M/S STEEL KRAFT INDIA, BATALA V. INCOME TAX OFFICER, WARD-2, BATALA

ITA 615/ASR/2017

• Counselvise Citation: [2019] 116 COUNSELVISE.COM (IT) 6296 (ITAT-AMRITSAR)
• Duration Of Justice: 1 year(s) 10 month(s) 3 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 29-07-2019
• Appeal Filed By: Assessee
• Order Result: Dismissed
• Bench Allotted: SMC
• Next Hearing Date: 01-05-2019
• Assessment Year: 2014-2015
• Appeal Filed On: 26-09-2017
• Result in Favour of: Revenue
• Court: TRIBUNAL
• Keywords: Business income; Avoidance of tax; Onus to prove
• Section: 143(3); 37

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL AMRITSAR BENCH, AMRITSAR (SMC) BEFORE SH. SANJAY ARORA, ACCOUNTANT MEMBER I.T.A. NO. 615/ASR/2017 A SSESSMENT YEAR: 2014-15 STEEL CRAFT INDIA, KUTBI NANGAL, G.T. ROAD, BATALA [PAN: ABAFS 1276R] VS. INCOME TAX OFFICER, WARD 2, BATALA (APPELLANT) (RESPONDENT) APPELLANT BY : NONE RESPONDENT BY: SH. CHARAN DASS (D.R.) DATE OF HEARING: 01.05.2019 DATE OF PRONOUNCEMENT: 29.07.2019 ORDER PER SANJAY ARORA, AM: THIS IS AN APPEAL BY THE ASSESSEE ARISING OUT OF TH E ORDER BY THE COMMISSIONER OF INCOME TAX (APPEALS)-1, AMRITSAR (' CIT (A)' FOR SHORT) DATED 02.06.2017, DISMISSING THE ASSESSEES APPEAL CONTES TING ITS ASSESSMENT U/S. 143(3) OF THE INCOME TAX ACT, 1961 ('THE ACT' HEREINAFTER) DATED 21.9.2016 FOR THE ASSESSMENT YEAR (AY) 2014-15. 2. THE ASSESSEE PREFERRING TO RELY ON WRITTEN SUBMI SSION, I.E., AS AGAINST PERSONAL HEARING, THE HEARING IN THE MATTER WAS PRO CEEDED WITH, AND ORDER RESERVED AFTER HEARING THE RESPONDENT WITH REFERENCE TO THE ASSESSEES CASE, I.E., AS PROJECTED BEFORE THE REVENUE AUTHORITIES, AS WELL AS PER ITS WRITTEN SUBMISSIONS. ITA NO. 615/ASR/2017 (AY 2014-15) STEEL CRAFT INDIA V. ITO 2 3. THE ISSUE INVOLVED IN THE INSTANT CASE IS THE DE DUCTION OF COMMISSION EXPENSES ALLOWED AT RS.3,69,427 BY THE ASSESSEE-FIR M TO ONE, SH. JASPREET SINGH, SON OF ONE OF THE PARTNERS, S. AMARJIT SINGH, AND C LAIMED IN THE COMPUTATION OF ITS BUSINESS INCOME FOR THE RELEVANT YEAR, DISALLOWED B Y THE REVENUE. 4. THE BRIEF FACTS OF THE CASE ARE THAT THE ASSESSI NG OFFICER (AO) OBSERVED THE FOLLOWING COMMISSION PAYMENTS MADE BY THE ASSESSEE- FIRM TO THREE PERSONS COVERED U/S. 40A(2)(B) OF THE ACT; PAYEE AMT.(RS) RELATION (A) GURMUKH SINGH 3,69,427 SON OF S. SUKHDEV SINGH (PA RTNER) (B) GURPREET SINGH 3,69,427 SON OF S. AMARJIT SINGH ( PARTNER) (C) JASPREET SINGH 3,69,427 SON OF S. AMARJIT SINGH (P ARTNER) THE ASSESSEE IS A CONTRACTOR FOR RAILWAY COACH FACT ORY, KAPURTHALA, SUPPLYING IT DIFFERENT PARTS. THE CONTRACT WITH THE RAILWAYS PRO VIDES FOR THE ASSESSEE TO EMPLOY ONE TECHNICAL PERSON FOR MAINTAINING LIAISON WITH T HE RAILWAY AUTHORITIES. THE COMMISSION TO GURPREET SINGH, A QUALIFIED ENGINEER, WAS ACCORDINGLY ALLOWED. PAYMENT TO GURMUKH SINGH, STATED TO BE FOR MARKETIN G SERVICES, WAS ALSO ALLOWED ON THE STRENGTH OF SALE BILLS. COMMISSION TO JASPRE ET SINGH WAS STATED TO BE FOR PURCHASED RELATED SERVICES. THE SAME DID NOT FIND F AVOUR WITH THE REVENUE; THE LD. CIT(A) CONFIRMING THE DISALLOWANCE BY HOLDING AS UN DER: 6. I HAVE GONE THROUGH THE GROUNDS OF APPEAL, SUBM ISSIONS OF THE APPELLANT AND THE ASSESSMENT ORDER OF THE AO. JASPREET SINGH IS SON OF ONE OF THE PARTNER OF M/S . STEEL CRAFT INDIA. IT IS CLEAR THAT COMMISSION IS EXCESSIVE AS TRADE PRACTICE IS 10% ON LY. JASPREET SINGH IS NOT QUALIFIED FOR THIS KIND OF WORK. HIS DIPLOMA IS FOR FINANCIAL ACC OUNTING AND NOT MECHANICAL ENGINEERING. PRODUCTS BOUGHT ARE TECHNICAL IN NATURE. MOST OF TH E PURCHASES ARE FROM SAIL FOR WHICH NO SERVICES OF JASPREET SINGH IS NEEDED. HENCE IT IS O BVIOUS THAT COMMISSION HAS BEEN PAID TO REDUCE TAXES. SO IT IS CLEAR THAT JASPREET SINGH HA S NO COMPETENCE IN THE FIELD OF PURCHASES ITA NO. 615/ASR/2017 (AY 2014-15) STEEL CRAFT INDIA V. ITO 3 DONE. HE BUYS STEEL & SOME PRECISION TOOLS WHICH CA N BE SOURCED BY ANY ONE. IT IS ALSO APPARENT THAT THE MOU GIVEN IS AN AFTER-THOUGHT TO GIVE CREDIBILITY TO THE CLAIM MADE. HENCE COMMISSION IS NOT JUSTIFIED. AGGRIEVED, THE ASSESSEE IS IN SECOND APPEAL. 5. I HAVE HEARD THE PARTIES, AND PERUSED THE MATERI AL ON RECORD. 5.1 MY FIRST OBSERVATION IN THE MATTER IS THAT THE IMPUGNED DISALLOWANCE IS NOT U/S. 40A(2)(A), BUT U/S. 37(1). THIS IS CLARIFIED A S THERE IS REFERENCE BY THE AO TO S. 40A(2)(B) AND, FURTHER, TO THE RATE OF COMMISSION ( TO SH. JASPREET SINGH AT 10 %) BY THE LD CIT(A). THE QUESTION IS NOT AS TO THE RAT E, WHETHER 10% (AS STATED IN THE IMPUGNED ORDER), OR 2.5% (AS STATED IN THE MEMORAND UM OF UNDERSTANDING DATED 01.4.2013 / PB PGS. 14-15), AT WHICH THE COMMISSION IS ALLOWED, IN WHICH A CASE THE DISALLOWANCE WOULD HAVE BEEN AT OF THE CLAIME D EXPENDITURE OF RS.3.6 LACS, AND NOT THE TOTAL. EVEN FOR THE OTHER TWO COMMISSIO N PAYMENTS, THOUGH COVERED U/S. 40A(2)(A), THERE IS NO WHISPER OF THE RATE/S A T WHICH THE COMMISSION IS PAID. IT WOULD THEREFORE WRONG TO SAY THAT THE DISALLOWANCE IS U/S. 40A(2)(A). THE FACT OF THE CLAIM FOR COMMISSION BEING AT 2.5% WOULD THUS B E OF NO CONSEQUENCE. THE PRINCIPAL REASON FOR THE DISALLOWANCE, AS WELL AS ITS CONFIRMATION IN FIRST APPEAL, AS A READING OF THEIR ORDERS BY THE REVENUE AUTHORITIES SHOW, IS OF THE IMPUGNED EXPENDITURE BEING WHOLLY UN-EVIDENCED I.E. , QUA THE SERVICE RENDERED. THE FACTUM OF THE SERVICES RENDERED, WHICH NEEDS TO BE ESTABLISHED, HAS NOT BEEN. IT IS FOR THESE SERVICES THAT THE EXPENDITURE HAS PURP ORTEDLY BEEN INCURRED, SO THAT, WHERE SO SHOWN, WOULD PROVIDE THE LEGAL BASIS FOR T HE ALLOWANCE OF A CLAIM IN ITS RESPECT INASMUCH AS THE SAME RENDERS IT BEING REGAR DED AS INCURRED WHOLLY AND EXCLUSIVELY FOR BUSINESS PURPOSES, QUALIFYING IT A S DEDUCTIBLE U/S. 37(1). 5.2 I MAY NEXT ADVERT TO THE LAW IN THE MATTER. IN LAKSHMIRATAN COTTON MILLS CO. LTD. V. CIT [1969] 73 ITR 634 (SC), IT STOOD HELD THAT THE BUR DEN OF PROVING THAT SERVICES WERE RENDERED BY THE MANAGING AGENTS FOR E ARNING THE REMUNERATION LAY ITA NO. 615/ASR/2017 (AY 2014-15) STEEL CRAFT INDIA V. ITO 4 UPON THE COMPANY AND IF NO RELIABLE EVIDENCE WAS FO RTHCOMING, THE TRIBUNAL WAS COMPETENT TO REACH THE CONCLUSION THAT IT DID. THE RECITALS IN THE MANAGING AGENCY AGREEMENT WHICH AUTHORIZED THE MANAGING AGENTS TO D O CERTAIN ACTS COULD NOT BE A SUBSTITUTE FOR EVIDENCE THAT THOSE ACTS WERE DONE B Y THE MANAGING AGENTS. THAT IT IS PERMISSIBLE FOR THE ASSESSING AUTHORITY TO GO BEHIN D THE WRITTEN DOCUMENTS IS TRITE LAW, FOR WHICH REFERENCE MAY BE MADE TO SWADESHI COTTON MILLS CO. LTD. V. CIT [1967] 63 ITR 57 (SC). IN LACHMINARAYAN MADAN LAL V. CIT [1972] 86 ITR 0439 (SC), WHERE, AGAIN, THE ISSUE INVOLVED WAS THE ALLOWANCE OF CLAI M FOR COMMISSION EXPENDITURE, THE TRIBUNAL CAME TO THE CONCLUSION THAT THE SO-CAL LED SELLING AGENCY AGREEMENT BETWEEN THE ASSESSEE-FIRM AND THE SELLING AGENCY FI RM WAS ONLY A MAKE-BELIEVE ARRANGEMENT. IT WAS MERELY A DEVICE TO MINIMISE THE TAX LIABILITY OF THE ASSESSEE- FIRM AND IT WAS NOT A GENUINE BUSINESS ARRANGEMENT. THE FINDINGS BY THE TRIBUNAL BEING FINDINGS OF FACT, NOT SHOWN TO BE PERVERSE OR VITIATED, WERE DECLINED TO BE INTERFERED WITH BY THE HONBLE COURT, STATING THAT THE MERE EXISTENCE OF AN AGREEMENT OR PAYMENT OF COMMISSION DOES NOT BIND TH E ITO TO ALLOW SUCH DEDUCTION. THE HONBLE COURT MADE AN EXTENSIVE REVI EW OF THE CASE LAW IN SO DECIDING. REFERENCE TO SOME OF ITS OBSERVATIONS IN THIS REGARD WOULD BE APPOSITE: IN CIT VS. A. RAMAN & CO . [1968] 67 ITR 11 (SC) THIS COURT RESTATED THE WEL L- ACCEPTED PROPOSITION THAT THE LAW DOES NOT OBLIGE A TRADER TO MAKE THE MAXIMUM PROFIT THAT HE CAN OUT OF HIS TRADING TRANSACTIONS. INCOME WHICH ACCRUES TO A TRADER IS TAXABLE IN HIS HANDS BUT INCOME WHICH HE COULD H AVE, BUT HAS NOT EARNED, IS NOT MADE TAXABLE AS INCOME ACCRUED TO HIM. AVOIDANCE OF TAX LIABILITY BY SO ARRANGING COMMERCIAL AFFAIRS THAT CHARGE OF TAX IS DISTRIBUTE D IS NOT PROHIBITED. A TAXPAYER MAY RESORT TO A DEVICE TO DIVERT THE INCOME BEFORE IT ACCRUES OR ARISES TO HIM. EFFECTIVENESS OF THE DEVICE DEPENDS NOT UPON CONSID ERATIONS OF MORALITY BUT ON THE OPERATION OF THE INCOME TAX ACT. BUT, THIS COURT IN THE SAME CASE FURTHER OBSERVED THAT BY ADOPTING A DEVICE, IF IT IS MADE TO APPEAR THAT THE INCOME WHICH BELONGED TO THE ASSESSEE HAD BEEN EARNED BY SOME OTHER PERSON, THAT INCOME MAY BE BROUGHT TO TAX IN THE HANDS OF THE ASSESSEE . ITA NO. 615/ASR/2017 (AY 2014-15) STEEL CRAFT INDIA V. ITO 5 IN OUR OPINION, THE FACTS OF THIS CASE COME WITHIN THE RULE LAID DOWN BY THIS COURT IN SWADESHI COTTON MILLS CO. LTD. VS. CIT [1967] 63 ITR 57 (SC). THE QUESTION WHETHER AN AMOUNT CLAIMED AS AN EXPENDITURE WAS LAI D OUT OR EXPENDED WHOLLY AND EXCLUSIVELY FOR THE PURPOSE OF THE BUSINESS HAS TO BE DECIDED ON THE FACTS AND IN THE LIGHT OF THE CIRCUMSTANCES IN EACH CASE. THE MERE E XISTENCE OF AN AGREEMENT BETWEEN THE ASSESSEE AND ITS SELLING AGENTS OR PAYM ENT OF CERTAIN AMOUNTS AS COMMISSION, ASSUMING THERE WAS SUCH PAYMENT, DOES N OT BIND THE ITO TO HOLD THAT THE PAYMENT WAS MADE EXCLUSIVELY AND WHOLLY FOR THE PURPOSE OF THE ASSESSEE'S BUSINESS. ALTHOUGH THERE MIGHT BE SUCH AN AGREEMENT IN EXISTENCE AND THE PAYMENTS MIGHT HAVE BEEN MADE, IT IS STILL OPEN TO THE ITO TO CONSIDER THE RELEVANT FACTORS AND DETERMINE FOR HIMSELF WHETHER THE COMMI SSION SAID TO HAVE BEEN PAID TO THE SELLING AGENTS OR ANY PART THEREOF IS PROPER LY DEDUCTIBLE UNDER S. 37 OF THE ACT. 5.3 IN THE FACTS OF THE INSTANT CASE, THE DISALLOWA NCE STANDS EFFECTED, DESPITE REFERENCE TO THE FACT OF THE PAYMENT BEING TO A PER SON SPECIFIED U/S. 40A(2)(A), U/S. 37(1), FOR WANT OF EVIDENCE, I.E., QUA THE SERVICES RENDERED. THERE IS NO IMPROVEMENT IN THE ASSESSEES CASE BEFORE THE TRIBU NAL. IT NEEDS TO BE APPRECIATED THAT THE PRIMARY BURDEN TO PROVE HIS RETURN AND THE CLAIMS PREFERRED THEREBY IS ON THE ASSESSEE ( CIT V. CALCUTTA AGENCY LTD . [1951] 19 ITR 191 (SC); CIT V. R. VENKATASWAMY NAIDU [1956] 29 ITR 529 (SC)). IT IS ONLY WHEN THE ASSES SEE FURNISHES SOME EVIDENCE IN SUPPORT OF HIS CLAIM THA T THE SAME COULD BE SUBJECT TO VERIFICATION OR INVESTIGATION BY THE REVENUE AUTHOR ITIES. THE PAYEE IS STATED, WITHOUT SHOWING, OF HAVING 15 YEARS EXPERIENCE IN T HE TRADE. HE IS IN FACT A WORKING PARTNER IN ANOTHER FIRM BY THE NAME STEEL CUT ENGINEERING (REFER HIS RETURN OF INCOME AT PB PGS. 1-4). CONTINUING FURTHER, MOST OF THE PARTIES TO WHOM THE PAYMENTS ARE MADE APPEAR TO BE REGULAR PARTIES (PB PGS. 5-13) AND, IN ANY CASE, THERE IS NOTHING TO SHOW THAT THEY ARE NOT, NOR ARE CLAIMED TO BE NOT S O. IT IS THEN STATED, AGAIN WITHOUT SHOWING, THAT THE PRODUCT PURCHASES ARE NOT OF STAN DARDIZED PRODUCTS. THERE IS NO DEMONSTRATION THEREOF, AS BY PRODUCING SALE BILLS ( OR MENTION OF THE ITEMS LISTED ITA NO. 615/ASR/2017 (AY 2014-15) STEEL CRAFT INDIA V. ITO 6 THEREIN), AT ANY STAGE OF THE PROCEEDINGS, SO THAT IT IS AGAIN A BALD CLAIM. A DIFFERENCE IN THE PRODUCT DIMENSION AND SIZE WOULD NOT, IN ANY CASE, MAKE IT A DIFFERENT PRODUCT. THE PARTS PRODUCED WOULD SURELY BE AS PER THE SPECIFICATIONS IN THEIR RESPECT. IT IS THE PRODUCTION PROCESSES THAT ARE IN FACT STANDARDIZED, AND ON WHICH BASIS, GIVEN THE PRODUCT SPECIFICATIONS, COST S ARE ESTIMATED AND RATES QUOTED. RATHER, THE ASSESSEE BEING ENGAGED IN THE SAID BUSI NESS, AS STATED, FOR A NUMBER OF YEARS, WOULD BE PRODUCING THE SAME (TYPE OR GENRE O F) GOODS FOR REGULAR SUPPLIES. IT IS IN FACT IN ITS OWN INTEREST AS WELL AS COMPE TITIVENESS THAT IT DOES SO. THERE IS NOTHING ON RECORD TO EXHIBIT THE COMPETITIVE BIDDIN G, AS CLAIMED, ENTERED INTO EACH TIME A PURCHASE IS TO BE MADE. ON THE CONTRARY, THE RE IS NO MENTION OF THE DIFFERENT ITEMS PURCHASED, I.E., DIFFERENT FROM THOSE PURCHAS ED FROM YEAR TO YEAR, I.E., IN THE MAIN. THERE IS FURTHER NO EXPENDITURE INCURRED BY T HE PAYEE TOWARD EARNING COMMISSION EVEN AS HIS WORK PROFILE, AS STATED, LIS TS MANY JOBS, INCLUDING TRAVEL. IT IS IN FACT VERY SURPRISING INDEED THAT IN ALL THE T HREE CASES THE COMMISSION PAID FOR DIFFERENT SERVICES, AND WITH REFERENCE TO DIFFERENT , OBJECTIVELY DEFINED CRITERIA, WORK TO THE SAME AMOUNT . 6. I, IN VIEW OF THE FOREGOING, HAVE NO HESITATION TO HOLD THAT THE ASSESSEES CLAIM QUA THE IMPUGNED EXPENDITURE IS WHOLLY UNEVIDENCED AND , ACCORDINGLY, DECLINE INTERFERENCE IN RESPECT OF THE IMPUGNED DIS ALLOWANCE. 7. IN THE RESULT, THE ASSESSEES APPEAL IS DISMISSE D. ORDER PRONOUNCED IN THE OPEN CO URT ON JULY 29, 2019 SD/- (SANJAY ARORA) ACCOUNTANT MEMBER DATE: 29.07.2019 /GP/SR. PS. ITA NO. 615/ASR/2017 (AY 2014-15) STEEL CRAFT INDIA V. ITO 7 COPY OF THE ORDER FORWARDED TO: (1) THE APPELLANT: STEEL CRAFT INDIA, KUTBI NAN GAL, G.T. ROAD, BATALA (2) THE RESPONDENT: INCOME TAX OFFICER, WARD 2, BATALA (3) THE CIT(APPEALS)-1, AMRITSAR (4) THE CIT CONCERNED (5) THE SR. DR, I.T.A.T TRUE COPY BY ORDER