TMI Blog2006 (6) TMI 265X X X X Extracts X X X X X X X X Extracts X X X X ..... d, facts of this case are that the assessee is a company and is engaged in the business of financial advertising since 1987. For assessment year 1995-96, return of income was filed on 30-11-1995 declaring a total income at Rs. 85,79,794 was subsequently revised on 19-11-1996 showing a revised total income at Rs. 85,13,860. The case was selected for scrutiny. The Assessing Officer noted that assessee had claimed a deduction of Rs. 1,14,10,882 on account of commission/service charges. The Assessing Officer asked the assessee to furnish the details to justify it s claim. The assessee furnished the details of parties to whom the commission was paid. It was explained that the company was engaged in the highly competitive business of financial advertising and publicity campaigns for Corporates coming out with public issues, therefore, the assessee paid commission to various parties (both Corporates and individuals) since beginning of it s operations from 1987 for generating business for the company. It was also explained that commission/service charges were paid through account payee drafts on the basis of debit notes/bills raised by the parties acting as agents. The assessee emphasized ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of law, the expenditure of Rs. 1,00,00,818 on account of commission/service ahcrges cannot be said to have been laid out or expended wholly and exclusively for the purposes of the business of the assessee within the meaning of section 37(1) of the Act and, therefore, deduction cannot be allowed for the same in computing the income of the assessee. Accordingly, deduction claimed for the above commission/service charges is disallowed and, in the result, a sum of Rs. 1,00,00,818 will be added to the total income. Penalty proceedings under section 271(1)(c) of the I.T. Act, 1961 are also initiated on this account." The Assessing Officer, however, accepted payment of commission of Rs. 14,10,064 to other parties at H.O. and payment of commission at other places. Aggrieved by the decision of the Assessing Officer, the assessee preferred an appeal before the learned CIT(A). In the appellate proceedings, findings of Assessing Officer were controverted by the assessee by submitting a series of explanations and arguments. The learned CIT(A) after considering the submissions made by the assessee and findings of Assessing Officer deleted the addition and recorded his findings as under : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urrent assessment year commission of Rs. 14,10,064 paid to several parties under similar facts and circumstances have been accepted by the Assessing Officer himself. Considering the rates of commission paid in earlier years, the rate of commission during this year cannot be said to be excessive or unreasonable. Nothing relevant has been brought on record to show that commission paid to SIL was for extra commercial consideration and, therefore, the expenditure was not spent wholly and exclusively for purposes of appellant s business. Therefore, commission paid to Snowcem India Ltd. during this year under similar circumstances cannot be disallowed. Under the circumstances, I find no justification for the disallowance of the payment of commission of Rs. 1,00,00,818. The Assessing Officer is directed to delete the same." In assessment year 1993-94, disallowance of commission of Rs. 67,87,536 paid to various parties by Assessing Officer was deleted by learned CIT(A). The findings of learned CIT(A) are as under : "I have carefully considered the submissions of the learned counsel as also the facts of this case. I find that the appellant is carrying on business in financial adverti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wholly and exclusively for the purposes of the assessee s business. The learned D.R. further submitted that the facts in both the years were identical qua of issue of commission paid, and hence for the purposes of his arguments, he relied on the order for assessment year 1995-96 wherein commission paid, to only one party i.e. Snowcem India Ltd. had been disallowed by the Assessing Officer referring to the evidence submitted in support of the claim of payment of commission, the learned D.R. firstly stated that the assessee-company had merely filed copies of debit notes raised and they had not filed any evidence by way of written contract, correspondence or reports etc. to prove that the commission agents had actually rendered services for the purposes of assessee s business. Secondly he submitted that Snowcem India Ltd., the commission recipient, though having acknowledged the receipt of commission, had not given specific replies to all the questions asked by the Assessing Officer. Thirdly, he submitted that only a few clients of the assessee-company had admitted to the involvement of Snowcem India Ltd. as an intermediary. It was also contended by the learned D.R. that the learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 87,536 1994-95 31,18,88,350 62,89,476 1995-96 57,56,64,499 1,38,37,147 6.1 The learned counsel appearing on behalf of the assessee further explained the nature of business carried on by the assessee and the nature of services rendered by the commission agents. The learned counsel contended that the commission agents had rendered the services of introducing new customer, for securing advertising contracts etc. He further contended that such services were more personal in nature wherein the commission agent was able to prevail over the prospective customers to assign their advertising contract to the assessee-company. He further submitted that normally for such services there would be no correspondence, records or documents. He further clarified that as per the SEBI regulations there was no requirement on the advertising agency to maintain the records, as was the case with the Lead Manager, Advisor to the issue or the Registrar to the issue. To support his contention regarding commission paid for introducing new customers, for securing advertising contracts, for canvassing business etc. was allowable expenditure, the learned counse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Bombay High Court in the case of CIT v. Goodlass Nerolac Paints Ltd. ( 188 ITR 1), the claim of commission paid was to be allowed in full. 6.5 As regards the specific issues in the appeal, the learned counsel also admitted that the facts obtained in both the years were identical qua the issue of commission paid, and hence for the purposes of his arguments, he also relied on the orders for assessment year 1995-96 wherein commission paid to only one party i.e. Snowcem (India) Ltd. has been disallowed by the Assessing Officer. In this connection the learned counsel submitted that Snowcem India Ltd. was not a related entity and that the entire transaction was at an arm s length. He further invited our attention on page 119 of the paper book to show that Snowcem India Ltd. had reflected the commission received as its income and had made a provision for taxation of Rs. 80,00,000 for the tax liability arising on current year s income of Rs. 6,55,33,473. He further stated that Snowcem India Ltd. was engaged in the business of exterior paints since last 37 years and during all these years had developed extensive business contacts and associations. On being asked, he stated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for the reason that the payment was never made and there was a finding that the payment was not made on grounds of commercial expediency. As regards the decision in case of CIT v. Transport Corporation of India Ltd. ( supra ), it was submitted that the case pertained to secret commission. As regards to the decision in the case of Chemaux Private Ltd. v. CIT ( supra ), it was submitted that commission was paid to employee for reimbursement of expenditure and since there was no evidence of expenditure incurred the commission was held to be non-allowable expenditure. As regards the decision in case of Vishnu Agencies (P.) Ltd. v. CIT ( supra ), it was submitted that the commission paid to the sole selling agency was disallowed as there was no documentary evidence to show that the agent had rendered any services. The Hon ble Calcutta High Court held that it was the duty of the Authorities to consider both oral as well as documentary evidences and hence set aside the matter to the ITAT. As regards the decision in the case of Precision Instrument Mfg. Co. v. CIT ( supra ), it was held that selling agency firm was not genuine and no services were rendered by the agency. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 4.44%. In the assessment year 1993-94, the rate was 7.5% and in the assessment year 1995-96, the rate was 6% of the total commission of the sales on the business generated through intermediaries. The details of commission paid and business done by the company since assessment year 1989-90 till 1995-96 are given below : Assessment Years Sales procured thro.Comm. Parties. Sales Thro. direct effort Total sales Commission/ Service Charges paid %of Comm. to sales thro. Comm. Parties 1989-90 28,60,840.00 4,56,21,734.00 4,84,82,574.00 2,14,563.00 7.50 1990-91 2,66,30,963.00 6,46,64,853.57 9,12,95,816.57 19,97,322.23 7.50 1991-92 3,17,82,896.71 8,15,62,285.81 11,33,45,182.52 18,87,118.00 5.94 1992-93 6,34,45,579.95 12,22,05,369.84 18,56,50,949.79 28,19,032.59 4.44 1993-94 9,05,00,487.00 22,38,86,103.38 31,43,86,590.38 67,87,536.50 7.50 1994-95 8,38,59,690.00 26,80,28,660.69 35,18,88,350.69 62,89,476.79 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al was filed, again the matter was set aside by the learned CIT(A) on 18-11-1996. Again the additions were confirmed by the Assessing Officer vide his order dated 6-11-1997 and 18-12-1997 for assessment years 1991-92 and 1992-93 respectively for the same reasons. The learned CIT(A) vide his order dated 9-6-1998 again set aside the matter. Finally, the Assessing Officer vide his order dated 28-3-2001 passed an order under section 143(3) read with section 250 within Rs. 60,435 and Rs. 85,225 only were disallowed out of total commission of Rs. 18,87,118 and 28,19,032 paid respectively after Assessing Officer was satisfied. On the basis of assessment history narrated as above, it is apparently clear that orders for the impugned years disallowing the payment of commission have been passed during the period where the orders of earlier years had not reached finality on this issue. In this view of the matter, we find force in the contention of the assessee that order of disallowance in the impugned years was made following the orders of earlier years on a routine manner. This is further supported by the fact that the manner of investigations is almost identical and the language of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssee which clearly establishes the fact that the assessee has derived immense benefits in the form of getting huge business from such referred clients. Therefore, there is a direct nexus between the amount of commission paid and the business purposes of the assessee because, but for this reference the assessee could not have got business and consequently it would not have paid any commission and there being no profits, no taxes would have been paid. Thus, in view of aforesaid discussions, it can be safely concluded that the impugned party rendered services within its scope as per mutual understanding with the assessee. In real business situations the businessmen can get the business by advertisement and publicity, through reference of specific customers or through professional liaison agencies. In the present case, the assessee has adopted the policy of furthering it s business interests by getting business through reference or introduction and paying incentives for this purpose then there is nothing wrong in this approach because such practice is prevalent in all trade/industrial and commercial activities. A satisfied customer or social contact can bring business more effectively ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter and nature as compared to traditional services where continuous efforts are required. Meticulously created evidence cannot be a conclusive evidence of rendering of services. The judicial position is also settled that rendering of services is an essential condition for the allowance of any expenditure related thereto. In the present case, the nature of services is entirely different and these types of services are rendered by professional bodies also. Thus, prevalence of such type of agencies and requirement of such services cannot be ruled out in modern business realities. As stated earlier that, generally no direct evidence can be produced in such types of cases where the assessee takes the help of the people/corporate entities to get the business, because such intermediary as such do not wish to be known as intermediaries working for a monetary consideration. Admittedly M/s. Snowcem India Ltd. has recorded the commission receipts as it s income which further corroborates the facts of rendering of the services of introduction/reference. The rendering of services is a matter of fact and it can be established so or otherwise only on the basis of facts of that case. Hence, no gen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3-94, the learned counsel has submitted the details substantiating the fact that the assessee paid commission only on the business generated through intermediaries and not total income by way of sales and services. The Assessing Officer has worked out over all profit margin at 3.26% of the total sales and services correctly, however, he has compared with the rate of commission being 7.5% of the business procured through intermediaries, this comparison, in our considered opinion it is not correct because the overall rate of commission on the gross sales and services is only approx. 2.02% and 7.5% and such rate is less than the overall net profit margin of 3.26% worked out by the Assessing Officer. In this factual background, the commission paid appears to be reasonable. The reasonableness of the rate of commission is also supported by the fact that in the earlier years, the assessee has paid commission at the rate as high as between 8% to 9% whereas the rate of commission in this year is 7.5%. 7.4 In view of the above discussion and after considering the specific facts and the circumstances of this case, we are of the considered opinion that the order of the learned CIT(A) is in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ies 209 ITR 383 (Bom.) b.CIT v. R.K.K.R. Steel Pvt. Ltd. 258 ITR 306 (Mad.) c.M. Subramaniam Bros. v. CIT 250 ITR 769 (Mad.) d.Intersil India Ltd. v. ACIT (ITA 1357/M/2001) for assessment year 1997-98 ITAT D Bench, Mumbai. 10. The learned counsel submitted that the appointment as Director of assessee-company for extraneous considerations was never the case of the Department for the purposes of making disallowance. He submitted that the salary paid in the earlier years to the Director had been allowed as a deduction and hence imputations at the appellate stage could not be levied as regards the merit or qualifications of a director. He submitted that as per the Companies Act, specific provisions were provided for the appointment of Directors. In the case of Shri Vineet Suchanti, all provisions of the Companies Act had been complied with. The learned counsel contended that the expenditure also could not be considered as personal in nature as the amount expended on training had not been treated as benefit or perquisite in the hands of the director. On the issue of the nexus of the expenditure with the business activities of the assessee, the learned counsel su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1357/M/2001) for assessment year 1997-98 ITAT D Bench, Mumbai, the learned counsel submitted that the expenditure was disallowed on the basis that the expenses were incurred solely for the reason that the person sent abroad for higher education was the son of the managing director of the company. 11. We have considered the submissions made by both the sides, material on record, orders of authorities below, applicable legal position and various judicial precedents cited by both the sides. Admittedly, Shri Vineet Suchanti was the employee Director of the Company since the age of 19 years and he was also paid remuneration for rendering services to the company. It is also not in dispute that he was sent for training abroad at the age of 23 merely 3 years after working with the company. It is also not in dispute that the expenditure incurred was related to business of the assessee. It is also not in dispute that after getting training Mr. Vineet Suchanti continued to work for the company. We also find sufficient merit in the contention of the assessee that as per the provisions of the Companies Act, specific qualifications which were prescribed for becoming a Director of the Com ..... X X X X Extracts X X X X X X X X Extracts X X X X
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