TMI Blog2023 (11) TMI 800X X X X Extracts X X X X X X X X Extracts X X X X ..... onable /fair market value of rate of interest on loan, the entire exercise of the Revenue authorities below, we hold, fails. Neither the AO nor the Ld.CIT(A) have demonstrated as to how the rate of interest applied by them was the fair rate , nor have they demonstrated as to how the rate applied by the assessee was unreasonable. As in the case of CIT vs NEPC India Ltd. [ 2006 (12) TMI 129 - MADRAS HIGH COURT] has held that there should be some material available for the assessing officer for invoking section 40A(2)(a) to initiate action to disallow excessive or unreasonable expenditure. That before taking any final decision by invoking the power u/s 40A(2)(a) such decision should be based on reasons well founded which are judiciously acceptable. This proposition was reiterated in another decision in the case of CIT vs Forbes Tea Brokers [ 2009 (6) TMI 50 - MADRAS HIGH COURT] The conditions to be fulfilled for applying the provisions of section 40A(2) of the Act were clearly not satisfied in the present case. Disallowance, therefore, made in the case of the assessee by treating 15% rate of interest as the reasonable rate of interest, as opposed to 18% claimed by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... established the genuineness of the claim of commission expenses and denial of the same is uncalled for, and therefore, the AO is directed to allow the claim of commission expenditure. Decided in favour of assessee. - Smt. Annapurna Gupta, Accountant Member And Miss Suchitra Raghunath Kamble, Judicial Member For the Assessee : Shri M.K. Patel, Adocate For the Revenue : Shri Rohit Asasudani, Sr.DR ORDER PER ANNAPURNA GUPTA, ACCOUNTANT MEMBER These are two appeals by the assessee both against orders passed by the Ld.CIT(A) u/s 250(6) of the Act, one confirming additions made by the AO to the income of the assessee in order passed u/s 143(3) of the Act and the other confirming levy of penalty under section 271(1)(c) of the Act on the additions confirmed by the Ld.CIT(A). The ld.CIT(A) s orders are dated 25.3.2015 and 4.1.2019 respectively and pertain to assessment year 2010-11. Both the appeals being connected were heard together and are being disposed of by this common order. 2. First we take up the assessee s appeal in quantum proceedings in ITA No.1236/Ahd/2015. 3. Ground no.1 raised by the assessee reads as under: (1) That on facts and in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to allow the interest payment at 15% and the disallowance is worked out at 3%. This ground is partly allowed. 6. The arguments of the ld.counsel for the assessee before us was that: In terms of section 40A(2) of the Act the onus to prove that the interest claimed by the assessee was excessive was on the Revenue and neither the AO nor the ld.CIT(A) had established this fact before restricting the interest paid by the assessee from 18% to 15%; that in any case the Directors had paid taxes on the interest income earned at the maximum marginal rate, and therefore, it was a tax neutral exercise warranting no disallowance in the case of the assessee. 7. The ld.DR, however, relied on the order of the ld.CIT(A), though he was unable to controvert the contention of the ld.counsel for the assessee that neither the AO nor the ld.CIT(A) had established in any way that the interest paid by the assessee to the directors at the rate of 18% was excessive. 8. We have heard both the parties. The issue before us relates to the disallowance of interest expenditure paid to the directors in terms of section 40A(2)(b) of the Act. As per the provisions of section 40A(2), the expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber or any other company carrying on business or profession in which the first mentioned company has substantial interest; (v) a company, firm, association of persons or Hindu undivided family of which a director, partner or member, as the case may be, has a substantial interest in the business or profession of the assessee; or any director, partner or member of such company, firm, association or family or any relative of such director, partner or member; (vi) any person who carries on a business or profession, (A) where the assessee being an individual, or any relative of such assessee, has a substantial interest in the business or profession of that person; or (B) where the assessee being a company, firm, association of persons or Hindu undivided family, or any director of such company, partner of such firm or member of the association or family, or any relative of such director, partner or member, has a substantial interest in the business or profession of that person. 9. In the facts of the present case, as rightly pointed out by the ld.counsel for the assessee that there has been no basis given by the AO or by the ld.CIT(A) for holding that the rate of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... read as under: 2) That on facts and in law, the learned CIT(A) has grievously erred in confirming the disallowance of commission expenses of Rs. 50,64,385/-. 3) That on facts, in law, and on the evidence on record, the entire commission payment ought to have been allowed as a necessary business expenditure and the entire disallowance ought to have been deleted as prayed for. 14. Facts relating to the issue being that an amount of Rs. 50,64,385/- was claimed by the assessee as commission paid to foreign nationals on sales. During assessment proceedings, since the assessee was unable to substantiate the genuineness of the claim, the AO disallowed the entire expenditure incurred by the assessee. 15. During appellate proceedings the assessee submitted additional evidence by way of confirmation of the said parties, and other details, which were admitted by the ld.CIT(A), noting that the assessee had sought time from the AO to procure these confirmations from the non-resident parties, but the AO had passed the order even before the assessee could submit the same. The additional evidence submitted by the assessee were sent to the AO for his report, and on the report of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld check the stock level of product Again such kind of work requires exchange of lots of emails so as to check the availability of stock, possibility of future order etc. It was claimed in the rejoinder, that AO has not given an opportunity during remand report proceedings. In view of natural Justice, by order sheet noting dated 4/03/15 the AR of the appellant was directed to submit the evidences to prove that actual services were rendered by the foreign agents. On 17/03/15 the AR again filed confirmation letters from two of the agents. No documents regarding correspondence or communication between appellant and the agent were filed. No copies of emails exchanged between the two parties have been submitted. In a nutshell, appellant could not provide a single document to prove that actual services were rendered by the agents benefiting the business of the appellant. This fact is also recorded by order sheet entry dated 24/03/15. 5.5.3 Just payment of some amount to a foreign party does not prove that such amount represented commission payment to an agent for the purpose of business activity of the appellant. The onus was on the appellant to prove that payments were made f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commission payment that it was in the business of manufacturing pharmaceutical drugs; that its entire sale was through export outside the country and it had no presence outside the country; that the pharmaceutical drugs required approval of concerned authorities of the country where sold , for which purpose and also for the purpose of procuring contracts and facilitating business with the foreign parties, these foreign agents were appointed in the absence of any presence of the assessee outside the country,. The quantum of work generated by them was pointed out to the ld.CIT(A) and these parties had filed their confirmation mentioning the invoice against which the commissions had been paid. He pointed out that it had been explained to the ld.CIT(A) that even shipping bills, which were made as per the RBI guidelines, showed the payment of commission. It was also pointed out that no such disallowance was made by the Revenue in scrutiny assessment for A.Y 2011- 12 2014-15. Copies of the orders were placed before us. Our attention as drawn to the explanation of the assessee in this regard filed to the ld.CIT(A) in his order i.e. 5.4 as under: 17. The ld.CIT(A) contended th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e facts, it is not improbable but in fact is quite normal and necessary for any entity to engage services of certain persons to ensure uninterrupted sale of its products outside the country. Besides, we have noted that the assessee has filed all details of sales made to different countries. The assessee has also filed confirmation from all six agents who in some cases have mentioned invoices against which the commission has been paid. The assessee has also filed copies of shipping bills mentioning the fact of commission paid to the assessee. 20. In the light of the above facts, in which no infirmity worth its name has been pointed out by the ld.CIT(A), we fail to understand how any person of reasonable mind could arrive at a finding that the genuineness of the expenditure has not been established. It is not the case of the Revenue that the parties to whom the payment has been made and who have confirmed the same also, in any case denied the said facts in any inquiry conducted by the Revenue. Merely because, certain evidences indicating exchange between the assessee and its agents were not filed by the assessee, it does not take away the weight of all other voluminous evidences f ..... X X X X Extracts X X X X X X X X Extracts X X X X
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