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2007 (11) TMI 341 - AT - Income TaxDisallowance of Payment on brokerage commission - nexus between the commission payment and sales - return of income declaring loss - difference of opinion between the Accountant Member and the Judicial Member - Third Member Order - Order AM - HELD THAT - We noted that without making any inquiry by the Assessing Officer he disallowed the huge amount. Further the assessee had declared loss which was assessed by the Assessing Officer. Therefore we are unable to understand that why the assessee will claim bogus payment of commission without any gain as the company is running in loss and further the company is running under the State Government Management. Therefore there is hardly any scope for claiming false payment of commission. Thus we do not find any infirmity in the order of the CIT(A). Hence this ground of appeal of the revenue is dismissed. Ground 2 Claim of telephone expenses - disallowed by the Assessing Officer for personal call - HELD THAT - We noted that Hon ble Gujarat High Court in the case of Sayaji Iron 2004 (2) TMI 6 - GUJARAT HIGH COURT which is a private limited company is a distinct assessable entity as per the definition of person under section 2(31) of the Act. Therefore it cannot be stated that when the vehicles are used by the directors even if they are personally used by the directors the vehicles are personally used by the company because a limited company by its very nature cannot have any personal use . The limited company is an inanimate person and there cannot be anything personal about such an entity. The view that we are adopting is supported by the provision of section 40(c) and section 40A(5) of the Act. Thus we do not find any infirmity in the order of the CIT(A) - Consequently the appeal of the revenue is dismissed. Order JM - I am of the view that since the ld. CIT(A) has not considered this issue in proper perspective and did not consider the objections raised by the Assessing Officer in the assessment order. The ld. CIT(A) was not justified in deleting the addition and the matter requires reconsideration at the level of the ld. CIT(A). I therefore set aside the order of the CIT(A) and restore the matter to his file with direction to decide the issue of commission payment afresh by giving reasonable sufficient opportunity of being heard to the assessee. The ld. CIT(A) shall also take into consideration the objections raised by the Assessing Officer in the assessment order while disallowing the commission payment. The ld. CIT(A) is directed to decide all the points which have been raised by the Assessing Officer in the assessment order. Third Member Order - It is clearly proved on record that the mill has been closed and BIFR recommended its winding up. The assessee did produce all the relevant material which was available with the assessee in support of its claim of commission/brokerage in dispute. It produced the details of sales on which commission was paid to majority of brokers. It is therefore not possible to accept that there is no evidence of services rendered by the brokers. It is further claimed that such commission and brokerage was paid as per business practice and on the basis of agreements. Copies of agreements were also made available to the Assessing Officer. The above material in my opinion fully discharged the burden which lay on the assessee to prove the payment of commission as similar commission was paid by the assessee in earlier year and is also paid by other mills of the assessee s size carrying on similar trade. It is difficult to hold that the expenditure of commission was not wholly laid for the purpose of business. The objection of the Assessing Officer that the agreements were not signed by the competent persons of the mill or counterfoils of cheques were not produced or to some of the brokers commission paid was found to be paid at the rate of 1.399 per cent was not material to disallow this claim. The Assessing Officer for verification of genuineness of payment was required to examine the bank statements of the assessee wherein the payment was debited. It is nobody s case that bank statements were not available with the assessee at the relevant time of such commission was not found debited. Without making any enquiry the finding that the commission paid was not genuine could not be arrived at. Similarly the finding that no services were rendered is also without any basis or justification. Therefore on the facts of the case I agree with the order proposed by the ld AM. The impugned order of the learned CIT(A) should be confirmed. Thus the file should now be placed before the regular Bench for passing an appropriate order as per law. Ground No. 2 was dismissed vide separate order. However on Ground No. 1 Third Member agreed with the order proposed by the AM - In view of the opinion of the majority of Members the ground No. 1 in departmental appeal stands dismissed. As a result appeal of the revenue is dismissed.
Issues Involved:
1. Disallowance of Rs. 13 lakhs on account of commission payment. 2. Disallowance of Rs. 50,000 on account of telephone expenses. Detailed Analysis: 1. Disallowance of Rs. 13 Lakhs on Account of Commission Payment: Assessing Officer's Disallowance: The Assessing Officer (AO) disallowed the commission payment of Rs. 13 lakhs due to the following reasons: - The assessee failed to prove the nexus between commission payments and sales. - The assessee did not specify the exact services rendered by the brokers. - There was an inconsistency in the commission rates paid to major brokers (0.90%) and smaller brokers (1.39%). - The assessee did not produce quarterly reports as per the agreement with the brokers. - No proof of payment of commission was provided. CIT(A)'s Decision: The CIT(A) deleted the disallowance, reasoning that: - The assessee, being under State Government management, was unlikely to make unjustified payments. - The sales of nearly Rs. 13 crores could not have been achieved without marketing efforts. - The commission amount was not unreasonable or excessive in relation to total sales. - The AO did not verify the payments from the concerned brokers before making the disallowance. ITAT Members' Opinions: - Accountant Member: - Agreed with the CIT(A) that the disallowance was not justified. - Emphasized that the AO did not make any inquiry into the genuineness of the payments. - Highlighted that the agreements with brokers were signed by the Chief Executive and the payments were made by account payee cheques/Demand Drafts. - Cited relevant case laws supporting the assessee's claim. - Judicial Member: - Disagreed with the CIT(A) and proposed a remand for reconsideration. - Noted that the AO had made efforts to verify the commission payments but found discrepancies. - Emphasized that the assessee failed to provide sufficient evidence of services rendered by the brokers. - Pointed out that the AO's objections were not adequately addressed by the CIT(A). Third Member's Decision: - Agreed with the Accountant Member. - Concluded that the objections raised by the AO were adequately addressed by the CIT(A) and the Accountant Member. - Found that the commission payments were justified and the disallowance was not warranted. - Confirmed that the payments were made as per business practice and agreements, and the services rendered by brokers were established. Final Decision: The majority opinion favored the deletion of the disallowance of Rs. 13 lakhs on account of commission payment. 2. Disallowance of Rs. 50,000 on Account of Telephone Expenses: Assessing Officer's Disallowance: - The AO disallowed Rs. 50,000 out of the total telephone expenses of Rs. 3,24,303, citing personal use of the telephone. CIT(A)'s Decision: - Deleted the disallowance, reasoning that the company, being under State Government management, would not incur personal expenses. - Emphasized that the company is a distinct assessable entity and cannot have personal use of assets. ITAT Members' Consensus: - Both the Accountant Member and Judicial Member agreed with the CIT(A) that the disallowance was not justified. - Cited relevant case laws supporting the claim that a limited company cannot have personal use of assets. Final Decision: The disallowance of Rs. 50,000 on account of telephone expenses was deleted. Conclusion: The appeal of the revenue was dismissed on both grounds. The disallowance of Rs. 13 lakhs on account of commission payment and Rs. 50,000 on account of telephone expenses were both deleted, with the majority opinion supporting the assessee's claims.
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