Seahorse Pharma Pvt. Ltd., Vadodara V. The ITO, Ward-2(1)(3), Vadodara

ITA 2539/AHD/2017

• Counselvise Citation: [2020] 111 COUNSELVISE.COM (IT) 1341 (ITAT-AHMEDABAD)
• Duration Of Justice: 2 year(s) 6 month(s) 4 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-05-2020
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: SMC
• Next Hearing Date: 07-04-2020
• Assessment Year: 2014-2015
• Appeal Filed On: 16-11-2017
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business expenditure; TDS
• Section: 37(1); 143(1); 143(2)

Judgement Text

, - IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH SMC [CONDUCTED THROUGH VIRTUAL COURT] BEFORE SHRI RAJPAL YADAV, VICE-PRESIDENT ./ ITA NO. 2539/AHD/2017 / ASSESSMENT YEAR: 2014-15 SEAHORSE PHARMA P.LTD. A/159, DARSHHNAM NR. PARIHAR CHAR RASTA WAGHODIA ROAD, VADODARA PAN : AAQCS 4592 Q VS ITO, WARD-2(1)(3) VADODARA. / (APPELLANT) / (RESPONDENT) ASSESSEE BY : SHRI MEHUL TALERA, AR REVENUE BY : SHRI VINOD TANWANI, SR.DR / DATE OF HEARING : 19/05/2020 /DATE OF PRONOUNCEMENT : 21/05/2020 O R D E R ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL AGAINST O RDER OF THE LD.CIT(A)-2, VADODARA DATED 26.9.2017 PASSED FOR TH E ASSTT.YEAR 2014-15. 2. SOLE GRIEVANCE OF THE ASSESSEE IS THAT THE LD.CI T(A) HAS ERRED IN CONFIRMING COMMISSION EXPENSES TO THE EXTENT OF RS. 22,31,200/- BY HOLDING THAT IMPUGNED PAYMENTS WERE NOT GENUINE. 3. BRIEF FACTS OF THE CASE ARE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY ENGAGED IN TRADING AND MANUFACTURING OF PHA RMA PRODUCTS. IT HAS EFILED ITS RETURN OF INCOME AT RS.98,280/- . A FTER PROCESSING THE RETURN UNDER SECTION 143(1) OF THE ACT, THE SAME WA S FURTHER SELECTED FOR SCRUTINY ASSESSMENT AND NOTICE UNDER SECTION 143(2) WAS ISSUED AND SERVED UPON THE ASSESSEE. DURING THE COURSE OF ASS ESSMENT PROCEEDINGS, ITA NO.2539/AHD/2017 - 2 - THE AO HAS NOTICED THAT THE ASSESSEE HAS PAID COMMI SSION EXPENSES OF RS.30,66,480/- WHICH APPEARED TO BE NOT GENUINE. T HE COMMISSION EXPENSES NOTICED BY THE AO IN THE IMPUGNED ORDER WE RE IN RESPECT OF THE FOLLOWING PERSONS: NAME OF PERSON AMOUNT PAID (IN RS.) JAGDISH CHANDER KUMAR 10,00,000 NEERU J PURI 5,00,000 MADHU KUMAR 10,00,000 DEVENDRA J KUMAR 2,61,900 DESAI PRITESH DOLATRAI 2,93,100 4. THE AO CONSTRUED THAT MAJORITY OF COMMISSIONS WE RE PAID TO THE FAMILY MEMBERS OF MAIN DIRECTOR OF THE ASSESSEE COM PANY VIZ. SHRI DEVENDRA KUMAR. THEREFORE, A SHOW CAUSE NOTICE WAS ISSUED TO THE ASSESSEE FOR EXPLANATION AND EVIDENCE IN SUPPORT OF SALES COMMISSION EXPENSES. IN RESPONSE TO THE SAME, ASSESSEE FILED W RITTEN SUBMISSIONS EXPLAINING THAT SINCE ASSESSEE STARTED NEW BUSINESS , IT REQUIRED EXPERIENCED MARKETING TEAM FOR MARKET EXPOSURE, SAL ES PROMOTION ACTIVITIES, BESIDES LIAISON ACTIVITIES WITH CUSTOME RS LOCATED VARIOUS PARTS OF THE COUNTRY. THE PERSONS ENGAGED BY THE ASSESSE E AS AGENTS ARE WELL EDUCATED AND HAVING EXPERIENCE IN PHARMA SECTOR. T HE ASSESSEE HAS PROVIDED COPIES OF AGREEMENTS ENTERED INTO BETWEEN THE COMMISSION AGENT AND THE ASSESSEE-COMPANY IN THIS BEHALF, AND THEREFORE, THE EXPENSES WERE INCURRED WHOLLY FOR THE BUSINESS ACTI VITIES OF THE ASSESSEE, AND THE SAME SHOULD BE ALLOWED AS DEDUCTION. HOWE VER, THE LD.AO DID NOT ACCEPT THE EXPLANATION OF THE ASSESSEE. AO WAS OF THE VIEW THAT THE ASSESSEE DID NOT HAVING ANY DOCUMENTARY EVIDENCE TO PROVE SERVICES RENDERED BY THE CONCERNED AGENTS AND TAKING INTO CO NSIDERATION THE FACT ITA NO.2539/AHD/2017 - 3 - THAT NO EVIDENCE SHOWING RENDERING OF SERVICES IN T ERMS OF AGREEMENTS ENTERED BETWEEN THEM, HE PRESUMED THAT MOTIVE OF TH E ASSESSEE WAS FOR DIVERSION OF PROFITS OF THE COMPANY TO MINIMIZE THE TAX PAYMENT, AND HENCE, IT WAS BOGUS COMMISSION EXPENSES PAID QUA SHRI JAGDISH CHANDER KUMAR OF RS.10.00 LAKHS, SMT.MADHU KUMAR OF RS.10,0 0,000/- AND SMT.NEERU J KUMAR OF RS.5,00,000/-. THUS, HE DISALL OWED A TOTAL AMOUNT OF RS.25.00 LAKHS, AND THE REMAINING WAS ALL OWED. IN APPEAL, THE LD.FIRST APPELLATE AUTHORITY UPHELD THE STAND T AKEN BY THE AO, BUT GAVE A PART RELIEF OF RS.2,68,800/- IN RESPECT OF C OMMISSION PAYMENT PAID TO SMT.MADHU KUMAR AND CONFIRMED BALANCE AMOUN T OF RS.22,31,200/-. AGAINST THIS CONFIRMATION, THE ASSE SSEE IS NOW BEFORE THE TRIBUNAL. 5. BEFORE ME, THE LD.COUNSEL FOR THE ASSESSEE REITE RATED HIS SUBMISSIONS AS WERE MADE BEFORE THE REVENUE AUTHORI TIES. THE ASSESSEE FILED A PAPER BOOK WHICH CONTAINED COPY OF AGREEMEN T ENTERED INTO WITH THE AGENTS AND SCOPE OF WORK. IT IS PLACED AT PAGE NO.40 AND 41 OF THE PAPER BOOK. HE SUBMITTED THAT THE AGENTS ARE HIGHL Y EDUCATED AND POSSESSING WIDE EXPERIENCE IN THE PHARMA SECTOR. T HEY ARE ALSO WORKING FOR SEVERAL COMPANIES AS COMMISSION AGENTS INCLUDIN G THE ASSESSEE- COMPANY. THEREFORE, THERE IS NO DISPUTE WITH REGARD TO THEIR CAPACITY TO ACT AS AGENTS TO THE ASSESSEE. HE FURTHER DREW OUR ATTENTION TO PAGE NO.42 WHEREIN DETAILED SUMMARY OF COMPARATIVE COMMI SSION EARNED BY SHRI JAGDISH CHANDERKUMAR AND SHRI MADHU KUMAR FROM VARIOUS COMPANIES AND THE COMMISSION EARNED FROM THE ASSESS EE-COMPANY WAS GIVEN. ASSESSEE HAS ALSO FILED COPIES OF FORM NO.2 6AS OF THE AGENTS FOR THE RELEVANT ASSESSMENT YEARS. THESE DETAILS CLEAR LY JUSTIFY THE CLAIM OF THE ASSESSEE TO BE GENUINE. SO FAR AS COMMISSION P AID TO SMT.NEERU PURI ITA NO.2539/AHD/2017 - 4 - IS CONCERNED, SHE IS A RETIRED EMPLOYEE, AS A POLIO PROGRAMMER, FROM THE STATE GOVERNMENT, AND HAS VERY GOOD EXPERIENCE IN P HARMA SECTOR. SHE IS WORKING AS FULL TIME DIRECTOR AND INCHARGE OF DA Y-TO-DAY AFFAIRS OF THE COMPANY, AND FOR THIS SERVICE, SHE IS PAID COMMISSI ON IN LIEU OF SALARY. THEREFORE, PAYMENT OF RS.5.00 LAKHS MADE TO HER DUR ING THE YEAR CANNOT BE DOUBTED. THE LD.COUNSEL FOR THE ASSESSEE FURTHER SUBMITTED THAT BECAUSE OF CONCERTED EFFORTS PUT IN BY THESE AGENTS , SALES OF THE ASSESSEE HAS BEEN INCREASED TO RS.1,71,11,199 IN THE ASSTT.Y EAR 2015-16 TO RS.96,96,84,544/- IN THE ASSTT.YEAR 2014-15. IT IS REITERATED THAT IT WAS A LEGITIMATE BUSINESS EXPENDITURE INCURRED FOR BUSINE SS PURPOSE WHICH CANNOT BE DOUBTED, AND THE SAME BE ALLOWED AS BUSIN ESS EXPENDITURE. 6. ON THE OTHER HAND, THE LD.DR SUPPORTED ORDERS OF THE REVENUE AUTHORITIES. HE FURTHER SUBMITTED THAT REVENUE AUT HORITIES HAVE JUSTIFIED IN DISALLOWING CLAIM OF THE ASSESSEE, BEC AUSE THERE WAS NO EVIDENCE IN THE FORM OF CLIENT BASE OF A PARTICULAR AGENT, CORRESPONDENCES MADE WITH THE CLIENTS, RATE OF COMMISSION FOR EACH TRANSACTION AND THE AGENT-WISE CONTRIBUTION TO THE ASSESSEES TURNOVER. THEREFORE, ORDERS OF THE REVENUE AUTHORITIES REQUIRE TO BE UPHELD. 7. I HAVE CONSIDERED RIVAL SUBMISSIONS AND GONE THR OUGH THE RECORD CAREFULLY. THE ISSUE BEFORE THE TRIBUNAL WAS WHETH ER THE COMMISSION PAYMENTS MADE BY THE ASSESSEE TO THE ABOVE AGENTS A RE GENUINE AND ARE ALLOWABLE EXPENDITURE UNDER THE PROVISIONS OF THE A CT. FOR ADJUDICATING THIS ISSUE, IT IS PERTINENT TO OBSERVE THAT IN ORD ER TO CLAIM EXPENDITURE UNDER SECTION 37(1) OF THE INCOME TAX ACT, THE ASSE SSEE REQUIRES TO FULFILL CERTAIN CONDITIONS VIZ. (A) THERE MUST BE EXPENDITU RE, (B) SUCH EXPENDITURE MUST NOT BE OF THE NATURE DESCRIBED IN SECTION 30 TO 36, (C) ITA NO.2539/AHD/2017 - 5 - EXPENDITURE MUST NOT BE IN THE NATURE OF CAPITAL EX PENDITURE, OR PERSONAL EXPENDITURE OF THE ASSESSEE, AND (D)EXPENDITURE MUS T BE LAID OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS. PAYMENT OF COMMISSION WAS A NORMAL TRADE PRACTICE I N THE LINE OF BUSINESS, AND EVERY BUSINESS MAN PAYS COMMISSION TO PROCURE BUSINESS. ASSESSEE IN ORDER TO PROVE ITS CASE HAS PROVIDED DO CUMENTS VIZ. COPY OF AGREEMENT ENTERED INTO BY THE ASSESSEE AND THE AGEN TS, WHICH INTER ALIA PROVIDE THE APPOINTMENT AND SCOPE OF THE WORK OF TH E ASSESSEE. CAPACITIES OF THE AGENTS TO ACT AS AGENTS OF THE AS SESSEE AND THE BUSINESS THEY HAVE PERFORMED FOR THE ASSESSEE HAVE NOT BEEN DOUBTED. THE COMMISSIONS WERE PAID IN RELATION TO THE BUSINESS P ROCURED BY AGENTS FROM VARIOUS LOCATIONS AS INDICATED IN THE DETAILS FURNISHED BY THE AGENTS. SUCH COMMISSION PAYMENTS WERE IN THE FORM OF ACCOUNT PAYEE CHEQUES, AND IN ORDER TO EVIDENCE THE GENUINENESS O F TRANSACTIONS OF COMMISSION RECEIVED BY THE AGENTS, THESE AGENTS HAV E PROVIDED A SUMMARY OF COMMISSION RECEIVED FROM VARIOUS COMPANI ES INCLUDING THAT OF THE ASSESSEE. THEY HAVE ALSO FILED COPIES OF FORM NO.26AS SHOWING DETAILS OF TDS AGAINST THE RECEIPT OF COMMI SSIONS, THEREFORE, A LIVE LINK BETWEEN THE BUSINESS OF THE ASSESSEE AND PAYMENTS MADE TO THE AGENTS HAVE BEEN ESTABLISHED. THESE INDEPENDENT EVI DENCES PRODUCED BY THE ASSESSEE WOULD PROVE THAT SERVICES WERE REND ERED BY THE AGENTS, WHICH HAVE NOT BEEN DISPUTED BY THE REVENUE. THE R EVENUE AUTHORITIES DOUBTED THE PAYMENT OF COMMISSIONS MERELY ON THE FA CTS THAT AGENTS ARE RELATED TO THE ASSESSEE, AND THAT COMMISSION EXPENS ES WERE CLAIMED TO REDUCE THE TAX LIABILITY OF THE ASSESSEE COMPANY, W HICH ALLEGATION WAS NOT SUPPORTED BY ANY INDEPENDENT FINDING. THE AGENT S HAVE INCLUDED THE RECEIPTS IN THEIR RETURN OF INCOME AND THAT THE RE WAS NO EVIDENCE TO ITA NO.2539/AHD/2017 - 6 - SHOW THAT THE MONEY HAS COME BACK TO ASSESSEE SO AS TO ALLEGE THAT THE TRANSACTIONS ARE BOGUS TO AVOID TAX BY REDUCING THE PROFIT. IN THE ASSESSEES CASE, RELEVANT CONDITIONS LAID OUT IN SE CTION 37(1) HAVE BEEN FULFILLED. THEREFORE, THE COMMISSION EXPENSES PAID WAS IN THE NATURE OF BUSINESS EXPENSE WHICH REQUIRES TO BE ALLOWED AS DE DUCTION. SINCE IT IS OF REVENUE NATURE AND EXPENDED WHOLLY AND EXCLUSIVE LY FOR THE PURPOSE OF BUSINESS AND, THEREFORE, THE AO IS DIRECTED TO A LLOW COMMISSION EXPENDITURE CLAIMED BY THE ASSESSEE. 8. IN THE RESULT, APPEAL OF THE ASSESSEE ALLOWED. PRONOUNCED IN THE OPEN COURT ON 21 ST MAY, 2020. SD/- (RAJPAL YADAV) VICE-PRESIDENT