2004 (6) TMI 577 - AT - Income Tax

Disallowance of commission paid for non-business considerations - club membership fees and income-tax liability of the Managing Director - HELD THAT - The circumstances brought by the Assessing Officer were enough to show that all was not well with regard to payment of commission to these parties. The needle of suspicion was therefore squarely pointing against genuineness of the claim for deduction of these expenses. The onus was squarely on the assessee to have dispelled all these doubts. The assessee merely relied on circumstantial evidence. It is not possible to accept the contention of the learned counsel for the assessee that there was no direct evidence was available apart from the confirmation of the assessee as well as the recipient of the commission which evidence in our view was self-serving and therefore could not be given much credence. Considering the quantum of commission paid the necessary details with regard to the nature of services provided by the recipient of commission with relevant documentary evidence ought to have been furnished by the assessee. The reliance placed by the learned counsel for the assessee on the decision of the Delhi Bench of the Income-tax Appellate Tribunal in the case of Instrumed (India) International v. ITO 1998 (5) TMI 48 - ITAT DELHI-D is not applicable to the facts of the present case. In the aforesaid case on similar facts apart from the confirmation of the assessee and recipient of the commission evidence in the form of correspondence to show the nature of services rendered were also filed and in those circumstances the Tribunal held that the onus was discharged by the assessee. Such are not the facts in the present case. We therefore hold that the action of the revenue authorities in disallowing the claim for deduction was proper and call for no interference. The ground of appeal of the assessee is dismissed. It is not in dispute that similar issue arose for consideration in assessee s case for the assessment year 1991-92 and this Tribunal had allowed the claim for deduction on account of club membership fees of Dr. Sella MD. while the claim for deduction on account of income tax liability of the M.D. borne by the assessee was disallowed by the Tribunal. Respectfully following the decisions referred to above and for the reasons stated in the aforesaid appeals the second ground of appeal of the assessee is allowed while the fourth ground of appeal of the assessee is dismissed. The Revenue s appeal was dismissed and the assessee s appeal was partly allowed.

Summary

Issues Involved:
1. Allowance of Entertainment Expenses u/s 37(2A).
2. Disallowance of Gift Expenses under Rule 6-B of the IT Rules.
3. Deduction of Research and Development Expenses.
4. Disallowance of Commission Payments.
5. Disallowance of Club Membership Fees and Income Tax Liability of Managing Director.

Summary of Judgment:

1. Allowance of Entertainment Expenses u/s 37(2A):
The Revenue's appeal contended that the CIT(A) erred in allowing 25% of entertainment expenses as attributable to employees' participation. The Tribunal upheld the CIT(A)'s decision, referencing a similar case in the assessee's history and the Delhi High Court's decision in CIT v. Expo Machinery Ltd., confirming that 25% of the expenses were correctly attributed to employees' participation.

2. Disallowance of Gift Expenses under Rule 6-B of the IT Rules:
The Revenue argued that Rs. 10,282 incurred on gift articles should be disallowed as they exceeded Rs. 200. The CIT(A) deleted this disallowance, stating the gifts did not carry the assessee's name or logo, thus not falling under advertisement expenses. The Tribunal upheld this view, supported by judicial precedents.

3. Deduction of Research and Development Expenses:
The Revenue and the assessee both appealed on the treatment of Rs. 31,77,716 spent on research and development. The CIT(A) allowed only 1/3rd of the expenses, treating the rest as deferred revenue expenditure. The Tribunal concluded that the entire expenditure was of a revenue nature and deductible in the year incurred, rejecting the concept of deferred revenue expenditure under the Income-tax Act.

4. Disallowance of Commission Payments:
The assessee's appeal against the disallowance of Rs. 37,64,138 paid as commission was dismissed. The Tribunal found the evidence insufficient to justify the payments, noting shared office space and common directors between the assessee and the commission recipients, and upheld the revenue authorities' decision.

5. Disallowance of Club Membership Fees and Income Tax Liability of Managing Director:
The Tribunal followed its previous decision for the assessment year 1991-92, allowing the deduction of club membership fees for the Managing Director but disallowing the deduction of income tax liability borne by the assessee.

Conclusion:
- The Revenue's appeal was dismissed.
- The assessee's appeal was partly allowed, with specific deductions allowed and others disallowed based on precedent and evidence.