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TMI Blog2002 (2) TMI 299X X X X Extracts X X X X X X X X Extracts X X X X ..... mmission by the assessee. Shri Patel also furnished during the hearing a separate compilation of various judicial pronouncements relied upon by him. 4. At the outset brief facts having bearing on the point in issue may be set out. The assessee-firm is engaged in the business of trading in electrical goods as well as carrying out job work like electrical installations, fixing of switchboards, etc. During the course of assessment proceedings the AO noted that a sum of Rs. 19,85,255 has been debited to the P&L a/c, on account of secret commission. When called upon to justify the claim of deduction by the AO, the assessee explained that secret commission has to be paid to procure more business. According to the assessee there was a trade practice in its line of business, namely, dealing in electrical goods and job-work of electrical installation, etc. to make commission payments to employees of customer concerns. The assessee stated that its major customers are business houses like M/s Reliance Filaments Ltd., Bharat Vijay Mills, Anti Friction Bearings, Chemstar Organics, PBM Poly Tex. etc. and commission has been paid to procure more business in the face of tough competition. The as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... secret commission: 1. Godlas Nerolac Paints Ltd. vs. CIT (1982) 28 CTR (Bom) 186 : (1982) 137 ITR 58 (Bom); 2. CIT vs. Goodlas Nerolac Paints Ltd. (1990) 90 CTR (Bom) 184 : (1991) 188 ITR 1 (Bom); 3. CIT vs. Sigma Paints Ltd. (1992) 103 CTR (Bom) 306 : (1991) 188 ITR 6 (Bom); 4. Dr. G.G. Joshi vs. CIT (1994) 117 CTR (Guj) 123 : (1994) 209 ITR 324 (Guj); 5. CIT vs. A.S.K. Rathinasamy Nadar (1995) 126 CTR (Mad) 400 : (1995) 212 ITR 527 (Mad); 6. Addl. CIT vs. Moolchand Jaikishandas & Co. (1977) 108 ITR 500 (Guj); 7. CIT vs. Tejaji Farasram Kharawala Ltd. (1965) 55 ITR 46 (Guj); 8. ITO vs. Wanson (India) (P) Ltd. (1983) 35 CTR (Pune) 42; 9. ITO vs. French Dyes & Chemicals (P) Ltd. (1985) 21 TTJ (Bom) 412; and 10. Mohan Singh vs. ITO (1985) 22 TTJ (Chd) 613. The learned CIT(A), after elaborate discussion of the aforesaid judicial authorities cited before him, culled out the following parameters as spelt out by the aforesaid judicial authorities for allowing the claim of secret commission vide para 6.2 of the appellate order: 1. There was an accepted trade practice of making payment of secret commission in the particular trade of the assessee, which would show th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n reducing the gross profit from about Rs. 49 lakhs to about Rs. 29 lakhs is not justified. Moreover, the claim of such a high expenditure of the order of Rs. 20 lakhs which cannot be brought to tax in hands of the recipients, in the absence of their names and addresses, is against the spirit of policy of taxation and is not in public interest. The claim also does not fall into the parameters which have been spelt out in various case laws. Specifically in the case of CIT vs. Goodlas Nerolac Paints Ltd. (1990) 90 CTR (Bom) 184 : (1991) 188 ITR 1 (Bom) and ITO vs. Wanson (India) (P) Ltd. (1983) 35 CTR (Pune) 42, due notice has been taken of the fact that the quantum of secret commission was very meagre. Moreover, in the case of the appellant since it is not possible to relate individual payments of secret commission to specific orders procured/executed, it cannot be said that secret commission has been paid in respect of each and every sale and as such the claim of secret commission at 7 per cent of the total sales is highly excessive and not at all justified. Further, it does not appear that a prudent businessman would allow 7 per cent out of his gross profit of 16.53 per cent to go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t secret commission had to be paid to the employees of the customers to procure orders as well as to achieve higher profit margin despite the steep competition in the market. The learned counsel placed reliance on the following decisions in support of his contention that payment of secret commission, justified by the exigencies of the business, have been accepted by the various judicial authorities: 1. CIT vs. Goodless Nerolac Paints Ltd.; 2. CIT vs. Sigma Paints Ltd.; 3. Dr. G.G. Joshi vs. CIT; 4. CIT vs. A.S.K. Rathinasamy Nadar; 5. Asstt. CIT vs. Moolchand Jaikishandas & Co.; 6. CIT vs. Tejaji Farasram Kharawala Ltd.; 7. CIT vs. Tejaji Farasram Kharawalla Ltd. (1968) 67 ITR 95 (SC); 8. ITO vs. Wanson (India) (P) Ltd.; 9. ITO vs. French Dyes & Chemicals (P) Ltd.; 10. Mohansing vs. ITO; 11. Sassoon J. David & Co. (P) Ltd. vs. CIT (1979) 10 CTR (SC) 383 : (1979) 118 ITR 261 (SC); and 12. Gordon Woodroffe Leather Mfg. Co. vs. CIT (1962) 44 ITR 551 (SC). 9. On behalf of the Department, Shri Umaid Singh Bhati, the learned senior Departmental Representative made two-fold contentions. Firstly, he argued that the assessee has failed to discharge the onus to esta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... act Act as well as IT laws. The learned Departmental Representative referred to the decision of Andhra Pradesh High Court in the cases of CIT vs. Kodandarama & Co. & Ors. (1983) 35 CTR (AP) 346 : (1983) 144 ITR 395 (AP) and argued that any payment opposed to public policy would not entitle to deduction as business expenditure. The learned Departmental Representative further placed reliance on the following decisions: 1. Nund & Samont Co. (P) Ltd. vs. CIT (1970) 78 ITR 268 (SC); 2. CIT vs. Westcoast Shipping Agencies (P) Ltd. (1981) 20 CTR (Ker) 40 : (1981) 127 ITR 442 (Ker); 3. Gwalior Road Lines vs. CIT (1999) 154 CTR (MP) 394 : (1998) 234 ITR 230 (MP); and 4. Maddi Venkataraman & Co. (P) Ltd. vs. CIT (1998) 144 CTR (SC) 214 : (1998) 96 Taxman 643 (SC). With regard to various judicial pronouncements relied by the learned counsel, the learned Departmental Representative argued that apart from distinguishing features on factual aspects, these decisions have been rendered prior to the insertion of Explanation to s. 37(1) as above and, therefore, there was no occasion for the various High Courts in considering the applicability of the aforesaid Explanation while adjudicating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ose of business. In addition to the aforesaid requirements emerging from the main provisions contained under s. 37(1), Explanation appended to the s. 37(1) further lays down that the expenditure should not have been incurred for any purpose which is an offence or which is prohibited by law. All the aforesaid conditions, having a bearing on the genuineness of the expenditure as well as legality thereof have to be fulfilled for deduction of the expenditure. 11.1. First we shall examine the issue in the context of the main provisions contained under s. 37(1). From the facts on record, as discussed hereinbefore, it clearly emerges that payment of secret commission to the extent of Rs. 19,85,255 being 7.03 per cent of the total sales has been claimed by the assessee, without furnishing the names and addresses of the recipients. In support of the payments the assessee has relied upon cash vouchers prepared by the partner of the firm. These cash vouchers have been prepared at randum in an ad hoc fashion and they do not contain particulars of the persons to whom the payments have been made. Even the details of the orders procured or the sales effected in relation to which secret commis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... im has been made by the AO as under: Commission claimed Rs. 3,81,646 Rate 4.44 per cent Disallowed Rs. 38,164 For subsequent years assessments have been made under s. 143(1)(a). From these facts it would be seen that secret commission claimed in the four scrutiny assessments as above, varied from Rs. 1.26 lakhs to Rs. 3.81 lakhs and the rate of commission varied from 2.7 per cent to 4.44 per cent. On agreed basis the AO finalised these assessments disallowing 10 per cent of the claim on ad hoc basis, as agreed to by the assessee. No enquiries or investigations had apparently been made by the AO calling upon the assessee to prove that genuineness of the expenditure by adducing evidences in support thereof. As against this, facts for the asst. yr. 1997-98 under consideration before us involve claim of secret commission to the extent of Rs. 19,85,255 @ 7.03 per cent of the turnover. The facts and features of the case which have been brought out by the Revenue authorities during the assessment year under appeal, have been briefly discussed above, which indicate that bald cash vouchers are prepared by a partner without indicating any particulars like identity of the recipient or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contrary stand. In Radhasoami Satsang vs. CIT cited by the learned counsel the Supreme Court held that in the absence of any material change justifying the Department to take a different view from that taken in earlier proceedings, exemption to the institution under ss. 11 and 12 of the IT Act, granted in the earlier years should not have been denied in the subsequent years. This decision is clearly distinguishable on facts and renders no assistance to the assessee's case. As we have already pointed out, the AO has in the instant case carried out scrutiny into the genuineness of the secret commission claimed by the assessee and disallowed the claim in the light of facts and circumstances brought on record. As against this, in the earlier years, no such scrutiny has been made and the AO rested content with making agreed disallowances on ad hoc basis. The Supreme Court decision cited by the learned counsel, therefore, rendered no assistance to the assessee's case. 13. In Stock Exchange, Ahmedabad vs. Asstt. CIT cited by the learned counsel, the issue involved related to grant of exemption under s. 11. The Tribunal held that since Stock Exchange has been held to be a charitable orga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merely audited but were also placed before the general body of the shareholders, that the assessee's turnover was increasing year after year and that such payments claimed as deduction had dropped from 1.34 per cent for one of the years to 0.22 per cent in the year in question, were very relevant. On the basis of these and other evidence, the Tribunal concluded that the fact of payment of commission was established even though the names and addresses of the recipients were not given and that the payments were made for the purpose of business." This decision has been rendered in the context of the aforesaid facts of the case wherein the rate of commission had come down from 1.34 per cent to 0.22 per cent of the sales and profits accounts and records were being maintained under supervision of top executive of the company and approved by the board of directors of the company. The accounts of the company were also placed before the general body meeting of the shareholders. In the instant case before us, the assessee has relied upon the cash vouchers prepared by the partner at randum without any indication regarding the names of the recipients or even the particulars of the orders ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t. The facts in this case are thus entirely distinguishable inasmuch as payments made to the employees on the basis of genuine agreement and deduction has been held allowable under s. 36(1)(ii). 21. In CIT vs. Tejaji Farasram Kharawalla Ltd. the assessee acted as selling agent of Ciba (India) Ltd. and was entitled to a commission of 12-1/2 per cent on the sales. It claimed exemption in respect of a part of the selling agency commission under the provisions of s. 4(3)(vi) of the IT Act, 1922. The issue involved is entirely different and does not support assessee's case. 22. The learned counsel has next referred to the decision of Special Bench of the Tribunal in ITO vs. French Dyes & Chemicals (I) (P) Ltd. The Special Bench of the Tribunal observed that there was a trade practice in the business of dyes and chemicals whereunder secret commission has been paid to dyeing masters and others. The Tribunal observed in para 32 of its order: "We have before us three assessees at least who between them cover several crores of rupees by way of turnover. The list of secret commission expenses incurred by these assessees as a percentage of their turnover shows that the percentage is ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cured or sales effected or even the name of the customer, etc. etc. In the absence of even bare details like particulars of the orders and sales for which secret commission has been paid, the cash vouchers prepared by a partner at his own sweet-will would not be any subject (sic). other independent authority unlike the proper records maintained in the cases cited and such records inspected by top executives of the company. Having regard to these distinguishing features, the reliance placed by the learned counsel on the aforesaid decision, is in our opinion entirely misplaced and does not support the assessee's case. 24. Having regard to the aforesaid discussion, we have come to the conclusion that the assessee has failed to discharge the onus of establishing the practice of payment of secret commission in his line of business and failed to adduce satisfactory evidence to establish the payments. Therefore, no deduction in respect of secret commission is liable to be allowed under the main provision of s. 37(1). 25. The next important facet of the controversy concerning the legality of the expenditure in the light of Explanation appended below s. 37(1) by the Finance (No. 2) Ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ployer could constitute an offence under the relevant provisions of IPC. Reference in this connection may be made to the provisions of s. 408 of the IPC read as under: "Sec. 408—Criminal breach of trust by clerk or servant: Whoever, being a clerk or servant or employed as a clerk or servant, and being in any manner entrusted in such capacity with property, or with any dominion over property commits criminal breach of trust in respect of that property, shall be punished with imprisonment of either description for a term which may extend to seven years, and shall also be liable to fine." Similarly, in the case of breach of trust by public servants, s. 409 would be applicable which reads as under: "See 409.—Criminal breach of trust by public servant, or by banker, merchant or agent,— Whoever, being in any manner entrusted with property, or with any dominion over property in the capacity of a public servant or in the way of his business as a banker, merchant, factor, broker, attorney or agent, commits criminal breach of trust in respect of that property, shall be punished with imprisonment for life, or with imprisonment of either description for a term which may extend to ten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wledge and consent may, therefore, be treated as immoral and unethical also. 28. Apart from the aforesaid statutory enactments, we may further point out that the secret commission of the substantial magnitude, being Rs. 20 lakhs claimed in the instant case, would be violative of the various provisions of the IT Act, 1961. Sec. 40A(3) prohibits, cash payments exceeding Rs. 10,000 relevant for asst. yr. 1996-97 the limit enhanced to Rs. 20,000 w.e.f. 1st April, 1997. In the instant case, since particulars of each payment has not been furnished and the assessee has produced merely ad hoc cash vouchers, the expenditure claimed is clearly contrary to the letter and spirit of s. 40A(3). We may further refer to statutory requirement enacted under s. 133(4) of the IT Act, 1961 which cast an obligation on any assessee to furnish a statement of the names and addresses of all persons to whom he has in any previous year given commission, rent, interest, etc. amounting to more than Rs. 1,000 together with particulars of all such payments made. This section clearly envisages maintenance of detailed information regarding the recipients of payment and furnishing of such information to the IT aut ..... X X X X Extracts X X X X X X X X Extracts X X X X
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