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Judgment
The assessee has preferred an appeal u/s 260A of the IT Act, 1961 (hereinafter referred to as the ''Act'') against the judgment dt. 11th Sept., 2008 passed by the Income Tax Appellate Tribunal (hereinafter referred to as the Tribunal) in ITA No. 4193/Del/2006 pertaining to asst. yr. 2003-04.
The assessee is aggrieved primarily on account of the fact that a certain sum out of the payments made to a sister concern, that is, M/s. Moti Lal Banarsidass Publisher (P) Ltd. (in short MBPPL) have been disallowed on the ground that the payments were ''excessive'' and ''unreasonable1''. In this respect the Department has resorted to the provisions of Section 40A(2)(a) r/w Section 40A(2)(b) of the Act. The payments disallowed on this account which have been treated as excessive and unreasonable are in the sum of Rs. 4,98,917 (being 5 per cent of the total purchase) out of the total payments made to MBPPL being a sum of Rs. 99,78,344. The other disallowance pertains to commission paid by the assessee to MBPPL amounting to Rs. 3,48,233 which the assessee claimed was really in the nature of rent for space and other facilities provided by MBPPL.
In order to adjudicate upon this appeal the following facts require to be noticed.
3.1 The assessee is in the business of export and publication of books. The assessee filed a return of income for the relevant assessment year, that is, asst. yr. 2003-04, declaring total income of Rs. 19,89,210. The said return was filed on 2nd Dec, 2003. On 2nd Dec, 2004 (sic) the return was processed u/s 143(1) of the Act. However, the assessee�s return was picked up for scrutiny and a notice dt. 18th Oct., 2004 was issued u/s 143(2) of the Act, which was duly served on the assessee on 20th Oct., 2004.
3.2 During the course of inquiry it was revealed that the assessee had made a total purchase of books worth Rs. 1,05,84,868, out of which books worth Rs. 99,78,344 were purchased from its sister concern, that is, MBPPL. In the scrutiny the AO discovered that in respect of books purchased by the assessee and by other persons from MBPPL, the payments that the assessee made were decidedly more than that which were paid by other persons who purchased the books from MBPPL. In this regard, it would be beneficial to extract the comparative chart incorporated in the AO''s order:
___________________________________________________________________________________________ Name of the book Rate charged to others Rate charged to (in Rs.) after discount assessee (in Rs.) after of 40% discount of 40% ___________________________________________________________________________________________ Sufi Message (Vol. 1) Inayat Khan Hazrat 87 147 ___________________________________________________________________________________________ Sufi Message (Vol. 3) Inayat Khan Hazrat 87 183/75 ___________________________________________________________________________________________ Sufi Message (Vol. 7) Inayat Khan Hazrat 87 87 ___________________________________________________________________________________________
3.3 Based on the difference in rates, as indicated in the box set out hereinabove, the AO sought to disallow payments made by the assessee to MBPPL on the ground that they were excessive and unreasonable by taking recourse to the provisions of Section 40A(2)(a) of the Act. The assessee attempted to explain the difference in rates by attributing the same to the fact that, what the assessee had purchased from MBPPL were a hardbound edition of the book, the rate for which was higher as compared to a paperback. The AO disbelieved the explanation given by the assessee. He came to this conclusion by virtue of the fact that the invoice/bill made no reference to the fact that books bought by the assessee were hardbound or paperback. He also noted that despite the fact that several opportunities had been given to the assessee to give requisite details of books purchased from MBPPL, none was supplied. He also noted that the GP rate of the assessee for the year under consideration, had fallen from 32.27 percent to 27.4 percent. Based on these findings and the fact that the assessee had claimed that 5 percent of the total purchases from MBPPL related to hardbound books, the AO disallowed, out of the total payment made to MBPPL, 5 per cent of the said payment. Accordingly, a sum of Rs. 4,98,917 was disallowed (i.e., 5 per cent of Rs. 99,78,344).
3.4 As regards commission paid to MBPPL the same was also disallowed. The assessee had paid a sum of Rs. 3,48,233 as commission which, according to the assessee was really, as indicated above, rent for space and other facilities pegged @ 1 per cent of the turnover. The said sum was disallowed by again resorting to the provisions of Section 40A(2)(a). In coming to this conclusion the AO took into account the fact that some of the directors of MBPPL and persons who were in control of the assessee were common. He was also of the view that the assessee had failed to establish the adequacy and need for payment of commission.
Aggrieved the assessee preferred an appeal to the Commissioner of Income Tax (Appeals) [hereinafter referred to as the ''CIT(A)''J. The CIT(A) by an order dt. 8th Sept., 2006 sustained the order of the AO.
In a further appeal to the Tribunal, the Tribunal dismissed the appeal of the assessee.
The assessee, being aggrieved, has preferred the present appeal before us. In respect of the disallowance with regard to payments made to MBPPL the learned Counsel for the assessee Mr. Rajiv Tyagi has submitted that the provisions of Section 40A(2)(a) of the Act are not applicable. He contends that the provisions can be triggered only if the payments made to a person, indicated in Section 40A(2)(b) of the Act, are unreasonable or excessive having regard to the fair market value of the goods, services or facilities. It is his contention that the fair market value, in the instant case, is the price printed on the book and having regard to this fact, it is obvious that the price charged by the assessee is less than the fair market value if regard is had of the fact that for the hardbound volume of Sufi Message (Vol. 1) the printed price is Rs. 245 while the price paid by the assessee is Rs. 147. Similarly, in respect of Sufi Message (Vol. 3) and Sufi Message (Vol. 7) the printed price, according to him, is more than the price paid by the assessee to MBPPL. It is his submission that a comparison of the rates charged by MBPPL for books supplied to the assessee and those to persons other than the assessee would show that there was a uniform rate of discount of 40 per cent and the difference in rate was only on account of the fact that the assessee had paid for hardbound editions whereas the rates picked up by the AO in respect of the other persons were for paperbacks.
We have considered the submissions of the learned Counsel for the assessee and have also heard Mr. R.D. Jolly, senior standing counsel appearing for the Revenue. Mr. Jolly has basically relied upon the orders of the authority below.
7.1 As regards the submission of the learned Counsel for the assessee that provisions of Section 40A(2)(a) of the Act are not applicable we are of the view that the submission is untenable. In the instant case as is evident from the orders of the authorities below the AO had compared the rates paid by the assessee with the rates charged by MBPPL in respect of persons other than the assessee. The assessee had explained the difference by stating that the variance occurred on account of the fact that the rates pertained to hardbound editions of the book. It is obvious that insofar as MBPPL was concerned it was selling books to the assessee, who is an exporter of books, as also to others, in bulk, at a uniform rate of discount. Therefore, the fair market value in the instant case had to be discerned by keeping in mind a similarly circumstanced person, that is, one who was a bulk purchaser of the books in issue. It is this which has prevailed with the authorities below. Therefore, in our view the submission of the learned Counsel for the assessee that the printed price ought to be taken as the fair market value is untenable and deserves to be rejected. It is pertinent to point out here that this stand is not articulated by the assessee before any of the authorities below. The other explanation given by the assessee, which was that the difference in rates arose on account of the fact that the assessee�s rates pertained to the hardbound editions of the books was rightly rejected by the authorities below on the ground that there was no material whereby the explanation given by the assessee could be accepted. In these circumstances, we agree with the view of the authorities below that in the absence of requisite details it was not possible to accept the contention of the assessee that the rate paid by the assessee, which undoubtedly is a higher rate, was for hardbound editions of the books.
With regard to the disallowance on account of commission, the learned Counsel for the assessee had argued that the authorities below had incorrectly disallowed the commission by making a value judgment that the commission @ 2.5 per cent was excessive and unreasonable. It was contended that as long as the assessee was able to show that the expenditure made by way of commission paid to MBPPL towards space and other facilities provided was incurred for the purposes of business, the same could not be disallowed by resorting to the provisions of Section 40A(2)(a).
8.1 On this aspect it is important to bring to fore the fact that the Tribunal, in the impugned judgment, noted the fact that in the case of the sister concern, that is, MBPPL, where MBPPL had paid commission to another sister concern, that is, Moti Lai Banarsi Dass (the owner of the space and the facilities in issue) it had allowed to MBPPL by its order dt. 3rd Aug., 2007 passed in ITA No. 4290/Del/2003 in the case entitled ITO v. Moti Lal Banarsi Dass (P) Ltd. deduction by way of commission @ 1 per cent of the turnover in respect of very same premises. Therefore, keeping this circumstance in mind the Tribunal disallowed the assessee�s claim for commission in excess of 1 percent on the basis that the facts of the case were identical to the aforementioned case.
8.2 The learned Counsel for the assessee sought to argue before us that in the earlier case to which reference has been made by the Tribunal in the impugned judgment, the commission paid had been allowed on the ground that it was less than the "normal warehousing charges". He contended that, therefore, as long as the commission paid was less than the "normal warehousing charges" and commission paid was commercially expedient, the same should have been allowed as a deduction.
8.3 We are not impressed with this submission, in view of the fact that, by virtue of the earlier order a bar had been set as to what was a reasonable sum payable for renting of the space and other facilities provided to a person similarly placed. It was not contended before the authorities below that either the space or the facilities were any different than that which were provided in the aforementioned case. In that view of the matter in our opinion the Tribunal rightly restricted the deduction of commission to the assessee to the extent of 1 percent of the turnover.
In view of our discussion above, we are of the opinion that no perversity can be found in findings returned in the impugned judgment. No question of law, much less a substantial question of law, has arisen for our consideration. In the result the appeal is dismissed.