ORDER
T. V. K. NATARAJACHANDRAN, A.M. :
This is an appeal by the Revenue which arises out of the order of the CIT(A)-IV, Ahmedabad dt. 20th Dec., 1988. Several grounds of appeal have been raised by the Revenue disputing the decision of the CIT(A) to urge that the CIT(A) erred in his decision and therefore, his order should be set aside and that of the ITO should be restored.
2. The assessee is an individual. The assessment year involved is 1985-86 for which the accounting period ended on 30th June, 1984. The assessee filed return on 21st May, 1986 admitting total income of Rs. 30,590 but the ITO determined the total income at Rs. 4,00,165 after making several additions and disallowances.
3. The first issue involved relates to loss of Rs. 27,279 in the business of M/s. Gujarat Parquet Flooring & Furnishing Centre. The ITO rejected the claim of loss in the aforesaid business on the ground that the assessee had not produced any books in support of the loss sustained. From the information furnished, he concluded that no prospective businessman would continue to incur more expenses than receipts. He also observed that the assessee has not maintained or produced any books such as, cash book, ledger book, wage-register etc., on the ground that they were not traceable or available. Thus, the stand of the ITO was that the loss claimed in the business was not supported by documentary evidence.
4. The assessee appealed against the disallowance of business loss. The CIT(A) found that on account of new business in gas agency taken over by the assessee there was lull in the business of M/s. Gujarat Parquet Flooring & Furnishing Centre, and such business was actually closed in the next assessment year. Till such time, the assessee was maintaining specialised labourers and plant and machinery, etc. The books of accounts were also produced before the CIT(A) and he observed that the genuineness of the expenditure could not be doubted and it was also not disproportionate. Therefore, he allowed the claim of business loss.
5. At the time of hearing, the learned Departmental Representative referred to the grounds (1) & (2) raised by the Revenue and stressed the fact that r. 46A of the IT Rules, 1962 was contravened by the CIT(A) by admitting new evidence in the form of books of accounts produced by the assessee which were in fact not produced before the ITO. The point he was making was that the ITO was not given any opportunity of being heard with regard to the new evidence produced before the CIT(A). The ITO was also not called upon to comment on the books of account produced for the first time before the CIT(A).
6. The learned counsel for the assessee supported the finding and decision of the CIT(A) and also stated that during the course of assessment proceedings before the ITO, the assessee has been producing books of account as and when called for.
7. After due consideration, we find force in the ground taken by the Revenue because the evidence which was not produced before the ITO was produced before the CIT(A) and inasmuch as the CIT(A) has not co-opted the concerned ITO nor called for his comments, the r. 46A has been violated. Accordingly, we accept the ground taken by the Revenue and restore the matter relating to the loss from the said business to the ITO for fresh adjudication after giving the assessee a reasonable opportunity of being heard and to produce the relevant books of account in support of the claim of loss.
8. The second issue pertains to payment of commission to Shri Badamilal. The ITO found that a sum of Rs. 19,062 was paid as commission to salesman Shri Badamilal. He was asked to be produced by the ITO but the assessee expressed his inability to do so. He was not an employee of Jacob Gas Agency, the new business started by the assessee nor was on the pay-roll of the assessee. Therefore, the commission paid was disallowed by the ITO.
9. On appeal, the stand taken by the assessee was that being new to this line of business especially the sale of Stainless Steel Hot Plates where there is a competitive market and on which the assessee was getting margin of commission @ 20 per cent, Shri Badamilal was engaged as he was having experience in this line of business. A commission of 1 per cent on the turnover effected by him was paid to him out of commission @ 20 per cent received by the assessee.
During the course of assessment proceedings, the ITO had sent Inspector to enquire about the whereabout of Shri Badamilal at the address given by the assessee, but the Inspector verified and reported that though he was staying in that address but he had left the place for Nepal, his native place. Similar commission was also paid in the subsequent assessment year also. At the end of every month, receipt for payment of commission on printed voucher was obtained by the assessee with reference to the sales effected in each month. Such receipts were produced before the CIT(A). Regular entries were also made in the books of accounts in the normal course of business.
10. Taking into account an overall view of the matter and preponderance the probabilities involved, the CIT(A) held that the commission payment should be accepted as genuine and it should not be rejected merely because Shri Badamilal was not available to confirm the commission payment. He, therefore, deleted the addition made by the ITO.
11. At the time of hearing, the learned Departmental Representative reiterated the ground and supported the order of the ITO. The learned counsel for the assessee, on the other hand, submitted that similar commission paid to Shri Badamilal in the next asst. yr. 1987-88 was also allowed by the CIT(A) but the Department had not filed appeal to the Tribunal against that order.
12. In this connection, ground No. 5 taken by the Revenue is also closely linked with the ground No. 3 taken because that ground relates to commission of Rs. 11,430 said to have been received by the same Shri Badamilal from a third party concern, namely, M/s. Premier Associates. In para 7 of the assessment order the ITO states that it was noticed by him that commission of Rs. 11,430 on sale of Stainless Steel Hot Plates was paid to Shri Badamilal Prasad by M/s. Premier Associates. Though that fact has been noticed by the ITO, the ITO concluded that M/s. Premier Associates might have paid the said amount to Shri Badamilal Prasad on behalf of the assessee and in turn Shri Badamilal has passed on the same amount to the assessee. Therefore, the commission received by Shri Badamilal was added to the income of the assessee.
13. On appeal, the CIT(A) held that the addition was made on the basis of surmises and conjectures and, therefore, it was deleted. The learned Departmental Representative as well as the learned counsel for the assessee have been duly heard in this regard. From the submissions of the parties in respect of both the grounds, the conclusion that emerges is the stand taken by the ITO in disallowing the commission paid to Shri Badamilal is contradictory to the stand taken by him by including the commission paid to Shri Badamilal by M/s. Premier Associates. From the facts it is clear that M/s. Premier Associates had paid commission to Shri Badamilal only for the services rendered by him. The ITO has no basis or jurisdiction to assessee the commission received by Shri Badamilal from M/s. Premier Associates because admittedly he is not an employee of the assessee either in the Gas Agency business or in the business of M/s. Gujarat Parquet Flooring & Furnishing Centre. Therefore, the conclusion that could be drawn from these facts is that Shri Badamilal was as agent of the assessee engaged especially for pushing up the sale of Stainless Steel Hot Plates in the same way he was engaged by the said M/s. Premier Associates. The services rendered by Shri Badamilal to the assessee though doubted by the ITO but he has not doubted the services rendered by him to M/s. Premier Associates, so as to earning the commission of Rs. 11,430. Therefore, the ITO is blowing hot and cold so far as these two items of commission payments are concerned. The commission paid to him is 1 per cent on the sales effected by him every month for which documentary evidence has been obtained and maintained by the assessee and produced by the assessee. There is also no evidence to show that Shri Badamilal earned the commission from M/s. Premier Associates as an employee of the assessee so as to include such commission in the total income of the assessee. Consequently, the CIT(A) was justified in coming to the conclusion that the commission paid to Shri Badamilal is to be allowed and, therefore, he is justified in deleting the addition made by the ITO. Similarly, he was also justified in deleting the inclusion of commission of Rs. 11,430 received from M/s. Premier Associates.
14. The fourth issue relates to deduction of Rs. 50,000 paid to M/s. Multiproducts, Ahmedabad. The assessee paid Rs. 50,000 as consultancy fees to M/s. Multiproducts, Ahmedabad for obtaining project report. The ITO observed that M/s. Multiproducts had not given any such project report to any other person and the assessee is also derived benefit of the project report in the years to come and, therefore, the payment was capital in nature. Consequently, he disallowed the claim and added that to the total income.
15. On appeal, the CIT(A), considered the various facets of the project report and the services rendered by M/s. Multiproducts. As per letter dt. 4th Feb., 1984 M/s. Multiproducts had agreed to take up the project for market survey, consultation and advise for the assessees gas agency and the charge fixed for was Rs. 50,000 for the total jobs. The scope of the work undertaken as per the report is as under :
1. Improve customer relation
2. Improve customer services
3. Suggest modern working methods to achieve the above goal
4. To establish MIS
5. To guide in office automation & computerisation
6. To increase profitability
7. Suggest future course of expansion and other allied activities
8. Methods to impart safety among the LPG users
On the basis of the aforesaid data, the assessee contended that the report given by M/s. Multiproducts for the purpose of facilitating carrying on the business in a more effective way by adopting modern management technics and, therefore, the expenses should be treated as revenue in nature and not as capital in nature. The CIT(A) was in full agreement with the claim made by the assessee. According to the CIT(A), the market survey and project report did not bring in any advantage of enduring nature. It only provided broad and scientific management system to the assessee which helped in carrying on the business in a more effective way to provide better services to the customers while at the same time helping to increase the profit of the assessee. Therefore, he concluded that the expenditure is revenue in nature and, therefore, it has to be fully allowed. Consequently, he deleted the addition.
16. The learned Departmental Representative has duly supported the conclusion of the ITO and stressed the ground taken by the Revenue. He filed a statement showing break up details of the consultation fees of Rs. 50,000 paid to M/s. Multiproducts. According to the statement, (i) for software development of gas agency working and selection of computer and training of personnel fees is Rs. 20,000 (ii) for management consultancy, selecting of personnel, steam lining of office work of gas agency, etc., by devising of cash flow, work chart and customer satisfaction survey and suggestions arising of responsibility, etc., for official working Rs. 25,000 and (iii) proposals for diversification new project facility on Pharmaceutical formulation Rs. 5,000. According to him, the expenditure relating to item No. (ii) amounting to Rs. 25,000 alone is attributable to the gas agency business, while the expenditure relating to item Nos. (1) & (iii) relate to new line of business and, therefore, the nature of expenditure is capital and not revenue. Therefore, he supported the order of the ITO with respect to expenditure in items Nos. (i) & (iii).
17. The learned counsel for the assessee, on the other hand, filed a paper book compilation and referred to the same in the course of his arguments. He has referred to page 25 of the paper book in which M/s. Multiproducts by letter dt. 4th Feb., 1984 addressed to the assessee had agreed to take up the project for market survey, consultation and advise for the agency and for future expansion project for which charges were fixed at Rs. 50,000. Page 27 of paper book contain list of contents of the services rendered which include scope of work, stock taking, market survey, staff structure, reporting system, documentations & formalities, automation and computerisation and future projects/expansion. Referring to these documents, the learned counsel for the assessee stated that for running existing business more profitably, the project report was obtained and not for commencing any other business. He pointed out that though the business was commenced on 1st July, 1983, the agreement was entered with M/s. Multiproducts on 4th Oct., 1984 to show that it is only out of commencement of the business the expenditure on project report was incurred and not prior to carrying on the business in Gas Agency. In this connection, he referred to the decision of the Andhra Pradesh High Court in CIT vs. Praga Tools Ltd. (1986) 157 ITR 282 (AP) at page 284. In that case, the assessee M/s. Praga Tools Ltd., a machine tools manufacturing co., incurred expenditure on consultancy services obtained from National Productivity Council for increasing the manufacturing efficiency and formulating incentive schemes. It was held by the Andhra Pradesh High Court that the expenditure was not incurred for acquiring asset of enduring nature but allowable as deduction. At page 284 of the report, it has been observed that the amount paid to National Productivity Council was paid for the benefit of increasing the manufacturing efficiency and formulating incentive schemes. In an age of speedy technological progress, no degree of permanency can be attached to these opinions given by the firms like the National Productivity Council on how to increase the production. They are all susceptible to modifications and alterations. Therefore, the fee paid to National Productivity Council was not regarded as expenditure incurred for acquiring asset.
18. He also referred to the decision of the Karnataka High Court in the case of CIT vs. Karnataka State Industrial & Investment Development Corpn. (1987) 163 ITR 657 (Kar) wherein the expenditure incurred on project report and feasibility studies was held to be revenue expenditure. Reference was also made to the judgment of Supreme Court in the case of Alembic Chemical Works Co. Ltd. vs. CIT (1989) 177 ITR 377 (SC).
19. We have duly considered the submissions of the parties. At the outset, we have to make a pointed reference to the letter dt. 4th Feb., 1984 conveying agreement of M/s. Multiproducts Ltd. for rendering services to the assessee. In this letter, besides market survey, consultation and advise for the gas agency, reference is also made for future expansion project. It is for this reason that the learned Departmental Representative has furnished break up details of the fees paid to M/s. Multiproducts and argued that the expenditure relating to software development and proposal for diversification to new project facility on pharmaceutical formulation relating to different project was capital in nature. Page 34 of the paper compilation filed by the assessee contains Chapter VIII relating to future project and expansion in which it has been mentioned that there was hardly any future prospects for gas agency business because as per the prevailing rules now the ceiling limit is kept at 6,000 refill sale per month and a distributor would not be getting new connection thereafter. Therefore, no additional income other than the commission on Cylinder delivery with prevailing commission of Rs. 3.62 per cylinder delivery maximum income will not exceed Rs. 19,720 per month. Therefore, it was suggested that the ideal time for gas distributor 10 diversity is on the later part of the second year of operation. Therefore, it was suggested the project of Intravenous Transfusion solution would be economically viable and for this purpose, they enclosed the study report procured from M/s. Core Consultants. Therefore, a perusal of the entire consultancy report including suggestion for future diversification shows that the entire fees paid to M/s. Multiproducts pertained to the gas agency business carried on by the assessee only and the bifurcation of the fees into three parts made by the learned Departmental Representative is not warranted. Keeping in view the legal principles laid down in the case of M/s. Praga Tools Ltd. (supra), Karnataka State Industrial & Investment Development Corpn. (supra) and Alembic Chemical Works Co. Ltd. (supra), the expenditure incurred by the assessee is revenue in nature because the assessee is already in business and being new to the line of business, he obtained the project report for running the business more profitably and the expenditure fell in the revenue field and not in the capital field though the benefit is enduring in nature. The decision of the Supreme Court in the case of Empire Jute Co. Ltd. vs. CIT (1980) 124 ITR 1 (SC) is relied on. Accordingly, we uphold the order of the CIT(A) on this point.
20. In the result, the appeal is partly allowed.