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PATEL BROTHERS Versus DY. C.I.T

Disallowance of secret commission - CIT(Appeals) has not disallowed the entire claim but limited it to 1% of the turnover of the assessee - ITAT confirmed disallowance - Held that:-CIT(Appeals) making the disallowance limited it to 1% of the turnover of the assessee noticing that the claim of secret commission, had shot up to 7.03% of the turnover for the year under consideration whereas the gross profit rate had gone down from 13.26% to 10.26%. More importantly, it was noticed that as against t .....

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APPEAL NO. 205 of 2002 - Dated:- 22-2-2016 - MR.AKIL KURESHI AND MR. Z.K.SAIYED, JJ. FOR THE APPELLANT : MRS SWATI SOPARKAR, ADVOCATE FOR THE OPPONENT : MRS MAUNA M BHATT, ADVOCATE JUDGMENT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. This appeal is filed by the assessee challenging the judgements of the revenue authorities and that of the Income Tax Appellate Tribunal. While admitting the appeal, following substantial questions of law were framed: 1. Whether, in the facts and circumstances of .....

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eturn of income on 27.10.1997 and had declared a total income of ₹ 6.68 lacs (rounded off). Such return was taken in scrutiny by the Assessing Officer. One of the questions came-up for consideration during such scrutiny assessment was the assessee's claim for deduction of ₹ 19.85 lacs (rounded off) by way of expenditure. The assessee claimed that he had paid such sum of ₹ 19.85 lacs to various persons by way of secret commission. The case of the assessee was that to the emp .....

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addresses and details of the recipients of such secret commission. The assessee claimed that entire amount was paid in cash but produced no receipts from the recipients of such commission. 3. The Assessing Officer questioned the very expenditure and noticed several factors to come to conclusion that the same was not allowable deduction at all. In addition to noticing that the assessee had not produced any details of whom such payments were made, no accounts were maintained by the assessee nor an .....

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e to 7.03%. The Assessing Officer also compared the gross profit to the sales and noticed that, in the assessment year 1997-98, there had been a drop in the gross profit ratio. The Assessing Officer referred to several decisions of this Court and other High Courts cited before him but came to the conclusion that the expenditure in question failed to fulfill the conditions for claiming deduction under Section 37 of the Income Tax Act, 1961. He recorded that the assessee failed to establish that t .....

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dispute the allowability of such an expenditure. He, however, formed an opinion that the expenditure claimed by the assessee was excessive compared to the preceding years and also compared to the turnover. He also marked that the GP rate had come down from ₹ 13.26% in the earlier year to 10.26% in the current year. He, therefore, while allowing the expenditure, limited the same to 1% of the total sales and, thus, allowed expenditure of ₹ 2.82 lacs (rounded off). CIT(Appeals) held an .....

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ght to tax in the hands of the recipients, in the absence of their names and addresses, is against the spirit of policy of taxation and not in public interest. The claim also does not fall into the parameters which have been spelt out in various cases laws. Specifically in the case of CIT vs. Goodlas Nerolac Paints Ltd. vs. CIT(188 ITR 1) and ITR vs. Wanson (India) Pvt. Ltd. (35 ITR 42) due notice has been taken of the fact that the quantum of secret commission was very meager. Moreover, in the .....

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be supported with the help of proper evidence. One the facts and circumstances of the case of the appellant, I would consider it most reasonable and fair to allow deduction for the claim of such commission paid for procuring orders at 1% of the total sales, which works out to ₹ 2,82,200/-. Addition to the extent of ₹ 17,03,955/- is therefore, confirmed and the balance is deleted. This diposes of all the grounds of appeal of the appellant. 5. The assessee carried the matter in furthe .....

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was against the Revenue, mere non-filing of the appeal by the Revenue would not limit our scope of examining all legal contentions arising out of judgement of the Tribunal. What may be limited is, relief that can be granted and not the contentions. 6. The Tribunal, in a detailed judgement, held that the entire expenditure was not allowable. The Tribunal referred to the explanation to Section 37(1) of the Act added by Finance (No.2) Act, 1998 with retrospective effect from 01.04.1962 to hold tha .....

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Soparkar for the appellant raised following contentions: (i) The Tribunal has applied concepts of morality and thereby expanded the scope of Section 37(1) of the Act. (ii) Explanation to sub section (1) of Section 37 of the Act was simply not applicable. As recipients are the employees of private company and not the Government employees, the commission was not barred by any law nor the act of the assessee amounted to any offence. (iii) In earlier assessment years, the expenditure was allowed aft .....

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e was made exclusively for the purpose of business. The Assessing Officer questioned the very relation of the expenditure with the business carried out by the assessee. The Tribunal has also given cogent reasons. 9. Sub section (1) of Section 37 of the Act provides that, any expenditure not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee laid down or expanded wholly and exclusively for the purp .....

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s expended wholly or exclusively for the purpose of business or profession. 10. In this context, we may refer to the judgement of Division Bench in case of Dr. G.G.Joshi vs. Commissioner of Income Tax reported in 209 ITR 324. In the said decision, the assessee had claimed similar deductions on secret commission paid. While recognizing such expenditure the Court held that, in order to be entitled to deduction of payments made to persons whose names are not disclosed, the assessee has to (i) estab .....

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by the Tribunal unless such finding is perverse. 11. In the case of Commissioner of Income Tax vs. Transport Corporation of India reported in 256 ITR 701 the Division Bench of Andhra Pradesh High Court observed that mere payment by the assessee itself would not entitle him to deduction of expenditure unless the same was proved to be paid for commercial considerations. It was observed that in such a situation, the burden of proof is on the assessee and not for the department to independently coll .....

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dinarily in a nature of payment in which the assessee would be reluctant to reveal the identity of the recipients. Such expenditure when allowed as a deduction would reduce the income of the assessee without the revenue being able to verify whether the recipients\ had offered such income to tax. Even otherwise such commission by very nature of things would be a small portion of an assessee's turnover. Thus flow the requirements of keeping such deductions down to a small proportion and castin .....

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ation to the assessee's turnover, expenditure under the head of secret commission and the gross profit ratio that the Assessing Officer disallowed the entire claim. 14. Had this been final finding approved by the CIT(Appeals) and the Tribunal, perhaps, the assessee would have been correct in contending that total disallowance was not justified, particularly, when year after year in the earlier assessment years, the assessee had claimed such deduction and the same, in principle, was also acce .....

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