A.K. Sikri, J.@mdashThe Appellant-Assessee herein is a Non-Banking Financial Company (NBFC) and is primarily engaged in hire, purchase,
lease and financing. For the instant Assessment Year, i.e., 1998-99, the Appellant filed income tax return declaring a loss of Rs. 3,82,00,783/-.
The Assessing Officer (AO) issued intimation u/s 143(1)(a) of the Income Tax Act (hereinafter referred to as ""the Act"") accepting the returned
loss. Return of income was revised on 27.12.1999, declaring a loss of Rs. 4,26,50,098/-. The revised return was also processed u/s 143(1) of the
Act, at the returned loss. During the instant assessment year, the Appellant had incurred an expenditure of Rs. 52,70,636/- on account of
commission paid to the Direct Selling Agents (DSA) for their services in sourcing hirers in the year in which the loan is disbursed and debited its
Profit & Loss account by a sum of Rs. 48,38,636/- for the purpose of accounting was treated as deferred revenue expenditure. The Appellant
claimed a deduction on entire sum of Rs. 52,70,636/- incurred during the year as a deduction on the ground that the expenditure was incurred
during the year and being revenue in nature, is fully allowable as deduction. The AO framed the assessment u/s 143(3) of the Act determining the
loss at Rs. 2,34,24,570/-, inter alia, making various disallowances/additions.
2. The only dispute in this appeal is in respect of disallowance of Rs. 48,38,636/- out of the commission paid by the Appellant company to its
DSAs for their services in sourcing hirers.
3. The CIT (A) upheld the addition of Rs. 48,38,636/- made by the AO on account of disallowance out of the commission paid to the DSAs
during the year. He held that the expenditure incurred in a deferred revenue expenditure and sought to draw his conclusion on the basis of the
judgment of Apex Court in the case of M/s. Madras Industrial Investment Corporation Ltd. Vs. The Commissioner of Income Tax, Tamil Nadu-I,
Madras, . According to the CIT (A), the aforesaid judgment was applicable to the facts of this case, as the commission is determined and paid
with reference to the period of loan and therefore, needed to be spread over the said period and thus, had to be treated as deferred revenue
expenditure over a period of loan, it could be not said that the entire expenditure related to the Assessment Year in question.
4. The Income Tax Appellate Tribunal (hereinafter referred to as ""the Tribunal"") by the impugned order, however, has restored the matter to the
file of AO for afresh adjudication of the disallowance made of Rs. 48,38,636/-, out of the total claim of the expenditure incurred of Rs. 52,70,636
on account of commission paid to the DSAs, to the file of the AO with certain directions. The Tribunal took into consideration the terms of the
Agreement as per which commission was payable to the DSAs. The term regarding payment stipulates as under:
1. The company shall pay the DSA as per case brokerage and a farther brokerage on the volume of business generated which will be
communicated to it from time to time against their making available to the company their expertise. The DSA will under no circumstance pass on
the said brokerage or apart of it to any prospective applicants in any form whatsoever.
2. The DSA shall ensure collection of upfront process in fee from the borrower in favour of the company, and remit the same to the company.
Thereafter the company shall pay the DSA share separately as decided mutually by the company and the DSA.
5. Taking note of this stipulation, the Tribunal has taken the view that the Assessee''s liability to pay the commission partly arises at the time when
the DSA sources the hirer and partly on the volume of business generated. The Assessee disburses the amount only after receiving the upfront
processing fee from the prospective borrowers. It is also accepted fact that upfront processing fee is taxed in the year of receipt itself and not
spread over the period of hire-purchase finance. Therefore, according to the Tribunal, payment of commission is not based on the hire-purchase
charges receivable by the Assessee but on the basis of hirer sourced by the DSA and in respect of such hirer the processing fee is received, which
is allowable in the year of payment. This shows that the Tribunal accepted the contention of the Assessee in principle. Still, it remitted the case
back to the AO on the ground that the copies of contracts with DSA placed before us do not demonstrate as to what are the services rendered by
the DSAs and therefore, it was not possible to work out as to how the liability to pay such brokerage arises. The Tribunal further observed that the
Agreement showed that the DSAs were to source the borrower, but the terms of Agreement did not reveal as to on which basis the brokerage is
payable and was linked to what, or how the Assessee would be liable to pay such brokerage. According to the Tribunal, therefore, there was no
sufficient material to give a fining as to the allowability of entire brokerage in the year of payment itself. Moreso, when the Assessee itself treats the
expenses as to be amortized over period beyond the relevant financial year. With this discussion, the precise directions given to the AO are as
under:
The Assessing Officer shall consider how the brokerage paid is worked out and is linked to what nature of income receivable by the Assessee. If
the brokerage payable is linked to hire charges which are receivable over period of hire purchase finance, the brokerage will also be allowed
accordingly. However, if it is otherwise, the same will be allowed in the year of payment itself. Even in case of Ashima Syntex Ltd. (supra) the
Special Bench of ITAT has laid down similar criteria. Accordingly the matter is restored back to the file of the Assessing Officer to be decided in
accordance with our above observations.
6. The submission of Mr. C.S. Aggarwal, Sr. Advocate who appeared for the Assessee was that there was no need to remit the case back to the
AO when the Tribunal had the entire material before it and could form an opinion itself on the basis of said material. Attention was drawn to the
provisions of Section 251 of the Act which lays down the scope of powers with the Commissioner (Appeals) and it was argued that the powers of
the Commissioner (Appeals) are co-terminus of that of the AO. Proceeding on this basis, it was argued that since the Tribunal was given power to
pass such orders in the appeal as thinks fit, it could pass the orders of its own on the merits of the case, instead of remanding the case back to the
AO. Mr. Aggarwal, placed reliance upon the judgment of the Supreme Court in the case of Hindustan Ferodo Ltd. v. Collector of Central Excise
Bombay 89 ELT 16 wherein the Supreme Court laid down the guidelines as to how the appellate powers were to be exercised by the Tribunal in
the following manner:
4. It is not the function of the Tribunal to enter into the arena and make suppositions that are tantamount to the evidence that a party before it has
failed to lead. Other than supposition, there is no material on record that suggest that a small scale or medium scale manufacturer of brake linings
and clutch facings ""would be interested in buying"" the said rings or that they are marketable at all. As to the brittleness of the said rings, it was for
the Revenue to demonstrate that the Appellants? averment in this behalf was incorrect and not for the Tribunal to assess their brittleness for itself.
Articles in question in an appeal are shown to the Tribunal to enable the Tribunal to comprehend what it is that it is dealing with. It is not an
invitation to the Tribunal to give its opinion thereon, brushing aside the evidence before it. The technical knowledge of members of the Tribunal
makes for better appreciation of the record, but not its substitution.
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7. Regrettably ,the Tribunal''s order under appeal shows that it was not fully conscious of the dispassionate judicial function it was expected to
perform, and it must be quashed.
8. He also referred to the judgment of the Apex Court in the case of Indian Molasses Co. (Private) Ltd. Vs. Commissioner of Income Tax, West
Bengal, which deals with the issue as to what constitutes ""expenditure within the meaning of that word"" u/s 10(2)(xv) of the Income Tax Act, 1929,
which is pari materia to Section 32 of the present Income Tax Act. Following observations therefrom were specifically were relied upon:
Side by side with these principles, there are others which are also fundamental. The income tax law does not allow as expenses all the deductions a
prudent trader would make in computing his profits. The money may be expend on grounds of commercial expediency but not of necessity. The
test of necessity is whether the intention was to earn trading receipts or to avoid future recurring payments of a revenue character. Expenditure in
this sense is equal to disbursement which, to use a homely phrase, means something which comes out of the trader''s pocket. Thus, in finding out
what profits there be, the normal accountancy practice may be to allow as expense any sum in respect of liabilities which have accrued over the
accounting period and to deduct such sums from profits. But the income tax laws decided on not take every such allowance as legitimate for
purposes of tax. A distinction is made between an actual liability in present and a liability de future which, for the time being, is only contingent. The
former is deductible but not the latter. The case which illustrates this distinction is Peter Merchant Ltd. v. Stedeford. No doubt, that case was
decided under the system of income tax laws prevalent in England, but the distinction is real. What a prudent trader sets apart to meet a liability,
not actually present but only contingent, cannot bear the character of expense till the liability becomes real.
9. There is no quarrel about the aforesaid propositions. No doubt, when the Tribunal is called upon to decide an issue on merits and sufficient
evidence/material is on record to decide that issue, it is supposed to render its decision on that issue. However, the Tribunal in the instant case has
referred the matter back to the AO categorically recording that there was no sufficient material placed before it to demonstrate as to what were the
services rendered by the DSAs from which it could be ascertained as to how allowability to pay such brokerage had arisen and could be worked
out. According to the Tribunal, mere Agreement was not sufficient for this purpose, as it does not reveal on what basis the brokerage is payable
and is looked into what and how the Assessee would be liable to pay such brokerage. Section 254(1) of the Act which confers power upon the
Tribunal to decide the appeal clearly states that after giving opportunity of being heard to both the parties, it may ""pass such an order thereon as
thinks fit"".
10. After stating the principle on which commission paid by the Assessee to DSAs would be treated as expenditure relating to particular areas, for
want of sufficient evidence to arrive at a definite finding in this behalf, the Tribunal, in its discretion, remitted the case back to the AO giving clear
guidelines how to examine the issue on the basis of records to be produced and what course of action, the AO was supposed to take.
11. We do not find any infirmity in this approach of the Tribunal. No substantial question of law arises. This appeal is dismissed in limine.
