High Court Of Delhi
Sawhney Rubber Industries vs. CIT
Section 37(1)
Asst. Year 1991-92, 1992-93
Madan B. Lokur & V.B. Gupta, JJ.
IT Appeal Nos. 821 & 824 of 2006
8th May, 2007
Counsel Appeared
O.S. Bajpai & O.N. Jha, for the Appellant : R.D. Jolly & Vishnu Sharma, for the Respondent
JUDGMENT
V.B. Gupta, J. :
By this common judgment two appeals bearing IT Appeal Nos. 821 and 824/2006 filed by the assessee arising out of common order dt. 16th Dec., 2005 passed by the Income-tax Appellate Tribunal (in short as âTribunalâ) in ITA No. 5389/Del/1994 (asst. yr. 1991-92) and ITA No. 7602/Del/1995 (asst. yr. 1992-93) are being disposed of. The assessee is in the business of manufacturing of cycle tyres and tubes. The AO on scrutiny of the P&L a/c of the assessee noticed that the commission paid by the assessee had increased to Rs. 55,68,854 from Rs. 33,34,235 in the last year. The assessee was required to file details of the commission. It was found by the AO that the assessee paid substantial commission to two parties, namely, M/s Associates Agencies and M/s Sawhney Tyres @ 3 per cent for the period from April, 1990 to September, 1991. Earlier, the commission was paid @ 2 per cent from May, 1988 to March, 1989 and it was increased to 2.5 per cent from 1st April, 1989 till March, 1990. The total commission was paid to the tune of Rs. 55,68,854 on total sales of Rs. 18,56,28,522 which was @ 3 per cent whereas for the previous year the commission was much less. The assessee was asked to explain and justify these payments of commission especially in view of the fact that they were increasing the rate of commission payable to these parties who were closely related to the assessee because the partners of these firms were related to assesseeâs wife being her brother and father. The AO found that the rate of commission was increased from 2.5 per cent to 3 per cent only for the relevant previous year and after the end of the closing year, the commission was reverted back to 2.5 per cent. Thus, this increase of 0.5 per cent was only for this year. M/s Associates Agencies claimed that they were having branches all over the country for which they could not manage on a commission of 2 per cent and so the commission was increased for them. The AO found that the assessee had unjustifiably increased the rate of commission to lower his income by transferring income from his proprietary concern to the firm of his in-laws and thus held that increasing commission from 2.5 per cent to 3 per cent was unjustifiable.
5. On appeal, the CIT(A) deleted the addition made by the AO holding that assessee has opened two new branches, one at Calcutta and another at Lucknow which resulted in increase of expenses and the selling agents were losing their net profit due to increase in their expenses and as such payments of excess commission for selling agents were justified.
6. Being dissatisfied with the order passed by the CIT(A), Revenue filed appeals before the Tribunal and the Tribunal vide its impugned order allowed the appeals filed by the Revenue.
7. It has been contended by learned counsel for the assessee that the commission was increased by 0.5 per cent only on account of heavy expenses incurred by the selling agents on account of opening of two branches, one at Calcutta and other one at Lucknow. He further contended that the sole selling agents did not carry out any other business except conducting the sale of the goods manufactured by the assessee and the sales of the assessee have increased by 43 per cent during the relevant year and in the process, the increase in any expenses incurred by the selling agents for conducting their sales had resulted into loss and the extra commission was paid to them for compensating their losses. Other contention is that the Revenue cannot assume the role of a businessman to decide how much is the reasonable expenditure having regard to the circumstances of the case and in support of its contentions cited a decision of this Court, CIT vs. Dalmia Cement (Bharat) Ltd. (2002) 174 CTR (Del) 188 : (2002) 254 ITR 377 (Del).
8. In Dalmia Cement (Bharat) Ltd.âs case (supra), the assessee, a manufacturer of cement, claimed payment to its sole selling agent commission @ Rs. 1.75 per metric ton, as a deduction. The AO, on a comparison with the commission paid by the assessee under an arrangement with another agent, held that the amount paid was on the higher scale and Re. 1 per metric ton would be permissible deduction, and disallowed the balance. Both the CIT(A) and the Tribunal upheld the claim of the assessee. On a reference, this Court held that :
“…….. The jurisdiction of the Revenue is confined to âdeciding the reality of the expenditureâ, namely, whether the amount claimed as deduction was factually expended or laid down and whether it was wholly and exclusively for the purpose of the business. The reasonableness of the expenditure could be gone into only for the purpose of determining whether, in fact, the amount was spent. Once it is established that there was a nexus between the expenditure and the purpose of the business, the Revenue cannot justifiably claim to put itself in the armchair of a businessman or in the position of the board of directors and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances of the case….”
9. On the other hand, it has been contended by learned counsel for Revenue that the increase in the rate of commission remained effective only for the year under consideration and if this plea of assessee is taken as correct that it was increased due to the opening of new branches, then there was no reason for reducing the commission from the next year and as such there appears to be no justification to increase the commission from 2.5 per cent to 3 per cent.
10. The foremost question for consideration is as to whether any substantial question of law arises in this case or not and on this point certain judgments of apex Court as well as of this Court may be referred to.
11. In case of Kondiba Dagadu Kadam vs. Savitribai Sopan Gujar AIR 1999 SC 2213, it has been explained as to what can be termed as substantial question of law. It was held : “If the question of law termed as substantial question stands already decided by a larger Bench of the High Court concerned or by the Privy Council or by the Federal Court or by the Supreme Court, its mere wrong application to facts of the case would not be termed to be a substantial question of law. Where a point of law has not been pleaded or is found to be arising between the parties in the absence of any factual format, a litigant should not be allowed to raise that question as substantial question of law in second appeal. The mere appreciation of the facts, the documentary evidence or the meaning of entries and the contents of the document cannot be held to be raising a substantial question of law. But where it is found that the first appellate Court has assumed jurisdiction which did not vest in it, the same can be adjudicated in the second appeal, treating it as substantial question of law. Where the first appellate Court is shown to have exercised its discretion in a judicial manner, it cannot be termed to be an error either of law or of procedure requiring interference in second appeal….”
12. In another case Panchugopal Barua vs. Umesh Chandra Goswami AIR 1997 SC 1041, it has been laid down that existence of substantial question of law is sine qua non for the exercise of jurisdiction. It was held : “8. A bare look at s. 100, CPC shows that the jurisdiction of the High Court to entertain a second appeal after the 1976 amendment is confined only to such appeals as involve a substantial question of law, specifically set out in the memorandum of appeal and formulated by the High Court. Of course, the proviso to the section shows that nothing shall be deemed to take away or abridge the power of the Court to hear, for reasons to be recorded, the appeal on any other substantial question of law, not formulated by it, if the Court is satisfied that the case involves such a question. The proviso pre-supposes that the Court shall indicate in its order the substantial question of law which it proposes to decide even if such substantial question of law was not earlier formulated by it. The existence of a âsubstantial question of lawâ is thus, the sine qua non for the exercise of the jurisdiction under the amended provisions of s. 100, CPC”
13. Similarly, in a decision of this Court in Mahavir Woollen Mills vs. CIT (2000) 162 CTR (Del) 267 : (2000) 245 ITR 297 (Del), meaning of “substantial question of law” has been explained. It was held :
“The issue raised by the assessee in the appeal cannot be said to involve any question of law, much less a substantial question of law. A question of fact becomes a question of law, if the finding is either without any evidence or material, or if the finding is contrary to the evidence, or is perverse or there is no direct nexus between the conclusion of fact and the primary fact upon which that conclusion is based. But, it is not possible to turn a mere question of fact into a question of law by asking whether as a matter of law the authority came to a correct conclusion upon a matter of fact. In Edwards vs. Bairstow (1955) 28 ITR 579 (HL), Lord Simonds observed that even a pure finding of fact may be set aside by the Court if it appears that the CIT has acted without any evidence or on a view of the facts which could not be reasonably entertained. Lord Radcliffe stated that no misconception may appear on the face of the case, but it may be that the facts found are such that no person acting judicially and properly instructed as to the relevant law could have come to determination under appeal. In those circumstances the Court may intervene. The words âsubstantial question of lawâ have not been defined. But, the expression has acquired a definite connotation through a catena of judicial pronouncements. Usually, five tests are used to determine whether a substantial question of law is involved. They are as follows :
(1) whether, directly or indirectly, it affects substantial rights of the parties, or
(2) the question is of general public importance, or
(3) whether it is an open question in the sense that the issue has not been settled by pronouncement of the Supreme Court or Privy Council or by the Federal Court, or
(4) the issue is not free from difficulty, and
(5) it calls for a discussion for alternative view.”
14. Now coming to the facts of the present case, it is purely a question of fact as to whether there has been increase in the commission and expenses and this point with regard to the increase in commission expenditure, has been dealt with by the Tribunal in the impugned order which reads as under :
“The increase in commission expenditure is claimed to be on account of opening of new branches of associate agency at Calcutta and Lucknow. In order to compensate the increased expenditure the commission is increased from 2.5 per cent to 3 per cent. However, there is no material on record to substantiate the said claim of the assessee. What are the details of such expenditure is also not on record. Besides, it is seen that this increase, in the rate of commission @ 3 per cent remained effective only for the year under consideration. Had the intention was to compensate the increased expenditure incurred by the commission agents on account of opening of new branches at Calcutta and Lucknow, the assessee would not have reverted back to the old commission rate of 2.5 per cent. In these circumstances, there appears to be no justification to increase the commission from 2.5 per cent to 3 per cent. We, therefore, reverse the order of the CIT(A) and uphold the order passed by the AO.” We agree with the reasoning given by the Tribunal that increased rate of commission remained effective only for the year under consideration and if the intention of the assessee was to compensate its agents for increased expenditure incurred by them on account of opening of new branches at Calcutta and Lucknow, then there would have been no ground for the assessee to have reverted back to the old rate of commission that is 2.5 per cent. Under these circumstances, there appears to be no justification to increase the commission from 2.5 per cent to 3 per cent only for the year under consideration and thereafter when the sale is on increase, there was no justification for reducing the rate of commission. Since it is purely a finding of fact given by the Tribunal, we find no reason to disagree with the reasoning given by the Tribunal and as such the ratio of Dalmia Cement (Bharat) Ltd. (supra) is not applicable to the facts of the case in hand. Under these circumstances, we hold that no fault can be found with the view taken by the Tribunal. Thus, the order of Tribunal does not give rise to a question of law, much less a substantial question of law, to fall within the limited purview of s. 260A of the Act which is confined to entertaining only such appeal against the order which involves a substantial question of law. Accordingly, both the appeals filed by the assessee are hereby dismissed.
[Citation : 294 ITR 592]