The ACIT, Circle-6, Surat V. M/s. Shree Saraswati Medical Agency, Surat

ITA 2676/AHD/2008

• Counselvise Citation: 267620514 RSA 2008
• Duration Of Justice: 3 year(s) 5 month(s) 28 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 25-01-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: C
• Next Hearing Date: 16-01-2012
• Assessment Year: 2005-2006
• Appeal Filed On: 28-07-2008
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business income; Capital receipt; Capital expenditure
• Section: 37(1); 10

Judgement Text

-1- IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'C' BEFORE SHRI D K TYAGI - JM AND SHRI A MOHAN ALANKAMONY AM ITA NO.2676/AHD/2008 (ASSESSMENT YEAR:-2005-06) THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-6, ROOM NO. 623, AAYAKAR BHAVAN, MAJURA GATE, SURAT V/S M/S SHREE SARASWATI MEDICAL AGENCY, 12/1492, BASEMENT, YOGESHWAR AWAS, SHAHPORE, SURAT PAN: AAKFS 5323 A [APPELLANT] [RESPONDENT] REVENUE BY :- SHRI VINOD TANWANI, SR. DR ASSESSEE BY:- SHRI HARDIK VORA, AR DATE OF HEARING:- 16-01-2012 DATE OF PRONOUNCEMENT:- 25-01-2012 O R D E R PER D K TYAGI (JM) :- THIS IS REVENUES APPEAL AGAINST THE ORDER DATED 08-05-2008 PASSED BY THE LEARNED CIT(A) -IV, SURAT FOR ASSESSMENT YEAR 2005-06. 2 GROUND NO.1 IN THE REVENUES APPEAL RELATES TO DE LETION OF AN ADDITION OF RS.2,46,332/- MADE BY AO ON ACCOUNT OF INSURANCE PREMIUM PAID UNDER THE KEYMAN INSURANCE SCHEME ON THE LIFE OF ITS PARTNER. THE FACTS OF THE CASE ARE THAT THE AO OBSERVED THAT THE ASSESSEE HAD CLAIMED THIS AMOUNT AS REVENUE EXP ENDITURE WHICH WAS NOT ALLOWABLE SINCE THE BENEFIT OF THE IN SURANCE IS IN THE NATURE OF CAPITAL RECEIPT AND SO THE EXPENDITUR E WOULD ALSO BE 2 CAPITAL EXPENDITURE. THE AO RELIED ON THE DECISION OF THE HONBLE GUJARAT HIGH COURT IN THE CASE OF KHODIDAS MOTIRAL PANCHAL 161 ITR 99 AND ALSO RELIED ON CBDT CIRCULAR NO.762, DAT ED 18-02- 1998. 3 AGGRIEVED BY THE ORDER OF THE AO, THE ASSESSEE FI LED AN APPEAL BEFORE THE LEARNED CIT(A). THE LEARNED CIT(A ) DIRECTED THE AO TO DELETE THE ADDITION BY OBSERVING AS UNDER :- I HAVE CONSIDERED THE SUBMISSIONS AND FIND THAT TH E DECISION OF HON'BLE GUJARAT HIGH COURT RELIED UPON BY THE AO PE RTAINS TO A Y.I 971-72. SUBSEQUENT TO THAT SECTION 2(24)(XI) WAS AM ENDED WITH EFFECT FROM 1.10.1996 BY THE FINANCE ACT,1996 AS A RESULT OF WHICH ANY SUM RECEIVED UNDER A KEYMAN INSURANCE POLICY INCLUDING THE SUM ALLOCATED BY WAY OF BONUS ON SUCH POLICY WOULD FORM PART OF THE TOTAL INCOME AND THE EXPRESSION KEYMAN INSURANCE POLICY H AS THE SAME MEANING ASSIGNED TO IT IN THE EXPLANALION-2 IN THE CLAUSE 10D OF SECTION 10 WHICH SAYS THAT ANY SUM RECEIVED UNDER A KEYMAN INSURANCE POLICY WOULD FORM PART OF THE TOTAL INCOM E OF PERSON. IT IS ALSO IMPORTANT TO NOTE THAT FIRM IS AN ARTIFICIAL E NTITY CONSTITUTED BY THE PARTNERS WHO ARE SEPARATE ENTITIES ALTHOUGH JOINTLY AND SEVERALLY LIABLE TO THE FIRM BUT A PARTNERSHIP FIRM WOULD HAVE AN IN SURABLE INTEREST IF BY THE DEATH OF ANY PARTNER, IT WILL SUSTAIN A LOSS OR A PECUNIARY LIABILITY, I HAVE ALSO GONE THROUGH THE INSURANCE R EGULATORY AND DEVELOPMENT AUTHORITY AC (IRDA), 1999 WHICH SPECIFI CALLY ALLOWS REDUCTION OF INSURANCE PREMIUM UNDER PARTNERSHIP IN SURANCE AS EXPENSES U/S 37(1) OF THE I T ACT. IT IS SEEN THAT THE AMENDMENT TO SEC. 2(24)(XI) HAS RESULTED IN AN AMOUNT RECEIVED ON MAT URITY OR ON THE DEATH OF A PARTNER UNDER THE KEYMAN INSURANCE SCHEM E AS INCOME CHARGEABLE TO TAX. BY THE SAME LOGIC, THE PREMIUM P AID FOR OBTAINING SUCH INSURANCE POLICY WOULD BE AN EXPENDITURE ALLOW ABLE U/S 37(1) OF THE I.T. ACT. FURTHER, THE AO'S OBSERVATION THAT SU CH PREMIUM COULD BE ALLOWED ONLY IF AN EMPLOYEE-EMPLOYER RELATIONSHI P EXISTED BETWEEN THE PREMIUM PAYER AND THE KEYMAN IS ALSO WITHOUT ME RITS SINCE AS PET 1 EXPLANATION TO SECTION 10 (101), 'KEYMAN INSURANC E POLICY MEANS A LIFE INSURANCE POLICY TAKEN BY A PERSON ON THE LIFE OF ANOTHER PERSON WHO IS OR WAS THE EMPLOYEE OF THE FIRST MENTIONED P ERSON OR IS OR WAS 3 CONNECTED IN ANY MANNER WHATSOEVER WITH THE BUSINES S OF FIRST MENTIONED PERSON,' IN THE INSTANT CASE, THE FIRST M ENTIONED PERSON IS THE PARTNERSHIP FIRM WHILE THE POLICY HAS BEEN TAKE N ON THE LIFE O! THE PARTNER WHO IS THE SECOND MENTIONED PERSON. THEREFO RE, THE AO'S ACTION IN DISALLOWING THE INSURANCE PREMIUM PAID BY THE FIRM UNDER KEYMAN INSURANCE POLICY IS NOT IN ORDER AND THE ADD ITION IS DIRECTED TO BE DELETED. THE CBDT CIRCULAR READ IN ITS ENTIRETY IS ALSO IN FAVOUR OF THE APPELLANT. 4 NOW, THE REVENUE IS IN APPEAL BEFORE US. AT THE T IME OF HEARING, BOTH THE PARTIES AGREED THAT THE ISSUE IS COVERED AGAINST THE REVENUE BY THE DECISION OF THE ITAT AHMEDABAD B ENCH-D IN THE CASE OF M/S PARMESHWAR ENGINEERS [ITA NO.4369/A HD/2007, ORDER DATED 20-08-2010]. 5 AFTER HEARING BOTH THE PARTIES AND PERUSING THE R ECORD, WE FIND THAT THE ISSUE IS COVERED IN FAVOUR OF THE ASS ESSEE AND AGAINST THE REVENUE BY THE AFORESAID DECISION OF TH E ITAT AHMEDABAD BENCH-D IN THE CASE OF M/S PARMESHWAR ENG INEERS [ITA NO.4369/AHD/2007, ORDER DATED 20-08-2010], WHE REIN ON IDENTICAL ISSUE, THE TRIBUNAL HAS DELETED THE ADDIT ION. RESPECTFULLY FOLLOWING THE SAID DECISION OF THE TRI BUNAL, WE UPHOLD THE ORDER OF THE LEARNED CIT(A). THUS, GROUN D NO.1 RAISED BY THE REVENUE STANDS DISMISSED. 6 GROUND NO.2 IN THE REVENUES APPEAL RELATES TO DE LETION OF DISALLOWANCE OF RS.10,68,300/- MADE BY THE AO ON AC COUNT OF SALES COMMISSION. THE FACTS OF THE CASE ARE THAT TH E AO OBSERVED THAT THIS AMOUNT WAS PAID TO VARIOUS PERSONS AND WA S OF THE VIEW THAT THE ASSESSEE WAS UNABLE TO PROVIDE THE PROOF O F SERVICES RENDERED. THE ASSESSEE SUBMITTED BEFORE THE AO THAT IT WAS IN THE 4 BUSINESS OF PURCHASE AND SALE OF MEDICINES ON WHOLE SALE BASIS. THERE WERE MORE THAN 6000 RETAIL OUTLETS TO WHOM ME DICINES WERE BEING SOLD AND THE ASSESSEES REPRESENTATIVES WOULD VISIT THE RETAILER EVERYDAY AND TAKE ORDER FROM DIFFERENT PAR TS OF THE CITY AND WOULD ALSO COLLECT PAYMENT OF THE PREVIOUS ORDE R FOR WHICH PURPOSE THEY WERE PAID COMMISSION. ALL THE PERSONS WERE ASSESSED TO TAX AT A HIGHEST SLAB AND THEIR STATEME NTS WERE RECORDED BY THE AO IN AY 2003-04 AND THE SAID COMMI SSION WAS ALLOWED. HOWEVER, THE AO REJECTED THE EXPLANATION A ND HELD THAT THERE WAS NO BASIC DATA FOR PAYMENT OF COMMISSION A ND THEREFORE THE COMMISSION WAS NOT AN ALLOWABLE EXPENDITURE AND HE MADE AN ADDITION ON THIS ACCOUNT. 7 ON APPEAL, THE LEARNED CIT(A) DIRECTED THE AO TO DELETE THE DISALLOWANCE IN THE FOLLOWING MANNER:- BEFORE ME THE ID. AR SUBMITTED THAT THE SAID COMMI SSION WAS PAID TO INCREASE THE SALES, IN MEDICINE MARKET, THE GENERAL PRACTICE WAS THAT EVERY RETAILER WOULD KEEP AN OPEN REGISTER IN WHICH LIE WOULD NOTE DOWN THE NAMES OF THE MEDICINES WHICH WERE ABOUT TO FINISH. ONE PERSON OF THE APPELLANT WHO WAS ASSIGNED TO THE ARE A WOULD VISIT THE SHOP EVERYDAY AND TAKE ORDERS AS PER THE REGISTERS AND REPORT THE SAME TO THE APPELLANT WHEN DELIVERY WAS MADE AND BILLS W ERE ISSUED. FOR THE SAID SERVICE THOSE REPRESENTATIVES WERE PAID COMMIS SION @ 1% OF THE TOTAL SALES. ALL THESE PERSONS WERE ASSESSED TO TAX AND DURING THE ASSESSMENT PROCEEDINGS IT WAS EXPLAINED THAT COMMIS SION WAS PAID @ 1% AND DISTRIBUTED AMONGST ALL THE PERSONS EQUALLY SINCE THE WORK ALLOTTED TO THEM WAS ALMOST THE SAME. IT WAS SUBMIT TED THAT THESE PERSONS WERE EXAMINED BY THE AO DURING ASSESSMENT P ROCEEDINGS FOR AY 2003-04 WHEN THE COMMISSION PAID TO THEM WAS ALL OWED. I HAVE CONSIDERED THE SUBMISSIONS MID FIND THAT THE APPELLANT'S VERSION HAS MERITS. ITS A USUAL PRACTICE IN WHOLESALE MEDIC INE BUSINESS TO EMPLOYEE PERSONS WHO WOULD VISIT THE RETAILERS IN D IFFERENT PARTS OF THE 5 CITY AND PROCURE ORDERS WHICH WOULD BE SUPPLIED TO THE RETAILER BY THE WHOLESALER. SUBSEQUENTLY, PAYMENTS FOR THE EARLIER SUPPLY WOULD COLLECT FROM THE RETAILERS BY THESE VERY PERSONS. I N ORDER TO VERIFY THE CLAIM TWO OF THE PERSONS TO WHOM COMMISSION WAS PAI D WERE EXAMINED BY ME AND IT WAS FOUND THAT WHAT THE APPEL LANT WAS SUBMITTING WAS CORRECT. IT IS ALSO SEEN THAT THE CO MMISSION IS BEING PAID @ 1% OF THE TOTAL SALES TO BE DISTRIBUTED EQUA LLY AMONGST THE LOUR RECIPIENTS. IT IS ALSO IMMATERIAL THAT THESE PERSON S WERE RELATED TO THE APPELLANT AND WOULD BE THE PERSONS AFFECTED BY PROV ISIONS OF SECTION 40A(2)(B) OF THE IT ACT SINCE EVEN OTHER WISE THE A PPELLANT WOULD HAVE TO PAY COMMISSION TO OUTSIDE PARTIES. I AM OF THE CONSIDERED VIEW THAT GENUINENESS OF THE COMMISSION PAID STANDS ESTABLISHED AND THE AO HAS NOWHERE GIVEN A FINDING THAT THE SAME WA S EXCESSIVE OR UNREASONABLE. ADDITION ON THIS ACCOUNT IS THEREFORE DIRECTED TO BE DELETED. 8 THE REVENUE IS IN APPEAL BEFORE US. THE LEARNED D R SUPPORTED THE ORDER OF THE AO. THE LEARNED COUNSEL OF THE ASSESSEE, ON THE OTHER HAND, SUPPORTED THE ORDER OF THE LEARNED CIT(A). 9 WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE RE CORD AND FIND THAT THE LEARNED CIT(A) HAS GIVEN CLEAR FINDIN G THAT THE PAYMENT MADE TO THE PARTIES IS GENUINE, AFTER VERIF ICATION FROM TWO PERSONS TO WHOM COMMISSION WAS PAID. THIS FINDI NG OF FACT WAS NOT DISPUTED BY THE REVENUE BEFORE US. THEREFOR E, WE ARE NOT INCLINED TO INTERFERE WITH THE ORDER PASSED BY THE LEARNED CIT(A) AND THE SAME IS HEREBY UPHELD. GROUND NO.2 RAISED B Y THE REVENUE IS DISMISSED. 10 GROUND NO.3 IN THE REVENUES APPEAL RELATES TO D ELETION OF DISALLOWANCE OF RS.70,960/- MADE BY THE AO ON ACCOU NT OF SALARY PAYMENT. THE FACTS AS NOTED BY THE LEARNED CIT(A) A ND FINDINGS GIVEN BY HIM ARE AS UNDER:- 6 THE NEXT GROUND OF APPEAL IS REGARDING DISALLOWANC E OF RS.70,960/- BEING 10% OF THE SALARY PAYMENT. THE AO HELD THAT S INCE THE BOOKS OF ACCOUNTS WERE NOT PRODUCED HAVING BEEN DESTROYED IN THE FLOODS, THERE WAS NO WAY OF VERIFYING THE GENUINENESS OF CLAIM OF SALARY WHICH WAS MOSTLY PAID IN CASH. THE APPELLANT STALED THAT SALA RY WAS BEING PAID TO STAFF AND TO THE DELIVERYMAN AND THE SALARY WAS PAI D IN CASH SINCE THE STAFF NORMALLY DID NOT HAVE ANY BANK ACCOUNT. THE A O DID NOT ACCEPT THE CONTENTION AND DISALLOWED 10% OF THE EXPENDITUR E. I DO NOT UNDERSTAND THE LOGIC OF THIS DISALLOWANCE. FOR MAKING THIS ADDITION THE AO HAS STATED THAT IN THE ABSENCE OF B OOKS OF ACCOUNTS AS WELL AS PAYMENT BEING MADE IN CASH, THE WHOLE AMOUN T PAID UNDER THE HEAD SALARY COULD NOT BE CONSIDERED AS EXPENSE FULL Y ALLOWABLE U/S 37(I) OF THE IT ACT THE REASON ASSIGNED BY THE AO I S NOT CONVINCING SINCE THE PAYMENT WOULD BE MADE BY CASH TO THE EMPL OYEES AND THERE IS NO STATUTORY REQUIREMENT OF SALARY TO BE PAID BY CHEQUE, ESPECIALLY TO LOWLY PAID EMPLOYEES, THE DISALLOWANCE IS NOT SU STAINABLE AND IS DIRECTED TO BE DELETED. 11 THE REVENUE IS IN APPEAL BEFORE US. THE LEARNED DR SUPPORTED THE ORDER OF THE AO. THE LEARNED COUNSEL OF THE ASSESSEE, ON THE OTHER HAND, SUPPORTED THE ORDER OF THE LEARNED CIT(A). 12 AFTER HEARING BOTH THE PARTIES AND PERUSING THE RECORD, WE DO NOT FIND ANY INFIRMITY IN THE ORDER OF THE LEARN ED CIT(A) IN DELETING THE DISALLOWANCE. THE LEARNED CIT(A) HAS G IVEN COGENT REASON FOR DELETING THE DISALLOWANCE THAT THE STAND TAKEN BY THE AO IS NOT CONVINCING SINCE THE PAYMENT WOULD BE MAD E BY CASH TO THE EMPLOYEES AND THERE IS NO STATUTORY REQUIREM ENT OF SALARY TO BE PAID BY CHEQUE, ESPECIALLY TO LOWLY PAID EMPL OYEES. WE ACCORDINGLY UPHOLD THE ORDER OF THE LEARNED CIT(A). GROUND NO.3 RAISED BY THE REVENUE IS DISMISSED. 7 13 IN THE RESULT, THE REVENUES APPEAL IS DISMISSED . ORDER PRONOUNCED IN THE COURT TODAY ON 25-01-2012 SD/- SD/- (A MOHAN ALANKAMONY) ACCOUNTANT MEMBER (D K TYAGI) JUDICIAL MEMBER DATE : 25-01-2012 COPY OF THE ORDER FORWARDED TO: 1. M/S SHREE SARASWATI MEDICAL AGENCY, 12/1492, BASEMENT, YOGESHWAR AWAS, SHAHPORE, SURAT 2. THE ASST. COMMISSIONER OF INCOME-TAX, CIRCLE-6, ROOM NO. 623, AAYAKAR BHAVAN, MAJURA GATE, SURAT 3. CIT CONCERNED 4. CIT(A)-IV, SURAT 5. DR, ITAT, AHMEDABAD BENCH-C, AHMEDABAD 6. GUARD FILE BY ORDER DEPUTY REGISTRAR ASSISTANT REGISTRAR ITAT, AHMEDABAD