Commissioner of Income Tax vs Chemaux Pvt. Ltd.

B.N. Srikrishna, J.—In this departmental reference made u/s 256(2) of the Income Tax Act, 1961, pertaining to the assessee''s assessment year 1962-63, the Income Tax Appellate Tribunal has referred to us the following questions of law for our opinion :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that secret commission, although disallowed in assessment proceedings for want of proof, has to be duly considered while making an order u/s 104 ?

Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the assessee has distributed dividends in excess of the one prescribed u/s 104 of the Act ?

Whether, on the facts and in the circumstances of the case, the order made u/s 104 of the Act was valid ?"

The central issue in this reference pertains to whether additional Income Tax is payable u/s 104 in respect of undistributed dividend attributable to secret commission stated to be paid by the assessee during the assessee year.

In the previous year corresponding to the assessment year 1962-63, the assessee derived income partly from processing activities and partly from trading. On the basis of the sale, the ratio was 33 : 37. The assessee claimed in its return that it had paid secret commission to one A.M. Khoparkar amounting to Rs. 29,934, which should be deducted from the taxable income while applying the provisions of section 104. The Tribunal came to the conclusion that, if this amount of secret commission is deducted from the distributable income, then the percentage of dividend distributed by the assessee would not warrant the application of section 104 of the Act. The question, therefore, arises as to whether the secret commission, though actually disallowed in the assessment proceedings, can be said to fall within the deduction u/s 109 while calculating the distributable income for the purpose of section 104 of the Act.

Section 109(i) (g) and (iv) read as follows :

"(i) ''distributable income'' means the gross total income of a company as reduced by - .....

(g) any expenditure actually incurred for the purpose of the business, but not deducted in computing the income chargeable under the head ''Profits and gains of business or profession'' being, -

(1) a bonus or gratuity paid to an employee,

(2) legal charges,

(3) any such expenditure as is referred to in clause (c) of section 40,

(4) any expenditure claimed as a revenue expenditure but not allowed to be deducted as such and not resulting in the creation of an asset or enhancement in the value of an existing asset."

"(iv) ''gross total income'' means the total income computed in accordance with the provisions of this Act before making any deduction under Chapter VI-A."

For the purpose of section 104, the expression "distributable income" means gross total income of the company as reduced by various items indicated in clauses (a) to (h). In our view, the secret commission paid by the assessee, though disallowed by the Income Tax Officer, cannot be considered as not having been expended in the pursuit of its business. The Assessing Officer appears to have disallowed the same on the ground that there was no proof available. That the amount was of such a nature as would relate to the business of the assessee is not in dispute. In our view, therefore, when expenditure of this nature which is really relatable to the assessee''s business and would normally amount to revenue expenditure is disallowed in the assessment, the provisions of section 109(i)(g)(4) would clearly be attracted. We are of the view that the secret commission would have to be deducted for the purpose of determining the distributable income u/s 104 of the Act. There is no dispute that, if such deduction is made, there is no liability u/s 104 of the Act.

We are fortified in our view by the judgment of the Supreme Court in the case of Commissioner of Income Tax, West Bengal Vs. Gangadhar Banerjee and Co. (Private) Ltd., , where the Supreme Court held that, in the absence of any material to show that the real commercial profits were artificially reduced in the balance-sheet it must be assumed that the amount mentioned in the balance-sheet correctly represented the "commercial profits". In the assessee'' case, barring the circumstances that the amount of secret commission has been disallowed in the assessment proceedings, no material had been brought no record to show that such an expenditure was not incurred or that was a bogus entry.

In the result, we answer the questions referred to us in the following manner :

Question No. 1 : In the affirmative and in favour of the assessee.

Question No. 2 : In the affirmative and in favour of the assessee.

Question No. 3 : In the negative and in favour of the assessee.

No order as to costs.