1991 (5) TMI 97 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of commission expenses paid to selling agents.
2. Contravention of agreement terms with selling agents.
3. Independent existence and services rendered by Bipco Sales Corporation.
4. Relationship between partners of the assessee and Bipco Sales Corporation.
5. Reasonableness of commission payment under section 40A(2) of the Income-tax Act.
6. Legitimacy of survey operations and statements recorded under section 133A.

Issue-wise Detailed Analysis:

1. Disallowance of Commission Expenses Paid to Selling Agents:
The assessee, a registered firm, had its assessment year 1982-83 completed with a total income of Rs. 15,51,048. The IAC disallowed commission expenses amounting to Rs. 11,91,114 paid to three parties, including Bipco Sales Corporation, citing reasons such as non-compliance with the agreement terms and lack of evidence of services rendered. The CIT(A) initially set aside the assessment, directing the IAC to provide the assessee an opportunity for cross-examination and to make specific inquiries about the services rendered by the agents. Upon reassessment, the IAC maintained the disallowance, concluding that the assessee failed to prove the services rendered by Bipco, suggesting that the commission was a device to divert profits.

2. Contravention of Agreement Terms with Selling Agents:
The IAC pointed out that the assessee did not comply with clause 3 of the agreement with Bipco, which required the delivery of goods from the factory to the agents for sale. Instead, deliveries were made directly to customers, with challans in Bipco's name. The CIT(A) accepted the assessee's argument that the procedure had been modified for convenience, and deliveries were made from the office instead of the factory. The CIT(A) also noted that the presence of Bipco's employees at the assessee's premises was necessary for sorting and forwarding goods to customers.

3. Independent Existence and Services Rendered by Bipco Sales Corporation:
Bipco Sales Corporation was recognized as an independent entity, assessed to tax as a registered firm since the assessment year 1972-73. The assessee argued that Bipco rendered substantial services, including procuring orders, sorting and packaging goods, securing payments, and incurring expenses for rent, taxes, and insurance. The CIT(A) initially found these arguments convincing and directed further inquiries. However, the IAC, upon reassessment, concluded that Bipco did not render any genuine services and that the commission was a means to siphon profits.

4. Relationship Between Partners of the Assessee and Bipco Sales Corporation:
The IAC and CIT(A) noted the close relationship between the partners of the assessee and Bipco, with partners' wives and close relatives being partners in Bipco. This raised suspicions of profit diversion. Despite this, it was established that Bipco had independent operations, separate licenses, and incurred significant expenses, indicating genuine business activities. The Tribunal found that the relationship alone did not negate the legitimacy of the services rendered by Bipco.

5. Reasonableness of Commission Payment Under Section 40A(2) of the Income-tax Act:
The issue of reasonableness of the commission payment under section 40A(2) was not considered by the revenue authorities. The Tribunal noted that the commission payments had been consistently allowed in previous years, and Bipco had been assessed to tax on such commission income. The Tribunal found no evidence to suggest that the commission payments were unreasonable or excessive.

6. Legitimacy of Survey Operations and Statements Recorded Under Section 133A:
The survey operations conducted under section 133A revealed that the assessee and Bipco shared premises, employees, and resources. The IAC used these findings to support the disallowance of commission expenses. However, the Tribunal found that the survey did not provide conclusive evidence to negate the genuineness of the services rendered by Bipco. The Tribunal emphasized that Bipco had been functioning as a sole selling agent for over a decade and had been assessed to tax on its commission income.

Conclusion:
The Tribunal reversed the CIT(A)'s order, allowing the assessee's appeal. It concluded that Bipco Sales Corporation rendered genuine services justifying the commission payments. The Tribunal emphasized the independent existence of Bipco, its long-standing business relationship with the assessee, and the lack of evidence to support the revenue's claim of profit diversion. The appeal was allowed in part, affirming the legitimacy of the commission expenses incurred by the assessee.