1991 (1) TMI 211 - AT - Income Tax

Summary

Issues Involved:
1. Disallowance of brokerage and discount on sales (commission) for assessment years 1984-85 and 1985-86.
2. Admissibility and evidentiary value of the statement made by the Managing Director under section 132(4) of the Income-tax Act.
3. Whether the company received back the commissions paid to the authorized dealer firms.
4. Whether allowing of discount or commission on sales up to 40% is a well-recognized trade practice in the assessee's line of business.
5. Applicability and retrospective effect of the Explanation to section 132(4) of the Income-tax Act.

Issue-wise Analysis:

1. Disallowance of Brokerage and Discount on Sales (Commission):
The assessee claimed deductions for commissions paid to authorized dealers for the assessment years 1984-85 and 1985-86. The Income-tax Officer disallowed these payments, suspecting them to be excessive and not wholly and exclusively for business purposes. The Commissioner of Income-tax (Appeals) partially allowed the claims but sustained some disallowances. The Tribunal found that the commissions were paid under valid agreements and were necessary for business operations. The Tribunal noted that the payments were made through account payee cheques and were accounted for in the books of the dealer firms, which were assessed to tax. The Tribunal concluded that the commissions were not excessive or unreasonable, considering the trade practice in the industry.

2. Admissibility and Evidentiary Value of the Statement under Section 132(4):
The Tribunal examined the statement made by the Managing Director, Shri K.V.R. Chowdary, during a search operation. The statement admitted that the commissions paid to the dealer firms were, in reality, the income of the assessee company. The Tribunal debated whether this statement was admissible and binding on the company. The Tribunal concluded that the statement was made voluntarily but lacked corroborative evidence to prove its truth. The Tribunal noted that no unaccounted funds or investments were discovered, and the statement alone could not form the basis for disallowing the commissions.

3. Whether the Company Received Back the Commissions Paid:
The Tribunal analyzed the evidence to determine if the commissions paid to the dealer firms were received back by the company. The Tribunal found no material evidence linking the company to any amounts flowing back from the dealer firms. The Tribunal noted that the dealer firms were registered and assessed as genuine firms, and the commissions were accounted for in their books. The Tribunal concluded that the leads provided by the Revenue did not establish that the company received back the commissions.

4. Whether Allowing of Discount or Commission on Sales up to 40% is a Well-Recognized Trade Practice:
The Tribunal examined the trade practice of allowing commissions in the industry. The Tribunal found evidence in the assessee's books and from other manufacturers indicating that similar commissions were paid. The Tribunal concluded that allowing commissions up to 40% was a well-recognized trade practice in the assessee's line of business and that the commissions paid by the assessee were not unreasonable or excessive.

5. Applicability and Retrospective Effect of the Explanation to Section 132(4):
The Tribunal discussed the Explanation to section 132(4) of the Income-tax Act, which was introduced with effect from 1-4-1989. The Explanation clarified that examination under section 132(4) could extend to all matters relevant for investigation, not just materials found during the search. The Tribunal debated whether this Explanation applied retrospectively. The Tribunal concluded that the Explanation was prospective and did not apply to examinations conducted before its introduction. However, the Tribunal noted that the statement made by Shri K.V.R. Chowdary could still be considered as evidence, even if gathered before the Explanation was introduced.

Conclusion:
The Tribunal allowed the assessee's appeals, concluding that the commissions paid were genuine business expenses, supported by valid agreements and trade practices. The Tribunal dismissed the departmental appeals, finding no evidence that the commissions were received back by the company or that the payments were excessive or unreasonable.