Income Tax Appellate Tribunal - Ahmedabad
Income Tax Officer vs Mugatlal B And Sons on 25 July, 2005
Equivalent citations: (2006)100TTJ(AHD)1042
ORDER
R.C. Sharma, A.M.
1. ITA Nos. 2491 & 2493/Ahd/2002 (Revenue's appeal for asst yrs. 1994-95 & 1995-96) :
ITA No. 2491/Ahd/2002 :The following grounds have been raised by the Revenue :
1. On the facts and in the circumstances of the case and in law, the CIT.(A)-IV has erred in directing to delete the addition made on account of secret commission payment.
1.1 On the facts and in the circumstances of the case and in law, the learned CIT(A)-IV, Surat, has erred in ignoring the fact that the assessee could not identify the persons to whom the commission has been paid, including the two persons in whose case confirmatory letters were submitted.
1.2 On the facts and in the circumstances of the case and in law, the learned CIT(A)-IV, Surat, has erred in ignoring the fact that within the ambit of Explanation to Section 37(1), the payment cannot be treated as allowable business expenditure merely on the ground of commercial expediency. Evidence regarding the genuineness of the payment has to be furnished.ITA No. 2493/Ahd/2002 :
1. On the facts and in the circumstances of the case and in law, the CIT(A)-IV has erred in directing to delete the addition made on account of secret commission payment.
1.1 On the facts and in the circumstances of the case and in law, the learned CIT(A)-IV, Surat, has erred in ignoring the fact that the assessee could not identify the persons to whom the commission has been paid, including the two persons in whose case confirmatory letters were submitted.
1.2 On the facts and in the circumstances of the case and in law, the learned CIT(A)-IV, Surat, has erred, in ignoring the fact that within the ambit of Explanation to Section 37(1), the payment cannot be treated as allowable business expenditure merely on the ground of commercial expediency. Evidence regarding the genuineness of the payment, has to be furnished.
2. The common issue in both the appeals filed by Revenue relate to the disallowance of expenditure incurred on payment of secret commission for asst. yrs. 1994-95 & 1995-96.
2.1 The brief facts of the case are that the assessee is carrying on business of trading in galvanized black pipes and pipe fittings. It is also engaged in the business of manufacturing of art silk and has also got engineering division and for each division separate books of accounts are maintained. The matter in question is basically pertaining to the assessee's trading activity of galvanized black pipe and pipe fittings. While finalizing the assessment, it was observed by the AO that the assessee has claimed a sum of Rs. 2,39,550 and Rs. 2,02,287 (gross of Rs. 2,77,007) as commission expenses for the asst. yrs. 1994-95 and 1995-96 respectively.
These expenses are the net amount after deducting the receipt of commission from M/s Tata Iron & Steel Company during the year under consideration. During the course of assessment proceedings, the AO desired the assessee to prove this expense. The assessee in reply has submitted that they have been making sales to industrial concern and dyeing houses and certain commission is to be paid to the staff and the plumbers to get the orders. It was also stated that payment of commission is as per practice prevailing in the business and it was paid fully and exclusively for boosting of sales. It was also submitted by the assessee to the AO that the release of said commission is paid to the plumbers, employees of the customers to keep them on right side, to ensure the flow of orders, passing of goods, release of payments and smooth running of business. These payments are fully vouched by making debit voucher by the accountant of the assessee and countersigned by the partner in the assessees firm giving the details of payment etc. In view of the above, it was contended by the assessee that this expense is allowable under Section 37 of the Act. The AO required the assessee to give names and addresses of the parties to whom these commissions were paid. It was submitted by the assessee that as the commission is paid with respect to the sales effected through these plumbers and staff of the purchaser and such commissions were of the secret nature by giving the names of those parties will harm the business interest of the assessee-firm. It was also submitted by them that they however, got complete details of bill number, the amount in question in bill and the payments made. It was also contended by them that as the payments are being made as per the normal business practice in their line of business the circumstantial evidences and other corroborative evidences should be accepted by the AO. In this regard, the assessee has also relied upon the decision of Bombay High Court in CIT v. Goodlas Nerolac Paints Ltd. and Gujarat High Court in Dr. G.G. Joshi v. CIT . As per this High Court decision, the assessee is to establish the following three conditions :
(i) Establish the practice prevailing in that line of business for making such payments.
(ii) To adduce satisfactory evidence to establish the payments; and
(iii) To satisfy the authorities that the payments were made for the purpose of business.
The AO rejected this and was of the opinion that the ratios of the above condition as laid down by the High Court decisions are not fully satisfied as the assessee has not filed any evidence that the payment has actually been made. As the payment of vouchers did not contain the signatures of the recipients. In view of this, the AO disallowed a sum of Rs. 2,63,284 and Rs. 2,77,007 in asst. yrs. 1994-95 and 1995-96 respectively under this head.
2.2 In the first round of appeal, the CIT(A) confirmed the action of the AO and the assessee filed appeal in the Tribunal which had allowed, assessee's appeal for statistical purposes and matter was restored back to the CIT(A) for deciding afresh. In the second round of appeal before the CIT(A), the assessee filed detailed paper book which was forwarded to the AO on 12th Feb., 2002 to give his comments/report. The AO submitted his remand report vide letter dt. 11th Feb., 2002 on which the assessee further submitted his comments to this report of the AO vide his letter dt. 23rd June, 2002. During the course of hearing before CIT(A), the AO Sri N.K. Singhal also attended on 7th May, 2002.
2.3 The contentions as raised by the assessee in his written submissions dt. 7th Feb., 2002 are summarized as below :
(i) It is usual practice in their line of business to give commission to the employees of the customers and plumbers etc. to procure their business, for passing of the goods, expedient receipt of payment and further flow of the orders.
(ii) These facts are supported by the affidavits filed by the other persons in their line of business. Giving a commission is a normal business practice as supported by (a) confirmations filed by the persons in their line of business (b) confirmations filed by the factory owner (c) confirmations filed by plumbers etc. (d) confirmations filed by the people in the same line in the purchase Department.
(iii) Giving commission to the concerned individuals has resulted in increase of their business turnover to 2-1/2 times since 1990-91 from a turnover of Rs. 1.85 crores to asst. yr. 1995-96, a turnover of Rs. 4.59 crores.
(iv) The net commission paid has not exceeded, it is in the range of 0.6 to 0.65 per cent sales.
(v) The vouchers giving complete details of payment, bill number etc. are prepared relating each and every payment to the corresponding sales. These vouchers contain complete details prepared by the assessee's accountant duly countersigned by the partners of the firm, The said voucher contains the following details :
(i) Date of bill,
(ii) Bill number
(iii) Name of the party
(iv) Sale amount
(v) Commission paid on it
(vi) Percentage of commission paid and
(vii) The date of payment of commission
(vi) As the commission paid is confidential in nature of secret commission, the same obviously does not appear the signature of the recipients. However, other corroborative and circumstantial evidential proof the genuineness of this transaction.
(vii) The conditions as laid down by Gujarat High Court in the case of Dr. G.G. Joshi v. CIT (supra) as under are fully satisfied :
(a) Establish the practice prevailing in that line of business for making such payments,
(b) To adduce satisfactory evidence to establish the payments and
(c) To satisfy the authorities that the payments were made for the purpose of business.
(viii) The conditions as laid down by Hon'ble Bombay High Court in the case of CIT v. Sigwa Paints Ltd. reported at (1992) 103 CTR (Born) 305--Ed. are fully satisfied in the case of the assessee. The Hon'ble Bombay High Court held as under :
In the instant case, there was a complete tally between the commission paid and the extent of business done by the mill company. Details were also available of the exact transactions in respect of which the assessee had to pay the secret commission. The assessee had given a complete list showing the turnover and the amount of secret commission paid from year to year. The percentage of secret commission was minimal. The full details of payment on the above basis in respect of several parties were available, They were correlated to the transactions which the assessee had with those persons and the period during which the transactions were entered into. The only missing item was stated to be the names of the particular parties to whom the payments were made. This, the Tribunal held could not be supplied without detriment to the business of the assessee in the very nature of thing. The Tribunal was justified in holding that the secret commission amounting to Rs. 1,41,346 paid by the assessee was an allowable deduction. No question of law arose from its order.
The assessee further relied upon the various other decisions such as Motiwala v. ITO in ITA No. 4898/Bom/85, (2) A.A. Pathan v. Asstt CIT .
2.4 The AO in his report dt. 19th Feb., 2002 and 9th March, 2002 has submitted that the assessee has submitted additional evidences during the appellate proceedings which were not submitted at the time of assessment proceedings. Hence should not be entertained. In this regard, it was submitted by the assessee that these details were asked by the AO for the first time on 27th Nov., 1997 in asst. yr. 1995-96 and the AO completed the assessment on the very next day on 28th Nov., 1997. It was also submitted by them that in the earlier years when this commission was being claimed since 1989-90 no such disallowance was made and it was for the first time that the AO had disallowed it for asst. yrs. 1994-95 and 1995-96. With regard to additional evidence submitted, the AO was aggrieved. The assessee submitted that these are not in violation of Rule 46A, With respect to Rule 46A, it was submitted that the assessee has intended to produce the evidence before the appellate authority whether oral or documents, other than evidence produced by him during the course of proceedings before the AO, except in the circumstances set out therein. Rule 46A does not deal with the powers of the CIT(A) to make further enquiry or to direct the AO to make further enquiry and to report the results of the same to him.
The remand report of the AO was as follows :
Disallowance in respect of secret commission :
The assessee has submitted that secret commission of Rs. 2,63,284 has been paid by him on a net sales of Rs. 4,21,20,581, which comes to 0.6 per cent, Shri Vinodbhai, partner of the firm along with Shri Tamakuwala, its CA attended before the undersigned on 7th March, 2002, they produced the sale registers and sale bills and other books of account. These were verified and test checked with the details of sales shown by the assessee on which commission has been claimed as paid. The assessee also has submitted copies of debit vouchers prepared for payment of commission. These vouchers contain the names of the persons to whom the commission has been paid. The vouchers also contain the details of sales on which the said commission has been paid. All these transactions have been summarised by the assessee in the enclosure page Nos. 6 to 10, submitted by him. First of all. I would like to submit that the perusal of these details reveals that the assessee has paid commission of Rs. 2,63,284 on sale of Rs. 1.74 crore. So the rate of commission comes to around 1.5 per cent and not 0.6 per cent as claimed by the assessee. The assessee has submitted the copy of vouchers prepared in respect of the commission paid. It has been explained in the assessment order itself that there is no signature of any person receiving the commission on the said vouchers. The vouchers have been prepared only for self serving purpose.
However, the assessee has submitted two confirmation letters from Shri Jamubhai Keshavbhai Patel and Shri Harishbhai J. Panwala during the appeal proceedings. No such confirmations were ever produced before the AO at the time of assessment proceedings. As these are new evidences these may kindly be not taken into account. Without prejudice to the above, these confirmations were verified with the vouchers submitted by the assessee. The copy of commission account submitted was also verified. However no such names were found either in the copies of debit vouchers or in the copy of account. However, the copy of debit vouchers was verified and it was found that the commission for sale of goods to M/s Dharmesh Silk Mills and M/s Asmi Dyeing have been paid as under :
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Name of the party to Amount of Commission Rate Commission Commission whom goods sold sale paid to paid on
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Dharmesh Silk Mills 1,76,575 2,650 1.5% Suresh 2-7-94
Chhaganlal
Asmi Dyeing Mills 2,04,328 3,000 1.47% Balubhai 9-7-94
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As can be seen above, the above commission has been paid to Shri Suresh Chhaganlal and Shri Balubhai Maranbhai on the sale of goods to M/s Dharmesh Silk Mills and M/s Asmi Dyeing Mills respectively and not to Shri Jamubhai Keshavbhai and Harishbhai J. Panwala, the confirmations of whom have been filed by the assessee. From the above facts, it is very clear that the assessee is filing false details. Further, as submitted earlier, contrary to the assessee's claims that, the commission is only 0.6 per cent on total sales, it can be seen from above, the commission @ 1.5 per cent has been paid on sale to individual parties.
The assessee was asked vide order sheet entry dt. 7th March, 2002 whether he can produce any person other than these two mentioned above. However, Shri Vinodbhai replied in negative.
The assessee has also submitted certificates from various parties as mentioned in Sr. 5 to 11 of its submission. Through these certificates, the assessee has tried to prove that it is prevailing practice in this line of business to pay secret commission. It is pertinent to mention that these are additional new evidences being produced by the assessee, which were not produced at the time of assessment. Therefore, these new evidences may kindly be not entertained.
2.5 In response to the comments of the AO, the assessee has made further submissions as under :
2.5.1 It is further submitted that in the chart which is extracted hereinabove (which was also given in the written submission) the assessee has given percentage of commission paid to sales in the earlier years and in the year under consideration on the basis of the total net sales and not in respect of the sales on which secret commission was paid. The assessee, therefore, submits that secret commission paid by it vis-a-vis total net sales is 0.6 per cent which is comparable with the earlier years during which similar secret commission was paid by the assessee for boosting its sales. At this juncture the assessee submits that on carefully considering the details furnished in the form of a chart which is extracted hereinabove, you will appreciate that the net sales of Rs. 1.85 crores in the asst. yr. 1990-91 is increased to Rs. 4.59 crores in asst. yr. 1995-96, that is, about two and half times over a period of five years. The aforesaid increase in sales in the city of Surat wherein there is a keen competition and particularly in the assessee's business. It is the case of the assessee that the increase in net sales by two and half times over a period of five years has been made possible by the assessee only because of continuous flow of orders from its old customers and new customers which has become possible mainly due to the assessee-firm agreeing to pay secret commission to employees of various concerns who could bring the orders of supply of pipes and pipe fittings.
2.6 Before the AO in the course of remand proceedings the assessee-firm has furnished complete details of commission paid in the form of a chart giving details of commission paid with the date of bill, bill number, name of the party to whom goods were sold, amount of commission paid, percentage of commission to the bill amount and the date of payment. The assessee-firm has also once again produced copies of vouchers prepared at the time of payment of secret commission, In this respect the AO has observed that these vouchers do not have signatures of persons receiving commission and therefore, these vouchers are self-serving evidence. In this respect it is submitted that as the name secret commission signifies that the commission is paid secretly that is without the knowledge of the person who actually purchased the goods from the assessee-firm. Therefore, the name of the person receiving the commission who generally happens to be an employee of the person purchasing the goods, will never be given and it is practically impossible for the assesses to record the correct name of the person to whom the secret commission is paid by it. Therefore, the signature of the person receiving secret commission on the voucher prepared by the assessee-firm is not possible. The AO has failed to appreciate that if the assessee insists on recording the correct name of the person receiving the commission and to receive his signature in the voucher prepared by it, the whole purpose of paying secret commission will be lost in as much as such person will never come back to the assessee for placing an order of supply of pipes and pipe fittings because such an employee would like to first preserve his service and thereafter earn a small amount in the form of secret commission from the assessee-firm. Therefore, no employee would ever give his signature on the vouchers prepared by the assessee for its own accounting purposes. However, to control the payment, the accountants prepared the vouchers of commission, which are countersigned by the partners of the firm. The vouchers are prepared not only for self-serving purpose, but is for countercheck on payment of commission. We have to state that the assessee came to know first time on receipt of order that ITO has disallowed the payment of secret commission as in his opinion there is no system of commission payment prevailing in the assessee's business and the same basis is also taken while finalizing the next year 1995-96 assessment which was done without giving any opportunity to the assessee. The order is finalized on the next day of submission only. Due to this assessee has gone in appeal, though there is a practice in the market, given sufficient evidence and proof for establishing the fact that there is the practice in the trade which he traded. Due to this we have filed the confirmation of Shri Jamubhai Keshavbhai Patel and Shri Harishbhai J. Panwala to whom the commissions were paid during the appeal proceedings. The payments were actually made to the party but due to secret commission paid, the correct name were not given in the voucher's during the financial year 31st March, 1994.
2.6.1 At this juncture it is submitted that what is required to be ascertained is not who has received such commission but whether it is the practice in the assessee's business to give such secret commission and whether the assessee is in a position to adduce circumstantial evidence to prove that it has paid such secret commission in the course of the business. The practice of paying secret commission in the assessee's business is proved beyond doubt, the fact that the assessee has paid such secret commission in the earlier years which has been accepted by the Department while carrying out the scrutiny assessments. Secondly, the assessee has adduced evidence in the form of vouchers and details in the form of a chart giving the bill number and the amount of bill on which commission is paid. The assessee has gone a step ahead and produced confirmation of two such parties who had actually received commission. Not only that the assessee has proved its bona fides by making written submissions to you to the effect that the assessee-firm has not paid secret commission in respect of each and every sale effected by it but it had paid secret commission only in respect of selected sales where the assessee had to induce the plumber or employee for giving repeated orders. Thus out of the sales of Rs. 4.21 crores the assessee-firm had paid secret commission in respect of sales of Rs. 1.75 crores only in asst. yr. 1994-95 whereas in asst. yr. 1995-96 the total net sales were Rs. 4.59 crores and the sales on which secret commission was paid were Rs. 1.43 crores.
2.7 By the impugned order the CIT(A) deleted the disallowance of commission by considering the following submissions of the assessee :
In the present case the assessee has given complete details of sales bills on which secret commission has been paid. In these details the assessee has given the date of the bill, the bill number, name of the party, sale amount, amount of commission, percentage of commission to sale and the date of payment of commission. As rightly held by their Lordships of the Bombay High Court, the only missing item is the name of the party to whom the payment was made. The assessee is unable to supply the name or correct name of the party receiving the secret commission without detriment to its business. It is, therefore, respectfully submitted that applying the decision of the Bombay High Court in Sigma Paints Ltd. (supra) the secret commission paid by the assessee-firm may kindly be allowed as the expenditure incurred, wholly and exclusively for the purposes of the assessee-firm's business. Your kind attention is also invited to the decision of the Tribunal, Bombay Bench in the case of Motiwala Corporation v. ITO from which, the relevant extract is given in para 24 of the written submission. In this judgment the Tribunal held that the payment of secret commission could be allowed if there was a trade practice for such payment and the fact that the assessee had not given the names of the recipients alone could not be a ground for disallowance. The Tribunal further held that the fact that the assessee had kept some contemporaneous records of such payments from which it could be reasonably inferred that the assessee has made the payments, strengthens the case of the assessee for allowance of such secret commission.
At this juncture your kind attention is also invited to the decision of the Tribunal, Ahmedabad Bench in the case of A.A. Pathan v. Asstt CIT wherein the Ahmedabad Tribunal has judicially noted the fact that the secret commission is paid on supply of E.R.W. Pipes and G.I. Pipes.
The learned ITO has erred in stating that cases cited by the assessee do not apply to the case at all. However the assessee in his written submission in the para 22, respectfully submitted that case of the assessee is in pan material with the decision of the Bombay High Court in the case of CIT v. Sigma Paints Ltd. . The assessee further submitted in paras 25 and 26 of written submission that analogy of A.A. Pathan v. Asstt. CIT (supra) decision is also fully applicable. The assessee has also relied on the judgment of CIT v. A.S.K. Rathmasamy Nadar and United Ink & Varnish Co. (P) Ltd. v. IAC (1992) 42 ITD 1 (Bom) in para 27 of the written submission. The assessee has established fully the payment of commission in para 18 of the written submission.
In respect of confirmation of Mr. Jamubhar Keshavbhai Patel and Mr. Harishbhai J. Panwala, the AO in his remand report of March, 2002 stated that the names of these two persons are not appearing in the copies of vouchers submrtted by the assessee. In this report it is submitted that Mr. Jamubhai Keshavbhai Patel is an employee of M/s Dharmesh Silk Mills to whom the assessee firm had paid commission of Rs. 2,650 on total sales effected by the assessee firm of Rs. 1,76,575 during the previous year relevant to the asst. yr. 1994-95. In respect of this commission the voucher shows the name of Mr. Suresh Chhaganlal." This discrepancy is due to the fact that the person who received commission would never allow the business man to give his real name while receiving the commission, However the voucher recording payment of secret commission of Rs. 2,650 records the fact the said commission has been paid in respect of sales effected to M/s Dharmesh Silk Mills as the voucher had recorded the name of the party to whom sale was effected to M/s Dharmesh Silk Mills as the voucher had recorded the name of the party to whom sale was effected and the gross amount of the sales. In these circumstances the assessee contacted M/s Dharmesh Silk Mills and requested Mr. Jamubhai Keshavbhai Patel to confirm that it had received commission of Rs. 2,650 in sales of Rs. 1,76,575. Thus in the appellate proceedings and in the remand proceedings the assessee had produced the real persons who had received the commission though the name of the said real person did not match with the name recorded in the voucher. This fact proves the bona fides of the assessee and therefore, no adverse inference can be drawn from these facts. By a single voucher the commission was paid to the employees of M/s Gomti Processors of Rs. 5,550 and M/s Dharmesh Silk Mills of Rs. 2,650. Thus the aggregate commission of Rs. 8,200 was paid by a single voucher which records in the name of Mr. Suresh Chhaganlal. Similarly the voucher recording the name of Mr. Babubhai Naranbhai shows that secret commission of Rs. 8,320 was paid in respect of sales to M/s Bharati Synthetics, sales to M/s Asmi Dyeing & Printing Mills and sales to M/s Beena Silk Mills. Therefore, it is incorrect on the part of the AO to come to the conclusion that the assessee produced Mr. Harishbhai J. Panwala who is the employee of M/s Asmi Dyeing & Printing Mills whereas the name written on the voucher is Mr. Babubhai Naranbhai. At this juncture it is also required to be noted that the AO ought to have appreciated that one person cannot be an employee of three different concerns. It is, therefore, submitted that the objection of the AO to the effect that the names of Mr. Jamubhai K. Patel and Mr. Harishbhai J. Panwala is not appearing in any of the vouchers produced by the assessee-firm is neither relevant nor it proves that the assessee firm has not paid secret commission as claimed by it. On the contrary the confirmations of Mr. Jamubhai Keshavbhai Patel and Mr. Harishbhai J. Panwala fully support the case of the assessee of having paid secret commission in the course of business and wholly and exclusively for the purposes of the assessee's business.
In view of the aforesaid it is respectfully submitted that the case of the assessee squarely falls within the ratio laid down by the Bombay High Court in the case of M/s Sigma Paints Ltd. which has been followed by the Bombay Tribunal. Hence the secret commission paid by the assessee is required to be allowed.
With regard to para 8, of the remand report, the assessee has to state that it is true that telephone line that is 32589 and 39437 are installed at Nanavat residence of the assessee but it is also true fact that there is a godown fully at ground floor of the resident building and another separate godown at 50 yards away from residence. Moreover purchases are to be made fully from Bombay, Delhi and Ahmedabad etc. and STD calls are to be done for purchases in the night time at concession rate hence 1/10 disallowance from the total bill is more compared to turnover and nature of business.
It is clearly stated by the assessee in paras 31 and 32 of written submission that log book and registers are only maintainable in the concern where the ownership and persons running of business activity are different persons like in the Government concerns and limited company, where it is maintained for the checking the wasteful expenses. While in our partnership firm the owners actively look after the business and under its own supervisor such registers and/or log book is not necessary. Moreover looking to the nature of business volume of turnover and godown located at different places the expenses on vehicle are reasonable. In view of the above it is respectfully submitted that addition may be deleted for commission expenses, vehicle expenses and telephone expenses.
In view of the above, it was submitted by the assessee that the above sum is an allowable expenditure under Section 37 of the Act.
2.7.1 The CIT(A) deleted the disallowance by observing as under :
I have gone through the orders passed by the AO and the remand reports submitted by him from time to time. I have also gone through the detailed submissions made by the assessee from time to time. The only question which is before me is to decide whether the commission paid by the assessee which is of secret nature is an allowable expenditure in terms of the Section 37 of the Act or not.
It is seen that the assessee's claim of payment of this commission is justifiable on account of the fact that the same has been paid, as per the business practice prevalent in their line of business. The name secret commission itself connotes that the identity of the recipient is kept confidential. It is also seen that the commission is ranging between 0.60 to 0.65 per cent on the total turnover and is between 1.25 to 1.8 per cent on the business transactions relatable to this commission as computed by the AO, which appears to be on the reasonable side.
Aggrieved by the above order of CIT(A) for the asst, yrs. 1994-95 and 1995-96, the Revenue approached for further adjudication. It was argued by learned Departmental Representative that the commission was paid secretly, the name of the persons to whom the commission paid were not provided. He placed reliance on the order of Tribunal, Ahmedabad Bench in the case of Patel Brothers v. Dy. CIT (2002) 75 TTJ (Ahd) 421 and also decision of Andhra Pradesh High Court in CIT v. Transport Corporation of India Ltd. and Tarini Tarpuline Productions v. CIT . As per learned Departmental Representative, in view of the Explanation to Section 37(1) which was inserted by Finance Act, 1998 with retrospective effect, payment of such commission cannot be allowed, as business expenditure.
3. On the other hand, learned Authorised Representative argued that all the conditions prescribed for allowability of secret commission as laid down by Bombay High Court in the case of (supra) and Gujarat High Court in (supra) were fulfilled with reference to established practice of the assessee in that line of business for making such payments, production of satisfactory evidence to establish actual payment of commission and that payment was made for the purpose of business. He drew our attention to the remand report called by the CIT(A) from the AO, in which a finding was recorded to the effect that the assessee has produced the sales register, sales bills and other documents during the course of assessment proceedings, which were verified with the details of sales shown by the assessee on which commission has been claimed as paid. In the remand report, the AO has stated that the assessee has also submitted copies of debit vouchers prepared for payment of commission. These vouchers contain the names of the persons to whom the commission has been paid. The vouchers also contain the details of sales on which the said commission was paid and all these transactions have been summarized by the assessee for enclosures furnished before him (AO). However, the AO observed the rate of commission works out to 1.5 per cent and not 0.6 per cent of sales. This observation was made on the fact that the assessee had worked out rate of commission on the total sales effected during the assessment years under consideration, whereas the AO has worked out percentage of commission on the basis of sales transactions on which commission was paid. Thus, the learned Authorised Representative submitted that both the assessee and AO were correct for the computation of percentage of commission on the basis of sales affected as taken into consideration by them respectively. The AO also recorded a finding in the remand report to the effect that the assessee has set the copies of vouchers prepared and commission paid. He further submitted that the observation of the AO with regard to two confirmation letters from Shri Jamubhai Keshavbhai Patel and Shri Harishbhai J. Panwala were not produced before the AO at the time of original assessment proceedings as the assessments were framed without asking for the same. In the remand report, the AO further stated that he has verified the debit vouchers and copy of account in respect of commission paid to M/s Dharmesh Silk Mills and M/s Asmi Dyeing wherein commission was stated to be paid to Sri Suresh Chhaganlal and Shri Balubhai, respectively. With regard to the name of actual recipient as per the copy of the account, the CIT(A) asked the assessee to submit explanation regarding the names of persons who are in actual receipt of commission. It was submitted before the CIT(A) that the assessee was having a trade practice of such payment of commission and because of this the assessee has filed confirmation letters of Shri Jamubhai Keshavbhai Patel and Shri Harishbhai J. Panwala to whom the commission was paid. The payments were actually made to the party but due to secret commission paid, the correct names were not given in the vouchers during the financial year 31st March, 1994.
3.1 The learned Authorised Representative has also drawn our attention to the debit vouchers in respect of commission paid to various persons furnished at p, 28 of the paper book, copy of commission account in the books of assessee, certificate of Rushikesh Builders as placed in the paper book, to the effect that in view of the nature of business the assessee was involved, there was a general practice that secret commission is given by the traders or suppliers to the purchasers or to the mediators of the purchasers. As per the certificate in the activities of builder and developer, plumber used to purchase on behalf of developer or builder, therefore generally trader passes on the commission to the plumber and for the sake of business expediency going on to boost the sales. In the certificate, it was also mentioned as the assessee-firm was builder and distributor of Tata Pipe and Genith Pipe and Fixtures, they have to pass on secret commission to mediators. Our attention was also drawn to the affidavit of Shri Govardhan, proprietor of Moti Builders & Organisers who was carrying on business as a builder and developer of immovable property for the last ten years. In the affidavit he affirmed on oath that there is a practice in the city of Surat that developers and builders generally give a contract of constructing a building to a contractor who is required to construct the building as per the specifications and designs approved by the builder. These contractors generally enter into contract with the licensed plumbers and licensed electricians who are required to take up all plumbing lines and electric lines which is being contracted by the contractor. In these subcontractors, it was a prevailing practice on a party's requirement for doing plumbing work from their own party because they get some commission on the invoice amount secretly from the trader.
3.2 With reference to Departmental Representative's argument regarding applicability of Explanation to Section 37(1), the learned Authorised Representative submitted that in view of trade practice prevailing in the line of business, payment of such commission cannot be branded with an offence or prohibited by law. Our attention was also drawn by the learned Authorised Representative to the order dt, 29th Sept, 1989 of Tribunal, Bombay Bench in case of Motiwala Corporation (supra) wherein the payment of secret commission was held to be fair and reasonable. It was also observed by the Tribunal in this case that allowance of such payment of secret commission is not against the public policy in so far as the parties involved were purely private business men and their employees, whatever may be the moral content involved, their action could not be regarded as opposed to the public policy unless it has some established customs or law or practice. As per learned Authorised Representative, this decision of the Tribunal was rendered on 29th Sept., 1989, which falls after the amendment with regard to insertion of Explanation brought into the statute book by Finance (No. 2) Act, 1989.
3.3 Reliance was also placed by learned Authorised Representative in Hon'ble Bombay High Court in the case of Sigma Paints Ltd. (supra) wherein the payment of secret commission was allowed since there was complete tally between the commission paid and extent of business done by the company. It was observed by the Hon'ble High Court that details were also available on the exact transactions in respect of which the assessee has to pay as secret commission. The assessee had given a complete list showing the turnover and the amount of secret commission paid from year to year, the percentage of secret commission was minimum; the full details of payments of secret commission in respect of several parties were available and they were correlated to the transactions which the assessee had with these persons and the period during which the transactions were entered into. The only missing item was stated to be the names of the particular party to whom the payments were made. Thus the Tribunal held that it is detrimental to the business of the assessee in the very nature of things. It was therefore held by the Hon'ble High Court that the Tribunal was justified in holding that secret commission amounting to Rs. 1,41,346 paid by the assessee was an allowable deduction and no question of law arose from its order.
3.4 Learned Authorised Representative that Hon'ble Supreme Court in the case French Dyes & Chemicals (I)(P) Ltd. v. CIT , dismissed the reference filed by the assessee on the plea that appellant had not questioned the finding of the fact that it has failed to establish the expenditure claimed was in fact incurred. Thus as per learned Authorised Representative when the Tribunal itself recorded the finding that the assessee had failed to establish the fact that the expenditure claimed having in fact incurred, no question of law arose out of the order of Tribunal. As per learned Authorised Representative in the instant case, finding has been given not only by the CIT(A) but also by the AO in his remand report to the effect that commissions have been paid.
4. We have considered the rival contentions and carefully gone through the orders of authorities below and also deliberated on the case laws cited at bar by the learned Departmental Representative and Authorised Representative in the context of factual matrix of the case. From the record we find that in the instant case, the assessee was carrying on the business of trading on galvanized black pipes and pipe fittings and also business of manufacturing of art silk. During the year under consideration it paid commission to the plumbers etc. in respect of sales effected through them. The assessee was having practice of paying such commission not only during the year under consideration but since long back the assessee firm came into existence. In all, the earlier years the payment of commission was allowed even during scrutiny assessment proceedings. However, during the year relevant to assessment years, payment of commission was disallowed under Section 37(1). On the first round of appeal, the Tribunal restored the matter back to the file of CIT(A) for deciding the issue afresh. During the course of second round of appeal, the CIT(A) called for remand report, according to which a clear finding was recorded by the AO to the effect that he has verified sales register, sales bills and other books of accounts with the details of sales shown by the assessee on which commission has been claimed as paid. In the remand report, the AO also admitted that the assessee has submitted copies of debit vouchers prepared for payment of commission. These vouchers contain the names of the persons to whom the commission has been paid and also contains the details of sales on which the said commission has been paid.
4.1 By the impugned order, the CIT(A) also recorded a finding to the effect that during the remand proceedings the assessee-firm has furnished complete details of commission paid in the form of chart giving details of commission paid with the date of bill, bill number name of the party to whom goods were sold, amount of commission paid, percentage of commission to the bill amount and the date of payment. The CIT(A) also observed that the assessee-firm had also once again produced copies of vouchers in respect of payments of secret commission. The CIT(A) further observed that the name of the person receiving the commission generally happens to be an employee of the person purchasing the goods. As the name of the recipient is kept secret, the voucher is being prepared on different names. In this regard, the CIT(A) also observed that the AO has failed to appreciate that if the receiver of the commission is asked to obtain (sic-put) his signature in the voucher prepared by it, the whole purpose of being secret commission will be lost in as much as such person will never come back to the assessee for placing order of supply of pipes and pipe fittings because such an employee would like to first preserve his service and thereafter earn a small amount in the form of secret commission from the assessee-firm. It was also observed by the CIT(A) that the practice of paying secret commission in the assessee's business is proved beyond doubt, the fact that the assessee had also paid such secret commission in earlier years which have been accepted by the Department in the scrutiny assessment. The CIT(A) also accepted the fact that the assessee has adduced various documentary evidence in the form of chart giving the bill number and amount on which commission was paid, the assessee has produced confirmation of two such parties who had actually received commission. Thus the assessee had proved its bona fide by making written submissions to the effect that the assessee had not paid secret commission in respect of each and every sales effected by it, but it had paid secret commission only in respect of selected sales where the assessee had to induce the plumber etc. for giving repeated orders. Thus out of the sales of Rs. 4,21 crores, the assessee-firm had paid secret commission, only in respect of sales of Rs. 1.75 crores in the asst. yr. 1994-95, whereas in the asst. yr. 1995-96 the total net sales were Rs. 4.59 crores and the sales on which secret commission was paid on sales of Rs. 1.43 crores. A finding was also recorded that looking to the nature of business, volume of turnover, percentage of commission was very reasonable and justified.
4.2 There is no dispute to the well settled legal proposition that burden of proving that a particular expenditure has been laid out or expended wholly and exclusively for the purpose of business is on the assessee. Furthermore, there is also no dispute to the well recognized and settled legal proposition that mere payment by itself would not entitle the assessee to the deduction of said expenditure unless the same was proved to be paid or incurred for commercial consideration. It is for the assessee to adduce necessary evidence in this regard and if the assessee fails to furnish such necessary evidence, the Department has all the rights to disallow such expenses. After the insertion of Explanation to Section 37(1) by the Finance (No. 2) Act, 1989 with retrospective effect from 1st April, 1962, the allowability of such expenditure has been further subjected to the condition that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deductions are allowed in respect of such expenditure. Thus the assessee is not only required to show that expenditure was incurred as a commercial expediency but also that expenditure has not been incurred for the purpose which is an offence or which is prohibited by -law. In the instant case, the act of commission having been paid to the plumber etc. is neither an offence nor it is prohibited by law. By producing various evidences which is as per material on record, it has been proved that commission was actually paid and the payment of such commission was as per the trade practice in which the assessee was dealing since inception.
4.3 Let us now discuss the case laws relied by learned Departmental Representative during the course of hearing :
(i) In the case of Pate] Brothers (supra) the Tribunal has disallowed the claim of secret commission by observing that the assessee-firm claiming deduction of secret commission which works out to 7.03 per cent of the total sales without furnishing satisfactory evidence of genuineness of the payment and the assessee-firm had not shown the trade practice prevailing in the line of business adopted by the assessee. The Tribunal further observed that since the particulars of such payments had not been furnished and the cash vouchers were prepared by the partners of the firm in an ad hoc manner without specifically indicating the sales transaction in respect of which the commission was paid, the same was not to be allowed.
4.3.1 However, in the instant case in the back of vouchers of commission, name of the customer and sale transaction in respect of which secret commission paid was clearly shown. Moreover, during the course of remand proceedings, a detailed statement showing date of bill, bill number, name of party, sales amount, amount of commission paid on it, percentage of commission paid, date of commission etc. were furnished. The rate of commission in the instant case was also within the range of 0.54 to 0.62 per cent of the total sales made during the relevant assessment year, whereas in the case of Patel Brothers (supra) commission at a very high rate of 7.3 per cent was paid. In the case of Patel Brothers (supra), on the commission vouchers, the details like name of the customer were not indicated in all the sales effected in relation to which such commission was paid. In the instant case, by bringing various documentary evidence of record, the assessee has established the trade practice of payment of commission in the nature of trade being undertaken by the assessee, whereas in case of Patel Brothers (supra), the assessee had evidently not established any trade practice in the line of business undertaken by it. In the case of Pate] Brothers (supra), total payment of commission was claimed as high as Rs. 20.00 lakhs whereas in the instant case, the commission claimed was only Rs. 2.77 lakhs and 2.63 lakhs in the asst. yrs. 1995^96 and 1994-95 respectively. Thus, it is clear from the above that the facts of the instant case are quite distinguishable from the case of Patel Brothers (supra) in which payment of secret commission was disallowed by the Tribunal.
4.3.2 In the case of Transport Corporation of India Ltd. (supra) relied on by learned Departmental Representative, the payment of secret commission was held to be not allowable since it was not verifiable. It was also observed in this case there is sharp increase in the commission payment as compared to the earlier year. However, in the instant case by bringing various documentary evidence on record, the assessee has proved the actual payment of commission in respect of various sales transactions effected by it and a finding to this effect has also been recorded in the remand report by AO which was further fortified by the CIT(A).
4.3.3 In the case of , relied on by learned Departmental Representative, the payment of commission was disallowed because of the inability of the assessee to correlate the payments of commission with reference to the order procured or sales effected. Where as in the instant case, the assessee has correlated and established each payment of commission with reference to sales bills, the amount of sales and the party to whom the sales were made. Thus the facts of the instant case are quite distinguishable and is of no help to the Revenue.
4.3.4 In the case of CIT v. Tamporvala Sons Co. (P) Ltd. , as cited by learned Authorised Representative, the disallowance of payment of secret commission was not confirmed by the Hon'ble High Court, but the matter was referred back for deciding the same in view of the Explanation to Section 37(1) introduced with retrospective effect.
Let us now discuss the Tribunal orders where such expenses have been allowed even after insertion of Explanation below Section 37(1).
4.3.5 In the case of New Bhotern (ITA No. 1420/Bom/91 order dt. 7th Dec., 1998) where the payment of ghost money to dock labour was disallowed under Explanation to Section 37(1) on the ground that it was illegal payments in view of the provisions of Dock Labour (Regulation and Employment) Act. It was observed by the Bombay Tribunal at p. 15 para 9 that "a word about the view taken by the IT authorities that the payments are opposed to public policy. This view appears to have no basis at all. There is no evidence to show that any payment of speed money or ghost money has been paid to any Government employee in violation of the law. The view appears to be more of surmise that conjuncture rather than based on any acceptable evidence". This decision of the Tribunal was taken on 7th Dec., 1998 in ITA No. 1420/Bom/1991 and the disallowance was made by the Department on the ground of Explanation given below Section 37(1) which was introduced by Finance Act, 1998 with retrospective effect from 1st April, 1962, i.e., much prior to the passing of order of Tribunal dt. 7th Dec., 1998 and the same has been deleted by the Tribunal by having above observation after taking into consideration the effect of Explanation to Section 37(1), on such payment.
4.3.6 Similarly in the case of Rishi Shipping, Gandhidham (ITA No. 302/Rjt/01 order dt. 28th April, 2005), deletion of disallowance of ghost money of Rs. 50 lakhs paid in violation of Dock Labour (Regulation and Employment) Act, 1948, an Act providing for regulation of employment of dock workers, was held to be not an illegal payment so as to disentitle the assessee as per Explanation found below Section 37(1), was confirmed by the Tribunal by order dt. 28th April, 2005. Before parting with the matter, it is pertinent to refer to the observation of Hon'ble Supreme Court in the case of Canbank Financial Services Ltd. , as relied on by learned Authorised Representative, it was observed that in the normal course of passing a title in favour of the transferee would not be illegal unless it is forbidden by law which includes attracting the wrath of Section 23 of the Contract Act. The 1988 Act while prohibiting Benami transactions does not provide that by any reason of such a transaction no title whatsoever would pass or the property would vest in the State. It was, therefore, held that the parties concerned, including the issuers of the securities became party to an arrangement which may have been unethical but not illegal.
4.3.7 Keeping in view of the above observation of Hon'ble Supreme Court, we can safely conclude that payment of such commission for increase of sales to the plumbers etc. was not illegal so as to attract the Explanation found below Section 37(1). Such payment of commission cannot be branded as an offence or prohibited by law. There was no allegation of the AO that the payment of such commission was to any Government or semi-Government employee in violation of law, nor it is the allegation of the AO that by paying commission for procurement of orders, the assessee has committed any offence or that such payment is prohibited by law. There are sufficient material on record which is supported by the findings recorded in the remand report by the AO as well as findings recorded by the CIT(A), so as to justify that payment was made as per legitimate needs of the business and was warranted by the commercial expediency in view of the fact that by paying commission the assessee has undisputedly procured more orders of sale and the payment of such commission was made to the plumbers and other persons approaching the assessee while placing the purchase order,, who were neither Government employees nor the semi-Government employees.
5. In view of the above discussion and as per material on record, we are inclined to agree with learned Authorised Representative that payment of very meager percentage of commission on sales to plumbers etc., the genuineness of which was not doubted nor actual payment and the full details with regard to the sales transactions have been satisfactorily established and explained along with documentary evidence, which has been properly incorporated by the AO in the remand report and further fortified by the CIT(A), cannot be disallowed by having recourse to Explanation found below Section 37(1).
5.1 However, keeping in view least chances of any part of such payment could not be satisfactorily verified, we direct the AO to restrict disallowance at 5 per cent (five per cent) of such commission payment.
5.2 Thus the appeals of the Revenue against deletion of disallowance of commission in the asst. yrs. 1994-95 and 1995-96 are allowed in part. ITA No. 2492/Ahd/2002:
6. The following grounds have been raised by the Revenue :
1. On the facts and in the circumstances of the case, and in law, the CIT(A)-IV has erred in directing to delete the penalty levied under Section 271(1)(c) of the Act.
1.1 On the facts and in the circumstances of the case, and in law, the learned CIT(A)-IV, Surat, has erred in ignoring the fact that the penalty was levied after appraising the fact with regard to the disallowance of commission payment, which was held to be spurious items of expenditure or deductions whereby there is a failure to return correct income.ITA No. 256/Ahd/2003:
7. The following grounds have been raised by the Revenue :
1. On the facts and in the circumstances of the case, and in law, the CIT(A)-IV has erred in directing to delete the penalty levied under Section 271(1)(c) of the Act.
1.1 On the facts and in the circumstances of the case, and in law, the learned CIT(A)-IV, Surat, has erred in ignoring the fact that the penalty was levied after appraising the fact with regard to the disallowance of commission payment, which was held to be spurious items of expenditure or deductions whereby there is a failure to return correct income.
7.1 As the quantum has already been deleted in the asst. yrs. 1994-95 and 1995-96, the deletion of penalty by the CIT(A), with reference to such payment of commission is also upheld. As the disallowance of 5 per cent commission has been retained on ad hoc basis, it does not amount to furnishing of inaccurate particulars of income or concealment of particulars of income as to attract the provisions of Section 271(1)(c).
7.2 In the result the appeal of Revenue in ITA Nos. 2492/Ahd/2002 and ITA No. 256/Ahd/2003 are dismissed, ITA No. 2221/Ahd/2000 :
8. Following grounds have been taken by the assessee :
(1) The learned CIT, Surat, has grievously erred in making the order under Section 263 though the assessment made by AO was not prejudicial to the Revenue.
(2) The learned CIT has grievously erred in finalizing the order under Section 263, when on the same points appeals are pending for asst. yrs. 1994-95 and 1995-96 with CIT(A)-II, Surat, who has completed the hearing also.
(3) The learned CIT was not justified in setting aside the assessment order passed by the learned AO without verifying the facts of the case when all the material is on record at the time of assessment arid detailed voluminous submission made before CIT, Surat, in proceedings under Section 263.
(4) Even on merits, the learned CIT has completely ignored the voluminous evidence on records and has erred in disallowing the commission paid by the assessee and enhancing the total income by Rs. 2,20,606.
(5) The learned CIT erred in not appreciating the particular facts of this case where the commission payments of Rs. 2,20,606 paid, which is wholly and exclusively for boosting the sale and it is as per practice prevailing in particular trade in which assessee traded. It is nothing but selling expenses, which is fully allowable under the Act.
(6) The learned CIT erred in enhancing the assessment by disallowing the commission paid without giving the proper hearing for details and verification of voluminous supports filed by the assessee with him in proceedings under Section 263.
(7) The learned CIT erred in comparing the net profit of the appellant-firm when the interest on partners' capital and salary under Section 40(b) on which partners have paid the income-tax in his individual returns.
(8) The learned CIT erred in following the order passed by the learned AO for asst. yrs. 1994-95 and 1995-96 where he has not given any opportunity or show-cause notice for proposed addition and to explain the details of commission paid and basis of working of sale bills given on the back of vouchers submitted in assessment proceedings and same is the subject-matter of appeal Where all the detailed workings are explained on each commission voucher placed at the time of hearing of assessment.
(9) The learned CIT erred in deciding the fact that no practice of payment of commission in the lines of appellant, when there is ample documents on record which is mentioned by him in para 8 of the order. Even he himself stated in the last line of para 8 that Musai Fakir Mohmed claim debit of commission of Rs. 9,180 in asst, yr. 1997-98. In addition we are in receipt of commission from Tata Iron & Steel Co. Ltd., Jindal Steel Co. Ltd. and Gujarat Steel Co. Ltd. etc. every year and from which we are paying the commission to boost the sale.
(10) The learned CIT erred in not issuing the show-cause notice to explain when he failed to appreciate the system of commission prevailing in the trade and before giving the adverse observations like payment made after 2-3 months without name or details in para 9 of the order though it is not correct/fact.
(11) The learned CIT in finalizing the order under Section 263 instead of issuing instructions to AO who shall allow the assessee a fair and reasonable opportunity of being heard and the learned CIT erred in stating in para 11 without going into depth or details submitted, "Where all the details of payment has been made, at what rate the payment has been made and the payment in question is related to which sales effected by the assessee during the year". All these facts have been clearly brought out by the assessee in the papers submitted, which can be seen from the submission given to CIT. It is wrong to say after verifying the evidence enclosed with the submission that "payment has been made by the assessee which is not supported by even a share of evidence.
(12) The learned CIT erred in not appreciating the fact that the assessee has proved his case and CIT has not called "for hearing for the detailed verification of voluminous papers submitted by the assessee and not raised any show-cause notice for any defects detected by him after submission of details.
(13) The assessee undertakes to produce all the documents papers referred hereinabove and submission made to CIT under Section 263 proceeding at the time of hearing of this appeal and also prayed that this appeal be allowed and order under Section 263 may be cancelled as no proper hearing for detailed verification is given for explaining all proof given in the details filed by way of submission with him.
8.1 In ITA No. 2221/Ahd/2000, the assessee is in appeal against the order of CIT dt. 28th Aug., 2000 under Section 263.
8.2 Arguing the validity of action under Section 263, the learned Authorised Representative submitted that the scrutiny assessment was not made by the AO in a 'hurry and the AO has seen all the details and duly specified that the claim was accepted with reference to the commission payment. The order of the AO was neither erroneous nor prejudicial to the interests of the Revenue. As per learned Authorised Representative, powers under Section 263 cannot be exercised merely on the ground that the decision taken by the AO was not liked by the CIT. Section 263 is to be invoked not as a jurisdictional corrective of as a review of subordinate's order in exercise of the supervisory power, but it is to be invoked and employed only for the purpose of setting right the distortion and the prejudice to the Revenue which is a unique conception and has to. be understood in the context and in the interest of Revenue administration. As per learned Authorised Representative, such power cannot be in any manner equated to or regarded as approaching in any appellate jurisdiction and even the ordinary revisional jurisdictionary powers conferred on the CIT under Section 264.
8.3 On merits the learned Authorised Representative submitted that the CIT was not justified in disallowing payment of secret commission on sales amounting to Rs. 2,20,606 which was paid by the assessee firm as a trade practice, payment of which has been allowed after proper verification by the AO, with reference to each sale transaction.
8.4 On the other hand, learned Departmental Representative relied on the order of CIT and stated that CIT was justified in invoking jurisdiction under Section 263 and thereby directing the AO to disallow payment of such commission and enhance income accordingly.
8.5. We have considered the rival contentions, as discussed elaborately hereinabove regarding allowability of commission in the asst. yrs. 1994-95 and 1995-96, with reference to provisions of Explanation to Section 37(1). We direct the AO to restrict the disallowance of commission to the extent of 5 per cent in the light of our discussion in IT A Nos. 2491 & 2493/Ahd/2003.
8.6 In the result appeal of the assessee in ITA No. 2221/Ahd/2000 is allowed in part.
8.7 In the result appeals of Revenue in ITA Nos. 2491 and 2493/Ahd/2002 are allowed in part where as appeals in ITA No. 256/Ahd/2003 and 2492/Ahd/2002 are dismissed, and the appeal of the assessee in ITA No. 2221/Ahd/2000 is also allowed in part.