IT: Where assessee produced complete details of purchase expenditure and further quantum of said expenditure was also reasonable, disallowance of expenditure could not be sustained
IT: Where salary expenses seemed reasonable and there was no violation of TDS provision, salary expenses to be allowed
■■■
[2013] 37 taxmann.com 223 (Agra - Trib.)
IN THE ITAT AGRA BENCH
Recent Insurance Services Ltd.
v.
Deputy Commissioner of Income-tax*
BHAVNESH SAINI, JUDICIAL MEMBER
AND A.L. GEHLOT, ACCOUNTANT MEMBER
AND A.L. GEHLOT, ACCOUNTANT MEMBER
IT APPEAL NO. 276 (AGRA) OF 2012
[ASSESSMENT YEAR 2008-09]
[ASSESSMENT YEAR 2008-09]
MAY 17, 2013
Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Data purchase] - Assessment year 2008-09 - Assessee, a corporate agent of an insurance company, claimed expenses on account of data purchase - Such data purchased was information regarding prospective buyers of insurance - Assessing Officer disallowed 30 per cent of expenses observing that assessee could not fully explain utility of such information - Whether since Assessing Officer did not doubt credential of firm from which such data was purchased and further percentage of expenditure in relevant year under head 'data purchase' was lower in comparison to subsequent years, assessee had genuinely incurred impugned expenses - Held, yes - Whether further since Assessing Officer did not point any specific defect in any data purchased by assessee, disallowance of said expenses was wholly unjustified - Held, yes [Para 30] [In favour of assessee]
Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Salary] - Assessment year 2008-09 - Assessee was a corporate agent of an insurance company - Assessing Officer disallowed 30 per cent of salary/wages expenses on ground that same was inflated and complete vouchers were not made available - Whether since considering volume and percentage of business receipts salary expenses seemed reasonable and no specific details of violation of TDS provision was noted in assessment order, there was no justification to disallow 30 per cent of salary expenses - Held, yes [Paras 31 & 32] [In favour of assessee]
Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of [Referral fees] - Assessment year 2008-09 - Assessee was a corporate agent of an insurance company - Referral fees, i.e., payment incurred on purchase of information relating to persons who might turn out to be prospective clients of assessee, was partly disallowed by Assessing Officer on ground that expenses were inflated, payments were made in cash and that payments were not made directly to persons shown in books of account - Whether considering nature of expenses incurred by assessee in earlier year and subsequent year it was difficult to believe that assessee had inflated expenses in question - Held, yes - Whether however considering certain discrepancies noted by Assessing Officer, disallowance should be maintained at 5 per cent as against 30 per cent proposed by Assessing Officer - Held, yes [Paras 33 & 34] [Partly in favour of assessee]
Circulars and Notifications : Circular No. 677, dated 28-1-1994.
FACTS
| ■ | The assessee was corporate agent of an insurance company. It derived commission in lieu of insurance business to said insurance company. During relevant assessment year, the assessee declared loss after claiming expenses on account of (i) certified data purchase, (ii) referral fee and (iii) salary, wages and bonus. | |
| ■ | The Assessing Officer having found that expenses claimed under said three heads were inflated and proper vouchers were not maintained, disallowed 30 per cent of all expenses. | |
| ■ | The Commissioner (Appeals) upheld the order of Assessing Officer. | |
| ■ | On second appeal: |
HELD
Expenses relating to certified data purchase
| ■ | The Assessing Officer was of the view that this data can be collected from any government and private agency. However, the Assessing Officer failed to note that the Revenue authorities could not dictate to the assessee as to how and in what manner the businessman shall have to run its business. The expenditure shall have to be considered from the point of view of the businessman/assessee and not from the point of view of the Revenue authorities. | |
| ■ | The assessee in the paper book filed complete details of the data purchased and explained that data was purchased from December, 2007 up to March, 2008 (P.B.I.). Copies of the data sheets are filed in the paper book to prove that the assessee maintained complete details of data purchased for the purpose of business which support the contention of the assessee that genuineness of expenditure have been incurred. [Para 29] | |
| ■ | In the assessment year under appeal the percentage of expenditure under data purchase is 6.64 per cent and in subsequent assessment years 2009-10 and 2010-11 the percentage of expenditure incurred by the assessee under this head was 61.92 per cent and 47.42 per cent and the same have been accepted by the Revenue Department. Thus, as compared to subsequent assessment year, the assessee has incurred lesser expenses under the head 'certified data' purchased, therefore, the history of the assessee would also suggest that the assessee has actually and genuinely incurred expenses under the head 'data purchased'. The Assessing Officer did not point out any specific defect in any data purchased by the assessee for the purpose of business, therefore, in the absence of any incriminating material or finding against the assessee, the Assessing Officer was not justified in holding that the assessee could not substantiate the above expenses under the head 'data purchase'. Therefore, the entire disallowance under the head is wholly unjustified, therefore, addition is deleted. [Para 30] |
Salary expenses
| ■ | The assessee maintained complete details regarding salary payment. Even the Assessing Officer found that the assessee has maintained salary of about 12,000 entries and salary have been paid to them ranging from Rs. 2,000 to Rs. 8,000. It would show that large number of employees have been employed by the assessee for the purpose of business of earning commission income on providing information data to the principal. The Assessing Officer observed that no vouchers have been produced to substantiate the payment without pointing out as to which of the vouchers have not been produced for examination and in the absence of any specific details or numbering of the vouchers, it is difficult to sustain the findings of the Assessing Officer on this issue. [Para 31] | |
| ■ | Further in the assessment year 2007-08, the Assessing Officer did not make any disallowances out of salary expenses in the order passed under section 143(3). No addition is also made in the subsequent assessment year 2010-11 despite assessment order passed under section 143(3). The chart submitted by the assessee would clearly show that in the preceding assessment year 2007-08 the assessee has paid salary to the staff in 39.05 per cent of the total commission and in the assessment year under appeal, i.e., 2008-09, the assessee paid salary to the staff in 42.40 per cent of the commission. Thus, the same is very reasonable looking to the previous year salary paid to the staff in percentage and volume of business receipts. Thus, there is no question on inflating expenses by the assessee under the head 'salary' as has been found by the Assessing Officer. | |
| ■ | No specific details of violation of TDS provisions have been noted in assessment order. Since salary has paid for the purpose of business and the Assessing Officer has not brought any adverse material against the assessee, there is no justification for the authorities below to disallow 30 per cent of the expenses out of salary. The addition is therefore, deleted. [Para 32] |
Expenses relating to referral fees
| ■ | Commission is different terms which could be provided to middlemen when the contract would settle between two parties. In the case of insurance even if the matter is settled between insured and insurance company, but no payment is settled at once and it is also not known as to when repayment would be possible, therefore, when reference have been provided by the persons to the assessee of the prospective buyers who would like to buy insurance policy through the assessee from Bajaj Allianz, there is no question of making any commission payment because ultimately the reference data provided to the assessee were forwarded to the principal for the purpose of issuing the insurance policy in favour of the prospective buyers. The person made reference is not directly connected with the insurance company. He cannot claim commission directly from insurance company. Thus, even if the word 'commission' was used by certain persons, it would be of no help to the Assessing Officer to make disallowance against the assessee. The assessee proved payment made to team leaders for providing reference data provided by his team for which complete details are prepared. [Para 33] | |
| ■ | The Assessing Officer in the preceding assessment year 2007-08 in the order under section 143(3) did not make any disallowance/addition on account of referral fees. In the preceding assessment year 2007-08, 43.76 per cent referral fee expenses is incurred but in the assessment order under appeal the same expenditure is incurred at 38.06 per cent, therefore, it is still lesser expenses incurred as against the expenses incurred in the preceding assessment year 2007-08. Therefore, considering the nature of the expenses incurred by the assessee in the earlier year and the subsequent year, it is difficult to believe that the assessee has inflated the expenses under this head as well. [Para 34] | |
| ■ | Considering the above discussion and certain discrepancies noted by the Assessing Officer in the assessment order, and considering the history of the assessee, it would be reasonable and proper for meeting the ends of justice that under the referral fees the disallowance should be maintained at 5 per cent of the total expenses claimed by the assessee under this head as against proposed by the Assessing Officer of 30 per cent. [Para 36] |
CASE REVIEW
CIT v. Dhanrajgirji Raja Narasingirji [1973] 91 ITR 544 (SC); CIT v. Walchand and Co. (P.) Ltd. [1967] 65 ITR 381 (SC) and Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261/1 Taxman 485 (SC) (para 29) followed.
CASES REFERRED TO
CIT v. Kinetic Capital Finance Ltd. [2013] 354 ITR 296/[2011] 202 Taxman 548/14 taxmann.com 150 (Delhi) (para 26), CIT v. Dhanrajgirji Raja Narasingirji [1973] 91 ITR 544 (SC) (para 29), CIT v. Walchand and Co. (P.) Ltd. [1967] 65 ITR 381 (SC) (para 29) and Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261/1 Taxman 485 (SC) (para 29).
Deependra Mohan for the Appellant. Waseem Arshad for the Respondent.
ORDER
Bhavnesh Saini, Judicial Member - This appeal by the assessee is directed against the order of the learned Commissioner of Income-tax (Appeals)- II, Agra dated February 22, 2012 for the assessment year 2008- 09, challenging the disallowance of 30 per cent. of the expenses, out of certified data purchased, referral fees expenses and salary, wages and bonus.
2. The assessee filed return of income at loss of Rs. 58,31,542. The Assessing Officer on consideration of facts and material before him observed in the assessment order that the assessee-company is a corporate commission agent of Bajaj Allianz and has received Rs. 10,60,95,656 as a commission comprising first year's commission, renewal commissions, etc. in lieu of insurance business provided it to M/s. Bajaj Allianz. As against receipt of Rs. 10,60,95,656, the assessee-company has incurred expenditure of Rs.11,15,29,056 thereby the company has claimed loss of Rs. 54,33,400. The company is not engaged in any kind of manufacturing or trading activity but it simply facilities commission on behalf of Bajaj Allianz and even then the company has incurred losses of Rs. 54,33,400. From a careful perusal, it is learnt that out of total expenses of Rs.11,15,29,056 the main expenses relates to mainly three heads, i.e., (i) certified data purchase of Rs.70,36,440 ; (ii) referral fee to medicare of Rs. 4,03,52,970, and (iii) Rs.4,49,63,429 under the head salary, wages and bonus. To understand the nature of business and this heavy expenses incurred on the above three heads, statement of Shri Ram Baboo Singh, the managing director of the assessee was also recorded on October 5, 2010. Shri Ram Baboo Singh has explained the entire process of doing insurance to the various persons.
3. The gist of the statement is that the assessee is a corporate agent of Bajaj Allianz Life Insurance Co. who is procuring insurance policy. The assessee has taken agency of the same and that after giving training, the assessee calls for reference from M/s. Shiva Fund Trust and the persons are collected in the group of 10/15 and whatever information are provided by trained personnels, the same was filled and provided to insurance company in form. For reference, referral fees is paid, whatever reference are received directly from M/s. Shiva Fund Trust, payments are made accordingly. Some times the references are not matured, therefore, small expenses are given. The information received through data even if mature or not the payment is to be made. For reference fee payments are made through cash and cheque and salary is paid to the employees for which complete details are maintained and those employees promoted the business by bringing prospective buyers. All payments are made for getting information for doing the business on commission basis.
4. From his statement, it is clear that the heavy salary expense of Rs.4,49,00,000 is attributable primarily to the persons who informs the public and promote them to get their insurance done, however, the treatment of the same under the head salary does not seen appropriate. The data purchase is the information regarding the prospective buyers. Furthermore, it has been explained that referral fee is the payment that relates to the various persons who provide the necessary references to the assessee about the prospective buyers meaning thereby that the amount of Rs.9,23,52,839 claimed to have been incurred on the purchase of information of the persons who may turn out to be the prospective clients of the assessee-company. Hence, as against the total receipts of Rs. 10,60,95,656 (which includes at least Rs. 1.5 crores of the insurance done in previous year), thus, as against Rs. 9,10,95,656 of commission the assessee has incurred Rs. 9,23,52,839 on the purchase of information. The expenses on account of purchase of information appears to be exceedingly high specially when assessee does not have any information bank or data pool as conceded by Shri Ram Baboo Singh in his statement on oath. As regards the admissibility of expenses in this trade, reference is also invited to a Circular No. 677, dated January 28, 1994 which reads as under ([1994] 205 ITR (St.) 331) :
"The Board in Circular No. 594 (F. No. 168/6/89-ITA-I, dated 27th February, 1991-[1991] 188 ITR (St.) 105 and corrigendum dated 15th May, 1991) has granted, subject to conditions therein specified, benefit of ad hoc deduction for expenses at 50 per cent. of the gross receipts of commission, to the authorised agent of the Unit Trust of India and the agents of the securities specified in the Circular. The benefit of ad hoc deduction is available only where no detailed accounts are maintained and the gross commission received by the agents is less than Rs. 60,000.
2. The Board has received representations for grant of similar ad hoc deduction to agents of mutual funds.
3. The Board has considered these representations and has decided that the benefit of ad hoc deduction for expenses at 50 per cent. of the gross receipts of commission be given to the agents of those mutual funds which are notified by the Central Government for the purposes of section 10(23D) of the Income-tax Act, 1961. The benefit of ad hoc deduction will only be available to agents not maintaining detailed accounts for the expenses incurred by them and having gross commission of less than Rs. 60,000 for the year, including gross commission as authorised agents of the Unit Trust of India and agents of securities specified in Board's Circular No. 594 dated 27th February, 1991 and corrigendum dated 15th May, 1991, as well as total commission from the Life Insurance Corporation as specified in Board's Circular No. 648 (F. No. 168/13/93-ITA-I, dated March 30, 1993- [1993] 201 ITR (St.) 4)."
5. The Assessing Officer further observed that though this circular is applicable in the cases of LIC agents whose commission is up to Rs. 60,000, though in the same trade, the Legislature has recognised 50 per cent. of expenses in this business. Whereas not only the assessee has incurred loss, surprisingly, the amount spent on the purchase of information is more than the commission itself.
6. Therefore, the moot question in this case is genuineness and veracity of the expenses claimed to have been made for the purchase of information and the same has been done in three heads-1. certified data purchase, 2. expenses relating to salary, and 3. expenses relating to referral fee. And the expenses under the every head were dealt separately by the Assessing Officer in the assessment order as under :
Certified data purchase :
7. The Assessing Officer observed that the assessee has purchased data worth Rs. 70,36,440 and specimen of data purchased by it was filed during the assessment proceedings and the same is as under :
| S.No. | Name | Address | City | Mobile No. |
| 1. | Anju Bala Arora | 2/7 M-S-20J.P.S. Tul Grove Road, Delhi | Delhi | 9868217442 |
| 2. | Raj Kumar | A26 MCD Colony A Block Samaypur, Delhi | Delhi | 9210470189 |
| 3. | Ramu Singh | F/108 Katwaria Sarai, New Delhi | Delhi | 9891652677 |
| 4. | Urmila Panday | 110A/3 Kiloka Jang Poura, New Delhi | Delhi | 9718823881 |
| 5. | Manoj Kumar | D 293/18 JJ Colony, Madanpur Khadar Phase II, New Delhi | Delhi | 9560934211 |
| 6. | Praveen Kumar | D 178/18 JJ Colony, Madanpur Khadar Phase II, New Delhi | Delhi | 9910624124 |
| 7. | Mahipal Singh | 1449/69A Street No. 6 Durga Puri Shahdra, Delhi | Delhi | 9868205092 |
| 8. | Bijender Singh | 1/154 Sri Ram Nagar Shahdra, Delhi | Delhi | 9811218036 |
| 9. | Yashvir Singh | H.No.468 B 29 Azad Pur Vill, New Delhi | Delhi | 9990478564 |
| 10. | Sandhya | 228 Block P 2 Sultanpuri, New Delhi | Delhi | 9918423373 |
8. However, from the above table, it is not understood how this data can be used by the assessee and why the assessee was paying Rs. 50 to Rs. 75 per information. This much information can be easily be collected from any Governmental and private service providing agency like municipal corporation, telephone department, Tata yellow pages, trade directories, etc. Therefore, prima facie the genuineness and the purpose of the expenses incurred by the assessee is not very clear specially when the assessee itself conceded that even if the above information does not materialise in the business, the assessee has to pay Rs. 50 to Rs. 75 per information. Furthermore, the information has been purchased from M/s. Shiva Fund Trust, controlled, managed and run by the brother of the managing director of the assessee-company residing at the same address whose credentials are also under doubt. Therefore, the assessee could not fully explain—
| 1. | The contents and utility of the information purchased by it. | |
| 2. | The process by which the same information is being utilised by it. | |
| 3. | The source of information is not very clear and the credential of the supplies of information, i.e. M/s. Shiva Trust is also under severe doubt. |
Therefore, the assessee could not substantiate the above expenses under the head data purchase.
Expenses relating to salary of Rs. 4,49,00,000
9. The Assessing Officer further noted that another head of procurement of information relates to the salary. The assessee has debited in its profit and loss account an amount of Rs. 4,49,63,429 under the head "Salary and wages". Vide show-cause dated December 16, 2010, the assessee was required to furnish the vouchers relating to all expenses, but no voucher to substantiate the payment of salary has been produced during the course of assessment proceedings, thereby precluded the office to verify the genuineness of the expenses under this head as claimed by the assessee. However, Form 16 issued to 75 person wherein the salary disbursement of Rs.1,42,36,179 have been shown were produced along with Annexure C-1. In Annexure C-1, details of salary under the following three heads have been shown :
| Head | Amount (Rs.) | |
| A | Salary I | 21,87,334 |
| B | Salary II | 3,29,75,227 |
| C | Salary III | 63,55,823 |
10. The amount shown under the head salary-I at Rs. 21,87,334 is covered by the provisions of PF/ESI. However, on the remaining amount of Rs. 3,29,75,227 and Rs. 63,55,823 has not been subjected to PF and ESI deductions. From the perusal of the details of this amount furnished in pages 6 to 230 of the annexure C-1, it is seen that Rs. 3,51,62,561 have been distributed by the assessee in the garb of salary payment through about 12000 entries. From the information available in annexure C-1, it cannot be ascertained whether these 12000 entries pertain to 12000 persons or less than that. However, the amount of salary shown to have been paid through each entry was found within the range of Rs. 2,000 to Rs.8,000. No voucher to substantiate the payment shown in these entries has been produced during the course of assessment. Further, the assessee itself has made the payment under salary for the procurement of information primarily in the nature of commission and no TDS as per the provision of section 194H has been complied with. For an argument, if it is a salary, no PF/ESI has been deducted from this amount, in such circumstances, Rs. 3,51,62,561 remained unsubstantiated.
Expenses relating to referral fee
11. The Assessing Officer further noted that the third head for the procurement of information relates to the referral fee. There are innumerable accounts relating to the payment to referral fee though a sincere effort was made to arrive at the quantum of the possible expenses incurred by the assessee in this business of commission under the head payment to referral fee. To verify the genuineness of the referral fee, assessee was asked to produce vouchers of any branch of its choice since most of the payments have been made through cash and it appeared that lot of people have been paid referral fee by the assessee-company. During the process of examination of the payments made under the referral fee, 14 show-causes were issued to the assessee on the discrepancies noted after careful perusal of the vouchers submitted by it and the sum and substance of each show cause is as under :
Show causes Nos. 1, 2 and 3 : From perusal of the vouchers furnished by the assessee of Mainpuri Unit, it was learnt that the signature of the recipients were not available on the vouchers, therefore, the assessee was asked to explain mailing address of the 16, 33 and 20 persons respectively mentioned in the show causes. The assessee in its reply stated that payments were made to the team leader not to the persons concerned.
Show causes Nos. 4 and 6 : In these show causes the assessee was asked to furnish the mailing address of 126 and 18 persons respectively who had not received the payment but somebody else had received on their behalf and the company was asked to specify the details of work done by the above persons. The assessee in its reply stated that the payments were made to the team leader, furnished the mailing address but could not specify the nature of service rendered by the persons mentioned in the show causes.
Show causes Nos. 7, 8 and 9 : In addition to the above information, in these show causes the assessee was asked to produce 112, 90 and 82 persons respectively mentioned in the show causes who had not received the payments directly but supposedly through somebody else as stated in foregoing paras. The assessee in its reply reiterated the same that the payment was received by the team leader but no person was produced by it for the examination.
Show causes Nos. 10, 12 and 14 : In addition to the information sought in the earlier show causes, this time the assessee was asked to provide acknowledgement of the receipt of the payment in addition to their mailing addresses, reason for not making payment directly and to produce them for examination in the cases of 38, 172 and 487 persons respectively. But this time also, the assessee could not produce any of the persons mentioned in the show-causes and very few acknowledgment of the receipt of the payment were furnished by it. As a result of this exercise of examination of the vouchers of referral fee, it is learnt that—
| (i) | almost all the payments have been made in cash through self made vouchers, which are not open for verification. | |
| (ii) | Further, it has also been observed that on 75 per cent. of vouchers of referral fee, the payment has not been made directly to the person to whom the payment has been shown in the books of account but to a person other than him. | |
| (iii) | It has also been gathered that the person who has received the payment on behalf of other has no authority to receive the same. | |
| (iv) | The assessee could not produce persons for the examination before the Assessing Officer. | |
| (v) | The assessee could not file the adequate acknowledgments of the receipt of payment in all the cases which were taken up for the detailed scrutiny. |
12. Since the assessee could not furnish the persons or acknowledgment of receipt of payment, therefore, the Assessing Officer was constrained to make the independent inquiry and notices under section 133(6) were issued to the following persons on random basis on the total addresses of 1012 persons furnished by the assessee on November 29, 2010 :
| 1. | Shri Kapil Kumar, G-102, Sector-56, Noida. | |
| 2. | Shri Udai Tripathi, 5/50, Bag Kuncha, Farrukhabad. | |
| 3. | M/s. Rekha Tripathi, 19-A, Aruna Nagar, Etah. | |
| 4. | M/s. Archana Chauhan C/o G.S. Chauhan, Murli Vihar, Airface, Tata Gate, Agra. | |
| 5. | Ms. Mithlesh Chauhan, G-97, Sector 56, Gautam Budh Nagar, Noida. | |
| 6. | Shri Naresh Kumar, House No.331, New Basti Devpura, Mainpuri - 205001 | |
| 7 | Ms. Chitra Gupta, 151, A.K. Block, Yasoda Nagar, Kanpur. | |
| 8. | Shri Tota Ram, 4/64, Avas Vikas Colony, Mainpuri. | |
| 9. | Ms. Vimla Dubey, 138, Rajiv Nagar, Mohammadabad, Farrukhabad. | |
| 10. | Ms. Namita Pariza, 12-B, Patel Nagar, Star Colony, Indira Nagar, Lucknow. | |
| 11. | Ms. Manju, 422C Block Panki, Kanpur (Near Railway Station) 208020. | |
| 12. | Shri Vinod Kumar Katiyar, House No.187, Gali No.6, Surya Vihar Part - 2, Sanjay Colony, Sehatpur, Faridabad. | |
| 13. | Ms. Kunti Dweodi, 125, Purohitana, Mainpuri. | |
| 14. | Ms. Sunita Sharma, 20-B, Shanti Nagar, Etah. | |
| 15. | Shri Brahm Dutt Singh, 285, Ashoka Nagar, Purani PAC Gali No.6, Etawah. | |
| 16. | Ms. Pooja Dixit, 36-A/23-B, Kirti Nagar, Defence colony, Agra | |
| 17. | Shri Yogesh Chandra Dubey, C-14, Nahar Colony, Mohammadabad Distt. (Sitapur) | |
| 18. | Shri Pradeep Kumar, H.No.209, Gali No.3, Ashoka Vihar, Gurgaon, Haryana. | |
| 19. | Ms. Ranjana Singh, 371/21-A, Baadshah Nagar, Old Roy Bihari Lal Road, Lucknow. | |
| 20. | Ms. Laxmi Shakya, 9/3565K, H.No.139, Dundala Chowk, Gali No. Dharmpura, Gandhi Nagar. | |
| 21. | Pankaj Singh Chauhan, 1258, Ratan Lal Nagar, Kanpur. | |
| 22. | Shri Umesh Kumar, GF-267, Housing Board Colony, Sector-48, Gurgaon, Haryana-122001 | |
| 23. | Prashant Shukla, 7-B, Friends Colony, Etawah. | |
| 24. | Shri Rajendra Kumar Pandey, 202 Har Mukhpur, Modi Nagar, Agra. |
13. Further, summons under section 131 of the Income-tax Act were also issued on November 25, 2010 to verify the genuineness of referral fee :
| 1. | Shri Vinod Kumar, village Tajpur Tigura P.O. Shali Pur, Tahala (Etah) | |
| 2. | Ms. Ranjana, Radhakrishna Mohalla (Pakka Bag), Aliganj Distt. (Etah). | |
| 3. | Shri Ravindra Nath Pandey, Railway Road Ahata sath Daulat Ram, Kasganj (Etah) | |
| 4. | Ms. Sangeeta Shakhwar, Village Tamori Post Takha Distt. (Etawah). | |
| 5. | Shri Brij Pal Singh Nagar Kharag P.O. Puraila Distt. Etawah | |
| 6. | Shri Prempal Singh Village Nagla Bodila, P.O. Kheria Patikara, Firozabad. | |
| 7. | Shri Dharam Pal Singh Nagla Bodila Post Kheria Patikara Distt. Firozabad | |
| 8. | Shri Sanjeev Kumar Bapur Nagar, Etah. | |
| 9. | Ms. Girja Devi, Bhartiya Nagar Near Sishu Mandir, Etah-207001 | |
| 10. | Shri Santosh Pandey, Village & Post Barna Distt. Etah 207247 | |
| 11. | Shri Raj Kumar Village Gariya (Kherara) Post Dal Shak (Etah) | |
| 12. | Nirmal Chand Tiwari 22/5, Raja Ganj, Bharthana Etawah. | |
| 13. | Shri Daushal Pratap Singh Village Nagla Baldev Etah-207246 | |
| 14. | Ms. Anupama Mishra, 81-A, Maitri Bagh, Agra | |
| 15. | Ms. Sheela Shakya, Malawar Distt. (Etah) | |
| 16. | Shri Rahul Shakya, Village Post Sariaghat Distt. (Etah) |
14. These summons and letter under section 133(6) of the Income-tax Act were sent through speed post at the address given by the assessee in its replies. In response to these, 40 summons/letters, the replies of the following persons were received in the office :
| '1. | Smt. Sangeeta Shankwar-She reported in her affidavit dated December 8, 2010 that she had received Rs. 2,152 as commission from M/s. Recent Insurance company Ltd. as she had insured two persons. Hence, it cannot be said that Smt. Shankwar had received any referral fee. | |
| 2. | Shri Nirmal Chand Tiwari-In his affidavit Shri Tiwari has stated that he had received Rs. 1,000, however, for what reasons this payment has been received had not been disclosed by him. Hence, it cannot be said that any payment in the shape of referral fee had been received by Shri Tiwari. | |
| 3. | Shri Yogesh Chandra Dubey-In his reply dated December 8, 2010, Shri Yogesh Chandra Dubey has stated that he had received commission of Rs. 2,153. Thus, this payment can also not be treated as referral fee. | |
| 4. | Smt. Rekha Tripathi-Vide her letter dated December 6, 2010, Smt. Tripathi has informed that during the period March, 2006 to June, 2008 she worked as an agent of M/s. Recent Insurance Services Ltd., Agra (corporate agent) and had purchased 4 ULIP policies for her family members and against these policies. M/s. Recent Insurance Services Ltd., Agra had provided me Rs. 18 to 20 thousand as commission through Shri Jitendra Kumar Shakya. Hence it cannot be said that Smt Rekha Triphati had received any referral fee. | |
| 5. | Smt Ranjana Singh-Smt. Ranjana Singh also informed that she had received Rs. 1,390 as commission which cannot be treated as referral fee. | |
| 6. | Shri Uday Triphathi-Shri Uday Triphathi has confirmed that he had received Rs. 1,959 on December 31, 2007 along with the reply he has also attached a TDS certificate where in the nature of payment has been shown as "insurance" and not the referral fee, hence it cannot be definitely said that Shri Triphathi had received any "referral fee" or the commission.' |
15. From the replies of the witnesses mentioned above, it can be safely concluded that of the total 39 notices/ summons issued by this office only 6 people had replied that they have received the money from the assessee-company and among the 6 only one person has confirmed that TDS was deducted but even in that case it is also not clear that TDS was deducted correctly on the payment made. Therefore, it is safely concluded that the compliance on the basis of enquiry initiated by this office is not more than 3 per cent.
16. Furthermore, the admissibility of commission in this trade is also not allowed as per the section 41 of the Insurance Act, 1938 prohibits the assessee to provide any temptation to anybody for keeping in force the insurance of life or goods. The provision of this section does not allow a person to give any discount for procuring insurance business. In case of non-compliance of these provisions penalty up to Rs. 500 can be imposed. Since the assessee had paid the commission not the referral fee for getting the insurance business from the aforesaid persons, hence it cannot be allowed under the head "Referral fee". Therefore, the assessee could not discharge its onus by stating why the same does not fall within the Explanation to section 37(1) of the Act.
17. Now, coming to the cases where no confirmation was received in compliance of letter under section 133(6) of the Income-tax Act, summons under section 131 of the Income-tax Act were returned unserved for reason given against them :
| Name of the person | Whether letter under section 133(6) or summons under section 131 of the Income-tax Act | Returned with postal remark |
| M/s Manju, R/o 422 C Block Panki (Near Railway Station), Kanpur | Letter under section 133(6) of the Income-tax Act dated November 29, 2010 | 422-C mein is nam ka koi nahi hai |
| Shri Pradeep Kumar, H.No.Gali No. 3, Ashok Vihar Gargaon Haryana | -do- | Is nam ka koi nahi hai |
| M/s. Vimal Dubey, Pata 38 Rajiv Nagar Mohamdabad, Farukhabad | -do- | Praptkarta ka Nahi hai |
Sunita Sharma, 20-B Shanti Nagar Etah | -do- | Prapt karta Agra hai |
| M/s Namita Pariza, 12-B Patel Nagar, Star Colony, Lucknow | -do- | Refused |
| Laxmi Shakya, 9/3565 Kh.No.139 Dundala Chock Dharpoura Gandhi Nagar | -do- | Returned unserved |
| Vinod Kumar Katiyar H.No.187 Gali No. 6 Surya Vihar Part-2 Sanjay Colony Sehat Pur Faridabad | -do- | Puchtach karne par prapt karta nahi mila |
| Shri Umesh Kumar G.F. 267 Housing Board Colony Sector - 48, Gurgaon Haryana 122001 | -do- | Adhora pata yeh SCII mein nahi hai atha vapas |
Shri Tota Ram, 4/64 Avas Vikas, Colony Mainpuri | -do- | 4/64 No. ka plot khali pada hai kripya sahi pata likh kar bhaje |
| Kushal Pratap Singh Village Nagla Baldev Etah | -do- | Incomplete |
| M/s Ranjana Radha Krishan Mohalla (Pakka Bagh) Distt Etah | -do- | Adhura pata preshak ko vapis |
| Shri Raj Kumar, Village Gariya (Kherara) Post Dal Shah Distt Etah | -do- | Prapt karta Bar-2 jane par malte nahi hai |
| Shri Sanjeev Kumar, Bapu Nagar Etah | -do- | Pata adhura hai |
| M/s Girja Devi, Bhartiya Nagar Near Sishu Mandir Etah | -do- | Pata adhura hai |
18. In the case of Shri Brahm Dutt Sharma R/O 285 Gali No.6 Purani PAO Ashoka Nagar Etawah, it has been stated by him that—
| "** | ** | ** |
Bhavdiya
Sd/-
(Brahm Dutt Sharma)"
19. It was further noted that the perusal of annexure A-6 furnished during the course of assessment proceedings it was found that the assessee had shown the payment against reference on October 14, 2007 to Shri Gyan Singh and not to Shri Brahm Dutt Sharma. Since Shri Brahm Dutt Sharma had not provided any services to the company there appears to be no reason for making any payment to him through Shri Gyan Singh. The only inference which can be drawn from the above is that the assessee had inflated its business expenses by adopting such bogus devices. In compliance of summons under section 131 Shri Ravindra Pandey R/o Ahata Dault Ram Railway Road Kasganj to whom the assessee has shown the payment of referral fee has stated as under :
| "** | ** | ** |
Dated : 4-12-2010
Subekshu
Ravindra Nath Pandey
Ahata Daulat Ram
Railway Road Kasganj
Jila Kashi Ram Nagar (U.P.)"
20. From the above reply, it is quite evident that the payment as referral fee shown to have made by the assessee to Shri Ravindra Nath Pandey is bogus.
21. Now, coming to the genuineness of the acknowledgment filed by the assessee in response to notice under section 142(1) in respect of the payment shown to have made as referral fee expenses. In compliance thereto, the assessee has furnished few confirmations. A perusal of these confirmations reveal that these were not the actual acknowledgments of the person to whom the referral fee payment has been shown. From the close perusal of these confirmations filed by the assessee, the following facts have emerged.
| (A) | From the comparison of confirmation letters dated November 29, 2010 of Durbesh Kumar (Code No. 30292) and Brijesh Kumar it appears that the signature on both the letters have been made by a single person. | |
| (B) | Similarly the signature on the confirmation letters Dated November 25, 2010 received on December 6, 2010 in the office in respect of Shri Satya Pal Singh (Code 31454) and Shyam Veer Singh (Code 16638) the signature handwritings appear to be of a same person. | |
| (C) | The signature of Mamta Mishra (Code 20277) and Shri Pramod Kumar Mishra (Code 207249) appears to be done by a single person. | |
| (D) | The signature on the confirmation letters of Shekaher Diwedi and Avinash Kumar Diwedi (25440) appear to be done by a single person. | |
| (E) | The signature dated August 11, 2007 of Shri Vinod Kumar Singhal (code No. 16049) made on business statement filed during the assessment proceedings does not tally with the signature made on the confirmation letter dated November 25, 2010. | |
| (F) | The signature of Lata Pandey (Code No. 26024) letters dated November 29, 2010 does not tally with the receipt voucher dated September 12, 2007. |
22. After doing all this examination by way of notices and summons and careful perusal of the acknowledgment filed by the assessee, a final show cause notice under section 142(1) of the Income-tax Act dated December 16, 2010 fixing the date December 21, 2010 was issued to the assessee. In compliance thereto the assessee has furnished a reply dated December 21, 2010, wherein certain contentions have been raised and the same are considered as under :
| (A) | With regard to the objection that summons were issued to the persons who had received the nominal amount of referral fee, it is clarified that in almost all cases the amount shown to have been paid as referral fee is very nominal as per the vouchers furnished by the assessee, moreover, during the entire proceedings of assessment the assessee had not furnished all the vouchers pertaining to referral fee expenses. Since the assessee itself has furnished the vouchers of nominal payment of referral fees, therefore the Revenue has no other alternative but to verify the genuineness of those vouchers furnished by the assessee during the assessment proceedings. Therefore, there appears to be no reason to raise question on the procedure adopted by the Department. | |
| (B) | With regard to the objection that the letter under section 133(6) of the Income-tax Act has been sent to Anupam Mishra in place of Annapurna Mishra it is clarified that this letter has been sent at the address furnished by you on November 22, 2010 in compliance to this office show cause dated November 16, 2010 issued to call for addresses of 112 persons however the addresses of 111 persons were provided. Since the assessee itself is not in a position to furnish the correct name of the recipient, how can it claim that the referral fee payment shown to have made was genuine. | |
| (C) | From the perusal of vouchers pertaining to referral fee expenses, it was found that the payment to a number of persons have been made through some other person. For example, the payment of Rs. 1,076 shown to have been made for Shri Brahmdutt Singh on October 17, 2007 was made to Shri Gyan Singh. Thus, the recipient has been shown as Shri Brahm Dutt Singh, however, the payment has been made to Shri Gyan Singh. Therefore, the assessee was required to furnish the latest mailing address of the recipient of referral fee debited by it in the profit and loss account thereafter on the basis of information provided the recipient was contacted for verification. On verification it was found that almost all the referral fee payments are not genuine. | |
| In compliance to notice dated December 16, 2010, the counsel of the assessee has attended the office and suo motu produced Mrs. Kunti Devi for examination and she was examined on the same day. Moreover, in each and every show cause the date compliance has been intimated to you in such circumstances your objection that the date of production of referral persons for examination were not intimated to you does not survive. | ||
| (D) | As regards the contention that genuineness may be verified through the city's Income-tax Officer, the assessee has forgotten that in most of the cases the address furnished by it were incomplete. As a result of which summons/letters under section 133(6) of the Income-tax Act sent by this office were returned unserved. Thus, the assessee has not discharged its onus to furnish the correct addresses of the payment of referral fees, in such circumstances it will not be a prudent step to ask the Income-tax Officer concerned for the verification of referral fee. | |
| (E) | From the perusal of the reply received in this office from the referral persons, it was found that the amount of TDS has been deducted from the payment of Shri Udai Tripathi. Since almost all the referral persons do not come under the preview of TDS provisions, hence the TDS certificate and the claim of refund on this account cannot be treated as a basis for deciding the genuineness of referral fee expenses. Moreover there are evidences on record which show that the referral fee has not been paid to the person to whom the payment has been shown in the books of account but to somebody else. If the assessee has made bogus claim of expenses in its books of account by paying a nominal amount of TDS and on the basis of such compliance of TDS provision it cannot claim that the expenses debited by it in the books of account were genuine. | |
| During the course of assessment proceedings, the assessee has furnished copies of Form 16A to substantiate the referral fee payment. However, the amount paid/credited through these TDS certificates (Form-16A) has been worked out less than Rs. 1.8 crores, which indicates that whole of the referral fee payment has not been subjected to TDS provisions. These copies of Form 16A also includes a certificates issued in the name of Beena Agarwal (PAN not available) wherein the nature of payment has been shown as "rent referral fee". Thus the assessee has included the amount of rent in the payment of referral fee which cannot be treated as correct method of accounting. | ||
| (F) | Further, out of 1143 persons, how many have claimed the refund in their income-tax return on account of TDS made, was not known to the assessee. It could not even furnish information, as to how much amount of referral fee was paid in cash and how much through banking channels. In such circumstances there appears to be no reason to blame the department for violation of natural justice. | |
| (G) | If in the completion of an assessment the attendance of a witness is required, the same is called for by the Department and the reimbursement of expenses as per rule is also provided to him. In this process there appears no violation of natural justice as raised by the assessee in its reply. Moreover, no bill of expenses claimed by any witness is pending for payment. Therefore, the objection on this count also does not survive. | |
| (H) | The assessee has claimed that the nature of business does not require to verify addresses individually of all the persons to whom payment of referral fee has been made because there is no risk of any default of those persons so that the assessee were not in position to verify individual address of all the above persons. Thus, the assessee itself is not in position to discharge its onus to prove the genuineness of expenses claimed in the return of income in the shape of referral fee. However, it required the attendance of Shri Brahmdutt Singh which is a bogus entity created by the assessee itself to justify a claim of expenses shown under the head "referral fee". Hence, the question of his personal attendance does not arise. It is a matter of surprise as to how details of bogus person such as name, father's name, address, phone number have been generated by the assessee. |
23. At the end, as the result of entire exercise undertaken by the Assessing Officer, the various discrepancies noted for the payment under the head "Referral fee" :
| (i) | All the vouchers pertaining to the referral fee have not been produced for verification despite giving so many opportunities to the assessee which shows that the assessee has no evidence to substantiate expenses shown under the head referral fee. | |
| (ii) | Whatever vouchers have been produced from their examination, it is learnt that almost all the payment have been made in cash through self made vouchers, which are not open for verification. | |
| (iii) | Further, it has also been observed that on the 75 per cent. of vouchers of referral fee, the payment has not been made directly to the person to whom the payment has been shown in the books of account but to a person other than that. | |
| (iv) | It has also been gathered that the person who has received the payment on behalf of other has no authority to receive the same. | |
| (v) | The assessee could not produce persons for the examination. | |
| (vi) | Some of the persons to whom the referral fee payment has been shown categorically stated that they have not received any payment from the assessee-company. | |
| (vii) | Most of the letters/summons sent to verify the genuineness of the referral fee expenses returned unserved. | |
| (viii) | Letters/summons were sent to 40 persons, however only one of them has stated that the TDS has been deducted from his payment, hence it cannot be said that the payment was made to the referral persons after the deduction of TDS. | |
| (ix) | The confirmation letters received from the person through counsel do not indicate the genuineness of the referral fee expenses as the signature available on these confirmation appear to be non-genuine. The detail discussion in this regard has been made supra and the copies of confirmation letter are enclosed herewith as Annexure A. | |
| (x) | The assessee has given the colour of referral fee payment to the payment of commission thereby controverted the provisions of section 45 of the Insurance Act 1938. |
24. Therefore, it is abundantly clear that the payment under the head referral fee is not fully substantiated, is full of various irregularities and bogus claim as mentioned above. The Assessing Officer considering nature of business and facts and circumstances of the case was of the opinion that the assessee has inflated its expenses under the above heads of expenses and the intention of the Legislature is clear from Circular No. 677 ([1994] 205 ITR (St.) 331)) that admissibility of the expenditure is permissible up to 50 per cent. of the expenditure. The Assessing Officer, therefore, disallowed 30 per cent. of the expenses under the above heads of expenditure which comes to Rs. 2,77,05,851 (Rs. 9,23,52,839 x 30 per cent.).
25. The assessee challenged the assessment order before the learned Commissioner of Income-tax (Appeals), however, the learned Commissioner of Income-tax (Appeals) on the same reasons as has been given by the Assessing Officer has confirmed all the addition and dismissed the appeal of the assessee.
26. Learned counsel for the assessee reiterated the submissions made before the authorities below and submitted that all additions are wholly unjustified because all the expenditures were incurred wholly and exclusively for the purpose of business and filed two paper books in support of his contention and also filed chart of the history of the assessee in preceding and subsequent assessment years to show that the Assessing Officer has made excessive disallowances out of expenses. He has also filed copies of the assessment orders in the case of the same assessee for the assessment years 2007-08 and 2010-11 dated September 29, 2009 and March 26, 2013 passed under section 143(3) of the Act and submitted that in the assessment year 2007-08 no disallowances have been made against the assessee out of any of the above expenditures and in the assessment year 2010-11 no disallowances have been made under the head salary and certified data purchase from M/s. Shiva Fund Trust and only part addition is made for different parties. He has also relied upon the unreported decision of the hon'ble Delhi High Court in the case of CIT v. Kinetic Capital Finance Ltd. [2013] 354 ITR 296/[2011] 202 Taxman 548/14 taxmann.com 150 on the proposition that Assessing Officer has to advert to each and every entry and not to pickup couple of entries, considering the same as undisclosed income. He has also referred to Circular dated November 18, 2010 of insurance regulatory and development authority in which 40 per cent. of first year's premium payable on policy paid towards commission was found to be in permissible limit.
27. On the other hand, the learned Departmental representative relied upon the orders of authorities below and also filed audited balance-sheet of the assessee and submitted that statement of Sri Ram Baboo Singh, managing director of the assessee which clearly justified disallowance of the expenses and submitted that appeal of the assessee may be dismissed.
Recent Insurance Services Ltd.
Assessment year 2008-09 ITA No. 276/AGR/2012
| 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 |
| Assessment year | Insurance commission receipt (Rs.) | Returned income (Rs.) | Salary (Rs.) | Referral fees (Rs.) | Certified data purchase | Total expenses | % | Status of assessment |
| 2007-08 | 8,47,37,809.00 | 4,36,930.00 | 3,30,89,788.00 | 3,70,85,078.00 | Nil | 7,01,74,866.00 | 82.81 | Assessment under section 143(3), no addition/disallowance under the head salary, referral fees and certified date purchase |
| 39.05 | 43.76 | 70,36,440.00 | 9,23,52,839.00 | 87.09 | Year under appeal | |||
| 2008-09 | 10,60,37,283.00 | (58,31,542.00) | 4,49,63,429.00 | 4,03,52,970.00 | ||||
| 42.40 | 38.06 | 6.64 | ||||||
| 2009-10 | 6,93,43,587.00 | 16,06,118.00 | 1,19,47,013.00 | 4,29,40,237.00 | 5,48,87,250.00 | 79.15 | Assessment under section 143(1)(a) | |
| 17.23 | nil | 61.92 | ||||||
| 2010-11 | 5,90,52,963.00 | Nil (Rs. 10,58,444 minus set off from b/f losses) | 2,00,34,327.00 33.93 | nil | 2,80,00,293.00 ww47.42 | 48,034,620.00 (Data Purchase from M/s. Shiva Fund Trust Rs. 2,38,42,181) | 81.34 | Assessment under section 143(3), no addition/disallowance under the head salary, and certified data purchase from M/s. Shiva Fund Trust (Prop. M/s. Recent Insurance Services) Rs. 2,38,42,181. Referral fees was not there and was merged in data purchase (data purchase from M/s. Shiva Fund Trust Rs. 2,38,42,181) |
28. Now, we consider all the different expenses incurred by assessee for the purpose of achieving the target of insurance company.
Certified data purchase
29. The assessee has purchased certified data of Rs. 70,36,440 and the same is noted in the assessment order. The Assessing Officer was of the view that this data can be collected from any government and private agency. However, the Assessing Officer failed to note that the Revenue authorities could not dictate to the assessee as to how and in what manner the businessman shall have to run its business. The expenditure shall have to be considered from the point of view of the businessman/assessee and not from the point of view of the Revenue authorities. We are fortified in our view by judgments of the hon'ble the Supreme Court in the cases of CIT v. Dhanrajgirji Raja Narasingirji [1973] 91 ITR 544, CIT v. Walchand and Co. (P.) Ltd. [1967] 65 ITR 381 (SC) and Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261/1 Taxman 485 (SC). The Assessing Officer found that assessee has purchased data from M/s. Shiva Fund Trust which is run and managed by the brother of the managing director of the assessee. The Assessing Officer did not accept contention of the assessee regarding the same because the assessee could not explain contents and utility of the information purchased and whether such data was used by the assessee or not and that the credential of the information supplied by M/s. Shiva Fund Trust is doubtful. The assessee in the paper book filed complete details of the data purchased and explained that data was purchased from December, 2007 up to March, 2008 (P.B.1). Copies of the data sheets are filed in the paper book from pages 191 to 290 to prove that the assessee maintained complete details of data purchased for the purpose of business which support the contention of learned counsel for the assessee that genuineness of expenditure have been incurred. Paper book page 291 is the copy of the acknowledgment of the return of income filed by M/s. Shiva Fund Trust for the assessment year 2008-09 showing the amount received from the assessee as income which is supported by the audited report as well. Learned counsel for the assessee submitted that in assessment year 2008-09 no regular assessment was framed in this case. However, regular assessment order was passed under section 143(3) of the Act in the assessment year 2010-11 dated April 30, 2012. Copy of the assessment order is filed as pages 307 to 309 of the paper book in which the Assessing Officer did not doubt the business activities of M/s. Shiva Fund Trust. The assessee, therefore, on the basis of these evidences have been able to prove that the assessee actually purchased data from M/s. Shiva Fund Trust and maintained complete details on the same and same information have been used for the purpose of earning business income. The credentials of M/s. Shiva Fund Trust are also genuine because the Revenue Department has accepted the income declared by the said party in their return of income which was received from the assessee.
30. Learned counsel for the assessee has also submitted that the entire data was received and used in the year under consideration from M/s. Shiva Fund Trust, therefore, in the absence of any data purchased from this party, the assessee would not have been able to earn commission income. In the preceding year 2007-08, the Assessing Officer passed regular assessment order under section 143(3) of the Act in the case of the assessee on September 29, 2009 in which the Assessing Officer did not make any addition against the assessee under all the above heads of expenses. The assessee has incurred expenditure for about 82.80 per cent. as against the insurance commission receipt and in the assessment year under appeal, i.e., 2008-09 the assessee has incurred expenses under the three heads in about 87.09 per cent. of the income. In the subsequent assessment year 2009-10 the claim of the assessee has been accepted under heads of the expenses and in the assessment year 2010-11 the Assessing Officer also passed regular assessment order under section 143(3) of the Act dated March 26, 2011 in which the Assessing Officer did not make any addition/disallowance on account of certified data purchased from M/s. Shiva Fund Trust and only out of small parties disallowance was made of Rs. 10,39,528. Thus, the Assessing Officer did not doubt the credential of M/s. Shiva Fund Trust in providing data to the assessee, for the purpose of completing the agency work. It may also be noted here that in the assessment year under appeal the percentage of expenditure under data purchase is 6.64 per cent. and in subsequent assessment years 2009-10 and 2010-11 the percentage of expenditure incurred by the assessee under this head was 61.92 per cent. and 47.42 per cent. and the same have been accepted by the Revenue Department. Thus, as compared to subsequent assessment year, the assessee has incurred lesser expenses under the head certified data purchased, therefore, the history of the assessee would also suggest that the assessee has actually and genuinely incurred expenses under the head data purchased. The Assessing Officer did not point out any specific defect in any data purchased by the assessee for the purpose of business, therefore, in the absence of any incriminating material or finding against the assessee, the Assessing Officer was not justified in holding that the assessee could not substantiate the above expenses under the head data purchase. We are, therefore, of the view that the entire disallowance under the head is wholly unjustified, therefore, addition is deleted.
Salary expenses
31. Learned counsel for the assessee explained that there are three types of salary paid as has been noted by the Assessing Officer in the assessment order, i.e., salary paid to administrative staff/supervisor and remaining salary/wages paid temporary staff, apprentice and field staff and in their cases no provident fund provisions are applicable. The assessee has filed copies of Form 16 from pages 310 to 465 of the paper book to show that genuine payments of the salary have been made to the staffs who are employed for the purpose of the business of the assessee. Learned counsel for the assessee submitted that there are voluminous vouchers of salary of thousands of employees employed by the assessee have been maintained and complete books of account are maintained. It would, therefore, show that the assessee maintained complete details on the same issue regarding salary payment. Even the Assessing Officer found that the assessee has maintained salary of about 12,000 entries and salary have been paid to them ranging from Rs. 2,000 to Rs. 8,000. It would show that large number of employees have been employed by the assessee for the purpose of business of earning commission income on providing information data to the principal. The Assessing Officer observed that no vouchers have been produced to substantiate the payment without pointing out as to which of the vouchers have not been produced for examination and in the absence of any specific details or numbering of the vouchers, it is difficult to sustain the findings of the Assessing Officer on this issue.
32. Further in the assessment year 2007-08, the Assessing Officer did not make any disallowances out of salary expenses in the order passed under section 143(3) of the Act. No addition is also made in the subsequent assessment year 2010-11 despite assessment order passed under section 143(3) of the Act. The chart submitted by the learned counsel for the assessee would clearly show that in the preceding assessment year 2007-08 the assessee has paid salary to the staff in 39.05 per cent. of the total commission and in the assessment year under appeal, i.e., 2008-09, the assessee paid salary to the staff in 42.40 per cent. of the commission. Thus, the same is very reasonable looking to the previous year salary paid to the staff in percentage and volume of business receipts. Thus, there is no question on inflating expenses by the assessee under the head salary as has been found by the Assessing Officer The assessee's counsel has demonstrated before us that the complete data were produced before the Assessing Officer in which no specific details against the assessee have been pointed out by the Assessing Officer Further salary accounts have been filed from pages 27 to 43 of the paper book to show that payment of salary have been made to large number of employees and details of month-wise and name wise have been maintained. Payment of salary cannot constitute payment of commission. No specific details of violation of TDS provisions have been noted in assessment order. Since salary has paid for the purpose of business and the Assessing Officer has not brought any adverse material against the assessee, therefore, in the absence of any material against the assessee, we do not find any justification for the authorities below to disallow 30 per cent. of the expenses out of salary. We, therefore, do not find any justification to sustain the order of the authorities below to disallow 30 per cent. of the salary. The addition is therefore, deleted.
Expenses relating to referral fees
33. Learned counsel for the assessee has filed complete evidence on this issue from pages 95 to 189 of the paper book which were filed on account on referral fees which is supported by complete data, vouchers and Form 16A, permanent account number and Tin-e-Tin payment data sheets. Learned counsel for the assessee, therefore, demonstrated that the assessee maintained complete details of referral fees paid for the purpose of business and even some of the persons appeared before the Assessing Officer and confirmed the receipt of money under this head from the assessee for providing references for the purpose of business. Paper book pages 95 and 96 are list of complete details and references fees paid, TDS deducted and documents produced. Pages 82 to 94 of the paper book is the reply filed before the Assessing Officer. Learned counsel for the assessee, therefore, submitted that all the discrepancies noted by the Assessing Officer have been explained. Learned counsel for the assessee has contended that even if some persons mentioned such payment as commission but in fact it was a referral fee paid to a large number of persons for providing reference to the assessee. Commission is different terms which could be provided to middlemen when the contract would settle between two parties. In the case of insurance even if the matter is settled between insured and insurance company, but no payment is settled at once and it is also not known as to when repayment would be possible, therefore, when reference have been provided by the persons to the assessee of the prospective buyers who would like to buy insurance policy through the assessee from Bajaj Allianz, there is no question of making any commission payment because ultimately the reference data provided to the assessee were forwarded to the principal for the purpose of issuing the insurance policy in favour of the prospective buyers. The person made reference is not directly connected with the insurance company. He cannot claim commission directly from insurance company. Thus, even if the word "commission" was used by certain persons, it would be of no help to the Assessing Officer to make disallowance against the assessee as noted above. The assessee proved payment made to team leaders for providing reference data provided by his team for which complete details are prepared.
34. The Assessing Officer in the preceding assessment year 2007-08 in the order under section 143(3) of the Act did not make any disallowance/addition on account of referral fees. In the preceding assessment year 2007-08, 43.76 per cent. referral fee expenses is incurred but in the assessment order under appeal the same expenditure is incurred at 38.06 per cent., therefore, it is still lesser expenses incurred as against the expenses incurred in the preceding assessment year 2007-08. Therefore, considering the nature of the expenses incurred by the assessee in the earlier year and the subsequent year, it is difficult to believe that the assessee has inflated the expenses under this head as well. We may also note here that Circular No. 677 dated January 28, 1994 ([1994] 205 ITR (St.) 331)) relied upon by the Assessing Officer for the purposes of making disallowance admittedly applies to ad hoc deduction when no details of account are maintained, but in the case of the assessee, the assessee maintained complete details and books of account, therefore, the Assessing Officer cannot use such circular against the assessee for the purpose of making addition. The Assessing Officer did not point out any specific defect in maintaining of books of account by the assessee, such circular therefore is not applicable to the case of the assessee. The history of the assessee as noted above, in the preceding and subsequent years and the voluminous details maintained by the assessee would clearly show that if the addition as proposed by the Assessing Officer is confirmed, it would enhance the income/profit of the assessee to exorbitant and excessive figure which is not permissible. The Assessing Officer should compute reasonable income of the assessee. The Assessing Officer, even if he finds certain discrepancies in the expenditure and evidences, he should have considered the history of the assessee for the purpose of computing income of the assessee. All the facts and circumstances of the case, nature of business of the assessee maintained in the earlier year and subsequent year and the necessary expenses incurred by the assessee under above three heads would clearly support the contention of the assessee that addition made by the Assessing Officer is wholly unjustified and deleted.
35. The Assessing Officer accepted substantially the incurring of the expenses for the purpose of business. The above facts would therefore, clearly show that all the expenses related to the earning of commission from Bajaj Allianz have been incurred wholly and exclusively for the purpose of business of the assessee.
36. Considering the above discussion and certain discrepancies noted by the Assessing Officer in the assessment order as noted above, and considering the history of the assessee, it would be reasonable and proper for meeting the ends of justice that under the referral fees the disallowance should be maintained at 5 per cent. of the total expenses claimed by the assessee under this head as against proposed by the Assessing Officer of 30 per cent. We find support from the fact that in the preceding assessment year 2007-08 the percentage of the expenditure under all the three heads incurred by the assessee was 82.81 per cent. and in the assessment order under appeal the percentage of the expenditure is 87.09 per cent. which is approximately higher by 5 per cent. and if the same expenditure is also compared with the subsequent assessment years 2009-10 and 2010-11 in which the assessee incurred percentage of expenditure at 79.15 per cent. and 81.34 per cent. would show that the disallowance out of referral fees would be justified at 5 per cent. only instead of 30 per cent. made by the Assessing Officer. The addition is, therefore, partly allowed.
37. Considering the above discussions, we are of the view that the authorities below were not justified in disallowing the expenses under the head certified data purchased and salary, wages and bonus. The additions made on account of disallowances of 30 per cent. of expenses under these heads are accordingly deleted. However, for the referral fees, we do not sustain the orders of the authorities below in making disallowance of 30 per cent. expenses and we restrict the disallowance under the head referral fees to 5 per cent. of the expenses on the amount claimed by the assessee at Rs.4,03,52,970. The orders of the authorities below are accordingly set aside and modified to the above extent and the Assessing Officer is directed to make disallowance of 5 per cent. of the expenses under the head referral fees only. The remaining addition under the head certified data purchased and salary/wages are accordingly deleted.
38. In the result the appeal of the assessee is partly allowed.
USPRegards
Prarthana Jalan
__._,_.___
No comments:
Post a Comment