TaxTMI 
TaxTMI 
1991 (1) TMI 211
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....sessment under section 143(3) though it has been erroneously stated as under section 143(1) on the body of the assessment order. The assessment for the assessment year 1985-86 under section 143(3) of the Income-tax Act was based on the materials gathered in the course of an extensive search conducted in the promises of the assessee, its directors and authorised dealers, on 10-2-1988 and 11-2-1988. While the learned Income-tax Officer did not have the advantage of such materials gathered subsequently for being used in the assessment for 1984-85, the assessment for 1985-86 proceeded on the basis of the materials collected in the course of the search conducted under section 132 of the Income-tax Act. For reasons discussed in the assessment orders, he disallowed the commission payments as follows:- Asst. Year Amount 1984-85 Rs. 86,76,463 1985-86 Rs. 56,16,426 4. The assessee carried the matter in appeal before the Commissioner of the Income-tax....
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....ovisions of the Companies Act, 1956 and having its Registered Office at Kakinada (hereinafter called "The Company" of the one part and M/s. Sri Bhanu Enterprises, 13-1-1961, Subhas Road, Kakinada-533001 hereinafter called the "Authorised Dealer" of the other part, whereby the company agrees to appoint M/s. Sri Bhanu Enterprises as one of the Authorised Dealers for the sale of the products manufactured by the company hereinafter referred to as 'SRMT' Auto Parts and the said Authorised Dealer agrees to act as such upon the following terms and conditions. 2. This agreement shall commence from 5th July, 1979 and shall be in force till subject to renewal thereafter by mutual consent of the parties hereto. 3. The Authorised Dealer shall during the said term book orders for 'SRMT' Auto Parts from dealers and Fleet Operators on the terms and conditions furnished hereunder: (a) The Authorised Dealer shall allow 25% discount on the list prices of the company to the Dealers irrespective of the value of the orders; (b) The Authorised Dealer shall extend the free freight, packing and forwarding to the destination for the supplies made by the company; (c) The Authorised Dealer sha....
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....n notice issued by either side. 13. Any subsequent additions of terms and conditions not contained in this Agreement and changes, if any, are effected will be informed separately and those should be implied with as part of this Agreement. 14. Nothing contained in this Agreement shall prevent the company from selling the products directly or appointing other Authorised Dealer or Dealers. 15. This Agreement may be terminated by either side by giving two months notice and the date that such notice is posted will be taken for the purpose of calculating the time of two months. 16. Notwithstanding anything contained in the clause No. 15 above, the company may terminate this Agreement at any time hereafter by giving the Authorised Dealer one month's notice should the work of Authorised Dealer be not satisfactory in the opinion of the company and the decision of the company of the work of the Authorised Dealer shall be final. 17. All matters of disputes arising out of this Agreement are subject to the jurisdiction of Kakinada Courts only. 18. In witness whereof the parties aforesaid have set their respective hands to this Agreement on this day mentioned in the first para.....
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....ope for disallowing the same. 8. In their rival submissions, Sri Ratnakar relied on the agreements and the reasons stated by the learned Commissioner of Income-tax (Appeals) and Sri Rangabhashyam supported the view of the learned Income-tax Officer. Having considered the matter carefully, we are of the view that no case was made out by the Income-tax Officer that the authorised dealer-firms constituted themselves as sole-selling agents of the assessee's products in violation of the provisions of section 294 and related sections of the Companies Act. The terms of the agreement are crystal clear. It did not result in the creation of any sole-selling agency right in favour of any one. In terms of clause 13 of the agreement quoted supra, the company has the right to sell its products in any area it likes. In fact, it has effected counter sales (see section 15 of Green Paper Book). A working arrangement for a smooth functioning of the sales effort cannot confer any enforceable right on the dealer-firms to claim exclusive rights or privileges. 'Me trade practice also is to market the goods through different authorised dealers in different areas due to operational needs and the exigenc....
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....sion. 10. We have heard rival submissions at length on this point and also perused the order of the learned Commissioner of Income-tax (Appeals). While appreciating the rival contentions, we have to bear in mind the terms of clauses 10, 11 and 12 of the agreements cited supra. From a reading of these clauses, a few facts emerge, viz., (i) booking of orders by the representatives of the dealer-firms, (ii) submission of copies of correspondence between the dealer-firms and the parties and (iii) the authorised dealer is saddled with responsibility for all the transactions carried out by him either directly or indirectly. The expression "indirectly" used in the agreement would mean that even in respect of sales made by the company directly, the authorised dealers are saddled with certain obligations. The assessee-company is not burdened with any loss that might arise on account of the lapses of the dealers in respect of their commitments with their parties. The dealer-firms have to make deposits as specified in clause 1 of the agreements. Even in the course of the search that was conducted subsequently on 10-2-1988 and 11-2-1988, no material was recovered that would militate against....
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....istence at Kakinada, though having different areas of working arrangement, it cannot be held that these firms did not do any service to the assessee-company. Even at this stage, apart from pointing out that some of the partners of the dealer-firms had expressed ignorance of the transactions between the company and the dealer-firms vis-a-vis the customers, no material has surfaced to dislodge the finding of the learned CIT (Appeals) that the authorised dealer-firms through their representatives and agents have rendered services to the company. On the other hand, there is evidence to show that the dealer-firms were granted registration or continuation of registration by the Income-tax Officer in the post-search period, in his orders dated 27-3-1989 in the case of two firms, and in the case of another firm registration was refused as assessment was made under section 144. There is no material to controvert the fact that the representatives and agents were employed by the authorised dealers and not by the assessee as their names are borne in the registers of the authorised dealers but not in those of the assessee and the payments of their commission or salaries are met by the authorise....
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...., and Sri Muralidhar, employee of Sri Bhaskara Auto Service. He also relied on the inferences drawn by the learned Income-tax Officer from an analysis of the bank accounts of some of the partners in Sri Bhaskara Auto Service and Sri Bhanu Enterprises. Their statements are found in two paper books filed by the department. 12. We have gone through the orders of the learned Income-tax Officer for both the assessment years under appeal on this aspect of the matter. We have also carefully gone through the orders of the learned CIT (Appeals). There is material to show that in the case of trading in automobile spare parts, there is a trade practice to allow discount or commission on the sales effected by the manufacturer or by the dealer. As a matter of fact, the assessee has produced a few invoices from other manufacturers wherein a discount of 35% to 40% is allowed on spare parts (pages 6.16 to 6.20 of green paper book of the assessee) : Swamy Motors (Inv. No. 1298), Hyco Manufacturers of India (Inv. No. 4966), Trading Corporation, Delhi (Inv. No. 9987), Goyal Tractor and Scooter Spares (Inv. No. 8642), Anand Spares, Delhi (Inv. No. 594), Jamuna Auto Industries (Inv. No. 714). The le....
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..... 36,00,000 nett (i.e. value of purchases made by the Authorised Dealer and the value of supplies effected to the parties directly by the company) and the period for this target starts from 1st January and up to 31st December." Thus, for Mehta Trading Company, in order to ascertain the eligibility, direct supplies made by the company are also reckoned for the purpose of arriving at the minimum amount of Rs. 36,00,000 but all the same additional discount is payable only on the total nett turnover of the business done by Mehta Trading Company. Thus, in no case additional discount was liable to be paid to the authorised dealers by the assessee-company. The Income-tax Officer has not brought on record instances of payment of additional discount to the dealer-firms on direct sales effected by the company to the parties, nor was any such instance brought to our notice. Hence, the allegation falls to the ground. We further note that the conditions for payment of additional discount are more stringent in the case of Kakinada firms than in the case of Mehta Trading Co., Bombay. The payment of 1% to 2% commission on direct sales effected by the company is not paid by the company but only ....
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....r payment was made. Even out of 11.25% paid to the authorised dealers, they have to part with a portion of it to the retail dealers or customers by way of target commission or additional trade discount to the retail dealers or customers, at rates fixed by the company from time to time. Brokers are also paid commission from 1% to 2% by the authorised dealers even on direct sales depending on the nature of sales. The details of commissions received by the dealer-firms and paid by the dealer-firms to the retail dealers or customers for a number of years are to be found in the assessee's (green) paper book at pages 2.1 to 4.22. From a comparison of the commission allowed by the assessee-company to the authorised dealer-firms and the commission allowed by the latter to their customers, it can be safely said that 50% to 60% of such commission received from the assessee-company by the authorised dealer-firms was disbursed to the retail dealers or customers. The relevant figures, for example for the assessment year 1985-86, are as follows:- &nbs....
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....d to quantification of disallowance, during the course of the hearing of the case, the assessee urged that the authorised dealer-firms were under an obligation to pay out of the commission received by them incentive commission to the customers at the rates announced by it from time to time although it is directly paid by the company to the customers through credit notes passed on to them and the adjustment of the same through customer's account. It pleads that it is a definite outgoing as far as the company is concerned and it should be allowed. The claim is found to be correct and deduction for incentive commission is allowed against the payments claimed. The balance is added back." We have already indicated that what is retained by the authorised dealers does not exceed 8% on the net value of the invoice or about 6% of the gross invoice value. The authorised dealer-firms had to incur a variety of expenditure on maintenance of staff, rents, office expenditure, travelling, advertisement etc. They have to pay commission to brokers from 1 % to 2%. Of course, there would still be some surplus in their hands, and if at all any disallowance is warranted, it cannot be the total commissio....
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....above figures were also verified by us with the Final Accounts of the company. There has been a tremendous improvement from year to year. Though the popularity of the assessee's products might be one of the reasons for hike in turnover, it could not be gainsaid that unless a consistent effort was made at selling, such a substantial increase in turnover would not be possible. The reasons are not far to seek. Automobile parts face a highly competitive market with different brands competing with each other. It is also flooded with fake spare parts which are sold at cheaper rates. Therefore, to maintain the sales in a competitive market, one has to keep running in order to stay where one is and in the scheme of things, unless there has been good canvassing and booking of orders, it would not be possible to achieve higher turnover. Therefore the increase in the turnover may be attributed at least largely if not mainly, to the existence of these dealer-firms. 17.3 The CIT (Appeals) had accepted the contention of the learned counsel for the assessee that when popular products of daily use which have become habits are being marketed by even monopolistic cartels who sell their products t....
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....in recognition of the services rendered by them and also the responsibilities undertaken and is covered by an agreement. The payment of commission was not in cash but only through account-payee cheques on which there is no dispute. There is no material to suggest that the cheques issued by the company from time to time in favour of authorised dealers were encashed by the employees of the company or others connected with the company. Another related aspect of the matter is that the canvassing work was carried on by only a few freelance brokers and the company could have directly secured the orders from the brokers and, therefore, the need for authorised dealer-firms was not very much evident except as a conduit to syphon off part of the profits. In this connection, Sri Rangabhashyam relied on the statement of the Managing Partner of Sri Bhanu Enterprises who was examined on oath on 11-6-1986, and also the statement of the Managing Partner of Sri Bhaskara Auto Service which were extracted at page 7 of the assessment order for the assessment year 1984-85. One of the questions put to the Managing Partner of Sri Bhanu Enterprises and the answer thereto are as follows:- "Q. What ar....
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....uld conduct its business. In judging the commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purposes of the business, he relied on the decision of the Supreme Court in CIT v. Walchand & Co. Ltd. [1967] 65 ITR 381, and also the decision of the Supreme Court in Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261. 18.3 Sri Rangabhashyam vehemently assailed the order of the CIT (Appeals) on this aspect stating that the expenditure is not allowable merely on the basis of a bundle of papers ; after all, the brokers are not many, who were working for the company, and the assessee itself could have employed those brokers directly without routing their employment through the dealer-firms. Sri Ratnakar, besides relying on the order of the learned CIT (Appeals), vehemently objected to the line of reasoning adopted by Sri Rangabhashyam, stating that it has never been proved that these agents were really working under the company instead of under the firms. 18.4 Having regard to rival submissions and the materials on record, we are unable to persuade ourselves to accept the viewpoint of the revenue. The managing partners of Sri....
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....omplaints and related matters. 40% of the sales are said to be on credit and if bad debts arise, they will have to be borne by the company, whereas, under the existing arrangement, it is the responsibility of the dealer-firms to see that no loss arises to the company out of its transactions. The dealer-firms are holding interest-free deposits with the company of die order of Rs. 20 lakhs during the impugned assessment years alone. In addition, the company has the benefit of interest-free credit balances of the authorised dealer-firms as follows: Name of the firm 1983-84 1984-85 LF Rs. LF Rs. Sri Bhanu Enterprises 559 12,12,986 627&....
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....mmediate supply of 3 Voltas air-conditioners for which orders were placed. At the relevant time, Sri Ch.V.V. Satyanarayana was the Managing Partner of M/s Sri Prabhakar Enterprises, a dealer in Voltas' products. The Income-tax Officer also referred to his sworn statement dated 10-2-1988 and thus inferred that the entire business of Sri Prabhakar Enterprises belonged to Sri. K.V.R. Chowdary, Managing Director of the assessee-company. 18.7 We have heard rival submissions. We are not on the issue whether the entire business of Sri Prabhakar Enterprises belonged to Sri K.V.R. Chowdary. We are on the issue of disallowance of commission paid by the assessee-company of which Sri K.V.R. Chowdary is the Managing Director. The Income-tax Officer has used this letter dated 21-8-1985 as a supportive material to say that people were working under the assessee-company. We do not uphold such an inference. Firstly, HMM Ltd., Dowlaiswaram, is not a freelance broker but only a customer asking for supply of 3 Voltas air-conditioners. Secondly, the letter is dated 21-8-1985 which is not relevant to any of the years under appeal. The fact that HMM Ltd. addressed a letter to the assessee drawing the ....
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....en, we feel that one should not hasten to draw an adverse inference. 18.10 Sri Rangabhashyam relied on another letter of one Sri Ramamurty, another. area representative, addressed to Sri K. Sarathy, Joint Managing Director of the assessee-company, on 13-11-1987 which reads as under:- "I wrote nearly 6 letters requesting your goodself to send me the balance standing to my credit with M/s Sri Bhaskara Auto Service and so far I have not received any payment." He also referred to another letter dated nil in which the representative writes to Sri Sarathy again requesting him to instruct the authorised dealer to supply him statements of accounts from 14-1986 to 31-3-1987. Adverting to these letters, Sri Rangabhashyam submitted that these are tell-tale evidence which will go to show that the representatives were really in the employment of the company for all practical purposes. Sri Ratnakar objected to such an inference. We uphold his objection. These letters were addressed to the Joint Managing Director of the assessee-company and the copies were recovered in the premises of M/s Sri Bhaskara Auto Service. If the Joint Managing Director had really given a reply to the representa....
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....nbsp; paper book 1. Sri K.V.R. Chowdary, MD & Chairman, SRMT Ltd. dt. 10/11-2-1988 1 to 15 2. Sri K.V.R. Chowdary dt. 11-2-1988 17 to 20 3. Sri Bhamidipati Nageswara Rao, Managing Partner of M/s Sri Bhaskara Auto Service, Kakinada, dt. 10-2-1988 29 to 34 4....
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....nbsp; 73 to 76 12. Sri J. Mangaraju dt. 10-2-1988 77 to 92 13. Sri. M.V.V. Satyanarayana Rao dt. 10-2-1988 93 to 108 He also made an analysis of the withdrawals from the bank accounts of 14 of the partners in M/s Sri Bhaskara Auto Service and 7 of the partners in M/s Sri Bhanu Enterprises. Reading together the statements of the partners as listed above and on an analysis of the withdrawals in the partners' accounts as mentioned above, he came to the conclusion that commission, which was initially paid to these dealer-firms, had been ploughed back to the coffers of the assessee-company; at any rate, it was a device to divert the profits of the assessee-company. Thus, he disallowed the net commission paid for the assessment year 1985-86. It is pertinent to recall that the above statements were not available before the Income-tax Offi....
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....overriding commission as per agreement on the sales effected by him, of the products of SRMT Ltd. After deducting the overriding commission, given away to the retail dealers the net income in the hands of the above said three partnership firms, has suffered tax, as income-of said three firms. I would like to state and affirm that the net income of the said three firms as referred to above is in reality the additional income during the respective years of the M/s SRMT Ltd. over and above the income assessed to tax or disclosed in the return of income or figuring (in) books of account of M/s SRMT Ltd. Right now I am not in a position to exactly state the said additional income relevant for each of the concerned years. However, taking an overall view, certain expenditure incurred etc. I would state and affirm that the total amount of additional income of M/s SRMT Ltd. for the above said years of payment of commission to the above said three firms, and till date, would be about Rs. 260 lakhs (Rs. two hundred sixty lakhs). Therefore, M/s SRMT Ltd. is liable to pay additional tax on the said additional income for the concerned years. I in my capacity as the Managing Director of M/s SRMT ....
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....and the premises of the firms and their partners were searched simultaneously ; statements were recorded under threat of dire consequences though it would be difficult for the assessee to provide any direct evidence in this regard; there was a lot of mental tension for Sri K.V.R. Chowdary who was above the age of 60 years ; when officers were going about their operations in his house from dawn to dusk to midnight to near dawn, apart from the humiliation, mental tension and physical inconvenience the search had caused, the presence of a large number of officers and the fact that simultaneous search operations were conducted in and around him had made him shiver in his shoes and in that state of mind the statement had been recorded. Thus, there was coercion at least mentally if not physically. The phrasing of the question No. 48 was a deliberate design to hustle him into a statement and the manner in which the statement itself ended abruptly would show that the department wanted a particular reply and once such reply was given there was no further questioning. This would suggest that Sri Chowdary was induced into making this statement. He further emphasized that in the second stateme....
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....regard. Knowing Sri Rangabhashyam as we do in his capacity as Senior Departmental representative, as a person endowed with sound knowledge of law coupled with mild temperament and endearing qualities of head and heart, we have no hesitation in accepting his personal explanation. Further, in the absence of material, we have to reject the allegations levelled by Sri Ratnakar as not substantiated. 19.5 Another related issue is whether the statements recorded on 10-2-1988 and 11-2-1988 by the Authorised Officers from Sri K.V.R. Chowdary 'were statements under section 132(4). Sri Rangabhashyam's submissions are threefold :(i) though no books of account, documents, money, bullion, jewellery or other valuable article or thing was found, Sri Chowdary as Managing Director of the company is deemed to have control of the books of account ; (ii) the word "thing" may refer to tangible and intangible assets and, therefore, it could take in its sweep an enquiry about the commission payments ; (iii) the Explanation to section 132 (4), inserted by the Direct Tax Laws (Amendment) Act, 1987 was clarificatory in nature and, therefore, even in an enquiry in connection with a proceeding under the Inc....
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.... do not find that Sri K.V.R. Chowdary was in possession of the company's books of account, nor any document relating to the company. There is no allegation that the personal books contained reference to commission payments. No money, bullion, jewellery or other valuable article or thing was found in his possession. The learned Senior Departmental Representative emphasizes that the expression "thing" occurring in section 132(4) would cover both tangible and intangible items. We are not persuaded by his argument. The word "thing" occurs along a train of words such as "books of account, documents, money, bullion, jewellery or other valuable article" and, therefore, the principle of ejusdem generis would apply in the context in which the word "thing" is used. Unless certain "thing" which has some monetary value was found in the possession or was in the control of a certain person, section 132(4) cannot be invoked. Besides, in the scheme of section 132(4) and (4A) and section 132(5), by using the words "valuable article or thing" what the legislature intended to imply is that the assets covered by these words should be such as could be converted into cash so that the tax liability of th....
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....nue's contention. 19.8 The third aspect of the matter is the Explanation as introduced by the Direct Tax Laws (Amendment) Act, 1987, with effect from 1-4-1989. The Explanation occurs under section 132(4) and it is as follows:- "For the removal of doubts, it is hereby declared that the examination of any person under this sub-section may be not merely in respect of any books of account, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act." It takes effect from 1-4-1989. This Explanation was not in force at the time when the search was conducted on 10-2-1988 to 12-2-1988. In our opinion, this is only prospective in operation and does not have any retrospective effect. Our reasons are as follows:- Section 132 enables the revenue to conduct search operations and effect seizures. Thus, it makes inroads into the personal liberty of the citizen, but such extreme measures are necessary in the context of economic offences. Citizen's substantive rights such as Right to Privacy which is part of ....
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....n, the Explanation to section 132(4) should be read only prospectively. Explanation to section 263(1) as introduced by the Finance Act, 1988, w.e.f. 1-6-1988, and as amended by Finance Act, 1989, w.e.f. 1-6-1988, is as follows: "For the removal of doubts, it is hereby declared that, for the purposes of this subsection,- (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal." From a reading of this Explanation, it is abundantly clear that the legislature wanted to clothe the Commissioner with retrospective powers to revise the order of an Assessing Officer to the extent to which it did not merge with the order of an appellate authority. In the absence of such a deeming provision, inasmuch as section 263 is only a procedural section, retrospective intendment could be inferred but doubts might be entertained about such an inference in some quarters. The legislature, the....
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....essee. As far as the assessee-company is concerned, it had parted with the commission from out of which the firms also had paid commission to the retail dealers and after that what the partners did with their money would be only an application of income in their hands. At any rate, it cannot be held that the company derived benefit out of it. He further submitted that he would go to the length of saying that even if some of the directors had obtained some benefit indirectly, for which there is no proof as on date, that should be tackled only in their hands but not in the hands of the company. Further, he submitted that if the partners of the dealer-firms had in turn entered into sub-partnership arrangements, again it is a matter not to be tackled in the hands of the company. The company is not concerned with what the partners of the dealer-firms do with their share of profits. 20.2 We have heard rival submissions and perused the records. The Income-tax Officer dealt with the withdrawals from bank accounts of some of the partners of the dealer-firms in the assessment order for the assessment year 1985-86. We quote below his observations in some such cases and comment on the same:....
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....amined under section 132(4) of the Income-tax Act. He is a cashier in Gopal Automotive Pvt. Ltd., Kakinada. He is not related to Sri K.V.R. Chowdary or Sri M.V.V. Satyanarayana Rao. He is said to carry on money-lending business (answer to question No. 6 in his statement at pages 77 to 91 of DPB) but no books were maintained. To a question whether he has any connection with SRMT Ltd., he had stated that he did not have any connection with SRMT Ltd., and he did not discharge any work of SRMT Ltd. (page 86 of DPB). He had also stated that the Managing Director of Gopal Automotive Pvt. Ltd. was Sri M.V.V. Satyanarayana Rao. Questions were asked about some of the above withdrawals and he answered that though he did not know Sri Yeramati Panasa Ramudu, he gave the cash to Sri M.V.V. Satyanarayana Rao (page 91 of DPB). However, we note that Sri Yeramati Panasa Ramudu was not examined. Besides, Sri Mangaraju had given a different version in his sworn deposition before the Income-tax Officer on 30-5-1988. (3) "Sri Mallidi Dorareddy, who is a partner in M/s Bhaskara Auto Service has S.B. Account No. 7318 in Canara Bank, Kakinada. A letter of authority has been obtained for the operatio....
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....to prove their proximity to the management. None of them was examined. (4) Another instance is where 5 cheques were in the name of M.V. Ratnam and B. Appalaraju issued by Sri Dwarampudi Venkata Reddy who is a partner in Sri Bhaskara Auto Service. None of them was examined. (5) In 1983, on cheque for Rs. 27,000 and in 1984 two cheques amounting to Rs. 46,050 were issued in favour of B. Appalaraju but he was not examined. (6) In Smt. Mallidi Krishna Kumari's account (partner of Sri Bhanu Enterprises) two cheques were impounded of which one was encashed by Sri J. Mangaraju and another was credited to Sri Aruna Auto Service (P.) Ltd., which was encashed by it and the Income-tax Officer wondered how this was available for distribution as share of profits to sub-partners. Whether the profits were available for distribution among the sub-partners or not, is a totally different question and no adverse inference can be drawn against the assessee-company about these withdrawals. No question was put to Sri Mangaraju about this withdrawal in account No. 8774. (7) Sri M.V. Ratnam and Sri B. Appalaraju had cheques in their favour from Sri Tadi Venkatareddy, partner in M/s Sri Bhaskar....
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....MT Ltd., getting a salary of Rs. 1,000. However, Sri Ch.V.V. Satyanarayana retracted his statement which is also referred to at page 19 of the assessment order for 1985-86. According to him, the firm was genuinely constituted, the profits were distributed in accordance with the shares in the agreement and he fulfilled the role as Managing Partner and SRMT Ltd. was threatening criminal action against him for giving false statement before the Income-tax authorities. The Income-tax Officer felt that Sri Ch.V.V. Satyanarayana was only obliging his pay-masters by retracing the statement given in the course of the search. 20.4 Similar is the case with the statement of Shri B. Nageswara Rao, Managing Partner of Sri Bhaskara Auto Service. More than one statement were recorded from him on 10-2-1988 in the course of the search. The Income-tax Officer referred to one of the statements and proceeded to observe therefrom that he was inducted into the firm by Sri K.V.R. Chowdary, that he was only a partner on paper and he never enjoyed the profits and that he signed only the cheques and gave them to accountant Sri Murali and before that to one Sri Suryanarayana Murthy, the then accountant, in....
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....rds personal expenses amount drawn is not known. The balance is bank account." "Q. Whether you withdraw any amount from the firm ? What is your initial capital investment in the firm in the first year of the firm ? What is your personal monthly expenses ? A. I have invested an amount of Rs. 12,000 (Rupees twelve thousand) by taking loan from my father's brother and relatives during the first year of business in 1984. I am not withdrawing any amount from the firm. I am a bachelor and my monthly expenses is about Rs. 200." "Q. Who manages the affairs of M/s Bhaskara Auto Service'? A. I manage." "Q. What are your activities as the managing partner of M/s Bhaskara Auto Service? A. I mainly look after the business correspondence of M/s Bhaskara Auto Service. I have got the cheque-drawing power." The third statement was recorded from the same person on 10-2-1988 at 1-30 A.M. and concluded at I P.M. (as per timings furnished by the learned Senior Departmental Representative). The following questions and answers are relevant : "Q. What are your sources of income? A. I am getting a monthly remuneration of Rs. 250 in the capacity of Managing Partner of M/s Bhaskara....
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....660624 Rs. 31,600 29-5-1982 " 660622 Rs. 900 5-12-1983 " 660626 Rs. 36,260 29-8-1983 " 660625 Rs. 30,000 Y. Parasuramulu 7-11-1984 Ch. No. 660277 Rs. 40,400 5-10-1983 " 660276 Rs. 34,440 29-8-1983 " 660275 Rs. 28,500 29-5-1982 " 660272 Rs. 3,050 24-7-1982 " 660273 Rs. 23,750 4-1-1983 " 660274 Rs. 69,640 Do you agree that cash was received by you? A. Yes, I agree that cash against these cheques was received by me." (p. 103 of DPB) "Q. Do you wish to state anything voluntarily? A. I wish to state that I have agreed regarding the Bank accounts in the names of J. Mangaraju and his family members in good faith under section 132(4) in the course of the search. I shall verify the extent of the transactions and disclose all the unaccounted incomes for which I may be exempted from penalty & prosecution." In addition,....
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....e the presumption. They are not single transactions but are several in number. They are found in the bank accounts of Sri Mangaraju. There is no evidence to show that the accounts were opened on an introduction by Sri M.V.V. Satyanarayana Rao nor is there any evidence to show that the cheques were filled in by Sri M.V.V. Satyanarayana Rao and the amounts purported to have been withdrawn from these accounts were in fact given to Sri Satyanarayana Rao on each occasion. No question was put to Sri Satyanarayana Rao as to what he did with those amounts. Sri Mangaraju and Sri M.V.V. Satyanarayana Rao have resiled their statements. In view of the retraction of the statement of Sri Mangaraju, the legal presumption that the transactions in the pass books found in his possession really belong to him, stares at the revenue. In fact, Sri Ratnakar argued that he would go to the length of saying that if the directors or the Managing Director of the company had obtained any indirect benefit, that would not fasten the liability on the company and the issue should be tackled only elsewhere but not in the hands of the company. There is force in his submission. Unlike partnership firm where a partner....
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....back the commissions paid to the authorised dealer-firms. Sri K.V.R. Chowdary's statement, we have already held, is not a statement under section 132(4). The manner in which question No. 48 was sprung on Sri Chowdary, the long statement with all its legal nuances made by him and the manner in which the statement ended abruptly without any further questioning as to how the sum of Rs. 2,60,00,000 allegedly received by the company was hidden in the company's accounts or otherwise dealt with, leave much to be desired. While we are not subscribing to the view that Sri K.V.R. Chowdary was under intimidation or coercion or threat, we find some under current of force in the arguments of the learned counsel for the assessee that the admission was made by Sri Chowdary in a state of tension in the late hours of 10-2-1988, especially when the search had commenced at 9 A.M. on that day and was extending beyond midnight. Question No. 48 is as follows:- "At this point of time may I invite your attention to section 132(4) of the I.T. Act, which states that any disclosure made during the course of search operation voluntarily would not amount to concealment of income. Would you make any disclosu....
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....; Rs. 26,23,833 (3) M/s Sri Prabhakar Enterprises Rs. 17,96,683 (4) M/s Mehta Trading Company Rs. 20,91,299 --------------- Rs. 97,67,300 Less: Incentive commission paid out of the above to the customers &....
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.... be subjected to disallowance. Though this alternative ground is raised for the assessment year 1984-85, similar plea was made before us for the assessment year 1985-86. We have carefully considered the issue. We have already held that there was genuine need for dealership arrangements and the transactions with the firms are not sham or make-believe arrangements, nor are the dealership firms benamis of the assessee-company as none of the partners of these firms or the sub-partnerships is shown to be a director or shareholder or related to the directors or shareholders of the assessee-company. It is also relevant to point out that in spite of a massive search, no unaccounted money, unaccounted bullion or other valuable articles or things or unaccounted documents, duplicate set of accounts or diaries or any slips etc. were unearthed either from the premises of the company or from the premises of the Managing Director or other directors. There is also evidence to show that the dealer-firms were granted registration or continuation of registration as genuine firms by the Income-tax Officer in the post-search period in his orders dated 27-3-1989 in the case of two Kakinada firms, and in....
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....ar 1985-86, we direct the Income-tax Officer to grant consequential relief to the assessee in accordance with law. 28. There is one more ground for the assessment year 1984-85 in the departmental appeal and that is regarding the deletion of the disallowance under section 43B of the Income-tax Act. The Income-tax Officer noted the following provisions:- Provident Fund Rs. 1,08,773 ESI Contribution Rs. 73,621 Employees' Family Pension Fund Rs. 15,428 ------------- &....
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....spares, is a well recognised trade practice in this line of business." I consider it proper to record reasons for which I disagree with the Ld. A.M. (i) According to Black's Law Dictionary (Fifth Edition) page. 1339 "A usage of trade is any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question. The existence and scope of such a usage are to be proved as facts." (ii) According to Random House Dictionary, the term "practice" means habitual or customary performance, etc. (iii) In my opinion, in order to establish that a particular modus of dealing is in accordance with trade practice, it is, sine qua non, that there must be regularity of observance. (iv) Regularity of observance is a continuous process. The existence and scope of such observance must be proved as facts. (v) The following invoices from other manufacturers were produced before us at the time of hearing wherein a discount of 35 per cent to 40 per cent is allowed on the spare parts. S.No. Name &....
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.... These manufacturers also allowed discount mostly at 35 percent to 40 percent except on one item at 15 per cent (vide page 12 of the order). In my opinion, on the basis of these invoices, it cannot be said that allowance of commission at the rate of 40 per cent is a well recognised trade practice in this line of business. The reasons areas under:- (a) Invoices produced at the time of hearing do not relate to the impugned assessment years. (b) Only some selected invoices from other manufacturers were produced. This does not prove regularity of observance so as to justify an expectation that it will be observed with respect to all the transactions, (c) The practice of allowing discount vary from person to person whereas new entrants or lesser known organisations pay higher commission or discount, the old established business concerns dictate their own terms and conditions. 32. At page 14, para. 13, Ld.A.M. has observed: "that if the commission at 36.25 percent on the gross invoice value is to be considered to be reasonable in the case of M/s Mehta Trading Co., we cannot hold a different view that the percentage are high in respect of Kakinada firms, especi....
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....t stood at the relevant point of time, is reproduced here as under :--- Section 132(4). "The authorised Officer may during the course of the search or seizure, examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing and any statement made by such person during such examination may thereafter be used in evidence in any proceeding under the Indian Income-tax Act, 1922 (II of 1922), or under this Act." 35. The Direct Tax Laws (Amendment) Act, 1987 (4 of 1988) inserted the following Explanation to Section 132(4) w.e.f. 1-4-1989:- Explanation.- For the removal of doubts, it is hereby declared that the examination of any person under this sub-section may be not merely in respect of any books of accounts, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Indian Income-tax Act, 1922 (11 of 1922) or under this Act. 36. The Memorandum explaining the provision stated [168 ITR (Statutes) 320]- "Clause 37 seeks to amend section 132 of the Ac....
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.... [1890] 63 LT 705 that a declaratory "Act means to declare the law or to declare" that which has always been the law, and there having been doubts which have arisen, Parliament declares what the law is and enacts that it shall continue what it then is. 41. Thus under the well known principles of construction of statutes when an Act is passed for the express purpose explaining or clearing up issues the presumption is that such an Explanatory Act is retrospective. 42. Therefore, even though it is stated that the Explanation will take effect from 1-4-1989, it only means that the Explanation may be the part of the Statute from that date but its effect will be to clarify the meaning of the term from the very inception and make explicit what was implicit in the section even before. In taking this view, I have respectfully followed the decision of ITAT Madras Bench in Kwality Textile Associates (P.) Ltd. v. ITO [1988] 24 ITD 454. 43. It has long been held that the admissibility of evidence is not affected by the illegality of the means by which the evidence has been obtained, though a person taking resource to illegality may be accountable under the law. In Kurma V. R. 1955 1 ....
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....ompany decided to terminate their appointments. In para. 22 Ld. A.M. summed up the issue as under:- "Having regard to the materials collected by the revenue, and having heard rival submissions, we hold that it had not been established that the company had received back the commission paid to the authorised dealer-firms. Sri K.V.R. Chowdary's statement, we have already held, is not a statement under section 132(4)." I record reasons for which I disagree with Ld. A.M.:- (i) The statement of Shri K.V.R. Chowdary can be used in evidence against the assessee. (ii) Certain cheques issued by some of the partners of the dealer-firms were alleged to have been encashed by the persons in the employment of the assessee company or its sister concerns. Viewing this aspect in the light of statement of Sri Chowdary, I find that my conclusion apropos the same differs from my Ld. brother. (iii) In the case of Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77, the Hon'ble Supreme Court has held that it is the duty of the court, in every case, where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke-sc....
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....ein there was claim for deduction of Rs. 86,76,463 as payment of commission on sales of spare parts. The Income-tax Officer was of the opinion that this expenditure was not wholly laid out for the purpose of business inasmuch as it was prohibited by the Companies Act, the agents had not discharged any functions to earn the commission and the amounts given have been received back. On appeal, the Commissioner of Income-Lax (Appeals) came to the conclusion that the payment was legal and for services rendered but sustained an addition of Rs. 10,00,000 for possible diversion of part of the profits through the agencies. For the assessment year 1985-86, corresponding to the previous year ended on 31-12-1984, the deduction claimed was Rs. 97,67,302. This included payment of Rs. 20,91,300 to Mehta Trading Co., which was allowed without question. Of the balance, in addition to the reasons given in the assessment order for the earlier year, the Income-tax Officer relied upon a statement given by the Managing Director of the Company as well as a partner of the agency firm and disallowed Rs. 56,16,426. The incentive commission paid to the customers out of the commission paid to the agents was, ....
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....eceived back the commissions paid to the authorised dealer firms?" 5. In this reference it was pointed out on behalf of the assessee that while differing on certain points of reasoning, the learned Judicial Member had by his silence accepted certain other points made by the learned Accountant Member such as his finding that Sri K.V.R. Chowdary was not a person in control of the affairs of the assessee and his statement could not bind the assessee company. It was also submitted that his decision was inconsistent with the assessment order itself where the payment of incentive commission paid to the customers was accepted, thus showing that the transactions had taken place and were genuine and consequently the claim of Sri K.V.R. Chowdary that his statement was not made voluntarily and did not represent the truth was required to be accepted. It was argued that since the entire case of the revenue rested with the statement of Shri K.V.R. Chowdary, the disallowance made cannot be sustained as long as that statement remains uncorroborated. 6. On the other hand, it was contended on behalf of the Revenue that the statement of Shri K.V.R. Chowdary should be taken along with the statem....
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....he difference has arisen as to whether this Explanation would apply to the examination made on 11-2-1988 prior to the introduction of this Explanation. To my mind, it is inappropriate to think of a retrospective operation of this Explanation. It is perhaps because the Income-tax Act is often amended with retrospective effect that a question is raised with reference to every amendment as to whether it is prospective or retrospective. But in a case of exercise of power granted to an authority under the Act, such a question is of no relevance because, obviously the power can be exercised only from the date it is granted and could not have been exercised before it was granted. However, if such a power had been already exercised even before it was granted, the only question that will remain is what is the consequence of such an exercise of power before the date on which it was granted. In other words, the question will be whether the material gathered by the Income-tax Officer in exercise of the power which was enlarged subsequently could be used as valid material for the purpose of investigation. This question itself has been posed by both the Members and they have both answered it in ....
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....ector himself was a party to receipt of the amounts paid as commission to the selling agents. 11. The third question is vital and is reflected by the point of difference in question 2 (ii) A close scrutiny of the statement of Shri K.V.R. Chowdary (which was also disclaimed later) shows it does not stand the test of truth. This is because his statement did not lead to any discovery of amounts received back by the assessee company. I have to keep in mind the fact that the assessee company is an independent legal entity and also a taxable entity. Even though the Managing Director said that the commission paid to the agencies represented the income of the company, it remained uncorroborated by any evidence of the amount flowing back to the company's coffers. In this context, it is seen that there were four agents one in Bombay and three in Kakinada. The revenue has accepted that the Bombay agency has been fully paid and there is no evidence of any kickback. It is only with reference to the Kakinada firms that doubts have been raised. Again the method of invoicing by the assessee was, on receipt of the orders booked of the agency, to bill customers for the price less 25% as commissio....