COMMISSIONER OF INCOME TAX Vs. TEXTOOL CO LTD

JUDGEMENT

(1.) TAX Case Appeal against the order of the Income TAX Appellate Tribunal, Madras 'A' Bench dated 07.03.2003 in ITA No,635/Mds/95 for the Assessment year 1991-92. The Revenue has come forward with this appeal on the following substantial questions of law.:- 1) Whether in the facts and circumstances of the case, the Tribunal was right in deleting the addition made on account of payments to third parties contrary to the terms of agreement with the agent? 2) Whether in the facts and circumstances of the case, payments made to third parties at the request of the agent, without any evidence of service having been rendered by the third parties can be treated as a business expenditure?

(2.) THE assessee is a manufacturer of textile machine tools. THE only issue is relating to payment of additional commission to M/s. Texind Corporation. THE Texind Corporation is an accredited agent for sale of textile machineries. During the assessment year 1991-92, a sum of Rs.44,57,020/- was shown as payment of commission to M/s. Texind Corporation. Out of the said sum, a sum of Rs.9,13,247/- was shown as additional commission. Before the Assessing authority, the asseesee contended that during the relevant assessment year, there was a dull in the sale of textile products and therefore, at the instance of their accredited agent viz., M/s. Texind Corporation, they availed services of certain individuals for whom the assessee was obliged to pay the commission, which was shown as additional commission. THE Assessing Authority declined to accept the said explanation offered by the asseessee by stating that the assessee was not able to establish the nature of services rendered by such third parties to the assessee or to M/s. Texind Corporation, that in the agreement with Texind Corporation, there was no provision for payment of additional commission or third party commission, that no material was produced in proof of payment at the time of hearing, that the only explanation was that such payments were made on the advise of M/s. Texind Corporation. On the above stated reasoning, the Assessing Authority disallowed the sum of Rs.9,13,247/- towards additional commission. Before the CIT appeals, the Chartered Accounts of the assessee placed various materials in support of its claim and the CIT appeals has rendered the finding as under:-

(3.) OUR conclusion is supported by the decision of our High Court in the case of [2008] 305 ITR 438 - Cit V. Sapthagiri Traders Ltd., wherein it is held that in order to claim a deduction under Section 37 of the Income Tax Act, two conditions must be satisfied (a) the expenditure should have incurred wholly and exclusively for the purpose of business and (b) such expenditure should not be in the nature of capital expenditure. After setting out the said legal principle, the Division Bench on being satisfied with the findings of the Tribunal held that it cannot be doubted and the same cannot be interfered with. When the above principle will apply to the facts of the present case, we too find that the assessee satisfactorily established before the CIT appeals that the expenditure incurred by it was exclusively for the purpose of business and was not in the nature of capital expenditure. Therefore, the impugned order of the CIT appeal as confirmed by the Tribunal cannot be interfered with.