1. These 16 cross-appeals have been filed against orders of the CIT(A) for the asst. yrs. 1980-81, 1981-82, 1982-83, 1983-84, 1986-87, 1987-88 and 1989-90. Since, common issue is involved in all these appeals, they are disposed of by this common order for the sake of convenience. The brief facts of the case were that the original assessment has been completed in each of the assessment year on an income detailed as under respectively :
Asst. yr. Date of original assessment Income assessed Rs.
1980-81 31-3-1982 83,76,660 1981-82 25-7-1981 97,85,840 1982-83 9-6-1982 69,47,160 1983-84 28-6-1983 49,10,053 1986-87 29-3-1989 1,07,21,250 1987-88 28-3-1990 1,13,44,690 1988-89 27-3-1991 1,03,93,660 1989-90 30-3-1992 1,06,36,440
2. There was search and seizure proceedings at the business premises of the assessee as well as at the residential premises of the managing director, Sri K.V.R. Chowdary on 10th Feb., 1988, in accordance with warrant of authorisation dt. 8th Feb., 1988. The search continued till 7 p.m. on 11th Feb., 1988. During the course of the search, although the cash book, ledger of the assessee-company and that of the family of the managing director and that of the other connected firms relating to the period from 1976-77 till 1987-88 were found and seized along with certain credit notes, share certificates and other slips tied up in 3 bundles. As per Panchnama certain documents and pronotes from the chamber of Sri K.V.R. Chowdary were also found and seized as per details given in Annex. A to the Panchnama, no undisclosed assets, bullion or cash in hand was found and seized. No additions were made by the AO on the basis of the books of account and documents found and seized as per Panchnama. The statement of managing director of the company who was 62 years old was recorded, as alleged from 8.45 a.m. on 10th Feb., 1988 and continued till 11th Feb., 1988 as is clear from the copy of the statement filed before us appearing from pp. 1 to 15 of the paper book No. 2 especially pp. 11, 12 to 15, the signatures of the managing director were taken upto p. 11 on 10th Feb., 1988 while from pp. 13 to 15 the signatures were taken on 11th Feb., 1988 although on all the pages witnesses have signed on 10th Feb., 1988 even though it was signed by the Revenue authorities on 11th Feb., 1988. This statement was regarded to be one recorded under Section 132(4) of the IT Act. The relevant abstracts of the statement from Q. No. 38 to Q. No. 48 are given as under :
"Q. 38 : Please explain your sales policy ?
Ans. : We deal with our distributors who in turn book the orders from customers. We have uniform discount policy. By and large, we send documents through bank and collect the payments. In respect of credit facility, it varies from customer to customer.
Q. 39 : How many types of discounts or commissions are offered to distributors by S.R.M.T. Ltd. ?
Ans. : The company gives two types of commission or discounts. One is customer's commission or discount and the other is middleman discount or commission.
Q. 40 : You stated that the company has the distributors for selling and booking orders. May I know the names of the distributors or authorised dealers ?
Ans. : There are 4 distributors or authorised dealers :
(i) Prabhakar Enterprises,
(ii) Bhaskar Auto Service,
(iii) Bhanu Enterprise,
(iv) Mehta Trading.
Q. 41 : What exactly is the service rendered by the above 4 concerns ?
Ans. : The above 4 concerns are booking orders and sending the same to us.
Q. 42 : From the above statement, I understand that they merely book the orders. Did I understand correctly ?
Ans. : Yes. You understood correctly.
Q. 43 : Are there any agreements with the above four concerns ?
Ans. : Yes. Agreements are available.
Q. 44 : Kindly tell me the addresses of the above-mentioned concerns ?
Ans. : M/s Mehta Trading Co. is located in Bombay and the other 3 concerns are located in Kakinada, A.P.
Q. 45 : Can you tell me the constitution of the aforesaid concerns, i.e., whether proprietary or partnership concerns, etc. ?
Ans. : All the four concerns are registered firms.
Q. 46 : Please tell me whether these agreements entered by the company were approved by the board of directors or not ?
Ans. : To the best of my remembrance, the board of directors approved the agreements.
Q. 47 : Please tell me the territory or products allotted to the aforesaid four concerns ?
Ans. : They do not have any territories and they can sell any where in the country.
Q. 48 : At this point of time, may I invite your attention to Section 132(4) of the IT Act, which states that any disclosure made during the course of search operation voluntarily would not amount to concealment of income. Would you make any disclosure voluntarily ?
Ans. : The statement below is written by me. Sd/- (K. Sarathi)
In my capacity of the managing director of M/s S.R.M.T. Ltd., would like to make some admissions. There are three firms of authorised dealers of the said company at Kakinada namely Sri Bhaskara Auto Services, Sri Bhanu Enterprises and Sri Prabhakar Enterprises, these are partnership firms, which from their conception, and till date, have been receiving commission from the said company at the rate of 15 per cent of net sales turnover a portion of which, roughly 50 per cent, is given away to the retail dealers as overriding commission as per agreement on the sales effected by him, of the products of S.R.M.T. Ltd. After deduction the overriding commission, given away to the retail-dealers the net income in the hands of the abovesaid three partnership firms, has suffered tax, as income of said three firms. I would like to state and affirm that the net income of the said three firms as referred to above is in reality the additional income during the respective years of the M/s S.R.M.T. Ltd. Over and above the income assessed to tax or disclosed in the return of income or figuring of books of account of M/s S.R.M.T. Ltd. right now I am not in a position to exactly state the said additional income relevant for each of the concerned years. However, taking an overall view, certain expenditure incurred etc., I would state and affirm that the total amount of additional income of M/s S.R.M.T. Ltd. for the above said years of payment of commission to the above said three firms, and till date, would be about Rs. 260 lakhs (Rs. two hundred sixty lakhs). Therefore, M/s S.R.M.T. Ltd. is liable to pay additional tax on the said additional income for the concerned years. In my capacity as the managing director of M/s S.R.M.T. Ltd. would undertake to arrange for expeditious payment of the said due additional taxes. However, I would expect that after collecting the additional taxes due credit for taxes paid by the abovesaid said three partnership firms and the partners of the said three firms should first be given and thereafter the net tax liability be determined. We would be providing exact figure for the respective assessment years after verifying our books of account keeping in view the above admitted figure Rs. 260 lakhs. But, however, since the concommitant tax liability will be staggering for being paid in one instalment I would expect that the IT Department will be considerate in accepting payment of the said additional due taxes over a period of 15 months.
Sd/- K.V.R. Chowdary,
The above statement has been explained to my father Sri K.V.R. Chowdary in Telugu and he accepted the contents true and correct.
Sd/- (K. Sarathi)
Sd/- (C.R. Sekhar Reddy)
Asstt. Director of Inspection (Inv.)
Q. No. 48 and its answer was signed on 11th Feb., 1988 while the others were signed on 10th Feb., 1988. On the basis of this statement, the AO reopened the assessment for the asst. yrs. 1980-81, 1981-82, 1982-83 and 1983-84 by issuing notices dt. 17th March, 1989, 12th Feb., 1990, 12th Feb., 1990 and 12th Feb., 1990, respectively. In response thereto, the assessee on 19th April, 1989, 16th March, 1990, 16th March, 1990 and 16th March, 1990, filed the returns respectively showing the income as has been originally assessed for each of the assessment years. The AO on the basis of the aforesaid statement of the managing director of the assessee disallowed the commission paid to three authorised dealers based at Kakinada while allowed the commission paid to the authorised dealers based at Mumbai in which case also the search under Section 132 has taken place. Thus, the assessments were completed for the asst. yrs. 1980-81 to 1983-84 under Section 143(3) read with Section 147 while the assessments for the asst. yrs. 1986-87 to 1989-90 were completed under Section 143(3) by making the following disallowances for commission paid :
Asst. yr. Addition made
3. When the matter went before the CIT(A), the CIT(A) deleted the addition for the asst. yrs. 1980-81 to 1983-84, 1988-89 and 1989-90 in toto while disallowances for the asst. yrs. 1986-87 and 1987-88 were partly deleted and sustained to the extent of Rs. 25,00,000 in each of the assessment years under appeal. The orders of the CIT(A) are dt. 24th Nov., 1989 for asst. yr. 1986-87, 30th Oct., 1991 for asst. yrs. 1980-81 and 1988-89, 9th Nov., 1990 for asst. yr. 1987-88, 23rd July, 1992 for asst. yrs. 1981-82 to 1983-84 and 3rd Aug., 1992 for asst. yr. 1989-90. Similar issue regarding the deductibility of the commission paid to the authorised dealer has also arisen in the asst. yrs. 1984-85 and 1985-86. In those assessment years also, the CIT(A) has partly sustained the disallowance to the extent of Rs. 20,00,000 and Rs. 21,29,270, respectively. For the asst. yr, 1984-85 and asst. yr. 1985-86, the appeals were disposed of by the Tribunal 'A' Bench Hyderabad in ITA Nos. 2000/Hyd/1987 and 1502/Hyd/1989 and ITA Nos. 2471/Hyd/1987 and 1622/Hyd/1989 vide order dt. 11th May, 1990 by which the learned AM allowed the appeal of the assessee and dismissed the appeal of the Department. But the learned JM passed a dissenting order and there being difference of opinion, the issue relating to the allowability of the commission referred to the Third Member. The learned Third Member vide order dt. 4th Jan., 1991 [reported as Ramadas Motor Transport Ltd. v. ITO (1991) 37 ITD 48 (Hyd)(TM)--Ed.] allowed the appeal of the assessee and dismissed the appeal of the Revenue by holding as under vide paras 7 to 13 of its order reads as under :
"7. On a consideration of the rival submissions, it is clear that the main point of dispute is whether the disallowance made by the ITO should be restored or not. The questions framed are only the stages in the process of reasoning to arrive at an inference on the facts on record as to whether the expenditure laid out by the assessee was genuine or not. Therefore, while proceeding to discuss the points of difference, it is well to bear in mind that there is no difference of opinion between the Members with regard to the basic facts, namely, that the accounts of the assessee have been audited and that there is no evidence of any unaccounted funds or investments in the name of the assessee-company. The case of the Revenue rests upon three pieces of evidence, which were actually gathered subsequent to the making of the assessment for the asst. yr. 1984-85 but allowed to be brought in as additional evidence for that year also. They are the statement of Shri K.V.R. Chowdhary on 11th Feb., 1998, the statement of Shri B. Nageswara Rao on 10th Feb., 1988 and the statement of K. Muralidhar on 10th Feb., 1988. The learned AM has in his elaborate order given the background to the statement of Shri K.V.R. Chowdhary in para 19.2 of his order. In answer to question 48 at the time of enquiry under Section 132(4), Shri K.V.R. Chowdhary, managing director of the assessee, stated that the net income of the three firms who are acting as selling agents was really the income of the assessee-company and would amount to about Rs. 2,60,00,000.
8. The first point in dispute is with regard to the admissibility of the statement as evidence. The Explanation to Section 132(4) was introduced w.e.f. 1st April, 1989, which stated that the examination of any person may extend to all matters relevant for the purpose of investigation and not merely in respect of materials found at the time of search. Therefore, the difference has arisen as to whether this explanation would apply to the examination made on 11th Feb., 1988 prior to the introduction of this explanation. To my mind, it is inappropriate to think of a retrospective operation of this explanation. It is perhaps because the IT Act is often amended with retrospective effect that a question is raised with reference to every amendment as to whether it is prospective or retrospective. But in a case of exercise of power granted to an authority under the Act, such a question is of no relevance because, obviously the power can be exercised only from the date it is granted and could not have been exercised before it was granted. However, if such a power had been already exercised even before it was granted the only question that will remain is what is the consequence of such an exercise of power before the date on which it was granted. In other words, the question will be whether the material gathered by the ITO in exercise of the power which was enlarged subsequently, could be used as valid material for the purpose of investigation. This question itself has been posed by both the Members and they have answered it in the affirmative in para 19.11 and para 43. Thus, this question is really academic and do not in any way affect the ultimate decision.
9. Having agreed with both the Members that the statement of Shri K.V.R. Chowdhary should be looked into, the next question that arises is on the evidentiary value thereof. The learned AM has rejected this evidence on two grounds, namely, that Shri K.V.R. Chowdhary was not a person in control of the books of account of the company so as to make any statement binding on the assessee in an examination under Section 132(4) of the Act, and that though it need not be doubted whether the statements was voluntary, the statement itself was not proved to be true. The learned JM is silent on the first link of this reasoning. It is not in dispute that no books of account or valuable thing belonging to the assessee was found at the time of search and the managing director was also not a person in control of the affairs of the company. His statement cannot, therefore, bind the company without correct evidence.
10. The learned JM appears to have accepted the treatment by the Revenue of the statement of Sri K.V.R. Chowdhary as a confession of concealment of income. Even though the Evidence Act does not directly apply to income-tax proceedings. Well-settled principles as to admission of evidence have to be followed in evaluating the evidence. When the statement of Sri K.V.R. Chowdhary is seen as a confession, the underlying emphasis is of concealment of income leading to penalty proceeds and even prosecution. Therefore, it has to be considered in all seriousness and with almost caution. Prudence demands that the evaluation of such a statement is based on the questions whether it was made voluntarily, whether it was made by a person, who was a party to that transaction and whether it was true. As to the first question, the learned AM has rejected the claim of the assessee that the statement was not voluntary and since the learned JM has not differed from that it is not necessary to express any opinion. As regards the second question, the learned JM has not disagreed with the finding of the learned AM that the managing director has no control over the affairs of the company. Moreover, there is no evidence to indicate that the managing director himself was a party to receipt of the amounts paid as commission to the selling agents.
11. The third question is vital and is reflected by the point of difference in question 2.(ii). A close scrutiny of the statement of Shri K.V.R. Chowdhary which was also disclaimed after shows (that) it does not stand the test of the truth. This is because his statement did not lead to any discovery of amount received by the assessee-company. I have to keep in mind the fact that the assessee-company is an independent legal entity and also a taxable entity. Even though the managing director said that the commission paid to the agencies represented the income of the company, it remained uncorroborated by any evidence of the amount flowing back to the company's coffers. In this context, it is seen that there were four agents one in Bombay and three in Kakinada. The Revenue has accepted that the Bombay agency has been fully paid and there is no evidence of any kickback. It is only with reference to the Kakinada firms that doubts have been raised. Again the method of invoicing by the assessee was on receipt of the orders booked by the agency, to bill customers for the price less 25 per cent as commission and credit the agency with a further commission of 15 per cent of the net amount. In the course of the year as an incentive in respect of customers who have exceeded a targeted turnover, a further commission was given them debiting the accounts of the agents. This has been accepted in the assessment for 1985-86 by the ITO himself who has allowed the deduction of the amounts paid as commission to the customers thus limiting the dispute to the amounts paid to the accounts of the three agency firms. These firms have been registered as genuine firms and it is not in dispute that their assessments have been completed on the amounts paid to them. The only further information given by the managing director was his explanation that to the best of his knowledge Rs. 30 to 40 lakhs remained in the books of S.R.M.T. Ltd. Out of the disclosed amount of Rs. 260 lakhs and the remaining amount was distributed to the respective dealers. The only link we can find is the amount of Rs. 20 lakhs given by the agency firms as interest-free deposits in addition to the outstanding interest-free credited balances of amount of Rs. 27 lakhs the asst. yr. 1983-84 and Rs. 34 lakhs of the asst. yr. 1984-85. But then the interest-free deposits were a condition precedent for the agency agreement and the credit balances were in a running current account and naturally did not carry interest, as the agency firms were to draw it at any time. As long as these liabilities remain unchallenged, they cannot be treated, as the income of the assessee not can they offset the commission payable to the agent firms. Thus the conclusion is inescapable that the statement of Shri Chowdhary has not been proved to be true and cannot, therefore, by itself form the basis of any assessment of an undisclosed income attributable to the assessee-company.
12. This leads to the next question whether the assessee-company has received back the commission paid to the authorised dealer firms. A perusal of the material recorded indicates that there was no material establishing any nexus between the company and any amounts following from the agency firms. Reference has been made to certain cheques issued by the partners of certain firms, in which partners of the agency firms were partners. It was stated that such chegues were encashed by certain employees of the assessee-company who had stated that the amount so encashed was given to one of the directors of the company. This is with reference to the statement of Shri Nageswara Rao and Muralidhar both of whom subsequently retracted from their statements. The assessee had no opportunity to cross-examine them. Further apart from stating that the money was paid to the director nothing has been stated as to the nature of the transaction or as to why the money was paid to the director at all. In any event payment of money to a director is not payment of the money to the company unless he acknowledges the receipt on behalf of the company. Since such an acknowledgement has not been established, I agree with the learned AM that the leads have not taken the Revenue any where near the assessee-company.
13. Now I am left with the last question which is posed as the first question in the reference, namely, whether there was a well-recognised trade practice of payment of commission. This is only to test whether the commission paid could be considered to be unreasonable or excessive. The learned AM has found material in the books of the assessee itself indicating that similar commission has been paid to the Bombay agency which remains undisputed and the assessee had received such commission on purchases from other manufacturers in respect of its transport business. The learned JM has rejected this practice only with reference to the statement of Sri K.V.R. Chowdhary and has not made it a separate issue. However, since a question has been posed, I agree with the learned AM that there is evidence on record to establish the trade practice of giving large commissions and in the light of the evidence on record, the amount paid by the assessee-company to the agency firms could not be considered to be unreasonable or excessive. I, therefore, agree with him that the assessee's appeals should be allowed and the Departmental appeals should be dismissed."
4. The appeals for the asst. yrs. 1980-81, 1986-87, 1987-88, 1988-89 were disposed of by the Hyderabad Bench of the Tribunal vide order dt. 13th Oct., 1994 by setting aside the issue relating to the disallowance of the commission and sending it back to the file of the AO for re-examination by holding under paras 40 to 48, reproduced as under :
"40. From all these, it appears that the three firms did not actually render any services on their own to the assessee but were stated to be rendering services through the dealers/representatives, etc. who were considered to be under the control of the three authorised dealers, in the absence of anything on record to suggest otherwise. In this context, the statements obtained by the Revenue in the proceedings for asst. yr. 1988-89 assume importance.
41. The CIT(A) dealt with these aspects in para 9 of his order by stating that the retail dealers were not supposed to be aware of the working arrangement of a manufacturing company for promoting and effecting its sales and it certainly suited the convenience of the assessee as well as the authorised dealer firms if the field representatives were introduced as working on behalf of the assessee, that the managing partner of Sri Bhanu Enterprises might have exhibited lack of knowledge about the functioning of that firm and his business relationship with the other partners, but that lack of knowledge might only be a shadow on the claim of that firm that he was the managing partner and that the firm was genuine, and that the said statement in itself would not be adequate to negate the existence and business of that firm. He then stated that he had refrained from making detailed discussion on the certificates given by the retail dealers, which were furnished before him, as he considered it to be unnecessary. This, in our opinion, is not proper. He should have evaluated the individual and cumulative effect of each and every statement on the issue rather than summarily disposing of the same. His order is accordingly set-aside. The gist of these statements was given by the ITO to the assessee and the assessee's grievance is that these statements were not given to it in full and, therefore, they cannot be used against the assessee. The assessee had also obtained letters from ten out of the twenty-eight dealers wherein they have stated without reference to their statements recorded that they have been carrying on trade in automobile spare-parts in Madras and among the products they were dealing in spare-parts manufactured by the assessee were also dealt in, that the representatives of the authorised dealer-firms of the assessee used to visit them at regular intervals and canvas the products of their principals and used to persuade them for placing orders through them and that they have been placing orders on the order forms of the relevant authorised dealer for parts manufactured by the assessee. This also requires consideration.
42. Further, from extract of minutes of board meeting of the assessee-company filed by the learned Departmental Representative, it appears that Sri K.V.R. Chowdary was not a stranger to the affairs of the assessee-company and was in fact authorised by the company to deal with the issue of search and seizure. In this context, the letter written by Sri K.V.R. Chowdary on 1st March, 1988, not denying the statement given by him on 10th Feb., 1988 but requesting the CIT to fulfil their impart of assurance not be initiate any further proceedings by way of issue of penalty notices, levy of interest and initiation of prosecution proceedings and stating that it was in order to set the record straight, assumes importance in the consideration of the matter. The minutes of the board of directors were not there before the Tribunal in the earlier years and it appears that they were not considered even by the CIT(A). Again, the statement of Sri Raju, managing partner of Bhanu Enterprises, recorded on 8th Jan., 1991, has a vital bearing on the issue and requires consideration.
43. Taking all the facts and circumstances of the case into consideration, we are of the opinion that the case of the assessee requires reconsideration in the light of the material brought on record in the proceedings for asst. yr. 1988-89 and utilised in making the reassessment for asst. yr. 1980-81. We, therefore, set-aside the assessment for asst. yrs. 1980-81 and 1988-89 and remit the matter back to the file of the AO for consideration of the matter afresh affording an opportunity of being heard to the assessee. Copies of the statements relied upon in the assessment, the extract only of which was stated to have been given to the assessee, were given to the assessee at the time of hearing before the Tribunal and it would enable the assessee to properly put forward its defence. In case any other statement or material is also required by the assessee, the same may be provided to it for effectively presenting its case.
44. In asst. yrs. 1986-87 and 1987-88, the assessee has also raised an issue that the new material collected by the Revenue in the proceedings for asst. yr. 1988-89 was not there when the assessments were made and, therefore, it being additional evidence should not be utilised in deciding the appeals for these two years and if that be so, the matter stands concluded by the Tribunal's decision for asst. yrs. 1984-85 and 1985-86. We do not find any force in this contention of the assessee. A similar contention was raised by the assessee before the Tribunal in the appeals for asst. yrs. 1984-85 and 1985-86 wherein the material collected during the search and seizure proceedings and utilised while making the assessment for asst. yr. 1985-86 was sought to be utilised in deciding the appeal for asst. yr. 1984-85. The contention of the assessee is contained in para 5 of the order which reads as under :
'The appeal for the asst. yr. 1984-85 was heard by us in full sans the materials collected in the course of search operation that took place at a date later than the completion of the assessment. While concluding his arguments, Sri K. Rangabhashyam, learned senior Departmental Representative, submitted that appeals have been filed both by the assessee and the Revenue on similar issues for the asst. yr. 1985-86, but in those appeals the materials collected at a later stage had been dealt with both by the ITO and the first appellate authority and, therefore, he sought the permission of the Bench to bring on record such material by way of additional evidence. Sri Y. Ratnakar, learned Counsel for the assessee, vehemently objected to such a plea at the fag end of the hearing, but submitted that he would have no objection if the appeals for the asst. yr. 1985-86 were taken up for consideration as the material would be relevant in those appeals. Accordingly, we admitted the petition of the learned senior Departmental, Representative and proceeded to hear the appeals for the asst. yr. 1985-86 also.'
It was rejected by the AM by discussion in para 19.11 and by the JM in para 43 which reads as under :
AM "19.11 Lastly, Sri Rangabhashyam submitted that even if certain materials were gathered in the course of an illegal search, the same can be used against the assessee. No doubt, he is supported by the decision of the Supreme Court in Pooran Mal v. Director of Inspection (1974) 93 ITR 505 (SC), in this regard. We are convinced that the search was properly authorised and was conducted in a smooth manner and, therefore, the question of using any material collected in the course of an illegal search does not arise in this case."
JM "43. It has long been held that the admissibility of evidence is not affected by the illegality of the means by which the evidence has been obtained, though a person taking recourse to illegality may be accountable under the law. In Karma V.R. 1955 All E.R. 326 PC, it was held that if evidence is relevant the Court is not concerned by the method by which it was obtained or with the question whether that method was tortuous but excusable. This principle of law propounded by the Privy Council was followed by the Supreme Court in Magraj Patodia v. R.K. Birla . It was held that the fact that a document was procured by improper or even illegal means will not be a bar to its admissibility if it is relevant and its genuineness is proved. In the case of Dr. Partap Singh v. Director of Enforcement , it was held that illegality does not vitiate evidence collected during search. Similar view was expressed in the case of Pooran Mal (supra). In my opinion, evidence collected during the search can be utilised against the assessee even if the search is illegal. It does not mean that such evidence collected during legal search cannot be utilised against the assessee. We are here concerned with the evidence which was collected during the properly authorised search operation conducted in a smooth manner. The findings of learned AM at para 19.4 are pertinent. I agree with the same. It cannot be said that the statements were taken under threat of intimidation or under coercion. There is no presumption of illegality or wrong-doing when an authority is exercising its statutory functions. It has to be proved, if there has been any. No such proof came forth except bare assertions. In these circumstances, acceptability of statements recorded under Section 132(4) cannot be questioned. Since the statements are relevant and the genuineness is proved, I do not think there is any bar as to its admissibility."
It was also noticed by the Third Member in para 8 of his order and he proceeded to dispose of the matter on the basis that both the Members agreed that the statement of Sri K.V.R. Chowdary should be looked into.
"45. In the decision of the Allahabad High Court in the case of Jagannath Prasad Kanhaiya Lal (supra) relied upon by the learned Counsel of the assessee, the material which was already there but not placed before the AO and the first appellate authority was filed along with the memo of appeal by way of additional evidence without application or affidavit stating their relevance or why the same were not filed earlier. In those circumstances, their Lordships of the Allahabad High Court held that the same could not be admitted under Rule 29 of the ITAT Rules. Their Lordships held that the admission of additional evidence at the appeal stage before the Tribunal is not referable to any right of the party to produce evidence. A party desiring to adduce additional evidence having a decisive or clinching value with reference to the point at issue may, however, invite the Tribunal to invoke the power under Rule 29 on the ground that the evidence was not available earlier or that the party was prevented from adducing it before the authorities below for any other substantial cause. But, for asking the Tribunal to exercise this power, it was held, the party shall have to lay the necessary foundation relevant to the context of the condition in Rule 29. The material collected by the Revenue in the proceedings for asst. yr. 1988-89 was not in existence and it was obtained subsequently. In these circumstances it was prayed that the same may be admitted as it has vital effect and there exists a substantial cause for receiving the additional evidence.
46. The decision of the Andhra Pradesh High Court in the case of A.K. Babu Khan (supra) is also not of much help to the assessee as. in that case the assessee was guilty of remissness and gross negligence and was therefore, held not entitled to indulgence being shown to adduce additional evidence. There is no such case appearing in these appeals.
47. We also do not find any force in the contention of the assessee that the appeals in the earlier years could be disposed of by the Tribunal without taking into consideration the additional evidence and, therefore, the additional evidence should not be admitted. The additional evidence was not there before the Tribunal and the Tribunal was required to decide the matter on the facts and circumstances available on record at that time. As aforesaid, the evidence collected by the Revenue in the proceedings for asst. yr. 1988-89 is substantially material to take a proper view of the matter in the appeals. We, therefore, admit the additional evidence. Since we have set-aside the assessments for asst. yrs. 1980-81 and 1988-89 to consider the material and decide the matter afresh, we set-aside the assessments for these two years as well on this issue and give similar directions for making the assessments afresh for these two years.
48. In the result, the assessments for all the years 1986-87, 1987-88, 1988-89 and 1980-81 are set-aside on this issue for fresh consideration in the light of the discussion aforesaid and in accordance with law."
5. The appeal for the asst. yrs. 1981-82 to 1983-84 were disposed of by the Tribunal vide order dt. 26th Oct., 1995 by setting aside the order and sending back the issue of the deductibility of the commission to the file of the AO following its earlier order dt. 13th Oct., 1994. Similarly the appeal for the asst. yr. 1989-90 was also disposed of by setting aside and sending back this issue to the file of the AO.
6. The AO completed the set-aside assessments for each of these assessment years on the date mentioned hereunder by disallowing the commission for each of the assessment year detailed as under : Asst. yr. Date of the order Disallowance Rs.
1980-81 30-3-1997 44,59,513 1981-82 11-2-1998 36,38,243 1982-83 11-2-1998 40,66,099 1983-84 11-2-1998 40,56,253 1986-87 31-3-1997 42,27,104 1987-88 31-3-1997 47,49,567 1988-89 31-3-1997 52,05,200 1989-90 11-2-1998 36,90,684
7. The AO made the aforesaid disallowances by making the following observations under paras 24 and 25 of his order for the asst. yr. 1980-81, dt. 30th March, 1997 :
"24. In nutshell, the following is the outcome of my examination of the witnesses and other documents produced by the assessee in the course of present proceedings :
(a) The assessee's claim of canvassing for the assessee's products; booking orders from various dealers and pursuing of dues from them by the authorised dealer firms is not at all genuine and thus the consequent agreements entered into by the assessee with them have no evidentiary value in the presence of the material gathered by the Department and statements recorded from the dealers. Similar is the case with regard to the statements of the alleged sales representatives and their agreements entered into with the authorised dealer firms;
(b) Whatever canvassing and other services claimed to have been rendered by the authorised dealer firms was in fact done by the assessee's own field representatives only;
(c) When the dealer claimed to have made transactions through the authorised dealer firms, for the assessee's products worth lakhs of rupees, which is evident from the size of the commission payments, it is highly unbelievable how they are unable to even express little knowledge about the latter firms' existence when they were specifically guestioned on this point in 1991;
(d) Having not been able to recollect the event of four years old at the time of giving statement under Section 131 in 1991 during the present proceedings, they have stated in their present statements/affidavits at the instance of SRMT people about booking of orders for the assessee's products by the representatives of the authorised dealer firms simply on seeing a single order form/credit note shown by the SRMT people, probably forgetting the fact that the incidence is of 10 years old in 1997 during the period of which loss of memory cannot be ruled out, when compared to 1991;
(e) It is peculiar that the authorised dealer firms to whom lakhs of rupees was claimed to have been paid by the assessee-company towards commission did not maintain even the dire and minimum necessities like telephone, office accommodation, etc. which were considered essential for the nature of business in which they were engaged, viz., 'commission agents', as without the telephone they could not have been able to carry out their business. Besides this, no worthful and meaningful expenditure was incurred by them on overheads like salaries to employees, etc. and also sufficient infrastructure did not appear to have been held by them for their business;
(f) Though at the instance of the assessee-company, the dealers have filed affidavits before me in favour of the former, when they were confronted during the course of recording statement under Section 131 of the IT Act they were unable to substantiate their averments made in the affidavits and rather most of them have stated that only at the instance of the assessee and on seeing the single piece of evidence, viz., credit note/order form they came forward with the affidavits, and excepting this they did not have any other proof to evidence the existence of the authorised dealer firms;
(g) The dealers appeared to have filed affidavits in favour of the assessee only on account of their past/present business relationship with the latter keeping aside the actual truth;
(h) Most of the dealers have also admitted that only after seeing the document shown by the SRMT people and after being told by them that they had booked orders through the authorised dealer firms, they came to know of the fact of booking orders through them. In other words, the dealers had given the said statement only at the instigation and tutoring of the SRMT people;
(i) In his statement recorded under Section 132(4) of the IT Act in February, 1988, the managing director, Sri K.V.R. Chowdhary had made the disclosure of the impugned commission payments as the income of the assessee-company which was substantially reiterated by him in his letter dt. 1st March, 1988 to the CIT (Central), Bangalore wherein he had requested him not to initiate/launch/penalty any or prosecution proceedings in view of such admission. His subsequent retraction from his earlier statement after a gap of 1-1/2 months does not have any evidentiary value on the face of the valid material gathered by the Department as discussed above and hence it is to be treated as an afterthought to suit his convenience;
(j) The agreements entered into by the assessee with the authorised dealer firms and the agreements entered into by the sales representatives with the authorised dealer firms are held to be not possessing any evidentiary value and hence no credence is given to them.
25. Having regard to the factual position brought out above, I have come to the conclusion that there is no truth in the assessee's claim of existence of authorised dealer firms and the corresponding payment of commission to them and thus the entire transactions are held to be sham and ingenuine thereby warranting disallowance of the commission payments. It may be observed here that the documents now relied on by the assessee with the help of which the dealers were persuaded to file affidavits in its favour are treated as fabricated documents to get through its claim and consequently the affidavits filed by them cannot be relied upon as having no evidentiary value. In this view of the matter, the disallowance made in the original assessment under Section 143(3) read with, Section 147 dt. 27th March, 1991 needs no disturbance and it stands accordingly."
8. By following the order for the asst. yr. 1980-81 the disallowances were also made in the other assessment years. The assessee went in appeal against the order of the AO. The CIT(A) by passing the two consolidated orders dt. 30th April, 1998 and 17th Aug., 1998 sustained the disallowance to the extent of Rs. 20,00,000; Rs. 18,00,000; Rs. 20,00,000; Rs. 20,00,000; Rs. 25,00,000; Rs. 25,00,000; Rs. 25,00,000 and Rs. 18,00,000 for each of the assessment year mentioned hereinabove respectively by observing as under vide paras 3.2.4 to 3.2.8 in his order dt. 30th April, 1998 and following the same in his subsequent order dt. 17th Aug., 1998 :
"3.2.4. In the light of the facts of the case as stated above and on reappraisal of all the evidences brought on record in the course of original assessment proceedings as well as set-aside assessment proceedings, my findings will be as under :
(i) No cash, bullion, jewellery or incriminating material was found in the premises of the assessee in the course of operation under Section 132. However, pursuant to search operation, the managing director of the assessee-company and the managing partners of some of the authorised dealer firms deposed under Section 131 denying the payment of the alleged commission by the assessee;
(ii) Subsequent to the search operation, managing director of the assessee-company and managing partners of some of the authorised dealer firms retracted from the admission made as above. Retraction from a statement made under Section 131 is acceptable in law, if the retraction made is corroborated by supporting evidences. Thus, if the original statements of the managing director and the managing partners of some of the authorised dealer firms had evidentiary value, the retraction made by them subsequently would not have less evidentiary value. The two statements will have to be considered independently and with reference to such evidences brought on record subsequently to disprove the averments made in the original statements.
(iii) Out of the 28 retail dealers from whom depositions were recorded by the IT authorities under Section 131 in March, 1991, some made controversial statements therein regarding the payment of the alleged commission by the assessee to the three authorised dealer firms. However, the said statements were recorded behind the back of the assessee without an opportunity being allowed to cross-examine the deponents and the additional materials were also utilised in the original assessment without opportunity being afforded to the assessee to controvert the materials. In the circumstances, I am really afraid whether at all these materials in the form of statements recorded originally from 28 retail dealers in March, 1991 regarding the alleged commission payments for being utilised in the assessments behind back of the assessee could be said to have any real evidentiary value.
(iv) The assessee produced 11 dealers out of the 28 dealers, who categorically deposed before the AO in the course in the set-aside assessment proceedings about the services rendered by the authorised dealer firms appointed by the assessee and also confirmed that they placed their orders for SRMT auto parts through these firms on their order forms. Affidavits filed by them in the course of the set-aside proceedings have also affirmed these facts by way of clarifying certain points made in the depositions recorded in March, 1991. From the depositions recorded from these persons as well as affidavits filed in the course of the set-aside assessment proceedings, it would be quite evident that none of them denied the services rendered by the authorised dealer firms. On the contrary, they categorically affirmed that the said firms did canvass for the assessee-company and booked orders for them.
(v) Nine of the dealers, who could not appear before the AO due to their business constraints filed affidavits affirming the services rendered by the authorised dealer firms for promotion of the products of the assessee and giving clarifications of certain points made in the depositions recorded from them in March, 1991.
(vi) Eight of the remaining dealers could not be produced before the AO as either some of them had wound up their business by then or others had died subsequently. These were certainly genuine reasons which prevented the assessee from producing these eight dealers before the AO in the course of the set-aside proceedings. Non-production of these eight dealers by itself could not be a ground for doubting the genuineness of the commission payments to the authorised dealer firms.
(vii) Though the three sales representatives representing respective dealer firms were not questioned by the IT authorities in March, 1991, the assessee on its own produced these representatives before the AO in the course of the set-aside proceedings, who stated on oath under Section 131 and filed affidavits confirming the fact that the authorised dealer firms were appointed by the assessee as commission agents as per agreements to book orders for SRMT products and for canvassing these products among various dealers and that they were paid commission by the AD firms for booking the orders for SRMT spare-parts and canvassing for them. The material in the form of statements of sales representatives and their affidavits certainly constituted independent material having distinct evidentiary value and which could not be brushed aside just like that in the set-aside assessment proceedings.
(viii) The transactions entered into by these 28 dealers were concerned with the three AD firms only but not at all connected directly with the assessee-company. Therefore, if the genuineness of such transactions were to be doubted and consequently disallowance of any commission payments or part thereof was to be considered, it should have been rightly done in the cases of the three AD firms but not in the case of the assessee-company.
(ix) Though there were some materials in the statements recorded from the managing director of the assessee-company, managing partners of the AD firms pursuant to operations under Section 132 and in the statements recorded from 28 retail dealers in March, 1991 to disprove the assessee's claim of commission payments to the AD firms for the relevant years, there were adequate materials as brought out from the statements recorded from some of the retail dealer firms, three field representatives of the AD firms and affidavits filed by majority of the dealers in the course of the set-aside proceedings to support the claim of commission payments made by the assessee to the AD firms for the said years.
3.2.5. At the time of hearing of appeal, it was contended on behalf of the assessee that the three AD firms duly reflected the commission received from the assessee in the relevant returns of income filed with the same AO, who also assessed such income for the said years with proper modifications. Registration was also granted to these firms under the IT Act and the genuineness of the said firms was finally upheld by the Tribunal vide their orders for the relevant years. Various assessment details of these firms were also filed with me in support of the aforesaid contention. On perusal of the details filed, I find that the three AD firms viz. BAS, PE, and BE were assessed by the AO, Central Circle, Visakhapatnam, who also happened to be the AO of the assessee-company for the relevant years. All the three firms were assessed as registered firms and the only source of income of the three firms was commission received by them from the assessee-company, though in the case of PE, it also carried on business in Voltas company fridges, etc. The commission received by these firms for the relevant year was subjected to tax in the respective assessment years. Besides, these firms have paid huge amounts of taxes and the share incomes from these partnership firms were also subjected to tax in the hands of the respective partners by the same AO who also assessed the assessee-company for those years. Besides, it is seen that even after search operations that took place on 10th Feb., 1998, the same AO, who assessed the assessee-company as well as the above three AD firms granted registration to these firms, a fact which would certainly establish the genuineness of these firms. This particular fact was also duly considered by the Hon'ble Tribunal in the assessee's case for the asst. yrs. 1984-85 and 1985-86 and the disallowance of commission retained by the CIT(A) out of similar commission payments was deleted in full by the Tribunal for the said years on cross-appeals filed by the assessee.
3.2.6. So far as M/s Ravi Auto Agencies, Kakinada, is concerned, the said firm was assessed by ITO, Ward-I, Kakinada, in the status of a registered firm for the asst. yr. 1980-81. Incidentally, the same AO also assessed the assessee for the year under consideration and the only source of income of the said firm was income by way of commission from the assessee for propagating and booking orders for its products and a part of the income was also from purchase and sale of fridges, etc. The genuineness of the said firm was also not doubted by the IT Department and the share income from the said firm was assessed by the same AO, who assessed the assessee and the said firm. Further, all the payments were made only through account payee cheques or crossed cheques by the assessee to the said firm, which stood dissolved in 1980. The assessability of receipt of commission from the assessee in the hands of the above AD firms for the relevant years was never in dispute. As a matter of fact, such claim of the AD firms was accepted by the respective AOs, who subjected the commission received from the assessee to tax in the hands of the said firms for the relevant years.
3.2.7. The genuineness of the AD firms (barring M/s Ravi Auto Agency) was of course, subsequently questioned by the same AO, who cancelled the registration allowed earlier for the relevant years by invoking the provisions of Section 186. However, in appeals filed by the said firms, the CIT(A) held that the firms were entitled to be assessed as registered firms and allowed registration to them under the IT Act accordingly for the relevant years. In further appeals preferred by the Department before the Hon'ble Tribunal, the orders of the CIT(A) allowing registration to these firms were upheld and consequently, the firms were allowed to be assessed as registered firms. Subsequent reference applications of the Department under Section 256(1) against the orders of the Tribunal in the case of the three firms were also rejected. The present AO was confronted with the assessment details of the AD firms as cited above in my official chamber on 27th April, 1998. He perused the assessment details of the AD firms and did not disagree with the details so filed. Thus, the genuineness of these three AD firms, carrying on independent business of its own, as commission agents for the products of the assessee has also been accepted by the Tribunal. It will not be out of place to mention here that the contention regarding the genuineness of the three AD firms constituted for the purpose of carrying on business as commission agents of the assessee-company and their claim regarding registration under the IT Act has been accepted by the Hon'ble Tribunal vide their orders in ITA Nos. 224 to 228/Hyd/1992, dt. 9th May, 1995 (in the case of Bhanu Enterprises); 211 to 217/Hyd/1992, dt. 9th May, 1995 (in the case of Bhaskara Auto Service) and 218 to 222/Hyd/1992, dt. 9th May, 1995 (in the case of Sri Prabhakar Enterprises) which were subsequent to the passing of their consolidated order dt. 13th Oct., 1994, setting aside the assessments for the relevant years to the file of the AO with a direction to decide afresh the issue regarding allowability of payment of commission by the assessee to the three AD firms. Considering this aspect of the matter, I am of the opinion that the Hon'ble Tribunal have impliedly agreed with the substantial claim of the assessee regarding the commission payments in question to the three AD firms and the relevant assessments were only set-aside to the file of the AO for being reframed after allowing the assessee an opportunity to rebut the material in the form of statements recorded from the 28 dealers in March, 1991. Presumably, the assessments were set-aside to comply with the formality of affording an opportunity to the assessee to rebut the above material. Thus, I would not agree with the opinion of the AO given in his supplementary remand report of the effect that it would not be necessary at the stage of reassessments to examine the issue as to how the commission payments have reached the AD firms and were reflected in their assessments for the relevant years. As a matter of fact, such an observation of his does not stand to any reason and the same must be treated as irrelevant for the present purpose. On the contrary, if the commission payments to the three AD firms were not genuine and were to be treated as bogus as contended by the AO, it was absolutely necessary for him to examine the issue as to how the alleged commission payments reached back the assessee-company and bring cogent materials on the record in support of the said contention, which he has failed to do. Apart from placing reliance on the materials in the form of statements recorded from the managing director of the assessee-company and the managing partners of some of the AD firms pursuant to operation under Section 132 and the statements recorded from the 28 dealer firms behind the back of the assessee in March, 1991, he has not brought on record any independent and positive material worth the name to disprove the claim of the assessee regarding the payment of commission to the AD firms for the relevant years.
3.2.8. In view of my observations as made in the preceding paragraphs especially the findings recorded in para 3.2.2 of this order, it would be really futile to hold the entire payments of commission to the subject AD firms as bogus. It would be rather worthwhile to attempt an exercise to find out only the reasonable sum out of the assessee's total claim of commission payments made to the AD firms, which could be said to have been wholly and exclusively laid out for the purpose of its business, keeping in view the volume of business done and the nature and extent of services rendered by the AD firms for the promotion of its business during the relevant years. In this regard, I would like to follow the order of my learned predecessor in ITA No.
14/AC(CC)/VSP/1988-89, dt. 24th Nov., 1989 for the asst. yr. 1986-87 in the assessee's case, wherein the tests for ascertainment of a reasonable allowance/disallowance out of the assessee's claim of commission payments to the AD firms have been prescribed. Following the same tests as laid down in the above cited appellate order, I would hold that the three AD firms had a large number of partners, who in their turn had entered into sub-partnerships with several persons and the allowable/disallowable sum out of the alleged commission payments should be determined with reference to the factors such as (i) Bona fide expenses of the dealership firms; (ii) Savings to the assessee of obligatory expenses as corporate body; (iii) Beneficial enjoyment by the assessee of substantial interest through deposits retained from the dealers; and (iv) Reasonable return on the capital investment by, the partners of the firm, together with income-tax paid by the firms. Considering the above aspects of the point at issue and the fact that exact quantification of the said four elements not being possible, I would restrict the disallowance of commission payments to the AD firms to Rs. 20 lakh in round figures for the asst. yr. 1980-81 and Rs. 25 lakh each for the asst. yrs. 1986-87, 1987-88 and 1988-89 which shall meet the ends of justice. I direct accordingly."
9. The assessee and the Revenue both being aggrieved have come in appeal before us. The issue involved in all these appeals concerns the deductibility of the payment of commission made to M/s Sri Bhanu Enterprises, M/s Sri Bhaskara Auto Service and Sri Prabhakar Enterprises and M/s Ravi Auto Agencies all of Kakinada. In some of the years, all the parties are not involved. The facts relating to the payment of commission are that the assessee allowed a trade discount of 25 per cent on list price of its automobile spares sold to the customers directly. The assessee had entered into agreements with the authorised dealers and allowed them a commission @ 15 per cent on the sale consideration, i.e., list price minus trade discount allowed on the orders booked by them. Besides the commission, the authorised dealers were also entitled to target commission in case total turnover exceeds the target assigned. The copies of the agreements entered into are available from pp. 37 to 47 of the paper book No. 3. The main terms and conditions as entered into by the assessee with the authorised dealer are reproduced as under:
"3. The authorised dealer shall during the said term book orders for 'SRMT' auto parts from dealers and fleet operators on the terms and conditions furnished hereunder :
(a) The authorised dealer shall allow 25 per cent discount on the list prices of the company to the dealers irrespective of the value of the orders;
(b) The authorised dealer shall extend the' free freight, packing and forwarding to the destination for the supplies made by the company;
(c) The authorised dealer shall not have to allow additional discounts to the dealers basing on the circulars to be released by the company from time to time.
4. The authorised dealer shall not under any circumstances sell or offer for sale of 'SRMT' auto parts either by deviating the above discount policies or by overselling in the prices stipulated by the company from time to time.
5. All the prices and discount structures are subject to change without notice and those that are communicated from time to time to the authorised dealer by the company shall be binding.
6. The company will allow the authorised dealer a discount of 25 and 15 per cent on the ruling list prices of 'SRMT' auto parts against the orders booked by their representatives and the difference of commission between the discount of the authorised dealer and discount allowed to the dealer will be credited to the account of the authorised dealer.
7. The company shall allow an additional trade discount of 1 per cent to the authorised dealer, at the end of the year, on the total turnover pf business obtained by him over and above Rs. 50,00,000 during the financial year ending with 31st March.
8. The authorised dealer shall bear the expenses incurred towards the consignments dishonoured.
9. The authorised dealer shall not be entitled for any discount or commission on the business of State Transport Undertakings or any other Government Departments.
10. The authorised dealer shall have to send the company the tour programmes of their representatives, true copies of the orders booked by their representatives with original reports and the copies of correspondence made between the authorised dealer and the parties.
11. The authorised dealer alone shall be held responsible for all the transactions carried out by him either directly or indirectly even after the termination of the agreement and the authorised dealer shall not be absolved from the responsibilities of realising his obligations arising out of his previous commitments with the parties; and the company shall not be liable to make good of any losses or promises to any one introduced or caused to introduce by the authorised dealer for any lapses of his fulfilment of such commitments with his parties."
10. Thus, the authorised, dealers were required to pay under the agreement incentive and the additional commission to the customers of the assessee-company. They were also required to keep the deposit with the company. They were also responsible for the recovery of the sale consideration for the orders booked through them. The additional commission payable to the customer varied between 2 per cent to 10 per cent depending upon the purchases made by the individual customer. The commission was paid by the assessee-company to each authorised dealer by cheque. During the course of enquiries, for the asst. yr. 1984-85, the AO noted that the authorised dealer firms and the sub-partnerships had only make-believe existence and that no work had been done by them to deserve such huge brokerage payments and that what has been paid by the assessee-company was brought back into the hands of the management of the company with the help of its employees and trusted persons who encashed many of the cheques supposed to have been given to the persons as their share of profit. Although the proceedings for the asst. yr. 1984-85 and asst. yr. 1985-86 became final with the order of the Tribunal deleting the disallowances made by the AO on this basis and on the basis of the statement recorded during the course of the search from the managing director of the company but the additions in all the other years were pending before the Tribunal. The Revenue brought additional evidences by way of statement of 28 dealers recorded by the Revenue in March, 1991 on the basis of which the Tribunal set-aside the assessment for the re-examination of this issue by the AO. Thus, when the disallowances were again made by the AO, the matter travelled to this Tribunal.
11. The learned Authorised Representative before us submitted as many as 8 paper books consisting of about 900 pages along with the written submissions. The learned Authorised Representative submitted that the AO disallowed the commission as he was of the view that the commission paid was not genuine. The CIT(A) although held that the payment of the commission is genuine but restricted the amount allowable on estimate basis. Thus, the only issue involved in these appeals is the allowability of the commission paid to the authorised dealers of the assessee-company situated at Kakinada. The CIT(A) accepted the plea of the assessee that the commission payment to the authorised dealers is for the specific services rendered by them according to the agreement entered into. The assessee is in appeal contesting the observation of the learned CIT(A) that payment of commission is excessive and whereas the Department is in appeal aggrieved by the order of the CIT(A) that the payment of commission is genuine. Therefore, the cross-appeals by the assessee and the Department have been filed against the same issue of allowability of commission paid by the assessee to the authorised dealers firms.
12. The assessee started business as a bus transporter in the year 1944 with nine buses but became one of the leading transport operator in India in course of time. It diversified (because of its experience in truck operations) to the business of manufacture of auto parts. It had to develop market all over India. At one stage it found that its marketing required further strengthening by introducing authorised dealers. They appointed one authorised dealer Mehta Trading Company at Bombay in 1969. After some years, it appointed three more firms during the periods 1979, 1981 and 1983 namely, Sri Bhanu Enterprises, Sri Bhaskara Auto Service and Sri Prabhakar Enterprises all of whom are based at Kakinada. The assessee entered into agreements with each of them specifying the obligations and duties of the authorised dealers and the remuneration payable to them. All the dealers are the partnership firms having no relationship whatsoever with the assessee-company. Each of them had given interest-free deposit of Rs. 5 lakhs. They have separate offices; their own staff and network to support the marketing of the assessee.
13. The IT authorities conducted search and seizure operations at the premises of the assessee on 10th Feb., 1988 which continued upto 12th Feb., 1988. Simultaneously the authorities also conducted search and seizure operations at the premises of the authorised dealers. The authorities did not find any incriminating documents/materials. The authorities did not find cash, jewellery or assets not accounted for either at the premises of the assessee or its directors or at the premises of the authorised dealer firms or their partners. The authorities also did not find any documents leading to the information that the commission paid was not in any way genuine. The search at the premises of the authorised dealers also revealed that the amount of commission received by them was in accordance with the agreements entered into and were properly recorded in their books of account and taxes were paid.
14. The authorities recorded a statement of Sri K.V.R. Chowdhary, the managing director of the company who was 62 years old at the time of search. He initially stated that commission was paid to the authorised dealers. The managing director was very clear till question No. 47 that all the payments of commission were genuinely made. At question No. 47, the date changed from 10th Feb., 1988 to 11th Feb., 1988. Thereafter, he was under pressure from the authorities conducting search and seizure operations and he was made to agree that the commission payments would be declared as undisclosed income. There is no material on record to come to conclusion that the payment of commission is not genuine. A significant mention made by the managing director in the statement was that an amount of Rs. 47 lakhs was with them out of the amount of commission paid and the balance of amount was utilised by the authorised dealer firms themselves. This amount represents commission payable by them (outstanding amount) and the advances received from the authorised dealers firms at the time of entering into agreement. The partners of the authorised dealer firms were also contacted on the date of search. Though they initially stated the truth that the receipt of commission from the assessee-company was true, they were forced by the authorities to state that the amount of commission would be paid back to the assessee-company. But for the statements recorded by the authorities, there was no data or information to prove that commission was not genuine. It is the practice of the authorities conducting the search and seizure operations to prolong the search till late in the night and when the inmates are under stress, coerce them for declaration. This observation is made by the Chellaiah Committee . The CBDT (in the year 2003) issued instructions (mentioning that it is clarificatory in nature) directing authorised officers not to obtain confessions without any material evidence. A copy of the said circular is filed before us. It would clarify that any admission or declaration cannot be taken unless there is corroborative evidence. The terminology used in the said instruction would clarify that the authorities are prevented from obtaining declarations without any material evidence. The Board mentioned that adverse view would be taken if such declarations were obtained. The case of the assessee is one such instance. It can be seen that in the entire statement of Sri K.V.R. Chowdhary, (the then managing director) no mention was made about the genuineness or otherwise of the commission. In the last sentences, in an answer to the last question, the assessee stated that he was under coercion, undue influence and threat till such time he made a declaration about the commission. In the case of the assessee if the facts are dispassionately seen, it clearly indicates that in the entire statement except the last being answer to question No. 48, no mention was made about the commission. The entire material found at the time of search and seizure operations both at the premises of the assessee and at the premises of the dealer firms suggest that the commission paid was genuine. The payments made were chronologically recorded in the books of account of the assessee indicating the sale bills, vouchers, etc. and whereas the seized books of the dealers establish the receipt of the said commission and the expenditure towards services rendered by them. Most of the transactions are through bank. The authorities did not find any cash or assets at the time of search and seizure operations at the premises of any of the directors of the company. There is no information in the seized material to suggest that the commission paid was received back by the company or its directors. The authorities also did not find any assets, cash and jewellery not accounted for in the books of account. The statements so recorded were retracted by the deponents vide their letter dt. 23rd March, 1988.
15. These statements were considered by the Hon'ble Tribunal for the asst. yrs. 1984-85 and 1985-86. A copy of the order of the Third Member who decided the appeal placed before the Hon'ble Tribunal. Suffice it to say that the Hon'ble Tribunal came to the conclusion that the statements recorded from the managing director and other firms of the dealers are not correct. Though the Hon'ble Tribunal did not find fault with the recording of a statement at the time of search, the Hon'ble Tribunal found that the statement was incorrectly recorded and held that they do not contain truth.
16. The AO while completing the regular assessments based the assessment only on such statements and disallowed the entire commission paid to the authorised dealers. The matter was initially decided by the CIT(A), Visakhapatnam, wherein for the asst. yrs. 1980-81, 1981-82, 1982-83, 1983-84, 1988-89 and 1989-90, the addition was totally deleted and for the asst. yrs. 1986-87 and 1987-88 it was partially sustained. However, for all the assessment years, the CIT(A) held that the statements cannot be the basis for making any addition. The Department filed appeals before the Hon'ble Tribunal for the asst. yrs. 1980-81, 1983-84, 1988-89 and 1989-90 whereas for the asst. yrs. 1986-87 and 1987-88 both the Department and the assessee are in appeal. In the meantime during the course of assessment proceedings, for the asst. yr. 1988-89, the AO contacted the retail dealers for whom the authorised dealers were booking the orders. It is not known how many such dealers were contacted by the AO but utilised 28 statements in the assessment order. The AO did not mention the number of retail dealers who were contacted. The gist of such statements is that the retailers have no knowledge of the authorised dealers firms to whom the commission was paid by the assessee. Even the statement of the authorised dealers firms were not properly examined. Our attention was invited to the statement of Shri C. Narayanan Menon, the copy of which is available at pp. 257 to 260 of paper book No. 1. From this statement it is apparently clear that the orders are to be booked through the representative of the authorised dealer. The relevant question and answer in this regard is reproduced as under :
"Q. No. 31 : To whom you pay the amounts of the supply bills ? Ans. : We purchases demand drafts favouring M/s S.R.M.T., Kakinada, on it. Q. No. 32 : Who pays the incentive to you ?
Ans. : M/s S.R.M.T., we adjust credit notes against supplies.
Q. No. 33 : Do you at any time get the services of any agent other than the field representatives ?
Ans. : No, we didn't get any services from anybody else except the field representative, Mr. Bhaskar."
Mr. Bhaskar is related to the Bhaskar Enterprises that is one of the authorised dealer firm. Copies of the statements were not provided to the assessee and the authorities sought to utilise such statements to support their view for all the assessment years under consideration. The Hon'ble Tribunal found it necessary to set-aside all the assessments to the file of the AO for reassessment in view of the statements recorded from the 28 retailers.
17. The present appeals are against the set-aside assessment made by the AO. During the set-aside assessment proceedings for all the assessment years, the AO based his assessments on the statements recorded from the managing director and the managing partners during the course of search and the statements recorded from the 28 retailers relevant for the asst. yr. 1988-89. It is submitted that insofar as statements recorded at the time of search are concerned, the Hon'ble Tribunal for the asst. yrs. 1984-85 and 1985-86 held that they are not true and cannot be relied upon for making any addition. The said decision of the Third Member of the Hon'ble Tribunal became final. Insofar, as the statements of 28 retailers are concerned, 11 persons could be produced before the AO, affidavits of 8 persons and the 11 persons who were produced were provided and the balance of 9 persons could not be produced as they were not available at the relevant point of time (out of 9, 6 persons died and 3 persons discontinued the business). From the statements recorded and the affidavits filed, it is clear that authorised dealer firms have really carried on the business activity. The AO without examining the dealers for eliciting the facts, started examining them to know who paid the travelling expenses to come to Visakhapatnam and with whom they stayed at Visakhapatnam, etc., which are not relevant to the point. The retailers have come to Visakhapatnam for appearing before the AO in connection with the assessment proceedings of the assessee-company. As the retailers came to Visakhapatnam at the instance of the assessee, the company took care of them, which is not an unusual practice. The AO did not properly elicit the details. The AO even rejected cross-examination in respect of 9 out of 11 persons produced before him. The AO did not examine any retailer relating to the other assessment years except for the asst. yr. 1988-89. He applied the impression carried by him by taking into consideration the 28 statements in completing the assessments for the asst. yrs. 1980-81 to 1983-84, 1986-87 to 1989-90. Further, the AO did not bring on record any further evidence as to how many persons were examined. The AO thus rejected the claim of the assessee that the commission payments were genuine and disallowed the entire payment of commission.
18. The learned CIT(A) held that insofar as the genuineness of payment of commission is concerned, the matter was already decided by the Hon'ble Tribunal for the asst. yrs. 1984-85 and 1985-86. As submitted in the earlier part of the submissions, the Hon'ble Third Member of the Tribunal held that the payment of commission has to be considered as genuine. While deciding the issue, the Hon'ble Tribunal took into consideration the fact that except the statement recorded at the time of search and seizure operations from Shri K.V.R. Chowdhary, there was no information on record to suggest that the payment of commission was not genuine. It was further submitted that the Hon'ble Tribunal held that the statement of Shri K.V.R. Chowdhary is not based on any fact available at the time of search and seizure operations and therefore, untrue. In the circumstances, the learned CIT followed the decision of the Hon'ble Tribunal for the asst. yrs. 1984-85 and 1985-86 and held that the payment of commission is genuine. According to the CIT(A), the statements recorded from the 28 retail dealers do not reveal that the commission payment is not genuine. Therefore, the CIT(A) held that the payment of commission is genuine on the ground that the AO based his addition only on the statements recorded at the time of search, which are held to be not true and the statement of 28 retailers, which was successfully rebutted by the assessee. However, the CIT(A) is of the view that the quantum of commission is excessive and, therefore, partly allowed the commission.
19. In the Departmental appeal, the Department relied on the statements recorded at the time of search, the letter of the managing director written to the CIT, Central, Bangalore, the minutes of the meeting of the board of directors of the company to contend that the payment of commission is not genuine. The learned Authorised Representative submitted the written submissions on some of the observations made by the AO as under :
"A. There is need to have the services of authorised dealer firms in the context of the business carried on by the assessee :
As the area of market for the marketing the products of the assessee is spread throughout the length and breadth of India and its neighbouring countries and as it is found not economically viable to have its own staff to market its products, in its own wisdom, the assessee took the services of the authorised dealer firms. The directors of the company are not in any way interested in the authorised dealer firms. The Department accepted the payment made to the authorised dealer firm of Bombay accepting the contention of the assessee that there was need to appoint authorised dealer firms.
B. Agreement with authorised dealer firms, etc. :
(a) The services of the authorised dealer firms are governed by written agreements between the assessee and the authorised dealer firms.
(b) The services rendered by these firms are as under : (i) Canvassing for the products manufactured by the assessee appointing field representatives, (ii) Booking orders for the assessee's products, (iii) Collecting 'C' forms from various dealers from whom they book orders, (iv) Collection of overdues from the dealers.
(a) The authorised dealer firms used to book orders for the assessee's products from the dealers on their own order forms, a copy of which was used to be sent to the assessee for execution of such orders. The order forms were found at the time of search both at the premises of the authorised dealers and at the premises of the assessee-company.
(b) For the service rendered, they were entitled to commission from the assessee at agreed rates.
(c) The said authorised dealer firms made huge amounts of interest-free deposits with the assessee.
(d) The assessee did not suffer loss on account of bad debts in this business at any point of time. In fact some of the dealers suffered bad debts when the amount could not be realised and the amounts were debited to their accounts.
(e) It can be seen from the final accounts of the assessee that it did not incur expenditure on marketing the goods manufactured by it and also did not suffer any loss on account of bad debt.
C. Income-tax assessment of the authorised dealer firms :
(1) The said firms were assessed as registered firms by the same AO who assessed the assessee even after the search operations--a fact which shows that these firms in fact carried on the business of marketing the assessee's products, their existence, etc. The dealers maintained separate books of account, filed their returns of income, maintained separate bank accounts and had their own office at Kakinada.
D. Trade Practice :
There is an accepted trade practice of giving commissions to the authorised dealer firms in the line of business of the assessee. On the basis of evidence filed before the authorities, the learned CIT(A) and later on before the Hon'ble Tribunal held that there existed a trade practice of appointment of authorised dealer firms, in this regard attention was invited to the decision of Third Member dt. 4th Jan., 1991 in the case of the assessee for the asst. yrs. 1984-85 and 1985-86 (reproduced hereinabove in the preceding paragraphs).
E. About the statements recorded from the managing director, Sri K.V.R. Chowdhary and others during the search proceedings and later on from Sri D.P.K.L.N. Raju, managing partner of Sri Bhanu Enterprises.
(1) Sri K.V.R. Chowdhary
(a) Never before he was ever subjected to interrogation or examination or search operations.
(b) He, therefore, was nervous and was out of his wits during search operations.
(c) The search operations were conducted simultaneously at various places of the assessee as well as the various residential places of the managing director and his family members and other sister-concerns of the assessee. The managing director was, therefore, called upon throughout the search operations by various search officials at various places to give information, etc. on various matters.
(d) In the above-mentioned circumstances, and in the abovestated mental condition of the managing director who happened to suffer from high blood pressure and diabetes, and who was never accustomed to work for more than 4 to 5 hours continuously. Deposition was taken from him in the very early hours of next day, i.e., nearly after more than 18 to 20 hours of grueling by the search officials during which period absolutely no rest whatsoever was given to him. Even in such a situation the managing director in the first instance did not admit any disclosure of unaccounted income but, he was forced to give such a disclosure because of the mental tension and continuous harassment, further he was induced to give such a disclosure.
(e) Thus having put words in the mouth of the unwilling managing director, a false disclosure of Rs. 2.60 crores of so-called unaccounted income representing the commissions paid to the abovesaid authorised dealer firms was forcibly extracted. Otherwise, how could he make such a disclosure as for actual services rendered by the said firms, which were all backed up by substantial evidence like agreements, payments by account payee cheques, etc. The Hon'ble Tribunal for the asst. yrs. 1984-85 and 1985-86 held that the statement is not true as the same is not based on any evidence procured during the course of search and seizure operations. The CBDT after considering the circumstances prevailing in the IT Department, issued instructions to the authorised officers not to obtain declarations without any data at the time of search and seizure operations.
(f) The search officials did not have the courtesy of giving a copy of the deposition taken in the above-mentioned circumstances even when they were approached on the ground that the copy of the such deposition would be given to the assessee only when it was to be used against the company.
(g) So from what he could recollect from his memory, the managing director has written a letter to the learned CIT, Central Circle, Bangalore, soliciting his confirmation to the promises of immunity from penalties, interest and prosecution earlier extended to him by the search officials while extracting the above disclosure. The learned CIT in his reply refused to confirm such immunities. In this letter, it was submitted that the statement was recorded under duress. The copies of the letters are reproduced as under : "K.V.R. Chowdhary
Chairman and Managing Director
Sri Ramdas Motor Transport Ltd.
P.B. No. 42, Subhash Road, Kakinada-533 001
TLX 0491-201 Grams Green Phone Off. 3211 Res. 3666 1st March, 1988
The CIT (Central),
Sub : Raid at our office and residential premises--Request for fur- nishing of statement Regarding.
You may recall that a raid was conducted under your supervision by the officers of the IT Department both at our office and residential premises of the directors. The raid started on the 10th February at 8.30 a.m. and continued on the whole of 10th and 11th and 12th February and was stopped at 11.30 p.m. on the 12th February. The raiding officers came in hundreds in strength at various places. The Asstt. CIT, Mr. Rangabhashyam and the Dy. Director of Inspection, Mr. Siudarshan Mishra were also present at the time of raid. We were never subjected to any raid by any Government agencies in the past and for the first time this raid was conducted at our office and residential premises. We were informed that we cannot attend to telephones during the time of raid and none of the directors or their family members were permitted to leave their premises, until the raid was completed. The entire atmosphere was made very tense and we were given to understand that we cannot seek any legal assistance from our lawyers and chartered accountants until the raid was over and statements were recorded by the Department.
During the two days of raid, we were persistently questioned and threatened that if the statements are not in the manner acceptable to the Department, we will be put to serious consequences. Being new to these procedures and not being aware of the consequences, we were mentally upset and became nervous in the course of the raid. After a massive search, a statement was recorded from me in the early hours of 11th February at 6.00 a.m. We were kept awake the entire night on 10th February answering to various queries put by the officers of the IT Department. We were finally informed that if we accept the commission payments claimed as deduction in the income-tax assessments of SRMT, the raid proceedings will come to an end much sooner and the IT Department would not take any serious view of the matter. We were also informed that we should pay the taxes immediately on the commission amount. The Department assured that there will be no levy of interest or penalty and no prosecution proceedings will be initiated since this would be a voluntary acceptance. We were also informed that the entire raid was organised for the limited purpose of enquiry into the commission payments and if this amount is accepted as income, the entire raid will become superfluous and unnecessary. We were also informed that if statements are given in the course of raid voluntarily accepting any item as income under the IT Act, the officers will accept the income so offered for tax without invoking any further provisions under the Act. We were warned and told that it will be in our interests to accept the commission amounts as income. We were assured that since the acceptance of commission payments as income would not entail further legal consequences apart from payment of taxes, we should readily accept in view of the Department's assurance, based on these assurances given to us and to spare us from the agony of further prolonged raid, I gave the statement accepting the commission payments to the three firms after deducting the expenditure incurred as income of SRMT. I have also stated that the exact figure will be calculated and will be furnished to the Department and requested that payment of taxes may be accepted in instalments. Notwithstanding this statement, the raid continued till 11th night and after seizing a number of books, registers, etc. the raid came to an end. At that time Mr. Rangabhashyam and other officers assured me that no penalties, interests would be initiated. On the strength of the said assurances, I have given the statements. In the said statements the assurance given by the Department were not incorporated.
Hence, in view of what is stated above, we expect that the Department from its side would keep its assurance and will not initiate any further proceedings by way of issue of penalty notices, levy of interest and initiation of prosecution proceedings. In order to set the record straight I am bringing these facts to your kind notice.
I wish to add that I waited so far with a view to submit my representation after looking into the copies of statements also, but since the furnishing of the copies is being delayed it is felt not desirable to wait any further time and I am filing this letter.
Please acknowledge receipt.
Sd/- (K.V.R. Chowdhary
C.C. to : 1. IAC (Central), Hyderabad.
2. ITO, Central Circle, Kakinada.
No : GI. 26/87-88/ClT(C)
Dt. 23rd March, 1988
Sri K.V.R. Chowdhary
Chairman & Managing Director
Sri Ramdas Motor Transport Ltd.
P. No. 42, Subhash Road
Kakinada : 533-001
Sub : Search at your office and residential premises on 10th Feb., 1988.
Please refer to your letter dt. 1st March, 1988 (received in this office on 7th March, 1988) in connection with search under Section 32 of the IT Act at your office and residential premises on 10th Feb., 1988. In the subject of your letter, you have made reference to request for furnishing of statement. Though there is no such specific prayer in your letter, I have to state that copies of statements recorded in the course of the search will be made available in due course under the provisions of the Act and Rules.
(2) In the second para of your letter, you have stated that the entire search was organised for the limited purpose of enquiring into the commission payment. This is not factually correct. The search was conducted under the provisions of the Act and relevant Rules and could not be for the limited purpose as alleged.
(3) In the second para of your letter starting with "during the two days of raid..." you made allegation that in the course of the search there was persistent question and threatening by; The Departmental officers, that the atmosphere was made very tense, that you were not allowed to leave the premises, etc. I understand on the basis of enquiries conducted in this respect that the search was conducted as per provisions of the Act, peaceably without any untoward incident and that there were no threatening postures by the Departmental officers at any stage.
(4) You have further stated that you have given a statement in the course of the search admitting the commission payment as income on the basis of assurances given by the Departmental authorities conducting the search regarding non-levy of penalty, prosecution, etc. In this connection, I have to clarify that under Section 132(4) of the IT Act, the authorised officer is entitled to examine on oath any person, who is found to be in possession or control of any books of account, etc., and that any statement made by such person during such examination may, thereafter, be used as evidence in any proceedings under the IT Act.
(5) Regarding levy of penalty, interest, prosecution under the Act, it is the ITO concerned who has to take decision in these matters on the basis of evidence and material. There cannot be assurance given in this respect by anybody at any stage.
(6) The IT Act in Expln. 5 to Section 271(1)(c) [as amended by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986] refers to certain concessions available to assesse's if certain conditions are fulfilled. If in your case the conditions are fulfilled, the concessions stated in the Act may be available. You may seek appropriate advice in this respect or discuss the matter further with the ITO/IAC concerned or this office. It appears, however, that, though you have admitted the commission payment as your income, you have not paid the tax thereon. You are required to make the tax payment forthwith. If this is not done, it may perhaps be treated as not fulfilling the conditions entitling you to concessions provided under the Act. You may, therefore, make the tax payment promptly without any delay.
Sd/- (V.H. Gangal)
Karnataka (Central), Bangalore"
(h) In such a situation and as the managing director found that there is no truth in the statement recorded, had no other option but to write a letter of retraction dt. 23rd March, 1991 from what he disclosed during the search, as :
(i) the disclosure does not represent any unaccounted money received from the authorised dealer firms.
(ii) the appointment of the authorised dealer firms, the service rendered by them to the assessee and the consideration received by them from the assessee for, such services are all genuine.
(iii) And thus the payment of commission to the authorised dealer firms though necessitated on account of genuine commercial expediency only with a view to purchase peace with the Department and to avoid protracted litigation and harassment, the above-mentioned disclosure was made essentially on the promise of immunity from penalties, interests and prosecution and because of the threat at the time of search and seizure operations.
F. In their order, the Hon'ble Tribunal observed that the statement recorded from the managing director is not based on facts and, therefore, it has to be considered as incorrect. The Hon'ble Tribunal rejected the statement given by the managing director Sri K.V.R. Chowdhary as not consisting of truth.
G. The CBDT vide Instruction No. 286/2/2003-IT (Inv.) dt. 10th March, 2003 observed that disclosures taken at the time of search without corroborative evidence cannot be considered for the purpose of assessment. In fact in the said instruction, the CBDT advised the authorised officers not to obtain such declarations without any basis and advised the authorities to collect details and information.
H. Managing partners of Sri Bhaskara Auto Service and Sri Prabhakara Enterprises viz., Sri Bamidipati Nageswara Rao and Sri Ch. V.V. Satyanarayana
(a) These two persons were never earlier subjected to search proceedings.
(b) Initially they admitted that for the services rendered by them commission was paid by the assessee.
(c) They were continuously harassed for more than twelve hours and under coercion and threats, statements were extracted from them to the effect that the said firms were only name-sake and that the amounts were paid back to the company.
(d) Immediately after search operations, they wrote letters to the IT Department stating that
(i) under coercion and threats they were made to give the above stated averments.
(ii) In fact for services rendered by these firms, commission was paid to them and thus they retracted from what they were forced to admit during the search operations.
(e) The Hon'ble Tribunal has considered the above facts and held that on the basis of the depositions given by them during the search, no adverse inference could be drawn to disallow the commission payments.
I. Sri D.P.K.L.N. Raju
He was the managing partner of Sri Bhanu Enterprises. He joined the said firm in October/November, 1987 and within few months, i.e., in March, 1988, the said firm was dissolved. Earlier he was not a partner in the said firm. Therefore, he could not give information about other partners and their investments, etc. He also stated that the firm conducted the activity of receiving and paying commission to the representatives. This indicates that the firms did some activity with reference to the sales representatives.
J. What was found in the search operations :
In the two days of thorough search of the premises of the assessee and the residential premises of directors, premises of the authorised dealer firms and their partners, nothing incriminating to the assessee was found, not a paisa of unaccounted cash/jewellery/any other asset was found, no documents or undisclosed accounts were found. No evidence whatsoever was brought on record showing receipt of kickbacks to the company and or its directors/shareholders from the authorised dealer firms.
K. About board resolution
The board's resolution was on 4th March, 1988. The declaration and the letter addressed to the CIT (Central) was prior to the board's resolution. The only act of the managing director after the resolution was to retract from the statement earlier given. Therefore, the board has decided to retract from the earlier statement as it was not true and accordingly the managing director did so. Further, the board's resolution did not ratify the act of the managing director in making declaration. Therefore, the board's resolution cannot be considered to have ratified the deposition of the managing director.
L. Benami not established :
There is nothing to suggest that the firms or its partners were Benamidars of the company. Only one partner of each authorised dealer firms were examined and that too during searches, they too have retracted from the earlier statement. One of the alleged partners was a partner only for two months before enquiry. Even the attempt of search officers and AO was to show that some directors could have got the commission, while there is nothing to suggest that they did. There was no evidence whatsoever of any repayment of commission during elaborate search either to the directors or to company. The AO himself has conceded work done by field representatives, whom he wrongly thought are employees of company while the fact is just the contrary."
20. Thus, it was vehemently submitted that during the course of search and seizure operations, the authorities found the books of account at the premises of the assessee and the dealers. The books of account indicate the payment of commission by the assessee and receipt by the dealers. The dealers in their books of account appropriated the receipt towards their expenditure. The expenditure incurred by them was also supported by the vouchers, etc. found at the time of search. The balance of profit amount was divided among the partners. The amount of deposit paid by the authorised dealers firms to the assessee also was recorded in the books of account. All the data support the claim of the assessee. In view of the provisions of Section 132(4A), the presumption is in favour of the assessee. According to the said provision, the books of account and other documents found at the time of search are to be considered as true. Further, no information contrary to the same was found. Therefore, it is not correct for the AO or the CIT(A) to hold any contrary view.
21. The amounts were paid in accordance with the agreements entered into. According to the agreement, the assessee pays 25 per cent direct to the retail dealers and 15 per cent on the balance of 75 per cent was paid to the authorised dealers, out of the said 15 per cent on the balance of 75 per cent of the sale price, the authorised dealers had to pay commission, incurred expenditure on its own establishment, remuneration to field representatives, their travelling expenses and bad debts. Attention is invited to the P&L a/c appearing at the paper book to stress that the authorised dealer has duly shown the income and has paid the heavy taxes imposed on them. There is also no relationship between the companies or its directors with the partners of the authorised dealer firms. Neither the AO nor the CIT(A) has brought on record any information to the effect that the payments made by the assessee are in any way excessive compared to the similar amounts paid in the market. Therefore, the CIT(A) is not justified in holding that the amounts are in any way excessive.
22. It was further submitted that the provisions of Section 40A(2) have no application to the facts of the case. None of the partners of the authorised dealer firms are relatives of any of the directors of the company. Therefore, the AO does not establish the relationship between the assessee-company and the authorised dealer firms. Further, the amount was paid in accordance with the trade practice and the assessee established the same. The authorities did not establish that the amounts were excessive compared to the amounts paid in the market. Therefore, it is submitted that provisions of Section 40A(2) have no application. When the provisions of the said section are not applicable, the learned CIT(A) is not justified in disallowing a part of the expenditure incurred, for, it is decided by the judicial pronouncements that it is the prerogative of the traders to incur the expenditure and the prudence of the Department cannot be substituted for the business needs of the trader.
23. It was further submitted that the authorities have allowed the deduction for the similar commission paid to the authorised dealer namely, Mehta Traders, Bombay, as genuine and was in accordance with the trade practice. Therefore, it cannot be said that the commission paid to the authorised dealers at Kakinada are in any way excessive when the payments made are at the same percentage at which the same were made to Mehta Traders of Bombay.
24. In brief it was submitted that while completing the set-aside assessment proceedings, the learned D.C. has disallowed the commission paid by the assessee to the three Kakinada based authorised dealers firms :
(a) Without following the directions of the Hon'ble Tribunal.
(b) Without appreciating the evidence brought on record by the assessee especially the production of witnesses in March, 1997 for the examination by the learned D.C.
(c) Even without finding any averments against the assessee's contentions in the depositions taken from the witnesses produced by the assessee for examination by the learned D.C. in March, 1997.
(d) On the same evidence/information and on the same grounds as mentioned in the original assessment orders and not on the basis of evidence brought on the record by the assessee and without appreciating the evidence in support of the claim made.
(e) The AO also did not consider the observations made by the Hon'ble Tribunal in their order for the asst. yrs. 1984-85 and 1985-86.
25. While making the aforesaid submissions, the learned Authorised Representative also relied on the various case laws. On the last date of the hearing, the learned Authorised Representative again filed written submissions in brief as under the respect of all these appeals, the written submissions are mentioned hereunder :
(i) The statement of Sri K.V.R. Chowdary, the then managing director recorded on 10th Feb., 1988/11th Feb., 1988 cannot be considered as :
(a) The same was held to be incorrect by the three Member decision of the Tribunal for the asst. yrs. 1984-85 and 1985-86;
(b) After retraction letter field by the managing director on 1st March, 1988 before the CIT (Central), mentioning that he was under coercion, threat and duress at the time of recording the statement and the managing director retracted the statement vide his letter dt. 23rd March, 1988; the authorities did not examine him after retraction.
The board's resolution dt. 4th March, 1988 did not ratify the statement obtained on 10th Feb., 1988/11th Feb., 1988 by the authorities from the managing director. The act done by the managing director after the board's resolution dt. 4th March, 1988 was to retract once again, from the statement so obtained at the time of search.
The evidence collected at the time of search, support the claim of the assessee, that payment of the commission was made, and no material to the contrary was either found or brought to record by any authority. The statements recorded from the partners of the authorised dealer firms were not supported by any material or documents at the time of search and the same were retracted by them, immediately after. The three-Member decision of Tribunal held that the said statements cannot be relied upon. They were not examined after retraction at the time of assessment proceedings.
(a) The statements of 28 retail dealers recorded also support the claim of the assessee. All of them stated that the representatives of the assessee-company approached them. The authorised dealer firms and their employees are also representatives of the assessee-company. The retailers of Chennai, had stated that one Mr. Bhaskaran, approached them. He was an employee representative of one of the authorised dealers firms. The assessee wanted the authorised dealers firms to use the trade name of "SRMT" before the dealers for canvassing its products, as the assessee-company, did not want the names of the authorised dealers firms to be advertised at its cost. The assessee submits that all the authorised dealers firms are outsiders, not related to the company in any way.
(b) Out of the 28, the assessee filed clarificatory affidavits of 19 retail dealers and produced 11 of them confirming the above fact. Therefore, there is nothing adverse in 28 retail dealers to the assessee. Similar payment of commission made under similar circumstances to Mehta Trading Co., is accepted by the authorities.
26. In the circumstances and in view of the submission made, during the course of hearing and written submissions, the assessee submits that it proved that genuineness of payment of commission to the authorised dealer firms. Insofar as restriction of allowance is concerned, it is submitted that CIT(A) did not bring on record any information that the payment of commission was in excess of the business needs. Further, the net payments made, work out to about 6 to 7 per cent [15 per cent of 75 per cent, i.e., 11.25 per cent (-) 5 per cent, further commission provided to the retailers] by the authorised dealer firms, which is not excessive. Their duties include sending representatives, booking orders, and collecting the dues. Instances where losses on bad debts were also suffered by the authorised dealer firms are also brought on record. In these circumstances, the assessee submits that the payment of commission is not excessive as observed by the CIT(A).
27. It is further submitted that the following decisions support the submission made by the assessee that the incurring of expenditure for the business purposes is a business decision taken by the assessee and the prudence or otherwise of such decision cannot be interfered by the IT authorities, by substituting their view :
(i) CIT v. Dhanrajgiriji Raja Narasingirji
(ii) J.K. Woollen Manufacturers v. CIT
(iv) Jamshedpur Motor Accessories Stores v. CIT
(v) Voltamp Transformers (P) Ltd. v. CIT (1981) 129 ITR 105 (Guj)
(vi) Addl. CIT v. Moolchand Jaikishandas & Co.
(viii) CIT v. National Rayon Commercial Co. Ltd. (1992) 193 ITR 744 (Bom)
(Business excessive--Brokerage was disallowed)
(ix) CIT v. Dalmia Cement (Bharat) Ltd.
(Commission paid to sole selling agent)
(x) CIT v. Vijayalakshmi Mills Ltd., .
28. Insofar as the validity of the statement recorded at the time of search were concerned, the assessee relies the observation made by the Chellaiah Committee and the clarificatory Circular No. 286/2/2003-IT (INVN.) dt. 10th March, 2003 of the CBDT.
29. The learned Departmental Representative on the other hand vehemently contended that no services were rendered by the authorised dealers firms. These firms were not genuine. The assessee was directly booking the orders through its own sales representative. The goods were supplied directly and the payments are received directly by the assessee. The statements of 28 dealers recorded by the Revenue clearly proves that the authorised dealers firm were not genuine firms and they were not rendering any services to the assessee. Under Section 37(1) only those expenses which have been incurred wholly and exclusively for the purpose of the business are to be allowed as deduction. The commission paid to the authorised dealers firm was accepted by the managing director as sham transaction in his statement dt. 10th Feb., 1988 during the course of search. This statement also proves that these authorised dealers firms were created with the object of reducing the tax liability of the assessee-company. The statement of the managing director is duly corroborated by the statement of 28 dealers. Accordingly, the Revenue has duly discharged its onus that the expenditure by way of commission paid was not genuinely incurred by the assessee. The learned Departmental Representative placed reliance on the order of the AO and submitted that the commission paid should not be allowed. The CIT(A) was not correct in law even disallowing part of the commission. Thus, it was vehemently submitted that the order of the CIT(A) be set-aside and that of the AO be restored.
30. We have considered the rival submissions perused the materials on record. We have also gone through the orders of the tax authorities below and also the case laws cited and relied on before us. The only issue involved in all these appeals is whether the commission paid by the assessee-company in each of the assessment years to the authorised dealers is allowable under Section 37(1) of the IT Act or not. There is no dispute that during the asst. yrs. 1984-85 and 1985-86 the commission paid by the assessee-company was allowed and the deductibility of such commission has been confirmed by this Tribunal in ITA Nos. 2000 and 2471/H/1987 and 1502-1622/H/1989 vide its order dt. 4th Jan., 1991. In all the years under appeal before us, when the issue about the deductibility of the commission paid to the authorised dealers firm had come before the Tribunal, the Revenue produced certain evidences in the form of statements recorded under Section 131 in respect of 28 dealers in March, 1991 at the back of the assessee during the course of the proceedings for the asst. yr. 1988-89. The Tribunal since noted that the assessee had not been provided the copies of these evidences for his rebuttal by the Revenue and these are the additional evidences brought on record for the first time, set-aside all these assessments under dispute vide its order dt. 13th Oct., 1994 with the direction to the AO to examine the claim of the assessee, after giving the proper opportunity to the assessee. The relevant directions so given by the Hon'ble Tribunal are produced hereinabove in the preceding paragraphs.
31. The AO asked the assessee to produce the said dealer in the set-aside proceedings. The assessee produced 11 dealers out of the 28 dealers from whom statements under Section 131 were recorded in the course of assessment proceedings for the asst. yr. 1988-89. The 11 dealers also filed the affidavits with the AO affirming the clarification on the disposition made before the IT authorities in March, 1991. The assessee also filed the affidavits from 9 dealers who could not appear before the AO. In these affidavits, these parties affirmed various services rendered by the authorised dealer firms to the assessee by booking orders on their behalf. In respect of the 8 retail dealers, the assessee neither produced them nor filed the affidavit as some of them had wound up their businesses and some of them expired subsequently. The assessee also produced 3 sales representatives one each from each of the authorised dealer firms who were appointed by the various dealer firms as per the agreements on commission basis for booking orders for the assessee's products. These sales representatives also filed their affidavits before the AO stating that they worked for the authorised dealer firms. These three sales representatives were in addition to the 28 persons from whom statements were recorded by the Department in March, 1991. The AO after analysing the statement of the 11 retail dealers produced by the assessee as well as the statement recorded from them in March, 1991 concluded that the existence of the authorised dealer firm were not genuine and these dealers tried to give statements in favour of the assessee. The AO also rejected the statement of the three sales representatives representing each of the authorised dealers firms. All these 11 dealers and 3 sales representatives were also cross-examined on behalf of the assessee. The cross-examination revealed that the authorised dealers firms were booking orders for the assessee through the representatives. The AO rejected the statement of the 11 dealers, 3 sales representatives and along with their respective affidavits. The affidavits of the 9 dealers, which were filed by the assessee were also rejected by the AO. The AO before rejecting the affidavits filed by the assessee and also by the various dealers did not cross-examine them and relied on the statements recorded in March, 1991 for the 28 dealers and concluded that the authorised dealers firms were not in existence genuinely and were simply set up and used by the assessee as a facade for reducing its tax liability and therefore, he disallowed the commission paid by the assessee to the authorised dealer firms relying on the findings given by the AO in the original assessment orders. The AO rejected the statements of the dealers mainly on the basis that most of the witnesses who had filed affidavits were obliged to the assessee as they served with the assessee for a long period and some of them are still serving the assessee and, therefore, the assessee might have exercised pressure on these people to give the statement in favour of the assessee during the course of the set-aside proceedings. In our opinion this consideration is totally irrelevant while examining the genuinety of the affidavit. The statements recorded in March, 1991 were at the back of the assessee. This is a settled law that a statement recorded at the back of the assessee cannot be used as an evidence against the assessee. The parties which were examined in March, 1991 had categorically stated on cross-examination and also on their re-examination by the AO that the services were rendered by the authorised dealer firm to the assessee. We have also gone through the finding of the AO in which the AO took the view that the authorised dealer firms were bogus. These findings in our opinion are not based on the cogent evidences or material on record. The AO has not raised any direct question to the dealer regarding the rendering of the services by the authorised dealers.
32. We also noted that while disallowing the commission, the AO also relied on statement recorded on 11th Dec., 1988 from the managing director, Shri K.V.R. Chowdhary ignoring the fact that the Tribunal has already deleted the additions on the basis of this statement by its order dt. 4th Jan., 1991 by the Third Member even ignoring the basic cardinal principle of law that the order of the Third Member is binding not on him but also on the appellate authorities consisting of we and CIT(A). We noted that the CIT(A) has also asked for the remand report from the AO and in the remand report specifically following two points were asked.
(a) To re-examine the managing partner or any other partner of the 3 authorised dealer firms and verify the claim of the assessee regarding the payment of the alleged commission.
(b) To pinpoint the exact position and answer in the statements recorded from the 11 dealers and 3 field representatives under Section 131 in the course of the set-aside proceedings on the basis of which, he came to the conclusion that the payment of commission to the 3 authorised dealer firms as claimed by the assessee for the relevant assessment year was bogus.
33. From the order of the CIT(A), we noted that 2 remand reports dt. 29th Dec., 1997 and 10th Feb., 1994 were submitted by the AO. In the remand report, the AO made the following comments on the claim of the assessee for the commission paid to the authorised dealer :
"1. Finally, I may submit that the dealers while giving statements in the year 1991 have firmly and instantly admitted before the Departmental authorities without any second thought that they had no business connections at all with the authorised dealer firms and most of them had also expressed their ignorance about the existence of the said firms. Even the present statements recorded from the dealers in 1997 and the statement recorded from Sri. Ch. V.V. Satyanarayana as per CIT(A)'s directions almost strengthens the stand of the Department that the entire transaction of huge commission payments to the alleged authorised dealer firms is bogus and ingenuine and it is. nothing but the assessee's income shown as commission payments by inflating the expenditure.
2. In the light of the discussion made above, I am of the opinion that as per the Tribunal's order dt. 13th Oct., 1994 wherein the assessments for the assessment years under consideration were set-aside, it is not necessary to examine the issue as to how the commission payments had reached back the assessee-company and I have already made necessary investigations as per the directions of the Tribunal in the order, dt. 13th Oct., 1994, which were elaborately discussed in the set-aside assessment orders for these years, dt. 31st March, 1997. However, necessary investigation was also carried out by examining the managing partner Sri Ch. V.V. Satyanarayana of M/s Prabhakar Enterprises as per the directions of the CIT(A) vide his letter dt. 12th Dec., 1997 and a compliance remand report was already submitted vide this office letter dt. 29th Dec., 1997, wherein it was clearly brought out that the assessee has intentionally not produced the other two managing partners viz. S/Sri B. Nageswara Rao and DPKLN Raju, in particular. In fact meaningful purpose would have been served had the assessee produced Sri DPKLN Raju as the Tribunal has given importance to the statement recorded from his witness on 8th March, 1991, which is not retracted subsequently. As already observed above, the Tribunal has almost brushed aside the statements of the managing partners S/Sri Bh. Nageswara Rao and Ch. V.V. Satyanarayana in view of their subsequent retraction and inconsistencies therein. In view of the facts brought out above, I am of the view that there is no case for the assessee to get through its claim of commission payments. For kind and ready reference of CIT(A), the file containing correspondence regarding remand report together with the Tribunal's order, dt. 13th Oct., 1994 for the 4 years under consideration is submitted herewith."
34. We also noted from the order of the CIT(A) that, the CIT(A) under paras 3.2.5, 3.2.6 and 3.2.7 has accepted the genuineness of the authorised dealers firms to whom the commission was paid. The registration has duly been granted to these firms under the IT Act as the genuinety of these firms has been finally upheld by the Tribunal vide their order for the relevant years. The learned Departmental Representative did not produce any evidence to the contrary before us which may prove that the authorised dealer firms were not genuine except the retracted statement of the managing director of the assessee-company and the statement of 28 dealers recorded in March, 1991, at the back of the assessee during the course of the assessment proceedings for the asst. yr. 1988-89. We noted that the commission had been paid to all the authorised dealers firms through cheques. All the authorised dealer firms are the regular income-tax assessees. They are filing their respective IT returns regularly. All the commission received from the assessee-company has been duly disclosed by the authorised dealer firms in their books of account and in the P&L a/c, copies of which were filed before us. These authorised dealers firms had also paid the income-tax on the income so disclosed. The dealers clarified in their affidavit and accepted that they used to give the orders through the representatives of the authorised dealer firms. Even they have accepted that the representative used to book orders on the printed form containing the names of the authorised dealers. Merely that the assessee could not produce affidavit of the 8 dealers as some of them has wounded up their business and some of them had expired, does not mean that the statement recorded by the AO at the back of the assessee will be relied on when all the parties which were examined subsequently had accepted the genuinely of the transaction. We are also of the view that generally when the orders are booked through the authorised dealer, the representatives although may be sent by the authorised dealers firms but they do not disclose their identity as coming on behalf of the authorised dealer firms but they generally represent before the customers as if they are representing the company who are the supplier or the manufacturer of the product. It not only generates confidence of the product in the purchaser but even the manufacturer also do not prefer that the third party may control their market. Therefore, when the turnover from marketing relating to own production increased from 4.94 crores to 17.21 crores, the services of the authorised dealers were stopped otherwise the benefits would have been availed of by the authorised dealers firms.
35. The Tribunal under para 41 of its order dt. 13th Oct., 1994 has observed that the assessee was not provided with the full copy of the statement. The assessee has also obtained letter from 10 out of the 28 dealers wherein they have stated they have been carrying on trade in automobile spare-parts in Madras and among the products they were dealing in spare-parts manufactured by the assessee were also dealt in. The representative of the various dealer firms of the assessee used to visit them at regular intervals and canvas the products of their principles and used to persuade them for placing orders through them and in fact they were placing orders on the forms of relevant authorised dealers. It appears that this fact has not been considered by the AO although there was specific direction to consider this aspect also.
36. We find force in the submissions of the learned Authorised Representative that whenever a dealer gives the orders to a sales representative, he is least bothered whether the said sales representative represent some agent appointed by the manufacturer or the manufacturer's sales representative will always say that he has come on behalf of the manufacturer company, because otherwise the sales representative will not be able to procure the orders so successfully. We find that in the statement recorded in 1991 as produced in the assessment order, the dealers had spelled out that they booked the order for the assessee's product through the sales representative visited to them.
37. We do not find any substance in the contention of the AO that the expenditure incurred on salaries, offices, travelling and bank charges by the authorised dealer was very less and the incurrence of less expenditure by the authorised dealer firms cannot be a basis for treating the authorised dealers firms to be non-genuine. But in our opinion this will counter the observations of the AO that the authorised dealers firms were created to evade the tax because in case the authorised dealers firms have debited less expenses their taxable income get increased and they have to pay more taxes.
38. No evidence has been brought on record that the amount as has been paid by the assessee-company by way of commission to the authorised dealers firms were received back by the directors of the assessee-company, although there had been affective search at the premises of the assessee and its director and also at the premises of the authorised dealer firm and its partners. The statement of the managing partner, one of the authorised dealer firm which was recorded during the course of remand report also proves that the authorised firms have received the commission and the representative of the authorised dealers were attending the booking of the orders.
39. The observations that whatever canvassing and other services claimed to have been referred by the authorised dealer firms was in fact done by the assessee's field representatives in our opinion is based without bringing any material on record. The copy of the order forms proves the booking of the orders by the representatives of authorised dealer firm. There is also no material brought on record that these representatives who booked the orders represent the assessee, not the authorised dealer firms. The authorised dealers were not supplying the goods and the AO could not be able to understand that the duties of the authorised dealers were restricted to the booking of the orders, promotion of the assessee's products and the recovery of the amount against the supply made by the assessee for the orders booked by the authorised dealer. We have noted from the copy of the balance sheet and P&L a/c that the authorised firms were actually made responsible for the bad debts incurred in respect of the supplies made to the dealers on the orders booked through the representative of the authorised dealers firms. This proves that the authorised dealers were responsible for the recovery of the debts.
40. The AO has also not brought any evidence on record that the order form or the credit notes were not there when the orders of the products of the assessee were placed by the dealers and were not available with the assessee even during the course of the search. Also the acceptance of the order form/credit note was not denied when the orders were booked by the representative of the authorised dealer in the order form consisting of the names and addresses of the authorised dealer. In our opinion, this evidence cannot be rejected merely on the basis of probabilities without bringing any evidence to the contrary on record which may prove that the orders were directly placed by the dealers to the assessee. The search has taken place at the premises of the assessee as well as of the authorised dealer but the Revenue could not find any material which may prove that the authorised dealers were not in existence and the orders were not placed through them.
41. Hon'ble Third Member in its order dt. 4th Jan., 1991, has accepted under para 13 that there is a trade practice to give commission to the authorised dealers firms. Even the AO has allowed the deduction of the commission paid to one authorised dealer firms M/s Mehta Trader, Mumbai, on the same terms and conditions, proves the trade practice prevalent in the trade. When the company grows in our opinion, due to the principle of span of control, it becomes necessary for them to appoint the authorised dealers on commission basis so that they may be motivated to procure more business for getting the more commission. It is a human tendency not to work without any incentive.
42. We do not find any substance on the observation of the AO that the assessee has incurred the expenses for bringing the witnesses for production before the AO, therefore, they were bound to oblige the assessee. When the assessee is asked to produce the witness, the assessee, in our opinion, is bound to bring the witness if he has come from far away places, the assessee has not committed any wrong if he has arranged for the travelling and the stay of the witnesses. Even a witness is entitled to claim the expenditure in view of the provision laid down under the Civil Procedure Code. Therefore, treating the commission paid non-genuine on this basis is not justified. Most of the observations made by the AO are not relevant for determining the genuinety of the transaction.
43. Now coming to the statement of the managing director of the assessee-company, Sri K.V.R. Chowdary, which was recorded on 10th Feb., 1988 and continued upto 11th Feb., 1988, we find that there are different dates written on the statement upto p. 12, the signature of the managing director were taken on 10th Feb., 1988, while from pp. 13 to 15, signatures were taken on 11th Feb., 1988. This is a fact that the recording of the statement was started at 8.45 a.m. on 10th Feb., 1988. Q. No. 48, which relates to the commission as has been reproduced in the preceding paragraphs was signed on 11th Feb., 1988, while the other questions were signed on 10th Feb., 1988. We find force in the submission of the learned Authorised Representative that this question and its answer was signed on 11th Feb., 1988. From the photocopy of the statement, which was filed before us also proves that in all the pages, the witnesses have signed on 10th Feb., 1988. This change in the date by the witnesses and by the deponent clearly proves that the answer relating to question was kept pending and no doubt undue influence must have been exercised on the assessee, especially when no material was found during the course of search to prove that the commission paid by the assessee-company was a bogus one and no incriminating material disclosing the undisclosed income of the assessee was found. If the statements to this effect have not been taken, the search would have failed. The assessee is a public limited company and is having turnover in crores. Therefore, the commission could not be paid merely at the instance of the managing director without getting it approved by the board of directors. The managing director was 62 years old and it is quite natural, a person may get exhausted after getting grilled over 16 hours and when he was not made to sleep throughout the night and was continued under the cross-questioning. The circumstances under which statement was recorded and the change in the date over the statement and also the subsequent letter dt. 1st March, 1988 and 23rd March, 1988 written by the managing director, Mr. K.V.R. Chowdary retracting the statement proves that the statement was taken from him regarding the commission paid by adopting the pressure techniques, otherwise the statement could have been recorded at one length. The learned Authorised Representative was at pain in emphasizing that the statement had been procured from the assessee under coercion and pressure and contrary to the CBDT instruction issued in March, 2003 pursuant to Kelkar Committee report. We find from the CBDT instructions and Kelkar Committee report that the prevalence of practice amongst the search parties to obtain forced confession of undisclosed income from the assessee. In our opinion, the preposition of law is well settled that the admission made by the assessee during the course of search constitutes substantial evidence in view of the provisions of Sections 17 to 21 of the Evidence Act, but such admission cannot be considered to be conclusive evidence against the assessee. In this regard, we noted the following propositions laid down in various case laws :
Hon'ble apex Court in the case of Pullangode Rubber Produce Co. Ltd. v. State of Kerala held :
An admission is an extremely important piece of evidence but it cannot be said that it is conclusive. It is open to the assessee who made the admission to show that it is incorrect.
Hon'ble apex Court in the case of Nagubai Armal v. B. Sharma Rao AIR 1965 SC 100 held :
An admission is not conclusive as to the truth of the matters stated therein. It is only a piece of evidence, the weight to be attached to which must depend on the circumstances under which it is made. It can be shown to be erroneous or untrue.
Hon'ble apex Court in the case of Sarwan Singh Rattan Singh v. State of Punjab (1957) SC 637 held :
In law it is always open to the Court to convict an accused on its confession itself though he has retracted it at a later stage. Nevertheless usually Courts require some corroboration to the confessional statement before convicting an accused person on such a statement. What amount of corroboration would be necessary in such a case would always be a question of fact to be determined in the light of the circumstances in his case.
Hon'ble High Court in the case of S. Arjan Singh v. CWT held :
An admission is an important piece of evidence, but it is not conclusive and it is open to the assessee to show that it is incorrect.
Tribunal in the case of Asstt. CIT v. Mrs. Sushiladevi S. Aggarwal (1994) 49 TTJ (And) 663 : (1994) 50 ITD 524 (And) held :
Where the assessee has retracted from statement given on search day, AO will not be justified in drawing adverse inference.
All that is stated by any deponent on the search day should not be taken as truth, the whole truth and nothing but the truth. Such statements indubitably have evidentiary value and credibility in law, but the same should be viewed with great caution, particularly when the same denied, varied or retracted or established by the defendant to have been obtained or given under mental stress, coercion, undue influence or due to any other abnormal condition and circumstances when such statement was given. If a person at later stage retracts from the statement given on the search day, then the Courts of Tribunal should try to ascertain the reasons or circumstances from such person for doing so and, if satisfied, not to place heavy reliance on such earlier statement which has subsequently been denied and retracted.
Tribunal in the case of Dineshchandra J. Dina v. ITO (2000) 112 Taxman 107 (Ahd)(Mag) held :
A party is entitled to show and prove that an admission made by him previously was in fact not correct and true.
Hon'ble apex Court in the case of Shri Krishan v. Kurukshetra University held :
an admission based on ignorance of fact is not binding.
Hon'ble Punjab & Haryana High Court in the case of Krishan Lal Shiv Chand Rai v. CIT held :
it is an established principle of law that a party is entitled to show and prove that an admission made by him previously was in fact not correct and true.
Tribunal in the case of R.P. Locks Co. v. Dy. CIT (2000) 67 TTJ (Del) 588 held :
Statement of assessee under Section 132(4) surrendering certain amount is legally relevant but it is open to a party making an admission to explain, clarify and demonstrate on basis of positive material under what circumstances admission was made or to prove that what was stated was not correct.
44. In view of the aforesaid case laws, in our opinion, the admission made by the assessee under Section 132(4) during the course of the search is not a conclusive evidence and such admission can be used as an evidence provided corroborating evidences are there on record. The assessee in this case has already retracted the statement. Although, there had been search in the case of the assessee but the Revenue could not bring any evidence or material on record except the statement of the dealers, which were recorded in March, 1991 and these statements clearly stated that the orders were placed by them through the sales representatives. These statements were although recorded at the back of the assessee. When these persons were cross-examined they clearly accepted about the booking of the orders on the order forms belonging to the authorised dealers through the representatives. Affidavits were also filed before the AO which were rejected by him without cross-examining the deponents contrary to the decision of Hon'ble Supreme Court in the case of Mehta Parikh & Co. v. CIT (1956) 30 ITR 181 (SC). Thus, the Revenue has not brought any corroborative evidences. The onus in our opinion is on the Revenue especially when the presumption under Section 132(4A) is available in this case on the basis of the books of account found at the time of search in favour of the assessee as discussed by us subsequently. We find that this Tribunal vide order dt. 4th Jan., 1991 passed by the Third Member for the asst. yrs. 1984-85 and 1985-86 under paras 9 to 11 of its order has not accepted the statement of Sri K.V.R. Chowdary, managing director of the company to be true. The judgment of the Third Member is also binding on us. Thus we are of the firm view that no disallowance can be made on the basis of the statement of the managing director recorded under Section 132(4) of the IT Act which was subsequently retracted and when the Tribunal has already deleted the additions made on the basis of retracted statement of the managing director.
45. We have also gone through the provision of Section 132(4A) on which the learned Authorised Representative has relied, we find that the presumption could be said as stipulated under the section to arise when it is established that any books of account, other documents, money, bullion, jewellery or other valuable articles or things are found in the possession or control of any person in the course of the search. The presumption stipulated are (a) that such books of account, other documents, money, bullion, jewellery or other valuable articles or thing belong or belongs to such person, (b) that the contents of such books of account and other documents are true and (c) that the signature and every other part of such books of account and other documents which purport to be in the handwriting of any other particular person or which may reasonably be assumed to have been signed by, or to be in the handwriting of any particular person, are in that persons handwriting, and in the case of a document, stamped, executed or attested, that it was duly stamped and executed or attested by the person by whom it purports to have been so executed or attested. These presumptions lay down the rule of evidence, which are applicable in the case of the search. On the basis of these presumptions, the books of account, documents and vouchers found in the possession of the assessee and which contain the entries relating to the commission paid are deemed to be correct and true. The presumptions laid down in the section are rebuttable which means the onus is on the party who wants to prove otherwise that is presumed. Since the assessee has duly entered into the agreement with the authorised dealers firms, paid them the commission and for which copies of the order forms, proof of the payment of the commission, were duly found in the possession of the assessee during the course of the search, the onus was on the Department to prove that the vouchers, books of account and entries therein regarding the commission paid and the copies of the orders forms proving that the orders were booked through authorised dealers were not correct. The AO in this case has not brought any cogent material or evidence on record except the retracted statement of the managing director of the assessee and the 28 statements of the dealers, which were also proved otherwise when the opportunity was given to the assessee. Therefore, in the absence of the contrary evidence being brought on record that the books of account and the vouchers were not correct, the presumption available under Section 132(4A) will be in favour of the assessee and the commission paid to the authorised dealers as recorded in the regular books of the assessee will be presumed to be correct and true.
46. Now, coming to the relevant provision in which the assessee claimed deduction is Section 37(1) of the IT Act, 1961. Section 37(1) reads as under :
"Any expenditure (not being expenditure of the nature described in Sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purpose of the business or profession shall be allowed in computing the income chargeable under the head 'Profits and gains of business or profession'
Explanation : For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure."
47. From the aforesaid section, it is apparently clear that various expenditures to be eligible for deduction under Section 37(1) must fulfil the following conditions :
(a) The expenditure should not be covered by the provisions of Sections 30 to 36 as these sections provide its specific treatment to expenditure laid down in those sections.
(b) Expenditure should not be capital in nature.
(c) It is not to be the personal expenditure of the assessee.
(d) It should be incurred wholly and exclusively for the purpose of business or profession.
(e) It should be incurred during the previous year.
(f) It should not be incurred for any purpose which is an offence or which is prohibited by law.
48. In the case of the assessee, there is no doubt that the commission paid by the assessee is not covered by the provision of Sections 30 to
36. There is also no dispute that the expenditure incurred by the assessee is of revenue nature and not of capital in nature. There is also no dispute about the fact that the expenditure has been incurred during the respective previous years. There is also no dispute that this expenditure has not been incurred for any purpose which is an offence or which is prohibited by law. The expenditure so incurred by the assessee-company cannot be regarded to be the personal expenditure of the assessee. There is no evidence on record that these expenses were incurred to meet out the personal needs of the assessee-company. The company is always incorporated for the purpose of carrying on the business as stipulated under its object clause laid down in the memorandum of association. The company so incorporated is not human being, which may have personal needs. The company is an artificial person incorporated under the legislature by having a separate entity. Although by having a separate entity; it may work as a human being in its own name but it does not require any expenditure to be incurred, as a human being requires for meeting out its personal needs. Therefore, the expenditure incurred by the assessee-company cannot be regarded to be the personal expenditure of the assessee. The personal expenditure of the management of the human beings who are controlling the company cannot be regarded to be the personal expenses of the assessee-company. It may be remuneration or perquisite in the hands of the management of the human beings but it cannot be regarded to be the personal expenses of an incorporated body.
49. The only dispute in this case relates to the fact whether the commission paid can be regarded to have been incurred wholly and exclusively for the purposes of the business or profession of the assessee-company. Before 1939, the phrase used was 'expenditure incurred solely for the purpose of earning profit'. The omnibus provision of Section 37 as amended by 1939 Act allows of 'expenditure incurred wholly and exclusively in connection with such business/profession' as long as no personal/capital element is involved. The scope of the term 'for the purpose of business' is surely wider than the term 'for the purpose of earning profit'. In our opinion, the IT Department cannot prescribe what expenditure an assessee should incur and under what circumstances. Every businessman knows his interest best. The assessee may not be a prudent man and yet an expenditure incurred voluntarily for the purpose of the business would be allowable under Section 37(1).
50. The Hon'ble apex Court in the case of Eastern Investment Ltd. v. CIT , laid down the following principles for
evaluation of 'wholly and exclusively for the purpose of business' :
(i) Even if the question must be decided on the facts of each case, the concluding decision will be one of law.
(ii) It is not necessary that the expenditure be incurred for earning profit.
(iii) It is enough that the money was expended "not of necessity and with a view to directing and immediate benefit to the trade, but voluntarily on the ground of commercial expediency, and in order, indirectly, to facilitate the carrying on of the business".
(iv) No hard and fast rule can be laid down to explain what the word "solely" is meant for.
51. The expression "wholly and exclusively" in Section 37(1) does not mean "necessarily". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of its or his business. Such expenditure may be incurred voluntarily and without any necessity, and if is incurred for promoting the business and to earn profits, the assessee can claim deduction, therefore, under Section 37(1) even though there was no compelling necessity to incur such expenditure. The Supreme Court, in the case of CIT v. Malayalam Plantation , held that it is not only expenditure which directly results in benefit or advantage to the assessee's business that is entitled to deduction, but also any expenditure which is incurred with a view to facilitating the carrying on of the business.
52. We do agree with the submissions of the learned Authorised Representative that it is not open to the Department to prescribe what expenditure the assessee should incur and in what circumstances he should incur that expenditure. Every businessman knows his interest best as this has been clearly laid down by the Hon'ble apex Court in the case of CIT v. Dhanrajgiri Raja Narsinghgiri (supra) relied on by learned Authorised Representative. No doubt every businessman is the best judge of his business expediency but the AO in our opinion has the right to know whether the expenditure has been incurred for business purposes or not or whether it has been incurred for other extraneous consideration. Similar view has been taken by the Hon'ble Rajasthan High Court in the case of Jaipur Electro (P) Ltd. v. CIT. The Hon'ble Bombay High Court has also taken the similar view in the case of Ramanand Sagar v. Dy. CIT in which it was held that the mere fact that the payment has been made under a contract is not conclusive of expenditure being laid down wholly and exclusively for the purpose of the business. Once doubt arises about the bona fide nature of the payment, it is necessary to look into the necessary circumstances such as relationship of the payee to the assessee, the general standard of similar expenditure in comparable business, the true worth of the services or goods in question and so forth. It is also open to the AO to question the reality of the expenditure, i.e., the true nature of the payment, the true consideration for it and so forth. Once the AO considers the payment and the purpose to be bona fide, it is not open for him to substitute his own judgment what is the reasonable quantum of expenditure for the assessee. The AO can only decide whether the expenditure is real, whether it relates to the business and is wholly spent for that purpose. In applying the test of commercial expediency, for determining whether the expenditure was wholly and exclusively laid out for the purpose of the' business the reasonableness of the expenditure has to be judged from the point of view of the businessman and not the Revenue CIT v. Walchand & Co. (P) Ltd. (supra). The similar view has been taken in the cases of J.K. Woollen Manufacturers v. CIT (supra), Aluminium Corporation of India Ltd. v. CIT and CIT v. Panipat Woollen & General Mills Co. Ltd. . Considering the true import of the expression "wholly and exclusively" it was observed by the apex Court in Sassoon J. David & Co. (P) Ltd. v. CIT . that the same does not mean "necessarily". Ordinarily, it is for the assessee to decide whether any expenditure should be incurred in the course of its business. Such expenditure may be incurred voluntarily and without any necessity and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction under the relevant provision even though there was no compelling necessity to incur such expenditure. The fact that somebody other than the assessee is also benefited by the expenditure should not come in the way of an expenditure being allowed by way of deduction under Section 37 of the Act if it otherwise satisfies the tests laid down by law. The bill (sic) read "any expenditure" laid out or expended wholly, necessarily and exclusively for the purposes of the business or profession shall be allowed in view of the protests raised by the taxpayers the word "necessarily" came to be dropped. It will be also noticed that in CIT v. Chandulal Keshavlal & Co. , it was observed as follows :
"Another fact that emerges from these cases is that if the expense is incurred for fostering the business of another only or was made by way of distribution of profits or was wholly gratuitous or for some improper or oblique purpose outside the course of business then the expense is not deductible. In deciding whether a payment of money is a deductible expenditure one has to take into consideration questions of commercial expediency and the principles of ordinary commercial trading. If the payment or expenditure is incurred for the purpose of the trade of the assessee it does not matter that the payment may incur to the benefit of a third party [Usher's Wiltshire Brewery Ltd. v. Bruce (1914) 6 Tax Cases 399 (HL)]. Another test is whether the transaction is properly entered into as a part of the assessee's legitimate commercial undertaking in order to facilitate the carrying on of its business; and it is immaterial that a third party also benefits thereby. But in every case it is a question of fact whether the expenditure was expended wholly and exclusively for the purpose of trade or business of the assessee."
53. If we apply the principles of the law as enunciated in the various judgments, we are of the opinion that once the AO finds that the assessee has bona fidely incurred the expenditure for the business, the AO cannot decide the quantum of the expenditure to be incurred by the assessee. In the case before us, the AO disallowed the commission because he finds that the assessee has not genuinely incurred the expenditure for the purpose of the business but this finding of the AO was not accepted by the CIT(A) and, the CIT(A) although accepted the genuineness of the expenditure but restricted the quantum of the expenditure incurred by the assessee.
54. In our opinion, the CIT(A) does not have the jurisdiction to decide the quantum of the expenditure which should be allowable to the assessee. Once the CIT(A) has given the finding that the expenses has been genuinely incurred by the assessee, the CIT(A) should have allowed full commission paid by the assessee. Neither the AO nor CIT(A) has brought out on record any evidence or material which may prove that the case of the assessee falls under Section 40A(2) of the IT Act. It is only the provision of Section 40A(2), which gives a power to the Revenue to look into the reasonability of the expenses incurred by the assessee. Even the learned Departmental Representative did not contend before us that this is a payment covered under Section 40A(2) of the IT Act. We, therefore, set-aside the action of the CIT(A) of estimating the quantum of the commission paid by the assessee and allowing it on estimate basis.
55. Now coming to the case laws cited before us, in the case of Dalmia Cement Ltd. (supra) the Hon'ble Delhi High Court has held as under :
"For the allowance under Section 37(1), the following conditions are to be satisfied, i.e., (a) there must be expenditure, (b) such expenditure must not be of the nature described in Sections 30 to 36, (c) the expenditure must not be in the nature of capital expenditure or personal expenses of the assessee, (d) the expenditure must have been laid out or expended wholly and exclusively for the purposes of the business or profession. The word 'wholly' refers to the quantum of expenditure, while the word 'exclusively' refers to the motive, objective and purpose of the expenditure. An expenditure to which one cannot apply an empirical or subjective standard is to be judged from the point of view of a businessman and it is relevant to consider how the businessman himself treats a particular item of expenditure. The term 'commercial expediency' is not a term of art. It means everything that serves to promote commerce and includes every means suitable to that serves to promote commerce and includes every means suitable to that end. In applying the test of commercial expediency, for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, the reasonableness of the expenditure has to be judged from the point of view of the businessman and not the Revenue [see CIT v. Walchand & Co. (P) Ltd. , J.K. Woollen Manufacturers v. CIT
, Aluminium Corporation of India Ltd. v. CIT
and CIT v. Panipat Woollen & General Mills Co.
Ltd. . But it must not suffer from the vice of
collusiveness or colourable devices.
It is be noted that in the present case, the question that has been raised by the Revenue is not one relating to the expenditure being not for the purposes of the business. It is a question of the appropriate amount which would have been paid as commission. In fact the AO himself has allowed to the extent of Rs. 4,35,854 holding inter alia, 'the payment of Rs. 1.75 per M.T. to Cement Distributors Ltd. is very much on the excessive side'. This in our view was impermissible, within the framework of Section 37 of the Act. The jurisdiction of the Revenue is confined to 'deciding the reality of the expenditure', namely, whether the amount claimed as deduction was factually expended or laid down and whether it was wholly and exclusively for the purpose of the business. The reasonableness of the expenditure could be gone into only for the purpose of determining whether, in fact, the amount was spent. Once it is established that there was a nexus between the expenditure and the purpose of the business, the Revenue cannot justifiably claim to put itself in the armchair of a businessman or in the position of the board of directors and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances of the case. We need not go into any hypothetical issue in this case in view of the accepted position that the factum of services rendered by the CDL has not been refuted by the Revenue. It needs no reiteration that the settled position in law is that no businessman can be compelled to maximise his profits. The obvious answer to the first question is in the affirmative, in favour of the assessee and against the Revenue."
56. In the case of Raj Kumar Daya Shanker v. CIT (1972) Taxation 32(3)-49 (All), Hon'ble Allahabad High Court has held as under :
"Where the Tribunal sustained partial disallowance of commission paid on the grounds of being excessive, it was held that the disallowance was based on no valid reason and was arbitrary. Similarly, where the Tribunal maintained partial disallowance out of travelling expenses on the ground that the possibility of some of the expenses being incurred for personal expenses of the partners could not be ruled out, it was held that the Tribunal has acted on pure surmise. Therefore, the partial disallowance was not justified."
Hon'ble Calcutta High Court in the case of J.K. Steel & Industries Ltd. v. CIT has held as under :
"The assessee-company entered into an agreement with a company whereby the later was appointed its sole selling agent. The agreement provided that 'the agents shall be responsible for payment of the prices and all other monies to the principal immediately after the goods shall leave the principal's works or go downs'. The agents were to be paid a certain percentage of the total sales as commission. The Tribunal found that the agreement was genuine but disallowed a part of the commission on the ground that the agents did not render any service. There was, however, no specific finding by the Tribunal that the payment was excessive or that any part of the commission was paid on extra commercial considerations. On a reference at the instance of the assessee :
Held on the facts, that the commission paid was referable to the agent undertaking the responsibility for payment and standing guarantee for the other customers of the assessee. The Tribunal was not right in holding that entire payment was hot an allowable deduction."
Tribunal in the case of ITO v. Shakti Cables (ITA Nos. 2844 and 3695 of 1986 by Tribunal Delhi) (1990) 50 Taxman 329 (Del)(Mag) allowed commission paid by the assessee-firm, dealing with the State Government Department to commission agents for services rendered by them in respect of conveying information about tenders, getting bills passed and payments made, etc. in view of facts (i) that utilisation of services of such agents was common in assessee's line of business, (ii) there was increase in turnover of assessee for said assessment year, (iii) agents were not related to any of the partners, (iv) payment of commission was in pursuance of agreements with agents, and (v) all agents had confirmed having done agency work and obtained commission by account payee cheques. It was further held that it was not for the assessee to prove manner in which agents utilised payments of commission.
Bombay Tribunal in the case of Bharat Bijlee Ltd. v. Dy. CIT (2001) 71 TTJ (Mumbai) 909 : (1999) 71 ITD 412 (Mumbai), when AO disallowed the assessees claim as not genuine in respect of commission paid to M/s R inspite of the following details submitted by assessee, the :
(i) confirmation from R
(ii) payments were made by account payee cheques.
(iii) the party whose contract was claimed to have been secured confirmed that the orders were placed through R.
because when the AO made enquiries at the given address of R, he found that no concern existed at that place, deleted the addition after noting as under :
(a) by submitting the aforementioned details, the assessee had sufficiently discharged the primary onus that laid upon it. Once the, primary evidence was produced by the assessee, the onus shifted to the AO.
(b) the mere fact that R was not found existing at the given address, did not automatically establish that no such party existed at the relevant point of time. The AO had failed to make enquiries as to whether R existed at the relevant point of time, i.e., in the year in which the payment of commission was claimed to have been made.
(c) if the AO had collected material to establish that R did not exist at the relevant point of time, then the obvious conclusion would be that the evidence furnished by the assessee was unreliable. However, the AO did not do so.
(d) when one weighed the evidence furnished by the assessee on the one hand and the information collected by the AO on the other, the balance tilted heavily in favour of the assessee.
57. In the case of IAC v. Haryana Conductors Ltd. (1990) 50 Taxman 291 (Del)(Mag), where assessee-company paid commission to various parties by account payee cheques, which was duly confirmed by them and record showed that they had rendered services for which commission was paid, expenditure was deductible.
Hon'ble apex Court in the case of Aluminium Corporation of India Ltd. v. CIT (supra) has held as under :
Under Section 10(2)(xv) of the 1922 Act [corresponding to Section 37(1) of the 1961 Act] it is for the ITO to decide whether any remuneration paid by an assessee was wholly or exclusively expended for the purpose of his business. It is also true that by the mere fact that the assessee establishes the existence of an agreement and the fact of actual payment, the discretion of the ITO to consider whether the expenditure was made exclusively for the purpose of the business is not taken away. But in applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue.
Where the selling agents had not only canvassed the sales but had also undertaken the responsibility for due fulfilment of contracts by customers and for the payment of amounts due by customer to the assessee, even in respect of sales not made through them, it was held that in the accounting year when all the sales were made directly by the company, the commission paid to the agents on all sales, whether made through them or not, was deductible.
Hon'ble Supreme Court in the case of J.K. Woollen Manufacturers v. CIT (supra) held as under :
In applying test of commercial expediency, to remuneration paid to an employee, case has to be adjudged from point of view of a businessman and not of IT Department.
Hon'ble Supreme Court in the case of CIT v. Walchand & Co. (P) Ltd. (supra) held as under :
In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for the purpose of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue. An employer in fixing the remuneration of his employees is entitled to consider the extent of his business, the nature of the duties to be performed, and the special aptitude of the employee, future prospects of extension of the business and a host of other related circumstances. The rule that increased remuneration can only be justified if there be corresponding increase in the profits of the employer is erroneous.
Hon'ble Supreme Court in the case of CIT v. Panipat Woollen & General Mills Co. Ltd. (supra) held as under :
In order to determine the question of reasonableness of the expenditure, the test of commercial expediency would have to be adjudged from the point of view of the businessman and not of the IT Department.
Hon'ble Supreme Court in the case of CIT v. Dhanrajgirji Raja Narsingirji (supra) held as under :
It is not open to the Department to prescribe what expenditure an assessee should incur and in what circumstances he should incur that expenditure. Every business knows his interest best.
Hon'ble Gujarat High Court in the case of Voltamp Transformers (P) Ltd. v. CIT (supra) held as under :
Where commission was paid by the assessee-company to its sole selling agent, a firm whose partners were one of the directors and the wives of two other directors of the assessee-company, and there was evidence that sales increased due to effort of the agent and that the commission paid was reasonable. Held, that the commission was deductible.
Hon'ble Tribunal in the case of VIP Industries Ltd. v. IAC (1991) 36 ITD 70 (Bom)(TM) allowed the commission paid to the agent. Assessee-company was carrying on business of manufacture of moulded luggage--During relevant accounting year, assessee paid certain commission to its agent M, who obtained orders from Canteen Stores Department, Government Department--M, which was a taxable firm, stated in a letter that it appointed B, who was able to render services to assessee--In an affidavit filed on behalf of B, it was admitted that they had received certain commission in question from M by account payee cheques, deposited in its account--Assessee had already been allowed deduction in respect of the commission paid to M in earlier years. Held that it could not be said that M had not rendered any services to assessee merely on grounds that there was no correspondence between assessee and M and that B had withdrawn entire amount in cash immediately on deposit in its account and as such it was an allowable deduction--Held, yes.
Hon'ble Mumbai High Court in the case of CIT v. National Rayon Commercial Co. Ltd. (supra) held as under :
As far as the question of brokerage is concerned, again the Tribunal in its order in respect of the asst. yr. 1972-73 as well as in the orders in respect of the assessment years with which we are concerned has pointed out that the genuineness of payment of the said brokerage has not been disputed by the Department. The only contention taken by the Department was that the payment of brokerage was excessive as the products manufactured by the assessee did not require any canvassing. As the Tribunal has pointed out, it is for a businessman concerned to run his business as he likes and whether to employ a broker or not so long as the genuineness of the employment of the broker is not in question. The Tribunal has moreover pointed out that the payment of brokerage for the sale of articles is the normal and established practice in the market and no material was brought before the Tribunal to show that any extra commercial consideration was involved in the employment of brokers by the assessee or in the payment of brokerage to them. In view of this, we see no reason to direct the Tribunal even to refer the questions in this regard for determination by this Court.
In the case of Jamshedpur Motor Accessories Stores v. CIT , the Hon'ble Patna High Court has held as under :
Held (i) That the Tribunal was not justified in not allowing a sum of Rs. 7,117 paid to the creditors, D.M.P. and R.M.P. under Section 10(2)(xv) of the Act. It has been laid down that when a claim for allowance under Section 10(2)(xv) of the Act is made, the IT authorities have to decide whether expenditure was incurred voluntarily and on grounds of commercial expediency and in order indirectly to facilitate the carrying on of the business. In applying the test of commercial expediency for determining whether the expenditure was wholly and exclusively laid out for purposes of the business, reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue.
In the case of Shahzada Nand & Sons v. CIT (supra), Hon'ble Supreme Court has held as under :
"The three factors laid down by the proviso to Section 36(1)(ii) are not really conditions on the fulfilment of which alone the amount of commission paid to an employee can be regarded as reasonable. They are merely factors to be taken into account by the Revenue authorities in determining the reasonableness of the amount of commission. It may be that one of these factors yields a negative response. To take an example, there may be no general practice in similar business or profession to give commission to an employee, but, yet, having regard to the other circumstances, the amount of commission paid to the employee may be regarded as reasonable. What the proviso requires is merely that the reasonableness of the amount of commission shall be determined with reference to the three factors. But it is well-settled that these factors are to be considered from the point of view of a normal, prudent businessman. The reasonableness of the payment with reference to these factors has to be judged not on any subjective standard of the assessing authority but from the point of view of commercial expediency. What is the requirement of commercial expediency must be judged, not in the light of the 19th century laissez faile doctrine which regarded man as an economic being concerned only to protect and advance his self-interest, but in the context of current socio-economic thinking which places the general interest of the community above the personal interest of the individual and believes that a business or undertaking is the product of the combined efforts of the employer and the employees where there is sufficiently large profit, after providing for the salary or remuneration of the employer and the employees and other prior charges such as interest on capital, depreciation, reserves, etc. a part of it should in all fairness to the employees.
It is not necessary, for commission paid to an employee to be allowable under Section 36(1)(ii), that it should be paid under a contractual obligation.
It is now well-settled that the mere fact that the commission is paid ex gratia would not necessarily mean that it is unreasonable.
Held, on the facts, that the commission paid to the two employees of the assessee was reasonable having regard to all the circumstances of the case and was allowable as a deductible expenditure under Section 36(1)(ii)."
In the case of Addl. CIT v. Moolchand Jaikishandas & Co. (supra), Hon'ble Gujarat High Court has held as under :
"Held, that the Tribunal had found as a matter of fact that the agreements entered into between the assessee-firm and the three employees were genuine transactions and not sham or bogus ones. It was also found that the amounts of commission shown to have been paid to the three employees were in fact paid. If the amount of the salary was low and the commission was part of the remuneration and not an ex gratia payment for services rendered, the amount, of the commission would have to be large in order to equalise the total amount and ensure a fairly high remuneration for these employees. The Tribunal had further found that in this particular trade of dyestuffs and colour chemicals which are being sold to textile mills, it is the usual practice to pay secret commission to dyeing masters, printing masters, etc. in order to secure orders and to ensure that the supplier concerned increased his sales. The Tribunal had also held that the three employees of the assessee-firm were visiting the various mills with whom the assessee had dealings and were securing business from those different mills for the assessee-firm. In view of these conclusions of the Tribunal and particularly in view of the conclusion of the Tribunal that the payment of commission under the agreements was necessary in the interest of the assessee's business, applying the correct test required to be applied for ascertaining the reasonableness of the commission paid in the light of the provisions of Section 36(1)(ii) of the Act, namely, the test of commercial expediency, it has to be held that the payment of commission to the employees in the light of the peculiar facts and circumstances of the particular case was reasonable. It must, therefore, be held that the claim of the assessee-firm was allowable under Section 36(1)(ii) of the Act.
Though the Tribunal had held that the amount of commission paid by the assessee to its employees was allowable under Section 37 of the IT Act, 1961, the High Court, on a reference made to it, is not precluded from arriving at its own . finding as to whether the deduction allowed by the Tribunal was allowable under any other section of the Act : CIT v. Breach Candy Swimming Bath Trust relied on.
The Tribunal was right in holding that the amount of commission paid to the employees was allowable as a deduction, but it would be allowable under Section 36(1)(ii) and not under Section 37 of the Act."
In the case of CIT v. Vijayalakshmi Mills Ltd. (supra), the Hon'ble Madras High Court has held as under :
"The ITO's jurisdiction to disallow an expenditure will arise only when the payment is not real or is not laid out wholly or exclusively for the purpose of the business. But, once it is found that an expenditure has really been incurred wholly and exclusively for the purpose pf the business, it is not for the Revenue to go into the question of reasonableness while construing the question of allowance under Section 10(2)(xv) of the Indian IT Act, 1922.
In the instant case, the assessee had actually paid higher amounts for the cotton purchased for its business and the Tribunal had found that the accounts had not been manipulated to show a larger outlay in order to reduce the income. In the circumstances, the High Court held that, having regard to the fact that the expenditure incurred for the purchase of cotton is indispensable for the production of yarn and as such has a close nexus with the business of the assessee, it is not possible for the Revenue to go into the question whether the payment of the higher price was reasonable or not, once it is found that the full amount at the higher rate had been actually paid."
58. In view of our aforesaid legal position and the discussions we had in the preceding paragraphs and also the specific finding given by the CIT(A) and also the evidences brought on record by the assessee in respect of the authorised dealers firms in the form of their respective assessment orders, balance sheet, P&L a/c, the statements of 11 dealers produced by the assessee and also the affidavits filed in respect of 9 dealers along with 11 dealers for which the statements were recorded and the fact that the affidavits were rejected without cross-examining the deponents, we upheld the finding of the CIT(A) and do not agree with the finding of the AO that the authorised dealers firms to whom commission was paid by the assessee were not genuine firms. But the CIT(A) was not justified in view of the legal position to restrict the claim of the assessee for the commission paid at the best of his estimate. We, therefore, set-aside the order of the CIT(A) to that extent and direct the AO to allow the assessee deduction in respect of the commission paid by him to the authorised dealers in each of the assessment year while computing the income of the assessee under the head income from business. Thus, the grounds of appeal of the assessee in each of the impugned assessment year relating to the commission paid are allowed while the grounds of appeals of the Revenue on this issue stand dismissed.
59. In the result, the appeals of the assessee are allowed and that of the Revenue stand dismissed.