RAJENDRA KUMAR KASLIWAL V. ASSIT COMMISSIONER OF INCOME TAX

ITA/648/2009

AI Insights

The case involves Rajendra Kumar Kasliwal, the appellant, who challenged the judgment and order of the Tribunal regarding the disallowance of a sale commission paid to relatives. The primary legal issue was whether the Tribunal was correct in law in upholding the order of the CIT(A) and confirming the disallowance of the sale commission paid at 5% to relatives, to the extent of 50% under Section 40A(2)(b) of the IT Act. The Tribunal found that the commission payments lacked proper evidence and verifiability, justifying the disallowance.

• Counselvise Citation: [2017] 140 COUNSELVISE.COM (IT) 762439 (HC-RAJASTHAN)
• Appeal Type: Others
• Pronouncement Date: 29-05-2017
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax vs. Udaipur Distillery Company Ltd., Commissioner of Income Tax vs. Grinar Construction Co., Commissioner of Income Tax vs. Indo Saudi Services (Travel) (P) Ltd., Commissioner of Income Tax vs. Brij Pal Sharma
• Laws Referred To: Income Tax Act
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: K D MATHUR; R B MATHUR
• Assessee Lawyers: TIKAM JAIN
• Keywords: Commission Disallowance; Income tax appeal; Relatives; Sale Commission; Statistical Purpose
• Section: 40A(2)(b)

Judgement Text

"HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 648 / 2009 Rajendra Kumar Kasliwal ----Appellant Versus Assit Commissioner Of Income Tax ----Respondent _____________________________________________________ For Appellant(s) : Mr. Tikam Chand Jain For Respondent(s) : Mr. K.D. Mathur for Mr. R.B. Mathur _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE DR. JUSTICE VIRENDRA KUMAR MATHUR Judgment 29/05/2017 1. By way of this appeal, the appellant has challenged the judgment and order of the Tribunal whereby the Tribunal has allowed the appeal of the department for statistical purpose and cross objection is partly allowed. 2. While admitting the appeal, this Court on 7th December, 2009, has framed the following substantial questions of law: “(1) Whether in the facts and in the circumstances of the case the Hon’ble Tribunal is correct in law in upholding the order of ld. CIT(A) and confirming disallowance of sale commission paid @ 5% to relatives, to the extent of 50% under Section 40A(2)(b) of the IT Act?” 3. We have heard the counsel for the parties. 4. Counsel for the appellant has also taken us to the order of AO, wherein it has been observed as under: “The assessee has made commission on sale of Rs. 4,90,727- out of which Rs. 4,49,861/- was paid to the (2 of 9) [ITA-648/2009] family members as under:- 1. Shri Manish Kasliwal _ Rs. 2,46,864/- 2. Reetika Jain _ Rs. 1,07,439/- 3. Avnish Kasliwal _ Rs. 95,558/- The assessee was asked to explain why the commission payment made to the family members be not disallowed. In reply to that vide his written reply filed on 16-10-2007 the assessee has stated as under:- “Assessee has paid commission on sale to five persons including 3 family members- the rate of commission being 5% on value of sales uniformly to all the 5. All the 3 family members namely Sh. Manish Kasliwal & Sh. Avnish Kasliwal (Sons) and Reetika Jain are rendering whole-time services of bringing foreign customer to assessee’s showroom, by canvassing and meeting them in hotels, sight seeing places like Amber, City Palace etc. In assessee’s case, this is the most effective mode of getting customers, since assessee’s showroom is located in a residential area and not in a commercial place where walk in customers could come in good numbers. Not all customers brought to the showroom buy goods. Commission is paid only when a sale takes place. Assessee has complete record linking each sale with name of the person bringing the customer to show room- nature of goods sold the value of goods sold etc. No taxi driver, tour operator or guide brings any customer nor is there is any walk-in customer sales. Taxi drivers etc. demand commission at much higher rates which the assessee is unable to pay hence no customers through them. Assessee has been following this practice of paying commission since last so many years, which has always been accepted as genuine finally in assessments u/s 143(3) in past years also even in case of the above close relatives (details for last 3 years enclosed). Reetika Jain is a qualified Gemologist. She stood first in exam in “Diploma in Gem Identification” course conducted Gem & jewellery Export Promotion Council (Sponsored by Ministry of Commerce, Govt. of India). She has also passed the Gemology Diploma Exam of Great Britain. With all these outstanding qualifications and being a smart lady she is well qualified to render services of bringing foreign customers- mostly ladies to the showroom”. 4.1. And also the order of CIT(A), wherein it has been observed as under: (3 of 9) [ITA-648/2009] “I have considered facts of the case and arguments taken by Sh. Mathur quite carefully. After going through the copies of evidence produced by Sh. Mathur it is noticed that on the letter head of appellant it was written that certain sales were booked through the efforts of those persons to whom commission was paid and thereafter on the basis of self made vouchers the commission @ 5% of sales was credited in the account of those persons to whom salary was also paid. The basic evidence is the invoice itself from which it could have been verifiable that whether said sales has been procured through the persons to whom commission has been paid or there could have been any independent evidence in the form of correspondence etc. but no such evidence could have been produced. Considering such non verifiability when A.O. has disallowed only 50% of the commission claimed in respect of the related persons within the meaning of S.40A(2)(b) of the I.T. Act then in my considered view he was fully justified in making aforesaid disallowance of Rs. 2,24,930/- which is hereby confirmed by rejecting relevant ground of appeal. 4.2. He also drew our attention to para 9 and 10 of the order of the Tribunal, which reads as under: 9. In support of this objection the Ld. AR referred details of commission paid during the A.Y. under consideration and in A. Yrs. 2002-03 to 2004-05, copies whereof have been placed at page Nos. 14 to 16 of the paper book filed on behalf of the assessee with this certificate that these documents were filed before the Ld. CIT(A). The Ld. AR also referred page Nos. 18 to 28 of the paper book wherein copies of assessment order u/s143(3)/254 for A.Y. 1997-98 accepting payment of commission @ 5%, details of commission paid during A.Y. 1997-98, and SFT wise sales linking with commission paid have been made available. The Ld. DR on the other hand tried to justify the first appellate order on the issue. 10. Considering the above submissions we find that the first appellate order on the issue is reasoned one upholding the disallowance of 50% of the claimed commission in respect of related persons within the meaning of S.40A(2)(b) in absence of its verifiability and proper evidence. The Ld. CIT(A) has noted that on the letter head of the assessee furnished in support of the claimed payment of commission, it was written that certain sales were booked through the efforts of those persons to whom commission was paid and thereafter on the basis of self made vouchers the commission @5% of sales was credited in the accounts (4 of 9) [ITA-648/2009] of those persons to whom salary was also paid. Thus, the basis evidence remained the invoice itself from which it could have been verifiable as to whether the said sales have been procured through the efforts of persons to whom commission was paid or there could have been any independent evidence in the form of correspondence etc. to support the genuineness of the claimed commission payment. Considering these material aspects we are of the view that the Ld. CIT(A) has rightly upheld the disallowance made by the AO. The objection No.2, is accordingly rejected.” 5. He relied upon the following decisions: 5.1 Commissioner of Income Tax vs. Udaipur Distillery Company Ltd. (2009)316 ITR 426 (Raj.), wherein it has been observed as under: 3. The matter was carried in appeal, and the learned CIT(A) deleted the additions. The learned CIT(A) had found that it is a fact on record that this issue has already been examined in the earlier assessment years by the AO while completing assessment under Section 143(3), and they have accepted the claim of the assessee with regard to payment of lease rent. 4. The Revenue carried the matter in appeal before the Tribunal, and the learned Tribunal found that the assessee has been paying this amount as per the agreement in earlier years, which was allowed in the assessment made under Section 143(3) and there is no change in the factual position from the earlier years vis-a-vis the instant year, and lease rent continues to be paid at the same level, and it was also held that there is no material worth the name with the AO justifying deviation from the earlier stand taken by the Revenue, in not accepting this payment of lease rent as per the agreement. Thus, it was found that the CIT(A) rightly dealt with the matter in allowing the assessee's claim. 10. since the question as framed comprehends the aspect that the deletion of addition has been made by ignoring relevant considerations which were required to be taken into account in terms of Section 40A(2)(a). But it is not the function of the Tribunal to determine the remuneration which in their view should be paid to an employee of the assessee. An employer in fixing (5 of 9) [ITA-648/2009] the remuneration of his employees is entitled to consider the extent of his business, the nature of the duties to be performed, and the special aptitude of the employee, future prospects of extension of the business, and a host of other related circumstances. 11. But it is not the function of the Tribunal to determine the remuneration which in their view should be paid to an employee of the assessee. An employer in fixing the remuneration of his employees is entitled to consider the extent of his business, the nature of the duties to be performed, and the special aptitude of the employee, future prospects of extension of the business, and a host of other related circumstances. 12. In our view, these two judgments are complete answer to the question to the effect that the learned CIT(A) and the learned Tribunal had not ignored the relevant considerations which were required to be taken into account in terms of Section 40A(2)(a) of the Act.” 5.2. Commissioner of Income Tax vs. Grinar Construction Co.(2003) 261 ITR 463 (Raj.), wherein it has been observed as under: Though they are relatives Rs. 1,000 per month to a person for the work they have done in our view cannot be said to be unreasonable. Otherwise, also that finding of fact the Tribunal that salary paid to Sumati and Padam Kumar is for the purpose of business and accounted for it cannot be said unreasonable in the facts and circumstances of the case. 6. Secondly he contended that in the earlier year the same expense were allowed. He has also relied upon the decision of Bombay High Court in Commissioner of Income Tax vs. Indo Saudi Services (Travel) (P) Ltd. (2009) 310 ITR 306 (Bom), wherein it has been observed as under: “Business disallowance under Section 40A(2)- Excessive or unreasonable payment Commission payment to sister concern-Assessee's business was that of being general sales agents of Saudi Arabian Airlines. It earned commission at the rate of 12 per cent from Saudi Arabian Airlines on the tickets (6 of 9) [ITA-648/2009] booked/sold by them. Assessee appointed several agents including its sister concern and paid incentive commission to such agents by way of handling charges. AO held that incentive paid to sister concern was more than sub-agents and disallowed excess commission paid to sister concern at the rate of 1/2 per cent which was confirmed by CIT(A). (i) That the assessee apart from paying handling charges @ 9 1/2 per cent to its sister concern, have paid handling charges at the same rate to other agents viz., M/s A.K. Travels, M/s Om Travels and M/s Jet Age Travels. (ii) For asst. yrs. 1986-87 and 1987-88 the assessee had paid the handling charges @ 10 per cent to the sister concern of the assessee and such charges paid were considered to be reasonable by the appellant, (iii) For asst.yrs. 1989-90 and 1990-91 the assessee had reduced the payment of handling charges to 9 1/2 per cent to its sister concern. The AO has considered the payment of commission to the sister concern in the asst. yr. 1989-90 and allowed the claim after due scrutiny. For asst. yr. 1990-91 also the claim of the assessee @ 9 1/2 per cent has been allowed though the same has not been dealt with by the AO specifically in the order. (iv) For asst.yrs. 1993-94 and 1994-95 the assessment has been made by the AO under Section 143(3) and handling charges paid to the sister concern @ 9.5 per cent have been considered to be reasonable and allowed. In view of the aforesaid admitted facts we are of the view that the Tribunal was correct in coming to the conclusion that the CIT(A) was wrong in disallowing half per cent commission paid to the sister concern of the assessee during the asst. yrs. 1991-92 and 1992- 93.” 7. With regard to third contention that commission paid @ 5% to relatives, he relied upon the decision of Punjab and Haryana High Court in Commissioner of Income Tax vs. Brij Pal (7 of 9) [ITA-648/2009] Sharma (2011) 333 ITR 229 (P and H), wherein it has been observed as under: “Business disallowance under Section 40A(2) - Excessive or unreasonable payment Hire charges of truck--The revenue raised the question of law whether Tribunal was right in law in affirming decision of CIT(A) in deleting addition of Rs. 4,00,000 made by AO under Section 40A(2) on account of truck hire charges, holding that AO had not demonstrated in what manner charges were excessive, disregarding the fact that charges were paid to assessee's son at rate per trip instead of normal practice of monthly rent. AO had ordered a deletion from out of machinery hire charges paid to S by asserting that same were on higher side. The second question raised by the appellant-revenue pertains to the payment of Rs. 18,75,875 to M/s. Satyen Enterprises. Out of this amount, the Assessing Officer ordered the deduction of Rs. 4 lakhs alleging that excessive payments were made to M/s. Satyen Enterprises. Thus viewed, it is not possible for us to accept that the Assessing Officer could have invoked Section 40A(2)(b) of the Act. The aforesaid provision can be invoked in case, an assessee incurs\"... excessive and unreasonable charges...\" favouring a relative of the assessee. Since the charges paid to M/s. Satyen Enterprises were admittedly less than the charges paid to M/s. Mehta Construction Company. We are of the view that the Assessing Officer could not have validly invoked Section 40A(2) (b) of the Act to order a deduction of a sum of Rs. 4 lakhs out of the truck charges/expenses incurred by the respondent- assessee favouring M/s. Satyen Enterprises.” 8. Lastly he contended that principle which have been applied was his own conclusions on material for which he relied upon the judgment of Gujrat High Court in Voltamp Transformers (P.) Ltd. vs. Commissioner of Income Tax (1981) 129 ITR 105 (Gujrat), wherein it has been observed as under: “if the Tribunal has applied wrong principles of law and has relied upon incorrect principles of law for arriving at its conclusion on facts, then those conclusions which become in such cases mixed questions of law and fact are vitiated and it is open to this court, in exercise of its jurisdiction under s. 256 of the I. T. Acts, to arrive at its own conclusions in the light of facts which are otherwise not in dispute or facts which otherwise emerge from the materials on record. Under s. 40A(2)(a) what the ITO has to decide is whether the expenditure in question is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made. In our opinion, the Tribunal has proceeded on a wrong footing of law altogether when it emphasised again and again in its order that the two ladies, Urmilaben and Kusumben, who were two of the partners in the firm of Voltamp Associates, had not attended personally to the work of the firm and had left it to J. P. Patel, (8 of 9) [ITA-648/2009] an employee of the partnership firm, to attend to the work of the firm. Thus, taking an overall picture on the ground of fair price for the services rendered by the sole selling agents, it cannot be said that the commission paid was exorbitant or excessive or unreasonable, nor can it be said that Voltamp Associates were selected by the assessee-company as their sole selling agents simply because two of the partners of Voltamp Associates were wives of two of the directors of the assessee-company and the third partner, B. H. Patel, was a director of the assessee- company. If services are in fact rendered by the sole selling agent, it is immaterial whether the partners of the sole selling agency firm personally do not attend to the work or get the work attended to by their employees. The question is whether services were in fact rendered by the sole selling agents to the principal, the manufacturer-assessee in this case, and, secondly, whether the remuneration which was paid to them was the fair market value for the services rendered by them. It is well-settled law that so far as the questions of commercial expediency and business needs of an organisation are concerned, it is not the view-point of a revenue officer which should count but it should be the view-point of an ordinary business man dealing with a situation like the one faced by the particular assessee in question. It is, therefore, from that particular view-point that the question has to be approached.” 9. He has also taken us to the observations made in the note which is reproduced and second amendment which came into force more particularly in paragraph 72 and 74, which reads as under: “72. The reasonableness of any expenditure is to be judged having regard to the fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession or the benefit derived by, or accruing to, the taxpayer from the expenditure. 74. the Income-tax Officer to scrutinise the reasonableness of the expenditure with reference to the criteria mentioned in the section. The Income-tax Officer is expected to exercise his judgment in a reasonable and fair manner. It should be borne in mind that the provision is meant to check evasion of tax through excessive or unreasonable payments to relatives and associate concerns and should not be applied in a manner which will cause hardship in bona fide cases.” 9.1. He contended that the expenses are reasonable and salary was meagre and considering the same all the authorities have seriously committed an error in not allowing the commission. 10. Counsel for the respondent Mr. Mathur, has contended that the commission to the extent of 2.5% was allowed and in that (9 of 9) [ITA-648/2009] view of the matter, no interference is called for. 11. Taking into considerations the observations made by the Tribunal, the expenses which are not allowed under 40A(2) in paragraph 10, as reproduced hereinabove, we are of the opinion that the view taken by the Tribunal is just proper. 12. The issue is answered in favour of the Department against the assessee. 13. The appeal stands dismissed. (VIRENDRA KUMAR MATHUR),J. (K.S. JHAVERI),J. b.m. gandhi/46 "