Income Tax Appellate Tribunal - Hyderabad
Drill Rock Engg. Co. (P.) Ltd. vs Income-Tax Officer on 29 April, 1988
Equivalent citations: [1993]45ITD149(HYD)
ORDER
UNDER S. 147 VIS-A-VIS S. 154--Justification Ratio & Held:
Where reassessment under section 147, or rectification under section 154, are both equally competent, the department may take action under either section since the two sections are not mutually exclusive. In this case both the courses, viz., reopening proceedings under section 147 as well as proceedings under section 154 were open to the revenue and the assessee had no right to question if the revenue had opted out to proceed under section 147 which is one of the courses open.
Case Law Analysis:
Sreerama Murthy v. ITO (1974) 97 ITR 290 (AP) followed.
Application:
Also to the current assessment years.
Income Tax Act 1961 s.147 Income Tax Act 1961 s.154 Reassessment under s. 147--NOTICE UNDER S. 148--Reasons for formation of belief Ratio & Held:
The reasons for formation of belief need not be mentioned or communicated in the notice of reopening under section 148. What is the requirement of section 148 is recording of reasons for reopening and not to list out the whole material on which his belief was formed. Simply because the facts or the material which form the basis of the Income Tax Officer's belief were not recorded in the notice of reopening, does not invalidate the notice under section 148. When in the reasons recorded for re-opening, the assessment is stated to be in violation of section 40A(3), it cannot be stated that the reasons for reopening were not recorded.
Application:
Also to current assessment years.
Income Tax Act 1961 s.147 Reassessment under s. 147--REASON TO BELIEVE--Violation of s. 40A(3)--Investigation into payments made in asst. yr. 1981-82 would justify verification of payments in asst. yr. 1980-81--ITO having Ratio & Held:
It cannot for a while be presumed that the Income Tax Officer would put on blinkers with regard to certain payments relating to assessment year 1980-81 and confine himself only for the verification of the payments concerning to assessment year 1981-82. Even otherwise it is reasonable to expect that the Income Tax Officer would verify the nature of payments with several banks pertaining to assessment year 1980-81 while he was investigating into payments which were all made in the accounting year relevant to assessment year 1981-82. The assessee himself was unable to give which of the amounts mentioned by the department make up Rs. 1,03,565.48 representing the payment of commission relating to assessment year 1980-81. The Income Tax Officer made enquiries with the banks with regard to nature of payments made during the accounting year, relevant to assessment year 1981-82, the Income Tax Officer had necessary information in his possession, which creates a reasonable belief in his mind that the assessee had contravened the provisions of section 40A(3).
Application:
Also to current assessment years.
Income Tax Act 1961 s.147 ORDER T.V. Rajagopala Rao, Judicial Member
1. This is an appeal filed by the assessee-company against the order of the Commissioner of Income-tax (Appeals) -II, Hyderabad dated 26-11 -1985 and it relates to assessment year 1980-81.
2. The assessee-company was incorporated on 15-9-1976 under the Companies Act, 1956 and closed its accounts for the first time on 30-6-1977. The assessment order under consideration is the third assessment made against the assessee-company. The previous year relevant to the said assessment year ended by 30-6-1979. The assessee is engaged in the business of dealing in drilling equipment and also drilling bore-wells and is also acting as distributor for air-compressors, spare parts for rigs and drilling equipment produced by M/s Consolidated Pneumatic Tools (India Ltd.) Water Development Society, Hyderabad and Drilloc Metal Carbides Ltd., Pune. For assessment year 1980-81 it had filed its return of income on 18-7-1980 admitting Rs. 1,56,490 as its total income and the original assessment under Section 143(3) was completed on 23-12-1980 on a total income of Rs. 2,05,330. The assessee made a provision towards discount and commission payable as customer discount or commission payable in an amount of Rs. 2,49,972.80 as on 30-6-1979. The account of the provision made appears in the assessee-company's ledger folio Nos. 362 and 363 for the relevant accounting year. It is an admitted case that out of the total provision of Rs. 2,49,972.80 made and allowed for the assessment year 1980-81, an amount of Rs. 1,05,421.63 ps. was paid to the parties either in cash or by cheque drawn on a bank, in the immediately succeeding accounting year, relevant to assessment year 1981-82 and an amount of Rs. 1,03,565.13 was paid in the accounting year relevant to assessment year 1982-83. Out of Rs. 1,05,421.63 ps. which was paid in the accounting year relevant to assessment year 1981-82 an amount of Rs. 93,287 represent payment of amounts in excess of Rs. 2,500 to the parties, either in cash or by way of cheque and the remaining amount of Rs. 12,134 represent payments below Rs. 2,500 to the parties. So also an amount of Rs. 1,00,109.93 out of Rs. 1,03,565.13 ps. represent payments made in amounts over and above Rs. 2,500 to the parties and an amount of Rs. 3,455.20 ps. represent payments which fall below Rs. 2,500 in the accounting year relevant to assessment year 1982-83.
3. During the course of assessment proceedings for assessment year 1981-82 the Income-tax Officer is stated to have come across payment of sums of more than Rs. 2,500 either in cash or by bearer cheques in violation of Section 40A(3) of the Income-tax Act, 1961 and the said payments relate to or forms part of the provision of Rs. 2,31,290.41 ps. which was already allowed as a provision in assessment year 1980-81. According to the revenue these state of facts found by the Income-tax Officer, while making the assessment for assessment year 1981-82 against the assessee-company provoked him to issue notice to the assessee-company for re-opening the assessment for assessment year 1980-81 and in fact, he had issued notice under Section 147/148 dated 5-7-1984 which was served against the assessee on the same date. In pursuance of the said notice the assessee-company filed its return on 4-8-1984 declaring the same income, which it had originally declared, under its original return filed on 4-8-1984.
4. A reading of the long re-assessment order dated 4-7-1985 would not disclose any objection of the assessee for re-opening under Section 147(b). However, before the Commissioner (Appeals) a ground was taken questioning the correctness of the re-assessment made under Section 147. Ground No. 2 of the grounds of appeal filed before CIT (Appeals)-II, Hyderabad is the relevant ground questioning the re-assessment. In fact, in her impugned orders dated 26-11-1985 the learned CIT(Appeals)-II Hyderabad went into the validity of re-opening under Section 147(b). The learned CIT(Appeals) relied upon Explanation (2) to Section 147 of the Income-tax Act as well as the ratio of the following decisions:
1. CIT v. Claggell - 1973 TLR 77
2. Salem Provident Fund Society Ltd. v. CIT [1961] 42 ITR 547 (Mad.) For the proposition that "information" may be available from the books of account, documents produced at the time of making the original assessment which the Income-tax Officer might have lost sight of due to inadvertence or mistake and also for the proposition that "information" for the purpose of Section 147(b) need not be wholly extraneous with the record of the original assessment and it was immaterial whether someone gave "information" or whether the Income-tax Officer informed himself. The learned CIT(Appeals) relied upon the Calcutta High Court's decision in Diamond Sugar Mills Ltd. v. ITO [1973] 89 ITR 171 to find out what are the requirements to invoke Section 147(b). After listing out all those requirements she stated that the facts of the present case fulfils all the conditions laid down in the said decision for invoking Section 147(b). She ultimately held at the end of para. 1.2 of her impugned orders as follows:-
In the course of enquiry conducted for the subsequent year, the Income-tax Officer had come across positive evidence in terms of Section 40A(3) and in view of this, he had decided to re-assess the income for the assessment year 1980-81. I would, therefore, upheld the action of the Income-tax Officer in reopening the assessment under Section 147 of the Income-tax Act, 1961.
This part of the order is now being assailed before this Tribunal. It may be stated that in the original grounds no specific ground was taken challenging the validity of re-opening the assessment under Section 147(b). However, during the course of the arguments additional grounds were filed. On 21-9-1987 the Departmental Representative has stated no objection for the admission of additional grounds by the assessee. As the question of validity of reopening was already agitated before the CIT (Appeals) and also as the revenue has no objection for admitting the additional grounds the said additional grounds filed by the assessee-company questioning the validity of re-opening under Section 147(b) are admitted and entertained. In the grounds relating to the re-opening it is contended that the learned CIT(A) erred in upholding the assumption of jurisdiction by the Income-tax Officer under Section 147(b) in view of the fact that the Income-tax Officer did not know and would not have known of any payments made in violation of Section 40A(3) of the Income-tax Act leading him to believe that there was concealment of income or that there was non-disclosure of primary facts. In view of the fact that the Income-tax Officer did now know any violation under Section 40A(3) before issuing notice it should be held that the Income-tax Officer did not legally assume jurisdiction under Section 147 and the re-assessment should be annulled.
5. It is next contended that the jurisdiction of the Income-tax Officer to proceed under Section 147 vitiated for non-disclosure of reasons for issuing notice under Section 148 to the assessee. It was also contended that the re-assessment is framed in violation of principles of natural justice and so bad in law and is liable to be annulled. Written arguments were submitted by the assessee in a paper compilation running into 15 pages which is marked as 'assessee-company's paper book No. 3'. Shri Ajay Gandhi, learned representative for the assessee, contended that reassessment was wrongly resorted to in this case. He argued that the material forming the basis of the belief should form part of the reasons. The Department's paper book No. 3 page No. 1 gives out the recorded reasons for re-opening the assessment and in those reasons the materials which formed the basis of the belief to form the opinion that there was no escapement of income were not mentioned. He asserted that on the date of issue of notice under Section 148 that the Income-tax Officer did not have anything on record to show that the payments were made by bearer cheques. He contended that for the first time the Income-tax Officer came to know that the payments were made by bearer cheques only in June/July 1985 when he obtained the bearer cheques from the Banks. It was argued that at the time of issue of a re-assessment notice it is incumbent on the Income-tax Officer to come to a conclusive finding that income has escaped assessment by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the relevant assessment. Such belief obviously at that stage, a tentative belief, on the materials before him has to be examined and scrutinised of such evidence as may be available in the proceedings for re-assessment. He also contended that it is only the information which is available before the date of initiation is relevant to decide the question of validity of re-opening. He strongly relied upon the Hon'ble Supreme Court's decision in ITO v. Madnani Engg. Works Ltd. [1979] 118 ITR 1. He strongly contended that the Income-tax Officer did not possess any "information" which would prove or gives the basis for formation of reasonable belief that the assessee had violated the provisions of Section 40A(3) of Income-tax Act, 1961. It is only in June/July 1985, long after the initiation of proceedings, the Income-tax Officer came to know about the fact of the assessee having allegedly paid the commission in an amount of Rs. 2,500 to each party by means of bearer cheques. The said material having not been secured into the records before issuing notice dated 5-7-1984 the very basis of formation of belief was never there and, therefore, the re-opening under Section 147(b) was bad in law. The fact of obtaining subsequently evidence which disclose controyersion of Section 40A(3) would not validate on otherwise invalid notice of re-opening under Section 147(b). The learned representative for the assessee further submitted that the draft assessment order for assessment year 1981-82 was framed prior to 5-7-1984 but the regular assessment order was passed for 1981-82 on 23-7-1984. Therefore, on 5-7-1984 the Income-tax Officer did not know that there was concealment or non-disclosure of primary facts which resulted in escapement of income. It is also contended by the learned representative for the assessee that the "information" should be recorded in the record of reasons itself and not elsewhere. Notes written by the Income-tax Officer even contemporaneously do not constitute reasons and they deserve to be ignored. In support of this proposition he relied upon the Karnataka High Court's decision in Vijayalakshmi Oil Industries v. ITO [1985] 155 ITR 748 and argued that only those grounds which are noted in the reasons are to be considered and any additional reasons disclosed by the Income-tax Officer in his affidavit before the Court in support of his action in reopening the assessment which might satisfy the Court would not validate the proceedings if the reasons recorded are not sufficient for the initiation of proceedings. He also relied upon the Calcutta High Court's decision in East Coast Commercial Co. Ltd. v. ITO [1981] 128 ITR 326. It was contended that the following facts are important to be borne in mind to hold that there is absence of any information for the revenue to justify reopening of assessment under Section 147(b):-
(1) During or after the proceedings for assessment year 1980-81, no enquiry was made whether the payments pertinent to the commission provision was subsequently made by cross or bearer cheques nor did the company make any statement thereabout.
(2) During the course of proceedings for assessment year 1981-82 a query was put and the company stated that the payments pertaining to provision of assessment year 1980-81 were subsequently made by bearer cheques consequent to which the Income-tax Officer disallowed the same.
(3) All payments pertaining to assessment year 1980-81 were made subsequently by bearer cheques (and not cash) and were recorded as Bank payments in the day book. Hence without further investigation, it was impossible for the ITO to know whether the cheques were crossed or bearer.
(4) For the first time the Income-tax Officer knew of the fact of bearer cheques being given to the parties after the search in April, 1985 when he obtained the encashed cheques from the Bank and examined them. Till then he did not know that the payments were by bearer cheques.
It is contended that the additional material placed by the revenue, before this Tribunal to justify re-opening of assessments, is liable to be ignored and also not enough to justify re-assessment. It is further contended that the said material merely shows that the ITO called for cheque books and pass books, pertaining to the previous year, relevant to the assessment year 1981-82 and he was informed by the assessee that payments pertaining to assessment year 1981-82 were subsequently made by bearer cheques, consequent to which he made disallowances in the assessment for that year. The material which is produced by the revenue in its paper book No. 3 does not show that the assessee-company did actually produce the cheque books, pass books etc. The material also does not show that the Income-tax Officer examined the cheque books, pass books etc., if produced or that the Income-tax Officer noticed a single payment in excess of Rs. 2,500 pertaining to assessment year 1980-81. The said material produced by the revenue in its paper book No. 3 does not show that the Income-tax Officer having noticed a payment exceeding Rs. 2,500 applied his mind to the payment and came to the conclusion that such payment was in violation of Section 40A(3) consequent to which he believed that a notice under Section 148 was justified. The learned counsel also contended that there was no law which requires that the cheque stubs (counterfoils) should indicate whether the cheques issued were crossed or uncrossed. The absence of any marking on the counterfoils cannot lead one to believe that the cheques were uncrossed. Besides, the company does not always mark its cheques as crossed on the counterfoils even if the cheques were crossed. The Income-tax Officer did not know and could not have known about the fact of payment by bearer cheques before June 1985. He did not have any kind of information about violation of Section 40A(3) before issue of notice under Section 148. Shri Ajay Gandhi learned representative for the assessee-company contended that any attempt on the part of the department to justify the re-opening of the assessment under Section 147(a) should not be allowed, inasmuch as the re-opening was specifically made under Section 147(b) and hence it cannot be justified under Section 147(a) vide the decision of the Supreme Court in Johri Lal (HUF) v. CIT [1973] 88 ITR 439. In any view of the matter in the circumstances of the case utmost rectification proceedings were called for and not re-assessment proceedings. He relied upon Margarine and Refined Oil Co. (P.) Ltd. v. ITO [1975] 98 ITR 636 (Kar.), which according to him had duly considered and adopted the ratio of the Supreme Court's decision in Suraj Mall Mohta and Co. v. A.V. Visvanatha Sastri [1954] 26 ITR 1 and Anandji Haridas and Co. (P.) Ltd. v. S.P. Kushare. STO [1968] 21 STC 326. He further submitted that the Department relied upon the Andhra Pradesh High Court's decision in G. Sreerama Murthy v. ITO [1974] 97 ITR 290, which according to him did not actually take into consideration the two Supreme Court decisions followed by the Karnataka High Court and for that reason he tried to persuade us to prefer the Karnataka High Court's decision than over the decision of the Andhra Pradesh High Court and to hold that rectification under Section 154 only is permissible and not re-assessment under Section 147(b).
6. On the other hand the learned Departmental Representative contended that there is sufficient material secured which forms the basis for issue of notice for re-opening under Section 147(b). The facts or information gathered priorto issueof notice under Section 147(b)/148 dated 5-7-1984 would form the basis for a reasonable belief that the assessee-company violated the mandatory provisions of Section 40A(3) resulting in escapement of income which is otherwise taxable. Firstly he contested the correctness of the proposition put forward by the assessee, stating that the reasons or the material on the basis of which the belief was arrived at should also be disclosed in the notice is not correct under law. Now firstly let us take up, whether there is any necessity for setting out the material in the notice on the basis of which a reasonable belief was found. In support of this proposition, the assessee's representative had very much relied upon the Supreme Court's decision in Madnani Engg. Works Ltd.'s case (supra). This case relied upon by the assessee's representative appears to us to be distinguishable. The appeal to the Supreme Court in that case was preferred in a writ proceeding. The Income-tax Officer was given an opportunity to file a counter affidavit.
The question before the Supreme Court was whether there was any material which form a reasonable basis to believe that the income chargeable to tax has escaped assessment. In that case the Hon'ble Supreme Court did not say that it is a requirement of Section 147/148 that the Income-tax Officer should set out the material which form the basis of his belief in the reasons recorded. What they held was that the Income-tax Officer having chosen to file his affidavit is expected to disclose the material on which he based his belief. Further, what the Supreme Court held was that they were not satisfied from the affidavit of the Income-tax Officer that there was any valid reason existing to believe that part of the income of respondent, in that case, escaped assessment. In our opinion, whatever their Lordships had expressed about the requirements of the affidavit which should have been filed by the Income-tax Officer was sought to be ascribed to the Supreme Court as their decision about the requirements of Section 147(b)/148. Our conclusion would bear out from the following portion of the Supreme Court's judgment in Madnani Engg. Works Ltd. 's case (supra) at pages 5 and 6:
We may also point out that though it was contended in the writ petition that the ITO could have no reason to believe that any part of the income of the respondent had escaped assessment by reason of its failure to make a full and true disclosure of material facts, the ITO did not disclose in his affidavit any material on the basis of which it could be said that he had come to the requisite belief. All that the ITO stated in his affidavit was that he discovered that the transactions of loan against security of hundis were not genuine and that the credits against the names of certain persons who were alleged to have advanced loans were bogus. The ITO merely stated his belief but did not set out any material on the basis of which he had arrived at such belief so that the court could decide for itself whether there was any material on the basis of which the ITO could reasonably entertain such belief. We are, therefore, not at all satisfied on the affidavit that the ITO had reason to believe that part of the income of the respondent had escaped assessment by reason of its failure to make a true and full disclosure of the material facts.
7. It was next contended by Shri Ajay Gandhi that recording of reasons must not only contain belief but also set out the material on the basis of which the belief was arrived at and in support thereof he had relied upon the Karnataka High Court's decision in Vijayalakshmi Oil Industries' case [supra) and the Calcutta High Court's decision in East Coast Commercial Co. Ltd.'s case (supra). We have gone through the decision in Vijayalakshmi Oil Industries' case (supra). Their Lordships of Karnataka High Court had examined the limited scope or field of enquiry available to High Court under Article 226 of the Constitution to go into the question of validity of re-opening under Section 147/148. We may immediately bring a portion of the judgment of the Karnataka High Court into record, which is stated at page 751 of the reported decision:
In a proceeding under Article 226 of the Constitution this court is empowered to examine only the reasons recorded by the ITO and cannot travel beyond the reasons recorded by him. On the other hand the acceptance of the contention urged by Sri Srinivasan calling for an examination of the 'notes' which is also fraught with grave dangers, would render the requirements of Section 148 of the Act otiose and would really convert this court into a court of appeal. On any legal principle, I cannot treat the notes prepared by the ITO as one recording his reasons as required by Section 148 of the Act.
In our opinion, the ratio of the decision given by the Karnataka High Court is to be understood as given within the limited ambit of exercising its powers under Section 226 as a Court but not as a Court of reference, exercising its powers under the Income-tax Act. Under Section 226 of the Constitution of India the High Court is entitled to quash the notice under Section 148 only when they were unable to find any live link between the reasons recorded by the Income-tax Officer and the belief which he had formed on those reasons. The question in such matters would be whether any rational person would form such a belief on the information or facts obtained which are recorded in the reasons for the re-opening. If no such live link is established then the notice would be quashed, otherwise the notice would be sustained. The Karnataka High Court stated as can be seen from the above quotation that if it were to take notings of the Income-tax Officer which were contemporaneous, the gist of which were not mentioned in the counter affidavit, filed by the Income-tax Officer, then the High Court would virtually become an appellate authority under the Income-tax Act. Therefore, it is clear that the authority of a Court or the ambit of enquiry available to a Court, in re-opening matters, is quite different, from the authority or power of an appellate authority under the Income-tax Act. The question whether the notes prepared by the Income-tax Officer constitutes information as to a fact to justify re-opening under Section 147(b) of the Act was purposely left open by the Karnataka High Court as can be seen at the close of the judgment. Therefore, Vijayalakshmi Oil Industries' case (supra) does not support the proposition sought to be canvassed by Shri Ajay Gandhi. There are a catena of decisions including Supreme Court cases which lay down categorically that the reasons for formation of belief need not be mentioned or communicated in the notice of re-opening under Section 148. In S. Narayanappav. CIT [1967] 63 ITR 219 (SC) at the close of the head-note of the decision at page 219 the following is found:-
The expression 'reason to believe' in Section 34 does not mean purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith: it cannot be merely a pretence. It is open to the court to examine whether the reasons for the belief have a rational connection or relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpose of the section. To this limited extent, the action of the Income-tax Officer in starting proceedings under Section 34 of the Act is open to challenge in a court of law.
Proceeding for assessment or reassessment under Section 34(1)(a) start with the issue of a notice and it is only after the service ofthe notice that the assessee, whose income is sought to be assessed or reassessed, becomes a party to those proceedings. The earlier stage of the proceedings for recording the reasons of the Income-tax Officer and for obtaining the sanction of the Commissioner are administrative in character and are not quasi-judicial. There is no requirement in any of of the provisions of the Act or any section laying down as a condition for the initiation of the proceedings that the reasons which induced the Commissioner to accord sanction to proceed under Section 34 must also be communicated to the assessee. The Income-tax Officer need not communicate to the assessee the reasons which led him to initiate the proceedings under Section 34.
In STO v. Uttareswari Rice Mills [1973] 89 ITR 6, the following is what is held by the Hon'ble Supreme Court:
There is nothing in the language of Section 12(8) of the Orissa Sales Tax Act, 1947, which either expressly or by necessary implication postulates the recording of reasons for initiating reassessment proceedings, in the notice which is issued to the dealer under that section. A notice issued under Section 12(8) is not invalid because the reasons which led to the issue of the notice are not mentioned in it.
In this connection the position under Section 147/148 of the IT Act is in no way different and the provisions as are relevant for our purposes are as follows:-
147.
(a) ** ** **
(b) notwithstanding that there has been no omission or failure as mentioned in Clause (a) on the part of the assessee, the Income-tax Officer has in consequence of information in his possession reason to believe that income chargeable to tax has escaped assessment for any assessment year.
he may, subject to the provisions of Sections 148 to 153, assess or reassess such income or recompute the loss or the depreciation allowance, as the case may be, for the assessment year concerned (hereafter in Sections 148 to 153 referred to as the relevant assessment year) Section 148(2) is as follows:
148. (1) ** ** ** (2) The Income-tax Officer, shall, before issuing any notice under this section, record his reasons for doing so.
Therefore, as can be seen what is the requirement of Section 148 is recording of reasons for re-opening and not to list out the whole material on which his belief was formed. Therefore, in our opinion, decision of the Supreme Court in Uttareswari Rice Mills' case (supra) fully supports our conclusion. Next is the decision of the Calcutta High Court in British Electrical and Pumps (P.) Ltd. v. ITO [1978] 113 ITR 143. The relevant portion of the decision at pages 153 & 154 is as follows: The Calcutta High Court after following the Privy Council's decision in CIT v. Mahaliram Ramjidas [1940] 8 ITR 442 and also the Supreme Court's decision in K.S. Rashid and Son v. ITO [1964] 52 ITR 355 in which it is held that the assessee is not entitled to a copy of the reasons recorded at the time of issue of notice under Section 34 gave the following verdict:
When, therefore, a challenge is thrown to the absence of requisite conditions precedent for issuance of notice, the court following the uniform and consistent practice looks Into the relevant records for (he purpose to see if there was any material at all before the Income-tax Officer for his belief that there has been an escapement of income on account of the failure of the assessee to disclose fully or truly all material facts or in consequence of information in his possession. The court will also scrutinise that the action has been taken purely on subjective satisfaction or the conclusion arrived at is bona fide and of a prudent or rational man and not merely based on gossip, rumour or change of opinion and the like and if thereby any of such infirmities the proceeding would be quashed. To investigate these aspects by the court it is not necessary that the reasons and materials must be disclosed to the assessee and he should be heard before the High Court comes to its conclusion and the court is not to decide the adequacy or sufficiency of reasons.
The next is the decision of the Rajasthan High Court in Vimal Chandra Golecha v. ITO [1982] 134 ITR 119. At page 128 of the said decision the following is what is held:
The setting of Sub-section (2) of Section 148 in the group of sections (i.e., Sections 147 to 153) clearly indicates that the reason behind the requirement in this Sub-section enjoining the ITO to record his reasons for initiating action for re-assessment is purely administrative in character, so as to enable the higher administrative authorities, i.e., the Commissioner and the CBDT to exercise proper control over and supervision of such action by the ITO and to restrain it, if necessary, in appropriate cases. That is why the Madras High Court, while dealing with Section 34, Indian Income- tax Act, 1922, which was in similar terms to Sections 147 and 148 of the Act, held in Presidency Talkies Ltd. v. First Addl. ITO [1954] 25 ITR 447, that the reasons recorded by the ITO for initiating action for reassessment need not be communicated to the assessee and that only object of the requirement as to the recording of reasons is to safeguard the interest of the assessee against any hasty action on the part of the ITO or action without any justification. The Supreme Court approved this ruling in S. Narayanappav. CIT [1967] 63 ITR 219 (SC) repeating that there is no requirement in any of the provisions of the Act that the reasons recorded under Section 148(2) must be communicated to the assessee as a condition for the initiation of action against him for reassessment of his income.
Next we may refer to the information furnished at 156 ITR (Statutes) 159 (SC). The information is with regard to the disposal of Sudini Pandurang Timblo v. G. Virendra, WTO [SLP (Civil) Nos. 244 and 245 of 1985].
Notice preceded by correspondence: Notice not specifying reasons: Valid 18-2-1985; Their Lordships R.S. Pathak and Sabyasachi Mukharji, JJ. dismissed a special leave petition by an assessee against the judgment of the Bombay High Court (Panaji Bench) dated 19-9-1984 in W.P. Nos. 124B and 126B of 1982 dismissing a writ petition challenging for not specifying reasons, a reassessment notice under Section 17 of the Wealth-tax Act, on the ground that the fact that the land owned by the assessee and her husband (in equal shares) had been acquired by the Government at a certain rate would be a relevant circumstances for determining the value and the omission to divulge this relevant circumstance by the assessee would be a good basis for issue of a notice under Section 17 and that the notice ultimately issued by the WTO was preceded by correspondence with the assessee and that, therefore, the non-specifying of reasons would not render the notice bad:
Therefore, we prefer to follow the ratio of the above decisions and hold that simply because the facts or the material which form the basis of the ITO's belief were not recorded in the notice of re-opening, does not invalidate the notice under Section 148. In our opinion in the facts and circumstances of this case when in the reasons recorded for re-opening, the assessment is stated to be in violation of Section 40A(3), it cannot be stated that the reasons for re-opening were not recorded. The recorded reasons of the ITO are as follows:
In the course of assessment proceedings for assessment year 1981-82 it was found that third party commission was not disallowed under Section 40A(3) for the assessment year 1980-81. Therefore, I have reason to believe that income chargeable to tax for the assessment year 1980-81 has escaped assessment within the meaning of Section 147 of the Income-tax Act, 1961.
Issue notice under Section 147 for the assessment year 1980-81.
So the basis for the belief is stated to be that the third party commission was not disallowed under Section 40A(3) for assessment year 1980-81. The specific material or the various facts which justified the disallowance of third party commission under Section 40A(3) is no doubt not mentioned in the reasons recorded. But, in our opinion, those can as well be gathered from the record for assessment year 1981-82 and from the admission of the assessee coupled with the provisions of Section 40A(3). In the original assessment for 1980-81 provision for third party commission allowed was admittedly an amount of Rs. 2,08,987.11. Out of the said provision the amount paid towards third party commission in the accounting year relevant to assessment year 1981-82 was Rs. 1,05,421.63 ps. As per the letter dated 20-12-1983 a photostat copy of which is furnished at page 8 of the Departmental paper book No. 3 it can be seen that the ITO while making assessment enquiry for assessment year 1981-82 called upon the assessee to appear with its books of account, purchase invoices, sale bills, vouchers for all expenses debited to trading account and profit & loss account and bank pass book etc. Copy of the said letter was marked to Shri J. Bhaskar Rao, the then Advocate of the assessee-company. Again the ITO during the course of assessment proceedings for 1981-82 addressed a letter dated 23-2-1984, a copy of which is furnished at page 9 of the Department's paper book No. 3, intimated the assessee that it was shown to have incurred an amount of Rs. 1,75,567 as demonstration expenses and it was also represented that an amount of Rs. 6,99,040 was paid as discount and commission. In that connection the ITO called upon the assessee to furnish the date of payment, mode of payment cash or cheque and state whether it is by cash or cheque (crossed or bearer cheque) and the name and address of the branch of the Bank on which the cheques were drawn and this information should be furnished in respect of each party separately. The Income-tax Officer also gave a notice dated 8-3-1984, a copy of which is furnished at pages 10 to 12 of paper book No. 3 filed on behalf of the Department. As can be seen from the said notice dated 8-3-1984 the amount of Rs. 2,17,913 is part of the discount and commission of Rs. 6,99,040 mentioned in the notice dated 23-2-1984. The ITO in his notice dated 8-3-1984 requested the assessee-company to produce evidence to show that the liabilities have really been incurred so as to justify the provision made in the accounts amounting to Rs. 2,17,913. The assessee submitted a reply dated 13-3-1984, a copy of which is furnished at pages 13 and 14 of paper book No. 3 filed by the Department. The assessee by its letter dated 13-3-1984 explained the figure of Rs. 2,17,913 under the head outstanding expenses saying that it represents incentive offered to their customers for enhancement of their future business. The said accounts have either been adjusted against further supplies made to them or in some cases they have refunded the amounts. So also in the letter dated 8-3-1984 the assessee was called upon to explain the payment of Rs. 72,980 as discount and commission allowed to miscellaneous charges. In its reply the assessee stated at page 13 of the paper book that the said amount represents third party commission agreed to be paid on the business solicited on their behalf by the middlemen. Considering the competition in the field at times the assessee-company was compelled to engage middlemen for performing their business which is not uncommon. If necessary, the ITO is requested to verify from other assessees in the same line of business viz., M/s. Krishna Rock Drills Pvt. Ltd. and M/s. Borewell equipment company. Further it was stated that in the past the predecessor ITOs were good enough to allow such expenditure. It was requested that similar allowance may also be made for assessment year 1981-82. In the letter dated 8-3-1984, inter alia, the ITO called upon to explain the service commission payable of Rs. 1,27,725. It is significant to note that even by the date of issue of the notice dated 8-3-1984 a statement was furnished by the assessee showing the commission allowed in invoices. The said statement must be the schedule of service commission, a photostat copy of which is furnished at page 14 of paper book No. 3 filed by the Department. The schedule for the most part contain the invoices and the amounts allowed as commission. The total of the commission was Rs. 2,31,290.41 ps. Out of the said total the balance relating to the previous accounting year i.e., the accounting year ending with 30-6-1979, relevant to assessment year 1980-81, was Rs. 1,03,565 and the amount relevant to the accounting year ending with 30-6-1980 relevant to assessment year 1981-82 was Rs, 1,27,725. The ITO in his notice stated that the names and addresses of the parties and the mode of payment was not furnished. Replying to the said notice the assessee in its reply dated 13-3-1984 stated that the nature of the service commission of Rs. 1,27,725 was more or less the same as of third party commission. The required information was already submitted to the ITO. That means according to the assessee-company the names and addresses of the parties and also the mode of payment were already given to the ITO. According to the assessee-company it had furnished a photostat copy of the ledger which is now found at page 2 of the paper book No. 3 of the Department and also page 15 of the paper book No. 3 filed by the Department. These two ledger copies, the former for the year ending 30-6-1980 and the latter for the year ending 30-6-1981, are relevant for assessment years 1981-82 and 1982-83, respectively, alleged to have revealed the names and addresses to whom the third party commissions were paid/payable, whether the amounts were paid by cash or by cheque and whether they are crossed cheques or bearer cheques. The ledger extract at page No. 2 of the Departmental paper book No. 3 reveals that out of the service commission in accounting year relevant assessment year 1980-81 in the accounting year relevant to assessment year 1981-82, payment was made towards third party commission/service commission/middlemen commission to an extent of Rs. 1,05,425. So also page No. 15, the ledger extract of service commission payable for the acconting year 1981-82 relevant to assessment year 1982-83, discloses that an amount of Rs. 1,03,565 relating to assessment year 1980-81 was paid in the accounting year relevant to assessment year 1982-83. There are 24 parties and transactions mentioned in the ledger extract provided at page 2. So also there are 25 transactions which are noted at page 15. In page 2 except for the first 5 parties the cheque Nos. were not given as against the rest of the parties/transactions. From serial Nos. 6 to 24 the name of the parry who was paid with the amount shown against him was noted. However, his address was not at all given. At least the town or village to whom he belongs was also not given let alone his full address. From serial Nos. 6 to 24 it is stated 'To CB payment". The cash book folio Nos. were given. However, the extracts of cash book folios themselves were not filed before the ITO along with the ledger copy at page 2.
Coming to page 15 neither the names of the parties to whom payments were made nor the cheque Nos. were noted in the ledger extract. As against 1 to 25 transactions noted the reference is given as 'To CB payment": The Cash Book Folio Nos. were given. These ledger folios were said to have been filed on 13-3-1984. For assessment year 1981-82 the return was filed on 25-7-1981 and the draft assessment order was dated 20-3-1984. The final assessment order for assessment year 1981-82 was dated 23-7-1984. The draft assessment order was provided at pages 16, 17 and 18 of paper book No. 3 filed by the Department. The final assessment order was provided at pages 4 and 4.1 of the first paper book filed by the assessee. Therefore, by the date of filing the ledger folios and by the date of re-opening notice viz., 5-7-1984 the assessment proceedings for assessment year 1981-82 were still in progress. In the draft assessment order for assessment year 1981-82 dated 20-3-1984 itself the ITO found that the assessee-company had paid three types of commission and discounts viz.,
(a) OEM Commission (Original Equipment Manufacturers Commission) paid on the original equipment on invoices as per the agreement with the principals viz., Water Development Society and Consolidated Pneumatics Tools (India) Ltd.
(b) Commission to customers by issue of credit notes.
(c) Commission paid to third parties by cash or cheque.
The ITO further observed that in the accounting year relevant for assessment year 1981-82 the assessee paid a sum of Rs. 1,27,725 by way of third party commission to various individuals. He further found that all the payments exceeded Rs. 2,500 and the payments were made either by cash or bearer cheques. The assessee was asked to explain as to why payments should not be disallowed under Section 40A(3). The assessee explained that it was incurred for promoting business. The explanation of the assessee was found not convincing and hence disallowance was made under Section 40A(3) and an amount of Rs. 1,27,725 was proposed to be added to the returned income. In the final assessment the proposal of the ITO was ratified and ultimately the addition was sustained by the IAC. The total payment made in the accounting year ending with 30-6-1980 was Rs. 2,31,290.41. Out of it, the payment relating to the accounting year ending 30-6-1980 was only Rs. 1,27,725 and an amount of Rs. 1,03,563 was stated to be representing payments made relating to the accounting year ending with 30-6-1979 relevant to assessment year 1980-81, that is as against the provision allowed for assessment year 1980-81, an amount of Rs. 1,03,563 was actually paid by the assessee-company, towards third party commission in assessment year 1981-82. So also out of Rs. 2,31,290.41 ps. paid by the end of the accounting year 1981-82, relevant to assessment year 1982-83, an amount of Rs. 1,03,565.48 ps. pertains to accounting year ending with 30-6-1979 relevant to assessment year 1980-81. At pages 5, 6 and 7 of paper book No. 3 filed by the Department we came across certain notings made by the ITO while investigating into the assessment for assessment year 1981-82. Pages 5, 6 and 7 were taken out of the docket for assessment year 1981-82 found in the miscellaneous records concerning that assessment year. By the notings it is found very clearly that the ITO found out that the accounting year relevant to assessment year 1980-81 is 1-7-1979 to 30-6-1980. Original assessment order for 1980-81 was passed on 23-1-1980 and he enquired whether the payments concerning the accounting year relevant to assessment year 1980-81 were by ordinary cheque or account payee cheque. Further, there is definite evidence to disclose that the assessee called for cheque books and pass books evidencing payments in the accounting year relevant to assessment year 1981-82. Having called for evidence of cheque books and pass books it is reasonable to presume that they were produced and that the assessment for assessment year 1981-82 was completed only after verifying the cheque books and pass books. It is also reasonable to presume that the ITO might have verified the nature of the payments with the Banks. In the notings found at pages 5, 6 and 7 of Departmental paper book No. 3 there are certain notings disclosing that the ITO verified the payments with Vijaya Bank, MG Road, Secunderabad. Had he not verified it it is highly improbable for the ITO to disallow Rs. 1,27,725 on the ground that the whole amount represents payment by bearer cheques. When he had verified all the payments made in the accounting year relevant to assessment year 1981-82 and when the total payment made in that year towards third party commission was Rs. 2,31,290.41 ps. it is reasonable to presume that the ITO would verify with the relevant banks the payment of the whole amount of Rs. 2,31,290.41 which includes Rs. 1,05,421.63 ps. relating to assessment year 1980-81. We cannot for a while presume that the ITO would put on blinkers with regard to certain payments relating to assessment year 1980-81 and confine himself only for the verification of the payments concerning to assessment year 1981-82, especially when the assessee-company itself was unable to show which of the payments made and belong to whom pertain to assessment year 1980-81 and which others pertain to assessment year 1981-82. Therefore, firstly it is highly reasonable for the ITO to presume that the information filed by the assessee-company itself at pages 2 and 15 which represent the ledger folios contain all the particulars with reference to the parties like addresses, cheque Nos. and they also disclosed whether the cheques were crossed or mere bearer cheques. We are also of the opinion that the ITO is quite reasonable to proceed on the premise that the information furnished at pages 2 and 15 of paper book No. 3 filed by the Department disclose true and full information asked for by the ITO and therefore, the said information in all fairness was made the basis of his belief. Transaction Nos. 6 to 24 at page No. 2 would not reveal the cheque Nos. On the other hand the ITO or any average ordinary and prudent man had to believe that payment was made in cash to those parties mentioned at serial Nos. 6 to 24 at page No. 2 since no reference to any cheque No. nor the name of the Bank to whom the cheque was directed were given in the said ledger entries. If we come to assessment year 1982-83 the information at page 15 which represents the ledger relating to service commission payable is much worse as no names, no cheque Nos. nor names of the Banks were given. The fact whether they are crossed cheques or crossed demand drafts were also not furnished. In those circumstances was the ITO reasonable to hold that the payments were all made in amounts more than Rs. 2,500 by cash and that such payments are to be disallowed under Section 40A(3) or not? We are of the opinion that the ITO was quite reasonable in coming to a conclusion from the material placed before him before issue of notice on 5-7-1984 that there is material which reasonably disclosed violation of Section 40A(3) provisions.
Even otherwise we are thoroughly convinced that it is reasonable to expect that the ITO would verify the nature of payments with several banks pertaining to assessment year 1980-81 while he was investigating into payments which were all made in the accounting year relevant to assessment year 1981-82. It is most significant to note that the assessee himself was unable to give which of the amounts mentioned in page 2 of paper book No. 3 filed by the Department make up Rs. 1,03,565.48 ps. representing the payment of commission relating to assessment year 1980-81. Thus however, if we proceed on the basis that no investigation was made and that the ITO had proceeded to issue re-opening notice dated 5-7-1984 only on the basis of the primary material produced on behalf of the assessee-company or if we proceed on the basis that on the information furnished, the ITO made enquiries with the Banks with regard to nature of payments made during the accounting year, relevant to assessment year 1981-82, we are thoroughly convinced that the ITO had necessary information in his possession, which creates a reasonable belief in his mind that the assessee had contravened the provisions of Section 40A(3).
8. Now let us see what are the consequences of the contravention of Section 40A(3). Section 40A(3) is introduced into the Statute Book on and from 1-4-1969. It states that if on or after 31-3-1969 an expenditure exceeding Rs. 2,500 is incurred then it should be paid either by a crossed cheque or Bank demand draft. Otherwise it should not be allowed as a deduction. It has got two provisos and the first proviso is relevant for our purposes; which is as follows :
Provided that where an allowance has been made in the assessment for any year not being an assessment year commencing prior to the 1 st day of April, 1969, in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes any payment in respect thereof in a sum exceeding two thousand five hundred rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, the allowance originally made shall be deemed to have been wrongly made and the Income-tax Officer may recompute the total income of the assessee for the previous year in which such liability was incurred and make the necessary amendment and the provisions of Section 154 shall, so far as may be, apply thereto, the period o, lour years specified in Sub-section (7) of that section being reckoned from the end of the assessment year next following the previous year in which the payment was so made.
This proviso clearly applies to the facts of the case inasmuch as the whole provision of Rs. 2,08,987.11 was allowed in original assessment for assessment year 1980-81. However, it was subsequently found out that the payment was actually made in assessment years 1981-82 and 1982-83 in violation of Section 40A(3) and therefore, the allowance originally made should be deemed to have been wrongly made and it should be withdrawn within four years from the end of the assessment year in which such allowance was allowed. The last day of the assessment year 1980-81 ends by 31-3-1981. Four years from that date ends by 31-3-1985. Therefore, the rectification is permissible within 31-3-1985. However, notice of re-opening was given on 5-7-1984 itself and hence it is quite within time.
9. The next question which arises is when action under Section 154 permissible under proviso No. (1) to sction 40A(3) how is the revenue entitled to take action under Section 147(b). The revenue contended Sections 154 and 147 often overlap each other. In such a case, the ITO has jurisdiction to take action under either of the two sections as the circumstances may require and in support of this proposition the following authorities are found out:
1. IAC v. V.M. Ravi Namboodiripad [1974] 96 ITR 73 (SC)
2. G. Sreerama Murthy's case (supra)
3. Bihar State Road Transport Corporation v. CIT [1976] 103 ITR 736 (Pat.)
4. Salem Provident Fund Society Ltd.'s case (supra) 9.1 The Supreme Court in V. M. Ravi Namboodiripad's case (supra) at page 78 held that from the facts and circumstances of that case the rectification could be made under Section 35 of the IIT Act, 1922, even though the reassessment could have been made under Section 34 of the IIT Act, 1922.
9.2 In G. Sreerama Murthy's case [supra) the AP High Court held as follows:
That where reassessment under Section 147, or rectification under Section 154, are both equally competent, the department may take action under either section since the two sections are not mutually exclusive. The amendment of the assessments of the individual partners as a consequence of the reassessment of the firm could be done only under Section 154 read with Section 155 and it was open to the Income-tax Officer to take action under Section 147 or under Section 154 read with Section 155. It was not open to the assessee to question the action of the Income-tax Officer on the ground that he should have taken action under the other section.
9.3 In Bihar State Road Transport Corpn.'s case [supra) at page 742 the following is what is held:
It is true that once a final assessment is arrived at, it cannot be reopened except in the circumstances detailed in Sections 147 and 154 of the Act. While Section 154 deals with mistakes apparent from the records and may not cover a case where a reassessment has to be made to charge tax, if it has escaped assessment, Section 147 covers cases of income escaping assessment where the Income-tax Officer has reason to believe, in consequence of information in his possession for that purpose and is not confined to cases where reassessment under Section 147 or rectification under Section 154 are both equally competent, the department may take action under either section, since the two sections are not materially exclusive. Reference in this connection may be made to the case of Salem Provident Fund Society Ltd. v. Commissioner of Income-tax whereafter completion of the assessment of the assessee when the Income-tax Officer discovered some mistakes, he proposed rectifying the same under Section 35 of the Old Act (now Section 154), but later initiated reassessment proceedings under Section 34 (now Section 147). When the reassessment proceedings were challenged, it was held that the proceedings were valid as 'information' for the purpose of Section 34 need not be wholly extraneous to the record of the original assessment. A mistake apparent on the facts of the order of assessment would itself constitute 'information'; whether someone else gave that information to the Income-tax Officer or he informed himself was immaterial.
An error apparent on the face of record constitutes "information" within the meaning of Section 147(b). The decision of the Gujarat High Court in CWT v. Smt. Arundhati Balkrishna Trust [1977] 108 ITR 78 gives support to this conclusion. In that case the trust deed was already filed at the time of original assessment. However, the clause that the beneficiary had a rightly only up to a maximum of 50 per cent of the corpus of the trust was lost sight of while making the original assessment. Subsequently the mistake was found out. However, a notice of re-opening the proceedings under Section 17(1)(b) of the WT Act was issued. The Tribunal held that there was no new information and the notice under Section 17(1)(b) was invalid. The Hon'ble Gujarat High Court, however, reversed the decision in Margarine & Refined Oil Co. (P.) Ltd. 's case (supra) in which it is stated that when two provisions of law are applicable to a given case and of them one is more onerous than the other, in the absence of any guidance so as to which of the two provisions should be resorted to in a given case, any action taken under the provision which is more onerous is liable to be struck down as being of violative of Section 14 of the Constitution of India. His Lordship of the Karnataka High Court while giving the said judgment purported to have followed the two Supreme Court decisions viz., Suraj Mall Mohta & Co. 's case (supra) and Anandji Haridas & Co. (P.) Ltd. 's case [supra).
10. It is submitted before us that in the facts and circumstances of this case it is quite evident that the proceedings under Section 147(b) in the present case are more onerous than the proceedings under Section 154. If it is a case of Section 154 no other addition except the addition contemplated under Section 40A(3) first proviso is permitted to be made, whereas if it is re-opening under Section 147(b), when once the re-opening is held to be validly made, then the entire assessment proceedings are held to be at large and it is open to the Income-tax authorities to reconsider any such reassessment all items of escapement of income without limitation. It was submitted before us that the AP High Court while delivering judgment in G. Sreerama Murthy's case (supra) overlooked the two decisions of the Hon'ble Supreme Court followed by the Karnataka High Court in Margarine & Refined Oil Co. (P.) Ltd.'s case (supra). Therefore, for that reason we should prefer following Karnataka High Court over the AP High Court in G. Sreerama Murthy's case (supra), submitted the assessee's counsel. We are unable to accept this argument. The Karnataka High Court's decision in Margarine & Refined Oil Co. (P.) Ltd. 's case (supra) is a writ proceeding. However, this Tribunal being a creature of the Statute (Income-tax Act, 1961) is not entitled to deal with Constitutional matters. It was open to the assessee to have approached the High Court and get the notice issued under Section 147(b)/148 quashed had it been so advised earlier. However, having acquiesced in the exercise of the jurisdiction by filing a return in pursuance of the reopening notice issued to it, it is not now open to the assessee to contend the invalidity of the re-opening under Section 148 invoking Article 14 of the Constitution. Further, we are bound by the AP High Court decision in G. Sreerama Murthy's case [supra). The Karnataka High Court in its judgment held that proceeding under Section 147(b) of Income-tax Act, 1961, would have given a much larger right to the assessee and would have been more advantageous to the assessee, inasmuch as, there was an appeal provided under that provision, whereas an action under Section 35 of the IIT Act, 1922 would not have provided such an appeal to the assessee. Therefore, in that case it was held that the proceedings under Section 35 of the IIT Act, 1922, contravened Article 14 of the Constitution. However, in this case the proceedings were initiated under Section 147(b). If we compare the procedural right available from the order under Section 147(b) vis-a-vis the order under Section 154 of the IT Act there is no difference at all. Under IT Act an order under Section 154 is appealable under Section 246F. Shri Ajay Gandhi, learned representative for the assessee, submitted that re-opening the proceedings under Section 147 gave the revenue much longer period of limitation than the limitation available under Section 154 of the IT Act. Had it been 154 proceedings there would have been no scope for the ITO to levy penalty under Section 271(1)(c) and the ITO would not have got a leeway to go through the accounts of the assessee-company if it is a proceeding under Section 154. However, we may observe that as regards the penalty, as and when the penalty proceedings started against the assessee-company this legal plea can as well be pressed into service in such proceedings and the validity of the penalty may as well be agitated in those proceedings. But as regards the assessment we are bound by the AP High Court's decision and in pursuance thereof we have to hold that from the facts and circumstances of this case both the courses viz., re-opening proceedings under Section 147 as well as proceedings under Section 154 were open to the revenue and the assessee had no right to question if the revenue had opted out to proceed under Section 147 which is one of the courses open. Thus we prefer to follow the AP High Court's decision over than of the Karnataka High Court's decision especially when the AP High Court's decision is found favour with the other High Courts also, including the Madras High Court.
11. For the reasons set out in the above paragraphs of this order we hold that the re-opening proceedings under Section 147 by the revenue is validly made and the objections raised by the assessee for the re-opened proceedings are not valid.
12. The learned DR Shri N. Santhanam sought to justify the re-opening under Section 147(a). He advanced this argument as an alternative to his argument, justifying the question of re-opening under Section 147(b). He argues that if the Tribunal is not going to accept the validity of re-opening under Section 147(b) then this alternative argument justifying the reopening of the assessment proceedings under Section 147(b) may be considered, deliberated upon and a decision may be given thereon. His argument justifying the re-opening under Section 147(a) proceeded as follows :
12.1 Page 19 of the Departmental paper book No. 1 gives the reasons for re-opening dated 5-7-1984. The same reasons are also found given at page 1 of Departmental Paper book No. 3. In the reasons for re-opening, the predecessor-ITO did not say whether the re-opening was sought to be made either under Section 147(a) or under Section 147(b). The successor -ITO completed the reassessment within the time allowed under Section 147(b) taking it to be a proceeding under Section 147(b). The learned CIT (Appeals) also looked upon the re-opening as one made under Section 147(b). However, the learned DR wanted to argue that the re-opening was in fact/done under Section 147(a). The previous year relevant to assessment year 1980-81 ended by 30-6-1979. What was allowed in the original assessment was a provision made on the last day of the previous year. The total of the amount of the provision allowed was Rs. 2,08,986.76 ps. The IT return in the original proceedings for assessment year 1980-81 was filed on 18-7-1980. The return filed in response to notice under Section 148 was filed on 4-8-1984. In Annexure C to the return in column No. 3 as against column "expenditure incurred otherwise than by crossed cheque - Section 40A(3) - Rule 6DD". This column was not filled up either in the original return or in the return filed under Section 148. On the date of original return, the assessee had noted all payments which attract Section 40A(3). By not filing the columns he suppressed primary facts. The learned DR tried to bring the reasons recorded on 5-7-1984 as forming a valid basis for a reasonable belief that the assessee failed to disclose all material facts fully and truly in the original return and that it formed the basis for re-opening under Section 147(a). He contended that the assessee must have fully known that he made a cash payment of Rs. 5,000 on 3-11-1979 towards OEM Commission and that on 9-9-1978 he made a payment of Rs. 9675.85 ps. as middlemen commission by a bearer cheque and he is fully aware of the fact that on 10-10-1978 he paid OEM Commission of Rs. 3,000 by bearer cheque but yet he suppressed to mention these contraventions under Section 40A(3) in the proper column intended therefor, in the original return or in the return filed in pursuance of the reassessment notice. According to the learned DR the point for consideration would be that merely because the assessee did not fill up a column in the IT return, does it amount to suppressing a primary fact which entail or justify re-opening under Section 147(a) and there are decisions to show that non-filling up a column in the return with necessary information does attract re-opening under Section 147(a). He cited the following decisions in support of the proposition:
12.2 K.C.P. Ltd. v. ITO [1984] 146 ITR 284. In this case the AP High Court held as follows:
There is no warrant for holding that 'material facts' are only those which are required to be mentioned in the returns of income. There is no reason for restricting the words 'omission or failure on the part of the assessee... to disclose fairly and truly all material particulars' in Section 148 of the Act, in the light of the proforma of the return prescribed under the rules. Therefore, every material fact which has got a bearing on the assessment for that assessment year must be disclosed by the assessee. What is a material fact is a question of fact which has to be decided in each case and it is not possible to lay down any hard and fast rule.
Therefore, it is argued, the information to be furnished as against the columns provided in the proforma of the return are to be considered as material facts or particulars.
12.3 In Kanhaiya Lal Prahladraiv. ITO [1986] 17 ITD 1075 (All.) in the Income-tax return columns the income of the wife was not filled up. The question was whether such failure to disclose the income of the spouse amounts to omission to disclose fully and truly all material facts necessary for assessee's assessment. The Allahabad Bench following the Supreme Court's decision in V.D.M. Rm. M.Rm. Muthiah Chettiar v. CIT [1969] 74 ITR 183 held that "After 1-4-1972 it was obligatory upon an assessee to declare the income of spouse/minor child as referred to in Chapter V in the return. Section 64 fell in that Chapter. Thus the assessee in the present case, was bound to disclose the income of his wife in the return, which admittedly related to the period after 1-4-1972 and in which also there was a column for declaring the income of the spouse/minor etc. Therefore, non-declaration of the share of the assessee's wife amounted to omission to disclose fully and truly all material facts necessary for the assessee's assessment. Thus, Section 147(a) had been correctly applied to the assessee's case. Therefore, the order of the Commissioner (Appeals) was upheld".
12.4 The next decision referred to was that of the Hon'ble Supreme Court in CIT v. Smt. P.K. Kochammu Amma [1980] 125 ITR 624. In the head-note, inter alia, the following is found at page 625:-
If this be the correct legal position, there can be no doubt that the assessee must disclose in the return submitted by him all amounts representing the shares of the spouse and minor child in the profits of the firm in which he is a partner, since they form part of his total income chargeable to tax. The words' his income'in Section 139(1) must include every item of income which goes to make up his total income assessable under the Act.
12.5 The Departmental Representative next cited before us the latest decision of the Hon'ble Supreme Court dealing with the question of reopening in Indo-Aden Salt Mfg. and Trading Co. (P.) Ltd. v. CIT [1986] 159 ITR 624. In that case it was held that whether there was non-disclosure of primary facts, as had caused escapement of income from assessment, was basically a question of fact and it is also held that it is well settled that the obligation of the assessee is to disclose only primary facts and not inferential facts. If some material for the assessment lay embedded in the evidence which the revenue could have uncovered but did not, then it is the duty of the assessee to bring it to the notice of the assessing authority. The assessee knows all the material and relevant facts-the assessing authority might not. In respect of the failure to disclose, the omission to disclose may be deliberate or inadvertent. That is immaterial. But if there is omission to disclose material facts, then subject to other conditions, jurisdiction to reopen is attracted. The learned DR also cited before us V. Jaganmohan Rao v. CIT [1970] 75 ITR 373 (SC) and CWT v. Subakaran Gangabhishan [1980] 121 ITR 69 (AP) (FB). In the Full Bench case of the AP High Court the following is what is held:
Re-assessment proceedings under Section 17(1) of the WT Act, 1957 wipes out the original assessment and the re-assessment can be in respect of not only items that escaped assessment but also the entire assets for the year. The assessing authority, apart from having jurisdiction to include all items that escaped assessment notwithstanding the fact that he had mentioned in the notice only some of them, is under an obligation to complete the assessment by bringing all the escaped assets to tax as if the re-assessment proceedings are de novo and fresh.
In view of the fact that we have held the re-opening of the assessment under Section 147(b) itself is valid and correctly made the alternative argument advanced by the learned DR justifying the re-opening under Section 147(a) was not taken up and dealt with in this order as it is felt unnecessary to do so.
13. Before taking up the merits of the case certain grounds of appeal relating to merits were not pressed by the learned counsel for the assessee. For instance he did not press the disallowance of demonstration expenses of Rs. 1,19,270 which is the fourth ground in the grounds of appeal originally filed before this Tribunal and hence the disallowance of Rs. 1,19,217 towards demonstration expenses is confirmed.
14. Ground No. 7 which deals with disallowance of carriage inward expenses of Rs. 16,720 was also not pressed. It is ground No. 7 in the original grounds of appeal and as this was not pressed this addition of Rs. 16,720 is hereby confirmed.
15. So also ground No. 10 deals with interest charged under Section 217(1A) (wrongly mentioned as 215(21). It is stated that a petition for rectification was filed and it was allowed and in view of the favourable orders obtained in the rectification proceedings, this ground was not pressed. Hence this ground is not taken up for consideration.
16. Thus we are left with the remaining grounds in the original grounds of appeal filed before this Tribunal.
17. Ground Nos. 1 to 3 may be taken up together and they relate to the disallowance of expenses alleged to have been incurred by the assessee-company towards payment of secret commission. The company debited an amount of Rs. 7,43,498 to profit & loss account towards discount and commission allowed in the accounting year relevant to assessment year 1980-81. The bifurcation of this amount was made into three heads as follows :-
Rs.
1. Discount and commission payable 2,49,972.80 ps.
2. OEM discount and credit notes 2,84,538.03 ps.
3. Third party commission or service commission payable 2,08,987.11 ps.
---------------
7,43,497.94 ps.
----------------
The names of the parties in whose favour the provision of Rs. 2,49,972.80 ps. was made on 30-6-1979 were appearing in the ledger folios bearing Nos. 362 and 363 of the assessee-company for 1980 relevant to assessment year 1981-82. The actual payments were made in 1980-1981 and 1982. The names of the person as per the ledger extract to whom the amount of Rs. 2,47,972.80 ps. was allowed were listed out at pages 3 and 4 of the ITO reassessment order. This amount of Rs. 2,49,973 was again bifurcated into three categories by the ITO as follows :
1. Bogus commission and discount payable - Rs.
customers denied: 96,542
2. Bogus commission and discount payable -
Parties could not be identified by
the company 28,569
3. Bogus commission and discount payable -
Full address of the parties not
furnished by the company 1,24,862
----------
Total: 2,49,973
----------
The names of the 18 parties, the amounts purported to have been given and the cheque nos. as well as the names of the banks on which cheques were issued totalling up to Rs. 96,542 were listed out at page 5 of the ITO's re-assessment order. Just a word about how the provision for Rs. 2,49,972.80 ps. was made in the account books of the assessee-firm on 30-6-1979, the commission and discount was allowed to various customers who had purchased air compressors. The assessee-company acted as distributors for the products manufactured by M/s. Water Development Society, Hyderabad. The memorandum of agreement which the assessee-company had entered into with the said company was provided at pages 22 onwards of the first paper book filed by the department. So also the assessee-company acted as distributors for the products manufactured by M/s Drill Co. Metal Carbides Ltd. for the four southern States and also for part of Maharashtra. Drill Co. Metal Carbides Ltd. is located at Pune. The assessee entered into the distribution agreement dated 22-8-1977 with the said company and a copy of the agreement obtained by the revenue is provided at page 30 of the paper book No. 1 filed by the Department. So also the assessee acted as agents of M/s. Consolidated Pneumatics Tools (India) Ltd., Bombay. It had entered into an agreement with the said company on 1-1-1977, 5-7-1977 and the copies of those agreements were also furnished to paper book No. 1 filed by the Dept. Commission and discount was allowed to customers who purchased air-compressors and drilling equipment from the assessee-company. The discount allowed was duly shown in the invoices and it was deducted from the price of the article sold and the sale account as well as the customers account were debited with the net amounts only. However, the company did not allow trade discount to all its customers. The amount of Rs. 2,49,972.80 ps. represents further discount alleged to have been allowed over and above the trade discount allowed In the invoices to the parties mentioned in pages 3 and 4 of the ITO's photostat copy of the reassessment order. As already stated the eighteen parties to whom the commission of Rs. 96,542.25 was said to have been granted were listed out at page 5 of the photostat copy of the ITO's order. A common questionnaire containing 10 questions were issued to those 18 parties and in response to those questions they have stated that they no doubt purchase spare parts or gave their rigs for repairs to the assessee-company. They stated that no broker or middle men had introduced them to the assessee-company and they have approached the assessee-company on their own, for making purchases or to get their rigs repaired. They further stated that whatever discount or commission, the assessee-company allowed it was deducted from the selling price by way of trade discount. Over and above, they did not recover any discount or commission. They are categorically ascertaining that no discount or commission was due to any of them from the assessee-company on 30-6-1979. They also stated that the assessee-company did not communicate to them about the commission or discount provided on 30-6-1979 in their favour. They further stated that they did not receive any cheque or cash towards commission or discount from the assessee-company. When cheque Nos., date of payment, name of the bank as furnished by the assessee-company were brought to their notice and specific questions were put to them on such information, those parties categorically denied of having received any cheques from the company and they have expressed their ignorance of the whole transaction. Summons were issued to the Banks under Section 131 to furnish xerox copies of the cheque Nos. and names furnished by the assessee-company vide Its letter dated 28-6-1985. The said summons were issued to the following Banks:
1. Vijaya Bank Limited, MG Road, Secunderabad.
2. State Bank of Hyderabad, Gunfoundry.
3. Punjab and Sind Bank, Secunderabad.
4. State Bank of India, Main Branch, Secunderabad.
5. Bank of Baroda, Secunderabad.
In pursuance of those summons the Banks were able to furnish some of the xerox copies of the cheques and they clearly reveal that they were all bearer cheques and all the cheques were issued out of the provision made on 30-6-1979. The information furnished by the above Banks was provided in a tabular form at page 7 of the photostat copy of the assessment order of the ITO. The information in the table revealed that when commission and discount was due to partnership firms and limited companies' cheques were issued in the name of individuals. On enquiry the ITO found the following procedure having been adopted by the assessee-company for issuing the cheques:
17.1 The cheques issued towards discount and commission used to be prepared by Sri N.V. Narasimham, Administrative Manager or Shri R.V. Krishnand, Accounts Officer or sometimes by Shri Koteswar Rao, Accountant After preparing the cheques in favour of the party, they used to submit them to the Managing Director or any of the directors and obtain their signature on them. On the back of each cheque one finds two signatures. One purports to be the signature of the party in whose favour the cheque was issued and the second signature pertains to the employee of the company who drew the cash from the Bank. Shri J.C. Minocha, Managing Director of the assessee-company agreed with the above facts in his sworn statement dated 1-7-1985. When confronted with one of such cheques and the two signatures obtaining on the back of that bearer cheque, Shri J.C. Minocha in reply stated that one signature on the back of the cheque pertains to the party in whose favour the cheque was issued and the second signature on the back of the cheque pertains to the employee of their company who drew cash from the Bank. The ITO issued summons under Section 131 to the following employees of the assessee-company:
1. Sri N. V. Narasimham, Aministrative Manager.
2.,, R.V. Krishnand, Accounts Officer.
3.,, T. Ramulu, Cashier.
4.,, T. Ramaswamy, Peon.
5.,, N.V.B. Seetharam, Typist.
6.,, M. Mallesh, Stores Assistant.
In pursuance of the summons all of them appeared and the ITO recorded sworn statements from them. Sworn statements recorded from Shri M. Mallesh, S/o Sri M. Narasimham, Sri N.V.B. Seetharam S/o Sri N. Ranga-chary, Sri T. Ramulu, S/o Sri T. Sankaraiah, Sri R. V. Krishnand S/o Sri R. Ramakrishna, were found as appendices to the re-assessment order passed by the ITO and also found at paras 8.27, 8.28, 8.29 and 8.30 of the first paper book filed on behalf of the assessee-company. The sworn statement of Shri J.C. Minocha is provided at pages 20 & 21 of Department's paper book No. I. The sworn statement of Sri N.V. Narasimham, Administrative Manager was furnished at pages 9, 10 and 11 of the photostat copy of the re-assessment order. The gist of the sworn statements is Sri N.V. Narasimham or Sri R.V. Krishnand or Sri Koteswar Rao used to prepare cheques on the directions of the Managing Director or any other director either in the name of the party or in the name of a fictitious person on that cheque the Managing Director or any of the directors used to sign. After obtaining the signatures of the Managing Director or any other directors on the cheques, one of the persons viz., Sri N.V. Narasimham or Sri R.V. Krishnand or Shri N.V.B. Seetharam or SriT. Ramulu, or Sri S.G. Reddy used to make signatures of the party on the cheque in whose name the cheque was written. After making the forged signatures the cheque used to be handed over to one of the persons viz., Sri T. Ramaswamy or Sri T. Ramulu or Sri N.V.B. Seetharam or Sri Mallesh who used to go to Bank and obtain cash from the Bank. After obtaining cash from the various Banks, the same was handed over to Sri N.V. Narasimham Administrative Manager. The cheque in favour of Sri S.G. Reddy (Cheque No. 784966 dated 18-8-1981) drawn in Vijaya Bank Ltd., Secunderabad was taken up as a sample with reference to which certain employees as well as Managing Director were examined. The cheque in question bears the signature of the two Directors. The cheque was issued and the name of Sri S.G. Reddy was appearing in the provision made towards discount and commission on 30-6-1979. When the signature of Sri S. Ganga Reddy in his sworn statement before the ITO and the purported signature of S.G. Reddy on the above mentioned cheque drawn on Vijaya Bank Ltd., were put before Sri N.V.B. Seetharam and when he was questioned Sri Seetharam stated in his sworn statement that on the request of Sri N.V. Narasimham, Administrative Manager, he had put the signature of Sri S. Ganga Reddy. In fact, it is not the signature of Sri S.G. Reddy but he made the signature of Sri S. Ganga Reddy. When the difference in signature of Sri S.G. Reddy as found in the cheque and as found in the sworn statement given before the ITO were brought to the notice of the Managing Director of Sri J.C. Minocha in his sworn statement dated 1-7-1985 he admitted that those two signatures did not tally. The assessee never wanted to cross examine any of their employees including Sri N.V. Narasimham. So also, when the persons who had denied of having received any cheques for rebate and commission were offered for cross-examination on 1-7-1985 and 2-7-1985, as per the ITO's letter dated 28-6-1985, the assessee declined to cross-examine them. When it was specifically brought to the notice of Sri J.C. Minocha as to what is his comment for the uniform version of the 18 parties examined that they had not received any commission from the assessee-company and that no commission or discount due to them on 30-6-1979, Sri J.C. Minocha simply answered "I do not know". However, in reply to the letter dated 28-6-1985 addressed by the ITO to the assessee-company, a written reply dated 3-7-1985 was sent by the assessee-company in which it is stated as follows :-
With respect to the specific queries raised by you regarding various parties we have to say that in most cases the parties' names represent the business in regard to which the commission is payable and not necessarily the parties to whom the same was paid. The money in these cases where it was withdrawn from the bank by our employees was paid to those parties to whom commission was paid. It was never retained by the assessee-company or its employees.
However, this explanation was found by the ITO to be untenable and also false. For the reasons which the ITO had listed out in pages 13 and 14 of the photostat copy of his re-assessment order, ultimately the ITO disallowed Rs. 96,542.25 representing discount and commission payable on 30-6-1979 for the following four reasons:
1. The entire provision of Rs. 96,542.25 on 30-6-1979 in the name of the abovementioned parties (18 in Nos.) was bogus as all the parties in whose favour the provision was made had denied and the company failed in rebutting it by producing documentary evidence.
2. Vouchers were not obtained when the alleged payments were made. In the sworn statements recorded from S/Shri R.V. Krishnand, T.R. Ramswamy, T. Ramulu, M. Mallesh and N.V.B. Seetharam they have categorically stated that after encashment of cheques the money was handed over to Sri N.V. Narasimham, Administrative Manager and not to persons mentioned in the cheque. This fact was also admitted by Sri N.V. Narasimham. The money obviously went back to the company. In the sworn statement Sri J.C. Minocha dated 1-7-1985 he admitted that the amount was drawn from bank and reinvested in the business. As this is an important admission both the question and answer are extracted as under:
Q. Vide your company's letter date 28-6-1985 the company furnished the cheque numbers and the names of the banks to whom payments were made in subsequent years. From the information filed, I find that the above parties had received cheques drawn on various banks mentioned against their names. The above parties in their sworn statements have categorically denied of having taken any cheques from DRE (P.) Ltd. towards commission and discount which was provided in the books of account of the company on 30-6-1979. What have you to say in this regard ?
A. I confirm that the amount was withdrawn against these cheques and re-invested for the purpose of business.
The ITO found that it is clear from the above answer that the amount drawn from Banks was never paid to the parties.
3. In its letter dated 28-6-1985 the assessee-company identified parties in whose favour the commission was paid and their names. The company also furnished cheque nos. and names of banks and date of payment. The above information is furnished at Annexure B of the re-assessment order. However, signatures of the various parties in whose favour the cheques were drawn were forged by the employees of the assessee-company and the assessee-company received back the cash. In the sworn statements given by the parties they have denied of having received commission or discount by way of cash or cheque or they have approached the assessee-company either through a broker or a middle man. In fact, Sri S. Ramachandra Reddy and Sri Y. Ranganayakulu two of the parties to whom the cheques were purported to have been passed by the assessee-company already died before issue of the cheques in their names. The legal representative of the above two parties denied of having received any cheques or cash in the name of the deceased.
4. The assessee-company did not explain any exceptional circumstances for which the commission or discount exceeding Rs. 2500 was paid otherwise than by crossed cheque or crossed DD and hence the entire payment alleged to have been paid by bearer cheques is disallowed under Section 40A(3).
17.2 Thus the ITO made an addition of Rs. 96,542.
18. The ITO also disallowed Rs. 28,569 on the ground that it represents bogus commission and discount provided for in the case of which the parties to whom the alleged commission was paid were not identified. The names of the parties and the amounts of provision made against them, according to the assessee-company's letter dated 28-6-1985, are as follows :-
No name Rs. 9,708.57 ps.
Orissa Borewells Rs. 5,647.50 ps.
No name Rs. 2,898.00 ps.
B.C. Paul Rs. 5,000.00 ps.
Y. Shankar Reddy Rs. 1,971.00 ps.
Jala Pratap Borewells Rs. 3,334.32 ps.
-----------------
Rs. 28,569.39 ps.
-----------------
The reasons for disallowance are given by the ITO as under:
(1) The parties in whose favour the provision was made on 30-6-1979 are not identifiable.
(2) The provision made on 30-6-1979 was paid by way of bearer cheques.
(3) Employees of the assessee-company made signatures of the parties in whose favour the cheques were written and the cash was drawn from the Bank by another employee and the cash had come back to the company.
(4) The ITO issued a show cause notice on 19-6-1985 to show as to why disallowance should not be made under Section 40A(3). The assessee-company filed a letter dated 1-7-1985 in which it was explained that they offered commission and discount in view of stiff business competition by way of cash incentives to the middlemen, as well as to the customers, but they were not in a position to establish the identity of the persons who had received the commission and discount for various reasons. Further, all the cheques drawn in their names were encashed and paid to them in order to promote business with good intention and faith. Most of the expenditure by way of commission and discount have been incurred while procuring business from Government, quasi-Government and other Government institutions and companies. It is common knowledge that in today's business without incentive, no human makes an endeavour to purchase or promote the product and therefore during the ordinary course of business, the assessee-company had to pay amounts to various persons but they could not identify for want of evidence. Thus it is clear that the assessee failed to establish the identity of the person in explaining the special circumstances under which the payments by way of bearer cheques were made. Further expenditure incurred by way of commission and discount while procuring business by offering incentives to the employees of Government, quasi-Government and Government Institutions is against public policy and for all the above reasons the ITO found, inter alia, that there was contravention of Section 40A(3) and made" addition of Rs. 28,569.
19. The ITO also made a disallowance of Rs. 1,24,862. The names and amounts of the firms, companies as well as persons to whom the alleged payments amounting to Rs. 1,24,862 were paid to have been paid, by means of cheques were furnished at page 17 of the photostat copy of the re-assessment order, passed by the ITO. Their names and the amounts were furnished as per the letter of the assessee-company dated 28-6-1985. The particulars were reproduced in Annexure B to the assessment order. The xerox copies of the cheques were summoned from various banks and the information furnished by the Banks was put in Annexure C to the re-assessment order. The ITO concluded that the assessee-company deliberately furnished wrong information, whereas the cheque nos. and names of Banks were furnished against names of companies and firms who made purchases from the assessee-company, the cheques obtained from banks reveal that the cheques were not issued in favour of the companies or firms but in favour of individuals. The ITO ultimately made the disallowance of Rs. 1,24,862 terming it as bogus commission for the following reasons:
(1) The parties in whose favour the provision was made on 30-6-1979 were bogus. There was no commission due to them.
(2) The cheques issued subsequently by debiting provision account, were encashed by the assessee-company itself after forging 14 signatures of the persons in whose favour the cheques were written.
(3) S/Shri N.V. Narasimham, R.V. Krishnand, N.V.B Seetharam and T. Ramulu admitted that they forged the signatures of the parties in whose favour the cheques were written and their admission proves that the whole provision of commission payment was bogus, especially in view of the fact that the assessee-co. did not choose to cross-examine its own employees. Further, the assessee-company could not explain the extraordinary or exceptional circumstances in which the payment was made by way of bearer cheques exceeding Rs. 2,500. Hence the disallowance.
20. The disallowance made by the ITO is an amount of Rs. 2,08,987 representing third party commission. He held that the payment of the whole amount is considered as bogus for the four reasons listed out and discussed by him at pages 20. 21, 22 and 23 of the photostat copy of the re-assessment order. Firstly, the ITO held after discussing thoroughly the evidence on record, that the parties in whose favour the third party commission was provided on 30-6-1979 were not identified by the assessee-company. The ITO wanted the assessee-company's explanation in this regard by his letter dated 28-6-1985, in reply whereof the assessee submitted a letter dated 3-7-1985 the gist of which is that the business of the assessee-company which is essentially a trading one involved supplies to large companies, public-sector undertakings, Government agencies etc. depends to a very large extent on the services of middlemen and liaisonmen. The company had to incur expenditure by way of commission to these middlemen, liaison men, agents, brokers etc. for purposes of its business. Very often the person who received the commission do not desire to receive it by crossed cheques or withdraw the same themselves from the Banks. This is for variety of reasons. Some of them are obvious enough. The company has only to oblige them. As such the company is not in a position to properly substantiate the commission paid and the fact remain that the company had incurred this expenditure. The ITO held that the assessee-company's argument that the parties are not identifiable is untenable. The payment of third party commission was not made as and when the customer was introduced to the assessee-company. In fact, the assessee-company took one to three years to make the payment of third party commission provided on 30-6-1979. One cannot understand how could the company remember the person to whom payment was made after one to three years from the date on which the transaction took place. A prudent business-man will maintain minimum details like names and addresses of parties to whom the company owes, not inconsiderable sums of monies like Rs. 40,402. Rs. 40,008, Rs. 27,830 etc. Nobody would wait till one to three years to receive commission in respect of purchase made by a customer who was^ introduced by him. For purchases made by B.H.E., Ramachandrapuram, an amount of Rs. 40,380.06 was stated to have been paid as third party commission. However, B.H.E.L. denied of having received any part of the said commission. So also the company is stated to have paid a commission of Rs. 3,467 to the middlemen who said to have secured business or introduced the Nuclear Fuel Complex, Hyderabad to the assessee-company. However, when the ITO addressed the summons under Section 131 the Nuclear Fuel Complex (NFC) had actually denied of having approached the assessee-company through a middle man or a broker. Similarly, third party commissions were said to have been provided in respect of business procured from Mishra Dhatu Nigam Limited. AP State Agro Industries and Hyderabad Asbestos Ltd. However, in response to summons under Section 131 the financial executives of the above organisations have appeared and categorically denied of having made purchases from the assessee-company through any middlemen or brokers in the accounting year, relevant to assessment year 1980-81. In view of their evidence the ITO deduced that the third party commission said to have been paid for securing business from the above Government and other companies is nothirlg but fabrication and bogus.
21.1 Though provision for payment of commission was purported to have been made in favour of third parties on 30-6-1979 in some instances those parties could not be identified by the assessee-company. At the time of making the payment the cheques were issued in favour of the assessee-company's own employees. This fact was brought to light after obtaining xerox copies of the cheques from various Banks. The dates of the cheques, the numbers, the names of the banks on which they were drawn and the amounts covering the cheques as well as the names of the employees were given were listed out at pages 22 and 23 of the photostat copy of the reassessment order of the ITO. The total of the cheques issued in favour of Sri T. Ramulu and Shri P.N. Murthy aggregated to Rs. 47,158.36 ps. The total of the cheques issued in the name of Sri T. Ramaswamy aggregated to Rs. 18,592.11 ps. The cheque issued in favour of Sri R.V. Narasimham is for Rs. 2,898 and the cheque issued in favour of Sri B. Mallesh is for Rs. 2,000. The above employees of the assessee-company in their statements on oath categorically stated that they withdrew cash in respect of cheques drawn in their favour and handed over cash to Sri N.V. Narasimham, Administrative Manager. Shri J.C. Minocha, Managing Director also admitted that cash was drawn by the employees and reinvested in the business. He also admitted that the company did not give any commission to its employees.
21.2 From the above it is very clear that part of the provision made on 30-6-1979 towards third party commission was withdrawn by the assessee-company by writing cheques in the names of its own employees.
22. The entire payment in respect of provision made on 30-6-1979 was paid by way of bearer cheques in fictitious names and the signatures of the parties in whose favour the cheques were prepared were made by the employees of the company. After forging the signatures the employees of the company used to hand over the cheques to other employees to draw cash from the bank and the cash so drawn was handed over to Sri N.V. Narasimham, Administrative Manager. The amount so given was reinvested in the business of the assessee-company, as admitted by its Managing Director Sri J.C. Minocha. The argument of the assessee that after the amounts were drawn from the bank the amounts were paid to third parties is false. If that was correct there was no need for the employees to forge the signatures of the parties in whose favour the cheques were issued. The fact that the assessee-company failed to identify the parties coupled with the fact of encashment of cheque by the assessee's own employees prove the fact that the entire provision made on 30-6-1979 in the name of third party commission was bogus.
23. The assessee-company also failed to establish the identity of the payee and failed to explain the exceptional circumstances in which the payment was made in subsequent years by bearer cheques in amounts more than Rs. 2,500. Hence the disallowance is also sustainable under Section 40A(3). He thus disallowed Rs. 2,08,987.
24. Next the ITO had taken up for consideration the O.E.M. discount and credit notes amounting to Rs. 2,84,538. The break up of this figure would reveal that two items of it represent third party commission. The break up is as follows:-
OEM (Original Equipment Manufacturers) discount and credits Rs. 2,33,180 Third party commission - Cash payment Rs. 5,000 Third party commission included in OEM discount Rs. 46,358
-------------
Total Rs. 2,84,538
-------------
For the reasons which are already assigned for disallowing third party commission the ITO disallowed items (2) and (3) viz., Rs. 5,000 and Rs. 46,258. The particulars of journal voucher number, name of the party as appearing in the cheque, cheque No., date of the cheque, name of the bank, name of the person who had encashed the cheque from the bank with reference to Rs. 46,358 were all provided at page 25 of the xerox copy of the ITO's order.
25. Dealing next with the OEM credit notes for Rs. 2,33,138 the ITO by his office letter date 28-6-1985 brought to the notice of the assessee-company that M/s. Borewell Equipment Corporation Kushaiguda, denied of having received the following credit notes:
Journal Voucher No. Amount
23 12,588
54 9,660
57 9,660
60 9,660
64 11,500
The assessee-company did not give any reply to this discrepancy. The ITO issued summons for production of the account books of Borewell Equipment Corporation, Kushaiguda (BEC) and verified them. Their books did not disclose the credit notes mentioned above. As per the books of the assessee-company credit notes worth Rs. 1,04,466 were noted to have been given to M/s. Borewell Equipment Corporation. However, in the books of BEC the ITO found it having received credit notes worth Rs. 50,492. Explaining the discrepancy the BEC gave its explanation dated 18-6-1985 after duly considering the explanation of the BEC the ITO disallowed Rs. 53,038 and added it to the returned income on the ground that it is an unproved provision. Thus the ITO made the following additions totalling to Rs. 5,63,356 as per his re-assessment orders dated 4-7-1985, under the head Commission Discount a/c.
(a) Customer Commission and discount:
(i) Customer denied - bogus Rs. 96,542
(ii) parties not identified Rs. 28,569
(iii) Bogus, even though full
addresses furnished by
the company Rs. 1,24,862
-------------
Rs. 2,49,973
-------------
(b) Third party comm-
ission bogus Rs. 2,08,987
(c) OEM discount and
credit notes :
(i) Third party commi-
ssion bogus Rs. 46,358
(ii) Unproved credit
notes in favour
of BEC Rs. 53,038
(iii) Third party comm-
ission cash
payments - no
evidence under
40A(3) Rs. 5,000 Rs. 1,04,396
---------- ------------
Rs. 5,63,356
------------
26. Aggrieved against this addition under the head commission and discount account the assessee-company preferred an appeal before the learned CIT (Appeals)-II, Hyderabad. The learned CIT (Appeals) in her elaborate orders dated 26-11-1985 considered both facts and law and ultimately confirmed in her orders at para 2.30 the total disallowance of the abovesaid Rs. 5,63,356.
27. Further aggrieved against the impugned orders of the learned CIT (Appeals) the assessee-company came up in second appeal before this Tribunal and thus the total addition referred to above stands for our consideration.
28. Before taking up the legal points argued before us let us see whether the commission payments were at all true. While discussing the addition of Rs. 2,49,972.80 the ITO stated that the assessee allowed commission and discount to its various customers who had purchased air-compressors and drilling equipment from it and the discount allowed was shown in the invoice and the net amount only was taken to sales account and customers account. However, the provision of Rs. 2,49,972.80 ps. is a provision made over and above the discount and commission payable to various customers. The invoice numbers to which this provision of Rs. 2,49,972.80 ps. relates to, were all listed out and given in. Annexure-A appended to the assessment order. The names of the parties were obtaining at ledger folios 362 and 363. The full addresses of those parties were called for as per the ITO's letter dated 28-6-1985. However, the ITO in certain cases could not identify the parties and in certain other cases the full addresses of those parties could not be furnished by the assessee-company and in certain cases though the full addresses as well the amounts of commission and discount alleged to have been provided were furnished the customers denied the payment in the sworn statements given by them. If really further discount and commission was intended to be paid under those invoices there is no reason why the further intended commission and discount was not given under the very invoices. If it is the case of the assessee-company that the commission and discount under these invoices were intended to be paid to middlemen, brokers, mechanics, partners, it is reasonable to presume that those people would expect brokerage or commission as soon as the transaction is struck or got through. However, the hard fact remains in this case that whereas the provision was made on 30-6-1979 the payment was made in the years 1980, 1981 and 1982. It is reasonable to expect that the assessee-company would know the name of the person to whom this commission and discount is expected to be paid would be noted either in the said invoice or in some other record. However, no such notings were ever made. It is not known how to verify the correctness of the contention if the assessee-company comes forward with a plea that X, Y, Z have acted as brokers or commission agents with regard to the transactions evidenced by certain invoices. It is not significant in this case that none of the so-called middlemen like commission agents, brokers, mechanics, partners, Government employees or other persons who were alleged to have acted as middlemen were examined, or were proved tb be in existence. Their affidavits were never filed or Shri J.M. Minocha did not file an affidavit confirming a particular person as a middleman in the transaction evidenced by a particular invoice. In the total absence of any of such material it is highly difficult to believe either the existence of the so-called middle men or commission agents or the services rendered by them to get business to the assessee-company. As regards the middle men who connected the deal between the assessee-company and the Government department no doubt stand on a different footing but it is not the case of the assessee-company that all other middlemen like mechanics, partners in the firm, persons responsible for getting purchases for others except the Government departments, have any compunctions to reveal their names. While issuing cheques to such persons the assessee-company was not coming to connect them to any transactions struck at their instance evidenced by any particular invoices. Therefore, there is no reason for such non-Governmental people to fear their names being mentioned in the cheques given by the assessee-company towards commission and discount. In fact, many of the cheques were given in the names of such persons though the transactions were affected as per the invoices maintained by the assessee-company in the firm's names. When in fact, the cheques were given in the names of middle men who are responsible to secure business for the assessee-company from certain firms and companies etc. What made them shy away without presenting the cheques to the Banks themselves and what made them not to sign the cheques and draw the amounts themselves ? We do not find any satisfactory answers to these questions from the assessee's explanation either written or oral. There is definite evidence on record to show that the staff of the assessee-company itself had forged almost all the signatures of the third parties, in whose favour the cheques were said to have been, passed and the cheques were also encashed by the staff of the assessee-company and the amounts were said to have been given to Sri N.V. Narasimham, Administrative Manager. The evidence of Sri N.V. Narasimham was already extracted in the assessment order and the statements given by the other staff members was appended as Annexures to the reassessment order. Though full opportunity was given to the assessee-company none of them were cross-examined. Their versions went uncontradicted in any particular whatsoever. Their clear and unequivocal statements would go to prove that the so called middle men, brokers, partners of the firm, mechanics through whom the assessee-company said to have obtained business, were not at all present at the time of either preparation of the cheques or at the time of presenting the cheques to the Banks or after the money under each of those cheques were brought and given to Sri N.V. Narasimham, the Administrative Manager. It is the unequivocal assertion of Sri N.V., Narasimham and Shri J.N. Minocha that the money obtained under those cheques was used again in the business of the assessee-company. It is the later version in the assessee's stand that the money thus drawn was later paid to the middle men but no voucher at all was obtained from a single person who acted as so-called middle men. There is no reason why when the cheque was prepared in the name of the middle men it should not be given to him for encashment. When the middle man fears to reveal his name he should have expressed his fear even at the time of noting his name in the cheque itself but when once his name is noted in the cheque there is no reason why he should fear any further. In the examination dated 16-1-1987 Sri N.V. Narasimham clearly admitted that from out of the money drawn under the cheques issued in the name of certain persons were given at the instance of the directors to different persons. He made it very clear that the names of persons whose names were entered in cheques were quite different from the names of the persons to whom the payments were given. He expressed his inability to name one or two persons, even to whom such payments were made. From the state of evidence on record it is difficult to come to a conclusion that any third party commission was paid to any recognised person, the identity of the person to whom such commission was paid, muchless, the amount paid to person were established in this case. The absence of reasonable explanations explaining the situation would clearly show that the latest version by the assessee is also not correct. However, there are instances where cheques were issued in favour of the dead persons and their LRs also denied of having received any commission. From a conspectus view of the whole matter and from the bulky evidence which is on record we have no hesitation to hold that there is no evidence to prove the payment of third party commission and the conclusion of the authorities below, that in all probability the disallowed amount stands for bogus commission appears to be correct and in fact a reasonable inference which can be drawn from proved facts.
29. Now as regards commission said to have been paid who acted as middle men for securing orders for purchase of the products sold by the assessee-company to the Government depts. and some Governmental organisations, as well as, big companies like Hyderabad Asbestos Limited are concerned, the ITO had requested Financial Executives of these Governmental and semi-Governmental organisations to intimate, whether they had entered into business with the assessee-company through any middle men and whether any such middle men was given commission by the assessee-company. The Government companies like BHEL Ramachandrapuram, NFC Hyderabad, Mishra Dhatu Nigam Ltd., AP State Agro Industries, Hyderabad Asbestos Ltd., categorically denied of having made purchases through any middle men or broker from the assessee-company. It is their version that the assessee-company had directly approached them for business and they have ordered certain supplies from the assessee-company. The assessee-company was given adequate opportunity to cross-examine the financial executives of the Governmental, semi-Governmental companies. However, the assessee-company did not avail the opportunity but had stated that it does not want to cross-examine them. In view of the strong denial made by the financial executives of the Government and semi-Government companies and taking into due consideration the fact that the assessee-company did not come forward to cross-examine any of them, we have to hold that the version of the assessee that it had secured business from the Government and semi-Governmental companies through middle men is not established, muchless either the identity of the persons who acted as middle men or the payments made to any of them were proved or established.
30. Shri Ajay Gandhi, learned counsel for the assessee argued that the commission paid by the assessee-company having been in the nature of secret commission it is highly improbable to expect the identity of the broker or the commission agent through whom the business was obtained or to establish the fact of payment to him. Even in such cases, if custom of payment of secret commission was established in the type of trade or business which the assessee carries on, then such secret commission at least on estimate basis, should be allowed to the assessee. In support of this proposition the assessee relied upon the following case law:
1. Mohan Singh v. ITO [1985] 22 TTJ (Chd.) 613
2. First ITO v. French Dyes and Chemicals (I) (P.) Ltd. [1984] 10 ITD 240 (Bom.) (SB)
3. Goodlass Nerolak Paints Ltd. v. ITO [1985] 11 ITD 767 (Bom.)
31. Shri Ajay Gandhi also relied upon the following case law for the proposition that whatever percentage which was felt justifiable can be allowed towards secret commission. Reliance is placed upon the following cases also :
1. Tejaji Farasram Kharawallav. CIT [1948] 16 ITR 260 (Bom.).
2. Ciba Dyes Ltd. v. CIT [1954] 25 ITR 102 (Bom.)
3. CIT v. Coimbatore Salem Transport (P.) Ltd. [1966] 61 ITR 480 (Mad.)
4. Addl. CIT v. Moolchand Jaikishandas and Co. [1977] 108 ITR 500 (Guj.)
5. CIT v. Arumugham Chettiar [1980] 125 ITR 753 (Mad.).
32. In Tejaji Farasram Kharawalla's case (supra) the assessee was paid by Ciba India Ltd. 7.5 per cent commission and 5 per cent as compensation in lieu of contingency expenses. The Bombay High Court held that it was not necessary for him to prove that the 5 per cent commission received by him was actually spent and the same could not be taxed in his hands. Obviously the assessee in that case was himself the commission agent who had received the commission at the rate of 5 per cent. However, the fact of payment at 5 per cent was clearly established. Whether commission payment was expended or not is not held to be the concern of the Court. The case does not bear any similarity with the case on hand. It is clearly distinguishable. In this case both the payment as well as the identity of the payee were not proved. So the Bombay decision In Tejaji Farasram Kharawalla's case (supra) does not apply to the present case.
33. In Ciba Dyes Ltd. 's case (supra) also the Bombay High Court held that where commission was paid to a representative for sales promotion and a portion thereof was made exclusively for specific expenses to be incurred by the representative to canvass business, the proof of actual expenditure by the representative was not necessary for allowing the expenditure. In this case also the payment of commission was never in doubt and, whether any portion of the commission was expended towards canvassing for business, before the payment is being allowed as business expenditure, in the hands of the commission agent was the only question which came up for decision. Again the assessee before the Bombay High Court is a recipient of commission money. In the facts before us we already held that the identity of the recipient of commission was not established. So also the factum of payment of the commission money, either to the broker or to the middlemen was not established. Therefore, in our opinion Ciba Dyes Ltd. 's case (supra) does not apply to the facts of the case.
34. The next case relied upon was the Madras High Court's decision in Coimbatore Salem Transport (P.) Ltd. 's case [supra). In that case it was held that tips given by the drivers and conductors of the assessee, a transport operator, to odd people on the bus routes were allowable expenses as the expenditure was inevitable if the assessee had to carry on its business. In this case also the payment of certain amounts by the drivers and conductors while the buses were travelling on the route were never doubted. But in the case before us the factum of the payment itself was doubted and was held not established. Hence it is distinguishable.
35. Strong reliance was placed upon Gujarat High Court's decision in Moolchand Jaikishandas & Co.'s case (supra). In this case the Tribunal found it as a fact that the agreement between the assessee-firm and the three employees were genuine transactions and not sham or bogus once. It was also found that the amount of commission shown to have been paid to the three emplyees were in fact paid. The High Court found that if the amount of salary was low and the amount was part of the remuneration and not as ex gratia payment for services rendered, the amount of commission would have to be much in order to equalise the total amount and ensure fairly higher remuneration for its employees. The Tribunal also found that in the light of business undertaken by the assessee-firm namely trade of dye stuffs and colour chemicals which are being sold to textile mills it is usual practice to pay secret commission to dyeing masters, printing masters etc., in order to secure orders and the Tribunal also found that three employees of the assessee firm were securing business from out of mills for the assessee firm. In those circumstances though the Tribunal allowed commission paid to the three employees under Section 37 the High Court changed the section and allowed it under Section 36(1)(ii) of the Act. But in the case before us the facts are quite different. The identity of the payees was not established, the factum of payment of commission and discount was also not established. Further the assessee company, did not establish the practice of giving third party commission in his business which it had undertaken. In the absence of proof of those important particulars, in our opinion, the Gujarat High Court's decision cannot be applied td the facts of present case.
36. Next decision on which reliance is placed was the Madras High Court's decision in Arumugham Chettiar's case (supra). In the facts of the Madras case, the assessee was a registered firm carrying on business as Stevedoring contractors to some companies. The assessee made certain payments of commission or mamul at the Madras Port to the crew of various ships calling at the port. It claimed that such payments were inevitable in this line of business as the captain of the ship had to issue no damage-certificate before it could claim the bills from the companies. The ITO did not dispute their genuineness but treated these payments as entertainment expenditure and limited the deduction to Rs. 5,000 for assessment year 1968-69 to assessment year 1970-71 in accordance with the law then in force, but he had disallowed the entire payments in the assessment years 1971-72 and 1972-73 in accordance with the provisions then in force. This was confirmed by the AAC. The Tribunal however held that though the payments were in the nature of general business expenditure in the absence of details, the entire claim could not be allowed and it had disallowed 15 per cent of the payment and allowed the balance. The Madras High Court upheld the order of the Tribunal. The facts in our case are quite different, whereas in Madras case the payment of commission or mamul was never doubted by the ITO, whereas in our case the ITO doubted not only the payment but also the identity of the payee, hence the Madras decision does not apply to the facts of the instant case.
37. The learned counsel for the assessee heavily relied upon the Bombay Special Bench decision in FrenchDyes & Chemicals (P.) Ltd. 's case (supra). In that case the facts of the case were clearly highlighted. The assessee is a manufacturer of chemicals and dyes and it had claimed certain items of expenditure described as 'Sales Promotion Expenses'. The expenditure was stated to have been incurred for making payments to certain textile mill companies to which the products of the assessee-company were sold to ensure acceptance of goods and continuance of custom. For strategic business reasons the names of the recipients were withheld even though the assessee does not disclose the names of the persons to whom ultimately the payments are made. The assessee has been following regular system of maintaining accounts and procedure for making the payments and the regular system it had followed and the regular procedure for making payments would be evident from the vouchers, entries in books etc. Explaining the procedure, the learned counsel for the assessee pointed out before the Special Bench that the cash is withdrawn by the directors of the Company for the specific purpose of making the payment. Cash vouchers for these companies are available. Out of the amounts drawn the details of the disbursements made to the various mill companies are available and noted on the back of the receipts. Any excess amount available after the specific payments have been made or carried over and held back with the director who again withdrew money for the purpose of further payments when necessary. There is complete tally for the amounts withdrawn from the banks and the statements made to the mill employees. Details are also available of the particular amounts of the transactions with the particular mill, in respect of which the commission is paid to the employee. The rate of commission which varies from mill to mill and also depends on the occasion are also given. The payments made have, thus, clear reliance to the actual amount of purchases made by the mills which themselves are supported by the relevant invoices. As in that case, in the case before us cash vouchers were never available. As in that case the details of disbursements made were not noted at the back of the receipts or invoices. In the case before Special Bench the particulars of the amounts of the transactions with the particular mill in respect of which the commission is paid to the employee, are also available. Here in our case on the invoices or on the back of the invoices the names of the mill or at what rate the commission was paid or the particulars of brokerage paid or discount paid were never noted. Further, we have already given a finding that from the state of evidence available on record the alleged payment of commission was not proved and the authorities were justified to come to a conclusion that the said payment was bogus. However, the Special Bench of the Tribunal held from the facts of the case before them that the payment to the dying masters was true. Therefore, on facts the Special Bench decision is distinguishable from the facts on hand. Further, in the Bombay Special Bench case, the custom of secret commission in the line of business taken up by the assessee was essential to be proved. It is always for the person who assert the existence of the custom to prove it It is the case of the assessee before the lower authorities that paying secret commission on the part of businessmen selling compressors, rigs and spare-parts to the purchaser, officers, commission agents, mechanics, partners of the firms etc. in order to push up the sales of their products. In fact, it was contended by the assessee that such a practice can as well be found out from BEC and Krishna Rock Drills Pvt. Ltd. of Hyderabad. The ITO had addressed letters to those two companies. The replies received from them are fuVnished at pages 27 and 28 of departmental paper book No. 2. It appears the ITO addressed to these two companies on 28-4-1987 and in the replies both the companies, inter alia, stated that they have not paid any secret commission to their customers or middle men or to any other persons. Therefore, it. is very clear that the assessee did not prove the custom of paying secret commission to middlemen in order to push up the sales of its products in which it deals. On the other hand the department had secured certain material to disprove that no such custom existed in the line of trade or business in which the assessee is engaged. For this reason also the Bombay Special Bench decision, in our opinion, does not apply to the facts of the case.
38. Now let us take up the contention of the assessee that to the facts on hand, the Bombay High Court decision in Goodlass Nerolak Paints Ltd. 's case (supra) does not apply. In that case the assessee is a company carrying on the business of manufacture and sale of paints, varnishes, pigments and so on. In previous years relevant to assessment years 1963-64 to 1968-69 the assessee claimed deductions out of its income in respect of various sums as selling expenses. These 'selling expenses' were claimed on the footing that they were commissions paid to the employees of certain purchasers in order to promote the sales of the assessee's products. As against demand, the assessee did not furnish any details whatsoever regarding the names and addresses of the parties to whom such commissions had been paid. In respect of assessment year 1963-64 half of the commission so claimed, was allowed by the ITO, in the original assessment order. However, that order was revised by the Commissioner under Section 263. In respect of the remaining assessments the ITO disallowed the entire 'selling expenses' which were claimed as deduction by the assessee, on the ground that the assessee had not furnished any details regarding names and addresses of the parties to whom such commissions had been allegedly paid and he relied upon the provisions of Section 133 of the Act. The ITO while framing the assessments for those years also held that under the circumstances, the assessee had failed to discharge the onus of proving that the said expenditure claimed as deduction was actually made. In the sense that the payments were actually made for purposes of business of the assessee. In appeals for assessment years 1964-65 to 1967-68, the AAC conformed the order of the ITO. However, the AAC disallowed only half of the selling expenses claimed by the assessee for assessment year 1968-69 and allowed the other half as deduction. The assessee preferred appeals from the order of the Commissioner for assessment year 1963-64 and from the order of the AAC for assessment years 1964-65 to 1967-68, whereas the Department filed appeal against the order of the AAC in respect of assessment year 1968-69. The Tribunal in their orders held that these payments were nothing but secret commissions and were actually described by the assessee as such. It also held that the assessee is entitled to claim any deduction in respect of such secret commission as claimed by the assessee. The conclusion of the Tribunal appears to have been based on two grounds. In the first place the Tribunal had taken the view that such secret commission, which are paid to the employees of the customers would be allowable to be taxed in the hands of the recipients and it would be against public policy to allow the recipients to escape proper tax as this would be the necessary result if the assessees were permitted to get the deductions in respect of such commissions without disclosing the names and addresses of the persons to whom the same were alleged to have been paid. Secondly, the Tribunal took the view that in the absence of names and addresses of the recipients of commissions in question, it is not possible to hold that expenditure in question was laid out wholly and exclusively for purposes of the business of the company, which means that in the view of the Tribunal, the assessee did not discharge the burden of proving that the expenses claimed to have been paid as secret commissions were in fact paid as such. The Bombay High Court on the above facts confirmed the decision of the Tribunal and while confirming the Tribunal's decision held as follows as pages 62 and 63 of the reported decision:-
Section 37 of the said Act, inter alia, clearly provides that the expenditure claimed by way of deduction should be laid out or expended wholly and exclusively for the purposes of business or profession and we totally fail to see how it could be said that the assessee was not bound to prove that the said amounts claimed to have been paid as secret commissions were actually laid out or expended to have been paid as secret commissions before becoming entitled to deduction under Section 37. As the assessee refused to furnish the names and addresses of the parties to whom such secret commission had been paid, it was perfectly open to the Tribunal not to accept that the assessee had, in fact, paid those amounts by way of secret commissions. It was for the Tribunal to decide, as the final judge of the facts, as to whether the case of the assessee that these amounts were actually paid by way of secret commissions, should be believed or not, in the absence of the names and addresses of the persons to whom secret commissions were alleged to have been paid. In the present case, the Tribunal has disbelieved this claim of the assessee and we do not see why we should interfere or how we can interfere with that conclusion. We also refer to Section 133(4) of the said Act which clearly requires that the names and addresses of the persons to whom commissions are alleged to be paid, must be disclosed to the ITO on demand. Where such disclosure is not made and the ITO or the Tribunal disbelieves the case that such commissions were paid as claimed by the assessee, we fail to see how it can be said that the Tribunal has gone wrong.
In our opinion, the facts before the Bombay High Court in that decision, are almost quite similar to the facts before us. We feel that this distinction sought to be drawn from the facts of this case on the one hand and the Bombay High Court's decision on the other, is an exercise in futility. Section 133(4) empowers the Income-tax Officer to require the assessee to furnish a statement of the names and addresses of all persons to whom he has paid in the previous year commission, brokerage etc. amounting more than Rs. 400 together with particulars of all such payments made. Now in this case admittedly the ITO had called upon the assessee to furnish the names of the middlemen, brokers, commission agents, mechanics, partners of firms and the persons at the helm of affairs concerning purchases etc. However, the assessee no doubt furnished three categories of such people : (1) Those who denied of having received commission and the assessee refused to cross-examine them and thus accepted their statements as correct. (2) List of persons to whom commission was said to have been paid was proved to be bogus. In this category includes the names of the persons who were dead and in whose favour cheques were issued and (3) cases in which the particulars of the alleged commission agents, brokers etc. were never given. The Bombay decision clearly applies to all sales made to customers whether those customers were either private parties or Governmental agencies. The Bombay High Court did not draw a distinction between ordinary customers and Government customers or semi-Government customers. The Bombay High Court held that any secret commission paid in the business as a sort of custom should be held to be against public policy, inasmuch it would be shielding the recipients of the commission from the obligation to pay the taxes due from them and not disclosing their full names and addresses is against the specific provisions of Section 133(4) of the Income-tax Act, 1961.
39. Shri Ajay Gandhi fairly conceded that as far as the middle men commission paid in getting orders of purchases from Government companies, semi-Government companies are held to be nothing but encouraging illegal gratifications to the employees working in those Government and semi-Government companies and such commissions would be illegal and against public policy, as held by the AP High Court in CIT v. Kodandarama and Co. [1983] 144 ITR 395. In that case the rice-millers who were also dealers in paddy, rice, brokens etc. made contributions to the AP Welfare Fund, West Godavari District in return whereof, they were granted export permits by the Collector for exporting boiled rice to Kerala. The contributions paid to the AP Welfare Fund were claimed as business expenditure under Section 37(1) of the IT Act. The ITO rejected the plea of the assessee, whereas the AAC as well as the Tribunal held that since the payments were only voluntary and that since contributions were not opposed to public policy, inasmuch as the benefit which was expected by the members of the association was only because of and through the association's role in the organisation of the scheme. The contributions made by the members should be allowed as business expenditure under Section 37. The AP High Court held in order to claim deduction of a particular amount under Section 37(1) of the Act, 1961 the payment need not necessarily be mandatory or statutory; even a voluntary payment made as long as it is made in the interest of the assessee's business, is entitled to be deducted as business expenditure. However, the assessee would not be entitled to deduction of contributions or payments made in contravention of law which are opposed to public policy, being in the nature of un-lawful consideration for discharging official duty otherwise than according to law, i.e., otherwise than on merits, cannot equally be recognised. It was not open to the District Collector or any other authority for that matter, to impose the condition like the present one, linking the grant of permits to the making of a particular contribution to particular fund, society etc., nor was it open to an authority to say that whoever made such contribution would be entitled to export permits. Such a claim would definitely lead to invidious distinction between the persons who made the contribution and those who did not; the person who paid would definitely get the permit while the other may or may not. This would certainly be subversive of public interest and good administration. Contributions to such funds are opposed to public policy and should be discouraged. This was no different from paying bribes. Therefore, the payments made by the assessee to the A.P. Welfare Fund for obtaining permits for export of rice being in contravention of public policy should not be allowed as a business expenditure. In the course of delivering judgment the A.P. High Court considered in Coimbatore Salem Transport (P.) Ltd.'s case (supra) relied upon by the assessee's counsel before us. It has also considered the decision in Arumugham Chettiar's case (supra). In this regard the AP High Court observed at page 413 of their judgment as follows:-
Similarly if the first two decisions are understood as laying down the proposition that even an illegal payment is entitled to be deducted under Section 37, we must express our respectful dissent therefrom.
Thus it is clear that the two decisions of the Madras High Court, relied upon by the assessee, were dissented from by the A.P. High Court, which is binding against this Tribunal. Therefore, the A.P. High Court's decision invalidates the commission paid to Government servants or the employees in Governmental and semi-Governmental companies like Nuclear Fuel Complem, Bharath Heavy Electricals Ltd., A.P. Agro Industries Ltd. etc. The assessee also relied upon the Delhi 'C Bench Judgment passed in IAC v. Punjab Steel Works [IT Appeal No. 4377 (Delhi) of 1984 and CO. No. 46 (Delhi) of 1985 dated 31-3-1986] in which the learned members of the Tribunal had followed the Special Bench decision in French Dyes & Chemicals (I.) (P.) Ltd.'s case (supra). In that case the learned Members observed that the trade practice for payment of secret commission was established. Such secret commission was being allowed to the assessee from assessment year 1969-70 onwards and the facts relating to assessment year 1980-81 were not at all different from the facts of any of the previous years. The circumstances and the manner in which the secret commission was paid and claimed as deduction remained the same in assessment year 1980-81 as in previous assessment years. The Tribunal held adverting to the claim of the revenue that for the year under appeal (assessment year 1980-81) a fresh look may be taken at the issue The Tribunal held that the quantum of payment for the year under appeal under the head Dastoori Commission is not excessive or unreasonable, firstly, there are complete details of commission with the cash memo numbers for the entire Dasturi Commission paid. These details are available at pages 17 to 20 on the assessee's paper book. The assessee had also given details in the form of a chart showing sales to those parties whose employees were paid commission. Thus the Tribunal found that there is a link between the payment of the commission to the employees and the business transaction of the assessee. The turnover in the accounting year under appeal is virtually doubled itself than over the previous year. In those circumstances, it was held by following the Special Bench decision in French Dyes & Chemicals (I) (P.) Ltd. 's case (supra) that the payment of secret commission was not opposed to public policy and deductible in computing the total income of the assessee and considering the jump in turnover, the quantum of payment of secret commission cannot be considered as excessive and hence the Tribunal had dismissed the departmental appeal. The Special Bench decision in French Dyes & Chemicals (I) (P.) Ltd.'s case (supra) is in conflict with the Bombay High Court's decision in Goodlas Nerolac Paints Ltd. v. CIT [1982] 137 ITR 58 as well as Kodandarama & Co. 's case (supra). As the Delhi Bench decision simply following the special decision of Bombay, we hold firstly that it is distinguishable on facts. The company was incorporated on 15-9-1976 and assessment year 1978-79 is the first assessment year of the assessee-company. The learned counsel of the assessee-company Shri Ajay Gandhi in his statements very fairly admitted that during the past assessment years the assessee claimed only the commission which was conceded as per the vouchers. It had not claimed any deduction towards secret commission, whereas in the Delhi decision rendered by the Tribunal, the secret commission was being allowed at least for 10 years. Further, the custom of paying secret commission was an established fact both in the Delhi case as well as in French Dyes & Chemicals (I) (P.) Ltd'.s case [supra). However, in the case before us, the assessee failed to prove any such custom. This is the first year of assessment in which it has been claiming the secret commission as a deduction. In none of the previous years the said commission was either claimed or allowed. There is a complete chain of evidence established in both the cited cases between the commission on the one hand and the business transacted on the other. In the sale bills or invoices themselves the names of the parties to whom secret commission was paid were noted. However, that was not the case here. Hence we hold that the Delhi Bench decision cannot be applied to the facts of the case. The assessee also relied upon the Ahmedabad B-Bench decision in ITA No. 1943 (Ahmedabad)/1977-78 dated 11-6-1979 and also the Delhi 'C' Bench decision in ITA Nos. 4508, 4509 (Delhi)/72-73 dated 18-2-1975. Copies of the orders are furnished in assessee's paper book No. 2. In the Ahmedabad Tribunal's decision, the assessee was a commission agent and he used to sell dyes and chemicals. It was entitled to 5 per cent on sale of dyes and 10 per cent on sale of chemicals. The assessee effected sales in favour of M/s. D.E. Ahmedabad amounting to about Rs. 22 lakhs and it was required to pay commission at 1/2 per cent to various parties as secret commission. The name of the parties were not indicated. But all the same it was claimed that according to trade practice the payment of such commission was essential. The AAC followed in Moolchand Jaikishandas & Co. 's case (supra) and allowed the claim of the assessee. The Tribunal followed the Gujarat High Court's decision in Moolchand Jaikishandas & Co. 's case (supra) and dismissed the appeal preferred by the Department. The Delhi C-Bench (second cited) held in its order that the longstanding practice followed by the assessee in making payments of Dasturi Commission or secret commission to the employees of its customers in Gujarat was established and the said practice was also recognised by the Income-tax Department, inasmuch as, such commission was fully allowed to the assessee for assessment years 1962-63 to 1967-68. Previously such commission allowed in the earlier years ranged between 0.1 per cent and 0.8 per cent. However, in the year under appeal, the commission claimed was 0.47 per cent and 0.30 per cent respectively of the sales. The Tribunal gave a finding that the payments were reasonable. Hence they allowed the assessee's appeals. The same reasons which distinguished the facts of this case with the earlier orders hold good here also. The next decision relied upon was that of the Bombay High Court in CIT v. Mills Stores Trading Co. India (P.) Ltd. [1984] 18 Taxman 85. Copy of the said decision was provided at pages 9 to 9.2 of the second paper book filed by the assessee. In that case the Tribunal believed the case of the assessee that the payments were made and that there was a nexus between the said payments and the business of the assessee. The Bombay High Court held that the above finding of the Tribunal is the finding of fact and no referable question of law arose out of it. However, none of the facts found by the Tribunal were established from out of the facts before us. On the other hand we found from the facts before us that the identity of the persons to whom the alleged secret commission was paid was not established and also we found that the payment of secret commission to the alleged middlemen whose names were furnished is bogus. Therefore, the facts on which the decision of the Bombay High Court was rendered in Mills Stores Trading Co. India (P.) Ltd. 's case (supra) was never obtaining in the case before us and therefore, the decision does not apply. We also wish to point out that even assuming the Special Bench decision in French Dyes & Chemicals (I) (P.) Ltd. 's case (supra) and the subsequent orders of the Tribunal passed thereon were held applicable we have to hold that those decisions came in conflict with the Bombay High Court's decision in Goodlas Nerolac Paints Ltd.'s case (supra) and the A.P. High Court's decision in Kodandarama & Co.'s case (supra) and therefore, we are bound to follow the Bombay and A.P. High Court's decisions in preference to any Special Bench decision of the Tribunal. Accordingly, we hold that the payment of secret commission even for the sake of argument if it is found to be true, is to be held as a payment made against public policy and hence illegal and cannot be allowed as a lawful deduction under Section 37.
40. Assuming without admitting that the liability of the secret commission is conceded under Section 37(1) as correctly pointed out by the learned CIT(Appeals) the assessee is bound to cross any other hurdle under Section 40A(3). Most of the commission amounts were in amounts more than Rs. 2,500 and therefore, the appellant was required to file evidence in accordance with the terms of Section 40A(3) read with Rule 6DD(j). The appellant made no attempt to comply with this except to state that the nature of the transaction being what it is, no evidence of the kind required under Section 40A(3) could be filed. Looking into the wording of Section 40A(3) as well as Rule 6DD(j) and also Board's Circular No. 220 issued in 1977 one of the primary requirements of Section 40A(3) is that the identity of the payee should be established before the ITO. The section is specifically enacted in order to curb the transactions in black money. However, the appellant before us failed to comply with the requirements of the above provisions as well as the Board's circular. Hence for these reasons also the amount of secret commission is to be disallowed.
40A. However, the ITO while he took up consideration of liability of OEM credit notes of Rs. 2,33,180 disallowed Rs. 53,038 under that head. This Rs. 53,038 relates to the following voucher Nos. under which credit notes were passed on to the Borewell Equipment Corpn :-
JVNo. Amount Rs.
23 12,588
54 9,660
57 9,660
60 9,660
64 11,500
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53,038
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It is conceded that Journal voucher No. 64 for Rs. 11,500 does not pertain to Borewell Equipment Corporation, Kushaiguda and therefore, it is conceded that the amount of disallowance should be reduced from Rs. 53,038 to Rs. 41,538. Except with this modification the rest of the alleged payment of secret commission disallowed by the lower authorities is to be confirmed. That is the following disallowance is confirmed:
(a) Customers commission and discount Rs. 2,49,973
(b) Third party commission - bogus Rs. 2,08,987
(c) OEM discount and credit notes Rs. 2,92,896
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Rs. 5,51,856
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41. The next ground in this appeal is about the disallowance under Section 36(1)(ii) representing the bonus paid to directors. Section 36(1)(ii) is as follows:-
36(1). The deductions provided for in the following clauses in respect of the matters dealt with therein, in computing the income referred to in Section 28-
(a)....
(ia)....
(ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission:
A sum of Rs. 42,910 was stated to have been paid by way of bonus to all the directors except to Sri Ajay Minocha. The list of the share-holders showed that except Mrs. Poonam Jolly and M/s. Indian Pneumatic Rock Drill Pvt. Ltd. the remaining share holders are the directors of the company. M/s. Indian Pneumatic Rock Drill Pvt. Ltd. is a sister concern of the assessee-company, wherein the directors are having substantial interest. The ITO by his letter dated 19-6-1985 called upon the assessee to explain why the amount of bonus paid to the directors should not be disallowed under Section 36(1)(ii) of the IT Act. In the explanation offered by the assessee it is stated that the bonus was paid to the directors for the services rendered by them as employees of the company. They are full time directors and full time employees of the company. The bonus was paid on no other ground than that they have worked for the benefit of the company and rendered regular services as employees. The ITO did not accept the assessee-company's contention. Had the bonus not been allowed to the directors they would have received the said bonus by way of dividends and this position is clearly covered by Section 36(1)(ii) and hence Rs. 42,910 is disallowed and added to the returned income. The learned CIT(A) confirmed the disallowance. It was contended before the learned CIT that if the directors, employees did not receive the bonus they in the capacity of the directors may receive some amount as dividend which would be liable to be diminished considerably because of (a) TDS (b) amount obtained by the company as undistributed profits and (c) amounts shared by the other share holders which would also be entitled to the dividends. It was also submitted that the company may not have available profits to declare dividends. Even if profits are available the bonus would have been reasonable. On behalf of the appellant the Bombay High Court decision in Loyal Motor Service Co. Ltd. v. CIT [1946] 14 ITR 647 was cited. The learned CIT(Appeals) found that no doubt the bonus was not exactly proportionate to the share-holdings. However, it was also not in proportionate to the salaries receivable by the directors. She held that it is erroneous to say that bonus was paid on the basis of services rendered by the directors. Many of the directors appeared to be non-working directors and they had vouched for bonus because of their dominant position by virtue of their share-holding in the assessee co. Ultimately the held it was not possible to identify the bonus payment to the personal exertion of the directors. Therefore, she disallowed the bonus payment. It is not known from the impugned orders of the learned CIT(Appeals) how many directors are full time directors, direct employees and what were their salaries whether any, if so how many, were rendering services to the company. Whether the bonus given to them should not have been payable as profits or dividends if the sum was not paid as bonus to the direct empolyees was not verified and elaborately discussed. The contention of the assessee-company that had not the bonus been paid the same would have been received by the directors as dividends or profit because of (a) TDS (b) amount retained by the company as undistributed profits and (c) amounts shared by other share holders who would also be entitled for the dividends, was not effectively dealt with by any short of discussion. Therefore, we cancel this addition and send back the matter to the CIT(Appeals) to take up the issue once again and decide it according to law after meeting all the arguments advanced on behalf of the assessee and also after givingfull particulars about the share-holding of each of the directors, by stating how many of the directors are employees and what are the services they rendered to the company etc. For statistical purposes this grounds is deemed to have been allowed.
42. The next ground is with reference to disallowance of Rs. 15,530 towards printing and stationery expeses. The company claimed Rs. 44,675 towards printing and stationery expenses as against Rs. 31,635 in the last accounting year. No vouchers were available for the some of the transactions which are appearing in LF No. 244 instead of LF No. 241 as per the dates of purchase. The particulars of the cash book folio, the voucher nos., the amounts covered by each of the vouchers were all given in a table at page 29 of the xerox copy of the reassessment order of the ITO. The total of the said tabular statement is Rs. 15,530. It is the contention of the assessee that the vouchers noted in the tabular statement were misplaced by the binder at the time of converting the loose vouchers into books. The ITO had taken the amount of Rs. 15,530 as unproved expenditure. As on 30-6-1979 an amount of Rs. 3, 218 outstanding as a due to National Printers, Karbala Maidan, Secunderabad towards purchase of cash book, Journal Ledger as well as Sales Registers, TA forms, files etc. in the last week of the accounting year. The ITO felt that the whole of the stationery could not have been cons med during the last week of the accounting year. The ITO solicited explanation of the assessee by his letter dated 19-6-1985 for increase in expenditure. The assessee did not show any closing stock in the stationery purchases. The ITO held 2/3rds of the total purchase of Rs. 3,218 as closing stock. That is, he had taken Rs. 2,146 as closing stock. The learned CIT(Appeals) cancelled the disallowance of Rs. 2,146 and confirmed the addition of Rs. 15,530 agreeing with the view of the ITO that this should be added as unproved expenditure. After considering the arguments on both sides we confirm the addition of Rs. 15,530. We have already held that the alleged payment of secret commission was bogus and so it would follow that the amount of Rs. 5,51,856 should have been available with the assessee firm and this amount of Rs. 15,530 could easily come out of the said sum of Rs. 5,51,856 and therefore, we want to telescope this addition into bigger addition and therefore, we donot propose to make an extra addition under this head.
43. The last of the grounds which remains for our determination is the deficit cash balance. The various amounts found as deficit cash balance on different dates were all listed out at page 32 of the xerox copy of the re-assessment order of the ITO. It was stated by the ITO that on 18-11-1978, 26-12-1978 and 2-3-1979 the assessee-company deposited money in bank though there was no cash in the cash book. The peak of the cash deficit is found on 26-12-1979 and the amount of the deficit was Rs. 35,567. This was added to the returned income. Before the learned CIT(Appeals) it was argued that the Directors usually take considerable amounts towards advances for expenses from time to time and it would have been possible that some of them might have made some payments to meet the expenses of the company and that the advances taken by the directors would cover the deficit cash balance and the credit should be given to such advances. The learned CIT (Appeals) did not accept this argument. The directors were said to have drawn several amounts towards specific expenses incurred by them. Had they returned the funds available with them to the company nothing would have been simpler than to pass appropriate entries in the books. As an alternative argument it is argued that if the assessee-company's commission expenses are bogus, then part of the bogus expenses should be admitted as available to square up the deficit cash balance. It seems that the learned CIT (Appeals) asked the assessee's counsel to admit specifically whether the deficit cash balances were actually made out of the bogus commission payments. However, nothing was conceded by the learned counsel for the assessee-company. Therefore, the learned Commissioner of Income-tax (Appeals) did not entertain the alternative contention. However, we held that the commission payments were never proved and were bogus also. Therefore, a vast sum of Rs. 5,51,856 was available with the assessee and the deficit cash balance would have been easily met from out of the bogus commission payments and therefore, no separate addition towards bogus commission payment is felt necessary by us and hence in our opinion no separate addition need be made under the head 'deficit cash balance'. The said addition can as well be telescoped into a bigger addition made towards unproved and bogus commission payments of Rs. 5,51,861.
44. Before parting with this case we cannot refrain ourselves from paying rich tributes to the excellent investigation made by Sri H. Sinivasulu, Income-tax Officer, who conducted the assessment proceedings and passed Assessment Orders.
45. In the result the appeal is partly allowed.