2015 (8) TMI 470 - HC - Income Tax

Disallowance the commission paid to the agents - agents were appointed for selling Indian Made Foreign Liquor manufactured by it to the Kerala State Beverages Corporation, a wholly owned Kerala Government Company - Tribunal deleted disallowance - Held that - Division Bench judgment of this Court reported in Commissioner of Income Tax v. Premier Breweries Ltd. 2005 (3) TMI 83 - KERALA High Court wherein held that the Tribunal should allow the claim only on being satisfied about the genuineness of the claim and the purpose for which commission was paid. The contention of the Revenue is that liquor distribution in the State is the monopoly of the sole marketing agency, which is the KSBC, a wholly owned Kerala Government company. Accordingly, there is no scope for paying any commission for the sale of liquor to a Government company. We find force in this contention because, collection of commission or incentive if any by a Government company or its employees would amount to a corrupt practice. There is prohibition against advertisements of liquor for sales promotion. Therefore, it is essentially a matter of selection of manufacturers and brands which should not involve any payment of commission because the sole purchaser in Kerala happens to be a Government company. The Tribunal allowed the appeals following the orders of earlier years, which, though was challenged in this Court was not considered on merits for the reason that the department did not press the appeals. We do not think the claim can be allowed on a regular basis merely because it was allowed in one year or for several years. If a mistake has happened, it can always be corrected in a subsequent assessment. Therefore, we feel matters require critical examination by the assessing officer. The assessee should be given full opportunity to give the entire details of the expenditure claimed under commission payments or if marketing expenses incurred are claimed as commission, the details thereof. We, therefore, allow the appeals by setting aside the orders of the Tribunal and that of the 1st appellate authority and remand the matter to the assessing officer to decide the matter afresh after giving opportunity to the assessee - Decided in favour of revenue for statistical purposes.

Issues Involved:
1. Whether the appeals filed by the Revenue are maintainable in light of Instruction No.5/2014 issued by the Central Board of Direct Taxes.
2. Whether the commission paid by the assessee to agents for selling Indian Made Foreign Liquor to the Kerala State Beverages Corporation is eligible for deduction.

Issue-wise Detailed Analysis:

1. Maintainability of Appeals in Light of Instruction No.5/2014:

The primary contention raised by the respondent assessee was based on Instruction No.5/2014 dated 10th July 2014, which set a monetary limit of Rs. 10,00,000/- for maintaining an appeal under Section 260A. The respondent argued that since the tax effect in these appeals was below this limit, the appeals should be dismissed. The Revenue countered this by arguing that the applicability of the Instruction should be judged based on the date of filing of the appeals, which in these cases were filed in 2001, 2003, and 2006, well before the issuance of Instruction No.5/2014.

The court examined the language of Instruction No.5/2014, particularly paragraphs 3 and 11, which explicitly state that the Instruction applies prospectively to appeals filed on or after 10th July 2014. The court concluded that the Instruction cannot affect appeals filed before this date. Therefore, the appeals in question, filed before 10th July 2014, are governed by the instructions operative at the time of their filing.

The court also addressed the alternative contention that ITA 50/02, filed on 9.10.2001, could not be maintained as the tax effect was below Rs. 2,00,000/-, the limit set by Instruction No.1979 dated 27th March 2000. The court referred to the Supreme Court's judgment in Commissioner of Income Tax v. Surya Herbal Limited, which held that High Courts could ignore circulars and decide statutory appeals on merits if the question involved is substantial. Based on this, the court rejected the alternative contention as well.

2. Deductibility of Commission Paid to Agents:

The court then addressed the substantive issue of whether the commission paid by the assessee to agents for selling liquor to the Kerala State Beverages Corporation (KSBC) is deductible. The Revenue argued that since KSBC is a wholly owned Kerala Government company with a monopoly on liquor distribution, there was no scope for paying any commission. The court found merit in this argument, noting that any commission paid in such a context could amount to a corrupt practice, as KSBC is the sole purchaser in Kerala.

The court referred to its earlier judgment in ITA Nos.95/10 and 168/10 concerning the same assessee and similar issues for the assessment years 2000-2001 and 2001-2002. In that case, the court had set aside the orders of the Commissioner (Appeals) and the Tribunal, remitting the matter back to the Assessing Officer for reconsideration. The court emphasized that the genuineness of the commission payments needed critical examination by the Assessing Officer, with the assessee being given full opportunity to provide details of the expenditure claimed.

Following this precedent, the court set aside the orders of the Commissioner (Appeals) and the Tribunal for the assessment years 1991-1992, 1992-1993, 1994-1995, 1995-1996, 1996-1997, and 2002-2003. The matters were remitted to the Assessing Officer to decide afresh, giving the assessee an opportunity to present details and, if necessary, calling for particulars or clarification from KSBC.

Conclusion:

The appeals were disposed of with directions to the Assessing Officer to reconsider the matter of the commission payments, following the precedent set in ITA Nos.95/10 and 168/10. The court clarified that Instruction No.5/2014 does not apply to appeals filed before 10th July 2014, and the substantial question of law involved justified the court's decision to proceed on merits.

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