DCIT 3(2), MUMBAI V. MODY INDUSTRIES (F.C) P.LTD, THANE

ITA 6270/MUM/2013

• Counselvise Citation: [2015] 134 COUNSELVISE.COM (IT) 3145 (ITAT-MUMBAI)
• Duration Of Justice: 1 year(s) 11 month(s) 2 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 30-09-2015
• Appeal Filed By: Department
• Bench Allotted: B
• Next Hearing Date: 22-09-2015
• Assessment Year: 2010-2011
• Appeal Filed On: 28-10-2013
• Court: TRIBUNAL
• Department Lawyers: VIVEK BUTRA
• Assessee Lawyers: S SINGHI
• Keywords: Bogus purchase
• Section: 69C

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL B BENCH, MUMBAI BEFORE SHRI RAJENDRA , ACCOUNTANT MEMBER AND SHRI SAKTIJIT DEY , JUDICIAL MEMBER ITA NO. 6270 /MUM./ 2013 ( ASSESSMENT YEAR : 20 10 11 ) DY. COMMISSIONER OF INCOME TAX CIRCLE 3 (2), AAYAKAR BHAWAN 101, M.K. ROAD, MUMBAI 400 020 .. APPELLANT V/S M/S. MODY INDUSTRIES (F.C) PVT. LTD. C 41, ROAD NO.34 WAGLE INDUSTRIAL ESTATE THANE 400 604 PAN AABCM8274E .... RESPONDENT REVENUE BY : SHRI VIVEK BUTRA ASSESSEE BY : SHRI S. SINGHI DATE OF HEARING 22 .09.2015 DATE OF ORDER 30.09.2015 O R D E R PER SAKTIJIT DEY, J.M. THE INSTANT APPEAL PREFERRED BY THE REVENUE IS DIRECTED AGAINST THE ORDER DATED 23 RD AUGUST 2013, PASSED BY THE LEARNED COMMISSIONER (APPEALS) 4, MUMBA I, PERTAINING TO THE ASSESSMENT YEAR 2010 11. M/S. MODY INDUSTRIES (F.C) PVT. LTD. 2 2. GROUND NO.1, RAISED BY THE REVENUE IS AGAINST THE DECISION OF THE LEARNED COMMISSIONER (APPEALS) IN RESTRICTING THE ADDITION ON ACCOUNT OF BOGUS PURCHASES TO ` 11,238. 3. BRIEFLY STATED THE FACTS ARE, THE ASSESS EE COMPANY IS ENGAGED IN THE BUSINESS OF MANUFACTURING AND SALE OF SUBMERSIBLE PUMPS AND ITS ACCESSORIES. FOR THE ASSESSMENT YEAR UNDER CONSIDERATION, THE ASSESSEE FILED ITS RETURN OF INCOME ON 28 TH SEPTEMBER 2010, DECLARING TOTAL INCOME OF ` 6,80,44,242. DURING THE ASSESSMENT PROCEEDINGS, ON THE BASIS OF INFORMATION RECEIVED FROM THE DIRECTOR GENERAL OF INCOME TAX (INV.), MUMBAI, TO THE EFFECT THAT PURCHASES EFF ECTED BY THE ASSESSEE ARE BOGUS, T HE ASSESSING OFFICER CALLED UPON THE ASSESSEE TO FURNISH THE D ETAILS. FROM THE MATERIAL ON RECORD, HE NOTICED THAT THE ASSESSEE HAD MADE BOGUS PURCHASES FROM M/S. SAMARTH ENTERPRISES, BHAYANDER, FOR ` 71,303, IN THE FINANCIAL YEAR 2009 10 AND ` 5,129, FOR THE FINANCIAL YEAR 2010 11 RESPECTIVELY. HE, THEREFORE, CALLED UPON THE ASSESSEE TO EXPLAIN AS TO WHY THE AMOUNT OF ` 71,303, SHOULD NOT BE DISALLOWED AND ADDED BACK TO THE INCOME OF THE ASSESSEE FOR THE ASSESSMENT YEAR UNDER CONSIDERATION. IN RESPONSE TO THE QUERY RAISED BY THE ASSESSING OFFICER, IT WAS SUBMITTED BY THE ASSESSEE THAT IT HAS PURCHASED GOODS FROM SMARTH ENTERPRISES FOR THE FINANCIAL YEAR 2009 10 FOR AN AMOUNT OF ` 11,238 AND FOR THE FINANCIAL YEAR 2010 11, FOR AN AMOUNT OF ` 5,129. IN SUPPORT OF SUCH CLAIM, THE ASSESSEE ALSO M/S. MODY INDUSTRIES (F.C) PVT. LTD. 3 SUBMITTED LEDGER ACCOUNT, C OPIES OF BILLS, DELIVERY CHALLANS, ETC. THE ASSESSING OFFICER, HOWEVER, WAS NOT CONVINCED WITH THE STATEMENTS MADE BY THE ASSESSEE. HE OBSERVED THAT SMARTH ENTERPRISES IS ONLY AN ENTRY PROVIDER WHICH HAS BEEN FOUND BY THE SALES TAX AUTHORITIES. THEREFORE, TREATING THE PURCHASES MADE FROM THE SAID PARTY A S NOT GENUINE, THE ASSESSING OFFICER ADDED THE AMOUNT OF ` 5,129. FURTHER, HE OBSERVED THAT AS PER THE INFORMATION RECEIVED, THE TOTAL PURCHASES MADE FROM THE SAID PARTY AMOUNT ED TO ` 71,303, WHEREAS THE ASS ESSEE HAS ACCOUNTED FOR IN ITS BOOKS AN AMOUNT OF ` 5,129, THE BALANCE AMOUNT OF ` 66,174, THEREFORE, HAS TO BE ADDED UNDER SECTION 69C OF THE ACT. 4. BEING AGGRIEVED OF SUCH ADDITION, THE ASSESSEE PREFERRED APPEAL BEFORE THE FIRST APPELLATE AUTHORITY. THE L EARNED COMMISSIONER (APPEALS), AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE IN THE LIGHT OF THE FACTS AND MATERIAL ON RECORD, FOUND THAT THE ASSESSEE DURING THE RELEVANT PREVIOUS YEAR, HAS RECORDED PURCHASES OF ` 11,238, FROM SMARTH ENTERPRISES, IN IT S BOOKS OF ACCOUNT. HE, THEREFORE, DIRECTED THE ASSESSING OFFICER TO RESTRICT THE DISALLOWANCE TO THAT AMOUNT. BEING AGGRIEVED, THE DEPARTMENT IS IN APPEAL BEFORE US. 5. HAVING CONSIDERED THE SUBMISSIONS OF THE PARTIES AND ON A PERUSAL OF THE MATERIAL ON REC ORD, WE DO NOT FIND ANY REASON TO M/S. MODY INDUSTRIES (F.C) PVT. LTD. 4 INTERFERE WITH THE DECISION OF THE LEARNED COMMISSIONER (APPEALS) ON THIS ISSUE. AS CAN BE SEEN, THE LEARNED COMMISSIONER (APPEALS), ON VERIFYING THE BOOKS OF ACCOUNT OF THE ASSESSEE FOR THE RELEVANT ASSESSMENT YEAR HAS GI VEN A FACTUAL FINDING THAT THE ACTUAL PURCHASES MADE BY THE ASSESSEE DURING THE YEAR UNDER CONSIDERATION FROM SAMARTH ENTERPRISES, WAS TO THE TUNE OF ` 11,238. THE DEPARTMENT HAS FAILED TO BRING ANY MATERIAL BEFORE US TO DISTURB THE AFORESAID FACTUAL FINDI NG OF THE LEARNED COMMISSIONER (APPEALS). THAT BEING THE CASE, WE UPHOLD THE ORDER OF THE LEARNED COMMISSIONER (APPEALS) BY DISMISSING THE GROUND RAISED BY THE REVENUE. 6. THE NEXT ISSUE RAISED IN GROUND NO.2 AND 3, IS AGAINST THE DECISION OF THE LEARNED COM MISSIONER (APPEALS) IN DELETING THE ADDITION MADE OF ` 47,19,138, ON ACCOUNT OF DISALLOWANCE OF COMMISSION PAID TO DIRECTORS. 7. BRIEFLY STATED THE FACTS ARE, IN THE COURSE OF ASSESSMENT PROCEEDINGS, THE ASSESSING OFFICER, WHILE VERIFYING THE FINANCIAL STATE MENTS, FOUND THAT THE ASSESSEE HAS MADE COMMISSION PAYMENT TO THE EXECUTIVE, CHAIRMAN AND DIRECTORS OF THE COMPANY NAMELY SHRI SAFEEQUR SHAH ` 23,59,569 SHRI JAGMOHAN BAWEJA ` 23,59,569 AND SHRI RAJ I ND ER KUMAR MOD Y ` 23,59,569. HE FOUND THAT SHRI JAG MOHAN BAWEJA AND SHRI RAJ I ND E R KUMAR MODY, ARE ALSO THE M/S. MODY INDUSTRIES (F.C) PVT. LTD. 5 SHAREHOLDER OF THE COMPANY HAVING SHAREHOLDING OF 71% AND 29% RESPECTIVELY. THE ASSESSING OFFICER BEING OF THE VIEW THAT COMMISSION PAID TO DIRECTORS IS NOT AN ALLOWABLE EXPENDITURE UNDER SECTION 36(1 )(II) OF THE ACT, PROPOSED TO DISALLOW THE SAME. THE ASSESSEE OBJECTING TO PROPOSED DISALLOWANCE SUBMITTED , AS PER THE USUAL PRACTICE FOLLOWED BY THE ASSESSEE, THE COMPANY HAS PAID COMMISSION TO ITS DIRECTORS @ 3% ON THE PROFITS EARNED DURING THE YEAR. IT WAS SUBMITTED, THE COMMISSION IS CALCULATED AS PER THE PROVISIONS OF COMPANIES ACT, 1956, AS A PART OR WHOLE TIME WORKING DIRECTORS REMUNERATION PACKAGE AND TDS HAS BEEN DEDUCTED UNDER SECTION 192B OF THE ACT BY TREATING IT AS PART OF SALARY. IT WAS ALSO SUBMITTED THAT SECTION 17 OF THE ACT ALSO TREAT S AS COMMISSION PART OF SALARY. THE BOARD RESOLUTION AUTHORISING PAYMENT OF COMMISSION TO THE DIRECTORS WAS ALSO SUBMITTED. THE ASSESSING OFFICER, HOWEVER, DID NOT FIND MERIT IN THE SUBMISSION OF THE ASSESS EE. HE OBSERVED THAT AS PER SECTION 36(1)(II ), ONE OF THE CONDITIONS FOR ALLOWING THIS TYPE OF EXPENDITURE IS THE AMOUNT PAYABLE TO EMPLOYEES AS BONUS OR COMMISSION SHOULD NOT OTHERWISE HAVE BEEN PAYABLE TO THEM AS PROFIT OR DIVIDEND SO THAT TAX AVOIDANC E BY DISTRIBUTING PROFIT BY WAY OF BONUS OR COMMISSION AMONGST THE NUMBER OF EMPLOYEES COULD BE CHECKED. THE ASSESSING OFFICER OBSERVED THAT BY PAYING COMMISSION, THE ASSESSEE DISTRIBUTED ITS PROFIT TO ITS SHAREHOLDERS WITHOUT PAYING DIVIDEND DISTRIBUTION TAX. RELYING UPON THE DECISION OF THE TRIBUNAL, MUMBAI BENCH, IN DALAL M/S. MODY INDUSTRIES (F.C) PVT. LTD. 6 BROACHA STOCK BROKING PVT. LTD. (TS 287 ITAT 2011 MUM), THE ASSESSING OFFICER ULTIMATELY DISALLOWED THE COMMISSION PAYMENT OF ` 47,19,138, AND ADDED BACK TO THE INCOME OF THE YEAR. BEIN G AGGRIEVED OF SUCH DISALLOWANCE, THE ASSESSEE PREFERRED APPEAL BEFORE THE LEARNED COMMISSIONER (APPEALS). 8. THE LEARNED COMMISSIONER (APPEALS), AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE AND PERUSING THE MATERIAL ON RECORD, FOUND THAT THE ASSESSEE H AS DECLARED DIVIDEND FOR THE ASSESSMENT YEAR 2008 09, 2009 10 AND 2010 11 AND THE DIVIDEND DECLARED IN EACH ASSESSMENT YEAR HAS PROGRESSIVELY INCREASED. THE ASSESSEE HAS ALSO PAID DIVIDEND DISTRIBUTION TAX ACCORDINGLY. HE ALSO NOTICED THAT FOR THE AFORESAI D ASSESSMENT YEARS, THE ASSESSEE HAD BEEN UNIFORMLY PAYING COMMISSION @ 3% OF THE PROFITS IN TERMS WITH THE PROVISIONS OF COMPANIES ACT, 1956. HE ALSO FOUND THAT COMMISSION IN FACT IS BEING PAID TO THE DIRECTORS FOR ALMOST 22 TO 25 YEARS. HE, THEREFORE, WA S OF THE VIEW THAT THE DECLARATION OF DIVIDEND AND PAYMENT OF COMMISSION ON REGULAR BASIS PROVES THAT THERE IS NO CO RELATION BETWEEN THE TWO PAYMENTS AS IS TRIED TO BE LINKED BY THE ASSESSING OFFICER. AS FAR AS THE DECISION IN THE CASE OF DALAL BROACHA ST OCK BROKING PVT. LTD. (SUPRA), THE LEARNED COMMISSIONER (APPEALS) FOUND THE SAME TO BE FACTUAL DISTINGUISHABLE FROM ASSESSEES CASE AS IN THAT CASE THERE WAS A NEXUS BETWEEN THE PAYMENT OF DIVIDEND AND COMMISSION TO THE M/S. MODY INDUSTRIES (F.C) PVT. LTD. 7 DIRECTORS. WHEREAS, IN THE CASE OF A SSESSEE, THE COMMISSION PAYMENT OF THE DIRECTORS WERE TOWARDS SERVICES RENDERED. HE OBSERVED THAT WHEN THE ASSESSING OFFICER ACCEPTS THE SERVICES RENDERED TO THE DIRECTORS TO BE GENUINE, THERE IS NO REASON TO DISALLOW THE COMMISSION. THE LEARNED COMMISSION ER (APPEALS) RELYING UPON CERTAIN DECISIONS OF THE HON'BLE DELHI HIGH COURT IN THE CASE AS REFERRED TO BY HIM AND A DECISION OF THE TRIBUNAL, FINALLY DELETED THE ADDITION MADE BY THE ASSESSING OFFICER. BEING AGGRIEVED, THE DEPARTMENT IS IN APPEAL BEFORE US . 9. WE HAVE CONSIDERED THE SUBMISSIONS OF THE PARTIES AND PERUSED THE MATERIAL AVAILABLE ON RECORD. AS COULD BE SEEN FROM THE FACTUAL MATRIX OF THE CASE, THE ASSESSEE DURING THE YEAR NOT ONLY HAS PAID DIVIDEND TO THE DIRECTORS BUT HAS ALSO PAID COMMISSION @ 3% OF THE PROFITS. IT IS ALSO NOT DISPUTED BY THE LEARNED DEPARTMENTAL RE PRESENTATIVE THAT THE ASSESSEE I S CONTINUOUSLY FOLLOWING THE PRACTICE OF PAYMENT OF DIVIDEND AS WELL AS COMMISSION TO THE DIRECTORS FROM PAST SEVERAL YEARS. IT IS ALSO NOT DISPUTED T HAT THE DIVIDEND PAYMENT TO DIRECTORS OVER THE YEARS HAS INCREASED SUBSTANTIALLY AND FOR THE IMPUGNED ASSESSMENT YEAR , AS NOTED BY THE LEARNED COMMISSIONER (APPEALS), THE ASSESSEE HAS DECLARED DIVIDEND OF APPROXIMATELY 55% OF THE PROFITS. IT IS ALSO NOT DE NIED THAT THE ASSESSEE HAS PAID DIVIDEND DISTRIBUTION TAX ON THE DIVIDEND DECLARED. THAT BEING THE CASE, THERE M/S. MODY INDUSTRIES (F.C) PVT. LTD. 8 BEING A QUANTUM JUMP IN THE DI VIDEND PAID TO THE SHAREHOLDERS, IT IS DIFFICULT TO BELIEVE THAT THE ASSESSEE WOULD HAVE ADOPTED A MECHANISM TO AVO ID PAYMENT OF DIVIDEND DISTRIBUTION TAX ON 3% OF THE PROFIT BY TREATING IT AS COMMISSION PAYMENT TO THE DIRECTORS. MORE SO, WHEN IT IS A FACT ON RECORD THAT SUCH COMMISSION PAYMENT TO DIRECTORS IS CONTINUING FOR PAST SEVERAL YEARS AND DEPARTMENT HAS N EVER QUESTIONED SUCH COMMISSION PAYMENT. AS RIGHTLY HELD BY THE LEARNED COMMISSIONER (APPEALS), THERE BEING NO NEXUS BETWEEN THE TWO PAYMENTS I.E., COMMISSION AND DIVIDEND TO THE DIRECTORS, THE DISALLOWANCE MADE COULD NOT HAVE BEEN SUSTAINED. ACCORDINGLY, WE UP HOLD THE ORDER OF THE LEARNED COMMISSIONER (APPEALS) DISMISSING THE GROUND RAISED BY THE DEPARTMENT. 10. THE OTHER GROUNDS RAISED BY THE REVENUE BEING GENERAL IN NATURE, D O NOT REQUIRE ANY SPECIFIC ADJUDICATION. 11. IN THE RESULT, REVENUES APPEAL STANDS DISMISS ED. ORDER PRONOUNCED IN THE OPEN COURT O N 30.09.2015 SD/ - RAJENDRA ACCOUNTANT MEMBER SD/ - SAKTIJIT DEY JUDICIAL MEMBER MUMBAI, DATED : 30.09.2015 M/S. MODY INDUSTRIES (F.C) PVT. LTD. 9 COPY OF THE ORDER FORWARDED TO : (1) THE ASSESSEE; (2) THE REVENUE; (3) THE CIT(A); (4) THE CIT, MUMBAI CITY CONCERNED; (5) TH E DR, ITAT, MUMBAI; (6) GUARD FILE . TRUE COPY BY ORDER PRADEEP J. CHOWDHURY SR. PRIVATE SECRETARY (DY./ASSTT. REGISTRAR) ITAT, MUMBAI