SHREE GOVIND BUILDNEED PRIVATE LIMITED V. ASSISTANT COMMISSIONER OF INCOME TAX

ITA/24/2019

AI Insights

The case involves Shree Govind Buildneed Private Limited, which appealed against the disallowance of commission expenses amounting to \\u20b9 97,98,305 by the Assistant Commissioner of Income Tax, Circle-4, Jaipur. The company, engaged in the business of pipes and sanitary wares, had its commission expenses disallowed during the Assessment Year 2013-14. The primary contention of the assessee was that the disallowance was arbitrary and lacked a rational basis, especially since similar expenses had been allowed in previous years with only marginal disallowances. The revenue authorities, however, found discrepancies and a lack of substantive evidence to support the commission claims, leading to a complete disallowance. The High Court, after reviewing the submissions and evidence, agreed with the lower authorities, emphasizing the need for proper verification and substantiation of such expenses.

• Counselvise Citation: [2019] 140 COUNSELVISE.COM (IT) 750703 (HC-RAJASTHAN)
• Appeal Type: Others
• Pronouncement Date: 16-07-2019
• Assessment Year: misc
• Other Referred Cases: Radhasoami Satsang vs. Commissioner of Income Tax, M/s Laxmi Engineering Industries vs. ITO, Kedarnath Jute Manufacturing Co. vs. Commission of Income Tax
• Laws Referred To: Income Tax Act
• Result in Favour of: Revenue
• Court: HIGH COURT
• Assessee Lawyers: SIDDHARTH RANKA
• Keywords: Assessment; Commission expenditure; Disallowance; Income tax appeal; Rule of consistency; Scrutiny; TDS
• Section: 143(3); 131; 260A

Judgement Text

"HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 24/2019 Shree Govind Buildneed Private Limited, Having Its Registered Address At C-30, Doctor Bunglow, Jhotwara Road, Bani Park, Shastri Nagar, Jaipur In The State Of Rajasthan. ----Appellant Versus Assistant Commissioner Of Income Tax, Circle-4, Jaipur Having Its Address At New Central Revenue Building, Statue Circle, Bhagwan Das Road, C-Scheme, Jaipur In The State Of Rajasthan. ----Respondent For Appellant(s) : Mr. Siddharth Ranka HON'BLE THE CHIEF JUSTICE HON'BLE MR. JUSTICE SANJEEV PRAKASH SHARMA Judgment REPORTABLE Per S. Ravindra Bhat, CJ. 16/07/2019 1. The assessee’s complaint in appeal under Section 260A of the Income Tax Act, is that the disallowance to the tune of ₹97,98,305/- is unsupportable, as it was made entirely on an arbitrary basis without rationale. 2. The assessee, inter alia, carries on business in pipes and sanitary wares and other fittings used in the construction of buildings. The company is also engaged in trading of irrigation pipes and fittings. In the Assessment Year (AY) 2013-14, the assessee declared its total income as ₹ 46,08,958/-. The AO who carried scrutiny under Section 143(c), assessed the income as ₹1,43,79,630/- and disallowed commission expenditure to the (2 of 6) [ITA-24/2019] tune of ₹ 97,98,305/-. The assessee’s appeal was rejected by the CIT(A). It approached the ITAT, unsuccessfully. 3. Learned counsel for the assessee points out that in all the previous years, especially in the last three years, similar commission expenditure was claimed and though the disallowance was made, it was only marginal. Learned counsel submits that the rationale for disallowance of 100% in respect of the commission paid to ten parties, was entirely arbitrary, since all the relevant documents, such as ITR, amount paid as well as the documentary evidence pertaining to each party were made available. 4. Attacking the approach of the revenue authorities, in adding entire amount, and disallowing the expenditure, the assessee submitted that the mere circumstance that three parties sent their representatives, despite repeated summons to ten of them and that small discrepancies were found in the explanation and documents given by such three parties, is tenuous and arbitrary. Explaining this aspect, learned counsel for the assessee submitted that the material on record showed that the assessee had discharged the burden of showing that the payments were made to its agents through banking channel, and as such, the presumption of regularity attached to them. 5. Furthermore, according to counsel, the assessee also deducted TDS while making payments and that the three parties who did approach the AO in answer to summons had, in fact, disclosed that the amounts were utilized for entirely subjective reasons and the assessee in these circumstances could not be found fault with. Lastly, the learned counsel for the assessee relied upon the rule of consistency and cited Radhasoami Satsang vs. Commissioner of Income Tax, (1991) 193 ITR 327. 6. At the outset, this Court notices that the issue of disallowance has been consistently and concurrently ruled against the assessee. The CIT(A) in this regard noticed that the assessee was impressed upon with the need for verification of commission expenses repeatedly in December, 2016 and January, 2017. (3 of 6) [ITA-24/2019] Despite this, the assessee did not produce a single witness. Summons were issued to ten witnesses under Section 131. Three from the list of ten persons replied. None of these individuals, in fact, appeared before the AO for verification and inquiry. Even the replies by the three parties were unsatisfactory. On this aspect, this Court notice that in Para 5.6, CIT(A) has extracted relevant details with respect to the concerned parties which shows, prima facie, that the amounts were deposited on a particular date and within two day the same or marginally higher amounts were withdrawn. 7. The assessee’s argument on this aspect was that it could not be expected to state why the amount was withdrawn but that, explanation as such could be valid and legitimate in the hands of the third parties. The CIT(A) pertinently held, as follows:- “5.4 In the adverse background of non-production any witness for commission payment, several adverse observations made by the AO in Para 4.6 does carry weight to adjudicate the matter because the increasing turnover by itself do not necessarily justify the increase in expenses. The relevant adverse observations of the AO are reproduced as under:- a. The assessee has paid commission of Rs.97,58,305/- on sales of Rs.15,66,26,437/- i.e. at average rate of 6.23% which is much higher in this trade or in any trade. d. No bills were furnished by any of the person for commission expenses. The assessee has so- moto paid commission to them. e. Sale bills do not contain name any of the broker or person alleged to the broker, so it cannot be verified that for which sales they have been paid commission. f. The commission paid varied from 4% to 8%. g. Commission has alleged to have been paid on sales to individuals also. 5.5 Though there cannot be strait-jacket formula for the percentage of commission, sales which may or may not carry commission expenses, and reasonable and justifiable level of commission expenses, the verification exercise intended and undertaken by the AO was precisely to come at right conclusion on (4 of 6) [ITA-24/2019] above aspects. It is precisely the failure of the appellant in producing witness of commission expenses the AO was under compulsion to make certain adverse observations as under:- b. Assessee’s non-commission sales was Rs. 7,88,90,251.45, if we calculate only commission part on this sale then it comes to Rs. 48,91,195/- where as the income as per return was Rs. 46,08,958/- which is below the figure. It means that the assessee has paid commission out of its pocket and not out of profits. Which is not possible in any business? c. During the year under consideration gross profit rate and net profit rate has been declined for which assessee failed to submit any justification. g. It was seen that for sale of some of the goods to a particular builder commission is shown to have been paid and for other sales to same builder no commission has been paid. 5.6 The replies received from three parties to whom commission is claimed to have been paid by the appellant, the following excerpted finding of the AO as mentioned in Para 4.5 on page 3 & 4 of the assessment order does not inspire to treat whole of commission expenses as genuine:- 1. Shri Ashok Kumar Baid:- He had submitted that he received commission of Rs. 3,31,470/- from M/s Shree Govind Buildned Pvt. Ltd. He had not mentioned the details of sales on which he received commission. He had not attended despite specifically written in the summon. On examination of Bank account it was found that on 01.01.2013 Rs. 2,98,323/- was deposited in his bank account and on 04.01.2013 Rs. 3,00,000/- were siphoned out. Since Shri Ashok Kumar Baid had not attended personally therefore, nature of work done by him cannot be verified. Withdrawal of Rs.3,00,000/- on 04.01.2013 cannot be verified. 2. Sri Sanjay Kumar Harlalka:- He did not attend the office on requisite date. He submitted reply on 26.02.2016 stating that he had received commission of Rs. 4,37,974/- from Shree Govind Bildneed Pvt. Ltd. he filed copy of ITR-V for the A.Y. 2013-14 and copy of Bank account was furnished. Gross total income of assessee was Rs.6,58,727/- this includes commission or not verifiable. On verification of (5 of 6) [ITA-24/2019] bank account it was found that Rs. 3,94,177/- was deposited on 07.03.2013 and on very next day Rs. 4,00,000/- was transferred to Shri Nand Kishore through RTGS Vide letter no.ACIT/Cir.- 4/92/2015-16/1918 dated 02.02.2016 Shri Sanjay Harlalka was again requested to attend this office on 04.03.2016. This letter was duly served upon him on 02.03.2016 but he did not attend. Signature on submission filed on 26.02.2016 and confirmation filed by the assessee during assessment proceedings were entirely different. 3. Shri Manoj Vyas:- He did not attend but furnished reply on 14.03.2016 stating that he received a sum of Rs.3,49,455/- on account of commission. On examination of bank account it was found that he received Rs.3,14,509/- on 28.03.2013 and on 29.03.2013 Rs. 3,14,539/- was transferred to Mahendra Kumar by RTGS. Shri Manoj Vyas is not filing return of income. Signature on submission filed on 14.03.2016 and confirmation filed by the assessee during assessment proceeding were entirely different. 5.7 There cannot be dispute to the ration laid down by the Hon’ble Rajasthan High Court in the case of M/s Laxmi Engineering Industries vs. ITO (2008) 215 CTR 0319 that for incurring of any expenditure during the course of business there is no requirement of any written agreement for the payment of commission. At the same time, the very conduct of business, relevant vouchers, accounting made and general instructions from time to time on subject by the businessman are always able to justify the claim of business expenditure when called upon by the AO. In this case there is visibly failure to do so by the appellant. I am surprised to note that none of above is present to defend the appellant and justify the ever increasing commission expenses. This is required of appellant when this issue is getting attention of the department since last three/four years. Therefore, the decision of the AO to not consider such unverifiable expenses is confirmed. In my considered view, the commission expenses claimed of Rs.97,58,305 is non-genuine and hence the same is confirmed.” 8. This Court is of the opinion that all three authorities i.e. AO, CIT(A) and ITAT scrutinized the record and held that the commission claimed, was not supportable in law and therefore, disallowed the deduction claimed, the only ground on which the (6 of 6) [ITA-24/2019] court could, if at all entertain the appeal is that the basis for such disallowance was entirely nonexistent. Such an argument in the opinion of the court is insubstantial in cases like present. 9. In court’s opinion, the reliance upon the so called rule of consistency in Radhasoami Satsang (supra) did not bar the revenue authorities from carrying out their task independently and as they did discharge in respect of the assessment in question. That in the past year or years, the orders made no doubt provide a guide as to the nature of business and the manner in which the assessing authorities adopted the method of assessing income. The method adopted by AO for completing the task, however, does not preclude in any manner the conducting of independent scrutiny of the material presented before the assessee in later years. The rule of consistency in the opinion of the court does not preclude the AO from conducting inquiry which he is bound by law to do, for determining in law what are the true and correct amounts, to determine the amounts legally chargeable as tax (Ref. Kedarnath Jute Manufacturing Co. vs. Commission of Income Tax, 82 ITR 363 (SC). 10. For the above reasons, no substantial question of law arises and the appeal is dismissed. (SANJEEV PRAKASH SHARMA),J (S. RAVINDRA BHAT),CJ Anil Makwana /10 "