TMI Blog2002 (2) TMI 299X X X X Extracts X X X X X X X X Extracts X X X X ..... hed during the hearing a separate compilation of various judicial pronouncements relied upon by him. 4. At the outset brief facts having bearing on the point in issue may be set out. The assessee-firm is engaged in the business of trading in electrical goods as well as carrying out job work like electrical installations, fixing of switchboards, etc. During the course of assessment proceedings the AO noted that a sum of Rs. 19,85,255 has been debited to the P L a/c, on account of secret commission. When called upon to justify the claim of deduction by the AO, the assessee explained that secret commission has to be paid to procure more business. According to the assessee there was a trade practice in its line of business, namely, dealing in electrical goods and job-work of electrical installation, etc. to make commission payments to employees of customer concerns. The assessee stated that its major customers are business houses like M/s Reliance Filaments Ltd., Bharat Vijay Mills, Anti Friction Bearings, Chemstar Organics, PBM Poly Tex. etc. and commission has been paid to procure more business in the face of tough competition. The assessee furnished the following chart regarding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee. The AO accordingly disallowed the entire commission of Rs. 19,85,255. 5. Aggrieved, the assessee carried the matter before the CIT(A). Before the CIT(A), the assessee cited the following decisions in support of the claim of secret commission: 1. Godlas Nerolac Paints Ltd. vs. CIT (1982) 28 CTR (Bom) 186 : (1982) 137 ITR 58 (Bom); 2. CIT vs. Goodlas Nerolac Paints Ltd. (1990) 90 CTR (Bom) 184 : (1991) 188 ITR 1 (Bom); 3. CIT vs. Sigma Paints Ltd. (1992) 103 CTR (Bom) 306 : (1991) 188 ITR 6 (Bom); 4. Dr. G.G. Joshi vs. CIT (1994) 117 CTR (Guj) 123 : (1994) 209 ITR 324 (Guj); 5. CIT vs. A.S.K. Rathinasamy Nadar (1995) 126 CTR (Mad) 400 : (1995) 212 ITR 527 (Mad); 6. Addl. CIT vs. Moolchand Jaikishandas Co. (1977) 108 ITR 500 (Guj); 7. CIT vs. Tejaji Farasram Kharawala Ltd. (1965) 55 ITR 46 (Guj); 8. ITO vs. Wanson (India) (P) Ltd. (1983) 35 CTR (Pune) 42; 9. ITO vs. French Dyes Chemicals (P) Ltd. (1985) 21 TTJ (Bom) 412; and 10. Mohan Singh vs. ITO (1985) 22 TTJ (Chd) 613. The learned CIT(A), after elaborate discussion of the aforesaid judicial authorities cited before him, culled out the following parameters as spelt out by the afore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tality of all the above facts and the ratios of various above referred judgments, while it is difficult to say that no secret commission whatsoever is paid by the appellant, yet the claim of such high expenditure of about Rs. 20 lakhs which has resulted in reducing the gross profit from about Rs. 49 lakhs to about Rs. 29 lakhs is not justified. Moreover, the claim of such a high expenditure of the order of Rs. 20 lakhs which cannot be brought to tax in hands of the recipients, in the absence of their names and addresses, is against the spirit of policy of taxation and is not in public interest. The claim also does not fall into the parameters which have been spelt out in various case laws. Specifically in the case of CIT vs. Goodlas Nerolac Paints Ltd. (1990) 90 CTR (Bom) 184 : (1991) 188 ITR 1 (Bom) and ITO vs. Wanson (India) (P) Ltd. (1983) 35 CTR (Pune) 42, due notice has been taken of the fact that the quantum of secret commission was very meagre. Moreover, in the case of the appellant since it is not possible to relate individual payments of secret commission to specific orders procured/executed, it cannot be said that secret commission has been paid in respect of each and eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommission from 4.2 per cent in the immediately preceding asst. yr. to 7.03 per cent in the assessment year under appeal is justified by the substantial increase in the turnover during the year as well as the profit margin shown by the assessee. Shri Patel urged that secret commission had to be paid to the employees of the customers to procure orders as well as to achieve higher profit margin despite the steep competition in the market. The learned counsel placed reliance on the following decisions in support of his contention that payment of secret commission, justified by the exigencies of the business, have been accepted by the various judicial authorities: 1. CIT vs. Goodless Nerolac Paints Ltd.; 2. CIT vs. Sigma Paints Ltd.; 3. Dr. G.G. Joshi vs. CIT; 4. CIT vs. A.S.K. Rathinasamy Nadar; 5. Asstt. CIT vs. Moolchand Jaikishandas Co.; 6. CIT vs. Tejaji Farasram Kharawala Ltd.; 7. CIT vs. Tejaji Farasram Kharawalla Ltd. (1968) 67 ITR 95 (SC); 8. ITO vs. Wanson (India) (P) Ltd.; 9. ITO vs. French Dyes Chemicals (P) Ltd.; 10. Mohansing vs. ITO; 11. Sassoon J. David Co. (P) Ltd. vs. CIT (1979) 10 CTR (SC) 383 : (1979) 118 ITR 261 (SC); and 12 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness malpractice involving breach of trust by the alleged recipients who are employees of the customers of the assessee and is clearly prohibited by the law. In this connection, the learned Departmental Representative, referred to various statutory enactments, like IPC, Contract Act as well as IT laws. The learned Departmental Representative referred to the decision of Andhra Pradesh High Court in the cases of CIT vs. Kodandarama Co. Ors. (1983) 35 CTR (AP) 346 : (1983) 144 ITR 395 (AP) and argued that any payment opposed to public policy would not entitle to deduction as business expenditure. The learned Departmental Representative further placed reliance on the following decisions: 1. Nund Samont Co. (P) Ltd. vs. CIT (1970) 78 ITR 268 (SC); 2. CIT vs. Westcoast Shipping Agencies (P) Ltd. (1981) 20 CTR (Ker) 40 : (1981) 127 ITR 442 (Ker); 3. Gwalior Road Lines vs. CIT (1999) 154 CTR (MP) 394 : (1998) 234 ITR 230 (MP); and 4. Maddi Venkataraman Co. (P) Ltd. vs. CIT (1998) 144 CTR (SC) 214 : (1998) 96 Taxman 643 (SC). With regard to various judicial pronouncements relied by the learned counsel, the learned Departmental Representative argued that apart from d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons whose names are not disclosed, the assessee has to— (i) establish the practice prevailing in that line of business for making such payment; (ii) adduce satisfactory evidence to establish the payments; and (iii) satisfy the authorities that the payments were made for the purpose of business. In addition to the aforesaid requirements emerging from the main provisions contained under s. 37(1), Explanation appended to the s. 37(1) further lays down that the expenditure should not have been incurred for any purpose which is an offence or which is prohibited by law. All the aforesaid conditions, having a bearing on the genuineness of the expenditure as well as legality thereof have to be fulfilled for deduction of the expenditure. 11.1. First we shall examine the issue in the context of the main provisions contained under s. 37(1). From the facts on record, as discussed hereinbefore, it clearly emerges that payment of secret commission to the extent of Rs. 19,85,255 being 7.03 per cent of the total sales has been claimed by the assessee, without furnishing the names and addresses of the recipients. In support of the payments the assessee has relied upon cash vouchers p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... claimed Rs. Rate percentage Commission disallowed as agreed by the assessee Rs. 1989-90 1,26,950 2.77 12,000 1990-91 2,00,250 3.06 20,000 1991-92 2,45,068 3.04 24,000 Subsequently, scrutiny has been made only for asst. yr. 1993-94 wherein a similar disallowance @ 10 per cent of the claim has been made by the AO as under: Commission claimed Rs. 3,81,646 Rate 4.44 per cent Disallowed Rs. 38,164 For subsequent years assessments have been made under s. 143(1)(a). From these facts it would be seen that secret commission claimed in the four scrutiny assessments as above, varied from Rs. 1.26 lakhs to Rs. 3.81 lakhs and the rate of commission varied from 2.7 per cent to 4.44 per cent. On agreed basis the AO finalised these assessments disallowing 10 per cent of the claim on ad hoc basis, as agreed to by the assessee. No enquiries or investigations had apparently been made by the AO calling upon the assessee to prove that genuineness of the expenditure by adducing evidences in support thereof. As against this, facts for the asst. yr. 1997-98 under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ata cited by the learned counsel before us, we find that these decisions do not in any manner incorporate the principle of res judicata with all its trappings into IT law. The proposition enunciated in these decisions is that unless there is a material change justifying the Revenue to take a different view of the matter, the Revenue should not reopen the issues decided in the earlier proceedings and take different and contrary stand. In Radhasoami Satsang vs. CIT cited by the learned counsel the Supreme Court held that in the absence of any material change justifying the Department to take a different view from that taken in earlier proceedings, exemption to the institution under ss. 11 and 12 of the IT Act, granted in the earlier years should not have been denied in the subsequent years. This decision is clearly distinguishable on facts and renders no assistance to the assessee's case. As we have already pointed out, the AO has in the instant case carried out scrutiny into the genuineness of the secret commission claimed by the assessee and disallowed the claim in the light of facts and circumstances brought on record. As against this, in the earlier years, no such scrutiny has be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at p. 4 of the report: "The Tribunal also found that the assessee was maintaining proper accounts and records regarding those payments in that the payments were made under the instructions and directions of the top executives of the company and were approved by the board of directors at the end of every month. According to the Tribunal, the facts that the assessee was a public limited company, that the accounts were not merely audited but were also placed before the general body of the shareholders, that the assessee's turnover was increasing year after year and that such payments claimed as deduction had dropped from 1.34 per cent for one of the years to 0.22 per cent in the year in question, were very relevant. On the basis of these and other evidence, the Tribunal concluded that the fact of payment of commission was established even though the names and addresses of the recipients were not given and that the payments were made for the purpose of business." This decision has been rendered in the context of the aforesaid facts of the case wherein the rate of commission had come down from 1.34 per cent to 0.22 per cent of the sales and profits accounts and records were being ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Moolchand Jaikishandas Co. In this case the assessee-company engaged in the business of textile chemicals, dyestuffs entered into an agreement with the employees for payment of commission. The Tribunal held that the amount of salary paid was low and the commission was part of the remuneration and not an ex gratia payment for services rendered. The deduction was held allowable under s. 36(1)(ii) and not under s. 37(1) of the Act. The facts in this case are thus entirely distinguishable inasmuch as payments made to the employees on the basis of genuine agreement and deduction has been held allowable under s. 36(1)(ii). 21. In CIT vs. Tejaji Farasram Kharawalla Ltd. the assessee acted as selling agent of Ciba (India) Ltd. and was entitled to a commission of 12-1/2 per cent on the sales. It claimed exemption in respect of a part of the selling agency commission under the provisions of s. 4(3)(vi) of the IT Act, 1922. The issue involved is entirely different and does not support assessee's case. 22. The learned counsel has next referred to the decision of Special Bench of the Tribunal in ITO vs. French Dyes Chemicals (I) (P) Ltd. The Special Bench of the Tribunal observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the cases cited above. In the case of the assessee quantum of secret commission claimed aggregates to Rs. 19,85,255 whereas the net profit of the assessee is only Rs. 6,14,847. The quantum of commission claimed thus manifold more than three times of business profits declared during the year. (iii) Cash vouchers prepared by the partner on ad hoc basis have been filed which do not indicate proper details like particulars of orders secured or sales effected or even the name of the customer, etc. etc. In the absence of even bare details like particulars of the orders and sales for which secret commission has been paid, the cash vouchers prepared by a partner at his own sweet-will would not be any subject (sic). other independent authority unlike the proper records maintained in the cases cited and such records inspected by top executives of the company. Having regard to these distinguishing features, the reliance placed by the learned counsel on the aforesaid decision, is in our opinion entirely misplaced and does not support the assessee's case. 24. Having regard to the aforesaid discussion, we have come to the conclusion that the assessee has failed to discharge the onus o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mployees rendering any service of undue favour to the detriment of the interest of customers of the assessee. This is particularly so when it is claimed before us that profit margin has been enhanced by increasing the secret commission. Such payments would evidently constitute a breach of trust on the part of the employees towards their employers with the active conspiracy of the assessee. Such breach of trust by an employee towards his employer could constitute an offence under the relevant provisions of IPC. Reference in this connection may be made to the provisions of s. 408 of the IPC read as under: "Sec. 408—Criminal breach of trust by clerk or servant: Whoever, being a clerk or servant or employed as a clerk or servant, and being in any manner entrusted in such capacity with property, or with any dominion over property commits criminal breach of trust in respect of that property, shall be punished with imprisonment of either description for a term which may extend to seven years, and shall also be liable to fine." Similarly, in the case of breach of trust by public servants, s. 409 would be applicable which reads as under: "See 409.—Criminal breach of trust by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich is in the nature of bribe, may place order for supply of goods to the assessee to the better quality or (sic-on) cheaper rates as may be quoted by other competitors (sic-of) in the market. Obviously any trader would not pay secret commission without consent of the customer themselves to any one unless he has expectation of deriving some undue gain from these employees. The payment of secret commission to the employees of customers without their knowledge and consent may, therefore, be treated as immoral and unethical also. 28. Apart from the aforesaid statutory enactments, we may further point out that the secret commission of the substantial magnitude, being Rs. 20 lakhs claimed in the instant case, would be violative of the various provisions of the IT Act, 1961. Sec. 40A(3) prohibits, cash payments exceeding Rs. 10,000 relevant for asst. yr. 1996-97 the limit enhanced to Rs. 20,000 w.e.f. 1st April, 1997. In the instant case, since particulars of each payment has not been furnished and the assessee has produced merely ad hoc cash vouchers, the expenditure claimed is clearly contrary to the letter and spirit of s. 40A(3). We may further refer to statutory requirement enac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... malpractices and promote integrity and fair dealings in the business and commercial environment of the country. In the prevailing economic environment of the country characterised by fast emerging trends of liberalisation and globalisation of our national economy, it is highly imperative that integrity and transparency of the business edifice is encouraged and ensured by the Government. Viewed in this perspective, Explanation introduced by the legislature excludes from the purview of admissible business expediency any expenditure incurred for any purpose prohibited by law or which is an offence. In our opinion the secret commission claimed by the assessee is clearly hit by the Explanation to s. 37(1) and (sic) 31. For the aforesaid reasons we hold that the payment of secret commission claimed by the assessee amounting to Rs. 19,85,255 does not constitute permissible business expenditure under the main provisions of s. 37(1) as well as Explanation appended thereto. However, since the learned CIT(A) has restricted the disallowance of secret commission to the extent of Rs. 17,03,055 and the Department is not in appeal before us against the deletion of the balance disallowance, we ..... X X X X Extracts X X X X X X X X Extracts X X X X
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