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C.I.T. versus M/S K.S.M. (P) LTD.

High Court of Judicature at Allahabad

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C.I.T. v. M/S K.S.M. (P) Ltd. - INCOME TAX REFERENCE No. 191 of 1981 [2004] RD-AH 430 (3 August 2004)


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Court No.37

I.T.R. No. 191 of 1981

The Commissioner of Income Tax

Lucknow ..........................Applicant


M/s Ishwari Khetan Sugar Mills (Pvt)

Ltd. Lakshmiganj, Deoria. ................................... Respondent


Hon'ble R.K.Agrawal, J.

Hon'ble K.N.Ojha, J.

The Income Tax Appellate Tribunal, Allahabad has referred the following questions of law under section 256(2) of the Income Tax Act (hereinafter referred to as the Act ) for opinion to this Court :

(1) Whether, on the facts and in the circumstances of the case, there was material on records justifying the Tribunal's finding that the payment of commission to M/s Bharat Vyapar Mandal was wholly and exclusively for the business of the assessee company ?

(2) Whether, on the facts and in the circumstances of the case, the appointment of M/s Bharat Vyapar Mandal as sole selling agents of the assessee company was in order in law ?

(3) Whether, on the facts and in the circumstances of the case, the Tribunal was in law justified in deleting the additions of Rs. 108139/- and Rs. 140024/- on account of commission to the sole selling agents in the assessment years 1969-70 and 1970-71 respectively ?

(4) Whether, on the facts and in the circumstances of the case, the Tribunal was legally correct in deleting the disallowance of Rs. 3401/- and Rs. 3460/- being interest paid to the Trust in respect of contribution to the provident Fund in the assessment years 1969-70 and 1970-71 respectively ?

The assessment year involved are 1969-70 and 1970-71. For these two assessment years the assessee opposite party claimed deduction of Rs. 108139/- and 140024/- being commission paid to one M/s Bharat Vyapar Mandal (hereinafter referred to as "the firm"). The assessee is a private limited company which  carries on the business of manufacture and sale of sugar, had appointed the firm as its sole selling agent by a deed dated 15th April, 1968. The firm was to be paid commission at the rate of 2 ½ % on the net sale price received by the assessee on sugar sold in the open market. The Income Tax Officer found that because of the control, there was scarcity of sugar  and it was selling at a very high price in the open market and hence there was no necessity for the appointment of sole selling agent to push up the sales.  He further found that in the previous four assessment years the assessee had shown heavy losses while in  these two years it had shown net profit and therefore it was a period  of boom and the  appointment of agent was hardly guided by commercial considerations. He further found  that the firm came into existence as a result of  a deed of partnership executed on that very date i.e. on 15.4.1968 and is controlled by the relatives of the directors of the assessee company. He further doubted the genuineness of the firm and held that no details was given to prove the nature of service rendered by the firm. The appointment of sole selling agent was also held to be in contravention of the provisions of Section 192 and 314 (b) of the Companies Act, 1956. The claim of deduction towards interest paid on delayed payment  of provident fund to the trust  amounting to Rs.3401/- and 3460/- respectively was also disallowed.

In the appeal filed by the assessee the Appellate Assistant Commissioner confirmed the assessment order. However, in the second appeal filed before the Tribunal , the Tribunal accepted the claim of the assessee opposite party and allowed the payment of commission and interest. So far as the question as to whether the commission paid by the assessee to the firm should have been allowed or not, the Tribunal has held as follows :

"We have carefully considered the respective submissions and the facts of the case. In our opinion, the objections which have been raised by the authorities below are mostly superficial. The firm has been assessed in the status of a registered firm and hence, its genuineness cannot be doubted. The firm was not a dealer within the meaning of clause 2(a) of the U.P.Sugar Dealer" Licencing Order, 1962 and as such, it was not necessary for it to obtain any licence under clause 3 of that order. The objection raised in regard thereto, therefore, is not correct. We also do not accept the objection that it was necessary that the resolutions passed by the board of directors required any sanction of the Central Government. The genuineness of the agreement as also of the payments have not been doubted. There are two main objections which have been taken firstly that there was no necessity for the assessee to appoint a sole selling agent and secondly that the selling agent did not render  any service. We have shown above that the existence of necessity is not a valid test for allowability of an expenditure under section 37. Anyhow, as a fact, necessity has been proved  and it was the rise and fall in the market trends and the prices of sugar. 40% of the sugar  was released for free sale in the open market and in order to have the best price and to be kept posted with the latest market trends, the appointment of selling agents was made and in our opinion, it was fully justified. In earlier years, the assessee had suffered considerable loss, while this year it earned substantial profit. The appointment of sole selling agents, was therefore quite justified . As regards the rendition of services, there is abundant material on record to show that selling agents did  render  services to the assessee and hence, the payment of commission was fully justified and we hold accordingly."

From the reading of the aforesaid order, it is absolutely clear that the Tribunal has found that the Firm had been assessed in the status of a registered firm. Thus it is a genuine firm. It has further found that the firm  had rendered the service on account of which the assessee had earned huge profits. The agreement entered by the assessee with the firm as also the payment of commission has not been doubted.  In view of the findings recorded by the Tribunal  which are based on appreciation of evidence and material on record, it cannot be said that the appointment and payment of commission to the said firm  was  wholly and exclusively for the purpose of business of the assessee company.

In view of the foregoing discussions, we answer the first three questions referred to us in the affirmative i.e. in favour of the assessee and against the revenue. So far as the fourth question  regarding interest paid to the trust in respect of contribution to the provident fund is concerned, it may be mentioned here that the Apex Court in the case of Mahalakshmi Sugar Mills Co. Vs. C.I.T. (1980) 123 I.T.R. 423 has held that interest for delayed payment of statutory dues is an allowable deduction under Section 37 of the Act. Interest on delayed payment of provident fund cannot be termed as  damages under Section 14 B of the Employees Provident Fund  and Miscellaneous Provisions Act, 1952, as such damages have been held by this Court to be penal in nature and not allowable as business expenditure under Section 37 of the Act in the case of Commissioner of Income Tax Vs. Kamlapat Motilal (1988) 172 I.T.R. 438.The Gujrat High Court in the case of Commissioner of Income Tax Vs. Visnagar Taluka Mazdoor Sahkari Mandali Limited (1987) 163 I.T.R. 224 has held that interest paid on the provident fund amount is deductible either under Section 28 or under Section 37 of the Act. Thus we are of the considered opinion  that interest on delayed payment of provident fund  is an allowable deduction.

In view of the foregoing discussions,  we answer the fourth question  also in the  affirmative i.e.  in favour of the assessee and against the revenue.. However, the parties shall bear their own costs.

Dt. 3.8.2004



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