Advance Exports, Ahmedabad v. The Income tax Officer,Ward-11(4),, Ahmedabad

ITA 2600/AHD/2009 | 2005-2006
Pronouncement Date: 11-03-2011 | Result: Partly Allowed

Appeal Details

RSA Number 260020514 RSA 2009
Assessee PAN AACFA8392B
Bench Ahmedabad
Appeal Number ITA 2600/AHD/2009
Duration Of Justice 1 year(s) 5 month(s) 25 day(s)
Appellant Advance Exports, Ahmedabad
Respondent The Income tax Officer,Ward-11(4),, Ahmedabad
Appeal Type Income Tax Appeal
Pronouncement Date 11-03-2011
Appeal Filed By Assessee
Order Result Partly Allowed
Bench Allotted SMC
Tribunal Order Date 11-03-2011
Date Of Final Hearing 09-03-2011
Next Hearing Date 09-03-2011
Assessment Year 2005-2006
Appeal Filed On 16-09-2009
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL : SMC BENCH : AHMEDABAD (BEFORE HONBLE SHR I T.K. SHARMA J.M .) I.T.A. NO. 2600/AHD./2009 ASSESSMENT YEAR : 2005-2006 ADVANCE EXPORTS AHMEDABAD -VS- I.T.O. WARD-11(4) AHMEDABAD (PAN : AACFA 8392B) (APPELLANT) (RESPONDENT) APPELLANT BY : SHRI M.J.SHAH A.R. RESPONDENT BY : SHRI VIMALENDU VERMA D .R. O R D E R THIS APPEAL FILED BY THE ASSESSEE IS AGAINST THE O RDER DATED 15.07.2009 PASSED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS)-XVI A HMEDABAD FOR THE ASSESSMENT YEAR 2005-2006. 2. VARIOUS GROUNDS RAISED IN THIS APPEAL ARE AS UND ER: 1. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEAL S) HAS ERRED ON FACTS AS WELL AS IN LAW IN CONFIRMING THE ADDITIONS MADE BY THE INCOME -TAX OFFICER ON ACCOUNT OF COMMISSION PAID TO PARTNER AMOUNTING TO RS.50 000/ -. 2. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEALS ) HAS FURTHER ERRED IN CONFIRMING RS.50979/- BEING 50% OF THE ADDITION OF RS.1 01 95 8/- MADE BY THE ASSESSING OFFICER ON ACCOUNT OF INTEREST PAYMENT. 3. THE LEARNED COMMISSIONER OF INCOME-TAX (APPEAL S) HAS CONFIRMED THE ADDITION OF RS.50000/- BEING COMMISSION ON SALES PAID TO SHRI AMIT BHAIRULAL. 3. THE FACTS RELATING TO CONTROVERSY INVOLVED IN GR OUND NOS. 1 AND 3 ARE THAT THE ASSESSEE FIRM HAS PAID COMMISSION OF RS.50 000/-. BEFORE THE ASSESSING OFFICER IT WAS CLAIMED THAT THIS COMMISSION HAS BEEN PAID TO SHRI AMIT BHAIRULAL PA RTNER TOWARDS SALES PROMOTION IN U.S. THE ASSESSING OFFICER DISALLOWED THE SAME ON THE GROUN D THAT THE ASSESSEE HAS NOT FURNISHED ANY SUPPORTING EVIDENCES IN THIS REGARD EXCEPT ACCOUNT OF COMMISSION PAID. THE ASSESSING OFFICER 2 ITA NO. 2600-AHD-2009 ALSO OBSERVED THAT IF SUCH COMMISSION WAS TO BE PAI D TO THE PARTNER IT SHOULD HAVE BEEN MENTIONED IN THE PARTNERSHIP DEED OR ANY AGREEMENT SHOULD HAVE BEEN ENTERED INTO WITH SUCH PARTNER IN RESPECT OF SUCH PAYMENT OF COMMISSION. T O SUM UP HE HELD THAT IN THE ABSENCE OF ANY SUCH SUPPORTING EVIDENCES COMMISSION PAID BY THE A SSESSEE FIRM CANNOT BE ALLOWED AS BUSINESS EXPENDITURE. HE ACCORDINGLY DISALLOWED COMMISSION OF RS.50 000/- PAID TO SHRI AMIT BHAIRULAL PARTNER. 4. ON APPEAL BEFORE THE LEARNED COMMISSIONER OF INC OME TAX(APPEALS) THE AUTHORISED REPRESENTATIVE OF THE ASSESSEE PRODUCED ARTICLE OF AGREEMENT ENTERED BETWEEN THE SEVEN PARTNERS OF THE FIRM. AS PER THIS AGREEMENT COMMIS SION IS PAYABLE @7.5% FOR PROMOTING SALES OF THE FIRM IN NEW MARKETS. IT WAS STATED THAT DURING THE YEAR SALARY OF RS.15 000/- EACH WAS PAID TO PARTNERS ALONE IS REQUIRED TO BE CONSIDERED UNDER S ECTION 40(B) OF THE I.T. ACT 1961. THE COMMISSION OF RS.50 000/- PAID TO ONE OF THE PARTNE R SHRI AMIT BHAIRULAL IS OVER AND ABOVE THE SALARY PAID TO HIM. THE LEARNED COMMISSIONER OF INC OME TAX(APPEALS) ASKED THE A.R. OF THE ASSESSEE TO EXPLAIN AS TO WHY SALARY SHOULD NOT INC LUDE COMMISSION FOR THE PURPOSE OF TAXATION UNDER THE I.T. ACT 1961. BEFORE THE LEARNED COMMIS SIONER OF INCOME TAX(APPEALS) A.R. OF THE ASSESSEE AGREED THAT THE SALARY INCLUDES COMMISSION . SINCE AS PER SECTION 40(B) OF THE I.T. ACT MAXIMUM SALARY PAYABLE TO ONE PARTNER IS RS.15 000/ - WHICH HAS ALSO BEEN PAID BY THE ASSESSEE THE PAYMENT OF RS.50 000/- IN THE FORM OF COMMISSIO N WILL BE DISALLOWED UNDER SECTION 40(B) OF THE I.T. ACT 1961. THE LEARNED COMMISSIONER OF INC OME TAX(APPEALS) ACCORDINGLY HELD THAT THE ASSESSING OFFICER IS JUSTIFIED IN DISALLOWING T HE COMMISSION OF RS.50 000/- PAID TO ONE OF THE PARTNER SHRI AMIT BHAIRULAL. 5. AGGRIEVED WITH THE ABOVE ORDER THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 6. AT THE TIME OF HEARING SHRI M.J.SHAH A.R. APPE ARED ON BEHALF OF THE ASSESSEE AND CONTENDED THAT SUB-CLAUSE (I) OF SECTION 40(B) CONT AINS THE WORD REMUNERATION AND REMUNERATION DOES NOT INCLUDE COMMISSION. AS AGAINS T THIS LD. D.R. DREW OUR ATTENTION TO CLAUSE (I) OF SECTION 40(B) WHICH READS AS UNDER: (B) IN THE CASE OF ANY FIRM ASSESSABLE AS SUCH - (I) ANY PAYMENT OF SALARY BONUS COMMISSION OR REMUNERATION BY WHATEVER NAME CALLED (HEREINAFTER REFERRED TO AS REMUNERATION) TO ANY PARTNER WHO IS NOT A WORKING PARTNER; OR 3 ITA NO. 2600-AHD-2009 6.1 ALTERNATIVELY THE COUNSEL OF THE ASSESSEE POIN TED OUT THAT IN CASE IT IS HELD THAT COMMISSION IS ALSO INCLUDIBLE IN REMUNERATION FOR T HE PURPOSE OF WORKING OUT THE DISALLOWANCE UNDER SECTION 40(B)(V). IN THAT EVENT THE ASSESSIN G OFFICER BE DIRECTED TO RE-WORKOUT THE DISALLOWANCE. 6.2 THE LD. D.R. POINTED OUT THAT CLAUSE (I) OF SEC TION 40(B) CLEARLY INDICATES THAT REMUNERATION INCLUDES COMMISSION. THEREFORE FOR TH E PURPOSE OF WORKING OUT THE DISALLOWANCE THE COMMISSION IS ALSO REQUIRED TO BE CONSIDERED UN DER CLAUSE (I) OF SECTION 40(B) OF THE I.T. ACT 1961. IN THE PRESENT CASE PAYMENT OF COMMISSION TO PARTNER IS NOT AUTHORISED BY PARTNERSHIP DEED. THEREFORE AS PER TERMS OF CLAUSE (II) OF SEC TION 40(B) OF THE I.T. ACT IT IS NOT ALLOWABLE. 7. RIVAL SUBMISSIONS WERE CONSIDERED. I FIND CONSID ERABLE FORCE IN THE SUBMISSIONS MADE BY LD. D.R. CLAUSE (I) OF SECTION 40(B) CLEARLY INDICA TES THAT SALARY BONUS COMMISSION OR REMUNERATION BE WHATEVER NAME CALLED IS REQUIRED TO BE CONSIDERED FOR THE PURPOSE OF ALLOWANCE/DISALLOWANCE. THE PARTNER TO WHOM THE ASS ESSEE FIRM PAID COMMISSION IS NOT AUTHORISED BY THE PARTNERSHIP DEED. THEREFORE AS P ER PROVISIONS CONTAINED IN CLAUSE (II) OF SECTION 40(B) OF I.T. ACT IT IS NOT ALLOWABLE. HEN CE THE ALTERNATE PLEA OF THE LD. COUNSEL OF THE ASSESSEE CAN BE ACCEPTED. THIS GROUND OF APPEAL IS REJECTED. 8. THE FACTS RELATING TO CONTROVERSY INVOLVED IN GR OUND NO.2 ARE THAT THE ASSESSING OFFICER DISALLOWED RS.1 01 958/- FOR THE DETAILED REASONS G IVEN IN PARA 5 OF THE ASSESSMENT ORDER WHICH IS EXTRACTED HEREINBELOW: ' ON VERIFICATION OF AUDIT REPORT IT IS NOTICED M OT ASSESSES HAS INCURRED INTEREST EXPENSES OF RS.4 00 980/-. IT IS ALSO NOTICED THAT ASSESSEE HAS ADVANCED AN AMOUNT OF RS.1 05 88 884/-TO AICO LABORATORIES INDIA LTD. ON WHICH NO INTEREST HAS BEEN CHARGED. THEREFORE VIDE ORDER SHEET ENTRY DATED 10.12.2007 THE ASSESSEE WAS ASKED TO SHOW CAUSE AS TO WHY ME INTEREST PAYMENT OF RS 4 00 9807- SH OULD NOT BE DISALLOWED. IN REPLY IT WAS SUBMITTED BY THE ASSESSEE THAT NO INTEREST HAS BEE N CHARGED ON ADVANCE GIVEN TO AICO LABORATORIES INDIA LTD. BECAUSE THE SAID AMOUNT WA S GIVEN FOR MANUFACTURING OF GOODS BY THE SAID COMPANY AND THIS IS ADVANCE AGAINST G OODS PURCHASED HENCE NO INTEREST HAS BEEN CHARGED. ON VERIFICATION OF THE AUDIT REPORT AND ITS ANNEXU RE IT IS NOTICED THAT THERE IS NO UNSECURED LOAN IN THE LIABILITY SIDE OF THE BALANC E SHEET EXCEPT A VERY MEGRE AMOUNT OF RS. 250/-. ON FURTHER VERIFICATION OF THE AUDIT RE PORT IT IS NOTICED THAT THE ASSESSEE HAS 4 ITA NO. 2600-AHD-2009 MADE PAYMENT OF INTEREST OF RS. 2 99 022/-TO ITS P ARTNERS AND PERSONS SPECIFIED IN SECTION 40A(2)(B) OF THE ACT. IT MEANS BALANCE INTEREST OF RS. 1 01 958/- HAS BEEN MADE TO THE BANK ON THE SECURED LOAN HORN THE ABOVE IT APPEA RS THAT THE ASSESSEE HAS UTILIZED ITS INTEREST BEARING FUNDS FOR THE PURPOSE OF LOONS/AD VANCES WITHOUT CHARGING ANY INTEREST. ACCORDINGLY THE INTEREST AMOUNT OF RS. 1 01 958/- PAID FOR INTEREST BEARING LOAN IS HEREBY DISALLOWED AND ADDED TO THE TOTAL INCOME OF THE AS SESSEE 9. ON APPEAL BEFORE THE LEARNED COMMISSIONER OF INC OME TAX(APPEALS) IT WAS STATED THAT LOANS AND ADVANCES GIVEN TO SISTER CONCERN M/S. AIC O LABORATORIES INDIA LTD. IS TOWARDS THE PURCHASES. THE ASSESSEE IS AN EXPORTER OF DYES AND CHEMICALS. MOST OF THE PURCHASES ARE MADE FROM SISTER CONCERN M/S. AICO LABORATORIES INDIA LT D. AGAINST CONFIRMED ORDER BANK GRANTS PACKING CREDIT TO THE ASSESSEE FIRM WHICH THE FIRM HAS GIVEN TO M/S. AICO LABORATORIES INDIA LTD. FOR PURCHASE OF DYES AND CHEMICALS WHICH ARE THEN E XPORTED. THE COPY OF THE ACCOUNT OF M/S. AICO LABORATORIES INDIA LTD. WAS SUBMITTED FOR THE PERIOD 01-04-2004 TO 31-03-2005 AND ALSO FOR THE PERIOD 01-04-2005 TO 31-03-2006. ON PERUSAL OF THIS ACCOUNT THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) OBSERVED THAT DURING THE PERIOD 01-04-2004 TO 03-09-2004 THERE IS A CREDIT BALANCE IN THE ACCOUNT OF M/S. AICO LABORATORIES IN DIA LTD. FROM 03-09-2004 ONWARDS THE ASSESSEE HAS STARTED PAYING BY VARIOUS CHEQUES TO M /S. AICO LABORATORIES INDIA LTD. AS ON 18.03.2005 THERE WAS A DEBIT BALANCE OF RS.1 32 64 937/-. THE BALANCE AS ON 31-03-2005 AFTER ADJUSTING THE PURCHASE DURING THE YEAR IS RS.1 05 88 884/-. ON THIS BASIS THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) DIRECTED THE AS SESSING OFFICER TO REDUCE THE DISALLOWANCE TO 50% OF RS.1 01 958/- I.E. RS.50 979 /- FOR THE REASONS GIVEN HEREUNDER: THE CONTENTION OF THE APPELLANT IS THAT THE ADVANC ES ADVANCE OF RS.1.05 CRORE AS ON 31- 3-2005 IS GIVEN TOWARDS THE PURCHASES TO BE MADE F ROM M/S. AICO LABORATORIES INDIA LTD IN THE SUBSEQUENT YEAR. A COPY OF ACCOUNT OF THE S UBSEQUENT YEAR FROM 1-4-2005 TO 31-3- 2006 SHOWS THAT THE FIRST PURCHASE IS MADE ON 8-4- 05 FOR RS.1 64 501/- ONLY. HOWEVER ON 18-4-2005 CHEQUE OF RS.12 LAC IS GIVEN BY THE APPE LLANT TO M/S. AICO LABORATORIES INDIA LTD AND AGAIN ON 5-5-2005 ANOTHER CHEQUE OF RS.50 60 000/- AND ON 7-5-2005 CHEQUE OF RS. 70 000/- IS PAID TO THIS COMPANY. ON 23-5-2005 ANOTHER CHEQUE OF RS. 5 LAC IS GIVEN TO THIS COMPANY WHEREAS THE PURCHASES ARE SHOWN FR OM THIS COMPANY ON 8-6-2005 FOR RS 21 15 000/- RS. 2 76 779/- ETC. AS ON 10-6-2005 T HERE IS A DEBIT BALANCE OF RS.1 48 92 604/-. AGAIN ON 13-6-2005 CHEQUE OF RS. 25 65 000/- IS GIVEN TO THE COMPANY BY THE APPELLANT EVEN THOUGH THE PURCHASES MODE AR E NOT VERY SIGNIFICANT. AT THE END OF THE YEAR I.E. AS ON 31-3-2006 THERE IS DEBIT BALAN CE OF RS.2 00 96 412/-. THE CONTENTION OF THE APPELLANT THEREFORE THAT THE ADVANCES ARE MADE TOWARDS THE PURCHASE IS NOT FULLY CORRECT. IF THE ADVANCES WERE MADE AGAINST THE PUR CHASES THEN AGAINST EACH ADVANCE THE PURCHASES SHOULD HAVE BEEN MADE BUT HERE IN THIS C ASE AT ANY POINT OF TIME THERE IS A SUBSTANTIAL DEBIT BALANCE IN THE ACCOUNT OF M/S. A ICO LABORATORIES INDIA LTD. THE FUNDS THEREFORE GIVEN TO M/S. AICO LABORATORIES INDIA LT D. CANNOT BE STATED TO BE USED FOR THE 5 ITA NO. 2600-AHD-2009 PURPOSE OF BUSINESS OF THE APPELLANT. IT IS TRUE T HAT THE APPELLANT HAS MADE PURCHASES FROM M/S. AICO LABORATORIES INDIA LTD BUT ALL THE FUNDS GIVEN TO THEM CAN NOT BE STALED TO HAVE BEEN USED FOR THE PURPOSE OF BUSINESS. THE AS SESSING OFFICER IS THEREFORE DIRECTED TO REDUCE THE DISALLOWANCE AT 50% OF RS.1 01 958/- I. E. RS 50 979/-. IN SHORT THE APPELLANT GETS RELIEF OF RS. 50 979/-. 10. AGGRIEVED WITH THE CONFIRMATION OF DISALLOWANCE TO THE EXTENT OF 50% I.E. RS.50 979/- THE ASSESSEE IS IN APPEAL BEFORE THE TRIBUNAL. 11. AT THE TIME OF HEARING BEFORE THE TRIBUNAL THE LD. COUNSEL OF THE ASSESSEE POINTED OUT THAT THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) OUG HT TO HAVE DELETED THE ENTIRE DISALLOWANCE KEEPING IN VIEW THE RATIO OF JUDGEMEN T OF THE HON'BLE SUPREME COURT IN THE CASE OF S.A. BUILDERS VS- CIT(A) REPORTED IN 288 ITR 1 (SC). THE COUNSEL OF THE ASSESSEE SUBMITTED THAT ADVANCES TO SISTER CONCERN WERE GIVEN FOR THE PURPOSE OF BUSINESS AND THE SAME IS ALLOWABLE AS A MEASURE OF COMMERCIAL EXPEDIENCY. THEREFORE T HE LD. COUNSEL REQUESTED TO DELETE THE SAME. AS AGAINST THIS LD. D.R. CONTENDED THAT DISALLOWAN CE TO THE EXTENT OF 50% WAS RIGHTLY CONFIRMED BY THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS). THEREFORE THE VIEW TAKEN BY THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) BE UPHE LD. 12. HAVING HEARD BOTH THE SIDES I HAVE CAREFULLY G ONE THROUGH THE ORDERS OF THE AUTHORITIES BELOW. IN MY CONSIDERED OPINION ONCE IT IS HELD AS ADVANCE TO SISTER CONCERN NAMELY M/S. AICO LABORATORIES INDIA LTD. FOR THE PURPOSE OF BUSINESS IN THAT EVENT THE LEARNED COMMISSIONER OF INCOME TAX(APPEALS) CLEARLY ERRED IN RESTRICTING TH E DISALLOWANCE TO 50%. THE JUDGEMENT OF THE HON'BLE SUPREME COURT IN THE CASE OF S.A. BUILDERS VS- CIT(A) ( SUPRA ) RELIED ON BY THE LD. COUNSEL OF THE ASSESSEE IS SQUARELY APPLICABLE TO THE FACTS OF THE ASSESSEES CASE. IN VIEW OF THIS FOLLOWING THE ABOVE DECISION OF THE HON'BLE SUPREME COURT THE DISALLOWANCE OF RS.50 979/- CONFIRMED BY THE LEARNED COMMISSIONER OF INCOME TAX (APPEALS) IS HEREBY DELETED. THIS GROUND OF THE ASSESSEES APPEAL IS ALLOWED. 13. IN THE RESULT FOR STATISTICAL PURPOSES THE AP PEAL FILED BY THE ASSESSEE IS PARTLY ALLOWED. ORDER PRONOUNCED IN THE COURT ON 11.03.2 011. SD/- (T.K. SHARMA) JUDICIAL MEMBER DATED : 11/03/2011 6 ITA NO. 2600-AHD-2009 COPY OF THE ORDER IS FORWARDED TO : 1) THE ASSESSEE 2) THE DEPARTMENT. 3) CIT(A.) CONCERNED 4) CIT CONCERNED 5) D.R. ITAT AHMEDABAD. TRUE COPY` BY ORDER DEPUTY REGI STRAR ITAT AHMEDABAD TALUKDAR/SR.P.S.