THE issue before the Bench is - Whether mere acceptance of proof of commission payments, agreements between the parties and affidavits, by the AO, will debar him from questioning whether expenses claimed u/s 37 are allowable. NO is the verdict of the Apex Court.
Facts of the case
The assessee company is engaged in the business of manufacturing and sale of beer and other alcoholic beverages. Certain States like Kerala and Tamil Nadu had established marketing corporations which were the exclusive wholesalers of alcoholic beverages for the concerned State whereby all manufacturers had to compulsorily sell their products to the State Corporations which, in turn, would sell the liquor so purchased, to the retailers. For such purpose, the manufacturers of beverages containing alcohol had to engage services of agents who would co-ordinate with the retailers and State Corporations to ensure continuous supply of goods to the ultimate consumers. Accordingly, the assessee had engaged agents namely, M/s. R.J. Associates and Golden Enterprises, and claimed deduction u/s 37 on the commission payments being made to them. The claim made of assessee was however disallowed by the AO and later on such disallowance was confirmed by the CIT(A) in first appellate proceedings. On appeal, the Tribunal reversed the order of CIT(A) and took the view that the assessee was entitled to deduction, as such expenditure was made for business purposes. The said view was however reversed by the jurisdictional High Court on further appeal by holding that the assessee had failed to discharge its burden u/s 37, in the reference made to it u/s 256(2).
Having heard the parties, the Supreme Court held that,
++ it is seen that the High Court while hearing the Reference made u/s 256(2) had set aside the order of the Tribunal. Undoubtedly, in the exercise of its Reference Jurisdiction the High Court was not right in setting aside the order of the Tribunal. However, reading through the order of the High Court, it is found that the error is one of form and not of substance inasmuch as the question arising in the Reference has been specifically answered. A reading of the questions initially framed and subsequently reframed by the High Court show that what was done by the High Court is to retain some questions, as initially framed, while discarding the rest. Some of the questions discarded by the High Court were actually more proximate to the question of perversity of the findings of fact recorded by the Tribunal, than the questions retained. From a reading of the order of the High Court, it is clear that the High Court had examined the entitlement of assessee to disallowance by accepting the agreements executed by the assessee with the commission agents. The question that was posed by the High Court was whether acceptance of the agreements, affidavits and proof of payment would debar the AO to go into the question whether the expenses claimed would still be allowable u/s 37. This is a question which the High Court held was required to be answered in the facts of each case in the light of the decision of this Court in Swadeshi Cotton Mills Co. Ltd. vs. CIT and Lachminarayan Madan Lal vs. CIT, wherein it was observed that:
["....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 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 u/s 37...."]
++ there were certain Government Circulars which regulated, if not prohibited, liaisoning with the government corporations by the manufacturers for the purpose of obtaining supply orders. It is noted that in the present case, the true effect of the Government Circulars along with the agreements between the assessee and the commission agents and the details of payments made by the assessee to the commission agents as well as the affidavits filed by the husbands of the partners of M/s. R.J. Associates (to whom commission were paid), had been considered by the jurisdictional High Court. The statement of the Managing Director of Tamil Nadu State Marketing Corporation Ltd., to whom summons were issued u/s 131, to the effect that M/s. Golden Enterprises had not done any liaisoning work with TASMAC Ltd. was also taken into account. The basis of the doubts regarding the very existence of R.J. Associates, as entertained by the AO, was also weighed by the High Court to determine the entitlement of the assessee for deduction u/s 37. In performing the said exercise, the High Court did not disturb or reverse the primary facts as found by the Tribunal. Rather, the exercise performed is one of the correct legal inferences that should be drawn on the facts already recorded by the Tribunal. The questions reframed were to the said effect. The legal inference that should be drawn from the primary facts, as consistently held by this Court, is eminently a question of law. No question of perversity was required to be framed or gone into to answer the issues arising. In fact, as already held by this Court, the questions relatable to perversity were consciously discarded by the High Court. This Court, therefore, cannot find any fault with the questions reframed by the High Court or the answers provided.
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