TaxTMI 
TaxTMI 
2003 (12) TMI 36
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....ssessee was only a device to avoid tax on income earned by the assessee?" The two assessees are agents of a company Dynavision (hereinafter referred to as "the company"), which manufactured television sets. According to the assessees, 70 per cent. of the production of that company was marketed through them. The company was promoted by persons whose relatives are partners in the two assessee firms. However, the majority of the shares in that company are not held by those promoters. Substantial part is held by the public sector companies and a large part by private shareholders, and about 26 per cent. by the promoters. The managing director of the company belongs to the promoters group. Several officers of the State Government are on the board of this company. For the assessment year 1992-93, when the returns filed by these asses sees were taken up for scrutiny, the Assessing Officer noticed certain amounts having been shown as credited to the account of the company. Pursuant to enquiries made by the Assessing Officer, the assessees produced a letter dated March 20, 1992, received by them from the said company and addressed to one of the assessees with a copy thereof marked to the ....
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....by the company on April 30, 1992, for these sums. The sums in the case of the assessee, Associated Electrical Agencies, are Rs. 72,28,025 towards marketing expenses and Rs. 45,11,700 towards the difference in price for the TV sets. In the case of Apex Agencies (Hyderabad), the sums are Rs. 72,28,025 towards marketing expenses and Rs. 22,74,075 towards the difference in price for the TV sets. The Assessing Officer, while accepting that the assessees maintained their books on mercantile system was, nevertheless, of the view that this was a post-accounting exercise undertaken solely for the purpose of reducing the taxable profit of the assessees and that the letter, dated March 20, 1992, issued by the company was not capable of being regarded as an agreement under which an enforceable liability was cast on the assessees. He, therefore, disallowed the sums, as a consequence of which, the taxable profit of the assessees went up substantially. On appeal, the Commissioner upheld the view of the Assessing Officer. On further appeal to the Tribunal, the Tribunal after noticing the fact that of the six directors of the company, three did not belong to the promoter group; that the chairman ....
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....ured by it and marketed by the assessees they were in effect advancing the cause of their own business. It also accepted the assessees' claim that the expenditure incurred was commercially expedient for the assessees. It also accepted the assessees' case that the expenditure in fact had been incurred as necessary entries had been made in the books of account. The Tribunal also took note of the fact that these amounts had been shown in the books of account of the company and that there had been no disallowance of expenditure by the Assessing Officer. The Tribunal concluded with the finding that the expenses as claimed by the asses sees were allowable as they were incurred indirectly to facilitate the carrying on of the business or to preserve their existing source of income with a view to safeguarding the business and also increasing their profits in future. It was submitted before us by learned counsel for the Revenue that what has been done by the assessees is merely a paper exercise with a view to reduce their own tax burden and they have merely taken advantage of the fact that the company was engaged in the production of a product, which it was not possible to market with the ....
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.... part of the monies agreed to be paid by the assessees to the company and for which sums credit had been given in the books of the assessees have subsequently come back to the assessees in any other manner. While it is no doubt true that there was no legal compulsion on the assessee to agree to pay the sums which are mentioned in the letter of the managing director of the company, there was also no legal bar to their agreeing to pay a higher price for supplies already received if they felt that it was in their long term interest to pay such a higher price. It was also open to them to agree to bear a part of the advertising and marketing costs as those costs were incurred with a view to enlarge the market and to improve the sales. Sales effected of the company's product resulted in benefits to the asses sees as they were the sel1ing agents for the company. This is not a case where the company to which credit was given by the assessees was completely owned or controlled by the partners of the assessee-firms although there is clearly a linkage between the two, inasmuch as two of the directors are partners in these firms and the other partners are their relatives. There is no material....