Income Tax Appellate Tribunal - Hyderabad
Bharat Motor Parcel Service vs Income-Tax Officer on 25 June, 1992
Equivalent citations: [1993]47ITD140(HYD)
ORDER
Chander Singh, Accountant Member
1. This appeal by the assessee for assessment year 1989-90 has been directed against the order of the Commissioner of Income-tax (Appeals).
2. The appellant is a registered firm having 11 partners. For the year ending 31-3-1989, the appellant had carried on transport business and had filed the return of income on 8-11-1989 declaring an income of Rs. 79,720. The Assessing Officer had completed the assessment under Section 143(1)(a) on 27-12-1989. This case was, however, selected by the Assessing Officer for scrutiny with the prior approval of the Deputy Commissioner and accordingly a notice under Section 143(2) was issued.
3. While completing the assessment, the Assessing Officer examined the payments under the head "Rebate & Refunds". During the accounting year relevant to assessment year under appeal, the appellant had claimed a sum of Rs. 3,53,968 as rebate & refunds on total turnover of Rs. 1,53,25,431. The Assessing Officer came to the conclusion that part of the claim of the appellant has to be disallowed and accordingly he added a sum of Rs. 1,24,088 out of the claim of rebate & refunds and computed the income at Rs. 3,69,230. While disallowing the rebate & refunds to the extent of Rs. 1,24,088, the Assessing Officer observed as under :
The assessee claimed Rs. 3,53,968 under this head on the total collections of Rs. 1,53,25,431. When asked to explain about the rebate & refunds, the A.R. has stated that these payments are made to the employees of the business concern, who are booking the luggage with the assessee, to obtain orders. These payments are not susceptible for any cross-verification as these amounts are paid merely passing book-entries only. The assessee could not produce any other evidence except the entries in the books, that is, why I am not convinced about the genuineness of these payments.
Secondly, there is no correlation between the amount of business and the percentage of rebate, which can be seen from the following table :
Name of Branch Total Rebate Percentage
collection paid
Rs Rs.
1. Palasa 1,54,666 5,210 3.37
2. Vijayawada-1 11,83,834 39,530 3.34
3. Vijayawada-2 12,03,489 1,02,270 8.50
4. Hyderabad 15,91,717 72.791 4.57
5. Secunderabad 13,53,748 34,484 2.55
6. Madras 4,12,187 23,803 5.77
7. Visakhapatnam 10,66,900 5,786 0.54
In the Visakhapatnam Branch, the total collections are Rs. 10.67 lakhs and the rebate paid thereon is less than 1 % whereas the assessee claimed 2.55% to 8.5% in other branches. This is very excessive. Taking Into consideration the business of the assessee and the computation in this line of business, I restrict this percentage to 1.5% on average on the total collections and disallow the balance. On the total collections of Rs. 1,53,25,431, the rebate & refunds are allowed at 1.5% which works out to Rs. 2,29,881. Deducting this from the assessee's claim of Rs. 3,53,969 the difference of Rs. 1,24,088 is added back. This particular addition is made on two grounds, firstly, due to lack of evidence in support of assessee's claim of payment and secondly, as the percentage Is very high and excessive.
Thus, the Assessing Officer accepted payments of Rs. 2,29,881 as allowable deduction as, in his view, the payment of rebate & refunds was necessitated by the trade practice and the business needs. However, for the aforesaid two reasons, the Assessing Officer disallowed the claim to the extent of Rs. 1,24,088. The appellant was aggrieved and had taken up the matter in appeal to the CIT (Appeals).
4. The CIT (Appeals) examined the grievance of the appellant and was of the view that the Assessing Officer should not have allowed even a sum of Rs. 2,29,881. In his view, the entire claim to the extent of Rs. 3,53,968 was to be disallowed. He accordingly, vide his letter dated 30-10-1991, issued an enhancement notice to the appellant and invited its objections. Before the CIT (Appeals), the appellant argued its appeal and placed reliance on the following judicial decisions :
1. CIT v. Goodlass Nerolac Paints Ltd. [1991] 188 ITR 1 (Bom.);
2. CIT v. Sigma Paints Ltd. [1991] 188 ITR 6 (Bom.);
3. CIT v. Coimbatore Salem Transport (P.) Ltd. [1966] 61 ITR 480 (Mad.);
4. CIT v. Hoechst Dyes & Chemicals Ltd. [1984] 17 Taxman 389 (Bom.);
5. CIT v. Mills Stores Trading Co. India (P.) Ltd. [1984] 18 Taxman 85 (Bom.);
6. CIT v. G.D. Kapoor & Sons [1986] 161 ITR (St.) 66.
It was argued by the appellant before the CIT (Appeals) that the payment of rebate & refunds was made exclusively for the purpose of the business and such payment was held to be an allowable deduction in the aforesaid decisions. The CIT (Appeals), however, distinguished the judicial decisions cited before him and, after deducting a sum of Rs. 51,579 which represented refunds actually given, he sustained an addition of Rs. 3,17,379 which also includes the sum of Rs. 1,24,088 which was originally added by the Assessing Officer. He thus enhanced the income of the appellant by a sum of Rs. 1,93,291.
5. In this appeal before us, the learned counsel for the appellant, Sri M. J. Swamy, has pointed out that there is no justification for the addition made by the Assessing Officer as well as the enhancement made by the first appellate authority. He, therefore, contests the addition of Rs. 3,17,379. The learned counsel points out that the nature of the business of the appellant is such that the secret commission, mamool etc. have to be paid to the employees of customers with a view to include business and increase the turnover. He points out that though the appellant has not mentioned the names and addresses of the actual recipients, the books of account of the appellant maintained during the course of its business reveal that the company-wise details and branch-wise details have been maintained. In this regard, he draws our attention to pages 8 and 9 of the material papers and points out that full details of the expenses are available. For instance, in Vijayawada-2 branch, the assessee has paid a rebate of Rs. 1,02,270 to Corn Products, Bambino Vermicelli. Corn and Voltas, Parry & Co., Glaxo (I) Ltd., Apex Agencies etc. Similar details are maintained in respect of other branches also. It could, therefore, be seen from the books of account that the appellant has been able to prove that the expenses were incurred wholly and exclusively for the purpose of business. The Assessing Officer also has not disproved the claim of the appellant. As a matter of fact, he has based the addition mainly on suspicion and conjectures. He has not pointed out any item of expenditure which could be termed as false.
6. By drawing our attention to the practice followed by the appellant in previous years, Sri Swamy points out that the business of the appellant is in existence for the last so many years. The rebate and refunds have been claimed consistently by the appellant in all the years which were accepted by the department. The appellant has followed the consistent method of accounting which was never questioned by the Revenue. Only an addition of Rs. 10,000 was made in assessment year 1982-83 which was subject matter of appeal before the Income-tax Appellate Tribunal. The learned counsel has taken us through the decision of the ITAT in ITA No. 1069/ Hyd./1985 dated 23-1-1986 and pointed out that the said addition of Rs. 10,000 was deleted by the Tribunal. It was also held in the said order that in this line of business the transport operators have to pay certain commissions or mamools to the employees of the customers with a view to enhance the business. If the secret commission is not paid to the employees of the customers there is every likelihood that the said employees would divert the business to some other transport operators who give such commission. The learned counsel contends that in the transport business, there is a cut-throat competition and unless some rebates or refunds are allowed, the business of the assessee will suffer irreparable damage. The learned counsel also points out that against the order of the ITAT for assessment year 1982-83 referred to above, the department did not file any reference application. The order of the ITAT, therefore, had become final and in a subsequent year no addition should have been made. The learned counsel also draws our attention to assessment years 1983-84 and 1984-85 wherein the Assessing Officer had disallowed certain portion of rebate & refunds. For these two years, the appellant had carried the matter to the CIT (Appeals) who, for the reasons recorded by him in his appellate order, had deleted the entire addition. Against the order of the CIT (Appeals) for those two years, the department did not prefer any appeal to the ITAT which also proves that the department has accepted that the appellant had in fact incurred the expenses on rebate & refunds. For the year under consideration, therefore, there is no justification for the Revenue to disallow the claim of the appellant.
7. Regarding the reliance placed by the CIT (Appeals) on the decision of the Bombay High Court in the case of Goodlas Nerolac Paints Ltd. v. CIT [1982] 137 TTR 58 : 10 Taxman 25., the learned counsel points out that the CIT (Appeals) failed to appreciate the Explanation dated 25-11-1991 submitted by the appellant. The same Bombay High Court in a subsequent decision in the case of the same assessee, viz., Goodlas Nerolac Paints Ltd.'s case (supra) reversed the decision of the earlier years and held that secret commission, if the payment is proved, is an allowable deduction. The CIT (Appeals) should, therefore, have appreciated that the same High Court in the case of the same assessee for a subsequent year has revised its opinion and hence the claim of the appellant should have been accepted by the CIT (Appeals). The other decisions relied upon by the appellant were fully applicable to the facts of the case and the CIT (Appeals) had made an unsuccessful attempt to distinguish the same.
8. The learned counsel, before us, has also cited some decisions in Goodlass Nerolac Paints Ltd. 's case (supra) and Coimbatore Salem Transport (P.) Ltd. 's case (supra), decision of the ITAT Special Bench, in the case of First ITO v. French Dyes & Chemicals (India) (P.) Ltd. [1984] 10 ITD 240 (Bom.) and decision of the ITAT, Bombay 'A' Bench, in the case of Indokem Ltd. v. ITO [1989] 34 TTJ 89. It is contended that the case of the appellant is fully supported by these decisions and, therefore, the disallowance was not called for.
9. On the other hand, Sri Surya Prakash Rao, learned departmental representative, merely relied on the decision of the CIT (Appeals) and had nothing further to add. It is prayed by him that the addition made by the Assessing Officer and the enhancement made by the CIT (Appeals) should be sustained.
10. We have heard the rival submissions. In our view, the case of the appellant has to be examined with reference to the past practice followed by the appellant and accepted by the department, the trade practice in similar cases, ethical and moral standard not being of any relevance and the judicial pronouncements on the issue. We have quoted above the observations of the Assessing Officer who made an addition of Rs. 1,24,088. The assessment order amply proves that the Assessing Officer has not given a clear-cut finding that the payments of rebate & refunds are not genuine payments. Had it been so, the Assessing Officer would not have allowed a sum of Rs. 2,29,881. In other words, the Assessing Officer treated the said sum of Rs. 2,29,881 as a genuine payment which was necessitated by business needs. He was, however, of the view that the percentage of payment with reference to the total turnover is very excessive and accordingly he restricted the addition only to Rs. 1,24,088. The past practice by the Revenue in the case of the appellant is also quite revealing. For assessment year 1982-83, an addition of Rs. 10,000 out of rebate & refunds was made which was deleted by the ITAT and the Revenue did not prefer any reference application against the order of the ITAT. For subsequent years, viz., 1983-84 and 1984-85 again certain additions were made by the Assessing Officer which were deleted by the CIT (Appeals) himself. Against these deletions, the Revenue again accepted the order of the CIT (Appeals) and no further appeal to the ITAT was preferred. The conduct of the Revenue, therefore, shows that the department is satisfied with the genuineness of the payment. Moreover, we have seen that for assessment year 1988-89, which immediately preceded the assessment year under appeal, rebate & refunds at 2.13% were allowed by the Revenue. In the year under appeal, the appellant has claimed rebate & refunds only to the extent of 1.98% on an increased turnover of Rs. 1,53,25,431 as against the turnover of Rs. 1,32,72,463 declared in assessment year 1988-89. We, therefore, find that the payment of rebate & refunds during the year is less than the payment claimed by the appellant and allowed by the Revenue for assessment year 1988-89. We are, therefore, of the view that with reference to the past record, the payment of rebate & refunds at 1.98% is reasonable.
11. It may also be mentioned that in the business of transport payment of rebate & refunds, otherwise known as secret commission, is quite common and a businessman would not be able to carry on business without such secret payments. The business in transport involves cutthroat competition and unless a trader is willing to part with some money by way of secret commission, the employees of a customer are likely to take away their business elsewhere. It, therefore, becomes a question of survival for a businessman and with a view to flourish and keep his business going, he has to fall prey to this pernicious practice. No disallowance can, in our view, be made unless the Assessing Officer brings some material on record to show that the payment was not genuine. As already mentioned, the Assessing Officer himself has accepted payments to the extent of Rs. 2,29,881 as genuine and, therefore, it cannot be said that he had doubted the genuineness of the payment. We are quite conscious of the fact that our order approving the payment of this nature could lead to malpractice and abuse, but the Tribunal, while allowing similar payments in the year 1982-83, was influenced by the fact that it would well nigh be impossible to carry on business without payment of commission of this nature and it was probably for this reason that the Tribunal showed preference to the business practice rather than to ethical or moral considerations.
12. We have very carefully gone through the order of the first appellate authority. We are of the view that the various decisions relied upon by the appellant before the first appellate authority have not been properly appreciated by him and the distinguishing features pointed out by him are in fact non-existent. The Bombay High Court in the case of Goodlass Nerolac Paints Ltd. (supra) has reversed its own earlier decision which was relied upon by the first appellate authority. In the said decision, it was held that the payment of secret commission was a finding of fact which could not be interfered with by the High Court. Even the Supreme Court has rejected SLP (191 ITR (Stat.) 307). This issue was again considered by the Bombay High Court, while dealing with a reference application in the case of Sigma Paints Ltd. (supra) wherein it was held by the High Court that the Tribunal was justified in holding that the secret commission paid by the assessee was an allowable deduction and no question of law arose from its order. The ratio of the decision of the Madras High Court in the case of Coimbatore Salem Transport (P.) Ltd. (supra) also supports the case of the appellant before us.
13. The issue of payment of secret commission was examined at length by the Special Bench of the Tribunal, Bombay, in the case of French Dyes & Chemicals (India) (P.) Ltd. (supra). The brief facts of the said case are as under:
In the relevant assessment years, the assessee, a manufacturer of chemicals and dyes, claimed certain items of expenditure described as sale promotion expenses. The expenditure was stated to have been incurred for making payments to employees of certain textile mill companies to which the products of the assessee-company were sold, to ensure acceptance of goods and continuance of custom. For strategic business reasons, the names of the recipients were withheld, but there was evidence that the assessee had been following a regular system of accounting for this expenditure and was following a certain procedure for making these payments which had been made for over 30 years. The payments were made by the directors of the company and complete details of amounts withdrawn and disbursed were available. Thus, there was sufficient supporting evidence, though no direct evidence of the expenditure. Also, the amounts paid by way of secret commission constituted a negligible percentage of the turnover of the assessee.
On these facts, it was held :
There were two aspects of the question. If, as the assessee contended, it was absolutely necessary in this field of business to make payments to employees of mills, whether any subsidiary papers for regular payments were maintained or available or not, the custom could be recognised. On the contrary, if this custom was not accepted, the absence of the names of the recipients would be sufficient for rejecting the claim of the assessee even if all intermediate details were maintained. The three assessees between them covered several crores of rupees by way of turnover. The list of secret commission expenses incurred by these assessees as a percentage of their turnover showed that the percentage was negligibly small. Two facts emerged from this, viz, that not merely the assessee but other persons with equally large turnover made such payments, and, secondly, this expenditure constituted a small portion of the turnover. The fact that some companies with substantially good turnover in the field and shown this necessity to make the payment indicated by itself that it was necessary in the trade to incur the expenditure. The evidence showed that the fact of payment had been with these assessees for at least 30 years. Even otherwise, there was sufficient information available in the market to strengthen the view that pushing sales amongst the mills required these payments. Taking all these factual details into account, it would be possible to come to the conclusion that in this field of business such payments were necessary and even recognised also. If that was so and because the assessees could not indicate the names of the recipients, the absence of the names alone could not be the reason for disallowing the expenditure. It was true that where the names of the recipients were not available so as to confirm the receipt, it would be possible for the assessee, even where it had to make a payment compulsorily, to inflate the expenditure and claim a larger amount as deduction. This only required that before allowing the expenditure the reasonableness of the claim was checked up but that would not by itself lead to the disallowance of the claim as such. While in the wake of an established custom or practice an amount of money spent on the purpose had to be allowed as deduction, where the assessee supplies further details his claim becomes stronger. In the instant case, the details maintained by the assessee over the years showed that the assessee had systematically dealt with these payments. Thus, the sales to the mills, the articles sold, the name of the particular mill, the date of sale etc., were available along with the percentage of commission amounts which, if added together, tallied with the amounts withdrawn from the bank. The withdrawal itself was done by a responsible director and this systematic procedure had been going on for nearly three decades and more. The details kept by the company were as complete as they could be in the context of the secret nature of the payments. In this view of the matter, there should be no hesitation to hold that the claim of secret commission should be allowed. There was also no case for interfering with the quantum of secret commission claimed as it comprised a very small percentage of the turnover and compared favourably with the other items of the assessee's expenditure. As regards the contention that the payments were opposed to public policy, the position is that where the parties involved are purely private businessmen or their employees, whatever may be the ethical or moral content involved, their action could not be regarded as opposed to the public policy unless it infringed some established custom or law or practice. The question of public policy couldn't arise in the instant case where all activities were in the sphere of private business in which self-interest is the best respected currency. Therefore, the assessee's claim had to be allowed for all the relevant assessment years
14. The ratio of the decision of the ITAT in the case of Indokem Ltd. (supra) also supports the case of the appellant. In the said decision also, it was held that allowability of the secret commission depends on facts like the prevailing practice in the trade, reasonableness of the amount claimed as deduction and the various parameters governing the payments. The payment of secret commission found to be actually made was held to be an allowable deduction.
15. It may also be mentioned that the appellant has maintained full details of the rebate & refunds. Though it is true that the names of the actual recipients have not been mentioned, the name of the employer-companies of these recipients have been entered by the appellant in its books of account. The details of company-wise payments have been placed on record at pages 8 and 9 of the material papers. This fact would, therefore, go to show that the appellant had in fact incurred the expenditure.
16. In view of the reasons mentioned above, we are of the view that the appellant has in fact made the payments and the past practice in the case of the appellant itself suggests that such payments were claimed by the appellant and allowed by the Revenue and also the judicial decisions support the case of the appellant. We, therefore, hold that the addition made by the Assessing Officer and the enhancement done by the CIT (Appeals) was not justified and is accordingly deleted. The appellant gets a relief of Rs. 3,17,379 on this count.
17. The last contention of the appellant is against an addition of Rs. 10,000 out of telephone expenses. The learned counsel for the appellant points out that only one telephone is located in the business premises of the managing partner and all the other telephones are located in the business premises of Head Office and Branches. All the telephone calls made from the telephones in the business premises were for the purpose of business. In respect of the telephone which was installed at the place of the managing partner, only a sum of Rs. 15,000 was incurred. The disallowance out of the said amount to the extent of Rs. 10,000 is, therefore, not justified.
18. On the other hand, the learned departmental representative supports the decision of the first appellate authority.
19. On a proper appreciation of the facts of the case, we find that out of a total claim of Rs. 3,01,030 as telephone expenses, the expenditure relating to the telephone installed at the residence of the partner is only Rs. 14,249 out of which a sum of Rs. 10,000 has been disallowed. It may also be mentioned that the disallowance has been made by the Assessing Officer and sustained by the CIT (Appeals) on the presumption that the partner must have used the telephone for his personal purpose also. We are, however, of the view that the branches of the assessee are spread over different cities and towns and, therefore, the partner was required to contact the branches for the purpose of business. The reason for this our conclusion is that compared to the total expenditure of more than Rs. 3 lakhs on telephone, the expenses on this telephone of Rs. 14,249 are very reasonable and, therefore, we do not find any justification for the disallowance. We, therefore, direct the Revenue to exclude the sum of Rs. 10,000 from the total income of the appellant.
20. The appeal is allowed.