Vildirect: IncomeTax-caselaws-1984-VIL-62-ITAT-

1984-VIL-62-ITAT-

Equivalent Citation: ITD 010, 240, TTJ 021, 412,

Income Tax Appellate Tribunal BOMBAY

Date: 31.07.1984

FIRST INCOME-TAX OFFICER.

FRENCH DYES AND CHEMICALS (INDIA) (PRIVATE) LIMITED.

BENCH

Member(s) : K. S. VISHWANATHAN., T. D. SUGLA., V. BALASUBRAMANYAM.

JUDGMENT

Per Dr. V. Balasubramanian, Vice President--All the appeals except the last two are by the department. The common point in dispute in all these appeals relates to the allowability of certain amounts claimed by the assessee under the head 'Sales Promotion Expenses' and stated to represent secret commission incurred in connection with its business. Except for the last two assessment years where the appeals of the assessee are before us, the Commissioner (Appeals) allowed the assessee's claim of secret commission. For the last two years, the claim not being allowed by the Commissioner (Appeals), the assessee has come up on appeal. For the assessment year 1975-76, the department has challenged four other points and for the assessment year 1976-77, three points. These are dealt with first and the common point relating to the secret commission is dealt with in the later part of this order.

Assessment year 1975-76 :

2. The assessee sold a flat during the year along with a garage at Hill Park. Long-term capital gains of Rs. 1,11,500 were returned. The ITO referred the matter to the Valuation Officer for finding out the fair market value of the property. The Valuation Officer fixed this at Rs. 4,34,000. Applying the provisions of section 52(2) of the Income-tax Act, 1961 ('the Act'), the ITO, therefore, worked out the capital gains at Rs. 3,56,500. On appeal, the Commissioner (Appeals) deleted the addition made on this score of Rs. 3,22,500.

3. The learned counsel for the department has pointed out that this was a clear case where the market value of the property was substantially higher than the recorded value. Even if the price fixed by the Valuation officer is regarded as high, it bears no comparison to the very low value shown by the assessee.

4. Having heard the learned counsel for the assessee, we find that this matter is clearly covered by the decision of the Supreme Court in the case of K.P. Varghese v. ITO [1981] 131 ITR 597. The Supreme Court has clearly held that section 52(2) can be invoked only where the assessee is shown to have received amounts in excess of what is declared or disclosed by him. No interference with the order of the Commissioner (Appeals) on this point is called for.

5. The assessee paid gratuity of Rs. 55,500 to four of its employees. The ITO rejected this claim. According to him, this was a gratuitous payment not arising out of any legally enforceable obligation. The assessee's gratuity scheme was covered by a policy from the LIC. Three of the employees concerned had retired before completing even five years. in fact on this score the LIC had returned part of the premium collected. The Commissioner (Appeals) on appeal allowed the claim of the assessee. According to him, this was not a case of a special payment to any particular employee singled out ; all persons prematurely retiring were paid gratuity.

6. Before us the learned counsel for the department has pointed out that the fact that the LIC refunded the premium itself is indicative of the non-enforceable nature of the liability. Gratuity as a concept involves certain minimum service period. Every payment made to every employee even in the case of premature retirement cannot be considered as one laid out for the business.

7. After hearing the learned counsel for the assessee, we see no reason to interfere with the decision of the Commissioner (Appeals). Prima facie it is not even pointed out that the payments were made for non-business considerations. Certainly these are not influential people entitled to special attention of the employer company. Even though some of the technicalities associated with payment of gratuity are not satisfied here, that the payment has been made on a uniform and regular basis would support the assessee's case. The payment clearly has been made with a view to inspire confidence in and gain loyalty of the continuing employees. The deletion is upheld.

8. The ITO disallowed a sum of Rs. 10,000 on estimate under section 37(3) of the Act read with rule 6B of the Income-tax Rules, 1962 ('the Rules'). The assessee had incurred a sum of Rs. 34,484 under the head 'Advertisement, etc., expenses'. The expenditure seems to have been incurred for distribution of dry fruit, biscuit tins, etc., among the assessee's customers on festival occasions. The price of these articles varied between Rs. 50 and Rs. 150. On appeal, the Commissioner (Appeals) held that expenditure on dry fruit, biscuit tins, etc., especially when their cost was not more than Rs. 50 generally could not be regarded as an expenditure on advertisement. The addition was deleted by him.

9. The learned counsel for the department has pointed out that the assessee itself has debited this expenditure to the advertisement account. The details given clearly indicate that they were to be disallowed under section 37(3). According to the learned counsel, any expenditure on advertisement could be explained away as for cementing good relations.

10. After hearing the learned counsel for the assessee, we see no reason to interfere with the order of the Commissioner (Appeals). The object of the advertisement is to attract customers. This may be done by extending to new persons facilities, advantages, etc., which would attract them to the assessee. The facilities also should indicate some excellence of the assessee's product over and above those of the competitors. Dry fruits, biscuit tins, etc., stated to have been distributed by the assessee in the present case may not serve this purpose of attracting new customers. Some of these must have been served to the existing customers. They know the worth of the assessee's products and require no advertisement. Some part of the distribution must have been done to persons, sympathisers, officials, people at strategic point, etc., who may never be the customers of the assessee's goods. Any expenditure spent on them could scarcely figure as for advertisement. It is only in exceptional cases where articles are distributed to potential customers, who are not already customers of the assessee, that it could bear the quality of advertisement expenditure. Even such expenditure should indicate the better qualities of the assessee's products, excellence in the commodities, etc. In the present case it would be too far-fetched to imagine that distribution of dry fruits and biscuit tins would give a potential customer any indication of the excellence of the assessee's products so as to attract him to the assessee. Distribution, therefore, of these items especially on festival occasions cannot be said to have any advertisement value whatever else they may serve. The assessee's claim, therefore, that these are intended to create smooth human relationships has been correctly accepted by the Commissioner (Appeals). This decision on this point is upheld.

11. Another point on which the department has challenged the order of the Commissioner (Appeals) for this year relates to the treatment of the company as an industrial company. For the assessment year 1975-76, out of the sales of Rs. 82,60,505 the sales of goods processed by the assessee came to Rs. 57,82,350, i.e., nearly 70 per cent. The Commissioner (Appeals) found that a major part of the working capital of the company was employed in the manufacturing or processing activity. The ITO rejected the assessee's claim for this year on the ground that its income arose during the year mainly from non-manufacturing activities. The Commissioner (Appeals) accepted the assessee's claim for the reason that 70 per cent of the turnover related to processed goods and the assessee should be regarded as a manufacturing company even on the basis of the capital invested.

12. After hearing the learned counsels from both sides, we uphold the Commissioner (Appeals)'s finding. While the proportion of income would be regarded as a criterion for deciding whether a company is an industrial or non-industrial one, perhaps the major test would be to see the extent of industrial activity. The extent of processing of goods, therefore, would be the correct test. Even if, therefore, for any particular year the extent of income from manufacturing or processing activities is less than that from non-manufacturing activities and if the assessee has done for the major part of its activity, processing or manufacturing, it should be regarded as a manufacturer and the activity of an industrial entity. Apart from satisfying these conditions of the extent of manufacture, the figures indicate that the proportion of processing income is also substantially higher than other income. The Commissioner (Appeals)'s finding, therefore, has to be upheld.

Assessment year 1976-77 :

13. The ITO disallowed certain amounts from the remuneration of Director-employees applying the provisions of section 40A(5) of the Act. He rejected the assessee's claim that section 40(c) of the Act applied to the case. The Commissioner (Appeals) accepted the assessee's claim.

14. The matter is covered by the decision of the Special Bench of the Tribunal in the case of Geoffrey Manners & Co. Ltd. v. ITO [1983] 3 SOT 40 (Bom.). The Commissioner (Appeals)'s order calls for no interference.

15. The ITO made an addition of Rs. 7,306 including three items of Rs. 5,130, Rs. 478 and Rs. 1,700 being the cost of presentation articles of small value under section 37(3) read with rule 6B. This was deleted by the Commissioner (Appeals).

16. The position here is exactly the same as for the assessment year 1975-76. The Commissioner (Appeals)'s order is upheld on this point.

17. For this year, another ground relates to the ITO treating the company as non-industrial company. Here also the position being exactly the same as for the assessment year 1975-76, the Commissioner (Appeals)'s order is upheld.

Assessment year 1977-78--Application of section 40A(5) instead of section 40(c) by the ITO : Treatment of the company as a non-industrial company :

18. The position here is exactly the same as for the assessment years 1975-76 and 1976-77. The Commissioner (Appeals)'s order is upheld.

19. The common ground for all the assessment years under appeal and in the appeals filed by the assessee for the assessment years 1978-79 and 1979-80 relates to the disallowance of various amounts under the head 'Sales Promotion Expenditure'. The assessee is a private limited company engaged in the business of chemicals and dyes. For the various years under appeal, the assessee claimed certain items of expenditure described as 'sales promotion expenses'. It was stated that the expenditure was incurred for the purpose of making payments to the employees of the various mill-companies to whom goods were sold. According to the assessee, when chemicals and dyes had to be sold to the mills, these had to be accepted and their quality and acceptability was certified by dyeing masters and other technical people at various stages. It was not possible for the assessee to push the sales with these companies or having made the sales, hope for further sales to them unless the officials of the mills at crucial stages of accepting the stores are kept in good humour. These persons had to be paid regularly certain amounts based on the extent of purchases of these commodities made by the mills and which in their capacity as technical men these employees certify for acceptance. The expenditure was clearly incurred for the business. If the persons who make the decision to purchase or certify the quality are not paid these amounts called commission, the assessee's business would have suffered and even may have closed down. From the very nature of things, the assessee could not give the names of the persons to whom these commissions were paid. Disclosure of the names would have created problems for these persons with their employers and the assessee's sales to these mill-companies would have been affected. The assessee, therefore, claimed before the ITO that even though full particulars such as names and addresses of the persons to whom the amounts were paid were not furnished, it being well known that to push the sales or even to preserve the minimum sales these payments had to be made, the expenditure should be allowed. The ITO did not accept the assessee's claim and disallowed the entire claim for expenditure on this account. The table below indicates the extent of expenses incurred by the assessee by way of secret commission or sales promotion expenses so called.

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Assessment Financial Gross turnover Profit-tax Sales Per cent year year promotion of column expenses 5 to 3

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1 2 3 4 5 6

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Rs. Rs. Rs.

1961-62 1960 1,17,96,647 2,20,781 94,093 0.80

1962-63 1961 1,03,41,642 6,60,045 75,160 0.73

1963-64 1962 1,10,31,585 6,46,748 14,630 0.13

1964-65 1963 88,45,377 8,64,682 10,620 0.12

1965-66 1964 1,02,90,689 9,40,052 10,115 0.10

1966-67 1965 69,53,988 2,99,034 3,729 0.05

1967-68 1966-67 1,03,04,590 9,19,867 17,528 0.17

1968-69 1967-68 52,22,691 35,210 24,115 0.46

1969-70 1968-69 58,59,951 27,494 16,117 0.27

1970-71 1969-70 68,92,730 2,94,371 13,462 0.19

1971-72 1970-71 83,84,913 90,023 16,606 0.20

1972-73 1971-72 58,14,402 30,917 10,611 0.18

1973-74 1972-73 62,11,221 31,069 16,183 0.26

1974-75 1973-74 87,36,416 1,52,106 21,841 0.25

1975-76 1974-75 82,60,506 1,11,186 20,635 0.25

1976-77 1975-76 1,63,75,941 4,03,754 20,468 0.13

1977-78 1976-77 1,38,90,103 2,53,043 17,362 0.12

1978-79 1977-78 1,02,47,639 1,83,390 20,495 0.20

1979-80 1978-79 1,36,30,985 4,57,298 27,262 0.20

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20. On appeal the Commissioner (Appeals) accepted the assessee's claim and allowed the deduction for the assessment years 1961-62 to 1972-73 and 1974-75. For the assessment years 1975-76, 1976-77 and 1977-78 also the Commissioner (Appeals), a different person, allowed the claim. For the assessment years 1978-79 and 1979-80, however, the last named Commissioner (Appeals), himself rejected the claim of the assessee. In doing so he relied on a decision of the Bombay High Court in the case of Goodlas Nerolac Paints Ltd. v. CIT [1982] 137 ITR 58 as supporting his view. The department has come up on appeal against the decisions of the Commissioner (Appeals) for the assessment years 1961-62 to 1972-73 and 1974-75 to 1977-78. The assessee has come up on appeal for the assessment years 1978-79 and 1979-80.

21. The learned counsel for the department has pointed out that in this case the assessee has claimed an expenditure as having been incurred wholly and exclusively for the purposes of the business. In that case it was his responsibility to show that the expenditure has been incurred and properly incurred also. The assessee has claimed that certain amounts were paid to certain employees of the mill-companies with whom it had business deals. The names and addresses of the employees have not been given. Whatever be the purpose for which the assessee withheld the names, for the purpose of income-tax unless the payment is approved allowance cannot be granted. It is only after finding out who received the payment, according to the learned counsel, it is possible to find out whether the expenditure has been incurred wholly and exclusively for the purposes of the business. Since the assessee has refused to divulge the names of the persons to whom allegedly the payments were made, according to the learned counsel, it was not possible to hold that this expenditure was incurred for the purpose of business and allow the payment. Taking us through the several orders of the Tribunal, the learned counsel pointed out that in the earlier years the assessee had absolutely no details regarding the payments and the claim was disallowed. Even though for some of the subsequent years evidences in the shapes of registers and details were sought to be produced before the Tribunal and the Tribunal admitted the same, such evidences on scrutiny also do not disclose the names of the persons to whom the payments were made. All the records produced, in this connection, relate to the employees or other persons connected with the assessee only, their evidence cannot, according to the learned counsel, be taken as supporting the claim of the payment.

21A. Referring to the order of the Tribunal in IT Appeal No. 3056 of 1975-76 for the assessment year 1973-74 in the assessee's case, the learned counsel pointed out that this order clearly set out the untenability of the assessee's claim. The Tribunal had occasion to go in detail into the alleged practice followed by the assessee with regard to the payment. The Tribunal also considered the question of practice prevailing of paying secret commission to dyeing masters, purchase officers, etc., and came to the conclusion that there was no such practice. According to the learned counsel, without such a practice being established and the assessee itself having no evidence to support the factum of payment for the purpose of the business, the deduction cannot be granted. The learned counsel has relied on the decision of the Bombay High Court in the case of Amritlal & Co. (P.) Ltd. v. CIT [1977] 108 ITR 719 which was discussed at length in the order of the Tribunal for 1973-74. Reliance is also placed on the decision of the Bombay High Court in the case of Goodlas Nerolac Paints Ltd. This latter decision, according to the learned counsel, clearly indicates that the burden of proving that the amounts were actually laid out or expended as secret commission for the purposes of the business lay on the assessee. As the assessee refused to furnish names and addresses of parties to whom secret commission is allegedly paid, it cannot be accepted that the assessee had really parted with these sums and for the purposes of the business. Section 133(4) of the Act relied upon in Goodlas Nerolac Paints Ltd.'s case is also stressed. Referring to the decision of the Andhra Pradesh High Court in the case of CIT v. Kodandarama & Co. [1983] 144 ITR 395 the learned counsel has pointed out that the payment, if any, is clearly opposed to public policy and in the light of the Andhra Pradesh High Court's decision even if the names were disclosed, the repugnance to public policy would have made the expenditure not allowable. Referring to the decision of the Bombay High Court in the case of Ciba Dyes Ltd. v. CIT [1954] 25 ITR 102 it is pointed out that even in Goodlas Nerolac Paints Ltd.'s case this decision was clearly distinguished.

22. The learned counsel for the assessee pointed out that the assessee, a private limited company, took over the individual business carried on by an individual earlier somewhere in 1947. There were two important textile centres at that time, one in Bombay and the other in Ahmedabad and the practice of giving secret commission to dyeing masters and purchase officers was even judicially noticed by the High Court as in connection with the business. In order to push up the sales of the assessee's commodities it has to incur this expenditure. The learned counsel has relied on the decision of the Bombay High Court in the case of Tejaji Farasram Kharawalla v. CIT [1948] 16 ITR 260. The expression 'incurred' does not mean 'actually incurred'. In fact this has been amended to the different expression 'to the extent expenditure is incurred'. The real requirement of law, according to the assessee's counsel, is that there must be a reasonable probability of the expenditure having been incurred. It is not in every case that it is possible to disclose the names of the persons to whom the payments are made. If in the present case the assessee were to disclose the names of the persons to whom the secret commission was paid, it would have jeopardised the assessee's business considerably. In fact, it would have been difficult for him to push up the sales to these companies at all. The learned counsel relied on the Gujarat High Court decision in the case of Addl. CIT v. Moolchand Jaikishandas & Co. [1977] 108 ITR 500 which clearly supported his case.

23. Referring to the past assessments and appellate proceedings in this case, it is pointed out that for the assessment years 1950-51 and 1955-56 to 1960-61 the assessee had produced evidence relating to the payment of secret commission before the Tribunal and in connection with the proceedings under section 23A of the Act the Tribunal accepted the assessee's claim. Even though in the assessment proceedings the assessee itself did not challenge the disallowance on appeal, subsequently it woke up to the situation when section 23A order was passed. The very evidence produced before the Bench of the Tribunal for the assessment years 1950-51 to 1955-56, etc., was produced year after year by the assessee. In fact for the assessment year 1950-51, the department came with a reference application against the Tribunal's order but it was withdrawn. In the Tribunal's order for the assessment years 1955-56 to 1960-61, in IT Appeal Nos. 28, 29, 4140 to 4143 (Bom.) of 1970-71, the Tribunal referred to this matter. The Tribunal noted that the order under section 23A was cancelled accepting the payment of secret commission as genuine.

24. The assessee has explained also before the Tribunal for these years the manner in which the amounts were withdrawn and payments made to these employees of the mill-company. The same procedure is followed by the company from year to year. For those years the Tribunal had test-checked the procedure followed and found that acceptable. Before us the learned counsel has elaborately explained the procedure followed by the assessee in making these payments. It is not as if a lump sum deduction is claimed on an arbitrary basis for the alleged purpose of paying secret commission. Even though the assessee does not disclose the names of the persons to whom ultimately the payments are made for strategic business reasons, that the assessee has been following a regular system of maintaining accounts and following a procedure for making the payments would be evident from the vouchers, entries in the books, etc. Explaining the procedure, the learned counsel pointed out that cash is withdrawn by the directors of the company for the specific purpose of making the payment. Cash vouchers for this purpose are available. Out of the amounts drawn the details of the disbursement made to the various mill-companies are available and noted at the back of the receipts. Any excess amount available after the specific payments have been made are carried over and held back with the director who again withdrew money for the purpose of further payments when necessary. There is a complete tally of the amounts withdrawn from the banks, balance left with the director, the further withdrawals from the bank and the payments made to the mill-employees. Details are also available of the particular amounts of the transactions with the particular mill, in respect of which commission is paid to the employee. The rate of commission which varies from mill to mill and also depended on the occasion are also given. The payments made have, thus, clear relevance to the actual amount of purchases made by the mills which themselves are supported by the relevant invoices. According to the learned counsel, therefore, the entire process of payment of secret commission is evidenced at every stage by vouchers, withdrawals from the bank, signatures of the director concerned, etc. Only the name of the actual person who ultimately receives the amount is not available. From the very nature of things it will be suicidal to the assessee's business to disclose the names. Referring to the cases of Amritlal & Co. (P.) Ltd. and Goodlas Nerolac Paints Ltd., it is pointed out that in these cases detailed evidences such as available with the assessee were not produced. In these cases no mention is made also of any question of public policy. On this issue the learned counsel has referred to an article in [1984] 17 Taxman (IV) 136.

25. According to the learned counsel, even though, therefore, the names of the persons who ultimately received the amounts were not given, there is sufficient material to show that the moneys have been properly withdrawn by responsible persons and paid to the mill-employees. In a matter of this type where direct evidence cannot be, for the protection of the business, produced, a decision has to be made based on the high probabilities of the situation. It is well known and as has been judicially recognised in decision in 17 ITR 260 (sic), that persons carrying on business like that of the assessee cannot push their sales in a competitive field without making these payments. The Tribunal in the earlier years has come to the conclusion that such payments had to be made. The Tribunal has also accepted the particular items of evidence which incidentally are the best the assessee can maintain--for the purpose of proving the payment, and cancelled the orders under section 23A. The same procedure has been followed by the assessee right from the assessment year 1950-51 onwards to date. The regularity of the accounts maintained and the details available along with the well known practice in the line would be sufficient to factually establish the assessee's claim. According to the learned counsel, the decisions have only laid down that factually the payment must be proved. There was no question of public policy involved in this.

26. Two other parties, Indochem Ltd. and Sigma Paints Ltd., intervened on this issue of secret commission. Their learned representatives were also heard.

27. The learned counsel for Indochem Ltd., referring to the history of his client's case, pointed but that up to 1959-60 no claim was made. For the assessment years 1960-61 to 1965-66, the claim made was disallowed by the ITO and the disallowance having been upheld by the Tribunal the matter was on reference. For the assessment years 1966-67 to 1969-70, the Tribunal reconsidering its decision for the earlier years allowed the payment of commission in full. In IT Appeal Nos. 2970 and 3624 of 1971-72 and 1401 to 1403 of 1972-73 the Tribunal accepted the fact of payment of the secret commission. According to the learned counsel, evidence on record fully supported the contention of the assessee that expenditure was incurred by way of secret commission and such expenditure had to be incurred in the interest of business. There was sufficient supporting evidence though not direct evidence for the incurring of the expenditure. The Tribunal also held that the amount paid by way of secret commission was most nominal looking to the turnover of the business and the profit made by the firm from year to year. For this reason commission claimed to have been paid was held to be a proper deduction. For the assessment years 1970-71 to 1975-76, according to the learned counsel, following its orders for the earlier years, the Tribunal allowed again the claim made by the assessee. In view of the fact that there was a fire in the premises of the assessee on 16-10-1982, records prior to this date could not be produced but the records after this date were produced for illustration of the actual nature of the claim.

28. The learned counsel has produced the various details and the records maintained by the company relating to the secret commission payments. Vouchers for the amounts received by the sales officer or other responsible person for the payment of secret commission are available. The details of sales transactions entered into with various mill-companies, in respect of which secret commission had to be paid, are available. There is a complete tally between the commission paid, the extent of business done by the mill-company, etc. Details are also available of the exact transactions in respect of which the assessee had to pay the secret commission. The assessee has given a complete list showing the turnover and the amount of secret commission paid from year to year from the assessment years 1957-58 to 1977-78. The percentage of secret commission and special allowance paid to the actual turnover of the company works out to a minimum of 0.130 per cent for the assessment year 1973-74 and to a maximum of 2.156 per cent for the assessment year 1958-59. The learned counsel has also referred to the details of payments in respect of different periods. Thus, in respect of Agarwal Industries for the period 1-4-1975 to 30-6-1975 an amount of Rs. 810 is paid. For the period 1-7-1975 to 30-9-1975 the commission payment came to Rs. 875. For the period 1-10-1975 to 31-12-1975 Rs. 1,030 and for the period 1-1-1976 to 31-3-1976 Rs. 820. For the period thus 1-4-1975 to 31-3-1976 the total amount paid came to Rs. 3,535. The full details of payment on the above basis in respect of several parties are available correlated to the transactions which the assessee had with these persons and the period during which the transactions were entered into. According to the learned counsel, apart from the practice of making payment to the employees of the mill companies, the existence of which could be properly verified from the market, the assessee has also maintained complete supporting details to the extent they are capable of being maintained. The only missing item was the names of the particular parties to whom the payments were made. From the very nature of things these particulars cannot be supplied without detriment to the business of the assessee.

29. The position, according to the learned counsel, is the same for both Indochem Ltd. and Sigma Paints Ltd. The extent of secret commission paid by the assessee is also a nominal amount.

30. The simple issue in all these appeals relates to the allowability of certain amounts stated to have been spent by the assessee for the purposes of sales promotion. The assessee is a dealer in chemicals and dyes. These are mostly sold to textile mills. In the process of pushing these sales amongst these textile mills, it is the assessee's case that they have to give by way of commission certain amounts to the officials concerned with the purchase, dyeing, etc., departments. The assertion is that if these people are not paid certain amounts, they would either outright discourage buying the assessee's products or where purchases have been made tend to condemn their quality. It is in this context, both to get business and also to continue business, that the assessee has to keep these officials in good humour. Naturally the mill-companies who are the actual purchasers do not know and are not supposed to know about the demands made by these officials or the payments made to them. It is for this reason that the names of these persons, according to the assessee, could not be disclosed to any outsider. If the above is the correct position, the assessee will have to incur the expenditure and also be not in a position to disclose the names of the recipients of the commission.

31. The assessee's case is that even against the above handicap over the years, the assessee has set up a procedure making it entirely regular and systematic for making these commission payments. It is in this context that the assessee has produced before us the details regarding withdrawal of money from the bank by the director, disbursement of those monies to individual persons, co-ordinating the money withdrawn with the alleged payments to the various employees of the mills, etc., with regard to the last, the particulars of sales to the mills in respect of which the commission paid are also available. In the long chain, therefore, of drawing money from bank account of the assessee and alleged disbursement to the employees of the mills the only missing link is the name of the employee himself. The assessee's case is in view of its inability to disclose the names, but in view of the other elaborate details available, which themselves are maintained continuously over a period of years, the high probability of the issue should be considered to accept the payment as genuine.

32. In our view, there are two aspects of the question. If, as the assessee contends, it is absolutely necessary in this field of business to make payment to employees of mills, whether any subsidiary papers for regular payments are maintained or available or not, the custom could be recognised. On the contrary if this custom is not accepted, the absence of the names of the recipients would be sufficient for rejecting the claim of the assessee even if all intermediate details are maintained, systematically and over a very long period. We have before us three assessees at least, who between them cover several crores of rupees by way of turnover. The list of secret commission expenses incurred by these assessees as a percentage of their turnover shows that the percentage is negligibly small. In the case of the present assessee, French Dyes & Chemicals (I) (P.) Ltd., the lowest percentage is .1 per cent for the assessment year 1965-66 and the highest .8 per cent for the assessment year 1961-62. For the last two years 1978-79 and 1979-80, the percentage comes to .2 per cent. In the case of Indochem Ltd. the said percentage is .130 per cent for the assessment year 1973-74 and 2.156 per cent for the assessment year 1958-59. These figures indicate that the claim made by the assessees for payment of commission refers to a negligible percentage of the turnover of the company. Two facts emerge from this : viz., that not merely the assessee but other persons with equally large turnover make such payments ; and secondly, this expenditure constitutes a small portion of the turnover, i.e., much less than many other items of expenditure they have claimed. The fact that some companies with substantially good turnover in the field have shown this necessity to make the payment indicates by itself that it is a necessity in the trade to incur the expenditure. These companies have been showing this expenditure sometimes pressing on all appeal a point with regard to this claim, sometimes not agitating the matter on appeal. The evidence shows that the fact of payment has been with these assessees for at least 30 years. The matter was considered in the case of Tejaji Farasram Kharawalla and in the case of Ciba Dyes Ltd. In these two cases there is sufficient material to hold that the payment to the mills-employees has been judicially taken note of. Even otherwise there is sufficient information available in the market to strengthen the view that pushing sales amongst the mills requires these payments. Taking all these factual details into account, we can come to a conclusion that in this field of business such payments are necessary and even recognised also. If that be so and because the assessees cannot indicate the names of the recipients, the absence of the names alone should not be the reason for disallowing the expenditure. It requires to be mentioned as clarified in Tejaji Farasram Kharawalla's case that in order to allow an expenditure while it is necessary to show that the amount has to be expended, it is not necessary to show the ultimate destination of the expenditure. It is true that where the names of the recipients are not available so as to confirm the receipt, it is possible for the assessee even where it has to make a payment compulsorily to inflate the expenditure and claim a larger amount for deduction. This only requires that before allowing the expenditure the reasonableness of the claim could be checked up, but that would not by itself lead to the disallowance of the claim as such.

33. While in the wake of an established custom or practice an amount of money spent on the purpose has to be allowed as deduction, where the assessee supplies further details his claim becomes stronger. In the present case the details maintained by the assessee over the years and for these assessment years under appeal show that the assessee has systematically dealt with these payments. In Ciba Dyes Ltd.'s case a regular agreement for payment of commission was reduced to a smaller amount, the latter being treated as going out for similar purposes. In the present case the assessee has shown that amounts have been systematically withdrawn from the bank against established details of expenses to be incurred. Thus, the sales to the mills, the articles sold, the name of the particular mill, the date of sale, etc., are available along with the percentage of commission calculated in respect of the transaction. All the commission amounts if added together, tally with the amounts withdrawn from the bank. The withdrawal itself is done by a responsible director and this systematic procedure has been going on for nearly three decades and more. Anything done systematically--even manipulations could be done systematically--should have some acceptance as genuine. It would be too much to presume, especially in the wake of the noted practice in the market, that the assessee has systematically managed to write out these details regarding the vouchers, bank account, withdrawals, etc., without any realistic background especially when several and different persons are involved. Though not, positively, therefore, negatively these details maintained by the assessee would support its case. The Tribunal in their order for the earlier years has actually accepted the assessee's claim in this regard as genuine on the strength of the details maintained. Thus, in their order for the assessment years 1955-56 to 1960-61 after test-checking the details they observed 'the details kept by the company are, therefore, as complete as they could be in the context of the secret nature of the payments'. In this view of the matter, we have no hesitation to hold that the claim of secret commission should be allowed. As pointed out earlier, when there is no confirmation from the recipient, there could be a suspicion about the quantum of payment. An estimate is possible, but here one has to be guided by the overall level of commission amount claimed. The claim made by the assessees, as pointed out above, comes to a very small percentage of the turnover and compares favourably with the other items of expenditure associated with the assessee's business. There does not seem to be any case for interfering with the quantum of secret commission claimed.

34. Several decisions were cited before us by the parties. In the case of Tejaji Farasram Kharawalla, the assessee was a representative of Ciba India Ltd., from whom under an agreement the assessee was entitled to a commission of 12 1/2 per cent. By a subsequent agreement this commission was bifurcated into two parts, viz., 7 1/2 per cent was to be the representative's own commission and 5 per cent was to be taken by him as compensation in lieu of contingency expenses he has to meet with, such as commission to dyeing master, agents, etc. The question before their Lordships of the Bombay High Court was whether the assessee's claim to exclude from his income .5 per cent commission received by him from Ciba India Ltd., could be allowed without it being proved by him that the whole commission received by him was spent in the performance of his duties as the representative of Ciba India Ltd. The High Court accepted the assessee's case. This decision in a way does support the case of the present assessee. Apart from giving judicial recognition to the custom of paying commission to dyeing masters and agents with which we have dealt with above, this also supports the present assessee's case that when the company has passed on regularly amounts calculated on the extent of commission to be paid to the director and this amount has gone out of his till, the expenditure should be allowed as a deduction. The director being part of the company in a loose sense, it may perhaps be pointed out that withdrawal of money by him amounts almost to withdrawal of money by the assessee himself. In our view, this position cannot, however, be countenanced because from year to year and involving several employees like cashiers, salesman, etc., the amounts have been systematically withdrawn by the director. If the Director, for argument sake, were regarded not to have even spent the money in full, the decision in Tejaji Farasram Kharawalla's case would support the case of the assessee. The decision in Tejaji Farasram Kharawalla's case was explained by their Lordships in Ciba Dyes Ltd.'s case.

35. In the case of Amritlal & Co. (P.) Ltd., the Bombay High Court had the occasion to consider the allowability of commissions paid to certain employees and certain allowances to two directors. The commission was disallowed and the disallowance was upheld by the High Court on the ground that they were disproportionately high as compared to the salaries and no trade practice had been pointed out by the assessee in support of the payment. Their Lordships of the Bombay High Court considered the decisions in the case of Ciba Dyes Ltd. and the decision of the Gujarat High Court in the case of Moolchand Jaikishandas & Co. The cases were distinguished. In Moolchand Jaikishandas & Co.'s case the question related to the payment of commission to certain employees. Their Lordships of the Gujarat High Court upheld the claim relying on the conclusion of the Tribunal that the payment of commission was necessary in the interest of the assessee's business. As correctly claimed by the learned counsel for the assessee in the present case, in Amritlal & Co. (P.) Ltd.'s case no substantial evidence seems to have been produced to justify the incurring of the expenditure. That case, therefore, on which reliance placed by the department, is not fatal to the assessee's claim.

36. The department has relied on the Bombay High Court decision in the case of Goodlas Nerolac Paints Ltd. to support the disallowance. The following is noteworthy and in fact is the ratio of this decision :

" ...As the assessee refused to furnish the names and addresses of the parties to whom such secret commissions had been paid, it was perfectly open to the Tribunal not to accept that the assessee had, in fact, paid those amounts by way of secret commissions. It was for the Tribunal to decide, as the final judge of facts, as to whether the case of the assessee that these amounts were actually paid by way of secret commissions, should be believed or not, in the absence of the names and addresses of the persons to whom secret commissions were alleged to have been paid. In the present case, the Tribunal has disbelieved this claim of the assessee and we do not see why we should interfere or how we can interfere with that conclusion... " [Emphasis supplied]

While holding that the Tribunal could refuse to accept the claim if complete details of persons, etc., are not produced, their Lordships have clearly stressed the point that the Tribunal as the final judge of facts has to decide whether the payment should be believed or not. In the detailed discussion of the question of payment in the present case, we have come to the factual conclusion that based on the probabilities and circumstantial evidence the expenditure must be regarded as having been incurred. If our factual finding is to this effect, the High Court decision cannot be said to be fatal to the present assessee's case.

37. Stress was also laid by the department on the question of public policy. Apart from the reference to the provisions of section 133(4) in Goodlas Nerolac Paints Ltd.'s case, reliance was placed on the decision of the Andhra Pradesh High Court in the case of Kodandarama & Co. Even though reference is made to section 133(4) which requires the assessee to give out the names of persons to whom payments are made, even the Bombay High Court decision has not categorically laid down that where this requirement is not satisfied even in a case which would have been detrimental to the business, the expenditure claimed should be disallowed. The Andhra Pradesh High Court's case dealt with the case of an assessee who were dealers-cum-mills of paddy who made contributions at specific rates to the Andhra Pradesh Welfare Fund and in return were granted export permits by the Collector for exporting boiled rice to Kerala. The High Court held that the contributions were compulsory payments exacted from the assessee as a price for granting export permits. According to their Lordships, it was not open to the District Collector or any other authority for that matter to impose a condition linking the grant of permits, to the making of a particular contribution to a particular fund, society, etc. Nor was it open to the authority to say that whosoever makes larger contribution alone would be entitled to export permits. It was for that reason that their Lordships held that the contributions were opposed to public policy almost, not different from paying bribes and disallowed the payment.

38. This decision has nothing to do with the circumstances obtaining in the present case. Public authorities and in fact the Government were involved in the Andhra Pradesh High Court's case situation. Transactions with the Government or the Government officers, if they are opposed to public policy and interest, should certainly be discouraged and in fact condemned. Where the parties involved are purely private businessmen or their employees, whatever may be the ethical or moral content involved, their action cannot be regarded as opposed to the public policy unless it infringes some established customs or law or practice. In a system of hire or fire private employment or business methods involving survival of the fittest, each man is entitled to try for as much profit as he can. Any individual-oriented action or procedure adopted cannot be regarded as opposed to public policy. If an employee of a mill getting an opportunity to earn some commission on the mill's transactions does make it, so long as it does not contravene any of their contractual obligations, he cannot be condemned. No public policy on the other side is so established or fool-proof as to compel every employer to do the best justice to his employees. In such a background the mere fact that finding it convenient to extract some commission from sellers of commodities who themselves are on the maximum profit-making spree, the mill employees collect it, neither what they do nor the payers of the commission can be regarded as doing anything basically wrong or opposed to public policy. The decision of the Andhra Pradesh High Court, therefore, would not, in our opinion, support the present case where all activities are in the sphere of private business, where self-interest is the best respected currency. On the contrary, the decision of the Madras High Court in the case of CIT v. Coimbatore Salem Transport (P.) Ltd. [1966] 61 ITR 480 is an answer to this issue.

39. In the present case, in our view, the facts are entirely in the assessee's favour. The alleged commission payments have certainly gone out of the coffers of the company and the company has incurred the expenditure as a matter of fact. There is evidence to support this. The matter is spread over nearly three decades and details are entered on a regular basis. Amounts are withdrawn regularly from the company. It is not the same but different persons-employees at different times cashiers, salesmen, etc., in addition to the director, who are involved. They have signed the vouchers evidencing such withdrawals. None of the persons has been examined or has deposed to the effect that these transactions are sham. Even if the present employees of the assessee-company may be expected not to give evidence against the assessee, certainly all the past employees would not collude with it and support the transactions even if they are sham. There is nothing to show that these payments have any other non-business destination. The amounts being, thus, a clear outgoing for the company have to be deducted. The assessee's claim for all the years is to be allowed.

40. The position in the case of intervener Indochem Ltd. is the same. The claim for payment of commission has to be allowed in their case also. Those appeals, however, are not fully heard by this Bench. The Bench which will be hearing the appeals in their case would, it is hoped, keep in mind our decision in the present case.

41. The departmental appeals are dismissed and the assessee's appeals are allowed.

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