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2012 (8) TMI 679 - AT - Income TaxDisallowance of commission expenses - Held that - It is settled law that if the assessee claimed deduction of any expenditure the burden of proof is on the assessee to establish that such expenditure was incurred wholly and exclusively for the purpose of assessee s business. In the present case it is an admitted fact that there is no written agreement between the assessee and the recipients of the commission agents. Even if there is no written agreement, the assessee could claim deduction for the expenses provided if it is established with documentary and cogent evidence that such expenditure was incurred for the purpose of its business. The assessee could not even produce any correspondence between the parties which could have served as a contemporaneous circumstantial evidence. The assessee is not able to correlate the commission payments with reference to the nature of service rendered by the recipient of the commission - the person/party to whom the payment by cheque is alleged to have been made has his own story to tell and which story is believed - against assessee.
Issues Involved:
1. Erroneous order of the CIT (Appeals) on facts and in law. 2. Addition of Rs. 13,60,300/- towards commission by the Assessing Officer. 3. Failure to appreciate evidence indicating commission payments were for business purposes. 4. Allowability of commission payments as a deduction under Section 37(1) of the IT Act. Detailed Analysis: 1. Erroneous Order of the CIT (Appeals) on Facts and in Law: The assessee contended that the CIT (Appeals) erred in confirming the addition made by the Assessing Officer towards commission payments. The CIT(A) observed that the assessee could not prove the genuineness of the commission payments despite several opportunities. The burden of proof lies on the assessee to demonstrate that the expenses were incurred wholly and exclusively for business purposes, as per Section 37(1) of the IT Act. The CIT(A) relied on the Supreme Court judgment in Laxmiratan Cotton Mills Co. (73 ITR 634), emphasizing that mere confirmation and payment by cheques do not conclusively prove that services were rendered by the commission agents. 2. Addition of Rs. 13,60,300/- Towards Commission by the Assessing Officer: The Assessing Officer disallowed the commission payments of Rs. 13,60,300, citing lack of evidence for the transactions. The commission payments were recorded on the last day of the accounting year and carried forward, with no prior history of such payments. No material evidence, such as agreements or bills, was found during the survey to support the commission payments. Statements from the managing partner and commission agents did not provide substantial proof of services rendered. The Assessing Officer concluded that the transactions were a connivance to evade taxes. 3. Failure to Appreciate Evidence Indicating Commission Payments Were for Business Purposes: The assessee argued that the payments were made through cheques and tax was deducted at source where necessary. The AR submitted that the commission agents admitted to rendering services and receiving commission, which was reflected in their income returns. The AR presented confirmations from purchasers and annual reports of the commission agents, indicating that the payments were for services rendered in arranging sales. However, the CIT(A) and Assessing Officer found no credible evidence correlating the commission payments with the services rendered. 4. Allowability of Commission Payments as a Deduction Under Section 37(1) of the IT Act: The AR cited several judgments to support the claim that the commission payments were for business purposes and should be allowed as deductions. These included Eastern Investment Ltd. vs. CIT (20 ITR 14) (SC), CIT v. Malayalam Plantation (53 ITR 140) (SC), and CIT v. Walchand and Co. Pvt. Ltd. (65 ITR 381) (SC), among others. The AR emphasized that the expenditure need not be necessary but should be incurred wholly and exclusively for business purposes. The AR argued that the absence of written agreements should not negate the legitimacy of the commission payments. However, the Tribunal found that the assessee failed to provide substantial evidence of services rendered by the commission agents. Conclusion: The Tribunal upheld the disallowance of the commission payments, concluding that the assessee failed to discharge the burden of proof that the payments were made wholly and exclusively for business purposes. The appeal of the assessee was dismissed, affirming the decision of the CIT(A) and the Assessing Officer. Order Pronounced: The order was pronounced in the open court on 29th June, 2012.
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