Rajendra Kumar Kasliwal v. Assit Commissioner Of Income Tax

HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH ATJAIPUR D.B. Income Tax Appeal No. 648 / 2009 Rajendra Kumar Kasliwal ----Appellant Versus Assit Commissioner Of Income Tax ----Respondent _____________________________________________________ For Appellant(s) : Mr. Tikam Chand Jain For Respondent(s) : Mr. K.D. Mathur for Mr. R.B. Mathur _____________________________________________________ HON'BLE MR. JUSTICE K.S. JHAVERI HON'BLE DR. JUSTICE VIRENDRA KUMAR MATHURJudgment 29/05/2017 1.By way of this appeal, the appellant has challenged thejudgment and order of the Tribunal whereby the Tribunal hasallowed the appeal of the department for statistical purpose andcross objection is partly allowed. 2.While admitting the appeal, this Court on 7[th] December,2009, has framed the following substantial questions of law: “(1) Whether in the facts and in the circumstances ofthe case the Hon’ble Tribunal is correct in law inupholding the order of ld. CIT(A) and confirmingdisallowance of sale commission paid @ 5% torelatives, to the extent of 50% under Section 40A(2)(b)of the IT Act?” 3.We have heard the counsel for the parties. 4.Counsel for the appellant has also taken us to the order of AO, wherein it has been observed as under: “The assessee has made commission on sale of Rs.4,90,727- out of which Rs. 4,49,861/- was paid to the family members as under:- 1. Shri Manish Kasliwal _ Rs. 2,46,864/- 2. Reetika Jain _ Rs. 1,07,439/- 3. Avnish Kasliwal _ Rs. 95,558/- The assessee was asked to explain why thecommission payment made to the family members benot disallowed. In reply to that vide his written replyfiled on 16-10-2007 the assessee has stated as under:- “Assessee has paid commission on sale to fivepersons including 3 family members- the rate ofcommission being 5% on value of sales uniformly to allthe 5. All the 3 family members namely Sh. ManishKasliwal & Sh. Avnish Kasliwal (Sons) and Reetika Jainare rendering whole-time services of bringing foreigncustomer to assessee’s showroom, by canvassing andmeeting them in hotels, sight seeing places like Amber,City Palace etc. In assessee’s case, this is the mosteffective mode of getting customers, since assessee’sshowroom is located in a residential area and not in acommercial place where walk in customers could come ingood numbers. Not all customers brought to theshowroom buy goods. Commission is paid only when asale takes place. Assessee has complete record linkingeach sale with name of the person bringing the customerto show room- nature of goods sold the value of goodssold etc. No taxi driver, tour operator or guide brings anycustomer nor is there is any walk-in customer sales. Taxidrivers etc. demand commission at much higher rateswhich the assessee is unable to pay hence no customersthrough them. Assessee has been following this practice of payingcommission since last so many years, which has alwaysbeen accepted as genuine finally in assessments u/s143(3) in past years also even in case of the above closerelatives (details for last 3 years enclosed). Reetika Jain is a qualified Gemologist. She stoodfirst in exam in “Diploma in Gem Identification” courseconducted Gem & jewellery Export Promotion Council(Sponsored by Ministry of Commerce, Govt. of India).She has also passed the Gemology Diploma Exam ofGreat Britain. With all these outstanding qualificationsand being a smart lady she is well qualified to renderservices of bringing foreign customers- mostly ladies tothe showroom”. 4.1. And also the order of CIT(A), wherein it has been observed as under: Assessee has been following this practice of payingcommission since last so many years, which has alwaysbeen accepted as genuine finally in assessments u/s143(3) in past years also even in case of the above closerelatives (details for last 3 years enclosed). Reetika Jain is a qualified Gemologist. She stoodfirst in exam in “Diploma in Gem Identification” courseconducted Gem & jewellery Export Promotion Council(Sponsored by Ministry of Commerce, Govt. of India).She has also passed the Gemology Diploma Exam ofGreat Britain. With all these outstanding qualificationsand being a smart lady she is well qualified to renderservices of bringing foreign customers- mostly ladies tothe showroom”. 4.1. And also the order of CIT(A), wherein it has been observed as under: “I have considered facts of the case and argumentstaken by Sh. Mathur quite carefully. After going throughthe copies of evidence produced by Sh. Mathur it isnoticed that on the letter head of appellant it waswritten that certain sales were booked through theefforts of those persons to whom commission was paidand thereafter on the basis of self made vouchers thecommission @ 5% of sales was credited in the accountof those persons to whom salary was also paid. Thebasic evidence is the invoice itself from which it couldhave been verifiable that whether said sales has beenprocured through the persons to whom commission hasbeen paid or there could have been any independentevidence in the form of correspondence etc. but no suchevidence could have been produced. Considering suchnon verifiability when A.O. has disallowed only 50% ofthe commission claimed in respect of the relatedpersons within the meaning of S.40A(2)(b) of the I.T.Act then in my considered view he was fully justified inmaking aforesaid disallowance of Rs. 2,24,930/- whichis hereby confirmed by rejecting relevant ground ofappeal. 4.2. He also drew our attention to para 9 and 10 of the order of the Tribunal, which reads as under: 9. In support of this objection the Ld. AR referreddetails of commission paid during the A.Y. underconsideration and in A. Yrs. 2002-03 to 2004-05,copies whereof have been placed at page Nos. 14 to16 of the paper book filed on behalf of the assesseewith this certificate that these documents were filedbefore the Ld. CIT(A). The Ld. AR also referred pageNos. 18 to 28 of the paper book wherein copies ofassessment order u/s143(3)/254 for A.Y. 1997-98accepting payment of commission @ 5%, details ofcommission paid during A.Y. 1997-98, and SFT wisesales linking with commission paid have been madeavailable. The Ld. DR on the other hand tried to justifythe first appellate order on the issue. 10. Considering the above submissions we find thatthe first appellate order on the issue is reasoned oneupholding the disallowance of 50% of the claimedcommission in respect of related persons within themeaning of S.40A(2)(b) in absence of its verifiabilityand proper evidence. The Ld. CIT(A) has noted that onthe letter head of the assessee furnished in support ofthe claimed payment of commission, it was writtenthat certain sales were booked through the efforts ofthose persons to whom commission was paid andthereafter on the basis of self made vouchers thecommission @5% of sales was credited in the accounts of those persons to whom salary was also paid. Thus,the basis evidence remained the invoice itself fromwhich it could have been verifiable as to whether thesaid sales have been procured through the efforts ofpersons to whom commission was paid or there couldhave been any independent evidence in the form ofcorrespondence etc. to support the genuineness of theclaimed commission payment. Considering thesematerial aspects we are of the view that the Ld. CIT(A)has rightly upheld the disallowance made by the AO.The objection No.2, is accordingly rejected.” 5.He relied upon the following decisions: of those persons to whom salary was also paid. Thus,the basis evidence remained the invoice itself fromwhich it could have been verifiable as to whether thesaid sales have been procured through the efforts ofpersons to whom commission was paid or there couldhave been any independent evidence in the form ofcorrespondence etc. to support the genuineness of theclaimed commission payment. Considering thesematerial aspects we are of the view that the Ld. CIT(A)has rightly upheld the disallowance made by the AO.The objection No.2, is accordingly rejected.” 5.He relied upon the following decisions: 5.1Commissioner of Income Tax vs. Udaipur Distillery Company Ltd. (2009)316 ITR 426 (Raj.), wherein it has beenobserved as under: 3. The matter was carried in appeal, and the learnedCIT(A) deleted the additions. The learned CIT(A) hadfound that it is a fact on record that this issue hasalready been examined in the earlier assessment yearsby the AO while completing assessment under Section143(3), and they have accepted the claim of theassessee with regard to payment of lease rent. 4. The Revenue carried the matter in appeal beforethe Tribunal, and the learned Tribunal found that theassessee has been paying this amount as per theagreement in earlier years, which was allowed in theassessment made under Section 143(3) and there isno change in the factual position from the earlier yearsvis-a-vis the instant year, and lease rent continues tobe paid at the same level, and it was also held thatthere is no material worth the name with the AOjustifying deviation from the earlier stand taken by theRevenue, in not accepting this payment of lease rentas per the agreement. Thus, it was found that theCIT(A) rightly dealt with the matter in allowing theassessee's claim. 10. since the question as framed comprehends theaspect that the deletion of addition has been made byignoring relevant considerations which were requiredto be taken into account in terms of Section 40A(2)(a).But it is not the function of the Tribunal to determinethe remuneration which in their view should be paid toan employee of the assessee. An employer in fixing the remuneration of his employees is entitled toconsider the extent of his business, the nature of theduties to be performed, and the special aptitude of theemployee, future prospects of extension of thebusiness, and a host of other related circumstances. 11. But it is not the function of the Tribunal todetermine the remuneration which in their view shouldbe paid to an employee of the assessee. An employerin fixing the remuneration of his employees is entitledto consider the extent of his business, the nature ofthe duties to be performed, and the special aptitude ofthe employee, future prospects of extension of thebusiness, and a host of other related circumstances. 12. In our view, these two judgments are completeanswer to the question to the effect that the learnedCIT(A) and the learned Tribunal had not ignored therelevant considerations which were required to betaken into account in terms of Section 40A(2)(a) of theAct.” 5.2. Commissioner of Income Tax vs. Grinar ConstructionCo.(2003) 261 ITR 463 (Raj.), wherein it has been observedas under: Though they are relatives Rs. 1,000 per month to aperson for the work they have done in our view cannotbe said to be unreasonable. Otherwise, also thatfinding of fact the Tribunal that salary paid to Sumatiand Padam Kumar is for the purpose of business andaccounted for it cannot be said unreasonable in thefacts and circumstances of the case. 6.Secondly he contended that in the earlier year the same expense were allowed. He has also relied upon the decision of Bombay High Court in Commissioner of Income Tax vs. Indo Saudi Services (Travel) (P) Ltd. (2009) 310 ITR 306(Bom), wherein it has been observed as under: 5.2. Commissioner of Income Tax vs. Grinar ConstructionCo.(2003) 261 ITR 463 (Raj.), wherein it has been observedas under: Though they are relatives Rs. 1,000 per month to aperson for the work they have done in our view cannotbe said to be unreasonable. Otherwise, also thatfinding of fact the Tribunal that salary paid to Sumatiand Padam Kumar is for the purpose of business andaccounted for it cannot be said unreasonable in thefacts and circumstances of the case. 6.Secondly he contended that in the earlier year the same expense were allowed. He has also relied upon the decision of Bombay High Court in Commissioner of Income Tax vs. Indo Saudi Services (Travel) (P) Ltd. (2009) 310 ITR 306(Bom), wherein it has been observed as under: “Business disallowance under Section 40A(2)-Excessive or unreasonable payment Commissionpayment to sister concern-Assessee's business wasthat of being general sales agents of Saudi ArabianAirlines. It earned commission at the rate of 12 percent from Saudi Arabian Airlines on the tickets booked/sold by them. Assessee appointed severalagents including its sister concern and paid incentivecommission to such agents by way of handlingcharges. AO held that incentive paid to sister concernwas more than sub-agents and disallowed excesscommission paid to sister concern at the rate of 1/2per cent which was confirmed by CIT(A). (i) That the assessee apart from paying handlingcharges @ 9 1/2 per cent to its sister concern, havepaid handling charges at the same rate to otheragents viz., M/s A.K. Travels, M/s Om Travels and M/sJet Age Travels. (ii) For asst. yrs. 1986-87 and 1987-88 the assesseehad paid the handling charges @ 10 per cent to thesister concern of the assessee and such charges paidwere considered to be reasonable by the appellant, (iii) For asst.yrs. 1989-90 and 1990-91 the assesseehad reduced the payment of handling charges to 91/2 per cent to its sister concern. The AO hasconsidered the payment of commission to the sisterconcern in the asst. yr. 1989-90 and allowed the claimafter due scrutiny. For asst. yr. 1990-91 also the claimof the assessee @ 9 1/2 per cent has been allowedthough the same has not been dealt with by the AOspecificallyintheorder. (iv) For asst.yrs. 1993-94 and 1994-95 theassessment has been made by the AO under Section143(3) and handling charges paid to the sisterconcern @ 9.5 per cent have been considered to bereasonable and allowed. In view of the aforesaid admitted facts we are of theview that the Tribunal was correct in coming to theconclusion that the CIT(A) was wrong in disallowinghalf per cent commission paid to the sister concern ofthe assessee during the asst. yrs. 1991-92 and 1992-93.” 7.With regard to third contention that commission paid @ 5%to relatives, he relied upon the decision of Punjab and HaryanaHigh Court in Commissioner of Income Tax vs. Brij Pal Sharma (2011) 333 ITR 229 (P and H), wherein it has been observed as under: “Business disallowance under Section 40A(2) - Excessive orunreasonable payment Hire charges of truck--The revenueraised the question of law whether Tribunal was right in law inaffirming decision of CIT(A) in deleting addition of Rs. 4,00,000made by AO under Section 40A(2) on account of truck hirecharges, holding that AO had not demonstrated in what mannercharges were excessive, disregarding the fact that charges werepaid to assessee's son at rate per trip instead of normal practiceof monthly rent. AO had ordered a deletion from out ofmachinery hire charges paid to S by asserting that same wereon higher side. The second question raised by the appellant-revenue pertainsto the payment of Rs. 18,75,875 to M/s. Satyen Enterprises.Out of this amount, the Assessing Officer ordered the deductionof Rs. 4 lakhs alleging that excessive payments were made toM/s. Satyen Enterprises. The second question raised by the appellant-revenue pertainsto the payment of Rs. 18,75,875 to M/s. Satyen Enterprises.Out of this amount, the Assessing Officer ordered the deductionof Rs. 4 lakhs alleging that excessive payments were made toM/s. Satyen Enterprises. Thus viewed, it is not possible for us to accept that theAssessing Officer could have invoked Section 40A(2)(b) of theAct. The aforesaid provision can be invoked in case, an assesseeincurs"... excessive and unreasonable charges..." favouring arelative of the assessee. Since the charges paid to M/s. SatyenEnterprises were admittedly less than the charges paid to M/s.Mehta Construction Company. We are of the view that theAssessing Officer could not have validly invoked Section 40A(2)(b) of the Act to order a deduction of a sum of Rs. 4 lakhs outof the truck charges/expenses incurred by the respondent-assessee favouring M/s. Satyen Enterprises.” 8. Lastly he contended that principle which have been applied was his own conclusions on material for which he relied upon the judgment of Gujrat High Court in Voltamp Transformers (P.) Ltd. vs. Commissioner of Income Tax (1981) 129 ITR 105 (Gujrat), wherein it has been observed as under: “if the Tribunal has applied wrong principles of law and hasrelied upon incorrect principles of law for arriving at itsconclusion on facts, then those conclusions which become insuch cases mixed questions of law and fact are vitiated and it isopen to this court, in exercise of its jurisdiction under s. 256 ofthe I. T. Acts, to arrive at its own conclusions in the light offacts which are otherwise not in dispute or facts whichotherwise emerge from the materials on record.relied upon incorrect principles of law for arriving at itsconclusion on facts, then those conclusions which become insuch cases mixed questions of law and fact are vitiated and it isopen to this court, in exercise of its jurisdiction under s. 256 ofthe I. T. Acts, to arrive at its own conclusions in the light offacts which are otherwise not in dispute or facts whichotherwise emerge from the materials on record. Under s. 40A(2)(a) what the ITO has to decide is whether theexpenditure in question is excessive or unreasonable havingregard to the fair market value of the goods, services orfacilities for which the payment is made. In our opinion, the Tribunal has proceeded on a wrong footing oflaw altogether when it emphasised again and again in its orderthat the two ladies, Urmilaben and Kusumben, who were two ofthe partners in the firm of Voltamp Associates, had not attendedpersonally to the work of the firm and had left it to J. P. Patel, an employee of the partnership firm, to attend to the work ofthe firm. Under s. 40A(2)(a) what the ITO has to decide is whether theexpenditure in question is excessive or unreasonable havingregard to the fair market value of the goods, services orfacilities for which the payment is made. In our opinion, the Tribunal has proceeded on a wrong footing oflaw altogether when it emphasised again and again in its orderthat the two ladies, Urmilaben and Kusumben, who were two ofthe partners in the firm of Voltamp Associates, had not attendedpersonally to the work of the firm and had left it to J. P. Patel, an employee of the partnership firm, to attend to the work ofthe firm. Thus, taking an overall picture on the ground of fair price forthe services rendered by the sole selling agents, it cannot besaid that the commission paid was exorbitant or excessive orunreasonable, nor can it be said that Voltamp Associates wereselected by the assessee-company as their sole selling agentssimply because two of the partners of Voltamp Associates werewives of two of the directors of the assessee-company and thethird partner, B. H. Patel, was a director of the assessee-company. If services are in fact rendered by the sole sellingagent, it is immaterial whether the partners of the sole sellingagency firm personally do not attend to the work or get thework attended to by their employees. The question is whetherservices were in fact rendered by the sole selling agents to theprincipal, the manufacturer-assessee in this case, and,secondly, whether the remuneration which was paid to themwas the fair market value for the services rendered by them.It is well-settled law that so far as the questions of commercialexpediency and business needs of an organisation areconcerned, it is not the view-point of a revenue officer whichshould count but it should be the view-point of an ordinarybusiness man dealing with a situation like the one faced by theparticular assessee in question. It is, therefore, from thatparticular view-point that the question has to be approached.” 9.He has also taken us to the observations made in the note which is reproduced and second amendment which came into force more particularly in paragraph 72 and 74, which reads as under: “72. The reasonableness of any expenditure is to be judged havingregard to the fair market value of the goods, services or facilitiesfor which the payment is made or the legitimate needs of thebusiness or profession or the benefit derived by, or accruing to, thetaxpayer from the expenditure. 74. the Income-tax Officer to scrutinise the reasonableness ofthe expenditure with reference to the criteria mentioned in thesection. The Income-tax Officer is expected to exercise hisjudgment in a reasonable and fair manner. It should be borne inmind that the provision is meant to check evasion of taxthrough excessive or unreasonable payments to relatives andassociate concerns and should not be applied in a manner whichwill cause hardship in bona fide cases.” 9.1. He contended that the expenses are reasonable and salary was meagre and considering the same all the authorities have seriously committed an error in not allowing the commission. 10.Counsel for the respondent Mr. Mathur, has contended thatthe commission to the extent of 2.5% was allowed and in that view of the matter, no interference is called for. 11.Taking into considerations the observations made by theTribunal, the expenses which are not allowed under 40A(2) inparagraph 10, as reproduced hereinabove, we are of the opinionthat the view taken by the Tribunal is just proper. 12.The issue is answered in favour of the Department againstthe assessee. 13.The appeal stands dismissed. (VIRENDRA KUMAR MATHUR),J. (K.S. JHAVERI),J. b.m. gandhi/46