ORDER
R.P. Tolani, Judicial Member-This is the assessee's appeal against the Commissioner of Income-tax (Appeals)'s order dated May 23, 2011 relating to the assessment year 2008-09. The following grounds are raised :
"1.
That the order passed by the learned Assessing Officer and confirmed by the Commissioner of Income-tax (Appeals), New Delhi is not only bad in law but also against the facts of the case.
2.
That learned Commissioner of Income-tax (Appeals) is erred under the law and facts while confirming the addition made by the Assessing Officer on account of sales commission in view of the fact that the appellant had duly filed various details and documents confirming the services rendered by the sales agent to the appellant.
3.
That the learned Commissioner of Income-tax (Appeals) is erred under the law while confirming the ad hoc disallowance out of foreign travelling expenses amounting to Rs. 1,50,000 made by the Assessing Officer."
2. The facts of the case, in brief are : The assessee is engaged in the business of import and sale of modular kitchen and appliances. During the course of assessment proceedings it was found that assessee had declared total sales of Rs. 7,85,44,927 on which it had incurred commission expenses of Rs. 29,50,904. The Assessing Officer asked for justification in this behalf. It was replied that the assessee had paid sales commission for booking of orders for modular kitchen to various customers. Debit notes showing the details were filed. The Assessing Officer found that the commission of Rs. 29,50,904 paid to one K. S. Singhal Dairies P. Ltd. ("KSSD") worked out at 22 per cent. of the gross sale executed. The Assessing Officer vide questionnaire dated November 19, 2010 asked the assessee—
(i)
The commission to KSSD has been shown to be incurred for the first time, whether requisite TDS was deducted on this commission and if so, form No. 16A may be submitted.
(ii)
Why these expenses have not been debited to profit and loss account under the head commission and have been reduced from the sales.
3. The assessee replied :
(i)
Requisite TDS was deducted and ledger account and form No. 16A copies were enclosed.
(ii)
Commission was incurred as per the copy of memorandum of understanding dated April 2, 2007 executed with KSSD.
(iii)
As per the assessee's accounting policy, the commission has been debited to sales account instead of debiting to profit and loss account, which in effect made no difference.
4. The Assessing Officer issued summons under section 133(6) on the said KSSD calling for—
(i)
confirmed copy of account in respect of the transactions entered into with the assessee.
(ii)
Mode of transaction between it and the assessee.
(iii)
Detailed note of business activity carried out in this behalf along with copy of memorandum of article.
(iv)
Copy of its profit and loss account for the period ending March 31, 2008.
(v)
Complete details about income-tax particulars, permanent account number and ward, where assessed.
5. Vide letter dated November 17, 2010 the said KSSD supplied the requisite information.
6. From the assessment record of KSSD the Assessing Officer found following facts and drew adverse inference that its directors had no knowledge in the field of modular kitchen appliances as they were earlier doing business of only sale of milk and allied products since more than twenty years :
(i)
KSSD was engaged in the sale and purchase of milk and allied products.
(ii)
KSSD has been claiming carry forward of unabsorbed depreciation and huge business losses since past years and the commission income has been utilised to reduce the loss and allow the assessee to reduce its profits.
(iii)
The auditors M/s Prakash & Prakash chartered accountants were common to both of them.
(iv)
Nothing has been produced by KSSD to show that any of the directors had any experience in the line of modular kitchen and appliances.
(v)
The commission has been shown by KSSD as business income whereas it has never been its business activity.
(vi)
KSSD was a loss making concern, paying no taxes.
7. The Assessing Officer further drew adverse inference that the commission at 22 per cent. given to KSSD was exorbitant, contrary to market practice and not expended for business purposes as the assessee had failed to discharge its burden in this behalf, this commission was disallowed.
8. Apropos foreign travelling expense, the same was disallowed by following observations :
"The assessee has claimed foreign travelling expenses of Rs. 15,73,323 which includes expenses on air ticket and lodging and boarding. From the details filed it is seen that the expenses included purchase of foreign exchange to meet expenses of personal nature and further some of the expenses are also not supported by bills/ vouchers. Therefore to cover up element of personal expenses and expenses of unverifiable nature, a disallowance of Rs. 1,50,000 is made. This will mean an addition of Rs. 1,50,000."
9. Aggrieved, the assessee preferred first appeal where the Commissioner of Income-tax (Appeals) confirmed both additions by the following observations :
"Commission income
4.1. In the present case, as stated earlier, the appellant-company has not been able to give any credible evidence which could prove that any services were rendered either by M/s. K.S. Singhal Diaries P. Ltd. or its directors in so far as the sales of the assessee's products are concerned. The memorandum of understanding dated April 2, 2007 and the debit notes issued by M/s. K.S. Singhal Dairies P. Ltd. have to be seen in the background that he said company was having accumulated huge losses and could have accommodated the appellant-company in saving the taxable income.
4.2. In view of the aforesaid, I do not find any substance in the claim of the appellant-company and the disallowance made by the Assessing Officer on account of payment of commission of Rs. 29,50,904 to M/s K.S. Singhal Dairies P. Ltd. is being sustained.
Foreign travelling expenses
I have carefully considered the submissions made on behalf of the appellant-company and the findings recorded by the learned Assessing Officer. On consideration, I find that whenever Sh. M. K. Gombar and Mrs. Kanupriya Gombar have visited foreign countries, substantial foreign exchange was purchased by the appellant-company. Therefore, learned counsel was asked by me to give specific details of items on which the foreign exchange purchased by the company was spent. In response to this, learned counsel expressed his inability to furnish the specific purposes for which the foreign exchange was utilised. Learned counsel was not even in a position to produce the copies of hotel bills where Mr. and Mrs. Gombar had stayed during their foreign visits. In the absence of necessary evidence, I am not inclined to accept the claim of the appellant-company that the entries expenditure of Rs. 15,73,323 was incurred wholly and exclusively for the purposes of business. It has to be appreciated that as per the requirement of section 37(1), it is for the tax payer to prove not only the fact that the expenditure was actually made but also the fact that the expenditure was wholly and exclusively in connection with business purposes. Accordingly, the disallowance made by the learned Assessing Officer is being sustained."
10. Aggrieved, the assessee is before us.
11. Learned counsel for the assessee contends that addition has been sustained on wrong premise. It is an established market practice that for sale of modular kitchens one has to hire services of various agents and it is not the case of the Department that the commission has been paid only to KSSD. A list is enclosed showing payment of Rs. 29,50,904 to persons other than KSSD which has been allowed by the Assessing Officer.
12. Besides the commission has been paid to KSSD in the assessment years 2009-10 and 2010-11 also. However in subsequent assessment year 2009-10 the commission has been allowed by an order under section 143(1) and for the assessment year commission has been allowed vide order under section 143(3). The commission was paid by a written agreement (MOU) dated April 2, 2007. It is pleaded that the expertise of selling agent is not a criteria, the important issue was KSSD's contracts.
13. Learned counsel drew our attention to clause 11 of the memorandum of understanding which is as under :
"11. That the agent shall be entitled for sales commission at 22 per cent. of the gross value of billing to the customers introduced by the agent. The principal shall forward a copy of invoice to the agent for his records and for his billing for sales commission simultaneously."
14. Thus, the rate of commission is fixed by the memorandum of understanding which is duly executed and binding on the assessee. It is pleaded that payment of commission to an agent who has rendered services is an allowable deduction. The assessee has discharged its burden by identifying the KSSD which has confirmed the receipt of the income and which is recorded in the books of account. The concerned copy of ledger has been produced.
15. Apropos foreign travelling learned counsel for the assessee contends that the foreign tours of the directors of the assessee-firm has not been doubted. Only because some details could not be produced, an ad hoc disallowance has been made out of the foreign exchange purchased by the assessee. It is pleaded that when the foreign travelling itself has been held for business purpose, there is no justification in making ad hoc disallowance out of the foreign travelling.
16. The learned Departmental representative, on the other hand, referred to the memorandum of understanding itself and contends that various clauses of memorandum of understanding prescribe mandatory protocol to be observed by both parties in their relationship as principal and agent, mainly as under :
"6. That the agent will ensure that the prospective buyer of the product is the end user of the product.
7. In all his commercial dealings and documentations and on the name plate or letterheads indicating his place of business described himself as selling agent of principal.
10. That the agent shall have uninterrupted right to visit principal's showroom along with his customer for live demonstration of modular kitchen by the principal's marketing team even at a shorter notice.
11. That the agent shall be entitled for sales commission at 22 per cent. of the gross value of billing to the customers introduced by the agent. The principal shall forward a copy of invoice to the agent for his records and for his billing for sales commission simultaneously.
12. That the agent shall raise its invoice/ debit note on quarter to quarter basis. He shall be entitled for payment only after the principal realises full value of sale proceeds to the customers introduced by the agent. However, the payment shall be subject to withholding tax as applicable under the Income-tax Act from time to time.
13. That it has been understood by the agent any deduction out of invoices raised by the principal to the customer of the agent, shall be on agent's accounts without any dispute."
17. Except confirming the amount and giving details, the assessee and KSSD both have not produced any other document, letter head, invoice, etc. as per the memorandum of understanding. It is undisputed fact that KSSD has huge claim of unabsorbed depreciation and business losses, whereas the assessee is a profitable firm. There is previous experience of KSSD in selling of modular kitchens as it has not claimed any technical experience in this field except of selling milk, ghee, paneer, butter, etc. sale of modular kitchen is a sophisticated activity and as per memorandum of understanding the agent was supposed to have an office, the printed letter head and invoices describing himself as selling agent of the principal, the assessee was supposed to forward copy of invoices to the agent office maintain relevant record. The commission will be given only after the full particulars about inquiries, delivery, sale of a modular kitchen and its proceeds are realised by the principal. All these conditions of memorandum of understanding clearly show that the assessee and agent were supposed to maintain copious records for the transactions of trade inquiries, sales and realisation of sale proceeds by cash or cheques. The record of modular kitchen specifications, length, breadth, width and other requirement of the customers all are essential for this type of business. Nothing worthwhile in this behalf has been supplied by the assessee or agent except figure of commission paid, TDS and income-tax record. The assessee has only pointed out about the identity of KSSD and its being an income-tax assessee, a crucial fact which is being glossed over by the assessee is the record of business services. It was a mutually beneficial dubious arrangement for both, i.e., to reduce the assessee's profits and thus avoid tax and for KSSD to reduce its loss. The production of skeleton record about identity as mentioned above does not prove that any business services were rendered by KSSD and enjoyed by the assessee for its business. No customer details about inquiry, requirement, size of their kitchen and model of kitchen by prospective visitors has been filed, similarly any proof about feed back, after sales service nothing has been rendered.
18. Apropos subsequent years allowance, the learned Departmental representative contends that it is trite law that in the Income-tax Act, every years is a separate unit and principle of res judicata do not apply. In the next year, i.e., assessment year 2009-10 the assessment was processed under section 143(1) and for the assessment year 2010-11 the assessment under section 143(3) may be tinkered with section 263 as the order does not refer to the commission or earlier year disallowance. Since the assessee except demonstrating the identity of party has failed to demonstrate rendering of any actual services for business purposes, the claim of expenditure becomes one which is not laid out or expended wholly and exclusively for the business in terms of section 37(1). The burden to prove is squarely on assessee, which it has failed to discharge. Therefore, the expenditure claimed by the assessee cannot be allowed as business expenditure due to non discharge of burden by the assessee.
19. Apropos foreign travel expenses, the learned Departmental representative vehemently argues that the Commissioner of Income-tax (Appeals) in upholding the addition has mentioned that the assessee failed to produce any record like hotel bills, etc., and the manner by which the foreign exchange was utilised, therefore, the addition has been rightly sustained.
20. We have heard rival contentions and gone through the entire material available on record. Facts have been narrated in details above. Section 37(1) prescribes as under :
"37(1). Any expenditure not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee, laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head 'profits and gains of business or profession'."
21. As the facts emerge, the Assessing Officer asked specific query to demonstrate that the expenditure was laid out or expended wholly and exclusively for the purpose of business, meaning thereby the amount was paid for the services which are rendered for the assessee's business. The assessee supplied only confirmation about the payment of commission and the income-tax record of KSSD. However, on the issue of rendering of service, no document record or evidence whatsoever was furnished despite so many requisitions by the Assessing Officer. The memorandum of understanding is relied on by the assessee to substantiate its claim that the amount was spent as per the binding memorandum of understanding for the purpose of business. At the same time various stipulations of memorandum of understanding prescribed that the assessee and agent will keep various types of record, send it to assessee, who in turn will process it, send the invoices to recipient who will collect the money paid to the assessee. Thus a full fledged exercise was to be carried out by the assessee and its agent as per the memorandum of understanding for rendering the services and earning the commission. No record or evidence whatsoever has been produced to this effect.
22. Thus the assessee has utterly failed to demonstrate the nature and extent of service rendered by the agent and availed of by the assessee for its business of modular kitchens. In this scenario what appears on record is merely book entries coupled with TDS the amount which will be claimed as a refund by the recipient being a loss making concern. In our considered view the assessee has produced only skeletal paper work of the arrangement without any iota of evidence about actual business services rendered.
23. The assessee's claim for allowing similar commission payment in subsequent year caries no merit inasmuch as the learned Departmental representative has rightly pleaded that each and every year of assessment is separate and independent unit and principles of res judicata do not apply. The assessment for the assessment year 2009-10 is under section 143(1) and for the assessment year 2010-11 there is no mention of the commission at all. Therefore, we are unable to give credence to the facts whose record is not before us and not referred to before the lower authorities.
24. We may further add that the hon'ble Supreme Court in the case of Commissioner Of Income-Tax v. Imperial Chemical Industries. [1969] 74 ITR 17 has unequivocally held that the burden of proving that a particular expenditure has been laid out or incurred wholly and exclusively for the purpose of business is entirely on the assessee. The discharge of the burden has to be effective and meaningful and not to cover up by merely book entries and paper work. In view thereof we see no infirmity in the order of the lower authorities in making this disallowance which is upheld.
25. Apropos second ground about foreign travel also the learned Commissioner of Income-tax (Appeals) has categorically remarked that full details were not produced before him. Thus here also the burden placed on the assessee in terms of Imperial Chemical Industries (India) (P.) Ltd. case (supra) also has not been discharged. In view thereof, we uphold the order of the lower authorities on this issue also.
26. In the result, the assessee's appeal is dismissed.
SUNIL