Vildirect: IncomeTax-caselaws-1987-VIL-55-ITAT-HYD

1987-VIL-55-ITAT-HYD

Equivalent Citation: [1988] 31 TTJ 71

Income Tax Appellate Tribunal HYDERABAD

ITA No. 94/Hyd/1986

Date: 28.12.1987

INCOME-TAX OFFICER.

MADDI LAKSHMAIAH AND COMPANY (P.) LIMITED.

BENCH

Member(s) : T. V. RAJAGOPALA RAO., G. SANTHANAM.

JUDGMENT

T.V. Rajagopala Rao, J.M.- This is a departmental appeal directed dated 25th October, 1985 and it relates to assessment against the order of the Commissioner (Appeals)-I, Hyderabad, year 1982-83. The only question involved in this appeal is whether the commission payments of Rs. 72,813 made to the three parties given below represent deductible business expenditure of the assessee-company. Admittedly the assessee is a private limited company engaged in the export of tobacco. It had paid to the following parties the amounts shown against each of them as commission for allegedly collecting orders for export of tobacco from USSR:

1. CTC International, Madras 54,611

2. MO Nandini Nambiar 9,101

3. N. Jayapalan, Madras 9,101

There was shipment of assessee-company's tobacco to USSR whose FOB value was Rs. 36,40,760. 1.5 per cent on the said FOB value was credited to CTC International, Madras by sending a credit note No. 1 dated 22nd November, 1980 to the said party. So also 0.25 per cent of the said FOB value which came to Rs. 9,101 was also credit to parties 2 and 3 given above by sending credit notes. The total of the commission said to have been paid to the above said three parties worked out to 2 per cent FOB value of the tobacco exported to the USSR. The ITO asked to furnish reasons for payment of commission to the above parties and also to adduce evidence in support of the services rendered by those three parties to enable them to get commission from the assessee- company. On behalf of the assessee-company it was pointed out that there was no documentary evidence like agreements, correspondence or proof to show that the above three parties rendered any services whatsoever in obtaining orders from the USSR. It was further stated before the ITO that the payments were made on the basis of oral agreements entered with them. It was asserted that without the assistance of the above three parties the assessee-company would not have got the Russian order. It is further submitted that the assessee had been making payments to the above said three parties even during the earlier period in order to enable them to get orders from USSR, but as the orders were not received during the earlier years no claim of commission was made by them. However, ultimately during the accounting year in question the order could be obtained and therefore the commission payment previously made was adjusted in their accounts as agreed upon. The ITO verified the accounts of the assessee- company bearing in mind the arguments advanced on this subject. He found that it was no doubt true that the assessee had been making payment off and on to the above said three parties but there is absolutely no trace of any documentary evidence to show either that the above three parties were appointed as agents or that they rendered any service whatsoever in obtaining orders from USSR. Under the circumstances he found it odd to see that there was no correspondence between the so called agents and the principal when they allegedly rendered services so as to enable them to receive heavy commission payments. The ITO opined that the services rendered by the above said parties if true cannot be of such an ethereal in nature. He held that in the absence of proof he was not prepared to accept the claim of the assessee and therefore, he proposed disallowance of Rs. 72,813 said to have been paid as commission to the above said parties. The learned IAC confirmed the action of the ITO in his directions given under section 144B. Therefore, in the final assessment order the ITO disallowed, inter alia, 72,813 and added it to the returned income of the assessee-company under his assessment orders dated 27th March, 1985.

2. Aggrieved against this and other disallowance the matter was carried in appeal to the Commissioner (Appeals) I, Hyderabad. It was submitted before the learned Commissioner (Appeals) that all the payments were made by crossed account payee cheques. It was further submitted on behalf of the assessee-company that in all such matter we have to see whether the following requirements were met with or not:

1. Whether payment of commission was real?

2. Whether it was exclusively for the purpose of the assessee's business?

3. Whether it was paid to the assessee in the capacity as a trader?

The assessee relied upon the decisions of the Hon'ble Supreme Court reported in Commissioner, Bombay v. Walchand & Co. Pvt. Ltd. (1967) 65 ITR 381 (SC), J.K Wollen Manufacturers v. Commissioner., UP (1969) 72 ITR 612 (SC), Aluminium Corporation of India Ltd. v. Commissioner, West Bengal (1972) 86 ITR 11 (SC). It was contended that as long as the above three requirements were satisfied the claim for commission cannot be disallowed on the ground that no evidence has been produced such as correspondence with the foreign party through intermediaries etc. It was further contended that the very fact that the commission agents had succeeded in getting the orders was proof enough to show that they have earned their commission. They had also declared the commission received from the assessee in their Income-tax. The payments of commission were made also by crossed account payee cheques. The receipt of the commission by these parties was not questioned by the ITO and it was not the case of the ITO that the payment of commission was made for a non-business purpose and therefore, it was submitted on behalf of the assessee that the claim should have been allowed. It appears that the learned Commissioner (Appeals) was very much impressed by the arguments advanced before him as he had accepted the assessee's contention and allowed the commission by deleting the same as addition to the returned income. At para 6 (ii) the learned Commissioner (Appeals) gave his reasoning and appreciation of the arguments advanced on behalf of the assessee. He stated as follows :

"After carefully considering the matter, I am of the view that the objections of the assessee are well taken. The ITO has not doubted the genuineness of the payment or the receipt of commission by the parties. It is not the ITO's case that the payment was made for a non-business purpose. As it is a fact that the assessee has secured Russian orders with the help of these parties, the deduction on account of commission to these parties cannot be denied merely on the ground that there is no correspondence with the assessee and the brokers in this regard. It is common knowledge that in modern business most of the transactions are put through the phone and personal discussions. There is no obligation under Law that all agreements for payment of commission should be in writing. In the absence of any material to indicate that other three parties had not received the commission or that they had not in fact rendered any services the disallowance by the ITO cannot be sustained. The addition of Rs. 72,813 is, therefore, deleted".

3. As against this portion of the learned Commissioner (Appeals)'s order the Revenue brought the second appeal which stands for our consideration. It is a fact that the assessee secured a big order from Russia for supply of its manufactured products worth Rs. 36,40,760 FOB. The ITO specifically asked the assessee to furnish reasons for the payment of commission to the above stated three parties and also to adduce evidence in support of the services rendered by them to enable them to get commission from the assessee. It is the case of the assessee that the following three parties by their efforts were able to secure the Russian order and so the first among the three parties was paid 1.5 per cent of the FOB value and 2 and 3 parties were each paid 0.25 per cent of the FOB value as commission for securing the Russion order. The names of the parties and the amounts paid to them are as follows.

1. CTC International, Madras    54,611

2. MO Nandini Nambiar Madras     9,101

3. N. Jayapalan, Madras          9,101

In answer to the query raised or doubt expressed by the ITO the assessee's authorised representative pointed out that the assessee company had not in possession of any documentary evidence like agreements, correspondence or proof to show that the above three parties rendered any service in obtaining orders from USSR. According to the assessee the payments were made on the basis of oral agreement entered into with the alleged commission agents and without their assistance, the assessee company would not have secured the Russian order. If fact, it was submitted that payments were being made to the above three parties even earlier in order to enable them to get orders from USSR and as the orders were not received during the earlier assessment years no claim for deduction of the payments made to them was made in the earlier assessments. However, ultimately during the accounting year in question the order could be obtained and therefore, the commission payment previously made was adjusted in their accounts as agreed upon. The ITO verified this claim made on behalf of the assessee company and found it as a fact that the assessee company has been making payment off and on to the above mentioned three parties. As can be seen from the version put forward on behalf of the assessee company the payment were stated to be given not in the accounting year in question but in the accounting years relating to the earlier assessment years even. In which assessment year actually the first payment was made to each of these three parties was not known. Generally if any of the three are appointed as commission agents of the assessee company there is nothing illegal to enter into an agreement with all or any of them agreeing to pay a stated percentage of commission for securing the orders either from USSR or from any other foreign country. However, the fact remained oral is true, then even at the time of adjusting the commission in the respective accounts of the alleged three commission agents nothing prevented the assessee company to pass resolutions authorising the payment of commission for the above said three parties. However, in this case curiously no such resolution for payment of commission was passed by the assessee company. There were discrepant versions put forward before the ITO as well as before the Commissioner (Appeals) regarding the mode of payment of the commission. Before the ITO it was clearly stated that the assessee began making payments to the alleged commission agents even during the earlier period in order to enable them to get orders from USSR. However, as no orders were secured in the past accounting year no claim for deduction was made of any of the payments made to them by the assessee. Further, it was categorically admitted that for 1.5 per cent commission of the FOB value of the USSR order credit note No. 1 dated 22nd January, 1980 was sent to CTC I International, Madras. This would clearly reveal that the commission payment was not made in cash or by cheque or by DD but the commission payment was made only by making an adjustment entry in the revenant accounts of the three parties maintained with the assessee company. However, when we come to the appeal before the Commissioner (Appeals) one of the arguments advanced was that the payments of commission were made by crossed account payee cheques. The version is quite contradictory to the version put forward before the ITO. Even if an adjustment entry crediting the commission amounts to the respective accounts of these three parties were made then the recitals of those entries atleast should have revealed that the credit entries represent commission payments for securing Russian order. However, the very fact that the account books of the assessee were not produced before us or before any of the lower authorities would clearly show that had they been produced the credit entries would not have supported the case of the assessee. The very fact that the ITO called upon the assessee to furnish reasons for payment of commission and also to adduce evidence in support of the services rendered by those three alleged commission agents would clearly go to prove that he wanted to verify whether the expenditure alleged to have been incurred through payment of commission was let out or expended wholly and exclusively for the purpose of business of the assessee company under section 37(1) of the Income-tax Act. However, except the bare assertion by the assessee company there is no other evidence to show that the so called three commission agents secured the Russian orders for the assessee company. USSR is socialist country and generally the contract would be by tenders. Atleast no proof was produced before us or before the lower authorities by what means the contract was struck _ is it by negotiations or is it by tenders? No evidence is produced that there is scope for commission agents or Liason Officers to have had a hand in concluding contracts with the USSR. Under the circumstances, let us see that even assuming the version that the three alleged commission agents had shown the commission payments in their respective Income-tax returns and were also assessed was correct, would it conclusively prove that the payment was for business purposes? In this connection we feel that the decision of the Calcutta High Court in Vishnu Agencies Pvt. Ltd. v. Commissioner (1979) 117 ITR 823 (Cal) is very apposite. In that case the commission paid to the sole selling agent came to be questioned before the Calcutta High Court on the ground that it was not incurred wholly and exclusively for the purpose of business of the assessee and hence not deductible. In that case there was an agreement between the assessee and the sole selling agent under which payment of 4 per cent commission on the listed price of all the sales of the products of the assessee was agreed upon. In that case it was found that all effective customers of the assessee-company were Government Departments which placed orders on the basis of tenders. In that case the assessee had at any rate did not produce any evidence to show that the service of the sole selling agents were necessary for entering into contracts with such Government Departments or that sales could be effected only with the help of agents. One of the contentions raised before the Calcutta High Court in that case was that the commission was in fact paid to the sole selling agent and that the sole selling agents had been assessed to tax on the receipt of commission from the assessee and that the agreement between the assessee and its selling agent was legally a binding contract. The Tribunal found that the fact that the agents filed returns and had been assessed to Income-tax only proved that the assessee had made the payments to them and nothing more. The Tribunal held that it does not prove that the sole selling agents rendered any service and the payment was made for any business purpose of the assessee. The Calcutta High Court held regarding the onus of proof as follows; at page 827 :-

"The onus was on the assessee to establish that there were facts in existence which entitled it to a deduction and it was for the assessee to adduce evidence to show what services, if any, were rendered by the sole selling agent. It cannot be said that the Tribunal has misdirected itself or omitted to consider any evidence or has relied on any irrelevant material in arriving at its conclusion."

Firstly the mere fact that the commission payments were shown in the Income-tax returns filed by the alleged commission agents and were assessed is not a conclusive proof of the services, if any, rendered by them in securing the contract from the USSR, Nor is it conclusive proof that the assessee incurred the expenditure for purposes of its business. According to the above stated Calcutta decision the onus is on the assessee that the commission payment constitutes a business expenditure. However, in our opinion the learned Commissioner (Appeals) had taken the mere circumstance of the receipt of the commission by the three parties as a conclusive proof of all the requirements. For instance he says in his impugned orders that it was not the ITO's case that the payment was made for a non-business purpose. If really the ITO felt that the payment is for business purposes why should be call upon the assessee to furnish reasons for payment of commission and adduce evidence in support of the services rendered by them to enable them to get commission. In our opinion the learned Commissioner (Appeals) went wrong in assuming that the ITO did not express any doubt about the business purpose of the expenditure. Misreading of the ITO's assessment order might only have made the Commissioner (Appeals) entertained the said wrong impression. As already stated before the learned Commissioner (Appeals) three Supreme Court decisions were relied upon. The learned Commissioner (Appeals) himself did not discuss any of them nor did he hold that any of them apply to the facts on hand. The first of the cases relied on was Commissioner, Bombay v. Walchand & Co. Pvt. Ltd. In that case the Tribunal which is final fact finding authority without assigning any reason whatsoever disallowed certain amount of remuneration payable to the executive officers of the assessee-company. However, it should be remembered that how much is to be paid to each of the executive officers, directors were all determined by the resolutions passed by the assessee-company. The Hon'ble Supreme Court while holding that if the Tribunal allowed only a part of the increase in remuneration payable to the exclusive officers of the assessee company without assigning reasons as to why it had disallowed certain part of the claim it should be held that that portion of the order of the Tribunal disallowing the claim was not supported by any evidence and on that ground it could not be sustained. The Supreme court held as follow as per the head note at page 381 :

"It is open to the Tribunal to come to a conclusion either that the alleged payment is not real or that it is not incurred by the assessee in the character of a trader or that it is not laid out wholly and exclusively for the purpose of the business of the assessee and to disallow it. But is it not the function of the Tribunal to determine the remuneration which in their view should be paid to an employee of the assessee".

It is significant to note that the Supreme Court categorically held that it is within the powers of the Tribunal to determine whether a particular payment was incurred by the assessee in the character of a trader or not or whether it was laid out wholly and exclusively for the purpose of business of the assessee or not. The Supreme Court in no uncertain terms held that the Tribunal is quite competent to hold that when once the expenditure is found to have been incurred for non-business purposes it is competent to disallow such expenditure. The next Supreme Court decision relied on was J.K. Woollen Manufacturers v. Commissioner UP. There also according to the terms of appointment of the General Manager Shri J.P. Vaish, it is stated that in case the profits of the assessee-company exceeded 1 lakh rupees the commission payable to him was 25 per cent. The lower authorities wanted to tinker with the said percentage of commission claimed as deduction (Rs. 75,465). The Supreme Court held that such tinkering is not allowable. It is significant that the Hon'ble Supreme Court made the following observation at page 616:-

"The question referred by the Tribunal and answered by the High Court only deals with the claim of deduction of the amount paid to Shri J.P. Vaish under section 10(2)(xv) and not under section 10(2)(x) of the Act".

That means the question referred was whether the impugned expenditure was incurred wholly and exclusively for purpose of a business or not and whether such expenditure is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made. What all that is held by the Supreme Court in that case was the following :-

"In applying the test of commercial expediency for determining whether an expenditure was wholly and exclusively laid out for the purpose of the assessee's business reasonableness of the expenditure has to be adjudged from the point of view of the businessman and not of the Revenue".

This proposition does not serve any purpose as far as the facts before us is concerned. We are not now on the point whether the quantum of expenditure said to have been incurred on commission payment was excessive or unreasonable or otherwise. We are of the opinion whether the said commission payment was made wholly and exclusively for purpose of business and whether the assessee proved that such expenditure was incurred wholly and exclusively for purpose of business. In this connection apart from the Calcutta case already referred to which had categorically stated about the onus of proof, we may also refer to a Bombay decision reported in Amritlal & Co. Pvt. Ltd. v. Commissioner (Central) Bombay (1977) 108 ITR 719 (Bom). In that case the assessee was a private limited company carrying on the business of importing dyes and selling the same. In that case the Tribunal allowed only half the allowance to the two directors, viz., Shri Doshi and Shri Desai. The Tribunal also wholly disallowed the commission payments to be paid by the assessee-company to four of its employees, viz., Shri Dutt (Rs. 17,520), Shri Khopkar (Rs. 9,660), Shri Bhatt (Rs. 5,500) and Shri Adalja (Rs. 8,625). The Tribunal also disallowed the commission paid to Shri Kamath and Shri Shah on the ground that they are excessive and unreasonable. In that case also an argument was advanced that because the payments were proved it should be taken that the payments were made for purpose of business. However, that argument was repelled by the Bombay High Court at page 730-their lordships held as follow :-

"The mere fact that the assessee-company had approved that payments were made to the two directors and the four salesmen in question could not carry the matter any further, for that fact itself would not be sufficient to entitle the assessee-company to claim a deduction under section 10(2) (xv) of the Act".

At page 733 their Lordships of the Bombay High Court held as follows :-

"As stated earlier, in the case before us, in spite of opportunity being given to the assessee-company, no particulars or details were furnished by the assessee-company so as to enable the taxing authorities or the Tribunal to come to a conclusion that the purpose for which the payments were made was satisfactorily established; in other words, the inquiry about details or particulars was not for determining the reasonableness or otherwise of the expenditure but for satisfying itself that the expenditure itself was for the purposes indicated in the resolutions and the taxing authorities and the Tribunal held that the assessee-company had failed to establish the same. As regards half of the expenditure allowed in the case of the two directors, it appears that the Tribunal has taken a lenient view that Rs. 3,500 in the case of each should allowed as that part could be ascribed to the contingency of entertainment mentioned in the resolution dated 12th May, 1955. In view of this position which obtains in the instant case, it is difficult to accept Mrs. Kolah's contention that the payments that were made to the two directors of the assessee-company and the four salesmen in question should have been allowed as a deduction under section 10(2) (xv) of the Act".

In our view the facts of the case dealt with by the Bombay High Court are near to the facts on hand and so the ratio laid down in the Bombay High Court broadly applies to the facts of our present case. In the case before us, after going through the whole record and also after considering the case law, we are of the opinion that the assessee was not able to discharge its burden to prove that the commission payment made by it to the three alleged commission agents was incurred wholly and exclusively for the purpose of business and in our opinion the disallowance made by the ITO is quite justified. The impugned order of the Commissioner (Appeals) is, therefore set aside and the appeal of the Revenue is allowed.

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