Sudhindra Mohan Guha, J. - (1.) The present reference relates to the assessment year 1962-63.
(2.) The assessee-company is a broker, dealer and exporter of jute goods. Its exports are mainly of carpet backing jute goods (hereinafter referred to as the wide hessian) to the USA. It started exports of this item in April, 1955, and made exports on consignment basis through its agent, M/s. White Lamb & Finlay (hereinafter referred to as WLF) up to November, 1955. During this period, WLF was paid a commission of 5 per cent. net on all exports and the assessee was reimbursing all other expenses incurred by WLF in the USA. The assessee, however, claimed that from December, 1955, its exports to WLF were on principal to principal basis. Under the new arrangement which was modified from time to time, it was further claimed that during the previous years goods were sold by the assessee to WLF on CIF basis, the assessee's selling price being 12 per cent. less than the list price in the USA. The list price was stated to be the expected selling price at which the goods were likely to be ultimately sold by WLF to their customers in the USA. Though there was no agreement in writing, one of the terms of sale was that if the goods were sold by WLF in the USA at a price lower than the list price on the basis of which the invoice was prepared, the assessee was to make good the deficiency. Similarly, in case, the exported goods were sold at a rate higher than the list price, the excess was to be made over by WLF to the assessee. For covering the loss on account of fall in the sale price, the assessee was under-drawing its invoice by about 5 per cent. to 15 per cent. which amount remained in the USA with WLF, of course, on assessee's account.
(3.) The ITO held that the assessee's exports of wide hessian to the USA through WLF continued to be on consignment basis. It was also found that the reasonable rate of net commission to WLF was 2 per cent. only as against the effective net commission rate of 7 per cent. allowed to them by the assessee. The case of the assessee was accepted, that, out of gross commission or gross margin of profit allowed at 12 per cent. , WLF was to incur certain expenses which he roughly estimated at 5 per cent. Accordingly, the ITO held that the commission or margin of profit to the extent of 5 per cent. of sale price allowed to WLF was without business consideration. Working out the total commission at the rate of 12 per cent. on the real sale price at Rs. 27,06,540, the ITO disallowed a sum of Rs. 11,27,730 as being payment without business consideration. It was further found that the assessee was under-drawing or under-invoicing WLF over and above the gross margin of 12 per cent. allowed to them. This amount, according to the ITO, was kept by the assessee in the USA with WLF with a motive and was never credited to its sales account. The sum of $ 1,08,400 was found to have accumulated in the USA out of its exports in the previous year. Its equivalent value being Rs. 5,16,200; the ITO made a separate addition of Rs. 5,16,200 on the ground that it was a part of the sale price of exported wide hessian kept back by the assessee in the USA.;