2009 (3) TMI 76 - HC - Income Tax

Commission Agent agreements with foreign company was in Individual names of the MD commission was booked in the books of account of the company an investigation revealed that entire exercise has been undertaken by the Company to absolve Shri Amin (MD) from violation of Foreign Exchange Regulation Act - receipt of the payment having been acknowledged by authorized person of the assessee Company held that entire amount of commission is taxable in the hands of company.

Issues Involved:
1. Taxability of commission received by the assessee company in the assessment year 1985-86.
2. Addition on account of sale of scrap outside the books of account.
3. Disallowance of advertisement expenses under Section 37(3A) of the Income Tax Act.
4. Allowability of payment for consultation services to a sister concern.

Issue-wise Detailed Analysis:

1. Taxability of Commission Received by the Assessee Company in Assessment Year 1985-86:
The Tribunal addressed whether the commission received by the assessee company from foreign entities was taxable in the assessment year 1985-86. The assessee argued that it followed the Cash System of Accounting and returned the commission as income in the assessment year 1988-89 when it was actually received. The Tribunal upheld the findings of the Assessing Officer and Commissioner (Appeals) that the commission was taxable in 1985-86, as the funds were received by the Managing Director on behalf of the company and were intended for the company's use. The Tribunal rejected the claim that the company had no knowledge of the funds, stating that the Managing Director acted as an agent for the company, and the receipt by the agent was equivalent to the receipt by the principal. The Tribunal found no merit in the contention that the company was unaware of the commission payments, as the Managing Director had admitted to entering into commission agreements on behalf of the company and retaining the funds for the company's benefit.

2. Addition on Account of Sale of Scrap Outside the Books of Account:
The Tribunal examined whether the addition of Rs. 3,00,000/- for the sale of scrap outside the books was justified. The Assessing Officer made an additional estimation based on the state of accounts maintained by the company, which lacked complete records of scrap generation and sales. The Commissioner (Appeals) and the Tribunal upheld the addition, noting that the company's records were inherently deficient, and a token addition was necessary to cover the discrepancies. The Tribunal emphasized that the company's admission of the lack of control over scrap generation justified the addition, despite the absence of direct evidence of unrecorded scrap sales.

3. Disallowance of Advertisement Expenses under Section 37(3A):
The Tribunal considered whether the sum of Rs. 8,93,653/- spent on publishing and distributing technical literature should be included for computing disallowance under Section 37(3A). The Tribunal concluded that the expenses were not for general advertisement but for providing product details to a specific group of dealers. Thus, these expenses did not qualify as advertisement expenses under Section 37(3A). The Tribunal's decision was supported by a precedent from the Gujarat High Court in the case of Commissioner of Income-tax Vs. Torrent Laboratories Pvt. Ltd., which held that such expenses are not subject to disallowance under Section 37(3A).

4. Allowability of Payment for Consultation Services to a Sister Concern:
The Tribunal addressed whether the payment of Rs. 2,00,000/- for consultation services to a sister concern was allowable as a revenue expenditure. The Tribunal found that the expenditure was incurred for the expansion of an existing project, not for setting up a new unit, and thus was revenue in nature. The Tribunal's finding was based on the undisputed fact that the factory was an existing unit undergoing expansion. Consequently, the Tribunal held that the payment was allowable as a revenue expenditure.

Conclusion:
The Tribunal answered the questions in favor of the revenue concerning the taxability of commission and the addition for scrap sales. It ruled in favor of the assessee regarding the disallowance of advertisement expenses and the allowability of consultation service payments. The Tribunal's decisions were based on a thorough examination of the facts, relevant legal principles, and precedents.

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