AI Insights
The case revolves around an appeal by Mr. Gagan Arora against the order of the CIT(A), which sustained the addition of commission expenses amounting to Rs. 27,50,000 to his income for the Assessment Year 2018-19. The AO had disallowed these expenses, asserting that the payments were not for commission but for sales, and were not made through banking channels nor subjected to TDS. The Tribunal, after examining the agreements, invoices, and the nature of the transactions, concluded that the expenses were indeed for commission and were properly documented and executed through banking channels with necessary TDS deductions.
Appeal Details
Counselvise Citation
[2023] 140 COUNSELVISE.COM (IT) 127565 (ITAT-CHANDIGARH)
Assessee PAN
Bench
Appeal Number
CRN Number
Duration Of Justice
9 month(s) 7 day(s)
Appellant
Respondent
Appeal Type
Income Tax Appeal
Pronouncement Date
01-03-2023
Appeal Filed By
Assessee
Order Result
Allowed
Bench Allotted
Not Allotted
Next Hearing Date
06-02-2023
Assessment Year
2018-2019
Appeal Filed On
22-05-2022
Judgement Text
आयकर अपील य अ धकरण,च डीगढ़ यायपीठ “एस.एम.सी” , च डीगढ़ IN THE INCOME TAX APPELLATE TRIBUNAL, CHANDIGARH BENCHES, “SMC” CHANDIGARH ी व म संह यादव, लेखा सद%य BEFORE: SHRI. VIKRAM SINGH YADAV, AM ITA No. 456/Chd/2022 Assessment Year : 2018-19 Mr. Gagan Arora H.No. 411/2, Sector 45-A, Chandigarh-160047 The ITO National e-Assesment Centre, Delhi/ Income Tax Officer, Ward 5(5), Chandigarh PAN NO: AFWPA3748Q Appellant Respondent ! " Assessee by : Shri Anil Batra, Advocate # ! " Revenue by : Smt. Amanpreet Kaur, Sr. DR $ % ! & Date of Hearing : 07/02/2023 '()* ! & Date of Pronouncement : 02/03/2023 आदेश/Order PER VIKRAM SINGH YADAV, AM: This is an appeal filed by the Assessee against the order of the Ld. CIT(A), NFAC, Delhi wherein the assessee has taken the following grounds of appeal: 1. The order of the Ld. Commissioner of Income Tax (Appeals) dated 31-03- 2022 passed U/s 250 of the Income Tax Act, 1961 is bad against facts and law in as much on. (a) In sustaining the addition of commission paid amounting to Rs. 27,50,000/- to (i) M/s The United Pest Management Services PAN AAIFT3308G Rs. 7,50,000/- (ii) M/s Mahadev Industries PAN AYBPA4599F Rs. 10,00,000/- & (iii) M/s A K Associates PAN BMXPA9667P Rs. 10,00,000/-. (b) In as much as raising presumption that the amount paid to M/s United Pest Management Services, M/s Mahadev Industries and M/s A K Associates was not Commission but Sales without appreciating the facts and circumstances that the term Sale was used inter changeably for commission. (c) In as much raising a presumption that the payments made by way of commission were not through banking channel's and no TDS was effected which is contrary to the facts on record. 2. That the Commission of Rs. 27,00,000/- paid by way expenses be allowed. 2 3. The appellant craves leave to add, amend or delete any of the found of appeal before the same in taken up for final disposal. 2. Briefly the facts of the case are that the assessee, engaged in trading and service of Agro chemicals, seeds, etc. in the name of New Malwa Sales Corporation, filed his return of income on 02/08/2018 declaring total income of Rs. 16,00,320/- and in the Profit and Loss Account, he has shown commission income of Rs. 91,34,077/- and has incurred commission expenses of Rs. 27,50,000/-. The case of the assessee was selected for complete scrutiny to verify business expenses compare to large commission receipts. Accordingly, notice under section 143(2) and 142(1) were issued. After calling for information and explanation from the assessee, the AO made an addition of Rs. 27,50,000/- by disallowing the whole of the commission expenses claimed by the assessee as paid to M/s United Pest Management, M/s Mahadev Industries and M/s AK Associates and the relevant findings read as under: “Commission Expense incurred to the above 3 entities: On verification of the copy of the agreements entered into by the assessee with these parties namely and their Profit And Loss Accounts, it is clearly seen that the assessee had earned commission income not from sales or supply of any material. Rather, such earning was for only and only for the services executed for and on behalf of the parties, from whom it had earned commission income i.e. Sumitomo & UPL. The assessee appears to have acted as an agent in liaising and procuring sales for these two Cos. It is also seen that all the above three entities have furnished the details of sale showing the amount mentioned by the assessee as sale and not as commission received as stated by the assessee Shri. Gagan Singh Arora. This fact also clear from the reading of the terms and conditions mentioned in the related agreements and Profit And Loss Accounts of the said three parties. It is to be noted the assessee had only executed services - as has been categorically specified in the agreements. It is also to be verified, from the agreements so executed, the assessee was not allowed by these two parties ( Sumitomo & UPL), to appoint any sub agent for such services - as per the terms of the agreement, executed with Sumitomo and/or UPL. In view of the above facts and submission, the amount paid by the assessee are separately discussed as under: On verification of the acknowledgement of ITR of A.Y.2018-19 of it is noticed that ITR M/s. United Pest Management Services has been filed by Shri Nikhil Singh Arora son of Gagan Singh Arora. In this regard the assessee accepted that t h e s a i d firm is owns by related party but all the payments are at comparable prices in the market and all payments are at arm's length. However, considering the fact of 3 the case and as assessee not furnished any satisfactorily justification, addition is required to be made in this regard. Regarding the payment of commission the verification unit has verified from the entity of M/s. United Pest Management services has submitted the monthly sales data showing total sales of Rs. 7,50.869/- with a copy of invoice reflecting the same amount. Therefore, the said payment made to M/s. United Pest Management Services, Partner Shri Nikhil Singh Arora son of Gagan Singh Arora, of Rs. 7,50,000/- are hereby disallowed from the business income of the assessee. Similarly, the ledger of New Malwa Sales Corporation in the books of M/s Mahadev Industries (Prop. Nikhil Singh Arora, S/o Gagan Singh Arora) has been submitted where in vide entry dated 14.01.2018, the account of New Malwa Sales Corp. is debited by Rs. 10,00,538/- on account of sales. In this regard the assessee accepted that the said firm is related party but all the payments are at comparable prices in the market and all payments are at arm's length. However, considering the fact of the case and as assessee not furnished any satisfactorily justification, addition is required to be made in this regard. M/s Mahadev Industries also submitted a chart of monthly sales activities with the client New Malwa Sales Corp. showing sales of total amount of Rs.10,00,538/-. M/s. Mahadev industries also submitted the invoice number 2017-18/0010 dated 14.01.2018 showing the commission against ULALA sales amounting to Rs. 10,00,538/-. It also reported that, on perusal of the acknowledgement of ITR of M/s. Mahadev Industries for A.Y 2018-19. it is noticed that Shri Nikhil Singh Arora ( Prop of M/s. Mahadev Industries) is son of the assessee Shri Gagan Singh Arora, therefore said expenses of Rs. 10,00,000/- paid are hereby disallowed from the business income of the assessee. On verification of commission paid to AK Associates (Prop. Akhil Singh Arora), a copy of agreement dated 22.09.2017 with New Malwa Sales Corp which was not complete and not legible, based upon the agreement with other sister concerns viz: Mahadev industries showing the rate of commission @2.5%(upto 10 MT) and 3% (greater than 10MT), the rate of commission may be estimated at the same percentage. In this regard the assessee accepted that the said firm is related party but all the payments are at comparable prices in the market and all payments are at arm's length. However, considering the fact of the case and as assessee not furnished any satisfactorily justification, addition is required to be made in this regard. M/s. AK Associates did not submitted copy of ledger of New Malwa Sales Corpo. In his books, however, submitted monthly sales data showing total sales of Rs. 10,00,538/- and did not submit any invoice for commission. On perusal of the acknowledgement of ITR of A.Y 2018-19, it is noticed that Shri Akhil Singh Arora is the son of the assessee Shri Gagan Singh Arora Therefore, the said payment made to M/s. AK Associates, Prop : Shri Akhil Singh Arora son of Gagan Singh Arora, of Rs. 10,00,000/-are hereby disallowed from the business income of the assessee. 3. Being aggrieved, the assessee carried the matter in appeal before the Ld. CIT(A) who has sustained the additions and his findings reads as under: “4.1 During the course of assessment proceedings the A.O. observed that on verification of the copy of the agreements entered into by the appellant with 4 these parties namely M/s. Sumito Chemical India Pvt Ltd, UPL Limited and their Profit and Loss Accounts, it is clearly seen that the appellant had earned commission income not from sales or supply of any material. Rather, such earning was for only for the services executed for and on behalf of the parties, from whom it had earned commission income. The appellant appears to have acted as an agent in liaising and procuring sales for these two Companies. It is also seen that all the above three entities i.e M/s The United Pest Management Services, M/s Mahadev Industries and M/s A K Associates were furnished the details of sale showing the amount mentioned by the appellant as sale and not as Commission received as stated by the appellant Shri. Gagan Singh Arora. This fact also clears from the reading of the terms and conditions mentioned in the related agreements and Profit and Loss accounts of the said three parties. It is to be noted the appellant had only executed services - it has been categorically specified in the agreements. It is also to be verified, from the agreements so executed, the appellant was not allowed by these two parties ( Sumito Chemical India Pvt. Ltd and UPL), to appoint any sub agent for such services - as per the terms of the agreement, executed with Sumito Chemical India Pvt. Ltd and UPL 4.2 Further, the A.O. observed that these three concerns i.e. M/s The United Pest Management Services, M/s Mahadev Industries and M/s A K Associates are belonging to Shri Nikhil Singh Arora and Akhil Singh Arora who are sons of the appellant. During the course of assessment proceedings, the appellant accepted that the said firms are related parties but all the payments are at comparable prices in the market and all payments are at arm's length. 4.3 In this instant case the main issue picked up for scrutiny under CASS, to examine low income compare to large commission receipts. Further, as seen from the facts emanating from the details gathered by the AO and explanation offered by the appellant during the course of appellate proceedings, the appellant is not able to substantiate his claim of payment of commission and had not substantiated/supported by material evidence. Further, during the course of proceedings, appellant did not filed any supporting evidence i.e. Commission paid through banking channel, any TDS deducted on the commission paid and filed only one case law which has different facts and circumstances. 4.4 However, in the instant case, as explained elsewhere in this order, the appellant has miserably failed to discharge the onus cast on him. The appellant could not provide sufficient evidence and proof in support of his claim of allowance of commission paid and thus, the disallowance of commission paid would partake the nature of unexplained expenditure. Further, as such, on examining all the facts and circumstances as above and after a detailed analysis of the facts brought out on record, it would reveal the fact that the explanation offered by the appellant and corresponding evidence produced to support the same are untrustworthy and, therefore, not reliable. Thus, the same cannot be considered as admissible evidence in the eyes of the law. Under the circumstances, on an objective analysis and appreciation of all the facts and surrounding circumstances of the case, I would like to apply the Theory of Human Probabilities' and Theory of Preponderance of Probabilities' in precedence over unreliable and inconsistent direct evidence filed by the appellant. 4.6 In this regard, reliance is placed on the following decisions of the Hon'ble Supreme Court and the Delhi High Court wherein it 5 was held that apparent was not real in all the cases and emphasised the importance of the surrounding circumstances and application of the test of Human Probabilities' to prove that the apparent was not real. 1. Sumati Dayal Vs CIT [1995] 214 ITR 801 (SC) 2. CIT Vs. DurgaPrasad More[1971] 82 ITR 540 (SC) 4.7 Thus, by virtue of the ratio laid down by Hon'ble Supreme Court the income tax authorities are entitled to look into surrounding circumstances in order to find out the real intention behind the apparent transactions. While doing so, test of Human Probabilities' would assume a vital significance. Accordingly, the addition made by the AO is hereby confirmed. Thus, the ground no. 1 and 2 of appeal raised by the appellant are dismissed.” 4. Against the said findings and directions of the Ld. CIT(A), the assessee is in appeal before us. 5. During the course of hearing, the Ld. AR reiterated the submissions made before the lower authorities and also relied on the written submissions which read as under: 1. “That the effective ground of appeal that requires to be adjudicated upon is ground i(a) / b No i(a) of the appeal which pertain to the disallowance of commission paid to known parties and which ground of appeal read as follow. Ground No i(a) / b. 2. Facts of the case are that the assessee is engaged in the business of Trading and liaison agent on Commission basis for Agent Chemicals, Pesticides and other crop protection product. He conducts his business as a proprietary concern in the name of M/s New Malwa Sales Corporation. 2.1. For the purpose of earning commission he had entered into Liaison Agreement with two concerns namely: - i) Sumitomo Chemical Pvt. Ltd. & ii). UPL Limited and had earned Rs. 7,18,474/- and Rs. 84,15,603/- respectively from each Company. The total commission earned being Rs. 91, 34,007/-. The respective agreements are placed at Page 84 & 90 of the Paper Book. 2.2. The area of operation as per the agreement was to procure orders form the whole of state of Punjab. However, as he was suffering from Angina problem, in 2017and had under gone bye pass surgery in 2019, he assigned part of the territory to three different concern, which belonged to his sons namely: - S. Nikhil Singh & S. Akhil Singh and parted with commission of Rs. 27, 50,000/- as per the following table. S. No Name Prop Commission Area 6 1. United Pest Mg. Services Partnership Concern Rs. 7,50,000/- District Amritsar 2. M/s Mahadev Industries S. Nakhil Singh Rs. 10,00,000/- Do 3. M/s A.K Association S. Akhil Singh Rs. 10,00,000/- Do The respective agreement is placed at Page 78 & 75 & 72 of the Paper Book. 2.3 The Ld. Assessing Officer in Para 6.1 of his Order under the caption 1 Commission Expenses incurred to the above three entities has observed that the bills raised by these three concerns were for Sale and not for Commission earned. The Ld. Assessing Officer has misunderstood and misread the invoice and the bills raised. The bill raised is for commission. The invoice describes the rate of billing of the product and the bill raised is for commission on the quantity sold and the rate of commission is 2.5% of the billing rate. The invoice and the bills are placed at Page 73, 74, 76, 77, 79 & 80, for each party. As the term of agreement are Pari- Passu the rate of billing is Rs. 7,453/- Kg. and the rate of commission of the billing price is Rs. 186.32/- Kg. which is exactly 2.5% of the billing price. The table of billing and the commission is placed below. S.No Name of the Party Qty Sold Rate at which billed Amount billed Rate of Commis sion Commission Paid 1. United Pest Mg. Service 4030 Kg. Rs. 7453/- kg. Rs. 300,35590 2.5% Rs.7,50,869/- 2. Mahadev Industries 5370 Kg. Rs. 7453/- Kg. Rs. 400,22610/- 2.5% Rs. 10,00,538/- 3. A.K Associate 5370 Kg. Rs. 7453/- Kg. Rs. 400,22,618/ - 2.5% Rs. 10,00,538/- 3. Ground 1 (c): That the Ld. CIT Appeal has raised a presumption against that the assessee that payments by way of commission were not through banking channels and that no tax was deducted at sources. This observation does not emanate from the assessment order. The payment was through banking Channel as will be evident from Page 81 to 83 of the Paper book TDS returns are placed at. 68 to 71 of the Paper Book. 4. The Ld. assessing Officer in the same Para referred “Commission Expense” supra has made a passing reference that the assessee under the agreement with Sumitomo & UPL Ltd. could not appoint the Sub-agent. Before the Ld. CIT (A) the appellant had urged that the only restraint placed on the appellant that it would not transfer the terms and condition to this agreement to any other party. There 7 was no restraint on the appoint of sub- agent. The Contestants raised the bills agents New Malwa Sales Corporation only. The Agreement with the other party i.e. Sumitomo Chemical India Pvt. Ltd. silent on this aspect. Reliance placed on the case of DCIT V/s M/s Ganges International Pvt. Ltd. B-36, Lawrence Road, Industrial Area, New Delhi 110035 Date of Pronouncement 09-04- 2021ITA No 3370/chny/2019 A.Y 2016-17” 6. Per contra, the Ld. DR submitted that firstly, these commission payments have been paid to related parties and the assessee has not submitted any satisfactory justification for making these payments to the related parties. Secondly, it was submitted that these payments are not even authorized in terms of initial agency agreements entered into by the assessee and in absence thereof, the assessee cannot appoint sub-agent. It was further submitted that the ld CIT(A) has taken the said findings of the AO into consideration and has held that even during the appellate proceedings, the assessee couldn’t substantiate his claim of payment of commission by filing any supporting evidence in terms of whether commission paid through banking channel, whether any TDS done on such payments or not and therefore couldn’t provide sufficient evidence and proof in support of his claim of commission expenses. The ld DR accordingly supported the order and findings of the lower authorities. 7. Heard the rival contentions and purused the material available on record. During the year under consideration, the assessee has entered into an agreement with M/s UPL Limited dt. 02/06/2017 wherein UPL has agreed to appoint the assessee as a consultant within the state of Punjab for the financial year 2017-18 to carry out specific work in relation to goods / products manufactured / dealt with by UPL and in particular, ULALA (Flonicamid) product and for the purpose, the assessee was entitled to receive commission @ 5% of the billing price of sales generated to end customer for sales up to 7.499 MT, 6% for sales between 7.5MT to 12.5 MT, 7% for sales between 12.5 MT to 17.5 MT and 8% above 17.5 MT. Basis the services rendered by the assessee, the assessee raised the invoices and received a sum of Rs. 81,15,603/- from UPL during the year under consideration which was credited in its P&L Account and duly offered to tax. 8 8. The assessee subsequently during the financial year 2017-18 entered into three agreements with three related concerns namely M/s United Pest Management Services, M/s Mahadev Industries and M/s A.K. Association and it has been submitted that as the assessee was suffering from angina problem and had undergone bye-pass surgery, he assigned a part of the territory to three different concerns and as per the services rendered by them, the assessee has agreed to pay commission to them @ 2.5% of the billing price of sales generated to end customers for sales up to 10 MT and 3% for sales beyond 10 MT. 9. During the course of assessment proceedings, copy of the agreements, the invoices raised by these related concerns and the fact the payments have been made through banking channel and TDS thereon has been done were duly submitted before the Assessing officer. It was also submitted that the payment to these related concerns were at the comparable price as prevailing in the market and in this regard, the relevant submissions dated 10/03/2021 of the assessee submitted before the AO read as under: “Transactions with Related Parties: Commission paid to M/S United Pest Management on the basis of service provided by such firm in a particular area to the state of Punjab purpose for appoint to maximize the sales volume because our commission directly linked to the sales quantity volume. The appointed firm have to demonstrate the product to the farmers who actually consumed such products i.e. ULALA and the commission based on such performance. Further the said firm is related party but all the payments are at comparable prices in the market. I can say all the payments are at arm's length. 2. Commission paid to M/S Mahadev Industries on the basis of service provided by such firm in a particular area to the state of Punjab purpose for appoint to maximize the sales volume because our commission directly linked to the sales quantity volume. The appointed firm have to demonstrate the product to the fanners who actually consumed such products i.e. ULALA and the commission based on such performance. Further the said firm is related party but all the payments are at comparable prices in the market. 1 can say all the payments are at arm's length. 3. Commission paid to M/S A. K. Associates on the basis of service provided by such firm in a particular area to the state of Punjab purpose for appoint to maximize the sales volume because our commission directly linked to the sales 9 quantity volume. The appointed firm have to demonstrate the product to the farmers who actually consumed such products i.e. ULALA and the commission based on such performance. Further the said firm is related party but all the payments are at comparable prices in the market. I can say all the payments are at arm's length. Also submitted that we never claimed that this amount is paid for Sales or Supply of any material, as per agreement it is clearly mentioned that as per sales volume (Quantity) of products (mentioned in the agreement of principal manufacturer) we are getting ORG Commission and on the same pattern the commission paid to the parties stated above as per agreement for the service as they rendered for us. Further how the businessman describe his business Revenue i.e. Sales. Gross Receipts, Commission or any other name this is the description and as per understanding of such businessman. In conclusion 1. No Difference in sales with M/S Sumitomo Chemical India private limited, copy of Ledger Attached as per annexure-I 2. Payment made to related parties for their services rendered by them and the same is duly considered in their respective Income Tax Return as all are income tax assessee. Further all the payment made after deducting TDS as applicable on commission payment as per Income Tax 1961 further no payment made was excessive and unreasonable having regard to market rate. Third Party Quotations attached for your reference annexure-II 10. In the aforesaid factual background, let’s look at the findings of the AO. On perusal of the order passed by the AO, it is noted that he has taken into account all the aforesaid documentation and submissions made by the assessee. Further, the payment of commission has been verified from the respective entities and the AO has also verified respective tax returns filed by the related entities wherein the commission income has been disclosed and offered for taxation. At the same time, the AO has disallowed the commission expenses on the ground that the payment have been made to related parties for instance, it has been stated that the payments to M/s United Pest Management Services have been made where Shri Nikhil Singh is the partner in the said concern and also happens to be the son of the assessee. Similarly, it has been stated that Shri Nikhil Singh is also the proprietor of M/s Mahadev Industries and similarly Shri Akhil Singh, another son of the assessee is the proprietor of M/s A.K. Association. It therefore appears that the AO was guided by the fact that since the 10 payment have been made to related parties and the assessee has not furnished any satisfactory justification for payment to related parties, the same has been disallowed. Further, the AO was also guided by the fact that the initial agreement entered into by the assessee with M/s UPL Ltd. does not allow any appointment of sub-agent by the assessee. Further on perusal of the order passed by the Ld. CIT(A), he has stated that the assessee has not filed any supporting evidence as to whether the commission has been paid through banking channel or whether any TDS has been deducted thereof and he therefore has gone ahead and confirmed the findings of the AO. 11. As far as the matter as to whether the initial agreement entered into between the assessee and M/s UPL allows the appointment of sub agent or not, in our view, irrespective of the terms of the said agreement which is a matter interse between the two parties as to whether there is a breach of terms and condition of the agreement entered into, so long as the same is not considered as a breach of law of the land, what is relevant to consider is the factum of actual rendering of services by these three related entities and the corresponding payments made by the assessee and I find that there is no findings recorded by the lower authorities challenging the factum of rendering of services by these entities. All documentation are on record in terms of the copies of the agreement entered into, the invoices raised, the payments made through the banking channel, TDS done while making the payment, filing of the TDS returns and also the fact that the related entities have confirmed the same in their communication to the AO and have also the fact that they have offered the same in their respective tax returns. None of these documentation have been questioned by the lower authorities. As far as the quantum of commission paid to these entities is concerned, the assessee has reasonably demonstrated before the lower authorities through third party data that these are comparable transaction and where the Revenue is to dispute the same, the evidence produced by the assessee needs to be rebutted by the bringing positive evidence on record and we find that there is no other comparable data which has been brought on record by the Revenue. In light of same, I find that the assessee has provided reasonable explanation alongwith supporting documentation to justify the incurrence of the commission expenses and therefore the 11 addition so made by the AO and sustained by the Ld. CIT(A) is hereby directed to be deleted. 12. In the result, the appeal of the assessee is allowed. (Order pronounced in the open Court on 02/03/2023 ) Sd/- व म संह यादव (VIKRAM SINGH YADAV) लेखा सद%य / ACCOUNTANT MEMBER AG Date: 02/03/2023 ( + ! , - . - Copy of the order forwarded to : 1. The Appellant 2. The Respondent 3. $ / CIT 4. $ / 0 1 The CIT(A) 5. - 2 ग 4 5 & 4 5 678 ग9 DR, ITAT, CHANDIGARH 6. ग 8 : % Guard File
Other Referred Cases
Sumati Dayal Vs CIT [1995] 214 ITR 801 (SC), CIT Vs. DurgaPrasad More[1971] 82 ITR 540 (SC)
Laws Referred To
Income Tax Act, 1961
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