Income Tax Appellate Tribunal - Hyderabad
Pennzol Investment And Trading Co. (P.) ... vs Assistant Commissioner Of Income-Tax on 27 October, 1993
Equivalent citations: [1994]49ITD534(HYD)
ORDER
R.P. Garg, Accountant Member 1 to 11. (These paras are not reproduced here as they involve minor issues.
12. Next common ground in both the appeals in regarding lease rent payment by the assessee for hiring plant and machinery. With a view to starting a new unit called "Pennzol Gases" for selling gases and supplying them to customers, the assessee took the plant and machinery on hire from Asiatic Oxygen (P.) Ltd. As per the lease agreement dated 7-9-1984, the rent was Rs. 1,19,000 per month. The trial production of the new project was carried out on 14-11-1985 and the commercial production started from 1-1-1986. As the expenses on hire charges of the aforesaid plant and machinery pertained to a period prior to commencement of the business ,the Assessing Officer disallowed the entire claim for the period from 7-9-1984 to 30-9-1985 in assessment year 1986-87 and for October 1985 in assessment year 1987-88. The assessee's contention was that it was already in the business of trading and, therefore, the business of manufacturing in the same line amounted to same business, was rejected by the Assessing Officer as, according to him, "income from trade and income from manufacture are two different sources though assessable under the head 'business'". In the instant case, he observed, the assessee switched from the source of trade to the source of manufacture and during the year of account no business was carried on with the activity of manufacture. Relying upon the decision of the Supreme Court in the case of Empue Jute Co. Ltd. v. CIT (1980] 124 ITR 1, he held that if the disbursement is made for acquisition of a source of profit or income, it would ordinarily, in the absence of any other countervailing circumstances, be in the nature of capital expenditure. If there is an enlargement of the permanent structure of which income would be a produce or fruit, he observed, there would be a change in the character of the profit-making apparatus. In other words, according to him, the profit earning structure of the assessee was enabled to produce more goods because of addition or augmentation in the profit making structures and not by simply operating the existing structure efficiently for longer working hours. Any change in the profit-making structure in the manner evisaged by the Supreme Court, would, according to him, amount to a substantial change, conferring enduring advantage or benefit on the assessee. Any expenditure incurred in this regard would be capital in nature. He also referred to the decision of the Andhra Pradesh High Court in the case of Vazir Sultan Tobacco Co. Ltd. v. CIT [1989] 175 ITR 55, wherein it was held that once it is found that the new venture is totally unconnected with the business now carried on and which has given rise to the income which is being computed for the purpose of determining the taxable amount, there appears to be no ground for holding that such expenditure is Lald out wholly or exclusively for the purpose of business carried on by the assessee. In view of the above, it was evident to him that Pennzol Gases division was not in any way connected with the existing trading activity of the assessee and that the expenditure, if any, incurred in connection with Pennzol Gases would come up for consideration only after the commencement of commercial production and that as such, the expenditure incurred prior to the commencement of the activity, though revenue in nature, had to be treated as capital expenditure and required to be disallowed.
13. The CIT (Appeals) upheld the disallowance for the assessment year 1987-88 by further supporting the order of the Assessing Officer by the decision of the Supreme Court in the case of Textile Machinery Corpn. Ltd. v. CIT [1977] 107 ITR 195. For assessment year 1986-87, which appeal happened to be decided later in point of time, the claim of the assessee was allowed by the CIT (Appeals) by taking a view contrary to that of his predecessor. In that order, the CIT (Appeals) observed that the entire business of trading in gases, cylinders and manufacturing gases was a composite business. It may be stated here that no reasons whatsoever have been given in the said order for coming to this conclusion and taking a contrary view to what his predecessor had taken of the matter. Be that, as it may, we have to decide the matter after taking into consideration the facts and circumstances of the case and the arguments made before us.
14. There is no dispute in this case that the assessee was carrying on trading business in gases and cylinders before the Unit of Pennzol Gases was launched and that the new project was in the same line of business excepting that in earlier years it used to trade in gases, in this year, besides trading it was also manufacturing gases. The revenue's case is that the two lines of business, viz., trading and manufacturing, are two different businesses unconnected with each other for which separate books of account were maintained, separate profit and loss accounts were prepared and pre-production expenses were capitalised and allocated to various buildings, viz., office building and gases building, by the assessee itself. Support is had of the decision of the Supreme Court in the case of Empire Jute Co. Ltd. (supra), Andhra Pradesh High Court in the case of Vazir Sultan Tobacco Co. Ltd. (supra) and the decision of the Supreme Court in the case of Textile Machinery Corpn. Ltd. (supra). The learned departmental representative further supported the case of the revenue by relying upon the following decisions:
(1) Ram Chandra MunnaLalv. CIT [1949] 17 ITR 394 (East Punj.);
(2) CITv. SarabhaiSons (P.) Ltd. [1973] 90 ITR 318 (Guj.);
(3) CIT v. Industrial Solvents & Chemicals (P.) Ltd. [1979] 119 ITR 608 (Bom.); and (4) CITv. Forging & Stamping (P.) Ltd. [1979] 119 ITR 616 (Bom.).
The claim of the assessee, however, is that it was an extension of the same business and not a different business. Reliance is placed on the following decisions:
(1) B.R. Ltd. v. V.P. Gupta, CIT [1978] 113 ITR 647 (SC);
(2) CITv. OswalSpg. & Wvg. Mills Ltd. [1986] 160 ITR 426 (Punj. & Har.) ;
(3) Gopal Films v. /TO [1983] 139 ITR 566 (Kar.);
(4) C.T. Desai v. CIT [1979] 120 ITR 240 (Kar.);
(5) CIT v. Hindustan Machine Tools Ltd. (No. 1) [1989] 175 ITR 212 (Kar.); and (6) Kesoram Industries & Cotton Mills Ltd. v. CIT [1992] 196 ITR 845 (Cal.).
15. We have heard the parties and considered the rival submissions. In our opinion, the assessee should succeed. As stated above, the assessee was already in the business in this line and any extension of the same would form part of the same business. Management of the two businesses is the same and there is inter-connection and inter-lacing of the two businesses inasmuch as the gases manufactured and filled are the items dealt in in the trading business of the assessee. The authorities relied upon on this aspect fully support the case of the assessee. The contention of the learned departmental representative that they are under Section 72 of the IT Act and, therefore, have no application for dealing with a question to be determined under Section 28, has no force. When for the purposes of cany forward and set off a new unit is treated as an existing business, for the purpose of setting up a unit it presupposes that the assessee is carrying on business and any expenditure which is of revenue nature has to be allowed. Such an expenditure cannot be disallowed on the ground that it pertained to pre-commencement period.
16. In B.R. Ltd. (supra), the Supreme Court held that for the purpose of ascertaining whether two lines of business constitute the same business, the decisive test is unity of control and not the nature of the two lines of business. In that case, the assessee-company incurred loss in the business of import and sale of fabrics in the calendar year 1952 which was the previous year relevant to the assessment year 1953-54. It closed the business towards the end of the calendar year and started from the commencement of the calendar year 1953, relevant to next assessment year 1954-55 the business of exporting cotton textiles and earned profits in the business in that year and subsequent years. In his report in the revisionary proceedings, it was expressly stated by the Income-tax Officer that "there was a common control and common management of the same board of directors" of the business of import and export. In the light of the aforesaid statement, their Lordships of the Supreme Court held that the unity of control and the other circumstances of the case showed that there was dovetailing or interlacing between the business of import and the business of export carried on by the assessee and that they constituted the same business. There is no dispute in the present case that there was a common board of directors controlling and managing both the lines of business and, therefore, there can be no doubt that the two lines of trading and manufacturing are the same business.
17. In the case of Oswal Spg. & Wvg. Mills Ltd. (supra) before the Punjab and Haryana High Court, the facts were that the assessee, hitherto carrying on the business of spinning and weaving woollen yarn, incurred registration charges for obtaining a loan for the purpose of starting a new venture, viz., manufacture of vanaspati ghee, and claimed the amount as business expenditure. The claim was disallowed by the Income-tax Officer on the ground that the new unit had not been set up during the relevant accounting period. The claim was allowed by the Tribunal and upheld by the High Court. The court observed that "moreover, the assessee was already a running concern and the endeavour was to set up a new vanaspati ghee unit and, therefore, the registration expenses were allowable as business expenditure".
18. In C.T. Desai's case (supra), the assessee was carrying on the business of film distribution on his own and also exhibition of films on percentage basis under agreements entered into by him with theatre owners. For the purpose of securing the lease of a fully equipped cinema theatre, he entered into an agreement with his wife in the subsequent year and in accordance therewith the assessee paid his wife a sum of Rs. 3,50,000 which the assessee had borrowed on interest and the wife was to construct the cinema theatre and to equip it fully for being used for the exhibition of films and to allow the assessee to use the theatre. The disallowance of interest claimed was made in that case on the ground that the cinema theatre came into existence only in February 1969 and, therefore, the capital borrowed was not for the purpose of assessee's business and the interest paid on the amount was not deductible. The claim was allowed by the High Court on a reference holding inter alia that the assessee was a businessman during the relevant year, even assuming that he was only doing the business of distribution of films and that as he wanted to extend his business to exhibition field also, for that purpose, it was necessary for him to acquire a theatre and for acquiring a theatre he had to pay a sum of Rs. 3,50,000 and it was for that purpose he borrowed the money. This case was followed in the later decision of the Karnataka High Court, in the case of Gopal Films (supra).
19. In another decision of the Karnataka High Court in the case of Hindustan Machine Tools Ltd. (supra), the Court held, where the assessee claimed deduction of the expenditure incurred in connection with new units and it was found that there was complete unity, interlacing, interdependence, interconnection of management, financial, administrative and production aspects, amongst all divisions of each unit and amongst all units of the business as a whole, that the expenditure incurred in connection with the new divisions was deductible as business expenditure.
20. In the case of Kesoram Industries & Cotton Mills Ltd. (supra) before the Calcutta High Court, the assessee had a cement unit in Andhra Pradesh. During the previous year relevant to assessment year 1975-76, it incurred miscellaneous expenditure and legal charges in connection with a proposed factory in Rajasthan and claimed it as business expenditure. The Tribunal held that the expenditure in connection with the proposed factory in Rajasthan unit was deductible. The Calcutta High Court upheld the order of the Tribunal by observing that the expenditure pertained to exploring the feasibility of expanding or extending the assessee's existing business and it was in connection with the carrying on of the assessee's business.
21. Taking the aforesaid into consideration, in our opinion, the expenditure incurred by the assessee in the setting up of Pennzol Gases Unit was an expenditure for extension of its existing business and, therefore, the expenditure was incurred in the same business.
22. In the case of Ram Chandra Munna Lal (supra) relied upon by the learned departmental representative, though it is true that the court held that where an assessee is carrying on more than one business in any accounting year, the expenditure incurred in one business cannot be allowed in computing the profits of another business and in order to claim a deduction the particular business must have been carried on during the accounting year and it is not enough that the assessee was carrying on some other business in the said period, these observations of the ICast Punjab High Court were in connection with two businesses and the court made it clear that "where an assessee carries on different varieties of trade, commerce or manufacture each variety will have to be regarded as a separate business for the purposes of Section 10 (of the 1922 Act) unless one or more varieties are so closely connected with each other as to be capable of being regarded as one business". In the present case, there was a close connection between the two businesses inasmuch as gases are being traded in the both the businesses in one trading alone and in the other manufacture and trading both. In any case, as held by the Supreme Court in the case of B.R. Ltd. (supra), it is the unity of control and the management which is decisive and not the nature of manufacturing between the two lines of business. There being a common board of directors controlling and managing both the businesses, the present is a case of same business.
23. In the case of Sarabhai Sons (P.) Ltd. {supra) before the Gujarat High Court, the expenditure was disallowed as pertaining to pre-commence-ment period of the business as the new business could not be said to be ready to discharge its functions for which it was established viz. manufacture of scientific instruments and communication equipment. That was a case of a new business and the assessee was not doing any business prior to that. The assessee was acting as managing agent of Swastik Oil Mills Ltd. since several years past and sometime towards the end of 1965, the assessee decided to start a new business for manufacturing scientific instruments and communication equipment. It was not the case of the assessee in that case that the carrying on of the agency business and the manufacturing constituted the same business. Therefore, this decision is of no help to the revenue.
24. In the case of Industrial Solvents & Chemicals (P.) Ltd. (supra) before the Bombay High Court, the assessee was incorporated in August 1959 and the expenses were claimed for the period prior to the setting up of its business and in that connection the court held that the expenses were not allowable. That was a case of an altogether new business. Similar is the position before the Bombay High Court in the case of Forging & Stamping (P.) Ltd. [supra). There also the company was incorporated in August 1962 for the purpose of manufacturing, fabricating, producing and selling all types of dies and moulds for drop forgings, drop stampings and various other tools. The expenditure claimed pertained to the period prior to its setting up of the business. That was also a case where there was no existing business before the new business was started.
25. In the case of Empire Jute Co. Ltd. [supra) relied upon by the learned Departmental Representative, the Supreme Court held that the disbursement made for acquisition of a source of profit or income is capital expenditure, but the court ultimately held that the expenditure should be in the capital field and that something tangible or of permanent character must be obtained by the assessee by incurring the expenditure. By taking the plant on hire in the present case, nothing tangible or of permanent benefit accrued to the assessee. The lease rent is only for the user of the plant and manchinery. This case also does not help the revenue.
26. In the case of Vazir Sultan Tobacco Co. Ltd. (supra), the Andhra Pradesh High Court held that if the new venture was totally unconnected with the business being carried on by the assessee, such expenditure cannot be said to have been Laid out wholly and exclusively for the purposes of the business carried on by the assessee. That is not the situation here in the present case. In both the ventures, gases were being dealt in by the assessee and there is a close connection between the two if it had any relevance as the decisive test as held by the Supreme Court is the unity of control and the management and not the nature of the two lines of business.
27. In these circumstances, we allow the claim of the assessee for assessment year 1987-88 and uphold the allowance by the C1T (Appeals) for assessment year 1986-87.
28. Similar is the situation admitted to be for the interest payment of Rs. 1,16,010 to Asiatic Oxygen (P.) Ltd. towards late payment of lease rent which was allowed by the CIT (Appeals) in the appeal for assessment year 1986-87. The order of the CIT (Appeals) in allowing this claim is accordingly upheld.
29. Ground Nos. 3 and 4 in the assessee's appeal for assessment year 1987-88 are with regard to the assessee's claim for transport charges of cylinders. The assessee claimed an expenditure of Rs. 2,07,440. No details were furnished before the Assessing Officer by the assessee as to the number of cylinders transported from one place to another, the charges paid per trip, etc. He, therefore, disallowed 25 per cent of the expenditure claimed by the assessee on estimate basis as not relating to business. Considering the submissions of the assessee to the effect that the movement of cylinders was almost a daily business inasmuch as while empty cylinders kept coming in, filled in cylinders kept going out and the inability expressed by the authorised representative of the assessee to give details of cylinder movements was due to high frequency of such movements and the number of places covered both within and outside the city, the CIT (Appeals) was of the view that disallowance of only 10 per cent of the expenditure claimed was called for.
30. Nothing further has been brought to our notice to justify any interference in the order of the CIT (Appeals). Looking to the facts and circumstances of the case, we are of the opinion that there is no further scope of reducing the disallowance as upheld by the CIT (Appeals). These two grounds of the assessee are, therefore, rejected.
31. Ground No. 6 in the assessee's appeal is with regard to the disallowance of 20 per cent of service charges incurred by the assessee. The assessee claimed a sum of Rs. 42,900 by debiting it to profit and loss account towards service charges. No details about the nature of these charges were furnished by the assessee. The Assessing Officer, therefore, disallowed 20 per cent of the service charges on estimate basis. The disallowance was upheld by the CIT (Appeals) as before him also the assessee had not furnished any details.
32. At pages 80 and 81 of the paper-book, the assessee has given some details of the service charges from which it appears that the expenditure was incurred by the assessee on payments to labourers towards cleaning and loading charges and painting and reconditioning charges of drums. All these payments were made in cash. At some places, only details are that a particular amount was spent by the assessee in January, February, March, April, June. 35c. and no further details are available. In these circumstances, in our opinion, the disallowance of 20 per cent cannot be said to be unreasonable. The order of the CIT (Appeals) on this point is accordingly upheld.
33. Next ground in the assessee's appeal for assessment year 1987-88 is with regard to the disallowance of commission payment of Rs. 13,01,662. It was paid by the assessee to M/s. New India Shipping Lines Ltd. (hereinafter referred to as NISL) of Calcutta for introducing the assessee to three suppliers of carbon for the manufacture of tyres. The suppliers are M/s. Philips Carbon Black Ltd., M/s. Gujarat Carbons Ltd. and M/s. Oriental Carbon and Chemicals Ltd. All these three companies belong to Duncan group. The assessee was successful in entering into agreements with the three parties and earned a commission of 6 per cent on the orders procured for the first party and 5.5 per cent in the case of other two parties. The assessee procured these orders from M/s. Ceat Tyres of India Ltd. and received a commission of Rs. 42,87,545 for the supply of carbon to them. In this process, the assessee had claimed that it had to pay a part of the commission to NISL and also to Ceat Tyres. The payments of Rs. 13,01,662 and Rs. 3,73,834 respectively were claimed as revenue expenditure but disallowed by the Assessing Officer. Though the payment to Ceat Tyres was allowed by the CIT (Appeals), the payment to NISL was disallowed.
34. The learned counsel of the assessee submitted that a similar claim came up for consideration before the CIT (Appeals) in appeal for the subsequent year 1988-89 and was allowed. No second appeal there-against was filed by the revenue and, therefore, he submitted, the matter stands concluded insofar as the department is concerned. It was further submitted that the assessee had earned a sum of Rs. 42.87 lakhs and paid Rs. 3.74 lakhs to Ceat Tyres and Rs. 13.01 lakhs to NISL. All these three activities were part of the same transaction and, therefore, the department is not justified in choosing only one and rejecting the claim of the assessee. Reliance in this connection was placed on the decision of the Supreme Court in the case of Lalchand Bhagat Ambica Ram v. CIT [1959] 37 ITR 288, wherein it was held that if a part of the claim is accepted, the other part cannot be disallowed. With the introduction by NISL, the assessee earned a commission of 6 per cent from Philips Carbon Black Ltd. and 5.5 per cent from other two companies. The claim for payment is only for 2 per cent which was paid for introduction of the assessee to the suppliers by NISL and should not, therefore, have been disallowed as it was for earning the income. Reliance in this connection was placed on the decision of the Gujarat High Court in the case of CIT v. Navsari Cotton & Silk Mills Ltd. [1982] 135 ITR 546, and in the case of Swastic Textile Co. (P.) Ltd. v. CIT [1984] 150 ITR 155 (Guj.). It was further submitted that NISL is not related to the assessee in any way. It is a limited company and has paid tax on the income earned from the assessee, and therefore, no evasion or saving of tax could be attributed. The decision of the Supreme Court in the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148, relied upon by the departmental authorities have been referred to in the subsequent decision in the case of CWT v. Awind Narottam [1988] 173 ITR 479 (SC) and was also a subject matter of consideration of the Madras High Court in the case of M. V. Valliappan v. ITO [1988] 170 ITR 238. It was further submitted by the learned counsel of the assessee that the apparent should be treated as real unless proved otherwise and for this proposition he relied on the decision of the Assam High Court in the case of TolaramDaga v. C/T[ 1966] 59 ITR 632. He submitted that nothing has been shown to prove the contrary, and therefore, the claim of the assessee should have been accepted. It. was further submitted that the debit notes are legal documents and should be treated as proof of services rendered to the assessee. The learned counsel further submitted that some discrepancies in the documents found by the departmental authorities are not sufficient to negative the claim of the assessee particularly when there is no finding that the claim of the assessee is bogus. He submitted that the substance and not the form should be seen in such a matter. The department is not to investigate the motive he submitted, but it should look to the facts as they are, as held by the Punjab and Haryana High Court in the case of CIT v. Om Parkash Behl [1981] 132 ITR 342. He further submitted that secret commission is being allowed in these days where there is no proof and, therefore, the claim made by the assessee for which ample evidence is on record should not have been disallowed. It was also submitted that the onus is on the revenue to demonstrate that no services were rendered, particularly when it accepts a part of the claim. In this connection, reliance was placed on the decision of the Supreme Court in the case of CIT v. Daulat Ram Rawatmull [1973] 87 ITR 349, the Karnataka High Court in the case of Ritz Hotels (Mysore) Ltd. v. CIT [1992] 196 ITR 614, and the Gujarat High Court in the case of Swastic Textile Co. (P.) Ltd. (supra).
35. The learned departmental representative, on the other hand, submitted that each year is a separate year and, therefore, merely because the claim has been allowed in a particular year, that fact is not a bar to consider the claim of the assessee in another year. He further submitted that no reasons have been given by the CIT (Appeals) in the appeal for assessment year 1988-89 for allowing the claim of the assessee. Supporting the orders of the departmental authorities, he submitted that no services were rendered nor proved to have been rendered by NISL and, therefore, the claim was rightly disallowed. The payment to Ceat Tyres was allowed because they supplied carbon and that payment has no connection with the payment to NISL and, therefore, there was no question of accepting a part of the claim and rejecting the other part as contended by the learned counsel of the assessee. NISLhas been assessed, he submitted, on income from other sources and in view of the fact that the entire amount has been assessed as income, it was earned without incurring any expenditure, meaning thereby that they have not made any efforts in earning the income. The assessee admits the defects in the letters filed and, therefore, they do not constitute evidence in proof of services having been rendered to the assessee. One set of letters dated 20-3-1986, 24-3-1986 and 28-3-1986 are not signed whereas the second set, though signed, were with different contents. In these circumstances, he contended that no credence could be given to either set of letters. There could be no question of introduction by NISL as the letters produced by the assessee are dated 20-3-1986 onwards whereas the agreements were prior to that, date, i.e. on 25-2-1986 in one case, 15-3-1986 and 17-3-1986 respectively in the other two cases. The payments are shown to have been made even before they accrued in the subsequent year. The payments, even if accepted, do not entitle the assessee for the allowance of the claim in the absence of services rendered and for this proposition, reliance is placed by the learned departmental representative on the decision of the Supreme Court in the case of Swadeshi Cotton Mills Co. Ltd. v. CIT [1967] 63 ITR 57, and in the case of Lachminarayan Madan Lal v. CIT [ 1972] 86 ITR 439 (SC), and the Punjab and Haryana High Court in the case of Ess Ess Kay Engg. Co. (P.) Ltd. v. CIT [1985] 151 ITR 636. He submitted that the onus is on the assessee and not on the department, and for this proposition he referred to the commentary of Chaturvedi and Pithisaria, 4th edition, volume 2 at page 1602, the decision of the Supreme Court in the case of Lachminarayan Madan Lal {supra) and the Bombay High Court in the case of Goodlas Nerolac Paints Ltd. v. CIT [1982] 137 ITR 58. The assessee not having discharged that onus, he submitted, it is not entitled to any deduction.
36. We have heard the parties and considered the rival submissions. Section 37 of the IT Act deals with the allowance of residuary expenditure which are not specifically allowable under Sections 30 to 36 in computing the income of an assessee from business. It provides that expenditure must be incurred wholly and exclusively for the purposes of business of an assessee and that the expenditure incurred should not be personal or capital in nature. The commission paid to the employees is specifically dealt with in Section 36(1)(i) of the Act and there is no specific provision for commission paid to others. The allowability of such commission has, therefore, to be determined with reference to the residuary provisions contained in Section 37 of the Act. The commission is paid to an agent for rendering certain services and where the services are connected with or for the purposes of the assessee's business, the payment is deductible as expenditure under Section 37 of the Act. It would be a business deduction as held by the Gujarat High Court in the case of Swastic Textile Co. (P.) Ltd. (supra). While the reasonableness of the amount cannot be questioned, it is always open to the department to consider the reality of the claim for payment of commission. The Supreme Court in the case of Lachminarayan Madan Lal (supra) held that merely because the assessee has established the existence of an agreement between him and an agent and the actual payment made thereunder, it would not take away the jurisdiction or discretion of the Assessing Officer to consider whether the expenditure was incurred wholly and exclusively for the purposes of the business of the assessee. At the same time, it was further held that it has also to be determined whether the expenditure incurred was commercially expedient. Any payment for extra-commercial considerations cannot be allowed as a business expenditure wholly and exclusively incurred for the purposes of business of the assessee. The emphasis is, therefore, on the services rendered. If there is no evidence to show that the agent made any sale or rendered any services whatsoever to the assessee, claim can be disallowed. In the case of Swadeshi Cotton Mills Co. Ltd. (supra), the Supreme Court held that where the payment has no relation with the value of the services or goods received in return, the payment could be disallowed notwithstanding that the payment was pursuant to an enforceable agreement. The submission of the learned counsel of the assessee that the onus is on the revenue has no force. The decision of the Bombay High Court in the case of Goodlas Nerolac Paints Ltd. (supra) is an authority for this, wherein it was held Since the claim of the assessee was that the commission was paid by the assessee, the burden of proving that the amounts were actually Laid out or expended as secret commission for the purposes of business lay on the assessee.
37. The decision of the Supreme Court in the case of Daulat Ram Rawatmull (supra) relied upon by the learned counsel of the assessee, was in respect of cash credit obtained on the security of fixed deposits of a third party and not with regard to payment of commission. This case is of no help to the assessee.
38. In the case of Ritz Hotels (Mysore) Ltd. [supra], the commission was being paid since 1974 and its genuineness and allowability was never in dispute. The assessing authority allowed the claim noticing the services rendered by the agent and the Commissioner of Income-tax wanted to revise the assessment by invoking the provisions of Section 263, In that context, it was held that the onus was on the revenue to establish that no services were rendered. It seems to be a case of shifting the onus on the revenue on prima facie proof brought by the Assessing Officer on record in allowing the claim of the assessee in assessment proceedings. The primary onus, therefore, remains with the assessee.
39. With this background, we have to examine the claim of the assessee and find whether any services were rendered by NISL or not to whom the payment is alleged to have been made. The following 1 otters were filed in the paper book :
(1) First letter dated 20-3-1986 by NISL to assessee (2) Second letter dated 20-3-1986 by NISL to assessee (3) First letter dated 24-3-1986 by assessee to NISL (4) Second letter dated 24-3-1986 by assessee to NISL (5) Letter dated 28-3-1986 by NISL to assessee (6) Letter dated 9-10-1990 by assessee to NISL (7) Letter dated 11 -10-1990 by NISL to assessee (8) Agreement dated 25-2-1986 with Philips Carbon Black Ltd.
(9) Agreement dated 15-3-1986 with Oriental Carbon & Chemicals Ltd.
(10) Agreement dated 17-3-1986 with Gujarat Carbon Ltd.
(11) letter dated 21-2-1986 by assessee to Philips Carbon Black Ltd. offering itself for appointment as agent for the supply of carbon to Ceat tyres of India Ltd. (12) Similar letters dated 21-2-1986 to Oriental Carbon & Chemicals Ltd, and Gujarat Carbon Ltd. (13) letter dated 21-2-1986 by NISL to Philips Carbon Black Ltd.
The first set of letters dated 20-3-1986, 24-3-1986 and 28-3-1986 were discarded by the departmental authorities on the ground that they were unsigned and were also vague as to rendering of any services by NISL to the assessee. The agreement letters dated 25-2-1986, 15-3-1986 and 17-3-1986 were found to be of no help as they do not have any reference to NISL's role in the assessee procuring the order from Ceat Tyres. The letters of NISL to the assessee are held to be an afterthought to support the accounting entries and, therefore, no credence was given. The second letter dated 20-3-1986 by NISL to the assessee also leaves the matter of service vague excepting for the introduction of the assessee to Philips Carbon Black Ltd. The letter dated 11-10-1990 confirming the introduction of the assessee by NISL to the three suppliers was in response to the assessee's letter dated 9-10-1990 seeking information.
40. According to the Revenue, the three agreement letters dated 25-2-1986,15-3-1986 and 17-3-1986 do not have any reference to the role of NISL. However, on a closer reading of these letters, we find that they contain a reference to respective letters dated 21-2-1986 which were written by the assessee seeking their appointment as agent. These letters clearly establish that Sri S.N. Dalmia of NISL was associated in discussion with the three suppliers and instrumental in procuring the orders to the assessee. One such letter written to M/s. Philips Carbon Black Ltd. reads as under :
Dear Sirs, Re: Carbon Black Supplies to Creat This refers to the several discussions the undersigned accompanied with Sri S.N, Dalmia, one of the directors of New India Shipping Lines Ltd. had with your Mr. T. Posaw in the last two weeks. In course of the said discussions, we repeatedly explained to you that we are in a position to obtain regular orders for Carbon Black from Ceat Tyres of India Ltd. and we would also undertake to ensure timely payments in respect of all supplies to be effected to the said company through us. Mr. Dalmia has already confirmed our ability to secure regular orders from Ceat Tyres of India Ltd. as well as to ensure timely payments from the said company. We shall be grateful if you kindly appoint us as your commission agent for arranging supplies of Carbon Black to Ceat Tyres of India Ltd. We do hereby confirm that we shall be personally responsible to act as commission agents in respect of your sales of Carbon Black to Ceat Tyres of India Ltd., as are routed through us and that you would be responsible to pay agency commission only to us. Between ourselves and New India Shipping Lines Ltd., there would be separate arrangement for sharing of the aggregate commission receivable from you and it would be our responsibility to settle the terms and conditions between ourselves and New India Shipping Lines Ltd. We do hereby further confirm that over and above the commission payable by you to us as commission agents, you would not be liable to make any extra payment of commission to New India Shipping Lines Ltd., who have very kindly introduced us to you in the aforesaid matter and who have all along been involved in our all discussions with you in the last 2 weeks. Thanking you, Yours faithfully, etc. The letter of NISL to Philips Carbon Black Ltd. dated 21-2-1986 also throws some light on this aspect. It reads as under :
Dear Sirs, Attn: Mr. T. Posaw Please refer to the several discussions the undersigned accompanied with Mr. B.R. Kothari of Pennzol Investment & Trading Company Pvt. Ltd. had with you in regard to the supply of Carbon Black by your Company to Ceat Tyres of India Ltd. As requested by you, we do hereby confirm that in case you appoint Pennzol Investment & Trading Co. Pvt. Ltd. as your commission agent in respect of supplies of Carbon Black made to Ceat Tyres of India Ltd., you would not be liable to make any separate payment of commission to ourselves. We shall obtain our portion of the commission directly from Pennzol Investment & Trading Co. Pvt. Ltd. This is for your information and record.
Yours faithfully.
For New India Shipping Lines Ltd.
(sd.) (S.N.Dalmia) Director.
41. Further, though copies filed before the Assessing Officer of the letters dated 20-3-1986, 24-3-1986 and 28-3-1986 were xerox copies of the unsigned typed copies of those letters, the assessee filed xerox copy of the letter dated 20-3-1986 which was signed by the Director of NISL. The second letter dated 20-3-1986 which was filed before the CIT (Appeals) was written by them after discussion of the matter by Sri Kothari, Director of the assessee-company, with Sri Dalmia about the revised arrangement whereunder the three suppliers were to supply goods directly to Ceat Tyres of India Ltd. and nobody was to look after the supplies. It is true that this letter is after the letter of appointment by the three suppliers, but the letters dated 25-2-1986, 15-3-1986 and 17-3-1986 were only offers and subject to approval by the assessee by putting its signature of acceptance. The letter of 11 -10-1990 by NISL though was on request by the assessee, nothing wrong could be imputed therein unless it is found to be bogus.
42. Be that as it may, this much is clear and also not disputed, rather admitted, by the departmental authorities, that NISL introduced the assessee to the three suppliers in connection with the supply of carbon black to Ceat Tyres of India Ltd. That itself would be a service rendered by NISL for the purposes of the assessee's business in the light of the decisions of the Gujarat High Court in the case of Swastic Textile Co. Pvt. Ltd. (supra). In that case, out of the aggregate amount of commission, the assessee claimed to have paid Rs. 14,250 to one Naresh K. Patel by way of commission on the sale of Pre-set-Felt Finishing Range manufactured by the assessee to M/s. Arvind Mills Ltd., Ahmedabad. The claim of the assessee-company did not find favour with the Income-tax Officer, who, on a consideration of the following circumstances, negatived the claim :-
(1) solitary role of Shri Naresh K. Patel acting as broker in respect of the sales effected by the assessee-company; (2) assertion by the purchasers, M/s. Arvind Mills Ltd. that they purchased the said items of machinery directly from the assessee-company; (3) no reference to the said Shri Naresh K. Patel acting as an intermediary;
(4) absence of agreement in respect of the payment of commission;
(5) absence of any other evidence that the said payment was for business expediency; and (6) failure on the part of Shri Naresh K. Patel to file a return.
The Appellate Assistant Commissioner, also on certain additional grounds, found himself unable to accept the claim and confirmed the order of the ITO by observing that the status of Shri Naresh K. Patel was a student in the relevant accounting year and that there was no evidence to indicate that Shri Naresh K. Patel helped the assessee In selling the machinery. The further appeal was dismissed by the Tribunal for the same reasons. On a reference, the High Court held that the statement of Shri Naresh K. Patel clearly established that he was instrumental in bringing both the purchaser and the supplier together: in other words, he introduced the supplier to the purchaser. The High Court further held that the reply of M/s. Arvind Mills Ltd. that they had purchased the above machinery directly from the assessee-company meant that they had not purchased through any stockist or dealer and it would not. mean that Shri Naiesh K. Patel was not responsible for bringing the purchaser and the supplier together. In these circumstances, it was held by the Gujarat High Court that it would be difficult to enclose, as has been done by the subordinate revenue authorities as well as by the Tribunal, that no services were rendered by him and that Shri Naresh K. Patel had rendered some services in introducing the parties to each other. This case clearly established that the commission paid for introducing the parties would be a payment for services rendered. Since the orders procured were for the purposes of the assessee before us, the expenditure incurred by the assessee would be allowable under Section 37 of the Income-tax Act.
43. The fact, as pointed out by the CIT (Appeals), that in the details prepared and filed before the Assessing Officer regarding outstanding creditors, the assessee mentioned "(cylinder hire charges)" after the name of NISL, does not have any material bearing on the issue, and in the books of account the entries are for commission outstanding and it was only a mistake in preparing the details which were submitted to the Assessing Officer.
44. The discrepancies pointed out by the CIT (Appeals) in making provisionson 1 -3-1987 for duly 1986 to September 1987 are not borne out by the records. Entries as per the books of the assessee, of which photostat copies have been filed show the provision of Rs. 13,01,662.27 was made on 30-9-1986 as under:-
30-9-1986 By Commission A/C. J/23 Rs. 13,01,662.27
D/N Date AMT (Rs.)
30-4-1986 2,98,418.58
31-5-1986 2,16,533.56
30-6-1986 2,04,219.60
31-7-1986 1,95,576.09
31-8-1986 2,12,594.61
30-9-1986 1,74,319.83
13,01,662.27
and on 30-9-1987 as under :-
Rs.
1-10-1986 By Opening Balance 13,01,662.27
30-9-1987 Commission J/28 3,94,685.90
16,96,348.17
The payment position as reflected in the books for the subsequent year is
as under :-
Rs.
March 30 To Ch. Com. April 1986 to July 1986 56 5,14,747.83
May 21 To Ch. Com. 71 50,000.00
May 22 To Ch. Com. August 1986 72 2,12,594.61
June 5 To Ch. Com. September 1986 to
January 1987 75 8,65,737.35
17 To Ch. on account 78 10,000.00
27 To Ch. " " 79 15,000.00
Sep. 24 To Ch. " " 105 20,000.00
30 To Commission A/C. J/17 5,256.00
16,93,335.79
Balance C/o 3,012.38
16,96,348.17
No discrepancy as stated by the CIT (Appeals) is discernible from the books of account. In view of the aforesaid and also in view of the other material on record, viz., the debit note copies filed, the assessment of NISL on the receipt, the absence of relation or connection of the assessee with NISL, the allowance of a similar claim by the CIT (Appeals) in the subsequent year against which no second appeal was preferred by the revenue, we have no hesitation in holding that the payment of Rs. 13,01,662 to NISL was for services rendered and an allowable deduction. We accordingly allow the same.
45. In these circumstances, the various decisions referred to by the learned counsel of the assessee need not be gone into.
46. In the result, the appeal of the assessee is partly allowed and the appeal of the revenue is dismissed.