TMI Blog1997 (11) TMI 119X X X X Extracts X X X X X X X X Extracts X X X X ..... to the interest of Revenue. Hence, he directed to decide the issue afresh after giving a reasonable opportunity of being heard to the assessee against which the assessee is in appeal before us. 3. The learned counsel on behalf of the assessee has submitted that the assessee has been appointed as sales and service agents by Sarabhai Chemicals and the appellant's division is known as SC operations. The assessee was appointed as sales and service agent by Sarabhai Chemicals by letter dt. 1st April, 1983, which has been brought on record on behalf of the assessee, according to which the assessee has to render different kinds of services, inter alia, to maintain premises, to complete accounts of stocks and other properties, to render general office services, e.g., receiving, storing and accounting of the stocks, execution of customers' orders, preparation of sales invoices, packing, forwarding, etc., to collect the proceeds of the cash bills or invoices from the parties and deposit such moneys into company's bank account. According to the said agreement, the assessee was to effect payment of remittance to the company's officers and others as per the directions of the company. The lea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee contends that the payments were made on behalf of M/s Sarabhai Chemicals and such payment do not represent any expenditure of the assessee, it would be as dubious method of tax planning to defraud the Revenue. The contention of the learned counsel on behalf of the assessee that while the CIT sending the issue back to the AO after setting aside the aforesaid finding recorded by the CIT was unwarranted and should not have been made without any basis. The learned counsel on behalf of the assessee relied on the decisions reported in CIT vs. Smt. Minalben S. Partho (1995) 127 CTR (Guj) 333 : (1994) 215 ITR 81 (Guj), 22 ITD 155, Balwant Singh vs. ITO (1996) 54 TTJ (JP) 560 : (1995) 55 ITD 363 (JP). The learned counsel on behalf of the assessee has further relied on the order passed by the Tribunal in ITA No. 1057/A/90 in the case of M/s Khemchand Sons. 4. On the other hand, the learned Departmental Representative supported the order passed under s. 263 and submitted that the ITO did not make any enquiry with regard to the nature of payment. Hence, the CIT was justified in setting aside the order holding the same as erroneous and prejudicial to the interest of revenue. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the assessee is that the expenditure incurred for making payment by Sarabhai Chemicals are not by the assessee and the aforesaid amount was debited in the accounts of M/s Sarabhai Chemicals. As such the disallowance under s. 40A(3) cannot be made in the hands of the assessee. It appears that the assessee filed a detailed reply pursuant to the notice under s. 263 before the CIT. The relevant portion of the said reply is as follows: "(g) The payments aggregating to Rs. 2,15,97,829 in respect of which the s. 263 is now proposed were made by our aforesaid division and debited to the aforesaid two accounts of Sarabhai Chemicals. These payments in reality were made by us on behalf of Sarabhai Chemicals towards their field staff salaries, travelling expenses, liability arising from deductions from their salaries, etc. (j) It needs to be specifically pointed out to your Honour that it is not that this company had merely addressed its letter dt. 30th March, 1988 in order to explain how s. 40A(3) could not be invoked in so far as payments aggregating to Rs. 2,15,97,829 debited to the account of Sarabhai Chemicals were concerned. What this company had also done during the assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment does not represent any such expenditure, the very question for invoking s. 40A(3) cannot arise. (d) That your impression that we had not indicated to the ITO the facts and circumstances justifying applicability of r. 6DD(j) is entirely misplaced. (e) That similarly, your impression that the ITO had failed to invoke s. 40A(3) in respect of Rs. 2,15,97,829 is also entirely misplaced". It appears from the order passed under s. 263, the CIT noticed the relationship between the assessee and Sarabhai Chemicals considering the agreement subsisting between them. Different clauses of the agreement under which the assessee rendered services has been mentioned in the said order by the CIT. The CIT has also noticed the fact that all the expenses incurred by the assessee will be reimbursed by Sarabhai Chemicals and over and above 5 per cent of such expenses will be paid to the assessee-company as service charges. The assessee brought to the notice of the CIT that before the AO the assessee filed written submission vide letter dt. 22nd March, 1990. The said submission of the assessee has been recorded at para. 4 of the impugned order. While recording his finding at para. 5, it has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epresentative reported in (1978) 111 ITR 312 (Guj), in the case of Addl. CIT vs. Mukul Corpn. jurisdictional High Court has observed that since the CIT by passing order under s. 263 did not settle the assessment finally, but preferred to direct the ITO to make an order for fresh assessment, the only proper course for the CIT was not to express any final opinion as regards the controversial points. On examination of the records filed before us, we are satisfied about the fact that the assessee-company made the payments on behalf of M/s Sarabhai Chemicals. Hence, the expenses were incurred for making payments by Sarabhai Chemicals and not by the assessee-company. The expenditure has been debited in the accounts of Sarabhai Chemicals. The learned counsel on behalf of the assessee brought to our notice the order of the Tribunal in ITA No. 1057/A/90 wherein disallowance was made in the hands of a commission agent and the Tribunal held that the commission agent was making payment in the capacity of an agent. Hence, disallowance under s. 40A(3) was not warranted. In the present case also, we find that the CIT himself found after examining the record that the assessee was rendering service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was a brought forward loss, as per books of accounts, amounting to Rs. 25,90,360. Thus, the total profit of the year, after adjusting earlier years losses showed a negative figure of Rs. 3,84,429. If we also take into account the note of the auditors that the gratuity liability not provided in the accounts amounted to Rs. 11,928, it becomes clear that the appellant company was hardly in a position to declare any dividend. In view of the fact that after adjustment of the earlier years' losses, the appellant company had no profits to declare dividend from, I accept the contention of the appellant that there was no commercial profits from which the dividends could be declared. I, therefore, hold that the case of the assessee would be covered by cl. (i) of sub-s. (2) of s. 104. Therefore, the ITO was not justified in making the order under s. 104 of the Act." 3. The learned Departmental Representative supported the order passed by the AO by which additional tax was levied. 4. The learned counsel on behalf of the assessee, on the other hand, relied on the order passed by the CIT(A) and submitted that the issue is now covered by the different orders passed by the Tribunal, copies ..... X X X X Extracts X X X X X X X X Extracts X X X X
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