Overseas Trading and Shipping Co. Pvt. Ltd. V. Assistant Commissioner of Income Tax

TAXAP/729/2013

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The case involves Overseas Trading and Shipping Co. Pvt. Ltd., the appellant, who entered into a contract for the import of furnace oil without a valid license, which was a requirement under the Solvent, Raffinate & Slop Order, 2000. To avoid penalties, the appellant transferred the contract to its sister concern, BGH Exim Limited, which had a valid license. The appellant claimed a commission for this transfer, which was disallowed by the Assessing Officer and the Tribunal, leading to this appeal. The Tribunal also disallowed business promotion expenses claimed by the appellant for sending mangoes to a supplier in Singapore, citing lack of evidence for the business purpose of such expenditure.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 804506 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 02-09-2013
• Assessment Year: misc
• Other Referred Cases: Prakash Cotton Mills v. CIT, CIT v. Kemchand Motilal Jain, CIT v. A.K Menon, K.N Narayana Iyer v. CIT, Sayaji Iron & Engineering Company v. CIT
• Laws Referred To: Essential Commodities Act, 1955, Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Assessee Lawyers: R K PATEL
• Keywords: Business promotion expenses; Commission Disallowance; Contractual Obligation; Import license; Tax appeal
• Section: 37(1); 3

Judgement Text

"O/TAXAP/729/2013 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL No. 729 of 2013 FOR APPROVAL AND SIGNATURE: HONOURABLE Mr. JUSTICE M.R. SHAH and HONOURABLE Ms. JUSTICE SONIA GOKANI ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ OVERSEAS TRADING AND SHIPPING CO. PVT. LTD.....Appellant(s) Versus ASSISTANT COMMISSIONER OF INCOME TAX....Opponent(s) ================================================================ Appearance: MR RK PATEL, ADVOCATE for the Appellant(s) No. 1 ================================================================ CORAM: HONOURABLE Mr. JUSTICE M.R. SHAH and HONOURABLE Ms. JUSTICE SONIA GOKANI 2 nd September 2013 ORAL JUDGMENT (PER : HONOURABLE Ms. JUSTICE SONIA GOKANI) Brief facts necessary for adjudication of this Tax Appeal are as follow:­ Page 1 of 14 O/TAXAP/729/2013 JUDGMENT 2. The appellant­assessee is engaged in trading of various goods in international markets as well as locally. 2.1 During the assessment year 2004­05, the assessee entered into a contract with Messrs. Swiss Singapore Overeases Enterprises Private Limited, UAE {“SSOE” for short} on 13 th June 2006 for import of 12500 MT of Fuel Oil 180 CST in bulk. 2.2 As notified by the Central Government in exercise of powers conferred by Section 3 of the Essential Commodities Act, 1955, acquisition, storage and sale of solvents without licence was prohibited by the Solvent, Raffinate & Slop [Acquisition, Sale, Storage & Prevention of Use in Automobiles] Order, 2000. 2.3 It is an undisputed fact that the appellant­assessee had no licence for it to legally import the furnace oil, when it entered into contractual obligation for import with SSOE. In the result, the assessee requested its sister concern viz., BGH Exim Limited to undertake and perform contractual obligations arising from the said contract between the appellant­assessee and SSOE for the payment of consideration, as also for the sum described as commission. 2.4 The assessee claimed an amount of Rs. 28,37,500/= as commission paid to its sister concern­M/s. BGH Exim Limited. During the course of assessment proceedings, the Assessing Officer noted that the assessee had Page 2 of 14 O/TAXAP/729/2013 JUDGMENT purchased such furnace oil from its sister concern and it did not believe that the commission was paid for transfer of contractual liability for importing the furnace oil from Singapore based company. On not having found satisfactory explanation, such claim of commission was held to be bogus and the same was disallowed. 2.5 The Assessing Officer also disallowed promotional expenditure of Rs. 1,65,172/= incurred by the assessee for sending mangoes to one of its supplier companies at Singapore. 2.6 Both these disallowances were challenged before the Commissioner of Income­Tax [Appeals], which passed an extensive order and allowed the said amount. 2.7 The Revenue, therefore, challenged such decision of CIT [A] before the Tribunal. The Tribunal, on detailed examination of the issues, reversed the order of CIT [A] and restored the order of Assessing Officer. 2.8 The Tribunal noted the contents of Notification of the Government of India in the ministry of Petroleum & Natural Gases, issued in exercise of powers conferred in Section 3 of the Essential Commodities Act, 1955 which prohibits acquisition, storage and sale of solvents without a licence issued by the State Government or the District Magistrate or any other officer authorized by the Central Government or the State Government under the Solvent, Page 3 of 14 O/TAXAP/729/2013 JUDGMENT Raffinate & Slop [Acquisition, Sale, Storage & Prevention of Use in Automobiles] Order, 2000. It further noted that an application was made to the District Magistrate on 1 st January 2002 seeking licence for acquisition, sale, storage of furnace oil, which never came to be granted to the assessee. It further noted that though the assessee had no licence, it entered into a contract with an overseas company for fulfilling contractual obligation which was prohibited by law. The subsequent action of making payment of commission to the sister company was also contractually referable to a purpose prohibited by law, and therefore, for acquisition of solvent without licence; if any amount is to be paid, explanation to Section 37 (1) of the Income Tax Act would not allow sustaining of claim of commission. The Tribunal also disallowed expenditure of claim by the assessee for sending mangoes to one Narayan V. Thosar through Air Wings. The Tribunal, further noted that, “13. The ld. Authorized representative of the assessee has placed reliance on few judgments one of which is Prakash Cotton Mills v. CIT, 201 ITR 684 (SC). The aforesaid judgment does not at all directly or indirectly deal with the issue under appeal ie., the applicability of Explanation to Section 37 (1). In fact, Explanation to section 37 (1) was inserted in the Income­tax Act by the Finance (No.2) Act 1998 whereas the aforesaid judgment was delivered by the Hon’ble Supreme Court on 6 th April 1993. Secondly, the impugned expenditure has been Page 4 of 14 O/TAXAP/729/2013 JUDGMENT incurred for a purpose prohibited by law and is therefore hit by Explanation to Section 37 (1) and not save by the aforesaid judgment. Another judgment relied upon by the assessee is CIT v. Kemchand Motilal Jain, 13 Taxmann.com 27. In that case, ransom was paid for saving the life of the kidnapped person, which was not prohibited by law, whereas, in the case before us, the impugned sum has been paid for a purpose prohibited by law. Judgments in CIT v. A.K Menon, 202 ITR 774 (SC) and K.N Narayana Iyer v. CIT, 202 ITR 774 (Ker) relied upon by the assessee are hardly relevant in the context of issue before us.” 3. Aggrieved by impugned decision of the Tribunal, the present Tax Appeal is preferred under section 260A of the Income­tax Act, 1961 [“Act” for short], proposing following substantial questions of law for our consideration:­ {A} “Whether on facts and in law, Tribunal has substantially erred in interpretation of Section 28 & Section 37 of the Income Tax Act, 1961 for confirming disallowance of commission of Rs. 28,37,500/= for honouring a contract and business promotion expenses of Rs. 1,65,172/= in case of appellant­Company ?” {B} “Whether on facts and in law, the Tribunal’s finding and conclusion for confirming disallowance of commission of Rs. Page 5 of 14 O/TAXAP/729/2013 JUDGMENT 28,37,500/= and business promotion expenses of Rs. 1,65,172/= for the year under consideration is in ignorance of relevant material on record and taking aid of irrelevant factors not germane to subject matter of appeal with the result that the finding and conclusion of the Tribunal is vitiated on facts and in law ?” 4. We have heard at length learned advocates Shri R.K Patel with Shri Bhargav Karia and also perused thoroughly, entire materials and additional documents brought on the record and also the judgments of all the revenue authorities. 5. Although, both the issues are raised in both the questions of law proposed in this Tax Appeal, the issue of disallowance of the claim of commission to the tune of Rs. 28.37 lakhs [rounded off] is to be treated as the first issue and business promotion expenses of Rs. 1,65,172/= is to be treated as a second issue. The first issue of disallowance of commission is discussed firstly hereinafter. 6. Learned advocate Shri Patel has fervently submitted that from the beginning, the accountant may have nomenclatured such amount as “commission” and that ipso facto would not change anything under the law as in fact to fulfill the contractual obligation, a request was made to the sister Page 6 of 14 O/TAXAP/729/2013 JUDGMENT concern M/s. BGH Exim Limited. It is also urged that when the character of payment is the consideration for transfer of a purchase contract which the assessee was unable to perform, with no relevance in the name or nomenclature, the amount ought to have been allowed by the Tribunal, considering substance of the transaction. He further urged that the Assessing Officer’s finding that the commission paid is bogus is illogical and there is no question of any undue benefit to be availed either by assessee or its sister concern. Both the assessee and M/s. BGH Exim Limited are tax paying companies falling under the same tax bracket. There is thus no loss to the Revenue and when the intention of claiming any bogus expenditure to evade tax otherwise payable, is completely absent, the Tribunal ought to have confirmed the order of the CIT [A]. In support of his submissions, learned counsel has placed reliance on the decision of Apex Court rendered in case of Prakash Cotton Mills v. CIT, reported in 201 ITR 684 (SC). 7. Having heard learned advocate and on having examined extensively the material placed on record, we are of the firm opinion that both the Tribunal and the Assessing Officer were justified in not allowing the amount of commission for the reasons to follow hereinafter. 8. The said amount of commission is essentially paid for transfer of contractual obligation. It is an undisputed fact that as per the prevalent law, Page 7 of 14 O/TAXAP/729/2013 JUDGMENT licence was a must for importing the furnace oil. An application for such licence before the District Magistrate was made on 1 st January 2002 and it is also an undisputed fact that till the date, the assessee does not have a licence for acquisition, storage and sale of solvents, as required by the Solvent, Raffinate & Slop [Acquisition, Sale, Storage & Prevention of Use in Automobiles] Order, 2000. It is also not disputed that during the assessment year 2004­05, the assessee had entered into a contract with SSOE for purchase of furnace oil of a specified quantity and in the event of any failure in performing the contract, the same would attract penal and civil liability of compensation. The assessee on having realized that any import in absence of a valid licence, would attract criminal/penal proceedings, it approached its sister concern­M/s. BGM Exim Limited. On consent having been obtained from the sister concern, it approached SSOE and insisted to transfer the contract of import of 12500 MT of furnace oil in the name of its sister concern on the ground that there was some problem of discharge of cargo in the name of the assessee at Kandla Port. After much persuasion, SSOE agreed and allowed such contractual obligation to be transferred to its sister concern, of course; subject to assessee undertaking the responsibility of payment and materials. In the correspondence dated 1 st August 2003, SSOE wrote thus ­ Page 8 of 14 O/TAXAP/729/2013 JUDGMENT “With reference to the above, we would like to inform you that we have no general practice for transfer of the contract in other name. We have discussed with our Management and they have allowed only after M/s. Overseas Trading & Shipping Company Private Limited, Gandhidham take responsibility of payments and material also. You please confirm the above condition so we can transfer the contract in the name of “BGH EXIM LIMITED”. 8.1 It appears that on 8 th August 2003, commercial invoice was already prepared in the name of sister concern – M/s. BGM Exim Limited. 8.2 It could also be noticed that subsequently from M/s. BGH Exim Limited purchases were made by the assessee of the very product and it also sold a portion of such quantity to IFFCO. Under such circumstances, Tribunal chose not to allow the amount of commission under section 37 of the Act. 9. Section 37 (1) of the Act and its explanation is to be reproduced at this stage, profitably ­ 37 (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee) laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head “Profits and gains of business or profession”. Page 9 of 14 O/TAXAP/729/2013 JUDGMENT Explanation – For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure. 10. When the Solvent, Raffinate & Slop [Acquisition, Sale, Storage & Prevention of Use in Automobiles] Order, 2000 particularly prohibits importation of goods without a valid licence and when it also prohibits its acquisition, storage and sale, in exercise of the powers conferred by Section 3 of the Essential Commodities Act, 1955, no import legally could have been made by the assessee of such furnace oil without issuance of a requisite licence by the authority concerned. Admittedly, the sister concern which had a licence undertook to perform contractual obligation arising out of the contract between the assessee and the SSOE, one could notice that a request was made by the assessee to SSOE to allow its sister concern to carry out such contractual obligations, as otherwise, it would have incurred huge amount of damages. The amount that was needed to be paid to SSOE by way of damages would have been to the tune of Rs. 55 lacs and odd – which is a sum equivalent to 5% of the contract, if it would have failed in performing the contract. 11. Even assuming that the sister concern since had a licence for importing Page 10 of 14 O/TAXAP/729/2013 JUDGMENT the furnace oil, the assessee diverted its contractual obligation for averting the payment of damages, nothing comes on the record to explain as to how the sum termed as “commission” for performing the contract obligation was needed to be paid to the sister concern. 12. It also emerges from record that not only the assessee got the contract executed through its sister concern even by a valid licence held by the sister concern, the subsequent purchases from the sister concern of the very furnace oil, its storage and consequent sale to IFFCO appear to be in complete breach of the Solvent, Raffinate & Slop [Acquisition, Sale, Storage & Prevention of Use in Automobiles] Order, 2000 which explicitly prohibits any of these acts without a valid licence. 13. Even the nomenclature used as “Commission” is not taken into consideration and the character of payment in substance if it is to be looked at, nowhere it emerges that there was any valid claim for allowing the sum of Rs. 28 lakhs which was a consideration for transfer of contractual obligation. Even if there is no loss to the revenue because the revenue has recovered tax on the said amount from the sister concern, then also, when from the record itself, it writs large that the transaction is in contravention of the Solvent Order, 2000 and the entire modus is also apparent from the paper book produced by the assessee, disallowance by the Tribunal invoking its statutory power requires to Page 11 of 14 O/TAXAP/729/2013 JUDGMENT be sustained. 13.1 The decision sought to be relied upon in case of Prakash Cotton Mills v. CIT [Supra] does not deal with issue directly or indirectly. In the said case, the assessee had paid statutory due imposed by way of damages or penalty or interest and claimed it as an allowable expenditure under section 37 (1) of the Act. The Supreme Court held that the authority has to allow deduction under Section 37 (1) wherever such examination reveals that the concern impost to be purely compensatory in nature. However, such imports, wherever is found to be of composite in nature, that is partly of compensatory and partly of penal nature, the authority has to bifurcate the two components of the impost and give deduction of that component which is compensatory in nature and refuse to give deduction of that component which is penal in nature. 13.2 The appellant has failed to show as to how this amount of commission is compensatory in nature, which would entitle the appellant to avail the benefit of this decision. 13.3 No question of law, therefore, raise for interference. 14. As far as second issue is concerned, it pertains to deduction of expenditure amounting Rs. 1,65,172/= for sending mangoes to one Narayan V. Thosar through Air Wings. According to the assessee, this expenditure was Page 12 of 14 O/TAXAP/729/2013 JUDGMENT incurred for business promotion, to maintain good business relations with the supplier company and its associate enterprises. 15. CIT [A] allowed the claim on the ground that it was an expenditure incurred for sending mangoes to its supplier to maintain good business relation. 15.1 The Tribunal disallowed the same on the ground that there is no material on record to show as to how such a large quantity of mangoes could be consumed on one day or over few days and what business purpose was to be achieved by giving such large quantity of mangoes to one Mr. Narayan Thosar. In absence of any material on record to establish business expediency for sending the mangoes to one particular person, this ground was disallowed. 15.2 This Court in case of Sayaji Iron & Engineering Company v. CIT, reported in 253 ITR 749 had permitted expenditure in maintenance of vehicles used by the Directors for personal purposes. The Directors’ remuneration includes any expenditure incurred in providing benefit free of charges. The Court reversed the decision of the Tribunal on the ground that the Directors of the assessee­company, who are entitled to use the vehicles for their personal use in accordance with the terms and conditions on which they were appointed and the perquisites given to the directors formed part of their remuneration under the Explanation to section 198 of the Companies Act, 1956 for the Page 13 of 14 O/TAXAP/729/2013 JUDGMENT purpose of determining their remuneration under section 309 of that Act. It further held that once such remuneration was fixed as provided under section 309, it was not possible to state that the assessee incurred the expenditure for the personal use of the Directors. Since it was as per the terms and conditions of service, it must be held as a business expenditure. As no ground comes forth, nor there is any rationale for such huge business promotion expenditure incurred for supplying mangoes to a particular person, this authority will not come to the rescue of the assessee. 16. Both – on the ground that this issue essentially being in the realm of facts and secondly, on the smallness of the claim, we do not deem it fit to interfere, as no substantial question of law arises therein. 17. Resultantly, Tax Appeal is dismissed. No costs. {M.R Shah, J.} {Ms. Sonia Gokani, J.} Prakash* Page 14 of 14 "