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TMI Blog2012 (11) TMI 160X X X X Extracts X X X X X X X X Extracts X X X X ..... e notice was issued, wherein it was noted that the commission was paid to Smt. Roopam Maradia who was holding 18.20% of shares of the assessee-company. It was also noted that the commission was paid @ Rs.100/- per M.T. of the sales. It was also noted that the family of Smt. Roopam Maradia was totally holding 80% shares of the assessee-company. Further, it was also noted that during the survey, it was found that the lady was neither marketing nor selling any of the products. A statement of Smt. Roopam Maradia was referred wherein she has acknowledged that her employees were marketing the product. However, the observation of the AO was that nothing could be borne out of the records in this regard and that there was no such evidence available. The AO has noted that the sales were made directly by the Director and employees of the company, namely Shri Vidhyut Kapadia, Shri Satishbhai and Shri Lavjibhai. According to AO, there was no evidence about the presence of any agent. Nothing was borne out of record that there was any agency or consignment for the purpose of execution of sale. Rather, the AO has noted that Shri Vidhyut Kapadia in his statement recorded during the survey proceedin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eration, no evidence was found regarding the said two employees doing any co-ordination work of sale or collection of dues for the assessee-company. In respect of Rajiv Mardia, it was noted by the AO that he was neither an employee nor a power of attorney holder of Nakoda Enterprises. There was no employer-employee relationship nor any agreement to establish the services rendered by these persons. It was concluded that the payment of commission was not incurred wholly and exclusively for the purpose of the business, therefore finally by invoking the provisions of section 37 of IT Act, the commission paid of Rs.24,71,078/- was disallowed. Being aggrieved the matter was carried before the first appellate authority. 3. Before ld.CIT(A), reliance was placed on an agreement stated to be in existence since year 2004 executed between the assessee-company and Nakoda Enterprises. A comparative chart has also been furnished to demonstrate that the turnover of the rolling mill had gone up from the year 2004-05 to 2006-07. It was also informed that on the total turnover the rate of commission was only 0.41%. It was argued that the entire marketing was taken care by Nakoda Enterprises. It was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of IT Act. The expenditure was not incurred wholly and exclusively for the purpose of the business rather the genuineness of the expenditure was doubted, hence disallowance u/s.37 was correctly made by the AO, ld. DR has argued. 5. From the side of the respondent-assessee ld.AR Mr. S.N. Soparkar appeared and submitted that the AO was confused whether the provisions of section 40A were to be applied or the provisions of section 37 were to be attracted. On merits he has stated that through the statement of S/Shri Vidhyut Kapadia, Hitesh Shah, Hemant Joshi and Smt. Roopam Maradia it was narrated that the payment of commission was towards sales of the company. An another point has also been raised that Smt. Roopam is independently subject to tax on the maximum tax bracket therefore there was no benefit of diversion of profit. The lady is neither wife of any of the Director nor she is holding more than 20% shares in the assessee-company, therefore the provisions were wrongly invoked. In her statement she has confirmed that her proprietary-firm was selling the product like channel, angles of the assessee-company. Ld.AR has also referred few confirmation of the parties who have purchase ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of payment whether on daily basis, monthly basis or yearly basis and the calculation of commission on each claimed transaction is to be placed on record. (iv) That whether the payment was made on the basis of credit notes or bills raised by the commission agent or that what was the basis of satisfaction before making of payment. (v) That the Assessee is required to establish that an agent has been appointed to look after the sales if not personally doing the marketing. (vi) That the assessee is to establish the existence of commission agency between the two parties, i.e. the principal and the agent. (vii) That the assessee is to establish the principle and agent relationship and for that all the ingredients as prescribed under the law has to be established. (viii) That the agent is required to be produced, so that he can establish what efforts he has made and how the efforts were fruitful and what correspondence in this regard was made between the principle and the parties. (ix) That the law is very clear that although the payment of commission might have been made through banking channel or could be in accordance with an agreement but still it is open to the Revenue Departm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id. The decision of Mrs.Irene D'Souza (supra) is in respect of an assessee happened to be C and F Agent handling of Cargo of Temper. The question was about the percentage of disallowance, however the genuineness was not doubted. The case law of Voltamp Transformers Ltd.(supra) is also not on the question of the genuineness of the transaction but about the admissibility of an expenditure. The question was whether the expenditure in question was excessive or unreasonable having regard to the fair market value of the goods or services, etc. Rather, the Hon'ble Court has given a finding on fact that the evidence regarding the commission paid was not disbelieved but the question was whether the payment of 5% commission was unreasonable or excessive. In order to arrive at the conclusion whether payment made was a fair market value for the services rendered by the sole selling agency the test of commercial expediency was taken into account and the expenditure was not found exorbitant. Because of these reasons, even this decision is not applicable on the facts of the present case. Likewise in the case of Sudarshan Chits (I) Ltd. (supra) the finding was that the payment was made on (i) co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Roopam to the assessee company in terms of an agreement dated 25.02.2004.The allegation of the AO was that the generator was taken on lease from the lady with an intention to pass on an undue benefit. The assessee's reply was that the decision of hiring of generator set was a commercial decision of the assessee-company. The lady has invested a huge amount towards purchase, therefore leased out the D.G.Set. The assessee-company has consumed substantial fuel to run the D.G. Set, hence the lease rent was claimed as an allowable expenditure. The AO has held that 50% of the expenditure could be meant for business purposes. Rest of the amount was disallowed by invoking section 37 of IT Act. In this connection, we have heard both the sides and perused the material placed on record. Our attention was drawn on page 142 of the compilation containing the agreement executed in respect of the lease of the D.G. Set. The assessee's contention is that the AO should not have partly disallowed the claim by invoking the provisions of section 37(1) of IT Act. It is true that the AO has invoked the provisions of section 37(1) of IT Act while disallowing 50% of the claim. We have noted that the lease r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t part is allowable. The words "wholly and exclusively", thus refer to the motive and the object behind the expenditure. The object has to be exclusively as also solely for running of the business. The expenditure has to be incurred in reality and there shall be ostensible reason for incurring of the expenditure. The Assessing Officer has thought it proper to decide the percentage of disallowance on the basis of the expected annual return on such investment. We, however, clarify that in no circumstance the disallowance as made by the Assessing Officer should be enhanced while we are restoring this ground back to the stage of the Assessing Officer with the direction that the assessee shall place on record the basic requirement of business necessity for taking on hire the impugned DG set. With these remarks this ground is restored back to the file of Assessing Officer for De novo decision. 9. Ground No.3 reads as under: 3. The CIT(A) has erred in law and on facts in deleting the disallowance of Rs.5,00,000 made out of miscellaneous expenses. 9.1 At the time of survey, certain loose-papers were recovered and on that basis it was noted that a transportation bill was not recorded in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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