1985 (5) TMI 84 - AT - Income Tax

Summary

Issues Involved:
1. Legitimacy of the special commission payments.
2. Justification and evidence for the claimed business expenditure.
3. Imposition of penalty under Section 271(1)(c) of the IT Act, 1961.
4. Interpretation of mens rea and the amended Explanation to Section 271(1)(c).

Detailed Analysis:

1. Legitimacy of the Special Commission Payments:

The Income Tax Officer (ITO) scrutinized the accounts of the assessee-company and noted that the company had debited Rs. 41,875 as special commission paid to two parties. The ITO required the assessee to explain the nature of these payments and to produce supporting bills and vouchers. The assessee failed to provide the necessary evidence or details regarding the nature of orders procured by the parties. Consequently, the ITO inferred that the amount could not be accepted as a legitimate deduction from the total income due to the absence of supporting details. This decision was upheld by both the Commissioner of Income Tax (Appeals) [CIT(A)] and the Tribunal, which noted that the assessee's counsel failed to produce any evidence of actual services rendered by the selling agents.

2. Justification and Evidence for the Claimed Business Expenditure:

The ITO's disallowance of the special commission payments was based on the lack of evidence provided by the assessee. The CIT(A) observed that the only justification for the payments was a Board's resolution and a letter stating that the commission was paid for executing orders worth Rs. 5.05 lakhs. However, the CIT(A) agreed with the ITO that sufficient justification was not made out for these payments, noting the absence of details regarding the actual sales and the rate of commission. The Tribunal further reinforced this by stating that the assessee did not furnish any supporting evidence or details regarding the nature of the orders procured by the selling agents.

3. Imposition of Penalty under Section 271(1)(c):

The ITO initiated action under Section 271(1)(c) for concealment of income, imposing a penalty on the assessee. The ITO noted that the claim for special commission could only be allowed if it could be shown that services were actually rendered by the parties to whom the commission was paid. The assessee failed to produce any evidence regarding the necessity or justification for the payment. The ITO concluded that the claim was not a genuine business expenditure and that the assessee could not entertain a bona fide belief that it was so. Therefore, the amount was deemed to represent income in respect of which particulars had been concealed within the meaning of Explanation I to Section 271(1)(c).

4. Interpretation of Mens Rea and the Amended Explanation to Section 271(1)(c):

The CIT(A) accepted the assessee's plea that the disallowance of the claim did not justify the levy of penalty under Section 271(1)(c), as there was no material to show that the claim was fraudulent or deceitful. The CIT(A) emphasized the necessity of establishing mens rea for imposing a penalty. However, the Department argued that the CIT(A) misdirected himself in law by not considering the amended Explanation to Section 271(1)(c), effective from April 1, 1978. The Explanation shifts the onus of proving mens rea from the ITO to the assessee, requiring the assessee to substantiate the explanation with cogent evidence. The Tribunal agreed with the Department, noting that the assessee failed to substantiate its explanation and did not disclose all material facts necessary for the computation of total income. Consequently, the Tribunal reversed the order of the CIT(A) and restored the ITO's order, upholding the imposition of the minimum penalty.

Conclusion:

The Tribunal concluded that the assessee failed to provide sufficient evidence to justify the special commission payments as legitimate business expenditure. The lack of substantiation led to the disallowance of the claim and the imposition of a penalty for concealment of income under Section 271(1)(c). The Tribunal emphasized the amended Explanation to Section 271(1)(c), which places the onus on the assessee to prove the bona fide nature of the explanation and disclose all relevant facts. The Department's appeal was allowed, and the penalty imposed by the ITO was upheld.