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Income Tax Appellate Tribunal - Chandigarh

Punjab Breweries Ltd. vs Assistant Commissioner Of Income Tax. ... on 25 August, 1998

Equivalent citations: [1998]67ITD107(CHD), [2000]245ITR49(CHD)

ORDER

R.K. Bali, A.M. 27th May, 1997

1. These two cross-appeals-one each by the assessee and the Revenue-relating to asst. yr. 1987-88, are taken up together and disposed of by a common order for the sake of convenience. ITA No. 810 is the appeal by the assessee, wherein the grounds taken are as under :

"1. That learned CIT(A)(C) has erred in confirming disallowance of Rs. 4,46,667 being the commission paid to Mrs. Samira Mallya ignoring the facts and submissions made before the lower authorities.

2.1 That learned CIT(A)(C) has erred in confirming addition of Rs. 10,45,000 being the C&F handling charges paid to Blue Chip Co. ignoring the facts of the case.

2.2 That it has been ignored that the said arrangement was necessitated by business considerations and there was absolutely no justification in not allowing the C&F handling charges paid to Blue Chip Co. as the expenditure was wholly and exclusively incurred for the purposes of business.

2.3 That while confirming the addition, learned CIT(A)(C) has relied on irrelevant considerations.

3. That learned CIT(A)(C) has erred in disallowing Rs. 2 lakhs paid to Corporate Management Division of United Breweries Ltd. ignoring the facts and the submissions made before her in support of the said claim.

4. That learned CIT(A)(C) has erred in disallowing Rs. 2,39,550 being the service charges paid to Bombay Brewery Ltd. in spite of the fact that sufficient evidence had been led in support of the said claim.

5. That learned CIT(A)(C) has erred in confirming levy of interest under s. 217(1A) of IT Act.

6. That learned CIT(A)(C) has erred in not allowing triple shift allowance on the machinery involved in the production of beer ignoring the past history of the case and the fact that beer manufacturing is a continuous process and the machinery is run for all three shifts and the appellant was rightly entitled to claim of triple shift allowance."

ITA No. 1145 is the appeal of the Revenue, wherein the only issue raised is as under :

"Learned CIT(A)(C) has erred both in law and on facts in deleting addition of Rs. 11,03,550 made out of service charges paid to marketing agents ignoring the fact that since the rates charged by the assessee at own L-1 depot at Bombay were excessive and AO was justified to make addition of undue benefit given to the marketing agents @ Rs. 2 per dozen, which was quite reasonable.

The order of learned CIT(A)(C) be set aside and that of the AO restored."

2. The assessee-firm is engaged in the business of manufacture and sale of beer of different brands. It also has L-1, License for sale of IMFL. For asst. yr. 1987-88, it filed a return declaring income at Rs. 1,54,66,160 on 29th June, 1987. Assessment was framed by the AO at an income of Rs. 2,01,02,399 on 30th March, 1990. The AO, while framing the assessment, made various additions, which were challenged by the assessee in appeal. Learned CIT(A) allowed partial relief to the assessee vide impugned order, dt. 18th March, 1991. The assessee as well as the Department have both filed the appeals against the said order.

3. Taking up the assessee's appeal first, ground No. 1 relates to the action of learned CIT(A) in confirming disallowance of Rs. 4,46,667, being the commission paid to Mrs. Samira Mallya wife of Mr. Vijay Mallya, chairman of the United Breweries Group of Industries, which is the holding company in relation to the assessee-company. The AO has discussed this issue in para 2 of the assessment order at pp. 2 to 4, whereas learned CIT(A) has adjudicated this issue in paras 2 to 2.2 at pp. 2 to 4 of the impugned order. Subhash Agarwal, Advocate, learned representative of the assessee, has furnished chart at p. 21 and a note at p. 23 of the paper-book, indicating the history of the company. It was submitted that United Breweries Group of Industries took over Punjab Breweries Ltd. in 1978 and, at the time of taking over, the company had paid up capital of Rs. 80 lakhs, its accumulated losses were to the tune of Rs. 1.70 crores. After taken over, the company made a cash profit of Rs. 32.95 lakhs for the first time in the year 1982-83. Brought forward losses were wiped out in the year 1983-84 and thereafter the company never looked back. It was submitted that this turnover around in the affairs of the company was on account of management acumen of the Board of Directors, who effectively supervised the working of the company. It was submitted that in the assessment year under consideration, the Chief Executive was directly reporting to the Board of Directors. It was submitted that in the extraordinary general meeting of the company convened on 31st July, 1985, a resolution was passed to the effect that the company's directors, other than the director nominated by the financial institutions, be paid every year w.e.f. 1st July, 1984, a commission equal to 3 per cent of the net profits of the company for that year, which amount they may apportion amongst themselves in any manner they deem fit, in addition to the sitting fee of Rs. 250 payable to each director for every meeting of the Board. It was submitted that it was in pursuant to this appeal resolution that the Board of Directors subsequently resolved on 6th September, 1985 that 3 per cent commission on net profit of the company, which was due to them, be paid to Mrs. Samira Mallya. It was submitted that Mrs. Samira Mallya was a member of the Board of Directors of the assessee-company and she had attended the meetings of the Board held on 18th November, 1985, 27th March, 1986 and 27th June, 1986. It was submitted that the AO as well as learned CIT(A) have disallowed the commission only on the ground that there is no direct documentary evidence for the services rendered by Mrs. Mallya for earning commission. Aggarwal submitted that the commission @ 3 per cent was resolved to be paid to the directors other than director appointed/nominated by the financial institutions and the directors, in their discretion, resolved that the commission due to them, should be passed on to Mrs. Mallya. It was submitted that the functions of a director of a limited company are quite different from the chief executive of the company. It was pleaded that it was not necessary that each and every director should actively participate in day to day business to become entitled to remuneration. It was submitted that a director is normally incharge for complying with the statutory regulations besides conducting the business and all the activities of the company are carried on under the direction and supervision of the Board and each one of the director plays very important part in it. It was submitted that it is on account of this fact that people of repute are much sought after by the company to have them on Board only for their names. The very name of a person gives a big boost to the business of the company in the eyes of public. It was submitted that Mrs. Mallya prior to her marriage to Mr. Vijay Mallya, was an air hostess and was a socialite visiting various metropolis of the country, where she used to visit 5-star hotels and after her marriage to Mr. Vijay Mallya, she continued to do so and by her mere presence, she acted as a catalyst for increasing turnover of the company. It was submitted that Mrs. Mallya in her own turn is a big assessee having income running into lakhs of rupees and there is absolutely no intention of any tax avoidance, by claiming deduction on account of the commission paid to Mrs. Mallya. Agarwal submitted copies of assessment orders of Smt. Mallya for asst. yrs. 1986-87 and 1987-88, wherein assessed income was Rs. 8,27,750 and 47,35,930 respectively. Agarwal, however, was fair enough to concede that payment of commission/remuneration is to be governed by provisions of s. 40(c)/40A(5) and the entire commission payment to Mrs. Mallya will not be allowable. Aggarwal has furnished a copy of order, dt. 20th January, 1992 passed by CIT(A) in the case of Herbertsons Ltd., another group of the company, for asst. yr. 1987-88, wherein similar commission paid to Mrs. Mallya was directed to be allowed, subject to the restrictions imposed under s. 40(c). Agarwal, however, conceded that in asst. yr. 1986-87, similar commission was disallowed by the AO as well as CIT(A) and the order was upheld by the Tribunal. It was submitted that the Tribunal upheld the action of the Departmental authorities in disallowing the commission on the ground that Mrs. Mallya was married to Mr. Vijay Mallya on 24th February, 1985, and the accounting year of the assessee-company ended on 30th June, 1985, and there was no evidence on record to indicate as to when Mrs. Mallya was appointed as a director of the assessee-company. The Tribunal took note of the fact that first resolution of the Board of Directors authorising payment of 3 per cent commission was passed on 27th June, 1985, whereas accounting year was coming to a close on 30th June, 1985. Agarwal submitted that it was because of these special circumstances prevailing in asst. yr. 1986-87 that the Tribunal upheld the disallowance of commission to Mrs. Mallya. Aggarwal submitted that for asst. yr. 1987-88, the position was entirely different, as admittedly Mrs. Mallya was working as a director of the company and had attended several meetings of the Board of Directors. It was submitted that payment of commission, as per Board's resolutions, has been approved by the Company Law Board. Accordingly, it was submitted that the facts in the assessment year under consideration being different from that of the preceding year, commission paid to the lady director Mrs. Mallya should be allowed as a deduction subject, of course, to the limitation under s. 40(c)/40A(5).

4. Harinder Kumar, learned Departmental Representative supported the order of the CIT(A) and further submitted that there was no evidence on record available to justify the payment of commission to the lady director. It was submitted that, no doubt, first resolution which was passed in the Board's meeting on 27th June, 1985, the meeting was attended by four directors including Mrs. Mallya as well as her husband Mr. Mallya. This resolution was affirmed in the extraordinary general meeting and there was another resolution, by which the directors in the Board agreed to pass on the commission receivable by them (the Board) to the lady director. It was submitted that none of these resolutions give any reasons for which the entire amount due to the directors was passed on to the lady director alone. Accordingly, it was pleaded that the payment was not for any business consideration and was rightly disallowed by AO and has been rightly upheld by CIT(A).

5. We have considered the rival submissions. The three resolutions, on the basis of which commission has been paid by the assessee-company to Mrs. Samira Mallya, read as under :

"Resolution, dt. 27th June, 1985 Resolved that an extraordinary general meetings of the company may be convened on 31st July, 1985 at 11 a.m. at the registered office of the company, to pass the following resolution with or without modification :

'Resolved that the company's directors, other than the directors nominated by the financial institutions, be paid every year w.e.f. 1st July, 1984, a commission equal to 3 per cent of the net profits of the company for that year, which amount they may apportion among themselves in any manner they deem fit, in addition to the sitting fee of Rs. 250 payable to each director for every meeting of the Board or any committee thereof attended by him/her, and that this resolution shall remain in force till 30th June, 1989'.

Resolution, dt. 31st July, 1985 Resolved that the company's directors, other than the directors nominated by the financial institutions, be paid every year w.e.f. 1st July, 1984, a commission equal to 3 per cent of the net profits of the company for that year, which amount they may apportion among themselves in any manner they deed fit, in addition to the sitting fee of Rs. 250, payable to each director for every meeting of the Board or any committee thereof attended by him/her and that this resolution shall remain in force till 30th June, 1989.

Resolution, dt. 6th September, 1985 Resolved that the remuneration equal to 3 per cent of the net profits of the company each year payable to the directors pursuance to the special resolution passed at the extra general meeting of the company held on 31st July, 1985, be paid to Mrs. Samira Mallya."

Pursuant to these resolutions, payments were made by the assessee-company to Mrs. Mallya and payment of commission has been approved by the Company Law Board, which indicates that the Company Law Board was satisfied that such payments were necessary for the purpose of the assessee-company.

It is an admitted position that Mrs. Mallya is not the whole-time director of the company and, as such, she was not expected to participate in day-to-day management of the company. From the evidence available on record, it is clear that she had participated and contributed at the Board's level in policy-making exercise or by lending her name to be associated with the product manufactured by the assessee-company. It is true that there is no direct evidence available of the services rendered by the lady director for the purpose of the business of the assessee-company and it was taking into consideration such type of situations that restrictions have been imposed by the legislature under s. 40(c)/40A(5), where payment/remuneration, etc. made to senior executive or director of the company are to be disallowed, if they are beyond a sum of Rs. 1,02,000. In this view of the matter, we are of the view that the assessee is entitled to deduction of Rs. 1,02,000 only in respect of commission paid to Board of Directors, at 3 per cent of net profits of the company, which was passed on by them to Mrs. Mallya. Accordingly, ground No. 1 is partly allowed.

6. Ground Nos. 2.1 to 2.3 relate to the action of the Departmental authorities in making an addition of Rs. 10,45,000, being C&F handling charges paid to Blue Chip Co. AO has discussed this issue in para 3 at pp. 4 to 10 of the assessment order, whereas learned CIT(A) has adjudicated this issue in paras 4 to 4.10 at pp. 7 to 17 of the impugned order. Agarwal submitted that the assessee-company's branch at Faridabad was earlier handling the sale of IMFL manufactured by McDowell and Herbertsons. It was submitted that McDowell & Co. Ltd., vide their letter, dt. 15th May, 1985, brought to the notice of the assessee-company regarding unsatisfactory sales of various McDowell products through the assessee's depot at Faridabad. McDowell & Co. Ltd. brought to the notice of the assessee that they wanted to find distributors who would be prepared to market only and exclusively their product and not concentrate on products of their competitors. McDowell & Co. Ltd. also pointed out that they wanted to appoint a new licensee who would undertake to deal with their product exclusively and would be responsible for giving adequate credit facility in the market and be ultimately responsible for all outstandings and bad debts, if any. Aggarwal submitted that on receipt of this letter, the assessee felt necessity of appointing Blue Chip & Co. as its C&F agent at Faridabad and it entered into an agreement with the said firm on 25th June, 1985, for sale of McDowell products at Faridabad depot and made a del credere arrangements between them. As a result of this agreement, Blue Chip & Co. took on rent separate premises, employed independent staff, opened an independent bank account and it started to work as an C&F agent for the assessee-company. It was submitted that Blue Chip & Co. was separately assessed to income-tax at Delhi in respect of handling charges received from the assessee-company and one of the partners of Blue Chip & Co., Birendra Pal Singh, was a man having large experience in liquor business and was independently managing a number of liquor vends in and around Delhi. It was submitted that the AO as well as the CIT(A) have disallowed this commission mainly on the ground that Blue Chip & Co. were having some ladies as partners, which could not be found at the addresses given. It was submitted that non-availability of partners of Blue Chip & Co. cannot be the basis for disallowing C&F handling charges paid by the assessee-company to Blue Chip & Co., which is a regular assessee being assessed by AC, circle 14 (2), New Delhi. Agarwal has furnished a copy of order, dt. 23rd June, 1989 of Blue Chip & Co., wherein assessment was framed in the status of RF at an income at Rs. 4,16,387. It was submitted that in the assessment year under consideration, the assessee-company was able to earn a net profit of Rs. 6,14,417 on sale of McDowell products alone, even after paying C&F handling charges of Rs. 10,45,894, and, unless, the assessee had appointed Blue Chip & Co. as C&F agent, it would have lost this business as McDowell & Co. was thinking of appointing another licensee. Agarwal submitted further that, as per the agreement entered between the assessee-company and Blue Chip & Co. responsibility for collection/bad debts in relation to the goods supplied by the assessee to vendor was that of Blue Chip & Co. and, in fact, an amount of Rs. 1.73 lakhs was recovered by the assessee from Blue Chip & Co., during accounting year 1987-88 on account of bad debt. Accordingly, it was pleaded that the agreement between the assessee and Blue Chip & Co. was purely a business decision, which was necessitated with the circumstances prevalent in the year under consideration. Agarwal also submitted that even this agreement with Blue Chip & Co. could not be continued, due to changed market conditions, and from the accounting year 1989-90, McDowell & Co. had totally withdrawn the agency from the assessee-company and given it to third party at Faridabad. Reliance was placed on the decision of the Supreme Court in the case of Sassoon J. David & Co. (P) Ltd. vs. CIT (1979) 118 ITR 261 (SC).

7. Learned Departmental Representative supported the order of CIT(A). He read out extensively from the orders of the AO as well as CIT(A) and submitted that the whole arrangement for making payment of C&F handling charges amounting to Rs. 10,45,894 by the assessee to Blue Chip & Co. was a bogus and sham transaction. It was submitted that the assessee-company, prior to its agreement with Blue Chip & Co., has employed eight members of the staff at its Faridabad depot to handle the products of McDowell as well as Herbertson and even after handling of McDowell products was given to Blue Chip & Co., staff strength remained the same. It was submitted that sales in the year under consideration of the products of Herbertson were less than half of the preceding year and yet the staff strength remained the same. It was submitted that this clearly showed that no businessmen would retain the staff, if the business has declined and, as such, the staff employed by the assessee at Faridabad continued to look after sale of McDowell & Co. although on paper it was shown that C&F handling job was given by the assessee to Blue Chip & Co. It was further submitted that the plea of the assessee that McDowell company forced upon the assessee to employ an independent agent to boost its sale as Herbertson were its competitors, is also not correct because McDowell as well as Herbertson belonged to the same UBG and the holding company (UBG) has interest in McDowell as well as Herbertson. It was also submitted that the investigation made by the AO revealed that Blue Chip & Co. was newly constituted firm, having Birendra Pal Singh as Karta of HUF as the main partner along with Mrs. Rattan Sundary and Mrs. Anjali and when the AO wanted to contact Mrs. Rattan Sundary and Mrs. Anjali at the addresses given in the partnership deed, these were not found there. Accordingly, it was submitted that the alleged agreement between the assessee and Blue Chip & Co., pursuant to which the assessee paid a sum of Rs. 10,45,894, was not a genuine transaction and the Departmental authorities were fully justified in making the disputed addition of Rs. 10,45,894.

8. We have considered the rival submissions and have gone through the orders passed by the AO as well as CIT(A) along with correspondence entered into between the assessee, McDowell and Blue Chip & Co., copies of which have been furnished to us at pp. 42 to 62 of the paper-book. The assessee-company is mainly engaged in the business of manufacture and sale of beer and it was having a L-1 licence and a depot at Faridabad, for dealing in IMFL. At the Faridabad depot, the assessee was selling products of McDowell as well as Herbertson. Both these companies are separate, independent entities and have different share holding pattern, though both of them belong to UBG. From copies of correspondence furnished to us at pp. 42 to 62 of the paper-book, it is seen that McDowell & Co., in an attempt to increase its sales in the market, decided to appoint an independent wholesaler to deal with its product exclusively that in the precondition for appointment was that wholesaler who was dealing in other competitive brands, will not be given distributorship of McDowell products. The assessee took up the matter with McDowell & Co. and requested it that it must be retained in one capacity or the other as a wholesaler licencee for the products manufactured by McDowell & Co. The assessee, it appears, was also concerned with extending credit facilities to L-II vendor, where chances of bad debt are more, as ownership of the vends may change with reauction of vends in subsequent year. It was under these circumstances and after tripartite discussion between McDowell Co. the assessee and Birender Pal Singh, it was agreed that the assessee should open an independent agency, to look after the products of McDowell and that agency will be wholly responsible for the sale and marketing of McDowell products and also for the bad debt in the market.

Pursuant to above discussion, it appears, the assessee contacted Birender Pal Singh, who was handling beer sale of the assessee for the last 22 years and was a well-known figure in liquor trade and was dealing with the products manufactured by McDowell in other territories like Delhi, Punjab and appointed him as C&F handling agent, to look after McDowell product, though agency in the form of L-1 licence will remain in the name of the assessee-company. Pursuant to the negotiations, the assessee-company entered into an agreement with Blue Chip & Co., through its partner, Birender Pal Singh and that arrangement was accepted by McDowell Co. as well. It is seen that Birender Pal Singh formed a firm in the name of Blue Chip & Co. with two other partners, to carry on this arrangement and that firm has taken a separate rented building, adjoining the assessee-company at Faridabad and it employed 13 persons to deal with McDowell product. C&F handling commission has been credited by the assessee-company to the account of Blue Chip & Co., as per terms and conditions of the written agreement, dt. 25th June, 1985, and by entering into such an agreement, the assessee-company was not only able to retain its agency of McDowell products but also made a net profit exceeding Rs. 6 lakhs in transactions relating to sales made through Blue Chip & Co. It is also pertinent to note that, as per the agreement, Blue Chip & Co. were made responsible for losses on account of bad debts and, in fact, the assessee did recover a sum of Rs. 1.73 lakhs on account of bad debts from Blue Chip & Co. In this view of the matter, we are of the opinion that the Departmental authorities were not justified in holding that the written agreement between the assessee and Blue Chip & Co. for appointment of C&F handling agent was a sham and bogus agreement, merely on the ground that two of the partners of Blue Chip & Co. were ladies who could not be contacted, when Blue Chip & Co. had been granted registration and had been separately assessed to income-tax by AC Circle 14 (2), New Delhi. Accordingly, addition of Rs. 10,45,000 made by the AO and sustained by CIT(A), is directed to be deleted.

9. Ground No. 3 relates to action of AO, which was confirmed by CIT(A), in disallowing an amount of Rs. 2 lakhs paid by the assessee to Corporate Management Division (CMD) of United Breweries Ltd. AO had discussed this issue at pp. 10 to 13 of the assessment order, whereas CIT(A) has adjudicated upon it at pp. 18 to 21 of the impugned order. Aggarwal submitted that the assessee is one of the companies of the UBG and the main company of the group is United Breweries Ltd. UBL started a CMD from 1st July, 1976 to render various services through various group agencies. Prior to establishment of this CMD, such division was managed by Herbertson Ltd, Bombay, and this consists of various departments, like corporate personnel and administration, finance, planning and co-ordination, public affairs and vehicle department. For rendering the services to various subsidiary companies, debit notes are raised at the end of the accounting year on the basis of time taken by each individual subsidiary company whereby the share of expenses allocable to the subsidiary is charged. In the accounts of UB Ltd., expenditure incurred is shown and recoveries made are also reflected in the books of account. It was submitted that as far as the assessee is concerned, payment of Rs. 2 lakhs has been made by it to UB Ltd., on the basis of a debit note raised by UBL, on the basis of time spent by CMD on the affairs of the assessee-company. Details of working has been given by Aggarwal at pp. 118 and 119 of the paper-book. At p. 118, there is a certificate from the auditors of UBL, wherein it is certified that the CMD of UBL has incurred a total revenue expenditure of Rs. 1,76,47,788 during the year ending 30th June, 1986, out of which an amount of Rs. 2 lakhs has been debited to Punjab Breweries Ltd., as their share of expenditure. At p. 119, number of hours spent by the CMD in relation to work relating to Punjab Breweries Ltd., has been shown at 1058 and rate has been worked out at Rs. 189.06 and, on the basis of above working, a sum of Rs. 2 lakhs has been debited by UBL to Punjab Breweries Ltd. Aggarwal submitted that the AO as well as CIT(A) were not justified in disallowing the amount of Rs. 2 lakhs. Reliance was placed on order, dt. 23rd December, 1996 of 'E' Bench Calcutta of Tribunal, in ITA No. 3415/91 in the case of Phipson & Co. Ltd., another group company, relating to asst. yr. 1987-88. Learned Departmental Representative supported the order of CIT(A).

10. We have heard the rival submissions and have gone through the orders passed by AO as well as CIT(A) along with order of the Tribunal in the case of Phipson & Co. Ltd. (supra). It is an admitted position that CMD of UBL have incurred a total revenue expenditure of Rs. 1,76,47,788 and, out of it, UBL had itself offered for disallowance a sum of Rs. 13,13,502 under r. 6D, s. 37(3) and entertainment. Details of expenditure amounting to Rs. 1,76,47,788 incurred by UBG has been given to us at pp. 113 and 114 of the paper-book. All the expenditure are of revenue nature. Major expenses is on travel inland, miscellaneous expenses, annual conference, vehicle expenses, legal and professional expenses etc. On the basis of number of working days, various statistics regarding working hours per day, total business hours per person and total business hours per year have been found out and, on that basis, total expenditure of CMD is averaged out so as to find out rate per hour and, therefore, taking into consideration number of hours spent by CMD in relation to various group companies, debit notes are raised. Books of account of UBL are audited and so also that of the assessee. The audit is not only under the Companies Act but also under the IT Act. No adverse material or note or qualification in respect of any professional is found so as to justify any disallowance. Aggarwal submitted that since disallowance, on the basis of r. 6D, s. 37 and entertainment expenditure, etc. has been made and added in the assessment of UBL, out of total expenditure of Rs. 1,76,47,788, no further disallowance can be made in assessment of the assessee-company. We, however, are not inclined to accept this argument because the expenditure is incurred for all entities under UBG, who have joined together to utilise the services of CMD and, therefore, allocation of expenditure also has to be on the basis of each expenditure incurred as such and, therefore, in each individual assessment of group company, appropriate disallowance is required to be made on the basis of statutory provision. Similar is the view of the Calcutta Bench, referred supra. We direct accordingly. This ground is partly allowed. AO may call for details of disallowance made in the hands of UBL and make proportionate disallowance in the case of the assessee-company.

11. Ground No. 4 relates to the action of CIT(A) in upholding the disallowance of Rs. 2,39,550, being the service charges paid to Bombay Brewery Ltd. This issue is covered in favour of the assessee, as per decision of the Tribunal for asst. yr. 1984-85 in ITA No. 312 and 325/90, dt. 5th April, 1991 (pp. 163 to 167 of the paper-book), dt. 25th April, 1995, for asst. yr. 1985-86 in ITA No. 604 and 722/90. This was also followed in ITA No. 1271/90, dt. 11th December, 1995, for asst. yr. 1986-87. Aggarwal further submitted that for asst. yr. 1989-90, CIT(A) allowed service charges paid by the assessee to Bombay Brewery Ltd. and order of CIT(A) was accepted by the Department. Learned Departmental Representative could not controvert the submissions made by learned counsel. Following the decision of the Tribunal in the assessee's own case for earlier years, addition of Rs. 2,39,550 is directed to be deleted.

12. Ground No. 5 relates to the action of Departmental authorities in charging interest under s. 217(1A) of the Act. No specific argument was advanced. The ground is dismissed as such. AO will, however, recalculate the interest under s. 217(1A) at the time of giving effect to this order.

13. Ground No. 6 relates to non-granting of TSA on the machinery. This ground was not pressed by learned counsel at the time of hearing, which is hereby dismissed as such.

14. There was an additional ground of appeal by the assessee to the effect that the Departmental authorities have erred in disallowing a sum of Rs. 13,84,106 on account of outstanding liability of sales-tax, by applying the provisions of s. 43B. It was submitted that this liability stood paid under statutory period in next year and, as such, no disallowance ought to have been made. Aggarwal, however, was fair enough to concede that the AO while passing assessment order, has allowed a deduction of Rs. 10,32,168 on account of sales-tax and other liabilities paid during the accounting year relevant to asst. yr. 1987-88, on actual payment basis under s. 43B. However, in the immediately preceding asst. yr. 1986-87, the Tribunal was pleased to allow claim of the assessee regarding addition of Rs. 10,32,168. Accordingly, it was submitted that necessary relief be allowed to the assessee. Learned Departmental Representative supported the orders of the authorities below. We have considered the rival submissions. The issue with regard to disallowance made under s. 43B is restored back to the file of the AO for fresh adjudication in accordance with law, settled by Hon'ble Supreme Court in the case of Allied Motors (P) Ltd. vs. CIT (1997) 224 ITR 677 (SC), wherein it has approved the decision of Gujarat High Court in the case of CIT vs. Chandulal Venichand (1994) 209 ITR 7 (Guj) and at the Patna High Court in the case of Jamshedpur Motor Accessories Stores vs. Union of India (1991) 189 ITR 70 (Pat) and has over-ruled the decision of Delhi High Court in the case of Sanghi Motors vs. Union of India (1991) 187 ITR 703 (Del). The AO will call necessary information from the assessee with regard to the payment of liability disallowable under s. 43B and readjudicate the issue on merits, in the light of the aforesaid decision of the apex Court.

15. Coming to the Revenue's appeal, the issue is squarely covered by the decision of the Tribunal in the assessee's own case for asst. yr. 1983-84 in ITA No. 1498/89, dt. 19th June, 1995. For the reasons given in detail in the impugned order passed by CIT(A) as well as order of the Tribunal, we do not find any merit in the appeal of the Revenue, which is dismissed.

16. In the result, assessee's appeal is partly allowed as above and the Revenue's appeal stand dismissed.

U.B.S. Bedi, J.M. 10th June, 1997

1. After carefully going through the proposed order of my learned brother, I have not been able to persuade myself to concur with the finding recorded therein, for the reasons hereinafter stated.

2. All the facts, circumstances and arguments of the parties are well-incorporated in the order above and, for the sake of brevity, need not be repeated.

3. In regard to ground No. 1 of the assessee's appeal relating to disallowance of Rs. 4,46,667 being commission paid to Mrs. Samira Mallya, such disallowance earlier made by the AO, confirmed by learned first appellate authority further came to be upheld by the Tribunal for asst. yr. 1986-87. The plea taken by learned counsel for the assessee is of general nature and there is no documentary or any other evidence to suggest that Mrs. Mallya has been instrumentator (sic) income and moreover what is to be seen is, whether expenditure is for business consideration or not. Since the resolutions passed by the Board of Directors agreeing to pass on the commission receivable by them to the lady director, do not give any sufficient reasons for doing so, accordingly it cannot be held that this payment was for business consideration. Taking entire facts and circumstances of the case into consideration, in my view, no interference is called for in the order of learned first appellate authority confirming disallowance of Rs. 4,46,667 being commission paid to Mrs. Mallya. Ground fails.

4. Ground No. 2.1 to 2.3 relates to confirmation of disallowance of Rs. 10,45,000 being the C&F handling charges paid to Blue Chip & Co. From the material on record and the circumstances emerging out of arguments of the parties it is established that it is a sham transaction as two of the three partners of the firm Blue Chip Co., were not found available on the addresses given; the staff strength before and after the agreement with Blue Chip & Co. remained the same, i.e. eight persons, when sales of Herbertsons was considerably low, i.e., less than half of the preceding year; and there is found force in the plea of the learned Departmental Representative that no prudent businessman would keep the same strength of the staff, if sales got reduced-less than half from earlier and this argument gets established that, in fact, whole of the staff of the assessee-firm in that area was looking after the business of McDowell & Co. and practically there was no arrangement of C&F handling with Blue Chip & Co. The plea of the assessee about Herbertsons being competitor of McDowell & Co. get defeated, as both are of same group i.e. UBG and holding company UBG has interest in both McDowell as well as Herbertsons. At no stage the assessee has even tried to establish about existence of so-called ladies partners; neither sufficient evidence has been adduced to establish that two companies of same group are in competition. Other relevant factor of non-function of the so-called firm Blue Chip & Co. for long, as so-called agreement could not be continued and regarding siphoning of funds-partly to Mrs. Mallya and partly to United Agencies, whose whereabouts are not known. The other pleas taken by learned counsel for the assessee are of general nature without any material or documentary evidence on record to support the same. Recovery of bad debts from Blue Chip & Co., in the absence of relevant evidence or material and how this amount became bad, where history of the case is otherwise and Blue Chip & Co. being assessed separately, would not help the assessee to establish that transaction of C&F handling charges was not bogus or sham when partners of Blue Chip & Co. were not found on the addresses given nor they were produced and no other material or evidence has been adduced to establish these expenses to be genuine. Therefore, in view of facts and circumstances of the case, I am not inclined to interfere in the action of the lower authorities. For the reasoning and basis given by learned first appellate authority, which I adopt as my own, the impugned disallowance is upheld and the ground fails.

5. Ground No. 3 relates to confirmation of disallowance of Rs. 2 lakhs paid to Corporate Management Division of United Breweries Ltd. This issue has been elaborately discussed by learned first appellate authority in paras 5.4 and 5.5 of the order. After considering the entire facts and circumstances of the case, I am of the considered opinion that no interference is called for in the finding impugned. Adopting the same reasoning, I confirm the disallowance of Rs. 2 lakhs paid to CMD. Ground fails.

6. In respect of finding on grounds Nos. 4, 5 and 6, I do concur with the finding recorded by my learned brother.

7. Now, coming to the Revenue's only ground against deletion of addition of Rs. 11,03,550 made out of service charges paid to marketing agents, while deleting the addition, main thrust by learned CIT(A) was on past history of the case. From the facts and circumstances, it is found that the AO has actually not been able to find out the extent of excessiveness to co-relate with material, therefore, in my view, it would be fair and reasonable to restore this issue to his file of AO for adjudicating the same afresh, after giving due opportunity to the assessee. Ground succeeds for statistics.

I hold and direct accordingly.

REFERENCE UNDER S. 255 (4) OF THE IT ACT, 1961 Dt. 23rd June, 1997 On a difference of opinion between the Members who heard these appeals, the following points of difference are referred to the Hon'ble President for the opinion of the third member :

"1. Whether, on the facts and circumstances of the case, the order of the learned CIT(A) confirming the addition of Rs. 4,46,667 should be partly upheld as held by the Accountant Member or the addition should be confirmed in its entirety as held by the Judicial Member ?

2. Whether, on the facts and in the circumstances of the case, the addition of Rs. 10,45,000 should be deleted as held by the Accountant Member or the addition should be confirmed as held by the Judicial Member ?

3. Whether, on the facts and in the circumstances of the case, the disallowance of Rs. 2 lakhs should be partly upheld as held by the Accountant Member or the disallowance should be confirmed in its entirety as held by the Judicial Member ?

4. Whether, on the facts and in the circumstances of the case, the ground relating to the deletion of addition of Rs. 11,03,550 in the Revenue's appeal should be dismissed as held, by the Accountant Member or the issue be restored to the file of the AO for fresh adjudication as held by the Judicial Member ?"

R. M. MEHTA, VICE PRESIDENT (THIRD MEMBER) :

The following points of difference were referred to me as a Third Member by the Hon'ble President acting under s. 255(4) of the IT Act, 1961 :

1. Whether, on the facts and circumstances of the case, the order of the learned CIT(A) confirming the addition of Rs. 4,46,667 should be partly upheld as held by the Accountant Member or the addition should be confirmed in its entirety as held by the Judicial Member ?

2. Whether, on the facts and in the circumstances of the case, the addition of Rs. 10,45,000 should be deleted as held by the Accountant Member or the addition should be confirmed as held by the Judicial Member ?

3. Whether, on the facts and in the circumstances of the case, the disallowance of Rs. 2 lakhs should be partly upheld as held by the Accountant Member or the disallowance should be confirmed in its entirety as held by the Judicial Member ?

4. Whether, on the facts and in the circumstances of the case, the ground relating to the deletion of addition of Rs. 11,03,550 in the Revenue's appeal should be dismissed as held by the Accountant Member or the issue be restored to the file of the AO for fresh adjudication as held by the Judicial Member ?

2. I have heard both the parties at length and also minutely gone through the orders passed by the learned Members constituting the Division Bench as also the material on record to which my attention was invited during the course of hearing. Before I deal with the issues raised, I find it necessary to mention that the assessee is engaged in the manufacture and sale of beer of different brands and it also holds L-1 licence for sale of IMFL. For the assessment year in question, it filed return declaring income of Rs. 1,54,66,160 on 29th June, 1987, and assessment came to be framed by the AO on an income of Rs. 2,01,02,399 on 30th March, 1990.

3. Taking up the first point of difference, the brief facts are to the effect that the assessee claimed a sum of Rs. 4,46,667 being the commission paid to Mrs. Samira Mallya, wife of Mr. Vijay Mallya, chairman of the United Breweries Group of Industries, which is the holding company vis-a-vis the assessee-company. It may be mentioned that Mr. Vijay Mallya is also the chairman of the Board of Directors of the assessee-company. Vide order-sheet entry the assessee was asked to adduce evidence in support of the services rendered by Mrs. Samira Mallya and a communication was also addressed by the AO vide letter, dt. 6th March, 1990. In response to the aforesaid, the assessee filed a written reply, dt. 8th March, 1990 contending that it had already given a note earlier in respect of the claim and over and above what had been stated therein it had no further explanation to offer. At P. 2 of the assessment order the AO has extracted the contents of his letter, dt. 6th March, 1990 and to summarise these, the assessee had offered an explanation to the effect that the services of Mrs. Samira Mallya had been utilised to propagate the beer manufactured by the company and for this purpose she contacted various five star hotels and attended social get-togethers. It is also seen that the assessee categorically accepted that it had no record of Mrs. Samira Mallya visiting the places aforesaid in promoting the sale of beer and there was also an admission to the effect that she had no special qualifications or expertise in promoting the sale of beer. It is also seen that vide order-sheet entry, dt. 16th January, 1990, and 24th January, 1990, the assessee was asked to produce Mrs. Mallya along with her passport so that she could be examined vis-a-vis the purported services being rendered by her to the company. The assessee initially stated that she could not be summoned to Ludhiana as she lived 200 kms-beyond that place and it was also stated that she was not available in India being away to UK. In view of the aforesaid facts, the AO in the ultimate analysis disallowed the commission payment of Rs. 4,46,667 paid to Mrs. Samira Mallya. On further appeal, the CIT(A) confirmed the disallowance on the same line of reasoning as had been adopted by the AO and also took into account the order of the first appellate authority for asst. yr. 1986-87 where identical claim had been rejected.

4. Being aggrieved with the order of the CIT(A), the assessee came up in appeal to the Tribunal. The learned Accountant Member who wrote the initial order allowed the claim vide para 5 of his order referring to three resolutions of the Board, dt. 27th June, 1985, 31st July, 1985 and 6th September, 1985, observing that payments were made to Mrs. Samira Mallya in pursuance to these resolutions and the payments had also been approved by the Company Law Board "which indicates that the Company Law Board was satisfied that such payments were necessary for the purpose of the assessee-company". The learned Accountant Member further observed that Mrs. Mallya had participated and contributed at the Board level in policy-making exercise and also lent her name to be associated with the products manufactured by the assessee-company. He, however, accepted that there was no "direct evidence" available of the services rendered by the lady but according to him the provisions of s. 40(c)/40A(5) had been brought on the statute book by the legislature only to take care of such a situation. In the ultimate analysis, the learned Accountant Member opined that the assessee was entitled to a deduction of Rs. 1,02,000 only in respect of the commission paid and the balance was to be disallowed. The learned Judicial Member dissented with the view taken by the learned Accountant Member taking note initially of the order of the Tribunal for asst. yr. 1986-87 which had confirmed a similar disallowance and thereafter observing that the plea taken by the assessee's counsel was of a general nature and there was no documentary or any other evidence to show that Mrs. Mallya had been instrumental or connected with the activities of the company which resulted in boosting the sales. The learned Judicial Member further observed that the resolutions passed by the Board of Directors agreeing to pass on the commission received by them to the lady did not give sufficient reason for doing so. He ultimately held that the payment was not for business considerations and, therefore, not to be allowed.

5. The learned counsel for the assessee reiterated the arguments advanced before the Division Bench accepting at the outset that the claim had been rejected by the Tribunal in asst. yr. 1986-87. He, however, hastened to add that the facts were slightly distinguishable in the year under consideration as had been argued before the Division Bench and as noted by the learned Accountant Member at p. 5 of his order. The learned counsel further contended that commission had been paid not for any specific services rendered but this had been done in the light of the resolutions passed on various dates as noted in the order of the learned Accountant Member. The learned counsel sought to distinguish the facts of the year under appeal as compared to the preceding assessment year on the following lines :

1. That the accounting year for asst. yr. 1986-87 ended on 30th June, 1985, and the lady was married to Mr. Vijay Mallya just a few months ago i.e. on 24th February, 1985.

2. That the first resolution of the Board of Directors authorising payment of 3 per cent commission was passed on 27th June, 1985, i.e. three or four days before the end of the previous year.

As compared to the aforesaid, the plea before me was that previous year as a whole was to be taken into account during which Mrs. Mallya had attended three meetings of the Board of Directors. His further argument was to the effect that such type of payment was allowed by the relevant provisions of the Companies Act and it was the acumen of the entire Board of Directors including the lady which brought the company out of the red and converted it into a profit-making company. The only other argument was to the effect that the directors were authorised to apportion amongst any one of themselves or more the commission in question and this is what had been done in the year under consideration. In concluding, the learned counsel urged that the view adopted by the learned Accountant Member be approved. The learned Departmental Representative, on the other hand, strongly supported the view taken by the learned Judicial Member contending in the process that the order of the Tribunal for asst. yr. 1986-87 was squarely applicable being identical on facts. He further stated that whereas the assessee had categorically stated before the AO that the lady was rendering services in boosting the sales, etc., a different stand was now being taken before the Tribunal by the assessee's counsel i.e. the Board of Directors being authorised to pay the commission to any one or more of themselves in the light of Board's resolutions. In concluding he urged that the claim be disallowed in full.

6. After examining the rival submissions, I am of the view that the claim for deduction has to be rejected in the light of the order of the Tribunal for asst. yr. 1986-87. I have to categorically hold that there is no change in the facts in between the two assessment years. A reference to the order of the Tribunal for asst. yr. 1986-87 shows that absolutely identical arguments were advanced by the assessee's counsel and although the actual facts and events came up towards the fag end of the previous year, the Tribunal took note of all the three resolutions which find mention in the order of the learned Accountant Member. This is what the Tribunal had to say in para 6 of its order for asst. yr. 1986-87 :

"6. We have considered the rival contentions and we are unable to agree with the learned counsel that the commission was paid for business consideration. The assessee had been taking the stand right from the beginning that the commission was paid to Mrs. Mallya for her services. As already seen, Mr. Mallya was married to Mr. Vijay Mallya, chairman and director, in the month of February, 1985. There is neither any letter of appointment of Mrs. Mallya as a director (except a mention in the annual report) nor any agreement as per which any commission was required to be paid to her. It is not clear as to how immediately after her marriage, she rendered services on the basis of which sale of beer increased and the company earned profit on account of her special efforts. Even if there is no written agreement, evidence in regard to services should have been brought on record. The AO required the assessee to produce evidence in that regard. The CIT(A) also gave opportunity to produce the director. As already seen, the recipient was not produced on the plea that she was residing in London. Even if it was so, evidence should have been furnished to substantiate the plea that she had rendered services. We agree with the learned Departmental Representative that the commission which was permissible under the Companies Act could not be allowed unless it was admissible under the IT Act. We have seen from the judicial pronouncements that where a specific plea is taken about the services and certain remuneration is paid by way of commission, the onus lay on the assessee to show that the expenditure had been incurred wholly and exclusively for business purposes. We have already seen that three resolutions were passed but none of them made any mention of the reason for which the commission was being paid. First resolution was passed in a Board's meeting, which was attended by four directors, including Mr. Vijay Mallya and his wife Mrs. Samira Mallya. This resolution was affirmed in the extraordinary general meeting. Third resolution, whereby the amount was passed on by the directors to the lady director, again does not give any reason for which the entire amount was so made over to the lady director alone. In our view, it was actually paid to the lady director not for the purposes of business expediency but for certain other reasons. The absence of any reason in any of the resolutions, reproduced above, made it amply clear that the payment was not made for commercial expediency, or in the interest of business. The company had indeed come out from the red and has started earning profit but that does not make out a case for payment of commission to the lady director. We have already seen that opportunities were given to the assessee to produce the director, but she had not been produced. In these circumstances, we are of the view that the payment of commission was rightly disallowed. Ground No. 1 fails."

As already noted by me earlier, even during the year under appeal, the assessee was asked to produce the lady and adduce necessary evidence to support the stand that services had been rendered but none of these was complied with. The learned Accountant Member in his order has not discussed the order of the Tribunal for asst. yr. 1986-87 although in the earlier part of his order he has recorded the arguments of the assessee's counsel whereby he had sought to distinguish the facts for the two assessment years. In my opinion, it was incumbent on the part of the learned Accountant Member to categorically deal with the arguments in this respect and express an opinion as to why the earlier order of the Tribunal on an identical issue was not applicable to a subsequent assessment year. The learned Accountant Member in fact accepts that there is no direct evidence available of the services rendered by the lady for the purpose of the business of the assessee-company but thereafter goes to hold that provisions of s. 40(c)/40A(5) are attracted in such a situation. He has further observed that approval by the Company Law Board means that payments were necessary for the purpose of the assessee-company. The Tribunal while considering identical arguments on the part of the assessee's counsel in asst. yr. 1986-87 observed as follows :

"We agree with the learned Departmental Representative that the commission which was permissible under the Companies Act could not be allowed unless it was admissible under the IT Act."

I endorse the view taken by the earlier Bench of the Tribunal for asst. yr. 1986-87 further observing that amount upto the restriction imposed by s. 40(c)/40A(5) cannot be allowed unless and until there is evidence to show that services were actually rendered by the person who is the recipient of the payment. In the final analysis, I hold that no part of the payment made to Smt. Samira Mallya was allowable as a deduction.

7. As regards the second point of difference, the facts are stated in the order of the learned Accountant Member and to recapitulate these, the assessee-company's case was that its Faridabad branch was earlier handling the sale of IMFL manufactured by McDowell and Herbertsons. Subsequently, vide letter, dt. 15th May, 1995, McDowell & Co. brought to the notice of the assessee-company that sales of its various products were unsatisfactory and McDowell & Co. also indicated its desire to find distributors who would be prepared to market their products exclusively. McDowell & Co. also pointed out that they wanted to appoint a new licensee who would deal exclusively with their products and also be responsible for giving adequate credit facilities in the market and also be responsible for all outstandings and bad debts, if any. It was further stated by the assessee's counsel before the Division Bench that on receipt of the aforesaid letter from McDowell & Co. the assessee appointed Blue Chip & Co. as its C&F agents at Faridabad for which purposes it entered into an agreement with the said firm on 25th June, 1985, for sale of McDowell products at Faridabad depot. It was explained that as a result of the aforesaid agreement, Blue Chip & Co. took on rent separate premises, appointed independent staff of about 13 persons opened an independent bank account and started working as a C&F agent for the assessee-company. It was also submitted that Blue Chip & Co. was separately assessed to income-tax at Delhi in respect of the handling charges received from the assessee-company and one of its partners, i.e. Birender Pal Singh, was a person having vast experience in liquor business and he was also independently managing a number of liquor vends in and around Delhi.

8. It was further submitted before the Tribunal that the tax authorities had disallowed the payment primarily on the ground that Blue Chip & Co. were having some ladies as partners who could not be found at the addresses given. It was contended that non-availability of partners could not be the basis for disallowing C&F handling charges paid to Blue Chip & Co. which was a regular income-tax assessee at New Delhi. In support of the aforesaid, a copy of assessment order, dt. 23rd June, 1989, of Blue Chip & Co. in the status of RF was furnished. The further plea on the part of the assessee's counsel was that in the year under consideration the assessee-company had been able to earn a net profit of Rs. 6,14,471 on sale of McDowell products alone and this was the figure after taking into account the C&F handling charges of Rs. 10,45,894 paid to Blue Chip & Co. The further submission was to the effect that in case the assessee had not appointed Blue Chip & Co. as C&F handling agent, the company would have lost this business as McDowell & Co. were thinking of appointing another licensee. Referring to the agreement between the assessee-company and Blue Chip & Co., the learned counsel for the assessee pointed out that the latter had the responsibility for collection/bad debts in relation to the goods supplied by the assessee to the vendors and it was stated as a fact that a sum of Rs. 1.73 lakhs had been recovered by the assessee from Blue Chip & Co. during the accounting year 1987-88 on account of bad debts. The further plea was to the effect that the agreement between the parties was a business decision and pointing to subsequent events it was submitted that the agreement could not be continued due to changed market conditions and from the accounting year 1989-90 McDowell & Co. Ltd.'s totally withdrew the agency from the assessee-company and gave it to a third party at Faridabad. In support of the various arguments advanced, reliance was placed on the Supreme Court decision in the case of Sassoon J. David & Co. (P) Ltd. vs. CIT (1979) 118 ITR 261 (SC).

9. The case of the Revenue before the Division Bench, on the other hand, was to the effect that the entire arrangement between the assessee-company and Blue Chip & Co. was a bogus and sham transaction. It was pointed out that prior to the agreement with Blue Chip & Co. the assessee had employed 8 staff members at Faridabad depot to handle the products of McDowell & Co. Ltd. as well as Herbertsons Ltd. and even after appointing Blue Chip & Co., the staff strength remained the same. It was submitted that sales in the year under consideration of the products of Herbertsons Ltd. were less than half of the preceding year and yet the staff strength remained the same. The argument was that no prudent businessman would retain the staff if the business had declined and as such the staff employed by the assessee at Faridabad continued to look after the sales of McDowell & Co. Ltd. although on paper it was shown that this was done by Blue Chip & Co. The other submission was to the effect that the plea of the assessee that McDowell & Co. Ltd. forced the assessee to employ an independent agent to boost its sales as against those of its competitors Herbertsons Ltd. was not correct since both the companies belonged to the same group i.e. United Breweries Group. Attention was also invited to the fact that investigation made by the AO revealed that Blue Chip & Co. was a newly constituted firm having Birender Pal Singh as Karta of the HUF as the main partner along with the two ladies namely, Mrs. Rattan Sundari and Mrs. Anjali, but these two ladies were not found at the addresses given in the partnership-deed when the AO wanted to contact them. In concluding the learned Departmental Representative urged that the payment of Rs. 10,45,894 to Blue Chip & Co. did not pertain to a genuine transaction and he therefore supported the action of the tax authorities in rejecting the claim.

10. The learned Accountant Member who wrote the initial order accepted the arguments advanced on behalf of the assessee noting the following facts and line of reasoning :

1. At its Faridabad depot the assessee was selling the products of McDowell & Co. Ltd. as well as Herbertsons Ltd. and although both the companies belonged to the same group, they were separate and independent entities having different shareholding pattern.

2. From the copies of the correspondence exchanged between the assessee, McDowell & Co. Ltd. and thirdly Blue Chip & Co. it was seen that McDowell & Co. Ltd. with a view to increase its sale in the market decided to appoint an independent wholesaler to deal with its products exclusively and stipulated as a precondition for appointment that a wholesaler who was dealing in other competitive brands would not be given the distributorship of McDowell & Co. Ltd.'s products. The assessee took up the matter with McDowell & Co. Ltd. requesting that it be retained in one capacity or the other as a wholesaler licensee for the products manufactured by McDowell & Co. Ltd.

3. The assessee was also concerned with extending credit facilities to L-II vendors where chances of bad debts were more since ownership of the vends changed with reaction in subsequent years.

4. Considering the aforesaid circumstances and after tripartite agreement between McDowell & Co. Ltd. the assessee and Birender Pal Singh, it was agreed that there should be an independent agency to look after the products of McDowell & Co. Ltd. and such an agency would not only be responsible for the sale and marketing but also for the bad debts in the market.

5. That Birender Pal Singh who was handling the beer sales of the assessee for the last 22 years was a well-known figure in the liquor trade dealing with the products manufactured by McDowell & Co. Ltd. in other territories like Delhi, Punjab, etc.

6. As a result of the negotiations, the assessee-company entered into an agreement with Blue Chip & Co. through its partner Birender Pal Singh and the arrangement was accepted by McDowell & Co. Ltd. as well.

7. That the firm Blue Chip & Co. was formed by Birender Pal Singh along with the two other partners to carry out the entire arrangement and this firm took on rent a separate building adjoining the assessee-company at Faridabad and employed 13 persons to deal exclusively with McDowell products.

8. C&F handling commission was credited by the assessee-company to the account of Blue Chip & Co. as per terms and conditions of the written agreement, dt. 25th June, 1985 and by entering into such agreement the assessee-company was not only able to retain its agency of McDowell products but also made a net profit exceeding Rs. 6 lakhs in transactions relating to sales made through Blue Chip & Co.

9. That as per the agreement Blue Chip & Co. were made responsible for losses on account of bad debts and it was a fact that the assessee recovered a sum of Rs. 1.73 lakhs on account of bad debts from Blue Chip & Co.

10. That there was no justification on the part of the tax authorities to hold that written agreement between the assessee and Blue Chip & Co. was a sham and bogus agreement merely on the ground that two of the partners who were ladies could not be contacted specially when Blue Chip & Co. had been granted registration and separately assessed to tax by the ITO concerned at Delhi.

In view of the aforesaid facts, the addition of Rs. 10,45,000 was deleted by the learned Accountant Member. The learned Judicial Member, however, did not agree with the view taken by the learned Accountant Member and by means of a dissenting order upheld the addition. This was done on the following grounds :

1. It was a sham transaction as two partners of the firm Blue Chip & Co. were not found available at the addresses given.

2. The staff strength of the assessee's Faridabad depot before and after the agreement with Blue Chip & Co. remained the same i.e, 8 when sales of Herbertsons Ltd. were considerably low i.e. less than half of the preceding year.

3. It was established that in fact whole of the staff of the assessee-firm in that area was looking after the business of McDowell & Co. and there was no arrangement with Blue Chip & Co.

4. The plea of the assessee about Herbertsons Ltd. being a competitor of McDowell & Co. got defeated as they were companies of the same group.

5. The assessee had not tried to establish "existence of so-called lady partners".

6. The non-functioning "of the so-called firm Blue Chip & Co. for long, as so-called agreement could not be continued" and siphoning of funds partly to Mrs. Mallya and partly to the United Agencies whose whereabouts were not known were relevant factors".

7. The recovery of bad debts from Blue Chip & Co. in the absence of relevant evidence or material and Blue Chip & Co. being assessed separately did not help the assessee to establish that the transactions were not bogus or sham.

11. Before me, the matter was argued at length by both the parties. The learned counsel for the assessee strongly supported the view expressed by the learned Accountant Member. In addition to reiterating the arguments advanced before the Division Bench the learned counsel highlighted the following :

1. The minimum staff strength had to be kept at 8 in the Faridabad depot and this was not at all a relevant factor for considering whether the transaction was genuine or otherwise.

2. That the sales of Herbertsons Ltd. had gone up and not declined as noted by the learned Judicial Member. Attention was invited to a letter, dt. 30th March, 1990, addressed to the AO (pp. 173 to 175 of the paper-book) wherein it had been mentioned that the sales at Faridabad had gone up by about 31 per cent over the sales of the previous year.

3. The lady partners of Blue Chip & Co. were not available during the relevant period i.e. when the assessment proceedings were taken up and concluded on 30th March, 1990, relevant to the previous year ending 30th June, 1986 and, therefore, they could not be contacted or produced was not a relevant factor. That the ladies at the relevant point of time were in Bombay and w.e.f. 31st March, 1989, the agency had closed, the Faridabad branch of the assessee stood closed on 31st March, 1992, and one of the lady partners, namely, Smt. Rattan Sundari, subsequently passed away.

The learned Departmental Representative on the other hand, strongly supported the orders passed by the tax authorities as also the order passed by the learned Judicial Member.

12. After considering rival submissions, I am of the opinion that the view expressed by the learned Accountant Member merits confirmation inasmuch as he not only taken into account all the relevant facts but has also given ample reasons for ultimately deleting the addition. In his order he has dealt with the complete background leading to the appointment of Blue Chip & Co. as the C&F agent of the assessee-company at Faridabad dealing exclusively with the products of McDowell & Co. He has also noted as a fact that the said agent took on rent separate independent premises to undertake the work and also employed independent staff and opened a separate bank account. It has also been noted that Blue Chip & Co. was assessed to tax for asst. yr. 1987-88 and granted registration. It stands to reason that a firm which is granted registration by the AO is a genuine partnership and not a bogus entity and subsequently after a gap of few years when the firm stands closed and the assessment proceedings of the company are in progress, it would stand to reason that the two lady partners or for that matter any partner of an erstwhile firm cannot be contacted when attempts are made to do so. On the circumstances of the present case, this cannot lead to an adverse inference on the part of the tax authorities. The learned Accountant Member has also noted as a fact and which has not been commented upon by the learned Judicial Member that even after making the impugned payment the assessee earned a net profit exceeding Rs. 6 lakhs and odd in relation to the sales made through Blue Chip & Co. He also noted as a fact that there was a recovery of Rs. 1.73 lakhs on account of bad debts from Blue Chip & Co. As against this, the learned Judicial Member does not find these two facts as of any relevance to hold that the transactions were not bogus or sham. In my opinion, this is not a correct view and I would say the same about the opinion expressed by the learned Judicial Member to the effect that once the partners are not found at the addresses given, then the indication is one of ingenuine rather than genuine. It is also noted as a fact by the learned Accountant Member and not commented upon by the learned Judicial Member that Birender Pal Singh who was handling beer sales for the assessee for the last 22 years was a well-known figure in the liquor trade and was instrumental in forming Blue Chip & Co. along with the two other lady partners. Then again the learned Judicial Member has commented upon the companies Herbertsons Ltd. and McDowell & Co. Ltd. being the companies belonging to the same group and the plea of competition amongst them being of no relevance. In my opinion, competition is competition, whether it is within the same group or outside, especially when these are limited companies who are answerable to their respective shareholders.

13. The arguments of the learned counsel for the assessee before me and which I have already summarised earlier are also reasonable and plausible in the sense that it is not a prudent decision to retrench staff unless and until the company itself closes down since closing of a branch and retrenchment of the staff may lead to labour unrest and in the case of big companies such as the ones in the present appeals, staff rather than being retrenched is taken care of in other offices or other of the group companies. In other words, much importance cannot be given to the fact that the staff strength remained the same before and after. The learned counsel has rightly pointed to p. 174 of the paper-book contending that sales have gone up rather than the other way round and the submissions about the lady partners of Blue Chip & Co. not being available at the time when the ITO was making enquiries also appears to be plausible and acceptable. The learned Judicial Member has made a mention about the siphoning of funds by Blue Chip & Co. partly to Mrs. Mallya and partly to United Agency as a factor for rejecting the assessee's claim but, in my opinion, one has to examine the matter taking an overall view of the cumulative factors rather than picking up one or two and this is what has been done by the learned Accountant Member to come to the conclusion that he did. In the final analysis, I uphold the view taken by the learned Accountant Member vis-a-vis the relief of Rs. 10,45,000 allowed in respect of the payment made to Blue Chip & Co.

14. As regards the third point of difference, the facts noted by the AO are to the effect that a sum of Rs. 2 lakhs was paid to United Breweries Ltd., Bangalore, claimed to be assessee's contribution to the Corporate Management Division established by the said company for the whole group of industries controlled by United Breweries, Bangalore. In response to specific queries raised by the AO vide order-sheet entries of various dates, the assessee stated that the "group" had opened a corporate office to provide common services to the companies within the group and these included : (a) financial services, (b) corporate planning and co-ordination, (c) marketing co-ordination, (d) legal, (e) personnel and (f) public relations. It was submitted that the corporate office had spent a sum of Rs. 1.76 crores for providing such common services to the group companies out of which the share of the assessee-company was determined and paid at Rs. 2 lakhs. It was explained that the aforesaid amount was fixed keeping in mind the time and efforts spent by the senior corporate officers. The further explanation was to the effect that by adopting aforesaid system the company had not involved itself in long-term standing expenses or heavy professional service bills but in fact had generated savings. It was also the plea that the company had been managed in the best possible manner. The assessee also placed on record opinion of a firm of Chartered Accountants claiming that the United Breweries group of companies had adopted the system of Corporate Management Division and this Division provided numerous services and also gave guidance in respect of marketing, finance and other aspects pertaining to the business. It was also claimed by the assessee that they had been submitting monthly P&L a/c cost yield, cash flow statement, etc. to the Division which in turn gave its advice for maximising profitability and optimum utilisation of resources available with the assessee-company. The assessee in support of its argument placed on record copies of telegrams and other correspondence but according to the AO these did not reveal the factum of rendering any specific services on the part of the said Corporate Management Division to the assessee. As against the aforesaid, the AO noted that the assessee-company already had Technical Assistance Agreement with United Breweries, Bangalore wherein it was specifically laid out that they would provide to the assessee the know-how for manufacturing beer as also for marketing and distribution purposes. According to the AO, the assessee in the light of the aforesaid agreement had to disclose to United Breweries Ltd. all the necessary information which is shown to have been forwarded vis-a-vis copy of correspondence, etc. filed by the assessee. The view of the AO, in other words, was that no evidence had been placed on record to prove that services had been rendered by the Corporate Management Division to the assessee. To the same effect were his observations in respect of the opinion filed by the Chartered Accountants. The AO also sought to distinguish the judgment of the Hon'ble Punjab & Haryana High Court in the case of CIT vs. Oriental Carpet Mfrs. (India) (P) Ltd. (1972) 86 ITR 543 (P&H), as also the decision of the Hon'ble Supreme Court in the case of CIT vs. Chandulal Keshavlal & Co. (1960) 38 ITR 601 (SC), purportedly relied upon by the assessee. In the final analysis, the AO rejected the claim following in this connection the decision of the Hon'ble Supreme Court in the case of Lachminarayan Madan Lal vs. CIT (1972) 86 ITR 439 (SC). On further appeal, the CIT(A) confirmed the disallowance on the same line of reasoning as adopted by the AO.

15. At the time of hearing before the Division Bench, the learned counsel for the assessee reiterated the arguments advanced before the tax authorities highlighting the following :

1. The assessee was one of the companies of the United Breweries Group and the main company of the said group was United Breweries Ltd.

2. United Breweries Ltd. started Corporate Management Division to render various services through group agencies and prior to establishment of this CMD, such Division was managed by Ltd., Bombay, and which consisted of departments such as corporate, personnel and administration, finance, planning and co-ordination, public affairs and vehicle department.

3. For effecting recoveries on account of services rendered to various group companies, debit notes were raised at the end of the accounting period on the basis of time taken by each individual subsidiary company and the share of expenses allocable to the said company were charged.

4. In the account of United Breweries Ltd., which ran the Corporate Management Division, expenditure incurred was shown and corresponding recoveries were also reflected.

5. Payment of Rs. 2 lakhs had been made by the assessee to United Breweries Ltd. on the basis of the debit-note raised which took into account the time spent by the Corporate Management Division on the affairs of the assessee-company.

As regards the evidence, the assessee's counsel invited reference to various documents, certificates appended on the paper-book which contained a certificate from the auditors of the United Breweries Ltd. (p. 118) which certified that the Corporate Management Division had incurred a total expenditure of Rs. 1.76 crores during the period ending 30th June, 1986, out of which an amount of Rs. 2 lakhs had been debited to the assessee-company as their share. Similarly, at p. 119 of the paper-book, details were available in respect of the number of hours spent by the Corporate Management Division in relation to the work relating to the assessee and this gave a figure of 1058 hrs. and the rate applied was Rs. 189.06 which had been debited to the assessee-company. The learned counsel for the assessee vehemently contended that there was no justification for disallowing the amount of Rs. 2 lakhs and in support of the arguments advanced, reliance was placed on an unreported decision of the Calcutta Bench of the Tribunal in the case of Phipson & Co. Ltd. in ITA No. 3415/91, dt. 23rd December, 1996. The learned Departmental Representative, on the other hand, supported the order of the CIT(A) rejecting the claim.

16. The learned Accountant Member accepted the arguments advanced on behalf of the assessee in part but recording finding of fact to the effect that the Corporate Management Division of United Breweries Ltd. had incurred total revenue expenditure of Rs. 1.76 crores out of which it had offered for disallowance a sum of Rs. 13,13,502 under various provisions i.e. s. 37(3) under r. 6D and on account of entertainment. The learned Accountant Member also took note of the details of total expenditure incurred i.e. Rs. 1.76 crores incurred by United Breweries Ltd. and given at pp. 113-114 of the paper-book. It was noted as a finding of fact that the entire expenditure was of revenue nature and major expenditure was on account of inland travelling, miscellaneous expenses, annual conference expenses, vehicle expenses, legal and professional expenses, etc. The learned Accountant Member also noted the system of working out the hours per group company as also the method of quantifying the amount which was to be debited to each such group company. It was also noted that the accounts of United Breweries Ltd. were audited as also was the position in the case of the assessee and this audit was not only under the Companies Act but also under the IT Act. It was also noted by the learned Accountant Member that no adverse material was found and there was no note or qualification in any of the audit reports. In other words, the learned Accountant Member accepted most of the arguments advanced on behalf of the assessee but did not agree to the submission that since a disallowance had already been made in the case of United Breweries Ltd. out of the total expenditure of Rs. 1.76 crores, no further disallowance was required to be made in the hands of the assessee-company. This was rejected with the following observations :

".... We, however, are not inclined to accept this argument because the expenditure is incurred for all entities under UBG, who have joined together to utilise the services of CMD and, therefore, allocation of expenditure also has to be on the basis of each expenditure incurred as such and, therefore, in each individual assessment of group company, appropriate disallowance is required to be made on the basis of statutory provision. Similar is the view of the Calcutta Bench, referred supra. We direct accordingly. This ground is partly allowed.

AO may call for details of disallowance made in the hands of UBL and make proportionate disallowance in the case of the assessee-company."

The learned Judicial Member, on the other hand, chose to reject the claim with the following observations :

"5. Ground No. 3 relates to confirmation of disallowance of Rs. 2 lakhs paid to Corporate Management Division of United Breweries Ltd. This issue has been elaborately discussed by learned first appellate authority in paras 5.4 and 5.5 of the order. After considering the entire facts and circumstances of the case, I am of the considered opinion that no interference is called for in the finding impugned. Adopting the same reasoning, I confirm the disallowance of Rs. 2 lakhs paid to CMD. Ground fails."

17. I have heard both the parties on the issue-the learned counsel for the assessee supporting the view taken by the learned Accountant Member and the learned Departmental Representative supporting the view taken by the learned Judicial Member. I am, however, not in a position to agree with the submissions made by the learned Departmental Representative as the learned Accountant Member has given detailed reasons after recording the relevant facts to come to the conclusion that he did whereas the learned Judicial Member without pointing out any infirmity either of fact or of conclusion in the order of the learned Accountant Member chose to adopt the reasoning of the CIT(A) as his own. In my opinion, the work-load is heavy on the person who writes a dissenting order as he is expected to deal with each and every factual aspect, point and the reasoning adopted by the other member or judge to come to the conclusion that he did whereas nothing of this sort is found in the present order of dissent. As the view taken by the learned Accountant Member is the correct one on the facts and circumstances of the case, as discussed by him in the preceding paras, I uphold the same.

18. As regards the last point of difference which arises out of the Revenue's appeal before the Tribunal, the facts are discussed at length in the orders passed by the tax authorities and it would suffice in case para 6.6 of the order of the CIT(A) is reproduced as under :

"6.6 Considering the facts of the case it is held that AO has not doubted the genuineness of the expenses and has admitted that these companies have rendered services but it is only questioning the extent of the expenditure. These companies to whom commission has been paid they are also in the same line of business, i.e., liquor and as pointed out earlier there is interaction among these companies. McDowell & Co. Ltd. and Herbertsons Ltd. all are also in the same trade as has been mentioned by the assessee's counsel that and its office located at various places and have establishment, therefore, these companies are also run for profit motive and they charge this amount from the assessee-company. Besides this, the assessee-company has recovered from those companies amount on account of non-returned of bottles. Considering these facts disallowing Rs. 2 per dozen on ad hoc basis does not carry any weight and no such addition has been made in the past. Facts in the past were also the same though AO argued those facts are highlighted and principle of res judicata in the income-tax proceedings is not applicable, yet I find that there is no reason to deviate from the past history specifically when it is admitted that these parties have rendered the services. It is very difficult to say this much amount is reasonable and the balance is not reasonable unless some comparison is made; i.e., for the same service in the market less commission is being paid. Addition made is deleted and this ground of appeal is allowed."

It is apparent that the CIT(A) has referred to the past history of the case and although it is an accepted position that principle of res judicata does not apply, the CIT(A) has categorically observed that there was no reason to deviate from the past history specifically when it was an admitted fact that parties to whom payments had been made had rendered services.

19. The learned Accountant Member confirmed the order of the CIT(A) observing that the issue was squarely covered in assessee's favour by the decision of the Tribunal in the assessee's own case for asst. yr. 1983-84 in ITA No. 1498/89, dt. 19th June, 1995. He accordingly rejected the solitary ground raised in the Revenue's appeal. The learned Judicial Member vide para 7 of his dissenting order restored the matter back to the file of the AO with the following observations :

"7. Now, coming to the Revenue's only ground against deletion of addition of Rs. 11,03,550 made out of service charges paid to marketing agents, while deleting the addition, main thrust by learned CIT(A) was on past history of the case. From the facts and circumstances, it is found that the AO has actually not been able to find out the extent of excessiveness to co-relate with material, therefore, in my view, it would be fair and reasonable to restore this issue to his file for adjudicating the same afresh, after giving due opportunity to the assessee."

The learned Departmental Representative supported the order of the learned Judicial Member whereas the learned counsel for the assessee supported the order of the learned Accountant Member contending that the issue was squarely covered by the earlier order of the Tribunal, supra, and the past history of the case was also in favour of the assessee. According to the learned counsel, the learned Judicial Member had restored the matter back to the file of the AO although it was not the case of any party either before the Tribunal or before the CIT(A) that something was lacking on the part of the AO and some further enquiries were required to be made. The learned Judicial Member has not mentioned a single word about the earlier order of the Tribunal and as to why it is not applicable and he appears to have inadvertently overlooked the "past history of the case" which, in my opinion, is important for deciding an issue which is purely factual. In the final analysis, I approve the view taken by the learned Accountant Member to maintain the relief given by the CIT(A) in respect of the sum of Rs. 11,03,550.

20. The matter would now be listed before the regular Bench for passing an order in accordance with the majority opinion.