Jhawar Biotech Pvt.Ltd., Surat V. The Dy.CIT.,Circle-1, Surat

ITA 3464/AHD/2008

• Counselvise Citation: [2009] 114 COUNSELVISE.COM (IT) 9367 (ITAT-AHMEDABAD)
• Duration Of Justice: 10 month(s) 1 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 21-08-2009
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: D
• Next Hearing Date: 07-07-2009
• Assessment Year: 2005-2006
• Appeal Filed On: 20-10-2008
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Keywords: Diversion of income; Corroborative evidences; Third party statement; Commercial expediency
• Section: 234B; 37(1); 143(1); 143(2)

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH 'D' (BEFORE S/SHRI H L KARWA,JM AND A N PAHUJA,AM) ITA NO.3464/AHD/2008 (ASSESSMENT YEAR: 2005-06) M/S JHAWAR BIO TECH PVT. LTD. 823/2, ROAD NO.8, G.I.D.C, SACHIN,NEAR SAGAR HOTEL, SURAT. [PAN:AAACJ6024A] V/S THE DCIT.CIRCLE-1, AAYAKAR BHAWAN, MAJURA GATE, SURAT (APPELLANT) (RESPONDENT) ASSESSEE BY :- SHRI RAMESH MALPANI, AR REVENUE BY:- SHRI RAJIV SAHAI, DR O R D E R A N PAHUJA: THIS APPEAL BY THE ASSESSEE AGAINST AN ORDER DATED 21.8.2008 OF THE LD. CIT(A)-I, SURAT, RAISES THE ISSUE RELATING TO DISALLOWANCE OF RS. 1,34,89,470/- ATTRIBUTABLE TO COMMISSION DEDUCTED I N SALES INVOICES. 2. FACTS, IN BRIEF, AS PER RELEVANT ORDERS A RE THAT RETURN DECLARING INCOME OF RS.7,28,000/- FILED ON 31.10.2005 BY THE ASSESSEE, ENGAGED IN MANUFACTURING AND EXPORT OF TEXTILE FABRICS, AFTER BEING PROCESSE D ON 23.3.2006 U/S 143(1) OF THE INCOME-TAX ACT,1961[HEREINAFTER REFERRED TO AS THE ACT] WAS TAKEN UP FOR SCRUTINY WITH THE ISSUE OF NOTICE U/S 143(2) OF THE ACT ON 13.10.2006. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER[AO IN SHORT] NOTICED THAT THE ASSESSEE HAD DEBITED COMMISSION OF RS. 1,34,89,470 /- ON EXPORT SALES. TO A QUERY BY THE AO, THE ASSESSEE SUBMITTED A CONFIRMA TION OF M/S AMBITIOUS IMPEX LLC,DUBAI, WHEREIN IT IS STATED THAT THE SAID FIRM RENDERED SERVICES SUCH AS PROCUREMENT OF SAMPLES, DECIDING THE ORDERS AND SET TLING ALL THE MATTERS BETWEEN BUYER AND SELLER. TO A FURTHER QUERY BY THE AO, THE ASSESSEE SUBMITTED VIDE LETTER DATED 24.12.2007 THAT THE COMMISSION DEDUCT ED IN SALES INVOICES IS AS PER THE TERMS OF EXPORT TO THE FOREIGN BUYERS AND THE LIABILITY TO PAY COMMISSION TO THE BUYERS AGENT WAS OF THE BUYERS AND ACCORDINGL Y, PRICE WAS DECIDED AFTER DEDUCTING COMMISSION FROM SALES INVOICES. REGARDING SERVICES RENDERED , IT WAS ITA NO.3464/AHD/2008 2 SUBMITTED THAT AFTER HAVING ORDERS FROM FOREIGN BU YERS ,AGENTS IDENTIFY SELLERS AND PROCURE SAMPLES/DESIGNS/QUALITY. THE AGENTS HAN DLE ALL THE MATTERS PERTAINING TO EXECUTION OF ORDERS AND ENSURE PAYMEN TS TO SELLERS. IT WAS POINTED OUT THAT EXPORTS WERE NOT AGAINST LETTERS OF CREDIT OR BANK GUARANTEE WHILE THE AGENT ALONE ENSURED PAYMENT TO THE ASSESSEE . WHILE PLEADING THAT THERE WAS NO REMITTANCE OF COMMISSION TO THE AGENT AND INSTEAD E XPORT SALES INCOME WAS DIVERTED TO THE EXTENT OF FOREIGN COMMISSION AT SOU RCE ITSELF, THE ASSESSSEE RELIED UPON A DECISION IN CIT VS. SITALDAS TIRATHDAS,41 I TR 367(SC). HOWEVER, THE AO REJECTED THESE CONTENTIONS OF THE ASSESSEE ON THE G ROUND THAT IF THE BROKER IS THE AGENT OF THE ASSESSEE THEN ALL THE DETAILS NAMELY N AME, ADDRESSES, SERVICES RENDERED ETC. HAS TO BE KNOWN TO THE ASSESSEE AND I F IT IS NOT SO AND IF THE AGENT IS THAT OF FOREIGN BUYER THEN IT IS NOT ASSESSEES LIABILITY TO PAY THE COMMISSION. WHILE DISTINGUISHING THE AFORESAID DECISION RELIED UPON BY THE ASSESSEE AND REFERRING TO THE DECISIONS IN THE CASE OF CIT VS. C ALCUTTA AGENCY LTD.,19 ITR 191(SC),CIT VS. IMPERIAL CHEMICAL INDUSTRIES (INDIA ) (P) LTD.,74 ITR 17(SC),CIT VS. PARAKH & CO.(INDIA) LTD.,29 ITR 661(SC),CIT VS. CHANDRAVILAS HOTEL,164 ITR 102(GUJ), LACHMINARAYAN MADAN LAL VS. CIT,86 ITR 43 9(SC),GOODLASS NEROLAC PAINTS LTD. VS. CIT,137 ITR 58(BOM.) AND LH SUGAR F ACTORY & OIL MILLS (P) LTD. VS. CIT,125 ITR 293(SC), THE AO CONCLUDED THAT THE ASSESSEE HAS CHOSEN NOT TO SUBSTANTIATE THEIR CLAIM OF EXPENSES AND ACCORDINGL Y, DISALLOWED THE CLAIM FOR DEDUCTION OF EXPENSES OF RS.1,34,89,470/-. 3. ON APPEAL, THE ASSESSEE ,WHILE REITERATING THEI R SUBMISSIONS BEFORE THE AO CONTENDED THAT I) THE SERVICES OF FOREIGN AGENTS ARE VERY MUCH EVIDENT FROM THE EXPORT SALES TRANSACTIONS THEMSELVES; II) SUFFICIE NT EVIDENCE IN RESPECT OF PAYMENT OF COMMISSION TO THESE AGENTS BY THE FOREIG N BUYER AND SERVICES RENDERED BY THESE AGENTS WERE FURNISHED TO THE AO; III)AS A MATTER OF PRICE FIXATION THE GROSS RATE WAS FIXED, OUT OF WHICH THE COMMISSION LIABILITY OF FOREIGN BUYER WAS AGREED TO BE DEDUCTED. THIS WAS MATTER O F PRICE FIXATION. ACCORDINGLY, FROM GROSS SELLING RATE THE COMMISSION WAS DEDUCTED AND ONLY NET SALES AMOUNT ACCRUED TO THE ASSESSEE AND IV) COMMIS SION AMOUNT WAS A DEDUCTION IN SALES INVOICE ITSELF AND IS AN AMOUNT DIVERTED AT SOURCE ITSELF. THIS WAY A LIABILITY OF FOREIGN BUYER WHO PAID THE SAME. ITA NO.3464/AHD/2008 3 4. IN THE LIGHT OF AFORESAID SUBMISSIONS, THE LD. CIT(A) CONCLUDED AS UNDER: 3.7 I HAVE CONSIDERED THE SUBMISSIONS MADE BY THE A PPELLANT AND OBSERVATION OF THE AO. FROM THE ABOVE IT IS VERY CLEAR THAT TH E AGENT TO WHOM THE COMMISSION HAS BEEN PAID IS THE AGENT OF THE FOREIG N BUYER AND NOT THE AGENT OF THE ASSESSEE AT ALL. THIS FACT HAS BEEN ADMITTED BY THE ASSESSEE BEFORE THE AO AS WELL AS DURING THE APPELLATE PROCEEDINGS. THE AP PELLANT HAS REPEATEDLY STATED THAT THE AGENT IS THE AGENT OF THE FOREIGN BUYER AN D NOT OF THE ASSESSEE. THEREFORE, IT IS VERY CLEAR THAT THE SERVICES ETC. HAVE BEEN RENDERED BY THIS AGENT TO THE FOREIGN BUYER WHICH IS AGAIN VERY CLEAR FROM THE CONFIRMATION FILED BY THE ASSESSEE FROM THE FOREIGN BUYERS VIZ. LANDMARK GENE RAL TRADING AND INDO EMIRATES TRADING. IT IS FURTHER SEEN THAT DURING TH E APPELLATE PROCEEDINGS THE APPELLANT HAS FILED CONFIRMATION FROM THE AGENT ALS O. THIS AGENT ALSO CONFIRMED THE SAME THING. CONFIRMATION OF AMBITIOUS IMPEX WHO IS THE AGENT OF THE FOREIGN BUYERS HAS STATED AS UNDER:- I) IT HAS RECEIVED COMMISSION FROM THE FOREIGN BUYE RS. II) IT HAS RENDERED SERVICES TO THE FOREIGN BUYERS IN ARRANGING PURCHASES OF TEXTILE FABRICS BY THOSE FOREIGN BUYER S. III) IT HAS RENDERED SERVICES SUCH AS PROCURING SAM PLES, DECIDING THE ORDERS, SETTLING ALL MATTERS BETWEEN THE BUYERS AND THE SELLER INCLUDING PAYMENTS MADE BY THE BUYER TO THE SELLER. IV) AS PER TERMS AND CONDITIONS OF THIS TRANSACTION COMMISSION WAS PAYABLE DIRECTLY BY THE BUYER AND THE SAME WAS TO B E DEDUCTED FROM THE GROSS SELLING RATE AND THE SELLER WAS ENTI TLED TO RECEIVE ONLY THE NET AMOUNT AFTER THE BUYER HAD DEDUCTED TH E COMMISSION PAYABLE BY HIM. 3.8 IN VIEW OF THE ABOVE IT IS FURTHER CLEAR THAT N OT ONLY THE FOREIGN BUYER BUT THE FOREIGN COMMISSION AGENT ALSO HAS REPEATEDLY ST ATED THAT THE FOREIGN COMMISSION AGENT WAS ENGAGED BY THE FOREIGN BUYERS FOR RENDERING SERVICES SUCH AS PROCURING SAMPLES, DECIDING THE ORDERS, SET TLING ALL MATTERS INCLUDING PAYMENT BETWEEN THE BUYER AND SELLER. IT IS ALSO VE RY CLEAR THAT IN SUCH CIRCUMSTANCES THE COMMISSION IS PAYABLE BY THE FORE IGN BUYER TO THESE PARTIES. AS ADMITTED ABOVE BY THE APPELLANT THEY DID NOT EVE N KNOW THE NAME AND ADDRESS OF THESE FOREIGN COMMISSION AGENTS. NO SERV ICES WERE RENDERED BY THESE FOREIGN AGENTS TO THE APPELLANT SINCE THE APP ELLANT DID NOT KNOW EVEN THEIR NAME. THEREFORE, IT IS VERY CLEAR THAT THE COMMISSI ON PAID OR DEDUCTED FROM THE SALES AMOUNT IS ACTUALLY THE LIABILITY OF THE FOREI GN BUYER AND NOT THAT OF APPELLANT. THE DEDUCTION OF COMMISSION FROM THE SALE AMOUNT CL EARLY SHOWS THAT THE APPELLANT HAS MADE PAYMENT ON BEHALF OF THE FOREIGN BUYERS AND HENCE IT IS NOT A QUESTION OF DIVERTING OF INCOME BY OVERRIDING TITLE BUT IS A CASE OF APPLICATION OF INCOME. THE SALE AMOUNT HAS ACCRUED TO THE APPELLAN T AND THIS INCOME HAS BEEN APPLIED FOR WHATEVER REASON IN MAKING PAYMENT OF TH E LIABILITY OF THE FOREIGN BUYER AND NOT FOR LIABILITY OF THE APPELLANT. THE COMMISS ION PAYMENT IS THEREFORE ITA NO.3464/AHD/2008 4 APPLICATION OF INCOME AND NOT DISCHARGE OF LIABILIT Y. THEREFORE, IT IS VERY CLEAR THAT THE COMMISSION PAID IS NOT TOWARDS DISCHARGE OF LIA BILITY OF APPELLANT. IT IS ALSO NOT AN INCOME WHICH HAS BEEN DIVERTED BY OVERRIDING TIT LE. 3.9 AS REGARDS THE DECISION OF THE HONBLE BOMBAY H IGH COURT IN THE CASE OF COLOURCHEM LTD. (SUPRA), IT IS SEEN THAT THE FACTS ARE ENTIRELY DIFFERENT IN THAT CASE INVOICES DID NOT SHOW ANY DEDUCTION FROM THE SALE B ILLS. AFTER THE GOODS HAVE BEEN SENT, BUYER A. G. HAD WRITTEN A LETTER TO THE ASSESSEE COMPANY ON 09.10.1974. THE LETTER VERY CLEARLY STATED AND ASKE D THE ASSESSEE COMPANY TO CONFIRM IF IT WOULD BE ABLE TO PAY AN OVERRIDING CO MMISSION OF ON THESE FACTS, THE HONBLE HIGH COURT STATED THAT THE COMMI SSION PAYMENT WAS OVERRIDING AND HENCE ONLY NET SALES ACCRUED TO THE ASSESSEE. 3.10 IN THE PRESENT CASE, IT IS CLEAR THAT THERE IS NO SUCH OVERRIDING COMMISSION CLAUSE. IN FACT THERE IS NO AGREEMENT AT ALL. AS ST ATED ABOVE, THE AGENT HAS RENDERED ALL THE SERVICES ONLY TO THE SELLER AND HE NCE THE COMMISSION WAS PAYABLE BY THE SELLER AND NOT BY THE ASSESSEE. HENC E, THE COMMISSION PAYMENT IS THEREFORE APPLICATION OF INCOME AND NOT DISCHARG E OF LIABILITY. THEREFORE, IT IS VERY CLEAR THAT THE COMMISSION PAID IS NOT TOWARDS DISCHARGE OF LIABILITY OF APPELLANT. IT IS ALSO NOT AN INCOME WHICH HAS BEEN DIVERTED BY OVERRIDING TITLE. THEREFORE, THE ADDITION MADE BY THE AO IS CONFIRMED AND THIS GROUND OF APPEAL IS DISMISSED. 5. THE ASSESSEE IS NOW IN APPEAL AGAINST THE AFO RESAID FINDINGS OF THE LD. CIT(A). THE LD. AR ON BEHALF OF THE ASSESSEE WHILE CARRYING US THROUGH THE IMPUGNED ORDERS AND RELYING UPON THE DECISION DATED 12-12-2008 OF THE TRIBUNAL IN THE CASE OF SHRI SAMIR A BATRA VS. ITO, WARD-5(4 ), SURAT IN ITA NO. 4130/AHD/2007,REITERATED THEIR CONTENTIONS BEFORE T HE LD. CIT(A).IT WAS ARGUED THAT ONLY NET SALES ACCRUED TO THE ASSESSEE IN TERM S OF PRICE ARRANGEMENT WITH THE FOREIGN BUYERS CONFIRMED BY THEM AS ALSO BY THE RECIPIENT OF COMMISSION DEDUCTED FROM THE GROSS PRICE REFLECTED IN THE INV OICES. THERE IS NO WRITTEN AGREEMENT WITH THE FOREIGN BUYERS OR THE AGENT, THE LD. AR ADDED. ON THE OTHER HAND, THE LD. DR SUPPORTED THE FINDINGS OF THE LD. CIT(A) AND CONTENDED THAT THE AFORESAID DECISION OF THE ITAT IS NOT APPLICABLE TO THE FACTS OF THE CASE NOR WAS THERE ANY COMMERCIAL EXPEDIENCY IN PAYMENT OF COMMI SSION TO THE AGENT OF THE FOREIGN BUYERS.HE FURTHER POINTED OUT THAT THE DOCU MENT DATED 20.11.2007 RELATING TO TERMS AND CONDITIONS PLACED AT PAGE 49- 50 OF THE PAPER BOOK WAS NEVER PLACED BEFORE THE AO AND ITS AUTHENTICITY IS DOUBTFUL SINCE SUCH DOCUMENTS ARE GENERALLY VERIFIED BY THE COUNSELLERS IN THE EM BASSY OR THE NOTARY. HE ADDED THAT IN THE AFORESAID DECISION OF THE ITAT, EXPENSE S WERE NOT DEBITED TO PROFIT AND LOSS ACCOUNT. ITA NO.3464/AHD/2008 5 6. WE HAVE HEARD BOTH THE PARTIES AND GONE THRO UGH THE FACTS OF THE CASE. UNDISPUTEDLY THE COMMISSION DISALLOWED BY THE AO WAS DEDUCTED FR OM THE AMOUNT REFLECTED IN THE EXPORT INVOICES RAISED BY THE ASSESSEE IN TERMS OF AN ARRANGEMENT BETWEEN THE BUYER AND TH E SELLER WHILE THE TRANSACTIONS BETWEEN THE ASSESSEE AND THE FORE IGN BUYERS WERE MEDIATED BY THE AGENT AS IS EVIDENT FROM THE CONFIR MATION PLACED AT PAGE 49-50 OF THE PAPERBOOK. IN THE SAID CONFIRMATI ON THE AGENTS HAVE CLEARLY STATED THAT THEY HAVE RENDERED SERVICE S IN PROCURING SAMPLES, DECIDING THE ORDERS AND SETTLING ALL MATT ERS BETWEEN THE BUYERS AND SELLER INCLUDING PAYMENTS BY THE BUYERS TO THE SELLER. CONSIDERING THE NATURE OF SUCH SERVICES RENDERED BY THE AGENTS, EVEN IF THEY WERE APPOINTED BY THE BUYERS, SERVICES WERE INDIRECTLY RENDERED TO THE ASSESSEE AS WELL. THE SAMPLES WERE PROCURED BY THEM FROM THE ASSESSEE, DETERMINED THE QUANTUM OF THE ORDER AND THE PRICE, AND SETTLED ALL DISPUTES BETWEEN THE TWO BUYERS M/S INDO EMIRATES TRADING CO. LLC,DUBAI & M/S LAND MARK GENE RAL TRADING FZE,UAE AND THE ASSESSEE BESIDES ENSURING THE PAYME NTS TO THE ASSESSEE. THE EXISTENCE OF THE AGENTS AND THEIR FU NCTIONING WAS FOR THE BENEFIT OF THE ASSESSEE AS WELL AND RENDERING O F SUCH SERVICES HAS NOT BEEN DISPUTED NOR SUCH EVIDENCE PRODUCED B Y THE ASSESSEE CAN BE IGNORED ON THE GROUND THAT THE AGENTS PROVID ED SERVICES ONLY TO THE BUYER AND NOT TO THE ASSESSEE. THE FACT OF SUCH COMMISSION IS EVIDENT FROM THE BANK CERTIFICATE IN RESPECT OF EACH OF THE INVOICE, COPY OF WHICH PLACED IN THE PAPER BOOK. TO A QUERY BY THE BENCH, THE ASSESSEE SUBMITTED A COPY OF THE RELEVA NT ASSESSMENT ORDER FOR THE PRECEDING ASSESSMENT YEAR 2004-05 WHERE IN SIMILA R COMMISSION TO THE SAME FOREIGN AGENT IN RELATION TO THE EXPORTS MADE TO M/S INDO EMIRATES TRADING CO. LLC,DUBAI HAS BEEN ALLOWED BY THE AO HIMSELF. T HERE IS NOTHING TO SUGGEST THE ORDERS FOR EXPORTS WERE PROCURED BY T HE ASSESSEE THROUGH SOME OTHER AGENT WHILE THE AFORESAID AGENT M/S AMBITIOUS IMPEX LLC,DUBAI CONFIRMED THE NATURE OF THE TRANSACTIONS. IN THE LIGHT OF THI S UNDISPUTED CONFIRMATION, THE ABSENCE OF ANY FORMAL AGREEMENT WOULD NOT INVALIDAT E THE CLAIM OF THE ASSESSEE . ITA NO.3464/AHD/2008 6 ONCE THE GENUINENESS OF THE COMMISSION AND JUSTIF ICATION FOR THE SAME IS ESTABLISHED BY THE ASSESSEE, THERE SEEMS TO BE NO A PPARENT REASON FOR DISALLOWING THE CLAIM, ESPECIALLY WHEN DEDUCTION OF COMMISSION, EVEN WHEN IT WAS A LIABILITY OF THE CONCERNED BUYERS, FROM THE E XPORT INVOICES, WAS AN ARRANGEMENT BETWEEN THE ASSESSEE AND THE BUYERS AND PRICES NEGOTIATED BETWEEN THEM WERE DETERMINED ONLY ON THAT BASIS. I N THESE CIRCUMSTANCES, WE ARE OF THE OPINION THAT THE LD. CIT(A) WAS NOT JUST IFIED IN UPHOLDING THE DISALLOWANCE ON THE GROUND THAT NO SERVICES WERE RE NDERED BY THE AGENT OR THAT THE COMMISSION PAID IS NOT TOWARDS DISCHARGE OF LIA BILITY OF APPELLANT . IN CIT V. DHANRAJGIRJI RAJA NARASINGIRJI [91 ITR 5 54 (SC)], IT WAS HELD THAT IT WAS FOR THE ASSESSEE TO DECIDE HOW BEST TO PROTECT HIS BUSINESS. THE DEPARTMENT CAN NOT PRESCR IBE WHAT EXPENDITURE ASSESSEE SHOULD INCUR . 7. MOREOVER, THE TRIBUNAL IN THEIR AFORESAID DE CISION DATED 12-12-2008 IN THE CASE OF SHRI SAMIR A BATRA(SUPRA) WHILE ADJUDICATIO N A SIMILAR ISSUE CONCLUDED AS UNDER: 25. WE HAVE HEARD THE RIVAL CONTENTIONS AND GONE T HROUGH THE FACTS AND CIRCUMSTANCES OF THE CASE. FIRST OF ALL, IT IS SEEN FROM THE ASSESSEES PAPER BOOK IN THE CASE OF GURIA TEXTILES AT PAPER B OOK PAGE 494 TO 519 THAT COMMISSION WAS PAYABLE TO THEM BY THE BUYER AN D SUCH SUMS WERE TO BE DEDUCTED FROM THE GROSS INVOICE ALOES SO TH AT THE SELLER WAS ENTITLED TO RECEIVE ONLY THE NET AMOUNT AFTER DEDUC TING THE COMMISSION IN RESPONSE OF EACH TRANSACTION. THEREFORE, THE RECEI PT OF THE COMMISSION AMOUNT HAD BEEN DULY CONFIRMED BY THE AGENTS, WHICH IN TURN MEANT THAT THE AMOUNTS WHICH WERE DEDUCTED FROM THE INVOICE VA LUES ACTUALLY REPRESENTED COMMISSION PAYMENTS WHICH WERE FINALLY RECEIVED BY THE AGENT. THIS FACT CLEARLY ESTABLISHED THE GENUINENE SS OF THE TRANSACTIONS AND WHAT IS IMPORTANT IS THAT THIS WAS DONE IN ACCO RDANCE WITH THE TERMS AND CONDITIONS AGREED UPON BETWEEN THE BUYERS AND S ELLER, EVEN THOUGH THERE WAS NO FORMAL AGREEMENT AS ARGUED BY THE LD. COUNSEL FOR THE ASSESSEE. WE FIND THAT THE AGENTS HAD UNEQUIVOCALLY CONFIRMED AND RECONFIRMED THE NATURE OF THE TRANSACTIONS, AND IN THE ABSENCE OF ANY FORMAL AGREEMENT, IT COULD NOT BE HELD AS A GROUND TO DISMISS THE CLAIM OF THE ASSESSEE. THERE WERE CLEAR CONTRA CONFIRMATIONS FROM THE AGENTS, WHICH SIMPLY COULD NOT BE WHISKED AWAY BY THE LOWER AUTHORITIES FOR THE DISALLOWANCE OF COMMISSION EXPENDITURE. THUS, ONCE THE GENUINENESS OF THE COMMISSION PAYMENTS AS WELL AS ITS JUSTIFICATIO N OF HAVING BEEN WHOLLY AND EXCLUSIVELY INCURRED FOR THE PURPOSE OF ASSESSE ES BUSINESS, THE SAME BECOMES ADMISSIBLE AS DEDUCTION U/S. 37(1) OF THE ACT. WE FIND THAT THE AO HAS RELIED UPON THE CONTENTS OF THE ACCOUNTI NG STANDARD-I, WHICH ITA NO.3464/AHD/2008 7 HOWEVER WAS NOT APPLICABLE TO THE ASSESSEES CASE, GIVEN THE NATURE OF THE TRANSACTIONS ENTERED INTO BY THE ASSESSEE. THE AO HAS ALSO REFERRED TO SEC. 5 OF THE ACT WHICH DEFINES TOTAL INCOME. I T IS OBVIOUS IN THE CIRCUMSTANCES AND THE NATURE OF TRANSACTIONS WHICH HAVE BEEN DISCUSSED ABOVE IN DETAILS, THAT, WHAT MAY HAVE ACCRUED TO TH E ASSESSEE WAS THE GROSS INVOICE VALUES, YET, THE ASSESSEE UNDER THE TERMS OF THE AGREEMENT OR UNDERSTANDING WITH THE BUYER, HAD TO D EDUCT FROM THE INVOICES THE AMOUNT OF COMMISSION PAYABLE. IN THE BACKGROUND OF SUCH FATS, IT COULD NOT BE HELD THAT THE GROSS INVOICE A MOUNTS WERE WHAT HAD ACCRUED TO THE ASSESSEE, AND THESE WERE THE AMOUNTS ON WHICH THE ASSESSEE SHOULD HAVE BEEN ASSESSED. THE OUTGOING C OMMISSION FROM THE INVOICE VALUES WOULD HAVE TO BE REDUCED FROM T HE GROSS AMOUNTS, AND THE NET AMOUNT WHICH WAS THE ACTUAL SUM RECEIVED B Y THE ASSESSEE IN INDIA, AND WHICH WAS DULY CERTIFIED AND PERMITTED BY THE RBI AND ITS AUTHORIZED DEALER, WAS WHAT HAD BEEN EARNED BY THE ASSESSEE FROM SUCH TRANSACTIONS. WE FIND, THAT THE AO HIMSELF HAD NOTE D IN THE ASSESSMENT ORDER THAT THE AMOUNTS DEDUCTED AS COMMISSION FROM THE SALE INVOICES WERE NEITHER RECEIVED BY THE ASSESSEE DURING THE YE AR, NOR WAS IT EVER GOING TO BE RECEIVED IN FUTURE. IF THIS WAS THE VI EW OF THE AO, THEN HE CONTRADICTED HIMSELF BY TAXING AMOUNTS WHICH HAD NO T BEEN RECEIVED AT ALL, NOR DID THE ASSESSEE HAVE ANY LEGAL RIGHT TO RECEIV E SUCH AMOUNTS. 26. WE FIND THAT THE COMMISSION WAS NOT DEDUCTED FROM THE EXPORT INVOICES IN AN AD HOC MANNER AND IT WAS CLEARLY UND ER AN AGREEMENT BETWEEN THE BUYER AND THE SELLER, AS ALSO BETWEEN T HE BUYER AND THE AGENT. CONSEQUENTLY, THE ASSESSEE WAS UNDER AN OBL IGATION TO DEDUCT COMMISSION FROM THE GROSS INVOICE VALUES. IN THE PR ESENT CASE, THERE WAS A COMPULSION TO DEDUCT THE COMMISSION FROM THE EXP ORT INVOICES WHICH WAS CLEARLY INDICATED IN THE CONFIRMATION LETTERS O F THE AGENTS, THE INGREDIENTS WHICH WERE NECESSARY FOR SUCH DEDUCTION OF COMMISSION TO BE TREATED AS DIVERSION OF INCOME BY OVERRIDING TITLE WAS CLEARLY PRESENT. IN THE CASE OF CIT V. MADRAS RACE CLUB (2002) 255 ITR 98, THE HON. COURT OBSERVED THAT IN ORDER TO DECIDE WHETHER THERE HA S BEEN DIVERSION OF INCOME BY OVERRIDING TITLE, THE TRUE TEST IS WHETH ER THE AMOUNT SOUGHT TO BE DEDUCTED, IN TRUTH, NEVER REACH THE ASSESSEE AS HIS INCOME. WHEREBY AN OBLIGATION, INCOME IS DIVERTED BEFORE IT REACHES THE ASSESSEE, IT IS DEDUCTIBLE, BUT WHERE THE INCOME IS REQUIRED TO BE APPLIED TO DISCHARGE AN OBLIGATION AFTER SUCH INCOME REACHES THE ASSESSEE, THE SAME CONSEQUENCE IN LAW DOES NOT FOLLOW. IN THE PRESENT CASE THE GROSS EXPORT PROCEEDS NEVER REACHED ITS HANDS, NO SUCH INCOME HA D THEREFORE ACCRUED TO THE ASSESSEE AND THIS WAS BECAUSE OF AN OBLIGATI ON OR COMPULSION TO DEDUCT THE COMMISSION FROM THE EXPORT INVOICES WHIC H CLEARLY SHOWED THIS TO BE A CASE OF DIVERSION OF INCOME BY OVERRIDING T ITLE. THE AMOUNTS DEDUCTED FROM THE EXPORT INVOICES WERE THUS CLEARLY ALLOWABLE AS DEDUCTION. THE LOWER AUTHORITIES HAVE NOTED THAT MO ST OF THE SO-CALLED CONFIRMATIONS ARE ON PAPER AND DOES NOT BEAR THE LE TTER HEAD OF THE SAID BUYERS. THIS IS PARTLY CORRECT BECAUSE PLAIN PAPER CONFIRMATION WAS IN REFERENCE TO ONE PARTY MOHMED ABDULA OF DUBAI I.E. AT ASSESSEES PAPER BOOK PAGE NO. 509, WHICH IS ON PLAIN PAPER. HOWEVER , IN SUCH SITUATION ITA NO.3464/AHD/2008 8 THE AO OUGHT TO HAVE MAKE INQUIRY IF HE HAS ANY DOU BT IN THIS REGARD. BUT HE SIMPLY CONCLUDED THAT IT IS ON A PLAIN PAPER AN D DID NOT BELIEVE THE AFORESAID COMMISSION PAYMENT, PARTICULARLY WHEN T HE ASSESSEE IS HAVING SUPPORTING EVIDENCE IN REFERENCE TO THE CONFIRMATI ON LIKE, SALES INVOICES, EXCHANGE CONTROL COPY OF SHIPPING BILLS AND BANK RE ALIZATION CERTIFICATE . ALL THESE EVIDENCE GOES WITHOUT SAYING THAT DE FACTO CO MMISSION HAS BEEN PAID BY ASSESSEES BUYER TO THE AGENTS DIRECTLY. TH E OTHER CONFIRMATION IS FROM AL AHED JAHID TEXTILES OF KUVAIT IS ENCLOSED AT PAPER BOOK PAGE NO. 508 WHICH IS ON LETTER HEAD, THEN P.T. SINAR OF IND ONESIA IS AGAIN ON LETTER HAD AT PAPER BOOK PAGE NO. 511 TO 515, THEN AGAIN AL AHEED ALJAHEED OF KUVAIT IS ON LETTER HEAD AT PAPER BOOK PAGE NO. 508 , THEN AGAIN P.T. SINAR IS ON LETTER HEAD AT PAPER BOOK PAGE NO. 511 TO 515 , JAY PRAKASH TRADING OF DUBAI IS AGAIN ON LETTER HEAD AT PAPER BOOK PAGE NO. 504 TO 506, THEN LIPINGE TEXTILE OF DUBAI IS AGAIN ON LETTER HEAD A T PAPER BOOK PAGE NO. 516 AND 518 AS WELL AS IN THE CASE OF SAUDI EXTENSI ON AGENCY AT PAPER BOOK PAGE 507. SO EXCEPT ONE PARTY NAMELY, MOHMED A BDULLA OF DUBAI AS MENTIONED ABOVE, ALL OTHER CONFIRMATIONS WERE ON LE TTER HEAD OF THE RESPECTIVE PARTIES. 27. WE FIND FROM THE RECORDS AS WELL AS THE ARGUMEN TS OF BOTH THE SIDES THAT NONE OF THE PAYMENT HAS COME BEYOND SIX MONTHS BUT IT WAS WITHIN SIX MONTHS AS CAN BE VERIFIABLE FROM BANK REALIZATI ON CERTIFICATE ENCLOSED AT PAPER BOOK PAGE NO. 390 TO 451. THE ASSESSEE HAS RECEIVED THE AFORESAID PAYMENT WITHIN SIX MONTHS AS PER RBI RULE S AND GUIDELINES. THE AO HAS PRESUMED THAT ASSESSEES BUYER HAS TO PAY C OMMISSION AS AND WHEN BUYER RECEIVED THE PAYMENT FROM THE ASSESSEE , WHICH IS NOT CORRECT BECAUSE IN ANY CASE THE ASSESSEE HAVE RECE IVED THE NET PAYMENT I.E. AFTER DEDUCTING COMMISSION AND PAYMENT OF COMM ISSION IS NEVER DEPENDENT ON PAYMENT TO BE RECEIVED BY THE ASSESSEE . SO IT HAS NO CONNECTION WITH THE REALIZATION OR SIX MONTHS CRI TERIA. IN VIEW OF THE ABOVE FACTS, NOW WE WILL DISCUSS THE PRINCIPLE LAID DOWN BY THE HON'BLE GUJARAT HIGH COURT IN THE CASE OF AHMEDABAD STAMP VENDORS A SSOCIATION (SUPRA). AS HELD BY THE HON'BLE HIGH COURT, THE INGREDIENTS OF WHAT IS COMMISSION ARE CONTAINED IN THE EXPLANATION TO SECT. 194H. TH ERE HAS TO BE RENDERING OF SERVICES, SUCH SERVICES HAVE TO BE RENDERED IN T HE COURSE OF BUYING AND SELLING OF GOODS OR IN RELATION TO ANY TRANSACTION INVOLVING ANY ASSET, VALUABLE ARTICLE OR THING. THERE HAS TO BE AN ELEM ENT OF AGENCY IN THE RENDERING OF ALL SUCH SERVICES OR TRANSACTIONS AND THE AGENT SHOULD HAVE BEEN AUTHORIZED TO BUY OR SELL ON BEHALF OF THE PRI NCIPAL. WHILE THE TRANSFEREE OR THE BUYER IS LIABLE TO THE TRANSFEROR OR THE SELLER TO PAY THE PRICE FOR THE GOODS, THE LIABILITY OF THE AGENT IS TO ENSURE THE DELIVERY OF THE GOODS TO THE BUYER NOT AS HIS OWN PROPERTY BUT AS T HE PROPERTY OF THE PRINCIPAL OR THE SELLER/TRANSFEROR. IF SUCH PRINCIP LES AS ENUNCIATED BY THE HON. COURTS ARE TO BE APPLIED IN THE CASE OF THE AS SESSEE, IT WILL BE SEEN THAT ALL THE ELEMENTS WHICH ARE REQUISITE FOR ANY T RANSACTION INVOLVING PAYMENT OF COMMISSION, WERE PRESENT. FIRSTLY, EAC H OF THE TRANSACTIONS BETWEEN THE ASSESSEE AS THE SELLER AND THE TWO BUYE RS WERE MEDIATED BY AGENTS, WHOLE EXISTENCE WAS ESTABLISHED BEYOND DOUB T, BY THE CONFIRMATION LETTERS. SECONDLY, THERE WAS RENDERING OF SERVICES. THE ITA NO.3464/AHD/2008 9 AGENTS HAD CLEARLY WRITTEN THAT THEY HAVE RENDERE D SERVICES; IN PROCURING SAMPLES, DECIDING THE ORDERS AND SETTLING ALL MATT ERS BETWEEN THE BUYERS AND SELLER INCLUDING PAYMENTS BY THE BUYERS TO THE SELLER. CONSIDERING THE NATURE OF SUCH SERVICES RENDERED BY THE AGENTS, EVE N IF THEY WERE APPOINTED BY THE BUYERS, SERVICES WERE INDIRECTLY R ENDERED TO THE ASSESSEE AS THE SELLER S WELL. THE SAMPLES WERE PR ODUCED BY THEM FROM THE ASSESSEE, THEY DECIDED ON THE QUANTUM OF THE OR DER AND THE PRICE, THEY SETTLED ALL DISPUTES BETWEEN THE BUYERS AND TH E SELLER, AND THEY ALSO ENSURED THE PAYMENTS TO THE SELLER. THE EXISTENCE OF THE AGENTS AND THEIR FUNCTIONING WAS FOR THE BENEFIT OF THE ASSESSEE AS WELL. THEREFORE, THE EVIDENCE PRODUCED BY THE ASSESSEE CANNOT BE WISHED AWAY ON THE GROUND THAT THE AGENTS ONLY PROVIDED SERVICES TO TH E BUYER AND NOT TO THE ASSESSEE. IN VIEW OF THE ABOVE FACTS AND CIRCUMSTA NCES, WE ARE OF THE VIEW THAT THE COMMISSION PAYMENT IS TO BE ALLOWED T O THE ASSESSEE AND ACCORDINGLY, WE ALLOW THE CLAIM OF THE ASSESSEE, AN D THE ORDERS OF THE LOWER AUTHORITIES ARE REVERED. THIS ISSUE OF THE A SSESSEES APPEAL IS ALLOWED. 8. IN THE CASE UNDER CONSIDERATION, THERE IS NOT HING TO SUGGEST THAT THE AMOUNTS DEDUCTED AS COMMISSION FROM THE SALE INVOICES WERE EITHER RECEIVED BY THE ASSESSEE DURING THE YEAR OR EVEN SUBSEQUENTLY NOR T HE ASSESSEE HAS ANY LEGAL RIGHT TO RECEIVE SUCH AMOUNTS. THE AMOUNT HAS BEEN DEDUCTED UNDER AN ARRANGEMENT BETWEEN THE BUYERS AND THE ASSESSEE. T HUS, THE GROSS EXPORT PROCEEDS MENTIONED IN THE INVOICES NEVER REACHED T HE ASSESSEE NOR IT WAS INTENDED SO. THEREFORE, THE AMOUNT EQUIVALENT TO CO MMISSION DEDUCTED HAD NEVER ACCRUED TO THE ASSESSEE AND THIS WAS BECAUSE OF AN OBLIGATION OR COMPULSION TO DEDUCT THE COMMISSION FROM THE AMOUN T INVOICED WHILE EXPORTING THE GOODS . 9. IN VIEW OF THE FOREGOING , ESPECIALLY WHEN A S IMILAR CLAIM IN RESPECT OF COMMISSION IN THE PRECEDING ASSESSMENT YEAR HAS BEE N ALLOWED BY THE AO HIMSELF AND THE EXPORT PRICES WERE DETERMINED WIT H THE BUYERS IN CONSEQUENCE OF AN ARRANGEMENT OF DEDUCTION OF COMMISSION PAYAB LE BY THE FOREIGN BUYERS TO THE FOREIGN AGENT FROM THE SALES INVOICES, WE ARE O F THE OPINION THAT THERE WAS NO JUSTIFICATION FOR THE DISALLOWANCE OF THE AFORESAID AMOUNT OF COMMISSION. THEREFORE, GROUND NO.1 IS ALLOWED. 10. GROUND NO.2 RELATES TO LEVY OF INTEREST U/S 2 34B OF THE ACT. THE LD. AR ON BEHALF OF THE ASSESSEE DID NOT MAKE A NY SUBMISSIONS ITA NO.3464/AHD/2008 10 ON THIS GROUND. LEVY OF INTEREST U/S 234B OF THE AC T , BEING MANDATORY [COMMISSIONER OF INCOME TAX.VS ANJUM M. H . GHASWALA AND OTHERS,252 ITR 1(SC)] AND NO INFIRMITY HAVING B EEN POINTED OUT IN ITS LEVY, THIS GROUND IS DISMISSED. HOWEVER, TH E AO SHALL ALLOW CONSEQUENTIAL RELIEF , WHILE GIVING EFFECT TO THIS ORDER . 11. NO ADDITIONAL GROUND HAVING BEEN RAISED IN T ERMS OF THE RESIDUARY GROUND NO. 3 , ACCORDINGLY, THE SAID GROUND IS DISMISSED . 12. IN THE RESULT, APPEAL IS PARTLY ALLOWED ORDER PRONOUNCED IN THE OPEN COURT ON 21ST AUGUST ,2009 SD/- SD/- (H L KARWA) JUDICIAL MEMBER A N PAHUJA) ACCOUNTANT MEMBER DATE : 21ST AUGUST,2009 COPY OF THE ORDER FORWARDED TO:- 1. THE ASSESSEE 2. THE DCIT.CIRCLE-1, AAYAKAR BHAWAN, MAJURA GATE, SURAT 3. THE CIT CONCERNED 4. THE CIT(A)-I, SURAT 5. THE DR, ITAT, AHMEDABAD 6. GUARD FILE TRUE COPY, BY ORDER, DEPUTY REGISTRAR.