1988 (4) TMI 119 - AT - Income Tax

Assessment Notice, Assessment Proceedings, Business Expenditure, Chargeable To Tax, Public Policy, Reassessment Notice, Reopening Assessment, Secret Commission

Issues Involved:
1. Validity of reopening the assessment under Section 147(b) of the Income-tax Act, 1961.
2. Disallowance of expenses towards payment of secret commission.
3. Disallowance of bonus paid to directors under Section 36(1)(ii).
4. Disallowance of printing and stationery expenses.
5. Addition towards deficit cash balance.

Issue-wise Analysis:

1. Validity of Reopening the Assessment under Section 147(b):
The primary issue was whether the reopening of the assessment for the assessment year 1980-81 under Section 147(b) was valid. The Income-tax Officer (ITO) issued a notice under Section 147/148 on 5-7-1984 based on information obtained during the assessment proceedings for the subsequent year, which indicated payments in violation of Section 40A(3). The Commissioner of Income-tax (Appeals) [CIT(A)] upheld the reopening, relying on Explanation (2) to Section 147 and relevant case law, concluding that the ITO had valid reasons to believe that income had escaped assessment. The Tribunal agreed, stating that the ITO had sufficient material before issuing the notice and that the reopening was justified. The Tribunal also noted that the reasons for reopening need not be communicated to the assessee, and the ITO's belief was based on reasonable grounds.

2. Disallowance of Expenses towards Payment of Secret Commission:
The assessee claimed deductions for expenses towards secret commission, which were disallowed by the ITO as bogus. The ITO found that the parties in whose names the commissions were claimed denied receiving any payments, and the cheques were encashed by the assessee's employees. The CIT(A) confirmed the disallowance, and the Tribunal upheld this decision, noting that the assessee failed to establish the identity of the payees or the fact of payment. The Tribunal also held that secret commissions, even if paid, were against public policy and not allowable under Section 37.

3. Disallowance of Bonus Paid to Directors under Section 36(1)(ii):
The ITO disallowed the bonus paid to directors, stating that it would have been payable as dividends if not paid as bonus. The CIT(A) upheld this disallowance, finding that the bonus was not proportionate to the services rendered. The Tribunal remanded the issue back to the CIT(A) for reconsideration, directing a detailed examination of the directors' shareholding, employment status, and services rendered.

4. Disallowance of Printing and Stationery Expenses:
The ITO disallowed Rs. 15,530 towards printing and stationery expenses due to the absence of vouchers. The CIT(A) confirmed this disallowance. The Tribunal upheld the disallowance, noting that the assessee failed to provide evidence for the claimed expenses. However, the Tribunal allowed the addition to be telescoped into the larger disallowance of bogus commission payments.

5. Addition towards Deficit Cash Balance:
The ITO added Rs. 35,567 towards deficit cash balance, which was confirmed by the CIT(A). The Tribunal held that the deficit cash balance could be met from the disallowed bogus commission payments and allowed the addition to be telescoped into the larger disallowance of Rs. 5,51,856 towards bogus commission payments.

Conclusion:
The Tribunal upheld the reopening of the assessment under Section 147(b) and confirmed the disallowance of secret commission payments, noting that they were bogus and against public policy. The disallowance of bonus paid to directors was remanded for further examination. The disallowance of printing and stationery expenses was confirmed, with the addition being telescoped into the larger disallowance. Similarly, the addition towards deficit cash balance was also telescoped into the larger disallowance. The appeal was partly allowed.

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