Commissioner Of Income Tax vs Dr R N Goel
2008 Latest Caselaw 1968 Del

*          THE HIGH COURT OF DELHI AT NEW DELHI

                                       Judgment reserved on : 04.09.2008
%                                     Judgment delivered on : 06.11.2008

+                    ITA No. 631/2007 & ITA No.632/2007

COMMISSIONER OF
INCOME TAX.                                                  ..... Appellant

                                       -versus-

DR R. N. GOEL                                            .....   Respondent

Advocates who appeared in this case:

For the Appellant           :         Mr Prem Lata Bansal
For the Respondent          :         Mr C S Aggarwal, Sr Advocate with Mr
                                      Prakash Kumar

CORAM :-

HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE RAJIV SHAKDHER

1.    Whether the Reporters of local papers may
      be allowed to see the judgment ?                                    Yes

2.    To be referred to Reporters or not ?                                Yes
3.    Whether the judgment should be reported
      in the Digest ?                                                     Yes

RAJIV SHAKDHER, J

1. This is an appeal under Section 260A of the Income Tax Act,

1961 (hereinafter referred to as "the Act") against a common judgment

dated 23.12.2005 passed by the Income Tax Appellate Tribunal

(hereinafter referred to as the "Tribunal") in ITA No. 180/Del/2000 and

ITA No.598/Del/2000, in respect of, assessment year 1996-97. Before the

Tribunal both the assessee, as well as, Revenue had preferred appeals

against the order of the Commissioner of Income Tax (Appeals)

(hereinafter referred to as "CIT(A)"). Before the Tribunal the appeal filed

by the assessee was numbered as ITA No. 180/Del/2000, whereas the

appeal filed by the Revenue was numbered as ITA No.598/Del/2000. By

the impugned judgment, the appeal of the Revenue has been dismissed

and that of the assessee has been allowed in respect of issues raised in

grounds 1 to 6 raised in his appeal filed before the Tribunal. In this Court

the Revenue has filed two appeals being ITA No. 631/2007 and ITA No.

632/2007 against the impugned judgment.

2. In order to dispose of the two appeals following facts require to be

noted:-

3. On 30.10.1996 the assessee filed his return of income declaring an

income of Rs 18,97,440/-. The return was processed under Section

143(1)(a) of the Act. The return was picked up for scrutiny. A statutory

notice under Section 143(2) of the Act was issued to the assessee. During

the course of the assessment proceedings queries were raised, inter-alia, in

respect of receipt of commission in the sum of Rs.30,39,710/- and service

charges of Rs.8,21,621/- paid by the assessee to one Chemline India Ltd

(hereinafter referred in short as CIL) . During the course of the

assessment proceedings the assessee filed a letter dated 19.1.1999,

wherein the assessee disclosed that CIL was appointed by the assessee as

a consignment agent under an agreement dated 01.4.1995. The assessee

further informed the Assessing Officer that the said consignment agent

had been appointed to market its products and also undertake development

of its products in the market. It was also disclosed that CIL was a public

limited company in which the assessee held 39% shares and, was also, one

of the three directors, managing CIL. It was further disclosed that due to

the efforts of the consignment agent i.e., CIL, the turnover of the assessee

had increased over the past few years. The figures disclosed by the

assessee to the Assessing Officer were as follows:-

                    A.Y.               Turnover (Rs)

                    1994-95            Rs.92,47,736.40

                    1995-96            Rs.1,01,79,754.08

                    1996-97            Rs.2,14,46,562,28

3.1 The assessee also informed the Assessing Officer that for the

services rendered in respect of sales made by the assessee through CIL,

commission @ 15% was paid to CIL. These were classified by assessee as

indirect sales. As regards sales made by the assessee directly the assessee

paid service charges @ 18% to CIL for the purposes of developing the

market.

3.2 The Assessing Officer after considering the explanation given by

the assessee came to the conclusion that the payment of commission was

unreasonable and, in particular, in the absence of proof of service

rendered by CIL held it to be excessive in terms of Section 40A (2)(b) of

the Act read with the explanation. However, curiously, despite this

observation, the Assessing Officer allowed an expenditure on commission

paid to CIL to the extent of 5%. The remaining commission of 13% was

disallowed. The disallowance of commission was quantified at Rs 21,95,347/-.

3.3 The broad reasons which weighed with the Assessing Officer in

disallowing the commission were as follows:-

(i) a perusal of the details filed by the assessee had shown that

the customers both in the preceding year and the year under

consideration had remained almost the same;

(ii) another consignment agent i.e., M/s Mahendru Chemicals

Pvt. Ltd. appointed on the same day i.e., 01.4.1995 had received

commission @ 5% and;

(iii) as stated above, there was no evidence of service rendered

by CIL.

3.4 In respect of service charges, the Assessing Officer was of the view

that since, its consignment agent played no role in the sales and no

services were rendered in that regard, the entire service charges had to be

disallowed. Accordingly, expenditure incurred on service charges to the

extent of Rs 8,21,621/- paid by the assessee to CIL were disallowed and

added back to the income of the assessee.

4. In the result, an assessment order dated 24.3.1999 was passed under

Section 143(3) of the Act.

5. Aggrieved by the order passed by the Assessing Officer, the

assessee preferred an appeal with the CIT(A). The CIT(A) by an order

dated 04.10.1999 allowed, completely, the expenditure incurred by the

assessee on commission charges paid to CIL. However, the CIT(A) in

respect of service charges restricted the allowable expenditure to 3%. As

against total service charges of Rs.8,21,621/- the CIT(A) allowed a sum of

Rs.1,36,935/- and sustained disallowance of a sum of Rs.6,84,686/-.

5.1 The CIT(A) gave detailed reasons for allowing the expenditure

incurred by the assessee on commission charges. These were broadly as

follows:-

(i) an examination of the profit and loss account and the

balance sheet of the assessee revealed that, as a matter of fact,

no expenditure had been incurred by the assessee on sale or

product development;

(ii) the entire marketing and sales of the product in issue

was carried out by the consignment agent, i.e., CIL;

(iii) there was a perceptible increase in the turnover in the

current year when compared with preceding years;

(iv) an examination of the books of accounts of CIL

indicated that CIL had genuinely carried out sales and marketing

activity for the assessee. A perusal of the profit and loss account

of CIL had shown that except for a small sum which comprised

of sales made on its own account a substantial part of its total

receipt, earned as, commission and services charges were from

service rendered to the assessee. Furthermore, the examination

also indicated that CIL had incurred expenses on advertisement

and publicity, printing and stationery, rebate and discount,

salaries, staff welfare, sales promotion and other miscellaneous

expenses. The CIT(A), thus found, as a fact, that the, said

expenses had been rendered towards sales and promotions of the

products;

(v) it was also found that in the year in issue, i.e., in

assessment year 1996-97 CIL had shown a net profit of

Rs 4,83,207/-, and also, the fact that it was regularly assessed to

tax by the AC Cir.21(1);

(vi) as against the view of the Assessing Officer that there

was no development of the market since, sales of the products

had been made to the old customers, it was found that there was

a substantial increase in turnover in the assessment year 1996-97

as compared to the earlier years, from which, it was deduced

that CIL had worked to develop the market and boost sales by

retaining old customers and;

(vii) as regards the Assessing Officer's observations that other

consignment agent i.e, Mahendru Chemicals Private Ltd, who

was appointed on the same day as CIL, was paid commission at

a lower rate of 5%, as against, that which is paid to CIL, it was

explained by observing that the quality of services rendered by

CIL was different. Mahendru Chemicals Pvt Ltd was required

to only, book orders. CIL was a del credere agent. The

assessee did not expose himself to any financial risk once the

goods were despatched to the consignment agent, i.e, CIL.

Under Clause XI of the consignment agreement CIL was

responsible for recovering the sales proceeds.

5.2. Insofar as service charges were concerned the CIT(A) came to the

conclusion that the service charges to the extent of only 3% was to be

allowed in favour of CIL on the ground that it would have carried out

some advertisement and publicity in respect of sales directly carried out

by the assessee.

6. The assessee being aggrieved by the order of CIT(A) to the extent

of disallowance of part of the services charges, preferred an appeal to the

Tribunal. Similarly, the Revenue also preferred a cross-appeal to the

Tribunal. By the impugned judgment the Tribunal disposed of both the

appeals. The Tribunal after examining the record, returned findings a

reference to which is made hereinbelow, in respect of, the expenditure

incurred by the assessee both by way of commission, as well as, service

charges paid to CIL. The Tribunal came to the conclusion that the

assessee was entitled to expenditure on both counts i.e., commission, as

well as, service charges and that too in entirety. The reasons which

weighed with the Tribunal were briefly as follows:-

(i) the assessee had claimed similar expenses on account

of commission charges at higher rates in the preceding year

which had been allowed by the Revenue;

(ii) the sales of the assessee had increased from Rs 1.02

crores, in assessment year 1995-96, to Rs 2.14 crores, in the

assessment year under consideration i.e., 1996-97. Therefore,

the Assessing Officer was wrong in brushing aside this material

aspect of the matter, by simply observing, that the, sales by the

assessee in the year under consideration had been made to

existing customers;

(iii) the Assessing Officer by allowing commission to the

extent of 5% as against 18% claimed by the assessee had in a

sense accepted the fact that services had been rendered by CIL

to the assessee. Given the fact that the services rendered by CIL

were qualitatively different from that of the other consignment

agent i.e, Mahendru Chemicals Private Ltd, the commission paid

by assessee @ 18% was neither excessive nor unreasonable.

Similarly, with regard to the service charges, Tribunal came to

the conclusion that having accepted the fact that payment of

commission charges to CIL was in order then, it would be

difficult to sustain disallowance of services charges to the extent

of 15% on the ground that service rendered by the commission

agent, in respect of, direct sale by the assessee were relatively

limited as compared to sales effected through CIL. The Tribunal

disagreed with the view of the CIT(A) that, service charges

were required to be disallowed to the extent of 15% - on the

ground that he had ignored the fact that, as per the agreement,

entered into between CIL and assessee, CIL rendered services

which involved development and promotion of the overall

market for the assessee's products and, in consideration thereof,

service charges which were paid by the assessee on direct sales

were in the nature of overriding commission.

6.1. Thus, the Tribunal came to the conclusion that having regard to the

nature and scope of service rendered by CIL, it was bound to have

favourable effect on the overall sales of the assessee as was evident from

the turnover and figures referred to by the assessee. The Tribunal

concluded that service charges paid to CIL @ 18% was neither excessive

nor unreasonable. The Tribunal also noted the fact that the income earned

by CIL in the form of service charges and commission were duly reflected

in the profit and loss account and return of income filed by CIL.

7. Having perused the record of the case, and after hearing the counsel

for both the Revenue, as well as, the assessee, we are of the view that the

issue involved before the authorities below was whether the expenses

claimed by the assessee towards payment of commission, as well as,

service charges to CIL was reasonable having regard to the provisions of

Section 40A of the Act. This issue according to us is a pure question of

fact. The Supreme Court in Upper India Publishing House Pvt Ltd v.

CIT: (1979) 117 ITR 569 and the Division Bench of this Court in the case

of CIT v. Northern India Iron & Steel Company Ltd: (1989) 179 ITR

599 and CIT v. Mohta Electrosteel Ltd: (1995) 215 ITR 522 have held

that whether or not an expenditure is unreasonable and hence, merits

disallowance under the provisions of Section 40Aof the Act, is essentially

a question of fact.

8. In view of the aforesaid statement of law and having examined for

ourselves the orders of the authorities below, we do not find any

perversity in the findings returned in the impugned judgment. In our

view, no substantial question of law has arisen for our consideration. In

the result, the appeal is dismissed.

RAJIV SHAKDHER, J

BADAR DURREZ AHMED, J

November 06, 2008 da