TMI Blog1984 (3) TMI 32X X X X Extracts X X X X X X X X Extracts X X X X ..... d the paid-up capital was Rs. 1,10,000. Prior to April 1, 1965, the company did not have any sole selling agents and it marketed its goods directly through the distributors. The list of distributors was approved by a resolution of the board of directors on January 21, 1965. On February 11, 1965, a firm under the name and style of M/s. Kay Engineering Sales Corporation came into existence. It was constituted by four persons, namely, Shri K. S. Khosla, son of Shri S. S. Khosla, holding 10 per cent. shares, Sint. Sumitra Khosla, wife of Shri S. S. Khosla-20 per cent. shares, Sint. Shakuntla Khosla, wife of Shri M. M. Khosla, son of Shri S. S. Khosla-35 per cent. shares and Sint. Kamla Kapur , daughter of Shri S.S. Khosla-35 per cent. shares. Each partner in the firm had, respectively, a connection with the company, inasmuch as Shri K. S. Khosla was a director up to March 31, 1966, Sint. Sumitra Khosla was a director, Sint. Shakuntla Khosla was the daughter-in-law of the managing director and wife of a director and also herself a director and Sint. Kamla Kapur was the daughter of the managing director, sister of another director and herself a director. So, the connection was obvious ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso examined the evidence furnished by the assessee in support of its claim. He also took into account the various arguments of the assessee, but disallowed the payment of commission in respect of the two assessment years. The assessee unsuccessfully appealed to the AAC in respect of both the assessment years. Against the consolidated order passed by him, the assessee went up in appeal before the Tribunal. The Tribunal too rejected the appeal by coming to the conclusion that there was no evidence on the record to establish that any specific services were rendered by the agency firm in order to justify the payment of commission credited to its accounts by the assessee-company during the relevant accounting periods. The Tribunal observed as under. We have heard the learned representatives of the parties at length and have gone through the records and, in our opinion, there is no evidence on record to establish the assessee's case that any specific services were rendered by M/s. Kay Engineering Sales Corporation in order to justify the heavy commission credited to its account by the company during the relevant accounting periods. Our conclusions are based on the following facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase, there is no evidence on record to show that the selling agency firm performed any propaganda work. Before us, the learned counsel for the assessee has pointed out to a circular letter issued by M/s. Kay Engineering Sales Corporation to the various dealers to press home his point of view that propaganda work was in fact done by the selling agency firm. We find from this circular letter that neither the letter is dated, nor signed by anybody. It is also not a printed letter, but only a cyclostyled one and, hence, it cannot be said with any amount of certainty that this circular letter was in fact issued by the selling agency firm and not by the assessee-company itself. This apart, we find that the assessee-company had already appointed a number of distributors for different territories and they were being paid substantial commission for undertaking the propaganda, publicity and canvassing of sales on behalf of the assessee-company. In these circumstances, the payment of a further overriding commission of 5% to the sole selling agents was not at all justified. (b) Coming now to clause 9 of the appointment letter, the learned counsel of the assessee had laid great emphasis on t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authorities below as well as before us, a lot of emphasis was laid on the fact that the sole selling agency firm appointed two travelling agents, namely, Shri Yodha Ram and Shri S. K. Puri, who undertook extensive tours to various parts of the country and propagated the sales of the goods manufactured by the assessee-company. It was also pointed out that these selling agents used to send daily progress reports to the head office, which, in turn, used to send the reports to the assessee-company. We, however, find from the following facts that the contention of the assessee is not supported by any evidence. (a) No appointment letters to these agents, namely, Shri Yodha Ram and Shri S. K. Puri, were produced to show whether these persons were appointed by the selling agency firm or by the assessee-company. (b) In spite of various opportunities allowed by the Income-tax Officer, these selling agents were not produced before the Income-tax Officer on the ground that they had left the services of the selling agency firm and their present whereabouts were not known. Enquiries made by the Income-tax Officer at the addresses given by the assessee also did not reveal their whereabouts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r partners out of which three were ladies. The only male partner was Shri K. S. Khosla who was twenty years and five months old at the time of the execution of the sole selling agency agreement with the assessee-company. The firm, M/s. Kay Engineering Sales Corporation, came into existence only on February I 1, 1965, without any previous experience in canvassing or propagation of sales. Thus the payment of a heavy commission during the years under consideration to a firm with little experience in the conduct of sales having three lady partners and a male partner with insufficient experience leaves no doubt in our minds that the setting up of the sole selling agency firm was only a device to reduce the incidence of taxation of the assessee-company. (vi) After the appraisal of the entire evidence on record and in view of the detailed reasons discussed in the foregoing paragraphs, we are of the opinion that no services were rendered by the sole selling agency firm in order to justify the payment of a commission amounting to Rs. 1,52,130 and Rs. 1,69,162, during the assessment years 1967-68 and 1968-69, respectively. The expenditure claimed by the assessee-company by way of payment o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... view to appropriate the funds of a flourishing concern to their own use by those who controlled the assessee-company, its managing agents and selling agents ", was approved by their Lordships by holding that this finding of the Tribunal was amply borne out from the evidence on record and no question of law arose out of the order of the Tribunal. Now, in the present case, there is sufficient material on record as discussed in the foregoing paragraphs, to hold that no specific services were rendered by the firm, M/s. Kay Engineering Sales Corporation, and the said firm was set up only as a device to fritter away the profits. The payment in question was clearly unreasonable having regard to the legitimate business needs of the company and the benefits derived by it therefrom. It is true that from the juristic point of view, the company was a legal personality entirely distinct from its members and the company was capable of enjoying rights and being subjected to the duties which were not the same as those enjoyed or borne by its members. But in certain exceptional cases, the court was entitled to pierce the veil of corporate entity and pay regard to the economic realities behind th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... order of the Tribunal. The Tribunal, however, referred only one question to this court for opinion which is to the following effect: " Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure of Rs. 1,52,130 and Rs. 1,69,162 for the assessment years 1967-68 and 1968-69, respectively, by way of payment of commission to M/s. Kay Engineering Sales Corporation, was not laid out wholly and exclusively for the purposes of assessee's business ?" The aforesaid question is the subject-matter of Income-tax References Nos. 118 and 119 of 1976. The assessee, thereafter, approached this court by filing the Income-tax Cases Nos. 32 and 33 claiming mandamus from this court for questions which had not been referred by the Tribunal for opinion. These four matters were placed before a Division Bench consisting of M. R. Sharma and S. S. Kang JJ. and it was ordered on November 2, 1981, that the Income-tax Tribunal should submit a better statement of the case indicating therein, how the questions of law claimed by the assessee are questions of fact or of law, as the case may be. Thus, a better statement was required to be submitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onclusion of the Tribunal is provisions of section 40(c) of the Income-tax based on the appreciation of Act, 1961, whether it did not err in law in evidence and application of ignoring the fact that the said commission principles laid down under was paid to a firm which is neither a section 37(1) of the Income-tax shareholder nor a person having substantial Act. In view of this, question No. interest in the appellant company and, 3 is also not referred for the consequently, the provisions of section 40(c) opinion of the Honourable High were inapplicable? Court. 4. Whether the learned Appellate Tribunal Question No. 4 refers to a was legally correct in holding that the firm of finding of the Tribunal and the basis selling agents was set up with a view to fritter of that finding is given in detail in away the appellant's profits, notwithstanding the order of the Tribunal. The that the said firm had been consequently finding of the Tribunal in this regard assessed as a 'registered firm' in respect of is clearly a finding of fact and this its income derived from the appellant company? question is, therefore, not referred for the opinion of the Honourable High Court. 5. Whether th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s were not rendered by the selling agents being a finding of fact, this question is not referred for the opinion of the honourable High Court for opinion. In view of the above juxtaposition, question No. 6, as modified, has now been referred to this court for opinion. It is to the following effect : " Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the expenditure of Rs. 1,52,130 and Rs. 1,69,162 for the assessment years 1967-68 and 1968-69, respectively, by way of payment of commission to M/s. Kay Engineering Sales Corpn. was not laid out wholly and exclusively for the purpose of the assessee's business ? " The learned counsel for the assessee pointed out that the ITO had held the provisions of s. 40(c) to be attracted and, as such, the said section being applicable to companies was in the nature of an exception to the general rule embodied in s. 37. It was stressed that the case had to be judged from the point (of view) of s. 40(c) alone and not under s. 37. On that basis, it was urged that all the questions sought by the assessee for reference to this court would become open, inclusive of those questions which we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or accruing to it therefrom, so, however, that the deduction in respect of the aggregate of such expenditure and allowance in respect of any one person referred to in sub-clause (i) shall, in no case, exceed (A) where such expenditure or allowance relates to a period exceeding eleven months comprised in the previous year, the amount of seventy-two thousand rupees; (B) where such expenditure or allowance relates to a period not exceeding eleven months comprised in the previous year, an amount calculated at the rate of six thousand rupees for each month or part thereof comprised in that period." The provision has pregnant words. The ITO can opine such expenditure or allowance to be excessive or unreasonable having regard to the legitimate business needs of the company and the benefit derived or accruing to it therefrom. The expenditure even then has outer limits. It can even be rejected totally as unreasonable. Unlimited expenditure is not permissible in any event. And besides that, s. 40 starts with a non obstante clause by providing " Notwithstanding anything to the contrary in sections 30 to 39, the following amounts shall not be deducted in computing the income chargeab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the language of s. 40(c), when it has employed expressions like " legitimate business needs " and " benefit derived ". We find no such inter-mixing. The finding recorded is to express that the expenditure claimed has not been expended wholly or exclusively for the purpose of the business or profession. The finding is in accord with the spirit and language of s. 37. Our attention was also drawn to conditions Nos. 4, 7 and 8 of the agency whereunder it was claimed that due to the existence of the agency, the assessee had maintained business accounts and had even kept with itself the commission as loan under condition No. 8. Furthermore, it was contended that the firm was a genuine firm and both the firm and the assessee had in observance of maintaining of accounts in the mercantile system, shown respectively, income and expenditure of the commission in their account books. These arguments do not impress us, for, if a state of affairs had come about, it does not mean that a sum shown in the accounts as having been expended as commission is necessarily allowable under s. 37. The elaborate reasoning given by the Tribunal justifies its conclusion that there was no evidence on the re ..... X X X X Extracts X X X X X X X X Extracts X X X X
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