TMI Blog1987 (12) TMI 61X X X X Extracts X X X X X X X X Extracts X X X X ..... etailed inquiries and on the basis of the information gathered as also on the basis of the information furnished by the assessee and explanations, the ITO concluded that the freight at the fixed rate of Rs. 6,000 per month per truck was on the higher side. He further found that the payment of Rs. 6,000 was being made although there was an agreement in operation to pay only Rs. 4,000 per month per truck. He accordingly proceeded to disallow 1/3rd of the total payment and for this purpose recorded the following facts and reasons: "It appears from the details of monthwise freight paid to the family members that during the whole year the family members have been paid at the rate of Rs. 6,000 per month per truck. Total amount of hire charges paid is Rs. 19,32,000 for the whole year. During the course of search certain written agreements with the owners of the trucks and who are family members were found. During the course of search Shri. Ravindra A. Mehta was examined on those agreements. Shri Mehta has stated that such agreements were not registered with any authority out were written on stamp papers. Shri Mehta also stated that rate of freight per month per truck was Rs. 3,500 at p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re charges at the rate of Rs. 4,000 per month only. The excess amount of hire charges paid to the family members during the year cannot therefore be said to have been laid out or expanded wholly and exclusively for the purposes of the business. The same is therefore required to be disallowed as expenditure for non-business purposes under s. 37(1) of the Act. As against the fixed amount of Rs. 4,000 per month as per the terms of the agreements dt., 1st June, 1979, operative during the year, the assessee has actually paid Rs. 6,000 per month to the family members. Thus the assessee has paid Rs. 2,000 i.e., 1/3rd of total actual more per month during the year. Such 1/3rd excess expenditure is therefore required to be disallowed. The assessee has paid total freight hire charges of Rs. 19,32,000 to the family members during the year. Therefore an amount of Rs. 6,44,000 being 1/3rd of the total payment for hire charges is disallowed under s. 37(1) of the Act. Since admittedly the payments for freight hire charges are made to the family members of the partners of the assessee firm, provisions of s. 40A(2) are also attracted. As discussed above, expenditure of freight hire charges pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry there is a direct decision of the Madras High Court in CIT vs. India Cements Co. (1975) 98 ITR 69 (Mad) wherein it is held that payment in excess of the amount which an assessee is liable to pay under the terms of an agreement is not an allowable deduction under s. 37(1) of the Act. Apart from the above decision of the Madras High Court the observations of the Supreme Court in CIT vs. Travancore Sugars and Chemicals Ltd. (1973) CTR (SC) 49 : (1973) 88 ITR 1 (SC) which reads as follows are also very relevant : "Allowability depending on the construction of an agreement, etc. In considering the nature of the expenditure incurred in the discharge of an obligation under a contract or a statute or a decree or some similar binding covenant, one must avoid being caught in the maze of judicial decisions rendered on different facts and which always present distinguishing features for a comparison with the facts and circumstances of the case in hand. Nor would it be conductive for clarity or for reaching a logical result if we were to concentrate on the facts of the decided cases with a view to match the colour of that case with that of the case which requires determination. The surer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... v., 1980 to 31st Oct., 1981 6,000 27th Oct, 1981) . 2038 (18th Oct., to 15th 1st Nov., 1981 to 31st Oct, 1982 4,500 Nov, 1982) . 2039 (16th Nov., 1982 to 1st Nov, 1982 to 31st Oct., 1983 3,500 4th Nov., 1983) . It was submitted that the rate was increased or decreased as per mutual agreement between the parties. (b) That the partner of the firm Shri Ravindra Mehta was examined on oath by the Department atleast seven times but in none of these examinations was a question posed to him as to why Rs. 6,000 was being paid when the agreed figure was Rs. 4,000. (c) The variation in the agreement between the parties was proved by the fact that although the payment in "Cash" was provided, the amount was being credited to the account of the parties and paid to them whenever required. (d) The main business of the assessee rested on the trucks provided by the relatives and these numbered around 29 in the year under appeal. (e) There was no whisper of any "tax evasion" having been included in by the assessee in respect of these transactions. ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eased to Rs. 6,000 per month per truck. In between S.Y. 2047 and S.Y. 2038 although there was an increase in the receipts the payment was reduced to Rs. 4,500 per month on account of recession in the transport business. As regards the period between S.Y. 2038 to S.Y. 2039 there was a decrease in the receipts to the extent of Rs. 12,19,275 leading to a further reduction in the payment which was fixed at Rs. 3,500 per month. 7. The learned counsel for the assessee concluded his arguments by referring to the following reported decisions: (i) CIT vs. Raipur Mfg., Co. Ltd. (1972) 84 ITR 508 (Guj) (ii) CIT vs. Dhanraj Girji Raja Narasingirji (1973) 91 ITR 544 (SC) (iii) CIT vs. Valchand and Co. Pvt. Ltd. (1967) 65 ITR 381 (SC) 8. The Departmental Representative on the other hand, strongly supported the action of the lower authorities pertaining to the disallowance on account of freight. His arguments are summarised as under: (a) The Department came to know about the agreement pertaining to the payment of freight to the relatives only at the time of carrying out a search in July, 1984. (b) The provisions of s. 40A(2) could be invoked by the ITO in the year under appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of their trucks by the firm. It is further admitted that agreements are drawn up between the firm and the partners, relatives for a payment of Rs. 4,000 per month per truck and such agreements are operative for the year under appeal. It is also accepted that a payment of Rs. 6,000 per truck per month has been made although there is no written agreement to vary the amount in question. 13. As against these facts it cannot be denied that the receipts on account of freight have been showing an upward trend and in the year under consideration itself there is an increase of Rs. 24,72,895 as compared to the earlier period. These receipts have increased in the subsequent period as well except in between the period S.Y. 2038 to S.Y. 2039 when there was a fall of Rs. 12,19,275. The highest figure reached was during the period ending S.Y. 2038 when the receipts were Rs. 1,24,29,689. We also find that the assessee struck to the agreement only for the asst. yr. 1980-81 and for the first half of asst. yr. 1981-82 and increased the figure to Rs. 5,000 per month during the second half of asst. yr. 1981-82. During the year under appeal the figure was Rs. 6,000 whereas for asst. yrs. 1983-84 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... octroi paid goods lying in the godown at the end of the year. It is clear from the assessee's explanations that the octroi is paid by the assessee firm in advance on behalf of the customers and is subsequently recovered from them. Admittedly such payments for octroi are not the business expenses of the assessee and are therefore not allowable against income of the assessee. These payments are advance payments on behalf of the customers and as per the correct principle of accountancy the assessee should have debited the same to the respective accounts of the customers or in a separate octroi advance account instead of charging it to the Trading account. Such octroi advance payments at the end of the year are to the extent of Rs. 2,56,496 as stated above and by charging the same to the trading account the assessee has reduced its profits to this extent. During the course of hearing it is argued on behalf of the assessee firm that this method is being followed from year to year. It is well known that there is no res judicata in the IT Act and therefore it is not necessary to follow the incorrect method followed in the earlier years. For the sake of understanding it may be stated that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relatable and incidental to the trade activities. In order to ascertain whether the expenditure has been incurred wholly and exclusively for the purpose of the business, he has to prove the direct concern and direct purpose for which the money is laid out. Regarding the accounting of this expenditure the manner in which an item of expenditure is recorded in the appellant's books of account, is not conclusive against or in favour of the appellant. In this regard the decision of the Supreme Court in the case of CIT vs. India Discound Co. Ltd. (1970) 75 ITR 191, 195 (SC) is relevant. In this case the Court has held that a receipt which in law cannot be regarded as income cannot become so merely because the assessee erroneously credited it to the profit loss account. Conversely it can be said that an expenditure which in law cannot be regarded as expenditure of the appellant cannot as such simply because the appellant has erroneously debited the same to its profit loss account. Apart from the above facts it would be pertinent to take a look at the chart showing the figures of octroi paid and received form the asst. yrs. 1980-81 to 1985-86 which is reproduced as below: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lus of Rs. 12,893 which had been subjected to tax whereas in asst. yr. 1986-87 (S.Y. 2041) there was a surplus of Rs. 1,07,711. He wound up his arguments by making a strong plea for the deduction to be allowed specially when it was strictly in accordance with the practice followed in the past. In support of his arguments he placed strong reliance on the following decisions: (i) Chowringhee Sales Bureu P. Ltd. vs. CIT (1973) CTR (SC) 44 : (1973) 87 ITR 542 (SC). (ii) Sinclair Murray and Co. P. Ltd. vs. CIT (1974) CTR (SC) 283 : (1974) 97 ITR 615 (SC) (iii) CIT vs. Western India Engg., Co (1971) 81 ITR 712 (Guj). 19. The Departmental Representative on the other hand, strongly supported the action of the lower authorities in rejecting the assessee's claim. His arguments were more or less on lines similar to the ones as had been adopted by the ITO and the CIT(A). 20. We have examined the rival submissions and have also perused the material on record. Admittedly the assessee's claim is in accordance with a system of accounting followed all along in the past. It is also an admitted fact that as and when there had been a surplus on this score the same has been subjected to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce of Rs. 1,48,388 out of commission paid. The ITO made the disallowance on the following lines: "On scrutiny of the accounts it is noticed that the assessee has paid total commission of Rs. 2,70,882 during the year. Details of commission account are filed. During the year out of the commission payment of Rs. 2,70,882 the assessee has paid commission of Rs. 2,22,582 to M/s. Laxmi Trading Corporation, Sidhpur. During the course of discussion the assessee was asked to furnish explanation regarding circumstances and the basis of commission paid to the above concern. The assessee has filed a written reply stating that the above firm procures business from local customers and on their request the goods are transported by the assessee. It is further stated that the said firm decides the rate of truck per trip as per prevailing market conditions. There is no fixed rate of truck hire facility provided by the assessee to the said firm and there is no such written agreements in this regard for the basis of payment of commission. However, it is stated that as per the agreement's freight bills are prepared by the assessee and collection of the same is also made by the assessee. After deduc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , not only excessive but unreasonable also. Considering close relationship of the partners of the assessee firm with the partners of firm of M/s. L.T.C. and considering the quantum of business procured for which commission is paid by the assessee to the said firm, it can be said that the amount of commission paid is not only excessive but unreasonable also having regard to the legitimate needs of the business of the assessee. Provisions of s. 40A(2) of the Act are, therefore, clearly attracted. The assessee has paid commission of Rs. 2.22,582 on the freight receipts of Rs. 13.62 Lakhs which comes to about 16 per cent of the freight received. By any standard this is certainly very high. It would be justified if the commission payment is restricted to 1/3rd of the total payment of Rs. 2,22,582 which amount would be Rs. 74,194. This roughly works out at little more than 5 per cent of the freight receipts of Rs. 13.62 Lakhs which is quite reasonable. It is, therefore, held that the balance amount of Rs. 1,48,388 being the 2/3rd of commission payment of Rs. 2,22,582 is excessive and unreasonable. The said amount is therefore, not allowed as deduction as per the provision of s. 40A(2) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... atement of computation of income filed with the return, the appellant has stated its business as Transport Commission Agents. In its letter dt., 2nd Jan, 1985 addressed to the ITO, a partner of M/s. LTC has also confirmed that their main business is of transport commission and considering the over all facts and circumstances I find that the appellant's contention now raised afresh before me is not at all acceptable on the facts of the case. There is, therefore, no reason for me to differ with the stand taken by the ITO in this regard. The disallowance has been correctly made by the ITO under s. 40A(2) only and not under s. 37(1) as has now been referred to by the appellant in their written submission. At no point of time the appellant has contested the quantum of disallowance of commission under s. 40A(2). The ITO has already allowed 1/3rd of the commission which to my mind is quite fair and reasonable and calls for no interference on my part". 25. Before us it has been vehemently argued on behalf of the assessee that M/s. Laxmi Trading Corporation (M/s. LTC for short) is a sister concern and the arrangement between the assessee and M/s. LTC is in existence for the last 16 years ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the two immediately preceding assessment years, ie., 1980-81 and 1981-82 (assessment order filed). 28. We are also unable to accept the arguments of the Departmental Representative to the effect that no specific services have been performed by M/s. LTC to earn this commission. We are afraid that this argument stands nulified by the observations of the ITO himself to the effect that "no services are rendered by the said firm except the procurement of business". According to us the procurement of business by itself is sufficient enough to entitled M/s. LTC to the commission. 29. Now coming to the quantum of the amount paid we reproduce below a chart furnished to us and pertaining to asst. yrs. 1978-79 to 1982-83: Assessment Gross Freight Truck Hire Commission % of Gross Year . Charges . Freight . Rs. Rs. Rs. 1978-79 13,77,783.01 11,68,846.00 2,08,938.01 15.16% 1979-80 07,06,968.53 6,01,524.65 1,05,443.88 14.91% 1980-81 10,54,614.46 8,86,049.00 1,68,565.42 15.98% 1981-82 8,98,970.35 7,44 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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