Income Tax Appellate Tribunal - Ahmedabad
Patel Brothers vs Deputy Commissioner Of Income Tax on 7 February, 2002
ORDER
The Bench
1. This appeal has been filed by the assessee against the order of the CIT(A) dt. 19th Oct., 2000 for asst. yr. 1997-98.
2. The only ground raised by the assessee is against the sustaining of the disallowance of 'secret commission' to the extent of Rs. 17,03,055 out of Rs. 19,85,255 claimed during the year. The learned CIT(A) has allowed deduction of secret commission amounting to Rs. 2,82,200 @ 1 per cent of the total sales of the assessee. The learned representatives of the parties informed the Bench that the Department has not filed any cross-appeal against the deletion of the addition on account of secret commission to the extent of Rs. 2,82,200 out of disallowance of Rs. 19,85,255.
3. Shri M.C. Patel, the learned counsel for the assessee, submitted during the course of hearing paper book comprising 36 pages which included Inter alia, written submissions made before the Revenue authorities regarding the payment of secret commission by the assessee. Shri Patel also furnished during the hearing a separate compilation of various judicial pronouncements relied upon by him.
4. At the outset brief facts having bearing on the point in Issue may be set out. The assessee-firm is engaged in the business of trading in electrical goods as well as carrying out job work like electrical installations, fixing of switchboards, etc. During the course of assessment proceedings the AO noted that a sum of Rs- 19,85,255 has been debited to-the P&L a/c, on account of secret commission. When called upon to justify the claim of deduction by the AO, the assessee explained that secret commission has to be paid to procure more business. According to the assessee there was a trade practice in its line of business, namely, dealing in electrical goods and job-work of electrical installation, etc. to make commission payments to employees of customer concerns. The assessee stated that its major customers are business houses like M/s Reliance Filaments Ltd., Bharat Vijay Mills, Anti Friction Bearings, Chemstar Organics, PBM Poly Tex. etc. and commission has been paid to procure more business in the face of tough competition. The assessee furnished the following chart regarding payment of secret commission in the earlier years vide its letter dt. 14th March, 2000, filed during the assessment proceedings. Yearwise position as reflected in the chart, as per p 9 of the paper book is reproduced hereunder:
Asst.
yr.
Order under s.
Sales Commission paid Commission disallowed Rate per cent Rs.
Rs.
Rs 1989-90 143(3) 46,85,781 1,26,950 12,000 2.77 1990-91 143(3) 65,37,356 2,00,250 20,000 3.06 1991-92 143(3) 80.61.312 2,45,068 24.000 3.04 1992-93 143(l)(a) 65.09,021 3,28,472
5.05 1993-94 143(3) 85,86,751 3.81.646 38,164 4.44 1994-95 143(l)(a) 1,71,27,927 7,82,204
-
4.57 1995-96 143(l)(a) 1,63,28,753 8,36,484 5.12 1996-97 143(l)(a) 2,36,32,398"
9,93,443 4.20 1997-98 143(2) 2.82,20,220 19.85,255 Assessment 7.03 under progress The assesses further stated that in spite of recessionary condition in the trade, the turnover has increased from Rs. 2.36 crores in asst. yr. 1996-97 to Rs. 2.82 crores in asst. yr. 1997-98 and further gross profit rate has also increased from 14.58 per cent in asst. yr. 1996-97 to 16.53 per cent in asst. yr. 1997-98. According to the assessee this increase could be achieved only by payment of higher commission on sales. In support of the payment of secret commission the assessee, however, stated that the names, addresses and signatures of the persons to whom payments have been made were not available and no receipts were obtained from the persons to whom payments were made. The assessee produced only cash vouchers signed by the partner(s) which do not bear the names, addresses and signatures of the recipients.
These cash vouchers prepared by the partner contain no particulars as to the specific orders procured or sales effected in respect of which secret commission has been paid. The AO accordingly held that the basic parameter, for claiming deduction under Section 37 are not fulfilled inasmuch as the assessee has failed to establish that any payments were made during the course of business or that there was any trade practice in the line of the business carried on by the assessee. The AO accordingly disallowed the entire commission of Rs. 19,85,255.
5. Aggrieved, the assessee carried the matter before the CIT(A). Before the CIT(A), the assessee cited the following decisions in support of the claim of secret commission :
1. Godlas Nerolac Paints Ltd. v. CIT (1982) 137 ITR 58 (Bom);
2. CIT v. Goodlas Newlac Paints Ltd. (1991) 188 ITR 1 (Bom);
3. CIT v. Sigma Paints Ltd. (1991) 188 ITR 6 (Bom);
4. Dr. G.G. Joshi v. CIT (1994) 209 ITR 324 (Guj);
5. CIT v. A.S.K. Rathinasamy Nadar (1995) 212 ITR 527 (Mad);
6. Addl. CIT v. Moolchand Jaikishandas & Co. (1977) 108 ITR 500 (Guj);
7. CIT v. Tejaji Farasram Khaiawala Ltd. (1965) 55 ITR 46 (Guj);
8. ITO v. Wanson (India) (P) Ltd.;
9. ITO v. French Dyes & Chemicals (P) Ltd. (1985) 21 TTJ (Bom) 412; and
10. Mohan Singh v. ITO (1985) 22 TTJ (Chd) 613.
The learned CIT(A), after elaborate discussion of the aforesaid judicial authorities cited before him, culled out the following parameters as spelt out by the aforesaid judicial authorities for allowing the claim of secret commission vide para 6.2 of the appellate order:
1. There was an accepted trade practice of making payment of secret commission in the particular trade of the assessee, which would show that the payments wore for business purposes :
2. Though the names and addresses of the payees were either not kept at all or not disclosed to the Department, some other satisfactory evidence of payments was necessary, e.g. the manner of disbursements was specific and regulated, the record containing full particulars of mills whose employees were paid the said secret commission and record of orders procured, etc. were maintained;
3. The amount of secret commission is very small/minimal both in absolute term and in terms of percentage of the sales/turnover;
4. The payments in the nature of secret commission were relatable to the orders procured or sales effected or were relatable to the company or mill to whom sales were effected.
6. While considering the facts of the assessee's case, in the backdrop of the aforesaid parameters, the CIT{A) observed that the amount of secret commission claimed to have been paid by the assessee being Rs. 19,85,255 on sales of Rs. 2,82,20,220 works out to 7.03 per cent of the sales which is the higher percentage of secret commission claimed by the assessee. According to the CIT(A) if the gross profit rate is worked out after deducting the secret commission paid the G.P. would come down to 10.6 per cent as against 13.26 per cent shown in the preceding assessment year. The learned CIT(A) further observed that the assessee has failed to bring out any other cases doing similar business i.e. dealing in electrical goods and doing electrical installation job work, where such payments of secret, commission have been claimed and allowed. The C1T(A) accordrngly held that the assessee has failed to establish that there was any trade practice for payment of secret commission in his line of business. Regarding the cash vouchers produced by the assessee, the CIT(A) observed that payments could not be linked with procurement of specific orders from the customers and the specific percentage of secret commission paid could not be worked out. Vide para 8 of the appellate order the learned CIT(A), while summarising his finding and reasons in support thereof concluded :
"Keeping in view the totality of all the above facts and the ratios of various above referred judgments, while it is difficult to say that no secret commission whatsoever is paid by the appellant, yet the claim of such high expenditure of about Rs. 20 lakhs which has resulted in reducing the gross profit from about Rs. 49 lakhs to about Rs. 29 lakhs is not justified. Moreover, the claim of such a high expenditure of the order of Rs. 20 lakhs which cannot be brought to tax in hands of the recipients, in the absence of their names and addresses, is against the spirit of policy of taxation and is not in public interest. The claim also does not fall into the parameters which have been spelt out in various case laws. Specifically in the case of CYT v. Goodlas Nerolac Paints Ltd. (1991) 188 ITR 1 (Bom) and ITO v. Wanson (India) (P) Ltd., due notice has been taken of the fact that the quantum of secret commission was very meagre. Moreover, in the case of the appellant since it is not possible to relate individual payments of secret commission to specific orders procured/executed, it cannot be said that secret commission has been paid in respect of each and every sale and as such the claim of secret commission at 7 per cent of the total sales is highly excessive and not at all justified. Further, it does not appear that a prudent businessman would allow 7 per cent out of his gross profit of 16.53 per cent to go out of its coffers for expenses, which cannot even be supported with the help of proper evidence. On the facts and circumstances of the case of the appellant, I would consider it most reasonable and fair to allow deduction for the claim of such commission paid for procuring orders at 1 per cent of the total sales, which works out to Rs. 2,82,200. Addition to the extent of Rs. 17,03,055 is, therefore, confirmed and the balance is deleted. This disposes of all the grounds of appeal of the appellant."
7. The assessee is aggrieved and has come up in appeal before us. Shri M.G. Patel, the learned counsel for the assessee strongly urged that secret commission of Rs. 19,85,255 paid by the assessee during the year is solely dictated by consideration of commercial expediency and is, therefore, allowable under Section 37 of the IT Act. The learned counsel contended that the trade practice for payment of secret commission in the line of business carried out by the assessee stands established by the secret commission paid and allowed by the AO in the past years. The learned counsel argued that since the practice of secret commission has been accepted in past, there is absolutely no justification for the AO to make a departure and take a contrary view against admissibility of such secret commission for the assessment year under appeal. The learned counsel argued that the principle of res judicata would apply in view of the following decisions :
1. Radhasoami Satsang v. CIT (1992) 193 ITR 321 (SO;
2. CIT v. Bhilai Engineering Corporation (P) Ltd. (1982) 133 ITR 687 (MP);
3. CWT v. N.R. Sirkar (1989) 178 ITR 311 (Gau);
4. Burmah Shell Refinery Ltd. v. ITO (1966) 61 ITR 493 (Bom);
5. CIT v. P. Kiishna Warner (1994) 208 ITR 823 (Ker);
6. CIT v. Shri Agastyar Trust (1984) 149 ITR 609 (Mad);
7. HA. Shah & Co. v. CIT (1956) 30 ITR 618 (Bom); and
8. Stock Exchange Ahmedabad v. Asstt. CIT (2000) 68 TTJ (Ahd) 596 : (2000) 74 ITD 1 (Ahd).
8. The learned counsel further submitted that the increase in the rate of secret commission from 4.2 per cent in the immediately preceding asst. yr. to 7.03 per cent in the assessment year under appeal is justified by the substantial increase in the turnover during the year as well as the profit margin shown by the assessee. Shri Patel urged that secret commission had to be paid to the employees of the customers to procure orders as well as to achieve higher profit margin despite the steep competition in the market. The learned counsel placed reliance on the following decisions in support of his contention that payment of secret commission, justified by the exigencies of the business, have been accepted by the various judicial authorities ;
1. CIT v. Goodless Nerolac Paints Ltd. (supra);
2. CIT v. Sigma Paints Ltd. (supra);
3. Dr. G.G. Joshi v. CIT (supra);
4. CIT v. A.S.K. Rathinasamy Nadar (supra);
5. Asstt. CIT v. Moolchand Jaikishandas & Co. (supra);
6. CIT v. Tejaji Farasram Kharawala Ltd. (supra);
7. CIT v. Tejaji Faiasiam Kharawalla Ltd- (1968) 67 ITR 95 (SC);
8. ITO v. Wanson (India) (P) Ltd. (supra);
9. ITO v. French Dyes & Chemicals (P) Ltd. (supra);
10. Mohansing v. ITO (supra);
11. Sassoon J. David & Co. (P) Ltd. v. CIT (1979) 118 ITR 261 (SC); and
12. Gordon Woodroffe Leather Mfg. Co. v. CIT (1962) 44 ITR 551 (SC).
9. On behalf of the Department, Shri Umaid Singh Bhati, the learned senior Departmental Representative made two-fold contentions. Firstly, he argued that the assesses has failed to discharge the onus to establish the genuineness of the expenditure in question. The learned senior Departmental Representative argued that except furnishing self-serving documents like cash-vouchers, signed by the partner, no evidence whatsoever has been adduced by the assessee in supports of the alleged payments despite opportunities given in this behalf by the AO during the course of assessment proceedings. The learned Departmental Representative pointed out that these cash-vouchers do not contain the names, addresses and signatures of the recipients of the secret commission. Even the particulars of orders executed or sales affected in relation to which the commission has been allegedly paid have not been indicated in these vouchers. According to the learned Departmental Representative cash-vouchers prepared at randum in an ad hoc fashion without indicating even the particulars of the sales transaction in relation to which the payment has been made have no evidential value whatsoever. The learned Departmental Representative referred to para 6.2 of the assessment order and pointed out that rate of secret commission claimed by the assessee has shot up from 4.2 per cent in asst. yr. 1996-97 to 7.03 per cent in the assessment year under appeal without any significant increase in the volume of business and without any real increase in the profit margin of the assessee. The learned Departmental Representative argued that the assessee has claimed payment of secret commission amounting to Rs. 20 lakhs without any supporting evidence when its own business income is around Rs. 6.7 lakhs. The learned Departmental Representative next advanced his arguments on the basis of Explanation to sj 37(1) introduced by the Finance (No. 2) Act, 1998, retrospectively, and around] that if at all any such expenditure has been incurred by the assessee, payment; of secret commission is hit by the mischief of the Explanation since it has been incurred for any purpose which is an 'offence' or which is 'prohibited by law.' The learned Departmental Representative submitted that secret commission claimed to have been paid would constitute a business malpractice involving breach of trust by the alleged recipients who are employees of the customers of the assessee and is clearly prohibited by the law. In this connection, the learned Departmental Representative, referred to various statutory enactments, like IPC, Contract Act as well as IT laws. The learned Departmental Representative referred to the decision of Andhra Pradesh High Court in the cases of CIT v. Kodandarama & Co. and Ors. (1983) 144 ITR 395 (AP) and argued that any payment opposed to public policy would not entitle to deduction as business expenditure. The learned Departmental Representative further placed reliance on the following decisions :
1. Mind & Samont Co. (P) Ltd v. CIT (1970) 781TR 268 (SC);
2. err v. Westcoast Shipping Agencies (P) Ltd (1981) 127 ITR 442 (Ker);
3. Gwalior Road Lines v. CIT (1998) 234 ITR 230 (MP); and
4. Maddi Venkataiaman & Co. (P) Ltd v. CIT (1998) 96 Taxman 643 (SC).
With regard to various judicial pronouncements relied by the learned counsel, the learned Departmental Representative argued that apart from distinguishing features on factual aspects, these decisions have been rendered prior to the insertion of Explanation to Section 37(1) as above and, therefore, there was no occasion for the various High Courts in considering the applicability of the aforesaid Explanation while adjudicating the deduction of secret commission in these decisions cited by the learned counsel. Even on factual merits the learned Departmental Representative referred to para 6.2 of the appellate order of the CIT(A) and argued that in the instant case, apart from non-furnishing the particulars of the recipients of the secret commission, even the particulars of the orders or the sales in respect of which commission has been paid, -have not been indicated and cash vouchers have been prepared by the partner of the firm who is not subjected to control and supervision of any independent authority. Furthermore, the rate of commission in the assessee's case is 7.03 per cent as against very small and petty payments involved in the cases cited by the assessee.
10. In rejoinder, Shri Patel contended that Explanation to Section 37{1) is not applicable inasmuch as secret commission has been paid for business purposes which is not prohibited by law.
11. We have given our thoughtful consideration to the rival submissions made before us and also gone through various judicial pronouncements cited before us. The issue regarding the deduction of the secret commission in the instant case would have to be considered under the provisions of Section 37(1) of the IT Act, as well as Explanation appended thereto. The twin facets of the controversy which are to be considered are thus the genuineness as well as legality of the impugned expenditure claimed to have been paid by the assessee. In the catena of decisions cited before us, the judicial authorities have examined the issue under the main provisions of Section 37(1) having a bearing on the issue of genuineness of the expenditure. The second facet of the controversy--namely, legality of the expenditure in the light of Explanation has not been considered since the Explanation has been inserted subsequent to these judicial pronouncements. The Bombay High Court relying upon its earlier decision in the case of Goodlas Nerolac Paints Ltd. v. CIT (supra) held in its subsequent decision in CIT v. Goodlas Nerolac Paints Ltd. (supra) 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 payment;
(ii) adduce satisfactory evidence to establish the payments; and
(iii) satisfy the authorities that the payments were made for the purpose of business.
In addition to the aforesaid requirements emerging from the main provisions contained under Section 37(1), Explanation appended to the Section 37(1) further lays down that the expenditure should not have been incurred for any purpose which is an offence or which is prohibited by law. All the aforesaid conditions, having a bearing on the genuineness of the expenditure as well as legality thereof have to be fulfilled for deduction of the expenditure.
11.1. First we shall examine the issue in the context of the main provisions contained under Section 37(1). From the facts on record, as discussed hereinbefore, it clearly emerges that payment of secret commission to the extent of Rs. 19,85,255 being 7.03 per cent of the total sales has been claimed by the assessee, without furnishing the names and addresses of the recipients. In support of the payments the assessee has relied upon cash vouchers prepared by the partner of the firm. These cash vouchers have been prepared at randum in an ad hoc fashion and they do not contain particulars of the persons to whom the payments have been made. Even the details of the orders procured or the sales effected in relation to which secret commission has been allegedly paid, have not been indicated by the assessee. In our considered opinion such cash vouchers prepared by the partner of the firm in an ad hoc fashion without specifically indicating the sales transactions in respect of which the commission is paid and without indicating the names of the recipients, are merely self-serving documents devoid of any evidentiary value. The proposition is well settled that the onus squarely lay upon the assessee to establish the genuineness of the payments debited in the books of accounts. Regarding the contention of the learned counsel that there was a trade practice for payment of secret commission in the line of business carried on by the assessee, we find that no evidence whatsoever has been filed regarding the existence of any such trade practice in the business carried on by the assessee, namely, dealing in electrical goods and job work in electrical installations. The assessee has failed to furnish the particulars of any such cases doing similar business where such payments of secret commission have been made. Merely because the assessee has been claiming such secret commission in the earlier years, would not, in our opinion, establish that such trade practice exists in the line of business of the assessee.
12. The learned counsel sought to invoke the doctrine of res judicata in support of his contention that in the earlier assessment years, payments of secret commission have been allowed by the AO after disallowing 10 per cent of the claim as agreed by the assessee. The plea of the learned counsel is that the past history of the case provide evidence that such a trade practice for payment of secret commission existed in the business carried on by the assessee. We are unable to accept this contention of the assessee. From the chart regarding payment of secret commission in the earlier years, as reproduced above, we find that for three assessment years, namely, asst. yrs. 1989-90, 1990-91 and 1991-92, the assessee had been allowed commission by the AO on agreed basis as under :
Asst. yr.
Commission claimed Rate percentage Commission disallowed as agreed by the assesses Rs.
Rs.
1989-90 1,26,950 2.77 12,000 1990-91 2,00,260 3.06 20,000 1991-92 2,45,068 3.04 24,000 Subsquently, scrutiny has been made only for asst. yr. 1993-94 wherein a similar disallowance @ 10 per cent of the claim has been by the AO as under:
Commission claimed Rs. 3,81,646 Rate 4.44 per cent Disallowed Rs. 38,164
For subsequent years assessments have been made under Section 143(1)(a). From these facts it would be seen that secret commission claimed in the four scrutiny assessments as above, varied from Rs. 1.26 lakhs to Rs. 3.81 lakhs and the rate of commission varied from 2.7 per cent to 4.44.per cent. On agreed basis the AO finalised these assessments disallowing 10 per cent of the claim on ad hoc basis, as agreed to by the assessee. No enquiries or investigations had apparently been made by the AO calling upon the assessee to prove that genuineness of the expenditure by adducing evidences in support thereof. As against this, facts for the asst. yr. 1997-98 under consideration before us involve claim of secret commission to the extent of Rs. 19,85,255 @ 7.03 per cent of the turnover. The facts and features of the case which have been brought out by the Revenue authorities during the assessment year under appeal, have been briefly discussed above, which indicate that bald cash vouchers are prepared by a partner without indicating any particulars like identity of the recipient or the sales transactions in respect of which the secret commission has allegedly been paid. Even the names of the customers have not been indicated. In the light of these facts and circumstances of the case, we are of the considered view that the Revenue authorities are not precluded from looking into the, genuineness of commission by the past records of the assessee particularly' when the quantum of secret commission as .well as rates of commission claimed are substantially higher. It is a well, settled proposition of tax jurisprudence accepted and acknowledged by the various judicial authorities that the doctrine of res judicata .or estoppel by record, is not applicable to IT proceedings. Admittedly this principle is subject to certain limitations for there should be finality and certainty in all litigations including litigation arising out of IT Act and an earlier decision on the same question cannot be reopened if it had been arrived at after due enquiry and if no fresh facts or evidence have been brought on record by the Revenue authorities in the subsequent years. Such limitations have obviously been imposed so as to ensure certainty and finality which are understandably the most essential attributes of mature and developed tax jurisprudence. Viewed in the aforesaid legal perspective, we feel that ad hoc disallowance made by the AO in the earlier assessment years 9n the issue of deduction of secret commission without examining the same in the light of provisions of Section 37(1) would not disentitle him in investigating into the matter in the assessment year under appeal, particularly in the light of substantially higher quantum of the claim made by the assessee. Each assessment year is an independent year and the AO is fully entitled to enquire into any issue arising during the assessment proceedings and arrive at a conclusion on the basis of facts and evidence brought on record. Regarding the decisions on the question of applicability of res indicate cited by the learned counsel before us, we find that these decisions do not in any. manner incorporate the principle of res judicata with all its trappings into IT law. The proposition enunciated in these decisions is that unless there is a material change justifying the Revenue to take a different view of the matter, the Revenue should not reopen the issues decided in the earlier proceedings and take different and contrary stand. In Radhasoami Satsang v. CIT (supra) cited by the learned counsel the Supreme Court held that in the absence of any material change justifying the Department to take a different view from that taken in earlier proceedings, exemption to the institution under ss. 11 and 12 of the IT Act, granted in the earlier years should not have been denied in the subsequent years. This decision is clearly distinguishable on facts and renders no assistance to the assessee's case. As we have already pointed out, the AO has in the instant case carried out scrutiny into the genuineness of the secret commission claimed by the assessee and disallowed the claim in the light of facts and circumstances brought on record. As against this, in the earlier years, no such scrutiny has been made and the AO rested content with making agreed disallowances on ad hoc basis. The Supreme Court decision cited by the learned counsel, therefore, rendered no assistance to the assessee's case.
13. In Stock Exchange, Ahmedabad v. Asstt. CIT (supra) cited by the learned counsel, the issue involved related to grant of exemption under Section 11. The Tribunal held that since Stock Exchange has been held to be a charitable organisation in the earlier years, claim of exemption cannot be denied on the basis of same facts on record. This decision again is distinguishable and does not help the assessee's case.
14. With regard to other decision cited by the learned counsel, on the question of applicability of dectrine of res judicata as referred to above, we do not consider it necessary to specifically refer to each of them since the proposition of law enunciated in these decisions by various Courts involve similar principles as enunciated in the aforesaid decisions and these decisions, therefore, do not in any manner support the contention of the learned counsel. The facts on record are undisputed that the assessee has failed to indicate any case in the similar business of the assessee wherein expenditure on secret commission has been incurred and allowed. The assessee has evidently not been able to establish any trade practice in its line of business for making such payments. Merely because certain payments have been claimed in the earlier years would not establish any such trade practice in assessee's business. Thus, an essential requirement laid down in Goodias Narolac Paints Ltd. (supra) by the Bombay High Court Court as well as various other cases relied upon by the learned counsel has not been fulfilled in the instant case and, therefore, the deduction of secret commission (SIC).
15. During the course of hearing the teamed counsel submitted a compilation of various judgments of High Courts and Supreme Court and argued that deduction of secret commission have been upheld by the Courts and the same may, therefore, be allowed in the instant case. We may briefly refer to these decisions relied upon by the learned counsel.
16. The first decision cited before us has been rendered by Bombay High Court in the case of CIT v. Goodlas Narolac Paints Ltd. (supra), In this case, the High Court upheld the finding of fact regarding payment of secret commission. The High Court observed at p. 4 of the report :
"The Tribunal also found that the assessee was maintaining proper accounts and records regarding those payments in that the payments were 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 the 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 decision has been rendered in the context of the aforesaid facts of the case wherein the rate of commission had come down from 1.34 per cent to 0.22 per cent of the sales and profits accounts and records were being maintained under supervision of top executive of the company and approved by the board of directors of the company.
The accounts of the company were also placed before the general body meeting of the shareholders. In the instant case before us, the assessee has relied upon the cash vouchers prepared by the partner at randum without any indication regarding the names of the recipients or even the particulars of the orders secured or sales effected in respect of which secret commission was being paid. The facts are, therefore, distinguishable and the decision does not help the assessee.
17. The next decision relied upon by the learned counsel is CIT v. Sigma Paints Ltd. (supra). In this case, the High Court held :
"that, in the instant case, there was a complete tally between the commission paid and the extent of business done by the mill-company. Details were also available of the exact transactions in respect of which the assessee had to pay the secret commission. The assessee had given a complete list showing the turnover and the amount of secret commission paid from year to year. The percentage of secret commission was minimal. The full details of payment on the above basis in respect of several parties were available. They were correlated to the transactions which the assessee had with these persons and the period during which the transactions were entered into. The only missing item was stated to be the names of the particular parties to whom the payments were made
18. In Dr. G.G. Joshi v. CIT (supra) the assessee was the branch manager of a company dealing in colours, chemicals etc. used mainly in textile mills. The assessee received special allowance of 2-1/2 per cent from the company on the goods sold through him to meet the expenses necessary for such sales. The High Court upheld the finding of fact that expenses should be allowed (c) 1.5 per cent of sales made through the assessee.
19. In CIT v. A.S.K: RaUiinasamy Nadai (supra), the High Court upheld the finding of fact recorded by the Tribunal that there was a general trade practice in the timber business of paying commission and brokerage and if the commission claimed is reasonable and comparable commission paid by others in this line of business, the claim of commission is liable to be allowed.
20. The learned counsel has next referred to the decision of Gujarat High Court in the case of Addl. CIT v. Moolchand Jaikishandas & Co. (supra). In this case the assessee-company engaged in the business of textile chemicals, dyestuffs entered into an agreement with the employees for payment of commission. The Tribunal held that the amount of salary paid was low and the commission was part of the remuneration and not an ex gratia payment for services rendered. The deduction was held allowable under Section 36(1)(ii) and not under Section 37(1) of the Act. The facts in this case, are thus entirely distinguishable inasmuch as payments made to the employees on the basis of genuine agreement and deduction has been held allowable under Section 36(1)(ii).
21. In CIT v. Tejaji Fatasram Kharawatta Ltd. (supra) the assessee acted as selling agent of Ciba (India) Ltd. and was entitled to a commission of 12-1/2 per cent on the sales. It claimed exemption tn respect of a part of the selling agency commission under the provisions of Section 4(3)(vi) of the IT Act, 1922.
The issue involved is entirely different and does not support assessee's case.
22. The learned counsel has next referred to the decision of Special Bench of the Tribunal in ITO v. French Dyes & Chemicals (1) (P) Ltd. (supra). The Special Bench of the Tribunal observed that there was a trade practice in the business of dyes and chemicals whereunder secret commission has been paid to dyeing masters and others. The Tribunal observed in para 32 of its order:
"We have before us three assessees at least who between them cover several crores of rupees by way of turnover. The list of secret commission expenses incurred by these assessees as a percentage of their turnover shows that the percentage is negligibly small. In the case of the present assessee French Dyes the lowest percentage is 1 per cent for the asst. yr. 1965-66 and the highest 8 per cent for the asst. yr. 1961-62. For the last two years 1978-79 and 1979-80 the percentage come to 2 per cent. In the case of Indochem the said percentage is 1.30 per cent for the asst. yr. 1973-74 and 2.15 per cent for the asst. yr. 1958-59. These figures indicate that the claim made by the assessees for payment of commission refers to a negligible percentage of the turnover of the company. Two facts emerge from this; viz., that not merely the assessee but other persons with equally large turnover make such payments; and secondly this expenditure constitutes a small portion of the turnover, i.e. much less than many other items of expenditure they have claimed. The fact that some companies with substantially good turnover in the field have shown this necessity to make the payment indicates by itself that it is a necessity in the trade to incur the expenditure."
The other decisions cited by the learned counsel are at si. Nos. 8, 10, 11 and 12. We have gone through these decisions also.
23. From the aforesaid decisions it would be seen that secret commission has been claimed for negligible amounts and held allowable on th'e finding that there was a trade practice for such payments and further that proper records in support of the payments have been maintained under the control and supervision of the top executives of the assessee-companies and the only missing detail in the evidence was the names of the recipients of the commission. We have already discussed above, salient features of the cases in hand regarding claim of secret commission, namely : (i) no such trade practice has been shown to exist in the line of business adopted by the assessee. (ii) The quantum of commission and the rate at which payment is claimed is substantial being 7.03 per cent as against minimal rates claimed in the cases cited above. In the case of the assessee quantum of secret commission claimed aggregates to Rs. 19,85,255 whereas the net profit of the assessee is only Rs. 6,14,847. The quantum of commission claimed thus manifold more than three times of business profits declared during the year, (iii) Cash vouchers prepared by the partner on ad hoc basis have been filed which do not indicate proper details like particulars of orders secured or sales effected or even the name of the customer, etc. etc. In the absence of even bare details like particulars of the orders and sales for which secret commission has been paid, the cash vouchers prepared by a partner at his own sweet-will would not be any subject (sic)......
other independent authority unlike the proper records maintained in the cases cited and such records inspected by top executives of the company. Having regard to these distinguishing features, the reliance placed by the learned counsel on the aforesaid decision, is in our opinion entirely misplaced and does not support the assessee's case.
24. Having regard to the aforesaid discussion, we have come to the conclusion that the assessee has failed to discharge the onus of establishing the practice of payment of secret commission in his line of business and failed to adduce satisfactory evidence to establish the payments. Therefore, no deduction in respect of secret commission is liable to be allowed under the main provision of Section 37(1).
25. The next important facet of the controversy concerning the legality of the expenditure in the light of Explanation appended below Section 37(1) by the Finance (No. 2) Act, 1998, remains to be considered. The Explanation inserted by the Finance (No. 2) Act, 1998. with retrospective effect i.e. 1st April, 1962, reads as under :
"Explanation : For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure."
During the course of hearing before us, when the learned counsel sought to justify the steep increase in the rate of secret commission from 4.2 per cent in the preceding assessment year to 7.03 per cent in the year under appeal by pointing out that higher rate has been paid for the purpose of higher price realisation from the customers resulting in higher G.P. rate, the Bench raised the query whether any such payment to the employees of the customers would be hit by the mischief of the aforesaid Explanation. The learned counsel took the plea that such payments made in the business interest are dictated by consideration of commercial expediency and are not in any manner prohibited by law. We, however, are not persuaded to accept the submissions of the learned counsel on, the issue. The payment of secret commission to employees of the customer companies/concerns, is clearly in the nature of undue inducement, paid in a clandestine fashion to the employees of the customers without the knowledge and consent of their employers. The G.P. margin shown by the assessee for the assessment year under reference works out to 16,53 per cent and with such margin if the assessee claims to pay 7.03 per cent of the sale price by way of secret commission and assuming that such payment has actually been made by the assessee, the assessee cannot be held to say that such payments are merely for keeping the employees in good humour and without the recipient employees rendering any service of undue favour to the detriment of the interest of customers of the assessee.
This is particularly so when it is claimed before us that profit margin has been enhanced by increasing the secret commission. Such payments would evidently constitute a breach of trust on the part of the employees towards their employers with the active conspiracy of the assessee. Such breach of trust by an employee towards his employer could constitute an offence under the relevant provisions of IPC. Reference in this connection may be made to the provisions of Section 408 of the IPC read as under:
"Section 408--Criminal breach of trust by clerk or servant:
Whoever, being a clerk or servant or employed as a clerk or servant, and being in any manner entrusted in such capacity with property, or with any dominion over property commits, criminal breach of trust in respect of that property, shall be punished with imprisonment of either description for a term which may extend to seven years, and shall also be liable to fine."
Similarly, in the case of breach of trust by public servants, Section 409 would be applicable which reads as under :
"See 409.--Criminal breach of trust by public servant, or by banker, merchant or agent,--
Whoever, being in any manner entrusted with property, or with any dominion over property in the capacity of a public servant or in the way of his business as a banker, merchant, factor, broker, attorney or agent, commits criminal breach of trust in respect of that property, shall be punished with imprisonment for life, or with imprisonment of either description for a term which may extend to ten years, and shall also be liable to fine,"
Since such an offence under the IPC is committed by the employees of the customer with .the conspiracy of the assessee who pays them secret commission, the expenditure in question may be treated as having been incurred for the purpose which is an offence under the relevant provisions of IPC.
26. It may also be relevant here to refer to provisions contained in Section 23 of the Indian Contract Act which is reproduced below :
23. The consideration or object of an agreement is lawful, unless--
it is forbiden by law; or is of such a nature that, if permitted, it would defeat the provisions of any law, or is fradulent: or involves or implies injury to the person or property of another; or the Court regards it as immoral, or opposed to public policy. In each of these cases, the consideration or object of an agreement is said to be unlawful. Every agreement of which the object or consideration is unlawful is void.
27. Section 10 of the Indian Contract Act provides that all agreements are contracts if they are made for a lawful purpose and lawful object. The agreement or understanding (even oral agreement) for payment of secret commission between the assessee and unidentifiable employees of various customers has to stand to the aforesaid test. Section 23 declares what kind of considerations and objects are not lawful. If an agreement is such that the Court regards it as immoral or opposed to public policy, it would be considered to be unlawful. Similarly, if an agreement involves or implies injury to the person or property of another, it would be unlawful and void. By payment of secret commission to the employees of the customers without the knowledge of customers would not only amount to breach of trust of the customer companies by their employees but it may also result into economic injury to the customers.. As employee of the customer who has accepted the secret commission, which is in the nature of bribe, may place order for supply of goods to the assessee to the better quality or (sic-on) cheaper rates as may be quoted by other competitors (sic-of) in the market. Obviously any trader would not pay secret commission without consent of the customer themselves to any one unless he has expectation of deriving some undue gain from these employees. The payment of secret commission to the employees of customers without their knowledge and consent may, therefore, be treated as immoral and unethical, also.
28. Apart from the aforesaid statutory enactments, we may further point out that the secret commission of the substantial magnitude, being Rs. 20 lakhs claimed in the instant case, would be violative of the various provisions of the IT Act, 1961. Section 40A(3) prohibits, cash payments exceeding Rs. 10,000 relevant for asst. yr. 1996-97 the limit enhanced to Rs. 20,000 w.e.f. 1st April, 1997. In the instant case, since particulars of each payment has not been furnished and the assessee has produced merely ad hoc. cash vouchers, the expenditure claimed is clearly contrary to the letter and spirit of Section 40A(3). We may further refer to statutory requirement enacted under Section 133(4) of the IT Act, 1961 which cast an obligation on any assessee to furnish a statement of the names and addresses of all persons to whom he has in any previous year given commission, rent, interest, etc. amounting to more than Rs. 1,000 together with particulars of all such payments made. This section clearly envisages maintenance of detailed information regarding the recipients of payment and furnishing of such information to the IT authorities. We may further refer to Section 194H as applicable for assessment year under reference which provides for deduction of tax at source out of any payments made by way of commission or brokerage, and the payment of secret commission in the instant case would clearly infringe the provisions of Section 194H of the IT Act. The aforesaid provisions have been enacted by the IT statute by the legislature with the avowed object of ensuring improved tax compliance by plugging the loopholes in the statute. Having regard to these provisions, it is amply clear that the payments in question particularly looking to the magnitude thereof are violative of letter and spirit of the statute and are hit by the aforesaid Explanation.
29. We may further consider the impugned payments of secret commission in the context of Section 278 of the IT Act which provides that if the person abets or induces in any manner another person to make and deliver an account or a statement or declaration relating to any income chargeable to tax which is false and which he either knew to be false or does not believe to be true, will constitute an offence under Section 278 and other relevant provisions in the IT Act. Withholding of names and identities of the payees may enable the payees to evade payment of tax on receipt of such secret commission with active connivances of the assessee. The payment of secret commission would in such circumstance be treated as covered within the ambit of Explanation to Section 37(1) and cannot be treated as allowable business expenditure merely on the ground of commercial expediency.
30. Explanation has clearly restricted the scope and ambit of Section 37(1) inasmuch as any expenditure prohibited by law or which involves an offence would be liable to be disallowed even if claimed to be incurred on the ground of commercial expediency. The legislative intention in inserting the aforesaid Explanation is to ensure eradication of business malpractices and promote integrity and fair dealings in the business and commercial environment of the country. In the prevailing economic environment of the country characterised by fast emerging trends of liberalisation and globalisation of our national economy, it is highly imperative that integrity and transparency of the business edifice is encouraged and ensured by the Government. Viewed in this perspective, Explanation introduced by the legislature excludes from the purview of admissible business expediency any expenditure incurred for any purpose prohibited by law or which is an offence. In our opinion the secret commission claimed by the assessee is clearly hit by the Explanation to Section 37(1) and (SIC)
31. For the aforesaid reasons we hold that the payment of secret commission claimed by the assessee amounting to Rs. 19,85,255 does not constitute permissible business expenditure under the main provisions of Section 37(1) as well as Explanation appended thereto. However, since the learned CIT(A) has restricted the disallowance of secret commission to the extent of Rs. 17,03,055 and the Department is not in appeal before us against the deletion of the balance disallowance, we would restrict our finding to the sustaining of disallowance of Rs. 17,03,055 as upheld by the learned CIT(A). The order of the learned CIT(A) is, therefore, upheld and the appeal of the assessee is dismissed.
32. In the result, the appeal is dismissed.