The DCIT, Circle-2, Surat V. M/s. Eurotex Chemicals, Surat

ITA 1714/AHD/2013

• Counselvise Citation: [2017] 128 COUNSELVISE.COM (IT) 6300 (ITAT-AHMEDABAD)
• Duration Of Justice: 3 year(s) 9 month(s) 21 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 03-04-2017
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: D
• Next Hearing Date: 08-03-2017
• Assessment Year: 2009-2010
• Appeal Filed On: 12-06-2013
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: ALBINUS TIRKEY
• Assessee Lawyers: SAPNESH SHETH
• Keywords: Commercial expediency; Capital expenditure
• Section: 143(3); 37(1); 37

Judgement Text

, - IN THE INCOME TAX APPELLATE TRIBUNAL CAMP AT SURAT BEFORE SHRI RAJPAL YADAV, JUDICIAL MEMBER AND SHRI AMARJIT SINGH, ACCOUNTANT MEMBER ./ ITA NO.1714/AHD/2013 / ASSTT. YEAR: 2009-2010 DCIT, CIR.2 SURAT. VS. M/S.EUROTEX CHEMICALS D-212, INTERNATIONAL TRADE CENTRE MAJURA GATE, RING ROAD SURAT 395 002. PAN : AACFE 0158 R / (APPELLANT) / (RESPONDENT) REVENUE BY : SHRI ALBINUS TIRKEY, SR.DR ASSESSEE BY : SHRI SAPNESH SHETH ! / DATE OF HEARING : 08/03/2017 '#$ ! / DATE OF PRONOUNCEMENT: 03/04/2017 %& / O R D E R PER RAJPAL YADAV, JUDICIAL MEMBER: REVENUE HAS COME UP IN APPEAL BEFORE THE TRIBUNAL A GAINST ORDER OF THE LD.CIT(A)-III, SURAT DATED 5.3.2013 PASSED F OR THE ASSTT.YEAR 2009-10. 2. THE REVENUE HAS TAKEN FIVE GROUNDS OF APPEAL, OU T OF WHICH GROUND NOS.4 AND 5 ARE GENERAL GROUNDS OF APPEAL, T HEY DO NOT CALL FOR RECORDING OF ANY SPECIFIC FINDING, AND HENCE THEY A RE REJECTED. ITA NO.1714/AHD/2013 2 IN GROUND NO.1 TO 3, REVENUE HAS CHALLENGED DELETI ON OF DISALLOWANCE IN RESPECT OF VARIOUS EXPENDITURE MADE BY THE AO. 3. WITH THE ASSISTANCE OF THE LD.REPRESENTATIVES, W E HAVE GONE THROUGH THE RECORD CAREFULLY. WE FIND THAT THE ASS ESSEE IS A PARTNERSHIP FIRM. AT THE RELEVANT TIME, IT WAS ENGAGED IN THE BUSINESS OF TRADING OF CHEMICALS WHICH ARE PRIMARILY USED IN TEXTILE PROCE SS. IT HAS FILED ITS RETURN OF INCOME ON 21.9.2009 DECLARING TOTAL INCOM E AT RS.14,60,263/- . THE CASE OF THE ASSESSEE WAS SELECTED FOR SCRUTI NY ASSESSMENT AND NOTICE UNDER SECTION 143(2) WAS ISSUED AND SERVE UP ON THE ASSESSEE. AFTER SCRUTINY OF THE ACCOUNTS, THE LD.AO HAS PASSE D ASSESSMENT ORDER UNDER SECTION 143(3) OF THE ACT ON 14.12.2011. HE MADE FOLLOWING DISALLOWANCE AND COMPUTED THE INCOME OF THE ASSESSE E AT RS.72,89,651/-. THE COMPUTATION MADE BY THE AO REA DS AS UNDER: TOTAL INCOME, AS PER RETURN OF INCOME FILED BY THE ASSESSEE. RS.14,60,263 1. DISALLOWANCE OF COMMISSION RS.31,78,965 2. DISALLOWANCE SALARY EXPENSES. RS.13,49,415 3. DISALLOWANCE OF SALARY EXP. FOR NON-PAYMENT OF TDS RS.2,40,000/- 4. DISALLOWANCE OF PARTNER SALARY RS.10,61,008/- TOTAL ASSESSED INCOME 4. DISSATISFIED WITH THE DISALLOWANCE, THE ASSESSEE CARRIED MATTER IN APPEAL BEFORE THE LD.CIT(A) WHO DELETED ALL THESE D ISALLOWANCES. 5. BEFORE US REVENUE IS ONLY CHALLENGING DELETION O F RS.31,78,965/- OUT OF COMMISSION PAYMENT; RS.13,49,415/- OUT OF SA LARY EXPENSES AND RS.10,61,008/- OUT OF PARTNERS SALARY. BEFORE AD VERTING TO THE FACTS HIGHLIGHTED BY THE AO FOR MAKING THESE DISALLOWANCE S AND RE- APPRECIATING ORDER OF THE LD.CIT(A) FOR DELETING TH ESE DISALLOWANCES, WE WOULD LIKE TO BEAR IN MIND CERTAIN BASIC PRINCIPLES REQUIRED TO BE APPLIED WHENEVER AN ADJUDICATING AUTHORITY IS BEING CALLED TO APPRECIATE THE ITA NO.1714/AHD/2013 3 ALLOWANCE AND DISALLOWANCE OF THE EXPENDITURE CLAIM ED BY THE ASSESSEE FOR ITS BUSINESS PURPOSE. IT IS PERTINENT TO OBSER VE THAT IN ORDER TO CLAIM EXPENDITURE UNDER SECTION 37(1) OF THE INCOME TAX A CT, THE ASSESSEE IS REQUIRED TO FULFILL CERTAIN CONDITIONS VIZ. (A) THE RE MUST BE EXPENDITURE, (B) SUCH EXPENDITURE MUST NOT BE OF THE NATURE DESC RIBED IN SECTIONS 30 TO 36, (C) THE EXPENDITURE MUST NOT BE IN THE NATUR E OF CAPITAL EXPENDITURE OR PERSONAL EXPENDITURE OF THE ASSESSEE , AND (D) EXPENDITURE MUST BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OR PROFESSION. THE EXPRESSION WHOLLY EMPLOYED IN SECTION 37 REFERS TO QUANTIFICATION OF EXPENDITURE WHILE EXPRESSION EXCLUSIVELY REFERS TO THE MOTIVE, OBJECTIVE AND P URPOSE OF THE EXPENDITURE. IN ORDER TO APPRAISE OURSELVES AS TO HOW THE CONCEPT OF COMMERCIAL EXPENDENCY AND BUSINESS NEEDS ARE TO BE APPRECIATED, WHILE CONSIDERING THE ALLOWANCE OR DISALLOWANCE OF EXPENDITURE CLAIMED BY AN ASSESSEE, WE WOULD LIKE TO MAKE REFERENCE TO THE JUDGMENT OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF VOLTAMP T RANSFORMER PVT. LTD. VS. CIT, 129 ITR 105 (GUJ). THE FOLLOWING OBSERVAT IONS ARE WORTH TO NOTE: SO FAR AS THE QUESTIONS OF COMMERCIAL EXPEDIENCY A ND BUSINESS NEED OF AN ORGANIZATION ARE CONCERNED, IT IS NOT TH E VIEW POINT OF A REVENUE OFFICER WHICH SHOULD COUNT, BUT IT SHOULD BE THE VIEW OF AN ORDINARY BUSINESSMAN DEALING WITH A SITUATION LI KE THE ONE FACED BY THE ASSESSEE. IN A SIMILAR CIRCUMSTANCE, THE HONBLE DELHI HIGH C OURT HAD AN OCCASION TO EXAMINE ASPECT OF COMMERCIAL EXPEDIENCY CONSIDERED BY A BUSINESSMAN WHILE INCURRING ANY EXPENDITURE. THE H ONBLE DELHI HIGH COURT HAS MADE THE FOLLOWING OBSERVATIONS ON THIS A SPECT IN THE DECISION OF THE CIT VS. DALMIA CEMENT LTD., 254 ITR 377. AN EXPENDITURE TO WHICH ONE CANNOT APPLY AN EMPIRI CAL OR SUBJECTIVE STANDARD IS TO BE JUDGED FROM THE POINT OF VIEW OF A BUSINESSMAN AND IT IS RELEVANT TO CONSIDER HOW THE BUSINESSMAN HIMSELF TREATS A PARTICULAR ITEM OF EXPENDITURE. TH E TERM 'COMMERCIAL EXPEDIENCY' IS NOT A TERM OF ART. IT ME ANS EVERYTHING THAT SERVES TO PROMOTE COMMERCE AND INCLUDES EVERY MEANS ITA NO.1714/AHD/2013 4 SUITABLE TO THAT END. IN APPLYING THE TEST OF COMME RCIAL EXPEDIENCY, FOR DETERMINING WHETHER THE EXPENDITURE WAS WHOLLY AND EXCLUSIVELY LAID OUT FOR THE PURPOSE OF THE BUS INESS THE REASONABLENESS OF THE EXPENDITURE HAS TO BE JUDGED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT THE REVENU E (SEE CIT V. WALCHAND AND CO. (P.) LTD. ; J. K. WOOLLEN MANUFACT URERS V. CIT; ALUMINIUM CORPORATION OF INDIA LTD. V. CIT AND CIT V. PANIPAT WOOLLEN AND GENERAL MILLS CO. LTD. 6. LET US FIRST CONSIDER THE FACTS DISCUSSED BY THE REVENUE AUTHORITIES BELOW. AS FAR AS FIRST ISSUE IS CONCER NED,I.E. DISALLOWANCE OF COMMISSION PAID BY THE ASSESSEE. IT EMERGES OUT FR OM THE RECORD THAT THE ASSESSEE HAS PAID COMMISSION TO 12 PERSONS AND IT RANGES BETWEEN 6% TO 15% OF THE SALES MADE THROUGH THEM. THE AO HAS DISALL OWED THIS COMMISSION ON THE GROUND THAT IN TEXTILE BUSIN ESS, THE COMMISSION RANGES IN BETWEEN 1% TO 3% WHEREAS IN THE CASE OF A SSESSEE THE RATE OF COMMISSION IS AS HIGH AS 15.25%. THE SECOND REA SON IN THE MIND OF THE AO IS THAT PERSON TO HIM COMMISSION WAS PAID IN LAST ASSESSMENT YEAR NOT PAID DURING THIS ASSESSMENT YEAR. THE NE XT REASON CONSIDERED BY THE AO IS THAT OUTSTANDING DEBTORS AT THE END OF THE YEAR WERE AT RS.1,38,67,850/-. AT THE RATE OF 15% COMMISSION PAY ABLE ON THIS OUTSTANDING DEBTS WOULD BE AROUND 20.8 LACS WHEREAS BROKERAGE SHOWN AS OUTSTANDING IS RS.13.37 LAKHS ONLY. THE CUMULAT IVE SETTING OF ALL THESE THREE FACTS PERSUADED THE AO TO DISBELIEVE IN CURRENCE OF EXPENDITURE, AND HE ACCORDINGLY DISALLOWED. THE LD .CIT(A) DELETED THESE DISALLOWANCE ON THE GROUND THAT REFERENCE MAD E BY THE AO ARE OF GENERAL NATURE. HE DID NOT POINT OUT SPECIFIC DEFE CTS. ACCORDINGLY, THE LD.CIT(A) DELETED THE DISALLOWANCE. 7. ON DUE CONSIDERATION OF THE ABOVE FACTS AND CIRC UMSTANCES, IN THE LIGHT OF THE PROPOSITION LAID DOWN BY TWO DECISIONS VIZ. IN THE CASE OF VOLTAMP TRANSFORMER PVT. LTD. AND CIT VS. DALMIA CE MENT LTD., (SUPRA), WE FIND THAT THE ASSESSEE HAS FILED CONFIR MATION. IT HAS DISCLOSED VARIOUS DETAILS OF COMMISSION RECIPIENTS; IT HAS DISCLOSED SALES MADE THROUGH SUCH PERSONS AND ALSO DISCLOSED RATE O F COMMISSION. IN ITA NO.1714/AHD/2013 5 OTHER WORDS, THE ASSESSEE HAS SUBMITTED COMPLETE BA SIC DETAILS. THE LD.AO HAS RE-APPRECIATED THESE DETAILS, BUT HE COUL D ONLY POINT OUT DEFECTS IN THE DETAILS. HE DISALLOWED THE COMMISSI ON PAYMENT ON THE BASIS OF GENERAL PRACTICE I.E. COMMISSION PAYMENT R ANGES IN BETWEEN 1% TO 2% IN THIS LINE OF BUSINESS. SUCH AN ISSUE W ILL DIFFER ON CASE TO CASE BASIS. THE AO HAS NOT MADE REFERENCE TO ANY O THER ASSESSES. MORE SO, WHEN THE ASSESSEE HAS ESTABLISHED BUSINESS , HE MIGHT NOT BE REQUIRED TO PAY COMMISSION, BUT A NEW ENTITY IN THE PROCESS OF ITS ESTABLISHMENT MIGHT HAVE PAID HIGHER RATE OF COMMIS SION. THE LD.AO FAILED TO GIVE ANY SPECIFIC DEFECTS. THE REFERENCE TO MARKET RATE OF COMMISSION HAS NO BEARING TO TEST THE GENUINENESS O F THE EXPENDITURE INCURRED BY AN ASSESSEE. THE LD.CIT(A) HAS RIGHTLY APPRECIATED THE CIRCUMSTANCES AND RIGHTLY DELETED. AS FAR AS SALARY EXPENSES ARE CONCERNED, THE LD.AO WAS OF THE VIEW THAT THE ASSESSEE WAS NOT REQUIRED 21 EMPLOYEE S. AGAIN WE ARE OF THE VIEW THAT THIS ASPECT OUGHT TO BE LEFT TO THE R EQUIREMENT OF BUSINESSMAN. AS FAR AS OUTSTANDING SALARIES ARE CO NCERNED, THE ASSESSEE HAS POINTED OUT THAT ON ACCOUNT OF FINANCI AL CRUNCH, SALARY COULD NOT BE PAID IN THE FIRST VIEW MONTHLY, AND UL TIMATELY ALL ARREARS WERE CLEARED. THIS WAS NOT SUCH A STRONG CIRCUMSTA NCE WHICH CAN DOUBT THE EXISTENCE OF EMPLOYER-EMPLOYEE RELATIONSHIP BET WEEN ASSESSEE AND ITS STAFF. THEREFORE, WE DO NOT ANY MERIT IN GROUN D NO.2 ALSO. IT IS REJECTED. AS FAR AS DISALLOWANCE OF SALARY PAID TO THE PARTN ER IS CONCERNED THE LD.AO HAS DISALLOWED THE SALARY PAID TO TWO FEM ALE PARTNERS ON THE GROUND THAT ONE OF THEM IS A SIMPLE GRADUATE AND SH E MIGHT NOT BE HAVING DAY-TO-DAY KNOWLEDGE OF BUSINESS. THE LD.CI T(A) HAS DELETED THIS DISALLOWANCE BY OBSERVING THAT ONE OF THE FEMA LE PARTNER WAS DOING CHEMICAL BUSINESS SINCE 1999 AND SHE HAD BEEN FILIN G INCOME-TAX RETURN. OTHER LADY PARTNER HAS ALSO B.COM. GRADUAT E. THE AO HAS ITA NO.1714/AHD/2013 6 DRAWN INFERENCE WITHOUT ANYTHING ON RECORD. ON DUE CONSIDERATION OF THE ABOVE FACTS AND CIRCUMSTANCES, WE ARE OF THE VI EW THAT THE LD.CIT(A) HAS RIGHTLY DELETED THE DISALLOWANCE. I T IS ALSO PERTINENT TO OBSERVE THAT SALARY TO THE PARTNER IS BEING REGULAT ED BY THE PROVISIONS OF SECTION 40(B) OF THE INCOME TAX ACT. IT IS TO B E PAID IN ACCORDANCE WITH THE PROVISION STIPULATED IN THE DEED WHICH SHO ULD BE IN COMMENSURATE WITH THE PROVISIONS OF SECTION 40(B) O F THE INCOME TAX ACT. ON SUCH SALARY PAYMENT, PROVISIONS OF SECTION 40A(2) CANNOT BE INVOKED. ON DUE CONSIDERATION ALL THE FACTS, WE D O NOT FIND ANY MERIT IN THESE GROUNDS OF APPEALS. THEY ARE DISMISSED. 8. IN THE RESULT, THE APPEAL OF THE REVENUE IS DISM ISSED. ORDER PRONOUNCED IN THE COURT ON 3 RD APRIL, 2017 AT AHMEDABAD. SD/- SD/- (AMARJIT SINGH) ACCOUNTANT MEMBER (RAJPAL YADAV) JUDICIAL MEMBER