Income Tax Appellate Tribunal - Mumbai
V.I.P. Industries Ltd. vs Inspecting Assistant Commissioner on 11 January, 1991
Equivalent citations: [1991]36ITD70(MUM)
ORDER
R.N. Singhal, Accountant Member
1. They are cross-appeals. Taking up assessee's appeal first, the first and foremost ground is directed against the disallowance of Rs. 26,99,863 claimed as commission payable to M/s. M.S. Textiles.
2. The assessee is one of the topmost moulded luggage manufacturers of India. It is wholly owned subsidiary of M/s. Blow Plast Ltd. Previous year relevant to this appeal is year ending 31-7-83. Vide para4 of the order of CIT(A), assessee claimed total commission payment of Rs. 35,27,000 inclusive of Rs. 26,99,863 to M/s. M.S. Textiles and the balance to M/s. Blow Plast Ltd. and another. The commission to M/s. Blow Plast Ltd. and another stands allowed and the balance of Rs. 26,99,863 to M/s. M.S. Plastics stands disallowed. Main thrust of assessee's argument is that the commission is paid in pursuance of agreement and further that the results achieved in the form of increase in sales to Canteen Stores Department are spectacular. The main argument of the department is that though the sales have been increased but there is no evidence that M/s. M.S. Textiles did any work at all and it is further contended by the department that major part of the commission received by M/s. M.S. Textiles has been shown by them as passed on to M/s. Bafna Traders and there is no trace of M/s. Bafna Traders and against cheques credited in the bank account of M/s. Bafna Traders almost immediately cash is withdrawn. The assessing officer has written a very detailed order and this point is dealt with at pages 2 to 9 of the assessment order. The CIT(A) also has written a very detailed order and the point is dealt with in paras 3 to 28 of his order on pages 2 to 11 thereof.
3. The learned Chartered Accountant, on behalf of the assessee, has taken us through the relevant portions of both the orders. On our specific query it was admitted before us that there was no factual error worth the name in either of these orders. While taking us through the orders he pointed out the aspects on which the assessing officer and the CIT(A) allegedly went wrong in drawing inference. We shall point out those aspects. But for the sake of brevity we would merely highlight some of the aspects considered by the assessing officer and the CIT(A). It was noted by the assessing officer that M/s. M.S. Textiles was given commission by the assessee-company only for two years viz., assessment years 1983-84 and 1984-85. It was highlighted by the assessee that in the relevant periods, the sales to Canteen Stores Department have increased by 74% in assessment year 1983-84 and by another 84% in assessment year 1984-85 as compared to the respective figures of immediately preceding year. The assessing officer mentioned that M/s. M.S. Textiles was merely a small partnership concern but the learned Chartered Accountant for the assessee questioned this statement and drew our attention to the final accounts of that firm for the years ending Diwali, 1982 and Diwali, 1983 kept on pages 126 to 135 of the second compilation of the assessee. We shall deal with this aspect in greater detail subsequently. The assessing officer noted that admittedly there was absolutely no documentary evidence to show that M/s. M.S. Textiles or M/s. Bafna Traders had done any work at all. Specific questions in the matter were put to the partner of M/s. M.S. Textiles and he, in effect, confirmed this position. The assessing officer made enquiries also from the Canteen Stores Department who gave categorical reply on this point against the assessee and the assessee's reply for that was that the commission for sales was paid for oral canvassing and persuasion for expediting the orders and payments for the supplies made. The position that there was absolutely no documentary evidence and the records of Canteen Stores Department also never disclosed any work done by M/s. M.S. Textiles or M/s. Bafna Traders was not controverted on behalf of the assessee. The assessing officer found that out of Rs. 26,99,863 shown as payable by the assessee to M/s. M.S. Textiles, the latter had shown as payable to M/s. Bafna Traders as much as Rs. 20.01 lakhs. Assessing officer tried to make enquiry about M/s. Bafna Traders and it is an admitted position that M/s. Bafna Traders could not be identified. The bank account of M/s. Bafna Traders showed credits for the cheques received from M/s. M.S. Textiles but also showed withdrawals by cash almost immediately after deposit. None of these facts have been controverted or questioned by the assessee and the plea taken is that the assessee is obliged to show the person to whom it has made the payments and it is not for the assessee to find out or show how M/s. M.S. Textiles dealt with the amount or what happened to the payment made by M/s. M.S. Textiles to M/s. Bafna Traders. It is also submitted before us that at any rate most of the payments have been made by M/s. M.S. Textiles to M/s. Bafna Traders after the close of the previous year of the assessee i.e., after 31-7-1983 and, therefore, that aspect was irrelevant for considering the facts and circumstances in this year. In para marked 2-D on pages 13 and 14 of the assessment order, the assessing officer has drawn inferences against assessee in Sub-clauses (a) to (f). Assessee's reply to Sub-clause (a) thereof is that the assessee has paid commission on sales to Canteen Stores Department(r) 5% in the first year and @ 4% in the second year. It is submitted on behalf of the assessee that it is a very reasonable rate of sales commission particularly looking to the fantastic increase in the figures of sales to the Canteen Stores Department. In regard to Clause (6) of para marked 2-D(ii) on page 13 of assessment order, the assessee has submitted that part of the sale turnover to Canteen Stores Department being attributable to the increase in price cannot be put against the assessee because increase in selling price has naturally resulted in higher margin of profit. In regard to Clause (d) on page 14 of the assessment order, the learned Chartered Accountant has submitted that the partners of M/s. M.S. Textiles were going to the depots of the Canteen Stores Department for canvassing the sales and also for expediting the payments.
4. In the context of order of CIT(A), the learned Chartered Accountant for the assessee has mentioned that in para 6(d) on page 3 of the appellate order, the CIT(A) has mentioned that M/s. M.S. Textiles have never had any dealings with Canteen Stores Department before and after the two years for which commission is shown as paid by the assessee. To this assessee's reply was that M/s. M.S. Textiles had expertise of dealing with other defence department establishments and also with Director General of Supplies and Disposals. It was, therefore, submitted that M/s. M.S. Textiles had the expertise of dealing with the Govt. Departments. In regard to the absence of documentary evidence, it was again emphasised that the follow up work was done by M/s. M.S. Textiles and perhaps by M/s. Bafna Traders also through personal contracts and oral canvassing, etc. In para 12 on page 5 of the CIT(A) noted that perhaps secret payments of commission to the Govt. Officers were routed through M/s. M.S. Textiles and M/s. Bafna Traders. But in this context it was clearly stated before us that such was not the assessee's case or submission at any time. In para 15(a) on page 7, the CIT(A) noted that assessee's sales to Canteen Stores Department were direct and that M/s. M.S. Textiles or M/s. Bafna Traders had no role in fixing the sale price. To this the reply of the learned Chartered Accountant for the assessee was that M/s. M.S. Textiles and M/s. Bafna Traders were orally doing the canvassing and follow up. In para 17 of the appellate order, the CIT(A) hac taken note of the dates of payments made by assessee to M/s. M.S. Textiles and then in turn by M/s. M.S. Textiles to M/s. Bafna Traders. We shall deal with this aspect subsequently in greater detail. Suffice it to mention that no error of facts, amounts or dates mentioned by the CIT(A) has been brought to our notice. In para 19 of his appellate order, the CIT(A) has cited a comparable case of Universal Luggage Mfg. Co. Pvt. Ltd. and assessee's reply thereto is that that case is not really comparable because that company had its own sales organisation. In para 27 of the appellate order on page 11, the CIT(A) has mentioned that there was no need for the utilisation of contact of M/s. M.S. Textiles when the assessee was already having substantial orders from Canteen Stores Department. To this assessee's reply is that existence or non-existence of need is not relevant and it is for the assessee to decide whether it should utilise the service of any person for enhancing the sales.
5. The learned departmental representative also took us to various portions of assessment order to emphasise that in the assessment order the assessee's case for claim of deduction has been very effectively met and rejected. He specifically drew our attention to the finding given in Clauses (a) to (f) of para 2-D(ii) on pages 13 and 14 of the assessment order. He, in particular, invited our specific attention to para 6 on pages 3 and 4 of the appellate order to emphasise the finding given by the IAC (Asst.) and upheld by the CIT(A). He also drew our attention to paras 7 and 9 of the appellate order and then ultimately submitted that the IAC as well as the CIT(A) had rightly come to a conclusion that there was no nexus between the payment and the purpose of payment. He laid special emphasis also on Clause marked (e) on page 8 of the appellate order to show that from Shri Mafatlal Bafna, Prop, of M/s. Bafna Traders, M/s. M.S. Textiles did not have any other dealings before or after.
6. After learned Chartered Accountant for the assessee as well as the learned departmental representative took us through various portions of assessment order and appellate order, some aspects emerged on which we sought clarifications and information from the learned Chartered Accountant. In particular, we sought information about M/s. M.S. Textiles. We noted that while the previous year for the assessee ended on 31st July every year, M/s. M.S. Textiles had adopted Diwali year as the previous year. In the second compilation furnished by the assessee before us on 19-3-90 there appear assessment orders, final accounts and relevant lists of M/s. M.S. Textiles for the assessment years 1983-84 andl984-85. On behalf of the assessee and on our request, the balance-sheets and Trading & Profits & Loss A/c. of M/s. M.S. Textiles were furnished, for assessment years 1982-83, 1985-86 and 1986-87. Assessee then furnished information of commission due and commission paid date-wise to M/s. M.S. Textiles. On the same sheet assessee incorporated payments made by M/s. M.S. Textiles to M/s. Bafna Traders. All these amounts pertain to assessee's claim for assessment year 1984-85. Corresponding figures and information for assessment year 1983-84 was furnished on our request. We would consider them in greater detail subsequently but here we may note first that for assessment year 1983-84 M/s. M.S. Textiles have shown payments of commission not to M/s. Bafna Traders but to two other entities viz., (i) Marahal De Cunha and (ii) Mansukhram Textiles (P.) Ltd. and we were told that in respect of these two parties also no further information was available. Yet another aspect was that assessee has shown payments to M/s. M.S. Textiles quite a bit late but M/s. M.S. Textiles have shown the payments to M/s. Bafna Traders and two entities much more belatedly.
7. From the final accounts of M/s. M.S. Textiles we have compiled figures as per the Annexure. From the debit side of the Profit &Loss A/c. we have selected items of salary, conveyance, travelling and telephone because in the context of assessee's claim of personal canvassing and running about by M/s. M.S. Textiles those four items would be most relevant. Then we have taken the figure of total expenses and net profit. From the credit side we have taken the sales and gross profit. Then we have taken the figures of commission received and commission paid and the net commission as taken on the credit side of the Trading-cum-Profit & Loss A/c. As already mentioned, previous years of the assessee and that of M/s. M.S. Textiles do not coincide. Commission payments to M/s. M.S. Textiles as shown by the assessee fall in two years i.e., from 1-8-81 to 31-7-83, corresponding to assessment years 1983-84 and 1984-85. This period would fall in three previous years of M/s. M.S. Textiles during years ending Diwali, 1981, Diwali, 1982 and Diwali, 1983. For the years ending Diwali, 1984 and Diwali, 1985 for M/s. M.S. Textiles, there was no payment of commission by the assessee. The assessee has shown commission paid/payable at Rs. 18.39 lakhs in assessment year 1983-84 and Rs. 26.99 lakhs in assessment year 1984-85 thus totalling Rs. 45.38 lakhs. From above it is obvious that in spite of such heavy receipts of commission by M/s. M.S. Textiles from the assessee, the not profit shown in the books of M/s. M.S. Textiles has not crossed the mark of Rs. 70,000 in any of the three previous years relevant to this payment viz. years ending Diwali, 1981, Diwali 1982 and Diwali, 1983. Yet another important thing is that the expenses on salary, conveyance, travelling and telephone have also not been very high nor the total expenses have been high in these three years. On the other hand, the net profit as well as the total expenses and travelling expenses have been substantially higher in subsequent two previous years viz. Diwali, 1984 and Diwali, 1985 when M/s. M.S. Textiles has not received any commission from the assessee. Yet another important aspect is that for M/s. M.S. Textiles for the three previous years in which commission is received from the assessee, total commission received is shown as Rs. 55.37 lakhs against which the total commission outgoing is Rs. 43.34 lakhs. Thus almost 80% of commission received has been shown as commission given. On the other hand, in subsequent two years, the commission paid by the assessee is not even 40% of the commission received. Thus, M/s. M.S. Textiles have admitted receipt of commission from the assessee but have, in turn, substantially reduced their income by showing very high payments of commission and thereby they have maintained their figure of book profit at a very modest figure.
8. We have already hinted that the CIT(A) has also touched upon that aspect in para 17 of his appellate order but we may now elaborate the aspect of payment of commission shown very very belatedly. In the context of assessee's previous year relevant to assessment year 1983-84, page 12 of assessee's third compilation shows that the total commission of Rs. 18.39 lakhs became payable in January, April and July, 1982 but the payments were made from April, 1982 to October 1982 giving broadly a time-lag of 3 months. However, the dates of payments shown by M/s. M.S. Textiles to Marahal De Cunha indicate that the last payment was made in March, 1983 and the total payment to that party was Rs. 5.52 lakhs. For that period the remaining amount of Rs. 9.19 lakhs was payable to M/s. Mansukhram Textiles (P.) Ltd. but not a pie out of that had been paid up to the end of July, 1982 and it is indicated on behalf of the assessee that M/s. M.S. Textiles paid to M/s. Mansukhram Textiles (P.) Ltd. the whole sum of Rs. 9.19 lakhs in the assessment year 1984-85. Similarly, for year ending 31-7-1983, relevant to assessment year 1984-85 of the assessee, commission is shown as fallen due in October, 1982, January, 1983, April, 1983 and July, 1983 but payments are shown as made by the assessee to M/s. M.S. Textiles up to September, 1985 and the dates of payment by M/s. M.S. Textiles to M/s. Bafna Traders give rise to a very very interesting position. For the work allegedly done by M/s. Bafna Traders from August 1982 to July 1983, payments are shown from May, 1984 to December, 1984. Now the interesting point is that M/s. M.S. Textiles and other three parties to whom M/s. M.S. Textiles have in turn allegedly paid commission are supposed to have done running about for contacting the persons of Canteen Stores Department all over the country with 29 outlets. Such contact was admittedly not established through correspondence. Therefore, such contact was possible only either by telephone or travelling. Now the point is that some expenditure would be required to be incurred for establishing such contact in person or telephonically, etc. From the angle of receipt of commission that would be important because commission is received subsequently. So the point is that somebody has to have some money for being spent for establishing contact by personally going or talking on telephone. In point of time such expenditure must be incurred first and since commission is shown as received subsequently, it cannot come out of the commission received. So somebody has to explain the availability of money with him for incurring that expenditure in advance in the hope that commission would be received subsequently. In the intervening period whose money has been spent nobody has been able to show. This is a very very important aspect, but the assessee has no explanation for the same.
9. Now we can summarise and highlight the important aspects which emerge from the assessment order, appellate order and the discussion contained hereinabove:
(a) Assessee's sales during its previous years relevant to assessment years 1983-84 and 1984-85 to Canteen Stores Department have undoubtedly shown fantastic rise:
(b) There is correspondence to show that the assessee and M/s. M.S. Textiles had agreed on some terms and conditions on whose basis payment of commission is claimed by the assessee;
(c) In the ultimate analysis, assessee is able to show that it has paid the impugned amounts to M/s. M.S. Textiles;
(d) It is, however, an admitted position that there is no documentary evidence of either M/s. M.S. Textiles or any of the three recipients of commission from M/s. M.S. Textiles having done any work for increasing the sales to Canteen Stores Department;
(e) Canteen Stores Department have completely denied having dealt with or knowing either with M/s. M.S. Textiles or any of the recipients of commission from M/s. M.S. Textiles;
(f) Analysis of relevant figures of final accounts of M/s. M.S. Textiles shows that before and during the relevant period M/s. M.S. Textiles had not incurred any expenditure worth the name for orally contacting the various outlets of Canteen Stores Department said to be 29 spread all over the country;
(g) M/s. M.S. Textiles claimed to have passed on payments 80% of the commission received by them from the assessee to three other parties - two in the first year and yet another in the second year. There is no trace of any of these parties;
(h) Bank account of one of the parties M/s. Bafna Traders has been found but cheques deposited therein have been followed by heavy cash withdrawals;
(i) As per the accounts of M/s. M.S. Textiles, commission paid by them to others is 40% of the commission received by them in the years ending Diwali, 1984 and Diwali, 1985 i.e., after they ceased to receive commission from the assessee but in the three previous years which would cover a period of 2 years of receipt of commission by them from the assessee, the commission payments shown by them are in the vicinity of 80% of the commission received by them ;
j) For doing the work of contacting the persons concerned in Canteen Stores Department, no expenditure worth the name is shown to have been incurred by M/s. M.S. Textiles. The three parties who allegedly received major part of commission from M/s. M.S. Textiles would have been required to incur the expenditure out of their own resources but two of them have not been even identified and one of them M/s. Bafna Traders has not shown resource for incurring that expenditure. The point is that identification and verification of the party becomes more important and more necessary when the question of availability of money for being spent or invested is also involved.
10. To conclude we broadly agree with the reasoning given and totally agree with the inferences drawn in the assessment order and the appellate order. Even before us and on our request some further information has been furnished. That also strengthens the inferences drawn hereinabove which are against the assessee. There is no substance in assessee's contention that M/s. M.S. Textiles or M/s. Bafna Traders did any work for increasing the sales of the assessee's products to Canteen Stores Department. Thus, there is no nexus between the payments made and the work done. Assessee's this ground of appeal is rejected.
11. Assessee's second set of grounds of appeal is directed against expenditure of Rs. 42,019 on repairs to motor-cars being considered for quantification of addition under Section 37(3A). The plea taken is that the expenditure on repairs is covered by Section 31 while Section 37(3A) applies only those expenses which are covered under Section 37. The Bombay High Court decision in CIT v. Chase Bright Steel Ltd. (No.l), [1989] 177ITR 124/42 Taxman 142 is cited in support of this proposition. Assessee's this ground of appeal deserves to be accepted. We hold that the expenditure on repairs of cars is to be ignored in quantification of addition under Section 37(3A).
12. Third set of grounds of appeal also pertains to the quantification of addition under Section 37(3 A) and refers sum of Rs. 25,826 relating to travelling; Rs. 9,876 relating to labour welfare; and Rs. 63,243 relating to hotel expenses. This set of grounds of appeal is not pressed before us. The same is rejected.
13. Fourth set of grounds of appeal objects to the inclusion of Rs. 3,405 in quantification of addition under Section 37(3 A). The point taken is that the said sum of Rs. 3,405 was included by the IAC in Rs. 7,25,778 but it represented only discounts allowed to the customers and was not expenditure. Details are furnished on pages 15 and 16 of 4th compilation of assessee presented on 4-4-1990. We find that assessee's this contention also deserves to be upheld. We hold that the said sum of Rs. 3,405 would not be considered in quantification of addition under Section 37(3A).
14. Fifth set of grounds of appeal of the assessee also relates to quantification of disallowance under Section 37(3A). As already mentioned assessee paid commission of Rs. 26,99,863 to M/s. M.S. Textiles which has been disallowed in full and the disallowance has been upheld above. But a further sum of Rs. 8,27,431 was paid as sales commission to M/s. Blow Plast Ltd. and Kemps & Co. Assessing Officer held that the Commission of Rs. 8,27,431 paid to these two parties was includible in quantification of addition under Section 37(3A). CIT(A) vide paras 34 and 35 of his order held that the sales commission of Rs. 8,27,431 was not wholly for sales promotion, publicity and advertisement and only 25% of that sum should be included for quantification of addition under Section 32(3A).
15. Before us it was explained on behalf of the assessee that almost all the sales were direct and only at Madras the sales were effected through consignment agents and the commission was paid as sales commission. Reliance was placed on the Tribunal's decision in Mopeds India Ltd. v. IAC [1984] 7 ITD 324 (Hyd.) and on Delhi Bench decision in ITO v. Premier Chit Fund & Finance (P.) Ltd. [1990] 32 ITD 647. We find that the assessee's submissions are well founded. Accordingly we hold that no part of the sales commission of Rs. 8,27,431 is includible in quantification of addition under Section 37(3A). Assessee's this ground of appeal succeeds.
16. Assessee's sixth set of grounds of appeal pertains to quantification of addition in the nature of entertainment expenditure. The IAC held that 30% of the expenses of Rs. 54,982 was required to be treated as entertainment expenditure. CIT(A) upheld this position in para 36 of his order.
17. It is contended on behalf of the assessee that the expenditure on the guest of the company would be minimal and at any rate should not be estimated at more than 10%. Taking totality of circumstances into account, we would hold that it would be just and proper to estimate the same at 20% (twenty) in place of 30% adopted by the CIT(A) and 10% propounded by the assessee.
18. Seventh set of grounds of appeal pertains to again the quantification of disallowance under Section 37(3A). The sum involved is Rs. 30,902. It was explained to us that this comprised of two items. One was Rs. 16,495 being 30% of Rs. 54,982 which was treated as entertainment expenditure in pursuance of immediately preceding group of grounds of appeal. The balance of Rs. 14,407 was out of staff welfare expenses. We agree with the assessee that neither the element of entertainment expenditure nor the sum of Rs. 14,407 out of staff welfare expenses would be includible in the quantification of addition under Section 37(3A). Assessee's this set of grounds of appeal is treated as accepted.
19. Assessee's eighth set of grounds of appeal is directed against a sum of Rs. 8,000 being considered in quantification of addition under Section 40A(5) in respect of Mr. Chowdhary, Vice President of the assessee-company. This sum pertains to accommodation used by Mr. Chowdhary. It was claimed that the accommodation was partly used by Mr. Chowdhary for official purpose. CIT(A) observed that in the residence no specific portion was marked for office work and simply because some office work was being done by Mr. Chowdhary at his residence it would not mean that some deduction should be allowed in respect of the accommodation while computing addition under Section 40A(5). The view taken by the CIT(A) is correct and justified on the facts and in the circumstances of the case. This set of assessee's grounds of appeal is rejected.
20. Ninth set of grounds of appeal objects to the disallowance of extra shift allowance on jigs, tools, fixtures, internal telephone, scales and electric installations. Our attention is drawn to Tribunal's order in assessee's own case for assessment year 1981-82 in ITA No. 4854 (Bom.) of 1985 dated 19-6-89 and also to the earlier decision for assessment years 1980-81, 1982-83 and 1983-84. Therein by relying on an earlier decision of the Tribunal, the assessee's contentions have been accepted that extra shift allowance would be allowable on electrical installations and weighing scales. It is also held therein that investment allowance is available to the assessee on jigs, tools, fixtures and electrical installations. Assessing Officer is directed to accept the assessee's claim for extra shift allowance on jigs, tools, fixtures, internal telephones, scales and electrical installations. Assessee's this ground of appeal is also treated as accepted.
21. Tenth set of grounds of appeal of the assessee objects to the disallowance of investment allowance on canteen equipment. In Tribunal's decision dated 27-5-88 in ITA No. 1772(Bom.)of 1985 for assessment year 1981-82 in the case of Unichem Laboratories Ltd. it has been held that the equipment used in the canteen of the factory would constitute plant and hence it would entitle to investment allowance. The same view is upheld. We would uphold the assessee's claim for investment allowance on canteen equipment. Assessee's this ground of appeal is also treated as accepted.
22. Assessee's eleventh set of grounds of appeal relates to levy of interest under Section 215. It was explained to us that it would be merely consequential.
23. For statistical purpose, assessee's appeal is treated as partly allowed.
24. In department's appeal, substantive grounds of appeal are as follows:
1. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing the IAC (Asstt.) to allow additional depreciation on the cost of dies, jigs, fixtures, weighing scale and electrical installations which are not installed in the office premises by holding these items to be integral part of the plant & machinery.
2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in directing the IAC (Asstt.) to allow investment allowance under Section 32A on dies, jigs, fixtures, weighing scales, electrical installation not installed in the office premises of the company.
25. Obviously, they relate to additional depreciation and investment allowance on dies, jigs, fixtures, weighing scales and electrical installations. The learned departmental representative argued that the items did not constitute plant. On the other hand, learned Chartered Accountant for the assessee relied on Tribunal's decision in assessee's own case for assessment year 1981 -82 in ITA No. 4854 (Bom.) of 1985 dated 19-6-89 and another consolidated order for assessment years 1980-81, 1982-83 and 1983-84 in ITA Nos. 166 (Bom.)/87, 6190 (Bom.)/85 and 167(Bom.)/87. In view of those decisions of the Tribunal, the departmental appeal deserves to be dismissed. We do so.
Annexure M/s. M.S. Textiles - Analysis of some items of Debit Side P. & L. A/cs
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S. Item Year ending Diwali Day of No.
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1981 1982 1983 1984 1985 (i) (ii) (iii) (iv) (v) (vi) (vii)
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1. Salary 32,770 68,543 62,956 1,18,050 1,47,075
2. Conveyance 23,834 26,926 51,737 80,609 77,487
3. Travelling 1,01,014 1,18,324 1,02,171 1,80,641 1,54,225
4. Telephone 9,990 45,958 35,194 41,803 69,758
5. Total expenses 3,15,891 4,80,386 4,74,874 8,01,577 8,79,794
6. Net profit 41,463 55,673 67,867 1,01,502 91,549
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Credit Side
7. Sales 1,16,871 4,39,762 6,50,708 7,25,523 59,08,404
8. G.P. on sales - 4,176 24,348 ' 722 4,64,081
9.
(a) Commission received 5,82,804 21,54,868 27,99,990 13,03,485 8,26,006 Less:
(b) Commission paid 2,33,125 16,50,011 24,50,377 5,31,210 3,18,743
(c) Net commission 3,49,679 5,04,856 3,49,613 7,72,275 5,07,263
(a) - (b) S.P. Kapur, Judicial Member
1. I have gone through the proposed order of my learned brother, the Accountant Member and being not able to persuade myself to the conclusions arrived at by him in para 10 of his proposed order, I append my note of dissent. The issue relates to claim of the assessee made in lieu of commission payment of Rs. 35,27,000 inclusive of Rs. 26,99,863, having been paid to M/s. M.S. Textiles. The dissent relates to the disallowance of Rs. 26,99,863 only. This has been discussed by my learned brother in paras 2 to 10 of his proposed order. By and large, he has discussed the facts in correct perspective except for certain observations made and inferences drawn. In para 9 of his order, he has summarised and highlighted the important aspects of the case, which, according to my learned brother, have emerged from the assessment order as also the appellate order. I broadly agree with the facts highlighted by my learned brother at (a) to (j) (para 9). In concluding para 9, he has observed that, "the point is that identification and verification of the party becomes more important and more necessary when the question of availability of money for being spent or invested is also involved."
2. Now the point is as to whether simply because the Canteen Stores Department, which is a Government Department, has denied having dealt with or knowing M/s. M.S. Textiles, does it point out to the irresistible and irrevocable conclusion that the commission paid by the assessee-appellant to M/s. M.S. Textiles was for no work done.
The partners of M/s. M.S. Textiles are in no way related to anyone in the Management or, else, the Board of Directors of the assessee-appellant M/s. VIP Industries Ltd. This is the first year when such payment has been made a subject matter of disallowance. For other years, such payments stood allowed. M/s. M.S. Textiles have been assessed in respect of commission payment received by them from the assessee appellant. The stand of M/s. M.S. Textiles is that the services have been rendered through one M/s. Bafna Traders. There has been real increase in sale of assessee's products to Canteen Stores Department and for that increase the assessee had not incurred any expenditure. In the accounting period 1980-81 relevant to assessment year 1982-83, sales to Canteen Stores Department accounted for Rs. 211.43 lakhs. In the accounting period 1981-82 relevant to assessment year 1983-84 these sales stood at Rs. 367.69 lakhs and in the accounting period 1982-83 relevant to assessment year 1984-85, i.e. assessment year under appeal, these stood at a figure of Rs. 675.82 lakhs. Percentage of increase over previous years vis-a-vis base accounting period 1980-81 relevant to assessment year 1982-83 was 75% and 84% and increase of sales in accounting period 1982-83, which is relevant to assessment year under appeal, over that of accounting period 1980-81 is 220%. As against that, percentage of increase in total sales is 70%, 22% and 110% respectively. Whereas in the accounting period 1981-82 other sales were Rs. 1665.61 lakhs and for the assessment year under appeal these accounted for Rs. 1800.86 lakhs and increase was 8% qua sales to Canteen Stores Department the relevant figures were Rs. 367.69 lakhs and Rs. 675.82 lakhs, which accounted for increase of 84%..
There being no material on record to warrant the inference that either the constituents of M/s. M.S. Textiles or, else, those of Bafna Traders being in any way related to the Management or executives or directors of the assessee-appellant, how and why commission worth lakhs of rupees was doled out to M.S. Textiles is anybody's guess but certainly it could not be for no services rendered. The preponderance of probabilities favours the assessee and the inference that commission has not been paid for no work done. M/s. M.S. Textiles claim and rightly so, on facts and in the circumstances of the case, that they have been contacting Canteen Stores Department through M/s. Bafna Traders. The stand of the assessee is that the steep increase in sales to Canteen Stores Department, which is 84%, as compared to the immediate preceding assessment year and 220% as compared to an earlier one as against 8% increase in general sales for the immediate preceding assessment year and 86% overall for the earlier assessment year and further that commission was paid to M/s. M.S. Textiles to achieve steep increase in sales to Canteen Stores Department. The probabilities are and it cannot be ruled out, that Canteen Stores Department being a Government department the huge sales and the percentage of increase over the earlier years point out that someone has rendered services to the assessee and that resulted in steep increase. That person can be M/s. M.S. Textiles who have caused the steep increase in sales through M/s. Bafna Traders.
3. On 6-1-1987, Shri Shekhar R. Shah, one of the partners of M.S. Textiles, was examined by the Inspecting Assistant Commissioner of Income-tax (Assessment) and his statement is placed on our file (pages 43 to 46 of assessee's paper book), which reads as under:-
'Q.(1): Since when M.S. Textiles is in existence and what is the business and GIR No. of this concern?
Ans.: M.S. Textiles is in the existence since 1980. Trading in textiles and hosiery. Selling their products to the Armed Forces and to the Para Military and Military Forces through DGS & D, Ministry of Defence, Ordnance Factory and Canteen Stores Deptt.
Q.(2): Name the Houses and their products which you sell.
Ans.: These are as under :
(i) Morarji Goculdas Spg. & Wvg. Co. Ltd. Sale textiles.
(ii) Navsari Cotton & Silk Mills Ltd. Textiles sold through us.
(iii) S. Kumars (P.) Ltd. Textiles - do -
(iv) Fancy Net (P.) Ltd. - do - & mosquito nets.
(v) Bharat Vijay Mills Ltd. - Textiles.
(vi) VIP Industries Luggage bags - For two years only
(vii) Digvijay Woollen Mills. Jamnagar - Textiles.
(viii) Jiyajee Cotton Mills, Gwalior - Textiles.
Q.(3): Who is the main partner looking after the sales and representation?
Ans. : There are two partners - one myself and another Mr. Mohanlal B. Jain. We both are equally important in sales/representation. We are both 50% partners.
Q.(4): Give qualification and experience of each partner.
Ans.: (i) Mohanlal Jain - Matric - age 32 yrs. -10 years experience in selling to Armed Forces.
(ii) Shekhar Shah - B.Com. - age 37 years. -15 yrs. in selling line.
Q.(5): What do you do to obtain orders from Canteen Stores Deptt. generally for your clients and what specifically you did in this regard in respect of VIP Industries?
Ans. : We meet the concerned officers of the Canteen Stores Deptt. and request them and convince them regarding products of my clinets such as durability, longevity and pricing in comparison to other competitors' products. This is all we do to get the orders. Something has been done in respect of VIP Industries. Q.(6) : Do you have any power of attorney or letter of authorisation issued by VIP Industries?
Ans. : I have a letter of appointment from VIP Industries.
Q.(7) : Whom you met in the Canteen Stores Deptt. in respect of VIP Industries job?
Ans.: I met several officers and at the moment I don't remember any single name.
Q.(8): Have you brought correspondent as required by the terms of notice under Section 131 of the Act with your concern and Canteen Stores Deptt. in respect of VIP's job?
Ans. : There is not even a single correspondence with Canteen Stores Deptt. and M/s. M.S. Textiles. This is so because orders are placed directly by the Deptt. on concerned parties and as such all correspondences are with them only.
Q.(9): Can you say that in any of the correspondences with Canteen Stores Deptt. and VIP Industries, reference of your concern is there anywhere?
Ans. : I cannot be sure. But there is some likely chance.
Q.(10): Please state whether sale is through tender or as per negotiation with VIP and Canteen Stores Deptt.
Ans.: It is not through tender. It is through negotiation.
Q.(11): What was the role of M/s. Bafna Traders in the assignment given to you by M/s. VIP Industries?
Ans.: M/s. Bafna Traders went to the various Deptts. of Canteen Stores Deptt. and helped him sending indents for VIP luggage to their H.O. Q.(12): Have you brought correspondence with you and M/s. Bafna Traders.
Ans.: Yes. I am giving you xerox copies - original will be submitted tomorrow.
Q.(13): Please identify the rank and designation of officers before whom you have represented VIP's case?
Ans.: I don't recollect any officer's rank and designation.
Q.(14): Please specify the various documents which you showed to the officers of Canteen Stores Deptt. on behalf of VIP Industries.
Ans.: No documents. There was no need to show anything. Everything was by the word of mouth.
Q.(15): Please state whether before and after your coming into picture whether VIP Industries were engaged in selling to Canteen Stores Deptt.?
Ans. : Yes, VIP Industries have been selling to Canteen Stores Deptt. before and after we come into picture.
Q.(16): Can you furnish copies of bills raised by you and M/s. Bafna Traders?
Ans.: Yes, by tomorrow.
Q. (17) : Please identify the persons of M/s. M.S. Textiles who have rendered services to get orders for M/s. VIP Industries.
Ans.: Myself, Mr. Mohanlal Jain - only two of us except for some clerks.
Q.(18): Please state whether during the relevant period when you were working for M/s. VIP Industries, did any of the competitors of M/s. VIP also got the order from Canteen Stores Deptt.?
Ans.: Yes the system is that M/s. Canteen Stores Deptt. has been buying luggage bags from the three reputed manufacturers like VIP, Aristocrat and Safari.
Q.(19): Please state why your services were terminated after two years?
Ans.: They wanted some price increase which I was unable to get.
Q.(20): When did you do the first job with Canteen Stores Deptt. and when did you first get the assignment from VIP Industries.
Ans.: In 1981. The first successful job with the Canteen Deptt. is in respect of VIP Industries only that started in 1981. After that no successful job has been done. I am trying.
Q.(21): How did you come in contact with M/s. Bafna Traders and what is their expertise?
Ans.: Mr. Mafatlal Bafna of M/s. Bafna Traders is operating looms at Bhiwandi and is a general commission agent and I met him due to certain purchases of powerloom textiles. His expertise when I selected was powerloom business.
Q.(22) : Who recommended M/s. Bafna Traders for VIP's job or what were the reasons for your selecting him as a major partner in VIP's job?
Ans.: Nobody. It was our own selection. There is no explanation as to why I selected him. He is hard working.
Q.(23): What were the instructions given by you to M/s. Bafna Traders? Whether they are in writing?
Ans.: We instructed them to procure orders and to see that everything happens smoothly. They are in writing (xerox copies shown).
Q.(24) : Did you know in advance that M/s. Bafna Traders had expertise or adequate contact to get orders from M/s. Canteen Stores Deptt.? If yes, how?
Ans.: We did not know but we were expecting.
Q.(25) : What was your job when the file of procuring the orders was given to M/s. Bafna Traders. Please refer to xerox copy of letter dt. 1-8-82 produced by you.
Ans.: There is error in the letter produced by me. My job was to get orders from Bombay Office while Mr. Bafna's job was to get orders from Depot of the deptt.
Q.(26): Do you mean to say that the letter dt. 1-8-82 does not convey the actual job to be done and there is understanding between you and M/s. Bafna Traders which is not re-effected in the so called agreement between you two?
Ans.: The understanding (oral) between M/s. Bafna Traders and M/s. M.S. Textiles is not reflected in the so-called agreement.
Q.(27): If the agreement between M/s. Bafna Traders and you does not convey the correct meaning as admitted by you only there is some understanding not recorded here, may I presume that similarly agreement (in the form of letter) between you and M/s. VIP Industries does not convey the correct terms and understanding?
Ans. : This conveys correct picture.
Q.(28) : Please name the persons with whom you had discussion of M/s. VIP Industries.
Ans.: Basically Mr. Harmeet Singh, Vice President (Sales) and Mr. P. Choudhary -do-
Q.(29): How did you come in contact with M/s. VIP Industries?
Ans.: Directors knew me because of my dealing then for one year with M/s. Morarji Goculdas.
Q.(30): Perusal of your both statements indicate that you have frequently deposited and withdrawn heavy cash. Please explain why?
Ans.: Cash is required for my personal business and also for intended property purchase.
Q.(31): Please give names of your travel agent and furnish copy of your account with them for the last year.
Ans.: M/s. D. Vensimal Basarmal, Opp. Edward Cinema, Kalbadevi, I will furnish this in few days (A/cs.) Q.(32) : Please give details of foreign travelling in the last 4 years and produce passport of yourself and your family members.
Ans.: I have been going abroad and in the last 6 years I might have gone twice or thrice. Passport will be produced.
Q.(33): Opportunity is given to Mr. Shah to say anything if he so wants.
Ans. : No comments.
Statements are recorded to the best of my knowledge, belief and they are recorded without any coercion.
Sd/ Sd/- (Shekhar R. Shah) (S.K. Jha)'
From the above it is apparent that M/s. M.S. Textiles are not only representing the assessee-appellant but seven other mills/companies also and with all of the eight mills mentioned in reply to question No. 2 M/s. M.S. Textiles are representative, -agents. For the assessee, M/s. M.S. Textiles have worked for two years.
4. The above statement having been made before the Inspecting Assistant Commissioner of Income-tax (Assessment) as required by him, certainly becomes a piece of evidence and material on record and there is no material to rebut the same and, accordingly, this piece of evidence in terms of deposition of the partner of M/s. M.S. Textiles cannot be brushed aside. Suspicion, howsoever grave, is no substitute for proof. The statement inspires the confidence that M/s. M.S. Textiles have rendered services to the assessee-appellant, of course, through M/s. Bafna Traders and the said services caused the steep rise in sales of assessee's products to the Canteen Stores Department.
5. That apart, the assessee has placed on our file as assessee's paper book (pages 6 to 11) copies of appointment letters of M/s. M.S. Textiles as selling representatives by various mills. Pages 12,13 & 14 are the letters of the assessees to M/s. M.S. Textiles and these read as under :-
'VIP Industries Limited Formerly Aristo Plast Limited Regd. Office. Elphin House Annexe, 88-C, Old Prabhadevi Road Bombay-400 025 27th July, 1981.
M/s. M.S. Textiles, 208, Dwarkesh Market, 2nd Floor, Bhuleshwar, Dr. Atmaram Merchant Road.
Bombay-400 002 Dear Sirs, We refer to your letter dated 1-7-81 and the subsequent discussions your Mr. Shekhar Shah had with us. Accordingly, we are pleased to appoint you as our Sales Promotion Agent to follow up our business with the Canteen Stores Department, Bombay, on the following terms and conditions:-
(1) You will be required to represent our Company to obtain orders for VIP Luggage items for which we are enlisted with the Canteen Stores Department. You will also follow up release of our payments against supplies made to the Department.
(2) It is agreed that due to your efforts our sales to the Canteen Stores Department will increase by atleast 30% over the previous year during the period of this arrangement. For this purpose, our financial year commencing August and closing July, will be taken into account. Kindly note that this is an important condition of this arrangement and unless this is fulfilled, we shall not be liable to pay any commission to you.
(3) We shall pay to you a commission of 5.0% on our nett sales made to the Canteen Stores Department, in return for your services rendered. It may be noted that in order to satisfy ourselves regarding Clause 2 of this letter, we will commence payment of commission to you after satisfactory completion of the first six months of this arrangement. Thereafter, payments of commission will be made to you on a quarterly basis.
(4) This arrangement will come into force from 1st August 1981 and will remain valid for a period of one year i.e. up to 31st July 1982. Thereafter, this arrangement is renewable on mutual consent. We are liable to terminate this arrangement within the above period if your services are not found to be in accordance with our agreement.
(5) It is agreed that you will not represent any other firm dealing in luggage and having business with the Canteen Stores Department.
We will appreciate if you could sign and return the duplicate copy of this letter signifying your acceptance of the terms given above.
Thanking you, Yours faithfully, For VIP Industries Ltd.
Sd/-
Harmeet Singh
Vice President-Marketing'
VIP Industries Ltd. VIP House
A wholly owned subsidiary 88C Old Prabhadevi Road,
of Blow Plast Ltd. Bombay-400 025
22nd July, 1982
M/s. M.S. Textiles,
208, Dwarkesh Market,
2nd Floor, Bhuleshwar,
Dr. Atmaram Merchant Road,
Bombay-400 002.
Dear Sirs,
We refer to the recent discussion your Mr. Shekhar Shah had with the undersigned, in context with our arrangement with you for promoting sales of VIP luggage to the Canteen Stores Department.
(1) We are pleased to extend the period of our arrangement upto 31st July 1983.
(2) We shall pay to you a commission of 4.0% on our nett sales to the Canteen Stores Department, in return for your services rendered.
(3) It is confirmed by you that due to your efforts, our sales of VIP luggage to the Canteen Stores Department during August 1982 to July 1983 will increase by atleast 20% over the corresponding period, last year.
(4) The other terms and conditions of our arrangement will remain, the same, as confirmed vide our letter dated 27th July 1981.
We will appreciate if you could sign and return the duplicate copy of this letter, signifying your acceptance of the contents.
Thanking you, Yours faithfully, For VIP Industries Limited Sd/-
Harmeet Singh Vice President-Marketing' Pages 23, 24 and 25 of assessee's paper book are letters exchanged between M/s. M.S. Textiles and VIP Industries and these are in the following terms:-
'VIP Industries Ltd.
VIP House 88C Old Prabhadevi Road, Bombay-400 025 14th July, 1983.
M/s. M.S. Textiles, 208, Dwarkesh Market, 2nd Floor, Bhuleshwar Dr. Atmaram Merchant Road, Bombay-400 002.
Dear Sirs, As you are aware, our proposal for price increase with CSD has been pending for almost 21/2 months now and you have been repeatedly assuring us about its favourable consideration.
Since we have also been making considerable efforts now with CSD for obtaining the price increase as well as to obtain proper orders and allocations to meetour targeted sales, we have decided to terminate our arrangements with your regarding your representing us for sales to CSD effective 31-7-83.
Your accounts for the period ended 31-7-83 Shall be settled after we receive the payment from CSD for supplies effected till Chat date.
Thanking you, Yours faithfully, for VIP Industries Limited, Sd/-
Director.' 'M.S. Textiles Cloth Merchant & Government Contractor 208, Dwarkesh Market, 2nd Floor, Bhuleshwar, Dr. Atmaram Merchant Road, Bombay-400 002.
Date 19th July, 1983 VIP Industries Ltd., Bombay.
Dear Sirs, We are in receipt of your letters dated 14-7-1983 regarding termination of the arrangement between us wherein we were representing you for your sales to CSD.
We request you to kindly reconsider your decision since during our association with you over the last 11/2 years for your business with CSD, your volume of business with CSD has grown by over 200%. This increase has been possible mainly on account of our regular follow-up with the various departments of CSD to ensure regular orders and prompt payments.
We therefore request you to consider the various difficulties that were explained by us to you with regard to price increase as well as reduced orders from CSD during the last few months and to continue to avail of our services, which we are confident would lead to further substantial increase in your business with CSD.
Thanking you, Yours faithfully For M/s. M.S. Textiles, Sd/-
Partner.' 'VIP Industries Ltd. VIP House 88C Old Prabhadevi Road, Bombay-400 025 22nd July, 1983 M.S. Textiles 208, Dwarkesh Market, 2nd Floor, Bhuleshwar, Dr. Atmaram Merchant Road, Bombay-400 002. Dear Sirs,
We refer to your letter dated 19th July, 1983 and our subsequent discussion on the subject.
We regret that we are unable to reconsider our decision regarding direct dealings with CSD.
We shall however get in touch with you in future if there are possibilities of mutually beneficial business arrangements.
Thanking you, Yours faithfully For VIP Industries Ltd., Sd/-
Director.' Page 33 is a letter from M.S. Textiles to Inspecting Assistant Commissioner (Assessment) page 34 is M.S. Textiles' letter to M/s. Bafna Traders, page 35 is Bafna Traders' rejoinder to Inspecting Assistant Commissioner and pages 36 and 37 are copy of affidavit filed by Bafna Traders with the Inspecting Assistant Commissioner (Assessment) and these read as under:-
'M.S. Textiles Cloth Merchant & Government Contractor 3AA, Edena, 3rd Floor, 97, Maharshi Karve Road (Queens Road) Bombay-400 020 9th March, 1987 The Inspecting Asstt. Commissioner of Income-tax Office of the IAC (Asst.), Range-VI(E), R.No. 632, 6th Floor, M.K. Marg, Bombay-400 020.
Dear Sir, We are in receipt of your letter No. IAC (Asst.) R.VI(E)/Misc./86-87 dated 2-3-87 and have noted the contents.
We are herewith enclosing a copy of a letter written by us to M/s. Bafna Traders asking them to contact you in reference to the case of VIP Industries.
M/s. Bafna Traders have acknowledged the receipt of this letter and they shall contact you in reference to the abovesaid letter.
Thanking you, Yours faithfully, For M/s. M.S. Textiles Sd/-
Partner Ends: As above' 'M.S. Textiles Cloth Merchant & Government Contractor 3AA, Edena, 3rd Floor, 97, Maharshi Karve Road (Queens Road) Bombay-400 020 5th March, 1987 M/s Bafna Traders, C/o Purushottam Patel, 132-E, Bhagathwadi 1st Floor, Bhuleshwar, Bombay-400 002.
Dear Sirs, We are in receipt of a letter No. I AC (Asst.) R.VI(R)/Misc./86-87 dated 2-3-87 from I AC Shri S.K. Jha with regard to the case of VIP Industries Ltd. Copy of this letter is enclosed herewith. As the letter is self-explanatory, we request you please contact the above mentioned IAC Shri S.K. Jha at the earliest and oblige.
Thanking you, Yours faithfully, For M.S. Textiles, Sd/-
Partner Ends: As above.' M/s. Bafna Traders Art Silk & Powerloom Cloth Merchants & Commission Agents C/o Purushottam Patel, 132-E, Bhagathwadi, 1st Floor, Bhuieshwar, Bombay-400 002.
9th March, 1987 Shri S.K. Jha, IAC, Range VI(E), R.No. 632, 6th Hoor, Aayakar Bhavan, Maharshi Karve Road, Bombay-400 020 Dear Sir, I am in receipt of copy of your letter No. IAC (Asst.) R.VI(E)/Misc./86-87 dated 2-3-87 addressed to M/s. M.S. Textiles, Bombay with reference to case of VIP Industries Ltd., wherein you have stated that efforts to serve summons to me have failed as you could not locate me and a registered letter was returned stating "Party not found".
In the above, M/s. M.S. Textiles have asked me to contact you immediately. However I beg to state that I am unable to do so as I am leaving Bombay for urgent prior business engagements and shall not return for some time.
I however confirm having received Rs. 20,06,250 from M/s. M.S. Textiles being commission on A/c for sales of VIP luggage to the CSD (Canteen Stores Department). This commission was paid by them for various services granted by me to them which included extensive travelling smooth despatch of stores and quick follow up for orders.
I am herewith enclosing an affidavit of the said effect.
Thanking you, Yours faithfully, For Bafna Traders, Sd/-
Proprietor.
' Encl: As above 'AFFIDAVIT I, Mafatlal D. Bafna, aged about 40 years,C/o Purushottam Patel, 132-E, Bhagathwadi, 1st Floor, Bhuieshwar, Bombay-400 002 and formerly carrying on business in the name of "Bafna Traders" at 2/4, Old Hanuman Lane/1st Cross Lane, 1st Floor, Bombay-400 002 solemnly affirm and declare as under:-
That I was working aa an agent of M/s. M.S. Textiles for supply of VIP luggages to Canteen Stores Department during S.Y. 2039. I had to carry out extensive tours of different Canteen Stores and collect orders and also I had to look after despatch of the goods.
That I was to get commission of 3% (Three per cent) on the total orders booked by me and executed by the company; and the said commission was receivable by me only after by me after M/s. M.S. Textiles get their own commission. A commission of Rs. 20,06,250 (Rupees twenty lakh six thousand two hundred and fifty only) was payable to me being 3% on the total supplies agreed be. The said commission I have received by account payee cheques during the year S.Y. 2040 and S.Y. 2041 which I have deposited in my Bank Account.
That I hereby confirm that I have rendered services to M/s. M.S. Textiles for which a commission of Rs. 20,06,250 (Rupees twenty lacs six thousand two hundred fifty only) was received by me during S.Y. 2040 and 2041 by account payee cheque which I have deposited in my bank account.
That what is stated above is true to the best of my knowledge and belief. Solemnly affirmed at Bombay this 9th day of March 1987.'
6. In the face of all these documents, it cannot be said that payment by the assessee to M.S. Textiles and, on its part, by M.S. Textiles to Bafna Traders was for no work done. In fact, these prove that services have been rendered to the assessee-appellant by M/s. M.S. Textiles through M/s. Bafna Traders. The payment as such is allowable as deduction being commission paid by the assessee company to M.S. Textiles.
7. In view of all the above facts and material on record, the amount claimed by the assessee, viz., Rs. 26,99,863 merits to be allowed as deduction in computing the total income of the assessee for the assessment year under appeal being commission paid for services rendered by M/s. M.S. Textiles, of course through Bafna Traders, which services caused steep rise in sales of assessee's products to Canteen Stores Department. I hold accordingly with the result that on this issue the assessee succeeds and the ground stands allowed.
IN THE INCOME TAX APPELLATE TRIBUNAL, BOMBAY BENCH 'A' REFERENCE UNDER SECTION 255(4) OF THE INCOME-TAX ACT, 1961 Following point of difference emerging from the proposed orders of the Members constituting the Bench in ITA No. 3161/Bom./88 in the case of M/s. VIP Industries Ltd. v. IAC, Assessment Range VI(E), Bombay, involving assessment year 1984-85 is being referred to the Hon'ble President of the Income-tax Appellate Tribunal for making reference to Third member as provided for in Section 255(4) of the Income-tax Act, 1961 :-
Whether, on the facts and in the circumstances of the case, the sum of Rs. 26,99,863 is allowable as deduction in computing the total income of the assessee for the assessment year under appeal?
THIRD MEMBER ORDER The Members of 'A' Bench Bombay owing to difference of opinion between them on the following point referred this matter to me under Section 255(4) of the Income-tax Act, for my opinion:
Whether, on the facts and in the circumstances of the case, the sum of Rs. 26,99,863 is allowable as deduction in computing the total income of the assessee for the assessment year under appeal?
2. I have heard Shri Ashwani Kumar for the assessee and Shri Keshav Prasad for the department and I perused the orders of the authorities below as well as the opinions expressed by my learned Brothers. On a careful consideration of this material, I have come to the conclusion that the disallowance of commission does not deem just.
3. The assessee is one of the top most moulded luggage manufacturers of India. It is wholly owned subsidiary of M/s Blow Plast Ltd. Its marketing agent for the products manufactured by it amongst others is Blow Plast Ltd. throughout India, except to Government departments where the assessee directly handles the supplies. During the year it claimed that it paid a total commission of Rs. 35,27,000 to its selling agents of which Rs. 26,99,863 was claimed to have been paid to M/s. M.S. Textiles and the balance to M/s. Blow Plast Ltd. There was no difficulty with regard to the allowance of commission paid to M/s. Blow Plast Ltd. The dispute arose only with regard to the commission paid to M/s. M.S. Textiles. In the previous assessment year, commission was paid to M/s. M.S. Textiles and was also allowed but this year detailed enquiries were made by the Department into the genuineness of the claim and for reasons that will be unfolded in the course of this order, the Department came to the conclusion that the payment of commission to M/s. M.S. Textiles was not genuine on the ground that no services were rendered by it meriting the payment of commission. In response to the enquiry from the Department, the assessee submitted that the disputed commission was paid for obtaining orders for supply of the goods manufactured by the assessee company from Canteen Stores Department, Govt. of India, Ministry of Defence, Bombay. The enquiries made at the address given by the assessee revealed that this party was not available at that address on the ground that the address was changed. In this connection, the reply of the assessee dated 12-1-1987 to the enquiry made by the Department deserve to be mentioned:
We have paid commission at the rate of 4% to M/s. M.S. Textiles on our net sales to Canteen Stores Department on account of services rendered by them such as obtaining orders, follow up for release of payments against supplies made to the Canteen Stores Department and helping in obtaining price increase from time to time. Letter dated 22-7-1982 is enclosed. Our sales to Canteen Stores Department was increased from Rs. 367.69 lakhs in the year 1981-82 to Rs. 675.82 lakhs in the year 1982-83, that is, a growth of 27.3%.
It may also be noted that the letter dated 22-7-1982 referred to above was the letter addressed by the assessee to M/s. M.S. Textiles confirming the payment of commission @4% on sales made to Canteen Stores Department. Further enquiries made by the Inspecting Asstt. Commissioner revealed the following:
(a) M/s. M.S. Textiles was a small partnership firm dealing in textiles and also having some commission business in textiles but not in moulded luggage.
(b) M/s. M.S. Textiles never had any dealings with Canteen Stores Department before and after the alleged deal with the said Department on behalf of the assessee company. No documentary evidence was produced showing the dealings by it with the Canteen Stores Department. No correspondence was produced or admitted.
(c) Major portion of this commission was paid by M/s. M.S. Textiles to another concern called M/s. Bafna Traders. The efforts made by the Department to trace Bafna Traders at the address given were in vain.
(d) In the sworn deposition recorded by one of the partners, he was not able to say the names of the officials either by rank or by name of the Canteen Stores Department who were contacted in this connection. His version that all the dealings were concluded by word of mouth was too much to believe.
(e) It was also discovered that the assessee was already having dealings with Canteen Stores Department even before M/s. M.S. Textiles came to the scene.
(f) Further enquiries revealed that M/s. Bafna Traders were operating looms at Bhiwandi and was a General Commission Agent whose expertise was in powerloom business and their connection in Canteen Stores Department was not at all discernible.
(g) The bank accounts of M/s. M.S. Textiles and M/s. Bafna Traders were located by the officers of the Department and their examination revealed that M/s. M.S. Textiles received commission in this year but the payments to M/s. Bafna Traders was made in subsequent years and immediately after depositing of the cheques, large amounts were withdrawn in cash which were highly suspicious in nature.
These findings were conveyed to the assessee for its comments and remarks by letter dated 27-9-1987. Independent enquiries were also made with the Canteen S tores Department under Section 131 of the Income-tax Act which showed that the Canteen Stores Department dealt with the assessee directly and not through M/s. M.S. Textiles.
4. Having regard to these facts, the IAC (Assessment) came to the conclusion that there was no proof of any services having been rendered by M/s. M.S. Textiles to the assessee qualifying for the payment of the commission of such a huge sum of Rs. 26,99,863. He, therefore, disallowed the claim. According to him, there was no force in the contentions of the assessee that these payments were made by account payee cheques, that there was a written agreement entered into which supported the payment of commission, that the arrangement entered into with M/s. M.S. Textiles provided fulfilment of certain conditions before the payment of commission and those conditions were fulfilled, that there was no relationship between the assessee or any of the persons of M/s. M.S. Textiles and, therefore, the provision of Section 40A(2) would not be applicable.
If M/s. M.S. Textiles had arranged in its turn with another concern to act for them that did not mean that the assessee had not obtained the services of the immediate agent, namely M/s. M.S. Textiles, that the non-availability of the agent appointed by M/s. M.S. Textiles to render the actual services did not mean or lead to the conclusion that M/s. M.S. Textiles did not render any service, that in all these cases payments of commission were made only for deriving maximum benefits out of the contacts that one had with the concerned officials or if those contacts were utilised and as a consequence there was a enormous improvement in turnover it could not be said that no services were rendered. It should be seen that as against a turnover of Rs. 367.69 lacs, the turnover this year had gone to Rs. 675.82 and that was all due to the efforts of M/s. M.S. Textiles who actuated their contacts and it should also be seen that in a case of this nature, there would be no direct evidence available about the activity of M/s. M.S. Textiles figuring in any correspondence with the Canteen Stores Department and it would, therefore, be natural for the Canteen Stores Department to deny the existence of M/s. M.S. Textiles as they are not supposed to deal with any middle man except directly with the supplier and, therefore, no reliance should have been placed for drawing adverse inference against the assessee on the letters written by Canteen Stores Department that M/s. M.S. Textiles did not deal with them, that in any case payment of commission of Rs. 18.38 lacs was paid to this very party in the immediately preceding assessment year and that was allowed as a deduction and there was no ground to reject similar claim made for the year under appeal. It was also to be seen that the rate of commission was reduced this year from 5% to 4% and since M/s. M.S. Textiles could not achieve the targets filed in the arrangement, the commission agency was terminated and, therefore, this could not be seen as a sort of subterfuge. The I AC (Asst.) rejected all these contentions and relying upon his enquiry that M/s. Bafna Traders was not available and Canteen Stores Department's communication denying the involvement of M/s. M.S. Textiles as agent, the claim was rejected. The CIT (Appeals) also upheld the view of the IAC (Assessment).
5. It was in these circumstances that the matter came up for consideration before the Income-tax Appellate Tribunal, Bombay Bench 'A'. The learned Accountant Member was of the opinion that for the reasons shown by the Department, the claim was rightly disallowed. According to him when M/s. M.S. Textiles had parted with more than 80% of the commission received by it from the assessee to others, the arrangement could not be said to be a proper and genuine arrangement. By parting with such a high amount of commission, M/s. M.S. Textiles had succeeded in substantially reducing their income by showing very high payments of commission and thereby managed to show their book profit at a very modest figure. This according to him was a suspicious feature which militated against the claim of the assessee. Another aspect on which he placed great reliance was the belated payments made by M/s. M.S. Textiles to Bafna Traders. According to him if the engagement of Bafna Traders by M/s. M.S. Textiles was a genuine arrangement, there would not be any delay in making the payments by M/s. M.S. Textiles to M/s. Bafna Traders because Bafna Traders acting as a sub-agent of M/s. M.S. Textiles could not be expected to wait for so long for the receipt of the commission as well as for the reimbursement of the expenditure which they incurred on their own out of their own cash. He summarised his findings in para 9 of his order which I reproduce below:
9. Now we can summarise and highlight the important aspects which emerge from the assessment order, appellate order and the discussion contained herein above:
(a) Assessee's sales during its previous years relevant to assessment years 1983-84 and 1984-85 to Canteen Stores Department have undoubtedly shown fantastic rise;
(b) There is correspondence to show that the assessee and M/s. M.S. Textiles had agreed on some terms and conditions on whose basis payment of commission is claimed by the assessee;
(c) In the ultimate analysis, assessee is able to show that it has paid the impugned amounts to M/s. M.S. Textiles;
(d) It is, however, an admitted position that there is no documentary evidence of either M/s. M.S. Textiles or any of the three recipients of commission from M/s. M.S. Textiles having done any work for increasing the sales to Canteen Stores Department;
(e) Canteen Stores Department have completely denied having dealt with or knowing either with M/s. M.S. Textiles or any of the recipients of commission from M/s. M.S. Textiles;
(f) Analysis of relevant figures of final accounts of M/s. M.S. Textiles shows that before and during the relevant period M/s. M.S. Textiles had not incurred any expenditure worth the name for orally contacting the various out-lets of Canteen Stores Department said to be 29 spread all over the country;
(g) M/s. M.S. Textiles claimed to have passed on payments 80% of the commission received by them from the assessee to three other parties-two in the first year and yet another in the second year. There is no trace of any of these parties;
(h) Bank account of one of the parties M/s. Bafna Traders has been found but cheques deposited therein have been followed by heavy cash withdrawals;
(i) As per the accounts of M/s. M.S. Textiles, commission paid by them to others is 40% of the commission received by them in the years ending Diwali, 1984 and Diwali, 1985 i.e., after they ceased to receive commission from the assessee but in the three previous years which would cover a period of 2 years of receipt of commission by them from the assessee, the commission payments shown by them are in the vicinity of 80% of the commission received by them;
(j) For doing the work of contacting the persons concerned in Canteen Stores Department, no expenditure worth the name is shown to have been incurred by M/s. M.S. Textiles. The three parties who allegedly received major part of commission from M/s. M.S. Textiles would have been required to incur the expenditure out of their own resources but two of them have not been even identified and one of them M/s. Bafna Traders has not shown resource for incurring that expenditure. The point is that identification and verification of the party becomes more important and more necessary when the question of availability of money for being spent or invested is also involved.
6. Eventually for the above reasons, he held that there was no substance in the assessee's contention that M/s. M.S. Textiles or M/s. Bafna Traders did any work for increasing the sales of the assessee's products to Canteen Stores Department and that there was no nexus between the payments made and the work done.
7. The learned Judicial Member was of a totally different opinion. He held that he broadly agreed with the fact highlighted by the learned Accountant Member at (a) to (i) reproduced above but he disagreed with the conclusions reached. The learned Judicial Member posed to himself a question as to whether when simply because Canteen Stores Department which is a Government Department denied having dealt with or knowing M/s. M.S. Textiles, did it conclusively mean that the commission paid by the assessee to M/s. M.S. Textiles was not for work done. He then observed that when the commission received by M/s. M.S. Textiles was assessed to tax in their hands after providing for the allowance of commission paid by it to M/s. Bafna Traders, nothing remained to prove or doubt that M/s. M.S. Textiles did not render any service. He noted that in the assessment year under appeal, the sales to Canteen Stores Department went up to Rs. 675.82 lacs from the turnover of Rs. 367.69 lacs in the immediately preceding assessment year and Rs. 211.43 lacs in the still preceding assessment year and that the increase in turnover which was about 84% over the turnover of the previous year or 220% over the turnover of 1983-84 assessment year, was purely on account of the efforts put in by M/s. M.S. Textiles and it would, therefore, be inappropriate and unjust to suggest that M/s. M.S. Textiles did not render any services at all. He was of the opinion that the preponderance of probabilities in this case favoured the view that commission must have been paid to M/s. M.S. Textiles as otherwise there would not have been any increase in turnover although the assessee was directly dealing with Canteen Stores Department in the earlier years.
8. He then referred to the examination of Shri Shekhar R. Shah, one of the partners of M/s. M.S. Textiles, made by the Inspecting Asstt. Commissioner of Income-tax (Asst.) wherein it came to light that Shekhar R. Shah had stated that M/s. M.S. Textiles was not only dealing in textiles and hosiery but was also dealing in sales of products to the Armed Forces, Para Military and Military Forces through DGS & D, Ministry of Defence, Ordnance Factory and Canteen Stores Department. In response to another question, Shri Shah said that they were dealing in the products of as many as 8 companies which included Textiles, Mosquito nets, luggage bags of several important and prominent and popular companies in the country. In response to a specific question as to how do they obtain orders from Canteen Stores Department generally and what was specifically done by them to get orders for the assessee, the answer of Mr. Shah was :
We meet the concerned officers of the Canteen Stores Department and request them and convince them regarding products of the clients namely (VIP Industries), such as durability, longivity and pricing in comparison to other competitors' products. This is all we do to get the orders. Something was done in respect of VIP Industries also.
In response to another question Shri Shah stated that he had a letter of appointment from VIP Industries, with the help of which he negotiated for replacement of orders by Canteen Stores Department. He also deposed that he met several officers in the Canteen Stores Department to obtain the orders. He said that there would not be any correspondence in this regard and, therefore, he would not be able to produce any correspondence. He gave the reason as to why there would be no correspondence. The reason was that orders are always placed directly by the Canteen Stores Department and concerned parties. Therefore, all correspondence would be with them directly. He categorically stated that the obtaining of orders was not by tender but only by negotiation.
9. Then a question was put to him as to the role that M/s. Bafna Traders had played in the organisation of the sales. He submitted that M/s. Bafna Traders went to the various Departments of Canteen Stores Department and helped sending indents for VIP luggage to the Headquarters. In response to a question as to whether there was any correspondence between M/s. M.S. Textiles and M/s. Bafna Traders, Mr. Shah stated very categorically that there was correspondence and produced the zerox copies of the correspondence, promising to produce the originals the next day. Then there was another question put to him as to whether he could furnish copies of bills raised by them and M/s. Bafna Traders and his answer was in the positive. There was another question put to him in response to which he answered that Canteen Stores Department not only placed orders for the purchase of luggagebags with the assessee, i.e., VIP Industries but also with Aristocrat and Safari. He was then asked a question as to why his services were terminated after two years, to which Mr. Shah replied stating that M/s. VIP Industries wanted to obtain some price increase and since they failed to get the increase, their services were terminated. Then his association with M/s. Bafna Traders were enquired into, to which suitable answers were given. According to the Judicial Member, a close reading of the questions and answers indicated, that it was M/s. Bafna Traders that did the entire leg work of canvassing and obtaining the orders from Canteen Stores Department and for that they charged a major chunk of the commission from M/s. M.S. Textiles and then M/s. M.S. Textiles charged a high rate of commission, a major portion went to M/s. Bafna Traders. These payments were made by cheques and if at the relevant time, none was available on behalf of the M/s. Bafna Traders, the assessee could not be punished for that. He produced before the ITO the orders they gave to M/s. Bafna Traders. The learned Judicial Member held that the statement showed that services were rendered by M/s. M.S. Textiles through the agency of M/s. Bafna Traders and the IAC of Income-tax making the assessment who recorded the statement could not bring any material on record or counter questions to show or even to suggest that what was being said by Mr. Shah was either false or vague. In the absence of any such counter material, it is not permissible for the Department to ignore the facts brought on record and still say that no services were rendered by M/s. M.S. Textiles all because they were not able to reach M/s. Bafna Traders. He held that what was in the minds of the Department was only suspicion and suspicion however strong or grave could not be substitute for proof. He also then referred to the letters written by the assessee to M/s. M.S. Textiles as selling representatives of various Mills, which according to him, proved beyond doubt that M/s. M.S. Textiles was specifically given some targets to achieve and the payment of commission was to depend only on fulfilment of those targets. One of the targets fixed was that due to the efforts of M/s. M.S. Textiles their sales to the Canteen S tores Department should increase by at least 30% over the turnover of the previous year. It was made very clear that unless that target was achieved, the assessee would not be liable to pay any commission to them. It was also pointed out that commission would be paid to them only after achieving the target.
10. Then he also referred to the letter written by the assessee to M/s. M.S. Textiles whereby he indicated that since he failed to get the price increased with the Canteen Stores Department, their arrangement was terminated w.e.f. 31st July, 1983. A request made by M/s. M.S. Textiles not to terminate the arrangement and give some more time which was not approved of by the assessee. After reference to these pieces of correspondence, the learned Judicial Member held that this showed beyond any shadow of doubt that the arrangement entered into between the assessee and M/s. M.S. Textiles was a genuine arrangement and the Department was not justified in brushing aside this evidence only because M/s. Bafna Traders was not available for cross-examination or the Canteen Stores Department stated that they dealt with the assessee directly or because the payment was made to M/s. M.S. Textiles which in turn made the payments to M/s. Bafna Traders belatedly.
11. Then the learned Judicial Member referred to letter written by M/s. M.S. Textiles to the IAC wherein M/s. M.S. Textiles pointed out that they were requesting M/s. Bafna Traders to appear before him in connection with the assessee's case and that they would certainly contact the IAC (Asst.). M/s. Bafna Traders also wrote a letter to the IAC on 9-3-1987 confirming the arrangement of working for the assessee through M/s. M.S. Textiles and promised to appear before the IAC after a little while as by then he was leaving for Bombay for urgent prior business engagement and would not be available to appear on that day. An affidavit was also sworn to by Mr. Mafatlal D. Bafna by M/s. Bafna Traders wherein the entire arrangement was again vividly explained and was confirmed and was filed. It was relying upon these documents, the learned Judicial Member came to the conclusion that the claim of the assessee for the payment of commission to M/s. M.S. Textiles could not be disallowed as there was abundance of proof to show that services were rendered by M/s. M.S. Textiles through M/s..Bafna Traders and it was only through their efforts that there was steep rise in the turnover of the assessee's products to Canteen Stores Department.
12. This is how the above difference of opinion arose which was referred to me for my opinion.
13.1 have carefully gone through the entire evidence on record, the paper book, the correspondence and as I mentioned a short while ago after going through these correspondence and the evidence brought on record, I was inclined to agree with the view expressed by the learned Judicial Member. The circumstances pointed out by the learned Accountant Member are very germane and relevant but they only throw out a strong case for suspicion. The paper book filed before the Bench and was referred to before me during the course of arguments contains lot of letters written by the assessee to M/s. M.S. Textiles, by M/s. M.S. Textiles to M/s. Bafna Traders and by Bafna Traders to IAC. What is more important is in a case of this nature where orders had to be obtained from Government Departments and the rules governing the placement of orders, the names of the middlemen or references to the middlemen would not be generally mentioned in correspondence unless they are accredited agents. If a person incharge of purchases in the Government Department has to make some purchases, there is a prescribed procedure. One is by inviting tender in which case the lowest tender could be accepted and the order is placed. The other is by negotiations. The third is placing orders directly upon suppliers approved by the Government. Even though purchases are made by negotiations or placing orders directly on the approved suppliers, certain amount of pre-information regarding the quality of the goods produced by the manufacturer is necessary. Either the manufacturers directly correspond with the men in authority by giving the specifications, utility, price range etc. in a bid to persuade them to buy their products in preference to the products of other manufacturers. Sometimes these are followed up by the representatives who do come and give demonstrations of their product. The higher the cost the more is the sophisticated methods of persuasions. These are the days of aggressive advertising, persuasion by contact, by word of mouth. In all these cases, the names of the persons who induced or persuaded the persons and authority who were authorised to place the orders are not generally written much less agreed to. In a competitive market, if is the personal contact that is more important to persuade the persons and authority to place orders and if those authorities are asked as to how they preferred a particular article to another article available in the market, they will never admit that they are persuaded by the personal contact made by the representatives of the manufacturers rather they would say that they were persuaded by the general information gathered. The gathering of general information will always mean personal contact. This is a reality which has to be borne in mind. If we approach the problem before us now with this reality in the background, we would appreciate how the Canteen Stores Department was not able to commit itself to the fact that it was on account the personal contact made by M/s. Bafna Traders that they were persuaded to place orders for the purchase of the assessee's products. The absence of reference in the correspondence with Canteen Stores Department of the name of M/s. M.S. Textiles or M/s. Bafna Traders was viewed by the Department more with suspicion. This should not have happened. As against this there was ample evidence on record to show :
(a) That assessee appointed M/s. M.S. Textiles to act as their agent to improve their turnover with Canteen Stores Department by affixing a target of 30% increase in turnover in the first year and 20% increase in the second year and making the payment of commission on the achievement of this target and also making it a condition that their further continuance would depend upon obtaining price increase. It is because of their failure to get the price increased, the agency was terminated. As against the repeated contentions of the Department all along that there was no evidence to show in writing about the services rendered by M/s. M.S. Textiles in the deposition of Mr. Shah he categorically stated before the IAC (Asst.) that they appointed M/s. Bafna Traders to work on their behalf and the correspondence between them and M/s. Bafna Traders was produced before him. The IAC should have referred to this correspondence and proved it to be false or got up for the purpose. No attempt was made by the IAC to disprove any of these letters produced. They ignored this part of the evidence but preferred to rely upon suspicions. On behalf of M/s. Bafna Traders, Mafatlal D. Bafna filed an affidavit wherein reference was made as to how they came in contact with M/s. M.S. Textiles, as to how he had to carry out tours of different Canteen Stores Department and collect orders and as to how he was looking after the despatch of the goods, as to how he collected a commission of 3% on the total orders booked by him and executed by the assessee company. He also admitted that a total commission of Rs. 20 lacs was due to him on the supplies made by him and that he received that commission by account payee cheques which he deposited in his bank account. When a person comes before the Department and swears to an affidavit that he received a commission of no smaller amount than Rs. 20 lacs what should the Department do? The Department should have enquired into the receipt of this commission from all angles and then proved that this commission was reached back to the assessee in one shape or the other or it was paid for some illegal purpose opposed to public policy only then it could be said that the entire arrangement was a bogus arrangement. Only then he could say that the arrangement was a sham arrangement or a collusive arrangement. No such attempt was made by the Department. They relied upon the statement given by the Inspector who said that Bafna Traders was not available at the address given. I do not think that this is sufficient to discharge the responsibility placed upon the department to disprove the claim made by the assessee to justify the disallowance of the claim.
14. In a letter written to the IAC (Asst.) on 9-3-1987 M/s. Bafna Traders categorically admitted that they have rendered services to VIP Industries through M/s. M.S. Textiles and received a commission of Rs. 20,06,250. It is not, therefore, a fact that was hidden from the knowledge of the IAC (Asst.). I find nothing from the orders of the authorities below that any effort was made by them to disprove this claim. The contention of the department that the amounts which were deposited were immediately withdrawn is no justification to say that no services were rendered or the money withdrawn by M/s. Bafna Traders had reached the assessee in some way or the other. On the contrary M/s. Bafna Traders have categorically stated in their affidavit that the money received from M/s. M.S. Textiles by way of commission was by a/c payee cheque and that money was deposited in their bank account. Their bank account should have been, therefore, examined to find out the ultimate destination of the money. No such attempt was ever made.
15. On 5-3-1987, M/s. M.S. Textiles wrote a letter to M/s. Bafna Traders stating that they received a letter from the IAC Shri S.K. Jha regarding the case of VIP Industries Ltd. and enclosing a copy of that letter M/s. M.S. Textiles requested M/s, Bafna Traders to contact the IAC (Asst.) and it was in response to that letter that M/s. Bafna Traders wrote a letter to the IAC (Asst.) on 9-3-1987 affirming the rendering of service, receipt of commission and enclosing an affidavit. In the face of this evidence how was it possible to accept the contention of the Department that they were not able to reach M/s. Bafna Traders and that M/s. Bafna Traders was non-existent and the payment of commission to M/s. Bafna Traders was a fake claim.
16. It is also to be seen that on 2-3-1987 the IAC (Asst.) wrote a letter to M/s. M.S. Textiles stating that all the efforts to serve summons on Mr. Mafatlal of M/s. Bafna Traders drew blank and that the summons sent at the given address came back unservcd and it was from this that the IAC (Asstt.) drew the conclusion that there was nothing like any M/s. Bafna Traders in existence as contemplated and M/s. M.S. Textiles was given seven days time to prove the existence of M/s. Bafna Traders. It was in response to this letter that M/s. M.S. Textiles wrote to M/s. Bafna Traders on 5-3-1987 and it was again in response to this letter that M/s. Bafna Traders wrote directly to the IAC on 9-3-1987 enclosing an affidavit. In view of this, it cannot be said that M/s. Bafna Traders was not a non-existent party.
17. Now having regard to this correspondence which proved that M/s. Bafna Traders existed and having regard to the fact that M/s. Bafna Traders admitted having received the commission from M/s. M.S. Textiles, having regard to the fact that they admitted that they received the amount by account payee cheques and that the money was deposited in their bank account and having regard to the fact that M/s. M.S. Textiles had always stated that it was through M/s. BafnaTraders that they were able to render services to VIP Industries in promoting their sales and having regard to the fact that a similar arrangement was already approved by the Department in the earlier assessment year, when a payment of about Rs. 18 lacs was allowed as a deduction, it is very difficult to accede to the view of the Department now that the same M/s. M.S. Textiles did not render any service and that the increase in sales was achieved only by the direct contact of assessee with Canteen Stores Department unaided of any other agency.
18. In this context, it is very relevant to point out that the learned Accountant Member and the Judicial Member agreed on some of the aspects namely: (a) that the assesscc's sales during the previous years relevant to the assessment years 1983-84 and 1984-85 to Canteen Stores Department had undoubtedly showed enormous increase; (b) there was correspondence to show that the assessee and M/s. M.S. Textiles had agreed on some terms and conditions on whose basis payment of commission was claimed by the assessee; (c) that the assessee was able to show that it paid the commission to M/s. M.S. Textiles.
But the learned Accountant Member had parted company with the learned Judicial Member from this stage. He argued that notwithstanding the above admitted position there was no documentary evidence to show that M/s. M.S. Textiles or any of the recipients of the commission from M/s. M.S. Textiles had done any work for increasing the sales to Canteen Stores Department, the payment of commission could not, therefore, be allowed.
19. The above discussion show that there was enough of documentary evidence to show that M/s. Bafna Traders - one of the major recipients of the commission from M/s. M.S. Textiles had done enough work on behalf of M/s. M.S. Textilesto promote the sales of the assessee company to Canteen Stores Department. Therefore, this observation made by the learned Accountant Member does not seem correct.
20. Another reason that prevailed with the learned Accountant Member was that the analysis of the figures of the final account showed that before and during the relevant period M/s. M.S. Textiles had not incurred any expenditure worth the name for contacting the various outlets of Canteen Stores Department. But I may point out here that in the evidence brought out by M/s. Bafna Traders, particularly in the affidavit, it came out that it was M/s. Bafna Traders that toured all the Canteen Stores Department in the country at their expense. Therefore, the question of M/s. M.S. Textiles incurring any expenditure for touring either before or during the relevant period does not arise or survive. The learned Accountant Member referred to another circumstance namely that the recipients of commission from M/s. M.S. Textiles were not traceable. This also does not seem to be correct because M/s. Bafna Traders who received a commission of as much as Rs. 20 lacs was available and they directly corresponded with the IAC (Asst.) and admitted not only having received the commission but also took it to their bank account. It is, therefore, not correct to say that those parties were not traceable. Merely because there was cash withdrawals in the bank account of M/s. Bafna Traders on the very same day or immediately after deposit of cheques did not mean anything unless it was proved that those moneys flowed back into the coffers of the assessee or were utilised for an oblique purpose. In the absence of any such finding supported by evidence, this circumstance by itself does not lead to the conclusion adverse to the assessee and on the contrary this contradicts the earlier finding given by the learned Accountant Member that the parlies were not traceable. When the parties were not traceable, how could the bank account of M/s. Bafna Traders could be traced. For these reasons, for the reasons shown above and for the reasons given in the order of Judicial Member, I am in agreement with the view expressed by him.
21. Before I close this matter, I would like to deal with one or two arguments addressed to me by the learned Departmental Representative on which he placed much reliance. One was neither M/s. M.S. Textiles nor M/s. Bafna Traders had any experience in dealing with moulded luggage. Therefore, they could not have rendered any service to the assessee in promoting the sales. This argument does not detain me for long for the reason that M/s. M.S. Textiles was dealing in a variety of products which included dealings with the Defence Department. Once an agent dealing in the products of established popular companies knows that a particular Government Department needs a particular item, he docs not have to have any experience in that item. All that he need to do is to know the manufacturer, contact the manufacturer, convince the manufacturer to supply goods to the concerned Government Department and settle the rate and schedule of delivery and modes of payment. Once the deal is through, collect his commission. This is a normal thing that happens now a days and in these dealings, the term 'experience' is not at all a pre-requisite. So also is the case with M/s. Bafna Traders. Whether they had any contact or not is a matter to be established. They have admitted in so many words that they have acquired contacts, activated them as a consequence promoted the sales of the assessee company. The assessee company has to part with a part of their profit by way of commission to these people for their contacts.
22. The second argument was M/s. Bafna Traders had the experience only in powerloom jobs. M/s. M.S. Textiles was dealing mainly in textiles and even if M/s. Bafna Traders can be said to have rendered services which was proved by the correspondence and so admitted and assuming that they are in existence, those services could only be in regard to promotion of sales of textiles or other matters but not in regard to the goods manufactured by the assessee namely VIP Industries. This argument also cannot hold water for the reason that their experience in powerloom job does not necessarily prevent them or exclude them from dealing with the Canteen Stores Department. In the affidavit of Shri Mafatlal Bafna, he very categorically stated that he toured all the Canteen Stores Departments in India to obtain orders for the assessee. This argument will not, therefore, advance the case of the Revenue. The learned Departmental Representative vehemently argued that there was no evidence produced to show that M/s. Bafna Traders had rendered any service, much less any documentary evidence between M/s. M.S. Textiles and M/s. Bafna Traders. But when his attention was drawn to the statement of Shri Shah wherein he stated that he produced the copies of the correspondence between M/s. M.S. Textiles and M/s. Bafna Traders, he had nothing to offer by way of any further argument. To me, it looked as if the entire case proceeded on the suspicion that M/s. Bafna Traders could not be in existence or was not in existence and the enormity of the commission paid could be for some ulterior purpose. But the facts on record show or lead to a different conclusion.
23. The assessee had established the identity of the parties, produced the documentary evidence and had discharged the primary onus that lay on it but the Department failed to prove that the documentary evidence produced by the assessee was false or fake. The Department could not, therefore, say that the assessee had failed to prove its case.
24. It appeared to me that the entire edifice of the case of the Department was built around the solitary circumstances (viz.) their belief of the non-existence of M/s. Bafna Traders which is now found to be incorrect. All the other points shown were only supporting points. Since M/s. Bafna Traders was found to be a party in existence which was proved beyond doubt by the correspondence that took place between them and the I AC (Asst.), I have to hold that the basis for the Department was mostly suspicion. Having accepted the claim in the earlier year on the same set of facts, the disallowance of the claim for subsequent year may not be proper. I have, therefore, preferred to rely upon the unfalsified evidence led by the assessee in preference to the suspicions relied upon by the Department. It is for this reason that I agreed with the view expressed by the learned Judicial Member.
25. Now the matter will go before the regular Bench for the disposal of the appeal in accordance with the opinion of the majority.