TaxTMI 
TaxTMI 
TaxTMI 
2005 (3) TMI 428
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....; 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 1,03,93,660 19....
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....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 proprietary or partnership concerns, etc.? Ans. : All the four concerns are registered firms. Q. 46 : Pleas....
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....ing 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, Hyderabad." Q. No. 48 and its answer was signed on 11th Feb., 1988 while the others were signed on 10th Feb., 1988. On the basis of this ....
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....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 being difference of opinion, the issue relating to the allowability of the commission referred to the Third Member. The learned Third Member vide order dt. 4th Jan., 1991 all....
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....ference 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.V.R. Chowdhary should be looked into, the next question that arises is on the evidentiary value thereof. The learned AM has rejected this evidence on two grounds, namely, that ....
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....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 assessment for 1985-86 by the ITO himself who has allowed the deduction of the amounts paid as commission to the customers thus limiting the dispute to the amounts paid to the accounts of ....
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....ent 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 agree with the learned AM that there is evidence on record to establish the trade practice of giving large commissions and in the light of the evidence on record, the amount paid by the as....
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.... 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 in fact authorised by the company to deal with the issue of search and seizure. In this context, the letter written by Sri K.V.R. Chowdary on 1st March, 1988 not denying the statement given by....
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....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 the material would be relevant in those appeals. Accordingly, we admitted the petition of the learned senior Departmental Representative and proceeded to hear the appeals for the asst. yr. 1985-86 ....
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....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 Rules. Their Lordships held that the admission of additional evidence at the appeal stage before the Tribunal is not referable to any right of the party to produce evidence. A party desiring to adduce additi....
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.... 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 44,59,513 1981-82 11-2-1998 36,38,243 1982-83 11-2-1998 &....
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....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 at the instance of the assessee-company, the dealers have filed affidavits before me in favour of the former, when they were confronted during the course of recording statement under s. 131 of the IT Act they were unable to substantiate their averments made i....
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....ated 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 subsequent order dt. 17th Aug., 1998: "3.2.4. In the light of the facts of the case as stated above and on reappraisal of all the evidences brought on record in the course of original assessment proceedings as well as set-aside assessment proceedings, my findings will be as....
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....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 of them had wound up their business by then or others had died subsequently. These were certainly genuine reasons which prevented the assessee from producing these eight dealers before the AO in the course of the set-aside proceedings. Non-production of these eight dealers by itself cou....
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....r 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 years. Besides, these firms have paid huge amounts of taxes and the share incomes from these partnership firms were also subjected to tax in the hands of the respective partners by the same AO who also assessed the assessee-company for those years. Besides, it is seen that even after search o....
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....irms. 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 in ITA Nos. 224 to 228/Hyd/1992, dt. 9th May, 1995 (in the case of Bhanu Enterprises); 211 to 217/Hyd/1992, dt.. 9th May, 1995 (in the case of Bhaskara Auto Service) and 218 to 222/Hyd/1992, dt. 9th May, 1995 (in the case of Sri Prabhakar Enterprises) which were subsequent to the passing of their ....
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....irms 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 firms had a large number of partners, who in their turn had entered into sub-partnerships with several persons and the allowable/disallowable sum out of the alleged commission payments should be determined with reference to the factors such as (i) Bona fide expenses of the dealership firms; (ii) Saving....
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....sed 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 the authorised dealer, at the end of the year, on the total turnover of business obtained by him over and above Rs. 50,00,000 during the financial year ending with 31st March. 8. The authorised dealer shall bear the expenses incurred towards the consignments dishonoured. 9. The authorised dealer shall not be entitled....
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.... 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 situated at Kakinada. The CIT(A) accepted the plea of the assessee that the commission payment to the authorised dealers is for the specific services rendered by them according to the agreement entered into. The assessee is in appeal contesting the observation of the learned CIT(A) that payment of commission is excessive and where....
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....he 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 themselves. This amount represents commission payable by them (outstanding amount) and the advances received from the authorised dealers firms at the time of entering into agreement. The partners of the authorised dealer firms were also contacted on the date of search. Though they initially stated the truth that the receipt of commission....
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....ctors 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 found that the statement was incorrectly recorded and held that they do not contain truth. 16. The AO while completing the regular assessments based the assessment only on such statements and disallowed the entire commission paid to the authorized dealers. The matter was initially decided by the CIT(A), Visakhapatnam, wherein for the ass....
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.... 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 were not available at the relevant point of time (out of 9, 6 persons died and 3 persons discontinued the business). From the statements recorded and the affidavits filed, it is clear that authorized dealer firms have really carried on the business activity. The AO without examining the dealers for eliciting the facts, started examining them to know who....
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.... 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 marketing the products of the assessee is spread throughout the length and breadth of India and its neighbouring countries and as it is found not economically viable to have its own staff to market its products, in its own wisdom, the assessee took the services of the authorised dealer firms. The directors of the company are not in any way interested in the authorised....
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.... 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 well as the various residential places of the managing director and his family members and other sister-concerns of the assessee. The managing director was, therefore, called upon throughout the search operations by various search officials at various places to give information, etc. on various matters. (d) In the above-mentioned circumstances, and in the abovestated mental condition of the ma....
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....td. 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 present at the time of raid. We were never subjected to any raid by any Government agencies in the past and for the first time this raid was conducted at our office and residential premises. We were informed that we cannot attend to telephones during the time of raid and none of the directors or their family members were permitted to leave their premises, until the raid was completed. The entire atmosphere was made very tense and w....
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....epted 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. I wish to add that I waited so far with a view to submit my representation after looking into the copies of statements also, but since the furnishing of the copies is being delayed it is felt not desirable to wait any further time and I am filing this letter. Please acknowledge receipt. Yours faithfully, Sd/- (K.V.R. Chowdhary) C.C. to: 1. IAC (Central), Hyderabad. 2. ITO, Central Circle, Kakinada. No: GI. 26/87-88/CIT(C) D....
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....ers 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 forthwith. If this is not done, it may perhaps be treated as not fulfilling the conditions entitling you to concessions provided under the Act. You may, therefore, make the tax payment promptly without any delay. Yours faithfully Sd/- (V.H. Gangal) CIT Karnataka (Central), Bangalore" (h) In such a situation and as the managing director found that there is no truth in the statement recorded, had no other option but to write a letter of retraction dt. 23rd March, 1991 fr....
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.... 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 firms did some activity with reference to the sales representatives. J. What was found in the search operations: In the two days of thorough search of the premises of the assessee and the residential premises of directors, premises of the authorised dealer firms and their partners, nothing incriminating to the assessee was found, not a paisa of unaccounted cash/jewellery/any other asset was found, no documents or undisclosed accounts were found. No evidence whatsoever was brought on record showing receipt of kick....
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....o 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. Attention is invited to the P&L a/c appearing at the paper book to stress that the authorised dealer has duly shown the income and has paid the heavy taxes imposed on them. There is also no relationship between the companies or its directors with the partners of the authorized dealer firms. Neither the AO nor the CIT(A) has brought on record any information to the effect that the payments made by the assessee are in any way excessive compared to the similar amounts paid in the market. Therefore, the CIT(A) is not justified in holding that....
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....tions 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 the asst. yrs. 1984-85 and 1985-86; (b) After retraction letter field by the managing director on 1st March, 1988 before the CIT (Central), mentioning that he was under coercion, threat and duress at the time of recording the statement and the managing director retracted the statement vide his letter dt. 23rd March, 1988; the authorities did not examine him after retraction. The board's resolution dt. 4th March, 1988 did not ratify the statement obtained on 10th Feb., 1988/11th Feb., 1988 by the authorities from the managing director. The act done by....
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....rovided 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 or otherwise of such decision cannot be interfered by the IT authorities, by substituting their view: (i) CIT vs. Dhanrajgiriji Raja Narasingirji 1973 CTR (SC) 445 : (1973) 91 ITR 544 (SC) (ii) J.K. Woollen Manufacturers vs. CIT (1969) 72 ITR 612 (SC) (iii) CIT vs. Walchand & Co. (P) Ltd. (1967) 65 ITR 381 (SC) (iv) Jamshedpur Motor Accessories Stores vs. CIT (1974) 95 ITR 664 (Pat) (v) Voltamp Transformers (P) Ltd. vs. CIT (1981) 23 CTR (Guj) 312 : (1981) 129 ITR 105 (Guj) (vi) Addl. CIT vs. Moolchand Jaikishandas & Co. (1977) 108 ITR 500 (Guj) (vii) Shahzada....
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....e 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 appeal before us, when the issue about the deductibility of the commission paid to the authorised dealers firm had come before the Tribunal, the Revenue produced certain evidences in the form of statements recorded under s. 131 in respect of 28 dealers in March, 1991 at the back of the assessee during the course of the proceedings for the asst. yr. 1988-89. The Tribunal since noted that the assessee had not been provided the copies of these evidences for his rebuttal by the Revenue and these are the additional evidences brought on record for the first time, set-aside all these assessments under ....
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....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. The AO rejected the statements of the dealers mainly on the basis that most of the witnesses who had filed affidavits were obliged to the assessee as they served with the assessee for a long period and some of them are still serving the assessee and, therefore, the assessee might have exercised pressure on these people to give the statement in favour of the assessee during the course of the set-aside proceedings. In our opinion this consideration is totally irrelevant while examining the genuinety of the affidavit. The statements recorded in March, 1991 were at the back of the assessee. This is a....
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.... 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 order dt. 13th Oct., 1994 wherein the assessments for the assessment years under consideration were set-aside, it is not necessary to examine the issue as to how the commission payments had reached back the assessee-company and I have already made necessary investigations as per the directions of the Tribunal in the order, dt. 13th Oct., 1994, which were elaborately discussed in the set-aside assessment orders for these years, dt. 31st March, 1997. However, necessary investigation was also carried out by examining the managing partner Sri Ch. V.V. Satyanarayana of M/s Prabhakar Enterprises as per the directions....
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.... 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 examined subsequently had accepted the genuinety of the transaction. We are also of the view that generally when the orders are booked through the "authorised dealer, the representatives although may be sent by the authorised dealers firms but they do not disclose their identity as coming on behalf of the authorised dealer firms but they generally represent before the customers as if they are representing the company who are the supplier or the manufacturer of the product. It not only generates confidence of the product in the purchaser but even the manufacturer also do not prefer that the third party may control thei....
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.... 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 the authorised dealers were attending the booking of the orders. 39. The observations that whatever canvassing and other services claimed to have been referred by the authorised dealer firms was in fact done by the assessee's field representatives in our opinion is based without bringing any material on record. The copy of the order forms proves the booking of the orders by the representatives of authorised dealer firm. There is also no material brought on record that these representatives who booked the orders represent the assessee, not the authorised dealer firms. The authorised dealers were not supplying the goods ....
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....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 justified. Most of the observations made by the AO are not relevant for determining the genuinety of the transaction. 43. Now coming to the statement of the managing director of the assessee-company, Sri K.V.R. Chowdary, which was recorded on 10th Feb., 1988 and continued upto 11th Feb., 1988, we find that there are different dates written on the statement upto p. 12, the signature of the managing director were taken on 10th Feb., 1988, while from pp. 13 to 15, signatures were taken on 11th Feb., 1988. This is a fact that the recording of the statement was started at 8.45. a.m. on 10th Feb., 1988. Q. No. 48, which relates to the comm....
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....ial 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 incorrect. Hon'ble apex Court in the case of Nagubai Armal vs. B. Sharma Rao AIR 1965 SC 100 held: An admission is not conclusive as to the truth of the matters stated therein. It is only a piece of evidence, the weight to be attached to which must depend on the circumstances under which it is made. It can be shown to be erroneous or untrue. Hon'ble apex Court in the case of Sarwan Singh Rattan Singh vs. State of Punjab (1957) SC 637 held : In law it is always open to the Court to convict an accused on its confession itself though he has retracted it at a later stage. Nevertheless usually Courts require some corroboration to the c....
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....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 been search in the case of the assessee but the Revenue could not bring any evidence or material on record except the statement of the dealers, which were recorded in March, 1991 and these statements clearly stated that the orders were placed by them through the sales representatives. These statements were although recorded at the back of the assessee. When these persons were cross-examined they clearly accepted about the booking of the orders on the order forms belonging to the authorised dealers through the representatives. Affidavits were also filed before the AO which were rejected by him without cross-examining the deponents contrary to the decision of Hon'ble S....
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....in 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 Department to prove that the vouchers, books of account and entries therein regarding the commission paid and the copies of the orders forms proving that the orders were booked through authorised dealers were not correct. The AO in this case has not brought any cogent material or evidence on record except the retracted statement of the managing director of the assessee and the 28 statements of the dealers, which were also proved otherwise when the opportunity was given to the assessee. Therefore, in the absence of the contrary evidence being brought on record that the books of account and the vouchers were not correct, the presumption available under s. 132(4A) will be ....
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.... 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 not require any expenditure to be incurred, as a human being requires for meeting out its personal needs. Therefore, the expenditure incurred by the assessee-company cannot be regarded to be the personal expenditure of the assessee. The personal expenditure of the management of the human beings who are controlling the company cannot be regarded to be the personal expenses of the assessee-company. It may be remuneration or perquisite in the hands of the management of the human beings but it cannot be regarded to be the personal expenses of an incorporated body. 49. The only dispute in this case relates to the fact whether the commission paid can be regarded to have been incurred wholly and ....
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....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 expediency but the AO in our opinion has the right to know whether the expenditure has been incurred for business purposes or not or whether it has been incurred for other extraneous consideration. Similar view has been taken by the Hon'ble Rajasthan High Court in the case of Jaipur Electro (P) Ltd. vs. CIT (1997) 134 CTR (Raj) 237. The Hon'ble Bombay High Court has also taken the similar view in the case of Ramanand Sagar vs. Dy. CIT (2002) 175 CTR (Bom) 220 : (2002) 256 ITR 134 (Bom) in which it was held that the mere fact that the payment has been made under a contract is not conclusive of expenditure being laid down wholly and exclusively for the purpose of the business. Once doubt arises about the b....
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....rd "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 payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may incur to the benefit of a third party [Usher's Wiltshire Brewery Ltd. vs. Bruce (1914) 6 Tax Cases 399 (HL)]. Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby. But in every case it is a question of fact whether the expenditure was ex....
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....pirical 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 whether the expenditure was wholly and exclusively laid out for the purpose of the business, the reasonableness of the expenditure has to be judged from the point of view of the businessman and not the Revenue [see CIT vs. Walchand & Co. (P) Ltd. (1967) 65 ITR 381 (SC) : TC 16R.447, J.K. Woollen Manufacturers vs. CIT (1969) 72 ITR 612 (SC) : TC 16R.557, Aluminium Corporation of India Ltd. vs. CIT 1972 CTR (SC) 336 : (1972) 86 ITR 11 (SC) : TC 16R.52 and CIT vs. Panipat Woollen & General Mills Co. Ltd. 1976 CTR (SC) 317 : (1976) 103 ITR 66 (SC) : TC 16R.625. But it must not suffer from the vice of collusiveness or colourable devices. It is be noted that in the present case, the question that has been raised by the Rev....
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.... 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 ground that the agents did not render any service. There was, however, no specific finding by the Tribunal that the payment was excessive or that any part of the commission was paid on extra commercial considerations. On a reference at the instance of the assessee: Held on the facts, that the commission paid was referable to the agent undertaking the responsibility for payment and standing guarantee for the other customers of the assessee. The Tribunal was not right in holding that entire payment was not an allowable deduction." Tribunal in the case of ITO vs. Shakti Cables (ITA Nos. 2844 and 3695 of 1986 by Tribunal Delhi) (1990) 50 Taxman 329 (Del)(Mag) allowed commission paid by the assessee-firm, dealing with the State Gov....
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....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 was wholly or exclusively expended for the purpose of his business. It is also true that by the mere fact that the assessee establishes the existence of an agreement and the fact of actual payment, the discretion of the ITO to consider whether the expenditure was made exclusively for the purpose of the business is not taken away. But in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue. Where the selling agents had not only canvassed the sales but had also undertaken the responsibility for due fulfilment of contracts by customers and fo....
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....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 services to assessee-In an affidavit filed on behalf of B, it was admitted that they had received certain commission in question from M by account payee cheques, deposited in its account-Assessee had already been allowed deduction in respect of the commission paid to M in earlier years. Held that it could not be said that M had not rendered any services to assessee merely on grounds that there was no correspondence between assessee and M and that B had withdrawn entire amount in cash immediately on deposit in its account and as such it was an allowable deduction-Held, yes. Hon'ble Mumbai High Court in the case of CIT vs. National Rayon Commercial Co. Ltd. held as under: As far as the question of brokerage is concerned, again the Tribunal in its order in respect of the as....
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....o 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 well-settled that these factors are to be considered from the point of view of a normal, prudent businessman. The reasonableness of the payment with reference to these factors has to be judged not on any subjective standard of the assessing authority but from the point of view of commercial expediency. What is the requirement of commercial expediency must be judged, not in the light of the 19th century laissez faile doctrine which regarded man as an economic being concerned only to protect and advance his self-interest, but in the context of current socio-economic thinking which places the general interest of the community above the personal interest of the individual and believes that a business or undertaking is the product of the combined efforts of the employer and the employees w....
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....pediency, 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 s. 37 of the IT Act, 1961, the High Court, on a reference made to it, is not precluded from arriving at its own finding as to whether the deduction allowed by the Tribunal was allowable under any other section of the Act : CIT vs. Breach Candy Swimming Bath Trust (1955) 27 ITR 279 (Bom) relied on. The Tribunal was right in holding that the amount of commission paid to the employees was allowable as a deduction, but it would be allowable under s. 36(1)(ii) and not under s. 37 of the Act." In the case of CIT vs. Vijayalakshmi Mills Ltd., the Hon'ble Madras High Court has held as under: "The ITO's jurisdiction to disallow an expenditure will arise only when the payment is not real or is not laid out wholly or exclusively for the purpose of the business. But, once it is found that an expenditure....