AI Insights
The case involves the Revenue's appeal against the order of the CIT(A) which had deleted the additions made by the Assessing Officer on account of commission expenses and gratuity payments claimed by Grand Polycoats Company Pvt. Ltd. for the Assessment Year 2013-14. The Assessing Officer had initially disallowed the commission expenses claiming they were excessive and not properly substantiated, and also disallowed gratuity payments made to an unapproved fund. The CIT(A) reversed these disallowances, leading to the Revenue's appeal. The Tribunal's decision affirmed the CIT(A)'s order, emphasizing the reasonableness of the commission rates and the compliance with legal provisions regarding gratuity payments.
Appeal Details
Counselvise Citation
[2023] 140 COUNSELVISE.COM (IT) 114198 (ITAT-AHMEDABAD)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
7 month(s) 9 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
25-05-2023
Appeal Filed By
Department
Order Result
Dismissed
Bench Allotted
B
Next Hearing Date
10-04-2023
Assessment Year
2013-2014
Appeal Filed On
16-10-2022
Judgement Text
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD “B” BENCH Before: Smt. Annapurna Gupta, Accountant Member And Shri T.R. Senthil Kumar, Judicial Member The ACIT, Circle-1(1)(1), Vadodara (Appellant) Vs Grand Polycoats Company Pvt. Ltd. 204-205, Siddharath Complex, R.C. Dutt Road, Alkapuri, Vadodara-390005 Gujarat PAN: AAACG8439N (Respondent) Assessee Represented: Shri S.N. Soparkar, Sr. Adv. & Shri Parin Shah, A.R. Revenue Represented: Shri Sudhendu Das, CIT-DR Date of hearing : 11-04-2023 Date of pronouncement : 26-05-2023 आदेश/ORDER PER : T.R. SENTHIL KUMAR, JUDICIAL MEMBER:- This appeal is filed by the Revenue as against the Appellate order dated 17.08.2022 passed by the Commissioner of Income Tax (Appeals), National Faceless Appeal Centre, Delhi, (in short referred to as “NFAC”), arising out of the assessment order passed under ITA No. 388/Ahd/2022 Assessment Year 2013-14 I.T.A No. 388/Ahd/20122 A.Y. 2013-14 Page No ACIT Vs. Grand Polycoats Co. Pvt. Ltd. 2 section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) relating to the Assessment Year (A.Y) 2013-14. 2. The brief facts of the case is that the assessee is a Private Ltd. Company engaged in the business of manufacturing of High Performance Industrial Coatings and Specialized Paints. The assessee company is the only Indian Company selected by Indian Space Research Organization (ISRO) to supply special paints to coat for space research and was awarded contract to supply special paints for “Mission Mars”. For the Assessment Year 2013-14, the assessee filed its Return of Income declaring total income of Rs. 2,06,00,640/-. 2.1. The return was selected for scrutiny assessment. The assessee claimed expenditure of Rs. 3,65,28,194/- under the head “commission expenses”. The Assessing Officer held that the assessee could not able to prove its claim of the commission expenses for the purpose of business. Thus the A.O. restricted the commission to the minimum rate of 2% of the total sales of Rs. 82,37,22,753/- as claimed by the assessee relating to four parties. The A.O. also made a disallowance of Rs. 5,27,881/- on account of payment made to an unapproved Gratuity Fund. 3. Aggrieved against the same, the assessee filed an appeal before Ld. NFAC. The Ld. NFAC deleted the addition made by the Assessing Officer observing as follows: “5.2. The appellant has argued that argued that none of the dealer is related party or is relative as per definition given in Section 40A (2) (b) of the Act. The commission rate is fixed prior to order placed and it varies from order to order, parties to parties as it depends upon the price at which the order is procured, profit margin of the appellant, quantum of I.T.A No. 388/Ahd/20122 A.Y. 2013-14 Page No ACIT Vs. Grand Polycoats Co. Pvt. Ltd. 3 order, expected future business etc. In case if a dealer gets order at the rate higher than standard selling price then excess is also passed on to dealers on a mutually agreed basis. Moreover, in case the dealers who manage godowns, are given additional commission on the total value of sales carried out from the godowns to meet additional cost of maintaining godown. Sometimes in case of strategically important customers a higher percentage is offered to compensate the dealer for the extra efforts. The commission is paid by cheque and TDS is deducted & paid. All the persons to whom commission payment is made are also assessed to the income tax. The appellant is maintaining its books of accounts in ERP system; Commission is calculated at the end of relevant quarter and after due verification of sales target achieved, payment received against sales etc. and on the basis of debit note received from dealers, the commission expenses is accounted in the books of company. The debit note for commission for April to June quarter is generally received and accounted in the month of July August. Similarly, debit note for commission for second quarter i.e. July to September in the month of October- November, for third quarter i.e. October to December in the month of January- February. Provision for commission for fourth quarter i.e. January to March is accounted on 31st March on accrual system of accounting. The sales commission is paid based on the sales orders placed by the dealer with the appellant. The appellant also monitors the sales commission account of the dealers by observing that the sales effected through them, the realization from customers have come or not. Dealers are made responsible for obtaining sales orders, collection of payments from the customers, collection of sales tax forms etc. Only after all these compliances are made, then only sales commission is released. Kindly note that in case there is shortfall in realization of receivables the same is recovered from their commission payable. The appellant has argued that the average rate of commission paid ranges from 2.75% to 6.75% and not 2% to 15% as alleged by the Ld. AO and the same is reasonable looking to the fact that huge cost like godown rent, electricity and taxes, salary and perks of staff, office expenses, conveyance and welfare expenses of staff etc. and many such expenses of branch office is totally saved in the bargaining, apart from saving of expenses the commission is paid only after realisation of sales proceeds from customers, in case the sales proceeds are not realised, the entire bad debts are also recovered from them. The appellant has further submitted that the average rate of commission paid calculated by the Ld AO in the assessment order paid to four parties ranging from 2% to 15% is incorrect. The appellant has argued that based on these erroneous working e. 15% rate of commission paid, the Ld. Addl. Commissioner had directed to allow only 2% of total sales as reasonable commission. However, the appellant has submitted that the average rate of commission paid is only 2.75 % to 6.75% and same being genuine, reasonable, the addition made based on the erroneous working needs to be deleted. I.T.A No. 388/Ahd/20122 A.Y. 2013-14 Page No ACIT Vs. Grand Polycoats Co. Pvt. Ltd. 4 5.3. The facts of the case are considered. The appellant's contention that none of the dealer is related party or is relative as per definition given in Section 40A (2) (b) of the Act and the fact that the commission is paid by cheque and TDS is deducted & paid, are considered. The AO's observation that total commission expenses is 4.4% of total sales, while net profit is 3.32% of total sales, it is held that the disallowances cannot be sustained on based on such comparisons Further, the appellant's argument that in the past also commission on the same basis had been paid and has been allowed by the department is also .considered. In view of these facts, the addition made by the AD is deleted. Appeal on ground No. 1 (1) is allowed.” 6.2 The appellant has submitted that the appellant has paid Rs.5,27,881/- being gratuity premium in compliance of provision of Section 36(v) r.w.s. 40A(9) and Section 43B of the Act. The appellant further submits that the application of approval of gratuity before competent authority was made in 1995 and neither any letter requiring further details has been received by your appellant nor the application is rejected. Kindly note that and as per the application approval is sought wef 01/08/1995. The appellant further has submitted that the said premium is paid to "Life Insurance Corporation", an alterative authority prescribed for the payment of gratuity to worker in compliance of the rules and regulation prescribed as per Gratuity Act and Income Tax Act. The reliance is placed on the following decision including that of Jurisdictional High Court & Tribunal Valsad District Central Co-Op. Bank Ltd. v. ACIT 92 taxmann.com 280 (Guj.) Commissioner of Income-tax v Jaipur Thar Gramin Bank 81 taxmann.com 126 (Raj) Tata Securities Limited v. DCIT 130 taxmann.com 65 (Mumbai - Trib.) Valsad Dist. Central Co-Op Bank Ltd. v. ACIT 105 taxmann.com 340 (Surat-Trib.) The appellant has submitted that the subject expenditure is allowable U/s 37(1) of the Act in view of the decision of Hon'ble Chennai High Court in the case of CIT v. Tamilnadu Maritime Board 131 taxmann.com 250, wherein the Hon'ble Court has held that contribution made towards fund was to be treated as business expenditure and, thus, same was to be allowed as deduction under section 37/1) even though said fund was unapproved. I.T.A No. 388/Ahd/20122 A.Y. 2013-14 Page No ACIT Vs. Grand Polycoats Co. Pvt. Ltd. 5 6.3. I have considered the facts of the case and the judicial decisions relied upon by the appellant. In view of the same, the appeal on Ground no. 1 (ii) is allowed. 4. Aggrieved against the same, the Revenue is in appeal before raising the following Grounds of Appeal: 1. "Whether on the facts of the case and in law, Ld.CIT(A) was justified in deleting the addition of Rs.2,00,53,739/- made by the AO on account of restricting the commission expenses to 2% without appreciating the fact that the assessee could not provide the basis of debiting commission expenses which were not corresponding to monthly sales." 1.1"Whether on the facts of the case and in law, Ld.CIT(A) was justified in deleting the addition of Rs.2,00,53,739/- made by the AO despite the fact that the assessee could not establish with documentary evidences his own argument that the commission expenses differ on case to case basis, on customer to customer basis and on product to product basis." 2. "Whether on the facts of the case and in law, Ld.CIT(A) was justified in deleting the addition of Rs.5,27,821/- made by the AO on account of disallowance of gratuity paid toward the fund which was not approved by Income-tax authority". 3. The appellant craves leaves to add, modify, amend or alter any grounds of appeal at the time of, or before, the hearing of appeal. It is prayed that the order of the CIT(A) on the above issues be set-side and that of the Assessing Officer be restored. 5. The Ld. CIT-DR Shri Sudhendu Das appearing for the Revenue in support of its grounds argued that the Ld. NFAC erred in deleting the commission expenses. When the assessee could not establish with the documentary evidences of the commission expenses differ from case to case basis and customer to customer basis and product to product basis. The Ld. CIT(A) is not justified in deleting the addition of Rs. 5,27,881/- on account of disallowance of Gratuity paid towards LIC fund which was not approved by Income Tax Authority. Thus the Ld. CIT-DR pleaded to sustain the addition made by the Assessing Officer and thereby allow the appeal filed by the Revenue. I.T.A No. 388/Ahd/20122 A.Y. 2013-14 Page No ACIT Vs. Grand Polycoats Co. Pvt. Ltd. 6 6. Per contra, the Ld. Sr. Counsel Shri S.N. Soparkar appearing for the assessee filed before us a Paper Book containing 140 pages of various details and documents submitted before the lower authorities. Our kind attention was invited to Page No. 51 of the Paper Book wherein a Chart depicting net sales commission paid to various parties by the assessee, the same is reproduced here below: Sr. No. Name of Party PAN Amount of Corresponding Sole (Rs.) Gross Commission (Rs.) Service Tax on Commissi on Net Commissio n whether covered u/s 40A[2J(b) Net Sales Commis sion 1 3S ENTERPRISE BFLPS7368A 44,76,452 3,02,314 3,02,314 No 6.75 2 ACE.ENGGSERVICES AAFFA9203Q 57,63,799 3,93,037 65,484 3,27,553 No 5.68 3 AMODPATIL AAYPP9738L 9,31,50,594 62,32,852 6,71,171 55,61,681 No 5.97 4 B. J. SHUKLA AFSPS6079J 4,03,00,513 27,72,141 2,97,573 24,74,568 No 6.14 5 K M MOHAMMAD NAJEEB AGMPM6199A 1,03,25,839 4,27,890 4,27,890 No 4.14 6 K R ANANTSIVAN ABUPA2213J 7,68,62,795 52,29,837 5,12,834 47,17,003 No 6.14 7 KUMAD MARKETERS AAYPB9409L 1,12,00,509 5,35,646 97,434 4,38,212 No 3.91 8 LEMAS AAJPM9156G 23,22,446 77,461 77,461 No 3.34 9 RJAGANNATHAN ACLPR2241P 27,67,407 1,47,114 1,47,114 No 5.32 10 RAHULJAIN AARPJ3143Q 1,05,01,491 2,88,791 2,88,791 No 2.75 11 RAPHAEL POLAKAT PETER AKIPP5724C 1,03,25,839 4,27,890 4,27,890 No 4.14 12 RDEVIS ENGINEERS PVT LTD AABCR3000K 15,15,42,040 1,02,97,870 9,07,117 93,90,753 No 6.20 13 S HARI AALPHJ191G 83,84,239 5,37,590 5,37,590 No 6.41 14 SAI ENTERPRISES AFQPB4346D 3,94,30,973 23,15,192 2,95,379 20,19,813 No 5.12 15 SIGMA COATS AATFS939SA 8,94,38,793 56,54,266 6,25,067 50,29,199 No 5.62 16 SSY ENTERPRISES AFXPG6022L 1,36,99,281 9,06,516 9,06,516 No 6.62 17 SUPTHA MARKETING ACPPC.5083J 4730509 1,74,010 1,74,010 No 3.68 18 SYSTEMTRONICS INDIA APYPS6439J 1,57,44,047 10,63,263 10,63,263 No 6.75 I.T.A No. 388/Ahd/20122 A.Y. 2013-14 Page No ACIT Vs. Grand Polycoats Co. Pvt. Ltd. 7 19 TS ENTERPRISES AEVPG3962Q 1,34,86,633 8,88,499 8,88,499 No 6.59 20 UDWIPAN COATINGS AASPV1303K 81,27,419 3,63,632 3,63,632 No 4.47 21 URMIPVORA AEIPV6657A 2,18,17,942 9,76,165 9,76,165 No 4.47 22 Service Tax Credit for the year -34,83,782 Total 63,43,99,560 3,65,28,194 Commissioner % on sales through Bus. Asso. 5.76 Minimum % 2.75 Maximum % 6.75 Average % 5.25 Total Sales as per P&L 82,37,22,752 Commission on Total Sales % 4.43 As per AO – 2% of Total Sales 1,64,74,455 Disallowance 2,00,53,719 6.1. Thus the Ld. Counsel submitted that the Commission paid to various parties is ranging from 2.75% to maximum of 6.75%. The Ld. Senior Counsel also further submitted none of the above 22 parties are related to the assessee company. Many of the parties were paid service tax on the above commission received by them. Thus the Assessing Officer without appreciating the facts held that 2% commission on the total sales made by the assessee and thereby disallowed balance Rs. 2,00,53,739/-. The Ld. CIT(A) after considering the facts of the case, deleted the addition made by the Assessing Officer that huge cost like godown rent, electricity charges, salary and perks of staff, office expenses, conveyance and welfare expenses of staff, etc., Branch office expenses are saved by bargaining commission to the parties that too after realization of sales proceeds from customers. Further in case the sales proceeds are not realized, the entire bad debts are recovered from the above parties. When the above dealers are not related party and appropriate TDS is deducted and commission is paid by cheques. Thus the Ld. CIT(A) deleted the addition made by the A.O. I.T.A No. 388/Ahd/20122 A.Y. 2013-14 Page No ACIT Vs. Grand Polycoats Co. Pvt. Ltd. 8 7. Regarding the disallowance of Gratuity premium of Rs. 5,27,881/-. The Ld. Senior Counsel relied upon Jurisdictional High Court Judgment in the case of Valsad District Central Co-Op. Bank Ltd. vs. ACIT reported in [2018] 92 taxmann.com 280. Thus the Ld. Senior Counsel submitted that the Gratuity premium is paid to LIC, an alternative authority prescribed for the payment of gratuity to employees, in compliance of the rules and regulation prescribed as per Gratuity Act and Income Tax Act. Thus the deletion made by the ld. CIT(A) does not require any interference and the appeal filed by the Revenue is liable to be dismissed. 8. We have given our thoughtful consideration and perused the materials available on record. Regarding the disallowance of commission expenses, the Assessing Officer observed that the payments under the head “commission” made to various persons engaged in marketing and distribution network and therefore estimated that the minimum rate of 2% on total sales claimed by the assessee. It is not in dispute that the above commission payment are made by the assessee by cheques and appropriate TDS is deducted and remitted to the Government account and the parties also assessed to Income Tax. The assessee is also maintaining its books of accounts in ERP system, Commission is calculated at the end of the relevant quarter and after due verification of sales target achieved, payment received against sales etc, and on the basis of debit note received from dealers, the commission expenses is accounted in the books of the assessee company. The assessing officer also found that similar commission expenses which was paid by the assesse in the earlier assessment I.T.A No. 388/Ahd/20122 A.Y. 2013-14 Page No ACIT Vs. Grand Polycoats Co. Pvt. Ltd. 9 years is being accepted by the department and which is not disputed by the A.O. Thus taking into account, overall facts of the case, the Ld. CIT(A) deleted the addition made by the Assessing Officer on commission expenses. The Ld. D.R. appearing for the Revenue could not place on record any contra view. In the absence of the same, we have no hesitation in confirming the deletion made by the Ld. CIT(A) on account of commission expenses. Thus the Ground Nos. 1 and 1.1 raised by the Revenue are devoid of merits and the same are hereby dismissed. 9. Regarding ground no. 2, Gratuity amount paid towards a fund which was not approved by the Income Tax Authority. This issue is been settled by the Hon’ble High Court of Gujarat in the case of Valsad District Central Co-Op. Bank Ltd. Vs. ACIT reported in [2018] 92 taxmann.com 280 in favour of the assessee held as follows: “......10. In the present case, the petitioner had raised a claim and had also placed all necessary computation on record in connection with such a claim. It is of course true that the contribution to the gratuity scheme itself was not sufficient to enable an assessee to claim deduction. Additional requirement that such scheme in which the contribution is made must also have been approved by the Commissioner is undisputable. In normal case therefore, non-disclosure of such claim not being approved, if such was the fact, may amount to not disclosing true and full facts. However, this issue must be examined in peculiar facts of the present case. According to the petitioner, factually, the scheme was approved by the Commissioner way back in A the year 1976. It was only after it, the LIC would undertake the responsibility to manage the same. It was on this basis that the petitioner had been raising the claim year after year right since its inception every year. In none of the past years, any such issue was raised by the Assessing Officers in this respect. Therefore, the petitioner produced what it had been producing all along namely, the contribution made towards the fund and the agreement of the LIC to manage the fund. If the Assessing Officer had any doubt about such a claim, it was always open for him to examine it, ask the petitioner to fulfill further requirements. Merely because the petitioner did not provide an additional declaration in the return that the scheme though approved, the pentioner is unable to produce a copy of the order approved by the Commissioner after long gap of time, cannot be categorized as failure on the part of the petitioner to disclose truly and fully all material facts. Only on this ground, we are inclined to quash the notice.” I.T.A No. 388/Ahd/20122 A.Y. 2013-14 Page No ACIT Vs. Grand Polycoats Co. Pvt. Ltd. 10 9.1. Further the Ld. CIT(A) relied upon the Madras High Court judgment in the case of CIT Vs. Tamilnadu Maritime Board reported in 131 taxmann.com 250, wherein the Hon’ble High Court has held that contribution made towards fund was to be treated as business expenditure and the same was allowable u/s. 37(1) of the Act, even though the said fund was unapproved by Income Tax Department. 10. Thus following the above judicial decisions, we have no hesitation in confirming the deletion made by the Ld. CIT(A). Thus the ground no. 2 raised by the Revenue is also devoid of merit and the same is liable to be rejected. 11. In the result, the appeal filed by the Revenue is hereby dismissed. Order pronounced in the open court on 26-05-2023 Sd/- Sd/- (ANNAPURNA GUPTA) (T.R. SENTHIL KUMAR) ACCOUNTANT MEMBER True Copy JUDICIAL MEMBER Ahmedabad : Dated 26/05/2023 आदेश कȧ ĤǓतͧलͪप अĒेͪषत / Copy of Order Forwarded to:- 1. Assessee 2. Revenue 3. Concerned CIT 4. CIT (A) 5. DR, ITAT, Ahmedabad 6. Guard file. By order/आदेश से, उप/सहायक पंजीकार आयकर अपीलȣय अͬधकरण, अहमदाबाद
Other Referred Cases
Valsad District Central Co-Op. Bank Ltd. v. ACIT, Commissioner of Income-tax v Jaipur Thar Gramin Bank, Tata Securities Limited v. DCIT, Valsad Dist. Central Co-Op Bank Ltd. v. ACIT, CIT v. Tamilnadu Maritime Board
Laws Referred To
Income Tax Act, 1961
1:1 Consultation on Business Development
₹1
1:1 Consultation on Tax Litigation
₹0
1:1 Consultation on Legal Requirements
₹1
Contractor Indemnity Agreement
₹0
Income Tax Act 2025
₹0
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