1983 (1) TMI 96 - AT - Income Tax

Summary

Issues Involved:
1. Justification of the commission payment to Photo Colour.
2. Applicability of the principle of res judicata in income-tax proceedings.
3. Proof of services rendered by Photo Colour.
4. Relationship between the partners of the assessee firm and Photo Colour.
5. Adequacy of the opportunity given to the assessee to present its case.

Issue-wise Detailed Analysis:

1. Justification of the commission payment to Photo Colour:
The primary issue was whether the payment of Rs. 60,743 as commission to Photo Colour was justified and for business purposes. The Income Tax Officer (ITO) disallowed the commission payment, stating that it was not justified and was made for considerations other than business purposes. The Appellate Assistant Commissioner (AAC) upheld this disallowance, reasoning that the payment appeared to be a diversion of income due to the relationship between the partners of both firms. The Tribunal's Judicial Member agreed with the lower authorities, emphasizing that there was no proof on record that Photo Colour rendered any services to the assessee.

2. Applicability of the principle of res judicata in income-tax proceedings:
The ITO argued that the principle of res judicata did not apply to income-tax proceedings, allowing the revenue to depart from the past record. The AAC supported this view, stating that each assessment year is a separate entity, and it must be shown that the payment was for business considerations each year. The Judicial Member of the Tribunal concurred, noting that the revenue was within its rights to deviate from past records if there was no material on record for the current year.

3. Proof of services rendered by Photo Colour:
The ITO and AAC both concluded that there was no evidence that Photo Colour rendered any services to the assessee. The Judicial Member of the Tribunal agreed, stating that the assessee failed to prove that the recipient company rendered services that entitled it to the commission. Conversely, the Accountant Member argued that there was no evidence on record to prove that Photo Colour did not render the services contracted for, emphasizing that the agreement had been acted upon in previous years without dispute.

4. Relationship between the partners of the assessee firm and Photo Colour:
The ITO noted that the partners of Photo Colour were closely related to the partners of the assessee firm, suggesting that the agreement might be a means to divert profits and avoid proper taxation. The AAC and Judicial Member echoed this concern, highlighting the intimate connections between the partners. The Accountant Member, however, argued that there is no prohibition in law against relatives doing business inter se and that the relationship alone does not invalidate the agreement.

5. Adequacy of the opportunity given to the assessee to present its case:
The Tribunal's Judicial Member concluded that the assessee had been given a proper opportunity to present its case, and its explanations were rightly rejected by the lower authorities. The Accountant Member disagreed, stating that the ITO had not provided adequate opportunity for the assessee to address the new inferences drawn against it. He emphasized that the established positions should not be disturbed unless there are changes in fact, law, or reasoning, none of which were present in this case.

Separate Judgments:
The Judicial Member and the Accountant Member delivered separate judgments. The Judicial Member upheld the disallowance of the commission payment, agreeing with the ITO and AAC's findings. The Accountant Member dissented, arguing that there was no fresh evidence to warrant a departure from the established position that the agreement with Photo Colour was genuine and acted upon in previous years.

Third Member's Opinion:
The Third Member, agreeing with the Accountant Member, concluded that the previous decisions allowing the commission payments were made after due enquiry and were not arbitrary. He found no fresh facts to justify a departure from the earlier findings and emphasized that the relationship between the partners did not invalidate the agreement. The Third Member thus ruled in favor of the assessee, allowing the commission payment as a deductible expense.

Conclusion:
The appeal was ultimately decided in favor of the assessee, with the Third Member's opinion prevailing. The commission payment to Photo Colour was deemed justified and allowable as a deductible expense.