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2016 (5) TMI 490 - BOMBAY HIGH COURT

2016 (5) TMI 490 - BOMBAY HIGH COURT - [2016] 386 ITR 233 - Addition made on account of payment of “Mehta Sukhadi” - According to the appellant, such commission has been paid secretly to employees of numerous clients and those amounts are deductible under Section 37(1) - Held that:- Vague references are made to the statement made by the partners of the assessee firm whose presence had been recorded by CIT (Appeals) at the hearing. The CIT (Appeals) does not record any substantial evidence that h .....

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part of the record. Although the list, a copy of which is now been taken on record, pursuant to the order in Notice of Motion reveals names of clients, most of whom are corporates, the assessee made no attempt to adduce any evidence as to which the partners dealt with clients in question. No attempt has been made to establish whether the payments were for the purpose of business. In fact the Assessing Officer has in our view rightly concluded that payment of commission did not result in any expe .....

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of the law existing at the time, the impugned order was passed to hold that the appellant had not established the payment of secret commission. No occasion arises to examine the application of the Explanation 1 to Section 37 of the Act, which would arise only if it is held that the expenditure of secret commission had in fact been incurred of the purposes of business. - Appeal must fail and the substantial question of law raised for our consideration in all the three appeals viz “Whether on .....

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Appeals under Section 260A of the Income Tax Act 1960 ( the Act ) were admitted on 26th February 2002 in respect of assessment years 1991-92, 1992-93 and 1993-94. All three appeals were admitted on an identical substantial question of law save and except that the amounts in dispute as indicated in the questions in the three appeals are different. For the purpose of these appeals this Court re-framed the solitary substantial question of law excluding the amounts in respect of each assessment yea .....

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the appellant for providing tarpaulin sheets for putting up protective weather sheds. It is the appellant's case that in the regular course of their business they are required to incur and pay costs by way of secret commission allegedly known in the trade as Mehta Sukhadi . According to the appellant, such commission has been paid secretly to employees of numerous clients and those amounts are deductible under Section 37(1) of the Income Tax Act, 1961 (the Act) as business expenditure. 3. I .....

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invited to the order dated 31.3.1992 passed by the Assessing Officer for AY 1990-91 wherein also the appellant claimed payment of secret commission to the employees of companies to whom tarpaulins were given on rent. In Assessment year 1990-91 this amounted to ₹ 1,37,375/-. In respect of this alleged payment of secret commission there were no receipts or vouchers or any other written evidence. The assessee's representative submitted before the Assessing Officer that on account of sever .....

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he Assessing Officer recorded in the Assessment Order that all payments were allegedly made in cash and a list of companies from whom the payments were received during the year along with details of payments made to employees of the said companies had been furnished by the Appellant. This amounted to 1% and 3% of the receipts. 4. The assessee relied upon the decisions in Commissioner of Income Tax Vs. Sigma Paints Ltd. 188 ITR 6, Commissioner of Income Tax Vs. Goodlass Nerolac Paints Ltd. 188 IT .....

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ee, observing inter alia that in the precedents cited, secret commission paid was less than ½% of the turnover, whereas in the case of the appellant-assessee the percentage was between 1% to 3% averaging to 2.5% which was held to be unreasonable. The Assessing Officer disallowed the entire deduction claimed by way of payment of secret commission. 5. Being aggrieved, an appeal was filed before the Commissioner of Income Tax (Appeals). By an order dated 26th February, 1993 the Commissioner .....

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. Gannon Dunkerley & Co. Ltd. 167 ITR 637 which held that the issue of secret commission is one of law and not fact. The Revenue was in appeal for orders of the Commissioner of Income-Tax (Appeal) relating to A.Y. 1989-90, 1990-91, 1991- 92 and 1993-94. The Tribunal heard appeals relating to all the above years together and passed a common impugned order on 31st January, 2000. It held that the appellants was given an opportunity by the Assessing Officer to substantiate the claim but the appe .....

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(Appeals). In doing so the Tribunal did not rely solely on the fact that the appellant had not furnished the names of recipients of the commission but held that evidence adduced was not enough to substantiate the actual payment of commission. The assessee-appellant is before us being aggrieved by the order of the Tribunal. Submissions on behalf the Assessee: 8. Mr. Joshi, the learned counsel appearing on behalf of the appellants has taken us through the various factual aspects. He made three su .....

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he order passed by the Tribunal. The Tribunal could not have upturned the CIT(Appeals) finding without spelling out the deficiencies in evidence led by the assessee. Mr. Joshi contended that the appellants had filed two compilations of documents containing evidence of Mehta Sukhadi (secret commission) paid which, according to him, were available before the Commissioner of Income Tax (Appeals) and the Tribunal. However, the Tribunal has erroneously concluded that no evidence was available in resp .....

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ulars of secret commission was detailed. One of the documents relied upon before the CIT(Appeals) is a list showing secret commission allegedly paid over 10 to 15 years against gross hire charges. This list discloses that between 1990-91 and 2003 diverse amounts have been paid as secret commission ranging between 2.2% to 2.37%. Similar statements have been filed for the year 1989-90, 1991-92, 1988-89 and 1987-88. 11. Thirdly, Mr. Joshi, submitted that the Tribunal had not spelt out as to why it .....

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nized in the pronouncement in Goodlass (Supra). In paragraph 5 of the said judgment it is recorded that in order to be entitled to deduction of payments to persons whose name were not disclosed, the assessee has to establish the practice prevailing in that line of business for making such payments. It has to adduce evidence to establish the payments and has to satisfy the authorities that the payments were in fact made for the purpose of business. 13. Mr. Joshi then relied upon the decisions of .....

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nion. 14. Mr.Joshi then relied upon the judgment of the Orissa High Court in Tarini Tarpauline Productions Vs. Commissioner of Income Tax 254 ITR Page 495 wherein the effect of amendment of explanation to Section 37(1) came to be considered. In the present case Mr. Joshi submitted that the payment of secret commission is not illegal inasmuch as offering commission to private party is not an offence. In the context of explanation to Section 37(I), it may be offence to offer such payment to Govern .....

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n by Mr.Joshi of Dr.G.G.Joshi vs. Commissioner of Income Tax (1994) 209 ITR Page 324 wherein Gujarat High Court had occasion to consider payment of secret commission and the High Court found that the Tribunal was satisfied that payment of secret commission was established as a practice prevailing in that line of business and the tribunal having come to such a finding, the same cannot be interfered with by the High Court. According to Mr.Joshi the facts in the present case are eminently in line w .....

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e against provisions of Section 37(I) including the explanation. In this view of the matter Mr.Joshi submitted that the appellants were well within their rights to claim a deduction. Submissions on behalf the Revenue : 17. Mr.Suresh Kumar Learned Counsel appearing for the revenue submitted that the payment of secret commission could not be allowed as deduction. According to Mr.Suresh Kumar, in the present case, there was no evidence whatsoever to support the petitioner's case and the judgmen .....

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that when the assessee claims such expenditure as deductions, the burden of proving that such expenditure was incurred is entirely upon the assessee and which included the burden of proving that the expenditure that was incurred for the purpose of business and if the same is not proved it may be presumed that it was not so incurred. In the instant case the assessee did not produce evidence that the payment was actually made and did not discharge that burden. 19. Mr.Suresh Kumar relied upon obser .....

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al had been admitted and the substantial question of law involved consideration of 'on money' received by a party. This Court had held that in the absence of evidence in the form of any entry in books of accounts or other documents to show receipt of money by the appellant, the amount added to the appellant's income as on money received was unsustainable in law. That in a subsequent period there was evidence available as to receipt of on money . However, for the period in question th .....

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crupulous practices ushering in at both ends. Mr.Suresh Kumar relied upon the finding that the expenditure incurred on secret commission would necessarily fall within the mischief of the explanation added to Section 37(1) of the Act. Mr.Suresh Kumar submitted that in the present case also there is no evidence to establish the claim of the appellant. The fact situation in the instant case according to Mr.Suresh Kumar does not warrant interference since it has not been established that payments of .....

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with various other aspects of cash amounting to ₹ 2,72,980/- found and seized as unaccounted and various blank signed debit cash vouchers found in order to inflate labour charges which do not concern us in the present appeals which only pertain to the payment of secret commission. 22. The order of the first appellate authority reveals that the partners of the appellants were stated to be present before the Commissioner of Income Tax (Appeals) and they reportedly confirmed that the disburse .....

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account of payment received from various companies and the amount of secret commission paid by the assessee to the staff of such companies. The only detail missing was the names of recipients. The Commissioner of Income Tax (Appeals) recorded that the appellant has been following this procedure for last 30 years and the details furnished show that payments are neither were large payments made to any single company nor were the payments out of the way. The CIT (Appeals) concluded that the details .....

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articularly when the same is not a part of the record before us. We noticed that during the arguments leading to the impugned order before the Tribunal the appellant had placed reliance on the decision of the Tribunal in case of M/s. French Dyes and Chemicals India Pvt. Ltd. Vs. Commissioner of Income-Tax (unreported). However the aforesaid decision was not available for our perusal. However we were informed by Mr.Suresh Kumar that the assessee M/s. French Dyes and Chemicals India Pvt. Ltd. had .....

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preme Court observed that not only had the assessee failed to disclose names of recipients but even the commission allegedly paid was not uniform. 25. It was further pointed out that the mere fact that certain amounts were made available to the Director of the assessee was not sufficient proof of its payment, inasmuch as, according to the assessee, the amounts were not paid by the Director by himself but through various employees. The names of persons who had allegedly made payments to the Dyein .....

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re approved by the Board of Directors at the end of every month. The Tribunal found in the facts of Goodlass Nerolac (supra) that the assessee was a public limited company whose accounts were not merely audited but were also placed before the general body of the shareholders. Moreover the assessee's turnover in Goodlas Nerolac (supra) was increasing year after year whereas amounts claimed as eligible for deduction had dropped from 1.34% to 0.22% in the year in question. These were considered .....

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proved these payments and that these payments accordingly qualified for deduction. 27. In Sigma Paints (supra) the assessee had maintained a record of payment of secret commission including vouchers for the amounts received by the sales officer and other responsible person for the payment of secret commission. The details of sales transaction entered into with various companies, in respect of which secret commission had to be paid, were available. There was complete tally between the commission .....

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ties to whom the payments were made. The Tribunal held that these names could not be supplied without detriment to the business of the assessee and in the very nature of things it was not possible to expect the assessee to reveal these names. 28. In Gannon Dunkerley (supra) the question Whether, on the facts and in the circumstances of the case, the tribunal was right in holding that the expenditure by way of secret commission was deductible under Section 37(1) of the Act in computing the busine .....

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made in respect of such expenditure. In that case, the court found merit in the submission of the counsel for the revenue that in view of amendment to Section 37(I) of the Act with retrospective effect the matter required reconsideration and the Tribunal was directed to decide the issue in the light of explanation inserted in Section 37(I). 30. In Gill & Co (supra) since the explanation to Section 37(I) had not been introduced to the statute book it was held that such reliance could not hav .....

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ned to disclose the identity of persons to whom commission was paid. The Assessing Officer did not accept the claim that the payments was made for the purpose of business. The assessee appeared before the CIT (Appeals) without success, yet again the made second appeal to the Tribunal but without success. The High Court then answered the question in favour of revenue and against the assessee specially in view of amendment. 32. We find that the facts of the present case are closest to the facts in .....

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we examined the order of CIT(Appeals) in the case at hand, we find that evidence relied upon by CIT (Appeals) is not dealt with at all in the satisfactory manner. Vague references are made to the statement made by the partners of the assessee firm whose presence had been recorded by CIT (Appeals) at the hearing. The CIT (Appeals) does not record any substantial evidence that had been provided and except to say that some documentary evidence was produced, the order of CIT (Appeals) leaves much to .....

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