Ita/1451/2009 Of The Commissioner Of Income Tax v. Shri. E.s.jose

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HON'BLE THE CHIEF JUSTICE DR. MANJULA CHELLUR &THE HONOURABLE MR.JUSTICE A.M.SHAFFIQUE TUESDAY, THE 22ND DAY OF OCTOBER 2013/30TH ASWINA, 1935ITA.No. 1451 of 2009 ( ) ------------------------- AGAINST THE ORDER IN ITA 508/coch/1998 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 13-09-2002 APPELLANT:--------- THE COMMISSIONER OF INCOMETAX, COCHIN. BY ADVS.SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT:---------- SHRI E.S. JOSE, PROP A-2-Z TILES & FLOORINGS, P.T. USHA ROAD, COCHIN-11. BY ADV. SRI.N.N.SUGUNAPALAN BY ADV. SRI.S.SUJIN THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 22-10-2013, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: APPENDIX TO I.T.A.NO.1451 OF 2009 PETITIONER'S EXHIBITS: ANNEXURE A: COPY OF THE ORDER OF THE ASSESSING OFFICER DATED27/3/1998.ANNEXURE B: TRUE COPY OF THE ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS) DATED 7/9/1998.ANNEXURE C: TRUE COPY OF THE ORDER OF THE TRIBUNAL DATED 13/9/2002. RESPONDENT'S EXHIBITS: NIL // True Copy// PA to Judge MANJULA CHELLUR, CJ & A.M.SHAFFIQUE, J. * * * * * * * * * * * * * I.T.A.No.1451 of 2009 ---------------------------------------- Dated this the 22[nd] day of October 2013 J U D G M E N T SHAFFIQUE,J This appeal is filed against the order of the Income taxAppellate Tribunal, Cochin Bench in I.T.A.No.508/COCH/98dated 13/09/2002. The respondent is the assessee and theissue involved is with reference to assessment year 1995-96.The assessment was completed on 27/03/1998 determiningthe total income at Rs.19,75,350/-. 2.While arriving at the total income, the AssessingOfficer disallowed the commission payment to the extent of4,03,853/- to agents and two relatives of the assessee byrestricting such commission to 1% of the total turnover. TheAssessing Officer has also made addition of Rs.11,91,600/- being credit in the account of the assessee as not proved tobe genuine. 3.An appeal was filed by the assessee before the Commissioner of Income Tax (Appeals). The appellateauthority interfered with the assessment order and in thecase of commission payments it is held that 2.5% of thetotal turnover has to be excluded. In respect of theunproved loan credits, the appellate authority deleted theaddition except in respect of two credits totallingRs.25,600/-. 4.The Revenue preferred an appeal before theAppellate Tribunal and the Tribunal confirmed the firstappellate order. The Revenue has filed this appeal inter aliacontending that none of the vouchers produced by theassessee in respect of payment of commission to agentscontained the signature of the recipients. The same was thesituation in respect of commission paid to two relatives. Inthe absence of any evidence to prove the payment ofcommission, allowance given by reducing 2.5% of the total turnover as against 1% given by the assessing authority is absolutely without any basis and therefore the decisions of the appellate authority and the Tribunal was perverse. 5.In respect of loan credits it is contended that nocorroboratory evidence was adduced by the assessee in theform of confirmation letters to prove the loans, before theAssessing Officer. The 1[st] appellate authority should nothave relied upon a document produced by the assessee atthe appellate stage without complying with Rule 46A of theIncome Tax Rules. The following substantial questions oflaw arise for consideration in the above appeal. i)In the absence of signatures in the vouchersproduced by the assessee in regard to payment ofcommission to agents, whether the Tribunal is justified inupholding the order of the 1[st] appellate authority restrictingthe addition on account of disallowance of commissionpayments at 2.5%. In the absence of signatures in the vouchers 5.In respect of loan credits it is contended that nocorroboratory evidence was adduced by the assessee in theform of confirmation letters to prove the loans, before theAssessing Officer. The 1[st] appellate authority should nothave relied upon a document produced by the assessee atthe appellate stage without complying with Rule 46A of theIncome Tax Rules. The following substantial questions oflaw arise for consideration in the above appeal. i)In the absence of signatures in the vouchersproduced by the assessee in regard to payment ofcommission to agents, whether the Tribunal is justified inupholding the order of the 1[st] appellate authority restrictingthe addition on account of disallowance of commissionpayments at 2.5%. In the absence of signatures in the vouchers ii)Whether the Tribunal was justified in confirmingthe order passed by the 1[st] appellate authority in regard to I.T.A.No.1451/2009 compliance of Rule 46A in relation to the credit of Rs.10lakhs while producing documents before the appellateauthority. 6.The assessee, in his return, had mentioned severalcredits for different amounts totalling more than Rs.11 lakhs.The assessing authority after taking evidence found that twocreditors disowned to have given any loan to the assessee.The amount involved is Rs.26,600/-. In respect of oneSri.Joseph Mathew who is shown to have given loan credit ofRs.5,00,000/-, on taking evidence it was found that theoutstanding amount was only Rs.4 lakhs. Therefore, it wasfound that the aforesaid amount i.e. Rs.1,26,600/- wasstated as income of the assessee under the head 'othersources'. 7.In respect of four other creditors as well, theassessing officer found that they have not signed theconfirmation letters. It was observed that the confirmationletters signed by the assessee in the name of such personswere not genuine and were fabricated. Therefore, the I.T.A.No.1451/2009 Assessing Officer found that the loan credits from fourpersons totalling Rs.50,000/- are unproved and wasassessed as income under the head other sources. Inrespect of another person also, an amount of Rs.15,000/-was shown as outstanding in his name which was alsotreated as unproved. The assessee has shown a furthercredit of Rs.5,50,000/- on 27/10/1994 and Rs.4,50,000/- on03/11/1994. Though the assessee was requested to produceevidence of the person who had given such amounts,according to the Assessing Officer the assessee did notproduce any evidence in respect of the said creditorMr.C.C.Thampi. When another opportunity was granted, theassessee requested for two months time. The AssessingOfficer did not accept the same in the absence of anyevidence. 8.In regard to sales commission, a sum ofRs.6,26,388/- was shown as sales commission. This workedout to 2.81% of the total turnover. The Assessing Officerfound that though notice was issued to few of those persons I.T.A.No.1451/2009 there was no response and ultimately found that eventhough there is a practice of giving commission, normallythe rate of commission is 0.5%. But having regard to thefact that the petitioner has only started business, 1% of thetotal turnover is treated as commission payment. 8.In regard to sales commission, a sum ofRs.6,26,388/- was shown as sales commission. This workedout to 2.81% of the total turnover. The Assessing Officerfound that though notice was issued to few of those persons I.T.A.No.1451/2009 there was no response and ultimately found that eventhough there is a practice of giving commission, normallythe rate of commission is 0.5%. But having regard to thefact that the petitioner has only started business, 1% of thetotal turnover is treated as commission payment. 9.Before the appellate authority, the 1[st] groundconsidered was regarding the sales commission. It is heldthat it is an accepted trade practice for businessmen dealingin sanitary equipments, ply woods and floorings etc. to paycommission to the Plumbers who introduce customers tobusiness establishments. It is found that to achieve a salesturnover of Rs.2.22 Crores, the appellant has to pay certainpercentage of commission and the percentage ofcommission paid is not on the higher side. The 1[st] appellateauthority also found that the commission paid by otheragencies cannot be compared with the commission paid bythe respondent herein as the respondent was marketing anew product and there was stiff competition. Having regardto the said finding it was found that restricting the claim at I.T.A.No.1451/2009 1% of the total turnover is not correct and it was held thatcommission at 2.5% of the total turnover has to be allowedas deduction. 10.In regard to the addition of Rs.11,91,600/- it wasfound that in respect of loan given by Sri.K.M.Jayachandran,it was found that the loan was availed in the assessmentyear 1993-94 relating to assessment year 1994-95 andhence the same was deleted. In regard to the addition ofRs.1,00,000/- it was found that when M/s.Quality Buildershave confirmed that there was some misclassification ingiving credit of Rs.1,00,000/- and when the paymentsreceived by M/s.Quality Builders correspond with the entriesmade in the books of the assessee, the books of M/s.A 2 ZBuilders Pvt. Ltd. and since the assessee was a Director inthe said company, the payment was made through himwhich was mistook as received from the assessee. Hencethe addition made for the said amount was deleted. Inregard to the loans relating to Rs.50,000/- as well, theappellate authority formed an opinion that all I.T.A.No.1451/2009 the four persons had confirmed before the assessing officerthat they have advanced various amounts. Hence there wasno reason to doubt their statements and accordingly thesaid amount of Rs.50,000/- was deleted. 11.In regard to addition of Rs.10 lakhs, it is found thatthe assessee had produced before the Assessing Officercopy of the bank account of Nedungadi bank Ltd. wherein,on 27/10/1994 and 03/11/1994 two sums of Rs.5,50,000/-and Rs.4,50,000/- were deposited to the account of theassessee by bank clearing. These amounts were paid bySri.C.C.Thampi through his bank account in Federal BankLtd. The appellant produced a confirmation letter also fromthe loan creditor. Hence the addition of the said amountwas also deleted. 12.Though the Revenue preferred an appeal before the Tribunal for the same reasons, the Tribunal hadconfirmed the directions issued by the Commissioner ofIncome tax (Appeals) and accordingly dismissed the appeal. I.T.A.No.1451/2009 11.In regard to addition of Rs.10 lakhs, it is found thatthe assessee had produced before the Assessing Officercopy of the bank account of Nedungadi bank Ltd. wherein,on 27/10/1994 and 03/11/1994 two sums of Rs.5,50,000/-and Rs.4,50,000/- were deposited to the account of theassessee by bank clearing. These amounts were paid bySri.C.C.Thampi through his bank account in Federal BankLtd. The appellant produced a confirmation letter also fromthe loan creditor. Hence the addition of the said amountwas also deleted. 12.Though the Revenue preferred an appeal before the Tribunal for the same reasons, the Tribunal hadconfirmed the directions issued by the Commissioner ofIncome tax (Appeals) and accordingly dismissed the appeal. I.T.A.No.1451/2009 13.The learned counsel appearing for the Revenuerelied upon the judgment of the Supreme Court inCommissioner of Income Tax v. P.Mohanakala[(2007)291 ITR 278 (SC)] for the proposition that in the cases wherethe explanation offered by the assessee about the natureand source of the sums found credited in the books is notsatisfactory but there is, prima facie, evidence against theassessee in regard to the receipt of money and thereafterthe burden is on the assessee to rebut the same and if hefails to rebut it, it can be held against the assessee that itwas a receipt of an income nature. Another judgment reliedupon isCommissioner of Income-Tax v. UnitedCommercial and Industrial Co.(P.) Ltd.[(1991) 187 ITR596]. This is a judgment of the Division Bench of CalcuttaHigh Court. The proposition is that mere production of theconfirmation letters before the Income Tax officer would notby itself prove that the loans have been obtained from thoseloan creditors or that they have creditworthiness. 14.It is argued that as far as commission isconcerned, there is no basis for allowing commission at2.5%. No evidence was adduced by the assessee to provethe said fact. No materials are relied upon by the appellateauthority to come to such a conclusion. Hence the saidfinding by the 1[st] appellate authority and the Tribunal isperverse and is liable to be set aside. 15.In regard to the deletion of other incomeespecially Rs.10 lakhs paid by Mr.C.C.Thampi it is arguedthat no evidence was produced before the Assessing Officerand the appellate authorities had committed serious error inrelying upon the additional document produced by theassessee which was contrary to Rule 46A of the Income TaxRules. In regard to the deletion of other income 16.On the other hand, learned counsel for theassessee placed reliance on the judgment inAddl.Commissioner of Income Tax, Bihar v. BahriBros. P.Ltd. [(1985) 154 ITR 244] to contend that when theassessee has disclosed the names of the creditors and the names of the banks on which the cheques were drawn, theassessee can be said to have discharged the primary onussince the assessee not only disclosed the identity of thecreditors but also the source of income. The onus thereforeshifts to the department to verify that the creditors werehaving bank account. The learned counsel for the assesseealso placed reliance on the Division Bench judgment of theOrissa High Court in Commissioner of Income Tax v.Baishnav Charan Mohanty [(1995) 212 ITR 199] whereinit is held that when a question arises whether cash creditappearing in the books of accounts of an assessee has to beaccepted, the assessee is required to establish the identityof the creditor, capacity of the creditor to advance moneyand the genuineness of the transaction. If these threeconditions are satisfied, it would be for the department todisprove the same. Another judgment relied upon isCommissioner of Income Tax v. R.S.Sibal [(2004) 269ITR 429]. This is a judgment of the Division Bench of theDelhi High Court. It is held that if both the lower appellate authorities have recorded a categorical finding that byproducing the documents, the assessee had discharged theonus which lay on him with regard to the genuineness of thegifts, the inference drawn would be on the appreciation ofthe evidence and facts. It will not give rise to any questionof law much less a substantial question of law. It is arguedthat the findings by the appellate authorities are based onappreciation of evidence and therefore, no substantialquestion of law arises for consideration in the matter. 17.On a perusal of the assessment order as well asthe orders passed by the appellate authorities, in regard tothe deletion made by the appellate authorities withreference to the credit shown in the accounts to an extent ofRs.11,60,000/-, the evidence clearly indicated that thepersons who appeared before the authorities haveconfirmed having given loans to the assessee in their swornstatements. Once such statements had been given andmerely because they have not given any confirmation letter,the said credits cannot be excluded appears to be wrong. The same is the situation with reference to the credit ofRs.10 lakhs. The assessee had indicated that the saidamount was sent by Sri.C.C.Thampi through bank accountand the particulars of bank account were also produced.The only reason for not deleting the said amount was non-production of confirmation letter. The same was producedat the appellate stage. The said confirmation letter wastaken as evidence by the appellate authority and the saidact had been confirmed by the Tribunal. Apparently,deletion of various amounts which were reflected as creditsin the books of the assessee was purely a factual matterwhich was required to be considered by the fact findingauthorities. Though the Assessing Officer had decidedagainst the assessee on those points, the appellate authorityhad accepted the explanation given by the assessee andhad deleted the said amount from the income as theevidence available was sufficient to prove the source. Thisapparently is a finding of fact which was confirmed by theTribunal and for that reason we do not think that any question of law arise for consideration to reconsider the saiddeletion. 18. Reference was made by the learned counsel forthe Revenue on Rule 46A to indicate that no application wasfiled for producing the confirmation letter fromMr.C.C.Thampi. The appellate authority had found that theassessee had already produced sufficient documents toprove the credit. That by itself was enough to prove that theloan was taken in two instalments and that too by receivingcheques drawn on Federal Bank Ltd. and those amountswere deposited in the Savings Bank account of the assesseemaintained in Nedungadi Bank Ltd. It is stated that theassessee had produced copy of the bank account ofNedungadi Bank Ltd which shows the deposits made to theassessee's bank. The confirmation letter produced by theassessee during the appellate stage was only a furtherdocument to prove such a credit. It is found by the appellateauthority that since the transaction was done through thebank account, the loan transaction was genuine and hence the addition made has to be deleted. Though it is argued onthe basis of the judgment in Mohanakala's case thatpayment through cheques sent from abroad by itself will notprove that the transaction was genuine, having regard to thefact that the appellate authority as well as the Tribunal hadaccepted the said finding, we do not think that non-compliance of Rule 46A of the Rules by itself would amountto a substantial question of law as even otherwise theappellate authority was convinced about the genuineness ofthe transaction. the addition made has to be deleted. Though it is argued onthe basis of the judgment in Mohanakala's case thatpayment through cheques sent from abroad by itself will notprove that the transaction was genuine, having regard to thefact that the appellate authority as well as the Tribunal hadaccepted the said finding, we do not think that non-compliance of Rule 46A of the Rules by itself would amountto a substantial question of law as even otherwise theappellate authority was convinced about the genuineness ofthe transaction. 19.In regard to the disallowance of the commissionpaid, we do not find any material on record, verified or reliedupon by the appellate authority to increase the commissionfrom 1% to 2.5%. The assessing authority had permittedcommission in the absence of any other evidence to provethe same at 1% of the total turnover taking into account thecommission paid by similar agencies. The assessingauthority had found that normally the commission wouldcome only to 0.5% of the total turnover. The appellate authority found that the commission would be in excess of1% taking into account the fact that the assessee had topromote a new company's product. It is not in dispute thatnone of the vouchers produced by the assessee was signedby any of the persons who had received the commission.Therefore, normally such amounts are to be added to theincome of the assessee. For deletion of such income,necessarily evidence has to be adduced. No evidence worthappreciating was available other than a general contentionthat commission had been paid. The Assessing Officerpermitted allowance of 1% as commission and we do notfind any reason for the appellate authority to have increasedthe said commission to 2.5%. This finding apparently isperverse as it is not substantiated by any material on record.Such an approach has been made purely based on surmises.The Tribunal has also approved the finding of the 1[st]appellate authority without considering the matter anyfurther. This finding, according to us, is hence perverse andis liable to be set aside. I.T.A.No.1451/2009 20.Having regard to the aforesaid consideration, wepartly allow the appeal setting aside the finding of the CIT(Appeals) and the Appellate Tribunal in respect of thedeletion of 2.5% of the turnover as commission andsustaining the order of the Assessing Officer in regard to thesame. In all other aspects, the finding of the CIT (Appeals)and the Appellate Tribunal are confirmed. (sd/-) (MANJULA CHELLUR, CHIEF JUSTICE) (sd/-) (A.M.SHAFFIQUE, JUDGE) jsr