ORDER
MISS MOKSH MAHAJAN, A. M. :
In an appeal filed the assessed has challenged the order of the learned CIT(A) for asst. yr. 1987-88 raising various grounds.
2. The first two grounds of appeal which are taken together pertain to confirmation of an addition of Rs. 15,483 incurred on providing tea and coffee to the staff members and business constituents and Rs. 21,304 incurred on auction expenses. According to Shri D. K. Kapila, the authorised representative, the assessee-company is engaged in the business of chit fund and financing. In connection with its business it has to incur expenditure on providing tea, coffee and snacks to its constituents who visit the office day-to-day. There are as many as 39 groups of chits and in the process of attending to its constituents the staff also partakes of the refreshment. The expenditure being incurred for promotion of sales and wholly connected with business, merits no disallowance. As to the auction expenses, the assessed conducts auctions of various chits on every third and fourth Sunday of each month. While doing so the amounts are spent on hiring of chairs, crockery, tables as well providing tea, coffee and snacks to the customers. Considering that there are more than 1,200 constituents who participate in the auctions, the expenses claimed by the assessed were not such to call for disallowance. Alternatively, the expenses attributable to the staff members should be allowed. The learned Departmental Representative, on the other hand, fully supported the orders of the Revenue authorities whereby it was clearly held that the expenses on tea and coffee being of entertainment nature, could not be allowed.
3. We have carefully considered the rival submissions. We find that the assessed has furnished details in regard to the expenses of Rs. 33,909.42 (appearing on pages 1 to 5 of the paper book) which included expenses on hiring of tent at Rs. 9,946, the remaining expenses are on providing tea, coffee and biscuits to the constituents as well as the staff members. These clearly are covered under the head entertainment in view of the Expln. 2 added in sub-s. (2A) of s. 37 of the Act. The only exception which could be made in regard to the expenses attributable to the staff members. In view of the arguments advanced before us, we would restrict the same to 15% of the aforesaid expenses which are allowable. The remaining expenses are not allowable as held by their Lordships of Supreme Court in the case of CIT vs. Patel Bros. & Co. Ltd. (1995) 126 Taxation 393 (SC). The Assessing Officer (AO) is directed to recompute the disallowance after allowing 15% of the expenses as incurred on tea, coffee, refreshment, etc., including the Halwai expenses which stand disallowed and also taking into consideration the exempt amount under the aforesaid section.
4. The third ground of appeal pertain to disallowance of Rs. 81,800 on account of commission paid to the various parties. In the course of appellate proceedings in the written submissions made the assessed restricted its claim to Rs. 32,600 in respect of the following parties alone on the ground that commission to the tune of Rs. 49,200 stood allowed under s. 250 of the IT Act :
1.
Shri Ashutosh Vats
Rs. 17,600
2.
Shri Ajay Bhamba
Rs. 7,900
3.
Smt. Kailash Bhamba
Rs. 7,100
As per the arguments advanced, the assessed was running as many as 39 chit fund groups during the year under consideration. The above three commission agents had introduced 84 subscribers out of the total number of over 1,200 subscribers with the assessee. The business could be procured only with the help of these agents to whom the payments were made by account payee cheques. As the parties duly confirmed having introduced the subscribers and also received the commission, the disallowance made was not called for. According to the learned authorised representative the statement of Shri Ajay Bhamba was recorded and it was used against the assessed without confronting him. The failure of the AO do so would render the proceedings illegal. The submissions were made by way of additional grounds of appeal furnished before us in the written submissions. The learned Departmental Representative, on the other hand, relying on the orders of the Revenue authorities submitted that before any expenditure could be allowed, it is necessary for the assessed to show that the same were incurred for the business of the assessee. In the case of the assessed no evidence was produced to show that the services were rendered by these three parties. In the circumstances, the disallowance was rightly confirmed.
5. We have carefully considered the rival submissions, in the light of the material as brought on record. We find that in support of the commission of Rs. 17,600 paid to Shri Ashutosh Vats, confirmation from the party was filed along with the letter mentioning the names of the subscribers who were introduced. The documents are on pages 39 to 42 of the paper book. On page 43 of the paper book, there is another letter from the father of Shri Ashutosh Vats conveying that the party was away to Holland and he was not available for 7 months. The letter is dt. 7th May, 1990. Considering that not only the party confirmed having introduced the subscribers and also having received the amount, we are unable to uphold the order of the learned CIT(A) on the issue. This is specifically so when at the time when the party was asked to be produced, he was not available in the circumstances as explained by his father. In absence of any material to hold that the evidence so produced is not worth credence we would delete the addition of Rs. 17,600.
6. The second amount pertains to Shri Ajay Bhamba which is at Rs. 7,900. In this respect, we find that in addition to the confirmation, the party listed the names of the subscribers and the amount subscribed by them to the assessee. The commission of Rs. 7,900 was stated to have been paid at 2%. As no GIR and permanent account numbers are specified, apparently the party is not assessed to tax. As per the statement recorded it is found that Shri Ajay Bhamba did his Higher Secondary in the year 1985. He is stated to have introduced the subscribers who were residents of Rani Bagh. There is no material brought on record to show that he was not in a position to introduce the parties whose names were given and was not in receipt of the commission which was duly credited to his bank account. In absence of any cogent evidence brought to rebut the material supporting the payment of commission for the services rendered, we would delete the addition as confirmed by the learned CIT(A).
7. As regards Smt. Kailash Bhamba in support of having received Rs. 7,100 confirmation letter along with the names of the subscribers were filed. In her affidavit she stated to have motivated various parties to subscribe to the chits which allegedly came out of her experience from being a participant in a local women kitty. The commission had been paid at 2%. Considering that no material to the contrary was brought on record, the addition so confirmed is deleted.
8. The next ground of appeal pertains to disallowance of Rs. 70,000 on account of the additions made to the share capital. The additions made were in respect of the deposits of the following persons :
(a)
Mrs. Darshana Gandhi
Rs. 7,000
(b)
Mr. Naresh Bansal
Rs. 8,000
(c)
Mr. Devender Mittal
Rs. 9,000
(d)
Smt. Kailash Bhamba
Rs. 7,000
Rs. 31,000
(e)
Smt. Darshan Kumari
Rs. 8,000
(f)
Smt. Sushma Bangia
Rs. 9,000
(g)
Sh. Ram Chander
Rs. 8,000
(h)
Sh. Ajay Bamba
Rs. 14,000
Rs. 39,000
Rs. 70,000
As per the submissions made Smt. Darshna Kumari, Smt. Sushma Bangia, Shri Ram Chander and Shri Ajay Bhamba were produced before the AO and their statements were duly recorded. As regards the remaining parties, confirmations and affidavits affirming that they had deposited the share application money were produced. Raising by way of additional arguments, it was submitted that no opportunity was allowed to the assessed by the Asstt. CIT for rendering Explanationn in regard to these credits. Since the statements as recorded were used against the assessee, as held by their Lordships of Supreme Court in the case of Kishan Chand Chela Ram vs . CIT : [1980]125ITR713(SC) , such an evidence is inadmissible. This apart, the deposits made are in respect of share application money and in case the shareholders are identified and it is established that they have invested money in the purchase of shares then investigation is to be done in the hands of the shareholders. In the circumstances, it was argued that the addition so made was not sustainable. The learned Departmental Representative on the other hand, heavily relied on the orders of the Revenue authorities. It was argued that since the assessed could not establish the creditworthiness of the parties for the reasons given in the order of the learned CIT(A), the addition was rightly sustained.
9. We have carefully considered the rival submissions in the light of the evidence as available on record. We find that while confirmation letters and affidavits were furnished in case of all the shareholders whose alleged share capital is in dispute, the AO also recorded statements of Smt. Darshan Kumari, Shri Ajay Bhamba, Smt. Sushma Bangia and Shri Ram Chander. From the facts as detailed by the learned CIT(A), we find that in the case of Smt. Darshan Kumari the amount was not accepted on the ground that she had mainly monthly income of Rs. 200 from tailoring work and she was not in a position to save Rs. 8,000 from her meagre income. As regards Smt. Sushma Bangia, since the party could not establish that the amount deposited with the company represented her savings from her pocket money and tuition work, the addition was sustained. Similar was the case in respect of Shri Ram Chander who was stated to have worked with Northern Railways as a carpenter. Despite an affidavit filed the party was not in a position to show that he could accumulate Rs. 8,000 to be advanced to the assessee. As regards Shri Ajay Bhamba, the amount is stated to have come from commission earned by the party and as no evidence of personal savings was rendered, the same was not accepted. Regarding the remaining four persons no relief was allowed on the ground that no evidence was furnished to show that the parties could advances the amounts as reflected in the books of the assessee. In this context, we find that while summons were issued in respect of four parties, it was not done in the case of other parties. The parties did confirm that they had contributed to the share capital and also specified the source in regard to their contributions to the share capital. The copies of the statements as filed in the paper book are not legible and it is not known whether the assessed or its representative was present when the parties were examined and also whether the parties have been given opportunity to rebut the evidence as brought in the statements. This apart, the evidence rendered was disbelieved on the ground that the parties did not appear to be creditworthy. The short question which arises is whether in the case of share application money on this ground could any addition be made in the case of the company or not. On this their Lordships of Honble Delhi High Court in the case of CIT vs . Sophia Finance Ltd. : [1994]205ITR98(Delhi) have held as under :
'If the shareholders are identified and it is established that they have invested money in the purchase of shares, then the amount received by the company would be regarded as a capital receipt and to that extent the observations in CIT vs . Stellar Investment Ltd. : [1991]192ITR287(Delhi) , are correct; but the observations in that case to the effect that even if the subscribers to the capital were not genuine under no circumstance could the amount of share capital be regarded as undisclosed income of the (company) are not (see p. 105E, F).'
Thus, the issue is to be decided is whether the share capital as introduced in the names of the various parties is genuine or not. This has to be looked into by the AO as contended by the authorised representative. This apart, in view of their Lordships decision in the case of Kishan Chand Chela Ram (supra) before evidence could be used against the assessee, the same has to be confronted to it before drawing any adverse inference on that account. Since this has not been done in the circumstances, we have no alternative but to restore the matter back to the file of the AO to re-examine the issue in the light of the decision of the Honble Delhi High Court in the case of Sophia Finance Ltd. (supra). Furthermore, in case the statements of the parties have to be relied upon, the aforesaid evidence has to be confronted to the assessee. This may now be done for which as stated earlier, we restore the matter back to the file of the AO.
10. In the result, the appeal is partly allowed.