MCLUBE ASIA PRIVATE LIMITED, MUMBAI V. DEPUTY COMMISSIONER OF INCOME TAX 3(2)(1), MUMBAI

ITA 246/MUM/2018

• Counselvise Citation: [2019] 112 COUNSELVISE.COM (IT) 6508 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 1 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-02-2019
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: D
• Assessment Year: 2013-2014
• Appeal Filed On: 09-01-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: D G
• Assessee Lawyers: APURVA R SHAH
• Keywords: Fair market value; TDS

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL, MUMBAI BENCH D, MUMBAI BEFORE SHRI RAJESH KUMAR, ACCOUNTANT MEMBER AND SHRI RAM LAL NEGI, JUDICIAL MEMBER ITA NO.246/M/2018 ASSESSMENT YEAR: 2013-14 M/S. MCLUBE ASIA PVT. LTD., 1207, MARATHON ICON, VEER SANTAJI LANE, GK MARG, LOWER PAREL (W), MUMBAI- 400 013 PAN: AADCM2536R VS. DCIT CIRCLE-3(2)(1), AAYAKAR BHAVAN, M.K. ROAD, MUMBAI - 400020 (APPELLANT) (R ESPONDENT) PRESENT FOR: ASSESSEE BY : SHRI APURVA R. SHAH, A.R. REVENUE BY : SHRI D.G. PANSARI, D.R. DATE OF HEARING : 13.02.2019 DATE OF PRONOUNCEMENT : 19.02.2019 O R D E R PER RAJESH KUMAR, ACCOUNTANT MEMBER: THE PRESENT APPEAL HAS BEEN PREFERRED BY THE ASSES SEE AGAINST THE ORDER DATED 04.09.2017 OF THE COMMISSIO NER OF INCOME TAX (APPEALS) [HEREINAFTER REFERRED TO AS TH E CIT(A)] RELEVANT TO ASSESSMENT YEAR 2013-14. 2. THE GROUNDS RAISED BY THE ASSESSEE ARE AS UNDER: 1. IN CONFIRMING A DISALLOWANCE U/S 40A(2)(B) OF A PORTION OF COMMISSION PAID TO LMJ EQUIPMENT P. LTD DESPITE CONFIRMING THAT T HE AO HAD NOT BROUGHT ANY FINDING ON RECORD TO ESTABLISH THAT BENEFITS GIVEN TO THE RELATED PARTY WERE MORE THAN FAIR VALUE. 2. IN UPHOLDING A PORTION OF THE DISALLOWANCE MEREL Y BECAUSE THE APPELLANT HAD PLEADED THAT THE DISALLOWANCE WAS VERY HIGH AND NEEDED TO BE SUBSTANTIALLY REDUCED WITHOUT APPRECIATING THAT THE SAME WAS ONLY A 'WITHOUT PREJUDICE' ARGUMENT. ITA NO.246/M/2018 M/S. MCLUBE ASIA PVT. LTD. 2 3. IN CONFIRMING A DISALLOWANCE OF 5% OF EXPENSES A S PERSONAL IN THE CASE OF TRAVELLING EXPENSES WITHOUT APPRECIATING THE NATURE OF THE APPELLANT'S BUSINESS, EXISTENCE OF EXPORTS AND LOCATION OF FACTORY PREMIS ES OUTSIDE MUMBAI. 3. THE ISSUE RAISED IN GROUND NO.1 & 2 IS AGAINST T HE CONFIRMATION OF DISALLOWANCE UNDER SECTION 40A(2)(B ) OF THE ACT QUA COMMISSION PAID TO LMJ EQUIPMENT AND TRADING CO . PVT. LTD. DESPITE THE FACT THAT AO HAS NOT BROUGHT ANY F INDING ON RECORD TO ESTABLISH THAT PAYMENTS TO THE RELATED PA RTIES WERE EXCESSIVE AND UNREASONABLE. 4. THE FACTS IN BRIEF ARE THAT AO DURING THE COURSE OF ASSESSMENT PROCEEDINGS OBSERVED THAT ASSESSEE HAS C HARGED TO THE PROFIT AND LOSS ACCOUNT COMMISSION OF RS.26,05 ,207/- UNDER THE HEAD SELLING EXPENSES AND OUT OF THAT ,T HE PAYMENT WAS MADE TO LMJ EQUIPMENT AND TRADING CO. PVT. LTD. OF RS.22,15,938/- A RELATED PARTY ON WHICH DUE TDS ALS O WAS DEDUCTED AND DEPOSITED. BESIDES THE PAYMENT WAS ST ATED DULY IN THE TAX AUDIT REPORT. THE AO ASKED THE ASSESSEE TO FILE THE BASIS OF SAID COMMISSION WHICH WAS REPLIED BY THE A SSESSEE THAT COMMISSION WAS PAID TO THE LMJ EQUIPMENT AND TRADIN G CO. PVT. LTD. FOR ADHESIVE BUSINESS FOR BONDING PVC TO M ETAL, MARKETING AND ADVERTISEMENT OF BUSINESS. HOWEVER, THE REPLY OF THE ASSESSEE DID NOT FIND FAVOUR WITH THE AO AND HE CAME TO THE CONCLUSION THAT PAYMENT OF COMMISSION IS EXCESSIVE AND UNREASONABLE BY NOTING THAT THE ASSESSEE HAS PAID C OMMISSION OF 40% WHICH IS UNREASONABLE. BESIDES THE AO NOTED THAT ASSESSEE HAS NOT PRODUCED COMPARABLE CASES TO JUSTI FY THE PAYMENT OF COMMISSION AND ACCORDINGLY AFTER CONSIDE RING THE GP AND NP OF THE ASSESSEE WORKED OUT THE DISALLOWANCE AT RS.7,58,452/-. ITA NO.246/M/2018 M/S. MCLUBE ASIA PVT. LTD. 3 5. IN THE APPELLATE PROCEEDINGS ALSO THE LD. CIT(A) AFFIRMED THE ORDER OF AO BY OBSERVING AND HOLDING AS UNDER: 5.2.4 IT IS WELL SETTLED FACT THAT THE PROVISIONS OF SECTION. 40A(2)(A) OF THE ACT CANNOT HAVE ANY APPLICATION UNLESS IT IS FIRST CONC LUDED THAT THE EXPENDITURE WAS EXCESSIVE OR UNREASONABLE, AS HELD IN THE CASE OF U PPER INDIA STEEL MANUFACTURING AND ENGINEERING CO. PRIVATE LIMITED, 117 ITR 569(SC ). AFTER CONSIDERING THE SUBMISSIONS GIVEN BY THE APPELLANT AS WELL AS OBSER VATIONS MADE BY THE ASSESSING OFFICER, I AM OF THE OPINION THAT IN ORDER TO MAKE DISALLOWANCE U/S. 40A(2)(B), IT IS NECESSARY THAT THE ASSESSING OFFICER SHOULD ESTABLI SH THAT BENEFITS GIVEN TO THE RELATED PARTIES ARE MORE THAN THE FAIR MARKET VALUE . IN THE INSTANT CASE, THE ASSESSING OFFICER HAS NOT BROUGHT ANY FINDING ON RE CORD TO ESTABLISH THIS. 5.2.5 THE ASSESSING OFFICER WHILE ASSUMING THE PROFIT MAR GIN TO BE 25 % DISALLOWED 14 % OUT OF 40 % COMMISSION PAID TO LMJ EQUIPMENT A ND TRADING CO. LTD. ON THE OTHER HAND, DURING THE APPELLATE PROCEEDINGS THE AP PELLANT CONTESTED AND SUBMITTED THAT 'THE DISALLOWANCE MADE IS VERY HIGH AND NEEDS TO BE SUBSTANTIALLY REDUCED'. KEEPING IN MIND THE ABOVE FACTS AND IN AB SENCE OF ANY SUBSTANTIAL REASONING THE MEDIAN I.E. 7% OF THE COMMISSION, IN MY OPINION, WOULD BE REASONABLE. 6. AFTER HEARING BOTH THE PARTIES AND PERUSING THE MATERIAL ON RECORD, WE FIND THAT IN THIS CASE THE PAYMENT IS MA DE TO RELATED PARTY AND THE DISALLOWANCE WAS MADE UNDER SECTION 4 0A(2)(B) BY STATING THE SAME AS THE UNREASONABLE AND EXCESSIVE BEING THE COMMISSION AT RATE OF 40%. HOWEVER, WE NOTE THAT A O HAS FAILED TO BRING ON RECORD ANY COMPARABLE CASES AND THUS FA ILED TO PROVE THAT PAYMENT TO BE EXCESSIVE AND UNREASONABLE. TH E LD. CIT(A) ALSO NOTED IN PARA 5.2.4 THAT PROVISION OF SECTION 40A(2)(B) CAN NOT BE APPLIED UNLESS IT IS CONCLUDED THAT EXPENDIT URE WAS EXCESSIVE AND UNREASONABLE AS HAS BEEN HELD IN THE CASE OF UPPER INDIA STEEL MANUFACTURING AND ENGINEERING CO. PVT. LTD. 117 ITR 569 (SC). HOWEVER, THE LD. CIT(A) RESTRICT ED THE DISALLOWANCE TO 7% OF THE COMMISSION PAID. IN OUR OPINION THE LD. CIT(A) HAS ALSO NOT REACHED A CORRECT CONCLUSIO N AS FIRST HE NOTED THAT THERE IS NO FINDINGS ON THE PART OF THE AO THAT PAYMENT IS EXCESSIVE AND UNREASONABLE WITH CORROBOR ATION WHILE SIMULTANEOUSLY HE PART CONFIRMED THE ADDITION. UND ER THESE ITA NO.246/M/2018 M/S. MCLUBE ASIA PVT. LTD. 4 CIRCUMSTANCES AND FACTS, WE ARE NOT IN AGREEMENT WI TH THE CONCLUSION DRAWN BY THE LD. CIT(A). ACCORDINGLY, W E DIRECT THE AO TO DELETE THE DISALLOWANCE. 7. THE ISSUE RAISED IN GROUND NO.2 IS AGAINST THE C ONFIRMATION OF DISALLOWANCE TO THE TUNE OF RS.1,23,12,941/- AS PERSONAL EXPENSES OUT OF TRAVELLING EXPENSES AS AGAINST THE DISALLOWANCE OF 10% MADE BY THE AO IN THE ASSESSMENT ORDER TO TH E TUNE OF RS.12,31,294/-. 8. THE AO DURING THE COURSE OF ASSESSMENT PROCEEDIN GS OBSERVED THAT ASSESSEE HAS INCURRED EXPENSES OF RS.1,23,12,941/- UNDER VARIOUS HEADS SUCH AS VEHICL E EXPENSES, TELEPHONE AND INTERNET EXPENSES, TRAVELLING EXPENSE S AND SALES PROMOTION AND MARKETING EXPENSES. ACCORDINGLY, THE AO ALSO NOTED THAT THE ABOVE EXPENSES COULD NOT BE VERIFIED AS INCURRED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF BUSINESS AND ACCORDINGLY ISSUED A SHOW CAUSE NOTICE TO THE ASSES SEE AS TO WHY 10% OF THE SAID EXPENSES SHOULD NOT BE DISALLOW ED FOR WHICH THE ASSESSEE OFFERED NO EXPLANATION AND ULTIM ATELY THE ADDITION WAS MADE. 9. IN THE APPELLATE PROCEEDINGS, THE LD. CIT(A) PAR TLY ALLOWED THE APPEAL OF THE ASSESSEE BY SUSTAINING THE DISALL OWANCE AT 5% OF THE TOTAL EXPENSES INCURRED BY THE ASSESSEE. TH E LD. CIT(A) RELIED ON THE ORDER OF EARLIER YEAR A.Y. 2011-12 AN D THE 5% ADDITION WAS CONFIRMED. HOWEVER, NO COGENT AND CON VINCING REASONS WERE GIVEN FOR SUSTAINING THE DISALLOWANCE. THE LD. A.R. VEHEMENTLY SUBMITTED BEFORE US DURING THE APPELLATE PROCEEDINGS IT WAS SUBMITTED THAT ALL THESE EXPENSE S WERE ITA NO.246/M/2018 M/S. MCLUBE ASIA PVT. LTD. 5 INCURRED FOR THE PURPOSE OF BUSINESS AND NONE WERE INCURRED TOWARDS PERSONAL EXPENSES. IN THIS CASE BOTH THE A UTHORITIES BELOW HAVE FAILED TO SPECIFICALLY POINT OUT THE PER SONAL ELEMENT IN THE EXPENSES INCURRED BY THE ASSESSEE. THEREFOR E, WE ARE OF THE VIEW THAT ADHOC DISALLOWANCE AS MADE BY THE LD. CIT(A) JUST BY FOLLOWING THE PREVIOUS ORDER APPEARS TO BE NOT C ORRECT AND ACCORDINGLY THE ORDER OF CIT(A) IS REVERSED. THE A O IS DIRECTED TO DELETE THE SAME. 10. IN THE RESULT, THE APPEAL OF THE ASSESSEE IS AL LOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 19.02.2019. SD/- SD/- ( RAM LAL NEGI) (RAJESH KUMAR) JUDICIAL MEMBER ACCOUNTANT MEMBER MUMBAI, DATED: 19.02.2019. * KISHORE, SR. P.S. COPY TO: THE APPELLANT THE RESPONDENT THE CIT, CONCERNED, MUMBAI THE CIT (A) CONCERNED, MUMBAI THE DR CONCERNED BENCH //TRUE COPY// [ BY ORDER DY/ASS TT. REGISTRAR, ITAT, MUMBAI.