M/s KHT Agencies Pvt. Ltd., Bangalore V. ACIT, Bangalore

ITA 1432/BANG/2013

• Counselvise Citation: [2017] 130 COUNSELVISE.COM (IT) 8600 (ITAT-BANGALORE)
• Duration Of Justice: 3 year(s) 3 month(s) 8 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-01-2017
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: A
• Next Hearing Date: 03-11-2016
• Assessment Year: 2005-2006
• Appeal Filed On: 17-10-2013
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: KAMALADHAR HEARD ON P
• Assessee Lawyers: H V GOWTHAMA
• Keywords: Question of law; Fair market value; Revenue expenditure
• Section: 143(3)

Judgement Text

ITA.1432/BANG/2013 PAGE - 1 IN THE INCOME TAX APPELLATE TRIBUNAL BENGALURU BENCH 'A', BENGALURU BEFORE SHRI SUNIL KUMAR YADAV, JUDICIAL MEMBER AND SHRI. S. JAYARAMAN, ACCOUNTANT MEMBER I.T(TP).A NO.1432/BANG/2013 (ASSESSMENT YEAR : 2005-06) M/S. KHT AGENCIES P. LTD, NO.10, PALLAVI COMPLEX, SUBBAIAH CIRCLE, MISSION ROAD, BENGALURU 560 027 .. APPELLANT PAN : AAACK7822R V. ASST. COMMISSIONER OF INCOME TAX, CIRCLE 11(5), BENGALURU 560 001 .. RESPONDENT ASSESSEE BY : SHRI. H. V. GOWTHAMA, CA REVENUE BY : SHRI. KAMALADHAR, STANDING COUNSEL HEARD ON : 03.11.2016 PRONOUNCED ON : 25.01.2017 O R D E R PER S. JAYARAMAN, ACCOUNTANT MEMBER : THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST TH E ORDER OF CIT (A)-I, BENGALURU, DT.08.03.2010, FOR THE ASSESSMENT YEAR 2 005-06. 02. M/S. KHT AGENCIES P. LTD, THE ASSESSEE , A PRI VATE LIMITED COMPANY IS AN AUTHORISED DEALER AND SERVICE AGENT FOR SWARA J MAZDA VEHICLES AT BANGALORE, FILED ITS RETURN FOR THE A Y 2005-06 ON 27.10.2005, DECLARING A TOTAL INCOME AT RS.47,34,2 88/-. IN ITA.1432/BANG/2013 PAGE - 2 THE ASSESSMENT MADE U/S 143(3) DATED 28/12/2007, TH E A O , INTER ALIA, DISALLOWED THE FOLLOWING AMOUNTS, THE FIRST F OUR DISALLOWANCES WERE MADE U/S 40 A(2)(A), WHICH WERE CLAIMED AS DEDUCTI ONS : I) COMMISSION PAID TO PBP ASSOCIATES RS. 12, 78,000 II) COMMISSION PAID TO KIRIT MORZARIA RS. 4,1 9,500 III) COMMISSION PAID TO ADIT MORZARIA RS. 7,64 ,500 IV) COMMISSION PAID TO SMT.HARSHIDA MOZARIA RS. 4,82, 080 V) RENT PAID TO SNIT. HARSHIDA MORZARIA RS. 3,15,500 VI) LABOUR CHARGES PAID TO MORZARIA MOTORS RS. 4, 30,845 VII) LOSS ADDED BACK RS. 91,670 TOTAL RS.37,82,015 03. ON APPEAL, THE CIT (A) -1, BANGALORE IN HIS ORD ER IN ITA NO 320/AC-11(5)/A-1/07-08 DT 08.3.2010 ALLOWED THE THE FIRST FIVE DISALLOWANCES, SUPRA, AND CONFIRMED THE DISALLOWANCE OF RS.4,30,8451 RELATING TO THE LABOUR CHARGES PAID TO M/S MORZARIA MOTORS. 04. AGGRIEVED BY THE ABOVE ORDER, THE REVENUE FILED AN APPEAL BEFORE THIS TRIBUNAL. THE HON'BLE ITAT IN ITS ORDE R IN ITA NO 776/BANG/2010, DT 25.11.2011 , INTER ALIA, ACCEPTED THE CONTENTION OF THE DEPARTMENT THAT THE CIT (A) HAS NOT GIVEN AN Y REASON WHILE DELETING THE ADDITION MADE BY THE AO. THEREFO RE , IT SET ASIDE THIS ISSUE TO THE CIT (A) WITH A DIRECTION TO PASS A WELL- REASONED AND SPEAKING ORDER. CONSEQUENTLY, THE CIT (A) PASSED AN ORDER IN ITA NO 320/AC-11(5)/A-1/07-08 DT 19.07.2013 DISM ISSING ITA.1432/BANG/2013 PAGE - 3 THE APPEAL. AGGRIEVED, THE ASSESSEE FILED THIS APPE AL WITH THE FOLLOWING GROUNDS OF APPEAL: ITA.1432/BANG/2013 PAGE - 4 05. THE ASSESSEE FILED THE FOLLOWING ADDITIONAL GRO UNDS ALSO : 06. THE AR SUBMITTED THAT THE CIT (A) IS NOT CORREC T IN CONFIRMING THE DISALLOWANCES ,WHEN HE HAD CONSIDERED ALL THE FACTS AND CIRCUMSTANCES IN HIS ORDER DT 08.3.2010 AND DID NOT APPRECIATE THE F ACT THAT THE COMMISSION PAID IN SIMILAR CIRCUMSTANCES HAS BEEN ALLOWED IN T HE EARLIER ASSESSMENT YEAR AND LATER ASSESSMENT YEAR. PER CONTRA, THE DR SUPPORTED THE FINDINGS OF THE CIT (A) AND RELIED ON THE DECISION OF THE HO NBLE APEX COURT IN GANAPATHY AND CO V CIT (2016) 381 ITR 363SC. WE HE ARD THE RIVAL SUBMISSIONS. THE RELEVANT PORTION OF THE CIT (A) OR DER IS EXTRACTED AS UNDER: 3. DISALLOWANCE OF COMMISSION PAYMENTS: 3.1 THE AO NOTED THAT THE APPELLANT HAD PAID COMMIS SIONS TO THE FOLLOWING FOUR PERSONS: ITA.1432/BANG/2013 PAGE - 5 I) COMMISSION PAID TO PBP ASSOCIATES RS. 12,78,000 II) COMMISSION PAID TO KIRIT MORZARIA RS. 4,19,500 III) COMMISSION PAID TO ADIT MORZARIA RS. 7,64,500 IV) COMMISSION PAID TO SMT.HARSHIDA MORZARIA RS. 4,82,000 TOTAL RS. 29,44,000 3.2 THE AO NOTED THAT, APART FROM SALARIES, THE DIR ECTORS OR THEIR RELATIVES RECEIVED COMMISSION FROM THE APPELL ANT- COMPANY. THE AO FOUND THAT THE COMMISSIONS HAD BEEN PAID BY JOURNAL ENTRIES AND NOT THROUGH BANK ACCOUNTS. THE APPELLANT SUBMITTED BEFORE THE AO THAT COMMISSION WERE PAID D EPENDING ON FACTORS LIKE THE PROFIT MARGIN EARNED ON EACH VEHIC LE, MODEL OF THE VEHICLE SOLD AND THE FITMENTS MADE TO THE VEHICLE. THE APPELLANT ALSO EXPLAINED THAT, IF EMPLOYEES SOLD VEHICLES WITHOUT DISCOUNT, THEY WERE GIVEN HIGHER , COMMISSION; THAT THE COMMISSION PAID TO DIRECTORS WAS BASED ON THE TURNOVER, PROFIT AND THE NUMBER OF VEHICLES SOLD IN BULK; THAT THERE WAS NO AGREEMENT WITH THE DIRECTORS OR THEIR RELATIVES FOR PAYMENT OF COM MISSION. THE AG ALSO NOTED THAT THE COMMISSION PAID TO PERSONS OTHE R THAN THE DIRECTORS AND THEIR RELATIVES WERE MUCH LESS. ANALY SING THE FACTS RELATING TO PAYMENT OF COMMISSION TO THE DIRE CTORS/THEIR RELATIVES, THE AO CAME TO THE CONCLUSION THAT THE P AYMENTS TO THEM WERE MADE ONLY THROUGH JOURNAL ENTRIES; THAT T HERE WAS NO BASIS FOR DETERMINING THE COMMISSION PAID THAT COMM ISSIONS PAID TO THE DIRECTORS/THEIR RELATIVES EXCEEDED THE COMMI SSIONS PAID TO OTHERS; THAT COMMISSIONS WERE PAID TO EMPLO YEES OF THE APPELLANT AND M/S PBP ASSOCIATES IN WHICH THE APPELLANT-COMPANY IS A PARTNER; THAT THE DIRECTORS AND THEIR RELATIVES CLAIMED DEDUCTION AT 30% OF COMMISSION AS EXPENDITURE, WHICH IS NOT ALLOWABLE SINCE THE COMMI SSION PAID TO THEM PARTAKE THE CHARACTER OF SALARY IN TER MS OF SECTION 17 OF THE ACT. IN VIEW OF THESE ADVERSE OBS ERVATIONS, THE AG DISALLOWED THE COMMISSION PAYMENTS TO THE DIRECTORS AND THEIR RELATIVES AMOUNTING TO RS.29,44,800/-. 3.3 IN SO FAR AS THE PAYMENT OF RENT OF RS.3,15,500 /- FOR THE PREMISES AT VADODARA, THE AO FOUND THAT, SI NCE THE SAME PREMISES WERE OCCUPIED BY M/S MORZARIA MOTORS, THE CLAIM REGARDING THE PAYMENT OF RENT WAS SHAM AND, THEREFO RE, DISALLOWED THE SAME. 3.4 THE FOLLOWING ARE THE RELEVANT GROUNDS OF APPEA L: ITA.1432/BANG/2013 PAGE - 6 '1.THE LEARNED ASSISTANT COMMISSIONER OF INCOME TAX ERRED IN DISALLOWING A SUM OF RS.37,82,015/- UNDER THE PROVI SION OF SECTION 40A(2)(A) OF INCOME TAX ACT, IN RESPECT OF COMMISSIONS PAID, LABOUR CHARGES PAID AND RENT PAID TO A PARTNE RSHIP FIRM, IN WHICH THE APPELLANT IS ALSO ONE OF THE PARTNER, TWO OF THE DIRECTORS AND THE HUSBAND OF THE DIRECTOR. 2.THE LEARNED ASSESSING OFFICER ERRED IN IGNORING T HE FACE THAT, PAYMENT OF THE COMMISSION IS MADE IN THE NORMAL COU RSE OF BUSINESS AND IT IS VERY REASONABLE AMOUNT CONSIDERI NG THE BUSINESS AND NET PROFIT EARNED BY THE COMPANY. 3.THE LEARNED ASSESSING OFFICER OUGHT TO HAVE CONSI DERED THAT, WITHOUT PUTTING EFFORTS IN THE NATURE OF THE BUSINESS CARRIED ON BY THE APPELLANT, IT IS DIFFICULT TO ACHIEVE THE TURNOVER, WHICH THE COMPANY HAS EARNED. 4.THE LEARNED ASSESSING OFFICER WAS WRONG IN CONSID ERING THE PAYMENT MADE AS EXCESSIVE. 5. THE LEARNED ASSESSING OFFICER ERRED IN CONCLUDIN G THAT, SINCE ALL THE COMMISSION ENTRIES HAVE BEEN MADE THROUGH J OURNAL ENTRIES, SOME PAYMENT IS A SHAM TRANSACTION. 6. THE APPELLANT SUBMITS THAT, SINCE THERE IS A REG ULAR RUNNING ACCOUNT OF PERSONS CONCERNED IN THE BOOKS O F ACCOUNT MAINTAINED, JOURNAL ENTRIES HAVE BEEN PASSED FOR CO MMISSION DUES AND THERE ARE ALL GENUINE TRANSACTIONS. 7. THE LEARNED ASSESSING OFFICER ERRED IN CONSIDERI NG THE PAYMENT OF RENT TO SMT. HARSHIDA MORZARIA, DIRECTOR OF THE COMPANY, HAS NOT CONNECTED WITH THE BUSINESS CARRIED ON BY THE A PPELLANT.' 3.5 THE FOLLOWING SUBMISSIONS HAVE BEEN MADE IN WRI TING : A. COMMISSION PAID TO DIRECTORS : BOTH HARSIDA MORZARIA AND ADIT MORZARIA ARE WORKING DIRECTORS OF THE COMPANY, DRAWING MONTHLY REMUNERATION WHICH HAS BEEN ALLOWED BY THE LEARNED ASSESSING OFFICER. APAR T FROM THE SALARY PAID, THE DIRECTORS HAVE BEEN PAID COMMISSIO N FOR THE BUSINESS SUPPORTED THEM TO THE COMPANY. THE GRO SS PACKAGE BY REMUNERATION PAID TO THEM EVER SINCE THE Y WERE EMPLOYED WAS PARTLY BY MONTHLY REMUNERATION AND PAR TLY BY ALES COMMISSION. THE GROSS COMMISSION PAID INCLUDIN G COMMISSION PAID TO PBP ASSOCIATES, A PARTNERSHIP FI RM, ITA.1432/BANG/2013 PAGE - 7 MR.KIRIT MORZARIA, RELATIVE OF A DIRECTOR AS WELL A S OTHER COMMISSION PAID TO SOME OF THE EMPLOYEES, WORKS OUT TO HARDLY 1.40% OF THE SALES AS AGAINST 1.46% PAID DURING THE ASST. YEAR 2004-05, WHICH IS DETAILED AS HEREUNDER: A.Y. 2004-05 A.Y. 2005-0 6 GROSS REVENUE 19.12 CRORES 33.91 CRORES COMMISSION PAID 28.01 LAC 47.70 CRORES PERCENTAGE 1.46% 1.40% THE TRADE IN WHICH THE APPELLANT COMPANY IS DEALING IN, IS COMPETITIVE AND IN THIS NATURE OF TRADE, PAYMENT OF COMMISSION IS COMMON. THE APPELLANT COMPANY EVEN FO R OTHER SENIOR EMPLOYEES OF THE COMPANY PAY BOTH SALA RY AS WELL AS COMMISSION WHICH HAS BEEN ALLOWED AS REVENUE EXP ENSES. DETAILS OF THE COMMISSION PAID DURING THE YEAR, INC LUDING THEIR PAN, WHEREVER AVAILABLE ARE ENCLOSED AS ANNEX URE. IT MAY BE OBSERVED THAT, ALL THE PERSONS TO WHOM COMMI SSIONS ARE PAID, ARE REGULARLY ASSESSED TO INCOME TAX. THE ONL Y REASON WHY THE ASSESSING OFFICER HAS CONSIDERED THAT THE P AYMENTS OF COMMISSION ARE NOT GENUINE IS FOR THE DIRECTORS AND THEIR RELATIVES, COMMISSIONS ARE PAID THROUGH JOURNAL ENT RIES AND THE SAME IS NOT PUT THROUGH THE BANK ACCOUNTS. IN THIS CONNECTION, WE WOULD LIKE TO SUBMIT THAT THE ABOVE PARTIES TO WHOM COMMISSIONS ARE PAID, NAMELY, PBP ASSOCIATES, DIREC TORS AND THEIR RELATIVES ARE HAVE RUNNING ACCOUNT WITH T HE COMPANY WHEREIN ALL THEIR DRAWINGS HAVE BEEN DEBITED. THERE ARE REGULAR PAYMENTS BY CHEQUES WHICH ARE DEBITED TO THEIR ACCO UNT. THE COMMISSION ENTRIES ARE FINALIZED ONLY AFTER THE END OF THE ACCOUNTING YEAR, DEPENDING ON THE TURNOVER AND THE NUMBER OF PARTIES INTRODUCED BY THE RESPECTIVE DIRE CTORS AND THEIR RELATIVES, THEREFORE THE SAME IS CREDITED THROUGH JOURNAL VOUCHERS. THE LIST OF PARTIES WHO HAVE BEEN INTRODUCED BY THE RESPECTIVE EMPLOYEES, DIRECTORS A ND THEIR RELATIVES IS ENCLOSED HEREWITH. THE PARTIES WHO HA VE BEEN INTRODUCED BY THE ABOVE PERSONS HAVE PURCHASED BULK NUMBER OF VEHICLES.THERE IS NO STANDARD PERCENTAGE OF COMMISS ION, BUT THE PAYMENT OF COMMISSION AS ALREADY MENTIONED TO T HE LEARNED ASSESSING OFFICER, DEPENDING UPON SALE OF VEHICLES WITHOUT DISCOUNTS. SOMETIMES, THE APPELLANT COMPANY OFFER DISCOUNTS TO PURCHASER OF THE VEHICLES.IF THE EMPLO YEE OR DIRECTOR IS ABLE TO REDUCE THE DISCOUNT PAYABLE TO THE PURCHASERS, THEY ARE OFFERED HIGHER COMMISSION. IN THE CASE WHERE H IGHER DISCOUNTS HAVE BEEN ALLOWED TO THE PURCHASERS, THE COMMISSION GIVEN TO THE DIRECTOR OR EMPLOYEE WILL BE LESS. TH IS HAS BEEN ALREADY SUBMITTED TO THE LEARNED ASSESSING OFFICER. ITA.1432/BANG/2013 PAGE - 8 B) SO FAR AS PAYMENT OF COMMISSION TO MR. KIRIT M ORZARIA IS CONCERNED, THE LEARNED ASSESSING OFFICER HAS DIS ALLOWED 50% OF THE COMMISSION PAID TO MR. KIRIT MORZARIA, A MOUNTING TO RS.4,19,500/-. IN THIS CONNECTION, WE WRITE TO SUBM IT THAT MR. KIRIT MORZARIA IS NOT AN EMPLOYEE OF THE COMPAN Y, HE DOES NOT DRAW ANY SALARY. WHATEVER PAYMENTS ARE MADE TO HIM ARE ONLY IN THE NATURE OF COMMISSION, AMOUNTING TO RS.8 ,67,000/-. HE IS WORKING FOR WHOLE DAY BOTH IN THE SALES O FFICE AS WELL AS WORKSHOP. HE INTRODUCES THE PARTIES AND SITS FOR NEGOTIATION FOR BOOKING THE ORDERS ALONG WITH THE D IRECTORS AS WELL AS OTHER EMPLOYEES OF THE COMPANY. HE IS HIGHL Y EXPERIENCED PERSON AND PAYMENT OF RS.8.67 LACS FOR THE EFFORTS IS MUCH LESS THAN THE MARKET CONDITION. EVE N FOR THIS COMMISSION, THE LEARNED ASSESSING OFFICER HAS MENTIONED THAT THE PAYMENTS ARE THROUGH JOURNAL VOUCHERS. AS STATED ABOVE, THERE IS A RUNNING ACCOU NT FOR MR. KIRIT MORZARIA AND THE AMOUNT DRAWN HAVE BEEN D EBITED TO THE ACCOUNT AND COMMISSION ENTRY IS MADE THROUGH JO URNAL VOUCHERS. C. PAYMENTS MADE TO PBP ASSOCIATES: PBP ASSOCIATES IS A PARTNERSHIP FIRM, CONSISTING OF THE ASSESSEE COMPANY AND TWO DIRECTORS SMT. HARSIDA MORZARIA AS WELL AS SRI ADIT MORZARIA AS PARTNERS. THE LEARNED ASSESSIN G OFFICER HAS DISALLOWED THE ENTIRE COMMISSION PAID TO PBP ASSOCIATES AS NOT GENUINE AND THE COMMISSION ENTRIE S HAVE BEEN MADE THROUGH JOURNAL VOUCHERS. EVEN THIS COMMI SSION IS BASED ON CERTAIN EMPLOYEES OF THE PBP ASSOCIATES BO OKING THE ORDERS. EVEN PRESUMING, BUT NOT ADMITTING, THAT THE COMMISSION IS REQUIRED TO BE DISALLOWED THE EXPENSE S INCURRED BY PBP ASSOCIATES AGAINST EARNING OF THE C OMMISSION WHICH AMOUNTS TO RS.11,89,048/-SHOULD HAVE BEEN ALL OWED AS EXPENDITURE OF THE APPELLANT COMPANY. BUT, THE ASS ESSING OFFICER HAS ONLY DISALLOWED THE COMMISSION PAID IGNORING THE EXPENDITURE INCURRED BY SAID FIRM. THE HON'BLE HIGH COURT OF DELHI IN THE CASE OF CIT VS DR. R.N. GOEL (177 TAXMAN, PAGE 374) HAS HELD THAT THE TRIBU NAL HAD COME TO THE CONCLUSION THAT HAVING REGARD TO TH E NATURE AND SCOPE OF THE SERVICE RENDERED BY CIL, IT WAS BOUND TO HAVE FAVOURABLE EFFECT ON THE OVERALL SALE S OF THE ASSESSEE, AS WAS EVIDENT FROM THE TURNOVER AND FIGURES REFERRED TO BY THE ASSESSEE. THE TRIBUNAL H AD CONCLUDED THAT THE SERVICE CHARGES PAID TO CIL AT T HE RATE OF 8 PERCENT WERE NEITHER EXCESSIVE NOR UNREASONABLE. T HE TRIBUNAL ALSO NOTED THAT THE INCOME EARNED BY CIL IN THE FORM OF SERVICE CHARGES ITA.1432/BANG/2013 PAGE - 9 AND COMMISSION WAS DULY REFLECTED IN THE PROFIT AND LOSS ACCOUNT AND RETURN OF INCOME FILED BY CIL (PARA 6). WHETHER OR NOT AN EXPENDITURE IS UNREASONABLE AND M ERITS DISALLOWANCE UNDER THE PROVISIONS OF SECTION 40A, I S ESSENTIALLY A QUESTION OF FACT. THERE WAS NO PERVERSITY IN THE FI NDINGS RETURNED BY THE TRIBUNAL IN THE IMPUGNED JUDGMENT. NO SUBSTANTIAL QUESTION OF LAW AROSE. THEREFORE, THE A PPEAL WAS TO BE DISMISSED'. FURTHER THE HON'BLE HIGH COURT OF DELHI HAS HELD IN THE CASE OF CIT VS DEVAYHI BEVERAGES LTD. (296 ITR, PAGE 41) TH AT 'REASONABLENESS OF EXPENSES COULD BE GONE INTO FOR THE PURPOSE OF DETERMINING WHETHER IN FACT THE AMOUNT W AS SPENT. BUT, IF THERE IS A NEXUS BETWEEN THE EXPENDI TURE AND THE PURPOSE OF THE BUSINESS, THE REVENUE CANNOT BE ALLOWED TO SUBSTITUTE ITS OPINION FOR THAT OF THE ASSESSEE, AS IF THE REVENUE WERE ITSELF THE BUSINESSMAN'. FURTHER, HON'BLE HIGH COURT OF MADRAS, IN THE CASE OF CIT VS PRINT SYSTEMS & PRODUCTS (285 ITR 337) HAS HELD THA T ' HELD, DISMISSING THE APPEAL, (I) THAT THE TRIBUNAL AFTER CONSIDERING THE RELEVANT MATERIALS CAME TO THE CONCLUSION THAT THE COMMISSION PAYMENT WAS NOT FOUND TO BE UNREASONABLE AND FURTHER THAT THE COMMISSION PAYMENT WHEN COMPARED WITH THE COMMISSION OFFERED BY OTHER ASSESSES IN SI MILAR BUSINESS AT 5 PERCENT, COULD NOT BE SAID TO BE EXCE SSIVE. NO FURTHER EVIDENCE OR MATERIAL WAS PRODUCED BY THE RE VENUE TO SHOW THAT THE ORDER OF THE TRIBUNAL WAS UNREASON ABLE AND UNJUST. THE TRIBUNAL WAS RIGHT IN LAW IN DELETING T HE ADDITION IN RESPECT OF COMMISSION PAID TO THE SISTER CONCERN UN DER SECTION 40A(2) OF THE INCOME TAX ACT, 1961'. TAKING SUPPORT FROM THE ABOVE DECISION, THE APPELLANT COMP ANY SUBMITS THAT PAYMENT OF COMMISSION TO THE ABOVE PER SONS ARE REASONABLE, CONSIDERING THE EFFORTS PUT IN BY THEM IN INCREASING THE SALES TURNOVER, WE RESPECTFULLY SUBM IT THE HON'BLE COMMISSIONER TO ALLOW THE ENTIRE COMMISSION PAID AS REVENUE EXPENDITURE. D. DISALLOWANCE OF RENT PAID: AS STATED EARLIER, THE APPELLANT COMPANY RUNS A WOR KSHOP FOR CARRYING OUT REPAIRS AND MAINTENANCE OF SWARAJ MAZDA VEHICLES IN BARODA. THE LEARNED ASSESSING OFFICER H AS OBSERVED IN PARA 7, PG.5 OF THE ORDER THAT ' THE AS SESSEE COMPANY IS THE ONLY AUTHORIZED DEALER FOR SWARAJ MA ZDA IN ITA.1432/BANG/2013 PAGE - 10 BANGALORE'. FOR REPAIR & MAINTENANCE OF SWARAJ MAZD A VEHICLES, THE APPELLANT COMPANY HIRED ONE WORKSHOP AT A-1, 987/12, GIDC SHED, MAKARPURA, VADODARA, WHICH IS OW NED BY SMT.HARSIDA MORZARIA, WHO HAD TAKEN THE WORKSHOP BUILDING OFF 30,000 SFT.FOR 99 YEARS LEASE FROM GOV T. OF GUJARAT. PART OF THIS, APPROX.15000 SFT. WAS RENTED OUT BY SMT. HARSIDA MORZARIA TO THE ASSESSEE COMPANY ON A MONTHLY RENT OF RS.26,500/-, WHICH APPROX. WORKS OU T TO RS1.77 PS PER SFT. IN AN INDUSTRIAL TOWN, HIRING WO RKSHOP AT SUCH A SMALL AMOUNT OF RENT CANNOT BE CONSIDERED AS UNREASONABLE. THE LEARNED ASSESSING OFFICER'S VIEW THAT THE APPELLANT COMPANY IS ONLY AUTHORISED DEALER FOR BAN GALORE CANNOT BE THE REASON FOR DISALLOWANCE OF RENT. THE APPELLANT COMPANY IS NOT PREVENTED FROM OPENING BRANCHES ANYW HERE IN INDIA SINCE A VACANT SHED WAS AVAILABLE AT BAROD A FOR A REASONABLE RENT, A SERVICE UNIT WAS OPENED IN BAROD A. COPY OF LEASE AGREEMENT ENTERED BETWEEN APPELLANT AND SMT. HARSIDA IS ENCLOSED HEREWITH. 3.6 I HAVE CAREFULLY CONSIDERED THE APPELLANT'S SU BMISSIONS, PERUSED THE ASSESSMENT ORDER AND OTHER MATERIALS AVAILABLE ON RECORD AND FROM IT REVEALS THAT THE APPELLANT COMPA NY CLAIMED RS.47,70,145/- TOWARDS COMMISSION PAYMENT T O THE DIRECTORS, EMPLOYEES, AND THE SISTER CONCERN. OUT O F RS.29,44,000/- DISALLOWED BY THE ASSESSING OFFICER AS NOT GENUINE. AT THE TIME OF APPEAL HEARING BEFORE THE H ON'BLE ITAT, BANGALORE, THE AR OF THE APPELLANT COMPANY FURNISHE D DETAILS OF NUMBER OF BUSES AND TRUCKS SOLD BY THE DIRECTORS AN D OTHER EMPLOYEES FOR WHOM THE COMMISSION HAVE BEEN PAID, THE SAME IS REPRODUCED BELOW : - ITA.1432/BANG/2013 PAGE - 11 3.7 FROM THE DETAILS GIVEN ABOVE, IT IS OBSERVED TH AT NUMBER OF TRUCKS AND BUSES WERE SOLD AND COMMISSION CLAIMED AGAINST DIRECTORS, EMPLOYEES OTHER PARTIES AND ASSOCIATES CONCERNED WH ICH IS SUMMARIZED AS UNDER : ITA.1432/BANG/2013 PAGE - 12 3.8 AS PER AUDITOR'S REPORT OPENING STOCK (VEHICLES ) PURCHASES DURING THE YEAR, SALE MADE DURING THE YEA R AND CLOSING STOCK (VEHICLES) REPORTED AS BELOW :- 3.9 IT MAY BE SEEN THAT THE TOTAL 416 VEHICLES (TRU CK - 141 + BUSES - 275) WERE SOLD DURING THE YEAR, HOWEV ER AS QUANTATIVE DETAILS FURNISHED BEFORE THE HON'BLE ITA T THE TOTAL VEHICLES SOLD SHOWN 426 I.E. 10 VEHICLES MORE. FURT HER, IT IS ALSO OBSERVED THAT COMMISSION CLAIM ON 416 VEHICLES UNIF ORMLY BY ALL DIRECTORS, RELATIVE OF DIRECTORS, ASSOCIATED CO NCERNED OF DIRFI, EMPLOYEES OF THE COMPANY AND ALSO BY OUTSI DE PARTIES. IN OTHER WORDS COMMISSION ON EACH VEHICLE CLAIMED A GAINST 6 CLAIMANTS WHICH INDICATED IN GIVEN TABULAR FORM ABO VE. IT MEANS ALL THESE CLAIMANTS HAVE PROCURED THE SALE OF ORDER ENTIRE TRUCK AND BUSES, SOLD DURING THE YEAR, ACCORDINGLY PROVIDED COMMISSIONS AGAINST THEM. THERE IS NO STRE TCH OF IMAGINATION THAT 6 PARTIES HAVE PROCURED THE PURCHA SE ORDER FOR THE TRUCKS AS WELL AS BUSES SOLDDURING THE YEAR. IN THIS CONNECTION, IT IS RELEVANT TO MENTION THE DECISION OF THE HON'BLE HIGH COURT OF GUJARAT IN THE CASE OF CORONATION FLOUR MI LLS VS. ACIT (2009) 314 ITR 1 (GUJ) WHEREIN IT WAS HELD THA T: - 'IN RELATION TO THE DISALLOWANCE UNDER THE PROVISIO NS OF SECTION 40A(2) OF THE ACT, A PLAIN READING OF THE PROVISION REVEALS THAT WHERE AN ASSESSEE -INCURS ONLY EXPENDITURE IN RESPE CT OF WHICH PAYMENT IS REQUIRED TO BE MADE OR HAS BEEN MADE TO ANY PERSON REFERRED TO IN CLAUSE (B) OF SECTION 40A(2) OF THE ACT AND THE ASSESSING OFFICER IS OF THE OPINION THAT SUCH EXPEN DITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO (A) FAIR MARKET VA LUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THEY PAYMEN T IS MADE OR (B) THE LEGITIMATE NEEDS OF THE BUSINESS OF THE ASSESSE E OR (C)THE BENEFIT DERIVED BY OR ACCRUING TO THE ASSESSEE ON R ECEIPT OF SUCH GOODS, SERVICES OR FACILITIES, THEN THE ASSESS ING OFFICER SHALL NOT ALLOW AS A DEDUCTION SO MUCH OF THE EXPEN DITURE AS IS SO ITA.1432/BANG/2013 PAGE - 13 CONSIDERED BY THE ASSESSING OFFICER TO BE EXCESSIVE OR UNREASONABLE. THEREFORE, IT BECOMES APPARENT THAT T HE ASSESSING OFFICER IS REQUIRED TO RECORD A FINDING AS TO WHETH ER THE EXPENDITURE IS EXCESSIVE OR UNREASONABLE IN RELATION TO ANY ONE OF THE THREE REQUIREMENT PRESCRIBED, WHICH ARE INDEPENDENT AND A LTERNATIVE TO EACH OTHER. ALL THE THREE REQUIREMENTS NEED NOT EXI STS SIMULTANEOUSLY. IN A GIVEN CASE, IF ANY ONE CAN BE INVOKED AND APPLIED IF THE FACT SO WARRANT. THE CONTENTION RAI SED ON BEHALF OF THE APPELLANT-ASSESSEE THAT THE FAIR MARK ET VALUE HAVING NOT BEEN ASCERTAINED BY THE ASSESSING OFFICE R NO DISALLOWANCE COULD HAVE BEEN MADE. THEREFORE, DOES NOT MERIT ACCEPTANCE. AS ALREADY NOTED HERE IN BEFORE, THE ASSESSING OFFICER HAS HELD A PART OF THE EXPENDITUR E TO BE EXCESSIVE HAVING REGARD TO THE LEGITIMATE NEEDS OF THE BUSINE SS AND FOR RECORDING SUCH FINDINGS COGENT REASONS ARE ASSIGNED BY THE ASSESSING OFFICER.' II)IN THE CASE OF CIT VS. PAAREL IMPORT & EXPORT (P ) LTD (2008) 171 TAXMAN 209 (KER), THE HON'HLE HIGH COURT HELD T HAT - 'THE MANAGING DIRECTOR AND OTHER DIRECTORS HAD RECE IVED REMUNERATION FROM THE COMPANY AND THEY HAD RENDERED SERVICES IN GENERAL ADMINISTRATION, MARKETING ETC., TO THE COMPANY. FOR THE VERY SAME FUNCTIONS SERVICE CHARGE S HAD BEEN PAID TO THE FIRM. IT REALLY SHOWED THAT T HE PERSONS CONCERNED WERE THE SAME AND THE REMUNERATION ACTUALLY RECEIVED FROM THE COMPANY REFLECTED THE SERVICE RENDERED BY THEM TO THE COMPA NY AND IT WAS NOT DUE TO ANY EXTRA SERVICE RENDERED BY THEM A S PARTNERS.' 3.10 THUS IT WAS A CASE WHERE REAL NATURE OF THE PA YMENT SHOWED THAT THE VERY SAME PERSON WHO WERE MANAGING THE COMPANY, HAD BEEN SHOWN AS IN RECEIPT OF REMUNERATI ON BEING THE PARTNERS OF THE FIRM. IN THE LIGHT OF THE DICTUM LA ID DOWN IN MC DOWELL & CO., LTD. VS. CTD (1985) 154 ITR 148 (S C) 22 TAXMAN 11(SC), THE TRANSACTION IN QUESTION WAS CLEA RLY A DEVICE TO AVOID TAX AND THE SAME WAS NOT CONVINCI NG. FURTHER HELD THAT : THE COMMISSIONER OF INCOME-TAX(APPEALS) REVERSED T HE ORDER PASSED BY THE ASSESSING OFFICER ONLY ON THE GROUND THAT TO HAVE THE APPLICATION OF SECTION 40A(2)(B) OF THE ACT, IT SHOULD HAVE BEEN ESTABLISHED THAT THE FAIR MARKET VALUE OF SERVICES FOR WHICH THE PAYMENT IS MADE IS LESS THAN THE AMOUNT PAID BY THE ASSESSEE. THE REAL ISSUE WAS NOT AT ALL CONSIDERED BY THE COMMISSIONER OF INCOME-TAX (APPEALS). THE APPROACH MADE IS TOTALLY ERRONEOUS. THE TRIBUNAL AFTER NOTICING T HAT THE ITA.1432/BANG/2013 PAGE - 14 MANAGING DIRECTOR OR SOME OF THE DIRECTORS OF THE A SSESSEE- COMPANY ARE RELATED TO THE PARTNERS OF THE FIRM, RE FERRED TO THE CLAIM OF THE ASSESSEE THAT SPECIALISED SERVICES REN DERED BY THEM ARE THOSE WHICH THE ASSESSEES-COMPANY COULD NOT DO AND THEY HELPED TO INCREASE THE EXPORT MARKET. THE TRIBUNAL ASSUMED THAT THEY ALSO INTRODUCED SOME INNOVATION IN THE WORKING OF THE COMPANY TO BOOST PRODUCTION AND IT WAS PRESUMED THAT THE PA YMENT OF SERVICE CHARGES PAID BY THE ASSESSEE WAS NOT BUSINE SS EXPEDIENCY AND HENCE AN ALLOWABLE DEDUCTION. WE ARE OF THE VIE W THAT NONE OF THE ASPECTS RELEVANT HAVE BEEN CONSIDERED BY THE TR IBUNAL AND THE IMPORT OF SECTION 40A(2)(B) HAS NOT BEEN DISCUS SED. THE FACT THAT THERE WAS NO BUSINESS INCREASE ACTUALLY, BECAU SE OF THE SERVICES RENDERED BY THEM, WAS ALSO NOT CONSIDERED AND THE FACT THAT THE COMPANY HAS BEEN PAYING SALARY AND COMMISS ION TO THEM FOR SOME SERVICE WAS ALSO NOT CONSIDERED. T HE APPROACH MADE IS TOTALLY PERVERSE AND THERE IS NO R ATIONALE IN IT. WE, THEREFORE, ANSWER THE QUESTIONS IN FAVOUR OF TH E REVENUE AND AGAINST THE ASSESSEE AND CONSEQUENTLY ALLOW THE APP EAL BY SETTING ASIDE THE ORDERS OF THE COMMISSIONER OF INC OME-TAX (APPEALS) AND THE TRIBUNAL AND RESTORE THE ORDER PA SSED BY THE ASSESSING OFFICER.' 3.11 IN THE CASE OF CIT VS. SULAIKHA CLAY MINES (20 10) 325 ITR 410 (KER) DISCUSSED BUSINESS DISALLOWANCE EXCESSIVE OR UNREASONABLE PAYMENTS AS UNDER 'SO FAR AS THE SECOND -ISSUE IS CONCERNED IT IS NOT IN DISPUTE THAT THE ENTIRE PAYMENTS OF AROUND RS.54 LA KHS OUT OF RS.63,23,282 SPENT BY THE FIRM AS HAVING BEE N PAID TO VARIOUS PARTNERS OR TO THEIR RELATIVES. SINCE PAYME NTS ARE MADE BY THE FIRM TO RELATED PERSONS THE OFFICER WAS PERFECTLY JUSTIFIED IN SCRUTINIZING THE ELIGIBILITY OF THE C LAIM. IT IS THE FINDING OF THE ASSESSING OFFICER THAT THE PAYMENTS ARE EXORBITANT. THE DETAILS OF PAYMENTS MADE TO PARTN ERS OR RELATIVES ARE DISCUSSED IN THE ASSESSMENT ORDER. N EITHER THE FIRST APPELLATE AUTHORITY NOR THE TRIBUNAL EXAM INED THE REASONABLENESS OF THE EXPENDITURE IN COMPARISON TO THE EXPENDITURE INCURRED IN SIMILAR CASES. THE FIRST AP PELLATE AUTHORITY AS WELL AS THE TRIBUNAL ALLOWED THE CLAIM BY HOLDING THAT THE EXPENDITURE IS REQUIRED IN THE NATURE OF T HE BUSINESS. WE ARE OF THE VIEW THAT THIS FINDING IS N OT SUFFICIENT TO REVERSE THE FINDING OF THE ASSESSING OFFICER BEC AUSE HE HIMSELF ALLOWED 75 PER CENT, OF THE EXPENDITURE AND ONLY 25 PER CENT, WAS FOUND TO BE INFLATED FOR THE PURPOSE OF HELPING THE RELATED PERSONS. WE DO NOT FIND ANY MATERIAL OR ITA.1432/BANG/2013 PAGE - 15 JUSTIFICATION FOR THE FIRST APPELLATE AUTHORITY OR THE TRIBUNAL TO ALLOW THE CLAIM. AT THE MAXIMUM THEY COULD HAVE REMANDED THE CASE TO THE ASSESSING OFFICER TO EXAMI NE EACH AND EVERY BILL AND VOUCHER PERTAINING TO THE P AYMENTS MADE TO PARTNERS AND RELATIVES TO COMPARE WITH MARK ET RATES AND TO DISALLOW THE EXCESS OVER ACTUAL PAYMEN TS. WE DO NOT THING AT THIS DISTANCE, OF TIME WE SHOULD RE MAND THE CASE FOR MORE THAN ONE REASON. IN THE FIRST PLACE, IF WE REMAND, THE ASSESSING OFFICER WILL HAVE TO EXAMINE EACH AND EVERY BILL AND VOUCHER AND THE EXCESS OVER MARKET R ATES FOR LORRY CHARGES, FOR TIPPER FOR EARTH MOVING EQUIPMEN T, ETC., SHOULD BE DISALLOWED WHICH MAY EXCEED MORE THAN 25 PER CENT ESTIMATED BY THE OFFICER. FURTHER, THERE IS LIKELIH OOD OF EXCESS PAYMENT FOR THE SIMPLE REASON THAT THE ASSES SEE - FIRM THOUGH REGULARLY ENGAGED IN MINING HAS NOT CHOSEN T O ACQUIRE ANY MINING EQUIPMENT LIKE EARTH MOVING EQUIPMENT, TIPPE RS, TRUCKS ETC.., WHICH ARE ACQUIRED BY THE PARTNERS AND RELAT IVES AND TAKEN ON HIRE BY THE FIRM AND THE PAYMENTS MADE ARE APPARENT LY HUGE AMOUNTS ABORTING MOST OF THE RECEIPTS IN BUSINESS I N THE CIRCUMSTANCES AND FOR THE SAKE OF FINALITY WE DECLI NE TO REMAND THE CASE BUT CONFIRM THE DISALLOWANCE OF 25 PER CENT, M ADE BY THE ASSESSING OFFICER UNDER SECTION 40A(2)(A) OF THE AC T. THE APPEAL IS CONSEQUENTLY, ALLOWED ON THIS ISSUE BY REVERSING TH E ORDER OF THE TRIBUNAL AND THAT OF THE FIRST APPELLATE AUTHOR ITY AND BY RESTORING DISALLOWANCE IN ASSESSMENT.' 3.12 THE HON'BLE HIGH COURT OF RAJASTHAN IN THE CAS E OF SHANTI LAL JAIN VS. CIT (212) 21 TAXMAN.COM 261 (RAJ) WHEREIN IT WAS HELD THAT :- 'IT IS APPARENT THAT THE ASSESSING OFFICER HAS EXAM INED VARIOUS STATEMENTS OF THE BROKERAGE WHICH WERE FURNISHED BY THE ASSESSEE BEFORE HIM AND IN THE CAS E OF INVESTOR, THE ASSESSEE HAS NOT SHOWN ANY PAYMENT OF BROKERAGE TO THE INVESTOR CONCERNED AND IT HAS ONLY SHOWN PAYMENT OF BROKERAGE TO HIS FAMILY MEMBERS. IT HAS BEEN FOUND BY THE ASSESSING OFFICER THAT IT HAS BEEN DON E TO DIVERT HIS INCOME TO HIS FAMILY MEMBERS WHICH WOULD OTHERW ISE BECOME TAXABLE IN HIS OWN HANDS. SHRI UTTAM CHAND J AIN AND SMT. SUNITA JAIN HAVING HUGE BROUGHT FORWARDED LOSS . THE INCOME WAS ALSO DIVERTED AS AGAINST THE HUGE LOSS. PROVISIONS OF SECTION 40A(2)(B) OF THE ACT HAS BEEN ATTRACTED.' SECTION 40A(2)(A) AND (2)(B) IS THE FOLLOWING TERMS :- (2)(A) WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN ITA.1432/BANG/2013 PAGE - 16 RESPECT OF WHICH PAYMENT HAS BEEN OR IS TO BE MADE TO ANY PERSON REFERRED TO IN CLAUSE (B) OF THIS SUB-SECTIO N, AND THE (ASSESSING) OFFICER IS OF OPINION THAT SUCH EXPENDI TURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES F OR WHICH THE PAYMENT IS MADE OF THE LEGITIMATE NEEDS OF THE BUSINESS OR PROFESSION OF THE ASSESSEE OR THE BENEFIT DERIVED BY OR ACCRUING TO HIM THEREFROM, SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. (III) ANY INDIVIDUAL WHO HAS A SUBSTANTIAL INTEREST IN TH E BUSINESS OR PROFESSION OF THE ASSESSEE, OR ANY RELA TIVE OF SUCH INDIVIDUAL; (IV) A COMPANY, FIRM, ASSOCIATION OF PERSONS OR HINDU UNDIVIDED FAMILY HAVING A SUBSTANTIAL INTEREST IN THE BUSINESS OR PROFESSION OF THE ASSESSEE OR ANY DIRECTOR, PARTNER OR MEMBER OF SUCH COMPANY, FIRM, ASSOCIATION OR FAMILY, OR ANY RELATIVE OF SUCH DIRECTOR, PARTNER OR MEMBER [OR ANY OTHER COMPANY CARRYING ON BUSINESS OR PROFESSION IN WHICH THE FIRST MENTIONED COMPANY HAS SUBSTANTIAL INTEREST]; (V) A COMPANY, FIRM, ASSOCIATION OF PERSONS OR HINDU UNDIVIDED FAMILY OF WHICH A DIRECTOR, PARTNER OR MEMBER, AS THE CASE MAY BE, HAS A SUBSTANTIAL INTER EST IN THE BUSINESS OR PROFESSION OF THE ASSESSEE; OR ANY DIRECTOR, PARTNER OR MEMBER OF SUCH COMPANY, FIRM, ASSOCIATIO N OR FAMILY OR ANY RELATIVE OF SUCH DIRECTOR, PARTNER OR MEMBER; (IV) ANY PERSON WHO CARRIES ON A BUSINESS OR PROFES SION, ITA.1432/BANG/2013 PAGE - 17 (A) WHERE THE ASSESSEE BEING AN INDIVIDUAL, OR ANY RELATIVE OF SUCH ASSESSEE, HAS A SUBSTANTIAL INTERE ST IN THE BUSINESS OR PROFESSION OF THAT PERSON; OR (B) WHERE THE ASSESSEE BEING A COMPANY, FIRM, ASSOCIATION OF PERSONS OR HINDU UNDIVIDED FAMILY, O R ANY DIRECTOR OF SUCH : COMPANY, PARTNER OF SUCH FIRM OR MEMBER OF THE ASSOCIATION OR FAMILY, OR ANY RELATIV E OF SUCH DIRECTOR, PARTNER OR MEMBER, HAS A SUBSTANTIAL INTE REST IN THE BUSINESS OR PROFESSION OF THAT PERSON. EXPLANATION - FOR THE PURPOSES OF THIS SUBSECTION, A PERSON SHALL BE DEEMED TO HAVE A SUBSTANTIAL INTEREST IN A BUSIN ESS OR PROFESSION, IF,-- (A) IN A CASE WHERE THE BUSINESS OR PROFESSION IS CARRIED ON BY A COMPANY, SUCH PERSON IS, AT ANY TIME DURING THE PREVIOUS YEAR, THE BENEFICIAL OWNER OF S HARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVID END WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) CARRYING NOT LESS THAN TWENTY PER CENT OF THE VOTING POWER; AND (B) IN ANY OTHER CASE, SUCH PERSON IS, AT ANY TIME DURING THE PREVIOUS YEAR BENEFICIALLY ENTITLED TO N OT LESS THAN TWENTY PER CENT OF THE PROFITS OF SUCH BUSINES S OR PROFESSION. 3.13 IN THE INSTANT CASE THE ASSESSING OFFICER HAS CONSIDERED THE PAYMENTS MADE TO PERSONS AS MENTIONED IN CLAUSE (A) OF SEC.40A(2) OF THE ACT EXPENDITURE IS EXCESSIVE OR U NREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS , SERVICES OR FACILITY ARE THE LEGITIMATE NEEDS OF THE BUSINES S OR PROFESSION OF THE APPELLANT. HEREIN THE FACTS SHOW THAT THE COMPANY CONSIST OF TWO DIRECTORS VIZ., (1) MRS. HAR SHIDA K MORZARIA AND (2) MR. ADIT K. MORZARIA. MR. KIRIT MORZARIA IS THE HUSBAND OF MRS. HARSHIDA MORZARIA (DIRECTOR) AND EMPLOYEE OF THE APPELLANT COMPANY. THEY ALSO FLOATE D A PARTNERSHIP FIRM VIZ., M/S P. B. P. ASSOCIATES WHER EIN THREE PARTNERS VIZ., (I) KHT AGENCY PVT. LTD (THE APPELLA NT) (II) MRS. HARSHIDA K MORZARIA (DIRECTOR) & (III) MR. ADI T K. MORZARIA (DIRECTOR). THE APPELLANT COMPANY CLAIMED EXPENSES AGAINST THE PERSONS MENTIONED ABOVE AS UNDER:- ITA.1432/BANG/2013 PAGE - 18 3.14 THE DETAILS GIVEN ABOVE SHOWS THAT DIRECTORS H AVE RECEIVED SALARY AND COMMISSION FROM THE APPELLANT COMPANY AS THEY HAVE RENDERED SERVICES IN GENERAL ADMINISTRATION, MARKETING ETC TO THE COMPANY. FOR T HE VERY FUNCTION, COMMISSION HAVE BEEN PAID TO THE FIRM M/S P.B.P. ASSOCIATES, THE EMPLOYEES OF THE APPELLANT COMPANY AND EVEN OUTSIDE PARTIES ALSO REFLECTS THE SERVICES RENDERED BY THEM TO THE COMPANY THEN IT WAS NOT DUE TO ANY EXTRA SERVICE RENDERED BY THEM AS DIRECTOR AND AS PARTNERS OF M/S P.B.P. ASSOCIATES. IT IS SIGNIFICAN T TO NOTE THAT THE. DIRECTORS AND ITS ASSOCIATES HAD MADE THEIR CL AIM THROUGH JOURNAL ENTRY ONLY. ON THE CONTRARY THE EMPLOYEES AND OTHER PARTIES PAYMENTS WERE MADE THROUGH CHEQUES AND DEMAND DRAFTS. FOR INSTANCE, SH RI S.VENKATESA, SHRI JAWAHAR KAPILA, MR. MIR NOOR AHME D, MRS.POONAM KAPILA, MR. IGNATIUS D MELLO PAYMENTS WE RE MADE THROUGH CHEQUES. FINDINGS OF MY PREDECESSOR WE RE ALSO THAT SUCH TRANSACTIONS WERE NON GENUINE, INTEN DED TO REDUCE THE PRO-FIT AND EVADE TAX THEREON SEEMS CORRECT BECAUSE THE APPELLANT HAS NOT DISPUTED THE FACT -THAT SUCH PAYMENTS ARE - ONLY JOURNAL ENTRIES EVEN THOUGH HASTILY IT HAS ALSO BEEN PLEADED THAT T HE CREDITS ARE TO BE THE RUNNING ACCOUNTS OF THESE PAY EES. THE AR OF THE APPELLANT PRODUCED A CERTIFICATE FROM N/S INDERSON MOTORS PVT. LTD. ITS REGISTERED OFFICE IN NEW DELHI, THAT THEY ARE GIVING COMMISSION TO THE MARKETING PERSONAL/AGENTS/BROKERS ETC RANGING FROM 0.25% TO 2 % ITA.1432/BANG/2013 PAGE - 19 DEPENDING ON NUMBER AND TYPE OF VEHICLES. FROM THE CERTIFICATE IT TRANSPIRES THAT THE SAID COMPANY PAY ING COMMISSION / BROKERAGE TO MARKETING PERSONNELS / AG ENTS / BROKERS, HOWEVER CERTIFICATE DOES NOT SPEAK ABOUT THE PAYMENT OF COMMISSION TO DIRECTORS OR THEIR RELATIVES. SECONDLY, PAYMENT OF COMMISSION RANGED BETWEEN 0.25% TO 2% MAY BE PREVAILING IN AND AROUND DELHI AND IT WILL VARY CITY TO CITY, REGION TO REGI ON, WHEREAS BUSINESS OF THE APPELLANT COMPANY IS IN SOUTHERN RE GION OF INDIA, THUS THE SAID CERTIFICATE HELD NOT APPLICABL E IN THE APPELLANT'S CASE. THE APPELLANT FAILED TO SATISFY T HREE REQUIREMENTS AS PRESCRIBED BY THE HON'BLE HIGH COUR T OF GUJARAT (SUPRA) AND THE ASSESSING OFFICER RIGHTLY H ELD THAT A PART OF THE EXPENDITURE TO BE EXCESSIVE HAVING REGA RD TO THE LEGITIMATE NEEDS OF THE BUSINESS. 3.15 AT THE TIME OF APPEAL HEARING THE AR OF THE APPELLANT FURNISHED THE COPIES OF ASSESSMENT ORDER DATED 23/11/2012 IN RESPECT OF MR. KIRIT MORZARIA AND SHR I ADIT K. MORZARIA FOR THE ASSESSMENT YEAR 200506, WHEREIN COMMISSION RECEIVED HAS BEEN CONSIDERED AS SALARY I N THE RESPECTIVE HANDS. IN VIEW OF THIS FACTS, THE APPELL ANT CONTENDED THAT SINCE COMMISSION PAID TO THEM ARE AS SESSED IN THEIR HANDS, HENCE SAME CANNOT BE ASSESSED IN THE H ANDS OF THE APPELLANT COMPANY, OTHERWISE IT TENTAMOUNT TO D OUBLE TAXATION. 3.16 IN THIS REGARD, I WOULD LIKE TO MENTION THAT T HE ASSESSING OFFICER JURISDICTION OVER THE AFORESAID PERSONS, HAVE NO OCCASION TO KNOW THE ACTUAL FACTS OF THE APPELLANT COMPANY, SINCE THE COMMISSION PAYMENTS AR E CONSIDERED IN THE HANDS OF THE APPELLANT COMPANY. SUBSTANTIVELY, CORRESPONDINGLY SO MUCH INCOME ASSES SED IN THE HANDS OF THE DIRECTORS, RELATIVES OF THE DIRECTOR A ND ASSOCIATES CONCERN REQUIRED TO BE EXCLUDED. 3.17 THE APPELLANT'S FURTHER CONTENTION IS THAT THE ASSESSMENT FOR EARLIER YEARS, EVEN SUBSEQUENT YEARS HAVE BEEN COMPLETED U/S 143(3) OF THE ACT AND COMMISSION PAYMENT HAS BEEN ACCEPTED IN TOTO, HENCE FOR THIS Y EAR ALSO BE ACCEPTED AS PAYMENTS WERE MADE REASONABLE AND BUSINESS REQUIREMENT. THIS CONTENTION ALSO NOT ACCEPTABLE AS PER INCOME- TAX, EACH YEAR HAVING SEL F CONTAINED UNIT AND THE SAME CANNOT BE EQUATED EITHE R FOR EARLIER YEARS OR FOR SUBSEQUENT YEAR/YEARS. ITA.1432/BANG/2013 PAGE - 20 3.18 IN VIEW OF THE DETAILED DISCUSSIONS MADE ABOVE , I AM AGREEMENT WITH THE FINDINGS OF THE ASSESSING OFFICE R AND DISALLOWANCE MADE ON ACCOUNT OF COMMISSION OF RS.29,44,000/- IS CONFIRMED. 4.0 AS REGARD THE DISALLOWANCE OF RENT OF RS.3,15,500/- IS CONCERNED THE FINDINGS OF THE ASSESSING OFFICER IS THAT PREMISES AT VODODARA IS O CCUPIED BY M/S MORZARIA MOTORS, HENCE PAYMENT AS RENT IS NO T GENUINE. IN WRITTEN SUBMISSION, THE AR OF THE APPEL LANT SUBMITTED THAT SMT. HARSHIDA K. MORZARIA, W/O KIRIT C. MORZARIA IS THE OWNER OF A-I, 987/12, GIDC SHED MAK ARPURA, VADODARA, TAKEN THE WORK SHOP BUILDING ABOUT 30,000 SQ. FT. FOR 99 YEARS LEASE FORM GOVERNMENT OF GUJURAT. PART OF THIS APPROXIMATELY 15,000 SQ. FT. WAS RENTED OUT BY SMT. HARSHA K MORZARIA TO THE APPELLANT COMPANY TO RS. 1 .77 PER SQ. FT., A COPY OF LEASE AGREEMENT ENTERED INTO BETWEEN THE APPELLANT AND SMT. HARSHIDA K MORZARIA ALSO ENCLOSE D. A PERUSAL OF THE SAID LEASE AGREEMENT SHOWS THAT TH E LEASE AGREEMENT WAS EXECUTED ON 01/04/2004 AND RELEVANT CONTENT OF THE AGREEMENT IS REPRODUCED BEL OW:- 'WHEREAS THE LESSOR IS IN POSSESSION OF THE A-I, 987/12, G.I.D.C., MAKARPURA, VADODARA - 390 010 DESCRIBED HERE BELOW:- ' I A N D , W H E R E A S , T H E L E S S E H E R E I N R E Q U E S T E D T H E LESSOR TO GRANT THE SAID 3500 SQUARE FEET APPROX, WORKSHOP SHED A PART OF A-I, 987/12, G.I.D.C. SHED ON LEASE AND THE LESSOR HAS AGREED TO GRANT THE SAID PREMISES ON LEASE SUBJECT TO CERTAIN TERMS AND CONDITIONS WHICH TERMS BEING AGREEABLE TO THE LESSEE AND ACCORDINGLY THE LESSEE HAS TAKEN THE SAID PREMISES ON LEASE ON 01/04/2004 FOR A PERIOD OF 60 MONTHS AND THE TERMS AND CONDITIONS OF LEASE AGREED TO BETWEEN THE PARTIES ARE REQUIRED TO BE RECORDED INTO WRITIN G: NOW, THEREFORE, THIS AGREEMENT CONFIRMING GRANT OF LEASE IS EXECUTED AND WITNESSTH AS FOLLOWS: 1. IN CONSIDERATION OF THE LESSEE PAYING TO THE LESSOR MONTHLY RENTAL PAYABLE AS SET OUT HEREBELOW AND OF THE COVENANTS OF THE LEASE CONTAINED HEREIN, THE LESSOR DOES HEREBY CONFIRM HAVING ALREADY GRANTED A PART OF 3500 SQ. FEET AT A -I, ITA.1432/BANG/2013 PAGE - 21 987/12, G.I.D.C., MAKARPURA, VADODARE - 390 010 TO THE LESSEE ON LEASE FOR A PERIOD OF 60 MONTHS COMMENCING FROM 01/04/2004 TO 31/03/2009 AND ACCORDINGLY THE LESSEE WHO HAS ALREADY BEEN IN POSSESSION OF THE SAID PREMISES ON 01/04/2004 SHALL HEREAFTER HOLD AND ENJOY THE SAME FOR THE SAID PERIOD SUBJECT TO THEIR TERMS AND CONDITIONS HEREINAFTER SET OUT.' 4.1 A CLOSE VERIFICATION OF THE COPY OF AFORESAID LEASE AGREEMENT FACTS EMERGED AS FOLLOWS :- I) STAMP PAPER PURCHASED IN THE NAME OF M/S MORZARIA FROM THE STATE BANK OF MYSORE, BANGALORE, KARNATAKA, THE AUTHORISED VENDOR NOT FROM THE VENDO R STATIONED IN GUJARAT. II) THAT STAMP PAPER WAS PURCHASED ON 28/10/2004, HOWEVER, LEASE AGREEMENT EXECUTED ON 01/04/2004 (SPECIALLY MENTIONED IN FIRS T LINE OF THE AGREEMENT) THUS IT CREATED DOUBT BEING A GENUINE AGREEMENT. III) AS PER LEASE AGREEMENT WORKSHOP SHED A-I 987/12 GIDC SHED IS ONLY 3,500 SQ. FT, WHEREAS AS PER THE APPELLANT'S SUBMISSION WORKSHOP SHED IS 30,000 SQ.FT, SUBMITTING CONTRADICTORY FACTS. IV) IN COLUMN 1 OF THE SAID LEASE AGREEMENT PURPORTED LEASE WOULD BE PART OF 3,500 SQ.FT. HOWEVER CONTENTION OF THE APPELLANT 15,000 SQ.FT. I.E. 50% OF 30 ) 000 SQ. FT BASED ON WHICH RATE PER SQ.FT WORKED OUT TO RS. 1.77. V) MONTHLY RENT FOR THE AFORESAID SHED WOULD BE RS.26,500/- AND SUCH RATE FOR 1,750 SQ FT. WOULD BE RS.15 PER SQ.FT WHICH IS MUCH HIGHER. VI) FROM THE INFORMATION FURNISHED BY THE APPELLANT SHOWS THAT MRS. HARSHIDA K MORZARIA OWNS SINGLE SHED, ADMEASURING 3,500 SQ. FT. NOT 30,000 S Q.FT AS CLAIMED. AS SUCH ACCOMODATABLE ONLY ONE WORK SH OP OR SERVICE CENTRE AND M/S. MORZARIA MOTORS MUST HAV E OCCUPIED THE SAME. ITA.1432/BANG/2013 PAGE - 22 4.2 THE FACTS NARRATED ABOVE, THE LEASE AGREEMENT PROVED TO BE ONLY A PAPER WORK, HENCE THE PAYMENT O F RENT IS ALSO NOT GENUINE. 4.3 THEREFORE, DISALLOWANCE OF RS.3,15,500/- IS CONFIRMED. 07. FROM THE ABOVE, IT IS CLEAR THAT THE CIT (A) FO UND THAT THE QUANTITATIVE DETAILS FURNISHED DID NOT MATCH IN PARA 3.9,SUPRA, TESTED THE TRANSACTIONS IN THE LIGHT OF THE REQUIREMENTS S PECIFIED BY THE HONBLE HIGH COURT OF GUJARAT REPORTED IN 314 ITR 1 IN PARA 3.13 & 3.14, SUPRA, AND CONFIRMED THE DISALLOWANCES . THE ASSESSEE COULD NOT LAY ANY MATERIAL TO ASSAIL SUCH FINDINGS AND HENCE WE CONFIRM THE ORDER OF THE CIT (A). SINCE THE ISSUES ARE DECIDED ON THE FACTS AND CIRCUMSTANCES OF THIS ASSESSEE , WE DO NOT FIND ANY MERIT IN THE ADDITIONAL GROUNDS AND HENCE DISMISS IT. SINCE THE ISSUE ON RENT DISALLOWANCE IS NOT PRESSED IT IS NOT ADDRESSED. 08. IN THE RESULT, THE ASSESSEES APPEAL IS DISMIS SED. ORDER PRONOUNCED IN THE OPEN COURT ON 25 TH DAY OF JANUARY, 2017. SD/- SD/- (SUNIL KUMAR YADAV) (S. JAYARAMAN) JUDICIAL MEMBER ACCOUNTANT MEMBER MCN* ITA.1432/BANG/2013 PAGE - 23 COPY TO: 1. THE ASSESSEE 2. THE ASSESSING OFFICER 3. THE COMMISSIONER OF INCOME TAX 4. THE COMMISSIONER OF INCOME TAX (A) 5. DR 6. GF, ITAT, BANGALORE BY ORDER ASSISTANT REGISTRAR