1. (In the open Court) - This appeal by the assessee is directed against the order of the CIT(A)-VIII, New Delhi dated 11-1-1985 relating to assessment year 1981-82. The Memo, of Appeal indicates four grounds taken up in appeal by the assessee. However, at the time of hearing the learned counsel for the assessee specifically" sought our permission and it was granted for withdrawal of grounds serially numbered 1, 3 and 4. Therefore the ground which survives for our determination is that the Id. CIT(A) erred in upholding the disallowance of Rs. 3,69,824 paid to M/s. Niki Tasha (India) Pvt. Ltd. On this issue, we have heard, the parties. In order to appreciate the con-tentions and in this context the reasons recorded by the authorities below, we proceed to record them in the presence of the parties before us.
2. The Income-tax Officer made the impugned assessment on 19-9-1984 under Section 143(3) read with Section 144B of the Act. In this assessment he determined the total income of the assessee at Rs. 34,95,840 as against the loss return of Rs. 7,53,740 filed on 30th June, 1981. Apparently, in the process of assessment, the ITO considered various facets of the assessment including an issue relating to payment of commission by the assessee to the parties, which we would refer to in this order subsequently. In this appeal, we are only concerned with the payment of commission by the assessee amounting to Rs. 3,69,824 to M/s. Niki Tasha (India) Pvt. Ltd. The ITO has recorded the reasons for not allowing this commission at page 6 of the impugned asst. order under the title "Commission paid". We do not intend to burden this order with the reasons that he has given as we will be dealing with them while considering the submissions of the parties made before us. Suffice to say that for the reasons given in the asst.
order, he added back this amount. The asst. as framed by the ITO included various other disallowances which we would not advert to in this order in view of the context of only ground of appeal taken before us here.
3. When that assessment was challenged in appeal before the CIT(A), the Id, Commissioner confirmed the order of the ITO disallowing the sum of Rs. 3,69,824 as he held that it cannot be said that any business expediency was involved in making the payments of the commission. In fact, he upheld the reasons given by the ITO in the impugned assessment for making the disallowance of this amount. The Id. CIT(A) also in passing referred to the similar payment made in the asst. year 1979-80 to Mrs. Ritu Nanda which he observed was held to be inadmissible in principle.
4. Before us the Id. counsel for the assessee opened his arguments in chief with reference to these observations of the Id. CIT(A) and with reference to the order of the Income-tax Appellate Tribunal for the asst. year 1979-80, in 1TA Nos. 623 and 628 of 1983 being cross appeals, dated 16th February. 1985. It was pointed out in particular by the Id. counsel for the assessee that when the Tribunal came to consider the payment to Smt. Ritu Nanda the Tribunal came to the conclusion that she had not rendered any services for which the commission was claimed to have been paid to her. However, the Tribunal considered that she had rendered a service in introducing M/s. Asar & Co. of Iran to the assessee. According to the Id. counsel, the facts of the case for the payment of the impugned commission for the year under appeal are on a better footing and he proceeded to state so as under.
5. According to him, the assessee-company passed a resolution dated 12-10-1978 as appearing at page 27 of the 1st paper book filed by the assessee authorising payment of 3 per cent to M/s. Niki Tasha (India) Pvt. Ltd. on the f.o.b. price of Rs. 5.275 crores of the goods exported under purchase contract No. 9589 dated 13-7-1977. He explained that in the explanatory statement appended to this resolution appearing at page 28 of this paper book, there is reference to tender No. 761/99/435 under which the contract was obtained. He submitted that this contract obtained by the assessee was with the aid and assistance rendered by said M/s. Niki Tasha (India) Pvt. Ltd., which he in all fairness admitted, was not only a closely held company but formed by closely related persons having shareholdings in assessee-company as well as in Niki Tasha. He, however, hastened to add that the payment of commission was absolutely and entirely on the basis of commercial expediency as M/s. Niki Tasha had rendered services to the assessee not only in obtaining this contract but also had helped the assessee to obtain farther contracts which were not allotted to the assessee at the time when the original tenders were opened.
6. The Id. counsel for the assessee made a point that the contracts entered into by the assessee-company were with the Govt. of Iran and the Govt. being a body consisting of various organisations and individuals, it could not be said that a contract taken earlier could give to the assessee the advantage of the type that normally flows from contracts with individuals. Therefore, the arguments raised in the impugned orders by the learned authorities below, he submitted, could not be applied to this case of the assessee. He emphasised that the agreement between the assessee and M/s. Niki Tasha (India) Pvt. Ltd. was a bona fide one and proceeded to emphasise this by showing that the assessee could not gain anything by transferring the said commission from it to the commission agent because in. the case of the assessee, the returned figure was of loss and in the case of the commission agent, there was positive income. It was emphasised that both being Private Limited companies it would be of no gain to the assessee to, as claimed, siphon of some amount without business consideration to that party. It was emphasised by him that the commission paid by the assessee to M/s. Niki Tasha (India) Pvt. Ltd. was shown and assessed by the revenue as income of the payee.
7. The Id. counsel relied upon the judgment of the Tribunal in the case of Modipow Ltd. v. ITO [1985] 22 TTJ (Delhi) 108, pp. 122 and Anr.
judgment in the case of Ensons v. ITO [1985] 23 Taxman 41 (Delhi) particular page 44. It was emphasised by him that it is now well settled that merely because a third party was benefited by the payment it should not be taken, for that reason, as payment made for extra commercial consideration and, for this proposition, he relied upon the judgment in the case of Sassoon J. David & Co. (P.) Ltd. v. CIT [1979] 118 ITR 261 (SO). He alleged that the authorities below in fact did not apply their minds to the facts of the case and merely proceeded to reiterate the stand taken earlier in making the disallowance of the payment of commission.
8. Replying to these submissions the Id. Sr. DR, Shri O.S. Bajpai pointed out that even a casual perusal of the evidence filed by the assessee in the paper book would show that the whole affair is, if he may use the term, Topsi Turvy. He pointed out that a reference be made to the resolution passed by the Board of Directors on 12th October, 1978 which date, he pointed out was after the date of agreement entered into between the assessee and the commission agent on 19-7-1978. He emphasised that here is a Board of Directors considering commission payment to a commission agent with whom there exists a written agreement but makes no reference, whatsoever, to that agreement.
Similar omission was pointed out by him with reference to the explanatory statements appearing at page 28 of the paper book, to project that the papers on which reliance has been placed in arguments in chief by the Id. counsel for the assessee do not create the type of contemporaneous evidence that may lead to the conclusion that payment made by the assessee was either genuine or made in the interest of the business of the assessee on the basis of commercial considerations or expediency.
9. The Id. DR made a specific point that the evidence filed by the assessee clearly indicates that the assessee was already paying 6 per cent commission to the foreign agents for getting the services in obtaining contracts from the Iranian Govt. and the extra payment of 3 per cent commission was really for extra-commercial consideration in view of the close relationship between the shareholders of the two companies. In any case, it was argued that there is no service rendered during the year under appeal to the assessee-company by the so-called agents. A point was made by the Id. DR with reference to the evidence available at pages 19, 20 and 22 of paper book-II filed by the assessee, wherein there is correspondence between the assessee and M/s.
Niki Tasha (India) Pvt. Ltd., to project that this type of evidence does not pinpoint either the services rendered or the point of time when any services were rendered which could or should oblige the assessee to make the impugned payments. The Id. DR particularly invited our attention to page 21 of the Paper Book No. II of the assessee which indicates that the payment earlier agreed to by the assessee as commission was at the rate of 4 per cent to foreign agents of M/s. Niki Tasha but, in fact, the payment has been at the rate of 6 per cent and has been allowed in the assessment. He emphasised that the claim of 3 per cent commission is in addition to 6 per cent and there is no evidence of M/s. Niki Tasha having rendered services of the type which would entitle the assessee to claim this as deduction in the computation of total income on the basis of commercial expediency.
10. On the basis of the ratio of the Supreme Court judgment in the case of CIT v. Durga Prasad More [1971] 82 ITR 540 the Id. DR submitted that the documents to which a reference has been made by the Id. counsel for the assessee are self-serving devices and brought in aid to support an action which is neither justified on facts nor in law. It was contended by the Id. DR that it is the duty of the ITO to go behind the smoke screen and find out the truth of the matter and it is well-settled law for which authority, if any, may be found in the case of Swadeshi Cotton Mills Co. Ltd. v. CIT [1967] 63 ITR 57 (SC). It was further contended that mere existence of agreement would not make either the payment genuine or eligible for deduction as having been made for commercial expediency. Reliance for this was placed on the judgment of the Supreme Court in the case of Lachminarayan Madan Lal v. CIT [1972] 86 ITR 489. When no services are rendered, even if there is an agreement that would not make the payment genuinely admissible as laid wholly and exclusively for the purpose of business as held in Bengal Enamel Works Ltd. v. CIT [1970] 77 ITR 119 (SC). In fact it was contended that all these documents are selfserving devices in furtherance of the cause of the assessee and cannot be relied upon in view of the judgment of the Supreme Court in the case of Durga Prasad More (supra).
11. The Id. DR submitted that the payment, in fact, is not probably admissible because it was not even due in the accounting period relevant to the assessment year under appeal if it had become payable on accrued basis either on the basis of so-called agreement or on the basis of the contract dated 13th July, 1977.
12. The Id. counsel for the assessee in the rejoinder pointed out that there is a system in the sphere of business of the assessee, namely, export to have an understanding during the course of export and the evidence at pages 19 to 20 referred to by the learned DR is in support of such understanding. The payments are, in fact, being made because the payments are to be made on prorata basis on execution of the contract. Coming to the rate of commission and as pointed out in reply by the Id. DR it was clarified by the learned counsel for the assessee that the assessee was having Asar & Co. as their agents at the rate of 2 per cent commission but in view of the fact that they were not rendering adequate services to the assessee, the assessee obtained the services of M/s. Sardar Sawhney & Co. to whom commission of 4 per cent was agreed to be paid. Thus, the total payment of commission to these two parties came to 6 per cent. This of course was approved by the Reserve Bank of India. The payment of the commission to M/s. Niki Tasha was at 3 per cent in addition to the above payments of commission to Asar & Co. (2 per cent) and M/s. Sardar Sawhney & Co. at 4 per cent.
13. We have carefully considered the submissions made by the rival parties, before us. We find that in a way the genesis of the issue before us for the year under appeal is embedded in the assessment for the assessment year 1979-80. When the CIT(A) disposed of this issue in para 3.3 of his impugned order, he clearly, supported the ITO, on the premise that, "it cannot be said that any expediency was involved in making payments of this commission". He also observed that similar payment made in the preceding assessment year to Mrs. Ritu Nanda was held to be Inadmissible in appeal. Though, these observations of the Id. CIT(A) do not specifically mention the preceding year of assessment, but, it was common ground by the parties that this reference is to the assessment year 1979-80. We find that for the assessment year 1979-80 commission amounting to Rs. 2,74,617 had been paid to Mrs. Ritu Nanda who is daughter-in-law of the Managing Director of the company Mrs. Raj Nanda, who is a common director of the two companies M/s. Har Parshad & Co., the assessee and M/s. Niki Tasha (India) Pvt. Ltd., the commission agents as claimed. That payment came up for consideration before the Tribunal and the arguments, which have been advanced before us by the ld. counsel for the assessee were, in fact, advanced before the Tribunal in that case. The Tribunal has recorded a finding of fact in their order dated 16-2-1985 relating to asst. year 1979-80 that Smt. Ritu Nanda was holidaying in Iran sometime in the year 1975 when she came to know from a friend of hers that the Iranian Railway Authorities were contemplating of buying certain metric tonnage of track equipment. On return to India, she seems to have given that information to the assessee-com-pany and had also informed the assessee-company about the existence of a concern, namely, Asar & Co.
Ltd., of Tehran, Iran. The Tribunal considered the submissions. The Tribunal pointed out that during all this period, Smt. Ritu Nanda was one of the Directors of M/s. Har Parshad & Co. Ltd. and that in statement recorded by the ITO on oath, she had stated as under : I found out about a large railway contract in Iran and offered to help M/s. Harprashad & Co. Ltd. I was a director of HPC but I resigned after 1975. Then I set up Marketing consultant. This was, a,nd is a sole proprietary concern. The HPC gave me commission for introducing it to Asar & Co. and bringing business term of contract for rail. The commission was 3 per cent of which 1 per cent was given to Jupiter Trading by verbal negotiation and contract. The reason for paying Jupiter was that they had introduced me to Asar & Co. Thereafter I had no further business contract with the rail contract. Thereafter, it was between Asar and Co. and Harprashad & Co. Ltd. For the next railway contract, no commission was received because Harprashad went directly.
The Tribunal relying upon her statement and other evidence produced before it, gave a finding of fact, that "for such a trivial contribution made by Smt. Ritu Nanda, who was at the relevant time a director of the assessee-company, we do not understand as to how the large payment of commission at Rs. 2,74,617 can be justified on grounds of commercial expediency". The Tribunal observed further that Smt. Ritu Nanda was the daughter-in-law of the Managing Director of the assessee-company and that she may not fall within the definition of the word relative, for the purpose of disallowance of expenditure under the provisions of Section 40A of the IT Act, yet the fact remains that she was intimately connected with the management of M/s. Harprashad & Co.
Ltd. and she was one of its directors at the material time. According to the Tribunal, in her capacity as a director, she owed certain duty towards the assessee-company and when she gave the piece of information on the basis of which Iranian Govt.'s contract was obtained, she was merely discharging the duties as a director of the company. The Tribunal, however, allowed that percentage of the commission as a deduction which had been passed on to M/s. Jupiter Trading Co.
14. Now, when we come to the asst. year under appeal, our attention was invited by the Id. counsel for the assessee, as in fact, we have recorded in his arguments in chief about the developments in the asst.
year 1979-80, to his submissions made before the ITO for the year under appeal appearing at pages 29 to 32 and further Special Resolution passed on 12-10-1978 and the explanatory statement required under Section 173(2) of the Companies Act, 1956 were brought to our notice.
In particular agreement dated 19th July, 1978 was projected as the document evidencing service rendered by the commission agents for which the impugned payments were to be justified. In fact, we have perused the entire evidence in the form of paper book filed by the assessee and the revenue. We are of the considered opinion that there is no evidence, whatsoever, contemporaneous in nature justifying payment of commission to M/s. Niki Tasha (India) Pvt. Ltd. by the assessee as claimed. The so-called agreement dated 19th July, 1978 shows that M/s.
Harprashad & Co. Ltd. and M/s. Niki Tasha (India) Pvt. Ltd. have their registered office at E-1 and 2, Mahajan House, NDSB Part-II, New Delhi.
The shareholders of the companies are mutually closely related. The agreement records that M/s. Niki Tasha was instrumental in getting the company i.e. the assessee, contract against tender No. 761/994/35 with M/s. Iranian State Railways through their foreign agents M/s. G,M.Singh, Nirendra Jog and Sardar Sawhney. The agreement further records that M/s. Niki Tasha will be paid commission at 3 per cent on the f.o.b. value of the contract with the Iranian State Railway through their foreign agents for the export of railway track material. We, however, find that, whatever is stated in this agreement is not based on any verifiable documentary evidence directly connected with the services rendered by M/s. Niki Tasha (India) Pvt. Ltd. to the assessee-company in obtaining the said contract. We have, therefore, to examine the entire circumstantial evidence to find out whether therefrom it can be gathered that the claims made in this agreement are justified and worthy of such credence that the sums claimed as paid thereunder may be deducted as expenses wholly and exclusively laid out for the purpose of the business. We, therefore, turn to, what has been put before us something like a trump card in support of the claim made by the assessee in the form of special resolution passed on 12th October, 1978 at the office of the assessee-company. We find that under Section 173(2) of the Companies Act, 1956 where any items of business to be transacted at the meeting are deemed to be special as aforesaid, there shall be annexed to the notice of the meeting a statement setting out all material facts concerning each such item of business, including in particular, the nature of the concern or interest, if any, therein of every director and the manager, if any. The proviso to this Sub-section incorporates that where any item of special business as aforesaid to be transacted at a meeting of the company relates to, or affects, any other company (emphasis added), the extent of shareholding interest in that other company of every director, if any, of the first mentioned company shall also be set out in the statement if the extent of such shareholding interest is not less than 20 per cent of the paid up share capital of that other company.
15. The statement by way of explanation at page 25 is in pursuance to this provision in the Companies Act. However, in this statement, the extent of shareholding of the concerned directors is not recorded. Even to a query in the Court about this, information was not forthcoming.
However, we leave it at that.
16. A special resolution was passed on 12th Oct., 1978 in tho context of the explanatory statement under Section 173(2) and payment of commission to Niki Tasha (India) Pvt. Ltd. at 3 per cent on the f.o.b.
price approximately Rs. 5.572 crores of goods exported under purchase contract No. 9589 dated 13-7-1977 to Iranian State Railway, Iran was approved. This purchase contract is connected with tender No.761/994/35. It is indeed surprising that this Special Resolution and the explanatory statement that, in the context of the law of the Companies Act, the assessee had to pass does not make any mention of the agreement dated 19th July, 1978 claimed to have been entered into between the assessee-company and M/s. Niki Tasha. These documents, therefore, apparently are not contemporaneous in nature nor do they inspire confidence in them so as to take them as containing such evidentiary value of the commitment or statement of the parties involved that would justify the payment of commission to M/s. Niki Tasha on that basis. In fact, the claim made by the ITO, that there is no evidence shown that any services were rendered by M/s. Niki Tasha for obtaining the contracts, for which the payments of impugned commission is being claimed is not controverted by anything.
17. When we abstracted a portion of the statement of Smb. Ritu Nanda as incorporated in the order of the Tribunal dated 16th Feb., 1985 relating to the asst. year 1979-80, we had a purpose on mind. We find that in this statement, she has asserted that she rendered service to M/s. Harprashad & Co. Ltd. by introducing M/s. Asar & Co. and helping the assessee in bringing business in terms of contract for rail. She also stated that 1 per cent commission was paid to Jupiter Trading because they helped her to make contact with Asar & Co. Hpwever, she asserted that she had no further business contract with the rail contract and that thereafter, it was between Asar & Co. and M/s.
Harprashad & Co. Ltd. In the last two sentences of her statement abstracted by the Tribunal, she asserted categorically, that "for the next railway contract no commission was received because Harprashad went directly". This assertion of hers clearly undercuts the claim made by the assessee that it was she, who brought these contracts in favour of the assessee and as such, she being representative of M/s. Niki Tasha (India) Pvt. Ltd., the payments to M/s. Niki Tasha @ 3 per cent on the f.o.b. price of Rs. 5.75 crores was justified. This explanation of the assessee has no substance in it as there is no supporting evidence except tall claims that have been repeatedly made.
18. Prom the above abstracted statement of Smt. Ritu Nanda, it is clear that M/s. Asar & Co. started dealing with the assessee-company after their introduction. Their introduction was held as having been made by Smt. Ritu Nanda in the ordinary course of her duties as a director of M/s. Harprashad & Co. Ltd. at the material time. This is very clear from the order of the Tribunal for the assessment year 1979-80 made on 16th Feb., 1985. Now, in her statement, she has also recorded that thereafter, she had no other services rendered to the assessee. Now, the assessee's claim before us is that M/s. Asar & Co., did not render such services to the assessee as to justify their continuation in service and for requisite payments. However, they were paid 2 per cent commission for the contract they helped the assessee to obtain.
Thereafter, the claim of the assessee is that the assessee paid 4 per cent commission to M/s. S.M. Singh, Narindera, Jog and Sardar Sawhney because "the introduction of Sardar Sawhney and Party by Niki Tasha in Iran proved very useful as the earlier foreign agency viz., M/s. Asar & Co. was not proving to be very effective and, their services had to be supplemented for the first contract by using Sardar Sawhney & Party in this case". The claim of the assessee is that it is M/s. Niki Tasha & Co. who introduced Sardar Sawhney & Party. But the director of M/s.
Niki Tasha (India) Pvt. Ltd., namely, Mrs. Ritu Nanda claimed in her statement on oath before the ITO that in the next railway contract, no commission was received because Harprashad went directly. Therefore, inference, from these statements is clear that M/s. Harprashad & Co.
had direct contact with M/s. Sardar Sawhney and Party and for the services which they rendered to the assessee, commission @ 4 per cent f.o.b. was paid and has in fact, been allowed by the ITO. It is not in dispute.
19. Prom what is stated above, we find that we are unable to accept the correctness of the recitals in the documents projected to us, which are not contemporaneous in nature. We find that the authorities below, on the facts of the case drew correct conclusions that the payments claimed to have been made to M/s. Niki Tasha (India) Pvt. Ltd. were not based upon commercial circumstances and were made for extra-commercial considerations in view of the close relationship both commercial and personal of the shareholders of the two companies. On such facts, the claim made by the Id. counsel for the assessee that the payments had, in fact, been reflected in the assessments of M/s. Niki Tasha would not cut much ice because, firstly, in both the cases, the assessments are not final and that was not the case made out by the ITO for disallowing the payments.
20. We have carefully considered the authorities cited from both the sides. The Id. counsel for the assessee relied upon two judgments of the Tribunal and a judgment of the Supreme Court, which we have recorded in para 7 above. A careful perusal of these authorities leaves us with the impression that the reliance thereupon by the Id. counsel for the assessee is of no avail, whatsoever, in the context of the facts of the case narrated supra. On the other hand, we find that the observations of the Tribunal in the case of the assessee for the asst.
year 1979-80 that the ITO had the right to examine the payments made from the angle of their admissibility are wholly in accordance with law and facts of the case. The question whether an amount claimed as expenditure was laid out or expended wholly or exclusively for the purpose of assessee's business, profession or vocation has to be decided on the facts and in the light of the circumstances of each case as held by the Supreme Court in the case of Swadeshi Cotton Mills Co.
Ltd. (supra). The mere existence of an agreement between the assessee and the commission agent, assuming, there was such agreement and payment, does not bind the ITO to hold that the payment was made exclusively and wholly for the purpose of the assessee's business.
Although, there might be such an agreement in existence and the payment might have been made, it is still open to the ITO to consider the relevant facts and determine for himself, whether the commission paid has been paid and is deductible in computing the total income of the assessee. This is clear from the judgment of the Hon'ble Supreme Court in the case of Lachminarayan Madan Lal (supra).
21. Thus, we see that not only on the facts of the case there is no evidence in support of the claim that commission was paid for the services rendered by M/s. Niki Tasha (India) Pvt. Ltd., but the manner and method, in which the ITO proceeded to disallow the claim is also justified in the absence of any evidence. The appeal of the assessee has, therefore, to be dismissed. It is dismissed.