TMI Blog2005 (3) TMI 428X X X X Extracts X X X X X X X X Extracts X X X X ..... 1987-88 28-3-1990 1,13,44,690 1988-89 27-3-1991 1,03,93,660 1989-90 30-3-1992 1,06,36,440 --------------------------------------------------------- 2. There was search and seizure proceedings at the business premises of the assessee as well as at the residential premises of the managing director, Sri K.V.R. Chowdary on 10th Feb., 1988, in accordance with warrant of authorisation dt. 8th Feb., 1988. The search continued till 7 p.m. on 11th Feb., 1988. During the course of the search, although the cash book, ledger of the assessee-company and that of the family of the managing director and that of the other connected firms relating to the period from 1976-77 till 1987-88 were found and seized along with certain credit notes, share certificates and other slips tied up in 3 bundles. As per Panchnama certain documents and pronotes from the chamber of Sri K.V.R. Chowdary were also found and seized as per details given in Annex. A to the Panchnama, no undisclosed assets, bullion or cash in hand was found and seized. No additions were made by the AO on the basis of the books of account and documents found and sei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... irms. Q. 46 : Please tell me whether these agreements entered by the company were approved by the board of directors or not? Ans.: To the best of my remembrance, the board of directors approved the agreements. Q. 47: Please tell me the territory or products allotted to the aforesaid four concerns? Ans.: They do not have any territories and they can sell any where in the country. Q. 48: At this point of time, may I invite your attention to s. 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? Ans.: The statement below is written by me. Sd/- (K. Sarathi) In my capacity of the managing director of M/s S.R.M.T. Ltd., would like to make some admissions. There are three firms of authorised dealers of the said company at Kakinada namely Sri Bhaskara Auto Services, Sri Bhanu Enterprises and Sri Prabhakar Enterprises, these are partnership firms, which from their conception, and till date, have been receiving commission from the said company at the rate of 15 per cent of net sales turnover a portion of which, roughly 50 per cent, is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10th Feb., 1988. On the basis of this statement, the AO reopened the assessment for the asst. yrs. 1980-81, 1981-82, 1982-83 and 1983-84 by issuing notices dt. 17th March, 1989, 12th Feb., 1990, 12th Feb., 1990 and 12th Feb., 1990, respectively. In response thereto, the assessee on 19th April, 1989, 16th March, 1990, 16th March, 1990 and 16th March, 1990, filed the returns respectively showing the income as has been originally assessed for each of the assessment years. The AO on the basis of the aforesaid statement of the managing director of the assessee disallowed the commission paid to three authorised dealers based at Kakinada while allowed the commission paid to the authorised dealers based at Mumbai in which case also the search under s. 132 has taken place. Thus, the assessments were completed for the asst. yrs. 1980-81 to 1983-84 under s. 143(3) r/w s. 147 while the assessments for the asst. yrs. 1986-87 to 1989-90 were completed under s. 143(3) by making the following disallowances for commission paid: ------------------------------------- Asst. yr. Addition made Rs. ------------------------------------- 1980-81 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , that the accounts of the assessee have been audited and that there is no evidence of any unaccounted funds or investments in the name of the assessee-company. The case of the Revenue rests upon three pieces of evidence, which were actually gathered subsequent to the making of the assessment for the asst. yr. 1984-85 but allowed to be brought in as additional evidence for that year also They are the statement of Shri K.V.R, Chowdhary on 11th Feb., 1998, the statement of Shri B. Nageswara Rao on 10th Feb., 1988 and the statement of K. Muralidhar on 10th Feb., 1988. The learned AM has in his elaborate order given the background to the statement of Shri K.V.R. Chowdhary in para 19.2 of his order. In answer to question 48 at the time of enquiry under s. 132(4), Shri K.V.R. Chowdhary, managing director of the assessee, stated that the net income of the three firms who are acting as selling agents was really the income of the assessee-company and would amount to about Rs. 2,60,00,000. 8. The first point in dispute is with regard to the admissibility of the statement as evidence. The Explanation to s. 132(4) was introduced w.e.f. 1st April, 1989, which stated that the examination of an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppears to have accepted the treatment by the Revenue of the statement of Sri K.V.R. Chowdhary as a confession of concealment of income. Even though the Evidence Act does not directly apply to income-tax proceedings. Well-settled principles as to admission of evidence have to be followed in evaluating the evidence. When the statement of Sri K.V.R. Chowdhary is seen as a confession, the underlying emphasis is of concealment of income leading to penalty proceeds and even prosecution. Therefore, it has to be considered in all seriousness and with almost caution. Prudence demands that the evaluation of such a statement is based on the questions whether it was made voluntarily, whether it was made by a person, who was a party to that transaction and whether it was true. As to the first question, the learned AM has rejected the claim of the assessee that the statement was not voluntary and since the learned JM has not differed from that it is not necessary to express any opinion. As regards the second question, the learned JM has not disagreed with the finding of the learned AM that the managing director has no control over the affairs of the company. Moreover, there is no evidence to ind ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 34 lakhs of the asst. yr. 1984-85. But then the interest-free deposits were a condition precedent for the agency agreement and the credit balances were in a running current account and naturally did not carry interest, as the agency firms were to draw it at any time. As long as these liabilities remain unchallenged, they cannot be treated, as the income of the assessee not can they offset the commission payable to the agent firms. Thus the conclusion is inescapable that the statement of Shri Chowdhary has not been proved to be true and cannot, therefore, by itself form the basis of any assessment of an undisclosed income attributable to the assessee-company. 12. This leads to the next question whether the assessee-company has received back the commission paid to the authorised dealer firms. A perusal of the material recorded indicates that there was no material establishing any nexus between the company and any amounts following from the agency firms. Reference has been made to certain cheques issued by the partners of certain firms, in which partners of the agency firms were partners. It was stated that such cheques were encashed by certain employees of the assessee-company who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee but were stated to be rendering services through the dealers/representatives, etc. who were considered to be under the control of the three authorised dealers, in the absence of anything on record to suggest otherwise. In this context, the statements obtained by the Revenue in the proceedings for asst. yr. 1988-89 assume importance. 41. The CIT(A) dealt with these aspects in para 9 of his order by stating that the retail dealers were not supposed to be aware of the working arrangement of a manufacturing company for promoting and effecting its sales and it certainly suited the convenience of the assessee as well as the authorised dealer firms if the field representatives were introduced as working on behalf of the assessee, that the managing partner of Sri Bhanu Enterprises might have exhibited lack of knowledge about the functioning of that firm and his business relationship with the other partners, but that lack of knowledge might only be a shadow on the claim of that firm that he was the managing partner and that the firm was genuine, and that the said statement in itself would not be adequate to negate the existence and business of that firm. He then stated that he had r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facts and circumstances of the case into consideration, we are of the opinion that the case of the assessee requires reconsideration in the light of the material brought on record in the proceedings for asst. yr. 1988-89 and utilised in making the reassessment for asst. yr. 1980-81. We, therefore, set-aside the assessment for asst. yrs. 1980-81 and 1988-89 and remit the matter back to the file of the AO for consideration of the matter afresh affording an opportunity of being heard to the assessee. Copies of the statements relied upon in the assessment, the extract only of which was stated to have been given to the assessee, were given to the assessee at the time of hearing before the Tribunal and it would enable the assessee to properly put forward its defence. In case any other statement or material is also required by the assessee, the same may be provided to it for effectively presenting its case. 44. In asst. yrs. 1986-87 and 1987-88, the assessee has also raised an issue that the new material collected by the Revenue in the proceedings for asst. yr. 1988-89 was not there when the assessments were made and, therefore, it being additional evidence should not be utilised in dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 recourse to illegality may be accountable under the law. In Karma V.R. 1955 All E.R. 326 PC, it was held that if evidence is relevant the Court is not concerned by the method by which it was obtained or with the question whether that method was tortuous but excusable. This principle of law propounded by the Privy Council was followed by the Supreme Court in Magraj Patodia vs. R.K. Birla AIR 1971 SC 1295. It was held that the fact that a document was procured by improper or even illegal means will not be a bar to its admissibility if it is relevant and its genuineness is proved. In the case of Dr. Partap Singh vs. Director of Enforcement (1985) 46 CTR (SC) 319 : (1985) 155 ITR 166 (SC), it was held that illegality does not vitiate evidence collected during search. Similar view was expressed in the case of Pooran Mal. In my opinion, evidence collected during the search can be utilised against the assessee even if the search is illegal. It does not mean that such evidence collected during legal search cannot be utilis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same may be admitted as it has vital effect and there exists a substantial cause for receiving the additional evidence. 46. The decision of the Andhra Pradesh High Court in the case of A.K. Babu Khan is also not of much help to the assessee as in that case the assessee was guilty of remissness and gross negligence and was therefore, held not entitled to indulgence being shown to adduce additional evidence. There is no such case appearing in these appeals. 47. We also do not find any force in the contention of the assessee that the appeals in the earlier years could be disposed of by the Tribunal without taking into consideration the additional evidence and, therefore, the additional evidence should not be admitted. The additional evidence was not there before the Tribunal and the Tribunal was required to decide the matter on the facts and circumstances available on record at that time. As aforesaid, the evidence collected by the Revenue in the proceedings for asst. yr. 1988-89 is substantially material to take a proper view of the matter in the appeals. We, therefore, admit the additional evidence. Since we have set-aside the assessments for asst. yrs. 1980-81 and 1988-89 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the alleged sales representatives and their agreements entered into with the authorised dealer firms; (b) Whatever canvassing and other services claimed to have been rendered by the authorised dealer firms was in fact done by the assessee's own field representatives only; (c) When the dealer claimed to have made transactions through the authorised dealer firms, for the assessee's products worth lakhs of rupees, which is evident from the size of the commission payments, it is highly unbelievable how they are unable to even express little knowledge about the latter firms' existence: when they were specifically questioned on this point in 1991; (d) Having not been able to recollect the event of four years old at the time of giving statement under s. 131 in 1991 during the present proceedings, they have stated in their present statements/affidavits at the instance of SRMT people about booking of orders for the assessee's products by the representatives 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidentiary value on the face of the valid material gathered by the Department as discussed above and hence it is to be treated as an afterthought to suit his convenience; (j) The agreements entered into by the assessee with the authorised dealer firms and the agreements entered into by the sales representatives with the authorised dealer firms are held to be not possessing any evidentiary value and hence no credence is given to them. 25. Having regard to the factual position brought out above, I have come to the conclusion that there is no truth in the assessee's claim of existence of authorised dealer firms and the corresponding payment of commission to them and thus the entire transactions are held to be sham and ingenuine thereby warranting disallowance of the commission payments. It may be observed here that the documents now relied on by the assessee with the help of which the dealers were persuaded to file affidavits in its favour are treated as fabricated 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re recorded behind the back of the assessee without an opportunity being allowed to cross-examine the deponents and the additional materials were also utilised in the original assessment without opportunity being afforded to the assessee to controvert the materials. In the circumstances, I am really afraid whether at all these materials in the form of statements recorded originally from 28 retail dealers in March, 1991 regarding the alleged commission payments for being utilised in the assessments behind back of the assessee could be said to have any real evidentiary value. (iv) The assessee produced 11 dealers out of the 28 dealers, who categorically deposed before the AO in the course in the set-aside assessment proceedings about the services rendered by the authorised dealer firms appointed by the assessee and also confirmed that they placed their orders for SRMT auto parts through these firms on their order forms. Affidavits filed by them in the course of the set-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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of the assessee-company. (ix) Though there were some materials in the statements recorded from the managing director of the assessee-company, managing partners of the AD firms pursuant to operations under s. 132 and in the statements recorded from 28 retail dealers in March, 1991 to disprove the assessee's claim of commission payments to the AD firms for the relevant years, there were adequate materials as brought out from the statements recorded from some of the retail dealer firms, three field representatives of the AD firms and affidavits filed by majority of the dealers in the course of the set-aside proceedings to support the claim of commission payments made by the assessee to the AD firms for the said years. 3.2.5. At the time of hearing of appeal, it was contended on behalf of the assessee that the three AD firms duly reflected the commission received from the assessee in the relevant returns of income filed with the same AO, who also assessed such income for 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 relev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of receipt of commission from the assessee in the hands of the above AD firms for the relevant years was never in dispute. As a matter of fact, such claim of the AD firms was accepted by the respective AOs, who subjected the commission received from the assessee to tax in the hands of the said firms for the relevant years. 3.2.7. The genuineness of the AD firms (barring M/s Ravi Auto Agency) was of course, subsequently questioned by the same AO, who cancelled the registration allowed earlier for the relevant years by invoking the provisions of s. 186. However, in appeals filed by the said firms, the CIT(A) held that the firms were entitled to be assessed as registered firms and allowed registration to them under the IT Act accordingly for the relevant years. In further appeals preferred by the Department before the Hon'ble Tribunal, the orders of the CIT(A) allowing registration to these firms were upheld and consequently, the firms were allowed to be assessed as registered firms. 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 assessmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s contended by the AO, it was absolutely necessary for him to examine the issue as to how the alleged commission payments reached back the assessee-company and bring cogent materials on the record in support of the said contention, which he has failed to do. Apart from placing reliance on the materials in the form of statements recorded from the managing director of the assessee-company and the managing partners of some of the AD firms pursuant to operation under s. 132 and the statements recorded from the 28 dealer firms behind the back of the assessee in March, 1991, he has not brought on record any independent and positive material worth the name to disprove the claim of the assessee regarding the payment of commission to the AD firms for the relevant years. 3.2.8. In view of my observations as made in the preceding paragraphs especially the findings recorded in para 3.2.2 of this order, it would be really futile to hold the entire payments of commission to the subject AD firms 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 h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce minus trade discount allowed on the orders booked by them. Besides the commission, the authorised dealers were also entitled to target commission in case total turnover exceeds the target assigned. The copies of the agreements entered into are available from pp. 37 to 47 of the paper book No. 3. The main terms and conditions as entered into by the assessee with the authorised dealer are reproduced as under: "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 per cent 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 not 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 policies or by overs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the individual customer. The commission was paid by the assessee-company to each authorised dealer by cheque. During the course of enquiries, for the asst. yr. 1984-85, the AO noted that the authorised dealer firms and the sub-partnerships had only make-believe existence and that no work had been done by them to deserve such huge brokerage payments and that what has been paid by the assessee-company was brought back into the hands of the management of the company with the help of its employees and trusted persons who encashed many of the cheques supposed to have been given to the persons as their share of profit. Although the proceedings for the asst. yr. 1984-85 and asst. yr. 1985-86 became final with the order of the Tribunal deleting the disallowances made by the AO on this basis and on the basis of the statement recorded during the course of the search from the managing director of the company but the additions in all the other years were pending before the Tribunal. The Revenue brought 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... port the marketing of the assessee. 13. The IT authorities conducted search and seizure operations at the premises of the assessee on 10th Feb., 1988 which continued upto 12th Feb., 1988. Simultaneously the authorities also conducted search and seizure operations at the premises of the authorised dealers. The authorities did not find any incriminating documents/materials. The authorities did not find cash, jewellery or assets not accounted for either at the premises of the assessee or its directors or at the premises of the authorised dealer firms or their partners. The authorities also did not find any documents leading to the information that the commission paid was not in any way genuine. The search at the premises of the authorized dealers also revealed that the amount of commission received by them was in accordance with the agreements entered into and were properly recorded in their books of account and taxes were paid. 14. The authorities recorded a statement of Sri K.V.R. Chowdhary, the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n answer to the last question, the assessee stated that he was under coercion, undue influence and threat till such time he made a declaration about the commission. In the case of the assessee if the facts are dispassionately seen, it clearly indicates that in the entire statement except the last being answer to question No. 48, no mention was made about the commission. The entire material found at the time of search and seizure operations both at the premises of the assessee and at the premises of the dealer firms suggest that the commission paid was genuine. The payments made were chronologically recorded in the books of account of the assessee indicating the sale bills, vouchers, etc. and whereas the seized books of the dealers establish the receipt of the said commission and the expenditure towards services rendered by them. Most of the transactions are through bank. The authorities did not find any cash or assets at the time of search and seizure operations at the premises of any of the directors 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on and answer in this regard is reproduced as under: "Q.No. 31: To whom you pay the amounts of the supply bills? Ans.: We purchases demand drafts favouring M/s S.R.M.T., Kakinada, on it. Q.No. 32: Who pays the incentive to you? Ans.: M/s S.R.M.T., we adjust credit notes against supplies. Q. No. 33: Do you at any time get the services of any agent other than the field representatives? Ans.: No, we didn't get any services from anybody else except the field representative, Mr. Bhaskar." Mr. Bhaskar is related to the Bhaskar Enterprises that is one of the authorised dealer firm. Copies of the statements were not provided to the assessee and the authorities sought to utilise such statements to support their view for all the assessment years under consideration. The Hon'ble Tribunal found it necessary to set-aside all the assessments to the file of the AO for reassessment in view of the statements recorded from the 28 retailers. 17. The present appeals are against the set-aside assessment made by 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 manag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment of commission has to be considered as genuine. While deciding the issue, the Hon'ble Tribunal took into consideration the fact that except the statement recorded at the time of search and seizure operations from Shri K.V.R. Chowdhary, there was no information on record to suggest that the payment of commission was not genuine. It was further submitted that the Hon'ble Tribunal held that the statement of Shri K.V.R. Chowdhary is not based on any fact available at the time of search and seizure operations and therefore, untrue. In the circumstances, the learned CIT followed the decision of the Hon'ble Tribunal for the asst. yrs. 1984-85 and 1985-86 and held that the payment of commission is genuine. According to the CIT(A), the statements recorded from the 28 retail dealers do not reveal that the commission payment is not genuine. Therefore, the CIT(A) held that the payment of commission is genuine on the ground that the AO based his addition only on the statements recorded at the time of search, 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 commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he dealers suffered bad debts when the amount could not be realised and the amounts were debited to their accounts. (e) It can be seen from the final accounts of the assessee that it did not incur expenditure on marketing the goods manufactured by it and also did not suffer any loss on account of bad debt. C. Income-tax assessment of the authorised dealer firms: (1) The said firms were assessed as registered firms by the same AO who assessed the assessee even after the search operations-a fact which shows that these firms in fact carried on the business of marketing the assessee's products, their existence, etc. The dealers maintained separate books of account, filed their returns of income, maintained separate bank accounts and had their own office at Kakinada. D. Trade Practice: There is an accepted trade practice of giving commissions to the authorised dealer firms in the line of business of the assessee. On the basis of evidence filed before the authorities, the learned CIT(A) and later on before the Hon'ble 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Department, issued instructions to the authorised officers not to obtain declarations without any data at the time of search and seizure operations. (f) The search officials did not have the courtesy of giving a copy of the deposition taken in the above-mentioned circumstances even when they were approached on the ground that the copy of the such deposition would be given to the assessee only when it was to be used against the company. (g) So from what he could recollect from his memory, the managing director has written a letter to the learned CIT, Central Circle, Bangalore, soliciting his confirmation to the promises of immunity from penalties, interest and prosecution earlier extended to him by the search officials while extracting the above disclosure. The learned CIT in his reply refused to confirm such immunities. In this letter, it was submitted that the statement was recorded under duress. The copies of the letters are reproduced as under: "K.V.R. Chowdhary Chairman and Managing Director Sri Ramdas Motor Transport Ltd. 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), Karnata ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... into the commission payments and if this amount is accepted as income, the entire raid will become superfluous and unnecessary. We were also informed that if statements are given in the course of raid voluntarily accepting any item as income under the IT Act, the officers will accept the income so offered for tax without invoking any further provisions under the Act. We were warned and told that it will be in our interests to accept the commission amounts as income. We were assured that since the acceptance of commission payments as income would not entail further legal consequences apart from payment of taxes, we should readily accept in view of the Department's assurance, based on these assurances given to us and to spare us from the agony of further prolonged raid, I gave the statement accepting the commission payments to the three firms after deducting the expenditure incurred as income of SRMT. I have also stated that the exact figure will be calculated and will be furnished to the Department and requested that payment of taxes may be accepted in instalments. Notwithstanding this statement, the raid continued till 11th night and after seizing a number of books, registers, etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... made very tense, that you were not allowed to leave the premises, etc. I understand on the basis of enquiries conducted in this respect that the search was conducted as per provisions of the Act, peaceably without any untoward incident and that there were no threatening postures by the Departmental officers at any stage. (4) You have further stated that you have given a statement in the course of the search admitting the commission payment as income on the basis of assurances given by the Departmental authorities conducting the search regarding non-levy of penalty, prosecution, etc. In this connection, I have to clarify that under s. 132(4) of the IT Act, the authorised officer is entitled to examine on oath any person, who is found to be in possession or control of any books of account, etc., and that any statement made by such person during such examination may, thereafter, be used as evidence in any proceedings under the IT Act. (5) Regarding levy of penalty, interest, prosecution under the Act, it is the ITO concerned who has to take decision in these matters on the basis of evidence and material. There cannot be assurance given in this respect by anybody at any stage. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e said instruction, the CBDT advised the authorized officers not to obtain such declarations without any basis and advised the authorities to collect details and information. H. Managing partners of Sri Bhaskara Auto Service and Sri Prabhakara Enterprises viz., Sri Bamidipati Nageswara Rao and Sri Ch. V.V. Satyanarayana (a) These two persons were never earlier subjected to search proceedings. (b) Initially they admitted that for the services rendered by them commission was paid by the assessee. (c) They were continuously harassed for more than twelve hours and under coercion and threats, statements were extracted from them to the effect that the said firms were only name-sake and that the amounts were paid back to the company. (d) Immediately after search operations, they wrote letters to the IT Department stating that (i) under coercion and threats they were made to give the above stated averments. (ii) In fact for services rendered by these firms, commission was paid to them and thus they retracted from what they were forced to admit during the search operations. (e) The Hon'ble Tribunal has considered the above facts and held that on the basis of the depositions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elaborate search either to the directors or to company. The AO himself has conceded work done by field representatives, whom he wrongly thought are employees of company while the fact is just the contrary." 20. Thus, it was vehemently submitted that during the course of search and seizure operations, the authorities found the books of account at the premises of the assessee and the dealers. The books of account indicate the payment of commission by the assessee and receipt by the dealers. The dealers in their books of account appropriated the receipt towards their expenditure. The expenditure incurred by them was also supported by the vouchers, etc. found at the time of search. The balance of profit amount was divided among the partners. The amount of deposit paid by the authorised dealers firms to the assessee also was recorded in the books of account. All the data support the claim of the assessee. In view of the provisions of s. 132(4A), the presumption is in favour of the assessee. According to the said provision, the books of account and other documents found at the time of search are to be considered as true. Further, no information contrary to the same was found. Therefore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mission paid to the authorised dealers at Kakinada are in any way excessive when the payments made are at the same percentage at which the same were made to Mehta Traders of Bombay. 24. In brief it was submitted that while completing the set-aside assessment proceedings, the learned D.C. has disallowed the commission paid by the assessee to the three Kakinada based authorised dealers firms: (a) Without following the directions of the Hon'ble Tribunal. (b) Without appreciating the evidence brought on record by the assessee especially the production of witnesses in March, 1997 for the examination by the learned DC. (c) Even without finding any averments against the assessee's contentions in the depositions taken from the witnesses produced by the assessee for examination by the learned D.C. in March, 1997. (d) On the same evidence/information and on the same grounds as mentioned in the original assessment orders and not on the basis of evidence brought on the record by the assessee and without appreciating the evidence in support of the claim made. (e) The AO also did not consider the observations made by the Hon'ble Tribunal in their order for the asst. yrs. 1984-85 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts products, as the assessee-company, did not want the names of the authorised dealers firms to be advertised at its cost. The assessee submits that all the authorized dealers firms are outsiders, not related to the company in any way. (b) Out of the 28, the assessee filed clarificatory affidavits of 19 retail dealers and produced 11 of them confirming the above fact. Therefore, there is nothing adverse in 28 retail dealers to the assessee. Similar payment of commission made under similar circumstances to Mehta Trading Co., is accepted by the authorities. 26. In the circumstances and in view of the submission made, during the course of hearing and written submissions, the assessee submits that it proved that genuineness of payment of commission to the authorised dealer firms. Insofar as restriction of allowance is concerned, it is submitted that CIT(A) did not bring on record any information that the payment of commission was in excess of the business needs. Further, the net payments made, workout to about 6 to 7 per cent [15 per cent of 75 per cent, i.e., 11.25 per cent (-) 5 per cent, further commission provided to the retailers] by the authorised dealer firms, which is not e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 37(1) only those expenses which have been incurred wholly and exclusively for the purpose of the business are to be allowed as deduction. The commission paid to the authorised dealers firm was accepted by the managing director as sham transaction in his statement dt. 10th Feb., 1988 during the course of search. This statement also proves that these authorised dealers firms were created with the object of reducing the tax liability of the assessee-company. The statement of the managing director is duly corroborated by the statement of 28 dealers. Accordingly, the Revenue has duly discharged its onus that the expenditure by way of commission paid was not genuinely incurred by the assessee. The learned Departmental Representative placed reliance on the order of the AO and submitted that the commission paid should not be allowed. The CIT(A) was not correct in law even disallowing part of the commission. Thus, it was vehemently submitted that the order of the CIT(A) be set-aside and that of the AO be restored. 30. We have considered the rival submissions perused the materials on record. We have also gone through the orders of the tax authorities below and also the case laws cited and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the agreements on commission basis for booking orders for the assessee's products. These sales representatives also filed their affidavits before the AO stating that they worked for the authorised dealer firms. These three sales representatives were in addition to the 28 persons from whom statements were recorded by the Department in March, 1991. The AO after analysing the statement of the 11 retail dealers produced by the assessee as well as the statement recorded from them in March, 1991 concluded that the existence of the authorised dealer firm were not genuine and these dealers tried to give statements in favour of the assessee. The AO also rejected the statement of the three sales representatives representing each of the authorised dealers firms. All these 11 dealers and 3 sales representatives were also cross-examined on behalf of the assessee. The cross-examination revealed that the authorized dealers firms were booking orders for the assessee through the representatives. The AO rejected the statement of the 11 dealers, 3 sales representatives and along with their respective affidavits. The affidavits of the 9 dealers, which were filed by the assessee were also rejected by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd report specifically following two points were asked. (a) To re-examine the managing partner or any other partner of the 3 authorised dealer firms and verify the claim of the assessee regarding the payment of the alleged commission. (b) To pinpoint the exact position and answer in the statements recorded from the 11 dealers and 3 field representatives under s. 131 in the course of the set-aside proceedings on the basis of which, he came to the conclusion that the payment of commission to the 3 authorised dealer firms as claimed by the assessee for the relevant assessment year was bogus. 33. From the order of the CIT(A), we noted that 2 remand reports dt. 29th Dec, 1997 and 10th Feb., 1994 were submitted by the AO. In the remand report, the AO made the following comments on the claim of the assessee for the commission paid to the authorised dealer: "1. Finally, I may submit that the dealers while giving statements in the year 1991 have firmly and instantly admitted before the Departmental authorities without any second thought that they had no business connections at all with the authorised dealer firms and most of them had also expressed their ignorance about the existenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he genuineness of the authorised dealers firms to whom the commission was paid. The registration has duly been granted to these firms under the IT Act as the genuinety of these firms has been finally upheld by the Tribunal vide their order for the relevant years. The learned Departmental Representative did not produce any evidence to the contrary before us which may prove that the authorised dealer firms were not genuine except the retracted statement of the managing director of the assessee-company and the statement of 28 dealers recorded in March, 1991, at the back of the assessee during the course of the assessment proceedings for the asst. yr. 1988-89. We noted that the commission had been paid to all the authorised dealers firms through cheques. All the authorised dealer firms are the regular income-tax assessees. They are filing their respective IT returns regularly. All the commission received from the assessee-company has been duly disclosed by the authorised dealer firms in their books of account and in the P L a/c, copies of which were filed before us. These authorised dealers firms had also paid the income-tax on the income so disclosed. The dealers clarified in their af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... st bothered whether the said sales representative represent some agent appointed by the manufacturer or the manufacturer's sales representative will always say that he has come on behalf of the manufacturer company, because otherwise the sales representative will not be able to procure the orders so successfully. We find that in the statement recorded in 1991 as produced in the assessment order, the dealers had spelled out that they booked the order for the assessee's product through the sales representative visited to them. 37. We do not find any substance in the contention of the AO that the expenditure incurred on salaries, offices, travelling and bank charges by the authorised dealer was very less and the incurrence of less expenditure by the authorized dealer firms cannot be a basis for treating the authorised dealers firms to be non-genuine. But in our opinion this will counter the observations of the AO that the authorised dealers firms were created to evade the tax because in case the authorised dealers firms have debited less expenses their taxable income get increased and they have to pay more taxes. 38. No evidence has been brought on record that the amount as has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence to the contrary on record which may prove that the orders were directly placed by the dealers to the assessee. The search has taken place at the premises of the assessee as well as of the authorised dealer but the Revenue could not find any material which may prove that the authorised dealers were not in existence and the orders were not placed through them. 41. Hon'ble Third Member in its order dt. 4th Jan., 1991, has accepted under para 13 that there is a trade practice to give commission to the authorised dealers firms. Even the AO has allowed the deduction of the commission paid to one authorised dealer firms M/s Mehta Trader, Mumbai, on the same terms and conditions, proves the trade practice prevalent in the trade. When the company grows in our opinion, due to the principle of span of control, it becomes necessary for them to appoint the authorised dealers on commission basis so that they may be motivated to procure more business for getting the more commission. It is a human tendency not to work without any incentive. 42. We do not find any substance on the observation of the AO that the assessee has incurred the expenses for bringing the witnesses for productio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... may get exhausted after getting grilled over 16 hours and when he was not made to sleep throughout the night and was continued under the cross-questioning. The circumstances under which statement was recorded and the change in the date over the statement and also the subsequent letter dt. 1st March, 1988 and 23rd March, 1988 written by the managing director, Mr. K.V.R. Chowdary retracting the statement proves that the statement was taken from him regarding the commission paid by adopting the pressure techniques, otherwise the statement could have been recorded at one length. The learned Authorised Representative was at pain in emphasizing that the statement had been procured from the assessee under coercion and pressure and contrary to the CBDT instruction issued in March, 2003 pursuant to Kelkar Committee report. We find from the CBDT instructions and Kelkar Committee report that the prevalence of practice amongst the search parties to obtain forced confession of undisclosed income from the assessee. In our opinion, the preposition of law is well settled that the admission made by the assessee during the course of search constitutes substantial evidence in view of the provisions ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent was given. If a person at later stage retracts from the statement given on the search day, then the Courts of Tribunal should try to ascertain the reasons or circumstances from such person for doing so and, if satisfied, not to place heavy reliance on such earlier statement which has subsequently been denied and retracted. Tribunal in the case of Dineshchandra J. Dina vs. ITO (2000) 112 Taxman 107 (Ahd)(Mag) held: A party is entitled to show and prove that an admission made by him previously was in fact not correct and true. Hon'ble apex Court in the case of Shri Krishan vs. Kurukshetra University AIR 1976 SC 376 held: an admission based on ignorance of fact is not binding. Hon'ble Punjab Haryana High Court in the case of Krishan Lal Shiv Chand Rai vs. CIT (1973) 88 ITR 293 (P H) held: it is an established principle of law that a party is entitled to show and prove that an admission made by him previously was in fact not correct and true. Tribunal in the case of R.P. Locks Company vs. Dy. CIT (2000) 67 TTJ (Del) 588 held: Statement of assessee under s. 132(4) surrendering certain amount is legally relevant but it is open to a party making an admission to expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... established that any books of account, other documents, money, bullion, jewellery or other valuable articles or things are found in the possession or control of any person in the course of the search. The presumption stipulated are (a) that such books of account, other documents, money, bullion, jewellery or other valuable articles or thing belong or belongs to such person, (b) that the contents of such books of account and other documents are true and (c) that the signature and every other part of such books of account and other documents which purport to be in the handwriting of any other particular person or which may reasonably be assumed to have been signed by, or to be in the handwriting of any particular person, are in that persons handwriting, and in the case of a document, stamped, executed or attested, that it was duly stamped and executed or attested by the person by whom it purports to have been so executed or attested. These presumptions lay down the rule of evidence, which are applicable in the case of the search. On the basis of these presumptions, the books of account, documents and vouchers found in the possession of the assessee and which contain the entries rela ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be covered by the provisions of ss. 30 to 36 as these sections provide its specific treatment to expenditure laid down in those sections. (b) Expenditure should not be capital in nature. (c) It is not to be the personal expenditure of the assessee. (d) It should be incurred wholly and exclusively for the purpose of business or profession. (e) It should be incurred during the previous year. (f) It should not be incurred for any purpose which is an offence or which is prohibited by law. 48. In the case of the assessee, there is no doubt that the commission paid by the assessee is not covered by the provision of ss. 30 to 36. There is also no dispute that the expenditure incurred by the assessee is of revenue nature and not of capital in nature. There is also no dispute about the fact that the expenditure has been incurred during the respective previous years. There is also no dispute that this expenditure has not been incurred for any purpose which is an offence or which is prohibited by law. The expenditure so incurred by the assessee-company cannot be regarded to be the personal expenditure of the assessee. There is no evidence on record that these expenses were incurre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rning profit. (iii) It is enough that the money was expended "not of necessity and with a view to directing and immediate benefit to the trade, but voluntarily on the ground of commercial expediency, and in order, indirectly, to facilitate the carrying on of the business". (iv) No hard and fast rule can be laid down to explain what the word "solely" is meant for. 51. The expression "wholly and exclusively" in s. 37(1) does not mean "necessarily". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of its or his business. Such expenditure may be incurred voluntarily and without any necessity, and if is incurred for promoting the business and to earn profits, the assessee can claim deduction, therefore, under s. 37(1) even though there was no compelling necessity to incur such expenditure. The Supreme Court, in the case of CIT vs. Malayalam Plantation (1964) 53 ITR 140 (SC), held that it is not only expenditure which directly results in benefit or advantage to the assessee's business that is entitled to deduction, but also any expenditure which is incurred with a view to facilitating the carrying on of the business. 52. We do ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6 ITR 11 (SC) and CIT vs. Panipat Woollen General Mills Co. Ltd. 1976 CTR (SC) 317 : (1976) 103 ITR 66 (SC). Considering the true import of the expression "wholly and exclusively" it was observed by the apex Court in Sassoon J. David Co. (P) Ltd. vs. CIT (1979) 10 CTR (SC) 383 : (1979) 118 ITR 261 (SC), that the same does not mean "necessarily". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under the relevant provision even though there was no compelling necessity to incur such expenditure. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under s. 37 of the Act if it otherwise satisfies the tests laid down by law. The bill (sic) read "any expenditure" laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed in view of the protests raised by the taxpayers the wo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2) of the IT Act. It is only the provision of s. 40A(2), which gives a power to the Revenue to look into the reasonability of the expenses incurred by the assessee. Even the learned Departmental Representative did not contend before us that this is a payment covered under s. 40A(2) of the IT Act. We, therefore, set-aside the action of the CIT(A) of estimating the quantum of the commission paid by the assessee and allowing it on estimate basis. 55. Now coming to the case laws cited before us, in the case of Dalmia Cement Ltd. the Hon'ble Delhi High Court has held as under: "For the allowance under s. 37(1), the following conditions are to be satisfied, i.e., (a) there must be expenditure, (b) such expenditure must not be of the nature described in ss. 30 to 36, (c) the expenditure must not be in the nature of capital expenditure or personal expenses of the assessee, (d) the expenditure must have been laid out or expended wholly and exclusively for the purposes of the business or profession. The word 'wholly' refers to the quantum of expenditure, while the word 'exclusively' refers to the motive, objective and purpose of the expenditure. An expenditure to which one cannot apply ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pothetical issue in this case in view of the accepted position that the factum of services rendered by the CDL has not been refuted by the Revenue. It needs no reiteration that the settled position in law is that no businessman can be compelled to maximise his profits. The obvious answer to the first question is in the affirmative, in favour of the assessee and against the Revenue." 56. In the case of Raj Kumar Daya Shanker vs. CIT (1972) Taxation 32(3)-49 (All), Hon'ble Allahabad High Court has held as under: "Where the Tribunal sustained partial disallowance of commission paid on the grounds of being excessive, it was held that the disallowance was based on no valid reason and was arbitrary. Similarly, where the Tribunal maintained partial disallowance out of travelling expenses on the ground that the possibility of some of the expenses being incurred for personal expenses of the partners could not be ruled out, it was held that the Tribunal has acted on pure surmise. Therefore, the partial disallowance was not justified." Hon'ble Calcutta High Court in the case of J.K. Steel Industries Ltd. vs. CIT (1978) 112 ITR 285 (Cal) has held as under: "The assessee-company enter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e enquiries at the given address of R, he found that no concern existed at that place, deleted the addition after noting as under: (a) by submitting the aforementioned details, the assessee had sufficiently discharged the primary onus that laid upon it. Once the, primary evidence was produced by the assessee, the onus shifted to the AO. (b) the mere fact that R was not found existing at the given address, did not automatically establish that no such party existed at the relevant point of time. The AO had failed to make enquiries as to whether R existed at the relevant point of time, i.e., in the year in which the payment of commission was claimed to have been made. (c) if the AO had collected material to establish that R did not exist at the relevant point of time, then the obvious conclusion would be that the evidence furnished by the assessee was unreliable. However, the AO did not do so. (d) when one weighed the evidence furnished by the assessee on the one hand and the information collected by the AO on the other, the balance tilted heavily in favour of the assessee. 57. In the case of IAC vs. Haryana Conductors Ltd. (1990) 50 Taxman 291 (Del)(Mag), where assessee-com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elated circumstances. The rule that increased remuneration can only be justified if there be corresponding increase in the profits of the employer is erroneous. Hon'ble Supreme Court in the case of CIT vs. Panipat Woollen General Mills Co. Ltd. held as under: In order to determine the question of reasonableness of the expenditure, the test of commercial expediency would have to be adjudged from the point of view of the businessman and not of the IT Department. Hon'ble Supreme Court in the case of CIT vs. Dhanrajgirji Raja Narsingirji held as under: It is not open to the Department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every business knows his interest best. Hon'ble Gujarat High Court in the case of Voltamp Transformers (P) Ltd. vs. CIT held as under: Where commission was paid by the assessee-company to its sole selling agent, a firm whose partners were one of the directors and the wives of two other directors of the assessee-company, and there was evidence that sales increased due to effort of the agent and that the commission paid was reasonable. Held, that the commission was deductible. H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Hon'ble Patna High Court has held as under: Held (i) That the Tribunal was not justified in not allowing a sum of Rs. 7,117 paid to the creditors, D.M.P. and R.M.P. under s. 10(2)(xv) of the Act. It has been laid down that when a claim for allowance under s. 10(2)(xv) of the Act is made, the IT authorities have to decide whether expenditure was incurred voluntarily and on grounds of commercial expediency and in order indirectly to facilitate the carrying on of the business. In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for purposes of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue. In the case of Shahzada Nand Sons vs. CIT, Hon'ble Supreme Court has held as under: "The three factors laid down by the proviso to s. 36(1)(ii) are not really conditions on the fulfilment of which alone the amount of commission paid to an employee can be regarded as reasonable. They are merely factors to be taken into account by the Revenue authorities in determining the reasonableness of the amount of commission. It may be that one of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n fact paid. If the amount of the salary was low and the commission was part of the remuneration and not an ex gratia payment for services rendered, the amount of the commission would have to be large in order to equalise the total amount and ensure a fairly high remuneration for these employees. The Tribunal had further found that in this particular trade of dyestuffs and colour chemicals which are being sold to textile mills, it is the usual practice to pay secret commission to dyeing masters, printing masters, etc. in order to secure orders and to ensure that the supplier concerned increased his sales. The Tribunal had also held that the three employees of the assessee-firm were visiting the various mills with whom the assessee had dealings and were securing business from those different mills for the assessee-firm. In view of these conclusions of the Tribunal and particularly in view of the conclusion of the Tribunal that the payment of commission under the agreements was necessary in the interest of the assessee's business, applying the correct test required to be applied for ascertaining the reasonableness of the commission paid in the light of the provisions of s. 36(1)(ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orised dealers firms in the form of their respective assessment orders, balance sheet, P L a/c, the statements of 11 dealers produced by the assessee and also the affidavits filed in respect of 9 dealers along with 11 dealers for which the statements were recorded and the fact that the affidavits were rejected without cross-examining the deponents, we upheld the finding of the CIT(A) and do not agree with the finding of the AO that the authorized dealers firms to whom commission was paid by the assessee were not genuine firms. But the CIT(A) was not justified in view of the legal position to restrict the claim of the assessee for the commission paid at the best of his estimate. We, therefore, set-aside the order of the CIT(A) to that extent and direct the AO to allow the assessee deduction in respect of the commission paid by him to the authorised dealers in each of the assessment year while computing the income of the assessee under the head income from business. Thus, the grounds of appeal of the assessee in each of the impugned assessment year relating to the commission paid are allowed while the grounds of appeals of the Revenue on this issue stand dismissed. 59. In the resul ..... X X X X Extracts X X X X X X X X Extracts X X X X
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