TaxTMI 
TaxTMI 
2006 (3) TMI 223
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....f manufacture and sale of fabrics. On examination of the P&L a/c during the course of assessment proceedings the AO noticed that the assessee had claimed business development expenses at Rs. 12,54,388. The AO directed the assessee to prove the genuineness of the expenses and allowability. It was explained by the assessee that the assessee was manufacturing fabrics on its own power-looms and in this business there was serious decline and on account of sluggishness in business, the assessee was exploring the possibility of any other business opportunities and in the process contacted one Mr. G.R. Vakil of M/s Associated Projects & Marketing, a consultancy firm which was specialist in Government tenders and which was operating from Srinagar. It was further submitted that the assessee participated in the tender floated by J&K Government for supply of school uniform cloth. Through the guidance and assistance of Mr. Vakil and negotiation it could get the contract during the year for supply worth Rs. 5,01,75,520. It was thus submitted that for procuring this voluminous business the assessee paid a sum of Rs. 12,54,388 as commission to the proprietor of the company, namely, Mr. Vakil who u....
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....sion was paid for business purpose, the deduction under s. 37 could not be allowed. In reaching to this conclusion he relied upon the decisions in the cases of Swadeshi Cotton Mills Co. Ltd. vs. CIT (1967) 63 ITR 57 (SC); and Lachminarayan Madan Lal vs. CIT 1972 CTR (SC) 418 : (1972) 86 ITR 439 (SC). Regarding rendering of services also it was held by him that there was no evidence to show that the agent rendered services to the assessee. On this issue reference was made to the ratio of decisions in the cases of Vishnu Agency (P) Ltd. vs. CIT (1979) 117 ITR 754 (Cal); and Chemaux (P) Ltd. vs. CIT (1977) 109 ITR 705 (Bom). 6. The learned counsel for the assessee has assailed the findings of the learned CIT(A). After explaining the circumstances of the matter he submitted that the assessee was working in Delhi and could file tenders in J&K only on the guidance of Mr. Vakil. He pointed out that without his assistance it was not possible for the assessee to procure the business in such huge volume from a Government Department of J&K. He submitted that the assessee had filed confirmatory letter from the commission agent to show that the transactions were genuine. It was pointed out b....
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....kil. He also submitted that there is no proof to show that Mr. Vakil participated in the negotiation for obtaining the order. 8. In rejoinder, the learned counsel for the assessee submitted that the negotiations could be finalized in January, 1998 and payments were made in March, 1998 and this could be possible only through the good services of the agent. It was pointed out by the learned counsel that in the normal business the assessee was utilizing its staff but no expenses were incurred on the deal relating to supply of school uniform cloth to J&K Government. It was finally submitted by the learned counsel that the assessee had no previous experience of working in J&K and in view of the considerable distance, different working culture and strange parties, the work could not be completed without services of the agent. He, thus, concluded that the assessee had made payment only for services rendered by Mr. Vakil during the course of business operations and for business activities and therefore the deduction for business promotion was allowable under s. 37 of the Act. In support of his argument the learned counsel placed reliance on the decision reported in CIT vs. Navsari Cotto....
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....iry was made. In our opinion, therefore, the learned CIT(A) was not justified in sustaining the disallowance when assessee had in fact discharged its burden by filing the confirmatory letter and other evidence to which reference has been made in the body of this order and in support of which documents have been filed in the paper book before us also. It was for the Department thereafter to have brought on record factors to show that the payment was not made to the agent by the assessee for rendering the service or that the expenditure was not incurred for business purposes. 9.3. In the light of above facts and also in view of the documentary evidence filed on record, it is established that the volume of business of the assessee-company assumed big boost on account of supply of garments to the Government of J&K. In the immediately preceding year the assessee had shown net profit of Rs. 2,171 only whereas in the assessment year under consideration its net profit went up to Rs. 13,06,958. This boost was definitely on account of the contract for supply of school uniforms cloth by the assessee. The documentary evidence filed by the assessee is credible and cogent and the span of time....