TaxTMI 
TaxTMI 
2005 (3) TMI 428
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....------------ 1980-81 31-3-1982 83,76,660 1981-82 25-7-1981 97,85,840 1982-83 9-6-1982 69,47,160 1983-84 28-6-1983 49,10,053 1986-87 29-3-1989 1,07,21,250 1987-88 28-3-1990 1,13,44,690 1988-89 27-3-1991 ....
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....re offered to distributors by S.R.M.T. Ltd.? Ans.: The company gives two types of commission or discounts. One is customer's commission or discount and the other is middleman discount or commission. Q. 40: You stated that the company has the distributors for selling and booking orders. May I know the names of the distributors or authorized dealers? Ans.: There are 4 distributors or authorized dealers: (i) Prabhakar Enterprises, (ii) Bhaskar Auto Service, (iii) Bhanu Enterprise, (iv) Mehta Trading. Q.41 : What exactly is the service rendered by the above 4 concerns? Ans.: The above 4 concers are booking orders and sending the same to us. Q. 42: From the above statement, I understand that they merely book the orders. Did I understand correctly? Ans.: Yes. You understood correctly. Q. 43: Are there any agreements with the above four concerns? Ans.: Yes. Agreements are available. Q. 44 : Kindly tell me the addresses of the above-mentioned concerns? Ans.: M/s Mehta Trading Co. is located in Bombay and the other 3 concerns are located in Kakinada, A.P. Q. 45 : Can you tell me the constitution of the aforesaid concerns, i.e., whether proprie....
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.... Ltd. is liable to pay additional tax on the said additional income for the concerned years. In my capacity as the managing director of M/s S.R.M.T. Ltd. would undertake to arrange for expeditious payment of the said due additional taxes. However, I would expect that after collecting the additional taxes due credit for taxes paid by the abovesaid said three partnership firms and the partners of the said three firms should first be given and thereafter the net tax liability be determined. We would be providing exact figure for the respective assessment years after verifying our books of account keeping in view the above admitted figure Rs. 260 lakhs. But, however, since the concommitant tax liability will be staggering for being paid in one instalment I would expect that the IT Department will be considerate in accepting payment of the said additional due taxes over a period of 15 months. Sd/- K.V.R. Chowdary, 11-2-1988. The above statement has been explained to my father Sri K.V.R. Chowdary in Telugu and he accepted the contents true and correct. Sd/- (K. Sarathi) 11-2-1988. Before me Sd/- (C.R. Sekhar Reddy) Asstt. Director of Inspection (Inv.) Unit-I....
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....A) deleted the addition for the asst. yrs. 1980-81 to 1983-84, 1988-89 and 1989-90 in toto while disallowances for the asst. yrs. 1986-87 and 1987-88 were partly deleted and sustained to the extent of Rs. 25,00,000 in each of the assessment years under appeal. The orders of the CIT(A) are dt. 24th Nov., 1989 for asst. yr. 1986-87, 30th Oct., 1991 for asst. yrs. 1980-81 and 1988-89, 9th Nov., 1990 for asst. yr. 1987-88, 23rd July, 1992 for asst. yrs. 1981-82 to 1983-84 and 3rd Aug., 1992 for asst. yr. 1989-90. Similar issue regarding the deductibility of the commission paid to the authorised dealer has also arisen in the asst. yrs. 1984-85 and 1985-86. In those assessment years also, the CIT(A) has partly sustained the disallowance to the extent of Rs. 20,00,000 and Rs. 21,29,270, respectively. For the asst. yr, 1984-85 and asst. yr. 1985-86, the appeals were disposed of by the Tribunal 'A' Bench Hyderabad in ITA Nos. 2000/Hyd/1987 and 1502/Hyd/1989 and ITA Nos. 2471/Hyd/1987 and 1622/Hyd/1989 vide order dt. 11th May, 1990 by which the learned AM allowed the appeal of the assessee and dismissed the appeal of the Department. But the learned JM passed a dissenting order and there bein....
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....riate to think of a retrospective operation of this explanation. It is perhaps because the IT 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 was1 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 ITO 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 answered it in the affirmative in para 19.11 and para 43. Thus, this question is really academic and do not in any way affect the ultimate decision. 9. Having agreed with both the Members that the statement of Shri K.....
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....nd the test of the truth. This is because his statement did not lead to any discovery of amount received 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 by the agency, to bill customers for the price less 25 per cent as commission and credit the agency with a further commission of 15 per cent of the net amount. In the course of the year as an incentive in respect of customers who have exceeded a targeted turnover, a further commission was given them debiting the accounts of the agents. This has been accepted in the assessme....
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....e director nothing has been stated as to the nature of the transaction or as to why the money was paid to the director at all. In any event payment of money to a director is not payment of the money to the company unless he acknowledges the receipt on behalf of the company. Since such an acknowledgement has not been established, I agree with the learned AM that the leads have not taken the Revenue any where near the assessee-company. 13. Now I am left with the last question which is posed as the first question in the reference, namely, whether there was a well-recognised trade practice of payment of commission. This is only to test whether the commission paid could be considered to be unreasonable or excessive. The learned AM has found material in the books of the assessee itself indicating that similar commission has been paid to the Bombay agency which remains undisputed and the assessee had received such commission on purchases from other manufacturers in respect of its transport business. The learned JM has rejected this practice only with reference to the statement of Sri K.V.R. Chowdhary and has not made it a separate issue. However, since a question has been posed, I agre....
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.... of the same. His order is accordingly set-aside. The gist of these statements was given by the ITO to the assessee and the assessee's grievance is that these statements were not given to it in full and, therefore, they cannot be used against the assessee. The assessee had also obtained letters from ten out of the twenty-eight dealers wherein they have stated without reference to their statements recorded that they have been carrying on trade in automobile spare-parts in Madras and among the products they were dealing in spare-parts manufactured by the assessee were also dealt in, that the representatives of the authorized dealer-firms of the assessee used to visit them at regular intervals and canvas the products of their principals and used to persuade them for placing orders through them and that they have been placing orders on the order forms of the relevant authorised dealer for parts manufactured by the assessee. This also requires consideration. 42. Further, from extract of minutes of board meeting of the assessee-company filed by the learned Departmental Representative, it appears that Sri K.V.R Chowdary was not a stranger to the affairs of the assessee-company and was ....
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....rein the material collected during the search and seizure proceedings and utilised while making the assessment for asst. yr. 1985-86 was sought to be utilised in deciding the appeal for asst. yr. 1984-85. The contention of the assessee is contained in para 5 of the order which reads as under: 'The appeal for the asst. yr. 1984-85 was heard by us in full sans the materials collected in the course of search operation that took place at a date later than the completion of the assessment. While concluding his arguments, Sri K. Rangabhashyam, learned senior Departmental Representative, submitted that appeals have been filed both by the assessee and the Revenue on similar issues for the asst. yr. 1985-86, but in those appeals the materials collected at a later stage had been dealt with both by the ITO and the first appellate authority and, therefore, he sought the permission of the Bench to bring on record such material by way of additional evidence. Sri Y. Ratnakar, learned counsel for the assessee, vehemently objected to such a plea at the fag end of the hearing, but submitted that he would have no objection if the appeals for the asst. yr. 1985-86 were taken up for consideration as....
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....er coercion. There is no presumption of illegality or wrong-doing when an authority is exercising its statutory functions. It has to be proved, if there has been any. No such proof came forth except bare assertions. In these circumstances, acceptability of statements recorded under s. 132(4) cannot be questioned. Since the statements are relevant and the genuineness is proved, I do not think there is any bar as to its admissibility." It was also noticed by the Third Member in para 8 of his order and he proceeded to dispose of the matter on the basis that both the Members agreed that the statement of Sri K.V.R. Chowdary should be looked into. "45. In the decision of the Allahabad High Court in the case of Jagannath Prasad Kanhaiya Lal relied upon by the learned counsel of the assessee the material which was already there but not placed before the AO and the first appellate authority was filed along with the memo of appeal by way of additional evidence without application or affidavit stating their relevance or why the same were not filed earlier. In those circumstances, their Lordships of the Allahabad High Court held that the same could not be admitted under r. 29 of the ITAT....
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....s issue for fresh consideration in the light; of the discussion aforesaid and in accordance with law." 5. The appeal for the asst. yrs. 1981-82 to 1983-84 were disposed of by the Tribunal vide order dt. 26th Oct., 1995 by setting aside the order and sending back the issue of the deductibility of the commission to the file of the AO following its earlier order dt. 13th Oct., 1994. Similarly the appeal for the asst. yr. 1989-90 was also disposed of by setting aside and sending back this issue to the file of the AO. 6. The AO completed the set-aside assessments for each of these assessment years on the date mentioned hereunder by disallowing the commission for each of the assessment year detailed as under: --------------------------------------------- Asst. yr. Date of the order Disallowance Rs. --------------------------------------------- 1980-81 30-3-1997  ....
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....ears old at the time of giving statement under s. 131 in 1991 during the present proceedings, they have stated in their present statements/affidavits at the instance of SRMT people about booking of orders for the assessee's products by the representatives of the authorised dealer firms simply on seeing a single order form/credit note shown by the SRMT people, probably forgetting the fact that the incidence is of 10 years old in 1997 during the period of which loss of memory cannot be ruled out, when compared to 1991; (e) It is peculiar that the authorised dealer firms to whom lakhs of rupees was claimed to have been paid by the assessee-company towards commission did not maintain even the dire and minimum necessities like telephone, office accommodation, etc. which were considered essential for the nature of business in which they were engaged, viz., 'commission agents', as without the telephone they could not have been able to carry out their business. Besides this, no worthful and meaningful expenditure was incurred by them on overheads like salaries to employees, etc. and also sufficient infrastructure did not appear to have been held by them for their business; (f) Though....
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....re held to be sham and ingenuine thereby warranting disallowance of the commission payments. It may be observed here that the documents now relied on by the assessee with the help of which the dealers were persuaded to file affidavits in its favour are treated as fabricated documents to get through its claim and consequently the affidavits filed by them cannot be relied upon as having no evidentiary value. In this view of the matter, the disallowance made in the original assessment under s. 143(3) r/w, s. 147 dt. 27th March, 1991 needs no disturbance and it stands accordingly." 8. By following the order for the asst. yr. 1980-81 the disallowances were also made in the other assessment years. The assessee went in appeal against the order of the AO. The CIT(A) by passing the two consolidated orders dt. 30th April, 1998 and 17th Aug., 1998 sustained the disallowance to the extent of Rs. 20,00,000; Rs. 18,00,000; Rs. 20,00,000; Rs. 20,00,000; Rs. 25,00,000; Rs. 25,00,000; Rs. 25,00,000 and Rs. 18,00,000 for each of the assessment year mentioned hereinabove respectively by observing as under vide paras 3.2.4 to 3.2.8 in his order dt. 30th April, 1998 and following the same in his sub....
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....he set-aside assessment proceedings about the services rendered by the authorised dealer firms appointed by the assessee and also confirmed that they placed their orders for SRMT auto parts through these firms on their order forms. Affidavits filed by them in the course of the set-aside proceedings have also affirmed these facts by way of clarifying certain points made in the depositions recorded in March, 1991. From the depositions recorded from these persons as well as affidavits filed in the course of the set-aside assessment proceedings, it would be quite evident that none of them denied the services rendered by the authorised dealer firms. On the contrary, they categorically affirmed that the said firms did canvass for the assessee-company and booked orders for them. (v) Nine of the dealers, who could not appear before the AO due to their business constraints filed affidavits affirming the services rendered by the authorised dealer firms for promotion of the products of the assessee and giving clarifications of certain points made in the depositions recorded from them in March, 1991. (vi) Eight of the remaining dealers could not be produced before the AO as either some o....
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....to the AD firms for the said years. 3.2.5. At the time of hearing of appeal, it was contended on behalf of the assessee that the three AD firms duly reflected the commission received from the assessee in the relevant returns of income filed with the same AO, who also assessed such income for the said years with proper modifications. Registration was also granted to these firms under the IT Act and the genuineness of the said firms was finally upheld by the Tribunal vide their orders for the relevant years. Various assessment details of these firms were also filed with me in support of the aforesaid contention. On perusal of the details filed, I find that the three AD firms viz. BAS, PE, and BE were assessed by "the AO, Central Circle, Visakhapatnam, who also happened to be the AO of the assessee-company for the relevant years. All the three firms were assessed as registered firms and the only source of income of the three firms was commission received by them from the assessee-company, though in the case of PE, it also carried on business in Voltas company fridges, etc. The commission received by these firms for the relevant year was subjected to tax in the respective assessment....
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....ed registration to them under the IT Act accordingly for the relevant years. In further appeals preferred by the Department before the Hon'ble Tribunal, the orders of the CIT(A) allowing registration to these firms were upheld and consequently, the firms were allowed to be assessed as registered firms. Subsequent reference applications of the Department under s. 256(1) against the orders of the Tribunal in the case of the three firms were also rejected. The present AO was confronted with the assessment details of the AD firms as cited above in my official chamber on 27th April, 1998. He perused the assessment details of the AD firms and did not disagree with the details so filed. Thus, the genuineness of these three AD firms, carrying on independent business of its own, as commission agents for the products of the assessee has also been accepted by the Tribunal. It will not be out of place to mention here that the contention regarding the genuineness of the three AD firms constituted for the purpose of carrying on business as commission agents of the assesseS-company and their claim regarding registration under the IT Act has been accepted by the Hon'ble Tribunal vide their orders ....
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....e regarding the payment of commission to the AD firms for the relevant years. 3.2.8. In view of my observations as made in the preceding paragraphs especially the findings recorded in para 3.2.2 of this order, it would be really futile to hold the entire payments of commission to the subject AD firms as bogus. It would be rather worthwhile to attempt an exercise to find out only the reasonable sum out of the assessee's total claim of commission payments made to the AD firms, which could be said to have been wholly and exclusively laid out for the purpose of its business, keeping in view the volume of business done and the nature and extent of services rendered by the AD firms for the promotion of its business during the relevant years. In this regard, I would like to follow the order of my learned predecessor in ITA No. 14/AC(CC)/VSP/1988-89, dt. 24th Nov., 1989 for the asst. yr. 1986-87 in the assessee's case, wherein the tests for ascertainment of a reasonable allowance/disallowance out of the assessee's claim of commission payments to the AD firms have been prescribed. Following the same tests as laid down in the above cited appellate order, I would hold that the three AD fir....
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....lers 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 shall not have-to allow additional discounts to the dealers basing on the circulars to be released by the company from time to time. 4. The authorised dealer shall not under any circumstances sell or offer for sale of 'SRMT' auto parts either by deviating the above discount policies or by overselling in the prices stipulated by the company from time to time. 5. All the prices and discount structures are subject to change without notice and those that are communicated from time to time to the authorised dealer by the company shall be binding. 6. The company will allow the authorised dealer a discount of 25 and 15 per cent on the ruling list prices of 'SRMT' auto parts against the orders booked by then representatives and the difference of commission between the discount of the authorised dealer and discount allowed to the dealer will be credited to the account of the authorised dealer. 7. The company shall allow an additional trade discount of 1 per cent to th....
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....sst. yr. 1985-86 became final with the order of the Tribunal deleting the disallowances made by the AO on this basis and on the basis of the statement recorded during the course of the search from the managing director of the company but the additions in all the other years were pending before the Tribunal. The Revenue brought additional evidences by way of statement of 28 dealers recorded by the Revenue in March, 1991 on the basis of which the Tribunal set-aside the assessment for the re-examination of this issue by the AO. Thus, when the disallowances were again made by the AO, the matter travelled to this Tribunal. 11. The learned Authorised Representative before us submitted as many as 8 paper books consisting of about 900 pages along with the written submissions. The learned Authorised Representative submitted that the AO disallowed the commission as he was of the view that the commission paid was not genuine. The CIT(A) although held that the payment of the commission is genuine but restricted the amount allowable on estimate basis. Thus, the only issue involved in these appeals is the allowability of the commission paid to the authorised dealers of the assessee-company si....
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....as not in any way genuine. The search at the premises of the authorized dealers also revealed that the amount of commission received by them was in accordance with the agreements entered into and were properly recorded in their books of account and taxes were paid. 14. The authorities recorded a statement of Sri K.V.R. Chowdhary, the managing director of the company who was 62 years old at the time of search. He initially stated that commission was paid to the authorised dealers. The managing director was very clear till question No. 47 that all the payments of commission were genuinely made. At question No. 47, the date changed from 10th Feb., 1988 to 11th Feb., 1988. Thereafter, he was under pressure from the authorities conducting search and seizure operations and he was made to agree that the commission payments would be declared as undisclosed income. There is no material on record to come to conclusion that the payment of commission is not genuine. A significant mention made by the managing director in the statement was that an amount of Rs. 47 lakhs was with them out of the amount of commission paid and the balance of amount was utilised by the authorised dealer firms the....
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....bills, vouchers, etc. and whereas the seized books of the dealers establish the receipt of the said commission and the expenditure towards services rendered by them. Most of the transactions are through bank. The authorities did not find any cash or assets at the time of search and seizure operations at the premises of any of the directors of the company. There is no information in the seized material to suggest that the commission paid was received back by the company or its directors. The authorities also did not find any assets, cash and jewellery not accounted for in the books of account. The statements so recorded were retracted by the deponents vide their letter dt. 23rd March, 1988. 15. These statements were considered by the Hon'ble Tribunal for the asst. yrs. 1984-85 and 1985-86. A copy of the order of the Third Member who decided the appeal placed before the Hon'ble Tribunal. Suffice it to say that the Hon'ble Tribunal came to the conclusion that the statements recorded from the managing director and other firms of the dealers are not correct. Though the Hon'ble Tribunal did not find fault with the recording of a statement at the time of search, the Hon'ble Tribunal fo....
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....horities sought to utilise such statements to support their view for all the assessment years under consideration. The Hon'ble Tribunal found it necessary to set-aside all the assessments to the file of the AO for reassessment in view of the statements recorded from the 28 retailers. 17. The present appeals are against the set-aside assessment made by the AO. During the set-aside assessment proceedings for all the assessment years, the AO based his assessments on the statements recorded from the managing director and the managing partners during the course of search and the statements recorded from the 28 retailers relevant for the asst. yr. 1988-89. It is submitted that insofar as statements recorded at the time of search are concerned, the Hon'ble Tribunal for the asst. yrs. 1984-85 and 1985-86 held that they are not true and cannot be relied upon for making any addition. The said decision of the Third Member of the Hon'ble Tribunal became final. Insofar as the statements of 28 retailers are concerned, 11 persons could be produced before the AO, affidavits of 8 persons and the 11 persons who were produced were provided and the balance of 9 persons could not be produced as they....
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....-86 and held that the payment of commission is genuine. According to the CIT(A), the statements recorded from the 28 retail dealers do not reveal that the commission payment is not genuine. Therefore, the CIT(A) held that the payment of commission is genuine on the ground that the AO based his addition only on the statements recorded at the time of search, which are held to be not true and the statement of 28 retailers, which was successfully rebutted by the assessee. However, the CIT(A) is of the view that the quantum of commission is excessive and, therefore, partly allowed the commission. 19. In the Departmental appeal, the Department relied on the statements recorded at the time of search, the letter of the managing director written to the CIT, Central, Bangalore, the minutes of the meeting of the board of directors of the company to contend that the payment of commission is not genuine. The learned Authorised Representative submitted the written submissions on some of the observations made by the AO as under: "A. There is need to have the services of authorised dealer firms in the context of the business carried on by the assessee: As the area of market for the market....
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....parate books of account, filed their returns of income, maintained separate bank accounts and had their own office at Kakinada. D. Trade Practice: There is an accepted trade practice of giving commissions to the authorised dealer firms in the line of business of the assessee. On the basis of evidence filed before the authorities, the learned CIT(A) and later on before the Hon'ble Tribunal held that there existed a trade practice of appointment of authorised dealer firms, in this regard attention was invited to the decision of Third Member dt. 4th Jan., 1991 in the case of the assessee for the asst. yrs. 1984-85 and 1985-86 (reproduced hereinabove in the preceding paragraphs). E. bout the statements recorded from the managing director, Sri K.V.R. Chowdhary and others during the search proceedings and later on from Sri D.P.K.L.N. Raju, managing partner of Sri Bhanu Enterprises. (1) Sri K.V.R. Chowdhary (a) Never before he was ever subjected to interrogation or examination or search operations. (b) He, therefore, was nervous and was out of his wits during search operations (c) The search operations were conducted simultaneously at various places of the assessee as....
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....ty from penalties, interest and prosecution earlier extended to him by the search officials while extracting the above disclosure. The learned CIT in his reply refused to confirm such immunities. In this letter, it was submitted that the statement was recorded under duress. The copies of the letters are reproduced as under: "K.V.R. Chowdhary Chairman and Managing Director Sri Ramdas Motor Transport Ltd. P.B. No. 42, Subhash Road, Kakinada-533 001 TLX 0491-201 Grams Green Phone Off. 3211 Res. 3666 1st March, 1988 The CIT (Central), Karnataka, Bangalore. Sir, Sub: Raid at our office and residential premises-Request for furnishing of statement Regarding. You may recall that a raid was conducted under your supervision by the officers of the IT Department both at our office and residential premises of the directors. The raid started on the 10th February at 8.30 a.m. and continued on the whole of 10th and 11th and 12th February and was stopped at 11.30 p.m. on the 12th February. The raiding officers came in hundreds in strength at various places. The Asstt. CIT, Mr. Rangabhashyam and the Dy. Director of Inspection, Mr. Siudarshan Mishra were also prese....
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....d readily accept in view of the Department's assurance, based on these assurances given to us and to spare us from the agony of further prolonged raid, I gave the statement accepting the commission payments to the three firms after deducting the expenditure incurred as income of SRMT. I have also stated that the exact figure will be calculated and will be furnished to the Department and requested that payment of taxes may be accepted in instalments. Notwithstanding this statement, the raid continued till 11th night and after seizing a number of books, registers, etc. the raid came to an end. At that time Mr. Rangabhashyam and other officers assured me that no penalties, interests would be initiated. On the strength of the said assurances, I have given the statements. In the said statements the assurance given by the Department were not incorporated. Hence, in view of what is stated above, we expect that the Department from its side would keep its assurance and will not initiate any further proceedings by way of issue of penalty notices, levy of interest and initiation of prosecution proceedings. In order to set the record straight I am bringing these facts to your kind notice. ....
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....ction, I have to clarify that under s. 132(4) of the IT Act, the authorised officer is entitled to examine on oath any person, who is found to be in possession or control of any books of account, etc., and that any statement made by such person during such examination may, thereafter, be used as evidence in any proceedings under the IT Act. (5) Regarding levy of penalty, interest, prosecution under the Act, it is the ITO concerned who has to take decision in these matters on the basis of evidence and material. There cannot be assurance given in this respect by anybody at any stage. (6) The IT Act in Expln. 5 to s. 271(1)(c) [as amended by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986] refers to certain concessions available to assesse's if certain conditions are fulfilled. If in your case the conditions are fulfilled, the concessions stated in the Act may be available. You may seek appropriate advice in this respect or discuss the matter further with the ITO/IAC concerned or this office. It appears, however, that, though you have admitted the commission payment as your income, you have not paid the tax thereon. You are required to make the tax payment f....
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.... and threats, statements were extracted from them to the effect that the said firms were only name-sake and that the amounts were paid back to the company. (d) Immediately after search operations, they wrote letters to the IT Department stating that (i) under coercion and threats they were made to give the above stated averments. (ii) In fact for services rendered by these firms, commission was paid to them and thus they retracted from what they were forced to admit during the search operations. (e) The Hon'ble Tribunal has considered the above facts and held that on the basis of the depositions given by them during the search, no adverse inference could be drawn to disallow the commission payments. I. Sri D.P.K.L.N. Raju He was the managing partner of Sri Bhanu Enterprises. He joined the said firm in October/November, 1987 and within few months, i.e., in March, 1988, the said firm was dissolved. Earlier he was not a partner in the said firm. Therefore, he could not give information about other partners and their investments, etc. He also stated that the firm conducted the activity of receiving and paying commission to the representatives. This indicates that the ....
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....enditure. The expenditure incurred by them was also supported by the vouchers, etc. found at the time of search. The balance of profit amount was divided among the partners. The amount of deposit paid by the authorised dealers firms to the assessee also was recorded in the books of account. All the data support the claim of the assessee. In view of the provisions of s. 132(4A), the presumption is in favour of the assessee. According to the said provision, the books of account and other documents found at the time of search are to be considered as true. Further, no information contrary to the same was found. Therefore, it is not correct for the AO or the CIT(A) to hold any contrary view. 21. The amounts were paid in accordance with the agreements entered into. According to the agreement, the assessee pays 25 per cent direct to the retail dealers and 15 per cent on the balance of 75 per cent was paid to the authorised dealers, out of the said 15 per cent on the balance of 75 per cent of the sale price, the authorised dealers had to pay commission, incurred expenditure on its own establishment, remuneration to field representatives, their travelling expenses and bad debts. Attentio....
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....es in March, 1997 for the examination by the learned DC. (c) Even without finding any averments against the assessee's contentions in the depositions taken from the witnesses produced by the assessee for examination by the learned D.C. in March, 1997. (d) On the same evidence/information and on the same grounds as mentioned in the original assessment orders and not on the basis of evidence brought on the record by the assessee and without appreciating the evidence in support of the claim made. (e) The AO also did not consider the observations made by the Hon'ble Tribunal in their order for the asst. yrs. 1984-85 and 1985-86. 25. While making the aforesaid submissions, the learned Authorised Representative also relied on the various case laws. On the last date of the hearing, the learned Authorised Representative again filed written submissions in brief as under the respect of all these appeals, the written submissions are mentioned hereunder: (i) The statement of Sri K.V.R. Chowdary, the then managing director recorded on 10th Feb., 1988/11th Feb., 1988 cannot be considered as: (a) The same was held to be incorrect by the three Member decision of the Tribunal for ....
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....ies. 26. In the circumstances and in view of the submission made, during the course of hearing and written submissions, the assessee submits that it proved that genuineness of payment of commission to the authorised dealer firms. Insofar as restriction of allowance is concerned, it is submitted that CIT(A) did not bring on record any information that the payment of commission was in excess of the business needs. Further, the net payments made, workout to about 6 to 7 per cent [15 per cent of 75 per cent, i.e., 11.25 per cent (-) 5 per cent, further commission provided to the retailers] by the authorised dealer firms, which is not excessive. Their duties include sending representatives, booking orders, and collecting the dues. Instances where losses on bad debts were also suffered by the authorised dealer firms are also brought on record. In these circumstances, the assessee submits that the payment of commission is not excessive as observed by the CIT(A). 27. It is further submitted that the following decisions support the submission made by the assessee that the incurring of expenditure for the business purposes is a business decision taken by the assessee and the prudence o....
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.... dealers. Accordingly, the Revenue has duly discharged its onus that the expenditure by way of commission paid was not genuinely incurred by the assessee. The learned Departmental Representative placed reliance on the order of the AO and submitted that the commission paid should not be allowed. The CIT(A) was not correct in law even disallowing part of the commission. Thus, it was vehemently submitted that the order of the CIT(A) be set-aside and that of the AO be restored. 30. We have considered the rival submissions perused the materials on record. We have also gone through the orders of the tax authorities below and also the case laws cited and relied on before us. The only issue involved in all these appeals is whether the commission paid by the assessee-company in each of the assessment years to the authorised dealers is allowable under s. 37(1) of the IT Act or not: There is no dispute that during the asst. yrs. 1984-85 and 1985-86 the commission paid by the assessee-company was allowed and the deductibility of such commission has been confirmed by this Tribunal in ITA Nos. 2000 and 2471/H/1987 and 1502-1622/H/1989 vide its order dt. 4th Jan., 1991. In all the years under ....
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....d dealer firm were not genuine and these dealers tried to give statements in favour of the assessee. The AO also rejected the statement of the three sales representatives representing each of the authorised dealers firms. All these 11 dealers and 3 sales representatives were also cross-examined on behalf of the assessee. The cross-examination revealed that the authorized dealers firms were booking orders for the assessee through the representatives. The AO rejected the statement of the 11 dealers, 3 sales representatives and along with their respective affidavits. The affidavits of the 9 dealers, which were filed by the assessee were also rejected by the AO. The AO before rejecting the affidavits filed by the assessee and also by the various dealers did not cross-examine them and relied on the statements recorded in March, 1991 for the 28 dealers and concluded that the authorised dealers firms were not in existence genuinely and were simply set up and used by the assessee as a facade for reducing its tax liability and therefore, he disallowed the commission paid by the assessee to the authorised dealer firms relying on the findings given by the AO in the original assessment orders.....
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....d by the assessee for the relevant assessment year was bogus. 33. From the order of the CIT(A), we noted that 2 remand reports dt. 29th Dec, 1997 and 10th Feb., 1994 were submitted by the AO. In the remand report, the AO made the following comments on the claim of the assessee for the commission paid to the authorised dealer: "1. Finally, I may submit that the dealers while giving statements in the year 1991 have firmly and instantly admitted before the Departmental authorities without any second thought that they had no business connections at all with the authorised dealer firms and most of them had also expressed their ignorance about the existence of the said firms. Even the present statements recorded from the dealers in 1997 and the statement recorded from Sri. Ch. V.V. Satyanarayana as per CIT(A)'s directions almost strengthens the stand of the Department that the entire transaction of huge commission payments to the alleged authorised dealer firms is bogus and ingenuine and it is nothing but the assessee's income shown as commission payments by inflating the expenditure. 2. In the light of the discussion made above, I am of the opinion that as per the Tribunal's or....
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....rs recorded in March, 1991, at the back of the assessee during the course of the assessment proceedings for the asst. yr. 1988-89. We noted that the commission had been paid to all the authorised dealers firms through cheques. All the authorised dealer firms are the regular income-tax assessees. They are filing their respective IT returns regularly. All the commission received from the assessee-company has been duly disclosed by the authorised dealer firms in their books of account and in the P&L a/c, copies of which were filed before us. These authorised dealers firms had also paid the income-tax on the income so disclosed. The dealers clarified in their affidavit and accepted that they used to give the orders through the representatives of the authorised dealer firms. Even they have accepted that the representative used to book orders on the printed form containing the names of the authorised dealers. Merely that the assessee could not produce affidavit of the 8 dealers as some of them has wounded up their business and some of them had expired, does not mean that the statement recorded by the AO at the back of the assessee will be relied on when all the parties which were examine....
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.... 37. We do not find any substance in the contention of the AO that the expenditure incurred on salaries, offices, travelling and bank charges by the authorised dealer was very less and the incurrence of less expenditure by the authorized dealer firms cannot be a basis for treating the authorised dealers firms to be non-genuine. But in our opinion this will counter the observations of the AO that the authorised dealers firms were created to evade the tax because in case the authorised dealers firms have debited less expenses their taxable income get increased and they have to pay more taxes. 38. No evidence has been brought on record that the amount as has been paid by the assessee-company by way of commission to the authorized dealers firms were received back by the directors of the assessee-company, although there had been affective search at the premises of the assessee and its director and also at the premises of the authorised dealer firm and its partners. The statement of the managing partner, one of the authorised dealer firm which was recorded during the course of remand report also proves that the authorised firms have received the commission and the representative of t....
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....alers firms. Even the AO has allowed the deduction of the commission paid to one authorised dealer firms M/s Mehta Trader, Mumbai, on the same terms and conditions, proves the trade practice prevalent in the trade. When the company grows in our opinion, due to the principle of span of control, it becomes necessary for them to appoint the authorised dealers on commission basis so that they may be motivated to procure more business for getting the more commission. It is a human tendency not to work without any incentive. 42. We do not find any substance on the observation of the AO that the assessee has incurred the expenses for bringing the witnesses for production before the AO, therefore, they were bound to oblige the assessee. When the assessee is asked to produce the witness, the assessee, in our opinion, is bound to bring the witness if he has come from far away places, the assessee has not committed any wrong if he has arranged for the travelling and the stay of the witnesses. Even a witness is entitled to claim the expenditure in view of the provision laid down under the Civil Procedure Code. Therefore, treating the commission paid non-genuine on this basis is not justifie....
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....ise the statement could have been recorded at one length. The learned Authorised Representative was at pain in emphasizing that the statement had been procured from the assessee under coercion and pressure and contrary to the CBDT instruction issued in March, 2003 pursuant to Kelkar Committee report. We find from the CBDT instructions and Kelkar Committee report that the prevalence of practice amongst the search parties to obtain forced confession of undisclosed income from the assessee. In our opinion, the preposition of law is well settled that the admission made by the assessee during the course of search constitutes substantial evidence in view of the provisions of ss. 17 to 21 of the Evidence Act, but such admission cannot be considered to be conclusive evidence against the assessee. In this regard, we noted the following propositions laid down in various case laws: Hon'ble apex Court in the case of Pullangode Rubber Produce Co. Ltd. vs. State of Kerala 1972 CTR (SC) 253 : (1973) 91 ITR 18 (SC) held : An admission is an extremely important piece of evidence but it cannot be said that it is conclusive. It is open to the assessee who made the admission to show that it is inco....
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....act not correct and true. Hon'ble apex Court in the case of Shri Krishan vs. Kurukshetra University AIR 1976 SC 376 held: an admission based on ignorance of fact is not binding. Hon'ble Punjab & Haryana High Court in the case of Krishan Lal Shiv Chand Rai vs. CIT (1973) 88 ITR 293 (P&H) held: it is an established principle of law that a party is entitled to show and prove that an admission made by him previously was in fact not correct and true. Tribunal in the case of R.P. Locks Company vs. Dy. CIT (2000) 67 TTJ (Del) 588 held: Statement of assessee under s. 132(4) surrendering certain amount is legally relevant but it is open to a party making an admission to explain, clarify and demonstrate on basis of positive material under what circumstances admission was made or to prove that what was stated was not correct. 44. In view of the aforesaid case laws, in our opinion, the admission made by the assessee under s. 132(4) during the course of the search is not a conclusive evidence and such admission can be used as an evidence provided corroborating evidences are there on record. The assessee in this case has already retracted the statement. Although, there had b....
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....such books of account and other documents which purport to be in the handwriting of any other particular person or which may reasonably be assumed to have been signed by, or to be in the handwriting of any particular person, are in that persons handwriting, and in the case of a document, stamped, executed or attested, that it was duly stamped and executed or attested by the person by whom it purports to have been so executed or attested. These presumptions lay down the rule of evidence, which are applicable in the case of the search. On the basis of these presumptions, the books of account, documents and vouchers found in the possession of the assessee and which contain the entries relating to the commission paid are deemed to be correct and true. The presumptions laid down in the section are rebuttable which means the onus is on the party who wants to prove otherwise that is presumed. Since the assessee has duly entered into the agreement with the authorised dealers firms, paid them the commission and for which copies of the order forms, proof of the payment of the commission, were duly found in the possession of the assessee during the course of the search, the onus was on the De....
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....law. 48. In the case of the assessee, there is no doubt that the commission paid by the assessee is not covered by the provision of ss. 30 to 36. There is also no dispute that the expenditure incurred by the assessee is of revenue nature and not of capital in nature. There is also no dispute about the fact that the expenditure has been incurred during the respective previous years. There is also no dispute that this expenditure has not been incurred for any purpose which is an offence or which is prohibited by law. The expenditure so incurred by the assessee-company cannot be regarded to be the personal expenditure of the assessee. There is no evidence on record that these expenses were incurred to meet out the personal needs of the assessee-company. The company is always incorporated for the purpose of carrying on the business as stipulated under its object clause laid down in the memorandum of association. The company so incorporated is not human being, which may have personal needs. The company is an artificial person incorporated under the legislature by having a separate entity. Although by having a separate entity; it may work as a human being in its own name but it does n....
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....ssee to decide whether any expenditure should be incurred in the course of its or his business. Such expenditure may be incurred voluntarily and without any necessity, and if is incurred for promoting the business and to earn profits, the assessee can claim deduction, therefore, under s. 37(1) even though there was no compelling necessity to incur such expenditure. The Supreme Court, in the case of CIT vs. Malayalam Plantation (1964) 53 ITR 140 (SC), held that it is not only expenditure which directly results in benefit or advantage to the assessee's business that is entitled to deduction, but also any expenditure which is incurred with a view to facilitating the carrying on of the business. 52. We do agree with the submissions of the learned Authorised Representative that it is not open to the Department to prescribe what expenditure the assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best as this has been clearly laid down by the Hon'ble apex Court in the case of CIT vs. Dhanrajgiri Raja Narsinghgiri relied on by learned Authorised Representative. No doubt every businessman is the best judge of his business....
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....e may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under the relevant provision even though there was no compelling necessity to incur such expenditure. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under s. 37 of the Act if it otherwise satisfies the tests laid down by law. The bill (sic) read "any expenditure" laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed in view of the protests raised by the taxpayers the word "necessarily" came to be dropped. It will be also noticed that in CIT vs. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC), it was observed as follows: "Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a paymen....
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.... cited before us, in the case of Dalmia Cement Ltd. the Hon'ble Delhi High Court has held as under: "For the allowance under s. 37(1), the following conditions are to be satisfied, i.e., (a) there must be expenditure, (b) such expenditure must not be of the nature described in ss. 30 to 36, (c) the expenditure must not be in the nature of capital expenditure or personal expenses of the assessee, (d) the expenditure must have been laid out or expended wholly and exclusively for the purposes of the business or profession. The word 'wholly' refers to the quantum of expenditure, while the word 'exclusively' refers to the motive, objective and purpose of the expenditure. An expenditure to which one cannot apply an empirical or subjective standard is to be judged from the point of view of a businessman and it is relevant to consider how the businessman himself treats a particular item of expenditure. The term 'commercial expediency' is not a term of art. It means everything that serves to promote commerce and includes every means suitable to that serves to promote commerce and includes every means suitable to that end. In applying the test of commercial expediency, for determining whe....
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....llahabad High Court has held as under: "Where the Tribunal sustained partial disallowance of commission paid on the grounds of being excessive, it was held that the disallowance was based on no valid reason and was arbitrary. Similarly, where the Tribunal maintained partial disallowance out of travelling expenses on the ground that the possibility of some of the expenses being incurred for personal expenses of the partners could not be ruled out, it was held that the Tribunal has acted on pure surmise. Therefore, the partial disallowance was not justified." Hon'ble Calcutta High Court in the case of J.K. Steel & Industries Ltd. vs. CIT (1978) 112 ITR 285 (Cal) has held as under: "The assessee-company entered into an agreement with a company whereby the later was appointed its sole selling agent. The agreement provided that 'the agents shall be responsible for payment of the prices and all other monies to the principal immediately after the goods shall leave the principal's works or go downs'. The agents were to be paid a certain percentage of the total sales as commission. The Tribunal found that the agreement was genuine but disallowed a part of the commission on the grou....
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....ted at the relevant point of time. The AO had failed to make enquiries as to whether R existed at the relevant point of time, i.e., in the year in which the payment of commission was claimed to have been made. (c) if the AO had collected material to establish that R did not exist at the relevant point of time, then the obvious conclusion would be that the evidence furnished by the assessee was unreliable. However, the AO did not do so. (d) when one weighed the evidence furnished by the assessee on the one hand and the information collected by the AO on the other, the balance tilted heavily in favour of the assessee. 57. In the case of IAC vs. Haryana Conductors Ltd. (1990) 50 Taxman 291 (Del)(Mag), where assessee-company paid commission to various parties by account payee cheques, which was duly confirmed by them and record showed that they had rendered services for which commission was paid, expenditure was deductible. Hon'ble apex Court in the case of Aluminium Corporation of India Ltd. vs. CIT has held as under: Under s. 10(2)(xv) of the 1922 Act [corresponding to s. 37(1) of the 1961 Act] it is for the ITO to decide whether any remuneration paid by an assessee wa....
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....IT Department. Hon'ble Supreme Court in the case of CIT vs. Dhanrajgirji Raja Narsingirji held as under: It is not open to the Department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every business knows his interest best. Hon'ble Gujarat High Court in the case of Voltamp Transformers (P) Ltd. vs. CIT held as under: Where commission was paid by the assessee-company to its sole selling agent, a firm whose partners were one of the directors and the wives of two other directors of the assessee-company, and there was evidence that sales increased due to effort of the agent and that the commission paid was reasonable. Held, that the commission was deductible. Hon'ble Tribunal in the case of VIP Industries Ltd. vs. IAC (1991) 36 ITD 70 (Bom)(TM) allowed the commission paid to the agent. Assessee-company was carrying on business of manufacture of moulded luggage-During relevant accounting year, assessee paid certain commission to its agent M, who obtained orders from Canteen Stores Department, Government Department-M, which was a taxable firm, stated in a letter that it appointed B, who was able to render....
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.... the carrying on of the business. In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for purposes of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue. In the case of Shahzada Nand & Sons vs. CIT, Hon'ble Supreme Court has held as under: "The three factors laid down by the proviso to s. 36(1)(ii) are not really conditions on the fulfilment of which alone the amount of commission paid to an employee can be regarded as reasonable. They are merely factors to be taken into account by the Revenue authorities in determining the reasonableness of the amount of commission. It may be that one of these factors yields a negative response. To take an example, there may be no general practice in similar business or profession to give commission to an employee, but, yet, having regard to the other circumstances, the amount of commission paid to the employee may be regarded as reasonable. What the proviso requires is merely that the reasonableness of the amount of commission shall be determined with reference to the three factors. But it is....
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.... usual practice to pay secret commission to dyeing masters, printing masters, etc. in order to secure orders and to ensure that the supplier concerned increased his sales. The Tribunal had also held that the three employees of the assessee-firm were visiting the various mills with whom the assessee had dealings and were securing business from those different mills for the assessee-firm. In view of these conclusions of the Tribunal and particularly in view of the conclusion of the Tribunal that the payment of commission under the agreements was necessary in the interest of the assessee's business, applying the correct test required to be applied for ascertaining the reasonableness of the commission paid in the light of the provisions of s. 36(1)(ii) of the Act, namely, the test of commercial expediency, it has to be held that the payment of commission to the employees in the light of the peculiar facts and circumstances of the particular case was reasonable. It must, therefore, be held that the claim of the assessee-firm was allowable under s. 36(1)(ii) of the Act. Though the Tribunal had held that the amount of commission paid by the assessee to its employees was allowable under....