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Commissioner Of Income-Tax v. Mohd. Ishaq Mohd. Gulam

Madhya Pradesh High Court

Mar 31, 2004

Judgment

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Factual and Procedural Background

These two appeals concern Revenue challenges to Tribunal orders concerning assessment years 1997-98 and 1998-99. The Revenue filed M.A. No. 40 of 2004 (for assessment year 1997-98) and M.A. No. 11 of 2004 (for assessment year 1998-99). The assessee is M/s Mohd. Ishaq Mohd, Gulam, a manufacturer and seller of bidis.

For assessment year 1997-98 the assessee filed a return on 31 October 1997 declaring income of Rs. 1,12,30,640. The assessing officer (AO) completed assessment under Section 143(3) of the Income-tax Act, 1961 by order dated 22 March 2000, determining total income at Rs. 1,13,15,834. The Commissioner of Income Tax (CIT) in revision under Section 263 passed an order on 5 November 2001 directing further inquiry with respect to certain cash credits and reducing the commission allowed to a sole selling agent from 10% to 7%, remitting matters to the AO for further inquiry.

The CIT's revision was challenged before the Income-tax Appellate Tribunal (Tribunal), which by order dated 23 June 2003 set aside the CIT's order, accepted the AO's approach, treated the cash credits as explained and allowed commission at 10% following earlier Tribunal decisions. The Revenue then filed the present appeals to the High Court seeking to challenge the Tribunal's order.

Legal Issues Presented

Whether the revisional authority (CIT) was legally justified in invoking Section 263 to revise assessments under Section 143(3) on the grounds that the AO did not sufficiently verify the source and genuineness of cash credits (creditors) and should have allowed only 7% commission instead of 10%.
Whether the Tribunal was justified in setting aside the CIT's order, upholding the AO's assessment (including allowance of 10% commission) after accepting confirmations, PAN details and other material as sufficient proof of genuineness of the cash credits.
Whether the questions raised by Revenue in these appeals raise any substantial question of law warranting interference with the Tribunal's factual findings and conclusions.

Arguments of the Parties

Revenue's Arguments (Appellant)

Learned senior counsel for the Revenue, Shri Rohit Arya, contended that the revisional authority (CIT) was right to intervene under Section 263 because the AO had not adequately verified the source of the creditors' deposits and had accepted confirmations at face value.
The Revenue submitted that in comparable cases the rate of commission allowed was 7% and that the AO should have restricted commission accordingly; therefore the Tribunal erred in reinstating the AO's allowance of 10% commission for the years in question.
The Revenue argued that the CIT's order directing further inquiry was proper and that the Tribunal was wrong to quash that order.

Assessee's Arguments (Respondent / as accepted by the Tribunal)

The assessee produced confirmations of loans/credits from identified creditors, including PAN details and signed confirmations; many creditors were assessed to Katni and the ITO, Katni verified relevant files and furnished confirmation to the AO that loans had been advanced by the named parties.
The assessee relied on compliance with prior Tribunal decisions and agreements with its sole selling agent (M/s Gulam Rasool & Co.), under which 10% commission had been paid for earlier years; payment of commission to a sister concern does not alter the commercial nature and reasonableness of the expenditure.
The assessee argued and the Tribunal found that the AO made due and proper enquiries before accepting the cash credits and allowing 10% commission; thus the CIT's invocation of Section 263 amounted to an impermissible roving inquiry to avoid finality of assessment.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Bank of Baroda v. H.C. Shrivastava & Ors. (2002) 256 ITR 385 (Bom)	Supports allowance of expenditure on principles of commercial exigency; Tribunal orders are binding on Revenue authorities.	Cited as authority that AO's compliance with Tribunal's decision to allow 10% commission could not be treated as erroneous and prejudicial; used to support setting aside CIT's revision.
K.N. Agarwal v. CIT (1991) 189 ITR 769 (All)	Assists the principle that expenditure may be allowed on commercial exigency grounds.	Relied on by the Tribunal and cited by court to support reasonableness of commission allowance.
CIT v. Murti Devi Pradeep Kumar	Decision noting that Benches' decisions are binding on Revenue authorities.	Cited to support the binding nature of Tribunal decisions which AO followed in allowing commission.
Agrawal Warehousing & Leasing Ltd. v. CIT (2002) 257 ITR 235 (UP)	Revenue cannot refuse to follow the order of the jurisdictional Bench of the Tribunal.	Used to justify AO's action in allowing commission in compliance with Tribunal precedent.
CIT v. Dalmia Cement (Bharat) Ltd.	Supports allowance of expenditure on commercial exigency principles (cited among similar authorities).	Cited by the Tribunal/court to bolster the assessee's claim that commission payments were permissible.
CIT v. Klas Engineering (P) Ltd.	Assists the assessee's stance on commercial exigency and reasonableness of expenditure.	Referred to in the Tribunal's reasoning and accepted by the court in upholding the Tribunal's conclusion.
CIT v. Modi Industries Ltd. (1993) 200 ITR 321 (Del)	Supports the principle of allowing expenditure under commercial exigency in relevant circumstances.	Included among authorities relied upon in upholding the 10% commission allowance.
CWT v. S. Muthukumaraswamy Udayat (1998) 232 ITR 864 (Mad)	Assists the assessee's contention regarding permissibility of expenditure.	Cited as supportive authority in Tribunal's and court's analysis.
CIT v. Sutlej Cotton Mills Ltd. (1992) 194 ITR 66 (SC)	Assists the claim of allowing expenditure on the principle of commercial exigency.	Relied upon as part of the body of precedent favouring the assessee's position.
CIT v. Hindustan Motors Ltd. (1991) 192 ITR 619 (Cal)	Supports allowance of expenditure in commercial contexts.	Cited to buttress the Tribunal's conclusions on commission payments.
Lachminarayan Madan Lal v. CIT (1972) 86 ITR 439 (SC)	Assists the assessee's claim regarding allowance of expenditure and related principles.	Referred to in the Tribunal's supporting authorities and accepted by the court.
Madhav Prasad Jatia v. Commissioner Of Income Tax, U.P. Lucknow (1979) 118 ITR 200 (SC)	Favour of the assessee on the reasonableness test for expenditure.	Cited as authority supporting the assessee's position on commission and commercial exigency.
CIT v. Sinnor Bidi Udyog Ltd. (2002) 123 Taxman 559 (Bom)	Supports the assessee's position on commission/payment of expenses in similar context.	Used by the Tribunal and cited by the court in upholding allowance of 10% commission.
Commissioner Of Income Tax, Orissa v. Orissa Corporation (P) Ltd. (1986) 159 ITR 78 (SC)	Authority for the proposition that cash credits can be substantiated by confirmations and affidavits (including PAN information) to discharge onus.	Relied upon to hold that the assessee had discharged the onus regarding cash credits and that AO's acceptance was justified.
Addl. CIT v. Hanuman Agarwal (1985) 151 ITR 150 (Pat)	Assists the proposition regarding proof of cash credits.	Cited among authorities supporting acceptance of confirmations and related material.
Dy. CIT v. Rohini Builders (2002) 256 ITR 360 (Guj)	Assists the assessee's claim on cash-credit proof and related assessments.	Referred to in the Tribunal's supporting precedents and relied upon by court in its reasoning.
GIT v. Shanti Swarup (2002) 255 ITR 655 (P&H)	Assists the assessee's position on proof of cash credits and acceptance by AO.	Cited as supportive precedent for the Tribunal's findings on genuineness of credits.
Russel Prop. Ltd. v. A. Chowdhuiy, Addl CIT (1977) 109 ITR 229 (Cal)	Holds that orders of the Tribunal are binding and AO's compliance with such orders cannot be said to be erroneous and prejudicial.	Relied on to conclude that the AO's allowance of commission in compliance with Tribunal precedents could not be faulted by CIT under Section 263.
CIT v. Arvind Jewellers (2003) 259 ITR 502 (Guj)	Principle that roving enquiries cannot be permitted and there must be finality to assessments.	Cited to support quashing the CIT's order that had set aside assessment for further enquiry; used to emphasise finality of assessments.
Malabar Industrial Co. Ltd. v. CIT (2000) 243 ITR 83 (SC)	Supports the principle against roving inquiry and for finality of assessment.	Relied upon to support the Tribunal's and court's rejection of CIT's revision under Section 263 for further inquiry.

Court's Reasoning and Analysis

The court's analysis proceeded from the factual findings recorded by the AO and the Tribunal, as reproduced in the record. The AO had noticed multiple new loans/cash credits in the assessee's books and had asked the assessee to explain the genuineness of the creditors. In response the assessee furnished confirmations, signed affidavits and PAN details; the AO sought verification from the ITO, Katni, who replied that he could locate six files showing that loans were advanced by the named persons. The assessee also filed photocopies of acknowledgements and income statements of some creditors.

The Tribunal examined the inquiries made by the AO and concluded that there was sufficient material on record for the AO to accept the cash credits as genuine and to allow commission at 10% in conformity with prior Tribunal decisions. The Tribunal held that the payment of commission to a sister concern did not alter the commercial character of the expense and that the reasonableness of such an expense is to be judged by the assessee in context of commercial exigency.

The court considered the Revenue's contention that the CIT was right to invoke Section 263 because the AO allegedly failed to verify the immediate source of deposits and should have restricted commission to 7%. The court reviewed the record and the Tribunal's reasoning (paras 14–15) and the authorities cited by the Tribunal. It agreed with the Tribunal's conclusions that:

The AO had carried out due and proper enquiry and had accepted the cash credits on the basis of confirmations, PAN details and the verification response from ITO, Katni;
The Tribunal was correct in treating prior decisions of the Tribunal as binding on revenue authorities when the AO acted in compliance with them;
The CIT's order under Section 263, which remitted the matter for further inquiry and reduced commission to 7% without definitive findings, amounted to an impermissible roving inquiry that undermined finality of assessment;
The question of commission rate was essentially one of fact and consistency with earlier Tribunal decisions and not a substantial question of law warranting interference.

On these bases the court concluded that the Tribunal's order suffered from no illegality and that there was no ground for interference: the findings of the AO and Tribunal on genuineness of creditors and allowance of 10% commission were supported by sufficient material and precedent cited.

Holding and Implications

HOLDING: The appeals filed by Revenue are dismissed; the Tribunal's orders upholding the AO's assessments (including acceptance of cash credits and allowance of 10% commission) are sustained.

Implications:

The direct effect is that the Tribunal's decision (allowing 10% commission and treating the cash credits as genuine) remains operative for the assessment years in question; the CIT's Section 263 orders are quashed to the extent they set aside AO's assessment for further enquiry without definite findings.
The court treated the commission rate as a question of fact, noting that when the Tribunal has allowed 10% in similar cases, the Tribunal is justified in treating the assessee similarly; therefore the Revenue's challenge did not present a substantial question of law.
No new legal principle was announced by the court; the decision rests on application of existing precedents and the factual sufficiency of the material before the AO and Tribunal. The court emphasized the principle that roving inquiries to avoid finality of assessment are not permissible.

Show all summary ...

ORDER Arun Mishra, J.

1. These two appeals involve common question for consideration. They are being dealt with together.

2. M.A. No. 40 of 2004 has been filed by the Revenue for relating asst. yr. 1997-98. M.A. No. 11 of 2004 pertains to asst. yr. 1998-99.

3. Briefly noted, the facts indicate that assessee, M/s Mohd. Ishaq Mohd, Gulam derives income from manufacture and sale of Bidis, filed its return for the asst. yr. 1997-98 on 31st Oct., 1997, declaring total income of Rs. 1,12,30,640. Assessment was completed vide order (Annex. A) dt. 22nd March, 2000 under Section 143(3) of the IT Act, 1961. The AO determined total income at Rs. 1,13,15,834. The CIT, in the capacity of revisional authority found that certain credits were shown which were accepted by the AO on the strength of confirmation. The assessee filed confirmation with GIR/PAN. The revisional authority has passed an order (Annex. B) on 5th Nov., 2001 that source of deposit was not examined with respect to the credit made by 6 persons. The 7 per cent commission was directed to be allowed, instead of 10 per cent. The GIT remitted the matter for further inquiry to the AO.

4. The order passed by the CIT was assailed before the Tribunal. The appeal has been decided by order (Annex. C) dt. 23rd June, 2003. The Tribunal has in various decisions, allowed 10 per cent commission in similar cases. The creditors identity, capacity and source have been explained to the satisfaction of the AO. The order passed by CIT has been set aside, hence the present appeal has been filed.

5. Shri Rohit Arya, learned senior counsel appearing with Shri Ajit Ade, submitted that in the facts and circumstances of the case, the order passed by the revisional authority was proper. The Tribunal has erred in law in setting aside the order for both the years, i.e., 1997-98 and 1998-99, as per common order (Annex. C). He has submitted that source of the creditor was required to be verified and the AO rightly directed to allow 7 per cent commission to Gulam Rasul. Thus, the Tribunal has erred in law in setting aside the order passed by the GIT, in both the cases.

6. With respect to the identity and source of creditors, order passed by the AO indicate that due and proper enquiry was made. New loans in the name of 12 parties were noticed as apparent from the assessment order (Annex. A) passed by the Jt. GIT (Asst.), Special Range, Jabalpur. The assessee was asked to explain the genuineness of creditors, in compliance to direction, confirmation of loan have been furnished, duly signed and giving the permanent account number of the creditors. All the creditors are assessed to Katni. ITO was requested to verify the loan advanced by the persons. In compliance to the said letter, ITO, Katni has sent the reply on 16th March, 2000 stating that he could lay hands on 6 files which showed that the loan was advanced by the above parties. The assessee has filed the photocopies of the acknowledgement and statement of income of some of the persons. Hence, the AO has opined that the loan has been explained properly and has accepted them to be genuine.

7. With respect to the asst. yr. 1998-99, names of 10 parties were noticed. Then the assessee was asked to explain the genuineness of the loan. In compliance to this the confirmation for such loan have been furnished duly signed and giving permanent account number of the creditors who are assessed at Katni. Loans have been accepted as genuine. The revisional authority has observed that immediate source of deposit was not at all verified and the credits have been accepted on the strength of confirmation letter filed by the assessee. We find that there was material on record before AO to accept creditors as genuine.

8. The Tribunal has dealt with the matter in paras 14 and 15 of the order. The Tribunal has observed that the AO was quite justified in passing the orders dt. 22nd March, 2000, 26th March, 2001, which were passed after thorough inquiry. The AO has allowed cash credit after verification of record as to capacity, genuineness of the transactions and identity of creditors. Roving enquiry cannot be permitted and in the facts it was unjustified.

9. The question of creditors as well as commission has been dealt with in paras 14 and 15 of the order, passed by the Tribunal. The relevant paragraphs are quoted below :

"14. We have heard the rival submission and perused the citations and paper book. We find there is sufficient force and effectiveness in the arguments submitted by counsel of the assessee. The assessee has paid 10 per cent commission in compliance to the order of learned Bench for the asst. yr. 1989-90 and the same was paid during many previous years as per the agreement signed by assessee and sole selling agent, i.e., M/s Gulam Rasool & Co. The payment of commission to sister-concern does not change the nature of expenditure incurred in commercial expediency. Therefore, order of assessments as regards to payment of commission cannot be said as erroneous and prejudicial to the interest of Revenue [Bank of Baroda v. H.C. Shrivastava & Ors., (2002) 256 ITR 385 (Bom), K.N. Agarwal v. CIT, (1991) 189 ITR 769 (All)]. The decisions of Benches are binding on Revenue authorities [CIT v. Murti Devi Pradeep Kumar. The Revenue cannot refuse to follow the order of jurisdictional Bench of this Tribunal [Agrawal Warehousing & Leasing Ltd. v. CIT, (2002) 257 ITR 235 (UP)]. The following decisions, i.e., CIT v. Dalmia Cement (Bharat) Ltd., CIT v. Klas Engineering (P) Ltd., (2002) 258 ITR 779 (Kar), 199 ITR 66 (Cal) (sic), CIT v. Modi Industries Ltd., (1993) 200 ITR 321 (Del), CWT v. S. Muthukumaraswamy Udayat, (1998) 232 ITR 864 (Mad), 222 ITR 20 (sic), CIT v. Dalmia Cement (Bharat) Ltd., CIT v. Sutlej Cotton Mills Ltd. (1992) 194 ITR 66 (SC), CIT v. Hindustan Motors Ltd. (1991) 192 ITR 619 (Cal), 98 Taxman 38 (sic), Lachminarayan Madan Lal v. CIT, (1972) 86 ITR 439 (SC) fully assist the claim of the assessee of allowing expenditure on the principles of commercial exigency. The reasonableness is to be judged by assessee as the best Judge. The decisions, i.e., (2002) 254 ITR 377 (Del) (supra), (2002) 258 ITR 779 (Kar) (supra), Madhav Prasad Jatia v. Commissioner Of Income Tax, U.P Lucknow., (1979) 118 ITR 200 (SC), and CIT v. Sinnor Bidi Udyog Ltd., (2002) 123 Taxman 559 (Bom) favour of the assessee. Apart from that, the assessee has proved the cash credits appearing in the books of accounts of the assessee on the basis of submitting confirmation and affidavits along with PAN numbers. The decision, i.e., Commissioner Of Income Tax, Orissa v. Orissa Corporation (P) Ltd.., (1986) 159 ITR 78 (SC), Addl. CIT v. Hanuman Agarwal, (1985) 151 ITR 150 (Pat), Dy. CIT v. Rohini Builders, (2002) 256 ITR 360 (Guj), GIT v. Shanti Swarup (2002) 255 ITR 655 (P&H) assist the claim of the assessee since the assessee has discharged the onus of submitting tax index numbers of the creditors and submitted that the capacity, identity and the source is fully explained to the satisfaction of AO, therefore, no addition is called for and therefore, the AO was fully justified for treating the cash credits not as income whereas it is not correct to say that the assessee has not proved capacity, genuineness of the credit and identity of the creditors where further enquiry is necessary as noticed in the order of CIT-II While passing the order under Section 263.

15. Therefore, we conclude that the learned CIT, while invoking the powers under Section 263 for revising the orders passed by AO under Section 143(3) of the Act simply pointing out that the AO has not made further enquiry in regards to cash credits and payment was made in excess to M/s Gulam Rasool whereas he should have paid 7 per cent commission is not legally justifiable. The AO was quite justified while passing the assessment orders under Section 143(3) after thorough enquiry. The conclusion, arrived at by CIT are not plausible and acceptable on the merits because the AO has allowed 10 per cent commission in compliance to the order of learned Bench of this Tribunal. The decision Russel Prop. Ltd. v. A. Chowdhuiy, Addl CIT (1977) 109 ITR 229 (Cal) and Bank of Baroda v. H.C. Shrivastava & Ors. (supra) opines that the order of Hon'ble Tribunal are binding and order passed by AO in compliance to the order of the Bench cannot be said to be erroneous and prejudicial to the interest of Revenue. The AO has allowed the cash credit after verification in regards to capacity, genuineness of the transaction and identity, therefore, the order passed by learned CIT deserves to be set aside while relying on the decisions in CIT v. Arvind Jewellers, (2003) 259 ITR 502 (Guj) and Malabar Industrial Co. Ltd. v. CIT, (2000) 243 ITR 83 (SC) because roving enquiry cannot be permitted and there should be a finality of assessment in the interest of justice is must. There is no different conclusion arrived at by learned CIT while passing the order under Section 263 of the Act. The findings of CIT are not definite one, except set aside the order passed by AO for further enquiry and investigation. For further investigation and enquiry no assessment order becomes erroneous and prejudicial to the interest of Revenue. The CIT while passing the order under Section 263 acting judicially, therefore, such roving enquiry to avoid finality of assessment is not justifiable. The order of learned CIT under Section 263 deserves to be quashed on the ground that AO has allowed 10 per cent commission to sole selling agent while following the decision of jurisdictional Bench of the Tribunal and allowed cash credit after having sufficient enquiry and after finding the cash credits were genuine."

10. Coming to the submission raised by Shri Rohit Arya, learned senior counsel appearing for the Revenue that revisional authority was justified in allowing commission at the rate of 7 per cent only, as in other similar decisions, 7 per cent commission has been allowed. We find that in the facts and circumstances of the case, the order passed by the Tribunal cannot be said to be suffering with any illegality. The submission that the commission at the rate allowed is unjustified as rate for the year 1989-90 is disputed cannot be accepted as several years have lapsed since the Tribunal has considered the question in extensive detail. We find no ground to make interference into allowing the commission @ 10 per cent as it is also a question of fact, not a substantial question of law. When in other similar cases Tribunal has allowed 10 per cent commission, we find that Tribunal is justified in treating assessee on similar footing.

11. The finding of genuineness of the creditors is based on sufficient evidence, which has been accepted by the AO and by the Tribunal. Question raised is of sufficiency of evidence. We find no substantial question of law arises in the appeal.

12. Resultantly, we find both the appeals to be meritless. The appeals are dismissed. .