Judgment:
K.S. Radhakrishnan, Actg. C.J.
1. Tribunal, Cochin Bench, on a direction given by this Court in OP No. 3740 of 1996, referred several questions under Section 256(2) of the IT Act, arising out of the order of the Tribunal in ITA No. 874/Coch/1993, for the opinion of this Court which we have reframed and stated in para 6 of this judgment.
2. Assessee is involved in the business of manufacture and sale of beer. It follows the mercantile system of accounting. It filed return of income for the asst. yr. 1990-91, declaring a total income of Rs. 56,14,990. On going through the accounts, it was noticed that the assessee had claimed Rs. 59,85,644 as marketing expenses and service charges. At the same time, expenditure under the same head for the period relevant for asst. yr. 1989-90 claimed was Rs. 60,750. Due to abnormal increase in the item of expenditure, the assessee was directed to furnish a detailed break up of the amount. Following are the details submitted by the assessee.
Rs.
1. Service charges on Kerala Supplies (KSBC) at the rate of Rs. 2
per dozen paid to R.J. Associates (387801 x 2), Coimbatore 7,75,602
2. Service charges on Tamil Nadu Supplies (TASMAC) at the rate
of Rs. 13 per dozen paid to Golden Enterprises (174784 x 13),
Madras 22,72,192
3. Corporate management charges at the rate of Rs. 4 per dozen
paid to U.B. Ltd. (on 521450 x 4), Bangalore 20,85,800
4. Trade scheme expenditure on Maharashtra Supplies (HPPL,
Western India Beverages and Vitari Distributors) 8,52,050
__________
Total 59,85,644
__________
3. Assessee had stated in the letter dt. 27th Dec., 1991, that in view of the extreme competition in all markets, additional expenditure had to be incurred to keep up its share in the market in the State of Kerala and Tamil Nadu. Further, they had tapped Maharashtra market for which also marketing expenditure had to be incurred. Assessee had clarified before the assessing authority that R.J. Associates was responsible for securing orders from the Kerala State Beverages (M&M;) Corporation Ltd. on a monthly regular basis for company's brands. Further, it is also stated that the assessee had entered into agreement dt. 8th April, 1999, for various liaisoning work to be rendered by the concern R.J. Associates which would help the company to get permit application. The main services to be rendered by the concern M/s R.J. Enterprises are as follows :
(1) Securing orders from Kerala State Beverages (M&M;) Corporation Ltd. (KSBC) on a monthly regular basis for company's brands;
(2) Constantly monitoring the stock position of beer in various KSBC depots and report to company;
(3) Getting excise permit from the concerned authorities based on the permit application received from the KSBC
(4) Closely following up the despatch of the goods received reports from the concerned KSBC depots to their HO at Trivandrum; and
(5) Assisting in expediting payments for supplies to KSBC.
Assessee had also made clarification regarding payment of Rs. 22,72,192 effected to M/s Golden Enterprises in respect of the supplies effected to TASMAC. Reference was also made to agreement dt. 7th June, 1989, entered into by the assessee with M/s Golden Enterprises to do all such liaisoning work with TASMAC to enable the company to procure orders for company on a regular basis and to constantly monitor the stock position in TASMAC depots and also for arranging redistribution to TASMAC's retail depots and for payment against supplies to be collected from TASMAC. Assessee had also claimed Rs. 20,85,800 towards corporate and management charges paid to United Breweries Ltd., Bangalore. Assessee had also claimed trade scheme expenditure on Maharashtra supplies at Rs. 8,52,050.
4. Explanation submitted by the assessee was considered by the assessing authority in detail. With regard to the payment effected to M/s R.J. Associates, the assessing authority had sent summons under Section 131 of the IT Act to the KSBC Ltd. calling for details and also with regard to the liaisoning work stated to have been undertaken either by R.J. Associates or by KSBC Ltd. KSBC had stated that no liaisoning work was done by M/s R.J. Associates with the Corporation. Assessing authority also issued summons under Section 131 of the IT Act to the proprietor and managing partner of Golden Enterprises. Assessing authority had also sent summons to managing director of TASMAC Ltd. and called for details with regard to the work undertaken by Golden Enterprises. Managing director of TASMAC had stated that no liaisoning work was entrusted to Golden Enterprises. Assessing authority also examined the claim of the assessee for Rs. 20,85,800, being the amount paid to United Breweries Ltd., Bangalore, on the sale of 521450 dozens, being the expenditure under marketing and service charges paid to United Breweries Ltd. Assessing authority had also made enquiry with regard to the claim made by the assessee on account of corporate management charges to United Breweries Ltd. for the sale of 3,59,050 dozens to HPPL. The assessing authority after collecting various details disallowed part of the same. Aggrieved by the order of the assessing authority, the assessee took up the matter before the CIT(A) and the CIT(A) dismissed the appeal. Assessee then took up the matter before the Tribunal. Tribunal however deleted the addition of Rs. 7,75,602 claimed by the assessee towards service charges paid to R.J. Associates. Tribunal took the view that the case of the assessee was well supported by the affidavits filed by R. Ramachandran Nair and Janakiraman and also in view of the agreement executed between the assessee and R.J. Associates. Tribunal on the other hand rejected the contention of the Department and held that the evidence adduced by the assessee in the form of agreements, affidavits and payments thereunder justifies the claims. With regard to the payment effected for Golden Enterprises, Tribunal took the view that taking into account the need for marketing services and the opportunity cost of having regular marketing force, payment to M/s Golden Enterprises was only for business purposes and was in business interest.
5. With regard to corporate management charges paid to United Breweries Ltd., Tribunal partly allowed the appeal and held that marketing service charges at the rate of Rs. 3 are reasonable and for the other services rendered by U.B. Ltd. insofar as up-country of Maharashtra and Bombay regions are concerned. Tribunal also disallowed Re. 1 out of Rs. 4 as not germane to the services rendered. The order of the AAC was accordingly modified by the Tribunal and substantial relief was granted to the assessee. Various questions of law are raised before this Court.
6. We may reframe the following questions of law for disposal of this case.
'Whether, on the facts and in the circumstances of the case, did the assessee discharge the burden of proof that lay on it in support of the claim for Rs. 7,75,602 ?
Whether, on the facts and in the circumstances of the case, did the assessee discharge the burden of proof that lay on it in support of the claim for Rs. 22,72,192 ?
Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and facts in holding that the payment to Golden Enterprises was only for business purpose or/and was in business interest ?'
The assessee who had claimed an amount of Rs. 59,85,644 as marketing expenses and service charges has the right to explain under Section 37 of the IT Act. Section 37 is a residuary provision explaining the allowance on items of business expenditure. It provides for the deduction of all expenditures wholly and exclusively laid out or expended for the purpose of business, where such expenditure is not expressly covered by any other specific provision of the Act. In order to be eligible for an allowance under Section 37, certain conditions are to be fulfilled for deduction of expenditure wholly and exclusively for the purpose of business.
(i) The expenditure must not be governed by the provisions of Sections 30 to 36 and 80VV.
(ii) The expenditure must have been laid out wholly and exclusively for the purpose of business of the assessee.
(iii) The expenditure must not be personal in nature.
(iv) The expenditure must not be capital in nature.
It is well-settled that burden of proving the abovementioned ingredients is on the assessee. Before the assessee could become entitled to allowance under Section 37, assessee must satisfy the assessing authority on the entire purpose for which the amount is spent, though generally assessing authorities are not entitled to go into the reasonableness of the expenditure. They are entitled to be satisfied as to the claim of interest on expending that amount. The mere fact that payment has been made under contract or agreement is not conclusive that the expenditure being paid off wholly and exclusively for the purpose of business. Once doubt arises about the bona fide nature of the payment, it is likely that it relates to the assessee. According to the assessee, payments were made by account payee cheques and R.J. Associates have acknowledged the payment and offered the same as income in their assessment. In relation to marketing and service charges paid to Golden Enterprises, assessee contended that it was also made under an agreement dt. 7th June, 1989 for rendering services to the assessee. The AO noted that the circular issued by KSBC Ltd. dt. 3rd Aug., 1984, prohibited liaison on the part of the representatives of the manufacturers for canvassing their brands by approaching its bonded warehouses and wholesale shops and if such canvassing was resorted to, KSBC Ltd. was free to withhold the orders. It was noticed that by another circular dt. 13th July, 1992, canvassing of business by any of the representatives of the manufacturers by approaching the Corporation's bonded warehouses and wholesale shops would invite stringent action including withholding of orders and blacklisting of companies. Further, managing director in response to the summons issued under Section 131 of the IT Act, informed the assessing authority that no liaisoning work was done by M/s R.J. Associates with the Corporation.
7. We are of the view, since liaisoning work with the Corporation has been banned, the assessee cannot claim that he had spent money for the purpose of the activity which is already banned by the Corporation. Further, it has also come out in evidence that M/s R.J. Associates was having only two lady partners who in their sworn statements stated that they had absolutely no knowledge about the marketing of any product and that they were not at all involved with the business activities of the firm and the business activities were being looked after by their husbands Sri C. Janakiraman and Sri A.N. Ramachandran Nair. According to the sworn statement of Sri A.N. Ramachandran Nair, services rendered by them are giving guidance to Sri Kurup, sales officer of the company. We are of the view mere existence of an agreement does not give rise to claim for payment of commission and the IT authorities can go into the question whether the commission paid is properly deductible under Section 37 of the IT Act, 1961. Further, on going through the IT returns filed by M/s R.J. Associates, it was found that the net profit returned by that firm was very meagre compared to the commission received by them from the assessee-company.
8. The assessee had also claimed that they had entered into an agreement with M/s Golden Enterprises, Madras, in respect of supplies effected to TASMAC Ltd., Madras. Agreement dt. 7th June, 1989 would indicate that Golden Enterprises was a proprietary business of one Bhaskar Reddy. Assessing authority had doubts about the genuineness of the documents and consequently made thorough enquiries. Summons was issued under Section 131 of the IT Act to the managing director of TASMAC Ltd., Madras and the managing director stated that M/s Golden Enterprises had not done any liaison work with M/s TASMAC. Assessing authority had also issued summons to M/s Golden Enterprises and visited the premises of the firm at No. 9, Bazullah road, T. Nagar, Madras on 13th Nov., 1992 and recorded the statements of A. Sivakumar Reddy, director of Balaji Group of Companies whose head office is situated in the premises of Golden Enterprises. He was unaware of the existence of the firm Golden Enterprises. When summons was issued to the proprietor/managing partner of M/s Golden Enterprises, it was received by A. Sivakumar Reddy on 13th Nov., 1992 and the case was posted to 23rd Nov., 1992. Mallikarjuna Rao requested for extension and the case was posted to 3rd Dec., 1992. Since nobody was turned up on that day, case was adjourned to 17th Dec., 1992. Assessing authority recorded the statement of wholetime director of the company and ultimately came to the conclusion that Golden Enterprises was not involved directly in the marketing and distribution arrangements. Assessing authority had doubted the existence of the firm Golden Enterprises and therefore, concluded that the so-called payment to Golden Enterprises was done for the purpose of diversion of profits to the assessee-company and payment was not made for any commercial expediency, it was not an allowable deduction under Section 37 of the Act.
9. We are in full agreement with the reasoning of the assessing authority. We have already indicated that burden is entirely on the assessee to prove those transactions. Agreement entered into between R.J. Associates and Golden Enterprises by itself would not advance the case of the assessee. In this connection, we may refer to the decision of the apex Court in Swadeshi Cotton Mills Co. Ltd. v. CIT : [1967]63ITR57(SC) , wherein the apex Court dealt with the question whether amount claimed as expenditure was laid out or expended wholly and exclusively for the purpose of the assessee's business, profession or vocation has to be decided on the facts and in the light of the circumstances of each case. The said principle has been reiterated by the apex Court in Lachminarayan Madan Lal v. CIT : [1972]86ITR439(SC) . The apex Court in the above case held as follows :
'The mere existence- of an agreement between the assessee and its selling agents or payment of certain amounts as commission, assuming there was such 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 payments might have been made, it is still open to the ITO to consider the relevant facts and determine for himself whether the commission said to have been paid to the selling agents or any part thereof is properly deductible under Section 37 of the Act.'
We may also hasten to add if any expenditure spent by the assessee for purposes which has been clearly banned, the assessee cannot claim any deduction of the amount alleged to have been spent for such purposes not provided by the authorities. In CIT v. Sauser Liquor Traders : [1996]222ITR33(MP) , the apex Court held that even though illegal transactions might have resulted in profit which may be taxable no deduction for the amount paid by the assessee for illegal purposes can be allowed under Section 37 of the IT Act.
10. The next question examined by the Tribunal was with regard to the disallowance of corporate and management charges paid to United Breweries Ltd. on sales effected to HPPL for a sum of Rs. 14,36,200 in respect of the sale of 3,59,050 dozens. We have already indicated that a sum of Rs. 14,36,200 was disallowed by the AO out of the amount of Rs. 20,85,800, holding that the attempt of the assessee was to avoid tax liability under the pretext of payment of corporate management charges. Assessee had claimed the said sum based on the agreement between them and United Breweries Ltd., Bangalore, for payment of royalty and technical know-how. Assessing authority conducted detailed enquiry. Details regarding the system of pricing of all brands of liquors in respect of other markets as well as Tamil Nadu and Kerala for the period relevant for the asst. yr. 1990-91 were called for and examined by the assessing authority. It was noticed that sales to U.B. Ltd. are for the resale by them to Andhra Pradesh, Karnataka, Goa and Daman and for which reinvoicing was done by U.B. Ltd. as per the price list and no amount on account of C.M.C. charges is separately paid to M/s U.B. Ltd. The assessing authority ultimately found that since U.B. Ltd. had been relieved from the responsibilities for the sales to Bombay/UP, Maharashtra regions, the claim on account of corporate management charges to U.B. Ltd. for the sales of 3,59,050 dozens to H.P.P.L. at the rate of Rs. 4 per dozen cannot be allowed under Section 37 of the IT Act. At the same time, assessment was not made on account of any commercial expediency but only with a view to reduce their profits by siphoning away the same to interested parties under the pretext of payment of C.M.C. charges. We are of the view there are no sufficient materials in this case to allow payment of Rs. 14,36,200 in respect of sale of 3,59,050 dozens for which no reinvoicing was done by U.B. Ltd. and was not made on account of any business or commercial expediency. Hence, the assessing authority rightly disallowed the claim.
11. The assessing authority has also disallowed the expenditure of Rs. 6,05,050 in respect of trade scheme expenditure on Maharashtra supplies. The assessing authority concluded that since sales to M/s U.B. Ltd. are made and then re-invoiced by M/s U.B. Ltd. to sub-distributors, no further expenditure in the nature of trade discount scheme expenditure is incurred by the assessee and the same method is equally applicable to sales effected to H.P.P.L. Ltd. and no further expenditure in the nature of trade discount scheme is warranted. Assessee tried to distinguish this payment from C.M.C. charges. Procedure followed in the case of U.B. Ltd. is equally applicable to H.P.P.L. Ltd. also in respect of reinvoicing. We are of the view since sales to M/s U.B. Ltd. were made and then reinvoiced by U.B. Ltd. to sub-distributors for such sales no further expenditure in the nature of trade discount scheme expenditure was incurred by the assessee. Same principle would apply in the case of sales effected to H.P.P.L. Ltd., Bombay and no reassessment was warranted. We are of the view the reasoning of the assessing authority as confirmed by the CIT is only to be upheld in the facts and circumstances of the case.
12. We are of the view the Tribunal has committed a grave error in upsetting the findings rendered by the assessing authority as well as the CIT(A). We notice that the Tribunal has failed to take into account relevant materials and has acted on inadmissible evidence based on mere conjectures and surmises and also ignored the materials on record. The High Court has always got the power to interfere with the orders of the Tribunal if the order is not supported by evidence or acted on irrelevant materials. This legal position has been settled by the decision of the apex Court in CIT v. S.P. Jain : [1973]87ITR370(SC) wherein the apex Court held as follows :
'The High Court and the Supreme Court have always the jurisdiction to interfere with the findings of the Tribunal if it appears that either the Tribunal has misunderstood the statutory language because the proper construction of the statutory language is a matter of law, or it has arrived at a finding based on no evidence or where the finding is inconsistent with the evidence or contradictory of it, or it has acted on material partly relevant and partly irrelevant or where the Tribunal draws upon its own imagination and imports facts and circumstances not apparent from the record or bases its conclusions on mere conjectures or surmises or where no person judicially acting and properly instructed as to the relevant law could have come to the determination reached.
We are of the view, the above dictum would squarely apply to the facts of this case. Tribunal has committed a grave error in not properly understanding the transaction entered into between the assessee and others. We, therefore, set aside the order of the Tribunal and uphold that of the CIT(A) and answer the questions in favour of the Revenue by holding that the assessee had not discharged the burden that it is entitled to deduction under Section 37 of the IT Act. Reference is answered accordingly.