TMI Blog1992 (1) TMI 154X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee was required by the ITO to produce supporting evidence in the form of any agreement for payment of huge amount of commission to Dr. B.N. Wahi. The assessee filed a letter before the ITO stating that Dr. B.N. Wahi was the general attorney of the assessee and was looking after the entire business since 1952 and that he did not draw any salary. Commission was paid to Dr. B.N. Wahi on gross sales at 8%. It was further stated that the facts had been explained to the ITO during the assessment year 1984-85. The ITO observed that no documentary evidence in the form of any agreement has been filed either during the assessment year 1984-85 or during the assessment year 1986-87. The ITO mentioned that the assessee was having sufficient staff under her employment and that huge commission paid to Dr. B.N. Wahi was not commensurate with the work done by him. In this connection, he has noted that sales and purchases were effected almost to the selected parties and Dr. B.N. Wahi had no role to play in the form of a salesman or a representative. The assessee did not produce any evidence to show if any orders were procured by Dr. B.N. Wahi. It was, however, stated before the ITO that for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt. It was submitted that for the assessment year 1986-87 Dr. B.N. Wahi was paid commission at 8% of the sales and the balance 2% has been diverted to his son Diwakar Wahi. 5. It was further submitted before the CIT(A) that commission payment to Dr. B.N. Wahi has been allowed in the earlier year and that no disallowance out of commission paid to Dr. B.N. Wahi was called for. A copy of the general power of attorney executed by the assessee in favour of Dr. B.N. Wahi was also filed before the CIT(A) in support of the contention that Dr. B.N. Wahi was looking after the business of the assessee. It was further submitted that being a qualified doctor he was eligible for the grant of drug licence which was necessary for the assessee's business. It was further submitted that commission paid to Diwakar Wahi could not be disallowed since his father relinquished his own share in favour of his son. 6. The CIT(A) concluded that payment of commission to Dr. B.N. Wahi and his son Diwakar Wahi was excessive and disproportionate to the services rendered by them. He noted that Dr. B.N. Wahi diverted a part of his commission of 2% to his son and this fact demonstrated the correctness of the IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of business. In this connection, our attention was also invited to the general power of attorney executed by the assessee in favour of Dr. B.N. Wahi a copy whereof is at pages 16 to 19 of the paper book. In clause 30 of this power of attorney, it is stipulated that in case of death of Dr. B.N. Wahi or his inability or unwillingness due to absence, illness or otherwise to act as an attorney, Dr. R.N. Wahi was appointed as an attorney in his place. It was thus contended that Dr. B.N. Wahi and his brother Dr. R.N. Wahi should be treated as one entity. Shri Sampath further submitted that while Dr. B.N. Wahi worked as chief consultant, his brother Dr. R.N. Wahi worked as a consultant. 8. It was next submitted that in the certificate of Drug Controller, a copy of which is at page 20 of the assessee's paper book, the name of Shri Sunil Mohan, one of the employees was added by way of caution and that both Dr. R.N. Wahi and Dr. B.N. Wahi were qualified doctors in whose favour a drug licence could be issued. Shri Sampath further submitted that due to a delicate relationship between the assessee and Dr. B.N. Wahi, no written agreement was executed. It was then contended that the turn-over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gement made for reducing the tax liability of the assessee. It was then contended that in the assessment year under consideration, the ITO made a thorough enquiry into the matter and that commission payment made this year cannot be allowed simply because similar payment had been allowed in the past. May be in the earlier assessment years Dr. B.N. Wahi was rendering consultancy services and so payment of commission to him was found to be in order. At any rate, it was submitted that there can be no agreement in perpetuity and that each year was a separate unit of assessment and the ITO was not bound to allow commission payment simply on the ground that similar payment had been allowed in the past. Learned Sr. Departmental Representative relied on the decisions of the Supreme Court in Lakshmiratan Cotton Mills Co. Ltd. v. CIT [1969] 73 ITR 634 and Lachminarayan Madan Lal v. CIT [1972] 86 ITR 439, decision of the Calcutta High Court in Vishnu Agencies (P.) Ltd. v. CIT [1979] 117 ITR 754 and of the Madhya Pradesh High Court in Ramdas Ramlal v. CIT [1983] 139 ITR 620. Reliance has also been placed on the decision of the Madhya Pradesh High Court in CIT v. Ramdas Ramlal [1984] 149 ITR 256 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e written submissions filed before the CIT(A) a copy whereof is at pages 21 to 23 of the paper book, it was, inter alia, contended on behalf of assessee that because of advanced age, Dr. Wahi was not able to do as efficiently as he had been doing before and, therefore, he relinquished his own share of commission in favour of his son Diwakar Wahi. What is significant is the fact that there is nothing on the record to suggest that during the assessment year under consideration Dr. Wahi rendered consultancy services or did consultancy work at the business premises of the assessee. On the other hand, there is evidence on the record which goes to prove that no consultancy work was done by Dr. B.N. Wahi during the assessment year under consideration. At page 33 of the paper book is the computation of income in the case of Dr. B.N. Wahi for the assessment year 1986-87. It shows that for this assessment year Dr. Wahi had commission income from sale of homoeopathic medicines besides interest income and income from house property. He did not have any income from any other source. So, this document totally militates against the contention advanced before us on behalf of the assessee that whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as given in section 2(41), provisions of section 40A(2) would not be applicable to the facts of the case. However, the question whether commission paid to Dr. B.N. Wahi and his son should be allowed as a deduction in computation of the business of the assessee has to be examined with reference to section 37. Onus is on the assessee to prove that the expenditure was laid out wholly and exclusively for the purpose of business. The fact that there was an oral agreement regarding payment of commission to Dr. Wahi and that payment was, in fact, made to him cannot legitimately lead to a conclusion that any specific services were rendered by him for which he was paid commission. The onus still lies on the assessee to show as to what specific services were rendered by Dr. B.N. Wahi during the assessment year under consideration for which he was paid commission @ 8% of gross sales. It has already been found about that during the assessment year under consideration Dr. B.N. Wahi did not render any consultancy services. No doubt, in the past commission paid to Dr. Wahi had been allowed. Earlier he was being paid commission at 10% of gross sales. We do not, however, know as to what were the r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r that services rendered by him were of more onerous nature as compared to the services rendered by Umesh Sehgal. From the facts and materials available on the record an inescapable conclusion is that Diwakar Wahi was paid substantial commission not on account of business expediency but for extraneous considerations which have nothing to do with the business activity of the assessee. So, the disallowance of one-half of commission paid to him is fully justified as it could not be shown by the assessee that the entire commission paid to Diwakar Wahi was for the purpose of business. 18. Some of the authorities cited on behalf of the assessee may be briefly considered. In J.K. Woollen Manufacturers it has been held that in applying the test of commercial expendiency for determining whether an expenditure was wholly and exclusively laid out for the purpose of business, reasonableness of the expenditure has to be judged from the point of view of the businessman and not of the Income-tax Department. In the case of Aluminium Corpn. of India Ltd. the question which arose for consideration was whether commission paid to the agent was allowable. The Tribunal held that the commission paid to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i has taken 8% and his son 2%. Since this internal arrangement between the father and son does not affect the assessee financially there could have been no objection from her for splitting the commission between father and son. Instead of paying the entire 10% to Dr. Wahi, at his request it had been split and 8% credited to Dr. B.N. Wahi's account and the balance 2% to his son's account. What is emphasised here is that the assessee is not incurring any new expenditure which she had not incurred in the prior years. At best-, for the Department, action can be taken in the assessment of Dr. B.N. Wahi to tax the entire 10% commission. It may be a case of application of income after the income was earned. 4. It was also suggested that Dr. B.N. Wahi is no longer doing any consultancy services. This submission is factually incorrect. Just as there is an agreement between the assessee and Dr. Wahi for payment of 10% of the sales as commission to Dr. Wahi there is also a parallel agreement under which Dr. Wahi is allowed consultancy work in the premises on condition that 50% of the consultancy fees is paid to the assessee. During the accounting year under consideration the assessee had re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ayments made to Dr. R.N. Wahi and the payments made to another employee by name Umesh Segal. There seems to be some confusion in the figure with regard to the payments for these two persons. From the chart given by the assessee I find the salaries paid to Diwakar Wahi is only Rs. 913 as against Rs. 3,550 for Umesh Segal. No bonus was paid to Diwakar whereas a bonus of Rs. 450 was paid to Umesh Segal. Leave benefit of Rs. 255 was paid to Segal and none to Diwakar. Commission of Rs. 1,183 was paid to Umesh Segal and none to Diwakar. The commission of Rs. 22,634 credited to-his account is really the commission payable to Dr. B.N. Wahi 2% of which has been split and credited to Diwakar at Dr. R.N. Wahi's instance. Thus there is no material to show that Diwakar was given any excessive remuneration. 9. 1 may now sum up: There is considerable material to show that the agreement between the assessee and Dr. B.N. Wahi is more than 25 years old and although not reduced to writing Dr. Wahi was entitled to 10 per cent of the sales. He had been associated with the business right from 1952. There is no one else had appointed as manager of the business. Dr. Wahi has been allowed to do consultan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atients as and when necessary. It was argued that the payment of commission was nothing new, nothing abnormal and should be allowed as it was an expenditure incurred wholly and exclusively for the sole purpose of the business. Somehow this explanation did not satisfy the Assessing Officer. He insisted upon existence of a documentary evidence in the shape of an agreement to allow the commission. The fact that there was no agreement entered into according to the Assessing Officer was fatal to the allowance of the claim. When there was sufficient staff to carry on the business, there was no need for such a huge commission to be paid to one doctor nor was it commensurate with the work done by the doctor as the doctor was not acting either as a salesman or as a representative. There was also no record to show the orders procured by Dr. B.N. Wahi to justify the payment of commission. The contention that the commission was being paid to him for the last so many years and was being allowed as a deduction and the rate of commission remained more or less constant and the amount varied because of the fluctuation in turnover did not appeal to the Assessing Officer as a relevant consideration f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt commission father received 8 per cent and the son 2 per cent. There was, therefore, no justification to consider this payment of commission as either uncalled for or not required for the purpose of the business. 4. But the learned Judicial Member was of a different opinion. Though he held that the mere absence of a written agreement would not justify the disallowance of a part of the commission paid to Dr. B.N. Wahi, the fact that 10 percent of the gross sales was being paid to Dr. B.N. Wahi as commission in the past shows that there was an oral agreement between the assessee and Dr. B.N. Wahi, still there was nothing on record to suggest that during the assessment year under consideration Dr. B.N. Wahi rendered consultancy services or did consultancy work at the business premises of the assessee. On the other hand, there was evidence to show that no consultancy work was done by Dr. B.N. Wahi during the year under consideration. Reliance for this conclusion was Placed upon the statement showing the computation of income in the case of Dr. B.N. Wahi for the assessment year 1986-87 where no income from consultancy was shown. There was a brother of Dr. B.N. Wahi called Dr. R.N. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... words and referred it to me as third Member under section 255(4) of the Income-tax Act, 1961 : "Whether, on the facts and circumstances of the case, the assessee is entitled to the deduction of the full amount of the commission paid to Dr. B.N. Wahi and Diwakar Wahi?" 6. I have heard at great length both Shri K. Sampath for the assessee and Shri Sandeep Tandon for the department. The assessee in this case is Smt. Godawari Devi, a widow aged about 80 years. Her husband Dr. R.N. Sehgal was carrying on the business of consultancy in Homeopathy died in 1947. Thereafter certain disputes arose in the family as a consequence of which the business was closed and again reopened in 1952 at the behest of intervention and promised assistance by Dr. B.N. Wahi in 1952. Though there was a general power of attorney executed in favour of Dr. B.N. Wahi to be in-charge of the business affairs and conduct it to the greatest advantage of the assessee, he was not to be paid any remuneration other, than commission. The agreement that the margin of gross profit on sales should be 30 percent out of which 10 percent shall be allowed towards expenses leaving a balance of 20 per cent, which is to be share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as 20,000 bills signed by Dr. B.N. Wahi, which demonstrate that services were rendered by Dr. B.N. Wahi and he did not sit idle in order that it may be said that the commission was paid to him just for doing nothing as if it is a pensionary benefit. These facts are all before the authorities below in one form or the other, at one stage or the other and they were not given, in my opinion, due weight. The Departmental Representative in the course of hearing also was not able to contradict. The fact that Dr. B.N. Wahi was rendering services from 1952 onwards without any interruption and the commission was being paid to him in the same manner as in the earlier years and having regard to the fact that that commission was allowed as a deduction in the past and having regard to the fact that there was ample evidence to show in the shape of bills that services were rendered by Dr. B.N. Wahi, that the maturity of Dr. B.N. Wahi was available to the advantage and promotion of the business, it could not be said that the payment of commission to Dr. B.N. Wahi was not for the purpose of the business and it could be disallowed on the ground that there was no proof of rendering of any service in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng consultancy services, that he was also helped by Dr. B.N. Wahi in that regard and the remuneration paid to Dr. B.N. Wahi was not for consultation as such but for the over-all supervision of the business and he was remunerated at 10 per cent of the gross sales and if that arrangement was not a colourable transaction or sham or fictitious, the quantum of commission that became payable as a consequence of increase in the turnover, could not be compared with the consultancy services/charges of Dr. R.N. Wahi, which is always bound to be much lower than the sales commission. This disparity could not have been made a reason for the disallowance of the commission. Even the department had accepted that out of consultancy services Dr. B.N. Wahi does not get anything but the assessee gets about 50 per cent and that was the arrangement in existence for the last 10 years. 8. There has been some discussion about the application of res judicata to income-tax proceedings presuming it to be a rule of inflexible application. The rule of res judicata or estoppel is a rule of evidence and it is well known that in tax matters ordinarily these principles do not apply particularly against a statute. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n to deviate from the earlier finding was the absence of evidence that Dr. B.N. Wahi did render any service. This was found to be factually incorrect. Thus the material on record continue to be the same as in the earlier years. Therefore the earlier finding would become good and cogent evidence for this year for the determination of the same question, Thus the doctrine of res judicata as applied to income-tax proceedings has to be understood, in my opinion, in the manner indicated above. 9. For these reasons having regard to the past accepted practice, which was found to be genuine and for the further reason that there was ample evidence to show that Dr. B.N. Wahi was over all in charge of the business and taking active part in the business and having regard to the fact that he was also having a general power of attorney on behalf of the assessee and having regard to the further fact that the absence of agreement to pay commission was not considered by both the members as a point against the assessee, I am of the opinion that on the facts and circumstances of the case and having regard to the totality of the circumstances I agree with the view expressed by the learned Vice-Presid ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
