1992 (3) TMI 110 - AT - Income Tax

Summary

Issues Involved:
1. Confirmation of disallowance of unvouched commission paid by the assessee.
2. Assessment of the necessity and business purpose of secret commission.
3. Evaluation of past practices and decisions regarding secret commission.
4. Determination of the burden of proof for claiming deductions under section 37(1) of the Income-tax Act.
5. Consideration of public policy in relation to secret commissions.
6. Extent of allowable deduction for secret commission.

Issue-Wise Detailed Analysis:

1. Confirmation of Disallowance of Unvouched Commission Paid by the Assessee:
The primary issue concerns the disallowance of Rs. 5,20,055 as unvouched commission by the Assessing Officer (AO). The AO scrutinized the nature of the commission and concluded that the payments were not substantiated with proper evidence. The assessee argued that the payments were made to petty employees of printing presses to ensure continued patronage, but the AO found no records of the actual recipients, thus disallowing the entire claim.

2. Assessment of the Necessity and Business Purpose of Secret Commission:
The assessee claimed that the secret commission was essential for maintaining business relationships and was a common practice in their industry. However, the AO and CIT (Appeals) challenged the necessity and authenticity of these payments. The CIT (Appeals) noted that while past records could guide, they did not bind the AO's decision in subsequent years if new facts warranted a different conclusion.

3. Evaluation of Past Practices and Decisions Regarding Secret Commission:
The assessee presented historical data showing that secret commissions had been partially allowed in previous years, except for two instances where the entire amount was disallowed. The CIT (Appeals) acknowledged the past practice but emphasized that it did not estop the AO from making a full disallowance if justified. The assessee cited several Tribunal decisions where secret commissions were allowed, but the CIT (Appeals) found these references insufficient to alter the current year's disallowance.

4. Determination of the Burden of Proof for Claiming Deductions Under Section 37(1) of the Income-tax Act:
The departmental representative argued that the burden of proof to establish that the expenditure was wholly and exclusively for business purposes rested on the assessee. The Tribunal cited the Bombay High Court's decision in Goodlass Nerolac Paints Ltd. [1982] 137 ITR 58, which held that the assessee must prove the genuineness of such payments. The Tribunal concluded that the assessee had not sufficiently discharged this burden due to the lack of recipient details.

5. Consideration of Public Policy in Relation to Secret Commissions:
The AO and CIT (Appeals) both opined that secret commissions, even if paid to private parties, were contrary to public policy and thus not allowable as revenue expenditure. The Tribunal reiterated this stance, emphasizing the need for transparency and proper documentation in business transactions.

6. Extent of Allowable Deduction for Secret Commission:
The Tribunal reviewed the past disallowance percentages and the current quantum of secret commission, which was over 33% of the profits earned. Considering the excessive nature of the claim and the lack of proper verification, the Tribunal concluded that a 50% disallowance of the secret commission was appropriate. This decision balanced the need to acknowledge some business practices while ensuring that only substantiated expenses were allowed.

Conclusion:
The Tribunal partially allowed the appeal, directing a 50% disallowance of the secret commission claimed by the assessee. This decision was based on the lack of adequate evidence, the excessive nature of the claim, and the principles established in the cited legal precedents.