Income Tax Appellate Tribunal - Mumbai
Heera Textiles vs Income-Tax Officer on 15 July, 1991
Equivalent citations: [1991]39ITD312(MUM)
ORDER
M.A. Ajinkya, Accountant Member
1. This is an appeal by the assessee for the assessment year 1988-89 against the order of the Commissioner of Income-tax (Appeals) in which he has confirmed the disallowance of Rs. 2,03,582 as brokerage and commission paid under Section 40A(2)(b). The relevant facts are as follows :
2. The assessee is a registered firm. The assessment year is 1988-89 and the accounting period is 31-3-1988. The firm was carrying on business of manufacturing and trading in suitings and shirting cloth. It purchased gray cloth and yarns and after getting it processed from the process houses sold finished, goods. While scrutinizing the accounts, the assessing officer noticed that the assessee firm had paid brokerage of Rs. 2,03,582 to three concerns viz., (1) Shree Krishna Silk Mills, (2) Veekayam Textiles Mills P. Ltd. and (3) Mahawar Silk Synthetics to whom the assessee had effected, sales of Rs. 2,03,58,096. Assessee's Representative when asked to explain why so much brokerage was paid, explained in a letter dated 13-2-1989 that the firm had strictly followed the business principles and in the previous years also commission was paid regularly on the supplies made either to the party concerned directly or to the brokers. The Income-tax Officer invoked the provisions of Section 40A(2)(b) because he found that the partners of M/s. Shree Krishna Silk Mills and Mahawar Silk and Syntheiics and the director of Veekayance Textiles (P.) Ltd. were relatives of the partners of the firm and, therefore, the payments made to them fell within the purview of definition of a 'person' as explained in Section 40A(2)(b). He, therefore, disallowed the claim of deduction for brokerage of Rs. 2,03,582.
3. The assessee went in appeal. An effort was made to point out that only discount of 1 per cent was allowed to these parties for purchases. Reliance was placed on the decision of the Karnataka High Court in T.T. (P.) Ltd. v. ITO [1980] 121 ITR 551 and the decision of the Madhya Pradesh High Court in Ganesh Soap Works v. CIT [1986] 161 ITR 876. The CIT (Appeals) has held that the assessee had failed to show as to how deduction of 1% was admissible on the sale price receivable from these three-parties who were related to the assessee-firm and, therefore, according to the CIT (Appeals) provisions of Section 40A(2)(&) were correctly involved hence this appeal before the Tribunal.
4. The advocate for the assessee argued that the nature of the payment was not commission or brokerage but a rebate or discount on purchases effected by them. The advocate further argued that the payment was not made to an individual but to the firm. She has filed copies of the credit notes in respect of all the three parties along with the copy of the accounts of the three parties as appearing in the books of the assessee-firm in support of the argument that what was paid to these three parties was in fact a rebate or discount at one per cent on total sales effected at the end of the year and this was not in the nature of commission. It was, therefore, argued that the provisions of Section 40A(2) were not properly invoked because, firstly, the rebate was allowed at one per cent as was the case in the past and the Income-tax Officer had not established that the expenditure was excessive or unreasonable having regard to the fair market value of the goods. Secondly, the payments were made to the firms or a limited company and not to individuals by the assessee which was a firm. Now Clause (b) of Sub-section (2) of Section 40A reads as follows:
(b) The persons referred to in Clause (a) are the following, namely :-
(i)...
(ii) Where the assessee any director of
is a company, firm, the company, partner
association of persons of the firm, or
or Hindu undivided member of the
family association or family, or any
any director of member of the
relative of such director, partner
or member;
In the present case, the assessee is a firm so what would come within the mischief of Section 40A(2) is that expenditure which is to be incurred on payments made to any director of a company, partner of the firm, or member of the association or family, or any relative of such director, partner or member. In the present case, the payments were made to the firms where relatives of a limited company were relatives of the partners of the firm. Hence according to the advocate, Section 40A(2) could not come into operation. Reliance was also placed on the decision of the Karnataka High Court in T.T. (P.) Ltd.'s case (supra) and the decision of the Madhya Pradesh High Court in Ganesh Soap Works' case (supra). The learned Departmental Representative relied on the orders of the revenue authorities.
5. We have considered the submissions made on both the sides. The main contention of the assessee that what was paid was in the nature of rebate or a discount at one per cent of the total purchases effected by the parties at the end of the year has not been taken into account at all by the Commissioner of Income-tax (Appeals) or by the Income-tax Officer. Secondly, the argument that the payment were not for services rendered and that therefore, the question of invoking of Section 40 A(2) could not arise has also not been properly appreciated by the revenue authorities and thirdly, the argument that the payment has been made by one firm to another or by one firm to a limited company and not to any individuals who are related to the partners of the firm has also not been taken into account by the revenue authorities. We may refer to the observations of the Karnataka High Court in the case of T.T. (P.) Ltd. (supra) which are as follows :
The expression 'services' used in Section 40A(2)(a) is an expression of the wider import. The crucial words in Section 40A(2)(a) are 'fair market value of the goods, services or facilities'. If the remuneration, benefit or amenity referred to in Section 40(c) is treated as the same as what is paid in return for 'goods, services, or facilities', then, irrespective of the fair market value of the goods, services and facilities provided by a person who may be a director or a person who has substantial interest in the company or a relative of the director or of such person, as the case may be, only a maximum of Rs. 72,000 can be allowed to be deducted in computing the income of the company in any one year. Parliament could not have intended that such a result should follow. The goods, services and facilities referred to in Section 40A(2)(a) are those which have a market value, which are commercial in character and which are now a days provided by independent organisations.
The type of expenditure such as rebate or discount cannot be considered as commission for services rendered and would not come within the purview of Section 40A(2). We find that no finding has been given by the assessing officer or by the CIT (Appeals) that the payment is excessive or unreasonable. It is stated that similar payment were made in the past and there has been no disallowance of this type in earlier years.
6. We have considered the various arguments advanced and have gone through the records. Firstly, we find that the payments are made by the assessee - Heera Textiles to three firms viz., (1) Mahawar Silk Synthetics, (2) Shree Krishna Silk Mills and (3) Veekayam Textiles Mills Pvt. Ltd. Copies of accounts of these parties as appearing in the books of the assessee have been filed by the Advocate, before us. It is seen from the perusal of the accounts that what is described as commission calculated at one per cent of the turnover is credited to the account of each of these parties at the end of the accounting year which is the financial year i.e. on 31-3-1988. Thus the true nature of the payment is in the nature of rebate and not commission paid in promoting the sales or for services rendered which could come within the mischief of Section 40A(2). Section 40A(2) in its operative portion speaks of expenditure in respect of which payment has been made or is to be made to any person referred to in Clause (b) which in the opinion of the assessing officer is excessive or unreasonable having regard to the fair market value of the goods, services or facilities for which the payment is made. Now, in the present case, the payment cannot be said to be made for any services rendered, since it is clear that what is paid is a rebate or commission worked out after the sales are effected at a certain percentage of sales. Secondly, the persons referred to in Clause (a) are specified in Clause (b) and as pointed out above in the case of a company, the person is a director of the company, partner of the firm, or member of the association or family, or any relative of such director, partner or member. In the present case, the payees are firms and not any individuals which can fall within any of these categories. Therefore, in our opinion, Section 40 A(2) has been wrongly invoked for disallowing the commission in the present case. We would reverse the order of the Commissioner of Income-tax (Appeals) and allow the appeal.