`IN THE INCOME TAX APPELLATE TRIBUNAL,
MUMBAI BENCH "I", MUMBAI
BEFORE SHRI D. KARUNAKARA RAO, ACCOUNTANT MEMBER AND
DR. S.T.M. PAVALAN, JUDICIAL MEMBER
ITA No. 5262/Mum/2011
Assessment Year: 2004-05
M/s. India Fashions Ltd. ITO Ward-6(3)(1)
A/2-369, Shah & Nahar Mumbai
Vs.
Industrial Estate, Sun Mills
Compound, Lower Parel
Mumbai-400 013
(Appellant) (Respondent)
Permanent Account No. :- AAACH 1262 Q
Assessee by Shri Vijay Mehta & Mr.
:
Mahesh O. Rajora
Revenue by : Shri Sunil Kumar Jain
Date of hearing : 05.06.2014
Date of Pronouncement : 08.08.2014
ORDER
PER DR. S.T.M. PAVALAN, JM:
This appeal filed by the Assessee is directed against the order of the
Ld.CIT(A) -2, Mumbai dated 01.03.2011 for the Assessment Year 2004-05.
2. In Grounds No. 1 and 2, the assessee has agitated the decision of the
Ld.CIT(A) enhancing the assessment and thereby making a disallowance of
Rs.56,41,676/- being commission paid on export sales.
2.1 Briefly stated, during the year under consideration, the assessee had allegedly
paid 25% commission amounting to Rs.56,41,677/- on export sales of
Rs.2,25,42,652/-. According to the assessee, the said commission had been paid to
M/s. Bombay Industries situated in U.S.A. in respect of export sales of commodities
sent to Mexico. The assessee had claimed the payment of the said commission as
business expenditure which was allowed by the AO in the assessment framed.
However, the Ld.CIT(A), during the first appellate proceeding, had disallowed the
expenditure on the reason that there is no written agreement evidencing the
ITA No. 5262/Mum/2011
2 M/s. India Fashions Ltd.
Assessment Year: 2004-05
payment of 25% commission to Bombay Industries U.S.A. and the assessee had not
deducted any TDS on the said payment. Aggrieved by the impugned decision, the
assessee has raised these grounds in the appeal before us.
2.2 Having heard both the sides and perused the material on record it is pertinent
to mention that during the first appellate proceeding when the case has been
discussed by the Ld.CIT(A) with the A.R. of the assessee, the Ld.CIT(A) noticed that
the assessee has paid commission of 25% on export sales to various persons which
according to the Ld.CIT(A) is excessive in nature. Accordingly, the Ld.CIT(A) asked
the assessee to file the details of commission paid with the names and addresses of
parties, relation with the assessee of the persons to whom commission has been
paid, a copy of the agreement for the commission, rate of commission paid, nature
of service rendered with evidence, copy of bills of commission paid etc. to explain
whether there is a loss or profit on the sales of which commission on paid.
Consequently, after perusing the details provided by the assessee, the Ld.CIT(A)
disallowed the claim in the appellate proceedings on the reasons that there is no
agreement for the payment of the commission to M/s. Bombay Agents, U.S.A., there
is no evidence to suggests that there is any sale on account of any effort made by
M/s. Bombay Industries and also the assessee has not deducted TDS on the
payment of the commission.
2.2.1 As regards the absence of agreement between assessee and the Bombay
Industries, which is one of the reasons on which the Ld.CIT(A) has rejected the
claim of the assessee, it is pertinent to mention that the Tribunal in the case of
Harrison Garments Division Vs. JCIT, in ITA No. 3022/Mum/2012, which has been
relied on by the Ld.AR, has held that mere existence of an agreement cannot decide
the allowability of commission payment, it is the presence of surrounding
circumstances and the basic facts that decide the issue in conclusive manner.
Similarly non existence of written agreement cannot be sole base for disallowance of
commission payment if other evidences prove the fact of incurring for such
expenditure wholly and exclusively. For the said decision the Tribunal has relied on
the decision of the Delhi High Court in the case of Gautam Creations Pvt. Ltd. 171
taxman 271 Delhi High Court, wherein it has been held that commission paid in the
ITA No. 5262/Mum/2011
3 M/s. India Fashions Ltd.
Assessment Year: 2004-05
absence of written agreement can be allowed if work has been done by the agent
for the assessee who pays the commission to the agent. Considering the ratio laid
down by the Delhi High Court which has been followed by the Tribunal in the said
case, we are of the considered opinion that proof/existence of a written agreement
between the assessee and the commission agent is not a requirement for allowing
the expenditure of the commission payment made by the assessee.
2.2.2 Further, the genuiness of payment by the assessee to Bombay Industries is
not in dispute as the confirmation from Bombay Industries for the said payment has
been made available before the authorities below and is placed at page no 77 of the
paper book. The perusal of the said confirmation further indicates that the payment
has been received by the party on Mexican orders. Moreover, the perusal of the P/L
account suggests that the export sale during the year under consideration is
increased and the loss is reduced. Also, it is seen that the assessee has secured the
order for export to Mexico without visiting the Mexico. These facts clearly evidence
that the assessee has paid the commission to M/s. Bombay Industries for the effort
made by it to secure the export order to Mexico as demonstrated by the Ld.AR for
the assessee.
2.2.3 On the issue of non deduction TDS on the said payment, we find that as per
the CBDT circular No.23 dated 23.7.1969 and circular No.786 dated 7.2.2000, the
assessee is not required to deduct the tax at source under Section 195 with regard
to payment of commission to foreign agent. It is also relevant to state that the
CBDT, withdrawing the circular No.23 of 1969 and circular No.786 of 2000 will be
operative only from 22nd October, 2009 and not prior to that date. Therefore, the
reasoning of the Ld.CIT(A) for making the impugned disallowance, in our view, is
not sustainable on facts and in law. In view of the aforementioned discussion, we
delete the impugned disallowance made by the Ld.CIT(A). Since the disallowance
made by the Ld.CIT(A) has been deleted on appreciation of merits in the claim of
the assessee, the adjudication of the contention of the Ld.AR that the Ld.CIT(A) has
conducted a roving and fishing enquiry in the appellate proceedings, which is not in
accordance with the exercise of appellate powers by the Ld.CIT(A), is not required.
Accordingly, grounds no 1 & 2 are allowed.
ITA No. 5262/Mum/2011
4 M/s. India Fashions Ltd.
Assessment Year: 2004-05
3. In Ground No. 3, the assessee has agitated the decision of the Ld.CIT(A)
confirming the addition of Rs.84,027/- made by the AO u/s 41(1) of the Income Tax
Act.
3.1 The relevant facts are that the AO, in his order observed that the provisions
of section 41(1) is applicable in the case of the assessee on an amount of
Rs.84,027/- which represented the liabilities that had not been paid for more than
three years and therefore was chargeable to tax u/s 41(1) of the Act. According to
the assessee, the assessee company was amalgamated with India Fashion House
vide High Court order dated 02.02.2007 and that liabilities pertaining to Trisha
Adworks of Rs.39,376/-, Ganashakti Enterprises amounting to Rs.12,134/- and
Krishna Textport amounting to Rs.29,970/- had been returned back in the books of
account on 01.04.2006 that is in the Financial Year 2006-07. For other three
creditors, namely, Logys amounting to Rs.1,884/-, Riddhi Button amounting to
Rs.240/- and Smart Art amounting to Rs.423/- were settled on 30.09.2006,
31.01.2006 and 31.03.2006 respectively. It was further the submission of the
assessee that the addition of Rs.84,027/- u/s 41(1) would amount to double taxation
on the same amount as this amount had already been either return back in the
books of account or had been settled. However, the said contention was not
accepted by the Ld.CIT(A) and thereby the Ld.CIT(A) upheld the disallowance made
by the AO. Aggrieved by the impugned decision, the assessee has raised this ground
in the appeal before us.
3.2 Having heard both the sides and perused the material on record, it is
pertinent to mention that the assessee, during the proceedings before us, has filed
statement showing list of sundry creditors return back in M/s. India Fashion Ltd. in
A.Y. 2006-07 and break up of assessee's creditor return back in that year. Since the
document has never been asked for by the AO or the Ld.CIT(A), the Ld.AR has
placed it as additional evidences before us to substantiate the claim of the assessee.
Having admitted the said statement as additional evidence, we are of the considered
view that it is just and proper to set aside this issue to the file of the AO to make a
fresh assessment on the said issue after providing reasonable opportunity of being
ITA No. 5262/Mum/2011
5 M/s. India Fashions Ltd.
Assessment Year: 2004-05
heard to the assessee. We direct and order accordingly. Ground No. 3 is allowed for
statistical purpose.
4. In Ground No. 4, the assessee has agitated the decision of the Ld.CIT(A)
confirming the addition of Rs.1,89,000/- made by the AO on account of free samples
given to customers.
4.1 The relevant facts are that the AO observed from schedule "L" to the
accounts under Serial No. 2 b that in respect of trading goods, the assessee had 784
pieces as the opening stock which was valued at Rs.128 per piece, further 294
pieces were purchased during the year at Rs.71 per piece and there was closing
stock of 236 pieces which was valued by the assessee at Rs.161 per piece. However,
842 pieces of the same item were sold at only Rs. 14 per piece and accordingly the
assessee was requested to explain the discrepancy with relevant evidences. The
assessee, in response, submitted that opening stock of trading goods were old stock
and hence valued at cost. The fashion trend for these items changed during the year
and hence the company managed to sell 52 items @ Rs. 240 per piece and out of
842 piece shown in sales 790 pieces were given us from freebies. However, the said
explanation was not accepted to the AO as the assessee was not able to prove that
the items were given as freebies and held that the 790 pieces were actually sold and
income of which had not been disclosed in the books of account. The AO adopted
rate at which the said pieces were sold during the year and the undisclosed income
in respect of above item was held to be Rs.1,89,600/- (790x240). Accordingly, the
AO added the impugned amount to the total income of the assessee. On appeal, the
Ld.CIT(A) confirmed the said addition. Aggrieved by the impugned decision, the
assessee has raised this ground in the appeal before us.
4.2 Having heard both the sides and perused the material on record, it is
pertinent to mention that the assessee during the assessment proceeding has given
the details of the freebies of 790 samples and the break up of freebies on trading
item to the AO. The break up shows that the assessee has given the freebies to the
companies namely First Choice, Indo Fabrics, Style Setlers and Transit for Sales
Seven Days. The relevant break up contains the actual invoice, number of total
quantity and the relevant details are available at page no. 34 of the paper book. The
ITA No. 5262/Mum/2011
6 M/s. India Fashions Ltd.
Assessment Year: 2004-05
perusal of page no. 76 of the Paper Book indicates that the assessee has made sales
to the parties to whom freebies are given. When the details have been so provided
to the AO, we are of the view that the AO is not justified in doubting the
genuineness of freebies given by the assessee by concluding that the freebies are
sold for a price. In such an event, we do not find any justification on the part of the
Ld.CIT(A) to confirm the impugned addition made by the AO. In view of that matter,
the impugned addition confirmed/made by the Ld.CIT(A)/AO stands deleted. Ground
No. 4 is allowed.
5. In Ground No. 5, the assessee has agitated the decision of the Ld.CIT(A) in
confirming the disallowance of Rs.1,86,178/- made by the AO u/s 14A of the Income
Tax Act.
5.1 The relevant facts are that the AO had noted that the assessee had received
Rs.1,96,351/- as dividend income which was exempt under the Income Tax Act.
Accordingly, the AO requested the assessee to furnish details of expenditure
attributable to earning the exempt income in view of the provisions of section 14A.
The assessee, in response, submitted that it did not incur any expenses to earn the
dividend income and hence no disallowance was warranted. Having not satisfied
with the explanation of the assessee, the AO had worked out the common expenses
debited to the P/L Account by the assessee at Rs.62,05,928/- and proceeded to
make a disallowance of Rs.1,86,178/- holding that 3% of common expenses
calculated at Rs.62,05,928/- were attributable to the expenditure for earning exempt
income. On appeal, the Ld.CIT(A) upheld the disallowance made by the AO.
Aggrieved by the impugned decision, the assessee has raised this ground in the
appeal before us.
5.2 Having heard both the sides and perused the material on record, it's a matter
of fact that the assessee has earned an exempt income of Rs.1,96,351/- and the
assessee has not offered any disallowance in respect of earning the exempt income.
No doubt, the assessee would have incurred certain administrative expenses for
earning the exempt income. However, we are of the considered opinion that
disallowance of 3% of the common expenses seems to be on the excessive side. In
ITA No. 5262/Mum/2011
7 M/s. India Fashions Ltd.
Assessment Year: 2004-05
this connection, it is relevant to state that the the Hon'ble Bombay High Court in the
case of CIT vs. Ms. Godrej Agrovet Ltd vide Income Tax Appeal No. 934 of 2011,
dated 8.1.2013, has held that percentage of the exempt income can constitute a
reasonable estimate for making disallowance in the years earlier to the assessment
year 2008-09. Following the said ratio, we remand the matter back to the file of the
AO to restrict the disallowance only to the extent of 5% of the total exempt income.
We direct and order accordingly. Ground No 5 is partly allowed.
6. In the result, the appeal filed by the Assessee treated as allowed.
Order pronounced in the open court on this 8th day of August, 2014.
Sd/- Sd/-
(D. KARUNAKARA RAO) (Dr. S.T.M. PAVALAN)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Mumbai, Dated: 08.08.2014
*Srivastava
Copy to: The Appellant
The Respondent
The CIT, Concerned, Mumbai
The CIT(A) Concerned, Mumbai
The DR "I" Bench
//True Copy//
By Order
Dy/Asstt. Registrar, ITAT, Mumbai.
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