Income Tax Appellate Tribunal - Madras
Trichy Everest Automobiles And ... vs Assistant Commissioner Of Income-Tax on 31 July, 2000
Equivalent citations: [2003]85ITD387(MAD)
ORDER
N.D. Raghavan, Judicial Member
1. These are appeals of the assessee challenging the orders of the CIT(A) as erroneous. Facts of the cases, issues involved, rival submissions thereon as well as the assessee herein happening to be one and the same, these proceedings are consolidated together for the sake of convenience by this common order.
2. The short delay of four days in filing the appeal for the assessment year 1988-89 is condoned after considering the reasons furnished by the assessee and after hearing the learned Representative for the Revenue.
3.1 The facts of the case as gathered from the record are briefly these: The assessee is a closely held company which carried on the business of distribution of liquor agency throughout the State of Tamil Nadu. In the income-tax assessments of the assessee for the assessment years 1985-86, 1986-87, 1987-88 and 1988-89 the assessee claimed to have paid commission to the tune of Rs. 3,00,000, Rs. 56,96,250, Rs. 83,21,250 and Rs. 1,10,60,000 respectively to various parties. Detailed enquiries were made in respect of the genuineness of the claim as well as the purported payments. The assessee had claimed that the payments were made to 217 Association of Persons for sales promotion services rendered to the assessee for promoting sales of liquor products of M/s. Shaw Wallace Ltd. Investigation and enquiries revealed that no such sales promotion work was done by any of the AOPs and none was in a position to render the services either. The AOPs were constituted with the members of the family of Sri A.C. Muthiah or the concerns belonging to and controlled by his group. The entire commission payments claimed as expenditure were disallowed in the income-tax assessments and were confirmed by the Appellate Commissioner. For the assessment years 1987-88 and 1988-89 the Tribunal by its order dated 16-4-1993 set aside the entire matter to the Assessing Officer on assessee's plea that it intended to file settlement petitions before the Settlement Commission. The Assessing Officer noticed that the assessee had itself stated before the Settlement Commission that it apprehended that it was not possible for it to prove the expenditure to the full satisfaction of the Revenue and also that the investigation would create hardships for the agents requiring extensive investigation and interrogation. The assessee accordingly offered for disallowance of an amount equal to 40% of the Commission payments claimed to have been made to the 217 AOPs. Taking an overall view of the matter, the Settlement Commission held that the assessee was entitled to a deduction of 25% of the sales promotion expenditure claimed in this regard and the balance amount was to be disallowed in the computation of total income. Thus 75% of the amount claimed was disallowed in the corresponding income-tax assessments as payments made for non-business considerations. The Assessing Officer held that the payments fell within the ambit of the provisions of the Gift-tax Act and accordingly brought the same to gift-tax.
3.2 On appeal the Appellate Commissioner held that: The assessee tried to build up and concocted a case of huge commission payments made to dubious entities styled as AOPs, the constitution of which itself was suggestive. The assessee not only failed to establish the genuineness of the expenditure claimed but even categorically conceded that the amounts had been shown to have been paid for non-business purposes. The Assessing Officer was justified in stating that the assessee merely sought to siphon off funds by way of payments shown to have been made to the dubious entities of AOPs which never did any business after the purpose for which they were brought into existence was over. There is nothing in the Act which prohibits the Assessing Officer from seeking to tax the amounts as gifts in the light of the fact that the 217 AOPs were entirely controlled by the same group which also happens to control the assessee-company. The transactions with the AOPs having been found, established, proved and admitted as sham, there was no reason why the Assessing Officer should be held to be precluded from concluding that gift-tax proceedings were required to be initiated under Section 16 following the ratio decidendi in CGT v. Elixir Plantations (P.) Ltd. [1995] 214 ITR 243' (Ker.). Aggrieved, the assessee is in second appeal before this Tribunal.
4. The learned counsel for the assessee submitted that : The Appellate Commissioner should have given reasonable opportunity to the assessee to represent the case. Even though the case was posted on 22-8-1995 it was by oversight that the date was failed to be noted by the authorised representative. When written submissions were furnished and appeal was heard in the presence of the authorised representative on two occasions, the Appellate Commissioner should have been judicious enough to grant atleast another opportunity to represent the matter. The Appellate Commissioner has reiterated what the assessee's representative has submitted but has not countered them in a judicious way. A reading of the order of the Appellate Commissioner would reveal that he has already made up his mind to uphold the proceedings of gift-tax since in all paragraphs of his order he has stated that he had already held that disallowance of expenditure under the I.T. Act was the one initiated by him and this will automatically attract gift-tax. Disallowance of expenditure in the income-tax proceedings would not automatically attract gift-tax since for attracting gift-tax for any transaction there should be a willing donor and a donee accepting the gift. When any gift is given, no person will pay income-tax on the amount of gift received. Since the AOPs have filed their returns and have paid the tax on the respective income and the same having been accepted by the Revenue, there cannot be any room for levy of gift-tax on the assessee. The assessee-company has expended the amount for the purpose of business to various AOPs but it was only on technical ground that a portion of the said expenditure was disallowed. Such disallowance will not automatically attract gift-tax. It can very well be seen from the records that the assessee as well as the department has accepted the services rendered by various AOPs but it was only on some extraneous ground that a portion of the expenditure was disallowed which cannot attract gift-tax. For a gift to take place there must be an intention on the part of the donor to make a gift without consideration and the donee to accept the gift for natural love and affection. When both the categories are absent, the question of gift become infructuous. Since the liability met is in accordance with contractual obligation, the question of gift can never arise. As per the facts and circumstances of the case it is also wrong to state that the AOPs were only relatives. Hence the orders of the Appellate Commissioner are contrary to law and facts of the case and may therefore be set aside and justice rendered.
5. On the other hand, the learned Representative for the Revenue countered, to say in brief, by defending the orders of the authorities below and by also submitting that : Once it has been held that the alleged payments of commission are not for any commercial consideration, then such payments made for extra commercial consideration has to be considered as gift unless the assessee proves that such payments were made for some other consideration. The onus is on the assessee to prove why excess consideration was paid and for what purpose. It should be borne in mind that there appears to be some nexus between the so called 217 AOPs and the management of the assessee-company. Hence the amounts paid in excess of commercial necessity is only a gift as the onus has not been discharged. The assessee's claim that the order of the Settlement Commission was the basis of or initiating gift-tax proceedings is not correct since the notice for reopening gift-tax assessment was served earlier to the order of the Settlement Commission. Therefore, the orders of the authorities below may kindly be upheld.
6.1 Rival submissions heard and relevant orders read including the case laws relied upon by the parties as well as the relevant paper books filed before us. After a careful analysis of the facts and circumstances of the instant case over the issue in question for a long time with due deliberations between us, we are of the considered opinion that the stand of the assessee has substantial force, in spite of the strenuous and appreciable efforts put forth by the learned Representative for the Revenue, for the reasons following.
6.2 The Assessing Officer on the basis of investigations done disallowed the entire commission payment claimed as expenditure in the income-tax assessment orders. After the Appellate Commissioner confirmed such assessments in this regard, the assessee appealed before the Tribunal but got the assessments set aside by the Tribunal to the Assessing Officer himself and preferred application before the Settlement Commission. The Settlement Commission has observed that the company appointed sub-agents for carrying out the activities and paid commission payments by cheque to these agents for carrying out sales promotion activities. The applicant apprehended that it not only could not prove the expenditure to the full satisfaction of the income-tax authorities but the investigation will also create hardships for these agents requiring extensive investigation and interrogation. The assessee therefore offered for disallowance 40% of the commission payments claimed as expenditure. The Settlement Commission has further observed that when further questioned about the payment of commission, the learned counsel for the assessee was fair enough to concede that a sizable portion of the commission payments could be treated as paid for non-business considerations. Taking an overall view of the matter, the Commission held that the assessee would be entitled to a deduction of 25% of the expenditure claimed and the balance amount out of the expenditure claimed as sales promotion would be disallowed in the computation of income.
6.3 It is, therefore, clear from the order of the Settlement Commission extracted in the assessment order that the company appointed sub-agents for carrying out certain activities. It is also not disputed that the company paid commission by cheque to those agents for carrying out such sales promotion activities. The only apprehension of the assessee was that it would be difficult to prove the expenditure to the full satisfaction of the income-tax authorities as the investigation would also create hardships for those agents requiring extensive investigation and interrogation. Therefore, under these facts and circumstances it is wrong to conclude that payments were not made and further that the payments were made not for services rendered. It is also clear that only to purchase peace the assessee has settled the matter before the Settlement Commission by agreeing for certain percentage to be allowed and for the rest to be disallowed. The assessee has also replied the Assessing Officer by its letter dated 20-3-1995 that no gift was involved from the payment of commission to AOPs, expenses disallowed could not be presumed to constitute gift, payments were made for services rendered, such payments made were subjected to income-tax, no voluntary transfer of any asset has happened, payments were made for consideration of services rendered and the Department having levied income-tax on AOPs cannot treat the payments as gift. Not only that these were evidences, but also the assessee has pointed out that it has approached the Settlement Commission praying also for a direction not to levy gift-tax on the assessee.
6.4 The Assessing Officer has observed that payments made for non-business purposes attract liability to gift-tax. It is not known as to how it would attract gift-tax. If the payments would have been made for non-business purposes, then naturally it has to be disallowed under the Income-tax Act which has been rightly done. But that cannot form the basis of arriving at a finding that it would attract liability to gift-tax. It is not known how it has been arrived at by the Assessing Officer that the payments were made for no consideration at all stating that no services were rendered by any of the AOPs warranting payments to them as remuneration. Just because the payments are big, it cannot be treated as gift rendering the assessee liable for gift-tax. It is also further not known as to how the payments which were subjected to tax in the hands of recipients can be the reason to attract the provisions of Gift-tax Act.
6.5 It is seen that the assessee has filed its written submissions before the Appellate Commissioner and it was sent to the Assessing Officer by the CIT(A) as well as the comments of the Assessing Officer being sent by the CIT(A) to the assessee. Just because the assessee has not responded to the comments of the Assessing Officer, it cannot be said that the assessee's case is weak and that to have it as the basis to conclude, as it has been done by the Appellate Commissioner to sustain the assessment order. The fact of the matter is that when the Appellate Commissioner has got the written submissions of the assessee as well as the comments of the Assessing Officer no more than these are required for the first appellate authority to take a decision after analysing these submissions and comments without waiting for any more response from the assessee to the comments of the Assessing Officer by sending the letter to the assessee.
6.6 The Appellate Commissioner has given a finding that the fact remains that the assessee tried to build up and concocted a case of huge commission payments made to dubious entities styled as AOPs and the number of AOPs being startling, what to talk of the constitution of the AOPs, which itself was suggestive. We may say that we are startled as to how the Appellate Commissioner has given such finding which, in our opinion, has no proper basis, material or support to arrive at such a finding and it clearly appears to us that the authorities below have proceeded on conjectures and surmises, which should not have been done. If the Department would be startled to note the hugeness of the amount involved and by it per se would like to conclude that atleast deemed gift must be involved, why not at the same time the other side of the picture be thought as to how it could be said that the issue of gift would arise in the case of Association of Persons of such large number of members.
6.7 The Appellate Commissioner has further mentioned that all aspects of the matter were discussed and dealt with by him in detail in the appellate orders in income-tax appeals for the assessment years 1987-88 and 1988-89. In our opinion, what matters if all these aspects were discussed and dealt with in income-tax proceedings and what is the relevancy of those for giving a finding in the gift-tax proceedings. Treatment for income-tax purposes is not a relevant one under the Gift-tax Act. In fact, it cannot be accepted that once a transaction has been treated as falling for consideration under the Income-tax Act it should also be treated as such for the purpose of Gift-tax Act. If the transaction comes within the mischief of definition of "gift" under Section 2(xii) it would be subject to tax irrespective of the fact that it might be subject to tax under any other provisions of the direct tax laws treating the transaction as something other than gift. Our view is supported by the decision in the case of ICI (India) (P.) Ltd. v. GTO [1977] 110ITR 88 (Cal.).
6.8 The Appellate Commissioner while on the one hand stated in his order that the assessee itself had sought to withdraw the appeals against the appellate orders, but on the other hand simultaneously stated that the assessee has specifically pleaded before the Tribunal that the proceedings be set aside to the file of the Assessing Officer to enable itself to move the Settlement Commission clearly to avoid the stringent ramifications of penalty and prosecution. In our view of the matter, the sentence would be self-explanatory to reflect that it is contradicting. The reason is that the assessee did not give up its claim before the Tribunal, but only has submitted that the matter at best be set aside to the file of the Assessing Officer for enabling the assessee to move before the Settlement Commission. The assessee has nowhere sought to withdraw the appeals and had it been so, it would not have prayed for setting aside the matter to the file of the Assessing Officer. The aim of the assessee as would be clearly seen is to avoid stringent ramifications of penalty and prosecution as stated in the order impugned itself and that is why to purchase peace the matter was prayed to be set aside to the Assessing Officer and the assessee went before the Settlement Commission for settling the matter amicably in order that a compromise is arrived at between the assessee and the Department under the seal of the Commission.
6.9 Under the aforesaid circumstances, we are unable to be convinced as to how the Appellate Commissioner can come to a conclusion that there can be no doubt that the assessee not only failed to establish genuineness of the expenditure claimed but even conceded and most categorically that the subject amount had been shown to have been paid as commission for non-business purposes. Even so, how it could be found that the amount spent for non-business purposes could be viewed as attracting gift and taxed under the Gift-tax Act.
6.10 The Appellate Commissioner, seeing in the light as he did, came to the wrong view that it cannot be denied that the Assessing Officer was perfectly justified and correct in stating that the assessee merely sought to siphon of funds by way of payments shown to have been made to 217 dubious entities which never did any business after the purpose for which these AOPs were brought into existence was over. If that is so, that is why it was disallowed in toto in the assessment order under the income-tax proceedings. But it is not known as to how just because of that it could be brought under the provisions of the Gift-tax Act.
6.11 The Appellate Commissioner further more continues to hold that the concocted device of genuineness apart, there was nothing in the Act which prohibits the Assessing Officer from seeking to tax the subject amount as gift seen especially in the light of the fact that the 217 AOPs were entirely controlled by the same group which also happens to control the assessee-company and the other SICA company which was the chief beneficiary of the arrangement in this regard. Assuming this to be correct, could it form the basis for deeming it as a gift to attract tax under the provisions of the Gift-tax Act is the question that ponders over in our mind, and when seen judiciously the answer is in the negative.
6.12 The Appellate Commissioner further goes on to state that the fact thus remains that the transactions with AOPs having been found established, proved and admitted as sham, there was no reason as to why the Assessing Officer should be held to be precluded from concluding that gift-tax proceedings were required to be initiated under Section 16. It is not known how the conclusion has been arrived at that the transaction with the AOPs found, established, proved and admitted as sham. Nowhere the Settlement Commission too says so that the transactions are sham. Even assuming it to be sham, how that could be deemed to cause it as gift to attract gift-tax under the relevant Act? If at all, disallowance could be made under the Income-tax Act which has been already done and thereafter the Settlement Commission has also settled the matter when the assessee desired to purchase peace, so that the matter is put to an end to at some point or stage which has happened.
6.13 The Assessing Officer viewed in his assessment order, which has been confirmed by the Appellate Commissioner, that as these payments get excluded from the computation of business income they have to be treated as gift made voluntarily without any consideration and also that the payments were not small to treat as sundry expenditure disallowed in the income-tax assessment and further that the payments were subjected to tax in the hands of the recipient, cannot all be valid reasons for warranting operation of Gift-tax Act. In our opinion, these comments of the Assessing Officer have been influenced by the magnitude of the amount involved and not by any legal principles. In our considered view, whatever be the quantum of the amount, whether big or small, what is involved is only principles of law which has to be given due weightage irrespective of the quantum of the amount. Such principles must apply equally and equitably, whether the amount involved is small or big. Therefore, the quantum of the amount cannot destroy the basic structure of the principles of law involved. It can also be seen from the record before us that the Settlement Commission has taken up the miscellaneous petition of the assessee filed under Section 154 of the Income-tax Act and has passed orders, in which paragraph 11 at page 8 is worthy of being mentioned. The Settlement Commission has also dealt with the issue of gift-tax at length at para 14 at page 14 in the concluding paragraph. It has held that it is, therefore, wrong to infer from the Commission's order that the said disallowance of the commission payment was made solely on the ground that the expenditure was wholly gratuitous and unconnected with the purposes of business and that such a clarification is well within the powers of the Commission and would not amount to review of its earlier order as also contended by the Representative for the Revenue before it. Therefore, the assessee has pleaded that having been totally clarified by the Settlement Commission's order aforesaid as not to proceed for the gift-tax, the gift-tax proceedings initiated by the Assessing Officer with a view to avoid limitation is liable to be quashed. We are unable to find any flaw in such stand being taken up by the assessee.
6.14 The Revenue before us has supported the order of the CIT(A) relying upon the judgment in the case of CGT v. Elixir Plantation (P.) Ltd. (supra). In that case the transaction was held as sham and therefore the difference was sought to be assessed to gift-tax unlike in the instant case where the Settlement Commission has not given its finding that the transactions are sham. In the instant case, since the assessee was not able to produce clinching evidence, a portion of the payment of commission was sought to be disallowed. Therefore, the rendering of service being for the purpose of business, the question of gift-tax cannot arise.
6.15 In the case of CIT v. Krishan Bans Bahadur [1974] 96 ITR 714 (Delhi) it was held that though it is the donor's intention and not the donee's which determines the nature of the gift, the donee's attitude may shed some light which may help in understanding the donor's intention and the precise character of the gift. In the instant case, the alleged donor has given commission only for business purposes and the alleged donee has not accepted it as gift but as a contracting party and after meeting certain expenditure has filed a return of income treating the commission as income of the said years. Return of income has also been filed and the assessment has also been completed in the hands of the so called donees. Therefore, the question of gift as has been viewed by the Department cannot be said to have arisen in the instant case.
6.16 In the case of K.V. Iyer v. CIT [1995] 215 ITR 4611 (Mad.) it has been held that if determination as to the validity or otherwise of the gift is permitted in collateral proceedings and in one proceeding it is held to be valid and in another invalid, the sufferer will be the assessee. Relying on this decision, the assessee has highlighted that so much so in the instant case too that though the assessee approached the Settlement Commission only for the purpose of settling the affairs still the assessee has been penalised with gift-tax proceedings also. We are unable to be dissatisfied with such stand taken by the assessee before us.
6.17 In the decision in the case of Keshub Mahendra v. CGT [1968] 70 ITR 1 (Bom.) it has been held that in construing commercial contracts of the kind, the tax authorities and the Tribunal must have regard to normal business considerations, and look at the substance of commercial transactions rather than the particular form they assume in a given case. They must not assume that every large transaction is a good potential source of revenue and then proceed to determine how much tax can be gathered from it, otherwise they are bound to fall into error and also make business impossible. In the instant case, in our considered opinion the authorities below particularly the Assessing Officer has exactly done what should not have been done according to the ratio decidendi stated above. For instance, it may be seen from the assessment order in the concluding paragraph the observation that the payments are not small to treat them as sundry expenses disallowed in the income-tax assessment.
6.18 In the instant case, the short issue before the Tribunal is relating to taxability of 75% of the commission disallowed in the hands of the assessee treated as gift. In our view disallowance made in the income-tax proceedings cannot be treated as subject of gift under the Gift-tax Act. If that stand of the Revenue is accepted, then in every income-tax appeal what has been disallowed by the Department has to be only treated as gift and proceeded to compute the tax under the Gift-tax Act for recovery thereof which would then become absurd. It is stated by the Revenue before us that once it has been held that such a payment is not for any commercial consideration, then the payment that has been made for extra commercial consideration has to be considered as gift unless the assessee proves that such payment was paid for some other consideration. We are unable to understand as to what is the basis of this stand taken by the Department. Who has to decide commercial consideration or extra commercial consideration, whether it is for the assessee or for Revenue to decide such case, and in our considered opinion it is not the Department but only the' assessee who only knows where his shoe pinches to determine such niceties involved in the business. It is highlighted by the Revenue that the onus is always on the assessee to prove why excess consideration was paid and for what purpose, and further that the amount paid in excess of the commercial necessity is only a gift as the onus has not been discharged. We may state here that gift must be a transfer without consideration in money or money's worth and that the onus is on the Revenue to establish lack of consideration. Under Section 3 of the Gift-tax Act, gift-tax can be levied only if there is a gift as defined under the Act. Under Section 2(xii) of the Act one of the essential conditions for a gift is that the transfer must be without consideration in money or money's worth and further that the burden of proving that a particular transfer is gift is on the Revenue by showing that the transfer was without consideration. Our view is fortified by the decision in the case of CGT v. J.N. Marshal[1979] 120 ITR 613' (Bom.).
6.19 'Gift' has been defined under Section 2(xii) of the Gift-tax Act as meaning transfer by one person to another of any movable or immovable property made voluntarily or without consideration in money or money's worth and includes transfer or conversion of any property referred to in Section 4 deemed to be gift under that section. In our considered opinion, the facts on record before us in the instant case over the issue in adjudication does not reveal to us, after a careful analysis of the rival submissions made before us by both the parties, that transfer has been made voluntarily but that it has been done intentionally for quid pro quo, i.e., made for professional services rendered. It is another matter as to how far such payments have been allowed or disallowed, and just because some payments have been disallowed by the Department or settled by the Settlement Commission it cannot be said that that amount under disallowance could be brought under the provisions of the Gift-tax Act to treat it as deemed gift for attracting gift-tax liability. Such transfer made also must be without consideration in money or money's worth, and in the instant case it is not without. We are also at the same time unable to find that the transaction involved in the instant case falls under the inclusive definition given under the aforesaid section to attract transfer or conversion of any property referred to in Section 4 for deeming it to be a gift under that section. It is also a well settled proposition of law that mere making of debit and credit entries in donor's books does not constitute valid gift besides that mere entries in account books of the firm are not sufficient to constitute gift, and further that gift by book entries is valid if there is evidence to show that gift was made by the donor and accepted by the donee and was acted upon by both of them unlike in the instant case.
6.20 Thus on the totality of the facts and the entirety of the circumstances of the instant case involved over the issue in adjudication after a careful analysis of the point for determination in the light of the rival stand taken by both the parties before us, though we must here appreciate the strenuous efforts taken by the learned representatives on both sides particularly of the Revenue, as well as in the background of several case laws cited and relied upon and a long and due deliberation between us, we ultimately come to the final conclusion that interest of justice warrants sustenance of the stand of the assessee taken before us. We, therefore, grant relief to the assessee as prayed for before us by quashing the orders impugned before us in all these proceedings.
7. In the result, the appeals of the assessee are allowed hereby.