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DCIT, Circle-49, Kolkata Versus M/s Nimbus Industries And Vice-Versa

2017 (12) TMI 424 - ITAT KOLKATA

Disallowance of commission paid - Held that:- In the instant case, there is no such finding recorded by the ld AO in his order. The revenue had not brought any material on record to prove that M/s R.N. Forgings Pvt. Ltd is a related concern of the assessee. The ld AO himself in the instant case had acknowledged the agreement for commission has been entered into on 18.3.2009 and the services are expected to be rendered by R.N. Forgings Pvt. ltd effective from 1.4.2009 onwards. Hence the reliance .....

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ay round i.e. the assessee firm had used the brand of Nimbus from NIPL and not as stated by the ld AO. - AR stated that the entire payments of commission to R.N. Forgings Pvt. Ltd had suffered service tax and were made by account payee cheques after due deduction of tax at source and TDS returns were duly filed with the income tax department. These facts are not disputed by the ld DR before us. CIT-A had rightly deleted the disallowance of commission paid to R.N. Forgings Pvt. Ltd - Decided .....

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as 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 these three commission agents had duly accounted for the commission received from the assessee in their respective income tax returns and paid taxes thereon. The business expediency of these commission payments also stands proved in as much as the assessee could achieve some reasonab .....

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assessee and the genuinity of the claims made by the assessee. In these circumstances, we hold that the lower authorities had erred in disallowing the commission payments to these three parties. Accordingly, the grounds raised in the cross objections of the assessee are allowed. - Disallowance of excess interest paid to persons covered u/s 40A(2)(b) - Held that:- It is not in dispute that these unsecured loans are brought forward from earlier years and terms and conditions of interest had be .....

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round it being excessive. In the instant case, in our opinion, the interest paid on unsecured loans at the rate of 18% per annum is not at all excessive compared to the other secured loans availed by the assessee. Hence we do not deem it fit to interfere with the order of the ld CITA in this regard. Accordingly, the Ground No. 4 raised by the revenue is dismissed. - Disallowance of interest on the loans availed by the assessee - Held that:- The assessee had duly submitted the complete utiliz .....

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s purposes is proved, the allowability of interest thereon u/s 36(1)(iii) is automatic. Hence we hold that the ld CITA had rightly deleted the disallowance of interest - I.T.A No. 859/Kol/2015 And C.O. No. 34/Kol/2015 - Dated:- 1-12-2017 - Shri M.Balaganesh, AM And Shri S.S.Viswanethra Ravi, JM For The Department : Shri Soumyajit Dasgupta, Addl. CIT For The Assessee : Shri S.S. Gupta, FCA Shri Arvind Agarwal, Advocate ORDER Per M.Balaganesh, AM 1. This appeal by the Revenue and Cross Objection b .....

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the disallowance of commission paid to M/s R.N.Forgings Pvt Ltd in the sum of ₹ 44,55,078/- in the facts and circumstances of the case. The interconnected issue to be decided in this regard is as to whether the ld CITA was justified in upholding the disallowance of commission paid to three individuals in the sum of ₹ 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 .....

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ansferred 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 ₹ 11,26,840/- and refund was claimed at ₹ 1,34,694/- which was on account of excess tax deducted at source by the party. 2.2. The ld AO observed that the assessee had debited expenditure towards paym .....

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xcept Aqueous Solution, all other parties to whom commission was paid in Asst Year 2010-11 were new. He also observed that the commission paid in the year under appeal had increased substantially as compared to that of Asst Year 2009-10. 2.2.1. Commission paid to R.N.Forgings Pvt Ltd - ₹ 44,55,078/- The assessee provided a copy of contractual agreement dated 18.3.2009 in connection with payment of commission to R.N.Forgings Pvt Ltd in respect of sales made by the assessee company to M/s Ni .....

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the necessity of making payment of commission to R.N.Forgings Pvt Ltd for effecting sales to NIPL who is already acting as a trusted distributor for the assessee. He observed that no prudent businessman would like to pay an agent for selling to its own distributor. He mentioned that there is no written agreement between assessee firm and NIPL. What is the nature of services rendered by R.N.Forgings Pvt Ltd for improving the sales of the assessee firm had not been proved by the assessee. The ld A .....

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s 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 ₹ 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 .....

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entification of customers of plastic pipes and irrigation instruments, procurement of order, realization of payments etc and accordingly disbelieved the services rendered by the said agent to the assessee warranting payment of commission. Based on these observations, he disallowed the commission of ₹ 44,55,078/-. 2.2.2. Commission paid to Mahendra Kumar Bharatia, Rajendra Kumar Bharatia and Omprakash Sharma The ld AO observed that the commission paid to aforesaid parties were in respect of .....

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ese two enterprises had reduced as compared to Asst Year 2009-10. The ld AO observed that there is no written agreement between the assessee and these three commission agents. Accordingly he concluded that the assessee had failed to establish the rendering of services by these agents for effecting payment of commission and accordingly disallowed the commission payments made to them. 2.3. Before the ld CITA, it was submitted that at the outset, M/s NIPL is not an associate concern of the assessee .....

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arty s main output is only of M.S.Ingots and it is not clear how this party can assist in the sale of irrigation systems and HDPE pipes. The ld AO also examined the profit and loss account of R.N.Forgings Pvt Ltd to conclude that this commission recipient did not have to incur any additional expenses for working as a commission agent for the assessee. The assessee clarified 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 .....

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/s NIPL was able to boost the sales of the products of the assessee from around ₹ 11 crores in Asst Year 2009-10 to ₹ 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 commis .....

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ion of tax at source and the TDS thereon had been duly remitted to the account of the Central Government and TDS returns filed accordingly. The ld AO in the remand report again reiterated that R.N.Forgings Pvt Ltd had reported commission income only to the tune of ₹ 7,99,862/- in its profit and loss account. This figure has been clarified by the assessee as being represented for the immediately preceding financial year i.e FY 2008- 09 relevant to AY 2009-10. The assessee explained that ear .....

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gings Pvt Ltd. 2.4. The ld CITA deleted the disallowance in respect of commission paid to R.N.Forgings Pvt Ltd in the sum of ₹ 44,55,078/- by observing as under :- After considering the above, it is noted that the whole set of arguments of the AO are seen to be based only on an assumption that M/s. R.N. Forgings P. Ltd. may not have done any business of commission agent. There is no field enquiry done by the AO and no statement has been recorded of the commission agents. In an armchair the .....

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sessee in its 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 ₹ 10.84 crores in A.Y. 2009-10 to ₹ 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 .....

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ted 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 the ground in this field. M/s. NIPL has also reported back to the commission agent in respect of the sales effected by it on a monthly basis. The claim of the AO that M/s. NIPL was already known to the assessee is not relevant because the AO cannot step into the shoes of the businessman and decide how the business is to be ca .....

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n ITA No. 225 of 2013 G.A. NO. 3825 of 2013 has rejected a similar approach of the Revenue and has held with reference to Section 32(2) of the Indian Evidence Act, 1872, that the AO cannot overlook the importance of the books of account maintained in the ordinary course of business. The Court held that the books of account maintained in the ordinary course of business are relevant and they cannot be discarded in the absence of appropriate reasons. In the instant case the AO has not brought any e .....

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nce has been made on a suspicion only and even here the AO has not been able to refute the contention of the assessee. In view of the same the disallowance of ₹ 44,55,078/- paid as commission to M/s. R.N. Forgings P. Ltd. is deleted and this part of the grounds of appeal is allowed . 2.5. Aggrieved, the revenue is in appeal before us on the following grounds :- 1. On the facts and circumstances of the case and in law, whether Ld. CIT(A) was justified in upholding assessee s contention of p .....

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s 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 t .....

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n of ₹ 6,28,894/- in respect of sales to Savitri Enterprises. The ld AO observed that in Asst Year 2009-10, the assessee had made sales of ₹ 2,61,92,343/- to M/s Savitri Enterprises without payment of any commission, but in Asst Year 2010-11, the sale to M/s Savitri Enterprises had reduced to ₹ 1,83,82,006/- and assessee further claimed that commission of ₹ 6,28,894/- was paid in respect of these sales. The assessee claimed that the party was not keen on carrying on the b .....

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mmission had been paid in respect of sales made to M/s Deep Construction Company and M/s Lucky Traders also in addition to the sales made to M/s Anjana Sprinkler & Supplier. The ld AO however disbelieved this argument as there was no agreement entered into with the said commission agent by the assessee. c) Similarly the assessee had claimed payment of ₹ 3,02,196/- to Shri Rajendra Kumar Bharatia in respect of sales made to M/s Jain Enterprises and M/s Shiva Sales Corporation totaling & .....

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sonal account by setting off this commission income with expenditure. 2.7. The ld CITA upheld the disallowance of commission paid to these three parties by observing as under:- The submissions of the assessee in these three cases above 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 .....

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ommission 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 ₹ 44,55,078/- and the balance sum of ₹ 6,28,894/-, ₹ 1,49,989/- & ₹ 3,02,196/- totaling ₹ 10,81,079/- is confirmed. The assessee gets partial relief. 2.8. Aggrieved, the a .....

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e was no services and/or to prove that any services were rendered by the said commission agents, and his such conclusions are based on his surmises and conjectures and hence not good in law and are grossly unjustified, erroneous and unsustainable, and are contrary to the facts and material on record. 2. Because that in the light of the documents on record and submissions before the lower authorities, the entire payment of commission totaling to ₹ 10,81,079/- ought to have been allowed as b .....

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udited A/c & Tax Audit Report of Nimbus Pipes Ltd. for the period 20.01.2010 to 31.03.2010. 70 - 90 Computation of Total Income of Nimbus Pipes Ltd. for 31.03.2010. 91 - 93 Statement of Commission paid by Nimbus Industries. 94 Copies of Commission Bills received from agents. 95 - 101 Ledger copy of the A/c of Commission payable as on 19.01.2010. 102 - 103 Ledger copy of the A/c of Commission agents from 20.01.2010 to 31.03.2010. 104 - 109 Photo copy of the Bank Statement showing payment to C .....

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39 163 - 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. .....

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r book, we find that it had offered commission income even in Asst Year 2009-10 to the tune of ₹ 7,99,862/-. This goes to prove that they are in commission agency business even in the earlier year. 2.9.3. The ld AO prepared a tabulation of expenses incurred by R.N.Forgings Pvt Ltd and came to a conclusion that they were incurred only for their routine business activities and no expenses were incurred by commission agent for deriving commission income. These observations are totally baseles .....

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M/s R.N.Forgings Pvt Ltd either u/s 133(6) or u/s 131 of the Act. No cross verification of the commission transactions were even made with the AO of the commission agent despite the entire details were placed before him on record. 2.9.5. It is a fact that the turnover of the assessee company had increased from ₹ 11 crores to ₹ 21 crores approximately during the year under appeal and had drastically come down in the immediately succeeding year, the moment the services of R.N.Forgings .....

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ings Pvt. Ltd had been duly acknowledged by the ultimate customer M/s NIPL on a monthly basis and hence the observation of the ld AO that no services were rendered by the commission agent stands nullified. It is to be noted that M/s R.N. Forgings Pvt. Ltd had acted as both purchase and selling agents to M/s NIPL which is evident from correspondences between them enclosed in pages A-2 to A-25 of the paper book. The assessee had explained the entire transactions of commission payment to M/s R.N. F .....

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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 fir .....

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case had acknowledged the agreement for commission has been entered into on 18.3.2009 and the services are expected to be rendered by R.N. Forgings Pvt. ltd effective from 1.4.2009 onwards. Hence the reliance on the decision of the Apex Court by the revenue is totally misplaced and is not applicable to the facts of the instant case before us. 2.9.8. With regard to the usage of brand name Nimbus by NIPL as observed by the ld AO, it would be relevant to note that M/s NIPL was incorporated on 13.9 .....

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and TDS returns were duly filed with the income tax department. These facts are not disputed by the ld DR before us. 2.9.10. In view of our aforesaid findings in the facts and circumstances of the case, we hold that the ld CITA had rightly deleted the disallowance of commission paid to R.N. Forgings Pvt. Ltd and no interference in the said order is called for. Accordingly, the Grounds 1 to 3 raised by the revenue are dismissed. 3. With regard to the disallowance of commission paid to three other .....

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closed 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 boo .....

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o 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 these three commission agents had duly accounted for the commission received from the assessee in their respective income tax returns and paid taxes thereon. The business expediency of these commission payments also stands proved in as much as the assessee could achieve some reasonable turnover wi .....

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he genuinity of the claims made by the assessee. In these circumstances, we hold that the lower authorities had erred in disallowing the commission payments to these three parties. Accordingly, the grounds raised in the cross objections of the assessee are allowed. 4. The second issue to be decided in the appeal of the revenue is as to whether the ld CITA was justified in deleting the disallowance of excess interest in the sum of ₹ 1,92,313/- paid to persons covered u/s 40A(2)(b) of the Ac .....

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st because these are for longer periods and are not required to be paid on demand. The ld AO however treated the rate of interest as excessive and restricted it to 15% p.a. leading to disallowance of ₹ 1,92,313/-. Before the ld CITA, the assessee pleaded that similar rate of interest was paid in Asst Year 2009-10 to the very same parties and the same were allowed by the ld AO. It was stated that the loans are old and carry forward from earlier years and rates paid are comparable to bank in .....

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te from the earlier position. The case laws cited by the assessee also declare the interest rate of 18% as reasonable. Therefore, the disallowance of ₹ 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 ₹ 1,92,313/- [@18% to persons covered u/s 40A(2)( .....

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omparative statement of interest paid to related parties in FY 07-08, 08-09 & 09-10 (interest paid @ 18% P.A.) 178 We find that the genuinity of the expenditure towards interest on unsecured loans is not disputed by the ld AO. It is always understood that the assessee had borrowed secured loans as well as unsecured loans and interest paid on secured loans would normally be lesser than the unsecured loans. Moreover, even on secured loans, the assessee had paid interest at the rate of 18.4995% .....

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erest paid even on secured loans. As long as the borrowed funds had been used for business purposes, merely because interest is paid to parties covered u/s 40A(2)(b) of the Act, the same cannot be disallowed on the ground it being excessive. In the instant case, in our opinion, the interest paid on unsecured loans at the rate of 18% per annum is not at all excessive compared to the other secured loans availed by the assessee. Hence we do not deem it fit to interfere with the order of the ld CITA .....

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at parties are not responding to notices and the assessee has not produced any loan agreement or documents to prove the business activities of the loan creditors. The assessee explained that all the loan creditors under question 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 t .....

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ted 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 ₹ 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 ₹ 64 lakhs but no business activity was being carried out there. The AO hinted that the assessee favoured its debtors with free funds. However, .....

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amounts as genuine and had not made any addition on that account. The AO has only disallowed the interest. Therefore, the disallowance of ₹ 13,69,122/- is held to be improper and is deleted. The ground of appeal Nos. 8 & 9 are allowed. 5.3. Aggrieved, the revenue is in appeal before us on the following grounds :- 5. On the facts and circumstances of the case and in law, whether the Ld. CIT(A) was justified in allowing interest payment of ₹ 13,69,122/- wherein the existence of lo .....

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