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TMI Blog2017 (12) TMI 424X X X X Extracts X X X X X X X X Extracts X X X X ..... is as to whether the ld CITA was justified in upholding the disallowance of commission paid to three individuals in the sum of Rs. 10,81,079/- in the facts and circumstances of the case for which assessee had raised cross objection before us. 2.1. The brief facts of this issue is that the assessee is a partnership firm engaged in the business of manufacture of plastic pipes and fittings, sprinkler irrigation and drip irrigation system at the plant at Jaipur and also undertake the laying and jointing works of plastic pipes and fittings manufactured by them. The firm continued its business in the status of the partnership firm up to 19.1.2010 and w.e.f. 20.01.2010, it was converted into a limited company under the name and style of 'Nimbus Pipes Ltd' and all its assets and liabilities were transferred in the companies books and income tax return of the said company was filed independently for the period 20.1.2010 to 31.3.2010. The income tax return of the firm for the period 1.4.2009 to 19.1.2010 was electronically filed by the assessee on 28.9.2010 declaring total income of Rs. 11,26,840/- and refund was claimed at Rs. 1,34,694/- which was on account of excess tax deducted at sour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnet and concluded that the said company is engaged in the manufacture and supply of M.S.Ingots, Copper Ingots, Aluminium Alloy Ingots, Stainless Steel Ingots etc. He verified from the profit and loss account of M/s R.N.Forgings Pvt Ltd that it had received commission income only from M/s Nimbus Industries (assessee herein) amounting to Rs. 45,69,416/-. The ld AO observed that according to agreement, M/s R.N.Forgings Pvt Ltd was appointed to function from 1.4.2009. The responsibilities entrusted as per contract, clearly involves lot of travelling and communicating with prospective purchasers, dealers, customers etc. Certainly the said commission agent had to incur lot of expenses under the head travelling and telephone in addition to its established business of trading and supplyof iron and steel products. In this regard, he made the comparative chart of expenses incurred by R.N.Forgings Pvt Ltd as under:- AY 2010-11 AY 2009-10 Travelling 2,08,040 1,93,200 Telephone 1,58,352 1,99,091 Conveyance 23,100 1,04,655 Commission NIL 2,36,966 Courier 6,105 4,995 The ld AO came to a conclusion from the aforesaid table that R.N.Forgings Pvt Ltd did not undertake any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ied that M/s R.N.Forgings Pvt Ltd had raised its commission bill on 25.3.2010, but as the firm had converted into a company w.e..f. 19.1.2010 eventhough the same business was continued with the erstwhile partners as directors / shareholders, the bill component was bifurcated into two parts and the assessee firm has accounted for the portion of the work done upto 19.1.2010 only and the remaining portion has been accounted only in the books of the limited company i.e Nimbus Pipes Ltd. The assessee explained that due to business connections and market knowledge of M/s R.N.Forgings Pvt Ltd, the distributor of the assessee M/s NIPL was able to boost the sales of the products of the assessee from around Rs. 11 crores in Asst Year 2009-10 to Rs. 21 crores in Asst Year 2010-11 (being the year under appeal). The assessee argued that in hardware business, the same shopkeeper can sell M.S.Ingots and irrigation systems / fittings and the commission agent had adequate experience and connections locally. The assessee filed copies of the final accounts of R.N.Forgings Pvt Ltd to prove that it had duly declared commission income of Rs. 45,69,418/- for the year. The assessee also refuted the assert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts irrigation system & HDPE pipe has shown a marked improvement, both in quantitative and qualitative terms. While the sale through M/s. Nimbus Irrigation P Ltd. (NIPL) increased from Rs. 10.84 crores in A.Y. 2009-10 to Rs. 21.21 crores in A.Y. 2010-11, the assessee's sale through NIPL rose from 41% to 81% of the total sales in this segment. The following table explains it better:- Reasons for appointing Sales Agent M/s. R.N. Furging Pvt. Ltd. ACCT. YEAR SALE in lacs SALE TO NIPL in lacs % of Sale to NIPL % of Sale to others % INCREASE in Sales % INCREASE in Sales to NIPL 2007-08 1,175.44 879.09 0.75 0.25 2008-09 2,660.84 1,083.79 0.41 0.59 126.37 23.28 2009-10 2,632.92 2,121047 0.81 0.19 (1.05) 95.75 The AO had wrongly claimed that M/s. R.N. Forgings P. Ltd. has declared only Rs. 7,99,862/- as commission received by it. The AO wrongly took the figure for the earlier A.Y. 2009-10 and in the remand proceedings the same error has been made. The AO has not disputed that the commission recipient's office is located at Jaipur and that it is engaged hardware business in Rajasthan. As such the commission agent had business contacts on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o assessee's distributor M/s Nimbus Irrigation Pvt. Ltd. when the said M/s R.N. Forgings Pvt. Ltd. was appointed for the first time and had no previous experience in assessee's line of business and/or did not provide any specific service to earn such commission. 2. On the facts and circumstances of the case and in law, Ld. CIT(A) erred in not appreciating the fact brought on records by AO that M/s R.N. Forgings Pvt. Ltd. being manufactures & engaged in Iron & Steel related products, having no apparent experience to develop market for irrigation system and HDPE Pipes and that too without incurring expenses under the head travelling & telephone, conveyance commission and also without undertaking any activities towards identification of customer of plastic pipes/irrigation instruments and for procurement of order/realization of payment for the assessee. 3. On the facts and circumstances of the case and in law, the Ld. CIT(A) erred in passing an erroneous & perverse order disregarding the judgment of Hon'ble Supreme Court on definition of colorable device in Mc Dowell & Co. Ltd. 2.6. With regard to the commission paid to three other parties viz Omprakash Sharma, Mahendra Ku ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ove are difficult to accept. In these three cases above there are no agreements at all. These three persons had not been engaged in the earlier years and there is no appreciation in sales in the current year on account of payment of these commissions. It is not known as to what services were performed by them. The mere fact that the individuals have declared the commission income in their individual return is immaterial. The assessee is not able to dislodge the primary objection that there is no contract with the commission recipients at all. The assessee has not been able to file any document from the sellers also indicating the role of the commission recipients as it has done in the case of M/s R N Forgings P Ltd. In view of the above the disallowance of commission to these three persons is sustained. The AO shall however restrict the disallowance to the actual commission declared paid after correcting the figure in respect of Shri Mahendra Kumar Bhartia. As a result, in respect of ground of appeal Nos. 2,3,& 4 the assessee gets a relief of Rs. 44,55,078/- and the balance sum of Rs. 6,28,894/-, Rs. 1,49,989/- & Rs. 3,02,196/- totaling Rs. 10,81,079/- is confirmed. The assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 152 - 155 Copy of reply dated 07/21.02.2013 in response to letter dated 04.02.2013. 156 - 162 Copy of judgement of Lachminarayan Madan Lal vs. CIT (SC) reported in 86 ITR page 439 163 - 167 Copy of judgement of Kolkata High Court dated 14.03.2014 in the case of CIT vs. Inbuilt Merchant (P) Ltd. 168 - 170 2.9.1. We find that the ld CITA had given a finding that the assessee and NIPL are not associated concerns which is not controverted by the revenue before us with any cogent material. We find from the memorandum of association of M/s R.N.Forgings Pvt Ltd enclosed in page 122 of the paper book vide clause 3 of the main objects of the said company includes as under:- 3. To carry on business manufacturers, of designers, fabricators, assemblers, processors, exporters, importers, buyers, sellers, contractors, traders, distributors, agents, stockists, commission agents and dealers in machinery and engineering products of all type, hardware cutting tools, hand tools; precision measuring tools, instruments and apparatus, fitting steel structures, boilers and furnace proprietors. 2.9.2. From the perusal of the balance sheet of M/s R.N.Forgings Pvt Ltd enclosed in paper b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . The assessee had explained the entire transactions of commission payment to M/s R.N. Forgings Pvt. Ltd in the form of a detailed note before the ld AO vide letter dated 7.2.2013 para 5. 2.9.6. It is well settled that the revenue cannot sit in the armchair of the businessman and direct how a businessman should conduct his business. The businessman knows his interest best. Whether the necessity of incurrence of an expenditure on the basis of commercial expediency of the business is to be viewed from the point of view of the businessman and not from the point of view of the revenue. 2.9.7. The ld AO relied on the decision of the Hon'ble Supreme Court in the case of Lachminarayan Madanlal vs CIT reported in (1972) 86 ITR 439 (SC) to justify his action of disallowing the commission. In the facts before the Hon'ble Apex Court, the assessee firm mad repayment of commission to another firm which was not at all in existence when the commission agreement was entered into. Moreover, in the payee firm, the minor children and spouse of the partners of the payer firm (ie assessee firm) were partners. These facts were duly appreciated by the Hon'ble Apex Court and was held that the commission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the pages 97 to 110 of the paper book containing the commission bills raised by the agents, ledger account for the period 1.4.2009 to 19.1.2010 pertaining to the assessee firm and for the period 20.1.2010 to 31.3.2010 pertaining to Nimbus Pipes Ltd ( i.e. the company which had taken over the assessee firm on going concern basis), that due bifurcation of bill amount between 1.4.2009 - 19.1.2010 and 20.1.2010 - 31.3.2011 had been made and expenses booked accordingly in the respective books. There is no duplication of claim of bills. Apparently the commission agents are not aware of the conversion of the assessee firm into a private limited company. In any case, when the bills are duly bifurcated and no allegation of duplication of bills and claim of expenses thereon has been made by the revenue, this cannot be a ground on which the disallowance of expenses could be sustained. We find that the assessee had duly informed the assessee in writing that the commission has been paid to these parties for sales effected to certain parties which were given in its reply letter filed before the ld AO. The sales made to those parties had not been disputed by the revenue. We find that all thes ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "The facts of the case are considered. The action of the AO is held unreasonable since the rate of interest @ 18% p.a. is not excessive by market or commercial standards and the AO had himself allowed the rate of interest in the immediately preceding assessment year. As the loans are carried forward from the earlier years, the AO has not been able to show any specific reason to deviate from the earlier position. The case laws cited by the assessee also declare the interest rate of 18% as reasonable. Therefore, the disallowance of Rs. 1,92, 313/- is deleted and the ground of appeal Nos. 5 & 6 are allowed." 4.3. Aggrieved, the revenue is in appeal before us on the following grounds :- 4. On the facts and circumstances of the case in law, whether the Ld. CIT(A) was justified in allowing excess interest amounting to Rs. 1,92,313/- [@18% to persons covered u/s 40A(2)(b)] against AO's contention that payment of interest is excessive and unreasonable. 4.4. We have heard the rival submissions and perused the materials available on record including the paper book containing the following papers :- Description Paper Book pages filed before us Statement of Unsecured Loan with rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estion were private limited companies and they all had filed letters dated 4.3.2013 in the office of the ld AO confirming the loan transactions and had filed bank statements, sources of the funds advanced, audited accounts, PAN details and ID proof of their directors. Further the assessee pointed out before the ld CITA that the ld AO had himself accepted the loan amounts and has not disputed the same. As regards the utilization of the loan amounts, the assessee explained that the immediate utilization of the funds was to purchase raw materials and some fittings. The assessee filed copies of its bank account of Jaipur branch evidencing receipt and disbursal of the sums received as loans. It was argued that once the loans have been accepted as genuine and had been accepted as being utilized for business purposes, there is no reason to disallow the interest paid thereon in the assessment. 5.2. The ld CITA deleted the disallowance of interest amounting to Rs. 13,69,122/- by observing as under:- "In the remand proceedings the AO further raised an issue that the Bhiwani Branch of the assessee had Sundry debtor of Rs. 64 lakhs but no business activity was being carried out there. The A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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