Decided on September 13,1962

K.T.KUBAL AND CO. (P) LTD. Appellant

Cited Judgements :-



TAMBE, J. - (1.)ON a direction given by this Court under sub-s. (2) of s. 66 of the IT Act, the Tribunal has referred to us the following two questions :
"1. Whether on the facts of the case the observations made in the Tribunal's appellate order relating to the asst. yrs. 1949-50 to 1952-53 amounted to information in the possession of the ITO within the meaning of s. 34(1)(b) to entitled the ITO to reopen the assessment for the tax years 1949-50 to 1952-53 under the said section ? and 2. Whether on the facts and in circumstances of the case the Tribunal was justified in not allowing the commission paid to Mr. B. M. Desai as an admissible expenses under s. 10(2)(xv) ?"

(2.)WE are here concerned with the four asst. yrs. 1949-50 to 1952- 53, the relevant account years being the calendar years 1948 to 1951. The question in substance that arises for consideration is whether the assessment orders, in which certain amount paid to one B. M. Desai by way of commission were allowed to the assessee, are liable to be reopened under s. 34(1)(b) of the Act, in consequence of certain observations made by the Tribunal in its appellate orders. The assessee is a private limited company, in which the majority of shares are held by one Mr. K. T. Kubal and his two brothers, and the business carried on by the assessee is manufacturing different kinds of condiments, tin drums and kegs. One B. M. Desai is an employee of the assessee and his salary is Rs. 165 per month. He also holds 8 shares in the company out of its total of 128 shares. The company was incorporated on 1st Jan., 1945. It appears that every year in the relevant account years to assessments years 1947-48 to 1952- 53, certain amounts are shown in the books of account of the assessee as having been paid to B. M. Desai by way of commission. In 1947- 48 and in all the assessment years, the assessee claimed deduction in respect of the said payments of commission. In 1947- 48, the assessee claimed a sum of Rs. 2,159 being the amount shown to have been paid to B. M. Desai by way of commission. Accepting the statement of the assessee that it was paid to B. M. Desai as commission, the claim was allowed by the ITO and was affirmed by the AAC as well as by the Tribunal. In 1948-49, the assessee claimed an amount of Rs. 14,352. Before the ITO, two statement were made. In the beginning, it was alleged by the assessee that the said commission was calculated at the rate of half-anna and one anna on certain orders in order to enable B. M. Desai to meet such payments to customers in securing orders. Subsequently, the assessee company changed the above explanation and stated that the said amount of Rs. 14,352 was paid by it to B. M. Desai at the rate of half anna per keg and one anna per drum. No commission was paid on masala. The ITO did not accept the explanation of the assessee and disallowed the whole claim for Rs. 14,352. In the appeal taken by the assessee against this order, the AAC allowed the claim of the assessee to the extent of Rs. 3,000. Against the disallowance of the balance, the assessee took a further appeal to the Tribunal, and it appears that B. M. Desai happened to be present before the Tribunal, and in the course of the hearing of the said appeal for asst. yr. 1948-49, it has been stated in the statement of the case that the following facts were established : " The payment of the amount was not made to him for any services rendered by him" and that "the amount represented secret commission in the nature of illegal gratification which had to be passed on to others in the course of securing orders."
Now, even though these facts were established, the Tribunal only rejected the claim of the assessee for the balance. In respect of the allowance of Rs. 3,000 the Tribunal in its appellate order observed :

"The AAC appears to have been reasonable in allowing the claim to the extent of Rs. 3,000."
It would be pertinent to mention that this appeal was disposed of by the Judicial Member, Mr. M. B. Samarth, and the Accountant Member, Mr. P. C. Malhotra. This order of the Tribunal is of dt. 27th Nov., 1950. Now in the assessment year 1949-50, the assessee claimed a deduction of the amount of Rs. 12,112. The statement of the case does not show that any fresh statement was made before the ITO at this stage. On the basis of the order of the AAC for 1948- 49, the ITO allowed deduction to the extent of Rs. 3,000. The appeal for the balance taken to the AAC failed. The assessee took a further appeal to the Tribunal. The Tribunal has disposed of the appeals in respect of the four asst. yrs. 1949-50, 1950- 51, 1951-52 and 1952-53 by one order. We will therefore refer to the Tribunal's order later. In the asst. yr. 1950-51, the assessee claimed a deduction of Rs. 5,925 by way of commission to B. M. Desai. It appears that during the course of the assessment proceedings before the ITO, a letter dt. 7th Feb., 1951, written by B. M. Desai to the assessee was placed before the ITO. The said letter was written by Desai to the assessee in consequence of the inquiry made by the ITO relating to these commission. In this letter, Desai had stated :
"I have to state that it was necessary for me to pay certain amounts to persons in charge to secure business. The total amount paid by me in this way according to the notes I have made comes to Rs. 1,000. I am not in a position to give the names of the persons to whom that amount was paid for obvious reasons. The balance of the amount of commission I have retained with me as my remuneration for securing orders."

Now, even though the claim made by the assessee was that barring Rs. 1,000 the rest of the amount was paid by the assessee to Desai by way of commission, the ITO by his order dt. 28th Feb., 1951, did not allow any amount by way of commission paid to Desai. On appeal by the assessee, the AAC, however, allowed deduction to the extent of Rs. 2,963. The assessee took a further appeal. In 1951-52, the assessee claimed a deduction to the extent of Rs. 5,774 on the same ground. By his order dt. 27th Oct., 1951, the ITO allowed a sum of Rs. 2,887. The appeal taken by the assessee to the AAC for the balance failed. The assessee took a further appeal to the Tribunal. In 1952-53, the assessee claimed a deduction of Rs. 5,878 on the same ground. By his order dt. 30th Aug., 1952, the ITO allowed the deduction to the extent of Rs. 2,939 and rejected the rest of the claim. The appeal taken by the assessee for the balance to the AAC failed. He took further appeal to the Tribunal. Now, all these appeals were heard by the Accountant Member, Mr. Dalal, and the Judicial Member, Mr. Aggarwal, on 1st Dec., 1953. Dealing with the case of the assessee for the year 1949-50, for the disallowance of Rs. 9,112 out of Rs. 12,112 claimed by the assessee as deduction on account of the commission paid to B. M. Desai, the Tribunal observed.

"B. M. Desai who is working as an accountant, it is admitted, does not canvass for the company's goods; he is not a salesman and it was also admitted that this sum of Rs. 12,112 was secret commission paid by the company, through him, to outsiders. No names and addresses of the persons who received this commission have been supplied and, in our opinion, the ITO should not allowed even Rs. 3,000, which is also part of the secret commission. Rs 9,112 have been rightly disallowed."

(3.)IN respect of similar claims made by the assessee for the remaining three assessment years, the Tribunal rejected them on the same ground as the one given for rejection of the appeal for 1949- 50. Now, on the basis of the observation made by the Tribunal in this order that the ITO could not have allowed even Rs. 3,000 which was also a part of the secret commission, the ITO, after recording the reasons and obtaining the sanction, issued notices to the assessee under s. 34(1)(b) of the IT Act. The reason recorded by the ITO for reopening assessment for the year 1949-50 are in the following terms :
"The Tribunal in their order dt. 1st Dec., 1953, have opined that Rs. 3,000 allowed out of the secret commission ought not to have been allowed."

Similar reasons with appropriate figures were given for the remaining three years. Before the ITO, the assessee raised two contentions, that there was no information in the possession of the ITO in consequence of which he had reason to believe that chargeable profits had escaped assessment, and as such initiation of action under s. 34(1)(b) was not validity made. The alternative contention was that the assessee's claim to deduct the said sums under s. 10(2)(xv) accepted either by the IT authorities or by the Tribunal. The reason given by the Tribunal for rejecting the first contention of the assessee is in the following terms :

"It was submitted by him (assessee) that there was no information in the possession of the ITO in consequence of which he had reason to believe that certain allowance is found to be wrongly made then to that extent, chargeable profits escape assessment or at least chargeable profits have been under- assessed. Again from the facts narrated at considerable length, it will be seen that the original assessments were made on the basis of certain facts and information being correct but in the course of appellate proceedings before the Tribunal, these facts and information itself came into the possession of the ITO as a result of the Tribunal's order on 1st Dec., 1953. We are, therefore, of the opinion that the action under s. 34(1)(b) has been properly initiated for each of these four years."

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