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Judgment
V.B. Gupta, J.—By this common judgment two appeals bearing No. ITA 821 and 824/2006 filed by the assessed arising out of common
order dated 16th December, 2005 passed by the Income Tax Appellate Tribunal (in short as ''Tribunal'') in ITA No. 5389/Del/94 (assessment
year 1991-92) and ITA No. 7602/Del/95 (assessment year 1992-93) are being disposed of.
The assessed is in the business of manufacturing of cycle tyres and tubes. The Assessing Officer on scrutiny of the Profit and Loss A/c of the
assessed noticed that the commission paid by the assessed had increased to Rs. 55,68,854/- from Rs. 33,34,235/- in the last year. The assessed
was required to file details of the commission. It was found by the Assessing Officer that the assessed paid substantial commission to two parties
namely M/s Associates Agencies and M/s Sawhney Tyres @ 3% for the period from April, 1990 to September, 1991. Earlier the commission
was paid @ 2% from May, 1988 to March, 1989 and it was increased to 2.5% from 1st April, 1989 till March, 1990. The total commission was
paid to the tune of Rs. 55,68,854/- on total sales of Rs. 18,56,28,522/- which was @ 3% whereas for the previous year the commission was
much less.
The assessed was asked to explain and justify these payments of commission especially in view of the fact that they were increasing the rate of
commission payable to these parties who were closely related to the assessed because the partners of these firms were related to assessed''s wife
being her brother and father.
The Assessing Officer found that the rate of commission was increased from 2.5% to 3% only for the relevant previous year and after the end of
the closing year, the commission was reverted back to 2.5%. Thus, this increase of 0.5% was only for this year. M/s. Associates Agencies claimed
that they were having branches all over the country for which they could not manage on a commission of 2% and so the commission was increased
for them. The Assessing Officer found that the assessed had unjustifiably increased the rate of commission to lower his income by transferring
income from his proprietary concern to the firm of his in laws and thus held that increasing commission from 2.5% to 3% was unjustifiable.
On appeal, the Commissioner of Income Tax (Appeal) deleted the addition made by the Assessing Officer holding that assessed has opened
two new branches one at Calcutta and another at Lucknow which resulted in increase of expenses and the selling agents were losing their net profit
due to increase in their expenses and as such payment of excess commission for selling agents were justified.
Being dissatisfied with the order passed by the Commissioner of Income Tax (Appeal), Revenue filed appeals before the Tribunal and the
Tribunal vide its impugned order allowed the appeals filed by the Revenue.
It has been contended by learned Counsel for the assessed that the commission was increased by 0.5% only on account of heavy expenses
incurred by the selling agents on account of opening of two branches one at Calcutta and other one at Lucknow. He further contended that the sole
selling agents did not carry out any other business except conducting the sale of the goods manufactured by the assessed and the sales of the
assessed has increased by 43% during the relevant year and in the process, the increase in any expenses incurred by the selling agents for
conducting their sales had resulted into loss and the extra commission was paid to them for compensating their losses. Other contention is that the
Revenue cannot assume the role of a business man to decide how much is the reasonable expenditure having regard to the circumstances of the
case and in support of its contentions cited a decision of this Court, Commissioner of Income Tax Vs. Dalmia Cement (B.) Ltd.,
In Dalmia Cement case (supra) the assessed, a manufacture of cement, claimed payment to its sole selling agent commission @ Rs. 1.75% per
M.T., as a deduction. The Assessing Officer, on a comparison with the commission paid by the assessed under an arrangement with another agent,
held that the amount paid was on the higher scale and Rs. 1 per M.T. would be permissible deduction, and disallowed the balance. Both the
Commissioner of Income Tax (Appeals) and the Appellate Tribunal upheld the claim of the assessed. On a reference, this Court held that:
The jurisdiction of the Revenue is confined to ''deciding the reality of the expenditure'', namely, whether the amount claimed as deduction was
factually expended or laid down and whether it was wholly and exclusively for the purpose of the business. The reasonableness of the expenditure
could be gone into only for the purpose of determining whether, in fact, the amount was spent. Once it is established that there was a nexus
between the expenditure and the purpose of the business, the Revenue cannot justifiably claim to put itself in the armchair of a businessman or in
the position of the board of directors and assume the said role to decide how much is a reasonable expenditure having regard to the circumstances
of the case.
On the other hand, it has been contended by learned Counsel for Revenue that the increase in the rate of commission remained effective only for
the year under consideration and if this plea of assessed is taken as correct that it was increased due to the opening of new branches, then there
was no reason for reducing the commission from the next year and as such there appears to be no justification to increase the commission from
2.5% to 3%.
The foremost question for consideration is as to whether any substantial question of law arises in this case or not and on this point certain
judgments of Apex Court as well as of this Court may be referred to.
In case of Kondiba Dagadu Kadam Vs. Savitribai Sopan Gujar and Others, it has been explained as to what can be termed as substantial
question of law. It was held:
If the question of law termed as substantial question stands already decided by a larger bench of the High Court concerned or by the Privy Council
or by the federal Court or by the Supreme Court, its mere wrong application to facts of the case would not be termed to be a substantial question
of law. Where a point of law has not been pleaded or is found to be arising between the parties in the absence of any factual format, a litigant
should not be allowed to raise that question as substantial question of law in second appeal. The mere appreciation of the facts, the documentary
evidence or the meaning of entries and the contents of the document cannot be held to be raising a substantial question of law. But where it is found
that the first appellate Court has assumed jurisdiction which did not vest in it, the same can be adjudicated in the second appeal, treating it as
substantial question of law. Where the first appellate Court is shown to have exercised its discretion in a judicial manner, it cannot be termed to be
an error either of law or of procedure requiring interference in second appeal.
In another case reported as Panchugopal Barua and others Vs. Umesh Chandra Goswami and others, , it has been laid down that existence of
substantial question of law is sine qua non for the exercise of jurisdiction. It was held:
A bare look at Section 100 C.P.C. shows that the jurisdiction of the High Court to entertain a second appeal after the 1976 amendment is
confined only to such appeals as involve a substantial question of law, specifically set out in the memorandum of appeal and formulated by the High
Court. Of course, the proviso to the Section shows that nothing shall be deemed to take away or abridge the power of the Court to hear, for
reasons to be recorded, the appeal on any other substantial question of law, not formulated by it, if the Court is satisfied that the case involves such
a question. The proviso presupposes that the Court shall indicate in its order the substantial question of law which it proposes to decide even if
such substantial question of law was not earlier formulated by it. The existence of a ''substantial question of law'' is thus, the sine qua non for the
exercise of the jurisdiction under the amended provisions of Section 100 C.P.C.
Similarly in a decision of this Court reported as Mahavir Woollen Mills Assessee Vs. Commissioner of Income Tax, , meaning of ''substantial
question of law'' has been explained. It was held:
The issue raised by the assessed in the appeal cannot be said to involve any question of law, much less a substantial question of law. A question of
fact becomes a question of law, if the finding is either without any evidence or material, or if the finding is contrary to the evidence, or is perverse or
there is no direct nexus between the conclusion of fact and the primary fact upon which that conclusion is based. But, it is not possible to turn a
mere question of fact into a question of law by asking whether as a matter of law the authority came to a correct conclusion upon a matter of fact.
In Edwards v. Bairstow[1955] 28 ITR 579, Lord Simonds observed that even a pure finding of fact may be set aside by the court if it appears that
the commissioner has acted without any evidence or on a view of the facts which could not be reasonably entertained. Lord Radcliffe stated that
no misconception may appear on the face of the case, but it may be that the facts found are such that no person acting judicially and properly
instructed as to the relevant law could have come to the determination under appeal. In those circumstances the court may intervene.
The words ''substantial question of law'' has not been defined. But the expression has acquired a definite connotation through a catena of judicial
pronouncements. Usually five tests are used to determine whether a substantial question of law is involved. They are as follows:
1) whether, directly or indirectly, it affects substantial rights of the parties, or
2) the question is of general public importance, or
3) whether it is an open question in the sense that the issue has not been settled by pronouncement of the Supreme Court or Privy Council or by
the Federal Court, or
4) the issue is not free from difficulty, and
5)it calls for a discussion for alternative view.
Now coming to the facts of the present case, it is purely a question of fact as to whether there has been increase in the commission and
expenses and this point with regard to the increase in commission expenditure, has been dealt with by the Tribunal in the impugned order which
reads as under:
The increase in commission expenditure is claimed to be on account of opening of new branches of Associate Agency at Calcutta and Lucknow.
In order to compensate the increased expenditure the commission is increased from 2.5% to 3%. However, there is no material on record to
substantiate the said claim of the assessed. What are the details of such expenditure is also not or record. Besides, it is seen that this increase in the
rate of commission @ 3% remained effective only for the year under consideration. Had the intention was to compensate the increased
expenditure incurred by the commission agents on account of opening of new branches at Calcutta and Lucknow, the assessed would not have
reverted back to the old commission rate of 2.5%. In these circumstances, there appears to be no justification to increase the commission of 2.5%
to 3%. We, Therefore, reverse the order of the Commissioner of Income Tax (Appeals) and uphold the order passed by the Assessing Officer.
We agree with the reasoning given by the Tribunal that increased rate of commission remained effective only for the year under consideration
and if the intention of the assessed was to compensate its agents for increased expenditure incurred by them on account of opening of new
branches at Calcutta and Lucknow, then there would have been no ground for the assessed to have reverted back to the old rate of commission
that is 2.5%. Under these circumstances, there appears to be no justification to increase the commission from 2.5% to 3%, only for the year under
consideration and thereafter when the sale is on increase, there was no justification for reducing the rate of commission.
Since it is purely a finding of fact given by the Tribunal, we find no reason to disagree with the reasoning given by the Tribunal and as such the
ratio of Dalmia Cement case (supra) is not applicable to the facts of the case in hand.
Under these circumstances, we hold that no fault can be found with the view taken by the Tribunal. Thus, the order of Tribunal does not give
rise to a question of law, much less a substantial question of law, to fall within the limited purview of Section 260-A of the Act, which is confined to
entertaining only such appeal against the order which involves a substantial question of law.
Accordingly, both the appeals filed by the assessed are hereby, dismissed.