Ita/58/2003 Of M/S Laxmi Engineering Industries v. The Income Tax Officer

IN THE HIGH COURT OF JUDICATURE FOR RAJASTHAN AT JODHPUR -------------------------------------------------------- 2. INCOME TAX APPEAL No. 58 of 2003 M/S LAXMI ENGINEERING INDUSTRIES Mr. SANJEEV JOHARI, for the appellant / petitioner Mr. KK BISSA, for the respondent Date of Order : 13.12.2007 HON'BLE SHRI MUNISHWAR NATH BHANDARI,J. These three appeals seek to challenge the order ofthe learned Income Tax Appellate Tribunal dt. 14.7.2003,deciding three appeals number 300 to 303 (JP) 2002. framing the following substantial questions of law:- 1. Whether the learned ITAT had material and wereright in law in sustaining dis-allowance of Rs.3,03,475/- being commission paid to M/s LaxmiStone Pvt. Ltd.? 2. Whether the finding that the appellant couldnot give specific evidence regarding nature ofservices rendered by the said Company is withoutevidence and contrary to the evidence on records,are perverse and have vitiated the conclusion? The precise controversy relates to the disallowance of the commission paid by the assessee to M/s.Laxmi Stone Pvt. Ltd., in the three relevant assessmentyears. The claim of the assessee had been, that when theCompany was formed, an Indian machine was installed whichwas previously imported, and there was an understandingbetween the firm, and the share-holders, that in case themachine is successful, more plants will be sold, and thefirm will give commission, and they will promote theirsales. It is claimed, that the commission in question waspaid in this regard. The learned assessing officer had disallowed thecommission, interalia finding, that the company is a sisterconcern of the assessee firm, and that no contract is shownto have been entered into between the assessee firm, andthe company, that the assessee has simply resorted todevice to reduce its income, and the payment is a bogusone. The other ground given is, that on opportunity being given the assessee failed to produce any evidence regardingthe details of the work done of the company, what was valueof the goods, and service, given by the Company, what wasthe market value of the goods, and services, given by thecompany, and whether such goods and services, provided bythe company, resulted in any profit to the assessee. Thenprovisions of Section 40A(2)(a) have also been considered,and the amount was disallowed as bogus payment. The learned Commissioner cataloged the four circumstances in para-15, which were said to have beenconsidered by the assessing officer, and were catalogued bythe learned Commissioner, which read as under:- “(1) There is no written agreement for the paymentof commission. (2) No details are available regarding the natureand extent of services provided by M/s. LaxmiStone (P) Ltd. In order to earn the allegedcommission. (3) The entry of the commission payment in thejournal of M/s. Laxmi Stone (P) Ltd., which wasfound in the premises of the appellant firm at thetime of survey, has been apparently made in asuspicious manner and not during the normal courseof business. (4)M/s. Laxmi Sonte (P) Ltd. is a connected familyconcern. It has been filed loss returns forvarious assessment years including the assessmentyear under consideration. It is clear that theappellant firm has diverted part of its profit inthe form of bogus commission to be adjustedagainst the losses declared by M/s. Laxmi Stone(P)Ltd.” After so cataloguing the circumstances, simplyheld, that these facts have not been disputed by thelearned counsel for the assessee, and thus it was found, that the payment of commission was not genuine, ratherthere has been clear attempt by the assessee to somehowtransfer part of the profit to the company. Then, when the matter was carried to the (4)M/s. Laxmi Sonte (P) Ltd. is a connected familyconcern. It has been filed loss returns forvarious assessment years including the assessmentyear under consideration. It is clear that theappellant firm has diverted part of its profit inthe form of bogus commission to be adjustedagainst the losses declared by M/s. Laxmi Stone(P)Ltd.” After so cataloguing the circumstances, simplyheld, that these facts have not been disputed by thelearned counsel for the assessee, and thus it was found, that the payment of commission was not genuine, ratherthere has been clear attempt by the assessee to somehowtransfer part of the profit to the company. Then, when the matter was carried to the Tribunal, the assessee produced voluminous evidence,comprising of number of affidavits of the persons who hadpurchased the plant from the present assessee, givingdifferent bill numbers, dates, and the price, for which itwere purchased, and also deposing that they were inspiredto purchase the plant looking at the plant working, whichhad been commissioned at the work premises of the company,and finding it satisfactory, and that they purchased it onthe performance of the plant, and being inspired by ShriParvinder Singh. The learned Tribunal, in the impugnedorder, in para-20, recorded positive finding, to theeffect, that admittedly partners of the firm were notdirectors of the company, the appellant firm constituted ofMr. K.G. Sharma and Kamlesh Devi, while the company hasfive directors. Admittedly Parvinder Singh is a Sikh, andis not a relation of the partners of the firm, and some ofthe directors were distant relatives. It was also noticed,that the appellant firm had submitted supporting affidaviton page 90 to 98, explaining that the supporting material could not be produced before the assessing officer, as onlythree days' time was given to him, and considered thereasons given by the C.I.T. for discussing, and in para-25,only proceeded to hold that the appellant could not givespecific evidence regarding nature of services rendered bythe appellant before the lower authorities, and purportingto have regard to entire facts and circumstances of thecase, proceeded to confirm the action of the assessingofficer, and that of the C.I.T. It is significant to note, that in this para-25itself, it was further held by the learned Tribunal, thatthere was no need for any written agreement for the paymentof commission, for the services rendered. Assailing the impugned order, the learned counselfor the assessee submitted, that when it was admittedposition, that the assessee and the company are not sisterconcern, and when it has been found that no writtenagreement was necessary for making payment of thecommission, for the services rendered, then in view of theaffidavits produced by the appellant before the learnedTribunal, it is more than clear, that the sales of theassessee were promoted by the activities of Shri ParvinderSingh, the director in the company, and in view of theagreement between the firm and the company, the commissionwas very much payable, and was accordingly paid. It was also submitted, that significantly the amount paid by theassessee is duly credited in the books of accounts of thecompany. Not only that, the amount has been subjected toassessment of tax, in the hands of the company. In suchcircumstances, according to the learned counsel, theauthorities below have proceeded, very substantially, ifnot solely, on suspicion, rather under the lurkingsuspicion, of the two being the sister concern, and onaccount of the books of accounts being found in thepremises of the assessee, at the time of search, and onaccount of the entry in the books of account of the companylooked suspicious, therefore, the impugned order is liableto be set aside. also submitted, that significantly the amount paid by theassessee is duly credited in the books of accounts of thecompany. Not only that, the amount has been subjected toassessment of tax, in the hands of the company. In suchcircumstances, according to the learned counsel, theauthorities below have proceeded, very substantially, ifnot solely, on suspicion, rather under the lurkingsuspicion, of the two being the sister concern, and onaccount of the books of accounts being found in thepremises of the assessee, at the time of search, and onaccount of the entry in the books of account of the companylooked suspicious, therefore, the impugned order is liableto be set aside. On the other hand, learned counsel for the Revenueassailed the impugned order by contending, that apart fromthe fact that the books of the accounts were found at thepremises of the assessee at the time of search, in thebooks of accounts of the company, entry clearly looked tobe clandestinely made between two lines, and was not anact done in the regular course of business, and therefore,it is clear, that the profits of the assessee were simplyattempted to be diverted to the company, and has rightlybeen disallowed by the learned authorities below. It wasalso contended, that the assessee has failed to produce anymaterial to show, that any services were rendered by thecompany, which entitled the company to receive the commission. May be, that the written agreement may not benecessary, but then, the evidence was required to be led bythe assessee, and despite opportunities being given by theassessing officer, the assessee did not lead any evidence,and therefore, the Tribunal was right in upholding thedisallowance of the amount. We have considered the submissions. At the out setwe may observe, that in J.K. Woolen Manufacturers Vs.C.I.T., reported in (1969) 72-ITR-612, Hon’ble the SupremeCourt has clearly ruled, that the expenditure could not bedisallowed merely on the basis of suspicion, rather inapplying commercial expediency for determining whether anexpenditure was wholly and exclusively laid out for thepurpose of assessee’s business, reasonableness of theexpenditure has to be judged from the point of view of thebusiness and not of the department. In the present case asnoticed above, admittedly the assessee and the company arenot the sister concerns, as noticed by the learned Tribunalitself. Then, it has also been found by the learnedTribunal, that there is no requirement of any writtenagreement to be there, for the payment of commission. Withthese two circumstances, a million dollar circumstancewhich goes against the Revenue is, that the receipt of thisamount had been shown by the company, in its books ofaccounts, and the company has already been assessed,regarding that amount, which fact is not in dispute. Obviously, this clearly excludes the theory of paymentbeing bogus payment, and negatives the suspicionentertained by the department, on account of, firstly thebooks of accounts of the company being found at thepremises of the assessee, and secondly on account of theentry being their in the books of accounts inserted inclandestine manner between two lines. Obviously, this clearly excludes the theory of paymentbeing bogus payment, and negatives the suspicionentertained by the department, on account of, firstly thebooks of accounts of the company being found at thepremises of the assessee, and secondly on account of theentry being their in the books of accounts inserted inclandestine manner between two lines. Then, so far as the finding of the learnedTribunal, about the assessee having not led any specificevidence, regarding nature of services rendered by thecompany before authorities below is concerned, true it isthat the assessee did not lead any evidence before theauthorities below, as contemplated by the learned Tribunal,but then, at least he had led his own evidence, by deposingto the effect, that at the time when company was formed, anIndian machine was installed which were previouslyimported, and there was an understanding between the firm,and the share holders, that in case the machine issuccessful, more plants will be sold, and the firm willgive commission, and they will promote their sales. This isvery clear and categoric evidence of the assessee, aboutthe nature of services rendered, terms of the agreement,and the eventualities in which the incident of commissionwould arise, attracting liability of the assessee towardsthe company, and to controvert this evidence, there isnothing on record, to show on the side of the Department, as to how this agreement, or story of this agreement iswrong, or evidence is not reliable. This, coupled with thefact, as found above, that the assessing officer had givena very very short time to the assessee, with the result,that the assessee could not lead evidence before theauthorities below, and therefore, the assessee had ledvoluminous evidence before the learned Tribunal, comprisingof the affidavits available at page-90 to 98; apart fromother affidavits, including that of Parvinder Singhhimself. A look at the order of the learned Tribunal doesshow, that the learned Tribunal has not at all even takencognizance, much less has it appreciated the same, or hasdisbelieved them, by giving any reason good, bad, orindifferent, whatever. It is a different thing, that it isnot shown before us, on the side of the Revenue, that evenbefore the Tribunal, the evidence comprised in theseaffidavits, was in any manner controverted by the Revenue.That being the position, a bare reading of these affidavitsdoes show, that all the deponents have consistentlydeposed, that all purchased machines, as detailed in eachaffidavit, for different prices, and vide different billnumbers, mentioned in the affidavits, and they had sopurchased it, being inspired by performance of the machineinstalled in the business premises of the company, and onthe advise, and with the cooperation of Parvinder Singh, who is the key person in the company; apart from the fact,that this Parvinder Singh himself has also corroborated it,by filing his own affidavit. Thus, the finding recorded by the learnedTribunal is vitiated on account of non reading of thematerial available on record as well. Thus, in our view, it cannot be said that thelearned Tribunal, or the authorities below were, correct indisallowing the amount of commission paid by the assesseeduring the relevant assessment years, and that the findingrecorded by the learned Tribunal is contrary to thespecific evidence led by the assessee, regarding the natureof service rendered by the company also. After considering the totality of circumstances asdiscussed above, it is more than clear that as a matter offact, the authorities below instead of proceeding withmaterial on record, including tangible evidence, haveproceeded solely, or in any case very substantially, on thebasis of suspicion, on the face of above two facts, whichwas not permissible, more particularly on the face of abovepositive circumstances, available in favour of theassessee, discussed above. Resultantly both the substantial questions of law, After considering the totality of circumstances asdiscussed above, it is more than clear that as a matter offact, the authorities below instead of proceeding withmaterial on record, including tangible evidence, haveproceeded solely, or in any case very substantially, on thebasis of suspicion, on the face of above two facts, whichwas not permissible, more particularly on the face of abovepositive circumstances, available in favour of theassessee, discussed above. Resultantly both the substantial questions of law, as framed, are answered in favour of the assessee, andagainst the Revenue. The orders impugned are modified inthe manner, that the dis-allowance of the amount ofcommission by the authorities below is set aside. Theappeals are accordingly allowed. ( MUNISHWAR NATH BHANDARI ),J. ( N P GUPTA ),J. /Sushil/