCOVERED ANY EVIDENCES THAT SUGGEST THAT THE TRANSACTIONS AND PAYMENTS WERE NOT WHAT THEY SEEMED TO BE. THE DECISION TO DISALLOW HAS BEEN MADE ON PRESUMPTION, SURMISE, CONJECTURE, SUPPOSITION, AND A SUMMARY AND UNILATERAL CON CLUSION BASED ON RUDIMENTARY FACTS (OF THE BUYERS BEING PRESUMABLY NON - EXISTENT OR APPARENTLY UNAWARE OF THE AGENTS AND THE AGENTS BEING UNABLE TO LIST THE BUYERS) TAKEN IN PREJUDICED ISOLATION AND BASED ON A SPURIOUS IMPLIED TRANSCENDENTAL PRINCIPLE THA T SEEKS TO COVER/FILL THE SCHISM BETWEEN FLIMSY FOUNDATIONS AND MERETRICIOUS ARGUMENTS ON ONE SIDE AND A TENDENTIOUS DECISION ON THE OTHER. THIS IS NOT A SCIENTIFIC, PROFESSIONAL AND RESPONSIBLE EXERCISE CARRIED OUT BY THE AO. MUCH MORE HOMEWORK WAS REQUIR ED TO BE DONE BY THE AO IN DISCHARGE OF HIS RESPONSIBILITIES, WHICH HE PLAINLY FAILED TO CARRY OUT. G) HOW TO GO ABOUT DOING ONES BUSINESS SIS THE PREROGATIVE OF THE BUSINESS MAN, AS ARE THE RELATED MATTERS LIKE INCURRING EXPENSES, 8 ITA NO. 142/CTK/2015 ASSESSMENT YEAR : 2010 - 2011 MAKING INVESTMENTS, OBTAIN ING LOANS AND PROVIDING ADVANCES, ETC. THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF S.A. BUILDERS LIMITED VS CIT, 288 ITR 1 (SC) IS RELEVANT. THE HONBLE COURT HELD IN THE ABOVE RATIO REITERATED THE SETTLED POSITION IN THE PAST THAT NO BUSINESSMA N CAN BE COMPELLED TO MAXIMIZE HIS PROFIT. WHILE CONSIDERING THE CLAIM OF DEDUCTION OF ANY EXPENDITURE, INCOME TAX AUTHORITIES MUST PUT THEMSELVES IN THE SHOES OF THE ASSESSEE AND SEE HOW A PRUDENT BUSINESSMAN WOULD ACT. ONCE IT WAS ESTABLISHED THAT THER E WAS NEXUS BETWEEN THE EXPENDITURE AND PURPOSE OF THE BUSINESS, REVENUE CANNOT JUSTIFIABLY CLAIM TO PUT ITSELF IN THE ARM CHAIR OF THE BUSINESSMAN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITUR E HAVING REGARD TO THE CIRCUMSTANCES OF THE CASE. THE AUTHORITIES MUST LOOK AT THE MATTER NOT FROM THEIR OWN POINT VIEW BUT THAT OF A PRUDENT BUSINESSMAN. H) CONSEQUENTLY, WHETHER TO ENGAGE THE SERVICES OF A COMMISSION AGENT OR NOT IN RESPECT OF HER S ALES IS THE BUSINESS PREROGATIVE OF THE APPELLANT, AND EVEN IF SUCH AGENTS DO ARE NOT ABLE TO BRING IN A SINGLE CUSTOMER, THE EXPENSES MADE OF THE NATURE OF COMMISSION PAYMENTS TO THE AGENTS WOULD NOT BE INELIGIBLE. I) IN HARMONY WITH THE PRINCIPLES OF ECONOMIC NEUTRALITY, WHAT IS TO BE VERIFIED IS WHETHER THE AGENTS ARE CREATING ECONOMIC VALUE FOR THE APPELLANT THROUGH THE FUNCTIONS CARRIED OUT, RISKS ABSORBED AND ASSETS BEING TIME AND EFFORT INVESTED IN BY IT, AND IS THEREFORE ENTITLED TO BE COMPENSAT ED FOR THE SAME IN THE FORM OF RECEIPTS OF COMMISSIONS. COMPENSATION CAN BE DENIED OR DISALLOWED ONLY IF IT IS PROVED THAT THE APPARENT ARRANGEMENT IS NOT GERMANE OR RELATED TO THE BUSINESS AND/OR IS NON - GENUINE AND NO ECONOMIC VALUE IS BEING GENERATED BY THE AGENT FOR THE PRINCIPAL. THE APPELLANT IS FREE TO ENTER INTO AGREEMENTS WITH AND APPOINT AS MANY AGENTS, AS IT SEEKS TO, IN LINE WITH ITS BUSINESS NEEDS AND COMMERCIAL PRACTICES. IF THE AGREEMENTS AND APPOINTMENTS ARE WHOLLY AND EXCLUSIVELY FOR THE PUR POSE OF BUSINESS, AND THE PAYMENTS MADE IN THE SAID REGARD ARE FULLY BILLED/VOUCHED, ACCOUNTED FOR AND AUDITED, THEN THERE IS LITTLE SCOPE FOR REVENUE TO TAKE A PREJUDICIAL VIEW. J ) THE AO HAS NOT BEEN ABLE TO SHOW THAT THE PAYMENTS HAVE NOT BEEN MADE TO T HE PURPORTED AGENTS AND THAT THESE PAYMENTS ARE NOT RELATABLE TO THE CARRYING OUT THE BUSINESS AND FOR OTHER 9 ITA NO. 142/CTK/2015 ASSESSMENT YEAR : 2010 - 2011 BUSINESS PURPOSES. THE AO HAS MERELY LEAPED TO CONCLUSIONS (IN THE CASES OF CATEGORIES II, III AND IV) THAT THE SEEMING ABSENCE OF BUYERS (AS OSTEN SIBLY EVIDENCED BY LETTERS ADDRESSED TO THEM RETURNING UNSERVED), OR THE NEGATIONS OR DISAVOWALS BY SUCH BUYERS OF ANY KNOWLEDGE OR NEXUS WITH THE AGENTS OR THE INABILITY OF THE COMMISSION AGENTS TO LIST THE ACTUAL BUYERS WOULD AUTOMATICALLY DISENTITLE THE AGENTS OF THEIR STATUS AND RIGHTS TO RECEIVE COMMISSION PAYMENTS. IN THE SCHEME SET IN PLACE BY THE APPELLANT, THE BUYERS DIRECTLY TRANSACTED WITH HER; THE AGENTS DID NOT ENROLL THEM AND THEREFORE IN MOST CASES WOULD NOT KNOW THEM. THE AGENTS WOULD BE ABL E TO ONLY PROVIDE SOME NAMES OF BUYERS IN RESPECT OF WHOM/WHICH THE AGENT WOULD HAVE FACILITATED THE SUPPLY AFTER THE SALES WERE MADE. LIKEWISE, SWORN DEPOSITIONS FROM THE BUYERS THAT THEY DID NOT KNOW THE AGENTS WOULD NOT MAKE FOR ADVERSE FINDING BECAUSE IN THE MINDS OF THESE BUYERS, THEY HAD TRANSACTED DIRECTLY WITH THE APPELLANT, AND THE PERSON REFERRED TO AS AN AGENT WOULD HAVE APPEARED IN THEIR EYES LIKE AN EMPLOYEE OF THE APPELLANT OR OTHER INDIVIDUAL ENGAGED IN FACILITATING THE MOVEMENT OF THE GOODS, AND NOT IN A FORMAL POSITION OF ENGAGEMENT AS AN AGENT. K) WHAT WAS NEEDED FOR THE AO WAS TO PROVE ANY OF THE FOLLOWING: A) THE IMPUGNED AGENTS DID NOT EXIST OR WERE NOT GENUINE AGENTS; B) THE AGENTS HAD NOT CARRIED OUT ANY FACILITATION WORK FOR THE APPELLANT; AND C) THE AGENTS HAD NOT ACTUALLY RECEIVED THE STATED COMMISSION MONEYS. HE HAS INSTEAD PROCEEDED ON PRESUMPTIONS AND CONCLUDED ON UNPROVEN INANITIES THAT THE ABSENCE OF INFORMATION ABOUT THE BUYERS MEANT THAT THE COMMISSION AGENTS DID NOT EXIST OR WERE NOT GENUINE PARTICIPANTS IN THE APPELLANTS BUSINESS. IN RESPECT OF CATEGORY I, THE BUYERS CONFIRMING AT THEY HAD CARRIED OUT DIRECT TRANSACTIONS WITH THE APPELLANT IS WELL WITHIN THE GENERAL AND ACCEPTED SCHEME OF THINGS. IT IS NOT PART OF THE ROLE OF THE AGENT TO ALWAYS ACT AS A PHYSICAL INTERMEDIARY BETWEEN THE BUYERS AND THE APPELLANT BEING THE SELLERS. PURCHASES WERE DIRECTLY MADE FROM THE APPELLANT WITH THE AGENT REMAINING IN THE BACKGROUND. THE BUYER IS INTERESTED ONLY IN EFFECTING THE PURCHASES; HE IS NOT DUTY BOUND TO KEEP TAX ON THE APPELLANT - SELLERS AGENTS AND PREPARE LISTS WHEN CALLED FOR. BUYERS ALSO INTERACT WITH SEVERAL AGENTS OF THE SAME NATURE EMPLOYED BY THEIR RESPECTIVE COMPETING PRINCIPALS PARTICIPATING IN THE SUPPLIER S OF MATERIAL SUPPLIES. SUCH LACK OF AWARENESS ALONE 'DOES NOT TAKE AWAY THE CHARACTER OF THE PAYMENTS MADE BEING THAT OF COMMISSIONS OR THE TRUTH AND GENUINENESS OF THE PRINCIPAL - AGENT TRANSACTIONS. THE PART OF THE ORDER THAT DEALS WITH THE ENHANCEMENTS O F COMMISSION PAYMENTS APPEARS TO HAVE FRAMED 10 ITA NO. 142/CTK/2015 ASSESSMENT YEAR : 2010 - 2011 ON SUSPICION AND PRESUMPTION, AND AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF STATE OF KERALA VS. M.M. MATHEW 42 STC (1978), HOWEVER STRONG SUCH SUSPICION OR PRESUMPTION IT COULD NOT REPLACE LEGAL PROOF. L) IN THE MATTER OF THE DISALLOWANCE OF THE COMMISSION AMOUNTS PAID TO THE HUFS TOTALING RS. 47,17,304/ - (CATEGORY V), THE SIMPLE ISSUE WAS WHETHER THE PAYMENTS WERE MADE TO THE HUFS CONCERNED. WHETHER THE PAYMENTS WERE ASSESSABLE AS INCOMES IN THE HANDS OF THE KARTAS OR IN THE HANDS OF THE HUFS THEMSELVES IS A SEPARATE MATTER. THE AOS GROUND THAT AN HUF COULD NOT SEEMINGLY PHYSICALLY RECEIVE THE COMMISSION AMOUNTS IS NOT ONE THAT AUTOMATICALLY DISALLOWS THE EXPENSE IN THE HANDS OF THE PAYER. SEPARATELY, THE CONCLUSION OF THE AO THAT HUFS ARE NOT PHYSICAL ENTITIES DISPLAY A LACK OF UNDERSTANDING/APPRECIATION OF THE PLAIN MEANINGS OF THE WORD PHYSICAL WHICH INCLUSIVELY CONNOTES A CORPOREAL, MATERIAL, PHENOMENAL AND TEMPORAL EXISTENCE OR STATE OF BEING. WHEN THERE IS NO TECHNICAL MEANING DEFINED OF A WORD EMPLOYED IN THE STATUTE, THE GENERAL MEANING OF THE SAME IN A PLAIN AND INCLUSIVE SENSE NEEDS TO BE EMPLOYED. M) THE WORD PHYSICAL DOES NOT LEND ITSELF TO EASY DEFINITION OR CONNOTATION. IT MEANS DIFFERENT THINGS TO DIFFERENT PEOPLE. WHEN UNDOUBTEDLY PHYSICAL MAN INHABITS A PHYSICAL WORLD, IT STANDS TO DEDUCTIVE REASON THAT GROUPS OF SUCH MEN SUCH AS ASSOCIATIONS OF PERSONS (AOPS) AND BODIES OF INDIVIDUALS (BOLS) TOO ARE PHYSICAL IN ESSENCE. EMPLOYING THE CANONIC PRINCIPLE OF NOSCITUR A SOCIIS (A WORD IS KNOWN BY THE COMPANY IT KEEPS), IT CAN BE READILY SEEN THAT AN HUF AS DEFINED U/S 2(15) OF THE INCOME - TAX ACT IS ACCOMPANIED BY OTHER PERSONS THAT INCLUDE INDIVIDUAL. IT OBVIOUSLY CANNOT BE THE AOS CASE THAT AN INDIVIDUAL IS NOT A PHYSICAL ENTITY, AND IT FOLLOWS THEREFORE THAT AN HUF, AND ALL THE OTHER PERSONS MENTIONED THEREIN ARE PHYSICAL ENTITIES UNDER THE STATUTE. N) THE WORD PHYSICAL ITSELF IS DERIVED FROM THE LATIN WORD PHY SIS WHICH MEANT MATTER IN ITS INDIVISIBLY ELEMENTAL FORM. HOWEVER, THE PHYSICAL WORLD IS BOTH TANGIBLE AND INTANGIBLE. THE HUMAN MIND INHABITS THE PHYSICAL WORLD AND THERE ARE PHILOSOPHIES THAT HOLD THAT MIND IS MADE UP OF AN INTANGIBLE PHYSICAL SUBSTANCE . THE CORPUS OF HUMAN KNOWLEDGE AS IT EXISTS TODAY IS INDEED REGARDED AS A PHYSICALLY SUBSTANTIVE ENTITY BY SUCH PHILOSOPHERS. IN ANY EVENT, THE STATEMENT OF THE AO THAT AN HUF IS NOT A PHYSICAL ENTITY HAS BEEN MADE WITHOUT LAYING ANY 11 ITA NO. 142/CTK/2015 ASSESSMENT YEAR : 2010 - 2011 FACTUAL FOUNDATIO N OR LOGICAL DISCURSIVE, DEDUCTIVE OR INDUCTIVE PROCESS AND CALLS FOR A SWEEPING AND BASELESS CONCLUSION. EVEN IF THE WORD PHYSICAL IS INTERPRETED IN ITS MOST LIMITED DEFINITION OF RELATING TO A BODY, IT CANNOT BE STATED THAT THE HUF AS DEFINED IN THE INCOME - TAX ACT DOES NOT HAVE A BODY AND IS THEREFORE NON - PHYSICAL. FOR, HUFS ARE MADE UP OF EMINENTLY PHYSICAL HUMAN BEINGS. NEXT, EVEN IF AN HUF IS NOT PHYSICAL, NOWHERE IS THE WORD PHYSICAL DEFINED IN THE INCOME - TAX ACT OR IT MENTIONED ANYWHERE T HEREIN THAT COMMISSION PAYMENTS ARE TO BE MADE ONLY TO PHYSICAL ENTITIES. UNDER THIS ARGUMENT, A REGISTERED FIRM OR A LIMITED COMPANY WOULD ALSO NOT BE PHYSICAL ENTITIES, AS THEY ARE DEFINED AND EXIST ONLY IN LAW. O ) HUF S EXIST AS ENTITIES UNDER LAW WHICH IS A CREATION OF CORPOREAL - PHYSICAL MAN TO FULFILL AND FACILITATE HIS LIFES NEEDS AND OBJECTIVES. HUFS EXIST IN PHYSICAL FORM AS MANIFESTED THROUGH. THEIR KARTAS AND IN SUCH FORM, AND AS, DEFINED PERSONS UNDER THE INCO ME - TAX ACT U/S 2(15) ARE / PERFECTLY CAPABLE OF CARRYING O UT BUSINESS AND/OR COMMERCIAL TRANSACTIONS. THERE ARE NO PHYSICAL/LEGAL INFIRMITIES IN THIS REGARD. IN THE CASE OF RAM LAXMAN SUGAR MILLS - V - CIT 66 ITR 613 SC, IT HAS BEEN HELD THAT A HINDU UNDIVIDED FAMILY IS UNDOUBTEDLY A 'PERSON' WITHIN THE MEANING OF THE INDIAN INCOME - TAX ACT. IN VARIOUS CASES THAT INDICATE THAT THE HONOURABLE COURTS HAVE UPHELD THAT HUFS CAN EARN COMMISSION INCOME, THE FOLLOWING MAY BE CONSIDERED. WHERE THE KARTA IS A PARTNER REP RESENTING THE HUF IN A FIRM AND SALARY OR COMMISSION IS PAID TO SUCH PARTNER, THE ISSUE ARISES WHETHER SUCH SALARY OR COMMISSION SHOULD BE ASSESSED IN THE HANDS OF HUF OR AS PERSONAL INCOME OF THE KARTA. THE TEST LAID DOWN BY THE HONOURABLE SUPREME COURT I N KUMAR SINGH HUKAM SINGHJI 78 ITR 33 (1970) (SC) IS WHETHER SUCH PAYMENT HAS BEEN MADE BECAUSE OF INVESTMENT IN THE FIRM OR AS A COMPENSATION FOR THE SERVICES RENDERED. IN CASE OF THE FORMER, IT WILL BE ASSESSED AS INCOME OF THE HUF WHILE IN CASE OF THE L ATTER, IT WILL BE ASSESSED AS THE PERSONAL INCOME OF THE KARTA. THIS PROPOSITION OF LAW HAS BEEN REITERATED IN PREM NATH - VS - CIT 78 ITR 319 (1970)(SC) AND HAS BEEN FOLLOWED IN CIT - VS - LACHLIMAN DASS BHATIA 162 TAXMANN 118 (DEL). THESE DECISIONS MEAN THAT HUF S CAN EARN COMMISSION INCOMES THAT ARE ASSESSABLE IN ITS HANDS (AS AGAINST THOSE OF THE KARTA) UNDER CERTAIN CONDITIONS. IN ANY EVENT, IN THIS CASE, THE PAYMENT HAS BEEN MADE AND WHETHER THE SAME IS TO BE ASSESSED IN THE HANDS OF THE HUFS OR THEIR RESPECTI VE KARTAS IS A DECISION TO BE TAKEN BY THE RESPECTIVE AOS POSSESSED OF THE JURISDICTION OF THOSE CASES. 12 ITA NO. 142/CTK/2015 ASSESSMENT YEAR : 2010 - 2011 P ) THE AOS PEJORATIVE STATEMENTS IN THE ASSESSMENT ORDER THAT 7/ MAY ALSO BE RECALLED THAT AN EXPENDITURE IS AN EXPENDITURE WHEN THE PAYER AND THE PA YEE ARE TWO DIFFERENT HANDS AND TWO DIFFERENT BEINGS. HERE IT IS THE SERVICES WHICH ARE BEING PAID FOR AND THESE SERVICES COULD ONLY BE PROVIDED BY FLESH AND BLOOD. SUCH INCOME CANNOT BE ATTRIBUTED TO AN ENTITY LIKE HUF AS THE HUF CANNOT PERFORM FUNCTIONS OF AN INDIVIDUAL BEING BECAUSE OF NOT EXISTING IN PHYSICAL FORM IS TO BE SEEN AGAINST THE FACT THAT THE APPELLANT AND THE RECEIVERS (THE HUFS) ARE TWO DIFFERENT HANDS AND TWO DIFFERENT BEINGS. ALSO AND IN PARTICULAR, NO FAIR AND REASONABLE OPPORTUNITY HAS BEEN PROVIDED TO THE APPELLANT TO ARGUE THE POINT OF THE PHYSICALITY OR OTHERWISE OF AN HUF. Q) IN CONSEQUENCE OF ALL THE ABOVE, IT IS HELD THAT THE AOS ACTION IN DISALLOWING THE IMPUGNED EXPENS ES TOTALING RS. 7,09,10,967 HAVE BEEN MADE ON EXTREMELY THIN AND SPECIOUS GROUNDS THAT THE BUYERS WERE NOT FOUND OR DID NOT RESPOND OR DISCLAIMED ANY KNOWLEDGE OF THE AGENTS OR THAT THE AGENTS WERE NOT ABLE TO REMEMBER THE BUYERS OR WERE NOT ABLE TO FURNIS H DETAILED PARTICULARS ABOUT THEM OR FOR THE REASON THAT THE COMMISSION AGENTS WERE HUFS. ALL OF THEM ARE REASONS THAT DO NOT SHOW ANY CLEAR UNDERSTANDING ABOUT T HE REASONS FOR AND THE MANNER IN WHICH THE AGENTS HA VE BEEN EMPLOY ED AND ENGAGED BY THE APPELL ANT. THE APPELLANT IS SEEN TO HAVE MADE THE NECESSARY DEDUCTIONS OF I DS, MAINTAINED THE NECESSARY BILLS, RECEIPTS CERTIFICATES AND OTHER DOCUMENTATION, MADE THE NECESSARY ENTRIES IN BOOKS OF ACCOUNTS THAT HAVE BEEN DULY AUDITED AND ALSO FURNISHED THE INCO ME - TAX PAR TICULARS OF THE AGENTS BEFORE TH E AO. COPIES OF SOME OF THE COMMUNICATIONS MADE BY THE APPELLANT TO THE AO IN THIS REGARD HAVE BEEN PROVIDED ON RECORD BY THE APPELLANT. R) THE INVERSE ARGUMENT OF THE AO THAT THE TDS DEDUCTIONS WERE PART OF A GRAN D INCOME - CONCEALMENT - TAX - EVASION - OR - ESCAPEMENT SCAM OPERATED BY THE APPELLANT IN A MANNER THAT THE LATTER WAS ENABLED TO LEGALLY DECAMP WITH 90% OF UNACCOUNTED MONEY DIVERSIONS AT A COST OF 10% OF THE SAME TOWARDS TDS, IS NOT BORNE OUT BY FACTUAL EVIDENCE S OR THE DILIGENT RESULTS OF RIGOROUS INQUIRY. THE STATEMENT OF THE AO THAT THE COMMISSION AGENTS WERE PROVED TO HAVE RENDERED NO SERVICES TO THE APPELLANT TOO IS SEEN TO BE ONE THAT CALLS FOR A CONCLUSION WITHOUT DUE FOUNDATION. RECORDING SWORN STATEMENTS FROM THE BUYERS AND NOT OBTAINING THESE FROM THE COMMISSION AGENTS THEMSELVES IS AN ASYMMETRIC EXERCISE, AND THE LATTER WOULD HAVE REVEALED THE K - TRUE PICTURE TO THE AO. 13 ITA NO. 142/CTK/2015 ASSESSMENT YEAR : 2010 - 2011 S ) THE ENHANCEMENT MADE OF RS. 7,09,10,967/ - ON THE SAID COUNT IS CONSEQUENTLY DELETED AND THE APPEAL ALLOWED. 8. LD D.R. COULD NOT POINT OUT ANY SPECIFIC ERROR IN THE FINDINGS OF THE CIT(A) THAT AT TIMES COMMISSION AGENT WHEN APPROACHES THE PURCHASERS, HE DOES NOT IDENTIFY HIMSELF AS AN AGENT OF THE SELLER AND MERELY IDENTIFYING HI MSELF AS REPRESENTATIVE OF THE SELLER, IN SUCH CIRCUMSTANCES, THE BUYER CANNOT BE AWARE THAT THE PERSON WHO HAS APPROACHED IS EMPLOYEE OF THE SELLER OR AGENT OF THE SELLER. FURTHER, THE CIT(A) OBSERVED THAT THE COMMISSION MAY BE PAID TO AN AGENT FOR FACI LITATING THE TRADE EVEN WHEN THE ORDERS ARE DIRECTLY GIVEN TO THE SELLERS BY THE PURCHASERS. FURTHER, NON - SERVICE OF LETTERS TO THE BUYERS OR NON - COMPLIANCE OF THE LETTERS BY THE BUYERS DOES NOT SHOW THAT THE PAYMENT OF COMMISSION WAS NOT GENUINE WHEN THE RELATIVE SALE WAS CONSIDERED GENUINE. FURTHER, NON - FURNISHING OF THE NAME OF THE BUYERS BY AGENT IN COMPLIANCE TO THE NOTICE DOES NOT NECESSARILY MEAN THAT THE AGENT IS NOT AWARE OF THE BUYERS. FURTHER, TO HOLD THAT IN NO SITUATION COMMISSION CAN BE EAR NED BY A PERSON LIKE HUF IS ALSO NOT TENABLE. WE FIND THAT NO MATERIAL COULD BE BROUGHT BEFORE US TO SHOW THAT THE PERSON TO WHOM COMMISSION WAS PAID WERE ACCOMMODATION/ENTRY PROVIDER AND THE MONEY WHICH WAS PAID THROUGH BANKING CHANNEL TO THEM CAME BACK TO THE ASSESSEE. IN THE CIRCUMSTANCES, IN THE ABSENCE OF ANY SPECIFIC DEFECT BEING POINT ED OUT IN THE ORDER OF THE CIT(A), WE FIND NO GOOD REASON TO INTERFERE WITH THE ORDER OF THE CIT(A), WHICH IS HEREBY CONFIRMED AND THE GROUND OF APPEAL OF THE REVENUE IS DISMISSED. 14 ITA NO. 142/CTK/2015 ASSESSMENT YEAR : 2010 - 2011 9. IN THE RESULT, APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRO NOUNCED IN THE OPEN COURT ON 31 /08/2017. SD/ - SD/ - ( PAVAN KUMAR GADALE) ( N.S SAINI) JUDICIALMEMBER A CCOUNTANT MEMBER CUTTACK; DATED 31 /08/2017 B.K.PARIDA, SPS COPY OF THE ORDER FORWARDED TO : BY ORDER, SR.PRIVATE SECRETARY ITAT, CUTTACK 1. THE APPELLANT : DCIT, ROURKELA CIRCLE, ROURKELA 2. THE RESPONDENT. SMT. INDRANI PATNAIK,A - 6, COMMERCIAL ESTATE, CIVIL TOWNSHIP, ROURKELA 3. THE CIT(A) - 2, BHUBANESWAR 4. PR.CIT - 2, BHUBANESWAR 5. DR, ITAT, CUTTACK 6. GUARD FILE. //TRUE COPY//