By TIOL News Service:

MUMBAI, MAY 13, 2016: THE issue is - Whether a partnership firm engaged in the business of hire purchase, is entitled for claiming deduction u/s 37(1) on account of expenditure incurred by way of secret commission paid to employees of its clients, without establishing the fact that such payment of commission was a matter of trade practice in its line of business for ensuring quick payment of hire charges. NO is the answer.

Facts of the case:

The assessee is a partnership firm engaged in the business of letting on hire tarpaulin sheets for the purposes of erecting weather sheds. It was the assessee's case that in the regular course of their business they were required to incur and pay costs by way of secret commission allegedly known in the trade as "Mehta Sukhadi". According to the assessee, such commission was paid secretly to employees of numerous clients and those amounts were deductible u/s 37(1) as business expenditure. In respect of A.Y. 1991-92, the assessee filed its return declaring income of Rs. 8.66 lakhs, after debiting an amount of Rs.1.45 lakhs as "Mehta Sukhadi" i.e. secret commission paid to employees of its customers. The AO however passed an order u/s 143(3) disallowing the secret commission by relying upon his order in assessee's case The assessee's representative submitted before the AO that on account of severe competition they were required to make certain percentage of the contract amount to select employees of clients, secretly, in order to approve the assessee's contracts, rates and help in getting quick payment of such hire charges. The representative further submitted that it was not possible to disclose the names of employees to whom payments of secret commission were made. The AO however rejected such submissions by observing that the percentage of secret commission was between 1% to 3% averaging to 2.5% which was held to be unreasonable. On appeal, the CIT(A) reversed the order of the AO observing that the payments were in the nature of liaison charges and secret commission.

On further appeal, the Tribunal observed that the assessee was given an opportunity by the AO to substantiate the claim, but the assessee simply contended that in their line of business, due to severe competition, a percentage of receivables had to be paid to select employee(s) secretly and which amounts were deductible as business expenses. The Tribunal concluded that the assessee had failed to provide documentary evidence to substantiate the payment of secret commission. It also recorded that the assessee was unable to give names of recipients of the commission. Hence, the Tribunal reversed the order of the CIT(A).

After hearing the parties, the High Court had held that:

++ it is seen that the AO has held that although it was the assessee's case that payment of secret commission ensured quick payment of hire charges, the particulars in the instant case revealed that hire charges running into lakhs of rupees remained overdue and that the payment of secret commission even if correct, cannot be justified. The order of the CIT(A) reveals that the partners of the assessee firm reportedly confirmed that the disbursements were made the partners in charge of the particular client's site by withdrawing money from bank. The CIT(A) further observed that the AO had noted that the assessee had furnished details of payment but the names of recipients were not made available. The CIT(A) also observed that on perusal of the details and the decisions relied upon by the assessee, they have rendered a proper account of payment received from various companies and the amount of secret commission paid by the assessee to the staff of such companies. The only detail missing was the names of recipients. The CIT(A) recorded that the assessee has been following this procedure for last 30 years and the details furnished show that payments are neither were large payments made to any single company nor were the payments out of the way. The CIT (A) concluded that the details submitted before him established that the rate of secret commission at 2.5% is reasonable and following the decision of this Court in Goodlass Nerolac Paints Ltd., the assessees contentions were accepted and the addition made on account of Mehta Sukhadi were deleted. Although assessee's counsel sought to contend that further documents were available, we declined to entertain this contention as we would not be justified in allowing him to rely upon other disputed documents at this stage particularly when the same is not a part of the record before us. It is noticed that during the arguments leading to the impugned order before the Tribunal, the assessee had placed reliance on the decision of the Tribunal in case of M/s. French Dyes and Chemicals India Pvt. Ltd. Vs. CIT. However the aforesaid decision was not available for perusal. However we were informed by Revenue's counsel that from a perusal of the tribunal's judgment in French Dyes, it was found that the assessee had failed to establish that the said amount was expended for the purpose indicated by the assessee. The Supreme Court in response to the SLP filed by the assessee therein observed that not only had the assessee failed to disclose names of recipients but even the commission allegedly paid was not uniform;

2. It was further pointed out that the mere fact that certain amounts were made available to the Director of the assessee firm was not sufficient proof of its payment, inasmuch as, according to the assessee, the amounts were not paid by the Director by himself but through various employees. The names of persons who had allegedly made payments to the Dyeing Masters of the clients had also not been disclosed. In this view of the matter the tribunal recorded the finding that the assessee therein had failed to establish that the said expenditure was incurred. It is found that the facts of the present case are closest to the facts in the case of French Dyes, as evidenced from the Apex Court order that although the CIT(A) had reached a finding that there was some evidence on record which justified payments to qualify for deduction, the tribunal found that there was no evidence to justify the allowance of deduction. When we examined the order of CIT(A) in the case at hand, we find that evidence relied upon by CIT(A) is not dealt with at all in the satisfactory manner. Vague references are made to the statement made by the partners of the assessee firm whose presence had been recorded by CIT(A) at the hearing. Apart from the fact that the names of recipients are not mentioned, we do not find any attempt on the part of assessee to lead any evidence indicating how these payments were made. None of the partners have given evidence to establish as to which partners dealt with various clients, whose names were not provided in the list forming part of the record. Although the list, pursuant to the order in Notice of Motion reveals names of clients, most of whom are corporates, the assessee made no attempt to adduce any evidence as to which the partners dealt with clients in question. No attempt has been made to establish whether the payments were for the purpose of business. In fact the AO has rightly concluded that payment of commission did not result in any expeditious payments due to the assessee. Moreover, the finding of fact reveal that the rate of commission was not uniform. There is no evidence brought on record by the assessee to establish that payment of commission was matter of trade practice in its line of business. In absence of such evidence, we are inclined to accept the findings of the tribunal which is last fact finding authority and as such we are not inclined to interfere with this finding. In view of the above, no occasion arises to examine the application of the Explanation 1 to Section 37, which would arise only if it is held that the expenditure of secret commission had in fact been incurred for purposes of business.

(See 2016-TIOL-927-HC-MUM-IT)