High Court Of Gujarat
Jyoti Ltd. vs. CIT
Section 4, 37(1), 37(3A), 69
Asst. Year 1985-86
D.A. Mehta & S.R. Brahmbhatt, JJ.
IT Ref. No. 20 of 2000
25th March, 2009
Counsel Appeared :
J.P. Shah, for the Applicant : B.B. Naik with Mrs. Mauna M. Bhatt, for the Respondent
JUDGMENT
D.A. MEHTA, J. :
The Tribunal, Ahmedabad Bench ‘B’, Ahmedabad has forwarded a consolidated statement of case under s. 256(1) of the IT Act, 1961 (the Act) in relation to Ref. Appln. No. 86/Ahd/1998 at the behest of the assessee applicant for asst. yr. 1985-86, and in relation to Ref. Appln. Nos. 103 and 104/Ahd/1998 at the behest of Revenue for asst. yrs. 1981-82 and 1985-86.
2. In case of the reference, wherein the assessee is the applicant, Tribunal has referred the following two questions
“(i) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the commission was received by the assessee company in asst. yr. 1985-86 ?
(ii) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee had sold the scrap outside the books of account and in estimating the same at Rs. 3,00,000 ?”
The assessee, a company, in which public are substantially interested, filed its income of return originally on 28th June, 1985, which was revised upward as per revised return of income filed on 30th Sept., 1981 (sic). The AO has recorded in para No. 4.2 of the assessment order dt. 13th March, 1989 that on receipt of certain information from the Department of Revenue, Ministry of Finance, Government of India, New Delhi vide letter No. F. No. 504/5/1987-FTD dt. 4th March, 1987 it came to knowledge that the assessee company had received a sum of US dollars 47,242 on 16th April, 1985 as agent commission from a Japanese company named Nissho Iwai Corporation, Tokyo, Japan.
3. The AO thereupon initiated necessary inquiries as to whether such commission had been entered in the books of account by the assessee company. After seeking various adjournments the assessee company vide letter dt. 7th May, 1987 stated no agent commission from Nissho Iwai Corporation has either been received or credited in company’s account in Singapore. We have, however, received an amount of Rs. 5,94,996 from Shri R.N. Amin on 4th May, 1987, which has been credited to the company’s account in Baroda as commission received from Nissho Iwai Corporation, Japan by Shri R.N. Amin. Ultimately after completion of the inquiries, the AO came to the conclusion that the assessee company had received the following amounts from different companies situated in Japan and West Germany. Name of the company Date of receipt Amount received Toyo Denki Seizo K.R., Japan24-8-1983 Y 3,872,800 2-10-1985 Y 1,074,000 2-12-1985 Y 10,478,000 June, 1986 Y 18,000,000 Nissho Iwai Corporation, Japan 17-4-1985 DM 8669.19 Ringfeder Gmbh, West Germany22-11-1983 DM 8669.19 22-2-1984 DM 1615.04 20-7-1984 DM 2799.55 23-8-1984 DM 1861.70 7-12-1984 DM 1150.25 2-8-1985 DM 2967.91 19-11-1985 DM 10925.10 This finding had been recorded by the AO on the basis of the various evidences including statement of Shri Rahul N. Amin, the managing director of the company. The AO also further recorded that, as accepted by Shri R.N. Amin, the following amounts were transferred to the account of the assessee company in May and June, 1987 : Date of letter Amount in Amount in foreign Indian Rs. currency 4- 5-1987 5,94,996 US $ 47,242 16-5-1987 22,90,406 US $ 1,81,858 12-6-1987 2,28,240 US $ 18,000 31,13,642 US $ 2,47,100 The AO thus came to the conclusion that a sum of Rs. 2,60,568 towards agent commission was taxable in hands of the assessee company for the year under consideration. When the matter was carried in appeal, CIT(A) accepted the stand of the AO and dismissed the appeal. The assessee therefore carried the matter in second appeal before the Tribunal and the Tribunal upheld the findings recorded by the CIT(A) as recorded in impugned order dt. 13th Oct., 1999.
Insofar as the second issue regarding sale of scrap outside books, generated during the course of manufacturing activities, is concerned, the AO made an addition to the tune of Rs. 61,74,512 comprised of a sum of Rs. 30,87,256 shown as sale of scrap in books of account of the company and further addition of the balance amount. The assessee carried the matter in appeal in relation to the further addition namely, the amount of Rs. 30,87,256, which was added by application of provisions of s. 145(2) of the Act. CIT(A) granted partial relief by holding that there was no basis for making addition to the tune of Rs. 30,87,256 towards estimated sale of scrap as the admission made by Shri R.N. Amin would not bind the company because Shri Amin, was not a managing director at relevant point of time when such admission was made. However, CIT(A) was of the opinion that the state of record maintained by the assessee was not foolproof so as to enable the AO to properly deduce the correct income for the year under consideration. CIT(A) in this context recorded that however, as admitted by the appellant itself that there is no control and/or check on the generation of scrap and discrepancy on such count is inherent in the very nature on account of the volume of business, size and organization, number of units and number of personnel handling the matter. To cover such inherent lacuna in the system as such it would be in order if a token addition of Rs. 3,00,000 as suggested by the appellant is made which would be approximately little less than 10 per cent of miscellaneous income on account of sale of scrap is added (sic) it would meet the ends of justice.
The assessee carried the matter in appeal before the Tribunal and the Tribunal upheld the findings recorded by the CIT(A) by not only recording what CIT(A) had recorded, but it was also recorded that at the same time there is no denial of the fact that it has not been possible for the assessee to maintain complete records in this regard. There is no dispute that the assessee must have earned some profit on the sale of scrap. We are therefore of the opinion that the estimate of Rs. 3 lakhs sustained by the CIT(A) is justified. The same is accordingly upheld. The learned counsel appearing for the applicant assessee assailed the impugned order of the Tribunal in relation to the first question principally on the ground that insofar commission receipts are concerned, assessee was constantly following cash system of accounting and the amount was returned as income in asst. yr. 1988-89, on the basis of actual receipt of the said amount from Shri R.N. Amin. That in fact the assessee company was not having any knowledge as to the amount of commission having been received by Shri R.N.Amin. In support of the submissions made attention was invited to statement dt. 9th March, 1989 of Shri R.N. Amin, recorded under s. 131 of the Act to submit that the said gentleman had accepted in terms that he had entered into commission agreements with three foreign companies in his capacity as a managing director and hence when the commission was paid by the three foreign companies, Mr. Amin temporarily retained the amount with him by depositing the same in the account of one Shri R.P. Jadeja, who was under control of Shri Amin. Reliance was placed on letter dt. 1st April, 1985, stated to be a copy of the communication from Shri R.P. Jadeja to the Japanese corporation as appearing at Annex. 17 (p. No. 151). Reliance was also placed on letter dt. 16th May, 1987 addressed by Shri R.N. Amin to the chairman of the company where Shri Amin had owned up having retained the funds. Attention was also invited to the minutes of the meeting of the board, which took place on 15th June, 1967, to point out that the board itself had come to the conclusion that retention of funds by Shri R.N. Amin with him personally, was unwise and imprudent. Thereafter, learned advocate pointed out a copy of the declaration made under the scheme of voluntary declaration of foreign currency, assets etc. to contend that such a declaration was made by Shri Amin in his personal capacity and said documents categorically reveal that the amounts had been retained by Shri Amin, either in the account of Shri Jadeja or younger brother of Shri Amin at Singapore or in USA and therefore, the assessee company was nowhere in picture nor did the assessee company have any knowledge about such funds being retained by Shri Amin. That in fact the declaration made for violation of Foreign Exchange Regulation Act,
1973 as it stood at the relevant time, was accepted and violation condoned by RBI by granting the amnesty under the said scheme. Mr. Shah, therefore, submitted that the entire evidence indicated that the company had at no point of time any knowledge about the commission payment by the foreign companies, nor was the company in actual or constructive receipt of the amount in question, and the assessee company being governed by cash system of accounting insofar as receipts are concerned, cannot be taxed in the year under consideration.
8. Shri Shah read extensively from the impugned order of the Tribunal to submit that on reading of the said order, it became clear that the Tribunal had taken into consideration irrelevant facts in para No. 6 of the order and therefore, the order was vitiated. It was submitted that the Tribunal has failed to appreciate the fact that the company was not in receipt of the commission amount till the point of time Shri R.N. Amin, brought the funds into India, deposited the same in his own separate account, and thereafter, transferred the same to the account of the company. In support of the submissions made, reliance has been placed on apex Court decision in case of Associated Banking Corporation of India Ltd. vs. CIT (1965) 56 ITR 1 (SC) to contend that only when the fact about embezzlement came to the knowledge of the company, can it be stated that the company is in any manner connected with such funds and thus, knowledge was a very important ingredient.
9. In relation to the second issue, it was submitted that both, CIT(A) and Tribunal had committed an error in law in sustaining the addition on account of sale of scrap only on an estimated basis without there being any evidence in this regard. If application of provision of s. 145 of the Act was not approved by CIT(A) there could be no addition made without any evidence in support of such addition. That there was no evidence that any sale of scrap, over and above what was shown by the assessee, was ever made by the company and such sale could not be presumed in absence of any evidence of sale of scrap outside books. In support of the submissions made, following six decisions were pressed into service : (i) Mrs. Hirabai D. Desai & Sons vs. CIT (1936) 4 ITR 95 (Bom); (ii) Pandit Bros. vs. CIT (1954) 26 ITR 159 (Punj); (iii) Bombay Cycle Stores Co. Ltd. vs. CIT (1958) 33 ITR 13 (Bom); (iv) R.B. Bansilal Abirchand Spinning & Weaving Mills Ltd. vs. CIT (1970) 75 ITR 260 (Bom); (v) International Forest Co. vs. CIT 1975 CTR (J&K) 88 : (1975) 101 ITR 721 (J&K); (vi) Malani Ramjivan Jagannath vs. Asstt. CIT (2007) 207 CTR (Raj) 19.
On behalf of Revenue, learned counsel placed reliance on the communication dt. 16th May, 1987 (Annex. 8) to submit that Shri Amin had accepted that he was managing director of the company, he had entered into commission agent agreements with foreign concerns on behalf of the company and he had received the funds on behalf of the company. That mere retention of the funds by Shri Amin, would not absolve the company from offering the said amount for taxation because in the said letter, addressed by Shri Amin to the board of directors of the company, there was categorical admission that the funds of the company were retained for working of the company and for benefit of enhancing the business of the company. In other words, according to Mr. Naik, it was not a case of unauthorized retention of the funds, as the funds belonged to the company, Shri Amin, was then the managing director, and Shri R.P. Jadeja, being an authorised signatory of the company, the principle of agency was fully established and the principal cannot distance itself from acts of the agent in such circumstances. Mr. Naik therefore, supported the impugned order made by the Tribunal. Insofar as second issue is concerned, it was submitted that there was a categorical admission on the part of representative of the company as regards the state of accounts maintained by the company, which would permit the assessing authority to make an addition. That at no point of time, the admission recorded by CIT(A) and Tribunal was disputed. Therefore, on this count also, according to learned advocate, the order of the Tribunal was justified.
In rejoinder, Mr. Shah submitted that insofar as the second issue is concerned, for all successive years estimated addition on account of sale of scrap outside books was being made in every succeeding year by applying the ratio of 10 per cent to the amount of sale of scrap shown in the books without there being any evidence in this regard. It was therefore urged that at least on this count the assessee was entitled to relief considering the legal position. Insofar as the first issue is concerned, it is not possible to accept the stand of the assessee company. It is true that if one reads a few lines of para No. 6 of the impugned order of the Tribunal, wherein inadvertent error in description of the parties, namely, names, has occurred, it may give a distorted picture if considered in isolation and shorn out of context. But, such mistakes cannot be termed to be of such a nature so as to conclude that entire order stands vitiated. Merely because instead of the name of foreign company, at couple of places, the name of assessee company appears, it cannot be stated that irrelevant factors have been taken into consideration by the
Tribunal while passing the impugned order. The order has to be read as a whole and inadvertent errors of description cannot vitiate the order. In this context, it is necessary to note that the assessee had moved the Tribunal by way of Misc. Appln. No. 53/Ahd/1999 filed on 20th July, 1988 seeking rectification of apparent error appearing in the impugned order dt. 13th March, 1988, but the said application did not raise the issue of the Tribunal having committed any apparent error on this count. On merits, if one examines the documents on which reliance has been placed, and which were before the Tribunal, it becomes apparent that Shri R.N. Amin, has accepted, not only in his statement recorded on oath, but even in his communication addressed to the board of directors that in his capacity as a managing director, he was entitled to enter into the agreements with both, Indian and foreign companies on behalf of the company and no separate resolution for this purpose was necessary (question and answer No. 13 of the statement dt. 9th March, 1989). In response to question No. 14 as to whether agreements were binding on the company, Shri Amin categorically replied in affirmative stating that the agreements are binding on the company. It is further stated in the communication that Mr. Amin, did not have any intention to retain the funds for any other purpose except for the working of the company and only idea was to use the funds for enhancing the business of the company. It is further stated in the communication that the funds were brought back considering the changed market situation in Malaysia and also the need of the company for funds for rehabilitation. It is nowhere stated by Shri Amin in the said communication that funds were retained by Shri Amin for his personal purpose. Had it been so, the retention of funds by Shri Amin would have assumed a different colour.
The communication dt. 1st April, 1985 calling upon the Japanese corporation by Shri R.P. Jadeja, to make payment of commission to the account of Shri R.P. Jadeja, in Singapore, when read as a whole, indicates that the letter-pad of the company was used, Shri R.P. Jadeja, has appended his signature as authorised signatory of the company and the office of the company at Singapore has been described in the said communication as representative office. Therefore, on overall reading of the entire evidence on record, it is not possible to accept the contention raised on behalf of the company that the company had no knowledge about the commission amount having been received by Shri Amin/Shri Jadeja, for and on behalf of the company. In fact when one examines the entire record, it becomes apparent that the entire exercise has been undertaken by the company to absolve Shri Amin, from violation of Foreign Exchange Regulation Act. There is nothing on the record to show as to what were the commission agent agreements about and apart from the names of three foreign concerns, there is no name of the principal situated in India with whom the foreign companies had transacted business so as to entitle the assessee company to any commission. Be that as it may, it is apparent that the amount described under the head ‘Commission’ was received by Shri Amin and/or Shri Jadeja, in relation to commission agent agreements entered into by Shri Amin, for and on behalf of the company. The said agreements were binding on the company and thus, the receipts by Shri Amin and/or Shri Jadeja, cannot be termed to be receipts by the said individuals on their individual account. It is not even the case of the assessee that Shri Amin and/or Shri Jadeja, were carrying on any business individually on their own, namely, independent of the business of assessee company. The payments being under the agreements with foreign companies, receipt of the payment having been acknowledged by authorised person of the assessee company, it is not possible to accept the contention that the assessee company was not in receipt of any amount. It is also necessary to note that there is no evidence on record to suggest that despite the transactions having taken place during the accounting period namely, 1st March, 1983 to 30th June, 1984, the assessee company took any steps to recover the so-called outstanding commission amount. The inaction on the part of the company to realize the commission, after services having been rendered by the company, which fact is not denied by the company, itself indicates that the company was in knowledge of the fact that the amount of commission had already been received by its authorised agent.
17. In light of the aforesaid evidence on record, it is not possible to accept the submission that the Tribunal has committed any error while holding that the commission amount was taxable in hands of the assessee company for the assessment year in question namely, 1985-86.
18. Insofar as the second issue is concerned, suffice it to state that there can be no dispute with the propositions laid down in the judgments cited on behalf of the assessee. However, in the facts of the present case as noted herein before, both, CIT(A) and Tribunal, have recorded, in no uncertain terms, the fact of state of accounts being of such a nature that there was an inherent lacuna in the system of accounting. CIT(A) has further recorded that token addition has been retained as suggested by the appellant. Therefore, there is no question of entering into any further discussion on this count.
19. In the result, both the questions referred at the instance of the assessee are answered in the affirmative i.e., in favour of the Revenue and against the assessee.
20. Insofar as Ref. Appln. No. 104/Ahd/1998 is concerned, the only question that has been referred by the Tribunal reads as under : “1. Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the sum of Rs. 8,93,653 being advertisement expenses should be deleted for the purpose of computing disallowance under s. 37(3A) ?”
21. Insofar as this question is concerned, the Tribunal has recorded as under : “We are of the opinion that the consideration of Rs. 8,99,653 for computing the disallowance under s. 37(3A) was not justified. The assessee is dealing in technical products and has to publish the materials and supply the same to the various dealers from time to time. This literature is meant only for the specified group of people. This only gives the details of goods manufactured and offered for sale in the market. In advertisement there has to be material provided to the people at large and such is not the case. Accordingly we are of the opinion that the CIT(A) was not justified in holding that the sum of Rs. 8,99,653 was rightly included for the purpose of computation under s. 37(3A). We accordingly direct that this sum should be deleted for the purpose of computing disallowance under s. 37(3A).” Learned counsel for the assessee placed reliance on decision of this Court in case of CIT vs. Torrent Laboratories (P) Ltd. (2000) 160 CTR (Guj) 333 : (2000) 245 ITR 29 (Guj), to submit that the issue stands concluded. The learned standing counsel appearing on behalf of the respondent was not in a position to dispute the fact that the amount in question had been expended on publication and distribution of the literature giving details of the goods manufactured and offered for sale in the market as recorded by the Tribunal. Hence applying the ratio of the aforesaid judgment of this High Court, the aforesaid question at the instance of the Revenue is answered in the affirmative i.e., in favour of the assessee and against the Revenue. In Ref. Appln. No. 103/Ahd/1998, following question has been referred by the Tribunal at the instance of Revenue : “Whether on the facts and in the circumstances of the case, the Tribunal is justified in law in holding that the payment for consultation services amounted to Rs. 2,00,000 to sister concern as allowable.”
25. In relation to this issue, the Tribunal has recorded in para No. 19.1 of the impugned order that the factory in question was not a new unit but the expenditure had been incurred for expansion of the existing project and was thus revenue in nature. This fact could not be disputed by learned advocate for the Revenue.
26. In the circumstances, no interference is warranted. The question is therefore answered in affirmative i.e., in favour of the assessee and against the Revenue.
27. Reference stands disposed of accordingly with no order as to costs.
[Citation : 321 ITR 135]
