9911796707
TMI Blog1988 (4) TMI 119X X X X Extracts X X X X X X X X Extracts X X X X ..... c Tools (India Ltd.) Water Development Society, Hyderabad, and Drilloc Metal Carbides Ltd., Pune. For assessment year 1980-81 it had filed its return of income on 18-7-1980 admitting Rs. 1,56,490 as its total income and the original assessment under section 143(3) was completed on 23-12-1980 on a total income of Rs. 2,05,330. The assessee made a provision towards discount and commission payable as customer discount or commission payable in an amount of Rs. 2,49,972.80 as on 30-6-1979. The account of the provision made appears in the assessee-company's ledger folio Nos. 362 and 363 for the relevant accounting year. It is an admitted case that out of the total provision of Rs. 2,49,972.80 made and allowed for the assessment year 1980-81, an amount of Rs. 1,05,42 1.63 ps. was paid to the parties either in cash or by cheque drawn on a bank, in the immediately succeeding accounting year, relevant to assessment year 1981-82, and an amount of Rs. 1,03,565.13 was paid in the accounting year relevant to assessment year 1982-83. Out of Rs. 1,05,42 1.63 ps. which was paid in the accounting year relevant to assessment year 1981-82 an amount of Rs. 93,287 represent payment of amounts in excess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent which the Income-tax Officer might have lost sight of due to inadvertence or mistake and also for the proposition that " information " for the purpose of section 147(b) need not be wholly extraneous with the record of the original assessment and it was immaterial whether someone gave " information " or whether the Income-tax Officer informed himself. The learned CIT(Appeals) relied upon the Calcutta High Court's decision in Diamond Sugar Mills Ltd. v. ITO [1973]89 ITR 171 to find out what are the requirements to invoke section 147(b). After listing out all those requirements she stated that the facts of the present case fulfils all the conditions laid down in the said decision for invoking section 147(b). She ultimately held at the end of para. 1.2 of her impugned orders as follows : --- " In the course of enquiry conducted for the subsequent year, the Income tax Officer had come across positive evidence in terms of section 40A(3) and in view of this, he had decided to re-assess the income for the assessment year 1980-81. I would, therefore, upheld the action of the Income-tax Officer in reopening the assessment under section 147 of the Income-tax Act, 1961." This part of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e asserted that on the date of issue of notice under section 148 that the Income-tax Officer did not have anything on record to show that the payments were made by bearer cheques. He contended that for the first time the Income-tax Officer came to know that the payments were made by bearer cheques only in June/July 1985 when he obtained the bearer cheques from the Banks. It was argued that at the time of issue of a re-assessment notice it is incumbent on the Income-tax Officer to come to a conclusive finding that income has escaped assessment by reason of omission or failure on the part of the assessee to disclose fully and truly all material facts necessary for the relevant assessment. Such belief obviously at that stage, a tentative belief, on the materials before him has to be examined and scrutinised of such evidence as may be available in the proceedings for re-assessment. He also contended that it is only the information which is available before the date of initiation is relevant to decide the question of validity of re-opening. He strongly relied upon the Hon'ble Supreme Court's decision in ITO v. Madnani Engg, Works Ltd. [1979]118 ITR 1. He strongly contended that the Inco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ear 1980-81, no enquiry was made whether the payments pertinent to the commission provision was subsequently made by cross or bearer cheques nor aid the company make any statement thereabout. (2) During the course of proceedings for assessment year 1981-82 a query was put and the company stated that the payments pertaining to provision of assessment year 1980-81 were subsequently made by bearer cheques consequent to which the Income-tax Officer disallowed the same. (3) All payments pertaining to assessment year 1980-81 were made subsequently by bearer chequ es (and not cash) and were recorded as Bank payments in the day book. Hence without further investigation, it was impossible for the ITO to know whether the cheques were crossed or bearer. (4) For the first time the Income-tax Officer knew of the fact of bearer cheques being given to the parties after the search in April, 1985 when he obtained the encashed cheques from the Bank and examined them. Till then he did not know that the payments were by bearer cheques. It is contended that the additional material placed by the revenue, before this Tribunal to justify re-opening of assessments, is liable to be ignored and also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ne Refined Oil Co. (P.) Ltd. v. ITO [1975]98 ITR 636 (Kar.), which according to him had duly considered and adopted the ratio of the Supreme Court's decision in Suraj Mall Mohta Co. v. A. V. Visvanatha Sastri [1954] 26 ITR 1 and Anandji Haridas Co. (P.) Ltd. v. S.P. Kushare, STO [1968] 21 STC 326. He further submitted that the Department relied upon the Andhra Pradesh High Court's decision in G. Sreerania Murthy v. ITO [1974]97 ITR 290, which according to him did not actually take into consideration the two Supreme Court decisions followed by the Karnataka High Court and for that reason he tried to persuade us to prefer the Karnataka High Court's decision than over the decision of the Andhra Pradesh High Court and to hold that rectification under section 154 only is permissible and not re-assessment under section 147(b). 6. On the other hand the learned Departmental Representative contended that there is sufficient material secured which forms the basis for issue of notice for re-opening under section 147(b). The facts or information gathered prior to issue of notice under section 147(b)/148 dated 5-7-1984 would form the basis for a reasonable belief that the assessee-compa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it any material on the basis of which it could be said that he had come to the requisite belief. All that the ITO stated in his affidavit was that he discovered that the transactions of loan against security of hundis were not genuine and that the credits against the names of certain persons who were alleged to have advanced loans were bogus. The ITO merely stated his belief but did not set out any material on the basis of which he had arrived at such belief so that the court could decide for itself whether there was any material on the basis of which the ITO could reasonably entertain such belief. We are, therefore, not at all satisfied on the affidavit that the ITO had reason to believe that part of the income of the respondent had escaped assessment by reason of its failure to make a true and full disclosure of the material facts." 7. It was next contended by Shri Ajay Gandhi that recording of reasons must not only contain belief but also set out the material on the basis of which the belief was arrived at and in support thereof he had relied upon the Karnataka High Court's decision in Vijayalakshmi Oil Industries' case and the Calcutta High Court's decision in East Coast Comm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthority or power of an appellate authority under the Income-tax Act. The question whether the notes prepared by the Income-tax Officer constitutes information as to a fact to justify re-opening under section 147(b) of the Act was purposely left open by the Karnataka High Court as can be seen at the close of the judgment. Therefore, Vijaylakshmi Oil Industries'case does not support the proposition sought to be canvassed by Shri Ajay Gandhi. There are a catena of decisions including Supreme Court cases which lay down categorically that the reasons for formation of belief need not be mentioned or communicated in the notice of re-opening under section 148. In S. Narayanappa v. CIT [1967]63 ITR 219 (SC) at the close of the head-note of the decision at page 219 the following is found :--- "The expression 'reason to believe' in section 34 does not mean purely subjective satisfaction on the part of the Income-tax Officer. The belief must be held in good faith : it cannot be merely a pretence. It is open to the court to examine whether the reasons for the belief have a rational connection or relevant bearing to the formation of the belief and are not extraneous or irrelevant to the purpo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Officer, shall, before issuing any notice under this section, record his reasons for doing so." Therefore, as can be seen what is the requirement of section 148 is recording of reasons for re-opening and not to list out the whole material on which his belief was formed. Therefore, in our opinion, decision of the Supreme Court in Uttareswari Rice Mills' case fully supports our conclusion. Next is the decision of the Calcutta High Court in British Electrical Pumps (P.) Ltd.v. ITO [1978]113 ITR 143. The relevant portion of the decision at pages 153 154 is as follows : The Calcutta High Court after following the Privy Council's decision in CIT v. Mahaliram Ramjidas [1940]8 ITR 442 and also the Supreme Court's decision in K.S. Rashid Son v. ITO [1964]52 ITR 355 in which it is held that the assessee is not entitled to a copy of the reasons recorded at the time of issue of notice under section 34 gave the following verdict : " When, therefore, a challenge is thrown to the absence of requisite conditions precedent for issuance of notice, the court following the uniform and consistent practice looks into the relevant records for the purpose to see if there was any material at all ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer to the information furnished at 156 ITR (Statutes) 159 (SC). The information is with regard to the disposal of Sudini Pandurang Timblo v. G. Virendra, WTO [SLP (Civil) Nos. 244 and 245 of 1985]. " Notice preceded by correspondence: Notice not specifying reasons: Valid 18-2-1985 ; Their Lordships R.S. Pathak and Sabyasachi Mukharji, JJ. dismissed a special leave petition by an assessee against the judgment of the Bombay High Court (Panaji Bench) dated 19-9-1984 in W.P. Nos. 124B and 126B of 1982 dismissing a writ petition challenging for not specifying reasons, a reassessment notice under section 17 of the Wealth tax Act, on the ground that the fact that the land owned by the assessee and her husband (in equal shares) had been acquired by the Government at a certain rate would be a relevant circumstances for determining the value and the omission to divulge this relevant circumstance by the assessee would be a good basis for issue of a notice under section 17, and that the notice ultimately issued by the WTO was preceded by correspondence with the assessee and that, therefore, the non-specifying of reasons would not render the notice bad : " Therefore, we prefer to follow th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt's paper book No. 3, intimated the assessee that it was shown to have incurred an amount of Rs. 1,75.567 as demonstration expenses and it was also represented that an amount of Rs. 6,99,040 was paid as discount and commission. In that connection the ITO called upon the assessee to furnish the date of payment, mode of payment cash or cheque and state whether it is by cash or cheque (crossed or bearer cheque) and the name and address of the branch of the Bank on which the cheques were drawn and this information should be furnished in respect of each party separately. The Income-tax Officer also gave a notice dated 8-3-1984, a copy of which is furnished at pages 10 to 12 of paper book No. 3 filed on behalf of the Department. As can be seen from the said notice dated 8-3-1984 the amount of Rs. 2,17,913 is part of the discount and commission of Rs. 6,99,040 mentioned in the notice dated 23-2-1984. The ITO in his notice dated 8-3-1984 requested the assessee-company to produce evidence to show that the liabilities have really been incurred so as to justify the provision made in the accounts amounting to Rs. 2,17,913. The assessee submitted a reply dated 13-3-1984, a copy of which is fur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nature of the service commission of Rs. 1,27,725 was more or less the same as of third party commission. The required information was already submitted to the ITO. That means according to the assessee-company the names and addresses of the parties and also the mode of payment were already given to the ITO. According to the assessee-company it had furnished a photostat copy of the ledger which is now found at page 2 of the paper book No. 3 of the Department and also page 15 of the paper book No. 3 filed by the Department. These two ledger copies, the former for the year ending 30-6-1980, and the latter for the year ending 30-6-1981, are relevant for assessment years 1981-82 and 1982-83, respectively, alleged to have revealed the names and addresses to whom the third party commissions were paid/payable, whether the amounts were paid by cash or by cheque and whether they are crossed cheques or bearer cheques. The ledger extract at page No. 2 of the Departmental paper book No. 3 reveals that out of the service commission in accounting year relevant assessment year 1980-81 in the accounting year relevant to assessment year 1981-82, payment was made towards third party commission/servic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on to customers by issue of credit notes. (c) Commission paid to third parties by cash or cheque. The ITO further observed that in the accounting year relevant for assessment year 1981-82 the assessee paid a sum of Rs. 1,27,725 by way of third party commission to various individuals. He further found that all the payments exceeded Rs. 2,500 and the payments were made either by cash or bearer cheques. The assessee was asked to explain as to why payments should not be disallowed under section 40A(3). The assessee explained that it was incurred for promoting business. The explanation of the assessee was found not convincing and hence disallowance was made under section 40A(3) and an amount of Rs. 1,27,725 was proposed to be added to the returned income. In the final assessment the proposal of the ITO was ratified and ultimately the addition was sustained by the IAC. The total payment made in the accounting year ending with 30-6-1980 was Rs. 2,31,290.41. Out of it, the payment relating to the accounting year ending 30-6-1980 was only Rs. 1,27,725 and an amount of Rs. 1,03,563 was stated to be representing payments made relating to the accounting year ending with 30-6-1979 relevant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year 1980-81. We cannot for a while presume that the ITO would put on blinkers with regard to certain payments relating to assessment year 1980-81 and confine himself, only for the verification of the payments concerning to assessment year 1981-82, especially when the assessee-company itself was unable to show which of the payments made and belong to whom pertain to assessment year 1980-81 and which others pertain to assessment year 1981-82.Therefore, firstly it is highly reasonable for the ITO to presume that the information led by the assessee-company itself at pages 2 and 15 which represent the ledger folios contain all the particulars with reference to the parties like addresses, cheque Nos. and they also disclosed whether the cheques were crossed or mere bearer cheques. We are also of the opinion that the ITO is quite reasonable to proceed on the premise that the information furnished at pages 2 and 15 of paper book No. 3 filed by the Department disclose true and full information asked for by the ITO and therefore, the said information in all fairness was made the basis of his belief. Transaction Nos. 6 to 24 at page No. 2 would not reveal the cheque Nos. On the oth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 69. It states that if on or after 31-3-1969 an expenditure exceeding Rs. 2,500 is incurred then it should be paid either by a crossed cheque or Bank demand draft. Otherwise it should not be allowed as a deduction. It has got two provisos and the first proviso is relevant for our purposes : which is as follows : " Provided that where an allowance has been made in the assessment for any year not being an assessment year commencing prior to the 1st day of April, 1969, in respect of any liability incurred by the assessee for any expenditure and subsequently during any previous year the assessee makes any payment in respect thereof in a sum exceeding two thousand five hundred rupees otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft, the allowance originally made shall be deemed to have been wrongly made and the income-tax Officer may recompute the total income of the assessee for the previous year in which such liability was incurred and make the necessary amendment, and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of the assessment yea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee to question the action of the Income-tax Officer on the ground that he should have taken action under the other section." 9.3 In Bihar State Road Transport Corpn.'s case at page 742 the following is what is held : "It is true that once a final assessment is arrived at, it cannot be reopened except in the circumstances detailed in sections 147 and 154 of the Act. While section 154 deals with mistakes apparent from the records and may not cover a case where a reassessment has to be made to charge tax, if it has escaped assessment, section 147 covers cases of income escaping assessment where the Income-tax Officer has reason to believe, in consequence of information in his possession for that purpose, and is not confined to cases where reassessment under section 147 or rectification under section 154 are both equally competent, the department may take action under either section, since the two sections are not materially exclusive. Reference in this connection may be made to the case of Salem Provident Fund Society Ltd. v. Commissioner of Income-tax whereafter completion of the assessment of the assessee when the Income-tax Officer discovered some mistakes, he proposed recti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -opening under section 147(b), when once the re-opening is held to be validly made, then the entire assessment proceedings are held to be at large and it is open to the Income-tax authorities to reconsider any such reassessment all items of escapement of income without limitation. It was submitted before us that the AP High Court while delivering judgment in G. Sreerama Murthy's case overlooked the two decisions of the Hon'ble Supreme Court followed by the Karnataka High Court in Margarine Refined Oil Co. (P.) Ltd.'s case. Therefore, for that reason we should prefer following Karnataka High Court over the AP High Court in G. Sreerama Murthy's case, submitted the assessee's counsel. We are unable to accept this argument. The Karnataka High Court's decision in Margarine Refined Oil Co. (P.) Ltd.'s case is a writ proceeding. However, this Tribunal being a creature of the Statute (Income-tax Act, 1961) is not entitled to deal with Constitutional matters. It was open to the assessee to have approached the High Court and get the notice issued under section 147(b)/148 quashed had it been so advised earlier. However, having acquiesced in the exercise of the jurisdiction by filing a ret ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion especially when the AP High Court's decision is found favour with the other High Courts also, including the Madras High Court. 11. For the reasons set out in the above paragraphs of this order we hold that the re-opening proceedings under section 147 by the revenue is validly made and the objections raised by the assessee for the re-opened proceedings are not valid. 12. The learned DR Shri N. Santhanam sought to justify the re-opening under section 147(a). He advanced this argument as an alternative to his argument, justifying the question of re-opening under section 147(b). He argues that if the Tribunal is not going to accept the validity of re-opening under section 147(b) then this alternative argument justifying the reopening of the assessment proceedings under section 147(b) may be considered, deliberated upon and a decision may be given thereon. His argument justifying the re-opening under section 147(a) proceeded as follows : 12.1 Page 19 of the Departmental paper book no. 1 gives the reasons for re-opening dated 5-7-1984. The same reasons are also found given at page 1 of Departmental Paper book no. 3. In the reasons for re-opening, the predecessor-ITO did not say ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessary information does attract re-opening under section 147(a). He cited the following decisions in support of the proposition : 12.2 K. C. P. Ltd. v. ITO [1984]146 ITR 284. In this case the AP High Court held as follows : "There is no warrant for holding that'material facts'are only those which are required to be mentioned in the returns of income. There is no reason for restricting the words 'omission or failure on the part of the assessee ..... to disclose fairly and truly all material particulars' in section 148 of the Act, in the light of the proforma of the return prescribed under the rules. Therefore, every material fact which has got a bearing on the assessment for that assessment year must be disclosed by the assessee. What is a material fact is a question of fact which has to be decided in each case and it is not possible to lay down any hard and fast rule." Therefore, it is argued, the information to be furnished as against the columns provided in the proforma of the return are to be considered as material facts or particulars. 12.3 In Kanhaiya Lal Prahladrai v. ITO [1986] 17 ITD 1075 (All.) in the Income-tax return columns the income of the wife was not filled ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authority. The assessee knows all the material and relevant facts---the assessing authority might not. In respect of the failure to disclose, the omission to disclose may be deliberate or inadvertent. That is immaterial. But if there is omission to disclose material facts, then subject to other conditions, jurisdiction to reopen is attracted. The learned DR also cited before us V. Jaganmohan Rao v. CIT [1970] 75 ITR 373 (SC) and CWT v. Subakaran Gangabhishan [1980] 121 ITR 69 (AP)(FB). In the Full Bench case of the AP High Court the following is what is held : " Re-assessment proceedings under section 17(1) of the WT Act, 1957 wipes out the original assessment and the re-assessment can be in respect of not only items that escaped assessment but also the entire assets for the year. The assessing authority, apart from having jurisdiction to include all items that escaped assessment notwithstanding the fact that he had mentioned in the notice only some of them, is under an obligation to complete the assessment by bringing all the escaped assets to tax as if the re-assessment proceedings are de novo and fresh." In view of the fact that we have held the re-opening of the assessment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... om the amount of Rs. 2,47,972.80 ps. was allowed were listed out at pages 3 and 4 of the ITO reassessment order. This amount of Rs. 2,49,973 was again bifurcated into three categories by the ITO as follows : 1 . Bogus commission and discount payable - Rs. 96,542 customers. denied : 2. Bogus commission and discount payable - Parties could not be identified by the company 28,569 3. Bogus commission and discount payable - Full address of the parties not furnished by the company 1,24,862 -------------------- Total : 2,49,973 -------------------- The names of the 18 parties, the amounts purported to have been given and the cheque nos. as well as the names of the banks on which cheques were issued totalling up to Rs. 96,542 were listed out at page 5 of the ITO's re-assessment order. Just a word about how the provision for Rs. 2,49,972.80 ps. was made in the account books of the assessee-firm on 30-6-1979, the commission and discount was allowed to various customers who had purchased air compressors. The assessee-company acted as distributors for the products manufactured by M/s. Water Development Society, Hyderabad. The memorandum of agreement which the assessee-com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee-company on 30-6-1979. They also stated that the assessee-company did not communicate to them about the commission or discount provided on 30-6-1979 in their favour. They further stated that they did not receive any cheque or cash towards commission or discount from the assessee-company. When cheque Nos., date of payment, name of the bank as furnished by the assessee-company were brought to their notice and specific questions were put to them on such information, those parties categorically denied of having received any cheques from the company and they have expressed their ignorance of the whole transaction. Summons were issued to the Banks under section 131 to furnish xerox copies of the cheque Nos. and names furnished by the assessee-company vide its letter dated 28-6-1985. The said summons were issued to the following Banks : 1. Vijaya Bank Limited, MG Road, Secunderabad. 2. State Bank of Hyderabad, Gunfoundry. 3. Punjab and Sind Bank, Secunderabad. 4. State Bank of India, Main Branch, Secunderabad. 5. Bank of Baroda, Secunderabad. In pursuance of those summons the Banks were able to furnish some of the xerox copies of the cheques and they clearly revea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ok filed on behalf of the assessee-company. The sworn statement of Shri J.C. Minocha is provided at pages 20 21 of Department's paper book No. 1. The sworn statement of Sri N.V. Narasimham, Administrative Manager was furnished at pages 9, 10 and 11 of the photostat copy of the re-assessment order. The gist of the sworn statements is Sri N.V. Narasimham or Sri R.V. Krishnand or Sri Koteswar Rao used to prepare cheques on the directions of the Managing Director or any other director either in the name of the party or in the name of a fictitious person on that cheque the Managing Director or any of the directors used to sign. After obtaining the signatures of the Managing Director or any other directors on the cheques, one of the persons viz., Sri N.V. Narasiniham or Sri R.V. Krishnand or Shri N.V.B. Seetharam or Sri T. Ramulu, or Sri S.G. Reddy used to make signatures of the party on the cheque in whose name the cheque was written. After making the forged signatures the cheque used to be handed over to one of the persons viz., Sri T. Ramaswamy or Sri T. Ramulu or Sri N.V.B. Seetharam or Sri Mallesh who used to go to Bank and obtain cash from the Bank. After obtaining cash from the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arties to whom the same was paid. The money in these cases where it was withdrawn from the bank by our employees was paid to those parties to whom commission was paid. It was never retained by the assessee-company or its employees." However, this explanation was found by the ITO to be untenable and also false. For the reasons which the ITO had listed out in pages 13 and 14 of the photostat copy of his re-assessment order, ultimately the ITO disallowed Rs. 96,542.25 representing discount and commission payable on 30-6-1979 for the following four reasons : 1. The entire provision of Rs. 96,542.25 on 30-6-1979 in the name of the abovementioned parties (18 in Nos.) was bogus as all the parties in whose favour the provision was made had denied and the company failed in rebutting it by producing documentary evidence. 2. Vouchers were not obtained when the alleged payments were made. In the sworn statements recorded from S/Shri R.V. Krishnand, T.R. Ramswamy, T. Ramulu, M. Mallesh and N.V.B. Seetharam they have categorically stated that after encashment of cheques the money was handed over to Sri N.V. Narasimham, Administrative Manager and not to persons mentioned in the cheque. This ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed under section 40A(3). 17.2 Thus the ITO made an addition of Rs. 96,542. 18. The ITO also disallowed Rs. 28,569 on the ground that it represents bogus commission and discount provided for in the case of which the parties to whom the alleged commission was paid were not identified. The names of the parties and the amounts of provision made against them, according to the assessee-company's letter dated 28-6-1985, are as follows : No name Rs. 9,708.57 ps. Orissa Borewells Rs. 5,647.50 ps. No name Rs. 2,898.00 ps. B.C, Paul Rs. 5,000.00 ps. Y. Shankar Reddy Rs. 1.971.00 ps. Jala Pratap Borewells Rs. 3,334.32 ps. ------------------------------- Rs. 28,569.39 ps. ------------------------------ The reasons for disallowance are given by the ITO as under : (1) The parties in whose favour the provision was made on 30-6-1979 are not identifiable. (2) The provision made on 30-6-1979 was paid by way of bearer cheques. (3) Employees of the assessee-company made signatures of the parties in whose favour the cheques were written and the cash was drawn from the Bank by another employee and the cash had come back to the company. (4) The ITO issued a show cause notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst names of companies and firms who made purchases from the assessee-company, the cheques obtained from banks reveal that the cheques were not issued in favour of the companies or firms but in favour of individuals. The ITO ultimately made the disallowance of Rs. 1.24.862 terming it as bogus commission for the following reasons : (1) The parties in whose favour the provision was made on 30-6-1979 were bogus. There was no commission due to them. (2) The cheques issued subsequently by debiting provision account, were encashed by the assessee-company itself after forging 14 signatures of the persons in whose favour the cheques were written. (3) S/Shri N.V. Narasiniham, R.V. Krishnand, N.V.B Seetharam and T. Ramulu admitted that they forged the signatures of the parties in whose favour the cheques were written and their admission proves that the whole provision of commission payment was bogus, especially in view of the fact that the assessee-co. did not choose to cross-examine its own employees. Further, the assessee-company could not explain the extraordinary or exceptional circumstances in which the payment was made by way of bearer cheques exceeding Rs. 2,500. Hence the di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to have been paid as third party commission. However, B. H. E. L. denied of having received any part of the said commission. So also the company is stated to have paid a commission of Rs. 3,467 to the middlemen who said to have secured business or introduced the Nuclear Fuel Complex, Hyderabad to the assessee-company. However, when the ITO addressed the summons under section 131 the Nuclear Fuel Complex (NFC) had actually denied of having approached the assessee-company through a middle man or a broker. Similarly, third party commissions were said to have been provided in respect of business procured from Mishra Dhatu Nigam Limited. AP State Agro Industries and Hyderabad Asbestos Ltd. However, in response to summons under section 131 the financial executives of the above organisations have appeared and categorically denied of having made purchases from the assessee-company through any middlemen or brokers in the accounting year, relevant to assessment year 1980-81. In view of their evidence the ITO deduced that the third party conunission said to have been paid for securing business from the above Government and other companies is nothing but fabrication and bogus. 21.1 Though pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he employees to forge the signatures of the parties in whose favour the cheques were issued. The fact that the assessee-company failed to identify the parties coupled with the fact of encashment of cheque by the assessee's own employees prove the fact that the entire provision made on 30-6-1979 in the name of third party commission was bogus. 23. The assessee-company also failed to establish the identity of the payee and failed to explain the exceptional circumstances in which the payment was made in subsequent years by bearer cheques in amounts more than Rs. 2,500. Hence the disallowance is also sustainable under section 40A(3). He thus disallowed Rs. 2,08,987. 24. Next the ITO had taken up for consideration the O.E.M. discount and credit notes amounting to Rs. 2,84,538. The break up of this figure would reveal that two items of it represent third party commission. The break up is as follows : OEM (Original Equipment Manufacturers) discount and credits Rs. 2,33,180 Third party conunission - Cash payment Rs. 5,000 Third party commission included in OEM discount Rs. 46,358 -------------------------- Total Rs. 2,84,538 -------------------------- For the reasons whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee-company preferred an appeal before the learned CIT (Appeals)-II, Hyderabad. The learned CIT (Appeals) in her elaborate orders dated 26-11-1985 considered both facts and law and ultimately confirmed in her orders at para 2.30 the total disallowance of the abovesaid Rs. 5,63,356. 27. Further aggrieved against the impugned orders of the learned CIT (Appeals) the assessee-company came up in second appeal before this Tribunal and thus the total addition referred to above stands for our consideration. 28. Before taking up the legal points argued before us let us see whether the commission payments were at all true. While discussing the addition of Rs. 2,49,972.80 the ITO stated that the assessee allowed commission and discount to its various customers who had purchased air-compressors and drilling equipment from it and the discount allowed was shown in the invoice and the net amount only was taken to sales account and customers account. However, the provision of Rs. 2,49,972.80 ps. is a provision made over and above the discount and commission payable to various customers. The invoice numbers to which this provision of Rs. 2,49,972.80 ps. relates to, were all listed out and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards the middle men who connected the deal between the assessee-company and the Government department no doubt stand on a different footing but it is not the case of the assessee-company that all other middlemen like mechanics, partners in the firm, persons responsible for getting purchases for others except the Government departments, have any compunctions to reveal their names. While issuing cheques to such persons the assessee-company was not coming to connect them to any transactions struck at their instance evidenced by any particular invoices. Therefore, there is no reason for such non-Governmental people to fear their names being mentioned in the cheques given by the assessee-company towards commission and discount. In fact, many of the cheques were given in the names of such persons though the transactions were affected as per the invoices maintained by the assessee-company in the firm's names. When in fact, the cheques were given in the names of middle men who are responsible to secure business for the assessee-company from certain firms and companies etc. What made them shy away without presenting the cheques to the Banks themselves and what made them not to sign the cheq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the persons to whom the payments were given. He expressed his inability to name one or two persons, even to whom such payments were made. From the state of evidence on record it is difficult to come to a conclusion that any third party commission was paid to any recognised person, the identity of the person to whom such commission was paid, muchless, the amount paid to person were established in this case. The absence of reasonable explanations explaining the situation would clearly show that the latest version by the assessee is also not correct. However, there are instances where cheques were issued in favour of the dead persons and their LRs also denied of having received any commission. From a conspectus view of the whole matter and from the bulky evidence which is on record we have no hesitation to hold that there is no evidence to prove the payment of third party commission and the conclusion of the authorities below, that in all probability the disallowed amount stands for bogus commission appears to be correct and in fact a reasonable inference which can be drawn from proved facts. 29. Now as regards commission said to have been paid who acted as middle men for securing o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Chemicals (I) (P.) Ltd. [1984] 10 ITD 240 (Bom.) (SB) 3. Goodlass Nerolak Paints Ltd. v. ITO [1985] 11 ITD 767 (Bom.) 31. Shri Ajay Gandhi also relied upon the following case law for the proposition that whatever percentage which was felt justifiable can be allowed towards secret commission. Reliance is placed upon the following cases also : 1. Tejaji Farasram Kharawalla v. CIT [1948]16 ITR 260 (Bom.) 2. Ciba Dyes Ltd. v. CIT [ 1954]25 ITR 102 (Bom.) 3 . CIT v. Coimbatore Salem Transport (P.) Ltd. [1966]61 ITR 480 (Mad.) 4. Addl. CIT v. Moolchand Jaikishandas Co. [1977]108 ITR 500 (Guj.) 5. CIT v. Arumugham Chettiar [1980]125 ITR 753 (Mad.). 32. In Tejaji Farasram Kharawalla's case the assessee was paid by Ciba India Ltd. 7.5 per cent commission and 5 per cent as compensation in lieu of contingency expenses. The Bombay High Court held that it was not necessary for him to prove that the 5 per cent commission received by him was actually spent and the same could not be taxed in his hands. Obviously the assessee in that case was himself the commission agent who had received the commission at the rate of 5 per cent. Howeve,. the fact of payment at 5 per cent was clea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hown to have been paid to the three employees were in fact paid. The High Court found that if the amount of salary was low and the amount was part of the remuneration and not as ex gratia payment for services rendered, the amount of commission would have to be much in order to equalise the total amount and ensure fairly higher remuneration for its employees. The Tribunal also found that in the light of business undertaken by the assessee-firm namely trade of dye stuffs and colour chemicals which are being sold to textile mills it is usual practice to pay secret commission to dyeing masters, printing masters etc., in order to secure orders and the Tribunal also found that three employees of the assessee firm were securing business from out of mills for the assessee firm. In those circumstances though the Tribunal allowed commission paid to the three employees under section 37 the High Court changed the section and allowed it under section 36(1)(ii) of the Act. But in the case before us the facts are quite different. The identity of the payees was not established, the factum of payment of commission and discount was also not established. Further the assessee company, did not establis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... es of the recipients were withheld even though the assessee does not disclose the names of the persons to whom ultimately the payments are made. The assessee has been following regular system of maintaining accounts and procedure for making the payments and the regular system it had followed and the regular procedure for making payments would be evident from the vouchers, entries in books etc. Explaining the procedure, the learned counsel for the assessee pointed out before the Special Bench that the cash is withdrawn by the directors of the Company for the specific purpose of making the payment. Cash vouchers for these companies are available. Out of the amounts drawn the details of the disbursements made to the various mill companies are available and noted on the back of the receipts. Any excess amount available after the specific payments have been made or carried over and held back with the director who again withdrew money for the purpose of further payments when necessary. There is complete tally for the amounts withdrawn from the banks and the statements made to the mill employees. Details are also available of the particular amounts of the transactions with the particular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... herefore, it is very clear that the assessee did not prove the custom of paying secret commission to middlemen in order to push up the sales of its products in which it deals. On the other hand the department had secured certain material to disprove that no such custom existed in the line of trade or business in which the assessee is engaged. For this reason also the Bombay Special Bench decision, in our opinion, does not apply to the facts of the case. 38. Now let us take up the contention of the assessee that to the facts on hand, the Bombay High Court decision in Goodlass Nerolak Paints Ltd.'s case does not apply. In that case the assessee is a company carrying on the business of manufacture and sale of paints, varnishes, pigments and so on. In previous years relevant to assessment years 1963-64 to 1968-69 the assessee claimed deductions out of its income in respect of various sums as selling expenses. These 'selling expenses' were claimed on the footing that they were commissions paid to the employees of certain purchasers in order to promote the sales of the assessee's products. As against demand, the assessee did not furnish any details whatsoever regarding the names and ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mmissions in question, it is not possible to hold that expenditure in question was laid out wholly and exclusively for purposes of the business of the company, which means that in the view of the Tribunal, the assessee did not discharge the burden of proving that the expenses claimed to have been paid as secret commissions were in fact paid as such. The Bombay High Court on the above facts confirmed the decision of the Tribunal and while confirming the Tribunal's decision held as follows as pages 62 and 63 of the reported decision : " Section 37 of the said Act, inter alia, clearly provides that the expenditure claimed by way of deduction should be laid out or expended wholly and exclusively for the purposes of business or profession and we totally fail to see how it could be said that the assessee was not bound to prove that the said amounts claimed to have been paid as secret commissions were actually laid out or expended to have been paid as secret commissions before becoming entitled to deduction under section 37. As the assessee refused to furnish the names and addresses of the parties to whom such secret commission had been paid, it was perfectly open to the Tribunal not to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were either private parties or Governmental agencies. The Bombay High Court did not draw a distinction between ordinary customers and Government customers or semi-Govemment customers. The Bombay High Court held that any secret commission paid in the business as a sort of custom should be held to be against public policy, inasmuch it would be shielding the recipients of the commission from the obligation to pay the taxes due from them and not disclosing their full names and addresses is against the specific provisions of section 133(4) of the Income-tax Act, 1961. 39. Shri Ajay Gandhi fairly conceded that as far as the middle men commission paid in getting orders of purchases from Government companies, semi-Government companies are held to be nothing but encouraging illegal gratifications to the employees working in those Government and semi-Government companies and such commissions would be illegal and against public policy, as held by the AP High Court in CIT v. Kodandarama Co. [1983] 144 ITR 395. In that case the ricemillers who were also dealers in paddy, rice, brokens etc. made contributions to the AP Welfare Fund, West Godavari District in return whereof, they were granted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s counsel before us. It has also considered the decision in Arumugham Chettiar's case. In this regard the AP High Court observed at page 413 of their judgment as follows : "Similarly if the first two decisions are understood as laying down the proposition that even an illegal payment is entitled to be deducted under section 37, we must express our respectful dissent therefrom." Thus it is clear that the two decisions of the Madras High Court, relied upon by the assessee, were dissented from by the A.P. High Court, which is binding against this Tribunal. Therefore, the A.P. High Court's decision invalidates the commission paid to Government servants or the employees in Governmental and semi-Governmental companies like Nuclear Fuel Complem, Bharath Heavy Electricals Ltd., A. P. Agro Industries Ltd. etc. The assessee also relied upon the Delhi 'C' Bench Judgment passed in IAC v. Punjab Steel Works [IT Appeal No. 4377 (Delhi) of 1984 and C.O. No. 46 (Delhi) of 1985 dated 31-3-1986] in which the learned members of the Tribunal had followed the Special Bench decision in French Dyes Chemicals (I.) (P.) Ltd.'s case. In that case the learned Members observed that the trade practice fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as conceded as per the vouchers. It had not claimed any deduction towards secret commission, whereas in the Delhi decision rendered by the Tribunal, the secret commission was being allowed at least for 10 years. Further, the custom of paying secret commission was an established fact both in the Delhi case as well as in French Dyes Chemicals (I) (P.) Ltd'. s case. However, in the case before us, the assessee failed to prove any such custom. This is the first year of assessment in which it has been claiming the secret commission as a deduction. In none of the previous years the said commission was either claimed or allowed. There is a complete chain of evidence established in both the cited cases between the commission on the one hand and the business transacted on the other. In the sale bills or invoices themselves the names of the parties to whom secret commission was paid were noted. However, that was not the case here. Hence we hold that the Delhi Bench decision cannot be applied to the facts of the case. The assessee also relied upon the Ahmedabad B-Bench decision in ITA No. 1943 (Ahmedabad)/1977-78 dated 11-6-1979 and also the Delhi 'C' Bench decision in ITA Nos. 4508, 4509 ( ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... und from the facts before us that the identity of the persons to whom the alleged secret commission was paid was not established and also we found that the payment of secret commission to the alleged middlemen whose names were furnished is bogus. Therefore, the facts on which the decision of the Bombay High Court was rendered in Mills Stores Trading Co. India (P.) Ltd.'s case was never obtaining in the case before us and therefore, the decision does not apply. We also wish to point out that even assuming the Special Bench decision in French Dyes Chemicals (I) (P.) Ltd.'s case and the subsequent orders of the Tribunal passed thereon were held applicable we have to hold that those decisions came in conflict with the Bombay High Court's decision in Goodlas Nerolac Paints Ltd.'s case and the A.P. High Court's decision in Kodandarama Co.'s case and therefore, we are bound to follow the Bombay and A. P. High Court's decisions in preference to any Special Bench decision of the Tribunal. Accordingly, we hold that the payment of secret commission even for the sake of argument if it is found to be true, is to be held as a payment made against public policy and hence illegal and cannot be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eductions provided for in the following clauses in respect of the matters dealt with therein, in computing the income referred to in section 28--- (i) ............... (ia) ............... (ii) any sum paid to an employee as bonus or commission for services rendered, where such sum would not have been payable to him as profits or dividend if it had not been paid as bonus or commission : " A sum of Rs. 42,910 was stated to have been paid by way of bonus to all the directors except to Sri Ajay Minocha. The list of the share-holders showed that except Mrs. Poonam Jolly and M/s. Indian Pneumatic Rock Drill Pvt. Ltd. the remaining share holders are the directors of the company. M/s. Indian Pneumatic Rock Drill Pvt. Ltd. is a sister concern of the assessee-company, wherein the directors are having substantial interest. The ITO by his letter dated 19-6-1985 called upon the assessee to explain why the amount of bonus paid to the directors should not be disallowed under section 36(1)(ii) of the IT Act. In the explanation offered by the assessee it is stated that the bonus was paid to the directors for the services rendered by them as employees of the company. They are full time direc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idends or profit because of (a) TDS (b) amount retained by the company as undistributed profits and (c) amounts shared by other share holders who would also be entitled for the dividends, was not effectively dealt with by any short of discussion. Therefore, we cancel this addition and send back the matter to the CIT(Appeals) to take up the issue once again and decide it according to law after meeting all the arguments advanced on behalf of the assessee and also after giving full particulars about the share-holding of each of the directors, by stating how many of the directors are employees and what are the services they rendered to the company etc. For statistical purposes this grounds is deemed to have been allowed. 42. The next ground is with reference to disallowance of Rs. 15,530 towards printing and stationery expenses. The company claimed Rs. 44,675 towards printing and stationery expenses as against Rs. 31,635 in the last accounting year. No vouchers were available for the some of the transactions which are appearing in LF No. 244 instead of LF No. 241 as per the dates of purchase. The particulars of the cash book folio, the voucher nos., the amounts covered by each of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... towards advances for expenses from time to time and it would have been possible that some of them might have made some payments to meet the expenses of the company and that the advances taken by the directors would cover the deficit cash balance and the credit should be given to such advances. The learned CIT (Appeals) did not accept this argument. The directors were said to have drawn several amounts towards specific expenses incurred by them. Had they returned the funds available with them to the company nothing would have been simpler than to pass appropriate entries in the books. As an alternative argument it is argued that if the assessee-company's commission expenses are bogus, then part of the bogus expenses should be admitted as available to square up the deficit cash balance. It seems that the learned CIT (Appeals) asked the assessee's counsel to admit specifically whether the deficit cash balances were actually made out of the bogus commission payments. However, nothing was conceded by the learned counsel for the assessee-company. Therefore, the learned Commissioner of Income-tax (Appeals) did not entertain the alternative contention. However, we held that the commission ..... X X X X Extracts X X X X X X X X Extracts X X X X
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