Income Tax Appellate Tribunal - Pune
Chandan Metal Products (P.) Ltd. vs Deputy Commissioner Of Income-Tax on 10 March, 1995
Equivalent citations: [1995]54ITD131(PUNE)
ORDER
G.K. Israni, Judicial Member
1. to 4. [These paras are not reproduced here as they involve minor issues].
5. The third issue relates to the disallowance of del credere commission paid to M/s Antler Corporation. M/s Antler Corporation is a partnership firm wherein the directors of the assessee-company have substantial interest. M/s Antler Corporation was paid del credere commission at 0.6% of the sales of the assessee-company and the amounts paid during the period from the assessment years 1985-86 to 1987-88 were as under:
Asst. year Payment of Del Amount of
Credere commission doubtful debt
1985-86 Rs. 1,26,081 Rs. 17,699
1986-87 Rs. 1,28,106 Rs. 9,460
1987-88 Rs. 1,20,367 Rs. 14,646
The Assessing Officer found that the amounts debited by the assessee on account of doubtful debts ranged from 8% to 14% of the commission paid. He further found that most of the sales effected by the assessee were to the Government, semi-Government agencies and regular and reputed dealers. He has further noted that the assessee had never suffered any loss on account of bad debts in the past. Considering all these facts, the Assessing Officer was of the opinion that the amount of del credere commission at 0.6% was excessive. He, therefore, concluded that the commission had not been paid to cover the loss likely to be incurred by the assessee on account of doubtful debts. However, considering the risk factor, he held that del credere commission at 0.4% to be reasonable and disallowed the balance to the extent of 0.2% under Section 40A(2) of the Income-tax Act.
6. During the course of the first appeal, the learned CIT(A) felt that the whole transaction of appointment of del credere agent and payment of del credere commission was a sham transaction and the payment was also unreasonable in terms of Section 40A(2). He accordingly required the asseessee's representative to show cause as to why the commission paid to the Corporation be not disallowed in its entirety resulting in enhancement of assessment. According to the learned CIT(A), since no services were rendered by M/s Antler Corporation, it was not reasonably entitled to any commission whatsoever. The Assessing Officer's action of partial disallowance and the learned CIT(A)'s proposed action of enhancement was opposed by the assessee. It was submitted by the assessee before those authorities that the del credere agents were fully responsible for the recovery of the sales dues and were to bear the loss of bad debts, if any. Although it was true that the partners of M/s Antler Corporation were close relatives of the directors of the assessee-company, yet this reason alone could not justify the treatment of the agency arrangement as sham or bogus or called for disallowance - in full or part - of the del credere commission paid. According to the assessee, the legitimate business needs of an assessee or the benefit derived or accruing to it from goods, services or facilities were not to be judged from the view of the revenue officer but from the view of a businessman. In the present case, M/s Antler Corporation guaranteed solvency of the third parties to their principals and that this itself reduced the heavy risk of bad debts on the part of the assessee. Such commission had been allowed in the past and, therefore, could not be treated as sham or unreasonable in the year under appeal. The commission was paid, inter alia, for the recovery of the debts and also for reimbursement of any bad debts suffered by the assessee. This was a legitimate business expenditure and, therefore, could not be subjected to disallowance.
7. The learned CIT(A), after consideration of all the relevant facts and the circumstances, came to the conclusion that the agency arrangement between the assessee and M/s Antler Corporation was a sham translation and the entire payment was unreasonable in terms of Section 40A(2). He accordingly directed disallowance of the entire commission of Rs. 1,20,367.
8. Before us, the same arguments were reiterated as were made before the learned CIT(A). It was submitted that seals of the assessee consisted almost entirely of credit sales. Although no bad debts had in fact arisen during the year under appeal or in the earlier years, yet this was because of the efforts for recovery made by the assessee as well as by M/s Antler Corporation. Doubtful debts - although of small amounts - had in fact arisen during the three years under reference. M/s Antler Corporation, by entering into agency commission had undertaken to recover doubtful debts. It in fact made such efforts in recovering such doubtful debts, thereby avoiding any debt becoming bad. On behalf of the assessee, it was further submitted before us that the appointment of del credere agents and payment of commission, therefore, is not an unusual or abnormal commercial feature. Even the payment of guarantee commission to its own directors of a company is being allowed for income-tax purposes. As such, it would not be just and reasonable to disallow the commission payment or any part thereof in the present case. Reliance for this purpose was placed upon the following decisions :
(1) JK Steel & Industries Ltd. v. CIT [1978] 112 ITR 285 (Cal.), (2) L.H. Sugar Factories & Oil Mills (P.) Ltd. v. CIT [1979] 118 ITR 985 (All.), and (3) Anand Dyes Industries (P.) Ltd. v. ITO [1986] 17 ITD 1041 (Ahd.).
9. As against the above, it was submitted by the learned departmental representative that there was no risk involved in the recovery of the price of goods sold by the assessee. The sales were made mainly to the Government/semi-Government and reputed and regular dealers. The assessee had not suffered any bad debts in the past. All efforts of recovering debts were in fact made by the assessee itself, whereas this obligation under the agency agreement was cast upon M/s Antler Corporation. The fact that there had been no occasion for that Corporation to make any such effort clearly indicates that in fact no services were needed or rendered by M/s Antler Corporation and the agency arrangement was a sham transaction. The partners in M/s Antler Corporation are the sons and wives of the directors of the assessee-company. No evidence has been produced to show that any effort was in fact made by M/s Antler Corporation to effect recovery of doubtful or other debts. M/s Antler Corporation did not engage in any activity other than the alleged recovery of the price of the sales effected by the assessee. M/s Antler Corporation had no source of income other than the commission received from the present assessee. Since there was absolutely no need of appointment of such agents nor M/s Antler Corporation had in fact rendered any services, the payment of commission was wholly unjustified. The payment was not made for commercial considerations. The payment made was for extra commercial considerations and was, therefore, rightly disallowed in its entirety by the learned CIT(A). Such disallowance can lawfully be made both under Section 37 as well as under Section 40A(2). Reference in this connection was made to the following decisions :
(1) Siddho Mai & Sons v. ITO[1980] 122 ITR 839 (Delhi), (2) Vishwanath Seth v. CIT[ 1980] 123 ITR 29 (AIL), (3) Hans Raj Gupta & Co. Ltd. v. CIT[ 1956] 29 ITR 667 (Punj.), (4) ITO v. Autometers Ltd. [1991] 39 TTJ (Delhi) 260, (5) Modi Industries Ltd. v. CIT[1993] 200 ITR 329 (Delhi), (6) Ess Ess Kay Engg. Co. (P.) Ltd. v. CIT [1985] 151 ITR 636 (Punj. & Har.), (7) Vishnu Agencies (P.) Ltd. v. CIT[1979] 117 ITR 754 (Cal.) (8) Chemaux (P.) Ltd. v. CIT[1977] 109 ITR 705 (Bom.), (9) Amritlal & Co. (P.) Ltd. v. OT[1977] 108 ITR 719 (Bom.), (10) Workmen of Associated Rubber Industry Ltd. v. Associated Rubber Industry Ltd. [1986] 157 ITR 77 (SC), (11) Lachminarayan Madan Lal v. CIT[1972] 86 ITR 439 (SC), (12) Anand Jyoti Printers (P.) Ltd. v. CIT[1987] 165 ITR 771 (MP), (13) Bengal Enamel Works Ltd. v. CIT[1970] 77 ITR 119 (SC), (14) Swadeshi Cotton Mills Co. Ltd. v. CIT[1967] 63 ITR 57 (SC).
10. We have considered the facts on the record and the relevant and surrounding circumstances of the case and find no hesitation in agreeing with the learned CIT(A) that there was absolutely no justification for the payment of del credere commission or any part thereof and, therefore, if was liable to be disallowed in its entirety. We similarly agree with the learned CIT(A) that the agency arrangement between the parties was a sham transaction and was entered into for extra commercial consideration. It is not disputed that the partners of M/s Antler Corporation are sons and wives of the directors of the assessee-company. The appointment of del credere commission agents is generally made with a view to firstly to ensure expeditious recovery of outstanding dues, secondly, to ensure risk against bad debts and, thirdly, to entrust the recovery part of the business function to a third party and thereby enabling the principal to concentrate fully on manufacture/production and marketing of its goods. In the present case, the facts of the case and the surrounding circumstances clearly indicate that the appointment of M/s Antler Corporation as del credere agent was not at all necessary for securing any of these three purposes. Indisputably, the sales in the present case were made mainly to the Government/semi-Government agencies and/ or to well-established business houses, whose solvency or honesty could not be a matter of doubt. This is evidenced in the present case by the smallness of the amounts of doubtful debts over the years. Even these doubtful debts have been recovered by the assessee by its own efforts. No evidence has been adduced to suggest that M/s Antler Corporation had made any efforts - serious or otherwise - to effect recovery of these doubtful debts or any part thereof. So far as the risk factor is concerned, there has not been a single bad debt over the three-year period. The directors of the assessee-company being men of business are presumably intelligent persons. It is, of course, true that the domain to decide as to whether a particular item of expenditure is necessary or expedient or not lies in the judgment and discretion of a businessman and an income-tax authority cannot be allowed to sit in judgment over such decisions of a businessman. But then, that does not preclude a revenue authority from looking into the genuineness and/or reasonableness of the payment and decide as to whether a presumably intelligent person and prudent man of business would incur such type of expenditure. In the present case, the Assessing Officer had allowed 0.4% commission on account of risk factor. Here, we find the Assessing Officer clearly faulted and therefore, the learned CIT(A) was justified in interfering on this aspect of the matter. As has already been stated, the partners of M/s Antler Corporation were the sons and wives of the directors of the assessee-company. The relationship was so close as to justify a conclusion that the directors of the assessee-company were virtually themselves partners of M/s Antler Corporation. It is difficult to appreciate that the directors of the assessee-company were themselves not prepared to take the risk of bad debts and they instead chose to pass on that risk to their own sons and wives. But even where such a formal arrangement has been entered into, yet in fact it would again be the directors of the assessee-company being the husbands and fathers of the partners of M/s Antler Corporation who would make real effort to recover the doubtful debts. It is for this reason that the assessee has not adduced any evidence in support of the fact that any efforts were in fact made by the wives and sons of the assessee's directors to recover the doubtful debts. The fact that there was no problem at all with regard to the recovery of the sale price of the goods is further indicated by the fact that not a single bad debt has arisen during the three-year period.
11. So far as the decisions relied upon by the learned counsel for the assessee are concerned, we find that they hardly offer any material assistance to the case of the assessee before us. In the case of J.K. Steel & Industries Ltd. (supra), the payment of commission was allowed by the High Court on the basis of the reason that there was no finding that commission was excessive or was paid on extra commercial consideration. In the present case, the learned CIT(A) has recorded an emphatic finding - with which we agree - that no services were in fact rendered by M/s Antler Corporation and the payment has been made purely for extra commercial considerations. As regards the case of L.H. Sugar Factories & Oil Mills (P.) Ltd. (supra), that case deals with the payment of guarantee commission to the directors of the assessee-company. The directors had stood personal security for raising financial loans. It was in that context that the commission was paid and allowed. The present case involved entirely different facts. No services have been rendered by M/s Antler Corporation. There was in fact no passing in of risk by the assessee to M/s Antler Corporation which consisted only of sons and wives of the directors of the assessee-company. The facts of the case of Anand Dyes Industries (P.) Ltd. (supra) are also materially different from those of the present appeal. There the unreasonableness or excessive nature of expenditure was being adjudged. The aspect of reasonableness had been taken care of by the Company Law Board when it granted permission under Section 294AA of the Companies Act, 1956. It was in that context that it was held that disallowance of such expenditure could not be made on the ground of it being excessive or unreasonable.
12. Besides the above, we have also gone through the agency agreement between the assessee and M/s Antler Corporation. This agreement purports to be effective from 1-4-1986. Earlier to this, similar agreement had been existing between the parties which was operative for 5 year period from 1-4-1981. Clause (c) of this agreement shows that the agents had deposited an amount of only Rs. 1 lakh with the principals on interest at the rate of 18% per annum. Now, furnishing of cash security of such a small sum as Rs. 1 lakh to guarantee recovery of price of credit sales worth crores of rupees is clearly inadequate. Moreover, even this small sum bears interest at a rate not less than 18% per annum. We fail to understand as to whether this small sum could be considered to be adequate security for the performance of contractual duties and obligations by the del credere agents. There was hardly any meaning or purpose in accepting a cash security of mere Rs. 1 lakh from one's own views and sons of guarantee recovery and payment of dues amounting to crores of rupees. This clause alone is sufficient to indicate the shamness of the transaction and lack of bona fides on the part of the parties to the agreement. We fail to understand as to what could be the possible gain to the assessee-company in entering into such arrangement with a firm consisting of such close relatives as partners. None of the three objects for which del credere agents are generally appointed in business world could be achieved out of the purported agency arrangement made in the present case. We, therefore, have no option but to concur with the learned CIT(A) that whole of this arrangement was sham one and the payment of the entire sum was unreasonable. Such payment can lawfully be disallowed both under Section 37 as well as under Section 40A(2). The learned CIT(A) was, therefore, justified in enhancing the income by disallowing this payment. This issue shall, therefore, stand decided against the assessee.
13. In view of the above discussion, we do not find any force in this appeal and dismiss the same.