Instrumed (India) International vs Income Tax Office
1998 Latest Caselaw 495 Del

ORDER

B.M. KOTHARI, AM.

The first ground relates to confirmation of the disallowance of commission payment of Rs. 1,54,385 made by the assessee to one Ajay Kumar Gupta.

1.1. The assessee is a partnership firm consisting of three partners, namely, Sameer Kapoor (33 per cent), Sushant Kapoor (33 per cent) and Ajay Saxena (34 per cent). The firm deals in supply of medical/surgical equipments and instruments to medical institutions and hospitals, etc. The assessee filed a return declaring an income of Rs. 1,27,590 on 31st Aug., 1989. The transitional previous year covered the period of 21 months starting from 1st July, 1987, to 31st March, 1989. The assessee claimed deduction of an amount of Rs. 1,54,384 as commission paid to one Ajay Kumar for procuring a contract for supply of surgical goods of Cimmco International (for short 'Cinimco") and also for guaranteeing timely payments from the said customer. The AO disallowed the said commission in view of the elaborate reasons mentioned in the assessment order. The CIT(A) also confirmed the said disallowance.

1.2. The learned counsel for the assessee contented that the company ma direct efforts for obtaining orders from Cimmcc, International but the same did not materialise. To corroborate this contention, copy of letter dt. 2nd Jan., 1987 & other letters sent by the company to Cimmco was brought to our notice (p. 1-5 of paper-book). A certificate has also been submitted before the AO that the assessee could not enter into any transaction with Cimmcc, pursuant to their direct efforts.

1.3. On 17th April, 1987, Ajay Kumar Gupta sent a letter to the assessee introducing himself as a commission agent/broker for supply of various kinds of surgical items. He also offered his services for obtaining orders on their behalf and indicated that -he would charge commission @ 15 per cent on sale value. The company vide letter dt. 30th April, 1987, invited him for personal discussion. On 6th May, 1987, Ajay Kumar Gupta gave another letter to the assessee-company stating that they can obtain the details of requirement of surgical equipments of Cinimco International and can send the same to the assessee. The assessee vide letter dt. 15th May, 1987, informed Ajay Kumar Gupta that they have directly sent quotations to Cinunco earlier but were never awarded any order. Therefore, they would certainly like to avail his services for the business of Cimmco. Ajay Kumar Gupta was again invited to visit assessee's office. Ajay Kumar Gupta visited the assessee's office on 22nd May, 1987, for this purpose. After personal discussion, the assessee gave letter dt. 25th May, 1987, to Ajay Kumar Gupta confirming that they will pay commission @ 11 per cent on the supply made to Cimmco. It was also mentioned that all bills of the assessee should be cleared within 30 days. The rejection of goods due to manufacturing defect or late supply wip be that of the assessee and any other r ejection will be debited to the account of said agent. It was further specified in the said letter that commission will be paid on all the goods as per quoted in the enquiry, if orders are procured in favour of the assessee. However, such commission will be paid after receiving the payments from the Cimmco.

1.4. Thereafter Cinimco gave orders to the assessee company vide letter dt. 9th Sept., 1987, and 29th Oct., 1987. Copies of the purchase orders and the letters have been submitted at pp. 12 to 17 of the paper-book.

1.5. The assessee wrote a letter dt. 1st April, 1989 to Ajay Kumar Gupta in which the details of various commission payments aggregating to Rs. 1,54,305 have been given. The assessee requested Mr. Ajay Kumar Gupta to confirm the same. Ajay Kumar Gupta has confirmed the same and has also stated that he is an existing income-tax assessee in Ward No. 11(3), New Delhi.

1.6. The AO recorded the statement of Ajay Kumar Gupta on 4th Dec., 1990, and 26th Sept., 1990. The copies of these statements submitted in the compilation were not legible and, therefore, the learned counsel for the assessee was requested to submit the typed and legible copies of those statements. This requirement was made during the course of hearing on 21st April, 1998. The typed copies of these statements were submitted on 30th April, 1998.

1.7. The AO observed that there are certain contradictions in the statement of Ajay Kumar Gupta as compared to the correspondence exchanged by him with the assessee-firm. He came to the conclusion that Ajay Kumar Gupta did not render any service to the assessee-firm. and the so-called inter- correspondence allegedly exchanged between Gupta and the assessee-firm appears to be an afterthought and designed to suit the assessee's false claim of commission. The AO also observed that out of the commission of Rs. 1,04,384, the alleged commission to the extent of Rs. 91,272 was made in cash in violation of s. 40A0. The details of such cash payments of commission have been given in para (v) at p. 5 of the assessment order.

1.8. The learned counsel submitted that there are no contradictions in the statements of the commission agent. The commission agent has procured the orders from Cimmco. He has also ensured that Simmco made the payment of the sale proceeds. Ajay Kumar Gupta is an existing income-tax assessee. Copies of his assessment orders, etc. were duly produced before the AO. As regards payments made in cash, the learned counsel submitted that cash payment had to be made to Ajay Kumar Gupta pursuant to his insistence for receiving commission in cash until he developed complete faith and confidence in the assessee. He invited our attention towards a certificate dt. 16th Jan., 1991, given by Ajay Kumar Gupta, in which he has confirmed that he received cash payments to the extent of Rs. 92,272 and the balance amount of Rs. 63,113 was received by cheques. He has further confirmed in the said certificate that he had insisted for cash payment of commission. The learned counsel also invited our attention towards statement of Ajay Kumar Gupta recorded on 4th Dec., 1990 (Question Nos. 7 and 8). Ajay Kumar Gupta has confirmed that commission was received in cash during the period from 17th Dec., 1987 to 8th March, 1988, as he had to incur expenses in cash and he was also not sure whether the assessee will pay such commission or not. That is why payment in cash was one of the conditions, which he insisted. Later on, the assessee realised the position and accepted the payments of commission by cheques. The learned counsel submitted that the cash payments made in such exceptional circumstances is clearly covered by Circular No. 220 dt. 31st May, [(1977) 108 M 8 (St.)].

1.9. The learned counsel also placed reliance on the decision of Tribunal Third Member in VIP Industries ITD. vs. L4C (1991) 36 ITD 70 (Bom.) (7M), which according to him, fully supports the allowability of commission. He also placed reliance on judgment in ITO vs. French Dyes & Chemicals (I) ITD. (1985) 21 77J (Bom.) 412 (SB): (1984) 10 ITD 240 (Bom.) (SB), to support his claim.

1.10. The learned senior Departmental Representative placed reliance on the detailed reasons mentioned in the assessment order. He submitted that no evidence of services rendered by the agent has been furnished before the AO. The facts of the case in (1991) 36 ITD 70 and (1985) 21 TTJ (Bom.) 412 (SB) : (1984) 10 ITD 240 (Bom.), are distinguishable. In that case the commission payment was made on account of personal contacts of agents with the customers. In the present case, there is no such evidence about any personal contacts of Ajay Kumar Gupta with the persons employed in Simmco, who were in a position to give orders.

1.11. The learned senior Departmental Representative also submitted that disallowance to the extent of Rs. 91,272 is fully justified in view of the clear provisions of s. 40AQ). He placed reliance on the judgment in VIP Industries ITD. vs. L4C (1991) 36 ITD 70 (Bom.)(IM) .. 163 ITR 695 (sic), Naghilal vs. CIT (1987) 66 CTR (Raj) 109 : (1987) 167 ITR 139 (Raj), Vijay Kumar Afit Kumar vs. CIT (1991) 96 CTR (AZI) 152: 55 Taxman 388 (All).

1.12. In the rejoinder, the learned counsel for the assessee invited our attention towards the copy of statement of facts annexed with the assessee's appeal before &he CIT(A) containing detailed explanation of the assessee in relation to the various observations made by the AO in the assessment order. He also pointed out that agent has admitted in the statement recorded by the AO on 4th Dec., 1990, that he visited the accounts branch of Cimmco, once to receive a cheque on behalf of the assessee. The agent has also gone to Simmco office for collecting Form No. ST-49, which is evident from copy of letter dt. 21st Dec., 1991, submitted at p. 21 of paper-book. The learned counsel submitted that the assessee has adequately discharged the onus of proving the genuineness of the transaction in question. The learned lawyer also pointed out that commission paid to various other persons has been allowed by the AO. He invited our attention towards the documents placed at pp. 32-36 of the compilation which give details of commission paid to Siddarath Enterprises @ 15 per cent on supplies made to S.M.G. Hospitals and @ 20 per cent on supply made to J1.M.L. Hospital, Srinagar, as well as the details of commission paid to Mr. Vijay Tikku. @ 15 per cent and 20 per cent as per details mentioned in letter dt. 19th April, 1991 (p. 36 of paper-book). He submitted that the commission to Ajay Kumar Gupta has been paid only @ 11 per cent. The assessee as prudent trader entered into such an agreement with Ajay Kumar Gupta by which it was agreed that commission will be paid only when he procures the order and the entire payments are received from the customers. Such an arrangement was beneficial in the interest of the assessee. He, therefore, once again strongly urged that deduction may be allowed in respect of the entire amount of commission paid by the assessee.

2. We have carefully considered the submissions made by the learned representative of the parties and have gone through the orders of the learned Departmental authorities as well as all other documents to which our attention was drawn during the course of hearing.

2.1. The assessee has submitted copies of various letters exchanged between Ajay Kumar Gupta (agent) and the appellant firm during the month of April and May, 1987. It is clear from the aforesaid letter that Ajay Kumar Gupta offered his services to the firm of the assessee for procuring orders from Cimmco for supply of surgical equipment, etc. The assessee agreed to pay commission @ 11 per cent on the sale price of goods to be supplied to Cinimco pursuant to orders procured through Ajay Kumar Gupta. Such commission was required to be paid only after the amount was realised from Cimmco. Ajay Kumar Gupta had also undertaken to accept the debit on account of rejection of goods by Cinimco for reasons other than the manufacturing defect or late supply. The order from Cimmco was received by the assessee in the month of September, 1987, and October, 1987. The letters exchanged between the assessee and Ajay Kumar Gupta have been brushed aside by the AO on the ground that such letters appear to be an afterthought designed to suit the assessee's false claim of commission. The charge of afterthought or falsity of such letters exchanged between Ajay Kumar Gupta and the assessee is not supported by any evidence brought on record by the AO. The AO has not even examined the partners of the assessee-firm in relation to the fact of exchange of such letters in the month of April and May, 1987. The letters sent by Ajay Kumar Gupta bear the seal of inward receipt "received" and the hand written date of receiving such letters. The AO has not interrogated the concerned persons who received such letters and marked the seal of "received" with date. In the absence of any material, it is validly impossible to hold that these letters were cooked up to support the alleged false claim of commission.

2.2. The assessee has also produced the confirmation of Ajay Kumar Gupta. He has clearly confirmed that he received commission aggregating to Rs. 1,54,385.24. Such commission payments were received by Ajay Kumar Gupta after successful execution of the sale contracts procured through, Ajay Kumar Gupta. In the confirmation, Ajay Kumar Gupta has also stated that he is an existing income-tax assessee in Ward 11(3), New Delhi. The assessee also submitted copies of the acknowledgment slip of the returns of income furnished by Ajay Kumar Gupta for asst. yrs. 1988-89 and 1989-90. The AO recorded the statement of Ajay Kumar Gupta on different dates. In his statement recorded on 4th Dec., 1990, Ajay Gupta has clearly confirmed that he has written a letter to the assessee that he can procure orders from Cinimco. He has also confirmed that after personal discussion, he agreed to obtain orders from Cimmco no commission @ 11 per cent. He has also confirmed that he received total commission of Rs. 1.53 lakhs approximately, which has duly been disclosed in his IT returns. In the statement of Ajay Gupta recorded on 9th Jan., 1991, he further informed that he was introduced by one of his friends, B.D. Joshi residing at R-84, Model Town-M, to the concerning person who is working, with Cimmco International. Ajay Gupta further stated that B.D. Joshi introduced him, to the said person working in Cimmco with the understanding that 25 per cent of total commission will be paid to B.D. Joshi. He has also stated that commission was received in cash w.e.f. 17th Dec., 1987, to 8th March, 1989, and later on it was received by cheques. Ajay Gupta in the said statement has also confirmed that he had insisted for cash payment of commission as he was required to incur expenses in cash. Ajay Gupta further confirmed that some commission payment was delayed on account of non receipt of Form 'H' from Cimmco. After the said form was obtained by Ajay Kumar Gupta from Cimmcc, and given to the assessee, the balance commission was also finally received in the month of March, 1990. The assessee has clearly discharged the burden of proving the genuineness of the commission transactions by producing the aforesaid documents in the form of letters, confirmation of Ajay Kumar Gupta and by producing Ajay Kumar Gupta before the AO. The onus thereafter shifts on the Revenue to prove that the amount of commission claimed to have been paid by the assessee to Ajay Kumar Gupta is sham or bogus transaction. Such a burden is required to be discharged by bringing on records positive material or evidence and not merely on the basis of suspicions and surmises. The Department has failed to bring any such evidence on records. The Department has also not brought any material on record to show that the amount shown as commission payment to Ajay Kumar Gupta has directly or indirectly flown back in the favour of the assessee at any point of time.

2.3. It may be relevant here to refer to the decision of Tribunal, Bombay Bench (Third Member) in the case of VIP Industries ITD. vs. IAC (supra). In this case, the assessee paid certain commissions to its agent 'M', who obtained orders from Canteen Stores Department (Government department). The AO disallowed the said commission. The Tribunal held in that case that where orders had to be obtained from Government departments, the names of the middleman or reference to the middleman would not be generally material in the correspondence unless they were ascertained agents. In this case M' stated that they had appointed 'B' to work on their behalf and the correspondence was produced before the IAC. The 1AC should have referred to this correspondence and prove it to be false. No attempt was made by the 1AC to disprove any of the letters produced. An affidavit of 'B' was also submitted, in which he admitted having received total commission of Rs. 20 lakhs in respect of supplies made by the assessee pursuant to the orders obtained through the services of 'M'. The Department also did not enquire- into the receipt of this commission from all angles and nor proved that this commission reached back to the assessee in one shape or the other or it was paid for some illegal purpose opposed to public policy. The Tribunal finally allowed deduction in respect of commission paid to 'M'.

2.4. A reference may also be made to the Tribunal, Delhi (Special Bench) in the case of ITO vs. Bench Dyes & Chemicals (1) (P) (supra). In this case, secret commission was paid by the assessee-company to the employee of customers on regular basis over a number of years to ensure acceptance of assessee's products. The names of the recipients could not be disclosed. The Tribunal held that some companies with substantially good turnover in the field had shown this necessity to make payment of such secret commission to the employees of the mills. There was sufficient information available in the market to strengthen the view that pushing sales amongst the mills requires this payment. The payment of commission made by the assessee comprises of a very small per cent of the turnover and compare favourably with the other items of assessee's expenditure. The Tribunal also observed that such payments cannot be regarded as opposed to public policy as the parties involved are purely private businessmen or their employees. Whatever may be the ethical or moral content involved their action could not be regarded as opposed to public policy unless it infringed some established customs or law or practice. The question of public policy could not (sic-apply) in the instant case where all activities were in (sic) private business in which self-interest is the best respected currency. Special Bench of the Tribunal held that secret commission so paid by the assessee is allowable as deduction.

2.5. If the assessee's claim for grant of deduction of commission is viewed in the light of principles laid down in the aforesaid decision, it will be found that the facts of the assessee's case are stronger as compared to the facts of the aforesaid two decisions. The assessee produced copies of letters exchanged between the agent and the assessee prior to obtaining of the orders by the agent from Cinimco. The assessee agreed to pay commission @ 11 per cent on sales made to Cimmco pursuant to orders obtained through the efforts of Ajay Gupta. The rate of 11 per cent is reasonable as compared to commission paid to other agents ranging between 15 per cent to 20 per cent which has been allowed by the AO. The assessee produced confirmation of Ajay Gupta. His statement was recorded by the AO, in which Ajay Gupta has confirmed having received the commission from the assessee. Ajay Gupta has also furnished a confirmation that he insisted for payment of commission in cash until he developed full confidence in the assessee. He also gave a certificate that he received Rs. 91,272 in cash as commission and had insisted for payment in cash as he did not know the party earlier and after some transactions, he agreed to receive the payments by cheques. The remaining amount of Rs. 63,113.23p. was received by cheques. The confirmation so given by the agent clearly brings the assessee's case within the exceptions enumerated in the Circular No. 220 dt. 31st May, 1977, in relation to interpretation of s. 40AQ) r/w r. 6DD(j).

2.6. On a careful consideration of the entire relevant material, we are of the considered opinion that the assessee is clearly entitled to grant of deduction of Rs. 1,54,385 in respect of commission paid to Ajay Gupta. The AO accordingly directed to allow the same.

3. The next ground relates to confirmation of addition of Rs. 54,000 on account of unexplained investment in the capital account of one of the partners, Ajay Saxena.

3.1. The learned lawyer appearing on behalf of the assessee submitted that no such addition can be validly made in the hands of the assessee-firm, particularly when the partner has clearly confirmed that he invested the amount in question as his contribution. He invited our attention towards judgment in Narayan Das Kedar Das vs. CIT (1952) 22 ITR 18 (Bom.), Balbhadra Chand Munnalal vs. CIT (1958) 33 M 781 (All), CIT vs. Jaiswal Motor Finance (1983) 37 CTR (All) 217: (1983) 141 EIR 706 (All) to support this contention. The learned counsel also submitted that statement of Ajay Saxena was recorded by the AO in which he has clearly confirmed having made the capital contribution in cash on various dates. The learned counsel submitted that the assessee cannot be required to prove the source of sources. The burden which lies on the assessee stands discharged as soon as Ajay Saxena admitted before the AO that he had, in fact, contributed the said amount in cash as his capital contribution. He placed reliance on judgment in Addl. CIT vs. Banuman Agarwal (1984) 42 CTR (Pat) 15 : (1985) 151 ITR 150 (Pat), Addl. CIT vs. Bhari Bros. (P) ITD. (1984) 42 CTR (Pat) 66 : (1985) 154 IM 244 (Pat) to support this contention.

3.2. The learned senior departmental Representative supported the orders of the departmental authorities and also relied upon the decision in CIT vs. Kapur Bros. (1979) 10 CTR (A1W 280 : (1979) 118 1TR 741 (All), Smt. Shanti Devi vs. CIT (1988) 68 CTR (P&H) 32 : (1988) 171 ITR 532 (P&H) and Bardwar Mal Onkarmal vs. CIT (1976) 102 ITR 779 (Pat).

3.3. We have carefully considered the submissions made by the learned representative of the parties. The AO made addition of Rs. 18,000 each on account of unexplained investment in the capital account in the name of partners, Sameer Kapoor, and Shushant Kapoor respectively. Likewise, he made an addition of Rs. 54,000 on account of unexplained capital introduced in the name of Ajay Saxena. The CIT(A) had restored back the issue relating to addition of Rs. 18,000 each in the account of Sameer Kapoor and Shushant Kapoor. The learned counsel for the assessee informed that these additions have been finally deleted.

3.4. As regards addition of Rs. 54,000 relating to credits in the capital account of Ajay Saxena, the CIT(A) confirmed the said addition by holding that mere filing of IT returns by Ajay Saxena cannot establish the availability of funds in the hands of the Ajay Saxena. No evidence has been furnished by the assessee regarding the earning of the amount and/or the savings thereof in the hands of Ajay Saxena. It is an undisputed fact that Ajay Saxena furnished returns of income for asst. yr. 1986-87 to asst. yr. 1988-89 and has been assessed to tax in respect of income declared in the said returns of income. The statement of Ajay Saxena was recorded by the AO on 26th Sept., 1990. In the said statement, Ajay Saxena has given complete details of capital contribution made by him in the assessee-firm on various dates in cash and by cheques. He has also given broad details of sources where from such amount was given. Ajay Saxena had stated in the said statement that he is an existing income-tax assessee and he has duly disclosed his income from tuition in the returns of income for asst. yr. 1986-87 to asst. yr. 1989-90. 3.5. The initial onus which lies on the assessee to prove the genuineness of the credit stands discharged after the assessee has proved the identity and capacity of the person concerned and has also established the genuineness of the credits in question. In the present case, Ajay Saxena, who is an existing income-tax assessee has appeared before the AO and confirmed the fact of contributing the capital as recorded in the books of accounts of the firm. The burden of the assessee stands discharged. The credit in the name of a partner of a firm, who is an existing income-tax assessee, should ordinarily not be added in the hands of the firm after the partner has confirmed the correctness and genuineness of such capital contribution. Such a view is clearly supported by decision in (1958) 33 ITR 781 (All), (1983) 37 CTR (All) 217 : (1983) 141 ITR 706 (All) and (1984) 42 CTR (Pat) 15 : (1984) 151 ITR 150 (supra). The facts of the various cases relied upon by the learned senior Departmental Representative are clearly distinguishable. For instance, he placed reliance on judgment of Punjab & Haryana High Court in the case of Hardwar Mal Onkar Mal vs. CIT (supra). In this case, the ITO found credit entries of Rs. 5,100 in the names of each of the 7 partners owing 119th share in the partnership and of Rs. 10,200 in the name of other partner having 2/9th share. On these facts, the High Court upheld the view taken by the Tribunal treating the sum of Rs. 45,900 as income of the assessee-firm. It will be clear from the facts of the aforesaid case that credits in the accounts of various partners were matching with their profit-sharing ratio. However, in the present case Ajay Saxena has 34 per cent share in the profits. The amount of unexplained cash credit added by the AO is Rs. 54,000. The addition on account of alleged unexplained capital in the accounts of the remaining two partners having 33 per cent shares each was Rs. 18,000 each. The addition of unexplained capital in the account of various partners had, therefore, no nexus or no relation with their respective profit-share ratio.

3.6. In view of the aforesaid facts and circumstances, we do not find any justification in sustaining the addition of Rs. 54,000 on account of alleged unexplained cash credit in the account of the partner, Ajay Saxena, in the hands of the firm. The AO, is accordingly directed to delete the said addition of Rs. 54,000.

4. In the result, the assessee's appeal is allowed.