- (1.) These two cross appeals by department and assessee are directed against the order of Commissioner (Appeals) dated 13-12-1993. Since the main issue involved is common and the appeals were heard together, so these are being disposed of by this consolidated order for the sake of convenience.
(2.) The only issue raised by the assessee and ground No. 2 in departmental appeal relate to the sustenance/deletion of commission expenses. The assessee was engaged in the business of processing of cloth, i.e., the assessee purchased gray cloth from the market and then carried out the activities of bleaching, dyeing, printing, finishing, and packing etc., and then sold it. During the year the assessee paid brokerage/commission of Rs. 7,29,602 to M/s Hindustan Textile Agency, Balotra which was paid at 3.5 per cent of the sales effected through that party. According to the assessing officer provisions of section 40(a)(2) were applicable since sole selling agent M/s Hindustan Textile Agency was a sister concern of the assessee. Before the assessing officer the assessee stated that the aforesaid concern was appointed sole selling agent long back and commission at 3.5 per cent had been paid for the period relevant to assessment years 1976-77 to 1982-83. It was stated that on account of excellent handling of the sales by the agent the sales had risen from Rs. 83,72,460 in the year 1975-76 to Rs. 2,22,09,939 for the year 1982-83 and in the succeeding year, i.e., accounting year 1982-83 relevant to assessment year 1983-84 the sale came down to Rs. 1,44,48,285 when the commission was reduced to 2.75 per cent from 3.50 per cent. It was contended that the transactions even with relatives or associate concerns could not be disregarded and price paid, as commission, could not be disregarded unless it was shown by the department that the transaction was sham or commission paid was not really paid. The reliance was placed on the judgment of Hon'ble Gujrat High Court in the case of Voltamp Transformers (P) Ltd. v. CIT (1981) 129 ITR 105. It was stated that the commission payment to M/s Hindustan Textile Agency was accepted as reasonable since assessment year 1976-77 and it was incorrect to disallow a part of the same payment. The reliance was placed on the following judgments : (i) Income Tax Officer v. Sh. Laxmi Textile & Allied Corpn. 40 Tax World 42 (ii) Mehta Transport Co. v. Income Tax Officer (1988) 31 TTJ (Ahd) 48 (iii) CIT v. Kumar Engineers . As regards to the comparable cases quoted by the assessing officer the assessee stated that case was not comparable because in the case of M/s Digvijay Textiles, the dealing was in printing and dyeing of sarees whereas the assessee was engaged in dyeing and printing of coarse cloth used for dress material. The assessee relied the case of M/s. Madhav Textiles and stated that this concern was carrying on dyeing and printing of cloth which was similar to that of assessee and that concern was paying commission at 3.25 per cent to its sole selling agent. The assessing officer observed that in the case of M/s. Digvijay Textiles, commission payment to sole selling agent was only 2.5 per cent. However, considering the fact that the turnover of M/s. Digvijay Textiles was fast and their goods had better market than that of the assessee's product, slightly higher rate of commission payment by the assessee may be treated as reasonable. He, therefore, treated the payment of commission at 2.75 per cent as fair and reasonable. The assessing officer also pointed out that in the subsequent year the assessee itself had reduced the payment of commission to 2.75 per cent, therefore, the assessing officer allowed commission at Rs. 6,06,835 as against claim of the assessee at Rs. 7,72,350. Accordingly, the difference between two figures, i.e., Rs. 1,65,515 was treated as excess payment of commission and disallowance was made under section 40(a)(2) of the Income Tax Act.
(3.) Before the learned Commissioner (Appeals) it was stated that the commission paid to the sister concern was not abnormal and was quite in consonance with the rate of commission payment made to third party. It was stated that such commission was paid in the past also but no disallowance had been made. The assessee agreed that in the subsequent year commission payment to this party had been reduced to 2.75 per cent, however stated that the assessing officer had not seen the background for reduction in rate of commission. Therefore, he was not justified in disallowing the commission at 0.75 per cent. The learned Commissioner (Appeals) after considering the submissions of the assessee observed that no doubt the assessee reduced the rate of commission payment to same party in the subsequent year and the reason for reduction was stated that in the earlier year this party was only sole selling agent but in the subsequent year this party also took selling agency of another party namely M/s. Rajkamal Textile, therefore, the assessee reduced the rate of commission to its sister concern since the party was not taking much interest in the selling of the goods of the assessee. The learned Commissioner (Appeals) pointed out that the sales of the assessee got reduced due to the reduction of commission to the sole selling agent and that the assessing officer had not commented upon the reply of the assessee to justify his action even when called upon to do so. However, the learned Commissioner (Appeals) sustained the addition of Rs. 65,515 and allowed a relief of Rs. 1,00,000.;