Smt. Satinderjit Kaur vs Income Tax Officer. Ito V. Smt. … on 8 June, 1994

ORDER

J. KATHURIA, A.M. :

These cross-appeals – one by the assessee and the other by the Revenue – and the cross-objection by the assessee pertain to asst. yr. 1985-86.

2. We shall first take up the assessee’s appeal (ITA No. 879/Chd/89). The only effective ground is against the confirmation of addition of Rs. 1,47,203 as commission paid to various agents.

3. Brief facts of the case are these. The assessee is an individual running proprietary concern in the name of M/s. Geeco Engineering, Ludhiana. For the year relevant to asst. yr. 1985-86, the accounting year ended on 31st March, 1985. The assessee derives income from manufacturing and assembly of spray pumps. Previously, the concern was run by the assessee’s husband who expired in 1975.

4. The Assessing Officer noted that the assessee had shown payment of commission of Rs. 1,47,203 to the following fifteen parties :

S.No.

S/Shri

Commission paid Rs.

1.

Ram Sarup Singh

12,128

2.

Paramjit Singh

9,492

3.

Gurnam Singh

5,160

4.

Krishan Gopal

8,629

5.

Navdeep Singh

14,450

6.

Sukhdev Singh

1,11,141

7.

Jaswinder Singh

10,305

8.

Devinder Singh

14,540

9.

Kesar Singh

4,975

10.

Charanjit Singh

13,400

11.

Satnam Singh

4,355

12.

Ashwani Kumar

11380

13.

Baldev Singh

10,393

14.

Ishwar Chander

6,897

15.

Karnataka Agro Inds. Corpn. Ltd.

2,955

Total :

1,47,203

The assessee had filed 12 affidavits. The Assessing Officer, however, recorded the statement of Navdeep Singh, Gurnam Singh and Kesar Singh, all at the back of the assessee. In their statements, according to the Assessing Officer, these persons denied having received any commission from the assessee. The Assessing Officer allowed an opportunity to the assessee to inspect the statements recorded by him and to produce the persons to whom the commission had been allegedly paid. Since no worthwhile evidence was forthcoming from the assessee and it appeared to the Assessing Officer that most of the sales were made to the Government departments and commission had been paid very late to these parties and that too in cash, the Assessing Officer disallowed the claim of commission of Rs. 1,47,203.

5. The learned CIT(A) got the parties examined by the Assessing Officer and also obtained the comments of the Assessing Officer and heard the assessee’s representative. It was noted by her that commission in all the cases had been paid @ 5% uniformly for which there was no written agreement. It was also noted by her that there was no proof of the agents having effected the sale of goods to the Government and semi Government departments. It was also pointed out by her that payments of commission had been made very late and these parties could not have waited for so long to receive such payments, particularly when they had no other source of income. It was also pointed out by her that there was no evidence of services rendered by these persons and, in fact, the payments had been shown only after March irrespective of the month in which the transactions were made on realisation of sales effected. She accordingly held that no commission had been paid by the assessee to any person and the alleged payment of commission was only to reduce the tax liability of the assessee. The addition of Rs. 1,47,203 was accordingly confirmed.

6. Shri Sudhir Sehgal, the learned counsel for the assessee, made detailed submissions. It was submitted that the statements of parties were recorded by the Assessing Officer at the assessee’s back and, hence, the principle of natural justice had been flouted. It was pointed out that when the assessee wanted to cross-examine the parties, the Assessing Officer merely permitted the assessee to inspect the statements of the parties having been recorded. It was pointed out that the assessee vide letter dt. 26th February, 1988 had requested the Assessing Officer to give a copy of the statements so that agents like Krishan Gopal and others be cross-examined. A copy of this letter is placed at page 21 of assessee’s paper book A. It was vehemently argued that the assessee’s counsel, in fact, had gone to the ITO with the commission agents so that their statements could be recorded but their statements were not recorded on that day by the ITO. The learned counsel, however, conceded that the learned CIT(A) gave an opportunity to cross-examine when these parties were produced before the Assessing Officer.

7. Drawing our attention to the details of turnover for several years at page 28, paper book A of the assessee, it was pointed out that in asst. yr. 1976-77, the sales were only of the order of Rs. 1,91,698 and that for asst. yr. 1983-84, these had increased to Rs. 16,57,200. It was pointed out that for asst. yr. 1984-85, the sales had slumped alarmingly to Rs. 10,26,571 which made the assessee sit up and think as to how to boost the sales. It was pointed out that in the year under consideration, it was because of the efforts made by the assessee which included the appointment of commission agents that the sales amounted to Rs. 28,70,384 thereby registering an increase of Rs. 18 lakhs. The G.P. rate earned by the assessee came to 15.59% and even if the assessee paid commission of 5%, the assessee was still having substantial income. In the subsequent year, no such commission was paid because the assessee had succeeded in marketing her products and in capturing the market. It was explained that that was the reason why in asst. yr. 1986-87, the sales were still higher at Rs. 30,62,339 in spite of the fact that commission agents had ceased to work.

8. The learned counsel for the assessee vehemently stressed that the Assessing Officer was not correct in saying that when the parties were produced, they gave tutored statements. In the first instance, the Assessing Officer did not examine the parties in the presence of the assessee and that later on when these parties were produced and the assessee was allowed an opportunity to cross examine them, the Assessing Officer took the plea that they were only giving a tutored version.

9. It was submitted that the payment of commission was made late to the parties only because the assessee wanted to ensure that the sale proceeds had been received from the parties to whom the sales had been effected by the commission agents. It was pointed out that the commission agents were employed who had influence in the rural areas and who could secure a market for the assessee’s products. Our attention was drawn to the copies of the accounts of the commission agents, their statements and affidavits and the details of the parties to whom the commission agents had made the sales. All these details are available in paper book B of the assessee from pages 2 to 76. It was pointed out that it was wrongly mentioned by the Assessing Officer that Shri Gurnam Singh had denied having received any commission from the assessee. It was pointed out that Shri Gurnam Singh had filed an affidavit in which it was admitted that commission of Rs. 5,160 had been received by him. In a statement recorded at the instance of the learned CIT(A) and even earlier, it had been clearly admitted that he had received commission from the assessee. It was, therefore, submitted that the Assessing Officer had unreasonably made the addition and harassed the assessee. As regards Shri Ram Sarup, it was submitted that the payments of commission were made late because the sale proceeds had been received late. It was also pointed out that he had previous experience and had confirmed the receipt of commission. As regards Shri Gurnam Singh, it was submitted that in the statement recorded by the Inspector, there was no denial by him regarding receipt of commission. He was an influential person. It was pointed out that mention of wrong year would not render the entire statement unreliable particularly looking to the rural background of these parties. A reference to a wrong year should not be fatal to the assessee’s case. It was pointed out that Shri Gurnam Singh had corrected the year in the statement and there was as such no discrepancy at the time of cross-examination.

10. In the case of Shri Krishan Gopal, it was pointed out that no question had been put by the Inspector regarding commission and that in the cross-examination, he clearly admitted to have received the commission. Similarly, in the case of Sarva Shri Navdeep Singh, Kesar Singh, Stanam Singh, Ashwani Kumar and others, our attention was drawn to the copies of their accounts, their statements and their affidavits and other information. It was also pointed out that in the case of Karnataka Agro Indus. Corpn. Ltd., commission @ 7.5% was paid by way of cheque. Our attention in this regard was invited to pp 74 to 76 of assessee’s paper book B.

11. It was submitted that the absence of written agreement should not go against the assessee particularly when the parties had filed affidavits and had deposed in their statements and had rendered services. As regards dealing with commission agents with Government and semi-Government departments, it was submitted that day in and day out commission was being paid to the parties even for paying commission to the Government and semi Government departments and the Courts and the Tribunals were allowing these as secret commission. As regards the charge of lack of experience by the commission agents, it was pointed out that the assessee shrewdly chose people who had village background and who by their influence could market the assessee’s products in the rural areas. It was also submitted that the payments of commission were made late to them because the payments were made only after ensuring that the sale proceeds had been received by the assessee. The learned counsel also joined issue on the point that persons like Gurnam Singh belonged to Ludhiana whereas they were shown to have effected sales in Jind area. In this regard, it was pointed out that there was no bar on such persons in exploring markets in another area. According to the learned counsel, this was irrelevant consideration which weighed with the learned CIT(A).

12. It was also pointed out that there was no material on record that the payment of commission was bogus. Reliance was placed on the Supreme Court decision in CIT vs. Delhi Safe Deposit Co. P. Ltd. (1982) 26 CTR (SC) 411 : (1982) 133 ITR 756 (SC) for the proposition that the true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going and of making it pay and not in any other capacity than that of a trader. In this context it was vehemently argued that the assessee paid the commission of Rs. 1,47,203 only out of commercial expediency and with a view to marketing the goods.

13. The learned counsel also relied on the Supreme Court decision in Sassoon J. David & Co. P. Ltd. vs. CIT (1979) 10 CTR (SC) 383 : (1979) 118 ITR 261 (SC) for the proposition that the business expenditure allowable under s. 37 should be incurred voluntarily and without any necessity and for promoting the business and to earn profit. It was submitted that it was not for the Revenue to sit in judgment and decide whether it was necessary for the assessee to incur such an expenditure or not. Reliance was also placed on the Supreme Court decision in Shahzada Nand & Sons vs. CIT 1977 CTR (SC) 246 : (1977) 108 ITR 358 (SC) for the proposition that no written agreement was necessary for paying commission to the commission agents and that all the surrounding circumstances had to be taken into consideration for deciding the issue.

14. The learned counsel also relied on the Gujarat High Court decision in Voltamp Transformers P. Ltd. vs. CIT (1981) 23 CTR (Guj) 312 : (1981) 129 ITR 105 (Guj) for the proposition that commission could be paid even when the sales were effected to Government and semi-Government departments.

15. To sum up, the learned counsel submitted that the commission had been paid out of commercial expediency and there was no justification for disallowing the same. It was also pointed out that, in this very case, certain credits were not accepted by the Assessing Officer but later on at the intervention of the learned CIT(A), the parties were summoned and statements were recorded and those very statements were accepted as genuine and correct by the learned CIT(A) without attributing the charge of these being tutored statements.

16. The learned Departmental Representative strongly relied on the orders of the Revenue authorities and submitted that the statements recorded initially could not be ignored and that the subsequent statements were manipulated and tutored. The learned Departmental Representative submitted that it was very strange that the rate of commission was 5% in all the cases which was highly improbable. It was also pointed out that the Assessing Officer only test-checked the cases and recorded the statement of five parties. It was also very unusual that the commission of such a huge amount had been paid only in the year under consideration and neither in the preceding year nor in the succeeding years.

17. We have carefully examined the rival submissions and perused the material on record. It is true that the commission of Rs. 1,47,203 has been paid only in the year under consideration and neither before nor afterwards. But that has a reason behind it. The assessee’s business was going on steadily upto asst. yr. 1983-84 when the sales shown amounted to Rs. 16,57,200. In the year relevant to asst. yr. 1984-85, however, the sales dropped down to Rs. 10,26,571. Against this background, the assessee was bound to feel alarmed and had to think of methods of boost the sales. One of the methods that suggested to the assessee was the appointment of commission agents. It was because of these efforts that the sales during the year under consideration went upto Rs. 28,70,384. Once the ship of business was brought on even keel, the assessee could dispense with the services of the commission agents and that is why no commission was paid in the subsequent years and still the sales were maintained at a high figure.

18. It is true that commission has been paid at a uniform rate and no written agreements have been entered into. It is, however, not necessary that there must be written agreement before a particular commission payment is allowed as a deduction. One has to look into the surrounding circumstances as well. In this case, the surrounding circumstances include the affidavits of the parties, their statements, the details of the parties to whom the sales were effected, copies of the accounts of the commission agents and their admission that they did receive the commission from the assessee.

19. The Assessing Officer unfortunately made enquiries through the Inspector in a few cases and came to the conclusion that the assessee had paid commission only to reduce the incidence of tax. The assessee requested the Assessing Officer to summon the parties or to allow the assessee to produce the parties so that they could be cross-examined but the Assessing Officer only allowed the assessee to inspect the statements recorded by his Inspector. This was against all canons of natural justice. The learned CIT(A), therefore, rightly allowed the assessee to produce the parties whose statements were recorded by the Assessing Officer and the assessee got an opportunity to cross-examine them. Except for a few discrepancies here and there which also have been reconciled and explained in the cross-examination, no serious defects or discrepancies have been pointed out on behalf of the Revenue in the statements of the agents. We have carefully gone through the material on record, the affidavits filed by the parties and their statements and their copies of accounts and we find that this plethora of evidence in the absence of written agreements cannot be brushed aside and has to be taken into consideration while deciding the issue of allowability or otherwise of commission payments. We are satisfied that the wealth of evidence produced by the assessee points to the commission agents being genuine parties and the commission payments being genuine payments. The Revenue authorities, in our opinion, have proceeded more on the basis of suspicion and conjecture which is a poor substitute for hard evidence. The case law relied upon by the learned counsel for the assessee also supports the assessee’s case. The Department cannot sit in judgment as to whether and when the assessee should employ commission agent or not. If an expenditure is wholly and exclusively for the purpose of business and whether it is dictated by necessity is irrelevant. On the facts and circumstances of the case, we hold that the payment of commission amounting to Rs. 1,47,203 was actuated by commercial expediency and had to be allowed as a deduction. We hold and direct accordingly.

20. In the result, the appeal is allowed.

21. Now we come to Revenue’s appeal (ITA No. 919/Chd/89). The first ground is against the trading addition of Rs. 1,72,218. The Assessing Officer noted that the G.P. rate of the assessee as compared to the immediately preceding year had dropped to 15.9% from 21.7%. It was also noted that the assessee was not maintaining day-to-day production register. Another point made was that the stock inventory had not been filed. The Assessing Officer accordingly rejected the book version, applied G.P. rate at 21% and made a trading addition of Rs. 1,72,218.

The learned CIT(A) deleted the addition.

22. The learned Departmental Representative submitted that because of the specific defects pointed out, the Assessing Officer was justified in rejecting the book results and applying G.P. rate of 21% which was shown by the assessee herself at 21.7% in the immediately preceding year.

23. Shri Sehgal submitted that it was wrong to say that no stock inventory had been filed. It was pointed out that before the learned CIT(A) it had been conceded by the Assessing Officer that the stock inventory was available in the file. As regards the non-maintenance of production register, it was pointed out that in the year under consideration, most of the goods purchased were in semi-finished stage and that the mere non-maintenance of a production register would not attract the provisions of s. 145(2) of the Act. It was also pointed out that the Assessing Officer had wrongly mentioned that the semi-finished goods purchased by the assessee were only 0.04% of the total purchases. It was pointed out before the learned CIT(A) the Assessing Officer had admitted that such purchases amounted to Rs. 17,69,433 which was quite a substantial amount. It was also submitted that for asst. yrs. 1976-77 to 1984-85, the gross profit shown by the assessee had ranged from 15.04% to 21.7%. In fact, drawing our attention to details at page 28 of the assessee’s paper book A, it was submitted that the G.P. rate of 21.7% was only in asst. yr. 1984-85 and that in other years, the G.P. rate was 15% or 16%. It was pointed out that in the immediately preceding year, the sales were to the extent of Rs. 10,26,571 only whereas in the year under consideration, the sales had gone upto Rs. 28,70,384. It was, therefore, pointed out that even for the sake of argument if the books of accounts were rejected, the rate of 15.59% shown by the assessee was quite reasonable and should be accepted.

24. After carefully considering the submissions of the parties, we are of the view that the learned CIT(A) was justified in deleting the addition of Rs. 1,72,218. In our opinion, the only defect that has been ultimately upheld is non-maintenance of production register. In our opinion, on that basis alone, the book results of the assessee cannot be rejected. Even if it is assumed that the provisions of s. 145(2) are attracted in the instant case, the history of the case shows that G.P. rate of 15% or 16% has been accepted as reasonable by the Assessing Officer in the case of the assessee in the past. Moreover, the two comparable cases of Modern Agro Sales Corpn. and Indo-German Corpn. also shows that the G.P. rate shown by them was around 17%. Taking into consideration all these factors, we hold that the learned CIT(A) justifiably deleted the addition of Rs. 1,72,218.

25. Ground No. 2 is against the deletion of addition of Rs. 39,500 made on account of squared up cash credits. The Assessing Officer noted that there were squared up accounts in the following names :

Rs.

Shri Harbans Singh

8,000

Shri Kamikar Singh

9,000 (5,000+4,000)

Shri Gurmeet Singh

7,500

Shri Bakhtawar Singh

7,000

Shri Balwinder Singh

8,000

Total

39,500

According to the Assessing Officer, the assessee failed to produce any evidence in support of these squared up accounts. The Assessing Officer accordingly held that these amounts represented the undisclosed income of the assessee. An addition of Rs. 39,500 was accordingly made. The learned CIT(A), however, got these creditors examined by the Assessing Officer and felt satisfied as to the genuineness of these creditors. She accordingly deleted the addition of Rs. 39,500.

26. The learned Departmental Representative submitted that Kamikar Singh’s second statement was a tutored one and could not be relied upon and that his first statement was more material because the truth came out in that. It was also pointed out that the statement of Balwinder Singh had not been recorded. He strongly relied on the order of the Assessing Officer.

27. Shri Sehgal, on the other hand, contended that it was only at the subsequent stage that the assessee was given an opportunity to cross-examine these parties in which the truth came out. It was submitted that the statement of Balwinder Singh had not been recorded because the statement of his father Shri Harbans Singh had been recorded in which he had admitted that the amount deposited in the name of Balwinder actually belonged to him (Harbans Singh),

28. Shri Sehgal drew our attention to pages 1 to 18 of assessee’s paper book part C and, in particular, the affidavit of Harbans Singh, the extent of agricultural holdings and the sale proceeds of agricultural commodities and to his statement. Similarly our attention was drawn at pages 19 to 27 in the case of Shri Kamikar Singh, pages 28 to 29 of Gurmit Singh, pages 40 to 50 in the case of Baktawar Singh and pages 51 and 52 in the case of Balwinder Singh. It was also pointed out that there was a credit of Rs. 5,000 in the name of Charanjit Singh s/o Harbans Singh, which was also added by the Assessing Officer and deleted by the learned CIT(A) and that the Revenue had accepted the order of the CIT(A) on the point. It was also pointed out that all the creditors except Shri Balwinder Singh had been produced and they had all affirmed having given credits to the assessee-firm. In the case of Balwinder Singh, it was pointed out that it was not necessary to produce him because his father Shri Harbans Singh accepted the credit as belonging to him. It was vehemently argued that the identity and the creditworthiness of the parties stood duly established and there was no doubt about the genuineness of these transactions.

29. After carefully considering the submissions of the parties, we are of the opinion that the learned CIT(A) has correctly deleted the addition of Rs. 39,500. These parties were identified, they had land holdings, they had filed affidavits and stood the test of cross-examination. We, therefore, hold that the learned CIT(A) correctly deleted the addition of Rs. 39,500.

30. The last effective ground is against the deletion of addition of Rs. 47,100 in the name of Miss Iqbaljit Kaur, Pritpal Singh and Kanwarpal Singh made on account of accretion in the cash credits. These three persons are the minor children of the assessee. The Assessing Officer asked the assessee to produce various donors who had gifted the amounts to her minor children. Out of the nine or ten donors, only two parties, namely Malwinder Singh and Manjit Singh, had been produced. The other donors were not produced in spite of numerous opportunities. The Assessing Officer accordingly held the accretion of Rs. 91,100 in the hands of the assessee. The learned CIT(A), however, deleted the entire addition.

31. The learned Departmental Representative relied on the order of the Assessing Officer.

32. Shri Sehgal, however, drew our attention to page 69 of the assessee’s paper book, part C, in which the accretion of Rs. 15,000 by way of gifts from Randhir Singh, Darshan Singh and Smt. Rajinder was reflected in the account of Miss Iqbaljit Kaur. Our attention was also drawn to pages 70, 71 and 72 which incorporate the memo of gift by Randhir Singh, his affidavit and his statement. Similarly, there is a memo of gift, affidavit and statement of Darshan Singh at pages 74 to 77. Similarly, pages 78 to 81 incorporate the memo of gift, affidavit and statement of Smt. Rajinder Kaur. It was submitted that on the basis of affidavits it was crystal clear that the donors had actually made the gifts to Miss Iqbaljit Kaur. It was pointed out that all these donors had their accounts in the books of the assessee which had been accepted Din the past and that these gifts owed their origin to those accounts.

33. Similarly, in the case of Pritpal Singh, our attention was drawn to pages 82 to 93 in which the gifts from Kuldip Singh, Lakhbir Singh and Gian Singh were received. These papers include memo of gifts, affidavits of the donors, copies of their accounts and their statements. It was submitted that on the basis of this evidence, it was crystal clear that the accretions in the name of this minor child of the assessee also stood established.

34. As regards the accretion of Rs. 15,000 in the name of Kanwarpal Singh, our attention was drawn to pages 94 to 105 of the assessee’s compilation, part C, in which the gifts were received from Dalwinder Singh, Bakshish Singh and Malwinder Pal Singh. These papers include the memo of gifts, their statements and affidavits and copies of their accounts appearing in the books of accounts. It was submitted that on the basis of this evidence, it was abundantly clear that the accretion in the name of the three minor children of the assessee stood established.

35. After considering the rival submissions and going through the material on record, we are satisfied that the donors, after withdrawing the moneys from their accounts in the books of the assessee, gifted certain amounts to the minor children of the assessee. The gifts are evidenced by the memoranda of gifts and in the affidavits and statements, the donors have admitted the factum of having made the gifts to the assessee’s minor children. We also find merit in the submission of Shri Sehgal that those donors, who are the near relations of the assessee, had deposited certain moneys in the books of the assessee in the earlier years after the death of the assessee’s husband and that it was out of these amounts which stood accepted that they had paid certain gifts to the assessee’s minor children. We accordingly uphold the action of the learned CIT(A) on the point and dismiss the ground of appeal.

36. In the result, the appeal is dismissed.

37. The cross-objection No. 83/Chd/89 is merely formal and supports the action of the learned CIT(A) on all the three points raised in the cross-appeal by the Revenue. Since we have already dismissed the Revenue’s appeal, the cross-objection becomes infructuous and is hereby dismissed.