M/s. Palvi Power Tech Sales Pvt.Ltd., Baroda V. The Dy.CIT.,Circle-4, Baroda

ITA 1891/AHD/2012

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 80389 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 1 month(s) 11 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 10-10-2014
• Appeal Filed By: Assessee
• Bench Allotted: B
• Next Hearing Date: 18-09-2014
• Assessment Year: 2009-2010
• Appeal Filed On: 29-08-2012
• Court: TRIBUNAL
• Department Lawyers: DINESH SINGH
• Assessee Lawyers: U S BHATI
• Keywords: Business income; Business expenditure; Cost of acquisition; Commercial expediency; Capital expenditure
• Section: 37; 6

Judgement Text

, , , , IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, AHMEDABAD 0 00 0 0 00 0 , , , , ! '# ! '# ! '# ! '#, , , , $ $ $ $ SHRI N.S. SAINI, ACCOUNTANT MEMBER AND SHRI KUL BHARAT, JUDICIAL MEMBER ./ ././ ./ ITA NO. 1891/AHD/2012 ' (' ' (' ' (' ' ('/ // / ASSESSMENT YEAR: 2009-10 M/S. PALVI POWER TECH SALES PVT. LTD., 315-316, ADITVIYA COMPLEX, DELUXE CHAR RASTA, NIZAMPURA, BARODA-390002 . PAN: AADCP8242K VS DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-4, VADODARA-390007. )*/ (APPELLANT) +, )*/ (RESPONDENT) REVENUE BY : SHRI DINESH SINGH, SR. D.R. ASSESSEE(S) BY : SHRI U.S. BHATI, AR !- . #// // / DATE OF HEARING : 18/09/2014 01( . #/ / DATE OF PRONOUNCEM ENT: 10/10/2014 2 2 2 2/ // / O R D E R PER SHRI N.S. SAINI, ACCOUNTANT MEMBER: THIS IS AN APPEAL FILED BY THE ASSESSEE AGAINST T HE ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS)-III, BA RODA DATED 21.06.2012. 2. GROUND NO. 1 OF THE APPEAL READS AS UNDER: THE LEARNED CIT(A) HAS ERRED IN FACT AND IN LAW CONFIRMING THE ACTION OF THE AO IN DISALLOWING SALE S COMMISSION OF RS 23,14,705/-. ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 2 - 3. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESS ING OFFICER OBSERVED THAT THE ASSESSEE HAS PAID COMMISSION OF R S 23,14,705/- TO RELATIVES AS UNDER: NAME OF PARTY AMOUNT IN RS PARTICULARS RELATION JASMINE BIPINCHANDRA LALA 8,72,325 COMMISSION ON SALES SISTER BIPINCHANDRA N ATTAWALA 6,18,750 COMMISSION ON SALES FATHER SEJAL DHAVAL LALA 8,23,630 COMMISSION ON SALES SISTER-IN-LAW (W/O OF BROTHER) TOTAL 23,14,705 4. ON INQUIRY BY THE ASSESSING OFFICER, THE ASSESS EE SUBMITTED AS UNDER: 'THIS HAS A REFERENCE TO THE LAST HEARING HAD ON TH E 9 TH OF NOVEMBER 2011 AND FURTHER TO THE SAME WE PRESENT H EREWITH POINT WISE SUBMISSIONS. B. DETAILS OF THE COMMISSION PAID RS 1,49,38,463 SHOWN IN DIRECT EXPENSES. THE SUMMARY OF THE COMMISSION AMOUNTS PAID HAS BEEN PLACED ON RECORD IN THE LAST HEARING, IN THE CURREN T SUBMISSION WE PLACE ON RECORD SAMPLE COMMISSION DEBIT NOTES. ( PLEASE REFER ANNEXURE B) C. DETAILS OF THE TRANSACTION WITH AZADY TRADING AN D AZADY TELECOM WITH REFERENCE TO THE COMMISSION PAID TO MR. BIPINCHANDRA SEJAL AND JASMINE AMOUNTING TO RS 23,14,505. (ADDITIONAL DOCUMENTS SUCH AS CONTRACTUA L AGREEMENT AND RELATED PAPERS ENCLOSED IN ANNEXURE C ) THIS COMMISSION INCLUDES AN AMOUNT OF RS 23,14,505 PAID TO THE RELATED PARTIES, THIS COMMISSION HAS BE EN PAID ON ACCOUNT OF TOTAL SALES AMOUNTING TO X 4.77 CRORES T O AZADY TELECOM AND AZADY TRADING COPIES OF THE PROFITABILI TY STATEMENT HAVE ALREADY BEEN PLACED ON YOUR RECORD I N THE LAST HEARING. DURING THE CURRENT SUBMISSION WE ARE PLACI NG ON RECORD THE COPY OF THE CONTRACT WHICH HAS BEEN ENTE RED INTO WITH M/S AZADY TELECOM AND AZADY TRADING, THIS CONT RACT WAS FOR SETTING UP OF A GALVANIZING PLANT IN IRAQ. WHER EAS YOUR ASSESSEE IS IN THE REGULAR BUSINESS OF MERCHANT EXP ORT OF ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 3 - CHEMICALS, THROUGH A FAMILY ARRANGEMENT THE ORDER H AS BEEN PROCURED FOR THIS GALVANIZING PLANT IN THE NAME OF YOUR ASSESSEE WHICH WAS PURELY OF A COMMISSION ARRANGEME NT THE ENTIRE TURNKEY PROJECT HAS BEEN EXECUTED BY A THIRD PARTY SINCE THERE WAS ONLY THE NAME OF A CORPORATE ENTITY REQUI RED WE WERE CONSTRAINED TO TAKE THIS ORDER IN THE NAME OF THE COMPANY. THE TOTAL FINANCIAL VALUE FOR THE CONTRACT WAS 4.77 CRORES APPROXIMATELY 10% OF THE TOTAL TURNOVER OF THE COMP ANY, THE TOTAL PROFITABILITY ON THIS CONTRACT WAS RS 70,41,4 92 OUT OF WHICH A COMMISSION OF RS 23,34,505 HAS BEEN PAID. THIS WORKS OUT TO ABOUT NEARLY 5% OF THE VALUE OF THE CO NTRACT. IT IS PERTINENT TO STATE THAT THOUGH THIS WAS A SHO RE IN PROFIT BUT SINCE THE THREE INDIVIDUALS BIPINCHANDRA , SEJAL AND JASMINE WERE NOT SHAREHOLDERS IN THE COMPANY WE COU LD NOT MAKE THE PAYMENT TO THEM IN FORM OF PROFIT SHARE BU T INFORM OF A COMMISSION. THE JUSTIFICATION OF THE PAYMENT TO THEM ARISES FRO M THE FACT THAT THIS FAMILY HAS SUPPORTED THE CONTRACTUAL EXECUTION BY IDENTIFICATION OF THE CONTRACTOR AND NEGOTIATING THE TERMS OF THE CONTRACT WITH THEM WHEREIN THE CONTRACTOR M/S G UNATIT BUILDERS HAS EXECUTED THE CONTRACT WITHOUT ANY ADVA NCE ON CREDIT TERMS. YOUR ASSESSEE HAS PLACED ON RECORD DURING THE COURS E OF THE HEARING ON 9/11/2011 THAT THE TOTAL EMPLOYEE ST RENGTH IN THIS COMPANY DURING THE FINANCIAL YEAR 2008-2009 WA S 7 AS AGAINST 6 EMPLOYEES IN THE PREVIOUS YEAR, WHEREAS T HE CONTRACT OF THIS SIZE AND ITS EXECUTION WOULD BE IM POSSIBLE TO EXECUTE WITHOUT THE CONCERTED EFFORTS OF THE MR. BI PINCHANDRA, SEJAL AND JASMINE. THE COMMISSION PAYABLE TO THE SA ID PERSONS IS ABSOLUTELY JUSTIFIED AND IS NOT UNREASON ABLE LOOKING INTO THE FACTS OF THE CONTRACT AND THE PROFITABILIT Y WHICH HAS RESULTED OUT OF THE CONTRACT. YOUR RESPECTED OFFICE WOULD APPRECIATE THAT THERE HAS ALSO BEEN A THREEFOLD INC REASE IN THE TURNOVER AND THE CONTRACT IN QUESTION IS ABOUT 10% OF THE TOTAL SALES VALE. IN SUPPORT OF ITS ABOVE SUBMISSION, THE ASSESSEE FI LED SAMPLES OF DEBIT NOTES OF BIPINCHANDRA N ATTAWALA, JASMIN BIPI NCHANDRA ATTAWALA AND SEJAL DHAVAL LALA. 5. THE ASSESSING OFFICER AFTER CONSIDERING THE SUB MISSIONS OF THE ASSESSEE, DISALLOWED THE COMMISSION PAYMENT OBSERVING AS UNDER: ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 4 - 3.1. THE ASSESSEE HAS SUBMITTED A MINIATURE OF DUPLI CATE COPY OF AGREEMENT FOR HOT DIP GALVANIZING PLANTS AT DUBAI AND IRAQ. PERUSAL OF A CRYPTIC AS WELL AS A DUPLICATE COPY OF 'AGREEMENT NO PPTSPL/07/02' ENLIGHTEN THAT THE AGREEMENT WAS S IGNED BETWEEN THE ASSESSEE COMPANY AND PIONEER MACHINERY AND EQUIPMENT INDUSTRY LLC OF DUBAI-UAE JOINTLY WITH AZ ADY TRADING FZCO OF DUBAI - UAE DATED 13.01.2007. HENCE, AS PER SAID AGREEMENT, M/S. GUNATIT BUILDERS HAD NO ROLE TO PLAY WITH. THEREFORE, A LETTER DATED 21.11. 2011 (SCANNED AND PASTED ABOVE) FROM GUNATIT BUILDERS CE RTIFYING THE ROLE OF MR. BIPINCHANDRA, PRODUCED BY THE ASSES SEE IS AN AFTERTHOUGHT AND HAS NO SANCTITY ON FACTS AND HAS N O LEGAL SANCTITY IN TERMS OF THE SURROUNDING SUBSTANCE OR T HE MATRIX LAID DOWN UNDER THE PROVISIONS OF SECTION 40A(2)(B) OF THE ACT. 3.2 THE DETAILS OF PASSPORTS OF ALL THE THREE FAMILY M EMBERS NAMELY SHRI BIPINCHANDRA N ATTAWALA, SMT. JASMIN BIPINCHANDRA ATTAWALA AND SMT. SEJAL DHAVAL LALA WE RE CALLED FOR SHRI BIPINCHANDRABHAI HAS AUTHENTICATED THAT HE DOES NOT HAVE ANY PASSPORT. THE COPIES OF PASSPORTS OF OTHER TWO FAMILY MEMBERS ENLIGHTEN THAT THEY HAD VISITED UAE IN THE YEAR 2010. 3.3 PERUSAL OF THE DEBIT NOTES RAISED BY INDIVIDUAL RE LATIVES DO NOT SUBSTANTIATE: (A) THE FAMILY MEMBERS SUPPORTED THE CONTRACTUAL EXECUTION BY IDENTIFYING THE CONTRACTOR, GUNATIT BU ILDERS AND NEGOTIATING THE TERMS OF THE CONTRACT WITH GUNATIT BUILDERS WHEREIN THE CONTRACTOR M/S GUNATIT BUILDERS EXECUTE D THE CONTRACT WITHOUT ANY ADVANCE ON CREDIT TERMS. (B) THE LETTER OF GUNATIT BUILDERS DOES NOT SUBSTAN TIATE THAT SHRI BIPINCHANDRA AND HIS FAMILY MEMBERS, TWO SISTE RS AND FATHER OF MRS. VIBHA H. MEHTA, DIRECTOR OF THE ASSE SSEE COMPANY EXECUTED ANY FINANCIAL GUARANTEE ON DOCUMEN T OR ANY ADVANCES PAID BY THEM TO GUNATIT BUILDERS ON BE HALF OF THE ASSESSEE COMPANY. GUNATIT BUILDERS IN THEIR LET TER DATED 21.11.2011 (PASTED ABOVE) ADDRESSED TO SHRI BIPINCH ANDRA HAVE VOUCHSAFED THAT THEY ACCEPTED TO UNDERTAKE THE CONTRACT BECAUSE OF THE ASSURANCE OF PAYMENT AND SAFETY TAKE N BY HIM FOR GUNATIT AND ITS STAFF IN IRAQ IS NOT AT ALL ACC EPTABLE. THE REASON IS SHRI BIPINCHANDRA NEITHER HAS ANY PASSPOR T NOR HAD HE APPLIED FOR THE SAME AND IT IS AMAZING THAT SUCH INDIAN RESIDENT CLAIMED TO HAVE UNDERTAKEN THE FINANCIAL G UARANTEE AND SAFETY OF STAFF IN THE COUNTRY LIKE IRAQ WHICH WAS POLITICALLY PRECARIOUS IN THE YEAR 2007-08. IT IS ALSO NOT ESTABLISHED BY THE ASSESSEE AS TO WH ETHER THEY HAD EVER RECEIVED ANY FINANCIAL AID IN ADVANCE FROM THE FAMILY MEMBERS. N O P RUDENT BUSINESSMAN OR BUSINESS HOUSE WOULD UNDERTAKE A RISK ON MERE WORDS. THEY HAVE POOL OF C ONSULTANTS TO SEEK FINANCIAL ADVICE, VISION OF BUSINESS, BANKE RS, KNOWLEDGE OF MARKET AND ETC. ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 5 - (B) NO ROLE OF THE FAMILY MEMBERS IS ESTABLISHED IN RELATION TO THE CONTRACT WITH AZADY TRADING AND AZADY TELECO M THAT THE EXECUTION OF CONTRACT WITH THAT UAE BASED PARTY WAS POSSIBLE ONLY WITH THE CONCERTED EFFORTS OF THE MR. BIPINCHA NDRA, FATHER, SMT. SEJAL, W/O BROTHER AND SMT. JASMINE, SISTER. (C) MERE ARGUMENT IS MADE THAT THE TOTAL FINANCIAL VALUE FOR THE CONTRACT WAS 4.77 CRORES & THE TOTAL PROFITABIL ITY ON CONTRACT WAS RS 70,41,492. THE COMMISSION PAID WAS ABOUT 5%. (D) IT DOES NOT MATTER AS TO WHAT WAS THE PERCENTAG E OF COMMISSION BUT THE ISSUE THAT MATTERS IS WHAT WAS T HE ROLE & CONTRIBUTION OF SERVICES. NO ROLE IN SALES, PROFITA BILITY OF THE COMPANY IS ESTABLISHED. NO SERVICE OF THE FAMILY MEMBERS IS ESTABLISHED AS NONE OF THE FAMILY MEMBERS WERE REMOTELY OR DISTANTLY PARTIES T O THE CONTRACT OF UAE BASED PARTY. NO ELEMENT OF PROOF HA D BEEN ADDUCED TO SUBSTANTIATE THEIR ACTIVE ROLE IN THE CO NTRACTUAL WORK UNDERTAKEN IN IRAQ. 3.4. IT IS THEREFORE PROVED THAT THE ASSESSEE PAID THE PURPORTED COMMISSION TO THE PARTIES BEING FATHER, S ISTER & W/O OF BROTHER OF THE DIRECTOR WHO ARE INDIAN RESIDENTS AND ARE ASSESSED TO TAX IN INDIA. HENCE, THE ARGUMENT OF THE ASSESSEE ABOUT DEDUCTION OF TAX ON COMMISSION AND OFFERING OF SUCH INCOME TO TAX BY THE RECIPIENTS IS NOT A VALID ARGUMENT IN TERMS OF THE CLAIM OF EXPENSE. THE ISSUE IS NOT SIMPLE AS THAT. THE STATUTE HAS NO T OFFERED ANY AMNESTY TO THE TAX PAYER TO MITIGATE ITS TAX OB LIGATION ADHERING TO ILLEGITIMATE CLAIMS OR WITHOUT PAYING D UE TAX ON THE INCOME EARNED. HENCE, IT IS BEYOND DOUBT THAT THE VITAL ELEMENTS S UCH AS SERVICES OF THE PARTIES, ROLE OF THE PARTIES, CONTR IBUTION TO THE PROFITABILITY AND ETC WERE NOT PROVED. 3.5. THE ASSESSEE HAS FAILED TO ESTABLISH RATIONALITY, F EASIBILITY, REASONABILITY, COMMERCIAL EXPEDIENCY ETC. AND CLAIM ED DEDUCTION ON SUCH COMMISSION EXPENSES TO RELATIVES. THE EXPENSES SO INCURRED ARE THEREFORE NOT INCIDENTAL T O THE BUSINESS OF THE ASSESSEE AND HENCE AN AMOUNT OF RS 23,14,705 IS DISALLOWED AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. PENAL PROCEEDINGS U/S 271(1)(C) OF TH E ACT ARE INITIATED SEPARATELY FOR FURNISHING INACCURATE PART ICULARS OF INCOME. * [ADDITION: RS23,14,705] 6. ON APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS), THE ASSESSEE SUBMITTED AS UNDER: 'COMMISSION OF RS 23,14,705.00 PAID TO BIPINCHANDRA ATTAWALA, JASMINE ATTAWALA AND SEJAL DHAWAL LALA, DISALLOWANCE UNDER SEC 40A(2)(B). ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 6 - THE LEARNED ASSESSING OFFICER HAS DISALLOWED THE SA ID COMMISSION AND THE POINTS PLACED ON RECORD ON WHICH BASIS THE HE HAS ARRIVED AT THE CONCLUSION THAT THE COMMI SSION IS EXCESSIVE OR UNREASONABLE; A) 3.1 PAGE 6/13 STATES THAT M/S GUNATIT BUILDER TH E SUB- CONTRACTOR IDENTIFIED BY THE COMMISSION BENEFICIARI ES ARE NOT A PARTY TO THE CONTRACT. YOUR APPELLANT HUMBLY STATES THE FACT THAT THIS CONTRACT WAS ENTERED INTO ON THE 13/1/200 7, SINCE YOUR APPELLANT WAS THE PRINCIPAL SIGNATORY TO THE C ONTRACT, THE ISSUE OF GUNATIT BUILDERS BEING A CONTRACTOR TO THE CONTRACT DOES NOT ARISE. B) 3.2 AND 3.3 PAGE 6/13 STATES THAT DETAILS OF PAS SPORTS OF THE BENEFICIARIES OF THE COMMISSION WERE CALLED FOR AND BIPINCHANDRA ATTAWALA HAS NO PASSPORT AND THERE ARE NO VISITS TO IRAQ TO, NEITHER HAS ANY FINANCIAL GUARANTEE BEE N FURNISHED. YOUR APPELLANT HAS STATED VIDE ITS SUBMISSION (EXTR ACT OF WHICH FORMS PART OF PAGE 3/13 OF THE LEARNED ASSESSING OF FICERS ORDER), THAT THE SUB-CONTRACTOR M/S GUNATIT BUILDER S IS A PARTY KNOWN TO BIPINBHAI AND SINCE THIS PROVIDED A CUSHIO N OF COMFORT LEVEL, THE ORDER WAS TAKEN UP BY SUB-CONTRA CTOR. M/S GUNATIT BUILDERS REPRESENTED BY ILESH VYAS HAS CONF IRMED THE CIRCUMSTANCES UNDER WHICH THE ORDER WAS ACCEPTED AN D ACKNOWLEDGES THE SAME. THE FACT THAT BIPINBHAI HAVI NG NO PASSPORT OR NO VISITS TO IRAQ CANNOT CONSTRUE AS UN REASONABLE GROUND. THE VERY FACT THAT MR. BIPINBHAI HAS PLAYED A ROLE IN SOURCING THE VENDOR ENABLING THE CONTRACT EXECUTION IS MATERIAL. ADDITIONALLY IN A BUSINESS ENVIRONMENT WHERE YOUR A PPELLANT HAS COMPLETED THE CONTRACT AND ENTIRE AMOUNT DUE TO SUB- CONTRACTOR HAS BEEN DISCHARGED IS BY ITSELF EVIDENC E THAT THE SUB-CONTRACTORS EXECUTION AT BEHEST OF BIPINCHANDRA AND OTHERS WAS JUSTIFIED. YOUR APPELLANT STATES AND SUBMITS THAT THESE ARE FA CTS ON BASIS OF WHICH THE ABOVE COMMISSION HAS BEEN PAID, THE CO MMISSION IS JUSTIFIED AND REASONABLE CONSIDERING THE TOTAL T URNOVER OF 4.77 CRORES REVENUE (10% OF TOTAL TURNOVER), WHICH YOUR APPELLANT HAS EARNED, THIS WORKS OUT TO 5% COMMISSI ON. YOUR APPELLANT HAS PAID COMMISSIONS RANGING FROM 2 TO 10% ON VARIOUS MERCHANT EXPORTS TOO DURING THE YEAR AND THE MERE FACT THAT THIS COMMISSION HAS BEEN PAID TO A RELATE D PARTY SHOULD NOT DENY YOUR APPELLANT OF ITS CLAIM OF A JU STIFIABLE EXPENSES. IT IS ALSO NOT OUT OF CONTEXT TO HUMBLY CONVEY TO Y OUR HONOR THAT DURING THIS YEAR THE TOTAL TURNOVER WAS RS 44,56,10,570.36 AS AGAINST RS 19,68,79,790.34 IN TH E ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 7 - PRECEDING YEAR AND THE TOTAL NUMBER OF EMPLOYEES IN CURRENT YEAR WERE 8 AS AGAINST 7 IN PRECEDING YEAR, IMPLYIN G THE TOTAL TURNOVER INCREASE OF 126%. YOUR APPELLANT SUBMITS T HAT THIS WAS A SPECIAL CONTRACT OUTSIDE ITS COMFORT ZONE OF REGULAR MERCHANT EXPORT ACTIVITY. YOUR APPELLANT ALSO RELIES ON THE DECISION IN THE C ASE OF VOLTAMP TRANSFORMERS P LTD V COMMISSIONER OF INCOME TAX, 1981 129 ITR 102 GUJ. YOUR APPELLANT ALSO RELIES IN THE CASE OF DCIT VS. M/S HALDIRAM BHUJIAWALIOL-538-ITAT-KOL' 7. THE COMMISSIONER OF INCOME TAX (APPEALS) DECIDE D THE ISSUE AS UNDER: 4.6 I HAVE CONSIDERED THE APPELLANTS SUBMISSIONS AN D THE AO'S OBSERVATIONS. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, AS WELL AS THE APPELLATE PROCEEDINGS, NO EVIDENCE OF ANY SERVICES RENDERED BY JASMINE BIPINCHANDRA AN D SEJAL DHAVAL LALA HAVE BEEN FURNISHED EXCEPT FOR THE COPI ES OF DEBIT NOTES ISSUED BY THESE PERSONS AND A BLAND SUBMISSIO N THAT THE FAMILY MEMBERS HAVE SUPPORTED THE CONTRACTUAL EXECU TION BY IDENTIFICATION OF THE CONTRACTOR AND NEGOTIATING TH E TERMS OF THE CONTRACT WITH THEM, WHEREIN THE CONTRACTOR M/S GUNNATI BUILDERS HAS EXECUTED THE CONTRACT WITHOUT ANY ADVA NCE OR CREDIT TERMS. 4.7 TO SUPPORT THESE CONTENTIONS, THE APPELLANT HAS SUBMITTED THE LETTER FROM GUNNATI BUILDERS WHICH HA S BEEN REPRODUCED ABOVE. IN THIS LETTER, THE CONTRACTOR HA S STATED THAT THE CONTRACT WAS AGREED UPON BY IT ONLY ON MR BIPIN CHANDRA PROVIDING ASSURANCE ON THE FINANCIAL SECURITY TO TH E TERMS AND CONDITIONS ON ACCOUNT OF THIS CONTRACT, AS ALSO THE ASSURANCE OF THE PAYMENT AND SAFETY OF THE CONTRACTOR AND IT'S S TAFF. THE AO HAS STATED IN HIS ORDER THAT MR BIPINCHANDRA HAD NE ITHER A PASSPORT NOR HAD HE APPLIED FOR THE SAME, HENCE HE COULD NOT HAVE UNDERTAKEN THE FINANCIAL GUARANTEE AND SAFETY OF STAFF IN THE COUNTRY LIKE IRAQ IN THE YEAR 2007-08. 4.8 DURING THE COURSE OF APPELLATE PROCEEDINGS, THE AR WAS ASKED TO SUBMIT THE NET WORTH OF MR BIPINCHANDRA AS ON 31/03/2009. THE AR HAS SUBMITTED THAT SAME. A PERUS AL OF THE SAME SHOWS THAT THE TOTAL NET WORTH IS RS 79,71,452 , OUT OF WHICH RS.30 LAKHS IS ON ACCOUNT OF GOODWILL. THE TO TAL AMOUNT IN BANK OF THIS PERSON IS RS. 1,21,462.00. IT IS QU ITE EVIDENT THAT SUCH A PERSON CANNOT GIVE A GUARANTEE FOR PAYM ENTS IN A CONTRACT INVOLVING TURNOVER OF ABOUT 4.8 CRORE. THI S FACT COUPLED WITH THE FACT THAT THIS PERSON NEVER HAD A PASSPORT AND HAD NEVER VISITED THE IRAQ, MAKES IT CLEAR THAT THE CONTENTIONS OF THE APPELLANT ARE NOT ACCEPTABLE AT ALL. ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 8 - 4.9 IN A RECENT DECISION IN THE CASE OF CIT VERSUS UNITED BREWERIES LTD, 70 TAXMANN.COM 6 (KAR), HONOURABLE K ARNATAKA HIGH COURT HAS HELD THAT WHERE THE NET WORTH OF THE CHAIRMAN WAS RS. 70.47 LAKHS AND ON HIS ALLEGED PERSONAL GUA RANTEE, THE GROUP COMPANIES BORROWED RS. 115.32 CRORES FROM BANKS, THEN MERELY BECAUSE CHAIRMEN AGREED TO STAND AT A G UARANTOR ON PAYMENT OF CERTAIN COMMISSION, IT WOULD NOT CONS TITUTE LAWFUL EXPENDITURE SO AS TO CLAIM DEDUCTION UNDER S ECTION 37(1). THIS DECISION IS SQUARELY APPLICABLE IN THE PRESENT CASE, AS PER DISCUSSIONS MADE ABOVE. 4.10 THE PAYMENTS MADE TO THESE PERSONS IS ALSO AN ATTEMPT TO DISTRIBUTE THE PROFITS OF THE APPELLANT COMPANY TO ITS DIRECTORS IN THE GARB OF COMMISSION PAYMENT TO THEI R RELATIVES. IN FACT, THE APPELLANT ITSELF IN THE SUBMISSION MAD E TO THE AO, HAS ACCEPTED THAT THOUGH THIS WAS THE SHARE IN PROF IT, BUT SINCE THESE 3 INDIVIDUALS WERE NOT SHAREHOLDERS IN THE COMPANY, HENCE PAYMENT COULD NOT BE MADE TO THEM IN FORM OF PROFIT SHARE. HENCE THE PAYMENT WAS MADE IN FORM OF COMMISSION. THUS THIS PROJECT CAN AT BEST BE HELD A S JOINT VENTURE AS THE APPELLANT ITSELF HAD STATED THAT THE PROJECT WAS DONE IN ITS NAME AS IT WAS REQUIRED TO BE MADE IN T HE NAME OF A CORPORATE ENTITY. IN SUCH A SITUATION, AS PER THE RATIO LAID DOWN BY HON'BLE SUPREME COURT IN ITS DECISION IN TH E CASE OF COMMISSIONER OF INCOME-TAX V. PANIPAT WOOLLEN & GEN ERAL MILLS CO. LTD, [1976] 103 ITR 66 (SC), THE PAYMENT MADE BY THE APPELLANT TO THESE 3 PERSONS AS THEIR SHARE OF THE PROFIT CANNOT BE ALLOWED AS A DEDUCTION UNDER SECTION 37 ( 1). 4.11 THE APPELLANT'S AR HAS PLACED RELIANCE UPON TH E JUDGEMENT OF HONOURABLE GUJARAT HIGH COURT IN THE C ASE OF VOLTAMP TRANSFORMERS PRIVATE LIMITED, 129 ITR 102 ( GUJ). BUT THE FACTS OF THIS DECISION ARE ENTIRELY DIFFERENT F ROM THE CURRENT CASE. IN THIS DECISION, THE HON'BLE HIGH COURT HAD HELD THAT THE FIRM, CONSISTING OF THE RELATIVES OF THE DIRECTOR O F THE COMPANY, TO WHICH THE COMMISSION HAD PLACES, IT WAS WORKING THROUGH AN EMPLOYEE WHO HAD EXPERIENCE IN THIS FIELD, IT HA D A STAFF OF 8 TO 9 PERSONS, AND HAD ALSO EARNED COMMISSION FROM OTHER PARTIES. IT WAS NOT AS IF A TOTALLY NEW, INEXPERIEN CED CONCERN WAS BEING INTERESTED WITH THE WORK OF SOLE SELLING AGENCY. ON THE CONTRARY, IN THE PRESENT CASE, NOTHING HAS BEEN BROUGHT ON RECORD TO SHOW THE EXPERIENCE AND CAPACITY OF THESE 3 PERSONS IN SECURING SUCH A CONTRACT, GUARANTEEING THE FINAN CIAL AND SECURITY ASPECTS OF THE CONTRACT, ET CETERA. 4.12 FROM THE INVOICES OF THIS 3 PERSONS COMMITTED BY THE APPELLANT, IT IS SEEN THAT THE COMMISSION HAS BEEN PAID FOR E. O. T. CRANE FOR GALVANISING KETTLE WIDE, GALVANISIN G KETTLE AND VARIOUS ITEMS SUPPLIED TO M/S AZADI TELECOM CO LTD. THUS, THE DESCRIPTIONS GIVEN IN THE INVOICES ARE NOT AS PER T HE SUBMISSIONS MADE BY THE APPELLANT. AS PER THESE INV OICES, THE ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 9 - COMMISSION IS BEING PAID FOR SUPPLIES MADE TO THE P ARTY IN UAE, WHEREAS THE APPELLANT IS CLAIMING THAT THE COM MISSIONS HAVE BEEN PAID FOR GUARANTEEING THE SECURITY OF THE CONTRACTOR AND HIS STAFF AND THE FINANCIAL POSITION OF THE CON TRACT. 4.13 IN SUCH CIRCUMSTANCES, THE DECISION OF HONOURA BLE SUPREME COURT IN THE CASE OF BENGAL ENAMEL WORKS LT D. V. COMMISSIONER OF INCOME-TAX, 77 ITR 119 (SC) IS APPL ICABLE. IN THIS CASE, THE COURT HAD HELD THAT WHERE A VERY LAR GE AMOUNT WAS BEING PAID BY THE ASSESSEE CONCERNED TO A DOCTO R OF MEDICINE WHO WAS NOT AN EXPERT IN ENAMELWARE, AND T HE PRINCIPAL BUSINESS OF THE ASSESSEE WAS MAKING AND S ELLING OF ENAMELWARE, IN SUCH A SITUATION, A DISALLOWANCE OF EXTRA EXPENDITURE IN THE SHAPE OF THE AMOUNT OF COMMISSIO N PAID TO THE DOCTOR OF MEDICINE, WHO HAPPENED TO BE THE SON- IN-LAW OF THE PRINCIPAL SHAREHOLDER AND MANAGING DIRECTOR OF THE COMPANY WAS CORRECT. SOME OTHER DECISIONS APPLICABL E TO THE FACTS OF THE CASE ARE AS FOLLOWS: I) COMMISSIONER OF INCOME TAX VS. CHANDULAL KESHAVLAL & CO., 38 ITR 601 (SC):- 'THE CASES WE HAVE DISCUSSED ABOVE SHOW THAT IT IS A QUESTION OF FACT IN EACH CASE WHETHER THE AMOUNT WHICH IS CL AIMED AS A DEDUCTIBLE ALLOWANCE UNDER S. 10(2)(XV) OF THE IT A CT WAS LAID OUT WHOLLY AND 'EXCLUSIVELY FOR THE PURPOSE OF SUCH BUSINESS AND IF THE FACT-FINDING TRIBUNAL COMES TO THE CONCL USION ON EVIDENCE WHICH WOULD JUSTIFY THAT CONCLUSION IT BEI NG FOR THEM TO FIND THE EVIDENCE AND TO GIVE THE FINDING THEN IT WILL B ECOME AN ADMISSIBLE DEDUCTION. THE DECISION OF SUCH QUEST IONS IS FOR THE TRIBUNAL AND THE DECISION MUST BE SUSTAINED IF THERE IS EVIDENCE UPON WHICH THE TRIBUNAL COULD HAVE ARRIVED AT SUCH A CONCLUSION. ANOTHER FACT THAT EMERGES FROM THESE CASES IS THAT IF THE EXPENSE IS INCURRED FOR FOSTERING THE BUSINESS OF A NOTHER ONLY OR WAS MADE BY WAY OF DISTRIBUTION OF PROFITS OR WA S WHOLLY GRATUITOUS OR FOR SOME IMPROPER OR OBLIQUE PURPOSE OUTSIDE THE COURSE OF BUSINESS THEN THE EXPENSE IS NOT DEDUCTIB LE. IN DECIDING WHETHER A PAYMENT OF MONEY IS A DEDUCTIBLE EXPENDITURE ONE HAS TO TAKE INTO CONSIDERATION QUES TIONS OF COMMERCIAL EXPEDIENCY AND THE PRINCIPLES OF ORDINAR Y COMMERCIAL TRADING. IF THE PAYMENT OR EXPENDITURE I S INCURRED FOR THE PURPOSE OF THE TRADE OF THE APPELLANT IT DO ES NOT MATTER THAT THE PAYMENT MAY INURE TO THE BENEFIT OF A THIR D PARTY: USHER'S WILTSHIRE BREWERY LTD. VS. BRUCE (SUPRA). A NOTHER TEST IS WHETHER THE TRANSACTION IS PROPERLY ENTERED INTO AS A PART OF THE APPELLANT'S LEGITIMATE COMMERCIAL UNDERTAKING I N ORDER TO FACILITATE THE CARRYING ON OF ITS BUSINESS; AND IT IS IMMATERIAL THAT A THIRD PARTY ALSO BENEFITS THEREBY : EASTERN INVESTMENTS LTD. VS. CIT (SUPRA). BUT IN EVERY CASE IT IS A QUE STION OF FACT ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 10 - WHETHER THE EXPENDITURE WAS EXPENDED WHOLLY AND EXC LUSIVELY FOR THE PURPOSE OF TRADE OR BUSINESS OF THE APPELLA NT.' II) ASIAN TOOL & PLASTIC CO. VS. COMMISSIONER OF INCOME TAX,55 ITR 392 (CAL) 'IT IS NOT OPEN TO THE IT AUTHORITIES TO SUBSTITUTE THEIR OWN STANDARD OF REASONABLENESS OF EXPENDITURE FOR THAT OF THE APPELLANT. BUT THIS PROPOSITION IS SUBJECT TO VARIO US LIMITATIONS, SUCH AS THE TRANSACTION IS NOT A GENUINE OR A STRAI GHTFORWARD ONE OR IS EITHER COLOURABLE OR ILLUSORY OR FRAUDULE NT, THERE WERE CONSIDERATION OTHER THAN THE PURPOSE OF THE BUSINES S, ON THE GROUND OF COMMERCIAL EXPEDIENCY THE EXPENDITURE WAS NOT JUSTIFIED OR THE EXPENDITURE WAS INCURRED FOR FOSTE RING THE BUSINESS OF ANOTHER ONLY OR WAS MADE BY WAY OF DIST RIBUTION OF PROFITS OR WAS WHOLLY GRATUITOUS OR FOR SOME IMPROP ER OR OBLIQUE PURPOSE OUTSIDE THE COURSE OF THE BUSINESS, THE TAX AUTHORITIES ARE ENTITLED TO DISALLOW THE DEDUCTION CLAIMED.' ; III) SWADESHI COTTON MILLS CO. LTD. VS. COMMISSIONER OF INCOME TAX, 63 ITR 57 (SC):- 'IT WAS AN ERRONEOUS PROPOSITION TO CONTEND THAT A S SOON AS AN APPELLANT HAD ESTABLISHED TWO FACTS, VIZ., THE E XISTENCE OF AN AGREEMENT BETWEEN THE EMPLOYER AND THE EMPLOYEE AND THE FACT OF ACTUAL PAYMENT, NO DISCRETION WAS LEFT TO THE ITO EXCEPT TO HOLD THAT THE PAYMENT WAS MADE WHOLLY AND EXCLUSIVELY FOR THE PURPOSES OF BUSINESS. ALTHOUGH THE RESOLUTION, ENABLING DIRECTORS TO ADDITIONAL REMUNE RATION, HAD A BINDING EFFECT BETWEEN THE COMPANY AND THE DIRECT ORS AND THE PAYMENT HAD TO BE LEGALLY MADE, IT WOULD STILL BE OPEN TO THE ITO TO TAKE INTO CONSIDERATION ALL RELEVANT FAC TORS TO DECIDE IF THE AMOUNT WAS DEDUCTIBLE UNDER S. 10(2)(XV). TH E DIRECTORS DID NOT RENDER ANY ADDITIONAL SERVICE IN THE ACCOUN TING YEAR, TO JUSTIFY PAYMENT OF ADDITIONAL REMUNERATION.' IV) COMMISSIONER OF INCOME TAX VS. NAVSARI COTTON & SILK MILLS, 135 ITR 546 (QUO) 'THERE ARE POSITIVE AS WELL AS NEGATIVE TESTS FOR F INDING OUT WHETHER A DEDUCTION COULD BE CLAIMED UNDER S. 3 7, SUBJECT TO THE SATISFACTION OF THE ESSENTIAL CONDITIONS THA T THE EXPENDITURE SHOULD NOT BE IN THE NATURE OF CAPITAL EXPENDITURE AND SHOULD BE LAID OUT OR EXPENDED, WHOLLY OR EXCLU SIVELY FOR THE PURPOSE OF THE BUSINESS OR PROFESSION. THE POSITIVE TESTS ARE IF THE EXPENDITURE IS INCURR ED (I) WITH A VIEW TO BRING PROFITS OR MONETARY ADVANTAGE EITHER TODAY OR TOMORROW; (II) TO RENDER THE APPELLANT IMMUNE FROM IMPENDING OR REASONABLY APPREHENDED LITIGATION; (HI) IN ORDER TO SAVE LOSSES IN FORESEEABLE FUTURE; (IV) FOR EFFECTING EC ONOMY IN WORKING WHICH MAY PAY DIVIDENDS TODAY OR TOMORROW; (V) FOR ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 11 - INCREASING EFFICIENCY IN WORKING; (VI) FOR REMOVING INEFFICIENCY IN THE WORKING; (VII) WHERE THE EXPENDITURE INCURRE D IS SUCH AS A WISE, PRUDENT, PRAGMATIC AND ETHICAL MAN OF THE W ORLD OF BUSINESS WOULD CONSCIENTIOUSLY INCUR WITH AN EYE ON PROMOTING HIS BUSINESS PROSPECTS SUBJECT TO THE EXPENDITURE B EING GENUINE AND WITHIN REASONABLE LIMITS; (VIII) WHERE IT IS INCURRED SOLELY BY WAY OF A CIVIL DUTY OWED BY THE APPELLANT TO THE SOCIETY HAVING REGARD TO THE NATURE OF HIS BUSINESS WHICH BRINGS HIM PROFITS BUT RESULTS IN SOME DETRIMENT TO THE PUBLIC AT LARGE EITHER BY WAY OF HEALTH HAZARD OR ECOLOGIC AL POLLUTION OR SERIOUS INCONVENIENCE TO THE CITIZENS WITH A VIE W TO MITIGATE THE AFORESAID EVIL CONSEQUENCES AND CONSEQUENCES OF A LIKE NATURE, SUBJECT TO ITS BEING GENUINE AND WITHIN REA SONABLE LIMITS. THE NEGATIVE TESTS ARE IF THE EXPENDITURE IS INCURR ED (I) FOR A MERE ALTRUISTIC CONSIDERATION; (II) MAINLY IN ORDER TO SATISFY HIS PHILANTHROPIC URGES; (III) MAINLY IN ORDER TO WIN A PPLAUSE OR PUBLIC APPRECIATION; (IV) FOR ILLEGAL, IMMORAL OR C ORRUPT PURPOSES OR BY ANY SUCH MEANS OR FOR ANY SUCH REASO NS; (V) MAINLY IN ORDER TO OBLIGE A RELATIVE OR AN OFFICIAL ; (VI) TO EARN THE GOODWILL OF A POLITICAL PARTY OR A POLITICIAN; (VII) TO SHOW OFF OR IMPRESS OTHERS WITH HIS AFFLUENCE OR FOR OSTENTA TIOUS PURPOSES; (VIII) APPARENTLY FOR A FACTOR LISTED AS A POSITIVE FACTOR BUT IN REALITY FOR ONE OF THE OBNOXIOUS PURP OSES LISTED AS A NEGATIVE FACTOR; (IX) ON A NEBULOUS PLEA OR PRETE XT BUT REALLY FOR ONE OR THE OTHER OF THE PURPOSES LISTED AS NEGA TIVE TESTS; (X) IT MUST NOT BE A BOGUS, FICTITIOUS OR SHAM TRAN SACTION; (XI) IT MUST NOT BE UNREASONABLE AND OUT OF PROPORTION; (XII) IT MUST NOT BE AN EXPENDITURE MERELY WITH A VIEW TO AV OID TAX LIABILITY WITHOUT ANY GENUINE PURPOSE OR REASON IN GOOD FAITH; AND (XIII) THE ADVANTAGE TO BE SECURED BY INCURRING THE EXPENDITURE MUST NOT BE OF THE NATURE OF A REMOTE P OSSIBLE ADVANTAGE DEPENDING ON 'IFS' AND 'BUTS' AND, IF AT ALL, TO BE SECURED AT AN UNCERTAIN FUTURE DATE WHICH MAY BE CO NSIDERED TOO REMOTE.' VI) [2003] 128 TAXMAN 759 (BOM.), COM MISSIONER OF INCOME-TAX V. SHATRUNJAY DIAMONDS: 'ONCE THE IMPORTS ARE MADE BY THE APPELLANT FROM TH E PERSONS FALLING UNDER THE CATEGORY UNDER SECTION 40A(2)(B), THEN THE BURDEN IS UPON THE APPELLANT TO ESTABLISH THAT THE PRICE PAID BY IT IS NOT EXCESSIVE OR UNREASONABLE. CERTAIN TRADE PRACTICES PREVALENT IN THE DIAMOND INDUSTRY ARE WITHIN THE KN OWLEDGE OF THE APPELLANT. THE PURPOSE BEHIND THE LEGISLATURE E NACTING SECTION 40A(2)(B) WAS TO PROVIDE FOR SHIFTING OF BU RDEN ON THE APPELLANT IN CASES WHERE THE TRANSACTIONS ARE NOT A T ARM'S LENGTH. [PARA 10, 11]' 4.14 HENCE ON THE BASIS OF THESE DISCUSSIONS, IT IS HELD THAT THE AO'S ACTION OF DISALLOWING THE COMMISSION PAID TO THESE 3 ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 12 - PERSONS IS CORRECT. AS A RESULT, THIS GROUND OF APP EAL IS DISMISSED. 8. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE ORDERS OF LOWER AUTHORITIES AND MATERIAL AVAILABLE ON RECORD. THE ASSESSEE COMPANY MADE PAYMENT OF COMMISSION OF RS 2 3,34,505/- TO THE THREE PERSONS AS UNDER: NAME OF PARTY AMOUNT IN RS JASMINE BIPINCHANDRA LALA 8,72,325 BIPINCHANDRA N ATTAWALA 6,18,750 SEJAL DHAVAL LALA 8,23,630 TOTAL 23,14,705 THE AFORESAID PAYMENT OF COMMISSION WAS MADE AFTER DUE DEDUCTION OF TAX AT SOURCE THEREON. THE ASSESSEE WAS ENGAGED IN THE BUSINESS OF CHEMICAL EXPORTS FOR LAST MANY YEARS. DURING TH E YEAR UNDER CONSIDERATION, THE ASSESSEE SECURED THE CONTRACT FO R SETTING UP GALVANIZED PLANTS IN UAE AND IRAQ FROM M/S. AZADY T RADING FZCO AND PIONEER MACHINERY & EQUIPMENT INDUSTRY LLC WHICH TH E ASSESSEE GOT EXECUTED BY AVAILING SERVICES OF M/S. GUNATIT BUILD ERS. THE ASSESSEE CLAIMED TO HAVE INCURRED COMMISSION EXPENSES IN RES PECT OF THIS BUSINESS AND SETTING UP OF GALVANIZED PLANTS AT UAE AND IRAQ. THE ASSESSING OFFICER DISALLOWED THE ABOVE CLAIM OF THE ASSESSEE BY DISBELIEVING THE CLAIM OF THE ASSESSEE THAT THESE T HREE PERSONS RENDERED ASSISTANCE TO THE ASSESSEE IN SECURING THE SAID BUSINESS AND IN EXECUTING THE SAID BUSINESS. THE ASSESSING OFFICER DISBELIEVED THAT ANY SERVICES WERE RENDERED BY THE THREE PERSON S TO WHOM COMMISSION WAS PAID BECAUSE THE SAID THREE PERSONS WERE RELATED TO ONE OF THE DIRECTORS OF THE ASSESSEE COMPANY. THE SAID THREE PERSONS EITHER HAD NO PASSPORT OR AS PER THEIR PASS PORTS, THEY VISITED IRAQ IN 2010, I.E. AFTER THE YEAR UNDER CONSIDERATI ON AND IN THE CONTRACT ENTERED INTO BETWEEN THE ASSESSEE AND THE TWO PARTIES I.E. ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 13 - M/S. AZADY TRADING FZCO AND PIONEER MACHINERY & EQU IPMENT INDUSTRY LLC, THE NAMES OF THE SAID THREE PERSONS D ID NOT APPEAR. 9. ON APPEAL, THE COMMISSIONER OF INCOME TAX (APPE ALS) CONFIRMED THE ACTION OF THE ASSESSING OFFICER. 10. BEFORE US, THE ASSESSEE SUBMITTED THAT THE ASS ESSEE COMPANY IS IN THE BUSINESS OF CHEMICAL EXPORTS FOR NUMBER OF YEARS. DURING THE YEAR UNDER CONSIDERATION, MR. BIPINCHAND RA N. ATTAWALA, MS. JASMINE B. LALA & MS. SEJAL DHAVAL LALA (RELATI VES OF ONE OF THE DIRECTORS OF THE COMPANY) HAD APPROACHED THE ASSESS EE WITH A LUCRATIVE PROPOSAL TO UNDERTAKE SUPPLY, ERECTION AN D COMMISSIONING OF GALVANISED PLANTS IN UAE AND IRAQ. THE OVERSEAS BUYERS WERE AZADY TRADING FZCO AND PIONEER MACHINERY & EQUIPMEN T INDUSTRY LLC. THIS CONTRACT WAS OF AN ESTIMATED VALUE OF RS. 5.00 CRORES I.E. ALMOST ONE FOURTH OF THE TOTAL TURNOVER OF THE ASSE SSEE COMPANY FOR LAST YEAR. INITIALLY, THE DIRECTORS OF THE ASSESSEE COMPANY WERE LITTLE HESITANT DUE TO THE FEAR OF TRADING IN UNKNOWN WATE RS BECAUSE THEY HAD NO EXPERIENCE IN DEALING WITH THESE KINDS OF MA CHINERIES AND HAD NO CONTACTS WITH ANY OF THE SUPPLIERS AND CONTRACTO RS FOR INSTALLATION OF THESE PLANTS AND MACHINERIES IN UAE AND IRAQ. FU RTHERMORE, DUE TO HIGHLY TENSE SITUATION PREVALENT IN IRAQ AT THAT TIME, IT HAD BECOME EXTREMELY DIFFICULT TO FIND SUPPLIER CONTRACTORS FO R THAT REGION. MOREOVER, THERE WAS A BIG QUESTION OF ARRANGING FIN ANCE FOR CONTRACT. MR. BIPIN AND OTHER MEMBERS HAD ASSURED THE DIRECTO RS OF THE COMPANY THAT THEY WOULD HELP IN FINDING A GOOD SUPP LIER FOR THE PROJECT AND ALSO ASSIST IN ARRANGING FINANCE FOR TH E CONTRACT. ACCORDINGLY, THESE AGENTS HAD CONTACTED ONE SHRI LL ESH VYAS OF GUNATIT BUILDERS, WHO WAS WORKING AS CONSULTANT & C ONSTRUCTOR FOR HOT DIP GALVANISED PLANT ETC; AND PERSUADED HIM TO WORK WITH THE APPELLANT COMPANY IN EXECUTION OF CONTRACT WITH AZA DY TRADING & ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 14 - PIONEER MACHINERY & EQUIPMENT INDUSTRY AFTER REMOVI NG HIS APPREHENSION REGARDING WORKING IN UAE AND PARTICULA RLY IN IRAQ AND ASSURING HIM THAT HIS PAYMENTS WOULD BE MADE ON TIM E. GUNATIT BUILDERS ALSO AGREED TO SUPPLY MATERIAL WITHOUT INS ISTING FOR ADVANCE PAYMENTS. THUS, THE APPELLANT COMPANY NEED NOT BOTH ER ABOUT FINANCE FOR THIS CONTRACT. COPY OF CONFIRMATION OF LLESH VYAS IS PLACED AT PAGE NO. 131 OF THE PAPER BOOK. UNDER THIS CONTR ACT THE APPELLANT HAD RECEIVED A SUM OF RS.4.77 CRORES FROM AZADY TRA DING FZCO AND PIONEER MACHINERY & EQUIPMENT INDUSTRY LLC AGAINST THE PURCHASE COST OF PLANTS AMOUNTING TO RS.4.07 CRORES. THUS A PROFIT OF RS.70.41 LACS WAS BOOKED BY THE ASSESSEE COMPANY AND EVEN AF TER PAYMENT OF COMMISSION AMOUNTING TO RS.23.14 LACS TO MR. BIPIN & COMPANY, THE NET PROFIT TO THE COMPANY WAS RS.47.04 LACS. THIS N ET PROFIT WAS WITHOUT INCURRING ANY COST ON MANPOWER AND INTEREST . (THE TOTAL STAFF MEMBERS EMPLOYED BY THE COMPANY LAST YEAR WERE SEVE N AS AGAINST THIS YEARS' EIGHT MEMBERS AND INTEREST COST HAD COM E DOWN TO RS.60,676/- DURING THE YEAR AS A AGAINST LAST YEAR' S RS. 4,23,352/-, AS PER DETAILS FILED BY THE ASSESSEE AT PAGE NO. 15 OF THE PAPER BOOK. AS PER THE CHART SUBMITTED DURING THE COURSE OF HEA RING, IT MAY KINDLY BE SEEN THAT HIGHER COMMISSION PAYMENT DURIN G THE YEAR UNDER CONSIDERATION (FROM RS.59.38 LACS TO RS.399.4 8 LACS) RESULTED IN INCREASING THE GROSS PROFIT OF THE ASSESSEE COMP ANY I.E. SIX TIMES AND SIMULTANEOUSLY, THE NET PROFIT HAD GONE UPTO EI GHT TIMES IN COMPARISON TO EARLIER YEAR. THUS THE ABOVE PAYMENTS OF RS.23,14,505/- WERE EXCLUSIVELY FOR THE PURPOSE OF BUSINESS OF THE ASSESSEE COMPANY. THE ABOVE PAYMENTS WERE MADE WITH THE EXPECTATIONS THAT SUCH PAYMENT WOULD IMMENSELY BENE FIT THE BUSINESS OF THE COMPANY AND ULTIMATELY THE BUSINESS OF THE COMPANY WAS BENEFITED. THIS EXPENDITURE WAS INCURRED AS PER BUSINESS EXPEDIENCY OF THE ASSESSEE COMPANY. IT IS HELD BY A BENCH OF THREE JUDGES OF THE HONBLE SUPREME COURT IN THE CASE OF CIT V/S WALCHAND ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 15 - & COMPANY 65 ITR 381 (S.C.) AND J.K. WOLLEN MANUFAC TURING COMPANY 72 ITR 612 (S.C.) THAT WHEN APPLYING THE TE ST OF COMMERCIAL EXPEDIENCY FOR DETERMINING WHETHER AN EX PENDITURE IS WHOLLY AND EXCLUSIVELY FOR BUSINESS, THE EXPENDITUR E HAS TO BE ADJUDGED FROM THE POINT OF VIEW OF THE BUSINESSMAN AND NOT OF THE REVENUE. EVEN IF PAYMENTS WERE MADE WITHOUT ANY CON TRACTUAL OBLIGATION OR EXTRA SERVICES WHICH RESULTED IN THE PROSPERITY OF THE BUSINESS ARE ALLOWABLE - SHAHZADA NAND & SONS V/S C IT 108 ITR 358 (S.C.) 11. THE ASSESSEE FURTHER SUBMITTED THAT PAYMENTS T O THE ABOVE THREE PERSONS WERE MADE THROUGH CHEQUES AFTER DEDUCTION OF TDS. ALL THE ABOVE THREE PERSONS HAD SHOWN THE RECE IPT OF THE ABOVE AMOUNT IN THEIR RESPECTIVE RETURNS OF INCOME. COPIE S OF FORM NO. 16A, COPIES OF ACCOUNTS AND COPIES OF THOSE RETURNS OF INCOME ARE PLACED IN THE PAPER BOOK PAGE NO. 109 TO 130. IN V IEW OF THE ABOVE DISCUSSIONS, IT IS CLEAR THAT THE CONTRACT OF SUPPL Y OF GALVANISED PLANT ETC WITH AZADY TRADING & PIONEER MACHINERY & EQUIPM ENT INDUSTRY WAS POSSIBLE IN THIS CASE ONLY BECAUSE OF ACTIVE IN VOLVEMENT OF MR. BIPINCHANDRA N. ATTAWALA, MS. JASMINE B. LALA & MS. SEJAL DHAVAL LALA WHO BROUGHT TOGETHER THE REPRESENTATIVES OF AZ ADY & PIONEER MACHINERY ON ONE HAND AND SHRI LLESH VYAS OF GUNATI T BUILDERS ON OTHER HAND WITH THE APPELLANT COMPANY. IT WAS HELD BY THE HON'BLE GUJARAT HIGH COURT IN SWASTIK TEXTILE CO. PVT. LIMI TED V/S CIT 150 ITR 155 (GUJ) THAT COMMISSION WAS ALLOWABLE AS DEDU CTION WHERE THE REVENUE HAD FAILED TO CONTROVERT THE BROKER'S STATE MENT THAT HE HAD BROUGHT THE PARTIES OF CONTRACT TOGETHER. 12. THE ASSESSEE ALSO RELIED UPON THE HEAD NOTES I N THE CASE OF CIT V/S ATMA PRAKASH BATRA 340 ITR 177 (GUJ) WHI CH READS AS UNDER: ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 16 - 'BUSINESS EXPENDITURE-ALLOWABILITY-EXPORT COMMISSIO N- TRIBUNAL, AFTER CONSIDERING THE RIVAL SUBMISSIONS A ND AFTER APPRECIATING THE EVIDENCE ON RECORD, FOUND THAT THE RECEIPT OF COMMISSION AMOUNT HAD BEEN DULY CONFIRMED BY THE AG ENTS WHICH IN TURN MEANT THAT THE AMOUNT WHICH HAD BEEN DEDUCTED FROM THE INVOICE VALUE ACTUALLY REPRESENTED COMMISS ION PAYMENTS WHICH WERE FINALLY RECEIVED BY THE AGENT- THIS HAD BEEN DONE IN ACCORDANCE WITH THE TERMS AND CONDITIO NS AGREED UPON BETWEEN THE BUYERS AND THE SELLER, EVEN THOUGH THERE WAS NO FORMAL AGREEMENT-THUS, ONCE THE GENUINENESS OF THE COMMISSION AS WELL AS ITS JUSTIFICATION OF HAVING B EEN WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF THE ASS ESSEE'S BUSINESS IS ESTABLISHED, THE SAME BECOMES ADMISSIBL E AS DEDUCTION U/S 37(1)' 13. THE DEPARTMENTAL REPRESENTATIVE SUPPORTED THE ORDERS OF LOWER AUTHORITIES. 14. WE FIND THAT THE CONFIRMATION OF M/S. GUNATIT BUILDERS WHICH IS PLACED AT PAGE NO. 131 OF THE PAPER BOOK F ILED BY THE ASSESSEE SHOWS THAT MR. BIPINCHANDRA N. ATTAWALA WA S INSTRUMENTAL IN ENTERING OF CONTRACT BETWEEN THE ASSESSEE COMPAN Y AND M/S. GUNATIT BUILDERS. FURTHER, WE FIND THAT THE ASSESS EE COMPANY CLAIMED THAT THE BUSINESS PROPOSAL OF SETTING UP OF GALVANIZED PLANTS IN UAE AND IRAQ WAS BROUGHT TO IT BY MR. BIPINCHAND RA N. ATTAWALA, MS. JASMINE B. LALA & MS. SEJAL DHAVAL LALA AND THE Y ASSISTED THE ASSESSEE COMPANY IN ENTERING INTO CONTRACT WITH M/S . GUNATIT BUILDERS ALSO FOR EXECUTING THE CONTRACT AND SETTIN G UP GALVANIZED PLANTS. 15. WE FIND THAT THE REVENUE HAS BROUGHT NO POSITI VE MATERIAL ON RECORD TO CONTROVERT THE ABOVE CLAIM OF THE ASSESSEE COMPANY. MERELY BECAUSE IN THE LEGAL CONTRACT WHIC H WAS DIRECTLY ENTERED INTO BETWEEN THE ASSESSEE COMPANY AND AZADY TRADING FZCO AND PIONEER MACHINERY & EQUIPMENT INDUSTRY LLC , THE NAMES ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 17 - OF THESE THREE PERSONS DID NOT APPEAR, DOES NOT EVI DENCE THAT THE BUSINESS PROPOSAL WAS NOT BROUGHT TO THE ASSESSEE C OMPANY BY THESE THREE COMPANIES. FURTHER, IT WAS NOT NECESSARY FOR THESE THREE PERSONS TO PHYSICALLY VISIT IRAQ BEFORE BRINGING A BUSINESS PROPOSAL IN IRAQ TO THE KNOWLEDGE OF THE KNOWLEDGE OF THE COMPA NY. IN ABSENCE OF ANY POSITIVE MATERIAL BROUGHT ON RECORD BY THE A SSESSING OFFICER AFTER EXAMINING THE THREE RECIPIENTS OF THE COMMISS ION TO SHOW THAT IN FACT NO SERVICES WERE RENDERED BY THESE THREE PE RSONS, IN OUR CONSIDERED VIEW, THE ADVERSE INFERENCE DRAWN BY THE ASSESSING OFFICER ON THE BASIS OF HIS SUBJECTIVE OPINION ONLY CANNOT BE SUSTAINED. 16. IN THE INSTANT CASE, THE GENUINENESS OF PAYMEN T IS NOT IN DOUBT AS THE PAYMENT WAS MADE THROUGH BANKING CHANN EL AFTER DEDUCTING TAX AT SOURCE THEREFROM AND THE RECIPIENT S OF COMMISSION HAVE ALSO SHOWN THE SAME AS THEIR INCOME. THE HO NBLE GUJARAT HIGH COURT IN THE CASE OF SWASTIK TEXTILE CO. PVT. LIMITED V/S CIT (SUPRA) HAS HELD THAT COMMISSION WAS ALLOWABLE AS D EDUCTION WHERE THE REVENUE HAD FAILED TO CONTROVERT THE BROKER'S S TATEMENT THAT HE HAD BROUGHT THE PARTIES OF CONTRACT TOGETHER. IN T HE CIRCUMSTANCES, IN OUR CONSIDERED VIEW, THE DISALLOWANCE OF COMMISS ION PAYMENT OF RS 23,14,705/- CANNOT BE SUSTAINED. WE THEREFORE, DELETE THE DISALLOWANCE OF RS 23,14,705/- AND ALLOW THE GROUN D OF APPEAL OF THE ASSESSEE. 17. GROUND NO. 2 READS AS UNDER: THE LEARNED CIT(A) ERRED IN FACT AND IN LAW IN CON FIRMING THE ACTION OF AO IN MAKING ADDITION OF RS 50,09,855 /- BEING FOREIGN SALES COMMISSION. ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 18 - 18. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSES SEE CLAIMED TO HAVE PAID FOREIGN COMMISSION OF RS 50,09,855/- T O MRS. JIGNA K. BABLA AND MRS. PRAMODINI R. BABLA. IN RESPONSE TO THE SHOW CAUSE NOTICE, THE ASSESSEE SUBMITTED THAT THE COMMISSION WAS PAID ON TOTAL SALE TRANSACTION TO M/S. CARUS CHEMICALS OF RS 7.23 CRORES WHICH YIELDED A NET PROFIT AFTER COMMISSION OF RS 1,14,64 ,751/- WHICH WAS ABOUT 15.84% OF THE TOTAL VALUE OF EXPORTS. THE CO MMISSION PAID WORKS OUT TO 7.77%. MR. KIRAN BABLA IS BASED IN TA NZANIA AND IS A REGULAR BUSINESS ASSOCIATE OF THE ASSESSEE AND THE ASSESSEE HAS EXECUTED A NUMBER OF CONTRACTS/SALES THROUGH HIS BU SINESS CONNECTIONS AND WAS HAVING A CORDIAL BUSINESS RELAT IONS. MR. KIRAN BALA AND HIS FAMILY BUSINESS CONCERNS HAVE BEEN INS TRUMENTAL IN SECURING THE CARUS CONTRACT, THE CEO OF THE COMPANY MR. HIMANSHU MEHTA HAD BUSINESS MEETING WITH MR. BABLA IN TANZAN IA WHERE MR. KIRAN BABLA PROVIDED BUSINESS LEAD ON THE CARUS CON TRACT. MR. KIRAN BABLA NOT ONLY PROVIDED THE BUSINESS LEAD BUT AS TH ERE WERE SOME PRICE INDICATIONS KNOWN TO HIM THROUGH HIS BUSINESS CONNECTIONS WHICH WERE CONVEYED THE BIDDING INDICATIONS FOR THE CONTRACT. THIS HAS LED TO THE COMPANY DERIVING PROFIT FROM THE CON TRACT AND THEREFORE THE ASSESSEE WAS REQUIRED TO PAY COMMISSI ON FOR THIS LEAD. THE BUSINESS PROVIDED BY MR. KIRAN BABLA CONTRIBUTE D TO COMPANYS TURNOVER OF 16.25%. THEREFORE, COMMISSION PAID TO MR. KIRAN BABLA AND HIS FAMILY MEMBERS IS REASONABLE AND AS PER NOR MAL BUSINESS TERMS OF TRADE AND IS COMPARABLE WITH THE NORMAL RA TES OF COMMISSION. THE ASSESSING OFFICER DID NOT FIND THE EXPLANATION OF THE ASSESSEE AS REASONABLE AND THEREFORE DISALLOWED THE COMMISSION PAYMENT OBSERVING AS UNDER: 4.1 PERUSAL OF THE REPLY SHOWS THAT THERE WAS NO CONTRACT BETWEEN MR. KIRAN BABLA AND THE ASSESSEE COMPANY. ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 19 - (A) THE ROLE OF MRS. JIGNA K. BABLA AND MRS. PRAMOD INI R. BABLA IN THE SALES MADE TO M/S. CARUS CORPORATIO N, 315 FIFTH STREET, PERU, IL 61354, USA IS NOT ESTABL ISHED. (B) THE SERVICE DISCHARGED BY MR. KIRAN BABLA AND H IS FAMILY MEMBERS (ONE OF THEM IS MOTHER OF KIRAN BABL A AND THE OTHER IS WIFE KIRAN BABLA) IN THE CONTEXT O F SALES MADE TO M/S. CARUS CORPORATION, 315 FIFTH STREET, P ERU, IL 61354, USA IS NOT ESTABLISHED. (C) THE ASSESSEE HAS NOT FURNISHED ANY CONTRACT BETWEEN MR. KIRAN BABLA AND THE ASSESSEE COMPANY. 4.2 THE ASSESSEE COMPANY HAS SUBMITTED A LETTER FRO M TRISTARS INVESTMENTS CO. LTD. DATED 18.11.2011 CONFIRMING THE COMMISSION RECEIVED BY MR. KIRAN BAB LA AND HIS FAMILY MEMBERS. TRISTARS INVESTMENTS CO. LTD POSTAL ADD: P.O. BOX 22642 DA R ES SALAAM (TANZANIA) PHYSICAL ADD: GROUND FLOOR, REA R SIDE, NMC BUILDING, ZANAKI STREET, DAR ES SALAAM: TANZANIA TELE/FAX: [phone] CELL: 4 255713685158/255 767 605156 TO WHOMSOEVER IT MAY CONCERN SUB: COMMISSION PAYMENT CONFIRMATION REF: ORDERS FOR CAUSTIC POTASH FLAKES TO M/S. CARU S CHEMICALS COMPANY-U.S.A. FOR ORDER NOS. 43581, 43582 & 43600. WITH REFERENCE TO ABOVE SUBJECT, THIS IS TO CONFIRM THAT M/S. PALVI POWER TECH SALES PVT. LTD. IS OUR REGULAR SUPPLIER OF VARIOUS CHEMICALS PRODUCTS TO OUR COMPANY AND WE DO INTERNATIONAL TRADING ALSO ON COM MISSION BASIS WITH THEM. IN THE YEAR 2008, WE HAD ARRANGED VARIOUS ORDERS FO R CAUSTIC POTASH FLAKES (ORDER REFERRED ABOVE) ON COMMISSION BASIS FOR M/S. CARUS CHEMICALS COMPANY USA. THE COMMISSION AGREED WAS US $ 150,00 PER TON TO BE PAID TO US ON EXECUTION OF THE SUPPLY AND RECEIPT OF PAYMENT AT THEIR END. PALVI POWER TECH SALES PVT. LTD. EXECUTED THREE PUR CHASE ORDERS REFERRED ABOVE SUCCESSFULLY AND HAD PAID COMMISSION TO US. THE CO MMISSION WAS PAID TO US IN TWO NAMES: 1) MRS. JIGNA K. BABLA (MY WIFE) AND 2) MRS . PRAMODINI R. BABLA (MY MOTHER) AGAINST THE DEBIT NOTES DATED 31.03 .2009 AS REQUESTED BY US. ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 20 - IT MAY PLEASE BE NOTED HERE THAT ORDER NO. 43601 & 43602 WERE NOT EXECUTED BY PALVI POWER TECH SALES PVT. LTD AS OUR CUSTOMER M/S . CARUS CHEMICAL COMPANY HAD ADVISED US THAT NOT TO SHIP FURTHER MATERIAL. THANKING YOU, FOR TRISTAR INVESTMENT CO. LTD. KIRAN BABLA TRISTARSINVESTMENTSCO. LTD P.O. BOX. 22642 DAR ES SALAAM (A) THE LETTER OF M/S. TRISTARS INVEST,MENTS CO. LT D. OF DAR ES SALAAM DOES NOT EVEN SUPPORT THE ROLE OF THE MR. KIRAN BABLA AND HIS FAMILY MEMBERS IN THE SALES MAD E BY THE COMPANY TO M/S. CARUS CORPORATION, USA. (B) THE ASSESSEE HAS NOT PUT ANYTHING ON RECORD TO ESTABLISH THAT THERE WAS ANY TRANSACTIONAL CORRESPONDENCE OR COMMUNICATION BETWEEN M/S. TRISTA RS INVESTMENTS CO. LTD AND M/S. CARUS CORPORATION FOR PLACING THE ORDERS OF PURCHASE FOR THE ASSESSEE COMPANY OR IN BEHALF OF THE ASSESSEE COMPANY. (C) THE INVOICES NO. 126,127,128,130,131 AND 135 DO NOT POSSESS ANY MENTION OF EITHER M/S: TRISTARS INVESTM ENTS CO. LTD OR MENTION OF MR. KIRAN BABLA AND HIS FAMIL Y MEMBERS AS ACTING AGENTS. THEREFORE, THE DEBIT NOTE NO. 03/08-09 RAISED ON 31.03.2009 BY MRS. JIGNA K. BABL A REQUESTING TO SETTLE COMMISSION HAS NO SANCTITY. HE NCE, THE CONFIRMATION DATED 18.11.2011 OF M/S. TRISTARS INVESTMENTS CO. LTD. OF DAR ES SALAAM IS AN AFTERTHOUGHT. 4.3 THE ASSESSEE HAS FAILED TO ESTABLISH RATIONALIT Y, FEASIBILITY, REASONABILITY, COMMERCIAL EXPEDIENCY & ETC IN CLAIMING DEDUCTION ON FOREIGN COMMISSION EXPENSES. THE EXPENSES SO INCURRED ARE THEREFORE NOT INCIDENTAL T O THE BUSINESS AND HENCE AN AMOUNT OF RS 50,09,855 IS DIS ALLOWED AND ADDED BACK TO THE TOTAL INCOME OF THE ASSESSEE. PENAL PROCEEDINGS U/S 271(1)(C) OF THE ACT ARE INITIATED SEPARATELY- FOR FURNISHING INACCURATE PARTICULARS OF INCOME. 19. ON APPEAL TO THE COMMISSIONER OF INCOME TAX (A PPEALS), THE ASSESSEE SUBMITTED AS UNDER: 'ADHOC DISALLOWANCE OF FOREIGN COMMISSION PAID 50,0 9,855.00 TO MRS. PRAMODINI BABLA AND JIGNA BABLA . ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 21 - THE LEARNED ASSESSING OFFICER HAS MADE AN ADHOC DIS ALLOWANCE OF THE SAID COMMISSION AND THE POINTS PLACED ON REC ORD ON WHICH BASIS HE HAS ARRIVED AT THE CONCLUSION THAT T HE COMMISSION IS EXCESSIVE OR UNREASONABLE; A) 4.1 PAGE 8/13 THERE IS NO CONTRACT BETWEEN MR KI RAN BABLA AND APPELLANT, THE ROLE PLAYED OR SERVICES PR OVIDED BY MR KIRAN BABLA AND FAMILY MEMBERS IN SALES MADE TO M/S CARUS CORPORATION NOT ESTABLISHED. RESPECTED SIR, YOUR APPELLANT HAS BEEN IN THE BUSIN ESS OF CHEMICAL EXPORTS FOR A NUMBER OF YEARS AND DURING T HIS YEAR THE TOTAL COMMISSION EXPENSES ARE 1,99,48,318.00 WH ICH INCLUDES ABOVE COMMISSION, IN MOST OF THE COMMISSIO N PAYMENTS THERE ARE NO AGREEMENTS, PERTINENT TO STAT E THERE ARE 14 COMMISSION AGENCIES IN NUMBER, THE MODE OF B USINESS IS TO RAISE DEBIT NOTES BASED ON SALES SOLICITED ON BEHALF OF YOUR APPELLANT. IN THE INSTANT CASE TOO AS IS A CO MMON PRACTICE, MR KIRAN BABLA HAS PROVIDED US WITH A BUS INESS LEAD BEING IN THIS CHEMICAL TRADING MARKET AND EXTREMELY RESOURCEFUL WITH IN DEPTH KNOWLEDGE IN COMMODITY MA RKETS, THIS BUSINESS LEAD PROVIDED YOUR APPELLANT WITH THE OPPORTUNITY OF EXECUTING A TOTAL CONTRACTUAL SALE O F 7.33 CRORES, WHICH ACCOUNTS FOR AT LEAST 16.25 % OF TOTA L MERCHANT EXPORTS. THE ROLE PLAYED BY KIRAN BABLA AND FAMILY WAS EXTREMELY IMPORTANT IN THE SECURING OF THIS CONTRAC T. A) 4.2 PAGE 8/9/10 OF 13 , THE LETTER OF CONFIRMATI ON PROVIDED BY TRISTAR INVESTMENTS CO LTD DOES NOT SUPPORT THE ROLE PLAYED BY BABLA FAMILY IN SALES MADE TO CARUS CORPORATION USA, NEITHER IS THERE ANY CORRESPONDENCE BETWEEN CARUS A ND M/S TRISTAR TO SUPPORT. YOUR APPELLANT HUMBLY STATES, THAT MOST OF THE BUSI NESS IN CHEMICAL TRADING OVER THE WORLD IS SOURCED WITH THE HELP OF INDIVIDUALS/COMPANY'S HAVE VERY GOOD CONTACTS AND S OURCES IN INTERNATIONAL MARKETS. M/S TRISTAR INVESTMENTS CO LTD (FAMILY CONCERN OF K IRAN BABLA, PRAMODINI BABLA AND JIGNA BABLA) IS ONE SUCH FAMILY ENTERPRISE THROUGH WHOM WE HAVE BEEN REGULARLY SOLI CITING / SOURCING THE BUSINESS. DURING THE YEAR UNDER APPEAL, THIS IS NOT THE FIRST BUSINESS CONTRACT EXECUTED, DURING THE YEAR THERE ARE OTHER CONTRACTS ALSO FOR WHICH COMMISSION HAS BEEN PAID TO MRS JIGN A BABLA AND MRS PRAMODINI BABLA AMOUNTING TO RS 305,825.00 AND 804,693.00 THE SAME HAVE BEEN ALLOWED. YOUR APPELLANT SUBMITS THAT THESE ARE FACTS ON BASI S OF WHICH THE ABOVE COMMISSION HAS BEEN PAID, THE COMMISSION IS JUSTIFIED AND REASONABLE CONSIDERING THE TURNOVER O F 7.33 ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 22 - CRORES REVENUE (16.25% OF TOTAL TURNOVER), WHICH YO UR APPELLANT HAS EARNED, THEIR COMMISSION WORKS OUT TO 7.77%. IT IS IMPORTANT TO STATE HERE THAT THE COMMISSION P AID IS A COST TO THE COMPANY, WHAT IS A REASONABLE COMMISSION BAS ED ON A TRANSACTION WOULD BE APPROPRIATELY JUDGED BY YOUR A PPELLANT, DURING THE YEAR UNDER APPEAL, YOUR APPELLANT HAS PA ID SEVERAL PARTIES A COMMISSION RANGING FROM 2 TO 10% ON VARIO US MERCHANT EXPORTS TOO DURING THE YEAR AND THE SAME H AS BEEN ALLOWED. RESPECTED SIR, YOUR APPELLANT ALSO SUBMITS THAT WE ALSO SOURCE ORDERS FOR GACL, WE WOULD FOR THE RECORD SUBMIT A S AMPLE COPY OF OUR DEBIT NOTE AND INVOICE OF GACL FOR THE YEAR UNDER APPEAL, ON GACL INVOICE THERE IS NO MENTION OF OUR NAME TO PROVE THE SALE HAS BEEN SOURCED THROUGH YOUR APPELL ANT, YET A COMMISSION ON THE SAME HAS BEEN RECEIVED AND OFFERE D AS INCOME FROM COMMISSION.' 20. THE COMMISSIONER OF INCOME TAX (APPEALS) CONFI RMED THE ORDER OF THE ASSESSING OFFICER BY OBSERVING AS UNDER: 5.4 I HAVE CONSIDERED THE APPELLANT'S SUBMISSION AN D THE A.O.'S OBSERVATION. HERE AGAIN, THE APPELLANT HAS F AILED TO FURNISH ANY EVIDENCE REGARDING THE SERVICES RENDERE D BY THESE 2 PERSONS EXCEPT A LETTER FROM A COMPANY IN WHICH T HESE PERSONS ARE INTERESTED. THIS LETTER IS ALSO ON THE LETTER PAD OF TRI-STARS INVESTMENTS CO. LTD, AND HAS BEEN SIGNED ON BEHALF OF THIS COMPANY ITSELF. IN THIS LETTER, THE COMPANY STATES THAT IT HAD ARRANGED VARIOUS ORDERS FOR CAUSTIC POTASH FLAK ES ON COMMISSION BASIS FOR M/S CAURAS CHEMICAL COMPANY, U SA. BUT SURPRISINGLY, THE COMMISSION HAS BEEN PAID NOT TO T HIS COMPANY, BUT TO INDIVIDUALS. IN THE LETTER, IT IS W RITTEN THAT THE COMMISSION HAS BEEN PAID TO THESE 2 PERSONS ON BEHA LF OF THE COMPANY. THE AO HAS OBSERVED IN HIS ORDER THAT THE LETTER OF THIS COMPANY DOES NOT EVEN SUPPORT THE ROLE OF THES E 2 PERSONS IN THE SALES MADE BY THE APPELLANT. MOREOVE R, THE APPELLANT HAS NOT PUT ANYTHING ON RECORD TO ESTABLI SH THERE IS THERE WAS ANY TRANSACTIONAL CORRESPONDENCE OR COMMU NICATION BETWEEN THE RECIPIENTS OF THE COMMISSION, THE SELLE R OF GOODS AND THE APPELLANT. UNDER SUCH CIRCUMSTANCES, THE DE CISIONS CITED ABOVE, IN RELATION TO GROUND NUMBER 1 ARE ALS O APPLICABLE IN THE PRESENT GROUND. HENCE FOLLOWING THESE DECISI ONS THE AO'S ACTION OF DISALLOWING THIS COMMISSION PAYMENT IS UPHELD AND THIS GROUND OF APPEAL IS DISMISSED. 21. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSE D THE ORDERS OF LOWER AUTHORITIES AND MATERIAL AVAILABLE ON RECORD. IN THE ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 23 - INSTANT CASE, THE ASSESSEE PAID COMMISSION OF RS 50 ,09,855/- TO MRS. JIGNA K. BABLA AND MRS. PRAMODINI K. BABLA ON ACCOU NT OF SALE TO M/S. CARUS CHEMICALS OF RS 7.23 CRORE. IN REPLY TO THE SHOW CAUSE NOTICE BY THE ASSESSING OFFICER, THE ASSESSEE SUBMITTED TH AT MR. KIRAN BABLA IS BASED AT TANZANIA WHO IS A REGULAR BUSINESS ASSO CIATE OF THE ASSESSEE AND EXECUTED A NUMBER OF CONTRACTS/SALES T HROUGH HIS BUSINESS CONNECTIONS AND WAS HAVING CORDIAL BUSINES S RELATIONS WITH THE ASSESSEE. MR. KIRAN BABLA AND FAMILY BUSINESS CONCERN WERE INSTRUMENTAL IN SECURING CARUS CONTRACT. THE CEO O F THE COMPANY MR. HIMANSHU MEHTA HAD A BUSINESS MEETING WITH MR. KIRAN BABLA IN TANZANIA WHEREIN MR. KIRAN BABLA PROVIDED THE BUSIN ESS LEAD ON THE CARUS CONTRACT. HE ALSO PROVIDED SOME PRICE INDICA TIONS KNOWN TO HIM THROUGH HIS BUSINESS CONNECTIONS AS WELL AS HE CONVEYED THE BIDDING INDICATIONS FOR THE CONTRACT TO THE ASSESSE E. THESE INFORMATIONS WERE TRANSLATED IN TERMS OF THE PROFIT ABILITY WITH THE COMPANY DERIVED FROM THIS CONTRACT AND AS PER THE R EGULAR COMMERCIAL TERMS OF CONTRACT, THE ASSESSEE HAD TO P AY THE COMMISSION FOR THIS LEAD. FROM THE BUSINESS LEAD P ROVIDED BY MR. KIRAN BABLA, THE TURNOVER OF THE COMPANY INCREASED BY 16.25% AND THE NET PROFIT AFTER COMMISSION OF RS 1,14,64,751/- WAS EARNED BY THE ASSESSEE WHICH WAS 15.84% OF THE TOTAL CONTRACT UAL VALUE OF THE EXPORTS. THEREFORE, THE ASSESSEE PAID THE COMMISSIO N OF RS 50,09,885/- WHICH WAS 7.77% OF THE SALES. THE ASSE SSING OFFICER WAS NOT CONVINCED WITH THE EXPLANATION OF THE ASSES SEE ON THE GROUND THAT ROLE OF MRS. JIGNA BABLA AND MRS. PRAM ODINI K. BABLA IN SALES TO M/S. CARUS CORPORATION WAS NOT ESTABLISHED AND THAT SERVICES DISCHARGED BY MR. KIRAN BABLA AND HIS FAMILY MEMBER S IN CONNECTION WITH THE SALES MADE TO M/S. CARUS CORPORATION WAS NOT ESTABLISHED AND THE ASSESSEE HAS NOT FURNISHED ANY CONTRACT BET WEEN MR. KIRAN BABLA AND THE ASSESSEE COMPANY. THE ASSESSEE HAS N OT BROUGHT ON RECORD ANY TRANSACTIONAL CORRESPONDENCE OR COMMUNIC ATION BETWEEN ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 24 - M/S. TRISTAR INVESTMENT COMPANY LTD. AND M/S. CARUS CHEMICAL CORPORATION FOR PLACING THE ORDERS OF PURCHASE FOR THE ASSESSEE COMPANY OR ON BEHALF OF THE ASSESSEE COMPANY, INVOI CE NO. 126,127,128,130,131 & 135 DO NOT CONTAIN MENTION OF EITHER M/S. TRISTAR INVESTMENT COMPANY LTD. OR MR. KIRAN BABLA AND HIS FAMILY MEMBERS ACTING AS AGENTS. HE, THEREFORE, MADE DISA LLOWANCE OF RS 50,09,855/- ON ACCOUNT OF COMMISSION PAYMENT. 22. ON APPEAL, THE COMMISSIONER OF INCOME TAX(APPE ALS) CONFIRMED THE SAME FOR THE VERY SAME REASONS. 23. WE FIND THAT THE ASSESSEE HAS FILED AT PAGE NO . 132 OF THE PAPER BOOK COPY OF LETTER DATED 18.11.2011 FROM M/S . TRISTAR INVESTMENT COMPANY LTD. WHO HAS CONFIRMED THAT THE ASSESSEE WAS THE REGULAR SUPPLIER OF VARIOUS CHEMICAL PRODUCTS A ND THAT THEY HAD ARRANGED ORDERS FOR CAUSTIC POTASH FLAKES ON COMMIS SION BASIS FOR M/S. CARUS CHEMICAL CORPORATION, USA AND THAT THE C OMMISSION OF US$ 150 PER TON WAS TO BE PAID. FURTHER, IN THIS L ETTER IT IS ALSO STATED THAT THE ASSESSEE EXECUTED THE PURCHASE ORDE RS REFERRED ABOVE SUCCESSFULLY AND PAID COMMISSION TO THEM THRO UGH MRS. JIGNA K. BABLA, WIFE OF MR. KIRAN BABLA AND MRS. PRAMODIN I K. BABLA, MOTHER OF MR. KIRAN BABLA. THUS, THIS EVIDENCES TH E FACT THAT RECIPIENTS OF THE COMMISSION WERE INSTRUMENTAL IN G ETTING THE SALES ORDER FROM M/S. CARUS CHEMICAL CORPORATION OF USA. FURTHER, IT IS ALSO NOT IN DISPUTE THAT THE ASSESSEE COMPANY EARNE D GROSS PROFIT OF RS 1.71 CRORES ON THE SALES MADE TO M/S. CARUS CHEM ICAL CORPORATION, USA OF RS 7.23 CRORES AND THAT THE PRO FIT AFTER COMMISSION WAS 15.85% AND THE COMMISSION WAS 7.7% O F SALES. FURTHER, WE OBSERVER THAT HONBLE GUJARAT HIGH COUR T IN THE CASE OF SWASTIK TEXTILE CO. PVT. LIMITED V/S CIT (SUPRA) HE LD THAT COMMISSION WAS ALLOWABLE AS DEDUCTION WHERE THE REVENUE HAD FA ILED TO ITA NO. 1891/AHD/2012 M/S. PALLAVI POWER TECH. SALES PVT. LTD., BARODA FOR A.Y. 2009-10 - 25 - CONTROVERT THE BROKER'S STATEMENT THAT HE HAD BROUG HT THE PARTIES OF CONTRACT TOGETHER. THUS, ON THE ABOVE FACTS AND CI RCUMSTANCES, IN OUR CONSIDERED VIEW THE COMMISSION PAYMENT WAS INCU RRED FOR COMMERCIAL EXPEDIENCY OF THE ASSESSEE. IT IS FURTH ER SUBMITTED IN THE WRITTEN SUBMISSIONS OF THE ASSESSEE PLACED ON P AGE 147 AND 148 OF THE PAPER BOOK THAT DURING THE YEAR UNDER APPEAL , THERE WERE OTHER CONTRACTS ALSO FOR WHICH COMMISSION OF RS 3,0 5,825/- TO MRS. JIGNA K. BALA AND RS 8,04,693/- WAS PAID TO MRS. PR AMODINI K. BALA AND THE SAME HAS BEEN ALLOWED BY THE ASSESSING OFFI CER. THEREFORE, IN OUR CONSIDERED VIEW, THE ASSESSING OFFICER WAS N OT JUSTIFIED IN DISALLOWING THE COMMISSION PAYMENT AND THE COMMISSI ONER OF INCOME TAX (APPEALS) WAS NOT JUSTIFIED IN CONFIRMIN G THE SAME. WE THEREFORE, SET ASIDE THE ORDERS AND DELETE THE ADDI TION OF RS 50,09,855/-. THUS, THE GROUND OF APPEAL OF THE ASS ESSEE IS ALLOWED. 24. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS A LLOWED. ORDER PRONOUNCED IN THE COURT ON FRIDAY, THE 10 TH OF OCTOBER, 2014 AT AHMEDABAD. SD/- SD/- (KUL BHARAT) JUDICIAL MEMBER ( N.S. SAINI) ACCOUNTANT MEMBER AHMEDABAD; DATED 10/10/2014 GHANSHYAM MAURYA, SR. P.S.