TAKTAWALA GLASS IND. PVT. LTD. V. ASSTT. COMMISSIONER OF INCOME TAX

TAXAP/1058/2006

AI Insights

The case revolves around the appellant, Takhtawala Glass Ind. Pvt. Ltd., challenging the partial disallowance of a 5% commission paid to its associated concern, Govind Glass Industries Ltd., for introducing new clients. The Income Tax Appellate Tribunal had partly allowed the appellant's appeal, which led to the current appeal. The main legal contention was whether the Tribunal was justified in disallowing 2% of the commission under Section 40A(2) of the Income Tax Act, 1961, without proof of it being excessive. The High Court of Gujarat, referencing previous decisions, concluded that the authorities failed to demonstrate that the commission was excessive or unreasonable, leading to the allowance of the full commission.

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 694337 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 26-11-2014
• Assessment Year: misc
• Other Referred Cases: Commissioner of Income Tax III Vs. Ashok J. Patel, Commissioner of Income Tax-IV Vs. Sarjan Realities Ltd.
• Laws Referred To: Income Tax Act
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: VARUN PATEL
• Assessee Lawyers: J P SHAH; MANISH SHAH
• Keywords: Commission Payment; Disallowance; Associated concern; Excessive or unreasonable payment
• Section: 40A(2)

Judgement Text

"O/TAXAP/1058/2006 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL NO. 1058 of 2006 FOR APPROVAL AND SIGNATURE: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER =========================================================== 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 ? ================================================================ TAKTAWALA GLASS IND. PVT. LTD.....Appellant(s) Versus ASSTT. COMMISSIONER OF INCOME TAX....Opponent(s) ================================================================ Appearance: MR JP SHAH, ADVOCATE for the Appellant(s) No. 1 MR MANISH J SHAH, ADVOCATE for the Appellant(s) No. 1 MR.VARUN K.PATEL, ADVOCATE for the Opponent(s) No. 1 ================================================================ CORAM: HONOURABLE MR.JUSTICE KS JHAVERI and HONOURABLE MR.JUSTICE K.J.THAKER Page 1 of 9 O/TAXAP/1058/2006 JUDGMENT Date : 26/11/2014 ORAL JUDGMENT (PER : HONOURABLE MR.JUSTICE K.S.JHAVERI) 1. By way of this appeal, the appellant­ assessee has challenged the order dated 30.05.2005 passed by the Income Tax Appellate Tribunal [for short “the Tribunal”], whereby the appeal preferred by the assessee was partly allowed by the Tribunal. 2. The facts in brief are that the assessee had debited in profit and loss account a sum of Rs.4,51,160/­ as commission paid to its associated concern, Govind Glass Industries Ltd.(GGL). The assessee had paid this commission to Govind Glass Industries Ltd. in respect of sale made to three parties introduced to assessee by Govind Glass Industries Ltd. The three parties were introduced for the first time by Govind Glass Industries Ltd. in the year under consideration. The commission was paid at the rate of 5% of the sale. The Assessing Officer was of the view that Govind Glass Industries Ltd. is an associated company of the assessee and closely related to it. Therefore, there are heavy loss in the above said company whereas the assessee company is the only company of the group which is making profit. The assessing Officer disallowed the claim of commission payment by observing that the same was general and vague and not supported by any evidence. 2.1. Against the order of the Assessing Officer, Page 2 of 9 O/TAXAP/1058/2006 JUDGMENT the assessee filed an appeal before the Commissioner of Income Tax. The CIT(A) partly allowed the said appeal. Being aggrieved by the order of the CIT(A), the assessee filed an appeal before the Income Tax Appellate Tribunal. The Tribunal vide order dated 30.05.2005 partly allowed the said appeal. Hence, this appeal is filed at the instance of the assessee. 3. While admitting this appeal on 06.02.2007, the Court had formulated the following substantial question of law:­ “Whether on the facts and in the circumstances of the case, the Tribunal was justified in disallowing under Section 40A(2) 2% out of 5% commission paid by the appellant to Govind Glass Industries Ltd. without proof of its being excessive as required by the above provision ?” 4. Learned counsel for the appellant has taken us through the entire record and has submitted that the Tribunal has failed to appreciate the fact the Department has not discharged the onus of proving that payment 5% was excessive or unreasonable having regard to the fair market value of the services of Govind Glass Industries Limited or the legitimate needs of the business of the appellant or the benefit derived by or accruing to the appellant from services. Page 3 of 9 O/TAXAP/1058/2006 JUDGMENT 4.1. Learned counsel for the appellant further submitted that in view of the decision of this Court in the case of Commissioner of Income Tax III Vs. Ashok J. Patel, reported in [2014] 43 Taxmann.com 227(Gujarat), more particularly paragraph Nos. 8, which reads as under :­ “8. That the assessee who is in the business of transportation claimed disallowance with respect to motor bus rent paid to various persons for transportation contracts. The AO was of the view that the assessee has failed to produce any comparative market price and that the nature of work carried out by the aforesaid persons is general in nature. The AO disallowed Rs.15,49,163/­ for AY 2005­06 and Rs.14,97,668/­ for AY 2006­07 out of the total payment of bus rent under section 40A(2)(b). With respect to AY 2006­07 AO also made disallowance of Rs.93,25,426 made under section 40(a)(ia) of the Act by holding that the amendment carried out by Finance Act, 2010 can be held to be retrospective from AY 2005­06. Now, so far as the disallowance made under section 40A(2)(b) of the Act on the ground of motor bus rent is concerned, it appears that the AO disallowed 5% of the total payments towards motor bus rent by observing that the assessee has failed to reconcile the difference in payments as per tax audit report and as submitted during the assessment proceedings and had also not produced any comparative prices. The learned CIT(A) deleted the said disallowances by observing that the AO has not made out any case for excessive or unreasonable payments to the related purpose towards the motor bus rent. The learned CIT(A) also observed that no comparative prices for similar transport services was cited by the AO and therefore, was not justified in making ad­hoc disallowance of 5% under section 40A(2)(b) of the Act and therefore, the CIT(A) as such rightly Page 4 of 9 O/TAXAP/1058/2006 JUDGMENT deleted the disallowances made under section 40A(2)(b) of the Act. Considering the provisions of Section 40A(2)(b) of the Act and the Evidence Act, if the AO was of the opinion that the payment for which disallowance is claimed, is excessive or unreasonable. In that case, it was for the AO to assess fair market price and give comparative instances for payment for similar transport service. In absence of such comparative cases brought on record, as rightly observed by the ITAT it was not open for the AO to make disallowance under section 40A(2)(b) of the Act. While deleting disallowance made by the AO under section 40A(2)(b) of the Act, the learned ITAT has observed and held in para 7 as under :­ 7. It is plain on principle that, so far as disallowance under Section 40A(2) for payment being excessive or unreasonable can only be made when the payment is made to the specified persons under clause 40A(2)(b) and the Assessing Officer is of the opinion that such expenditure is excessive or unreasonable having regard to the fair market price of the goods, services or facilities for which the payment is made. The opinion of the Assessing Officer for the expenditure being excessive or unreasonable is to be formed vis­a­vis fair market price of such goods services or facilities. It is thus sine qua non for making a disallowance under section 40(A)(2) that the Assessing Officer has to ascertain the fair market price of such goods, services or facilities, and then make a disallowance for the amount which is in excess of fair market value of such goods, services or facilities. Unless there is a categorical finding about the fair market value and the assessee has an opportunity to be heard on Assessing Officers finding about such fair market value, there cannot be an occasion to make a disallowance under section 40A(2). The very scheme of Section 40A(2) does not envisage an adhoc disallowance as has been made in the present case. For this short reason Page 5 of 9 O/TAXAP/1058/2006 JUDGMENT alone, the impugned deletion of disallowance must stand confirmed. There is, however, one more reason for doing so. As evident from a plain reading of the assessment order, the Assessing Officer, had called upon the assessee to demonstrate that the payment made by the assessee to the specified persons is not unreasonable or excessive, and it is thus failure of the assessee which has resulted in disallowance under section 40A(2). However, proving a negative, as the assessee has been called upon to do in this case, is an impossible onus to perform. In any event, this onus is on the Assessing Officer and the AO has failed to discharge the said onus. For this reason also, the disallowance is unsustainable in law. As regards the discrepancy in the figures of the tax audit report and the assessee, neither such a situation can be a reason enough to make a disallowance under section 40A(2) nor the onus of explaining such a variation is on the assessee. A tax auditor is an independent professional and any errors in his report cannot be put to assessees disadvantage. In view of these discussions, as also bearing in mind entirety of the case, we approve the conclusions arrived at by the CIT(A) and decline to interfere in the matter. We are in complete agreement with the view taken by the ITAT and the observations made by the learned ITAT while deleting disallowances made by the AO under section 40A(2)(b) of the Act on motor bus rent. No error has been committed by the learned ITAT which calls for interference of this Court. No question of law much less any substantial question of law arises. 4.2. Learned counsel for the appellant relied upon another decision of this Court in the case of Commissioner of Income Tax­IV Vs. Sarjan Realities Ltd. reported in [2014] 50 taxmann.com 52 (Gujarat), Page 6 of 9 O/TAXAP/1058/2006 JUDGMENT more particularly paragraph No.5, which reads as under:­ 4. Heard Shri Varun Patel, learned advocate for the revenue. Now so far as question no. 2(a) with respect to disallowance of Rs.1,22,13,280/­ made by the AO u/s 40A(2)(b) of the Act being excessive interest paid to associates is concerned, it is required to be noted that it is the contention on behalf of the revenue that as such the company paid the interest at different rates from different persons / companies and therefore, the same was rightly disallowed under Section 40A(2)(b) of the Act. However, it is required to be noted that except aforesaid there was no basis for the AO to come to the conclusion that amount of interest paid at the rate of 12% would relate to the concerned parties was otherwise excessive and/or unreasonable. It is not the case on behalf of the revenue that considering the market rate the aforesaid interest charged at the rate of 12% can be said to be excessive and /or unreasonable. Under the circumstances, solely because the assessee for whatever reasons/ consideration charged the interest at different rates by that itself cannot be a ground to come to the conclusion that charging of interest at higher rate than charged from other party was excessive and/ or unreasonable. Under the circumstances, both the learned CIT(A) as well as learned ITAT have rightly deleted the disallowance of Rs. Rs.1,22,13,280/­ made by the AO u/s 40A(2)(b) of the Act. We are in complete agreement with the view taken by the learned Tribunal. Under the circumstances, question no. 2(a) is answered against the revenue. 5. As against this, Mr. Patel, learned advocate for the respondent has strongly urged that all the Page 7 of 9 O/TAXAP/1058/2006 JUDGMENT three authorities have concurrently held against the appellant. Therefore, he urged that the order of the Tribunal is just and proper and does not warrant any interference by this Court. 6. We have heard learned advocate for the parties and perused the material on record. If we go through paragraph No.3.1 of the Assessing Officer’s order, wherein the Assessing Officer held relating to the question framed in this appeal i.e. commission of Govind Glass Industries limited, we see no germane reason in the finding of the Assessing Officer in concluding against the appellant. 7. Further, the CIT(A) while partly allowing the appeal of the assessee has again in paragraph No.8 has held that the commission payment to GGL was justified but the CIT(A) has not given any reason why the total sales of 5% should not be granted. Similar mistake came to be committed by the Tribunal. The Tribunal again fall into error while partly allowing the appeal of the assessee. The Tribunal has also not given any germane reasons why 5% interest is not allowed. Further, it appears from the record that the appellant has produced the evidence before the Tribunal. Therefore, the decisions relied upon by the learned advocate for the appellant would enure for the benefit of the appellant. 8. Taking into consideration the aforesaid facts and circumstances of the case and also the Page 8 of 9 O/TAXAP/1058/2006 JUDGMENT principle laid down by this Court in the case of Ashok J. Patel (supra) & Sarjan Realities Ltd. (supra), it cannot be said that the Tribunal was right in granting 3% commission out of 5% to Govind Glass Industries Ltd. 9. In the result, the appeal is allowed. Accordingly, the question posed in this appeal is answered in favour of the assessee and against the revenue. The order of the Tribunal stands modified to the said effect. (K.S.JHAVERI, J.) (K.J.THAKER, J) pawan Page 9 of 9 "