2007 (3) TMI 409 - AT - Income Tax

Disallowance of the Commission - adjustment in the accounts and that agents were not informed whenever the commission amount was credited to their account - failed to produce evidence as proof for the services rendered by the business agents - agents booked the orders from the Government agencies and public undertaking - Deductions under sections 80HH and 80-I - manufacture of pneumatic compressors spares tools - HELD THAT - The assessee is in this line of business for the number of years and allowance of commission in the earlier years paid by the assessee in the same manner is not in dispute. It is also not in dispute that sales made by the assessee in these locations through such parties directly or indirectly have been accepted as genuine. The assessee has established the fact of rendering of services by these parties by adducing ample evidences which have been placed on record hence genuineness of transactions cannot be doubted for this reason. We have also noted that the assessee in case of goods purchased by these agents from the assessee has sold such goods at a discounted price and these parties earned their profit by selling these goods at a higher price. In respect of commission payable to them with regard to direct sales the assessee has credited the accounts of these parties and made payment or adjusted the same from the amounts due from such parties which in our opinion is a normal accounting practice hence merely for this reason the genuineness of transactions cannot doubted. The other reasons given by the Revenue authorities for disallowing the payment in our considered opinion are in the nature of directions to the assessee as to how he should conduct his business and such directions are beyond the scope of the jurisdiction of Revenue Authorities. Even otherwise the assessee has established the fact that it s business policies are commercially sound and are as per prevalent business models at the relevant time. Further the interim report received from the concerned Assessing Officer also supports the case of the assessee. We also do not find any substance in the contention of Revenue that agreements of appointment of commission agents should have been executed on legal documents instead of letter form because this not so required under any law. Thus taking into consideration of the facts and circumstances of the case we find no justification for making the disallowance. Accordingly we reverse the order of learned CIT(A) and direct the Assessing Officer to allow the commission as claimed by the assessee. Thus Ground Nos. 1 2 stand accepted. Ground Nos. 3.1 to 5.1 are in the nature of arguments related to aforesaid ground Nos. 1 2 hence no decision is required thereon as these have already been taken into consideration while deciding ground Nos. 1 2. Deduction under sections 80HH and 80-I - original return of income - It is a settled position that the Circulars issued by the Board are binding on the subordinate income- tax authorities and if C.B.D.T. issues directions which arc beneficial to the assessees although the same may not be directly in consonance with the provisions of law even then these instructions have to be given effect and adhered to by the concerned authorities. Thus there is a strong case for reciprocity to be shown by the Revenue Authorities while completing assessments and to avoid administrative hardships to the assessee. As far as the decision in the case of Goetze (India) Ltd. 2006 (3) TMI 75 - SUPREME COURT is concerned there is no dispute that the same is binding on everybody concerned. In the said decision the Hon ble Apex Court has also ruled that Appellate Tribunal may adjudicate the issue if a claim is made by any party subject to satisfaction of prescribed rules hence even the Hon ble Apex Court has not barred the assessee raise it s legal claim before Appellate Authorities. In our opinion therefore circulars of same nature which have been already issued would not become irrelevant or can be ignored. Admittedly the circular issued in 1995 has not been withdrawn hence it has got binding force on the subordinate authorities even as on date. Accordingly we hold that the Assessing Officer is bound to assess the correct income and for this purpose the Assessing Officer may grant reliefs/refunds suo motu or can do so on being pointed out by the assessee in the course of assessment proceedings for which assessee has not filed revised return although as per law the assessee is required to file the revised return. Having stated so in our view the learned CIT(A) having co-terminus powers with the powers of Assessing Officer and the fact that appellate proceedings are the continuation of original proceedings should have entertained the claim of assessee and allowed if other conditions of the provisions of the law were satisfied. In this view of the matter we accept both the grounds of the assessee and direct the learned CIT(A) to consider the claim of the assessee at the revised figures on merits and decide the same according to the provisions of sections 80HH and 80-I of the Act after hearing the assessee. Thus this ground of the assessee stands accepted. In the result appeal of the assessee stands partly allowed.

Summary

Issues Involved:
1. Disallowance of commission expenses.
2. Penalty proceedings under Section 271(1)(c).
3. Inclusion of excise duty, sales tax, and conversion charges in total turnover for Section 80HHC.
4. Deduction of warranty claims.
5. Deduction under Sections 80HH and 80-I.
6. Provision for Cash Compensatory Scheme (CCS) claims.
7. Treatment of debenture issue expenses.
8. Disallowance of entertainment expenses.
9. Treatment of long-term capital loss.
10. Disallowance under Rule 6D of the Income-tax Rules.

Detailed Analysis:

1. Disallowance of Commission Expenses:
The assessee's appeals primarily concern the disallowance of commission payments made to M/s. Drill Rock Engineers and M/s. Mindrill Services. The assessing officer disallowed these expenses, questioning the genuineness of the transactions due to a lack of evidence and the nature of services rendered. The Commissioner (Appeals) upheld these disallowances, citing similar reasons. However, the Tribunal found that the assessee provided ample evidence of services rendered and noted that similar commissions were allowed in previous years. The Tribunal reversed the disallowances, directing the assessing officer to allow the commission expenses as claimed by the assessee.

2. Penalty Proceedings under Section 271(1)(c):
The Tribunal addressed the penalty proceedings initiated under Section 271(1)(c) in multiple appeals. It was noted that the penalty was based on the disallowance of commission expenses. As the Tribunal allowed the commission expenses, it held that the penalty under Section 271(1)(c) had no basis and dismissed the penalty appeals as infructuous.

3. Inclusion of Excise Duty, Sales Tax, and Conversion Charges in Total Turnover for Section 80HHC:
The Tribunal dealt with the inclusion of excise duty, sales tax, and conversion charges in the total turnover for computing the deduction under Section 80HHC. It referred to the jurisdictional High Court's decision in CIT v. Sudarshan Chemicals Industries Ltd., which excluded excise duty and sales tax from the total turnover. However, it included conversion charges, as they are integral to export activities. The Tribunal directed the assessing officer to exclude excise duty and sales tax but include conversion charges in the total turnover.

4. Deduction of Warranty Claims:
The assessee's provision for warranty claims was disallowed by the assessing officer, who allowed only the actual claims settled. The Tribunal accepted the assessee's argument that the provision was made based on claims lodged and service engineers' reports, making it a crystallized liability. The Tribunal allowed the provision for warranty claims as a deductible expense.

5. Deduction under Sections 80HH and 80-I:
The assessee revised its claim for deductions under Sections 80HH and 80-I during assessment proceedings. The assessing officer and Commissioner (Appeals) did not consider these revised claims. The Tribunal held that the Commissioner (Appeals) should have entertained the claims, given their co-terminus powers with the assessing officer. The Tribunal directed the Commissioner (Appeals) to consider the revised claims on merits.

6. Provision for Cash Compensatory Scheme (CCS) Claims:
The Tribunal addressed the inclusion of CCS claims in the assessee's income. The assessing officer included the CCS claim as income, as the assessee followed the mercantile system of accounting. The Tribunal noted that mere lodging of a claim does not constitute income unless the claim is accepted. It found that the assessing officer did not examine the terms and conditions of the scheme to determine the accrual of income. The Tribunal dismissed the ground, as no useful purpose would be served by restoring the issue to the Commissioner (Appeals).

7. Treatment of Debenture Issue Expenses:
The Tribunal accepted the assessee's claim for debenture issue expenses, citing the Supreme Court's decision in Madras Industrial Investment Corpn. Ltd. v. CIT, which allowed such expenses to be spread over the period of the debentures.

8. Disallowance of Entertainment Expenses:
The Tribunal dealt with the disallowance of entertainment expenses, where the assessee claimed expenses for employees' lunch and sales conferences. The Tribunal allowed the expenses incurred for employees but upheld the disallowance where details were not furnished.

9. Treatment of Long-Term Capital Loss:
The Tribunal addressed the disallowance of long-term capital loss on the sale of land. The Commissioner (Appeals) set aside the assessing officer's disallowance. The Tribunal directed the Commissioner (Appeals) to allow the claim if the conditions were met.

10. Disallowance under Rule 6D of the Income-tax Rules:
The Tribunal dismissed the assessee's ground regarding disallowance under Rule 6D, as the issue was covered against the assessee.

Conclusion:
The Tribunal partly allowed the assessee's appeals, providing relief on several grounds, including the disallowance of commission expenses, inclusion of excise duty and sales tax in total turnover, provision for warranty claims, and revised claims under Sections 80HH and 80-I. Penalty proceedings under Section 271(1)(c) were dismissed as infructuous.