Gujarat High Court
G.G. Joshi vs Commissioner Of Income-Tax on 16 September, 1993
Equivalent citations: [1994]209ITR324(GUJ)
Author: M.B. Shah
Bench: J.M. Panchal, M.B. Shah
JUDGMENT M.B. Shah, J.
1. The Income-tax Appellate Tribunal has referred the following questions of law to this court at the instance of the assessee and at the instance of the Department under section 256(1) of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), for our opinion :
"At the instance of the assessee :
(1) Whether the Tribunal was justified in law in rejecting the claim of the assessee that the entire commission of Rs. 1,64,342 was not exempt under section 10(14) and/or 16(v) of the Act in the hands of the assessee?
(2) Whether the Tribunal was justified in upholding partial disallowance to the extent of one per cent. on Rs. 1,64,342 and whether the said finding is reasonable ?
At the instance of the Revenue :
(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that even in the absence of any positive evidence the assessee should be allowed a deduction to the extent of 1 1/2 per cent. of sales through him as secret commission under sub-section (14) of section 10 or sub-section (v) of section 16 of the Income-tax Act, 1961 ?
(2) Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the assessee should be allowed deduction of 1 1/2 per cent. of the sales through him as probable expenses incurred for paying secret commission to employees of textiles mills who purchased the goods of Indokem Private Limited, is sustainable in law?
2. Before the Tribunal, the appeals were filed by the assessee and the Income-tax Officer against the order of the Appellate Assistant Commissioner of the assessment year 1966-67. The assessee is the branch manager of the Ahmedabad branch of Indokem Private Limited, a company dealing in colours, chemicals, etc., used mainly in textile mills. Since December 7, 1965, the company decided to pay special allowance of 2 1/2 per cent. on the goods sold through him to meet the expenses necessary for the sale of the goods of the company. To meet the sales target of the company, he was required to pay secret commission to the employees/officers of the textile mills who purchased the goods of the company. After hearing the assessee, the Income-tax Officer held that the secret commission of 2 1/2 per cent. (Rs. 1,64,342) received by the assessee was taxable in the hands of the assessee and he rejected the assessee's claim under section 10(14) as well as section 16(v) of the Act. As against that, the assessee preferred an appeal before the Appellant Assistant Commissioner. The Appellate Assistant Commissioner allowed the appeal partly by relying upon the decision of the Tribunal and held that, looking to the various aspects of the case, the assessee was entitled to have deduction of one per cent. of the expenses incurred by him for paying secret commission to the employees of the various textile mills. The assessee filed an appeal against the said order and contended that his claim with regard to the amount of commission in full ought to have been granted by the Appellate Assistant Commissioner. The Department filed an appeal against the deduction of one per cent commission of the sales through the assessee.
3. After hearing both the parties, the Tribunal partly allowed the appeal filed by the assessee by holding that the expenses should be allowed at 1 1/2 per cent. of the sales made through the assessee. The Tribunal also partly allowed the appeal filed by the Department by holding that the period from April 1, 1965, to March 31, 1966, which is the basis, should be taken into consideration for calculation of the commission. For this purpose, the Tribunal relying upon its earlier decisions rendered in I. T. A. No. 796 (Ahd) of 1970-71 and I. T. A. Nos. 1485 and 1466 (Ahd) of 1970-71 held that payments of such commission, howsoever undesirable or against public policy and good morality, had to be faced as a fact of life and these were necessary expenses for the smooth running of sales canvassed by the assessee. The Tribunal rejected the contention of the Department that the expenses made by the assessee should be disallowed, as the assessee refused to give the names of the persons who had received the secret commission during the relevant years or failed to produce any receipt for the said amount. Therefore, the Tribunal held that it would be reasonable to allow the expenses at the rate of 1 1/2 per cent. of sales made through the assessee.
4. In our view, the aforesaid questions are based on a finding of fact arrived at by the Tribunal. For this purpose, it would be worthwhile to refer to the decision of this court in the case of Addl. CIT v. Moolchand Jaikishandas and Co. [1977] 108 ITR 500. Dealing with a similar question of payment of secret commission, this court declined to interfere with the finding given by the Tribunal on the ground that it satisfied the test of commercial expediency. The relevant observation is as under (at page 510) :
e Tribunal has further held that in this particular trade of dye-stuffs and colour chemicals which are being sold to the textile mills it is the usual practice to pay secret commission to dyeing masters, printing masters, etc., in order to secure orders and in order to see that the supplier concerned increases his sales. The Tribunal has also held that the three employees of the assessee-firm were visiting the various mills with whom the assessee had dealings and were securing business from those different mills for the assessee-firm."
5. court further held (at page 511) :
"So did the quantum of sales effected by the assessee-firm. Further, the finding of the Tribunal is that in this particular trade in order to maintain the level of business and in order to secure large business, such secret commissions have to be paid. The real case of the assessee is that the assessee has paid these amounts of commission to its employees but the employees in their turn had to part with some amount of the commission coming to them in order to secure business or in order to continue the business with these different textile mills and, if one may say so, that is the fact of life with which this particular trade is faced. In view of these conclusions of the Tribunal in the light of the test of commercial expediency we can say that all the amounts of commission paid by the assessee-firm to its employees were reasonable because these amounts of commission were, as found by the Tribunal, paid by the assessee-firm to its employees in the interest of the assessee's business and the payment of commission under the circumstances was necessary in the interest of the assessee's business. In our opinion, this satisfies the test of commercial expediency laid down by this High Court and once that test is applied in the light of the findings of the Tribunal which we have summarized above, it must be held that the case of the assessee-firm falls fairly and squarely within section 36(1)(ii) of the Income-tax Act, 1961."
6. Further, a similar view is taken by the Bombay High Court in the case of CIT v. Goodlass Nerolac Paints Ltd. [1991] 188 ITR 1. The Bombay High Court, relying upon its earlier decision rendered in the case of Goodlass Nerolac Paints Ltd. v. CIT [1982] 137 ITR 58, held that it cannot, perhaps, be disputed that, in order to be entitled to deduction of payments to persons whose names are not disclosed, the assessee has to -
(i) establish the practice prevailing in that line of business for making such payments;
(ii) adduce satisfactory evidence to establish the payments;
(iii) satisfy the authorities that the payments were made for the purpose of business.
7. It is further held that this would be a finding of fact and the court would normally decline to interfere with the view taken by the Tribunal. It is also held therein that the High Court would not interfere with the finding of fact unless such finding is perverse or is such that no reasonable person can give such finding.
8. As stated above, in the present case, the Tribunal has relied upon its previous decisions with regard to the same company for holding that it was a practice prevailing in the trade of dye-stuffs and colour chemicals which are being sold to the textile mills to pay secret commission. This aspect is also considered by this court in the case of Moolchand Jaikishandas and Co. [1977] 108 ITR 500. Considering the aforesaid facts and the established trade practice, it cannot be said that the finding given by the Tribunal of upholding partial disallowance can be interfered with by this court. In this view of the matter, as all these questions referred to this court are based upon a finding of fact, they are required to be answered accordingly.
9. In the result, questions Nos. 1 and 2, referred at the instance of the assessee, are answered in the affirmative, in favour of the assessee and against the Revenue. Similarly, questions Nos. 1 and 2, referred at the instance of Revenue, are also answered in the affirmative. Accordingly, we answer all the four questions in the affirmative. The reference stands disposed of accordingly with no order as to costs.