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Income Tax Appellate Tribunal - Ahmedabad
Remo Marketing Pvt.Ltd.,, ... vs Assessee on 22 September, 2011

IN THE INCOME TAX APPELLATE TRIBUNAL,

" D" BENCH, AHMEDABAD

Before Shri BHAVNESH SAINI, JUDICIAL MEMBER

and Shri A. K. GARODIA, ACCOUNTANT MEMBER

I.T.A. No.1157 / Ahd/2008

(Assessment year 2003-04)

ITO, Ward 5(3), Vs. Zaheer Jalaluddin Rana, Ahmedabad 13, Nure Burhan Society, Sarkhej Road, Ahmedabad

I.T.A.No. 1427/Ahd/2008

(assessment year 2003-04)

Zaheer Jalaluddin Rana, Vs. ITO, Ward 5(3), 13, Nure Burhan Society, Ahmedabad Sarkhej Road, Ahmedabad

I.T.A.No. 1461/Ahd/2008

(assessment year 2003-04

ITO, Ward 5(3), Vs. Remo Marketing Pvt. Ltd., Ahmedabad 49, 5th Floor, Shree Krishna Centre, Nr. Mithakhali Six, road,

Ahmedabad

I.T.A.No. 1489/Ahd/2008

(assessment year 2003-04)

Remo Marketing Pvt. Ltd., Vs. ITO, Ward 5(3), th

49, 5 Floor, Shree Krishna Centre, Ahmedabad Nr. Mithakhali Six, road,

Ahmedabad

PAN/GIR No. : ADKPR7123A

(APPELLANTS) .. (RESPONDENTS) 2

I.T.A.No.1157,1427,1461 & 1489 /Ahd/2008

Appellant by: Shri Ravindra Kr. CIT DR Respondent by: Shri J M trivedi, AR

Date of hearing: 22.09.2011

Date of pronouncement: 21.10.2011

ORDER

PER SHRI A. K. GARODIA, AM:-

These are cross appeals in respect of two different but connected assessees and these appeals are directed against the order of Ld. CIT(A) XI, Ahmedabad dated 02.03.2007 for the assessment year 2003-04 in the cases of Shri Zahir Jalaluddin Rana. The appeals in case of M/s. Remo Marketing Pvt. Ltd. for the same assessment year are against the order of the same CIT(A) dated 15.02.2008. Since connected issue is involved in these two cases, all these appeals were heard together and are being disposed off by way of this common order.

2. The grounds raised in the assessee's appeal i.e. in the case of Zahir J. Rana in I.T.A.No. 1427/Ahd/2008 are as under: "1. that the Ld. A.O. has erred in law and on facts in determining total income at Rs.7,53,04,460/- and Ld. via has erred in confirming income i.e. commission income @ 7% of receipts.

2. That o as well as CIT(A) erred in determining income on receipt of Remo Marketing Pvt. Ltd., which was not introduced by the appellant.

3. That the Ld. CIT(A) erred in not properly considering the various explanations furnished by the appellant."

3. The grounds raised by the revenue in the same case in I.T.A.No. 1157/Ahd/2008 are as under:

"1. The Ld. CIT(A) has erred in law and on facts in restricting the commission to 7% instead of 11% as adopted by the A.O.

2. the Ld. CIT(A) has erred in law and on facts in restricting the commission from Rs.7,53,04,460/- to Rs.4,79,21,020/-. 3

I.T.A.No.1157,1427,1461 & 1489 /Ahd/2008

3. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the A.O.

4. It is, therefore, prayed that's the order of the Ld. CIT(A) may be set aside and that of the A.O. be restored."

4. The grounds raised by the assessee in the case of M/s. Remo Marketing Pvt. Ltd. in I.T.A.No. 1489/Ahd/2008 are as under: "1. That the Ld. A.O. erred in assessing income at Rs.68,45,86,000/- u/s 144 r.w.s. 147 of the act and Ld. CIT(A) erred in estimating income at Rs.16,43,00,786/- for taxation purpose on the reason stated in respective orders.

2. that A.O. as well as CIT(A) erred in not considering properly the nature of business as well as the material available on record as well as the provision of law and case law and explanation furnished by appellant.

3. That the Ld. CIT(A) erred in not appreciating that notice as well as proceeding u/s 142(1) and u/s 144 being not proper, assessment required to be cancelled.

4. On the facts available, it is submitted that estimate of income s made by CIT(A) being excessive require to be deleted and or substantially reduced."

5. The grounds raised by the revenue in the same case in I.T.A.No. 1461/Ahd/2008 are as under:

"1. The Ld. CIT(A) has erred in law and on facts in directing the A.O. to calculate gross profit at 30% of the total receipts instead ofRs.68,45,86,000/- as computed by the A.O.

2. The Ld CIT(A) has erred in law and on facts in directing the A.O. to allow 20% of gross profit as an expenditure.

3. On the facts and in the circumstances of the case, the Ld. CIT(A) ought to have upheld the order of the A.O.

4. It is therefore prayed that the order of Ld. CIT(A) may be set aside and that of the A.O. be restored."

6. The brief facts of the case regarding the case of Remo Marketing Pvt. Ltd. are that it is noted by the A.O. in the assessment order that the 4

I.T.A.No.1157,1427,1461 & 1489 /Ahd/2008

assessee had not filed its return of income u/s 139(1) of the Income tax Act, 1961 for the present assessment year and hence notice was issued by the A.O. u/s 148 of the Income tax Act, 1961 on 18.04.2005 which was served on the assessee on 04.05.2005. It is also noted by the A.O. in the assessment order that this notice u/s 148 was issued after recording reasons for the same. The A.O. has further noted that in response thereto, the assessee did not furnish any return of income and subsequent notice u/s 142(1) was also issued on 20.01.2006, 26.10.2006 and 14.11.2006 but none of the notices had been complied with. He further noted hat Shri Zahir J Rana, MD of the assessee company in his submission dated 13.02.2006 citing various reasons stated that as he was behind the bars since May 2005, he is not in a position to attend the office. The A.O. was not satisfied regarding this reason for non compliance of the notices issued by him and a final show cause notice dated 05.12.2006 had been issued with a request to comply with the requirements mentioned in the notices issued earlier. The A.O. has noted that there was no compliance of this show cause notice also and hence, the A.O. held that there is no alternative but to finalize the assessment u/s 144 of the Income tax Act, 1961 on merits and on the basis of material available on record. In para 8 of the assessment order, the A.O. has noted that except the copies of the documents mentioned in that para, no other evidence is available to assess the correct income of the assessee company for the present assessment year. The documents stated in that para of assessment order are statement of Shri Zahir J Rana recorded before the police authorities on 26.05.2003 and the details of movable/immovable properties as prepared and provided by the police authorities and bank statement of various banks, in total 6 banks collected during the course of the assessment proceedings u/s 133(6). The A.O. has noted the detials of these bank 5

I.T.A.No.1157,1427,1461 & 1489 /Ahd/2008

accounts on page 6 of the assessment order as per which, total amount of Rs.82,79,97,,479/- was deposited in these bank accounts during the relevant year. The A.O. further noted that the assessee is running the business in the name of Remo Marketing Pvt. Ltd. wherein it has done the business of marketing of various schemes during the present year and it had floated various schemes details of which are given by the A.O. in Annexure "C" of the assessment order. Other documents i.e. statement of Shri Zahir J Rana and the details of movable /immovable properties are also enclosed by the A.O. along with the assessment order as per Annexure "A" & "B" respectively. The A.O. has further noted at para 8 of the assessment order that the assessee has made total 3422933 members (separate Annexure D) and collected Rs.68,45,86,600/- and stated that list of such members and the amounts collected is also noted by him on page 7 of the assessment order. The A.O. further noted that according to the statement of Shri Zahir J. Rana, the company is having about 500 agents who are being paid commission as per their individual performance. He further noted that there are approximately 100 employees working on monthly salary and after deduction of business running expenditure, generally profit @ 25% is earned which has been used for purchase of various assets being movable/immovable properties in the name of Shri Rana and his close relatives. The A.O. also narrated description of various assets on page 8 of the assessment order and total value had been worked out by him at Rs.1,92,94,761/- for immovable assets and at Rs.208.50 lacs for movable assets. Thereafter, the A.O. has noted that in view of the specific provisions of Section 37, the assessee is not entitled for claiming any expenses for collection of the receipts of Rs.6845.86 lacs. He has placed reliance on the judgment of Hon'ble Karnataka High Court in the case of CIT Vs Smt Amarjeet Kaur as 6

I.T.A.No.1157,1427,1461 & 1489 /Ahd/2008

reported in 283 ITR 71 in support of this contention that when expenditure incurred is prohibited by law in view of the Explanation to Section 37(1) of the Income tax Act, 1961, the expenditure shall not be deemed to have been incurred for the purpose of business and, therefore, no deduction or allowance can be made in respect of such expenditure in computing the income chargeable under the head "profits & gains of business or profession". He further noted that the facts of this case are similar to those of the assessee company. He also placed reliance on the judgment of Hon'ble M.P. High Court rendered in the case of CIT Vs Dr. P.A. Qureshi as reported in 275 ITR 352 in support of the same contention. By following these two judgements and by invoking the provisions of Explanation to Section 37(1), it was held by the A.O. that the assessee is not eligible for deduction of any expenditure against the total receipt of the assessee of Rs.6845.86 lacs and he assessed the income of the assessee company at a figure of Rs.6845.86 lacs, which is gross receipts. Against this, the assessee carried the mater in appeal before Ld. CIT(A) who held that although no details are forthcoming even during appellate proceedings but still it has to be accepted that there would be several expenses to run this kind of business and to provide amenities and facilities to the customers and it cannot be ruled out. He held that 20% of gross receipts should be taken as profit and it will be reasonable in the facts of the present case and accordingly, he directed the A.O. to assess the income of the assessee company at Rs.16,43,00,786/- being 20% of the gross receipt. Now, the assessee is in further appeal before us for the addition sustained by Ld. CIT(A) and the revenue is in appeal for the relief allowed by the Ld. CIT(A).

7. Regarding individual case of Shri Zahir J. Rana, the facts are that it is noted by the A.O. in the assessment order that he did not file any return 7

I.T.A.No.1157,1427,1461 & 1489 /Ahd/2008

of income u/s 139(1) and that notice u/s 148 was issued on 18.04.2005 which was served on 04.05.2005 but assessee did not furnish any return of income and subsequently, notice u/s 142(1) had been issued on various dates but there is no compliance of these notices also and thereafter, the assessee has given reply dated 14.02.2006 stating various reasons stating that as he is behind the bars since May 2005, he is not in a position to attend the office. The A.O. was not satisfied and he issued final show cause notice dated 05.12.2006 and asked the assessee to comply with the requisition mentioned in the earlier notices but there was no compliance of this show cause notice also and, thereafter, the A.O. held that under these facts, he has no alternative but to complete the assessment proceedings u/s 144 of the Income tax Act, 1961. Thereafter, he noted that the assessee is the Managing Director in the company Remo Marketing Pvt. Ltd. and he is having the income as remuneration and commission income from the said company which is engaged in the business of marketing various products. The A.O. further noted that in the present year, the company has floated different schemes which have been mentioned in the assessment order passed for the same assessment year of the said company. He further noted that the entire business of that company had been run by Shri Zahir J Rana by resorting various programs and propaganda as is evident form the statement of Shri Rana recorded by the police authorities. The entire activities of the company run around Shri Rana and virtually, it has been one man show. He further noted that as there is no evidence available for working out the commission paid to Shri Rana, the ratio of the commission paid in the preceding year is taken over as base. He further noted that in the last year, the turnover of the company was shown at Rs.137.02 lacs on which the assessee had received commission of Rs.14,92,761/-, which works out 8

I.T.A.No.1157,1427,1461 & 1489 /Ahd/2008

to 10.9%. He further noted that from the details collected, it is seen that the investment in various properties has been made by this assessee and he noted the details of those investments being immovable properties of Rs.1,92,94,761/- and movable property of Rs.208.50 lacs total of Rs.4,01,44,761/-. The A.O. completed the assessment at 11% of the total receipt of Remo Marketing Pvt. Ltd. of Rs.6845.86 lacs and in this manner, he assessed the income of the assessee at Rs.7,53,04,460/-. Being aggrieved, this assessee also carried the matter in appeal before Ld. CIT(A) who held that he is satisfied that commission income of this assessee should be assessed @ 7% of the gross receipt of the company instead of 11% as has been done by the A.O. Now, the revenue is in appeal before us for the relief allowed by the Ld. CIT(A) and the assessee is in appeal before us for the addition confirmed by him.

8. It was submitted by the Ld. A.R. that in the preceding year, in the case of the company i.e. M/s. Remo Marketing Pvt. Ltd., deduction was allowed of expenses to the extent of 94.15% of gross receipt and net profit was only 5.85% of gross receipt and hence, in the present year also, the income of the company should be assessed @ 6% of gross receipt which works out to Rs.4,10,75,160/-. He submitted that the balance sheet of the company for the year ended 31.03.2002 is available on page 145 of the paper book and P & L account of that year is available on page 146 of the paper book and its groupings are available on pages 147-148 of the paper book.

9. In the case of the individual Shri Zahir J Rana, it was submitted by him that the A.O. has finalized the assessment u/s 144 of the Income tax Act, 1961 by estimating the income of the assessee @ 11% of the entire receipt of Remo Marketing Pvt. Ltd. as commission income and for doing so, he has based his decision on the order of earlier year. He further 9

I.T.A.No.1157,1427,1461 & 1489 /Ahd/2008

submitted that the A.O. based his decision on the basis of last year but he has not followed the facts. It was submitted that in the last year, major receipt of the company were introduced through assessee himself and the receipt of that year was only Rs.137.02 lacs whereas receipt in the present year of the company is Rs.6845.86 lacs which comprises of receipts brought by outside agents as well as others and entire receipt of the company is not on account of efforts of the assessee. He further submitted that since the assessee is behind the bars, he could not prove the same but the factual position should be considered and the issue should be decided on this basis.

10. As against this, Ld. D.R. of the revenue supported the assessment order. He also placed reliance on the judgment of Hon'ble Gujarat High court rendered in the case of CIT Vs Hynoup Food & Oil India (P) Ltd. as reported in 150 Taxman 194 and submitted that no deduction is allowable in the case of the company for the expenses because the entire expenses were incurred by the company in cash and as per the provisions of Section 40A(3), it the expenses are incurred in cash for an amount exceeding Rs.20,000/-, no deduction is allowable u/s 40A(3) unless the assessee establishes business expediency and genuineness of payment and identity of payee. It was submitted that since in the present case, the assessee has neither established business expediency nor genuineness of payment and identity of the payee, no deduction is allowable in the hands of the company for this reason also.

11. We have considered the rival submissions, perused the material on recorded and have gone through the orders of authorities below. First we decide the case of the company M/s. Remo Marketing Pvt. Ltd. The A.O. has invoked the provisions of explanation to Section 37(1), as per which, where expense incurred by the assessee is an offence or which is 10

I.T.A.No.1157,1427,1461 & 1489 /Ahd/2008

prohibited by law, it shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance should be made in respect of such expenditure. As per this explanation to Section 37(1), if the expenses incurred by an assessee is an offence or if such expenditure is prohibited by law, it should not be considered for allowing any deduction, but the question is, as to whether, the entire expenses incurred by the company is of such nature. Ld. CIT(A) has stated in his order that the assessee's entire business receipts cannot be treated as income since the assessee gives incentives to the number of customers introduced and ultimately there can be only a gross profit for which further expenditure like electricity, salaries paid to the employees, rent of the business premises etc. have to be allowed. On the basis of this argument, he held that income to the extent of 20% of the gross receipt should be considered reasonable in the present case. We also feel that in the facts of the present case, the order of Ld. CIT(A) deserves to be upheld because it cannot be accepted that all the expense incurred by the company were for an offence or were prohibited by law because the payment of incentives to customers, payment to agents, electricity, rent etc. cannot he held to be an offence or prohibited by law. Since, no details or evidence has been brought on record by the assessee, the income of the assessee had been determined on a reasonable basis by Ld. CIT(A) and in the facts of the present case, we feel that the decision of Ld. CIT(A) to assessee 20% of the gross receipt as income of the company is reasonable estimate and hence, we uphold the decision of Ld. CIT(A) considering the facts of the present case.

12. Regarding reliance of Ld. D.R. on the judgment of Hon'ble Gujarat High Court rendered in the case of CIT Vs Hynoup Food & Oil Ind. (P) Ltd. (supra), we feel that the same also got complied with when 11

I.T.A.No.1157,1427,1461 & 1489 /Ahd/2008

the income is assessed @ 20% of gross receipt because it is not acceptable that entire expenditure was incurred in cash and that too exceeding Rs.20,000/- per day per payee because as per the balance sheet of the company available on pages 144-188 of the paper book, the company was having bank account also and therefore, it cannot be accepted that the entire expenditure was incurred in cash and that too exceeding Rs.20,000/- per day per payee. We feel that since in the last year, only 5.85% of gross receipt was the income declared by the assessee as per P & L account appearing on page 146 of the paper book for the year ended 31.03.2002, the income of this company @ 20% of the gross receipt will take care of the disallowances under Explanation to Section 37(1) as well as disallowances to be made under sub-section (3) to Section 40A. We, therefore, decline to interfere in the order of Ld. CIT(A) in the case of the company.

13. Now, we take up and decide the appeal of the individual Shri Zahir J. Rana. In this case, the A.O. has assessed the commission income of the assessee @ 11% of gross receipt of the company M/s. Remo Marketing Pvt. Ltd. His decision is based on the commission income of the assessee in the preceding year. In his case, Ld. CIT(A) has directed the A.O. to assess the commission income of the assessee @ 7% of gross receipt of the company Remo Marketing Pvt. Ltd. Before Ld. CIT(A) and before us, this is the contention of the Ld. A.R. that in the preceding year, the gross receipt of the company M/s. Remo Marketing Pvt. Ltd. was very small, i.e. Rs.137.03 lacs only whereas in the present year, the gross receipt of this company is huge at Rs.6845.86 lacs. It is also submitted that in the preceding year, the entire receipt of the company was because of the efforts of the assessee i.e. Shri Zahir J Rana, Managing Director of the company. But in the present year, the gross receipt of this company 12

I.T.A.No.1157,1427,1461 & 1489 /Ahd/2008

to this extent of Rs.6845.86 lacs cannot be on the basis of sole efforts of one individual Shir Zahir J Rana. We find force in this contention of the Ld. A.R. and hence, we feel that Ld. CIT(A) has rightly decided the issue by holding that 7% of gross receipt of the company M/s. Remo Marketing Pvt. Ltd. should be assessed as commission income of this individual assessee Shri Zahir J Rana. We, therefore, decline to interfere in the order of Ld. CIT(A) in his case also.

14. In the result, both appeals of the assessees and of the revenue are dismissed.

15. Order pronounced in the open court on 21st Oct., 2011.

Sd./- Sd./- (BHAVNESH SAINI) (A. K. GARODIA) JUDICIAL MEMBER ACCOUNTANT MEMBER Ahmedabad; Dated : 21.10. 2011

Sp

Copy of the Order forwarded to:

1. The applicant

2. The Respondent

3. The CIT Concerned

4. The Ld. CIT (Appeals)

5. The DR, Ahmedabad By order

6. The Guard File

AR,ITAT,Ahmedabad

1. Date of dictation......17/10

2. Date on which the typed draft is placed before the Dictating Member...18/10.Other Member ............

3. Date on which the approved draft comes to the Sr. P.S./P.S.19/10

4. Date on which the fair order is placed before the Dictating Member for pronouncement .........21/10

5. Date on which the fair order comes back to the Sr. P.S./P.S.21/10

6. Date on which the file goes to the Bench Clerk .........21/10/2011

7. Date on which the file goes to the Head Clerk .......................

8. The date on which the file goes to the Assistant Registrar for signature on the order .........................

9. Date of Despatch of the order. .......................