Aashish Shukla, Delhi V. ITO, Ward-36(1), New Delhi

ITA 1588/DEL/2018

• Counselvise Citation: [2019] 115 COUNSELVISE.COM (IT) 6880 (ITAT-DELHI)
• Duration Of Justice: 1 year(s) 7 month(s) 24 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 31-10-2019
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: SMC
• Assessment Year: 2014-2015
• Appeal Filed On: 06-03-2018
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Department Lawyers: EKTA VISHNOI
• Assessee Lawyers: MRS PREM LATA BANSAL
• Keywords: Gift; Business expenditure; Fair market value; Commercial expediency; Sham transactions; Capital expenditure; Set aside
• Section: 143(3); 133(6); 37(1); 143(2); 37

Judgement Text

PAGE 1 OF 24 IN THE INCOME TAX APPELATE TRIBUNAL DELHI BENCH SMC: NEW DELHI BEFORE SHRI H.S. SIDHU, JUDICIAL MEMBER ITA NO. 1588/DEL/2018 A.Y.: 2014-15 AASHISH SHUKLA, VS. ITO, WARD 36(1), PROP. M/S MEDI, ROOM NO. 910, SPM CIVIC 2 ND FLOOR, TAGORE PARK, CENTRE, NEW DELHI 2 MODEL TOWN, NEW DELHI 99 (PAN: BBAPS2543G) (APPELLANT) (RESPONDENT) ASSESSEE BY : MRS. PREM LATA BANSAL, SR. ADV. & SH. ABHISHEK KUMAR, ADV. DEPARTMENT BY : MS. EKTA VISHNOI, SR. D R. O R D E R THIS APPEAL FILED BY THE ASSESSEE IS DIRECTED AGAIN ST THE ORDER DATED 15.11.2017 OF THE LD. CIT(A)-12, NEW DELHI PERT AINING TO ASSESSMENT YEAR 2014-15 ON THE FOLLOWING GROUNDS:- 1. THAT THE LD. CIT(A) HAS ERRED IN CONFIRMING THE ADDITION OF RS. 25,72,092/- MADE BY THE ASSESSING OFFICER BY DISALLOWING THE COMMISSION PAID BY THE ASSESSEE TO M/S IDEM HEALTH CARE PVT. LTD. 2. THAT THE LD. CIT(A) HAS ERRED IN CONFIRMING THE DISALLOWANCE OBSERVING THAT THE ASSESSEE HAD FAILED TO ESTABLISH THE PAYMENT OF COMMISSION BY WAY OF NECESSARY EVIDENCES. 3. THAT THE LD. CIT(A) HAS ERRED IN IGNORING THE MATERIAL FACT THAT THE ASSESSING OFFICER HAD NOT PAGE 2 OF 24 DOUBTED RENDERING OF SERVICES FOR WHICH COMMISSION HAD BEEN PAID. INFACT CIT(A) HAD INVOKED PROVISIONS OF SECTION 40A(2) FOR DISALLOWING THE PAYMENT OF COMMISSION AND NOT THE PROVISIONS OF SECTION 37(1) OF THE ACT. 4. THAT THE LD. CIT(A) HAS MISDIRECTED HIMSELF IN N OT CONSIDERING TH'E LAW AND FACTS THAT MERE SUSPICION OR DOUBT IS NOT SUFFICIENT TO DISALLOW THE EXPENDITURE WHEN THE SERVICES WERE PERFORMED FOR WHICH THE PAYMENT WAS MADE. 5. THAT INFACT THE LD. AO AND LD. CIT(A) HAS NOT CONSIDERED THE NATURE AND CHARACTER OF THE BUSINESS PORTAL OF THE ASSESSEE WHICH IS PREVALENT IN THIS TY PE OF BUSINESS WHILE DISALLOWING PAYMENT OF COMMISSION AND GUIDED BY THE FACT THAT ASSESSEE HAD MADE PURCHASES FROM AND SALES TO THE RELATED PERSONS AND THE COMMISSION WAS PAID TO THE RELATED CONCERN. 6. THAT WHILE CONFIRMING THE ADDITION, LD. CIT(A) HAS NOT CONSIDERED THE MATERIAL FACT THAT BY DISALLOWING THE COMMISSION OF RS. 25,72,092/-, NET PROFIT CAME TO RS. 28,66,412/- I.E. 34.60% OF THE TURNOVER, WHICH COULD NEVER BE THE CASE PARTICULARLY WHEN THE ASSESSEE HAD LAUNCHED THE NEW PRODUCTS IN THE COMPETITIVE MARKETS. 7. THAT THE ADDITION MADE BY THE ASSESSING OFFICER WAS ARBITRARY AND CAPRICIOUS IN NATURE, WHICH DESERVES TO BE SET ASIDE. PAGE 3 OF 24 8. THAT THE APPELLANT SEEKS LEAVE TO ADD, AMEND, ALTER, ABANDON OR SUBSTITUTE THE ABOVE GROUNDS DURING THE HEARING OF THE APPEAL. 2. THE BRIEF FACTS OF THE CASE ARE THAT ASSESSEE FILE D HIS RETURN OF INCOME DECLARING INCOME AT RS. 3,97,240/- ON 29.3.2 015. THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTINY THROUGH CASS. ACCORDINGLY, NOTICE U/S. 143(2) OF THE INCOME TAX ACT, 1961 (IN SHORT ACT) WAS ISSUED ON 28.8.2015 AND SERVED UPON THE ASSESSEE. IN RESPONSE TO THE SAME AND SUBSEQUENT NOTICES, THE AR OF THE ASSE SSEE ATTENDED THE PROCEEDINGS AND FILED DETAILS FROM TIME TO TIME. DURING THE YEAR UNDER CONSIDERATION, THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF TRADING OF MEDICINES AND HAD SHOWN INCOME FROM HOUSE PROPERTY, INCOME FROM BUSINESS AND PROFESSION AND INCOME FROM OT HER SOURCES. DURING THE YEAR UNDER CONSIDERATION, THE SALES FROM THE PROPRIETORSHIP CONCERN M/S MEDI WERE DECLARED AT RS.82,85,280/- AGAI NST THE PURCHASES OF RS.73,38,607/-. THE GROSS PROFIT WAS DEC LARED AT RS.32,49,063/- AND NET PROFIT AT RS.2,94,320/-. THE AO FOUND ON COMPARISON THAT THOUGH GROSS PROFIT DURING THE YEAR UNDE R CONSIDERATION AS BETTER, NET PROFIT FELL DOWN TO 3.55% AGAINST THE NET PROFIT OF 10.64% AND 11.17% IN THE RELEVANT FINANCIAL YEARS FOR ASSESSMENT YEARS 2013-14 & 2012-13 RESPECTIVELY. ON FURTHER EXAMINATION THE ASSESSING OFFICER FOUND THAT 77.78% OF THE GROSS PROFIT HAS BEEN INCURRED ON COMMISSION. THE AO FURTHER NOTED THAT THE ASSESSEE DID NOT PAY ANY COMMISSION FOR THE PREV IOUS FINANCIAL YEAR RELEVANT FOR AY 2013-14. THE ASSESSEE SUBMITTED THAT COMMISSION AMOUNTING TO RS.25,27,092/- WAS PAID TO M/S IDEM HEALTHCARE PVT LTD. DURING THE RELEVANT FINANCIAL YEAR. IT WAS ALSO PAGE 4 OF 24 INFORMED THAT THE ASSESSEE WAS HIMSELF THE DIRECTOR IN M/S IDEM HEALTHCARE PVT. LTD. THE INQUIRY REVEALED THAT MR. AASHI SH SHUKLA WAS THE DIRECTOR IN THE SAID COMPANY SINCE 27.07.2012. TH E OTHER DIRECTORS OF THE COMPANY WERE WIFE OF THE ASSESSEE, YOUNGER BROTHER OF THE ASSESSEE AND FATHER OF THE ASSESSEE. THE ASSE SSING OFFICER OBSERVED THAT M/S IDEM HEALTHCARE PVT. LTD. WAS BEING R UN BY SHUKLA FAMILY. THE ASSESSEE SUBMITTED BEFORE THE ASSESSING OFFICER THAT THE FIRM MEDI (THE PROPRIETORSHIP CONCERN OF THE APPELLANT) LAUNCHED NEW PRODUCT DURING THE RELEVANT FINANCIAL YEAR AND APPOINT ED IDEM HEALTHCARE PVT. LTD. TO PROMOTE THE PRODUCTS. THIS COMPA NY INCURRED EXPENSES ON SALARY TO STAFF IN ADDITION TO OTHER ADM INISTRATIVE EXPENSES. ON EXAMINATION THE ASSESSING OFFICER FOUND THAT THE PURCHASES AND SALES WERE MADE FROM / TO FAMILY CONCERN S. THE PURCHASE WAS MADE FROM THE PROPRIETORSHIP CONCERN OR ASS ESSEES FATHER AND SALE WAS MADE TO THE PROPRIETORSHIP CONCERN O F MOTHER. THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN AS TO WHY COMMISSION EXPENSES SHOULD NOT BE DISALLOWED IN THE LIGHT OF THE PROVISIONS U/S 40A(2) OF THE ACT. THE ASSESSEE PURCH ASED MAJORITY OF THE GOODS (63.70% OF TOTAL PURCHASES) FROM HIS FATHER S H. SURENDER SHUKLA AND HAD SOLD MAJORITY OF THE GOODS (90.35% OF THE TOTAL SALES) TO HIS MOTHER SMT. PREM SHUKLA AND FOR THESE TRANSACTIO NS HE PAID COMMISSION OF RS. 25,27,092/- TO A COMPANY M/S IDEM HEALTHCARE PVT. LTD. IN WHICH HE HAS A DIRECTOR. THE ASSESSING OF FICER REFERRED TO THE PROVISIONS OF SECTION 40A(2)(B) AND HELD THAT TH E PAYMENTS WERE NOT JUSTIFIED IN VIEW OF THE LEGITIMATE NEEDS OF TH E ASSESSEE'S BUSINESS. THERE WAS NO NEED TO PAY COMMISSION TO THE COMPANY IN WHICH ASSESSEE WAS HIMSELF A DIRECTOR. THIS WAS ONLY AN INFLATION OF PAGE 5 OF 24 EXPENSES TO REDUCE THE BURDEN OF LAX. ACCORDINGLY, TH E ASSESSING OFFICER DISALLOWED THE CLAIM OF DEDUCTION AND MADE T HE ADDITION OF RS. 25,27,092/- BY ASSESSING THE INCOME AT RS. 29,24,33 0/- VIDE ORDER DATED 30.12.2016 PASSED U/S. 143(3) OF THE ACT. AG AINST THE ASSESSMENT ORDER, ASSESSEE APPEALED BEFORE THE LD. C IT(A), WHO VIDE HIS IMPUGNED ORDER DATED 15.11.2017, DISMISSED THE AP PEAL OF THE ASSESSEE. AGAINST THE IMPUGNED ORDER DATED 15.11.201 7 OF THE LD. CIT(A), ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 3. AT THE TIME OF HEARING, LD. SR. COUNSEL FOR THE ASSE SSEE HAS SUBMITTED THAT LD. CIT(A) HAS ERRED IN CONFIRMING T HE ADDITION OF RS. 25,72,092/- MADE BY THE ASSESSING OFFICER BY DISALLO WING THE COMMISSION PAID BY THE ASSESSEE TO M/S IDEM HEALTH C ARE PVT. LTD. SHE FURTHER SUBMITTED THAT LD. CIT(A) HAS ERRED IN CONF IRMING THE DISALLOWANCE OBSERVING THAT THE ASSESSEE HAD FAILED TO ESTABLISH THE PAYMENT OF COMMISSION BY WAY OF NECESSARY EVIDENCES. IT WAS FURTHER SUBMITTED THAT LD. CIT(A) HAS ERRED IN IGNORING THE MATERIAL FACT THAT THE ASSESSING OFFICER HAD NOT DOUBTED REND ERING OF SERVICES FOR WHICH COMMISSION HAD BEEN PAID. INFACT LD. CIT(A) HAD INVOKED PROVISIONS OF SECTION 40A(2) FOR DISALLOWING THE PAY MENT OF COMMISSION AND NOT THE PROVISIONS OF SECTION 37(1) O F THE ACT. THE LD. CIT(A) HAS MISDIRECTED HIMSELF IN NOT CONSIDERING THE LAW AND FACTS THAT MERE SUSPICION OR DOUBT IS NOT SUFFICIENT TO DISALLOW THE EXPENDITURE WHEN THE SERVICES WERE PERFORMED FOR WHIC H THE PAYMENT WAS MADE. THE AO AND LD. CIT(A) HAS NOT CONSIDERED THE NATURE AND CHARACTER OF THE BUSINESS PORTAL OF THE ASSESSEE WHICH IS PREVALENT IN THIS TYPE OF BUSINESS WHILE DISALLOWING PAYMENT OF COMMISSION AND GUIDED BY THE FACT THAT ASSESSEE HAD MADE PURCHASES FROM AND SALES PAGE 6 OF 24 TO THE RELATED PERSONS AND THE COMMISSION WAS PAID TO THE RELATED CONCERN. THAT WHILE CONFIRMING THE ADDITION, LD. C IT(A) HAS NOT CONSIDERED THE MATERIAL FACT THAT BY DISALLOWING THE COMMISSION OF RS. 25,72,092/-, NET PROFIT CAME TO RS. 28,66,412/- I.E. 34.60% OF THE TURNOVER, WHICH COULD NEVER BE THE CASE PARTICULARLY WHE N THE ASSESSEE HAD LAUNCHED THE NEW PRODUCTS IN THE COMPET ITIVE MARKETS. IN SUPPORT OF HER CONTENTION, SHE FILED A PAPER BOOK C ONTAINING PAGES 1-71 IN WHICH ASESSEE HAS ATTACHED THE COPY OF WRITT EN SUBMISSIONS FILED BEFORE CIT(A); COPY OF LETTER DATED 24.11.2016 FILED BY THE ASSESSEE BEFORE AO; COPY OF RETURN OF ASSESSEE FOR AY 2014-15 ALONGWITH COMPUTATION OF TOTAL INCOME, BALANCE SHE ET, PROFIT AND LOSS ACCOUNT; COPY OF RETURN OF ASSESSEE FOR AY 2013-14 AL ONGWITH COMPTATION OF TOTAL INCOME, BALANCE SHEET, PROFIT AN D LOSS ACCOUNT; COPY OF LETTER DATED NIL SHOWING TRADEMARK OF MEDICINE S IN THE NAME OF ASSESSEE; DETAILS OF STOCK AND SALES ANALYSIS; LETTER DATED 20.12.2016 FILED BY THE ASSESSEE BEFORE AO; DETAILS FILED BY M/S THE MEDI WORM PROP. SHRI SURENDRA SHUKLA IN PURSUANCE TO NOTI CE U/S. 133(6) ALONGWITH COPY OF RETURN, STATEMENT OF INCOME , BALANCE SHEET, TRADING AND PROFIT AND LOSS ACCOUNT AND THE COPY OF A CCOUNT OF ASSESSEE DULY CONFIRMED; COPY OF ACCOUNT OF M/S MEDI WORM FROM THE BOOKS OF ASSESSEE DULY CONFIRMED; DETAILS FILED BY M/S VINDHYAAS PROP. MRS. PREMA SHUKLA IN PURSUANCE TO NOTICE U/S. 133( 6) ALONGWITH COPY OF RETURN, STATEMENT OF INCOME, BALANCE SHEET, TRADING AND PROFIT AND LOSS ACCOUNT AND THE COPY OF ACCOUNT OF ASSESSE E DULY CONFIRMED; COPY OF ACCOUNT OF ASSESSEE DULY CONFIRMED; COPY OF ACCOUNT FO M/S VINDHYAAS FROM THE BOOKS OF ASSESSEE; REPLY FILED B Y M/S IDEM HEALTHCARE PVT. LTD. IN PURSUANCE TO NOTICE U/S. 133(6 ) OF THE ACT PAGE 7 OF 24 ALONGWITH COPY OF ITR, STATEMENT OF INCOME, BALANCE SHEET, PROFIT AND LOSS ACCOUNT AND THE COPY OF ACCOUNT OF ASSESSEE; A CCOUNT OF M/S IDEM HEALTHCARE FROM THE BOOKS OF ASSESSEE AND DETAIL S OF OPENING STOCK, CLOSING STOCK, SALES SUMMARY AND PURCHASES A ND ALSO FILED THE WRITTEN SUBMISSIONS BEFORE THE TRIBUNAL, WHICH READ AS UNDER:- WRITTEN SUBMISSIONS ASSESSEE SHRI AASHISH SHUKLA, A PROPRIETOR OF M/S MEDI, WAS HOLDING TRADEMARK OF FOLLOWING PRODUCTS: A) ASERP TABLET H) MEDENT PASTE B) CALCIDEM SOFTGEL I) MEDICLAV 625 TABLET C) CLIK CAPSULE J) MEDICLAVE DRY SYRUP D) CLIK SYRUP K) MEDIKUF SYRUP E) D3-NEXT SACHET I)MEDIROSE DSR CAPSULE F) D3-NEXT SOFTGET M) NUWASH G) FLAG TABLET N) TOQU TABLET DURING THE YEAR, LAUNCHED FOLLOWING PRODUCTS: A) MEDIKUF SYRUP B) MEDICLAV DRY SYRUP C) MEDIENT PASTE D) MEDIROSE DSR CAPSULE SINCE M/S IDEM HEALTHCARE PVT. LTD. (IN WHICH ASSESSEE AND HIS FAMILY MEMBERS ARE DIRECTORS) WAS IN THE BUSINESS OF MARKETING AND PROMOTION OF DRUGS, PHARMACEUTICALS AND MEDICINES OF EVERY NATURE, PAGE 8 OF 24 ASSESSEE ENTERED INTO A VERBAL AGREEMENT WITH MIS IDEM HEALTHCARE PVT. LTD. FOR PROMOTING ITS PRODUCT FOR A COMMISSION OF RS. 2 LAKH PER MONTH AND 20% ABOVE RS. 30 LAKH SALE FOR THE ABOVE SAID PERIOD. DURING THE YEAR, ASSESSEE PAID RS. 25,27,092/- TO MIS IDEM WHICH WAS DISALLOWED BY THE ASSESSING OFFICER HOLDING THAT THE ENTIRE EXPENDITURE WAS EXCESS AND TOTALLY UNREASONABLE FOR THE LEGITIMATE NEEDS OF THE ASSESSEE'S BUSINESS. HE FURTHER HELD THAT THERE WAS NO NEED TO PAY COMMISSION TO ASSESSEE'S DIRECTORSHIP COMPANY AND THAT TOO FOR MAKING SALE OF GOODS TO HIS MOTHER'S PROPRIETORSHIP FIRM MIS VINDHYA'S AFTER PURCHASING IT FROM HIS FATHER'S PROPRIETORSHIP FIRM MIS MEDIWORM. HE WAS OF THE VIEW THAT IT WAS JUST INFLATION OF EXPENSES TO REDUCE NET PROFIT TO GET RID OF TAX. ACCORDINGLY, HE DISALLOWED A SUM OF RS. 25,27,092/- AND ADDED TO THE INCOME OF ASSESSEE. CONTENTIONS A) AS PER THE PROVISIONS OF SECTION 37(1), ANY EXPENDITURE NOT BEING IN THE NATURE OF CAPITAL EXPENDITURE OR PERSONAL EXPENSES, LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS, PAGE 9 OF 24 SHALL BE ALLOWED IN COMPUTING THE INCOME CHARGEABLE UNDER THE HEAD 'PROFIT & GAINS OF BUSINESS OR PROFESSION'. B) ASSESSEE HAD PAID COMMISSION TO MIS IDEM FOR PROMOTING ITS NEW PRODUCT WHICH IS REVENUE IN NATURE, INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS AND THEREFORE, IS ALLOWABLE ULS 37(1) OF THE ACT. C) THE ASSESSING OFFICER HAS DISALLOWED THE EXPENDITURE INVOKING SECTION 40A(2) AND NOT ULS 37(1)OF THE ACT. SECTION 40A(2) LAYS DOWN THAT WHERE THE ASSESSEE INCURS ANY EXPENDITURE IN RESPECT OF WHICH PAYMENT IS MADE TO ANY PERSON R'EFERRED TO IN CLAUSE (B) OF THIS SUB- SECTION AND THE ASSESSING OFFICER IS OF THE OPINION THAT SUCH EXPENDITURE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO (I) THE FAIR MARKET VALUE OF THE GOODS, SERVICES OR FACILITIES FOR WHICH THE PAYMENT IS MADE OR (II) THE LEGITIMATE NEEDS OF THE BUSINESS OF THE ASSESSEE OR (III) THE BENEFIT DERIVED BY OR ACCRUING TO HIM THERE FROM. SO MUCH OF THE EXPENDITURE AS IS SO CONSIDERED BY HIM TO BE EXCESSIVE OR UNREASONABLE SHALL NOT BE ALLOWED AS A DEDUCTION. D) ASSESSING OFFICER HAVE HELD THAT THE ENTIRE EXPENDITURE IS EXCESSIVE AND UNREASONABLE PAGE 10 OF 24 HAVING REGARD TO THE LEGITIMATE NEED OF THE ASSESSEE'S BUSINESS. AS PER THE PROVISIONS OF SECTION 40A(2), ONCE IT IS HELD THAT EXPENDITURE IS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF THE BUSINESS THEN THE ENTIRE EXPENDITURE CANNOT BE DISALLOWED INVOKING SECTION 40A(2). E) ASSESSING OFFICER HAS NOT UNDERSTOOD THE BUSINESS MODEL OF THE ASSESSEE. DURING THE YEAR, ASSESSEE HAD LAUNCHED THE PRODUCTS WHICH HAVE THOUSANDS OF SUBSTITUTE AND HUNDREDS OF COMPETITOR. THOUGH, THE PRODUCT WAS SAME AS OTHERS, IT LOOKS DIFFERENT AND BECOME SALEABLE ONLY DUE TO AN INNOVATIVE STYLE. ASSESSEE HAD GOT THIS NEW PRODUCTS MANUFACTURED BY MANUFACTURER WHO PROCURED THE CHEMICALS AND CONVERTED INTO SALEABLE DRUGS, PACKED IT AS PER THE REQUIREMENT OF THE BUYER IN THE BRAND NAME OF THE ASSESSEE I.E. MEDI. F) THEN ASSESSEE HAD TO PROMOTE I MARKET THE PRODUCTS TO DOCTORS, HOSPITALS, CHEMIST ETC. IN THIS LINE OF BUSINESS, ASSESSEE HAS TO APPOINT SUPER STOCKIEST AND DISTRIBUTOR. SUPER STOCKIEST IS A FORWARDING AGENT WHOSE SERVICES ARE USED TO FORWARD THE STOCKS TO DISTRIBUTORS OF THE COMPANY, WHICH IN TURN WOULD SUPPLY THE STOCK TO THE CHEMISTS / HOSPITALS / DOCTORS. HOWEVER, PAGE 11 OF 24 IT IS THE DUTY OF THE ASSESSEE TO ADVERTISE / PROMOTE ITS BRAND AND ALSO THE PRODUCT BY APPOINTING SALES REPRESENTATIVE WHO WILL MEET THE DOCTORS ETC. VARIOUS INCENTIVE SCHEMES ARE TO BE FLOATED TO PERSUADE THE DOCTORS, RETAILERS, CHEMIST ETC. THUS BRAND PROMOTION REQUIRES SELLING AND ADMINISTRATION COST. G) ASSESSEE HAS NOT DEBITED ANY SELLING OR ADMINISTRATION COST TO THE PROFIT & LOSS A/C RATHER HE APPOINTED M/S IDEM HEALTHCARE PVT. LTD. TO PROMOTE ITS PRODUCT. M/S IDEM HAD APPOINTED ITS SALES REPRESENTATIVE AND DID THE ENTIRE PROMOTION WORK FOR THE ASSESSEE. HAD IT NOT BEEN APPOINTED, ASSESSEE HAD TO HIMSELF APPOINT THE SALES REPRESENTATIVE OR TO HIMSELF ADVERTISE ITS PRODUCT WHICH WOULD HAVE ENTAILED THE EXPENDITURE. IT IS OBVIOUS THAT NO NEW PRODUCT CAN BE SOLD IN THE COMPETITIVE MARKET WITHOUT INCURRING ANY EXPENDITURE. H) ASSESSING OFFICER WAS PREJUDICED BY LOW NP RATIO IGNORING THE MATERIAL FACT THAT THE ASSESSEE HAD- INTRODUCED NEW PRODUCTS DURING THE YEAR. HENCE EXPENDITURE HAD TO BE INCURRED FOR ADVERTISEMENT, SALES PROMOTION, BRAND BUILDING ETC. INFACT, SALE OF THE ASSESSEE WAS INCREASED BY 2.7 TIMES. PAGE 12 OF 24 I) IT WAS A BUSINESS EXPEDIENCY TO APPOINT M/S IDEM FOR SALE PROMOTION WHO WAS ALREADY IN THE FIELD OF PROMOTING THE PHARMACEUTICAL PRODUCTS. FURTHER LAUNCHING NEW PRODUCTS ALWAYS INVOLVES MARKET RISK. J) ASSESSING OFFICER WAS INFLUENCED BY THE FACT THAT THE ASSESSEE HAD SOLD THE GOODS TO HIS MOTHER'S FIRM AND THEREFORE, THERE WAS NO LEGITIMATE BUSINESS NEED TO PAY COMMISSION. K) THE ASSESSING OFFICER HAS NOT CONSIDERED THAT M/S VINDHYA'S (MOTHER'S FIRM) IS A SUPER STOCKIEST WHOSE SERVICES ARE TAKEN FOR DISTRIBUTING THE PRODUCT TO THE RETAILERS I DOCTORS I HOSPITALS ETC. IT IS NOT THAT M/S VINDHYA HAD MADE THE SALES ONLY TO THE ASSESSEE. INFACT, M/S VINDHYA'S IS A STOCKIEST OF NO OF ITEMS AND IS IN THE BUSINESS SINCE LONG. THE TOTAL TURNOVER OF M/S VINDHYA'S IS RS. 7.20 CRORE AND IT HAS DECLARED A TOTAL PROFIT OF RS. 10,77,194/- IN ITS RETURN OF INCOME. IT IS NOT THE CASE OF THE ASSESSING OFFICER THAT THE TRANSACTIONS ENTERED INTO BY THE ASSESSEE WITH M/S VINDHYA'S WERE SHAM TRANSACTIONS. L) ROLE OF STOCKIEST I DISTRIBUTORS IS PIVOTAL IN PHARMACEUTICAL INDUSTRY. PAGE 13 OF 24 THEY MAINTAIN THE STOCK DEPENDING UPON THE DEMAND OF THE PRODUCT AND INCENTIVE SCHEMES FLOATED BY THE PRODUCT LAUNCHER. THEY MAKE PAYMENT IN ADVANCE THEY SERVE IN THE DEFINED TERRITORY. THEY PROVIDE CREDIT FACILITY TO THE CHEMISTS. DISTRIBUTORS ALSO SETTLE THE COMPLAINTS E.G. COMPLAINTS RELATED TO EXPIRY OF PRODUCT, CLAIM SETTLEMENT, DUMPING DUE TO SCHEMES AND INCENTIVES, NON-AVAILABILITY OF PRODUCTS ETC. INFACT COMPANIES WILL HAVE TO HAVE A CLOSE LIAISON WITH THE STOCKIEST SO AS TO AVOID COMPLAINTS. THUS STOCKIEST IS THE ESSENTIAL INTERMEDIARY IN THE PHARMACEUTICAL INDUSTRY. M) ASSESSING OFFICER WAS ALSO INFLUENCED BY THE FACT THAT ASSESSEE HAD PURCHASED THE PRODUCTS FROM M/S MEDIWORM WHICH IS BEING RUN BY HIS FATHER SH. SURENDER SHUKLA. N) ASSESSING OFFICER HAS IGNORED THE MATERIAL FACT THAT M/S MEDIWORM IS THE DISTRIBUTOR RUNNING BUSINESS SINCE LONG. DURING THE YEAR, MEDICINES WORTH RS. 46,74,588/- WERE SOLD TO ASSESSEE WHICH WAS NOT EVEN 0.9% OF ITS TOTAL TURNOVER OF RS.52,97,08,298/-. M/S MEDIWORM HAS DECLARED THE PROFIT OF ITS BUSINESS AT RS. 21,99,358/- IN THE RETURN OF INCOME FOR THE RELEVANT YEAR. NO UNDUE BENEFIT HAS BEEN PAGE 14 OF 24 RECEIVED BY THE ASSESSEE OR HIS FATHER BY PURCHASING MEDICINES FROM MIS MEDIWORM, THE FIRM RUN BY ASSESSEE'S FATHER. MOREOVER PURCHASES HAD NOT BEEN TREATED AS SHAM TRANSACTIONS BY THE ASSESSING OFFICER. HE HAS. DISALLOWED ONLY THE COMMISSION PAID TO M/S IDEM. 0) EXPENDITURE BY WAY OF COMMISSION HAS BEEN INCURRED BY THE ASSESSEE TO TEST LAUNCH THE PRODUCT IN ONE SEGMENT. AFTER CHECKING FOR ACCEPTANCE OF THE PRODUCT IN THAT SEGMENT, HE WOULD COVER OTHER SEGMENTS OF THE MARKET. ASSESSEE BEING 25 YEARS OLD HAS JUST ENTERED INTO THE BUSINESS, IT IS THE TRIAL FOR HIM, ENTREPRENEURSHIP IS NOT THE ARITHMETIC OF PROPORTIONATE RESULT, RISK AND FAILURE ARE ALWAYS THERE. WHEN NEW PRODUCTS ARE LAUNCHED, COMPARISON OF THE RESULTS WITH EARLIER YEARS IS NOT CORRECT. P) COMMISSION IS NOT PAID BY THE ASSESSEE FOR SOLICITING THE CLIENT LIKE HIS MOTHER, AS UNDERSTOOD BY THE ASSESSING OFFICER BUT IS PAID DUE TO SEPARATE CONTRACT BETWEEN THE ASSESSEE AND MIS IDEM WHICH HAD INBUILT PROGRAMMES E.G. I) CONTACTING ALL RETAILERS AND DOCTORS WITHIN A DEFINED TERRITORY WITH ADVERTISING MATERIAL, FREE PAGE 15 OF 24 SAMPLES, GIFTS AND EXPLAINING THEM ABOUT NEW PRODUCT, II) GETTING FEED BACK AT REGULAR INTERVAL, III) RECEIVING ORDER FOR AND ON BEHALF OF SUPER STOCKIEST, IV) FOLLOW-UP POST DELIVERY FOR PAYMENT ETC., V) SETTLING THE COMPLAINTS AFTER SALE. THE WHOLE CONTENTION OR UNDERSTANDING OF ASSESSING OFFICER THAT GOOD OFFICE OF MIS IDEM HAD SOLICITED MRS PREM SHUKLA (PROP. OF M/S VINDHYA'S) AND EARNED COMMISSION IS BASICALLY WRONG. Q) BY DISALLOWING COMMISSION, ASSESSING OFFICER HAS COMPUTED NET PROFIT AT RS. 29.24 LAKH I.E. 35.5% OF THE TURNOVER, WHICH IS NEXT TO IMPOSSIBLE PARTICULARLY WHEN THE ASSESSEE HAS INTRODUCED NEW PRODUCTS IN THE MARKET HAVING THOUSANDS OF COMPETITORS AND HUNDREDS OF SUBSTITUTES. R) IT IS NOT OUT OF PLACE TO MENTION THAT PAYMENT OF COMMISSION IS REVENUE NEUTRAL. M/S IDEM HAD SHOWN THE AMOUNT AS RECEIPTS WHICH HAD BEEN OFFERED FOR TAXATION. HAD THE COMMISSION NOT BEEN PAID TO M/S IDEM THEN THE ASSESSEE ITSELF HAD TO INCUR EXPENDITURE WHICH IS REVENUE IN NATURE. PAGE 16 OF 24 S) THE ASSESSING OFFICER NEVER EXAMINED AS TO WHETHER THE EXPENDITURE INCURRED BY THE ASSESSEE IS EXCESSIVE OR UNREASONABLE HAVING REGARD TO THE FAIR MARKET VALUE OF THE GOODS OR SERVICES FOR WHICH THE PAYMENT IS MADE. IT IS NOT THE CASE OF ASSESSING OFFICER THAT NO PAYMENT IS MADE. CASE OF THE DEPARTMENT IS THAT THE PAYMENT OF ENTIRE COMMISSION IS EXCESSIVE AND UNREASONABLE AND THEREFORE, NOT ALLOWABLE. WHILE OBSERVING SO, ASSESSING OFFICER HAS ACTED ARBITRARILY. SIMPLY BECAUSE THE PURCHASES ARE MADE FOR THE DISTRIBUTOR I.E. M/S MEDIWORRN AND THE SALES ARE MADE THROUGH THE SUPER STOCKIEST I.E. M/S VINDHYA'S, IT CANNOT BE SAID THAT THE PAYMENT OF COMMISSION WAS EXCESSIVE PARTICULARLY WHEN M/S IDEM HAD RENDERED SERVICES THROUQH ITS SALES REPRESENTATIVES, WHICH IS NOT DISPUTED BY THE ASSESSING OFFICER. ASSESSING OFFICER HAS NOT, INFACT, UNDERSTOOD THE BUSINESS MODEL OF THE ASSESSEE WHICH IS ADOPTED BY ALL THE BUSINESSMEN IN THIS INDUSTRY. T) SIMILARLY, LEGITIMATE NEED OR THE BUSINESS EXPEDIENCY CANNOT BE SEEN FROM THE POINT OF VIEW OF THE ASSESSING OFFICER. EXPENDITURE INCURRED VOLUNTARILY ON THE GROUND OF COMMERCIAL EXPEDIENCY AND IN ORDER TO INDIRECTLY PAGE 17 OF 24 FACILITATE THE CARRYING ON OF THE BUSINESS WOULD BE DEDUCTIBLE. THE QUESTION WHETHER IT WAS NECESSARY OR COMMERCIALLY EXPEDIENT OR NOT IS A QUESTION THAT 'HAS TO BE DECIDED FROM THE POINT OF VIEW OF THE BUSINESSMEN AND NOT BY THE SUBJECTIVE STANDARD OF REASONABLENESS OF THE REVENUE - CIT VS SALES MAGNASITE (P) LTD. (1995) 214 ITR 01. DEPARTMENT CANNOT DICTATE THE CIRCUMSTANCES - IN WHICH EXPENDITURE IS TO BE INCURRED. IT IS NOT OPEN TO THE DEPARTMENT TO PRESCRIBE AS TO WHAT EXPENDITURE AN ASSESSEE SHOULD INCUR AND IN WHAT CIRCUMSTANCES HE SHOULD INCUR THAT EXPENDITURE. EVERY BUSINESSMEN KNOWS HIS INTEREST BEST CIT VS DHANRAJ GIRJI RAJA NARSINGH GIRJI (1973) 91 ITR 544 (SC). THE TEST OF COMMERCIAL EXPEDIENCY CANNOT BE REDUCED IN THE SHAPE A RITUALISTIC FORMULA, NOT CAN IT BE PUT IN A WATER-TYPE COMPARTMENT SO AS TO BE CONFINED IN A STRAIGHT JACKET FORMULA. THE TEST REALLY MEANS THAT THE COURT WILL PLACE ITSELF IN THE POSITION OF A BUSINESSMEN AND FIND OUT WHETHER THE EXPENSES INCURRED COULD BE SAID TO HAVE BEEN LAID OUT FOR THE PURPOSE OF BUSINESS OR TRANSACTION WAS MERELY A SUBTERFUGE FOR THE PURPOSE OF SHARING OR DIVIDING THE PROFITS ASCERTAINED IN A PARTICULAR MANNER. IT SEEMS PAGE 18 OF 24 THAT IN THE ULTIMATE ANALYSIS, THE MATTER WOULD DEPEND ON THE INTENTION OF THE PARTIES AS SPELT OUT FROM THE TERMS OF THE AGREEMENT OR THE SURROUNDING CIRCUMSTANCES, THE NATURE OR CHARACTER OF THE TRADE OR VENTURE, THE PURPOSE FOR WHICH THE EXPENSES ARE INCURRED AND THE OBJECT WHICH IS SOUGHT TO BE ACHIEVED FOR INCURRING THESE EXPENSES - CIT VS PANIPAT WOOLEN AND GENERAL MILL COMPANY LTD. (1976) 103 ITR 66 (SC). U/S 37(1) OF THE ACT, THE JURISDICTION OF THE REVENUE IS CONFINED TO DECIDING THE REALITY OF THE BUSINESS EXPENDITURE, VIZ., WHETHER THE AMOUNT CLAIMED AS DEDUCTION WAS FACTUALLY EXPENDED OR LAID OUT AND WHETHER IT WAS WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. THE REASONABLENESS OF THE EXPENDITURE COULD BE GONE INTO ONLY FOR THE PURPOSE OF DETERMINING WHETHER, INFACT, THE AMOUNT WAS SPENT. ONCE IT IS ESTABLISHED THAT THERE WAS NEXUS BETWEEN THE EXPENDITURE' AND THE PURPOSE OF THE BUSINESS, THE REVENUE CANNOT JUSTIFIABLY CLAIMED TO PUT ITSELF IN THE ARM CHAIR OF THE BUSINESSMEN OR IN THE POSITION OF THE BOARD OF DIRECTORS AND ASSUME THE ROLE TO DECIDE HOW MUCH IS REASONABLE EXPENDITURE HAVING REGARD TO THE CIRCUMSTANCES OF THE CASES. NO BUSINESSMEN CAN BE COMPELLED TO MAXIMIZE PAGE 19 OF 24 HIS PROFITS - CIT VS DALMIA CEMENT (8) LTD. (2002) 254 ITR 377. U) IN MITTAL METAL VS ITO, DELHI BENCH OF ITAT HAVE HELD THAT UNDER THE PROVISIONS OF SECTION 40A(2), THE ASSESSING OFFICER CAN DISALLOW ONLY THAT PORTION OF THE TOTAL EXPENDITURE WHICH IN HIS OPINION IS EXCESSIVE OR UNREASONABLE. HE CANNOT DISALLOW THE TOTAL EXPENDITURE BY INVOKING THE PROVISIONS OF SECTION 40A(2) R/W SECTION 37. SECTION 40A(2) AND SECTION 37 CANNOT GO TOGETHER BECAUSE SECTION 40A(2) IS OF OVERRIDING NATURE WHICH WOULD COME INTO OPERATION IF THE PAYMENT IS OTHERWISE FOUND TO BE ALLOWABLE U/S 37(1) OF THE ACT. V) IN CIT VS HIND NIHON PROTEINS (P) LTD. (ITA NO.574 OF 2005 DECIDED ON 10.01.2018, HON'BLE DELHI HIGH COURT HAVE ALLOWED THE COMMISSION PAID BY THE ASSESSEE TO THE RELATED 02 PARTNERSHIP FIRMS, HOLDING THAT THE ASSESSEE HAD FILED CONFIRMATION LETTERS ISSUED BY THE PARTNERSHIP FIRM WHO HAD DECLARED THE COMMISSION IN THEIR RESPECTIVE RETURNS. U) FURTHER IT IS NOT THE CASE OF THE DEPARTMENT THAT NO BENEFIT HAD BEEN DERIVED BY THE ASSESSEE BY PAYING THE COMMISSION TO MIS IDEM. INFACT, HIS TURNOVER HAS BEEN INCREASED PAGE 20 OF 24 BY 2.7 TIMES, NEW PRODUCT IS ACCEPTED IN THE MARKET. W) PROVISIONS OF SECTION 40A(2) ARE NOT APPLICABLE IN THE PRESENT CASE AS NONE OF THE CONDITIONS ARE SATISFIED. INFACT, NATURE AND CHARACTER OF THE BUSINESS AND THE SELLING AND ADVERTISING PATTERN HAS NOT BEEN UNDERSTOOD BY THE ASSESSING OFFICER. HENCE, THE ADDITION OF RS. 25,27,092/- MADE BY THE ASSESSING OFFICER BY DISALLOWING PAYMENT OF COMMISSION TO MIS IDEM BE DELETED IN THE INTEREST OF JUSTICE. X) IN THE CASE OF GLAXO SMITHKLINE ASIA (P) LTD., DELHI BENCH OF ITAT HAVE ALLOWED ADMINISTRATIVE EXPENSES CLAIMED BY THE ASSESSEE TO ITS SISTER CONCERN FOR MARKETING ITS PRODUCTS PARTICULARLY WHEN ASSESSEE HAD NO INFRASTRUCTURE AND HAD ONLY ONE EMPLOYEE TO ITS COMMAND. DELHI HIGH COURT HAS CONFIRMED THE ORDER OF TRIBUNAL RIGHT FROM AY 1997 -98 TO 2001-02 AND HON'BLE SUPREME COURT HAS ALSO DISMISSED REVENUE'S APPEAL FOR AY 2001-02. PAGE 21 OF 24 IN VIEW OF ABOVE SUBMISSIONS, LD. SR. COUNSEL FOR THE ASSESSEE REQUESTED TO DELETE THE ADDITION IN DISPUTE AND ALLO W THE APPEAL OF THE ASSESSEE. 4. ON THE CONTRARY, LD. DR RELIED UPON THE ORDERS OF TH E AUTHORITIES BELOW AND STATED THAT LD. CIT(A) HAS PASSED A WELL RE ASONED ORDER WHICH DOES NOT NEED ANY INTERFERENCE ON OUR PART. 5. I HAVE HEARD BOTH THE PARTIES AND PERUSED THE ORDERS PASSED BY THE REVENUE AUTHORITIES ESPECIALLY THE PAPER BOOKS FIL ED BY THE LD. COUNSEL FOR THE ASSESSEE ALONGWITH THE WRITTEN SUBMIS SIONS OF BOTH THE PARTIES. I FIND THAT THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF TRADING OF MEDICINES AND HAD SHOWN INCOME FROM HOUSE PROPERTY, INCOME FROM BUSINESS AND PROFESSION AND INCOME FROM OT HER SOURCES. DURING THE YEAR UNDER CONSIDERATION, THE SALES FROM THE PROPRIETORSHIP CONCERN M/S MEDI WERE DECLARED AT RS.82,85,280/- AGAI NST THE PURCHASES OF RS.73,38,607/-. THE GROSS PROFIT WAS DEC LARED AT RS.32,49,063/- AND NET PROFIT AT RS.2,94,320/-. AFTE R EXAMINING THE RELEVANT RECORDS AVAILABLE WITH THE AO, AO FOUND THAT ASSESSEE DID NOT PAY ANY COMMISSION FOR THE PREVIOUS FINANCIAL YE AR RELEVANT FOR AY 2013-14. THE ASSESSEE SUBMITTED THAT COMMISSION AMOUNTING TO RS.25,27,092/- WAS PAID TO M/S IDEM HEALTHCARE PVT LTD. DURING THE RELEVANT FINANCIAL YEAR THE AO WAS OF THE VIEW THAT THE ASSESSEE WAS PAGE 22 OF 24 HIMSELF THE DIRECTOR IN M/S IDEM HEALTHCARE PVT. LTD. AND AO MADE THE INQUIRY AND FOUND THAT MR. AASHISH SHUKLA WAS TH E DIRECTOR IN THE SAID COMPANY SINCE 27.07.2012. THE OTHER DIRECTORS O F THE COMPANY WERE WIFE OF THE ASSESSEE, YOUNGER BROTHER OF THE ASSE SSEE AND FATHER OF THE ASSESSEE. THE ASSESSING OFFICER ALSO FOUND TH AT M/S IDEM HEALTHCARE PVT. LTD. WAS BEING RUN BY SHUKLA FAMILY. HE ALSO FOUND THAT THE PURCHASES AND SALES WERE MADE FROM / TO FAM ILY CONCERNS. THE PURCHASE WAS MADE FROM THE PROPRIETORSHIP CONCERN O R ASSESSEES FATHER AND SALE WAS MADE TO THE PROPRIETORSHIP CONCERN O F MOTHER. THE ASSESSING OFFICER ASKED THE ASSESSEE TO EXPLAIN AS TO WHY COMMISSION EXPENSES SHOULD NOT BE DISALLOWED IN THE LIGHT OF THE PROVISIONS U/S 40A(2) OF THE ACT. THE ASSESSEE PURCH ASED MAJORITY OF THE GOODS (63.70% OF TOTAL PURCHASES) FROM HIS FATHER S H. SURENDER SHUKLA AND HAD SOLD MAJORITY OF THE GOODS (90.35% OF THE TOTAL SALES) TO HIS MOTHER SMT. PREM SHUKLA AND FOR THESE TRANSACTIO NS HE PAID COMMISSION OF RS. 25,27,092/- TO A COMPANY M/S IDEM HEALTHCARE PVT. LTD. IN WHICH HE HAS A DIRECTOR. THE ASSESSING OFF ICER HELD THAT THE PAYMENTS WERE NOT JUSTIFIED IN VIEW OF THE LEGI TIMATE NEEDS OF THE ASSESSEE'S BUSINESS. THEREFORE, THERE WAS NO NEED TO PAY COMMISSION TO THE COMPANY IN WHICH ASSESSEE WAS HIMSELF A DIREC TOR. IT WAS ONLY AN INFLATION OF EXPENSES TO REDUCE THE BURDEN OF TAX ES. ASSESSEE PAGE 23 OF 24 COULD NOT FIND ANY CONTRARY EVIDENCE ON SATISFYING TH E QUERY RAISED BY THE AO. SIMILARLY, ASSESSEE HAS NOT FILED SUFFICIENT EVIDENCE BEFORE THE LD. CIT(A) IN THE APPELLATE PROCEEDINGS AND LD. CIT(A ) HAS ALSO AFTER PERUSING THE ORDER PASSED BY THE AO CONFIRMED THE AD DITION IN DISPUTE BY DISMISSING THE APPEAL FILED BY THE ASSESSEE. 5.1 AFTER GOING THROUGH THE ORDERS PASSED BY THE REVEN UE AUTHORITIES, WRITTEN SUBMISSIONS FILED BY BOTH THE P ARTIES, ESPECIALLY THE EVIDENCES IN THE SHAPE OF PAPER BOOK, I AM OF THE CONSIDERED VIEW THAT AO MADE THE ENQUIRY AND CAME TO THE CONCLUSION THAT ASSESSEE MADE THE PURCHASES FROM THE RELATED CONCERN AND SALES WERE ALSO MADE TO RELATED CONCERN AND PAYMENT OF THE COMMISSI ON WAS ALSO MADE TO THE RELATED CONCERN WHICH WAS NOT JUSTIFIED IN VIEW OF THE LEGITIMATE NEEDS OF THE ASSESSEES BUSINESS. THERE I S NO NEED TO PAY THE COMMISSION TO THE COMPANY IN WHICH THE ASSESSEE WAS HIMSELF A DIRECTOR. THIS WAS ONLY AN INFLATION OF EXPENSES TO REDUCE THE BURDEN OF TAXES. AS PER RECORD OF THE REVENUE AUTHORITIES, TH E PURCHASE AND SALES WERE MADE FROM / TO THE FAMILY MEMBERS AND COMM ISSION WAS ALSO PAID TO THE RELATED CONCERNS. KEEPING IN VIEW OF THE FACTS AND CIRCUMSTANCES OF THE CASE AS EXPLAINED ABOVE AND THE ORDERS PASSED BY THE REVENUE AUTHORITIES, AFTER MAKING THE ENQUIRY, T HE ADDITION WAS RIGHTLY MADE BY THE AO AND CONFIRMED BY THE LD. CIT (A), WHICH DOES PAGE 24 OF 24 NOT NEED ANY INTERFERENCE. THEREFORE, I UPHOLD THE WE LL REASONED ORDER PASSED BY THE LD. CIT(A) ON THE ISSUE IN DISPUT E AND REJECT THE GROUNDS RAISED BY THE ASSESSEE. 6. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS DI SMISSED. ORDER PRONOUNCED ON 31-10-2019. SD/- [H.S. SIDHU] JUDICIAL MEMBER DATE:31/10/2019 SRB COPY FORWARDED TO: - 1. APPELLANT 2. RESPONDENT 3. CIT 4.CIT (A) 5. DR , ITAT TRUE COPY BY ORDER, ASSISTANT REGISTRAR, ITAT, DELHI BENCHES