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TMI Blog2007 (11) TMI 341X X X X Extracts X X X X X X X X Extracts X X X X ..... was completed at the loss of Rs. 1,86,09,750. The Assessing Officer noted that the assessee in the Profit and Loss account, debited commission and brokerage on cloth and yarn at Rs. 13 lakhs on total sales of Rs. 1,329.14 lakhs. Thus, commission worked out by the Assessing Officer at the rate of 0.97 per cent on sales. The Assessing Officer required to supply names and addresses of all the persons to whom commission has been paid and to give the details of services rendered by the Commission Agent. Further, the Assessing Officer required the basis on which commission had been paid. It was explained to the Assessing Officer that commission is being given to brokers appointed by the company on the terms and conditions mentioned in the agreement and as per the policy of the company. It is further explained that the commission is being given either by crossed cheque/Demand Draft or adjusted against the amount recoverable from brokers. Further, commission to brokers are paid for the services rendered by them i.e., procuring the orders and receiving the payments from the buyers. The assessee also submitted names and addresses of 19 brokers. The Assessing Officer has mentioned in the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee that the commission is paid to brokers/agents since the inception of the company. However, the Assessing Officer has disallowed the amount of commission during the year under consideration. It is also contended that as per the business practice, the brokers/agents procure the orders and take responsibility of receiving the payments and for doing such types of activities, they have been paid commission. The assessee had submitted the copy of agreements etc., which were made with the different brokers/agents at the time of assessment proceedings and methods and procedures by which the brokers procure the orders and receive the payment. The assessee has given the list of all the brokers/agents to whom commission given with complete address. Further, the assessee-company is being run under the supervision of M.P. State Textile Corpn. by the State Government of M.P. and nobody can spend even a single paisa, which is not necessary. All the payment of the commission to brokers/agents have been paid by crossed account payee cheque/Demand Draft and strictly as per the agreement. It is further argued that the ld. Assessing Officer should at least verify the payment from the concerne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7.23 lakhs while in the year under consideration, the sale has been declared at lesser amount of Rs. 1,354.44 lakhs. Therefore, according to her the sales have gone down in spite of the fact that the commission has been paid to the brokers at Rs. 13 lakhs. The ld. Departmental Representative further invited our attention to page 2, wherein the details of nine Directors nominated by the Government of Madhya Pradesh. He further invited our attention to pages 12 to 16, which is copy of agreement between the assessee-company and various brokers. This agreement was signed by Shri U.S. Pandey, the chief executive of the assessee-company, who is not nominated by the Government of M.P. as Director. At pages 20-23 of the paper book, she filed a copy of decision of this Bench in the case of Kirti Industries (India) Ltd. [IT Appeal No. 834 (Indore) of 1983 for assessment year 1997-98] wherein the disallowance of commission payment to M/s. Agarwal Traders and M/s. Sanjay Agencies were confirmed. 8. After hearing the ld. Departmental Representative and going through the paper book filed by her, which is placed on record, we noted that small reduction in sale cannot be basis of disallowance of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly stipulated in the agreement at paras 7 and 8 of the agreement that the offer received by the brokers should be communicated to the Mills expeditiously for consideration and if the offers are accepted, they should arrange execution between buyers and sellers. The cloth delivery should be taken within the stipulated period, if the cloth had been manufactured but delayed in delivery of the goods by the Mills for any reasons, the buyers and brokers will not be entitled to cancel the contracts. At para 15, it is mentioned that the selling agent shall be solely responsible for effecting the delivery of the goods against the payments for goods sold through them and in case any of their Merchants/Buyers refused to take the delivery of the goods or refused to payment the amount of goods, the selling agents shall be fully responsible for making full payments with interest and other expenses etc. At para 8, it is mentioned that the brokers shall be entitled for commission at the rate of 0.5 per cent on ex-mill value of the goods excluding the excise duty etc., on such sales made by them. 9. From the above, we noted that as per the business practice, the brokers/agents procured the orders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... instructions and directions of the top executives of the company and were approved by the board of directors at the end of every month. According to the Tribunal, the facts that the assessee was a public limited company, that the accounts were not merely audited but were also placed before the general body of shareholders, that the assessee's turnover was increasing year after year and that such payments claimed as deduction had dropped from 1.34 per cent for one of the years to 0.22 per cent in the year in question, were very relevant. On the basis of these and other evidence, the Tribunal concluded that the fact of payment of commission was established even though the names and addresses of the recipients were not given and that the payments were made for the purpose of business. This was a finding of fact which could not be interfered with by the High Court. The payments of commission of Rs. 96,807 and Rs. 78,805, respectively, for the assessment years 1970-71 and 1971-72 were deductible;" 11. Hon'ble Punjab & Haryana High Court in the case of CIT v. Ishwar Prakash &Bros. [1986] 159 ITR 843, held that the finding arrived at by the Tribunal, on appreciation of the evidence, was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... has wrongly disallowed the telephone expenses of Rs. 50,000. The assessee is a sick unit and not a single paisa is being spent which in the personal nature or which is not for business. No personal phone was made by any person. The assessee has submitted the copies of telephone bills etc. and requested several times that there is no personal phones in its bill. On the other hand, the ld. Departmental Representative relied upon the assessment order. 15. The CIT(A) held that this being a case of company, that too Company under the State Government Management, the disallowance made by the Assessing Officer for personal calls, cannot be sustained in fact and in law. Therefore, he directed to delete the amount of Rs. 50,000. Further the Assessing Officer should have appreciated that it was not a case of Private Limited Company. However, we noted that Hon'ble Gujarat High Court in the case of Sayaji Iron 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 per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the company on the company terms and conditions as per policy of the company and the commission is being paid either by crossed cheque/Demand Draft or adjusted against the amount recoverable from brokers. The commission broker is responsible for collecting orders and receiving payment thereof. The assessee later on submitted names of 19 brokers to whom commission was paid and as per details submitted, it was seen that these brokers procured the sale orders for Rs. 11,30,95,411.77 and commission paid to them was Rs. 10,22,675.40. It was explained that other agents could procure only small orders. The percentage of commission on sales for these 19 brokers worked out to 0.90 per cent. By implication the rest of the commission agents put together procured the remaining orders and on average they got brokerage of 1.399 per cent. The Assessing Officer, therefore, noted that there is inconsistent statement of the assessee giving the commission of 0.97 per cent of the sales. The Assessing Officer also noted from sample copy of the agreement that brokers have to prepare statement of sales and work out commission payable to them every quarter of the year. However, the assessee failed to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an Lal v. CIT [1972] 86 ITR 439 held- "That mere existence of an agreement between the assessee and its selling agents or payment of certain amounts as commission, assuming there was such payment, does not bind the Income-tax Officer to hold that the payment was made exclusively and wholly for the purpose of the assessee's business. Although there might be such an agreement in existence and the payments might have been made, it is still open to the Income-tax Officer to consider the relevant facts and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under section 37 of the Act." 19. The ld. DR has pointed out from the sample agreement that the commission agents are required to file statement of sales in order to work out the commission. However, the assessee has not filed any such statement before Assessing Officer. The assessee has thus failed to satisfy the Assessing Officer as to what services have been rendered by the commission agents for the assessee. The Assessing Officer has very specifically recorded a finding of fact that the assessee has failed to state specifically the services rendere ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted through relevant material. Thus, the assessee has failed to bring sufficient evidence before the Assessing Officer to prove as to what services were rendered by the commission agents for the assessee. 20. Considering the above discussion, 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. 21. As a result, the appeal of the revenue is allowed for statistical purposes on the issue of commission payment on which the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns to whom commission has been paid and to give the details of work done by these commission agents and the basis on which commission has been paid. The assessee's only submission was that commission is being given to brokers who are appointed by the company on the company terms and condition and as per the policy of the company. Commission is being paid either by crossed cheque/DD or adjusted against the amount recoverable from broker. Commission broker is responsible for collecting order and receiving the payment thereof". The assessee later submitted names addresses of 19 Brokers, amount of brokerage given and the value of sales procured. Here also the assessee failed to give the dates of procurement of order as called for. As per these details submitted, it was seen that value of sales procured through them was Rs. 11,30,95,411.77 and the total commission paid to them was Rs. 10,22,675.40. According to assessee this list contained only the major commission agents. Other agents procured only small orders. The percentage of commission to sales for these 19 brokers works out to 0.90 per cent. By implication, the rest of the commission agents put together procured orders worth Rs. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o brokers/agents have been paid by crossed account payee cheques/DDs and strictly as per agreements. The learned Assessing Officer without making any verification disallowed huge amount of commission. It was also emphasized that no textile mill could run without appointing brokers/agents and without making payment of brokerage/commission to them. Accordingly, the disallowance made was submitted to be unjustified and deserved deletion. 5. The learned CIT(A) deleted the disallowance of Rs. 13 lakhs with the following observations:- "4.2 The Assessing Officer in disallowing entire commission expenditure of Rs. 13 lakhs has noted some discrepancy in the amount of brokerage payment made vis-a-vis large brokerage payment made and payment made to other remaining brokers and has farther held that the appellant company failed to prove the nexus between the commission payment and sales and the details of exact services rendered and the goods in terms of quantum could not be furnished. Thereafter, after referring to the small discrepancy between the rate of commission for major brokerage and brokerage related to smaller sales and in absence of quarterly reports from the brokers as well proo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not given any finding on this finding of the Assessing Officer. Even the counterfoils of the cheque through which payments have been made to the commission agents were not produced before the Assessing Officer. Thus, the assessee has failed to produce reliable and cogent material or evidence before the Assessing Officer to satisfy the Assessing Officer as to what services have been rendered by the commission agents for the assessee. The ld. DR also pointed out from the profit and loss account and balance sheet filed by the assessee before the Assessing Officer to show that even the sales have gone down in the assessment year in question as compared to earlier assessment year. Therefore, the assessee has failed to prove through reliable and cogent material before the Assessing Officer that the expenditure claimed was in fact laid out or expended wholly and exclusively for the purpose of business. The DR also correctly pointed out that the assessee being a sick company declared by BIFR and the management was taken over by State Government but the commission agreements were not signed by any responsible Officer. Therefore, looking to the financial position of the assessee, the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rned Departmental Representative, and Shri Manoj Fadnis, for the assessee. 10. Smt. Vandana Sagar, learned Departmental Representative, drew my attention to the reasonings recorded by the Assessing Officer and reproduced above for disallowing the claim of Rs. 13 lakhs. She emphasized that the commission was claimed to have been paid as per agreement which provided that the brokers shall prepare a statement of sales made by them and work out the commission payable to them every quarter of the year. However, no such statements were produced before the Assessing Officer. Thus, the details of sales on which the commission was paid were not filed before the Assessing Officer. Further, the assessee has claimed to have paid commission at the rate of 0.97 per cent of the sales but it was found that to small brokers commission was paid at the rate of 1.399 per cent. This excessive rate of brokerage paid was not explained. She further stated that the genuineness of the brokerage was not established as counterfoils of cheques issued to brokers were not produced for verification. Lastly, she emphasized that the learned CIT(A) was swayed by the fact that the assessee-company was run under the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rroneous. Further, as noted even by the Assessing Officer, complete details of sales on which commission was paid were fully furnished before the Assessing Officer. These details are also available at pages 8 and 9 of the paper book filed by the learned Departmental Representative. Having regard to the above details, it was immaterial that the assessee did not produce bifurcated figure of sales and commission due in each of the quarters of the year. For this reason, commission could not be disallowed. Likewise, the payment of brokerage/commission differed from broker to broker depending upon the agreement with the broker and, therefore, the fact that although average brokerage on total sales was 0.97 per cent, on small quantity of sales, brokerage paid worked out to 1.399 per cent. At any rate, even the brokerage paid at the above rate cannot be said to be excessive and is fully supported by the documentary evidence. 13. The assessee-company paid the brokerage through crossed cheques or DDs and this fact was verifiable with reference to the bank statements. It is not in dispute that the bank statement was available with the assessee. Yet the Assessing Officer wrongly insisted on p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccept 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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