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TMI Blog2018 (11) TMI 788X X X X Extracts X X X X X X X X Extracts X X X X ..... ee in the absence of cogent material to discredit the version of the assessee. Hence this ground is decided in favour of the assessee and against the Revenue. The depreciation allowed earlier by the authorities shall consequently be reversed for all the affected years. - Decided against revenue Allowability of commission expenses paid by the assessee - allowable business expenditure - TDS liability - Held that:- The facts itself are disputed by both the parties which need verification by authorities as to whether deduction/payment of Income-tax at source was undertaken with respect to payment of commission being hit by provisions of Section 40(a)(ia), non consideration of CBDT circular no. 7/2009 dated 22nd October 2009 withdrawing CBDT circular no. 23 dated 23.07.1969 so far as payments of commission expenses to foreign agents, we are of the considered view that in substantial interest of justice and in all fairness to both the parties, the matter need to be set aside and restored to the file of the AO for denovo determination of the issue on merits in accordance with law. We have not commented on the merits of the issue but however our above observations shall be considered by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he opinion of the AO, this large amount of expenditure towards repairs vis-a-vis value of building comes to the tune of 40% of the value of factory building which was very high. The assessee was asked as to why these expenses should not be considered as capital in nature. The assessee submitted that the units at Vatva was located in two plots and there is one factory at Chattral. It was explained that these buildings were purchased more than 2 decades ago. It was explained by the assessee that the factory building located at Gujarat were heavily affected because of un-seasonal cyclonic rains . The factory building were severally damaged due to cyclone struck in Gujarat in financial year 2008-09. It was submitted that the assessee has incurred huge building repair expenses in financial year 2008-09 and 2009-10 . It was also submitted by assessee that quality of material used in repairs was also of high quality to strengthen the building and sustain against future occurrence of natural calamity and no new assets was created and these are repairs and maintenance expenses on the existing assets which did not resulted into creation of any new assets and the same should be treated as rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... object of the expenditure to bring a new asset into existence or to obtain a new advantage is an allowable revenue expenses. The relevant para of die observation is reproduced under: * In the case of CIT v. Delhi Press Samachar Patra (P) Ltd. (2010) 322 ITR 590, the Hon ble Delhi High Court has held that expenses related to repairs of beams, pillars, walls etc. of the existing building that has not brought into existence any new asset over and above the existing building are in the nature of revenue expenses 1.1.5 The Appellant further submits before your Honor that during the financial Year 2008-09 Appellant's factory buildings located in Gujarat were heavily affected because of unseasonal cyclonic rain. The factory buildings were severally damaged due to the cyclone struck Gujarat and hence in addition to the recurring expenditure, the Appellant has incurred huge building repair expenses in financial year 2008-09 and 2009-10. Further to that the quality of material used in repairs is also of high quality considering the uncertainty and its strength to sustain future occurrence of any natural calamity The repairs and maintenance expenses on the existing assets, ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant's factory buildings, located in Gujarat, were heavily damaged because of unseasonal cyclonic rain and were in dilapidated condition. The appellant had incurred huge one-time expenses in plastering and painting of external and internal walls, painting of structures like cranes, beams, machinery, water-proofing, floor surfacing/re-surfacing floors, maintaining factory compound walls, gates, furniture and fixtures, civil work like partition/sliding doors and windows, tiles replacement . plumbing, electric, false coiling, internal roads, maintaining gardens in the factory premises,fire fighting systems, water tank and water pumps, wash rooms, washbasins and toilets and canteen, cleaning of premise, etc. during the financial year 2008-09 and 2009-10, to make thorn fit for use The Ld AR claimed that the above expenses are recurring and not one time expenses and that the appellant has not derived any enduring benefit from these expenses. In support of its claim that the said expenditure is revenue expenditure, the Appellant has placed its reliance on the decision of the Hon'ble Supreme Court m the case of CIT v Saravana Spinning Mills (P ) ltd. ([2007] 293 ITR 201) (SC). H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst canteen repairs, ₹ 2,10,912/- against GH repair and ₹ 1,79,416/- against underground water tank repairs, totalling to ₹ 21,60,696/- are allowed as repairing expenditures and balance amount of R.s.30.84,857/- plus ₹ 7,57,906 and ₹ 23,08,986/- totalling to ₹ 61,51,749/- , is hereby capitalized, being capital / one time / first time / enduring in nature. However, the depreciation (a) 10% i.e. ₹ 6,15,175/- is hereby allowed on same. This will result into disallowance of ₹ 55,36,574/-, as against ₹ 74,81,201/-, disallowed by the A.O. The appellant will get relief of ₹ 19,44,627/-. This ground of appeal is partly allowed. 7. Aggrieved by the appellate order dated 29.08.2016 passed by learned CIT(A), the assessee filed second appeal before the tribunal . The assessee filed paper book with the tribunal. The Ld. Counsel for the assessee submitted that these expenses are Revenue in nature and it was submitted that these are normal repair and maintenance expenses of factory building. It was submitted that there was a cyclone storm in Gujarat in the financial year 2008-09 which led to the damage to the factory building and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ook value of the factory building as is appearing in the books. The assessee was claiming depreciation on these factory buildings. These expenses were in the nature of repairs and maintenance such as plastering and painting of external and internal walls, painting , water proofing, floor surfacing , resurfacing floors, furniture and fixture repairing , civil work like partition/sliding doors and windows, tiles replacement, plumbing, electric repairing , false ceiling repairs, repairs to fire fighting systems , repairs to water tank and water pumps, maintenance of wash rooms, washbasins and toilets at factories and canteen expenses , cleaning of premises expenses, etc. . We have gone through the details of expenses incurred and we have observed that these may be one time expenses for repairing/renovation to the factory buildings but they are in the nature of current repairs and cannot be treated as capital in nature as no new asset of enduring nature has come into existence . These expenses are incurred only to make factory building operational after it was hit by cyclone and could be classified at major repairs but still it does not losses the character of current repairs being rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in M/s. Maitry Exports P. Ltd. . The AO observed commission of ₹ 60 lakh vis-a-vis additional new turnover of ₹ 5 crores lead to commission @ 12% which is on the higher side as against prevailing rate of 1 to 2% . It was also observed by the AO that the total turnover of assessee is ₹ 206 crore and commission payment was only ₹ 2.09 crore which come to 1%. The AO allowed commission to M/s. Maitry Exports P. Ltd. to the tune of 1% of ₹ 5 crores and balance amount of ₹ 61,18,000/- was disallowed by the AO and added to the income of the assessee , vide assessment order dated 26.03.2013 passed u/s 143(3) of the 1961 Act. The AO was of the view that the assessee has paid commission expenses on earlier years also and in this year sales have not jumped because of appointment of Maitry Exports Private Limited and thus excess amount was added back to the income of the assessee by the AO. 11. The assessee company filed first appeal with Ld. CIT(A) with regard to the disallowance of commission expenses paid to the tune of ₹ 61.18 lakhs to M/s. Maitry Exports P. Ltd., and the assessee submitted before Ld. CIT(A) as under: 2.1.1 The Appellant is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nalysing their prices and method of marketing and distribution thereby leading in increase in the sales of the Appellant. As mentioned above , the strategy developed had helped to procure substantial orders from the new and existing Clients for the Appellant. 2.1.8 The Appellant humbly submits before your Honor that the commission expenses has incurred under the normal trade parlance and looking at its commercial expediency the same should he allowed as business expenses. 2.19 The Appellant submits before Your Honor that the Learned AO has made the addition merely by observing that wife and daughter of the director of the Appellant are having 80% of shareholding in the Maitry Exports P. Ltd., and had applied arbitrary rate of commission @1% on turnover without appreciating the fact that by incurring the commission expenditure, the Appellant's sale have increased substantially in comparison to the last year (i.e. from ₹ 121 crore to ₹ 206 crores). Without prejudice to above, it is expressly staled that M/s. Maitry Exports Pvt. Ltd is a domestic company which is liable to pay tax at the same rate at which Appellant is liable to pay the tax. Neverthel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d substantially in comparison to the last year (i.e. from ₹ 121 crs to ₹ 206 crs). It is further claimed that rate of commission differs under various circumstances and arbitrary rate of commission cannot be applied to all levels of the transaction. 9.2 In view of above arguments and in order to ascertain the genuineness of appellant's claim, during the course of appellate proceedings, the Ld. AR was requested to furnish credible documents, i.e. nature of research and development carried out correspondence made by the daughter and wife of the director of M/s. Windsor Machines Ltd. to find out the new clients, for procuring orders, party-wise details of commission paid, etc. In compliance the Ld. AR could not furnish the credible documents, in support of above various claims. The Ld. AR. however, submitted the list of parties to whom commission was paid (copy of the said list is annexed with the appeal order for ready reference). 9.3 The perusal of the same reveal that the appellant had paid commission of ₹ 2,09,31,005/- @ 7.21% on the total sale of ₹ 23,68,74,400/-, to various parties at various rates ranging from 0.43% lo 20%. In compliance, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmission of ₹ 7,95,000/- @ 20% to P Sirkantbabu, ₹ 15,00,000/- @ 9.32% to Smt. Sarita Soni, ₹ 7,10,000/- @ 8.39% to Pabba Anitha and ₹ 21,10,000/- @ 12.47% to Pabba Puender Gupta, is also not commensurate with the rate prevailing in the market vis-a-vis nature of business and appears to have been given for other than business needs, for which the appellant could not offer any valid explanation. 9.4 On perusal of details submitted by the Ld. AR in support of above payments, it is noticed that in most of the cases, the stereo type of confirmation letters i.e. kindly release my commission amount Rs. ...., as discussed with you, against machinery.... supplied to M/s. ..... vide invoice no..... Likewise the perusal of details of list of TDS deducted and deposited, it is noticed that in most of the cases, the appellant had not deducted/deposited the tax, namely Maitry Exports P. Ltd., (total commission ₹ 66,18,000/- AVA Satish (Rs. 1,22,544/-, Shivaji Rao Sambhaji Deshmukh (Rs. 3,56,326/-), Edwunwu David (Rs. 3,58,827/-). Addex Plastic Machinvery (Rs. 18,21,507/-), Hussain Mohammed Mansoar (Rs. 1,28,360/-). Suju Daniel (Rs 3,31,996/-). Plastic Poly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... served as under :- 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 factors and determine for himself whether the commission said to have been paid is properly deductible. In this case absolutely no material on record has been brought by the assessee to suggest that the commission agents had procured any orders for the assessee. The production of bills or payments having been made by account-payee cheques cannot by itself show that the commission agents had procured any order for the assessee. No correspondence.............. 9.6 In the above case, the Hon'ble Supreme Court has made it very clear that by creating documents and making payment through banking channel to give colour, does not sacrosanct/ establishes the genuineness of the transaction. In view of these facts, an enhancement notice u/s 251(2) of the Act dated 24.08.2016 was issued as under: 2. On perusal of material available on record, it is seen that during the year you have paid commission of ₹ 2.09 Crores, ranging from 0.43% to 20%, mainly to ladies/relatives/ others on ad-ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IT(A) had issued notice of enhancement which ultimately led to disallowance of ₹ 1,52,00,000/- as against disallowance of ₹ 61.18 lakhs made by the AO, vide appellate order dated 29.08.2016 passed by learned CIT(A). 13. The matter has now reached the doors of the tribunal at the behest of the assessee who has filed second appeal with the tribunal. The learned counsel for the assessee at the outset submitted that total commission expenses paid were ₹ 2.09 crores as against total turnover of the assessee of ₹ 206.57 crores. It was submitted that preceding year turnover was ₹ 121 crores and there has been an substantial increase of turnover in the year under consideration vis-a-vis preceding year. It was submitted that commissions were paid to marketing consultants/agents for generating orders in favour of the assessee. It was submitted that an agreement was entered into with Maitry Exports Private Limited wherein it was agreed to pay fixed consultancy fee of ₹ 60,00,000/- per annum exclusive of service tax thereon and they were to assure additional new business of ₹ 5 crores or more. It was submitted that it is true that relatives of Direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s generated through these marketing agents/consultants which comes to 7.31%. It was submitted that income-tax was not deducted at source on commissions paid to foreign agents owing to CBDT circular of 1969 but it was fairly admitted by learned counsel for the assessee that the said circular number 23 dated 23.07.1969 stood withdrawn by another CBDT circular number 7/2009 dated 22.10.2009 concerning provisions of Section 9 of the 1961 Act. The assessment year under consideration before us is AY 2010-11 and the CBDT circular of 1969 was withdrawn on 22.10.2009. It was submitted that no proceedings were initiated against the assessee u/s 201 read with Section 195 of the 1961 Act . It was submitted that complete details of the commission/marketing agents/consultants were submitted to whom overseas commission was paid but no enquiry was conducted by the AO/CIT(A) . It was also submitted that complete details of sales is available. It was submitted that learned CIT(A) took an adverse view on the grounds that these commissions paid to agents were in round figures. The another reason why learned CIT(A) took adverse view is that commissions were paid to ladies which in view of learned CIT(A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... parties. 14. We have carefully considered rival contentions and perused the material on record including cited case laws , relevant orders of authorities and paper book filed before the tribunal. We have observed that the assessee is engaged in the business of manufacturing of plastic processing machineries and looms. The assessee has claimed to have engaged services of marketing agents/consultants for giving support services for generating sale orders, day to day co-ordination / liaison with buyers, successful conclusion of the orders leading to supplies of machineries by the assessee to its customer and collection of payments for which commission payments were made. The assessee s industrial units for manufacturing of plastic processing machineries and looms are located in Gujarat and Thane, Maharashtra. As could be seen from chart of sales orders claimed to be generated by these marketing agents/consultants as are placed in paper book filed by the assessee, the buyers are spread all across country as well in foreign countries. The assessee turnover was ₹ 121 crores in the AY 2009-10 which increased to ₹ 206.56 crores during the year under consideration. The commi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreement to prove their competency to render these contractual marketing services. It is also not brought on record by the assessee that these parties claimed to be brought in by Maitry Exports Private Limited are new customers who placed orders with the assessee for the first time with the efforts and initiative of Maitry Exports Private Limited. The terms of the agreement with Maitry Exports Private Ltd is in variance with the terms and conditions agreed with the other agents/consultants as in the cases of other agents/consultants, they claimed their payment for commission after realisation of sale proceed by the assessee , while only in the case of Maitry Exports Private Limited, the payments were made to the tune of ₹ 60 lacs per annum + service tax payable on monthly basis based on the assurance that atleast new business of ₹ 5 crores is generated by said Maitry Exports Private Limited in favour of the assessee, which also translated into commission rate of 12% on sales generated by them. The conditions in the agreement prima-facie appeared to be tilted in favour of Maitry Exports Private Ltd . No such special reasons for entering this agreement with Maitry Export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst law. The learned CIT(A) asked assessee to produce various persons before him vide notice of enhancement dated 24.08.2016. The assessee did not produce these parties before learned CIT(A). The powers of learned CIT(A) are coterminous with powers of the AO. The commission expenses were claimed by the assessee as deduction for expenses from income and these expenses were appearing in assessee s books of accounts. The primary burden/onus is on the assessee to place all relevant records and cogent material before the authorities below in order to prove that these expenses are genuine and were incurred wholly and exclusively for the purposes of business of the assessee satisfying the mandate of Section 37(1). Once the assessee discharges its primary burden, then the burden/onus will shift to the Revenue to bring on record cogent material to demolish the contentions of the assessee. As detailed above, the primary onus/burden which fell on the assessee was not completely discharged. However, The findings of learned CIT(A) that payments were made to ladies and hence it cannot be allowed is erroneous and violates Article 14 and 19(1)(g) of the Constitution of India which needs to be dis ..... X X X X Extracts X X X X X X X X Extracts X X X X
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