INCOME TAX OFFICER Vs. BELLISS AND MORCOM
LAWS(IT)-1985-5-24
INCOME TAX APPELLATE TRIBUNAL
Decided on May 08,1985

Appellant
VERSUS
Respondents

JUDGEMENT

Anand Prakash, Accountant Member - (1.)THIS is a departmental appeal challenging the order of the learned Commissioner (Appeals) deleting the imposition of penalty by the ITO amounting to Rs. 24,183 in terms of Section 271(1)(c) of the Income-tax Act, 1961 ('the Act') in respect of the assessment year 1978-79.
(2.)The circumstances in which the aforesaid penalty came to be levied may be noted. The assessee-company derives income from its business of manufacture and sale of multi-stage and single-stage steam turbine condensing and back pressure type turbo-generating sets, etc., mentioned in detail by the ITO in paragraph No. 2 of his order. While scrutinising the accounts of the assessee-company, the ITO noted that the assessee-company had debited Rs. 41,875 by way of special commission paid to the following two parties :
JUDGEMENT_6598_TLIT0_19850.htm

The ITO required the assessee to explain as to what was the special commission and the supporting bills and vouchers in respect of the above payment may be produced before him. The assessee replied to the ITO stating, inter alia, as follows :

The commissions of Rs. 11,875 and Rs. 30,000 were paid to Mr. A.N. Shukla and Sunder Electric Mart by account payee cheques. The commissions were paid for securing orders procured by them.

The assessee did not produce before the ITO either supporting evidence or details regarding the nature of orders procured by the above two parties in support of the above claim. The ITO, therefore, inferred that the above amount could not be accepted as a legitimate deduction from the total income in the absence of any details in support thereof. The above order of the ITO was upheld in appeal both by the Commissioner (Appeals) and the Tribunal. The Commissioner (Appeals) made the following observations while upholding the order of the ITO :

The only justification for paying these amounts has been given as a board's resolution authorising these payments. Regarding the nature of the payment, the only evidence was letter dated 23-9-1981 by the appellant to Price Waterhouse & Co. stating that their canvassers' commission of Rs. 41,875 paid to Sunder Electric Mart (P.) Ltd. and Mr. A.N. Shukla, 'was paid on lump sum basis towards execution of orders worth Rs. 5.05 lakhs'. On these facts, I agree with the ITO that sufficient justification was not made out for these payments, even though these may have been authorised by the board of directors. Items of actual sale of Rs. 5.05 lakhs, the rate of commission, etc., have not been furnished. The ITO could not verify these amounts and was within his rights in not allowing these as an allowable expenditure.

The Tribunal while sustaining the above addition made the following observations :

The assessee's learned counsel was unable to produce before us any evidence in regard to the actual services rendered by the two selling agents. It is also found from the IAC's order that the assessee, in spite of opportunity given, as per letter dated 6-3-1981, did not furnish any supporting evidence nor details in regard to the exact nature of the orders produced by the two selling agents. Besides stating that the payments have been authorised by the board of directors and that the two sums of Rs. 30,000 and Rs. 11,875 have been paid by account payee cheques, no other evidence has been produced to show that Sunder Electric Mart and Mr. A.N. Shukla procured orders by rendering special service to the assessee-company and, consequently, we are satisfied that the expenditure claimed was not laid out or expended wholly and exclusively for the purpose of assessee's business. Both the additions are, accordingly, upheld.

The ITO had initiated action under Section 271(1)(c), while finalising the assessment and after the disallowance in question was upheld in appeal, he imposed penalty on the assessee for concealment of income. While doing so, he made, inter alia, the following observations :

But with regard to claim for expenses mentioned under Clause (i) above, the position is quite different. Claim for special commission with regard to sales could be allowed only when it could be shown that services were actually rendered by the parties to whom the alleged commission is shown to have been paid. Rendering of service by way of booking of order, etc., is a question of fact, which is to be proved by leading positive evidence. In this case, the assessee has failed to produce any evidence about the necessity or justification for payment of any commission to the parties concerned. Mere authorisation by the board of directors or payment by cheque does not prove the genuineness of claim for special commission. Nor can it be said to constitute the service rendered. Allowability or otherwise of the claim for special commission depends on question of fact and no point of law is involved therein. As the assessee has failed to produce any evidence regarding the justification or necessity for payment of special commission, I am of the opinion that it was not a genuine business expenditure and that the assessee could not entertain a bona fide belief that it was so. The assessee has failed to substantiate the explanation offered in support of the claim and this amount is deemed to represent the income in respect of which particulars have been concealed within the meaning of Explanation 1 to Section 271(1) (c).

I, therefore, hold that with regard to this claim for expenses of Rs. 41,875 on account of special commission (as alleged), the assessee is guilty of concealment of particulars of income in the matter of reducing its income by the said amount and, consequently, reducing its liability for income-tax thereon and the provisions of Section 271(1)(c) read with Explanation 1 are clearly attracted.

(3.)THE assessee challenged the above order before the learned Commissioner (Appeals) and pleaded before him that the assessee was not guilty of concealment of particulars of income and that 'all that had happened was that the claim made by the appellant-company was disallowed by the ITO, because according to the IAC, no evidence or details were forthcoming.... THE mere fact of disallowance by the IAC of the appellant's claim did not justify the levy of penalty under Section 271(1)(c), particularly when no mens rea was proved....' THE learned Commissioner (Appeals) accepted the above plea of the assessee. While doing so, he made, inter alia, the following observations :
In this case, the IAC rejected the appellant's claim because supporting evidence and details were not produced. It is significant that the IAC has not brought on record any material to show that the claim was fraudulent or deceitful. It must, therefore, be held that even though the IAC might have been justified in rejecting the appellant's claim in this regard in the quantum assessment, the impugned penalty lacks basis. THE basic ingredient of the main provisions of Section 271(1)(c) is the existence of mens rea. THErefore, unless the assessing authority establishes the existence of mens rea, the penalty cannot be said to be exigible. And as pointed out earlier, the IAC has not brought on record any material to prove the existence of mens rea.



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