9911796707
TMI Blog1991 (1) TMI 211X X X X Extracts X X X X X X X X Extracts X X X X ..... n 143(3) though it has been erroneously stated as under section 143(1) on the body of the assessment order. The assessment for the assessment year 1985-86 under section 143(3) of the Income-tax Act was based on the materials gathered in the course of an extensive search conducted in the promises of the assessee, its directors and authorised dealers, on 10-2-1988 and 11-2-1988. While the learned Income-tax Officer did not have the advantage of such materials gathered subsequently for being used in the assessment for 1984-85, the assessment for 1985-86 proceeded on the basis of the materials collected in the course of the search conducted under section 132 of the Income-tax Act. For reasons discussed in the assessment orders, he disallowed the commission payments as follows:- Asst. Year Amount 1984-85 Rs. 86,76,463 1985-86 Rs. 56,16,426 4. The assessee carried the matter in appeal before the Commissioner of the Income-tax (Appeals). The first appellate authority disposed of the appeal for the assessment year 1984-85 after considering rival submissions and materials on record, by sustaining a disallowance of Rs. 10,00,000. The appeal for the assessment year 1985-86 was disposed o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany agrees to appoint M/s. Sri Bhanu Enterprises as one of the Authorised Dealers for the sale of the products manufactured by the company hereinafter referred to as 'SRMT' Auto Parts and the said Authorised Dealer agrees to act as such upon the following terms and conditions. 2. This agreement shall commence from 5th July, 1979 and shall be in force till subject to renewal thereafter by mutual consent of the parties hereto. 3. The Authorised Dealer shall during the said term book orders for 'SRMT' Auto Parts from dealers and Fleet Operators on the terms and conditions furnished hereunder: (a) The Authorised Dealer shall allow 25% discount on the list prices of the company to the Dealers irrespective of the value of the orders; (b) The Authorised Dealer shall extend the free freight, packing and forwarding to the destination for the supplies made by the company; (c) The Authorised Dealer shall have to allow additional discounts to the dealers basing on the circulars to be released by the company from time to time. 4. The Authorised Dealer shall not under any circumstances sell or offer for sale of 'SRMT' Auto Parts either by deviating the above discount policies or by over ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from selling the products directly or appointing other Authorised Dealer or Dealers. 15. This Agreement may be terminated by either side by giving two months notice and the date that such notice is posted will be taken for the purpose of calculating the time of two months. 16. Notwithstanding anything contained in the clause No. 15 above, the company may terminate this Agreement at any time hereafter by giving the Authorised Dealer one month's notice should the work of Authorised Dealer be not satisfactory in the opinion of the company and the decision of the company of the work of the Authorised Dealer shall be final. 17. All matters of disputes arising out of this Agreement are subject to the jurisdiction of Kakinada Courts only. 18. In witness whereof the parties aforesaid have set their respective hands to this Agreement on this day mentioned in the first para." Similar agreements have been entered into with the other firms. The Income-tax Officer was of the view that these agreements are sole-selling agency agreements and are violative of the provisions of section 294 of the Companies Act. 7. We have carefully gone through the orders of the Income-tax Officer and the fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t by the Income-tax Officer that the authorised dealer-firms constituted themselves as sole-selling agents of the assessee's products in violation of the provisions of section 294 and related sections of the Companies Act. The terms of the agreement are crystal clear. It did not result in the creation of any sole-selling agency right in favour of any one. In terms of clause 13 of the agreement quoted supra, the company has the right to sell its products in any area it likes. In fact, it has effected counter sales (see section 15 of Green Paper Book). A working arrangement for a smooth functioning of the sales effort cannot confer any enforceable right on the dealer-firms to claim exclusive rights or privileges. 'Me trade practice also is to market the goods through different authorised dealers in different areas due to operational needs and the exigencies of the business. The learned CIT(Appeals) has spelt out his reasonings which are based on material and we do not find any infirmity in his findings. For these reasons, we reject the contention of the learned Senior Departmental Representative that the payment of commission is violative of the provisions of section 294 of the Compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (i) booking of orders by the representatives of the dealer-firms, (ii) submission of copies of correspondence between the dealer-firms and the parties and (iii) the authorised dealer is saddled with responsibility for all the transactions carried out by him either directly or indirectly. The expression "indirectly" used in the agreement would mean that even in respect of sales made by the company directly, the authorised dealers are saddled with certain obligations. The assessee-company is not burdened with any loss that might arise on account of the lapses of the dealers in respect of their commitments with their parties. The dealer-firms have to make deposits as specified in clause 1 of the agreements. Even in the course of the search that was conducted subsequently on 10-2-1988 and 11-2-1988, no material was recovered that would militate against the terms of understanding. For one thing, there is no allegation that there was no correspondence between the authorised dealer and the parties. For another, there is no allegation that the orders were not canvassed by the representatives of the authorised dealers, though there is an allegation that they work at the behest of the compan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the customers, no material has surfaced to dislodge the finding of the learned CIT (Appeals) that the authorised dealer-firms through their representatives and agents have rendered services to the company. On the other hand, there is evidence to show that the dealer-firms were granted registration or continuation of registration by the Income-tax Officer in the post-search period, in his orders dated 27-3-1989 in the case of two firms, and in the case of another firm registration was refused as assessment was made under section 144. There is no material to controvert the fact that the representatives and agents were employed by the authorised dealers and not by the assessee as their names are borne in the registers of the authorised dealers but not in those of the assessee and the payments of their commission or salaries are met by the authorised dealers but not by the assessee. In fact, the employment and supervision of agents and representatives from north to south and east to west of the country is an important activity of the dealer-firms and the assessee-company, having a very large establishment with variegated activities, could as well feel relieved by divesting itself of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ough the orders of the learned Income-tax Officer for both the assessment years under appeal on this aspect of the matter. We have also carefully gone through the orders of the learned CIT (Appeals). There is material to show that in the case of trading in automobile spare parts, there is a trade practice to allow discount or commission on the sales effected by the manufacturer or by the dealer. As a matter of fact, the assessee has produced a few invoices from other manufacturers wherein a discount of 35% to 40% is allowed on spare parts (pages 6.16 to 6.20 of green paper book of the assessee) : Swamy Motors (Inv. No. 1298), Hyco Manufacturers of India (Inv. No. 4966), Trading Corporation, Delhi (Inv. No. 9987), Goyal Tractor and Scooter Spares (Inv. No. 8642), Anand Spares, Delhi (Inv. No. 594), Jamuna Auto Industries (Inv. No. 714). The learned Senior Departmental Representative admitted that these invoices show a discount of 35% to 40% allowed to the customers but he pleads that they were all in the periods relating to 1986 and 1987 and not in relation to the impugned assessment years. Sri Ratnakar submitted that the assessee was only trying to establish the trade practice in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oned for the purpose of arriving at the minimum amount of Rs. 36,00,000 but all the same additional discount is payable only on the total nett turnover of the business done by Mehta Trading Company. Thus, in no case additional discount was liable to be paid to the authorised dealers by the assessee-company. The Income-tax Officer has not brought on record instances of payment of additional discount to the dealer-firms on direct sales effected by the company to the parties, nor was any such instance brought to our notice. Hence, the allegation falls to the ground. We further note that the conditions for payment of additional discount are more stringent in the case of Kakinada firms than in the case of Mehta Trading Co., Bombay. The payment of 1% to 2% commission on direct sales effected by the company is not paid by the company but only the authorised dealer-firm to the brokers from out of their commission. 14. The company directly allowed 25% discount or commission to the customers, who are retail dealers or others, and deducted the same from the invoice value. This cannot be held to be a make-believe arrangement. The identity of the payee is known and the payment itself is by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alers even on direct sales depending on the nature of sales. The details of commissions received by the dealer-firms and paid by the dealer-firms to the retail dealers or customers for a number of years are to be found in the assessee's (green) paper book at pages 2.1 to 4.22. From a comparison of the commission allowed by the assessee-company to the authorised dealer-firms and the commission allowed by the latter to their customers, it can be safely said that 50% to 60% of such commission received from the assessee-company by the authorised dealer-firms was disbursed to the retail dealers or customers. The relevant figures, for example for the assessment year 1985-86, are as follows:- Commission Commission Name of the allowed by allowed by the dealer-firm the assessee dealer-firm Sri Bhanu Enterprises Rs. 32,55,485 Rs.18,03,911 (55.4%) Sri Bhaskara Auto Service Rs. 26,23,833 Rs. 12,16,753 (46.4%) Sri Prabhakar Enterprises Rs. 17,96,683 Rs. 10,26,059 (57%) The learned Income-tax Officer did not deny that the authorised dealer-firms passed on a part of the commission as above to the retail dealers or customers. Therefore, out of the 15% commission earned by the dealer-firms ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ir hands, and if at all any disallowance is warranted, it cannot be the total commission as in the case of assessment year 1984-85. 16. The crucial question is whether the revenue is entitled to tax net commission or any part of it in the hands of the assessee-company. In answering this question, we have to consider several aspects of the matter. 17.1 One aspect of the matter is whether there was need for an arrangement with the dealer-firms in the carrying on of the business of the company. Sri Ratnakar submitted that the assessee-company was not only dealing in automobile spare parts but had a variety of activities. Marketing of automobile spare parts involves meticulous canvassing, booking of orders, attending to complaints and realisation of debts. In such consumer products dealership arrangements are very common and are found to be more convenient and economical. The company did not want to take additional responsibility by marketing the products itself through its channels but instead preferred to concentrate on the manufacture of the products which has to be done with great care and precision with an eye on quality as the products are used in automobiles. For these reasons ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntry. We also see the point in Sri Ratnakar's argument that the assessee in view of its desire to concentrate on the manufacture and its varied activities, left the business of procuring the market to the authorised dealers through the canvassing agents or authorised representatives. The assessee manufactures about 300 different items of automobile spare parts used in heavy vehicles. In addition to large companies like TVS Ltd., Rani India Ltd., there, are other small manufacturers in the field. Besides, the assessee is also running a parcel service the income from which is of the order of Rs. 4,74,56,069 and Rs. 5,48,53,943 for the two years under appeal. Further, it is also engaged in the sale of Tata Diesel Vehicle Chassis, air-conditioners, water coolers and heaters, Voltas' products, room coolers etc., apart from the sale of spares, tyres, tubes and batteries. We are told that it employs about 3,500 people on its rolls in manufacturing and other activities. There is force in the contention that in the light of variety of activities, the assessee wanted to divest itself of the marketing functions in respect of the automobile spare parts which are as many as 300 in number. The a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dhakrishna Murty. Excepting controlling the activities of the above brokers or representatives, the firm of M/s Sri Bhanu Enterprises does not carry on any other operations. We write our accounts on the basis of the credit notes given by the company S.R.M.T. I cannot immediately tell you how much is the commission paid to our representatives at the rate of 1% and 2%. In other words the commission is paid on the direct orders received by the company S.R.M.T." Similarly, one of the questions put to Sri Bhamidipati Nageswara Rao and the answer thereto in his sworn statement dated 4-7-1986 were as follows :--- "Q. What are the duties of your firm in order to earn the commission given by SRMT? A. We employ six agents. They are (1) S. Prakasarao; (2) N.S.R. Murthy ; (3) N. Rama Murty; (4) P. Prema Chandran; (5) Damera Enterprises; (6) PASBS Baburao. The first five are paid brokers. The last employee, i.e. Baburao gets salary. Brokerage is paid at the rate of 1% on direct orders received by the company and 2% on booked orders." 18.1 From the above, the Income-tax Officer deduced that the representatives mentioned above are the persons actually working for the assessee-company and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs or representatives and that the commission is paid to their representatives at the rate of 1% and 2% even though the exact amount could not be named. They had also stated that the brokers received commission even on orders received by the company directly. The Managing Partner of Sri Bhaskara Auto Service is admitted to have 6 agents or brokers one of whom is a salaried person and brokerage is paid at 1% on direct orders received by the company and 2% on orders booked through them. Apart from the engagement of these brokers by the authorised dealer-firms, the important aspect of the matter is supervision and control of their activities. We have noticed earlier in our order that one of the reasons for appointing these authorised dealer-firms was for the company to rid itself of the botheration of looking after the marketing functions. This control aspect is admitted to have been exercised by these authorised dealer-firms and no material has surfaced to show that these firms did not exercise control over the freelance brokers or their representatives in spite of a massive search in their premises. The payment of commission to the brokers even on direct orders received by the compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... als) has recorded a finding that these brokers were in the employment of the authorised dealers and the commission paid to them was adjusted in the accounts of the authorised dealers. In this connection, we may usefully refer to certain additional material unearthed in the course of the search during the period from 10-2-1988 to 12-2-1988. We have already admitted the additional material for our consideration. Among the loose papers seized from the premises of Sri Prabhakar Enterprises (marked A6), there is a letter dated 21-8-1985 from HMM Ltd., Dowlaiswaram, addressed to the assessee-company with "Attention: Mr. Ch. V.V. Satyanarayana" requesting for immediate supply of 3 Voltas air-conditioners for which orders were placed. At the relevant time, Sri Ch.V.V. Satyanarayana was the Managing Partner of M/s Sri Prabhakar Enterprises, a dealer in Voltas' products. The Income-tax Officer also referred to his sworn statement dated 10-2-1988 and thus inferred that the entire business of Sri Prabhakar Enterprises belonged to Sri. K.V.R. Chowdary, Managing Director of the assessee-company. 18.7 We have heard rival submissions. We are not on the issue whether the entire business of Sri Pra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is. The learned senior Departmental Representative relied on the orders of the Income-tax Officer. 18.9 Having regard to the submissions made before us, we do not see how such a letter written by a representative can go to prove that the dealer-firm is only a device and its employees are really the employees of the company. For one thing, the Marketing Manager Sri Venkata Rao had not been examined on the representation by Sri Sundara Mahalingam, the Bangalore representative. For another, the representative himself has not been examined. Without examining them and also without going into the circumstances in which such a letter came to be written, we feel that one should not hasten to draw an adverse inference. 18.10 Sri Rangabhashyam relied on another letter of one Sri Ramamurty, another. area representative, addressed to Sri K. Sarathy, Joint Managing Director of the assessee-company, on 13-11-1987 which reads as under:- "I wrote nearly 6 letters requesting your goodself to send me the balance standing to my credit with M/s Sri Bhaskara Auto Service and so far I have not received any payment." He also referred to another letter dated nil in which the representative writes to S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... do- dt. -do- 45 to 48 7. -do- dt. 4-7-1986 49 to 52 8. Sri K. Muralidhar, employee of Sri Bhaskara Auto Services, dt. 10-2-1988 55 to 64 9. Sri Anaparthi Sriramulu dt. 10-2-1988 65 to 68 10. Sri Chandrada Subba Rao, Pr. in Sri Prabhakar Enterprises, dt. 10-2-1988 69 to 72 11. -do- dt. 10-2-1988 73 to 76 12. Sri J. Mangaraju dt. 10-2-1988 77 to 92 13. Sri. M.V.V. Satyanarayana Rao dt. 10-2-1988 93 to 108 He also made an analysis of the withdrawals from the bank accounts of 14 of the partners in M/s Sri Bhaskara Auto Service and 7 of the partners in M/s Sri Bhanu Enterprises. Reading together the statements of the partners as listed above and on an analysis of the withdrawals in the partners' accounts as mentioned above, he came to the conclusion that commission, which was initially paid to these dealer-firms, had been ploughed back to the coffers of the assessee-company; at any rate, it was a device to divert the profits of the assessee-company. Thus, he disallowed the net commission paid for the assessment year 1985-86. It is pertinent to recall that the above statements were not available before the Income-tax Officer when he completed the assessment for the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ffected by him, of the products of SRMT Ltd. After deducting the overriding commission, given away to the retail dealers the net income in the hands of the above said three partnership firms, has suffered tax, as income-of said three firms. I would like to state and affirm that the net income of the said three firms as referred to above is in reality the additional income during the respective years of the M/s SRMT Ltd. over and above the income assessed to tax or disclosed in the return of income or figuring (in) books of account of M/s SRMT Ltd. Right now I am not in a position to exactly state the said additional income relevant for each of the concerned years. However, taking an overall view, certain expenditure incurred etc. I would state and affirm that the total amount of additional income of M/s SRMT Ltd. for the above said years of payment of commission to the above said three firms, and till date, would be about Rs. 260 lakhs (Rs. two hundred sixty lakhs). Therefore, M/s SRMT Ltd. is liable to pay additional tax on the said additional income for the concerned years. I in my capacity as the Managing Director of M/s SRMT Ltd. would undertake to arrange for expeditious payme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... simultaneously ; statements were recorded under threat of dire consequences though it would be difficult for the assessee to provide any direct evidence in this regard; there was a lot of mental tension for Sri K.V.R. Chowdary who was above the age of 60 years ; when officers were going about their operations in his house from dawn to dusk to midnight to near dawn, apart from the humiliation, mental tension and physical inconvenience the search had caused, the presence of a large number of officers and the fact that simultaneous search operations were conducted in and around him had made him shiver in his shoes and in that state of mind the statement had been recorded. Thus, there was coercion at least mentally if not physically. The phrasing of the question No. 48 was a deliberate design to hustle him into a statement and the manner in which the statement itself ended abruptly would show that the department wanted a particular reply and once such reply was given there was no further questioning. This would suggest that Sri Chowdary was induced into making this statement. He further emphasized that in the second statement recorded on 11-2-1988, to question No. 10 having reference t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r Departmental representative, as a person endowed with sound knowledge of law coupled with mild temperament and endearing qualities of head and heart, we have no hesitation in accepting his personal explanation. Further, in the absence of material, we have to reject the allegations levelled by Sri Ratnakar as not substantiated. 19.5 Another related issue is whether the statements recorded on 10-2-1988 and 11-2-1988 by the Authorised Officers from Sri K.V.R. Chowdary 'were statements under section 132(4). Sri Rangabhashyam's submissions are threefold :(i) though no books of account, documents, money, bullion, jewellery or other valuable article or thing was found, Sri Chowdary as Managing Director of the company is deemed to have control of the books of account ; (ii) the word "thing" may refer to tangible and intangible assets and, therefore, it could take in its sweep an enquiry about the commission payments ; (iii) the Explanation to section 132 (4), inserted by the Direct Tax Laws (Amendment) Act, 1987 was clarificatory in nature and, therefore, even in an enquiry in connection with a proceeding under the Income-tax Act, statements could be recorded whether anything is found o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of account, nor any document relating to the company. There is no allegation that the personal books contained reference to commission payments. No money, bullion, jewellery or other valuable article or thing was found in his possession. The learned Senior Departmental Representative emphasizes that the expression "thing" occurring in section 132(4) would cover both tangible and intangible items. We are not persuaded by his argument. The word "thing" occurs along a train of words such as "books of account, documents, money, bullion, jewellery or other valuable article" and, therefore, the principle of ejusdem generis would apply in the context in which the word "thing" is used. Unless certain "thing" which has some monetary value was found in the possession or was in the control of a certain person, section 132(4) cannot be invoked. Besides, in the scheme of section 132(4) and (4A) and section 132(5), by using the words "valuable article or thing" what the legislature intended to imply is that the assets covered by these words should be such as could be converted into cash so that the tax liability of the assessee concerned, as revealed from his undisclosed income, could be duly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... troduced by the Direct Tax Laws (Amendment) Act, 1987, with effect from 1-4-1989. The Explanation occurs under section 132(4) and it is as follows:- "For the removal of doubts, it is hereby declared that the examination of any person under this sub-section may be not merely in respect of any books of account, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act." It takes effect from 1-4-1989. This Explanation was not in force at the time when the search was conducted on 10-2-1988 to 12-2-1988. In our opinion, this is only prospective in operation and does not have any retrospective effect. Our reasons are as follows:- Section 132 enables the revenue to conduct search operations and effect seizures. Thus, it makes inroads into the personal liberty of the citizen, but such extreme measures are necessary in the context of economic offences. Citizen's substantive rights such as Right to Privacy which is part of the Right to Liberty, and the Right to Hold and Enjoy Property, are made subject to rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 263(1) as introduced by the Finance Act, 1988, w.e.f. 1-6-1988, and as amended by Finance Act, 1989, w.e.f. 1-6-1988, is as follows: "For the removal of doubts, it is hereby declared that, for the purposes of this subsection,- (c) where any order referred to in this sub-section and passed by the Assessing Officer had been the subject matter of any appeal filed on or before or after the 1st day of June, 1988, the powers of the Commissioner under this sub-section shall extend and shall be deemed always to have extended to such matters as had not been considered and decided in such appeal." From a reading of this Explanation, it is abundantly clear that the legislature wanted to clothe the Commissioner with retrospective powers to revise the order of an Assessing Officer to the extent to which it did not merge with the order of an appellate authority. In the absence of such a deeming provision, inasmuch as section 263 is only a procedural section, retrospective intendment could be inferred but doubts might be entertained about such an inference in some quarters. The legislature, therefore, took care to spell out its intention very clearly even while dealing with a procedural se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch the firms also had paid commission to the retail dealers and after that what the partners did with their money would be only an application of income in their hands. At any rate, it cannot be held that the company derived benefit out of it. He further submitted that he would go to the length of saying that even if some of the directors had obtained some benefit indirectly, for which there is no proof as on date, that should be tackled only in their hands but not in the hands of the company. Further, he submitted that if the partners of the dealer-firms had in turn entered into sub-partnership arrangements, again it is a matter not to be tackled in the hands of the company. The company is not concerned with what the partners of the dealer-firms do with their share of profits. 20.2 We have heard rival submissions and perused the records. The Income-tax Officer dealt with the withdrawals from bank accounts of some of the partners of the dealer-firms in the assessment order for the assessment year 1985-86. We quote below his observations in some such cases and comment on the same: (1) "Smt. Mutala Adilakshmi is a partner in M/s Bhaskara Auto Service. She had a S.B. account No. 362 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o question No. 6 in his statement at pages 77 to 91 of DPB) but no books were maintained. To a question whether he has any connection with SRMT Ltd., he had stated that he did not have any connection with SRMT Ltd., and he did not discharge any work of SRMT Ltd. (page 86 of DPB). He had also stated that the Managing Director of Gopal Automotive Pvt. Ltd. was Sri M.V.V. Satyanarayana Rao. Questions were asked about some of the above withdrawals and he answered that though he did not know Sri Yeramati Panasa Ramudu, he gave the cash to Sri M.V.V. Satyanarayana Rao (page 91 of DPB). However, we note that Sri Yeramati Panasa Ramudu was not examined. Besides, Sri Mangaraju had given a different version in his sworn deposition before the Income-tax Officer on 30-5-1988. (3) "Sri Mallidi Dorareddy, who is a partner in M/s Bhaskara Auto Service has S.B. Account No. 7318 in Canara Bank, Kakinada. A letter of authority has been obtained for the operation of this bank account in favour of Sri Chittoori Raghavaiah, who incidentally is the letter of authority holder in the case of Sri Yeramati Panasa Ramudu referred to above. Six cheques relating to the years 1981 to 1983 were issued by Chitt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of them was examined. (5) In 1983, on cheque for Rs. 27,000 and in 1984 two cheques amounting to Rs. 46,050 were issued in favour of B. Appalaraju but he was not examined. (6) In Smt. Mallidi Krishna Kumari's account (partner of Sri Bhanu Enterprises) two cheques were impounded of which one was encashed by Sri J. Mangaraju and another was credited to Sri Aruna Auto Service (P.) Ltd., which was encashed by it and the Income-tax Officer wondered how this was available for distribution as share of profits to sub-partners. Whether the profits were available for distribution among the sub-partners or not, is a totally different question and no adverse inference can be drawn against the assessee-company about these withdrawals. No question was put to Sri Mangaraju about this withdrawal in account No. 8774. (7) Sri M.V. Ratnam and Sri B. Appalaraju had cheques in their favour from Sri Tadi Venkatareddy, partner in M/s Sri Bhaskara Auto Service, but none of them was examined. In the above instances pointed out by the Income-tax Officer, the Income-tax Officer was not dealing with the accounts of the company nor was he dealing with the accounts of the firms. He was only dealing with t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rdance with the shares in the agreement and he fulfilled the role as Managing Partner and SRMT Ltd. was threatening criminal action against him for giving false statement before the Income-tax authorities. The Income-tax Officer felt that Sri Ch.V.V. Satyanarayana was only obliging his pay-masters by retracing the statement given in the course of the search. 20.4 Similar is the case with the statement of Shri B. Nageswara Rao, Managing Partner of Sri Bhaskara Auto Service. More than one statement were recorded from him on 10-2-1988 in the course of the search. The Income-tax Officer referred to one of the statements and proceeded to observe therefrom that he was inducted into the firm by Sri K.V.R. Chowdary, that he was only a partner on paper and he never enjoyed the profits and that he signed only the cheques and gave them to accountant Sri Murali and before that to one Sri Suryanarayana Murthy, the then accountant, introduced by Sri K. V.R. Chowdary. He also stated that he had never operated the bank account himself though he used to sign blank cheques brought before him by the accountant. He admitted that 2 per cent commission was paid to the field representatives and 1 per ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of Rs. 12,000 (Rupees twelve thousand) by taking loan from my father's brother and relatives during the first year of business in 1984. I am not withdrawing any amount from the firm. I am a bachelor and my monthly expenses is about Rs. 200." "Q. Who manages the affairs of M/s Bhaskara Auto Service'? A. I manage." "Q. What are your activities as the managing partner of M/s Bhaskara Auto Service? A. I mainly look after the business correspondence of M/s Bhaskara Auto Service. I have got the cheque-drawing power." The third statement was recorded from the same person on 10-2-1988 at 1-30 A.M. and concluded at I P.M. (as per timings furnished by the learned Senior Departmental Representative). The following questions and answers are relevant : "Q. What are your sources of income? A. I am getting a monthly remuneration of Rs. 250 in the capacity of Managing Partner of M/s Bhaskara Auto Service. Apart from this I do not have any other sources or modes of income." "Q. You are claiming that you are the Managing Partner of M/s Bhaskara Auto Service and that you are getting a monthly remuneration of Rs. 250 for services rendered. Are you not getting any profit from the said concern ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gree that cash was received by you? A. Yes, I agree that cash against these cheques was received by me." (p. 103 of DPB) "Q. Do you wish to state anything voluntarily? A. I wish to state that I have agreed regarding the Bank accounts in the names of J. Mangaraju and his family members in good faith under section 132(4) in the course of the search. I shall verify the extent of the transactions and disclose all the unaccounted incomes for which I may be exempted from penalty & prosecution." In addition, he had stated that should there be a voluntary disclosure on the part of SRMT Ltd. group of concerns, including the firms, he should be relieved of the additional income-tax thereon. However, in his sworn deposition recorded on 30-5-1988 by the Income-tax Officer, to specific questions that were put about the cheques referred to in the preceding paragraphs - cheques drawn by Chittoori Raghavaiah in cheque Nos. 660623 to 660625 and cheque Nos. 660272 to 660277, but encashed by him - Sri J. Mangaraju had stated that the proceeds were given to Chittoori Raghavaiah only. The name of Sri M.V.V. Satyanarayana Rao was not mentioned (see questions & answers 31 and 32 in the sworn depositi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legal presumption that the transactions in the pass books found in his possession really belong to him, stares at the revenue. In fact, Sri Ratnakar argued that he would go to the length of saying that if the directors or the Managing Director of the company had obtained any indirect benefit, that would not fasten the liability on the company and the issue should be tackled only elsewhere but not in the hands of the company. There is force in his submission. Unlike partnership firm where a partner can bind the firm or the other partners even wrongful transactions done in the course of the business of the firm (see sections 26 and 27 of Partnership Act), directors of a company have no such power. They can only act bona fide within the limits laid down by the Memorandum of Association and the Articles of Association and also within the provisions of the Companies Act. Further, we observe that it has not been proved that the company has in fact received the amounts. Moreover, before the assessment was completed, the statements of the Managing Director and the Managing Partners were resiled. The company particularly wanted to cross-examine the Managing Partners of the firms on their st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unsel for the assessee that the admission was made by Sri Chowdary in a state of tension in the late hours of 10-2-1988, especially when the search had commenced at 9 A.M. on that day and was extending beyond midnight. Question No. 48 is as follows:- "At this point of time may I invite your attention to section 132(4) of the I.T. Act, which states that any disclosure made during the course of search operation voluntarily would not amount to concealment of income. Would you make any disclosure voluntarily?" Such a question can be put only when any money, bullion or other valuable article or thing is found. In fact, the instructions issued by the Central Board of Direct Taxes (Instruction No. 1741 dated 29-12-1986) specially enjoins upon the Authorised Officers to invite the attention of the persons searched to Explanation 5 to section 271(1)(c) only when unaccounted assets are found in the course of the search. When nothing was found in the premises of Sri K.V.R. Chowdary, there was no need for phrasing the question in the manner in which it has been done. This has given a handle to the learned counsel for the assessee to complain of inducement and assail the voluntary nature of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out in the preceding paragraphs, there is no justification to disallow any part of the commission paid to the three firms of Kakinada. Hence, the additions for both the years are deleted. 24. The major issue in the departmental appeals is about the relief granted by the learned CIT (Appeals) in respect of the commission payments. For the detailed discussions made by us in the preceding paragraphs, we reject the department's contention. 25. The revenue raises an alternative plea that at least the commission paid to the Kakinada firms after deducting the expenditure by the Kakinada firms should be subjected to disallowance. Though this alternative ground is raised for the assessment year 1984-85, similar plea was made before us for the assessment year 1985-86. We have carefully considered the issue. We have already held that there was genuine need for dealership arrangements and the transactions with the firms are not sham or make-believe arrangements, nor are the dealership firms benamis of the assessee-company as none of the partners of these firms or the sub-partnerships is shown to be a director or shareholder or related to the directors or shareholders of the assessee-company. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... amount was an admissible deduction?" The revenue contended that the amount that was actually expended in this behalf was only Rs. 4,57,150 which was much more than the amount that was paid by the assessee-company to J. Hence the difference should be taxed in the hands of the assessee-company as not having been incurred for the purposes of the business. The High Court held that the department's contention was devoid of merit and the entire sum was allowable as deduction in the hands of the assessee-company. 27. As for interest under section 139(8) and section 215 for the assessment year 1985-86, we direct the Income-tax Officer to grant consequential relief to the assessee in accordance with law. 28. There is one more ground for the assessment year 1984-85 in the departmental appeal and that is regarding the deletion of the disallowance under section 43B of the Income-tax Act. The Income-tax Officer noted the following provisions:- Provident Fund Rs. 1,08,773 ESI Contribution Rs. 73,621 Employees' Family Pension Fund Rs. 15,428 ------------- Rs. 1,97,822 ------------- He took the view that these amounts were hit by the provisions of section 43B. The assessee's cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d scope of such a usage are to be proved as facts." (ii) According to Random House Dictionary, the term "practice" means habitual or customary performance, etc. (iii) In my opinion, in order to establish that a particular modus of dealing is in accordance with trade practice, it is, sine qua non, that there must be regularity of observance. (iv) Regularity of observance is a continuous process. The existence and scope of such observance must be proved as facts. (v) The following invoices from other manufacturers were produced before us at the time of hearing wherein a discount of 35 per cent to 40 per cent is allowed on the spare parts. S.No. Name Invoice No. 1. Swamy Motors 1298 2. Myco Manufacturers of India 4966 3. Trading Corporation, Delhi 9987 4. Goyal Transport & Scooter Spares 8642 5. Anand Spares, Delhi 594 6. Jamuna Auto Industries 714 Coming now to the evidence, submitted subsequent upon the hearing, it appears from the order of Ld. A.M. that the following invoices were produced: S.No. Name Date Invoice No. 1. Beant Automobiles, Delhi 27-2-1984 18 2. Rasana Enterprises, Delhi 3-3-1984 RD/155/83-84 3. Trading Corporation 3-1-1983 7549 4. Anand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1-4-1989. It was not in force at the time when the search was conducted on 10-2-1988 and 11-2-1988. This is only prospective in operation and does not have any retrospective effect." In arriving at this conclusion Ld.A.M. adumbrated on the following reasonings:- (a) Section 132 of the Income-tax Act, 1961 (hereinafter called the Act) is a substantive provision and deals with the substantive rights, no retrospective effect can be inferred from a provision unless stated expressly. (b) The purpose of an Explanation is to remove any ambiguity in or to explain the meaning of the words or expression used in the section preceding it. Explanation to section 132(4) does not deal with any ambiguity in relation to the words or expression found in the section. (c) Even if certain materials gathered in the course of an illegal search the same can be used against the assessee in view of the decision of the Hon'ble Supreme Court in Pooran Mal v. Director of Inspection, [1974] 93 ITR 505. Here since the search was properly authorised and was conducted in a smooth manner, the question of using any material collected in the course of an illegal search does not arise in this case. 34. Section 13 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to future hearings after the Act of 1967 comes into operation; but it then applies even though the hearing be in respect of matters which arose before that Act was passed." [Selangor United Rubber Estate Ltd. v. Cradock (No. 2) 1968 1 WLR 319, per Ungoed Thomas J. at page 321]. In view of the above, it can be said that section 132(4) is procedural in nature. 39. As stated in CRATES (Statute Law, 7th Edition, Page 58), and approved by the Hon'ble Supreme Court in Central Bank of India v. Their Workmen AIR 1960 SC 12, p. 27: "For modem purposes a declaratory Act may be defined an Act to remove doubts existing as to common law, or the meaning of effect of any Statute. Such Acts are usually held to be retrospective. The usual reason for passing a declaratory Act is to set aside what Parliament deems to have been a judicial error, whether in the statement of the common law or in the interpretation of Statutes." 40. The Explanation introduced to this section is in the nature of a declaratory Act. Balckstone, J. in Nicol v. Verelst [1779] 26 ER 751 said "declaratory statutes do not prove the law was otherwise before, out rather the reverse". Coleridge, CJ. said in Jones v. Bennet [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n under threat or intimidation or under coercion. There is no presumption of illegality or wrong-doing when an authority is exercising its statutory functions. It has to be proved, if there had been any. No such proof came forth except bare assertions. In these circumstances acceptability of statements recorded under section 132(4) cannot be questioned. Since the statements are relevant and the genuineness is proved, I do not think there is any bar as to its admissibility. 44. In view of the above, I am of the opinion that statements recorded on 10-2-1988 and 11-2-1988 by the authorised officer from Shri K.V.R. Chowdary can be used in evidence against the assessee. 45. Third issue at para. 22 concerns with the question whether the company had received back the commissions paid to the authorised dealer firms? It was contended on behalf of the revenue that there was no need for such selling arrangements except as conduits as is obvious from the fact that these firms have disappeared by 1989. Learned counsel for assessee submitted that in view of the grave doubts entertained by the revenue about the bonafide of the company in having dealings with these firms, the company decided to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pares is a well recognised Trade Practice in assessee's line of business? (2) (i) Whether Explanation to section 132(4), which begins with the words "For the removal of doubts", is only prospective in operation or does it have any retrospective effect? (ii) Whether the statements recorded on 10-2-1988 and 11-2-1988 by the Authorised Officer from Sri K.V.R. Chowdary can be used in evidence against the assessee? (3) Whether in the facts and circumstances of the case the company had received back the commissions paid to the authorised dealer firms? THIRD MEMBER ORDER This case has been referred under section 255(4) of the Income-tax Act, 1961 on a difference of opinion between two Members who have heard the case. 2. The facts in brief giving rise to the reference are as follows. The assessee is a Public Limited Company carrying on business as dealers of Trucks and Voltas' Products as well as in manufacture and sale of automobile spares besides running a lorry service. For the assessment year 1984-85 corresponding to the previous year ended on 31-12-1983, the assessee filed return based on its audited and published accounts wherein there was claim for deduction of Rs. 86,76,463 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Revenue. He differed from the reasoning adopted by the learned Accountant Member inasmuch as he was of the view that the questions put to Shri K.V.R. Chowdary were within the powers granted to the Income-tax Officer and that his statement was admissible in evidence against the assessee which itself proved that the commissions have been received back inasmuch as trade practice of payment of commission had not been established. 4. In these circumstances, the following questions have been referred: "(1) Whether in the facts and circumstances of the case allowing of discount or commission on sales up to 40% depending on the nature of the spares is a well recognised Trade Practice in assessee's line of business? (2) (i) Whether Explanation to section 132(4), which begins with the words "For the removal of doubts", is only prospective in operation or does it have any retrospective effect? (ii) Whether the statements recorded on 10-2-1988 and 11-2-1988 by the Authorised Officer from Sri K.V.R. Chowdary can be used in evidence against the assessee? (3) Whether in the facts and circumstances of the case the company had received back the commissions paid to the authorised dealer firm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red subsequent to the making of the assessment for the assessment year 1984-85 but allowed to be brought in as additional evidence for that year also. They are the statement of Shri K.V.R. Chowdary on 11-2-1988, the statement of Shri B. Nageshwara Rao on 10-2-1988 and the statement of Shri K. Muralidhar on 10-2-1988. The learned Accountant Member has in his elaborate order given the background to the statement of Shri K.V.R. Chowdary in para 19.2 of his order. In answer to question 48 at the time of enquiry under section 132(4), Shri K.V.R. Chowdary, Managing Director of the assessee, stated that the net income of the three firms who are acting as selling agents was really the income of the assessee company and would amount to about Rs. 2,60,00,000. 8. The first point in dispute is with regard to the admissibility of that statement as evidence. The Explanation to section 132(4) was introduced with effect from 1-4-1989 which stated that the examination of any person may extend to all matters relevant for the purpose of investigation and not merely in respect of materials found at the time of search. Therefore, the difference has arisen as to whether this Explanation would apply to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act does not directly apply to income-tax proceedings, well settled principles as to admission of evidence have to be followed in evaluating the evidence. When the statement of Sri K.V.R. Chowdary is seen as a confession, the underlying emphasis is of concealment of income leading to penalty proceedings and even prosecution. Therefore, it has to be considered in all seriousness and with utmost caution. Prudence demands that the evaluation of such a statement is based on the questions whether it was made voluntarily, whether it was made by a person who was a party to that transaction and whether it was true. As to the first question, the learned Accountant Member has rejected the claim of the assessee that the statement was not voluntary and since the learned Judicial Member has not differed from that it is not necessary to express any opinion. As regards the second question, the learned Judicial Member has not disagreed with the finding of the learned Accountant Member that the Managing Director had no control over the affairs of the Company. Moreover, there is no evidence to indicate that the Managing Director himself was a party to receipt of the amounts paid as commission to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cedent for the agency agreement and the credit balances were in a running current account and naturally did not carry interest as the agency firms were to draw it at any time. As long as these liabilities remain unchallenged, they cannot be treated as the income of the assessee nor can they offset the commission payable to the agency firms. Thus the conclusion is inescapable that the statement of Shri Chowdary has not been proved to be true and cannot, therefore, by itself form the basis of any assessment of an undisclosed income attributable to the assessee-company. 12. This leads to the next question whether the assessee-company had received back the commission paid to the authorised dealer firms. A perusal of the material recorded indicates that there was no material establishing any nexus between the company and any amounts flowing from the agency firms. Reference has been made to certain cheques issued by the partners of certain firms, in which partners of the agency firms were partners. It was stated that such cheques were encashed by certain employees of the assessee-company who had stated that the amount so encashed was given to one of the directors of the company. This is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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