TMI Blog2005 (3) TMI 83X X X X Extracts X X X X X X X X Extracts X X X X ..... h/93, for the opinion of this court which we have reframed and stated in paragraph 6 of this judgment. The assessee is involved in the business of manufacture and sale of beer. It follows the mercantile system of accounting. It filed return of income for the assessment year 1990-91 declaring a total income of Rs. 56,14,990. On going through the accounts it was noticed that the assessee had claimed Rs. 59,85,644 as marketing expenses and service charges. At the same time expenditure under the same head for the period relevant to the assessment year 1989-90 claimed was Rs. 60,750. Due to abnormal increase in the item of expenditure the assessee was directed to furnish a detailed break up of the amount. The following are the details submitted by the assessee: Rs. 1. Service charges on Kerala supplies (KSBC) at the rate of 7,75,602.00 Rs. 2 per dozen paid to R.J. Associates (387801 x 2) Coimbatore 2. Service charges on Tamil Nadu supplies (TASMAC) at the rate of 22,72,192.00 Rs. 13 per dozen paid to Golden Enterprises (174784 x 13) Madras 3. Corporate management charges at the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aid to United Breweries Ltd., Bangalore. The assessee had also claimed trade scheme expenditure on Maharashtra supplies at Rs. 8,52,050. The explanation submitted by the assessee was considered by the assessing authority in detail. With regard to the payment effected to M/s. R.J. Associates the assessing authority had sent summons under section 131 of the Income-tax Act to the KSBC Ltd., calling for details and also with regard to the liaisoning work stated to have been undertaken either by R.J. Associates or by the KSBC Ltd. The KSBC had stated that no liaisoning work was done by M/s. R.J. Associates with the Corporation. The assessing authority also issued summons under section 131 of the Income tax Act to the proprietor and managing partner of Golden Enterprises. The assessing authority had also sent summons to the managing director of TASMAC Limited and called for details with regard to the work undertaken by Golden Enterprises. The managing director of TASMAC had stated that no liaisoning work was entrusted to Golden Enterprises. The assessing authority also examined the claim of the assessee for Rs. 20,85,800 being the amount paid to United Breweries Limited, Bangalore, on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the case, did the assessee discharge the burden of proof that lay on it in support of the claim for Rs. 22,72,192? Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and fact in holding that the payment to Golden Enterprises was only for business purpose or/and was in business interest?" The assessee who had claimed an amount of Rs. 59,85,644 as marketing expenses and service charges has the right to explain under section 37 of the Income-tax Act. Section 37 is a residuary provision explaining the allowance on items of business expenditure. It provides for the deduction of all expenditure wholly and exclusively laid out or expended for the purpose of the business, where such expenditure is not expressly covered by any other specific provision of the Act. In order to be eligible for an allowance under section 37, certain conditions are to be fulfilled for deduction of expenditure wholly and exclusively for the purpose of the business: (i) The expenditure must not be governed by the provisions of sections 30 to 36 and 80VV. (ii) The expenditure must have been laid out wholly and exclusively for the purpose of the business of the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtners who in their sworn statements stated that they had absolutely no knowledge about the marketing of any product and that they were not at all involved with the business activities of the firm and the business activities were being looked after by their husbands, Sri C. Janakiraman and Sri A.N. Ramachandran Nair. According to the sworn statement of Sri A.N. Ramachandran Nair, services rendered by them are giving guidance to Sri Kurup, sales officer of the company. We are of the view, mere existence of an agreement does not give rise to a claim for payment of commission and the income-tax authorities can go into the question whether the commission paid is properly deductible under section 37 of the Income-tax Act, 1961. Further, on going through the income-tax returns filed by M/s. R.J. Associates, it was found that the net profit returned by that firm was very meagre compared to the commission received by them from the assessee-company. The assessee had also claimed that they had entered into an agreement with M/s. Golden Enterprises, Madras in respect of supplies effected to TASMAC Ltd., Madras. The agreement dated June 7, 1989, would indicate that Golden Enterprises was a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of each case. The said principle has been reiterated by the apex court in Lachminarayan Madan Lal v. CIT [1972] 86 ITR 439. The apex court in the above case held as follows: "The mere existence of an agreement between the assessee and its selling agents or payment of certain amounts as commission, assuming there was such payment, does not bind the Income-tax Officer to hold that the payment was made exclusively and wholly for the purpose of the assessee's business. Although there might be such an agreement in existence and the payments might have been made, it is still open to the Income-tax Officer to consider the relevant (acts and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under section 37 of the Act." We may also hasten to add if any expenditure is spent by the assessee for purposes which has been clearly, banned the assessee cannot claim any deduction of the amount alleged to have been spent for such purposes not provided by the authorities. In CIT v. Sauser Liquor Traders [1996] 222 ITR 33, the Madhya Pradesh High Court held that even though illegal transactions might ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e expenditure on Maharashtra supplies. The assessing authority concluded that since sales to M/s. U.B. Limited are made and then reinvoiced by M/s. U.B. Limited to sub-distributors no further expenditure in the nature of trade discount scheme expenditure is incurred by the assessee and the same method is equally applicable to sales effected to H.P.P.L. Limited and no further expenditure in the nature of trade discount scheme is warranted. The assessee tried to distinguish this payment from CMC charges. The procedure followed in the case of U.B. Limited is equally applicable to H.P.P.L. Limited also in respect of reinvoicing. We are of the view, since sales to M/s. U.B. Limited were made and then reinvoiced by U.B. Limited to sub-distributors for such sales no further expenditure in the nature of trade discount scheme expenditure was incurred by the assessee. The same principle would apply in the case of sales effected to H.P.P.L. Limited, Bombay, and no reassessment was warranted. We are of the view, the reasoning of the assessing authority as confirmed by the Commissioner is only to be upheld in the facts and circumstances of the case. We are of the view that the Tribunal has co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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