1985 (4) TMI 326 - AT - Income Tax

Summary

Issues Involved:
1. Validity of reopening the assessment for the assessment year 1974-75.
2. Disallowance of commission paid to Samrat Sales.

Issue-Wise Detailed Analysis:

1. Validity of Reopening the Assessment for the Assessment Year 1974-75:

The assessee challenged the reopening of the assessment for the assessment year 1974-75, which was originally completed on 4-6-1976 with a total income of Rs. 1,92,246. The assessment was reopened by a notice dated 22-3-1979, on the ground that the commission of Rs. 5,611 paid to Samrat Sales had been wrongly allowed. The reopening was based on the belief that Samrat Sales was essentially part of the assessee-firm, with all partners having substantial interest in it. The learned Commissioner (Appeals) upheld the reopening.

The assessee argued that all material facts were disclosed to the ITO and that the reasons for reopening were not communicated. However, it was noted that the assessee did not request these reasons from the ITO, nor did they challenge the jurisdiction to reopen before the ITO. The Tribunal concluded that the conditions precedent for initiating reassessment proceedings were present, and the reopening could not be successfully challenged.

2. Disallowance of Commission Paid to Samrat Sales:

The main controversy revolved around the payment of commission to Samrat Sales. The amounts of commission paid by the assessee to Samrat Sales for the assessment years 1973-74, 1974-75, 1975-76, and 1976-77 were Rs. 1,912.75, Rs. 56,911.57, Rs. 63,826.77, and Rs. 65,609.90 respectively. The ITO disallowed these amounts, influenced by the IAC's directions under section 144A. The factors considered included the shared business premises and telephone, lack of rent payment by Samrat Sales, absence of employees, and the familial relationship between partners of both firms.

The IAC viewed this arrangement as a tax evasion device. The learned Commissioner (Appeals) confirmed the disallowance, stating that Samrat Sales was a benami for the assessee and that no services were rendered.

The assessee argued that Samrat Sales was a genuine entity, constituted in the assessment year 1971-72 and granted registration by the ITO. They contended that Samrat Sales was responsible for market study, sales programs, and contact with parties. The assessee provided explanations for shared premises and telephone, and highlighted that commission at higher rates was paid to other agents. They cited various judicial decisions to support their claims.

The Tribunal noted that for the assessment year 1975-76, the commission was allowed without any reopening action. The relationship between the firms alone was insufficient to disallow the commission. The Tribunal emphasized that suspicion could not replace proof. The income-tax authorities failed to provide tangible evidence against the assessee's claims. Certificates from various parties confirmed that Samrat Sales rendered services. The expenses incurred by Samrat Sales were debited in their profit and loss account, and the commission was offered for taxation.

The Tribunal found that the payment of commission was bona fide, legitimate, and reasonable. The disallowance was deemed unwarranted and unjustified.

Conclusion:

The appeals for the assessment years 1973-74 and 1976-77 were partly allowed, while the appeal for the assessment year 1974-75 was fully allowed.