Fashion Suitings (P) Ltd. v. Joint CIT

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The Tax Publishers2013 TaxPub(DT) 1337 (Jod-Trib) : (2014) 056 (II) ITCL 0226 : (2013) 154 TTJ 0001 : (2013) 086 DTR 0049 Income Tax Act, 1961 --Business expenditureAllowability Commission to distributors--Assessee-company has engaged in manufacture and trading of textile/fabric, FMCS products, readymade garments, etc. and selling through Multilevel Marketing network. Concept of Multilevel Marketing had been accepted by Revenue in earlier years which was evident from assessment orders passed under section 143(3) for assessment year 2005-06 to 2008-09. Ever if a purchase was made by a downliner.... distributor in chain, that purchase has a sale in hands of assessee and commission was also paid on that sale. Assessing officer disallowed commission of Rs. 125 crores out of total commission of Rs. 1,59,30,34,605.Held Not justified. As assessing officer did not doubt genuineness of commission amounting to Rs. 34,30,34,605 and as such accepted part of commission as genuine and did not give any reason or basis for doubting remaining commission disallowance made by assessing officer and sustained by Commissioner (Appeals) has therefore, not justified. It is noticed that many persons who were placed above the lines were not getting the commission. From page No. 293 of the assessee's paper book, which is the summary of tree of distributors and chart of distributors' commission income on the basis of their level, it is noticed that there were 17 distributors at level 2. They received commission of Rs. 80 only while 105 persons at level 36, received commission of Rs. 62,05,936 and 436 persons at level 37, received commission of Rs. 1,091 only. Similarly at page No. 294 at S. No. 40, 4 persons were at level 47, who received the commission of Rs. 1,828 only and at S. No. 78, 18 persons were at level 85, who received commission of Rs. 19,65,381. 1 distributor was at level 168 who received the commission of Rs. 53 only while 2 distributors at the level of 182 received the commission of Rs. 10,14,428. There were 7 distributors at level 233 who received the commission of Rs. 21,81,576. From the above details it is crystal clear that this allegation of the assessing officer that a very little part of commission paid actually goes to the person who has actually sold the product and the major portion goes to the entire chain of persons above who had not rendered any service was without any basis. On the contrary, the commission goes to those persons who rendered the service and participated in real sale of the products. In the present case, the concept of multilevel marketing has been accepted by the Department in the earlier years also which is clear from assessee's compilation, which are the copies of the assessment orders framed under section 143(3) for the assessment year 2005-06 to 2008-09. In the said assessment orders, the assessing officer accepted that the assessee started the new concept of marketing called as 'multilevel marketing'. So this concept, of multilevel marketing is not the new concept for the year under consideration but it was also accepted by the Department in the earlier years. In the present case, the assessing officer disallowed the impugned commission by observing that a person in the chain was getting commission even for purchase or sale made by downliner in chain i.e., even if purchases made by downliner distributors as well as retailing made by downliners, in other words, a person was getting huge amount of commission even without actually working. The said observation of the assessing officer was not correct because in 'multilevel marketing' concept the distributors are appointed and they further introduce other distributors and the other distributors also introduce the distributors and so on but the commission is paid on the sales. In the present case, the sale of the assessee has been accepted. It is not the case of the assessing officer that the sale was suppressed or the rate of commission varied on the similar sale made by different persons. In the instant case, the rate of commission was same on the sale and even if a purchase was made by the downliner distributors in the chain, that purchase was a sale in the hands of the assessee and commission was paid on that sale. Therefore, it cannot be said that the commission paid by the assessee was not related to its sale. In the present case, as we have already pointed out that all the distributors were not earning the commission because it depended upon the quantum of sales made by the chain of distributors and the amount of commission was not consistent for all the chains of distributors as was clear from page Nos. 293 to 442 of the assessee's compilation which is the copy of details of distributors commission on the basis of their level, it is noticed that none of the distributors at levels 5 to 8 received any commission, that may be due to the reason that they have not contributed to the sale of the assessee. In the instant case the percentage of commission to the sale for the year under consideration was lower as compared to the preceding years, which is clear from the chart furnished by the assessee. From the chart, it is noticed that percentage of commission to the sale for the assessment year 2006-07 to 2009-10 was at 34.48 per cent, 32.89 per cent, 27.31 per cent and 23.82 per cent, respectively. From the above details it is clear that there was decreasing trend in payment of the commission on the sale, so it cannot be said that the assessee inflated the commission expenses. It is also noticed that the GP rate for the year under consideration was at 11.97 per cent in comparison to the earlier year at 9.41 per cent. In fact there was increasing trend in the GP rate since the assessment year 2006-07 onwards. In the instant case, it is noticed that the Department had accepted the distributors commission in proceeding years while framing the assessment under section 143(3). Para 10.1 Department has accepted the payment of commission on the sales in multilevel marketing by the assessee continuously from the assessment year 2005-06 to assessment year 2008-09, and the Commissioner also for the assessment year 2006-07 while exercising the revisionary power under section 263 did not doubt the payment of commission on the sales and the facts for the year under consideration are identical to the facts involved in aforesaid referred to assessment years, therefore, the assessing officer was not justified in not accepting the claim of the assessee for the year under consideration for the commission to the distributors on the sale through them. In the present case, it is an undisputed fact that the assessing officer disallowed the commission of Rs. 125 crores out of total commission of Rs. 1,59,30,34,605. In other words, the assessing officer did not doubt the genuineness of the commission amounting to Rs. 34,30,34,605 (Rs. 1,59,30,34,605 - Rs. 125 crores) and accepted that commission on sales but disallowed Rs. 125 crores out of the commission paid. Therefore, the assessing officer accepted part of the commission as genuine but did not give any reason or basis for doubting the remaining commission and making the ad hoc disallowance. The Commissioner (Appeals) also while confirming the ad hoc disallowance made by the assessing officer in slipshod manner had not given any cogent reason particularly when he admitted in para 6.5 of the impugned order that the major sale of the assessee was through multilevel marketing and in the said system there was a large number of distributors wherein every person who joined the network got commission. In the instant case, it is not in dispute that the purchases made by the distributors for their own consumption or sale made to the others was in fact the sale in the hands of the assessee and the commission was paid only on that sale, so it was a genuine expenditure for the business purpose and was allowed in the earlier years also so it was allowable under section 37(1) for the year under consideration. As we have already pointed out that the assessing officer had not given any basis for making the ad hoc disallowance of Rs. 125 crores and the learned Commissioner (Appeals) in a slipshod manner sustained the disallowance, therefore, considering the totality of the facts, as narrated hereinabove, the disallowance made by the assessing officer and sustained by Commissioner (Appeals) was not justified. In that view of the matter, the impugned addition is deleted. Para 10.4 Income Tax Act, 1961 Section 37(1) Income Tax Act, 1961 --Business income--Business loss Value of damaged stock--Assessee claimed allowance towards stock damaged in process of packing, manufacturing, grading, transportation, etc. assessing officer disallowed to extent of 30%. Disallowance of 50 lacs was sustained by Commissioner (Appeals) out of disallowance of 2,52,02,544 made out by assessing officer. *Held* Not justified. As assessee had maintained proper books of account which have been duly audited no specific discrepancies have been pointed out by assessing officer while making impugned disallowance. Further it was also not a case that assessee sold stock out side books of account thus, as facts disallowance of 10 lakhs sustained. In the present case, it appears that the assessee maintained proper books of account, which were duly audited and no specific discrepancies have been pointed out by the assessing officer while making the disallowance @ 30 per cent of the wastage claimed by the assessee. In the present case, the assessee explained the reason for shortage, which was mainly due to process of packing, manufacturing, grading and transportation etc. It is not the case of the assessing officer that the assessee sold the stock outside the books of account. It is also not the case that proper books were not maintained. The assessee pointed out certain defects in the working of the assessing officer, which were accepted by the Commissioner (Appeals) while sustaining the disallowance at Rs. 50 lacs put of the disallowance of Rs. 2,25,02,544 made by the assessing officer. However, in our opinion, disallowance sustained by the learned Commissioner (Appeals) is on higher side. Therefore, considering these facts that the volume of the turnover was high and voluminous items were there in which the assessee was dealing, there are some chances of mistake. However, no specific defect has been pointed out by the assessing officer or the learned Commissioner (Appeals) except a general remark that there is some mismatch in the closing stock in units taken by the assessee and shown in the Form No. 3GD. It is also true that the assessee had not shown any realizable value in respect of the damaged stock, if any, and the assessing officer was of the view that it was not possible that damaged stock value would be nil value. Therefore, some disallowance is required to be made in such type of cases. However, the disallowance sustained by the Commissioner (Appeals) at Rs. 50 lacs appears to be on higher side. Therefore, by considering the totality of the facts and to meet the ends of justice, it would be fair and reasonable to sustain the disallowance of Rs. 10 lacs. Para 22 Income Tax Act, 1961 Section 28(i) Income Tax Act, 1961 --Business disallowance under section 40A(2)--Excessive and unreasonable expenditure Remuneration to directors--Assessee-company paid remuneration to directors to extent of 78 lacs compared to 48 lacs in earlier year. Assessee-company had paid directors' remuneration to its directors looking at work profile, contribution to the business of the company and experience of directors. The remuneration is determined by whole management in the board meeting; resolution had also been passed at the meeting. However, assessing officer made disallowance of Rs. 17,81,852 by observing that 'directors' remuneration is based on contribution and services provided by these persons and profitability earned due to contribution of these person' also looks not acceptable because net profit of company for year under consideration is only Rs. 37.59 crores as against Rs. 40.87 crores in assessment year 2007-08 and Rs. 60.07 crores in assessment year 2008-09. Above shows a decrease in turnover and profits, whereas the directors' remuneration has increased tremendously. Accordingly, the increased remuneration claimed by the company during year under consideration is excessive and unreasonable. Therefore, the same is allowed upto Rs. 60,18,148 and remaining Rs. 17,81,852 stands disallowed. According to Commissioner (Appeals) assessee failed to mention any specific contribution or service rendered by directors to justify increase in their remuneration. Accordingly, the Commissioner (Appeals) sustained disallowance made by assessing officer. *Held* Not justified. Remuneration of directors could not be linked with turnover or profits of assessee-company, disallowance made by assessing officer and sustained by Commissioner (Appeals) has not justified particular when directors who are well experienced and qualified rendered services to assessee-company and also remuneration to directors has within limit under company law. In the instant case, it appears that the assessing officer disallowed the directors' remuneration by linking it with the turnover of the year under consideration and the earlier year. He was of the view that when the commission was paid to the distributors, the remuneration paid to the directors was on higher side. Remuneration of the directors cannot be linked with the turnover or the profit earned by the assessee. The only thing is to be seen is as to whether it was excessive for making the disallowance under section 40A(2). In present case, assessing officer did not doubt the payment of remuneration to directors and it is also not case that services were not rendered by them. It is also not case of authorities below that the payment made to the directors on account of remuneration was higher than the limit prescribed in company law. Disallowance made by assessing officer and sustained by Commissioner (Appeals) was not justified particularly when the directors who are well experienced and having proper qualification rendered services to assessee company. Addition made by the assessing officer and sustained by the learned Commissioner (Appeals) is deleted. Para 34 SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2013 TaxPub(DT) 1337 (Jod-Trib) : (2014) 056 (II) ITCL 0226 : (2013) 154 TTJ 0001 : (2013) 086 DTR 0049

Income Tax Act, 1961

--Business expenditureAllowability Commission to distributors--Assessee-company has engaged in manufacture and trading of textile/fabric, FMCS products, readymade garments, etc. and selling through Multilevel Marketing network. Concept of Multilevel Marketing had been accepted by Revenue in earlier years which was evident from assessment orders passed under section 143(3) for assessment year 2005-06 to 2008-09. Ever if a purchase was made by a downliner.... distributor in chain, that purchase has a sale in hands of assessee and commission was also paid on that sale. Assessing officer disallowed commission of Rs. 125 crores out of total commission of Rs. 1,59,30,34,605.Held Not justified. As assessing officer did not doubt genuineness of commission amounting to Rs. 34,30,34,605 and as such accepted part of commission as genuine and did not give any reason or basis for doubting remaining commission disallowance made by assessing officer and sustained by Commissioner (Appeals) has therefore, not justified.

It is noticed that many persons who were placed above the lines were not getting the commission. From page No. 293 of the assessee's paper book, which is the summary of tree of distributors and chart of distributors' commission income on the basis of their level, it is noticed that there were 17 distributors at level 2. They received commission of Rs. 80 only while 105 persons at level 36, received commission of Rs. 62,05,936 and 436 persons at level 37, received commission of Rs. 1,091 only. Similarly at page No. 294 at S. No. 40, 4 persons were at level 47, who received the commission of Rs. 1,828 only and at S. No. 78, 18 persons were at level 85, who received commission of Rs. 19,65,381. 1 distributor was at level 168 who received the commission of Rs. 53 only while 2 distributors at the level of 182 received the commission of Rs. 10,14,428. There were 7 distributors at level 233 who received the commission of Rs. 21,81,576. From the above details it is crystal clear that this allegation of the assessing officer that a very little part of commission paid actually goes to the person who has actually sold the product and the major portion goes to the entire chain of persons above who had not rendered any service was without any basis. On the contrary, the commission goes to those persons who rendered the service and participated in real sale of the products. In the present case, the concept of multilevel marketing has been accepted by the Department in the earlier years also which is clear from assessee's compilation, which are the copies of the assessment orders framed under section 143(3) for the assessment year 2005-06 to 2008-09. In the said assessment orders, the assessing officer accepted that the assessee started the new concept of marketing called as 'multilevel marketing'. So this concept, of multilevel marketing is not the new concept for the year under consideration but it was also accepted by the Department in the earlier years. In the present case, the assessing officer disallowed the impugned commission by observing that a person in the chain was getting commission even for purchase or sale made by downliner in chain i.e., even if purchases made by downliner distributors as well as retailing made by downliners, in other words, a person was getting huge amount of commission even without actually working. The said observation of the assessing officer was not correct because in 'multilevel marketing' concept the distributors are appointed and they further introduce other distributors and the other distributors also introduce the distributors and so on but the commission is paid on the sales. In the present case, the sale of the assessee has been accepted. It is not the case of the assessing officer that the sale was suppressed or the rate of commission varied on the similar sale made by different persons. In the instant case, the rate of commission was same on the sale and even if a purchase was made by the downliner distributors in the chain, that purchase was a sale in the hands of the assessee and commission was paid on that sale. Therefore, it cannot be said that the commission paid by the assessee was not related to its sale. In the present case, as we have already pointed out that all the distributors were not earning the commission because it depended upon the quantum of sales made by the chain of distributors and the amount of commission was not consistent for all the chains of distributors as was clear from page Nos. 293 to 442 of the assessee's compilation which is the copy of details of distributors commission on the basis of their level, it is noticed that none of the distributors at levels 5 to 8 received any commission, that may be due to the reason that they have not contributed to the sale of the assessee. In the instant case the percentage of commission to the sale for the year under consideration was lower as compared to the preceding years, which is clear from the chart furnished by the assessee. From the chart, it is noticed that percentage of commission to the sale for the assessment year 2006-07 to 2009-10 was at 34.48 per cent, 32.89 per cent, 27.31 per cent and 23.82 per cent, respectively. From the above details it is clear that there was decreasing trend in payment of the commission on the sale, so it cannot be said that the assessee inflated the commission expenses. It is also noticed that the GP rate for the year under consideration was at 11.97 per cent in comparison to the earlier year at 9.41 per cent. In fact there was increasing trend in the GP rate since the assessment year 2006-07 onwards. In the instant case, it is noticed that the Department had accepted the distributors commission in proceeding years while framing the assessment under section 143(3). Para 10.1 Department has accepted the payment of commission on the sales in multilevel marketing by the assessee continuously from the assessment year 2005-06 to assessment year 2008-09, and the Commissioner also for the assessment year 2006-07 while exercising the revisionary power under section 263 did not doubt the payment of commission on the sales and the facts for the year under consideration are identical to the facts involved in aforesaid referred to assessment years, therefore, the assessing officer was not justified in not accepting the claim of the assessee for the year under consideration for the commission to the distributors on the sale through them. In the present case, it is an undisputed fact that the assessing officer disallowed the commission of Rs. 125 crores out of total commission of Rs. 1,59,30,34,605. In other words, the assessing officer did not doubt the genuineness of the commission amounting to Rs. 34,30,34,605 (Rs. 1,59,30,34,605 - Rs. 125 crores) and accepted that commission on sales but disallowed Rs. 125 crores out of the commission paid. Therefore, the assessing officer accepted part of the commission as genuine but did not give any reason or basis for doubting the remaining commission and making the ad hoc disallowance. The Commissioner (Appeals) also while confirming the ad hoc disallowance made by the assessing officer in slipshod manner had not given any cogent reason particularly when he admitted in para 6.5 of the impugned order that the major sale of the assessee was through multilevel marketing and in the said system there was a large number of distributors wherein every person who joined the network got commission. In the instant case, it is not in dispute that the purchases made by the distributors for their own consumption or sale made to the others was in fact the sale in the hands of the assessee and the commission was paid only on that sale, so it was a genuine expenditure for the business purpose and was allowed in the earlier years also so it was allowable under section 37(1) for the year under consideration. As we have already pointed out that the assessing officer had not given any basis for making the ad hoc disallowance of Rs. 125 crores and the learned Commissioner (Appeals) in a slipshod manner sustained the disallowance, therefore, considering the totality of the facts, as narrated hereinabove, the disallowance made by the assessing officer and sustained by Commissioner (Appeals) was not justified. In that view of the matter, the impugned addition is deleted. Para 10.4

Income Tax Act, 1961 Section 37(1)

Income Tax Act, 1961

--Business income--Business loss Value of damaged stock--Assessee claimed allowance towards stock damaged in process of packing, manufacturing, grading, transportation, etc. assessing officer disallowed to extent of 30%. Disallowance of 50 lacs was sustained by Commissioner (Appeals) out of disallowance of 2,52,02,544 made out by assessing officer. Held Not justified. As assessee had maintained proper books of account which have been duly audited no specific discrepancies have been pointed out by assessing officer while making impugned disallowance. Further it was also not a case that assessee sold stock out side books of account thus, as facts disallowance of 10 lakhs sustained.

In the present case, it appears that the assessee maintained proper books of account, which were duly audited and no specific discrepancies have been pointed out by the assessing officer while making the disallowance @ 30 per cent of the wastage claimed by the assessee. In the present case, the assessee explained the reason for shortage, which was mainly due to process of packing, manufacturing, grading and transportation etc. It is not the case of the assessing officer that the assessee sold the stock outside the books of account. It is also not the case that proper books were not maintained. The assessee pointed out certain defects in the working of the assessing officer, which were accepted by the Commissioner (Appeals) while sustaining the disallowance at Rs. 50 lacs put of the disallowance of Rs. 2,25,02,544 made by the assessing officer. However, in our opinion, disallowance sustained by the learned Commissioner (Appeals) is on higher side. Therefore, considering these facts that the volume of the turnover was high and voluminous items were there in which the assessee was dealing, there are some chances of mistake. However, no specific defect has been pointed out by the assessing officer or the learned Commissioner (Appeals) except a general remark that there is some mismatch in the closing stock in units taken by the assessee and shown in the Form No. 3GD. It is also true that the assessee had not shown any realizable value in respect of the damaged stock, if any, and the assessing officer was of the view that it was not possible that damaged stock value would be nil value. Therefore, some disallowance is required to be made in such type of cases. However, the disallowance sustained by the Commissioner (Appeals) at Rs. 50 lacs appears to be on higher side. Therefore, by considering the totality of the facts and to meet the ends of justice, it would be fair and reasonable to sustain the disallowance of Rs. 10 lacs. Para 22

Income Tax Act, 1961 Section 28(i)

Income Tax Act, 1961

--Business disallowance under section 40A(2)--Excessive and unreasonable expenditure Remuneration to directors--Assessee-company paid remuneration to directors to extent of 78 lacs compared to 48 lacs in earlier year. Assessee-company had paid directors' remuneration to its directors looking at work profile, contribution to the business of the company and experience of directors. The remuneration is determined by whole management in the board meeting; resolution had also been passed at the meeting. However, assessing officer made disallowance of Rs. 17,81,852 by observing that 'directors' remuneration is based on contribution and services provided by these persons and profitability earned due to contribution of these person' also looks not acceptable because net profit of company for year under consideration is only Rs. 37.59 crores as against Rs. 40.87 crores in assessment year 2007-08 and Rs. 60.07 crores in assessment year 2008-09. Above shows a decrease in turnover and profits, whereas the directors' remuneration has increased tremendously. Accordingly, the increased remuneration claimed by the company during year under consideration is excessive and unreasonable. Therefore, the same is allowed upto Rs. 60,18,148 and remaining Rs. 17,81,852 stands disallowed. According to Commissioner (Appeals) assessee failed to mention any specific contribution or service rendered by directors to justify increase in their remuneration. Accordingly, the Commissioner (Appeals) sustained disallowance made by assessing officer. Held Not justified. Remuneration of directors could not be linked with turnover or profits of assessee-company, disallowance made by assessing officer and sustained by Commissioner (Appeals) has not justified particular when directors who are well experienced and qualified rendered services to assessee-company and also remuneration to directors has within limit under company law.

In the instant case, it appears that the assessing officer disallowed the directors' remuneration by linking it with the turnover of the year under consideration and the earlier year. He was of the view that when the commission was paid to the distributors, the remuneration paid to the directors was on higher side. Remuneration of the directors cannot be linked with the turnover or the profit earned by the assessee. The only thing is to be seen is as to whether it was excessive for making the disallowance under section 40A(2). In present case, assessing officer did not doubt the payment of remuneration to directors and it is also not case that services were not rendered by them. It is also not case of authorities below that the payment made to the directors on account of remuneration was higher than the limit prescribed in company law. Disallowance made by assessing officer and sustained by Commissioner (Appeals) was not justified particularly when the directors who are well experienced and having proper qualification rendered services to assessee company. Addition made by the assessing officer and sustained by the learned Commissioner (Appeals) is deleted. Para 34