TMI Blog2005 (7) TMI 279X X X X Extracts X X X X X X X X Extracts X X X X ..... the payment has to be furnished." ITA No. 2493/Ahd/2002: "1. On the facts and in the circumstances of the case and in law, the CIT(A)-IV has erred in directing to delete the addition made on account of secret commission payment. 1.1 On the facts and in the circumstances of the case and in law, the learned CIT(A)-IV, Surat, has erred in ignoring the fact that the assessee could not identify the persons to whom the commission has been paid, including the two persons in whose case confirmatory letters were submitted. 1.2 On the facts and in the circumstances of the case and in law, the learned CIT(A)-IV, Surat, has erred in ignoring the fact that within the ambit of Explanation to s. 37(1), the payment cannot be treated as allowable business expenditure merely on the ground of commercial expediency. Evidence regarding the genuineness of the payment has to be furnished." 2. The common issue in both the appeals filed by Revenue relate to the disallowance of expenditure incurred on payment of secret commission for asst. yrs. 1994-95 1995-96. 2.1 The brief facts of the case are that the assessee is carrying on business of trading in galvanized black pipes and pipe fittings. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be accepted by the AO. In this regard, the assessee has also relied upon the decision of Bombay High Court in CIT vs. Goodlas Nerolac Paints Ltd. (1990) 90 CTR (Bom) 184 : (1991) 188 ITR 1 (Bom) and Gujarat High Court in Dr. G.G. Joshi vs. CIT (1994) 117 CTR (Guj) 123 : (1994) 209 ITR 324 (Guj). As per this High Court decision, the assessee is to establish the following three conditions: (i) Establish the practice prevailing in that line of business for making such payments. (ii) To adduce satisfactory evidence to establish the payments; and (iii) To satisfy the authorities that the payments were made for the purpose of business. The AO rejected this and was of the opinion that the ratios of the above condition as laid down by the High Court decisions are not fully satisfied as the assessee has not filed any evidence that the payment has actually been made. As the payment of vouchers did not contain the signatures of the recipients. In view of this, the AO disallowed a sum of Rs. 2,63,284 and Rs. 2,77,007 in asst. yrs. 1994-95 and 1995-96 respectively under this head. 2.2 In the first round of appeal, the CIT(A) confirmed the action of the AO and the assessee filed ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proof the genuineness of this transaction. (vii) The conditions as laid down by Gujarat High Court in the case of Dr. G.G. Joshi vs. CIT as under are fully satisfied: (a) Establish the practice prevailing in that line of business for making such payments. (b) To adduce satisfactory evidence to establish the payments and (c) To satisfy the authorities that the payments were made for the purpose of business. (viii) The conditions as laid down by Hon'ble Bombay High Court in the case of CIT vs. Sigma Paints Ltd. [reported at (1992) 103 CTR (Bom) 305-Ed.] are fully satisfied in the case of the assessee. The Hon'ble Bombay High Court held as under: "In the instant case, there was a complete tally between the commission paid and the extent of business done by the mill company. Details were also available of the exact transactions in respect of which the assessee had to pay the secret commission. The assessee had given a complete list showing the turnover and the amount of secret commission paid from year to year. The percentage of secret commission was minimal. The full details of payment on the above basis in respect of several parties were available. They were correlated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned on 7th March, 2002, they produced the sale registers and sale bills and other books of account. These were verified and test checked with the details of sales shown by the assessee on which commission has been claimed as paid. The assessee also has submitted copies of debit vouchers prepared for payment of commission. These vouchers contain the names of the persons to whom the commission has been paid. The vouchers also contain the details of sales on which the said commission has been paid. All these transactions have been summarised by the assessee in the enclosure page Nos. 6 to 10, submitted by him. First of all, I would like to submit that the perusal of these details reveals that the assessee has paid commission of Rs. 2,63,284 on sale of Rs. 1.74 crore. So the rate of commission comes to around 1.5 per cent and not 0.6 per cent as claimed by the assessee. The assessee has submitted the copy of vouchers prepared in respect of the commission paid. It has been explained in the assessment order itself that there is no signature of any person receiving the commission on the said vouchers. The vouchers have been prepared only for self serving purpose. However, the assessee h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ditional new evidences being produced by the assessee, which were not produced at the time of assessment. Therefore, these new evidences may kindly be not entertained. 2.5 In response to the comments of the AO, the assessee has made further submissions as under: 2.5.1 It is further submitted that in the chart which is extracted hereinabove (which was also given in the written submission) the assessee has given percentage of commission paid to sales in the earlier years and in the year under consideration on the basis of the total net sales and not in respect of the sales on which secret commission was paid. The assessee, therefore, submits that secret commission paid by it vis-a-vis total net sales is 0.6 per cent which is comparable with the earlier years during which similar secret commission was paid by the assessee for boosting its sales. At this juncture the assessee submits that on carefully considering the details furnished in the form of a chart which is extracted hereinabove, you will appreciate that the net sales of Rs. 1.85 crores in the asst. yr. 1990-91 is increased to Rs. 4.59 crores in asst. yr. 1995-96, that is, about two and half times over a period of five yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er give his signature on the vouchers prepared by the assessee for its own accounting purposes. However, to control the payment, the accountants prepared the vouchers of commission, which are countersigned by the partners of the firm. The vouchers are prepared not only for self-serving purpose, but is for countercheck on payment of commission. We have to state that the assessee came to know first time on receipt of order that ITO has disallowed the payment of secret commission as in his opinion there is no system of commission payment prevailing in the assessee's business and the same basis is also taken while finalizing the next year 1995-96 assessment which was done without giving any opportunity to the assessee. The order is finalized on the next day of submission only. Due to this assessee has gone in appeal, though there is a practice in the market, given sufficient evidence and proof for establishing the fact that there is the practice in the trade which he traded. Due to this we have filed the confirmation of Shri Jamubhai Keshavbhai Patel and Shri Harishbhai J. Panwala to whom the commissions were paid during the appeal proceedings. The payments were actually made to the pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmission without detriment to its business. It is, therefore, respectfully submitted that applying the decision of the Bombay High Court in Sigma Paints Ltd. the secret commission paid by the assessee-firm may kindly be allowed as the expenditure incurred, wholly and exclusively for the purposes of the assessee-firm's business. Your kind attention is also invited to the decision of the Tribunal, Bombay Bench in the case of Motiwala Corporation vs. ITO from which the relevant extract is given in para 24 of the written submission. In this judgment the Tribunal held that the payment of secret commission could be allowed if there was a trade practice for such payment and the fact that the assessee had not given the names of the recipients alone could not be a ground for disallowance. The Tribunal further held that the fact that the assessee had kept some contemporaneous records of such payments from which it could be reasonably inferred that the assessee has made the payments, strengthens the case of the assessee for allowance of such secret commission. At this juncture your kind attention is also invited to the decision of the Tribunal, Ahmedabad Bench in the case of A.A. Pathan v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commission of Rs. 2,650 in sales of Rs. 1,76,575. Thus in the appellate proceedings and in the remand proceedings the assessee had produced the real persons who had received the commission though the name of the said real person did not match with the name recorded in the voucher. This fact proves the bona fides of the assessee and therefore, no adverse inference can be drawn from these facts. By a single voucher the commission was paid to the employees of M/s Gomti Processors of Rs. 5,550 and M/s Dharmesh Silk Mills of Rs. 2,650. Thus the aggregate commission of Rs. 8,200 was paid by a single voucher which records in the name of Mr. Suresh Chhaganlal. Similarly the voucher recording the name of Mr. Babubhai Naranbhai shows that secret commission of Rs. 8,320 was paid in respect of sales to M/s Bharati Synthetics, sales to M/s Asmi Dyeing Printing Mills and sales to M/s Beena Silk Mills. Therefore, it is incorrect on the part of the AO to come to the conclusion that the assessee produced Mr. Harishbhai J. Panwala who is the employee of M/s Asmi Dyeing Printing Mills whereas the name written on the voucher is Mr. Babubhai Naranbhai. At this juncture it is also required to be not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above, it was submitted by the assessee that the above sum is an allowable expenditure under s. 37 of the Act." 2.7.1 The CIT(A) deleted the disallowance by observing as under: "I have gone through the orders passed by the AO and the remand reports submitted by him from time to time. I have also gone through the detailed submissions made by the assessee from time to time. The only question which is before me is to decide whether the commission paid by the assessee which is of secret nature is an allowable expenditure in terms of the s. 37 of the Act or not. It is seen that the assessee's claim of payment of this commission is justifiable on account of the fact that the same has been paid, as per the business practice prevalent in their line of business. The name secret commission itself connotes that the identity of the recipient is kept confidential. It is also seen that the commission is ranging between 0.60 to 0.65 per cent on the total turnover and is between 1.25 to 1.8 per cent on the business transactions relatable to this commission as computed by the AO, which appears to be on the reasonable side." Aggrieved by the above order of CIT(A) for the asst. yrs. 1994-95 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent years under consideration, whereas the AO has worked out percentage of commission on the basis of sales transactions on which commission was paid. Thus, the learned Authorised Representative submitted that both the assessee and AO were correct for the computation of percentage of commission on the basis of sales affected as taken into consideration by them respectively. The AO also recorded a finding in the remand report to the effect that the assessee has set the copies of vouchers prepared and commission paid. He further submitted that the observation of the AO with regard to two confirmation letters from Shri Jamubhai Keshavbhai Patel and Shri Harishbhai J. Panwala were not produced before the AO at the time of original assessment proceedings as the assessments were framed without asking for the same. In the remand report, the AO further stated that he has verified the debit vouchers and copy of account in respect of commission paid to M/s Dharmesh Silk Mills and M/s Asmi Dyeing wherein commission was stated to be paid to Sri Suresh Chhaganlal and Shri Balubhai, respectively. With regard to the name of actual recipient as per the copy of the account, the CIT(A) asked the ass ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount secretly from the trader. 3.2 With reference to Departmental Representative's argument regarding applicability of Explanation to s. 37(1), the learned Authorised Representative submitted that in view of trade practice prevailing in the line of business, payment of such commission cannot be branded with an offence or prohibited by law. Our attention was also drawn by the learned Authorised Representative to the order dt. 29th Sept., 1989 of Tribunal, Bombay Bench in case of Motiwala Corporation wherein the payment of secret commission was held to be fair and reasonable. It was also observed by the Tribunal in this case that allowance of such payment of secret commission is not against the public policy in so far as the parties involved were purely private business men and their employees, whatever may be the moral content involved, their action could not be regarded as opposed to the public policy unless it has some established customs or law or practice. As per learned Authorised Representative, this decision of the Tribunal was rendered on 29th Sept., 1989, which falls after the amendment with regard to insertion of Explanation brought into the statute book by Finance (No.2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rix of the case. From the record we find that in the instant case, the assessee was carrying on the business of trading on galvanized black pipes and pipe fittings and also business of manufacturing of art silk. During the year under consideration it paid commission to the plumbers etc. in respect of sales effected through them. The assessee was having practice of paying such commission not only during the year under consideration but since long back the assessee-firm came into existence. In all, the earlier years the payment of commission was allowed even during scrutiny assessment proceedings. However, during the year relevant to assessment years, payment of commission was disallowed under s. 37(1). On the first round of appeal, the Tribunal restored the matter back to the file of CIT(A) for deciding the issue afresh. During the course of second round of appeal, the CIT(A) called for remand report, according to which a clear finding was recorded by the AO to the effect that he has verified sales register, sales bills and other books of accounts with the details of sales shown by the assessee on which commission has been claimed as paid. In the remand report, the AO also admitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here the assessee had to induce the plumber etc. for giving repeated orders. Thus out of the sales of Rs. 4.21 crores, the assessee-firm had paid secret commission, only in respect of sales of Rs. 1.75 crores in the asst. yr. 1994-95, whereas in the asst. yr. 1995-96 the total net sales were Rs. 4.59 crores and the sales on which secret commission was paid on sales of Rs. 1.43 crores. A finding was also recorded that looking to the nature of business, volume of turnover, percentage of commission was very reasonable and justified. 4.2 There is no dispute to the well settled legal proposition that burden of proving that a particular expenditure has been laid out or expended wholly and exclusively for the purpose of business is on the assessee. Furthermore, there is also no dispute to the well recognized and settled legal proposition that mere payment by itself would not entitle the assessee to the deduction of said expenditure unless the same was proved to be paid or incurred for commercial consideration. It is for the assessee to adduce necessary evidence in this regard and if the assessee fails to furnish such necessary evidence, the Department has all the rights to disallow such ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... .62 per cent of the total sales made during the relevant assessment year, whereas in the case of Patel Brothers commission at a very high rate of 7.3 per cent was paid. In the case of Patel Brothers, on the commission vouchers, the details like name of the customer were not indicated in all the sales effected in relation to which such commission was paid. In the instant case, by bringing various documentary evidence of record, the assessee has established the trade practice of payment of commission in the nature of trade being undertaken by the assessee, whereas in case of Patel Brothers, the assessee had evidently not established any trade practice in the line of business undertaken by it. In the case of Patel Brothers, total payment of commission was claimed as high as Rs. 20.00 lakhs whereas in the instant case, the commission claimed was only Rs. 2.77 lakhs and 2.63 lakhs in the asst. yrs. 1995-96 and 1994-95 respectively. Thus, it is clear from the above that the facts of the instant case are quite distinguishable from the case of Patel Brothers in which payment of secret commission was disallowed by the Tribunal. 4.3.2 In the case of Transport Corporation of India Ltd. reli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ptable evidence". This decision of the Tribunal was taken on 7th Dec., 1998 in ITA No. 1420/Bom/1991 and the disallowance was made by the Department on the ground of Explanation given below s. 37(1) which was introduced by Finance Act, 1998 with retrospective effect from 1st April, 1962, i.e., much prior to the passing of order of Tribunal dt. 7th Dec., 1998 and the same has been deleted by the Tribunal by having above observation after taking into consideration the effect of Explanation to s. 37(1), on such payment. 4.3.6 Similarly in the case of Rishi Shipping, Gandhidham (ITA No. 302/Rjt/01 order dt. 28th April, 2005), deletion of disallowance of ghost money of Rs. 50 lakhs paid in violation of Dock Labour (Regulation and Employment) Act, 1948, an Act providing for regulation of employment of dock workers, was held to be not an illegal payment so as to disentitle the assessee as per Explanation found below s. 37(1), was confirmed by the Tribunal by order dt. 28th April, 2005. Before parting with the matter, it is pertinent to refer to the observation of Hon'ble Supreme Court in the case of Canbank Financial Services Ltd. (2004) 8 SCC 355, as relied on by learned Authorised Rep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ). 5.1 However, keeping in view least chances of any part of such payment could not be satisfactorily verified, we direct the AO to restrict disallowance at 5 per cent (five per cent) of such commission payment. 5.2 Thus the appeals of the Revenue against deletion of disallowance of commission in the asst. yrs. 1994-95 and 1995-96 are allowed in part. ITA No. 2492/Ahd/2002: 6. The following grounds have been raised by the Revenue: "1. On the facts and in the circumstances of the case, and in law, the CIT(A)-IV has erred in directing to delete the penalty levied under s. 271(1)(c) of the Act. 1.1 On the facts and in the circumstances of the case, and in law, the learned CIT(A)- IV, Surat, has erred in ignoring the fact that the penalty was levied after appraising the fact with regard to the disallowance of commission payment, which was held to be spurious items of expenditure or deductions whereby there is a failure to return correct income." ITA No. 256/Ahd/2003: 7. The following grounds have been raised by the Revenue: "1. On the facts and in the circumstances of the case, and in law, the CIT(A)-IV has erred in directing to delete the penalty levied under s. 271( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see with him in proceedings under s. 263. (7) The learned CIT erred in comparing the net profit of the appellant-firm when the interest on partners' capital and salary under s. 40(b) on which partners have paid the income-tax in his individual returns. (8) The learned CIT erred in following the order passed by the learned AO for asst. yrs. 1994-95 and 1995-96 where he has not given any opportunity or show-cause notice for proposed addition and to explain the details of commission paid and basis of working of sale bills given on the back of vouchers submitted in assessment proceedings and same is the subject-matter of appeal Where all the detailed workings are explained on each commission voucher placed at the time of hearing of assessment. (9) The learned CIT erred in deciding the fact that no practice of payment of commission in the lines of appellant, when there is ample documents on record which is mentioned by him in para 8 of the order. Even he himself stated in the last line of para 8 that Musai Fakir Mohmed claim debit of commission of Rs. 9,180 in asst. yr. 1997-98. In addition we are in receipt of commission from Tata Iron Steel Co. Ltd., Jindal Steel Co. Ltd. and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthorised Representative, powers under s. 263 cannot be exercised merely on the ground that the decision taken by the AO was not liked by the CIT. Sec. 263 is to be invoked not as a jurisdictional corrective or; as a review of subordinate's order in exercise of the supervisory power, but it is to be invoked and employed only for the purpose of setting right the distortion and the prejudice to the Revenue which is a unique conception and has to be understood in the context and in the interest of Revenue administration. As per learned Authorised Representative, such power cannot be in any manner equated to or regarded as approaching in any appellate jurisdiction and even the ordinary revisional jurisdictionary powers conferred on the CIT under s. 264. 8.3 On merits the learned Authorised Representative submitted that the CIT was not justified in disallowing payment of secret commission on sales amounting to Rs. 2,20,606 which was paid by the assessee-firm as a trade practice, payment of which has been allowed after proper verification by the AO, with reference to each sale transaction. 8.4 On the other hand, learned Departmental Representative relied on the order of CIT and state ..... X X X X Extracts X X X X X X X X Extracts X X X X
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