Income Tax Appellate Tribunal - Ahmedabad
Standard Salt Works Ltd. vs Ito on 16 August, 1999
Equivalent citations: (2001)73TTJ(AHD)71
ORDER
Vimal Gandhi, V.P. This appeal by the assessee, a private limited company incorporated in the name of "Gulmohar Agro (P) Ltd." on 5-6-1974, later amalgamated with Standard Salt Works Ltd. is directed against the order of the Commissioner (Appeals) not only confirming levy of penalty of Rs. 51,190 but enhancing the same with directions to the assessing officer to levy further penalty on disallowance of Rs. 27,473.
2. The accounting period relevant to assessment year 1976-77 was the first year of assessees business which was dealing in agency, dealership, stockists, etc. of pesticides. For purposes of selling the said product the assessee had to employ sales representatives as field assistants on a nominal salary and bonus. These assistants were also claimed to be entitled to commission on sale termed as "sale incentive commission". The assessee claimed deduction of a sum of Rs. 1,02,473 towards sale incentive commission. It is claimed that the incentive commission was provided for in the year under consideration and paid in the next year. The revenue authorities and the Tribunal held the claim to be non-genuine and disallowed the same in the quantum proceedings. The learned Commissioner (Appeals) in assessment proceedings found that sum of Rs. 75,000 was paid in cash and the balance Rs. 27,475 through cheque. While confirming the disallowance of Rs. 75,000 he restored the matter to the file of the assessing officer to re-examine the case in respect of amount of Rs. 27,475.
3. The assessing officer also initiated penalty proceedings under section 271(1)(c) for the ingenuine claim in return by the assessee. Subsequently, he levied penalty in respect of amount of Rs. 75,000 the disallowance made and confirmed in appeal. The assessee impugned the above levy in appeal before the learned Commissioner (Appeals) who found that disallowance in respect of balance amount of Rs. 27,475 was reconfirmed by the assessing officer subsequently. While considering the issue of penalty in respect of Rs. 75,000, the learned Commissioner (Appeals) enhanced the quantum of penalty by directing the assessing officer to levy penalty in respect of sum of Rs. 27,475 paid through cheque.
4. The assessee is aggrieved and has come up in appeal. The particulars of incentive commission claimed by the assessee with names of persons along with salary and bonus paid to them are as under :
Name of the person Salary Rs.
Bonus Rs.
Commission Rs.(1)
Shri Gumanbai J. Patel 1.960 392 20,496 (2) Shri V.M. Naik 5,700 1,140 20,496 (3) Shri R.C. Bhatt 3,180 636 15,372 (4) Shri Bachugiri Khandugiri 5,180 1,036 10,241 (5) Shri Fedrik Moses 7,680 1,536 15,372 (6) Shri J.M. Suratia 2,110 422 20,496 1,02,473
5. The assessing officer in the course of assessment proceedings recorded the statements of above recipients. All the six persons confirmed the receipt of commission. Subsequently, the AC cross-examined four of the six persons. The assessee then moved the Inspecting Assistant Commissioner under section 144A of the Income Tax Act. The Inspecting Assistant Commissioner in his directions under section 144A after examining the statements of recipients disallowed the expenditure. The Inspecting Assistant Commissioner concluded as under :
"11. On reading the statements of the above persons, it does not look as though they are capable of fetching so much genuineness for which they have been paid such huge commission partly in cash and partly otherwise. The explanation is not tenable. Therefore, the Income Tax Officer is directed to disallow the payment as commission to the above persons which includes the cash payment mentioned above, as these persons have been paid the same in disproportionate to their salaries and capacities. Without prejudice to the above reasoning the part of the commission which was paid in cash can also be disallowed under section 40A(3) as the payments do not attract the various exceptions in r. 6DD. "
6. Subsequently, the assessing officer issued a draft order under section 144B of the Act disallowing the incentive commission. The draft order was approved under section 144B of the Income Tax Act by the Inspecting Assistant Commissioner. The disallowance was confirmed in appeals by the learned Commissioner (Appeals) and by Tribunal though in two stages, one relating to Rs. 75,000 paid in cash and other in respect of Rs. 27,445 paid through cheque.
7. In the penalty proceedings, the revenue authorities including the learned Commissioner (Appeals) mainly relied on facts found in the assessment proceedings particularly in proceedings under section 144B of Income Tax Act. As the deduction claimed was held to be ingenuine, the assessee was held to have furnished inaccurate particulars of income. Simultaneously, it was held that the assessee concealed income by claiming false deduction.
8. The assessee is aggrieved and has come up in appeal. We have heard both the parties in this appeal and with their help considered the relevant material available on record. In respect of penalty enhancement made by learned Commissioner (Appeals), Shri K.C. Patel, the learned counsel for the assessee, submitted that no enhancement notice was issued by learned Commissioner (Appeals) and, therefore, his order without a show-cause notice is bad in law and unmaintainable, we agree with above submissions. The revenue authorities could not show us any notice issued by the learned Commissioner (Appeals). In above circumstances, the directions of learned Commissioner (Appeals) to levy penalty on amount of Rs. 27,473 are held to be without jurisdiction and are hereby vacated. We would examine the issue in respect of penalty of Rs. 51,190 imposed in respect of disallowance of Rs. 75,000 claimed as incentive commission. The final finding would also be applicable to this sum of Rs. 27,473.
9. Shri K.C. Patel, the learned counsel for the assessee read out in detail various directions issued by the revenue authorities during the course of assessment proceedings. He started with order under section 144A of the Income Tax Act and pointed out that two reasons were given in the aforesaid order. He then moved to directions under section 144B and stated that about 20 grounds were given in the above order to justify the disallowance. The learned Commissioner (Appeals) and the Tribunal more or less followed the reasons given by the Inspecting Assistant Commissioner under section 144B of the Income Tax Act. However, these authorities failed to consider the statements of the recipients where in the receipt of commission was clearly admitted. The recipients also stated on oath that they were entitled to receive commission. The above statements on oath are corroborated by entries in books of accounts. The assessee might have failed in assessment proceedings but there was no justification to levy penalty under section 271(1)(c) as there was good material on record to show that claim of deduction was not bogus. Shri Patel, accordingly, emphasised that neither the concealment of income nor furnishing of inaccurate particulars of income was established in this case. Shri Patel relied on the following decisions :
(1) Hindustan Steel Ltd. v. State of Orissa (1972) 83 ITR 26 (SC);
(2) CIT v. Anwar Ali (1970) 76 ITR 696 (SC);
(3) CIT & Anr. v. Khoday Eswarsa & Sons (1972) 83 ITR 369 (SC);
(4) D.M. Manasvi v. CIT (1973) 86 ITR 557 (SC);
(5) CIT v. Lakhdhir Lalji (1972) 85 ITR 77 (Guj):
(6) CIT v. Manu Engineering Works (1980) 122 ITR 306 (Guj);
(7) CIT v. S. P. Bhatt (1974) 97 ITR 440 (Guj);
(8) Vishwakarma Industries v. CIT (1982) 135 ITR 652 (P&H) (FB);
(9) Sreelekha Banerjee & Ors. v. CIT (1963) 49 ITR 112 (SC);
(10) S. Hastimal v. CIT (1963) 49 ITR 273 (Mad);
(11) CIT v. Nipani Tobacco Stores (1984) 145 ITR 128 (Pat);
(12) J.K. Jajoo v. CIT (1990) 181 ITR 410 (MP);
(13) CIT v. Nepani Biri Co. Trust (1991) 190 ITR 402 (All);
(14) Kikani Gordhandas & Co. v. (1993) 200 ITR 678 (Guj); and (15) Silk Museum, Rajkot (ITA Nos. 411 & 412/Ahd/1990 order dated 30-4-1997).
10. Shri A.K. Singh, the learned Departmental Representative strongly supported the impugned order of learned Commissioner (Appeals). He argued that highest fact finding body, the Tribunal also held that claim of commission was not genuine. Shri Singh read out certain portions of Tribunals order to highlight the above point. Thus, when the Tribunal has held that the claim of commission was false, the revenue was not required to prove anything further for establishing default under section 271(1)(c). Shri Singh accordingly, justified levy of penalty.
11. We have given careful thought to the rival submissions of the parties. The Tribunal upheld disallowance of Rs. 75,000 mainly relying upon the finding of Inspecting Assistant Commissioner under section 144B of the Income Tax Act. The learned Commissioner (Appeals) had concurred with the view taken by Inspecting Assistant Commissioner and relied upon the facts found by him. It would, therefore, be in the fitness of things to take into account the reasoning given by the Inspecting Assistant Commissioner under section 144B for disallowing the claim of incentive commission. These reasonings along with brief criticism of the counsel of the assessee are as under :
Reasonings Criticism (1) These employees/sales representatives did not join the assessee-company in response to any advertisement in newspaper.
Not material.(2)
Original application forms for recruitment were produced by two persons. The remaining four persons only produced xerox copies of such applications. No clear indication of salary, bonus or commission from application.
These points are all irrelevant when salary and bonus paid to these persons have been duly allowed and there is no dispute about their employment.(3)
The employees/representatives had not signed the application in token of their acceptance of the terms.
Do (4) The appointment letters were on plain papers and not on letterhead of assessee-company Do (5) No record of sales procured by these representatives could be produced by these representatives. Therefore, it is impossible to accept the veracity of statement and figures given by them.
The commission was agreed to be paid at 3 percent of sale and in statement on oath the details of services rendered were given. Later reference would be made to them.(6)
No resolution was passed by Directors to pay bonus or commission to these representatives.
No resolution is necessary for incurring these expenses. At any rate, there is no dispute about the claim of bonus.(7)
None of the witnesses examined by or past experience and the incentive commission in spite of low salary and bonus was not withdrawn in the period under consideration.
No academic background was necessary. The amount was paid to them the Inspecting Assistant Commissioner had academic background as and when cash was available with the assessee.(8)
The witnesses produced before the Inspecting Assistant Commissioner could not give satisfactory account of exact mode of receipt of commission nor shown how they utilised the amount.
This is all wrong as is clear from account given in the statement.(9)
The accounts showed that these persons were paid negligible daily allowance and travelling expenses. They hardly undertook any tour. The employees also did not keep any details regarding tour undertaken by them for getting order.
Some travelling expenses are admittedly debited in the accounts. Other persons were not to be paid travelling expenses apart from the commission.(10)
The assessee had seven directors and they were actually responsible for getting orders.
It is not the job of directors to go to villages and promote sale of pesticides.(11)
The product traded by the assessee was of standard quality and assessee was entitled to receive from manufacturer fixed commission of 5 per cent on sale. Therefore, the assessee could not part with commission at the flat rate of 3 per cent to petty employees.
The sale was to be carried by the employees and as a business measure commission was offered to boost sale particularly in the first year of business.(12)
There was no specific contract to pay incentive commission. Even assuming that commission was payable the assessee did not deduct tax at source from the payment. Assessees plea that employees directly paid the advance-tax is not acceptable as the same is an after-thought, Estimate was filed only on 15-12-1976.
Conclusion of non-payment cannot be derived from non-deduction of tax at source. No nexus between the two. The advance-tax was paid by employees in the year of receipt of commission.(13)
The employees did not show the commission under the head "salaries" or "income from other sources" in their return for the assessment year 1977-78.
No adverse inference is possible from lack of knowledge on the part of employees, if any.(14)
Receipt of commission produced did not bear audit mark.
The auditor did not see the receipts at the time of audit although commission is duly provided in audited accounts.(15)
The incentive commission was paid only on Rs. 34.20 lakhs out of total sales of Rs. 39.75 lakhs no commission was paid in the next year although agreement was in force.
The commission paid on sales effected by employees due to heavy losses suffered by the company the employees gave up commission in the next year.(16)
Only small amount of commission was withdrawn after the same was credited to the accounts of the employees. The major withdrawal was made on 15-12-1976 when advance tax was paid by employees.
The amount was withdrawn as per mutual arrangement.(17)
The incentive commission claimed was not genuine and was put forward to reduce income-tax liability. "The mere receipt or acknowledgment in token of payment would not entitle the assessee to a deduction as a revenue expenditure." The assessee must establish expenditure incurred wholly and exclusively for carrying on its business. The assessee hopelessly failed to prove its claim.
Conclusion is erroneous.
The learned Inspecting Assistant Commissioner also attacked provision of incentive commission of sum of Rs. 1,02,473 made in accounting year 1975-76 and reiterated that amount was not actually paid in the above accounting year. He rejected the cash book and ledger of the assessee as ingenuine on account of the following reasons :
" . . . . . . . A glance at the entries in the cash book for the accounting year 1975-76 shows a few entries which have been erased and rewritten and some of them present a very curious and interesting, if not mysterious, picture. A few examples may be cited :
(i) On pp 4 of the cash book (3-7-1975), a sum of Rs. 9,500 allegedly received from Shri Amratlal L. Desai, one of the directors, was first entered as receipt by cash and then, changed under the head "bank". According to the narration, the amount was received by cash and deposited into the bank. The source from which Shri Amratlal brought the said money was not mentioned. It is seen from his account in the books that the amount was brought by cash. The totals at the end of the page are made after erasers and in different ink and different handwriting,
(ii) On pp 19 (18-7-1975), a receipt, by cash, of Rs. 25,000 was shown at the end of other entries in different handwriting with a narration :
"Credit to the account of Shri Amratlal L. Desai on account of deposit brought by him."
The details about the person from whom Shri Amratlal brought the deposit have not been mentioned.
(iii) On pp 22 of the cash book (21-7-1975), an entry-for payment of Rs. 15,000 was made at the end of other entries in different ink and different handwriting showing that the amount was paid by cash to Shri Gumanbhai J. Patel against account. As already brought out, the voucher was not shown to the auditors during the course of audit.
(iv) On pp 24 (22-7-1975), an entry was made at the end of the day in different ink and different handwriting showing that cash of Rs. 25,000 was brought by Shri Prafulbhai L. Nayak, director as a deposit. Details in regard to the person from whom the deposit was brought have not been mentioned.
(vi) On pp 42 (1-8-1975), an entry was made at the end of the day in different ink and different handwriting stating that a sum of Rs. 15,000 was paid by cash to Shri Virendrabhai M. Nayak against account. The voucher for payment has not been seen by the auditor.
(vii) On pp 46 (5-8-1975), an entry was made at the end of the day in different ink and different handwriting stating that a sum of Rs. 10,000 was paid by cash to Shri Ramanbhai C. Bhatt against account. Here again, the voucher was never seen by the auditors.
(viii) On pp 51 (9-8-1975), a sum of Rs. 25,000 was shown as a deposit. The details about the source from which the deposit was made were not recorded.
(ix) On pp 56 (12-9-1975), an entry was made at the end of the day in different ink and different handwriting stating that a sum of Rs. 10,000 was paid by cash to Shri Fredrick C. Moses. The voucher for payment was not seen by the auditors.
(x) On pp 62 (14-8-1975), an entry was made at the end of the day in different ink and different handwriting showing payment of Rs. 10,000 by cash to Shri Bachugiri Khandugiri. This voucher also does not bear the auditors marking.
It may also be mentioned, even at the cost of repetition, that cash balances were not struck from day-to-day and the totals on certain pages even at the time of writing these directions were either found to have been made on several pages in ink or pencil or rewritten in ink different from the ink normally used by the regular accountant. It is also interesting to point out that transactions in regard to any cash receipt from or through the director ceased after the impugned payments of incentive bonus were eliminated from the accounts. "
The learned Departmental Representative laid great stress on order of the Tribunal in quantum appeal and, therefore, in order to complete the record, we may extract certain observations of the Tribunal. At p. 3 of its order the Tribunal observed as under :
" . . . . . . . . . . . The order of the Inspecting Assistant Commissioner under section 144B is a very detailed order in which the statements of the persons produced have been duly considered and their statements have been disbelieved. The Commissioner (Appeals) has adopted the reasons given by the Inspecting Assistant Commissioner and has given additional reasons which, according to him, were of clinching nature. Consequently, it cannot be said that the order of the Commissioner (Appeals) was vitiated. "
11.1. After referring to the observations of the Inspecting Assistant Commissioner and Commissioner (Appeals), the Tribunal held as follows :
" . . . . . . . . . . After taking into account the entire circumstances we agree with the conclusion reached by the Inspecting Assistant Commissioner as well as by the Commissioner (Appeals) to the effect that incentive commission was not really payable and had not really been paid to the employees and that the provisions in the relevant accounting year and made in order to reduce the tax liability. Consequently, the disallowance was justified. "
It is clear from the above observation that order of the Tribunal is based on the conclusion reached by the Inspecting Assistant Commissioner and Commissioner (Appeals). We have already pointed out that order of learned Commissioner (Appeals) is based on directions of Inspecting Assistant Commissioner under section 144B. The material portions of above orders have already been referred to earlier.
11.2. Having considered the case made out against the assessee it would be only appropriate to refer to the case pleaded by the assessee. The assessee has mainly relied upon the statements of the recipients recorded by the assessing officer in proceedings under section 144A of the Act. The first statements were recorded on 7-9-1978. The relevant portion of these statements is as under :
1. Shri Virendra MaganIal Nayak In his statement he gave his age and address and in response to question about the source of income stated as under :
"I am working in M/s Janak Distributors, I get Rs. 500 as salary and I am a partner in M/s. Gulmohar Co., Surat."
The witness was then asked about the other partners. The witness gave names of other partners. He was further asked :
"Q. How did you joint Gulmohar Agro (P) Ltd. ?
A. I was working in M/s Janak Distributors and my work was to contact various licence holders such as societies, dealers and to collect orders and to collect outstanding amounts.
.........................................................................
Q. Do you pay income-tax ?
A. I pay income-tax. It was on Rs. 26,296.
Q. How much commission you received on how much sale ?
A. I get Rs. 20,596 as commission, it was at 3 per cent.
Q. When did they stop giving commission to you ?
A. It was before eight to twelve months when the company left me.
.........................................................................
Q. Do you have a bank account ?
A. I have a bank account in bank of Baroda, Omkar Chambers, Surat.
.........................................................................
Q. You say that you got commission of Rs. 20,596, do you have any account for that ?
A. A bunglow is in my name. I have invested Rs. 12,500 which I got through cheque some times and I got in cash sometimes.
.........................................................................
Q. Will you give the names of the societies from which you get the orders ?
A. (1) Sodgar Group Co-op. Multi-purpose Society Ltd.
(2) Sarvodaya Seva Sahakari Mandali Sodgnon.
(3) Sarvodaya Luna Pansoli Luna.
(4) Koravividh Karyakari, Kara. Tal. Valia.
(5) Aosvad Group Co-op. via Ankleshwar.
(6) Kalyan Group Co. op. Multi-purpose Society Ltd. via. Ankleshwar.
(7) The Amli Group Co-op. Multi-purpose via. Ankleshwar, Tal. Sagwada.
(8) Dediapada Co-op. Via, Ankleshwar.
(9) Chigda Group Co-op. Ta. Dediapada.
(10) Dedvan Group Co-op. Multi-purpose.
(11) Ambavadi Group Co-op. Multi-purpose Ta. Dediapada.
(12) Ram Traders, Valia.
(13) Olpad Groups Co-op. Cotton Society Tal Olpad.
(14) Sanad Group Co-op. Society.
(15) Shoshath Group Co-op. Society. Tal Olpad.
Q. Which medicines did you get the orders for ?
A. Dimacron 100, Nuacrom 40 Numan 100, D.D.T. 50.
Q. You were made to work so what were your duty regarding the service ?
A. To make farmers understand who grew cotton Sankar 4 about insects and crop disease and which medicines should be sprayed on which type of insects and to make these medicines used was my work."
(2) Shri Jashvantsinh Motisinh Soratia This witness also gave details of business carried on by him. He further stated that he was to get commission at 3 per cent besides the salary and that he earned commission of 20 per cent which was paid to him through cheque and in cash in April/May, 1975. He also explained as to where he utilised this money by buying agricultural land, and by buying seeds and fertilizer to carry on agricultural operations. At pp 3 of the statement he was asked a pertinent question. The question and answer are as follows :
Q. Who spent money when you went out ?
A. M/s Gulmohar Agro (P). Ltd.
The other questions were also promptly replied by him.
(3) Shri Bachugiri Khandugiri Goswami He gave his source of income as business of insecticide carried on since June, 1978 under name of Sharad Co., Katargaon, Surat. He stated that he was to get salary at the rate of Rs. 425 besides commission. He further admitted that he received commission through cheque and in cash. He stated that he was paying income-tax. The pertinent question on orders booked by him and his reply are as under.
"Q. Is there any note of your sale and the orders you got ?
A. No. I informed the orders from farmers. Mainly they were Co-op. Societies such as : (1) Puna Seva Sahakari.
(2) Navsari Bagayat Co-op. Society.
(3) Ganat Vividh Karyakari Sahakari Mandli, Tal. Gandevi, (4) Pioneer Agro Co. Valsad.
Q. Do you have any proof of getting orders ?
A. No. "
(4) Shri Govanbhai Jayrambhai Patel This witness gave his address and further stated that he was working as a Field Supervisor in M/s. Gulmohar Agro (P) Ltd. He was to get salary of Rs. 200 per month besides commission and daily allowance of Rs. 3 plus bus fare. He earned commission of approximately Rs. 20,000 on sale at the rate of 3 per cent. Some commission was received in cash and some through cheque. He stated that he had 18 acres of land. He also explained where the receipt of commission was spent. In reply to another question, whether he paid income-tax, he stated that he paid tax with Income Tax Officer, Surat. In respect of efforts made by the witness, his statement is to the following effect :
"Q. What sort of efforts you put to get the Commission ?
A. Received orders from the societies.
(1) Chhaparabtatah Group Tal. Olpad.
(2) Talad Cotton Tal. Olpad.
(3) Pal Group Cotton Society, Tal. Olpad.
(4) Asnad Cotton Sales Society Tal. Olpad.
(5) Sansad Group Co-op. Tal. Olpad.
(6) Asnad Cotton Sales Society Olpad.
(7) Sarvodaya Society Sodgaon Tal, Valia.
(8) Soadgam Multi-purpose Society Tal. Valia.
(9) Luna Pansoli Seva Sahakari Mandal. Tal. Valia, (10) Kada Sahakari Mandali Tal. Valia.
Q. Did you spend all the money in agriculture ?
A. Spent in agriculture as well as cleared the previous debts."
5. Shri Ramanlal Chhotalal His statement is also similar to the statement given by other witnesses. He confirmed having received Rs. 15,000 as commission from the assessee-company through cheque and in cash. He also explained the utilisation of commission. In respect of sale effect by him he made the following statement.
"Q. Where have you been for sale ?
A. (1) Sodgaon Co-op. Multi-purpose Society Tal. Valia Dist. Broach.
(2) Kabra Co-op. Multi-purpose Society.
(3) Samled Co-op. Multi-purpose Society.
(4) Patel Traders, Broach.
Received the orders from the above sources and did the sale.
Q. How did you get the orders ? and did you write to the company ?
A. Whenever anybody gave orders we used to take it, and informed the company.
Q. When you went out for sale who spent the money ?
A. Company gave it, we used to go by ST and used to come back by ST.
Q. How did you give the bills ?
A. Used to give the ST tickets to the company.
Q. How much is in saving out of Rs. 15,000 ?
A. Nothing is in saving."
(6) Shri Fredrik G. Moses He stated that his source of income was service. He did not pay income-tax. He stated that he received commission besides salary of Rs. 600 per month. He did not maintain any bank account but explained how he got the cheque of commission discounted. In respect of services done by him his statement is as under :
"Q. Would you tell ? Which Societies you get the orders from ?
A. Purshottam Farms, Olpad Group, Samrod, Dist. Broach Sodgaon Multipurpose Society Samrod, Vividh Karyakari Sahakari Mandali, etc. Q. What is the proof of the order you send ?
A. Order was sent through order book and were informing orders orally in the office also.
Q. How much commission you got ?
A. I got commission of Rs. 15,000 approximately.
Q. How much have you studied ?
A. Passed S. S. C."
These witnesses were again summoned and examined on 5-1-1980. They reconfirmed the receipt of commission from the assessee-company.
11.3. The Inspecting Assistant Commissioner again examined four of the above said witnesses on 5-9-1981 in proceedings under section 144B. The four persons examined were as under :
(1) Shri Fredrik G. Moses.
(2) Shri Jaswantsing Motising Suratia.
(3) Shri Virendra Maganlal Nalk.
(4) Shri Bachugiri Kandugiri Goswami.
The above persons again confirmed that they had received commission from the assessee-company besides salary and bonus. The questions asked suggest that commission was paid on the basis of some written arguments. For example Shri Jaswantsinh Motisinh Suratia answered the following question :
"Q.30. I hereby show to you xerox copy of the letter of appointment dated 20-7-1974, which purports to have been acknowledged by you. Can you identify you signature as correct ?
A Yes.
Q 31. Did you understand the implications of the terms of employment ? If so, did you not realise that all the terms in regard to payments were totally vague ?
A. All I can say is that I read the terms and signed the agreement in good faith as the company had agreed to pay me adequate salary and commission.
The other witnesses also gave similar reply.
12. On the above evidence, we are to determine whether the assessee committed a default liable to be penalised under section 271(1)(c) of the Income Tax Act.
12.1. In the case of Shri Ashwin K. Parikh v. Assistant Commissioner ITA No. 49/Ahd/1994 decided vide order dated 22-7-1999 relating to levy of penalty under section 271(1)(c) of the Income Tax Act, where one of us (Vice President) was a party, the SMC Bench of the Tribunal has observed as under :
"7.1 The learned representatives of the parties addressed considerable arguments on the question of onus which either of them claimed was on the opposite party and was not discharged. In fact, in all penalty proceedings considerable time is taken by the parties in canvassing that the revenue has failed to establish conscious and deliberate concealment on the part of the assessee and that it has failed to prove that addition made was in fact income of the assessee. The decisions of the Honble Supreme Court in Hindustan Steel Ltd. v. State of Orissa (1972) 83 ITR 26 (SC) and in the case of CIT v. Anwar Ali (1970) 76 ITR 696 (SC) are still pressed into service. There is hardly any need to trace the history of penalty provisions under section 271(1)(c) suffice it to say that word "deliberately" was deleted and an Explanation which is known as 80-20 Explanation was added. If the returned income was less than 80 per cent of the assessed income, onus was shifted on the assessee to prove that it is not a case of fraud or gross or wilful neglect on his part. These amendments were made with effect from 1-4-1964. The later amendment made with effect from 1-4-1976 took into account the conduct of the assessee to see whether any explanation was offered by the assessee, whether the same was substantiated or such explanation was found to be false. In recent time again, further amendments have been made in the provisions. The decisions in the cases of Hindustan Steel Ltd. (supra) and Anwar Ali (supra) are no more applicable to cases of penalties under section 271(1)(c) in view of the statutory changes, fully discussed by the Supreme Court in the case of CIT v. Mussadilal Ram Bharose (1987) 165 ITR 14 (SC). Now the question is whether in a given case burden of proof has been discharged or not would depend upon the facts and circumstances of the case. No uniform rule can be laid down which would apply to all cases.
7.2. It is well accepted that penalty proceedings are distinct and separate from the assessment proceedings. The assessee and the revenue can lead evidence which they did not file in the assessment proceedings. The mere fact that addition has been made does not mean that the assessee is to be penalised under section 271(1)(c). At the same time, it is not necessary that revenue should lead some additional evidence over and above what is available in the assessment proceedings to establish the charge under section 271(1)(c) of the Act. The evidence in the assessment order and the assessment order itself may contain sufficient material to establish the charge of concealment or furnishing of inaccurate particulars of income under section 271(1)(c) of the Income Tax Act. It again depends upon the facts and circumstances of the case. As penalty proceedings are separate proceedings, the revenue authorities and higher courts are required to re-appraise evidence available on record to determine whether concealment or deemed concealment or furnishing of inaccurate particulars of income has been proved in a given case. With the above legal coating, I proceed to examine the facts and circumstances of the case."
12.2. The basic principles stated above are applicable to the case in hand also and we proceed to appraise evidence on record. There is no doubt that deduction of Rs. 75,000 towards sale incentive commission has not been allowed. In fact, the genuineness of the transaction has been doubted right upto the Tribunal in quantum assessment but as noted earlier, we are required to reappraise the evidence to determine whether the case that the assessee concealed income or furnished inaccurate particulars of income has been established or not. We have noted above the reasoning for disallowing the commission claimed. Having considered the reasoning of Inspecting Assistant Commissioner under section 144B reproduced at pp. 6-7 of this order, we find that reasons (1) to (4) are irrelevant when position of recipients as employees has been accepted and salary and bonus claimed duly allowed. Likewise, as far as reasons Nos. (6) and (7) relating to resolution of directors and academic background of the employees, these are not material for determining the issue. No adverse inference can be drawn against the assessee from the fact that the company had seven directors and receipts of commission did not bear audit marks when the audited accounts duly recorded provision of incentive bonus in the assessment year under appeal.
12.3. We have also considered very carefully the observation of Inspecting Assistant Commissioner relating to entries in the books of accounts. About the books of accounts, the overwriting and writing in different ink has been emphasised. This fact may lead to the conclusion that books are not written in the regular course and should be rejected. But we do not know how on account of overwriting an inference can be drawn that Shri Amratlal L. Desai did not deposit any cash when amount was credited in his account on 18-7-1995. Same is the position of deposit made by Shri Prafulbhai Nayak. It is not clear as to how without asking, the assessee was to explain "details about the person from whom Shri Amratlal brought the amount have not been mentioned". Similar observations are there is respect of amount brought by Shri Prafulbhai Nayak, We are not aware of any rule under which the narration of source of each credit is to be given in books of accounts. The assessing officer should have questioned the depositors before drawing an adverse conclusion. This was not done and, therefore, from overwriting or writing in different ink it was concluded that entries relating to the payment of commission are not genuine. We, however, found force in criticism advanced on behalf of the assessee and noted above.
12.4. The assessee, on the other hand, has placed voluminous evidence to show that commission was paid to these employees for rendering services to the assessee and the commission was worked out on the sale effected by the above named persons. In the first place, it is clear that these persons were either agriculturists or closely connected with agricultural operations. They had good knowledge of pesticides and had worked in this line of business. It is further clear from their cross-examination that some photostat copies of agreement between the assessee and these persons were available on record and commission was paid to them under such agreements. These persons duly confirmed that commission was paid to them under agreements in writing although the manner in which the questions have been put leaves the matter less than clear on this aspect. These persons further furnished details of commission received by them and the manner in which commission was utilised. A part of commission (Rs. 25,475) was paid through cheque. In their cross-examination, these persons furnished details of services rendered by them. They also furnished details of persons, co-operative societies contacted by them for sale of pesticides. They were subjected to lengthy cross-examination which they stood very well. There is no good ground why statements of these persons on oath should be rejected in the penalty proceedings. The learned counsel for the assessee has rightly pointed out that the learned Commissioner (Appeals) was not justified in deciding the issue without considering the statements of the recipients in this case. In our considered opinion, the statements on oath of employees was a material evidence which was not given full weight during the course of assessment proceedings. As stated earlier, we do not find sufficient ground to reject the statements when other documentary evidence duly support and corroborate the statements.
12.5. The fact that commission was credited and not paid cannot lead to the conclusion that liability to pay commission was not there, particularly when the revenue has accepted that part of it was actually withdrawn by the employees. The major portion was utilised in payment of taxes which the employees paid on receipt basis in the next year as per evidence placed on record. The commission received has also been taxed in the hands of the employees. The payment of income-tax for and on behalf of the employees cannot be doubted and at least to the above extent. Direct evidence of receipt has to be accepted. The question whether in the return the amount was shown under the wrong head or that it was shown in wrong assessment year could not make any difference to the question of genuineness of claim made by the assessee. Having regard to the standing of the employees, it is difficult to accept that these employees would have agreed to work without receipt of commission as claimed. No workers even in those times was expected to work on such low salary as shown against names of these employees. There has to be additional salary either in the shape of commission or in some other form. Therefore, the claim of commission on facts of the case, appears to be quite natural.
12.6. In the light of the above circumstances, particularly the documentary evidence in the shape of agreement between the parties, confirmation of receipt of payment, statement on oath of the persons giving full details of receipt of commission as also of services rendered by them, documentary evidence in the shape of income-tax returns submitted by the employees and the tax paid by them, admitted position that some withdrawals out of credited commission was made by the employees etc., we cannot hold that claim of commission was fictitious and the assessee made a fraudulent deduction. All the material at least raise a doubt on the finding recorded in the quantum proceedings and benefit of doubt has to be given to the assessee. Having regard to the overall picture, the present case cannot be taken as a fit case for levy of penalty under section 271(1)(c) of the Income Tax Act. Therefore, we cancel the penalty levied and allow this appeal.
13. In the result, the assessees appeal is allowed.