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TMI Blog2017 (12) TMI 424X X X X Extracts X X X X X X X X Extracts X X X X ..... y the ld AO. AR stated that the entire payments of commission to R.N. Forgings Pvt. Ltd had suffered service tax and were made by account payee cheques after due deduction of tax at source and TDS returns were duly filed with the income tax department. These facts are not disputed by the ld DR before us. CIT-A had rightly deleted the disallowance of commission paid to R.N. Forgings Pvt. Ltd - Decided in favour of assessee. Disallowance of commission paid to three other individuals namely Mahendra Kumar Bharatia, Rajendra Kumar Bharatia - disallowance made for want of written agreements and on the count that single bill has been raised by those commission agents for the services rendered to the assessee in March 2010, whereas the assessee firm was no longer in existence from 20.1.2010 - Held that:- We find that the assessee had duly informed the assessee in writing that the commission has been paid to these parties for sales effected to certain parties which were given in its reply letter filed before the ld AO. The sales made to those parties had not been disputed by the revenue. We find that all these three commission agents had duly accounted for the commission received fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced on record before the ld AO regarding their identity, creditworthiness and genuineness of the transactions. In any case, we find that no addition has been made towards the loan amounts in the assessment. Once the loan amounts have been accepted as genuine and its utilization thereon for business purposes is proved, the allowability of interest thereon u/s 36(1)(iii) is automatic. Hence we hold that the ld CITA had rightly deleted the disallowance of interest - I.T.A No. 859/Kol/2015 And C.O. No. 34/Kol/2015 - - - Dated:- 1-12-2017 - Shri M.Balaganesh, AM And Shri S.S.Viswanethra Ravi, JM For The Department : Shri Soumyajit Dasgupta, Addl. CIT For The Assessee : Shri S.S. Gupta, FCA Shri Arvind Agarwal, Advocate ORDER Per M.Balaganesh, AM 1. This appeal by the Revenue and Cross Objection by the assessee arise out of the order of the Learned Commissioner of Income Tax(Appeals)-15, Kolkata [in short the ld CIT(A)] in Appeal No.23/CIT(A)-15/14-15/Cir-49/Kol dated 23.03.2015 against the order passed by the DCIT, Circle-49, Kolkata [ in short the ld AO] under section 143(3) of the Income Tax Act, 1961 (in short the Act ) dated 22.03.2013 for the Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commission was paid in Asst Year 2010-11 were new. He also observed that the commission paid in the year under appeal had increased substantially as compared to that of Asst Year 2009-10. 2.2.1. Commission paid to R.N.Forgings Pvt Ltd ₹ 44,55,078/- The assessee provided a copy of contractual agreement dated 18.3.2009 in connection with payment of commission to R.N.Forgings Pvt Ltd in respect of sales made by the assessee company to M/s Nimbus Irrigation Pvt Ltd [ in short NIPL]. The assessee claimed that M/s NIPL was the distributor of assessee s products i.e HDPE pipes and Irrigation Systems and had been acting as wholesale distributor of assessee s products for several preceding years including the year under consideration. The ld AO observed that the assessee had allowed Nimbus Irrigation to use its own trade / brand name Nimbus . This clearly indicate that NIPL was an associate company of assessee firm. The ld AO questioned the necessity of making payment of commission to R.N.Forgings Pvt Ltd for effecting sales to NIPL who is already acting as a trusted distributor for the assessee. He observed that no prudent businessman would like to pay an agent for selling ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 44,55,078/-. 2.2.2. Commission paid to Mahendra Kumar Bharatia, Rajendra Kumar Bharatia and Omprakash Sharma The ld AO observed that the commission paid to aforesaid parties were in respect of sales made to Anjana Sprinkler and Savitri Enterprises. The ld AO observed that sales were made to these parties in Asst Year 2009-10 for which no commission has been paid by the assessee and hence there is no reason for the assessee to engage the services of these three commission agents for effecting sales to aforesaid two enterprises during the year. He concluded that these agents do not possess requisite expertise to render the agency services to the assessee. Moroever, the sales made to these two enterprises had reduced as compared to Asst Year 2009-10. The ld AO observed that there is no written agreement between the assessee and these three commission agents. Accordingly he concluded that the assessee had failed to establish the rendering of services by these agents for effecting payment of commission and accordingly disallowed the commission payments made to them. 2.3. Before the ld CITA, it was submitted that at the outset, M/s NIPL is not an associate concern of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of service tax. It was stated that the entire commission payment was made by account payee cheques after due deduction of tax at source and the TDS thereon had been duly remitted to the account of the Central Government and TDS returns filed accordingly. The ld AO in the remand report again reiterated that R.N.Forgings Pvt Ltd had reported commission income only to the tune of ₹ 7,99,862/- in its profit and loss account. This figure has been clarified by the assessee as being represented for the immediately preceding financial year i.e FY 2008- 09 relevant to AY 2009-10. The assessee explained that earlier its sale of project work used to account for 48.33% of its total turnover but in AY 2010-11 its project work business had declined and in AY 2010-11 the sale of irrigation system HDPE pipes account for 95.15% of its total turnover and this is possible only due to special emphasis placed on increasing the sale of irrigation system HDPE pipes whose sales increased from ₹ 13.61 crores to ₹ 25.05 crores with the bulk of the increase coming through the work of M/s R.N.Forgings Pvt Ltd. 2.4. The ld CITA deleted the disallowance in respect of commission paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he AO has not disputed that the commission recipient s office is located at Jaipur and that it is engaged hardware business in Rajasthan. As such the commission agent had business contacts on the ground in this field. M/s. NIPL has also reported back to the commission agent in respect of the sales effected by it on a monthly basis. The claim of the AO that M/s. NIPL was already known to the assessee is not relevant because the AO cannot step into the shoes of the businessman and decide how the business is to be carried out. Further the AO by reporting the commission income of the Commission Agent for A.Y. 2009-10 indirectly accepts that the commission agent had commission income in earlier years also even when on the internet there is no mention that M/s. R.N. Forgings P. Ltd. is engaged in the business of commission work. The AO has disbelieved the books of the assessee without any evidence. This is not as per law. In the case of CIT v. M/s. Inbuilt Merchant P. Ltd. the Hon ble High Court of Kolkata in ITA No. 225 of 2013 G.A. NO. 3825 of 2013 has rejected a similar approach of the Revenue and has held with reference to Section 32(2) of the Indian Evidence Act, 1872, that the AO ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rse order disregarding the judgment of Hon'ble Supreme Court on definition of colorable device in Mc Dowell Co. Ltd. 2.6. With regard to the commission paid to three other parties viz Omprakash Sharma, Mahendra Kumar Bharatia and Rajendra Kumar Bharatia, the assessee explained party wise as under:- a) In the case of Shri Omprakash Sharma, the ld AO found that the commission recipient had been paid the commission of ₹ 6,28,894/- in respect of sales to Savitri Enterprises. The ld AO observed that in Asst Year 2009-10, the assessee had made sales of ₹ 2,61,92,343/- to M/s Savitri Enterprises without payment of any commission, but in Asst Year 2010-11, the sale to M/s Savitri Enterprises had reduced to ₹ 1,83,82,006/- and assessee further claimed that commission of ₹ 6,28,894/- was paid in respect of these sales. The assessee claimed that the party was not keen on carrying on the business with the assessee and it was only the said commission agent (i.e omprakash sharma) who ensured that some business could be carried out. The ld AO however disbelieved this argument as there was no agreement entered into with the said commission agent by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in respect of Shri Mahendra Kumar Bhartia. As a result, in respect of ground of appeal Nos. 2,3, 4 the assessee gets a relief of ₹ 44,55,078/- and the balance sum of ₹ 6,28,894/-, ₹ 1,49,989/- ₹ 3,02,196/- totaling ₹ 10,81,079/- is confirmed. The assessee gets partial relief. 2.8. Aggrieved, the assessee is in cross objection before us on the following grounds:- 1. Because that the Ld. Commissioner of Income Tax (Appeals) was erred in law as well as in facts in confirming the disallowance made by the Ld. AO on account of commission paid to Omprakash Sharma of ₹ 6,28,894/-, Shri Mahendra Kumar Bhartia of ₹ 1,49,989/- and Shri Rajendra Kumar Bhartia of ₹ 3,02,196/-, totaling to ₹ 10,81,079/- on the alleged ground that the appellant did not file any evidence and there was no services and/or to prove that any services were rendered by the said commission agents, and his such conclusions are based on his surmises and conjectures and hence not good in law and are grossly unjustified, erroneous and unsustainable, and are contrary to the facts and material on record. 2. Because that in the light of the documents ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f judgement of Kolkata High Court dated 14.03.2014 in the case of CIT vs. Inbuilt Merchant (P) Ltd. 168 170 2.9.1. We find that the ld CITA had given a finding that the assessee and NIPL are not associated concerns which is not controverted by the revenue before us with any cogent material. We find from the memorandum of association of M/s R.N.Forgings Pvt Ltd enclosed in page 122 of the paper book vide clause 3 of the main objects of the said company includes as under:- 3. To carry on business manufacturers, of designers, fabricators, assemblers, processors, exporters, importers, buyers, sellers, contractors, traders, distributors, agents, stockists, commission agents and dealers in machinery and engineering products of all type, hardware cutting tools, hand tools; precision measuring tools, instruments and apparatus, fitting steel structures, boilers and furnace proprietors. 2.9.2. From the perusal of the balance sheet of M/s R.N.Forgings Pvt Ltd enclosed in paper book, we find that it had offered commission income even in Asst Year 2009-10 to the tune of ₹ 7,99,862/-. This goes to prove that they are in commission agency busi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vide letter dated 7.2.2013 para 5. 2.9.6. It is well settled that the revenue cannot sit in the armchair of the businessman and direct how a businessman should conduct his business. The businessman knows his interest best. Whether the necessity of incurrence of an expenditure on the basis of commercial expediency of the business is to be viewed from the point of view of the businessman and not from the point of view of the revenue. 2.9.7. The ld AO relied on the decision of the Hon ble Supreme Court in the case of Lachminarayan Madanlal vs CIT reported in (1972) 86 ITR 439 (SC) to justify his action of disallowing the commission. In the facts before the Hon ble Apex Court, the assessee firm mad repayment of commission to another firm which was not at all in existence when the commission agreement was entered into. Moreover, in the payee firm, the minor children and spouse of the partners of the payer firm (ie assessee firm) were partners. These facts were duly appreciated by the Hon ble Apex Court and was held that the commission agreement is only a device to shift the profits from the payer firm to payee firm and accordingly upheld the disallowance of commission payment. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to 19.1.2010 pertaining to the assessee firm and for the period 20.1.2010 to 31.3.2010 pertaining to Nimbus Pipes Ltd ( i.e. the company which had taken over the assessee firm on going concern basis), that due bifurcation of bill amount between 1.4.2009 19.1.2010 and 20.1.2010 31.3.2011 had been made and expenses booked accordingly in the respective books. There is no duplication of claim of bills. Apparently the commission agents are not aware of the conversion of the assessee firm into a private limited company. In any case, when the bills are duly bifurcated and no allegation of duplication of bills and claim of expenses thereon has been made by the revenue, this cannot be a ground on which the disallowance of expenses could be sustained. We find that the assessee had duly informed the assessee in writing that the commission has been paid to these parties for sales effected to certain parties which were given in its reply letter filed before the ld AO. The sales made to those parties had not been disputed by the revenue. We find that all these three commission agents had duly accounted for the commission received from the assessee in their respective income tax returns and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 18% p.a. is not excessive by market or commercial standards and the AO had himself allowed the rate of interest in the immediately preceding assessment year. As the loans are carried forward from the earlier years, the AO has not been able to show any specific reason to deviate from the earlier position. The case laws cited by the assessee also declare the interest rate of 18% as reasonable. Therefore, the disallowance of ₹ 1,92, 313/- is deleted and the ground of appeal Nos. 5 6 are allowed. 4.3. Aggrieved, the revenue is in appeal before us on the following grounds :- 4. On the facts and circumstances of the case in law, whether the Ld. CIT(A) was justified in allowing excess interest amounting to ₹ 1,92,313/- [@18% to persons covered u/s 40A(2)(b)] against AO s contention that payment of interest is excessive and unreasonable. 4.4. We have heard the rival submissions and perused the materials available on record including the paper book containing the following papers :- Description Paper Book pages filed before us Statement of Unsecured Loan with rate of interest paid to loan parti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activities of the loan creditors. The assessee explained that all the loan creditors under question were private limited companies and they all had filed letters dated 4.3.2013 in the office of the ld AO confirming the loan transactions and had filed bank statements, sources of the funds advanced, audited accounts, PAN details and ID proof of their directors. Further the assessee pointed out before the ld CITA that the ld AO had himself accepted the loan amounts and has not disputed the same. As regards the utilization of the loan amounts, the assessee explained that the immediate utilization of the funds was to purchase raw materials and some fittings. The assessee filed copies of its bank account of Jaipur branch evidencing receipt and disbursal of the sums received as loans. It was argued that once the loans have been accepted as genuine and had been accepted as being utilized for business purposes, there is no reason to disallow the interest paid thereon in the assessment. 5.2. The ld CITA deleted the disallowance of interest amounting to ₹ 13,69,122/- by observing as under:- In the remand proceedings the AO further raised an issue that the Bhiwani Branch of the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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