ORDER
K. P. T. THANGAL, J.M. :
This appeal by the assessee pertains to asst. yr. 1989-90. The assessee is a partnership firm doing business of trading in dyes and chemicals. The relevant asst. yr. is 1989-90 and the accounting year ended on 31st March, 1989. The relevant previous year was of 15 months. The assessee is an authorised agent, i.e., stockist of Sandoz Ltd. Sales quantity accounts have been maintained in terms of quality and quality (sic). Sales and purchases are vouched. The return was filed on 27th October, 1989 declaring income at Rs. 6,78,600. During the year under consideration, the assessee disclosed gross profit of Rs. 32,87,251 on total sales of Rs. 2,82,45,125. The percentage of G.P. comes to 11.6% as against G.P. of last year 10.9%.
2. At the time of framing the assessment order, the ITO noted that the assessee had paid secret commission to the tune of Rs. 5,58,951 in addition to discount amounting to Rs. 3,67,193 and sales commission amounting to Rs. 5,41,068. The Assessing Officer allowed performance discount and sales commission but not secret commission on the ground that the assessee has not been able to co-relate the transactions of sales with the alleged payment of secret commission. According to the Assessing Officer the assessee has not proved the genuineness of the payment. Further the Assessing Officer disallowed the claim of the assessee on the ground that other stockists of Sandoz India Ltd. has not claimed any secret commission as claimed by the assessee. The assessee contended before the Assessing Officer that in the previous year the commissions were allowed as claimed by the assessee. However, the learned ITO was of the opinion that the claim of the assessee in addition to the performance discount and sales commission amounting to Rs. 9 lakhs is excessive and without basis and not genuine, as the assessee has failed to support by material evidences.
3. Aggrieved by the above disallowance, the assessee preferred an appeal before the first appellate authority. It was also submitted before the first appellate authority that the assessee being a practical business concern, it cannot disclose the names of the payees to whom the commissions were paid. It was also contended that in the preceding years the commissions claimed were allowed by the Assessing Officer concerned. The first appellate authority disallowed the claim of the assessee on the following grounds :
The assessee has not been able to co-relate any particular transaction of sales. The sales commission and performance in discount has been claimed and allowed. The secret commission has not been supported by any material evidence whatsoever. Other stockists of Sandoz (India) Ltd. has not claimed any secret commission and a sister concern of the assessee has claimed secret commission and the facts are similar in the instant case and the same was disallowed. The first appellate authority concurred with the opinion of the Assessing Officer that the products of Sandoz (India) Ltd. do not in fact need any secret commission to be paid as there have a very good market for the products of Sandoz Products. The cases relied upon by the assessee are not applicable in the instant case of the assessee.
4. Aggrieved by the above order, the assessee is in appeal before the Tribunal. The learned authorised representative submitted that as a result of the payment of secret commission, performance discount and sales commission, the turnover of the company jumped by over 1.70 times compared to last year. In this field of business, there is a cut throat competition in the market of dyes and chemicals. Even though there is a heavy demand for these products in Surat, a large number of manufacturers have sprung up over a period of time. Sandoz Products are known to be costliest and in view of the keen competition from other manufacturers whose products are equally good, but cheaper, the assessee has to offer some incentive to the employees of the purchasers of the product. As a result, with a view of promote sales, the assessee has to keep the dyeing masters, printing masters and storekeepers and employees of the purchase department happy and to pay secret commission from time to time. It was further submitted that the audit objection raised in the past was dropped in the proceedings under s. 263 and this commission was always allowed in all the years of past assessments. The assessee could not give list of persons to whom the secret commission was paid or any other evidence of such payment except entries in the books of accounts because the secret commission by its nature itself is secret. The fact that the vouchers of secret commission are maintained indicates the withdrawal of fund and all these matters are directly dealt with by the partners. The commission was always paid by the partner himself under proper authorisation and control. It is stated that all the inflow of funds of sales bills are received by account payee cheques, so also the withdrawal from the bank to pay secret commission. Therefore, relying upon the following judgments assessee’s representative submitted that the secret commission paid by the assessee is an allowable item of expenditure :
Addl. CIT vs. Moolchand Jekisondas & Co. (1977) 108 ITR 500 (Guj), EWAC Alloys Ltd. vs. Dy. CIT (1993) 42 ITD 218 (Bom); Sasson J. David & Co. (P) Ltd. vs. CIT (1979) 10 CTR (SC) 383 : (1979) 118 ITR 261 (SC); CIT vs. Coimbatore Salem Transport (P) Ltd. (1966) 61 ITR 480 (Mad); CIT vs. Goodlass Nerolac Paints (P) Ltd. (1990) 90 CTR (Bom) 184 : (1990) 188 ITR 1 (Bom); First ITO vs. French Dyes & Chemicals Ltd. (1985) 21 TTJ (Bom) 412 (SB) : (1984) 10 ITD 240 (Bom)(SB).
Addl. CIT vs. Moolchand Jekisondas & Co.
In this case the High Court upheld the agreement entered into between the assessee firm and three of its employees, though the ITO contended that the agreements were sham and not genuine to pay commission and the withdrawals by the employees were fictitious and the deduction of secret commission were entirely wrong and unjustifiable on grounds of public policy.
Sasson J. David & Co. (P) Ltd.
In this case the issue before the Hon’ble Supreme Court was whether the expression ‘wholly and exclusively’ in s. 37(1) does not mean ‘necessarily’. The Hon’ble Supreme Court held that ordinarily it is for the assessee to decide whether any expenditure should be incurred in the course of its business. Such expenditure may be incurred voluntarily and without any necessity, and if it is incurred for promoting the business and to earn profits, the assessee can claim deduction thereof under s. 37(1) even though there was no compelling necessity to incur such expenditure.
Coimbatore Salem Transport (P) Ltd.
In this case the issue before the Court was whether mamools paid for certain wayside expenses which was actually in the nature of tips or presents to odd people on the bus routes were allowable as deduction or not. The Tribunal held in the very nature of the expenditure shows that there could be no documentary evidence. This finding was upheld by the Hon’ble High Court.
Goodlas Nerolac Paints (P) Ltd.
In the above case the Hon’ble High Court upheld the decision of the Tribunal that the payments of commission made under the instructions and directions of the top executives of the company which were also approved by the board of directors even though the names and addresses of the recipients were not given and the payments were made for the purposes of business.
The Special Leave Petition in this case was preferred by the Department, The Supreme Court rejected the SLP vide SLP (Civil) Nos. 15931, 15932 of 1991) as reported in (1991) 191 ITR (St) 307.
First ITO vs. French Dyes & Chemicals Ltd.
In this case the Tribunal held that secret commission paid by the assessee to employees of customers on regular basis over a number of years to ensure acceptance of assessee’s products, though names of recipients could not be disclosed, a negligible percentage of turnover of the assessee is allowable as deduction, though it is possible to inflate the expenditure. In such cases, it requires verification of the reasonable claim. However, this would not by itself lead to the disallowance of the claim of the assessee.
5. Hence, the learned counsel for the assessee argued that the disallowance of the secret commission paid by it should be allowed as expenditure incurred wholly and exclusively for the purpose of business under s. 37(1) of the Act.
6. The volume of business of other stockists and the assessee has great difference in volumes as assessee paid the secret commission in the business transaction. It is also to be noted that the payments were directly made by the partner himself and maintenance of vouchers of secret commission indicates the correctness of the claim by the assessee. The learned counsel also contended that though Sandoz Products are known in the market and has a goodwill, being costliest, in view of the cut throat competition in the market from the new entrants, whose products are also perhaps as good as Sandoz, it cannot be ruled out that the assessee had to pay such secret commission, from the point of view of a prudent businessman.
7. Considering the entire facts and circumstances of the case we hold that the claim of the assessee with regard to payment of secret commission is a neither fully proved nor disproved. However, the claim of the assessee in addition to performance discount of Rs. 3,76,193 and sales commission amounting to Rs. 5,41,068 is on higher side. Therefore, we are of the opinion that the justice will be met by allowing the secret commission at 50% of the total claim of the assessee on this head. Assessee will get the benefit to that extent and ordered accordingly.
8. The next ground taken by the assessee is with regard to confirmation of disallowance of conveyance expenses of Rs. 18,910 being 1/4th of such expenses and depreciation on vehicles of Rs. 20,100 being 1/4th depreciation. This amount was disallowed on account of personal use of conveyance. The learned authorised representative submitted that the vehicles were always used for business purpose and, therefore, no disallowance could be made on this count. Regarding the depreciation it was further submitted that the depreciation on vehicles are allowed under block of assets, even if it is used for part of the year.
9. On the other hand the learned Departmental Representative relied upon the orders of the Revenue authorities.
10. We are not impressed by the arguments of the learned authorised representative. We are also unable to accept the decision of the Tribunal of Bombay Bench in the case of ITO vs. Asian Steel Yard ‘SMC’ in ITA No. 1888 (Bom) 1991 as reported in 24 BCAJ 11, as it is not possible to appreciate the issue involved in that case and what transpired between contending parties. On the basis of mere gist, we cannot appreciate the reasoning of the Tribunal to come to that conclusion.
11. In the result the appeal on this ground is rejected.
12. In the result, the appeal is allowed in part.