TMI Blog1991 (1) TMI 211X X X X Extracts X X X X X X X X Extracts X X X X ..... ted as under section 143(1) on the body of the assessment order. The assessment for the assessment year 1985-86 under section 143(3) of the Income-tax Act was based on the materials gathered in the course of an extensive search conducted in the promises of the assessee, its directors and authorised dealers, on 10-2-1988 and 11-2-1988. While the learned Income-tax Officer did not have the advantage of such materials gathered subsequently for being used in the assessment for 1984-85, the assessment for 1985-86 proceeded on the basis of the materials collected in the course of the search conducted under section 132 of the Income-tax Act. For reasons discussed in the assessment orders, he disallowed the commission payments as follows:- Asst. Year Amount 1984-85 Rs. 86,76,463 1985-86 Rs. 56,16,426 4. The assessee carried the matter in appeal before the Commissioner of the Income-tax (Appeals). The first appellate authority disposed of the appeal for the assessment year 1984-85 after considering rival submissions and materials on record, by sustaining a disallowance of Rs. 10,00,000. The appeal for the assessment year 1985-86 was disposed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reby the company agrees to appoint M/s. Sri Bhanu Enterprises as one of the Authorised Dealers for the sale of the products manufactured by the company hereinafter referred to as 'SRMT' Auto Parts and the said Authorised Dealer agrees to act as such upon the following terms and conditions. 2. This agreement shall commence from 5th July, 1979 and shall be in force till subject to renewal thereafter by mutual consent of the parties hereto. 3. The Authorised Dealer shall during the said term book orders for 'SRMT' Auto Parts from dealers and Fleet Operators on the terms and conditions furnished hereunder: (a) The Authorised Dealer shall allow 25% discount on the list prices of the company to the Dealers 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 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 pol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall prevent the company from selling the products directly or appointing other Authorised Dealer or Dealers. 15. This Agreement may be terminated by either side by giving two months notice and the date that such notice is posted will be taken for the purpose of calculating the time of two months. 16. Notwithstanding anything contained in the clause No. 15 above, the company may terminate this Agreement at any time hereafter by giving the Authorised Dealer one month's notice should the work of Authorised Dealer be not satisfactory in the opinion of the company and the decision of the company of the work of the Authorised Dealer shall be final. 17. All matters of disputes arising out of this Agreement are subject to the jurisdiction of Kakinada Courts only. 18. In witness whereof the parties aforesaid have set their respective hands to this Agreement on this day mentioned in the first para." Similar agreements have been entered into with the other firms. The Income-tax Officer was of the view that these agreements are sole-selling agency agreements and are violative of the provisions of section 294 of the Companies Act. 7. We have carefully gone through the orders of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re of the view that no case was made out by the Income-tax Officer that the authorised dealer-firms constituted themselves as sole-selling agents of the assessee's products in violation of the provisions of section 294 and related sections of the Companies Act. The terms of the agreement are crystal clear. It did not result in the creation of any sole-selling agency right in favour of any one. In terms of clause 13 of the agreement quoted supra, the company has the right to sell its products in any area it likes. In fact, it has effected counter sales (see section 15 of Green Paper Book). A working arrangement for a smooth functioning of the sales effort cannot confer any enforceable right on the dealer-firms to claim exclusive rights or privileges. 'Me trade practice also is to market the goods through different authorised dealers in different areas due to operational needs and the exigencies of the business. The learned CIT(Appeals) has spelt out his reasonings which are based on material and we do not find any infirmity in his findings. For these reasons, we reject the contention of the learned Senior Departmental Representative that the payment of commission is violative of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... these clauses, a few facts emerge, viz., (i) booking of orders by the representatives of the dealer-firms, (ii) submission of copies of correspondence between the dealer-firms and the parties and (iii) the authorised dealer is saddled with responsibility for all the transactions carried out by him either directly or indirectly. The expression "indirectly" used in the agreement would mean that even in respect of sales made by the company directly, the authorised dealers are saddled with certain obligations. The assessee-company is not burdened with any loss that might arise on account of the lapses of the dealers in respect of their commitments with their parties. The dealer-firms have to make deposits as specified in clause 1 of the agreements. Even in the course of the search that was conducted subsequently on 10-2-1988 and 11-2-1988, no material was recovered that would militate against the terms of understanding. For one thing, there is no allegation that there was no correspondence between the authorised dealer and the parties. For another, there is no allegation that the orders were not canvassed by the representatives of the authorised dealers, though there is an allegation t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the company and the dealer-firms vis-a-vis the customers, no material has surfaced to dislodge the finding of the learned CIT (Appeals) that the authorised dealer-firms through their representatives and agents have rendered services to the company. On the other hand, there is evidence to show that the dealer-firms were granted registration or continuation of registration by the Income-tax Officer in the post-search period, in his orders dated 27-3-1989 in the case of two firms, and in the case of another firm registration was refused as assessment was made under section 144. There is no material to controvert the fact that the representatives and agents were employed by the authorised dealers and not by the assessee as their names are borne in the registers of the authorised dealers but not in those of the assessee and the payments of their commission or salaries are met by the authorised dealers but not by the assessee. In fact, the employment and supervision of agents and representatives from north to south and east to west of the country is an important activity of the dealer-firms and the assessee-company, having a very large establishment with variegated activities, could as w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by the department. 12. We have gone through the orders of the learned Income-tax Officer for both the assessment years under appeal on this aspect of the matter. We have also carefully gone through the orders of the learned CIT (Appeals). There is material to show that in the case of trading in automobile spare parts, there is a trade practice to allow discount or commission on the sales effected by the manufacturer or by the dealer. As a matter of fact, the assessee has produced a few invoices from other manufacturers wherein a discount of 35% to 40% is allowed on spare parts (pages 6.16 to 6.20 of green paper book of the assessee) : Swamy Motors (Inv. No. 1298), Hyco Manufacturers of India (Inv. No. 4966), Trading Corporation, Delhi (Inv. No. 9987), Goyal Tractor and Scooter Spares (Inv. No. 8642), Anand Spares, Delhi (Inv. No. 594), Jamuna Auto Industries (Inv. No. 714). The learned Senior Departmental Representative admitted that these invoices show a discount of 35% to 40% allowed to the customers but he pleads that they were all in the periods relating to 1986 and 1987 and not in relation to the impugned assessment years. Sri Ratnakar submitted that the assessee was only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect supplies made by the company are also reckoned for the purpose of arriving at the minimum amount of Rs. 36,00,000 but all the same additional discount is payable only on the total nett turnover of the business done by Mehta Trading Company. Thus, in no case additional discount was liable to be paid to the authorised dealers by the assessee-company. The Income-tax Officer has not brought on record instances of payment of additional discount to the dealer-firms on direct sales effected by the company to the parties, nor was any such instance brought to our notice. Hence, the allegation falls to the ground. We further note that the conditions for payment of additional discount are more stringent in the case of Kakinada firms than in the case of Mehta Trading Co., Bombay. The payment of 1% to 2% commission on direct sales effected by the company is not paid by the company but only the authorised dealer-firm to the brokers from out of their commission. 14. The company directly allowed 25% discount or commission to the customers, who are retail dealers or others, and deducted the same from the invoice value. This cannot be held to be a make-believe arrangement. The identity of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... id commission from 1% to 2% by the authorised dealers even on direct sales depending on the nature of sales. The details of commissions received by the dealer-firms and paid by the dealer-firms to the retail dealers or customers for a number of years are to be found in the assessee's (green) paper book at pages 2.1 to 4.22. From a comparison of the commission allowed by the assessee-company to the authorised dealer-firms and the commission allowed by the latter to their customers, it can be safely said that 50% to 60% of such commission received from the assessee-company by the authorised dealer-firms was disbursed to the retail dealers or customers. The relevant figures, for example for the assessment year 1985-86, are as follows:- Commission Commission Name of the allowed by allowed by the dealer-firm the assessee dealer-firm Sri Bhanu Enterprises Rs. 32,55,485 Rs.18,03,911 (55.4%) Sri Bhaskara Auto Service Rs. 26,23,833 Rs. 12,16,753 (46.4%) Sri Prabhakar Enterprises Rs. 17,96,683 Rs. 10,26,059 (57%) The learned Income-tax Officer did ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... maintenance of staff, rents, office expenditure, travelling, advertisement etc. They have to pay commission to brokers from 1 % to 2%. Of course, there would still be some surplus in their hands, and if at all any disallowance is warranted, it cannot be the total commission as in the case of assessment year 1984-85. 16. The crucial question is whether the revenue is entitled to tax net commission or any part of it in the hands of the assessee-company. In answering this question, we have to consider several aspects of the matter. 17.1 One aspect of the matter is whether there was need for an arrangement with the dealer-firms in the carrying on of the business of the company. Sri Ratnakar submitted that the assessee-company was not only dealing in automobile spare parts but had a variety of activities. Marketing of automobile spare parts involves meticulous canvassing, booking of orders, attending to complaints and realisation of debts. In such consumer products dealership arrangements are very common and are found to be more convenient and economical. The company did not want to take additional responsibility by marketing the products itself through its channels but instead pref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... marketed by even monopolistic cartels who sell their products through a system of outlets having several tiers, there is nothing wrong in the assessee employing authorised dealers for canvassing and booking the orders throughout the country. We also see the point in Sri Ratnakar's argument that the assessee in view of its desire to concentrate on the manufacture and its varied activities, left the business of procuring the market to the authorised dealers through the canvassing agents or authorised representatives. The assessee manufactures about 300 different items of automobile spare parts used in heavy vehicles. In addition to large companies like TVS Ltd., Rani India Ltd., there, are other small manufacturers in the field. Besides, the assessee is also running a parcel service the income from which is of the order of Rs. 4,74,56,069 and Rs. 5,48,53,943 for the two years under appeal. Further, it is also engaged in the sale of Tata Diesel Vehicle Chassis, air-conditioners, water coolers and heaters, Voltas' products, room coolers etc., apart from the sale of spares, tyres, tubes and batteries. We are told that it employs about 3,500 people on its rolls in manufacturing and other ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses and the answer thereto are as follows:- "Q. What are the duties discharged by you to earn the commission? A. We have got four freelance brokers. Their names are (1) P.S. Prakasa Rao ;(2) Y.V. Subba Rao; (3) M. Nageswara Rao; (4) Ch. Radhakrishna Murty. Excepting controlling the activities of the above brokers or representatives, the firm of M/s Sri Bhanu Enterprises does not carry on any other operations. We write our accounts on the basis of the credit notes given by the company S.R.M.T. I cannot immediately tell you how much is the commission paid to our representatives at the rate of 1% and 2%. In other words the commission is paid on the direct orders received by the company S.R.M.T." Similarly, one of the questions put to Sri Bhamidipati Nageswara Rao and the answer thereto in his sworn statement dated 4-7-1986 were as follows :--- "Q. What are the duties of your firm in order to earn the commission given by SRMT? A. We employ six agents. They are (1) S. Prakasarao; (2) N.S.R. Murthy ; (3) N. Rama Murty; (4) P. Prema Chandran; (5) Damera Enterprises; (6) PASBS Baburao. The first five are paid brokers. The last employee, i.e. Baburao gets salary. Brokerage is paid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oint of the revenue. The managing partners of Sri Bhanu Enterprises and Sri Bhaskara Auto Service have admitted the employment of the freelance brokers. They have also admitted that their duties extend to controlling the activities of the above brokers or representatives and that the commission is paid to their representatives at the rate of 1% and 2% even though the exact amount could not be named. They had also stated that the brokers received commission even on orders received by the company directly. The Managing Partner of Sri Bhaskara Auto Service is admitted to have 6 agents or brokers one of whom is a salaried person and brokerage is paid at 1% on direct orders received by the company and 2% on orders booked through them. Apart from the engagement of these brokers by the authorised dealer-firms, the important aspect of the matter is supervision and control of their activities. We have noticed earlier in our order that one of the reasons for appointing these authorised dealer-firms was for the company to rid itself of the botheration of looking after the marketing functions. This control aspect is admitted to have been exercised by these authorised dealer-firms and no materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Income-tax Officer's inference is erroneous and his suggestion that the assessee itself could have employed the brokers on its own etc. should be only viewed from the point of view of the businessman vis-a-vis his needs and not from the angle of a tax gatherer. 18.6 It was the view of the Income-tax Officer that the brokers worked under the company. There is no material to suggest that they were in the employment of the company though they canvassed orders for the products of the company. The CIT (Appeals) has recorded a finding that these brokers were in the employment of the authorised dealers and the commission paid to them was adjusted in the accounts of the authorised dealers. In this connection, we may usefully refer to certain additional material unearthed in the course of the search during the period from 10-2-1988 to 12-2-1988. We have already admitted the additional material for our consideration. Among the loose papers seized from the premises of Sri Prabhakar Enterprises (marked A6), there is a letter dated 21-8-1985 from HMM Ltd., Dowlaiswaram, addressed to the assessee-company with "Attention: Mr. Ch. V.V. Satyanarayana" requesting for immediate supply of 3 Vol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g in the letter to suggest that he had gone there in connection with the work of M/s Sri Bhaskara Auto Service. Whatever field work was done by the dealer-firms, the company cannot afford to sit idle without studying the market for its own products even occasionally. Therefore, when the Marketing Manager of the company visited Bangalore, it may be that the representative had met him and made certain representations and the Marketing Manager might have given some suggestions but no mileage, can be, drawn out of this. The learned senior Departmental Representative relied on the orders of the Income-tax Officer. 18.9 Having regard to the submissions made before us, we do not see how such a letter written by a representative can go to prove that the dealer-firm is only a device and its employees are really the employees of the company. For one thing, the Marketing Manager Sri Venkata Rao had not been examined on the representation by Sri Sundara Mahalingam, the Bangalore representative. For another, the representative himself has not been examined. Without examining them and also without going into the circumstances in which such a letter came to be written, we feel that one should n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tners each and the sub-partnership arrangements among the partners of the firms, He also referred to certain sworn statements listed below: Page No. in Sl No. Name of deponent departmental. paper book 1. Sri K.V.R. Chowdary, MD Chairman, SRMT Ltd. dt. 10/11-2-1988 1 to 15 2. Sri K.V.R. Chowdary dt. 11-2-1988 17 to 20 3. Sri Bhamidipati Nageswara Rao, Managing Partner of M/s Sri Bhaskara Auto Service, Kakinada, dt. 10-2-1988 29 to 34 4. -do- dt. -do- 35 to 38 5. -do- dt. -do- 39 to 44 6. -do- dt. -do- 45 to 48 7. -do- dt. 4-7-1986 49 to 52 8. Sri K. Muralidhar, employee of Sri Bhaskara Auto Services, dt. 10-2-1988 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... agreements, and if so whether they were approved by the Board oil Directors. The answers were to the effect that the firms were partnership firms, that the dealership is governed by agreements and that such agreements were approved by the Board of Directors. Now comes question No. 48 and the question and the answer thereto are as follows :--- "Q. 48. At this point of time may I invite your attention to section 132 (4) of the IT Act, which states that any disclosure made during the course of search operation voluntarily would not amount to concealment of income. Would you make any disclosure voluntarily?" (The answer to this question was written by Sri K. Sarathi, son of Sri K.V.R. Chowdary) "A. I in my capacity of the Managing Director of M/s SRMT Ltd. would like to make some admissions. There are three firms of authorised dealers of the said company at Kakinada namely Sri Bhaskara Auto Service, Sri Bhanu Enterprises and Sri Prabhakar Enterprises. These are partnership firms, which from their conception, and till date, have been receiving commissions from the said company at the rate of 15% of net sales turnover a portion of which, roughly 50% is given away to the retail dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ointing them as Authorised Dealers of SRMT Ltd. In this sworn statement he categorically stated that M/s Bhaskara Auto Service was floated on your instructions with an intention to divert a portion of the profits of SRMT Ltd. Please read his deposition and what have you to say in respect of the statement of Sri B. Nageswararao?" The original answer was "All that is said in the above statement is not correct." This line was scored out and the answer was recorded as follows:- "In my earlier statement I explained about the commission payments. Voluntarily I disclosed an amount of Rs. 260 lakhs and at this point of time I do not want to give explanation about the statement of Sri Bhamidipati Nageswara Rao." Sri Ratnakar submitted that nothing was found in the possession of Sri K.V.R. Chowdary-cash, jewellery, bank accounts, valuable articles or things. Therefore, the above statements recorded are not statements recorded under section 132(4) of the Income-tax Act. He submitted that the search started on the morning of 10th February 1988 and lasted for several hours and extended beyond midnight. An army officers were on the scene; the premises of the company and its Managing Direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 PM on 11-2-1988 and concluded at 9-00 PM on the same night. Though the search had lasted for long hours, no inconvenience was caused to Sri K.V.R. Chowdary or to any member of his family or to anyone and there was no complaint about that. The officers knew their job and were always polite and no threat or intimidation was resorted to as alleged by Sri Ratnakar. Speaking on a personal note, he submitted that he was in overall charge of the search operations on those two days and to his knowledge none complained about any threat or intimidation. Thus, the allegations of the assessee's counsel are baseless and are designed to detract from the main issue. 19.4 We have heard rival submissions and perused the statements. It cannot be said that the statements were taken under threat or intimidation or under 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 had been any. No such proof has come forth except bare assertions. Sri Rangabhashyam on a personal note had explained before us that he was in overall control of the search operations and to his knowledge no complaint was made in this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 132(4), as for example in the case of the Explanation to section 263(1). Sri Rangabhashyam in his reply submitted that though the deeming provision was to be found in the Explanation to section 263(1), it was because there was a limitation for action under section 263(1) and, therefore, such a deeming provision was considered essential. Even if the deeming provision is removed, it could be said that whenever the expression "For the removal of doubts" is employed in an Explanation, it is always clarificatory in nature and is declaratory in its content. Thus, the Explanation has retrospective effect. 19.6 We have heard rival submissions and perused the records. Section 132(4) at the relevant time was as follows:- "The authorised officer may, during the course of the search or seizure, examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing and any statement made by such person during such examination may thereafter be used in evidence in any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act." On a perusal of the Panchnama, we do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... documents had been kept. Further, the term "control" would naturally refer to control over something found in a particular place, especially when such term is used beside an expression like "possession". Moreover, the affairs of the company are always subject to the control and supervision of the Board of Directors. More so, in the case of this company, in view of Articles 14, 15, 16 and 18 of the Articles of Association. Even the resolutions passed by the company in 1981 and 1984 on the terms and conditions of appointment of Managing Director and Joint Managing Director relate only to remuneration and perquisites and to none else. No particular direct or the Managing Director for that matter can claim to have control of the affairs of the company, because control and supervision vest with the Board of Directors as such. This apart, Sri K.V.R. Chowdary is not the only Managing Director. There is also a Joint Managing Director. At any rate, individually a director or Managing Director cannot be said to have control of the books of account of the company or the affairs of the company. This is the pith and substance of the provisions of the Companies Act. Thus, we reject the revenue's ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Sri Rangabhashyam. The purpose of an Explanation is to remove any ambiguity in or to explain the meaning of the words or expressions used in the section preceding it. However, we notice that the Explanation inserted with effect from 1-4-1989 to section 132(4) does not deal with any word or expression employed in that section, nor does it deal with any ambiguity in relation to the words or expressions found in the section, but goes to give a new meaning to the section itself by bringing within its ambit a totally new concept viz. by using the words "not merely but also" and thus the scope of the main section itself stands re-written. So, for all practical purposes, the Explanation is a sub-section to section 132 though it is called an Explanation. Any sub-section can take effect only from the date from which it comes into force and not before. In this view of the matter also, we reject the revenue's contention. 19.10 Sri Ratnakar cited the Explanation to section 263(1) as introduced by Finance Act, 1988, w.e.f. 1-6-1988, wherein the deeming provision is found, unlike in the case of Explanation to section 132(4), and emphasized that in the absence of a deeming provision, the Expl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the persons in the employment of the assessee-company or its sister concerns. On the basis of these materials, he submitted that the commission payments found their way back to the company. Sri Ratnakar vehemently objects to such a proposition. It may be that the cheques issued by some of the partners of the dealer-firms were encashed by some of the employees of the assessee-company or its sister concerns, but that does not mean that the money had flowed back to the company. Kakinada is a small town and the firms are also situated near the premises of the assessee-company and, therefore, some of the employees of the company or its sister concerns might have done personal services to some of the partners of the dealer-firms. Such personal service might be by way of courtesy or for pecuniary gain for them and merely because a few employees obliged the partners of the dealer-firms, no adverse inference can be drawn against the company. None of the cheques has been traced into the accounts of the company nor into the accounts of Sri K.V.R. Chowdary, Managing Director, or its Joint Managing Director. Therefore, it cannot be held that the money had flowed back to the assessee. As far as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... haskara Auto Service, had an account bearing No. 7299 in Canara Bank, Kakinada. An authorisation has been given to one Sri Chitturi Raghavayya by this partner and he has signed all the 7 cheques issued from 1981 to 1984. Sri Chittoori Raghavaiah has been working as Parts Manager in M/s Gopal Auto Service, a sister concern of SRMT Ltd. The cheques issued were either self-cheques or cheques issued in favour of Sri Mangaraju. Out of 7 cheques, 6 cheques were encashed by Sri Mangaraju, an employee of M/s Gopal Auto Service and a trusted lieutenant of Sri. M.V.V. Satyanarayana Rao, Director, SRMT The proceeds of such cheques aggregated to Rs. 2,46,850." The details are to be found in department's paper book at pages marked as A (b). We are concerned with the calendar years 1983 and 1984 during which period the following withdrawals are found:- 1983 Rs. 1,32,580 1984 Rs. 40,400 Of the four withdrawals spreading over 2 years, two are by Sri Mangaraju amounting to Rs. 62,940. Sri Yeramati Panasa Ramudu was not examined. Sri Mangaraju was examined under section 132(4) of the Income-tax Act. He is a cashier in Gopal Automotive Pvt. Ltd., Kakinada. He is not relate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statement dated 10-5-1988 before the Income-tax Officer. 20.3 The Income-tax Officer then proceeded to deal with another set of cases where the cheques were signed by the account holder himself, i.e. the partner of the authorised dealer-firm, but the cheques were issued in favour of persons connected with the assessee-company or its sister concerns or were self cheques. The instances cited by the Income-tax Officer are as follows :--- (1) M. Sarveswara Rao or O. Balaraju encashed some of the cheques of Gunnam Rama Rao, partner of Sri Bhanu Enterprises. But, none of them was examined. (2) Sri Ch.V.V. Satyanarayana and Sri Sirajuddin encashed the cheques of Sri Sathi Reddy. Sri Satyanarayana is an employee of the assessee-company. But, none of them was examined. (3) Sri M.V. Ratnam and Sri B. Appalaraju, employees of the assessee-company, encashed four cheques of Sri Tetali Sathi Reddy, partner in Sri Bhaskara Auto Service. Though the Income-tax Officer states. that they are trusted persons of the management of SRMT Ltd., no material is on record to prove their proximity to the management. None of them was examined. (4) Another instance is where 5 cheques were in the name o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... V. Satyanarayana, Managing Partner of M/s Sri Prabhakar Enterprises. Both the cheques were encashed by Sri Satyanarayana who is also an employee of SRMT Ltd. The deposition of Sri Ch. V.V. Satyanarayana in the course of the search is discussed by the Income-tax Officer in the assessment order for 1985-86. It is stated that though there is the written agreement between the assessee and Sri Prabhakar Enterprises, whatever amounts were credited to the accounts of the partners towards sales commission should be returned to Sri K.V.R. Chowdary, Managing Director of the assessee-company, and other directors. He was inducted into the partnership by them. The cheque drawing power which he had in terms of the partnership deed was only an empty power. He used to hand over the cheques issued in favour of the partners to Sri K.V.R. Chowdary, who made his own arrangements to get back the proceeds of the cheques. But, as far as his share was concerned, he drew the money from the bank and handed over the cash to Sri K.V.R. Chowdary. He was only an employee of SRMT Ltd., getting a salary of Rs. 1,000. However, Sri Ch.V.V. Satyanarayana retracted his statement which is also referred to at page 19 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rvice, Kakinada, commenced business in January 1984. 1 do not know about the accounting year of the firm. I got a profit of Rs. 42,000 (Rupees forty two thousand) approximately during the first year. Second year also I have received similar sum of Rs. 42,000 (Approx.) towards my share of profit." "Q. Whether you are having any Bank account. Where did you keep this amount of Rs. 84,000 (profit for two years) ? A. I am having my personal current account in Corporation Bank, Market Street Branch, Kakinada. The share profit amount of Rs. 42,000 per year is again divided to other three sub-partners, one is Sri Edala Ramarao, Kakinada (full address is not known to me) and I do not know the other two sub-partners' names. I have never seen the other two sub-partners." "Q. What happened to the amount of share profit received by you ? A. Every year my share of profit is Rs. 42,000 (approx.) in the main firm. After dividing the share profit to other sub-partners my share of profit is about Rs. 14,000 per year. I have drawn some amount towards personal expenses amount drawn is not known. The balance is bank account." "Q. Whether you withdraw any amount from the firm ? What is your in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inconsistencies in his statements and, therefore, his statement cannot be relied upon and cannot be used in part against the assessee. He had resiled his statement which was against the interests of the assessee. He had also given a sworn deposition as early as 4-7-1986 before the Income-tax Officer wherein he had admitted that the firm was employing agents for sales and paying commission etc. In the light of the above, we cannot rush to the conclusion that Sri Bhaskara Auto Service was a conduit for the assessee-company. 20.6 Sri M.V.V. Satyanarayana Rao had also given a deposition on 10-2-1988. The following questions and answers are relevant (page 103 of DPB):- "Q. According to Shri Mangaraju's statement on oath, the following cheques were drawn by Shri Chittoori Raghavaiah, Spare Parts Manager, and Yeramati Parasuramulu of Rayavaram on Canara Bank under either their names or 'self' were paid to you on encashment: Chittoori Raghavaiah 24-7-1982 Ch. No. 660623 Rs. 25,000 4-1-1983 Ch. No. 660624 Rs. 31,600 29-5-1982 " 660622 Rs. 900 5-12-1983 " 660626 Rs. 36,260 29-8-1983 " 660625 Rs. 30,000 Y. Parasuramulu 7-11-1984 Ch. N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e transactions found in those bank accounts did not belong to him but they belonged to Sri M.V.V. Satyanarayana Rao, Managing Director of Sri Gopal Automotive Pvt. Ltd., Incidentally, Sri M.V.V. Satyanarayana Rao is also a director of the assessee-company. When pass books or bank statements bearing his name or the names of members of his family are found in the possession of a person in the course of search under section 132(4), the presumption arises that the accounts belong to the person found in possession and the transactions found in those accounts really belong to that person. The mere owning of these transactions by another person at the instance of the revenue that the other person had stated so is not enough to dislodge the presumption. They are not single transactions but are several in number. They are found in the bank accounts of Sri Mangaraju. There is no evidence to show that the accounts were opened on an introduction by Sri M.V.V. Satyanarayana Rao nor is there any evidence to show that the cheques were filled in by Sri M.V.V. Satyanarayana Rao and the amounts purported to have been withdrawn from these accounts were in fact given to Sri Satyanarayana Rao on each o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... appointments and go in for the appointment of authorised dealers from the open market and in this connection they had given an advertisement in The Hindu on 21-12-1988 and appointed M/s Ram Associates, a consultancy firm in marketing, finance and computers, to select on the assessee's behalf authorised dealers. A photostat copy of the advertisement was subsequently filed along with the report of Ram Associates about the selection of dealers or distributors for the assessee-company. Therefore, there is business need for marketing the products through dealers. 22. Having regard to the materials collected by the revenue and having heard rival submissions, we hold that it has not been established that the company had received back the commissions paid to the authorised dealer-firms. Sri K.V.R. Chowdary's statement, we have already held, is not a statement under section 132(4). The manner in which question No. 48 was sprung on Sri Chowdary, the long statement with all its legal nuances made by him and the manner in which the statement ended abruptly without any further questioning as to how the sum of Rs. 2,60,00,000 allegedly received by the company was hidden in the company's accou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted by the Income-tax Officer at great length have not led him to the company. 23. The Income-tax Officer had disallowed the total amount of the commission paid by the company to the dealer-firms for the assessment year 1984-85. However, for the assessment year 1985-86, he accepted the contention of the assessee that if at all any commission is to be disallowed, it should be the net commission and not the gross commission, and on that basis, he made the disallowance for the assessment year 1985-86 as follows:- (1) M/s Sri Bhanu Enterprises Rs. 32,55,485 (2) M/s Sri Bhaskara Auto Service Rs. 26,23,833 (3) M/s Sri Prabhakar Enterprises Rs. 17,96,683 (4) M/s Mehta Trading Company Rs. 20,91,299 --------------- Rs. 97,67,300 Less: Incentive commission paid out of the above to the customers of the assessee Bhanu Enterprises Rs. 18,03,911 Bhaskara Auto Service Rs. 12,16,753 Prabhakar Enterprises Rs. 10,26,059 Mehta Trading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of two Kakinada firms, and in the case of another firm registration was refused as assessment was made under section 144. Thus, taking into account the totality of the circumstances of the case, we hold that no part of the commission paid by the assessee-company to the dealership firms can be disallowed, and reject the alternative ground of the revenue. 26. We are supported in this view by the decision of the Bombay High Court in the case of CIT v. Bharat Barrel and Drum Mfg. Co. (P) Ltd. [1990] 182 ITR 21. In that case, the assessee claimed deduction of an amount of Rs. 7,32,260 in connection with the export of some steel drums to a foreign party. The amount was paid to J, one of the assessee's sister concerns, by way of forwarding and freight charges. (In the case before us, none of the authorised firms is a sister concern of the assessee-company.) The Income-tax Officer disallowed the claim for deduction on the ground that the payment was not verifiable and not connected with the business. The Appellate Assistant Commissioner restricted the disallowance to Rs. 2,75,110 as he found that J had actually incurred expenditure of Rs. 4,57,150 on this account. The Tribunal fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -S.Govind Raja Reddiar v. ITO. (iii) [IT Appeal No. 1320 (Ahd.) of 1985, dated 1-7-1986] - ITO v. T. Lakersi Babubhai Co. The learned CIT (Appeals) following the Tribunal decision upheld the claim of the assessee. In the light of the decision of the Andhra Pradesh High Court in Srikakollu Subba Rao Co. v. Union of India [1988] 173 ITR 708, a liability which had not become due for payment as on the date of the balance-sheet is not hit by the provisions of section 43B. In view of this, we reject the contention of the revenue. 29. In the result, the assessee's appeals are allowed and the departmental appeals are dismissed. Per Shri M.K. Chaturvedi, Judicial Member: 30. I have carefully perused the order proposed by my learned brother Shri G. Santhanam. I respectfully differ with him on the issues discussed hereinafter. The proposed order gives all the relevant facts and rival submissions therefore I do not find it necessary to repeat the same. I also do not propose to deal in a detailed manner the submissions made by either of the parties. I now propose to consider and catalyse correctly the concerned issues. 31. First issue (Para. 12) concerns with the question whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 14-5-1983 1894 These manufacturers also allowed discount mostly at 35 percent to 40 percent except on one item at 15 per cent (vide page 12 of the order). In my opinion, on the basis of these invoices, it cannot be said that allowance of commission at the rate of 40 per cent is a well recognised trade practice in this line of business. The reasons areas under:- (a) Invoices produced at the time of hearing do not relate to the impugned assessment years. (b) Only some selected invoices from other manufacturers were produced. This does not prove regularity of observance so as to justify an expectation that it will be observed with respect to all the transactions, (c) The practice of allowing discount vary from person to person whereas new entrants or lesser known organisations pay higher commission or discount, the old established business concerns dictate their own terms and conditions. 32. At page 14, para. 13, Ld.A.M. has observed: "that if the commission at 36.25 percent on the gross invoice value is to be considered to be reasonable in the case of M/s Mehta Trading Co., we cannot hold a different view that the percentage are high in respect of Kakinad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as it stood at the relevant point of time, is reproduced here as under :--- Section 132(4). "The authorised Officer may during the course of the search or seizure, examine on oath any person who is found to be in possession or control of any books of account, documents, money, bullion, jewellery or other valuable article or thing and any statement made by such person during such examination may thereafter be used in evidence in any proceeding under the Indian Income-tax Act, 1922 (II of 1922), or under this Act." 35. The Direct Tax Laws (Amendment) Act, 1987 (4 of 1988) inserted the following Explanation to Section 132(4) w.e.f. 1-4-1989:- Explanation.- For the removal of doubts, it is hereby declared that the examination of any person under this sub-section may be not merely in respect of any books of accounts, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Indian Income-tax Act, 1922 (11 of 1922) or under this Act. 36. The Memorandum explaining the provision stated [168 ITR (Statutes) 320]- "Clause 37 seeks to amend section 132 of the Act ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 63 LT 705 that a declaratory "Act means to declare the law or to declare" that which has always been the law, and there having been doubts which have arisen, Parliament declares what the law is and enacts that it shall continue what it then is. 41. Thus under the well known principles of construction of statutes when an Act is passed for the express purpose explaining or clearing up issues the presumption is that such an Explanatory Act is retrospective. 42. Therefore, even though it is stated that the Explanation will take effect from 1-4-1989, it only means that the Explanation may be the part of the Statute from that date but its effect will be to clarify the meaning of the term from the very inception and make explicit what was implicit in the section even before. In taking this view, I have respectfully followed the decision of ITAT Madras Bench in Kwality Textile Associates (P.) Ltd. v. ITO [1988] 24 ITD 454. 43. It has long been held that the admissibility of evidence is not affected by the illegality of the means by which the evidence has been obtained, though a person taking resource to illegality may be accountable under the law. In Kurma V. R. 1955 1 All ER 326 P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to terminate their appointments. In para. 22 Ld. A.M. summed up the issue as under:- "Having regard to the materials collected by the revenue, and having heard rival submissions, we hold that it had not been established that the company had received back the commission paid to the authorised dealer-firms. Sri K.V.R. Chowdary's statement, we have already held, is not a statement under section 132(4)." I record reasons for which I disagree with Ld. A.M.:- (i) The statement of Shri K.V.R. Chowdary can be used in evidence against the assessee. (ii) Certain cheques issued by some of the partners of the dealer-firms were alleged to have been encashed by the persons in the employment of the assessee company or its sister concerns. Viewing this aspect in the light of statement of Sri Chowdary, I find that my conclusion apropos the same differs from my Ld. brother. (iii) In the case of Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77, the Hon'ble Supreme Court has held that it is the duty of the court, in every case, where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke-screen and discover the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction of Rs. 86,76,463 as payment of commission on sales of spare parts. The Income-tax Officer was of the opinion that this expenditure was not wholly laid out for the purpose of business inasmuch as it was prohibited by the Companies Act, the agents had not discharged any functions to earn the commission and the amounts given have been received back. On appeal, the Commissioner of Income-Lax (Appeals) came to the conclusion that the payment was legal and for services rendered but sustained an addition of Rs. 10,00,000 for possible diversion of part of the profits through the agencies. For the assessment year 1985-86, corresponding to the previous year ended on 31-12-1984, the deduction claimed was Rs. 97,67,302. This included payment of Rs. 20,91,300 to Mehta Trading Co., which was allowed without question. Of the balance, in addition to the reasons given in the assessment order for the earlier year, the Income-tax Officer relied upon a statement given by the Managing Director of the Company as well as a partner of the agency firm and disallowed Rs. 56,16,426. The incentive commission paid to the customers out of the commission paid to the agents was, however, allowed. 3. Both ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the authorised dealer firms?" 5. In this reference it was pointed out on behalf of the assessee that while differing on certain points of reasoning, the learned Judicial Member had by his silence accepted certain other points made by the learned Accountant Member such as his finding that Sri K.V.R. Chowdary was not a person in control of the affairs of the assessee and his statement could not bind the assessee company. It was also submitted that his decision was inconsistent with the assessment order itself where the payment of incentive commission paid to the customers was accepted, thus showing that the transactions had taken place and were genuine and consequently the claim of Sri K.V.R. Chowdary that his statement was not made voluntarily and did not represent the truth was required to be accepted. It was argued that since the entire case of the revenue rested with the statement of Shri K.V.R. Chowdary, the disallowance made cannot be sustained as long as that statement remains uncorroborated. 6. On the other hand, it was contended on behalf of the Revenue that the statement of Shri K.V.R. Chowdary should be taken along with the statement of the partner of the agency fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r this Explanation would apply to the examination made on 11-2-1988 prior to the introduction of this Explanation. To my mind, it is inappropriate to think of a retrospective operation of this Explanation. It is perhaps because the Income-tax 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 was 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 Income-tax Officer 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 both answered it in the affirmative in para 19.11 and par ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the amounts paid as commission to the selling agents. 11. The third question is vital and is reflected by the point of difference in question 2 (ii) A close scrutiny of the statement of Shri K.V.R. Chowdary (which was also disclaimed later) shows it does not stand the test of truth. This is because his statement did not lead to any discovery of amounts received back 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 of the agency, to bill customers for the price less 25% as commission and credit the agency with a further c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the directors of the company. This is with reference to the statement of Shri Nageswara Rao and Muralidhar both of whom subsequently retracted from their statements. The assessee had no opportunity to cross-examine them. Further apart from stating that the money was paid to the 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 acknowledgment has not been established, I agree with the learned Accountant Member that the leads have not taken the Revenue anywhere 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 Accountant Member 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X
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