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* IN THE HIGH COURT OF DELHI AT NEW DELHI
Date of Decision: 04.01.2018
+ ITA 640/2017
PR. COMMISSIONER OF INCOME TAX - 6 ..... Appellant
Through: Mr. Zoheb Hossain, Sr. Standing
Counsel.
versus
M/S. MOHAN EXPORT INDIA PRIVATE LIMITED
..... Respondent
Through: Mr. V.P. Gupta, Advocate.
CORAM:
HON'BLE MR. JUSTICE S. RAVINDRA BHAT
HON'BLE MR. JUSTICE A.K. CHAWLA
S. RAVINDRA BHAT, J.
1. In this appeal, the revenue challenges findings rendered by
the Income tax appellate tribunal (ITAT) as unreasonable and
contrary to fact. The ITAT affirmed the decision of the CIT
(Appeals), who had directed deletion of the amounts that were
brought to tax by the AO, by disallowance of expenditure claimed,
by the assessee.
2. The assessee had filed its return for assessment year (AY)
2006-07, declaring an income of `28,56,87,073/- on 05.12.2006.
On 19.12.2008, in answer to queries made by the AO, the assessee
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furnished the statement showing the FOB Value of exports to the
parties where Agency Commission was payable, along with an up
to date statement of commission showing commission paid/payable
during the AY 06-07 in respect of exports made. The outstanding
commission payable continued to be shown as a liability in its
books of account. The details of the statement clearly shows that
out of seven commission agents, payments were made for
`7,52,783.52/- and the assessee had claimed the commission due as
being ` 1577070.55/-. The AO felt that no prudent person would
show that such commission was unpaid even after a lapse of 3
years and commission agents were entitled to pursue their
payments only after the year 2010. The AO held that the assessee
had failed to prove genuineness of the business transaction and
payment made to the service agents, and also considering the
background of the assessee as reported in the Volcker Committee
Report, the entire amount of ` 7,33,09,398.93/- was added back to
the total income of the assessee. The AO also asked the assessee to
explain the source of deposits shown by it; in response, the
assessee furnished the source of cash deposit as withdrawals on
different dates from different banks. The entries were scrutinized
and it was found that no direct link except the deposit of
`9,00,000/- dated 05.11.08 could be linked to the assessee as this
was the only sum which could be linked with the withdrawal which
was made on 03.11.08. Holding there was proper evidence and
explanation, the cash deposits of `2,10,00,000/- made on different
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dates was treated as unexplained deposits in the bank and added in
the assessee's total income.
3. The findings of the AO were carried in appeal to the CIT(A),
who firstly permitted the assessee to adduce additional evidence.
The CIT(A) found that all the details relating to commission
payments had been filed by the assessee company in the course of
assessment proceedings and the details of commission payments
below `5 lakhs were not filed under a bona fide belief that the AO
had only asked for details of major expenses exceeding `5 lakhs.
Though, there is a clear requirement of commissions paid and
received vide Para 20 of the questionnaire dated 12.02.2008, the
AO did not give any specific reminder to the appellant to the effect
that details relating to commission payment below `5 lakhs were
not filed. Therefore, there was some communication gap between
the AO and the assessee company in so far as filling details of
`10,28,957/- was concerned. The CIT(A) noted that the assessee
company had made an aggregate payment of `7,08,59,575/- and all
requisite details were duly made available to the AO but for the
details of commission of `10,28,957/-,which is only 1.45% of the
total expenditure and part of which was paid to the parties which
are already included in the details filed before the AO. Therefore,
the CIT (A) was of the view that the assessee company did not file
the details of `10,28,9571- as it was under bona fide impression
that there was sufficient compliance by filing details of
commissions exceeding `5 lakhs. Accordingly, the CIT (A) found
that the assessee company was prevented by sufficient cause.
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He also noted that the AO has been allowed sufficient opportunity
to examine the additional evidence in the course of the remand
proceedings. In view of the aforesaid facts and circumstances, the
Ld. CIT(A) allowed the assessee's request and took the additional
evidence on record.
4. On the merits with regard to addition of `7,33,09,398/- the
CIT(A)'s opinion was that, the AO failed to appreciate the situation
in which the assessee was making payment of commission to the
commission agents. An important condition in the contracts was
that the payment had to be made only after receipt of payment by
the assessee against the exports made through the concerned
agents. Therefore, the CIT(A) held that no prudent businessman
will pay commission till the payments from the importers/buyers
are realized. In fact, there is a clear stipulation by the RBI that in
no circumstances agency commission would be remitted before
shipment of the goods subject matter of export.
5. The CIT(A) also noted that the assessee's representative had
furnished copies of letters written by the assessee to its bankers for
release of remittance of commission amount to the agents. Those
letters clearly suggested that the assessee had to declare not only
the appointment of agents, export of goods with his assistance, but
it also has to declare the fact that it has received and realized the
sales proceeds. It was only thereafter that banks released the
payment(s) of commission. Thus, the payment of commission was
not left to the sweet will or discretion of the assessee; it was to be
paid after satisfaction/fulfillment of stringent conditions laid down
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by the Reserve Bank of India; commission payments were to made
only after realization of export sales proceeds. The CIT(A) also
agreed with the assessee that the expenditure was allowable on the
basis of the mercantile system of accounting obliging it to book the
commission expenses in the year of accounting of export sales.
6. The AO's observation that no details of specific services
rendered by the commission agents have been furnished in the
course of assessment proceedings was held to be devoid of any
merits. A detailed discussion made in the order said the CIT (A)
suggested that the assessee had listed specific responsibilities of the
commission agents in the agreement executed with the respective
commission agents. Therefore, it could not be said that no details
of actual services rendered by the commission agents were filed
before her, as copies of the agreements were duly placed before her
in the course of assessment proceedings. Some agreements were
old and the assessee on the basis of such agreements made
commission payments even in earlier years. Therefore, keeping in
view the detailed responsibilities assigned to the commission
agents, the CIT(A) disagreed with the AO's finding that no specific
details of services rendered by the commission agents were made
available. With regard to naming the assessee in the independent
inquiry committee, namely, Volcker Committee Report, the
CIT(A) held that this ground was also not relevant so far as the
present AY was concerned. As stated by the assessee, no export,
directly or indirectly, had been made to Iraq nor had the assessee
claimed any commission payment in connection with any
ITA No.640/2017 Page 5 of 9
transactions pertaining to Iraq during the year under consideration.
Further, the AO had conveniently ignored the fact that Saddam
Hussain was removed as president of Iraq and was jailed in April,
2003 and therefore there was no basis for using the findings of
Volcker Committee for disallowing the assessee's claim for the
assessment year under consideration.
7. As regards addition of `2,10,00,000/- the CIT(A) was of the
view that the AIR information showing cash deposits of
`2,10,00,000/- on 28 occasions by the assessee in the Lord Krishna
Bank, New Delhi did not appear to be correct. The assessee had
made cash deposits of only `1,05,00,000/- (`52,50,000/- on 7
occasions in CP and `52,50,000/- on 7 occasions in the Lajpat
Nagar branch of Lord Krishna Bank, New Delhi) which were
verifiable from the cash books produced during the remand
proceedings and the bank NC(s) of the assessee and also certified
by the bank. In view of the above facts and considering the report
of the AO, the CIT(A) held that all the cash deposits made by the
assessee were duly explained and no addition was called for.
Accordingly, the addition of `2,10,00,000/- was deleted.
8. The ITAT affirmed the CIT (A)'s findings; it also noticed
that the entire quantum of commission paid was meager, in
percentage terms, compared to the aggregate value of the contracts
entered into by the assessee, with various foreign buyers, for
supplies; those buyers were located in 10 different countries and
there were different contracts, for various periods. Furthermore,
with respect to the deposits made, the ITAT concluded, on an
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appreciation of the material on record, that the additions made by
the AO were not justified.
9. The revenue argues, in support of its appeal, that the findings
in the impugned order are unsustainable, because the claim of
commission expenditure was dubious as the assessee failed to
discharge its onus under Section 37(1) of the Income Tax Act,
1961 (the Act) which mandates that the expenditure had to be
actually incurred and impugned expenditure was laid out and
expanded wholly and exclusively for the purpose of the business of
the assessee. It was argued that apart from producing agreements
entered into with the agents, who were paid commission, there was
no other material to support the expenditure claimed. Counsel
submitted that without a correlation to the nature of service
provided, by the commission, the needle of suspicion that the
amounts were slush money, as was suggested in the Volker
Committee Report, could not be ruled out. Similarly, with respect
to the cash deposits, counsel highlighted that the ITAT fell into
error, because there was no sufficient co-relation between the
amounts withdrawn.
10. It is seen from the above discussion that the additions made
by the AO were on two counts: commission expenditure and
deposits. The first was disallowed, because, in the AO's opinion,
apart from producing copies of agreements, the assessee did not
furnish any other proof of payment. Moreover, the sums payable
were not shown to be due; the AO correctly concluded that prudent
men of commerce would not have allowed matters regarding
ITA No.640/2017 Page 7 of 9
payment to languish as was apparent in the books of account, and
other material, furnished. The CIT (A) and the ITAT concluded
that the nature of the assessee's activities, i.e as a trader and
supplier, could lead one to conclude that the assistance of
commission agents, was to aid it to introduce buyers and transact
business. The ITAT, from the given materials and circumstances,
produced in a tabular statement, the payments above 10 lakh; it
also drew another chart indicating the amounts made to different
parties in different African countries. The impugned order shows
that 9 parties in 11 different countries were shown to have been
paid `7,33,093,398/- out of a total of `167,68,66,065/25 ( over
Rupees one hundred and sixty seven crores) worth of contracts
entered into. This translates to commission payouts of less than
4.50%.
11. In this court's opinion, the AO's additions, made on account
of the disallowance of commission payments claimed, are based
entirely on suspicion. The assessee is a private party; it sources
goods and commodities and trades in them in various countries in
Africa. To secure contracts and also to ensure that payments are
received in a timely manner and repatriated expeditiously, it
utilizes the services of local agents in each country. From the angle
of the Indian economy, the assessee's efforts lead to export
transactions, which in turn augment the foreign exchange
resources; the assessee reports income, which is subjected to
taxation. The commission expenditure laid out, therefore, can
reasonably be linked with its business; its claim that it is laid out
ITA No.640/2017 Page 8 of 9
wholly for commercial terms is not fantastic; neither are the parties
paid the amounts, bogus or dubious. In fact, they even confirmed
receiving payments. By disallowing this expenditure, based on the
AO's personal understanding of how business ought to be
conducted, the purpose of Section 37 was set at naught; besides,
the AO virtually positioned himself in the armchair of the assessee,
as regards the business conducted by it- an entirely untenable
situation, that the law frowns upon. For these reasons, the court is
of opinion that the concurrent findings of fact rendered by the
lower appellate authorities do not call for disturbance.
12. As in the case of commission expenditure, the AO's
conclusion that the sources of income towards deposits made were
not disclosed or sufficiently proved, were correctly set aside by the
lower authorities, who carried out their fact appreciation exercise,
reasonably.
13. For the above reasons, it is held that no question of law
arises; the appeal is therefore, dismissed as unmerited. No costs.
S. RAVINDRA BHAT, J
A.K. CHAWLA, J
JANUARY 04, 2018
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