Vildirect: IncomeTax-caselaws-2007-VIL-337-ITAT-IND

2007-VIL-337-ITAT-IND

Equivalent Citation: ITD 112, 135, TTJ 115, 145,

Income Tax Appellate Tribunal INDORE

Date: 26.11.2007

ASSISTANT COMMISSIONER OF INCOME-TAX, RATLAM.

SHREE SAJJAN MILLS LIMITED.

BENCH

Member(s) : VIMAL GANDHI., BHAVNESH SAINI.

JUDGMENT

Per M.L. Gusia, Accountant Member.-This appeal of the revenue is directed against the order passed by the CIT(A), Ujjain, on 31-5-2004, for assessment year 1993-94.

2. None appeared on behalf of the assessee, therefore, the case was heard ex parte.

3. The first ground of appeal is that the ld. CIT(A) erred in allowing brokerage payment of Rs. 13 lakhs, which was disallowed by the Assessing Officer on account of company's failure to prove the nexus between the commission payment and sales.

4. Facts of the issue are that the assessee is a Limited Company, which filed return of income declaring loss of Rs. 6,06,15,483. The assessee is engaged in the business of manufacturing cotton cloth. The company was closed in February, 1986, because of heavy losses suffered by it and was restarted in July, 1989, under the management of M.P. Government through M.P. State Textile Corporation Limited. The assessment was completed at the loss of Rs. 1,86,09,750. The Assessing Officer noted that the assessee in the Profit and Loss account, debited commission and brokerage on cloth and yarn at Rs. 13 lakhs on total sales of Rs. 1,329.14 lakhs. Thus, commission worked out by the Assessing Officer at the rate of 0.97 per cent on sales. The Assessing Officer required to supply names and addresses of all the persons to whom commission has been paid and to give the details of services rendered by the Commission Agent. Further, the Assessing Officer required the basis on which commission had been paid. It was explained to the Assessing Officer that commission is being given to brokers appointed by the company on the terms and conditions mentioned in the agreement and as per the policy of the company. It is further explained that the commission is being given either by crossed cheque/Demand Draft or adjusted against the amount recoverable from brokers. Further, commission to brokers are paid for the services rendered by them i.e., procuring the orders and receiving the payments from the buyers. The assessee also submitted names and addresses of 19 brokers. The Assessing Officer has mentioned in the assessment order that the assessee failed to give the dates of procurement of orders from the Commission Agent. As per the details submitted about 19 brokers, the Assessing Officer found that the value of sales procured through these brokers was Rs. 11,30,95,411 and the total commission paid to them was Rs. 10,20,675. It was explained that the list of 19 brokers contained the major commission agents. Other agents procured only small orders. The percentage of commission on sales for these 19 brokers is at 0.90 per cent. He, therefore, worked out the balance of commission paid to small brokers on procurement of orders worth Rs. 1,98,18,589 and commission paid at Rs. 2,77,325 i.e., at the rate of 1.39 per cent. According to the Assessing Officer, this is inconsistent with the assessee's own statement that only the nineteen brokers in the list are major, but they are getting lesser brokerage of 0.90 per cent, whereas smaller broker received commission at the rate of 1.39 per cent. Further, the Assessing Officer noted that as per the agreement between the assessee-company and the brokers, the brokers required to prepare a statement of sales made by them and work out the commission payable to them every quarter of the year. The assessee failed to produce such quarterly reports. According to the Assessing Officer, the assessee failed to specify the services actually rendered by the brokers to verify the claim. The assessee was further required to produce the counterfoils of cheques by which payment was made to them. However, no such evidence was produced before the Assessing Officer. Thus, in view of the above facts and circumstances, he disallowed the commission claimed at Rs. 13 lakhs on the following reasons:-

(i) The assessee has failed to prove the nexus between commission payments and sales.

(ii) The assessee failed to explain the services rendered by the brokers for which commission was paid and the orders procured on the basis of that goods sold in terms of quantum.

(iii) It is unreasonable to presume that the major brokers were paid commission at the rate of 0.90 per cent of the sales, while smaller brokers were paid at the rate of 1.39 per cent on sales.

(iv) No quarterly report as stipulated in the agreement between the assessee and broker could be produced.

(v) No proof of payment of commission was produced.

5. Before the CIT(A), it is argued by the assessee that the commission is paid to brokers/agents since the inception of the company. However, the Assessing Officer has disallowed the amount of commission during the year under consideration. It is also contended that as per the business practice, the brokers/agents procure the orders and take responsibility of receiving the payments and for doing such types of activities, they have been paid commission. The assessee had submitted the copy of agreements etc., which were made with the different brokers/agents at the time of assessment proceedings and methods and procedures by which the brokers procure the orders and receive the payment. The assessee has given the list of all the brokers/agents to whom commission given with complete address. Further, the assessee-company is being run under the supervision of M.P. State Textile Corpn. by the State Government of M.P. and nobody can spend even a single paisa, which is not necessary. All the payment of the commission to brokers/agents have been paid by crossed account payee cheque/Demand Draft and strictly as per the agreement. It is further argued that the ld. Assessing Officer should at least verify the payment from the concerned broker/ agent before making the disallowance of huge amount of commission. Further, no Textile Mill can do marketing without appointing the brokers/agents and payments of commission has to be made to them. Therefore, the Assessing Officer has disallowed the commission paid, which is an essential expenditure of business.

6. The CIT(A) observed that the Assessing Officer disallowed entire commission expenditure of Rs. 13 lakhs on the basis of some discrepancies in the amount of brokerage payment made vis-a-vis large brokerage payments made and payment made to other remaining brokers and has further held that the assessee company failed to prove the nexus between the commission payments and sales and the details of exact services rendered and the goods in terms of quantum could not be furnished. Thereafter, after referring to the small discrepancies between the rate of commission for major brokerage and brokerage related to smaller sales and in absence of quarterly reports from the brokerage as well as proof of payment of commission, the entire commission claim of Rs. 13 lakhs was disallowed. The CIT(A) mentioned in his order that the contention put forward by the assessee-company has sufficient merit being a company under the State Government Management. The Assessing Officer was not justified in making disallowance of commission payment, for the so called discrepancies noticed and on account of absence of quarterly reports and further details. According to the CIT(A), the Assessing Officer should have appreciated that without marketing efforts, the sales to the tune of nearly Rs. 13 crores could not have been achieved. Further, the Assessing Officer should have appreciated that the amount claimed was not unreasonable and excessive vis-a-vis total sales and after all, it was a case of State Government undertaking. Thus, the Assessing Officer's action in disallowing of commission is not found by the ld. CIT(A) to be based on sound reasoning and footings. Accordingly, the addition of Rs. 13 lakhs was deleted by the ld. CIT(A).

7. During the course of hearing, the ld. Departmental Representative filed a paper book containing total pages 23, which is placed on record. She invited our attention to page 1 of the paper book, which is Profit and Loss account as on 31-3-1993 and as on 31-3-1992. In the immediately preceding year, the sales were declared at Rs. 1,367.23 lakhs while in the year under consideration, the sale has been declared at lesser amount of Rs. 1,354.44 lakhs. Therefore, according to her the sales have gone down in spite of the fact that the commission has been paid to the brokers at Rs. 13 lakhs. The ld. Departmental Representative further invited our attention to page 2, wherein the details of nine Directors nominated by the Government of Madhya Pradesh. He further invited our attention to pages 12 to 16, which is copy of agreement between the assessee-company and various brokers. This agreement was signed by Shri U.S. Pandey, the chief executive of the assessee-company, who is not nominated by the Government of M.P. as Director. At pages 20-23 of the paper book, she filed a copy of decision of this Bench in the case of Kirti Industries (India) Ltd. [IT Appeal No. 834 (Indore) of 1983 for assessment year 1997-98] wherein the disallowance of commission payment to M/s. Agarwal Traders and M/s. Sanjay Agencies were confirmed.

8. After hearing the ld. Departmental Representative and going through the paper book filed by her, which is placed on record, we noted that small reduction in sale cannot be basis of disallowance of commission payments. Further, the order of this Bench relied upon by the ld. Departmental Representative cannot support her contention, for the reasons that the facts of that case are different to the instant case. In that case, it was claimed that M/s. Agarwal Traders and M/s. Sanjay Agencies belonged to Neemuch (M.P.) have good contact and infrastructure. Hence, they were successful in getting the orders. However, when the information was called for from these brokers under section 133(6), the letters sent to M/s. Sanjay Agencies was received back unserved. Another letter issued at the new address supplied by that assessee also could not be served. Further, M/s. Agarwal Traders, another broker though confirmed the receipt of the commission, but failed to give the services rendered by it. Further, no supporting evidence was furnished by the assessee before the Assessing Officer, when the supply was only to Gram Panchayat. There was no requirement to appoint further brokers, when a regular agent in the form of M/s. Annapurna Agencies was already promoting sales of the assessee's products. Further appointment of these two alleged agents appeared not believable and unnecessary. The Tribunal also required the assessee to explain with evidence in regard to the services rendered by the alleged agents M/s. Agarwal Traders and M/s. Sanjay Agencies, for which the ld. Authorized Representative in that case required some time, which was given by the Tribunal. However, in spite of that no such evidence of services rendered by these alleged two brokers was supplied. In that circumstances, the disallowance of commission was confirmed by this Bench. We noted from pages 8 and 9 of the paper book filed by the ld. Departmental Representative that details of 19 major brokers have been given with their complete addresses, amount of commission and the amount of sales made through them. In case the Assessing Officer had any doubt about the genuineness of payment of commission, he could have issued summons to those brokers to find out the genuineness of the payments of commission, but the Assessing Officer failed to do so. The copy of agreement between the assessee-company and various brokers furnished by the ld. Departmental Representative show that the agreement was signed by the Chief Executive of the assessee-company and signed by the brokers as well as witnesses. It is clearly stipulated in the agreement at paras 7 and 8 of the agreement that the offer received by the brokers should be communicated to the Mills expeditiously for consideration and if the offers are accepted, they should arrange execution between buyers and sellers. The cloth delivery should be taken within the stipulated period, if the cloth had been manufactured but delayed in delivery of the goods by the Mills for any reasons, the buyers and brokers will not be entitled to cancel the contracts. At para 15, it is mentioned that the selling agent shall be solely responsible for effecting the delivery of the goods against the payments for goods sold through them and in case any of their Merchants/Buyers refused to take the delivery of the goods or refused to payment the amount of goods, the selling agents shall be fully responsible for making full payments with interest and other expenses etc. At para 8, it is mentioned that the brokers shall be entitled for commission at the rate of 0.5 per cent on ex-mill value of the goods excluding the excise duty etc., on such sales made by them.

9. From the above, we noted that as per the business practice, the brokers/agents procured the orders and take the responsibility of receiving the payments and for doing such type of activities, they have been paid commission. The assessee has claimed that all the payments of commission has been made by account payee cheques/Demand Drafts and strictly as per the agreement. In case the Assessing Officer has any doubt, he could have issued summons to the Brokers as complete address has been supplied by the assessee to the Assessing Officer, however, the Assessing Officer failed to make any inquiry in this regard. We are also in agreement with the CIT(A) that no textile mill can do marketing without appointing the brokers/agents and payment of commission has to be made to them. We also agree with the CIT(A) that the assessee-company being a company under the State Government Management, the Assessing Officer was not justified in making the disallowance of the commission payment for the reasons mentioned in the assessment order.

10. The Hon'ble Supreme Court in the case of Aluminium Corpn. of India Ltd. v. CIT [1972] 86 ITR 11, reversed the decision of the High Court for the reasons that the Tribunal after taking into consideration various terms of the agreement as well as significance of the deduction given in the earlier assessment year had come to conclusion that the commission paid was expended wholly and exclusively for the purposes of the assessee's business. Further the Hon'ble Jurisdictional High Court of M.P. in the case of CIT v. Pure Pharma (P.) Ltd. [2004] 270 ITR 382 has held that since a doubt was raised with regard to payment made to various parties as commission, inquiry was held. It was found that all the payments had been made as commission to various parties by Demand Drafts, wherein the identity of each of the Agent was also established. It had also been found that commission was paid exclusively for business purposes only. In the instant case, the assessee has explained that all the payments have been made by account payee cheque/Demand Draft. In case the Assessing Officer had any doubt, he could have made inquiry directly with the Commission Agents, as the complete addresses of the brokers was supplied to the Assessing Officer by the assessee. The Hon'ble Bombay High Court in the case of CIT v. Goodlas Nerolac Paints Ltd. [1991] 188 ITR 1, held as under:-

"that the Tribunal had found that the payments of commission had been made under the instructions and directions of the top executives of the company and were approved by the board of directors at the end of every month. According to the Tribunal, the facts that the assessee was a public limited company, that the accounts were not merely audited but were also placed before the general body of shareholders, that the assessee's turnover was increasing year after year and that such payments claimed as deduction had dropped from 1.34 per cent for one of the years to 0.22 per cent in the year in question, were very relevant. On the basis of these and other evidence, the Tribunal concluded that the fact of payment of commission was established even though the names and addresses of the recipients were not given and that the payments were made for the purpose of business. This was a finding of fact which could not be interfered with by the High Court. The payments of commission of Rs. 96,807 and Rs. 78,805, respectively, for the assessment years 1970-71 and 1971-72 were deductible;"

11. Hon'ble Punjab & Haryana High Court in the case of CIT v. Ishwar Prakash &Bros. [1986] 159 ITR 843, held that the finding arrived at by the Tribunal, on appreciation of the evidence, was a finding of fact and no question of law arose for reference. In that case, the assessee carried on the business of purchase and sale of milk cans. It entered into an agreement with 'S' in pursuance of which 'S' was to help the assessee in procuring orders from various Government and semi-Government Departments, providing design for the cans, in getting the goods finished and packed and in securing payments for the goods supplied. The assessee paid a commission of Rs. 36,000 to 'S'. The ITO disallowed the payment. The Tribunal found that a valid agreement had been entered into between the assessee and 'S' and that the payment of the commission to 'S' was genuine and did not amount to diversion of the income of the assessee to reduce the tax liability. The Tribunal allowed the claim of the assessee. The Tribunal rejected the application of Commissioner under section 256(1) of the Income-tax Act, 1961, for referring a question of law. On an application under section 256(2).

12. Keeping in view, the facts and circumstances, discussed above and having regard to the various decisions referred to above, we noted that without making any inquiry by the Assessing Officer, he disallowed the huge amount of Rs. 13 lakhs. Further, the assessee had declared loss of Rs. 6,06,15,483, which was assessed by the Assessing Officer at Rs. 1,86,09,750. Therefore, we are unable to understand that why the assessee will claim bogus payment of commission of Rs. 13 lakhs without any gain as the company is running in loss and further the company is running under the State Government Management. Therefore, there is hardly any scope for claiming false payment of commission. In view of the above, facts and circumstances, we do not find any infirmity in the order of the CIT(A). Hence, this ground of appeal of the revenue is dismissed.

13. The next ground is that the ld. CIT(A) erred in allowing the claim of telephone expenses of Rs. 50,000, which was disallowed by the Assessing Officer for personal call.

14. Facts of the issue are that in the misc. expenses, the assessee had included Rs. 3,24,303 for telephone charges. The assessee failed to produce the details of telephone calls made. The Assessing Officer also mentioned that the assessee agreed for disallowance of Rs. 50,000 out of the total claim of Rs. 3,24,303. However, before the CIT(A), it is contended that the Assessing Officer has wrongly disallowed the telephone expenses of Rs. 50,000. The assessee is a sick unit and not a single paisa is being spent which in the personal nature or which is not for business. No personal phone was made by any person. The assessee has submitted the copies of telephone bills etc. and requested several times that there is no personal phones in its bill. On the other hand, the ld. Departmental Representative relied upon the assessment order.

15. The CIT(A) held that this being a case of company, that too Company under the State Government Management, the disallowance made by the Assessing Officer for personal calls, cannot be sustained in fact and in law. Therefore, he directed to delete the amount of Rs. 50,000. Further the Assessing Officer should have appreciated that it was not a case of Private Limited Company. However, we noted that Hon'ble Gujarat High Court in the case of Sayaji Iron which is a private limited company is a distinct assessable entity as per the definition of 'person' under section 2(31) of the Act. Therefore, it cannot be stated that when the vehicles are used by the directors, 'even if they are personally used by the directors' the vehicles are personally used by the company, because a limited company by its very nature cannot have any 'personal use'. The limited company is an inanimate person and there cannot be anything personal about such an entity. The view that we are adopting is supported by the provision of section 40(c) and section 40A(5) of the Act.

16. In view of the above, we do not find any infirmity in the order of the CIT(A).

17. Consequently, the appeal of the revenue is dismissed.

Per Bhavnesh Saini, Judicial Member.- I have had an opportunity to go through the order of my learned brother (Accountant Member). I have carefully gone through the order and after having discussion on the issue, tried to pursue myself to agree with the conclusion arrived at by my learned brother on the issue of disallowance of Rs. 13 lakhs stated to be paid on account of commission payment, but I could not do so. I am unable to uphold the view taken by the ld. CIT(A) in deleting the addition of Rs. 13 lakhs and in allowing the appeal of the assessee. However, I agree with the conclusion arrived at by my learned brother on the issue of disallowance of telephone expenses of Rs. 50,000. The departmental appeal to the extent of disallowance of Rs. 50,000 on ground No. 2 shall stand dismissed as is proposed by my learned brother (Accountant Member).

18. The facts of the case are not in dispute and the same have been elaborately mentioned above in this order. For the sake of avoidance of repetition, I am not repeating the same as well as the arguments of the ld. DR. The Assessing Officer has very categorically recorded the fact that the assessee is engaged in the business of manufacture of cotton cloth. The assessee-company was closed because of suffering heavy losses which was restarted in July, 1989 under the management of State Government. The assessee-company has been declared a relief undertaking by the M.P. State Government and BIFR has also registered a case under Sick Industrial Companies Act, 1985. The Assessing Officer on issue of commission payment of Rs. 13 lakhs directed the assessee to give names and address of all the persons to whom commission has been paid and to give details of work done by these Commission agents and the basis on which the commission has been paid. The assessee's only submission was that the commission being 0.97 per cent of sales is being given to brokers who are appointed by the company on the company terms and conditions as per policy of the company and the commission is being paid either by crossed cheque/Demand Draft or adjusted against the amount recoverable from brokers. The commission broker is responsible for collecting orders and receiving payment thereof. The assessee later on submitted names of 19 brokers to whom commission was paid and as per details submitted, it was seen that these brokers procured the sale orders for Rs. 11,30,95,411.77 and commission paid to them was Rs. 10,22,675.40. It was explained that other agents could procure only small orders. The percentage of commission on sales for these 19 brokers worked out to 0.90 per cent. By implication the rest of the commission agents put together procured the remaining orders and on average they got brokerage of 1.399 per cent. The Assessing Officer, therefore, noted that there is inconsistent statement of the assessee giving the commission of 0.97 per cent of the sales. The Assessing Officer also noted from sample copy of the agreement that brokers have to prepare statement of sales and work out commission payable to them every quarter of the year. However, the assessee failed to produce such quarterly reports in case of any of the brokers. The assessee also failed to state specifically the services rendered by these brokers. No such evidence was produced to prove as to what services have been rendered by these brokers for the assessee. Even the counter foils of the cheques through which payments are stated to be made were not produced before the Assessing Officer. The Assessing Officer, therefore, observed that the assessee has failed to prove nexus between the commission payment and sales. The assessee also failed to prove the exact services rendered or goods sold in terms of quantum. The assessee also failed to give reasons for inconsistency in the statement for giving different commission to different brokers. No quarterly report as per the agreement is filed or produced before the Assessing Officer. No proof of payment of commission was produced. The Assessing Officer accordingly disallowed Rs. 13 lakhs stated to have been paid on account of commission payment. The assessee reiterated the same submissions before the CIT(A). On going through the findings of the CIT(A), I find that the CIT(A) did not consider any of the objections noted by the Assessing Officer as referred to above while deciding the appeal of the assessee. The ld. CIT(A) while deleting the addition merely considered the fact that the assessee being under the State Government management has properly paid the commission payment. The ld. CIT(A) also has given reason for deleting the addition that the assessee could not have achieved sales of Rs. 13 crores approximately without marketing efforts. The ld. CIT(A) also has given reason that the commission payment is not unreasonable or excessive vis-a-vis total sales. On consideration of the findings of the CIT(A), I am of the view that the CIT(A) did not address himself to the points and objections raised by the Assessing Officer in the assessment order for making the disallowance. It is a settled law that if the deduction is claimed by the assessee then the burden of proof would lay upon the assessee to prove the same through reliable and cogent evidence. The question whether the amount claimed as expenditure was laid out or expended wholly and exclusively for the purpose of business has to be decided on the facts in the light of the circumstances in each case. The Hon'ble Supreme Court in the case of Lachminarayan Madan Lal v. CIT [1972] 86 ITR 439 held-

"That mere existence of an agreement between the assessee and its selling agents or payment of certain amounts as commission, assuming there was such payment, does not bind the Income-tax Officer to hold that the payment was made exclusively and wholly for the purpose of the assessee's business. Although there might be such an agreement in existence and the payments might have been made, it is still open to the Income-tax Officer to consider the relevant facts and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under section 37 of the Act."

19. The ld. DR has pointed out from the sample agreement that the commission agents are required to file statement of sales in order to work out the commission. However, the assessee has not filed any such statement before Assessing Officer. The assessee has thus failed to satisfy the Assessing Officer as to what services have been rendered by the commission agents for the assessee. The Assessing Officer has very specifically recorded a finding of fact that the assessee has failed to state specifically the services rendered by the broker. The ld. CIT(A) has not given any finding on this finding of the Assessing Officer. Even the counterfoils of the cheque through which payments have been made to the commission agents were not produced before the Assessing Officer. Thus, the assessee has failed to produce reliable and cogent material or evidence before the Assessing Officer to satisfy the Assessing Officer as to what services have been rendered by the commission agents for the assessee. The ld. DR also pointed out from the profit and loss account and balance sheet filed by the assessee before the Assessing Officer to show that even the sales have gone down in the assessment year in question as compared to earlier assessment year. Therefore, the assessee has failed to prove through reliable and cogent material before the Assessing Officer that the expenditure claimed was in fact laid out or expended wholly and exclusively for the purpose of business. The DR also correctly pointed out that the assessee being a sick company declared by BIFR and the management was taken over by the State Government but the commission agreements were not signed by any responsible Officer. Therefore, looking to the financial position of the assessee, the Assessing Officer had been justified to look into all aspects of the matter to verify as to whether any genuine payment is made on account of commission payment or what services are rendered by the commission agents to the assessee. However, the assessee has not produced any specific or reliable material before the Assessing Officer to satisfy the conditions for making the payment of commission to the commission agents. It, therefore, appears to me that the ld. CIT(A) has been swayed by irrelevant consideration and did not consider the reasons given by the Assessing Officer while deleting the disallowance. I may also state with great respect to my ld. brother that the ld. Accountant Member in para 12 has noted that the Assessing Officer disallowed the commission payment without making any enquiry. However, the assessment order revealed something else in which the Assessing Officer has tried to make proper inquiry into the matter and directed the assessee to furnish several details before him as noted above in order to justify the commission payment. However, the assessee filed a very brief reply before the Assessing Officer which was also not supported through relevant material. Thus, the assessee has failed to bring sufficient evidence before the Assessing Officer to prove as to what services were rendered by the commission agents for the assessee.

20. Considering the above discussion, I am of the view that since the ld. CIT(A) has not considered this issue in proper perspective and did not consider the objections raised by the Assessing Officer in the assessment order. The ld. CIT(A) was not justified in deleting the addition and the matter requires reconsideration at the level of the ld. CIT(A). I, therefore, set aside the order of the CIT(A) and restore the matter to his file with direction to decide the issue of commission payment afresh by giving reasonable sufficient opportunity of being heard to the assessee. The ld. CIT(A) shall also take into consideration the objections raised by the Assessing Officer in the assessment order while disallowing the commission payment. The ld. CIT(A) is directed to decide all the points which have been raised by the Assessing Officer in the assessment order.

21. As a result, the appeal of the revenue is allowed for statistical purposes on the issue of commission payment on which the revenue has raised ground No. 1 above.

22. Appeal of the revenue is allowed for statistical purposes.

ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961.

As there is a difference of opinion between the Accountant Member and the Judicial Member on the issue raised in the appeal, we request the Hon'ble President of the Income-tax Appellate Tribunal to refer the following point of difference to a Third Member under section 255(4) of the Income-tax Act, 1961:-

"Whether, on the facts and in the circumstances of the case, the ld. CIT(A) was justified in deleting the addition of Rs. 13 lakhs on account of disallowance of commission payment claimed during the assessment years, in question."

ORDER (THIRD MEMBER)

Per Vimal Gandhi, President.-On account of difference between the learned Judicial Member and the Accountant Member of Indore Bench of the Appellate Tribunal, following question has been referred to me as a Third Member under section 255(4) of the Income-tax Act:-

2. The facts of the case are that the assessee-company was engaged in the business of manufacture and sale of cotton cloth in the relevant period. The company was closed down in February, 1986 because of heavy losses and was restarted in July, 1989 under the Management of M.P. Government through M.P. State Textile Corporation Limited. For the assessment year, under consideration, it filed a return declaring loss of Rs. 6,06,15,483. After making various disallowances/additions, the Assessing Officer assessed the assessee at a loss of Rs. 1,86,09,750. One of the expenditure claimed by the assessee was commission/brokerage of Rs. 131akhs on total sales of Rs. 1329.14 lakhs.

3. The claim of commission was disallowed by the Assessing Officer with the following observations:-

"The profit and loss account submitted by the assessee along with the return show that commission and brokerage on cloth and yarn has been claimed at Rs. 13 lakhs i.e., sale of cloth (Rs. 1186.64 lakhs + sale of yarn Rs. 142.50 lakhs). Thus commission being 0.97 per cent of sales. To verify this claim, the assessee was asked vide notice dated 8-11-1995 to give names and addresses of all persons to whom commission has been paid and to give the details of work done by these commission agents and the basis on which commission has been paid. The assessee's only submission was that commission is being given to brokers who are appointed by the company on the company terms and condition and as per the policy of the company. Commission is being paid either by crossed cheque/DD or adjusted against the amount recoverable from broker. Commission broker is responsible for collecting order and receiving the payment thereof". The assessee later submitted names addresses of 19 Brokers, amount of brokerage given and the value of sales procured. Here also the assessee failed to give the dates of procurement of order as called for. As per these details submitted, it was seen that value of sales procured through them was Rs. 11,30,95,411.77 and the total commission paid to them was Rs. 10,22,675.40. According to assessee this list contained only the major commission agents. Other agents procured only small orders. The percentage of commission to sales for these 19 brokers works out to 0.90 per cent. By implication, the rest of the commission agents put together procured orders worth Rs. 198,18,589 (1,329.14 lakhs-11,30,95,412) and their commission was Rs. 2,77,325 (13,00,000-10,22,675) i.e., on an average, they got a brokerage of 1.399 per cent. This is inconsistent with assessee's own statement that only the 19 brokers in the list are major, but they are getting lesser brokerage of 0.90 per cent whereas smaller ones are getting 1.399 per cent.

Further, as per para 9 of the sample copy of agreement b/w assessee and the brokers, the 'Broker shall prepare a statement of sales made by them and work out the commission payable to them every quarter of the year. The assessee failed to produce such quarterly reports in case of any of the brokers. The assessee also failed to state specifically the services rendered by the brokers. To prove his claim, the assessee was further asked to produce the counterfoils of cheques by which payment was made to them. No such evidence was produced either. Thus in view of the following facts, I disallow the whole of the commission paid of Rs. 13 lakhs:-

(i) The assessee has failed to prove the nexus between commission payment and sales if any.

(ii) The exact services rendered or the goods sold in terms of quantum could not be brought on record.

(iii) It is unreasonable to presume that major brokers were paid 0.90 per cent of sales while smaller brokers were paid 1.399 of sales.

(iv) No quarterly reports as per the agreement between the assessee and the brokers could be produced.

(v) No proof of payment of commission was produced.

Thus, the whole of commission of Rs. 13 lakhs is disallowed."

4. The disallowance of commission was challenged in appeal before the learned CIT(A) and it was contended by the assessee that the Assessing Officer has wrongly disallowed the commission which is being given since the start of the company. The commission was given to brokers' agents to procure orders and take the responsibility of payment and for doing such type of activities they do as per business practice. The assessee further claimed that the commission was paid as per agreements with the brokers and some copies of agreements filed before the Assessing Officer were referred to in appeal. It was also emphasized that the assessee was being run under the supervision of M.P. State Textile Corporation Limited and, therefore, there is no question of spending or wasting even a single paisa. All the payments of commission to brokers/agents have been paid by crossed account payee cheques/DDs and strictly as per agreements. The learned Assessing Officer without making any verification disallowed huge amount of commission. It was also emphasized that no textile mill could run without appointing brokers/agents and without making payment of brokerage/commission to them. Accordingly, the disallowance made was submitted to be unjustified and deserved deletion.

5. The learned CIT(A) deleted the disallowance of Rs. 13 lakhs with the following observations:-

"4.2 The Assessing Officer in disallowing entire commission expenditure of Rs. 13 lakhs has noted some discrepancy in the amount of brokerage payment made vis-a-vis large brokerage payment made and payment made to other remaining brokers and has farther held that the appellant company failed to prove the nexus between the commission payment and sales and the details of exact services rendered and the goods in terms of quantum could not be furnished. Thereafter, after referring to the small discrepancy between the rate of commission for major brokerage and brokerage related to smaller sales and in absence of quarterly reports from the brokers as well proof of payment of commission, the entire commission claimed of Rs. 13 lakhs was disallowed. The contention put forward by the appellant company has sufficient merit, being a company under the State Government management the Assessing Officer was not justified in making disallowance of the commission payment for the so called discrepancies noticed and on account of absence of quarterly reports and further details. It should have been appreciated by the Assessing Officer that without marketing efforts the sales to the tune of nearly Rs. 13 crores (approx.) could not have been achieved. Further the Assessing Officer should have appreciated that amount claimed was not unreasonable or excessive vis-a-vis total sales and after all it was a case of State Government undertaking. Thus, the Assessing Officer's action in disallowing of commission is not found to be based on sound reasoning and footing and the same is hereby deleted."

6. The revenue being aggrieved challenged the above deletion in appeal before the Tribunal.

7. After hearing the appeal, a difference arose between the learned Accountant Member and the Judicial Member of the Bench who heard the appeal. The learned Accountant Member upheld the order of the learned CIT(A) in a very elaborate order running into more than 10 pages. He has noted each and every important fact and held that the commission payment was fully justified. The learned Accountant Member has also quoted the relevant case law in support of his proposed order.

8. The learned Judicial Member did not agree with the order proposed by the learned Accountant Member. For the reasons given in paras 19 and 20 of his order, he has set aside the impugned order of the learned CIT(A) and remitted the matter for reconsideration to the learned CIT(A). The pertinent observations made are as under:-

"19. The ld. DR has pointed out from the sample agreement that the commission agents are required to file statement of sales in order to work out the commission. However, the assessee has not filed any such statement before Assessing Officer. The assessee has thus failed to satisfy the Assessing Officer as to what services have been rendered by the commission agents for the assessee. The Assessing Officer has very specifically recorded a finding of fact that the assessee has failed to start specifically the services rendered by the broker. The ld. CIT(A) has not given any finding on this finding of the Assessing Officer. Even the counterfoils of the cheque through which payments have been made to the commission agents were not produced before the Assessing Officer. Thus, the assessee has failed to produce reliable and cogent material or evidence before the Assessing Officer to satisfy the Assessing Officer as to what services have been rendered by the commission agents for the assessee. The ld. DR also pointed out from the profit and loss account and balance sheet filed by the assessee before the Assessing Officer to show that even the sales have gone down in the assessment year in question as compared to earlier assessment year. Therefore, the assessee has failed to prove through reliable and cogent material before the Assessing Officer that the expenditure claimed was in fact laid out or expended wholly and exclusively for the purpose of business. The DR also correctly pointed out that the assessee being a sick company declared by BIFR and the management was taken over by State Government but the commission agreements were not signed by any responsible Officer. Therefore, looking to the financial position of the assessee, the Assessing Officer had been justified to look into all aspects of the matter to verify as to whether any genuine payment is made on account of commission payment or what services are rendered by the commission agents to the assessee. However, the assessee has not produced any specific or reliable material before the Assessing Officer to satisfy the conditions for making the payment of commission t9 the commission agents. It, therefore, appears to me that the ld. CIT(A) has been swayed by irrelevant consideration and did not consider the reasons given by the Assessing Officer while deleting the disallowance. I may also state with great respect to my ld. Brother that the ld. Accountant Member in para 12 has noted that the Assessing Officer disallowed the commission payment without making any enquiry. However, the assessment order revealed something else in which the Assessing Officer has tried to make proper inquiry into the matter and directed the assessee to furnish several details before him as noted above in order to justify the commission payment. However, the assessee filed a very brief reply before the Assessing Officer which was also not supported through relevant material. Thus, the assessee has failed to bring sufficient evidence before the Assessing Officer to prove as to what services were rendered by the commission agents for the assessee.

9. In the above background and difference, the matter has been brought to me. The case was fixed for hearing and, accordingly, I have heard Smt. Vandana Sagar, learned Departmental Representative, and Shri Manoj Fadnis, for the assessee.

10. Smt. Vandana Sagar, learned Departmental Representative, drew my attention to the reasonings recorded by the Assessing Officer and reproduced above for disallowing the claim of Rs. 13 lakhs. She emphasized that the commission was claimed to have been paid as per agreement which provided that the brokers shall prepare a statement of sales made by them and work out the commission payable to them every quarter of the year. However, no such statements were produced before the Assessing Officer. Thus, the details of sales on which the commission was paid were not filed before the Assessing Officer. Further, the assessee has claimed to have paid commission at the rate of 0.97 per cent of the sales but it was found that to small brokers commission was paid at the rate of 1.399 per cent. This excessive rate of brokerage paid was not explained. She further stated that the genuineness of the brokerage was not established as counterfoils of cheques issued to brokers were not produced for verification. Lastly, she emphasized that the learned CIT(A) was swayed by the fact that the assessee-company was run under the management of the M.P. Government. This fact was totally irrelevant. She accordingly, relied upon the order of the ld. Judicial Member wherein it has been specifically recorded that the objections raised in the assessment order by the Assessing Officer were not met in appeal by the learned CIT(A) or the learned Accountant Member. However, she also did not agree with the ld. Judicial Member that the matter should have been remanded back to the learned CIT(A). She argued that on the facts and in the circumstances of the case, the disallowance of commission in dispute should have been upheld.

11. The ld. counsel for the assessee, Shri Manoj Fadnis, supported the impugned order of the learned CIT(A) and also the proposed order of the learned Accountant Member. He has pointed out that the mill continuously suffered losses for the last several years and was ultimately closed. Due to closure of the mill, the case could not be very effectively persuaded. He emphasized that even after the addition, what has been assessed is loss and no tax is involved in this appeal. There is no question of adjustment of huge brought forward losses as in the relevant period, the mill only suffered heavy losses without making any positive profit. He further submitted that the objection of the Assessing Officer relating to execution of agreements with brokers by a non-Director of the company was without any basis as Mr. Pande, who had signed agreements, was General Manager of the company on deputation from M.P. State Trading Corporation. At any rate, the accounts prepared were duly adopted by the Board of Directors in which admittedly large number of senior Officers of the Government were Directors. The accounts of the assessee having been approved by the Board, the objection that the competent person did not enter into agreement did not have any meaning. The General Manager was fully competent to enter into agreement with brokers.

12. Shri Manoj Fadnis, ld. counsel, further submitted that alleged defects pointed out by the Assessing Officer were not material or sufficient to disallow the commission in dispute. The commission has all along been paid by the assessee as has been noted by the learned CIT(A) in para 2 page 2 of the order and it has also been specifically recorded by the learned Accountant Member. There is no material on record to show that the above factual finding was erroneous. Further, as noted even by the Assessing Officer, complete details of sales on which commission was paid were fully furnished before the Assessing Officer. These details are also available at pages 8 and 9 of the paper book filed by the learned Departmental Representative. Having regard to the above details, it was immaterial that the assessee did not produce bifurcated figure of sales and commission due in each of the quarters of the year. For this reason, commission could not be disallowed. Likewise, the payment of brokerage/commission differed from broker to broker depending upon the agreement with the broker and, therefore, the fact that although average brokerage on total sales was 0.97 per cent, on small quantity of sales, brokerage paid worked out to 1.399 per cent. At any rate, even the brokerage paid at the above rate cannot be said to be excessive and is fully supported by the documentary evidence.

13. The assessee-company paid the brokerage through crossed cheques or DDs and this fact was verifiable with reference to the bank statements. It is not in dispute that the bank statement was available with the assessee. Yet the Assessing Officer wrongly insisted on production of counterfoils of cheques which at the relevant time could not be produced for several reasons but from the above it cannot be said that the brokerage was not paid. Therefore, on the facts and in the circumstances of the case, the learned CIT(A) and the learned Accountant Member did record that the claim of the assessee relating to payment of brokerage through crossed cheques and bank drafts was rejected without any verification.

14. The finding that no services were rendered by the brokers/commission agents was without any justification. As already noted, the turnover of the assessee was more than Rs. 13 crores and the same could not be arrived at without the help of brokers/commission agents. These persons were also responsible for making recoveries as per the agreements. In the light of the agreements and payments by cheques, the case of services rendered was fully established. Similar brokerage was also paid in earlier year as has been specifically noted by the learned CIT(A) in the opening part of para 2. This finding has been rightly confirmed by the learned Accountant Member in his order. The ld. counsel for the assessee, accordingly, supported the proposed order of the learned Accountant Member.

15. I have given careful thought to the rival submissions of the parties. I have also examined the material available on record to which my attention was drawn. Having done so, in my opinion, the proposed order of the learned Accountant Member is required to be upheld. As is clear from the submissions of the ld. counsel for the assessee, all the objections raised by the Assessing Officer in the assessment order have been fully met within the impugned order of the learned CIT(A) and in the proposed order of the learned Accountant Member. Therefore, after the matter was elaborately discussed by the learned Accountant Member, in my humble opinion and with utmost respect, there was no scope for the learned Judicial Member to differ and remand the matter for the purpose of further enquiry. It is clearly proved on record that the mill has been closed and BIFR recommended its winding up. The assessee did produce all the relevant material which was available with the assessee in support of its claim of commission/brokerage in dispute. It produced the details of sales on which commission was paid to majority of brokers. It is, therefore, not possible to accept that there is no evidence of services rendered by the brokers. It is further claimed that such commission and brokerage was paid as per business practice and on the basis of agreements. Copies of agreements were also made available to the Assessing Officer. The above material, in my opinion, fully discharged the burden which lay on the assessee to prove the payment of commission as similar commission was paid by the assessee in earlier year and is also paid by other mills of the assessee's size carrying on similar trade. It is difficult to hold that the expenditure of commission was not wholly laid for the purpose of business. The objection of the Assessing Officer that the agreements were not signed by the competent persons of the mill or counterfoils of cheques were not produced or to some of the brokers, commission paid was found to be paid at the rate of 1.399 per cent, was not material to disallow this claim. The Assessing Officer for verification of genuineness of payment was required to examine the bank statements of the assessee wherein the payment was debited. It is nobody's case that bank statements were not available with the assessee at the relevant time of such commission was not found debited. Without making any enquiry, the finding that the commission paid was not genuine could not be arrived at. Similarly, the finding that no services were rendered is also without any basis or justification. In the light of the elaborate discussion of facts and the relevant case law in the proposed order of the learned Accountant Member, I do not think any useful purpose would be served in repeating all what has been said in his proposed order. I deem it sufficient to say that the arguments of the ld. counsel for the assessee are well taken and should be accepted. I do not see any legal justification for the remand of the case. Therefore, on the facts of the case, I agree with the order proposed by the learned Accountant Member. The impugned order of the learned CIT(A) should be confirmed.

16. In the light of the above observations, the file should now be placed before the regular Bench for passing an appropriate order as per law.

ORDER

Per M.L. Gusia, Accountant Member.-This appeal was filed by the revenue on the following grounds of appeal:-

"(i) On the facts and in the circumstances of the case, the ld. CIT(A) erred in allowing the brokerage payment of Rs. 13,00,000 which was disallowed by the Assessing Officer on account of companies failure to prove the nexus between the commission payment and sales.

(ii) On the facts and in the circumstances of the case, the ld. CIT(A) further erred in allowing the claim of telephone expenses of Rs. 50,000 which was disallowed by the Assessing Officer for personal call."

2. Ground No. 2 was dismissed vide separate order. However, on Ground No. 1, there was a difference of opinion between the Members of Tribunal, therefore, matter was referred to the Third Member for his opinion. Hon'ble President of Income-tax Appellate Tribunal being Third Member vide his order dated 26-11-2007 agreed with the order proposed by the AM.

3. In view of the opinion of the majority of Members, the ground No. 1 in departmental appeal stands dismissed.

4. As a result, appeal of the revenue is dismissed.

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