1992 (3) TMI 361 - AT - Indian Laws

Tribunal allows 50% disallowance of secret commission in tax appeal decision.

United Ink & Varnish Co. (P.) Ltd. Versus Inspecting Assistant Commissioner

The Tribunal partially allowed the appeal, directing a 50% disallowance of the claimed secret commission of Rs. 5,20,055 paid by the assessee for ... - Issues Involved:1. Confirmation of the CIT (Appeals) of disallowance of a sum of Rs. 5,20,055 representing unvouched commission paid by the assessee.Issue-wise Detailed Analysis:1. Confirmation of the CIT (Appeals) of disallowance of a sum of Rs. 5,20,055 representing unvouched commission paid by the assessee:The assessee, engaged in the manufacture of printing inks, appealed against the disallowance of Rs. 5,20,055 as secret commission. Historically, the assessee had claimed deductions for secret commissions since the assessment year 1959-60, with partial disallowances ranging from 7.27% to 24.08% by the Assessing Officer (AO). In the years 1972-73 and 1973-74, the entire claim was disallowed, but only 14% was sustained by the Tribunal. For the current year, the AO scrutinized the nature of the commission more thoroughly. The assessee claimed that the commission was paid to petty employees of printing presses to maintain their patronage. Payments were made through Senior Sales Officers via internal vouchers, but the recipients' names were not recorded. The AO disallowed the entire amount, deeming it against public policy and unverifiable.Upon appeal, the CIT (Appeals) upheld the AO's decision, stating that past records could guide but not bind future decisions. The CIT (Appeals) noted that secret commissions to private parties were also against public policy and that the claimed amount was excessive, being over 33% of the profits. The assessee's argument that the payments were for business purposes and not to public servants was rejected.The assessee contended that the practice of paying secret commissions was established and accepted by the department historically. They referenced past Tribunal decisions and the Bombay High Court's ruling in CIT v. Goodlass Nerolac Paints Ltd. (1991) 188 ITR 1, where secret commissions were allowed based on commercial expediency. The learned counsel for the assessee suggested that the disallowance should be limited to 20% as per past practice.The departmental representative argued that the burden of proof lay on the assessee to establish that the expenditure was wholly and exclusively for business purposes. He cited the earlier Bombay High Court decision in Goodlass Nerolac Paints Ltd. v. CIT (1982) 137 ITR 58, emphasizing that the names and addresses of recipients were not disclosed, thus failing to meet the burden of proof.The Tribunal considered both sides' submissions and noted that the question of payment of commission should be determined as a question of fact, considering all circumstances. The Tribunal referenced confirmations from salesmen, internal vouchers, and the past history of partial disallowances. They concluded that the quantum of secret commission had become excessive and that the CIT(Appeals) rightly observed this. The Tribunal decided to disallow 50% of the claimed secret commission, directing accordingly.Conclusion:The appeal was allowed in part, with the Tribunal directing a 50% disallowance of the claimed secret commission.