2012 (12) TMI 195 - AT - Income Tax

Disallowance of commission payment CIT u/s 263 held that the order of the AO is erroneous and prejudicial to the interest of revenue - the assessee had incurred expenditure in the form of commission paid to various parties for services rendered during the course of sale of iron ore - All the commission payments were made through account payee cheques and tax was duly deducted at source from commission payments Held that -As the CIT though said in his order that there is no proper enquiry by the AO, he, instead of directing the AO to carry on further enquiry from the point where he has stopped, disallowed the entire commission payments. This is not proper. The CIT is required to cause enquiry himself regarding the genuineness of payments of commission or got it done from the AO. AO is directed to examine the entire issue and if he finds the assessee has incurred any commission payments wholly and exclusively for the purpose of business commensurate with the services rendered by the respective parties. Remand back to AO

Issues Involved:
1. Jurisdiction under Section 263 of the Income Tax Act.
2. Disallowance of commission payments by the Assessing Officer.
3. Adequacy of the Assessing Officer's inquiry into commission payments.
4. The role of the Commissioner in revising the assessment order.

Issue-wise Detailed Analysis:

1. Jurisdiction under Section 263 of the Income Tax Act:
The assessee challenged the jurisdiction of the Commissioner of Income Tax (CIT) under Section 263 of the Income Tax Act, 1961. The CIT had revised the assessment order, directing the Assessing Officer (AO) to disallow commission payments totaling Rs. 4,18,80,995. The assessee argued that the AO had already examined the issue during the assessment proceedings and that the CIT could not substitute his own views under Section 263. The AR cited several case laws to support this contention, emphasizing that the AO had applied his mind and that the assessment order was not erroneous.

2. Disallowance of Commission Payments by the Assessing Officer:
The CIT found that the AO had accepted the commission payments without proper verification. The AO had relied solely on confirmation letters from the parties without gathering evidence on the services rendered. The CIT deemed the AO's order erroneous and prejudicial to the interests of the revenue, as it lacked proper inquiry into the genuineness of the commission payments.

3. Adequacy of the Assessing Officer's Inquiry into Commission Payments:
The AR argued that the AO had conducted adequate inquiries, as evidenced by the questionnaires and explanations provided by the assessee. However, the CIT contended that the AO had not conducted further necessary inquiries to verify the genuineness of the commission payments. The CIT noted the absence of documentary evidence, such as agreements, correspondence, and details of services rendered by the commission agents.

4. The Role of the Commissioner in Revising the Assessment Order:
The Tribunal examined whether the CIT was justified in invoking Section 263. It was noted that the CIT could exercise revision jurisdiction if the AO's order was erroneous and prejudicial to the interests of the revenue. The Tribunal highlighted that the AO's role was not only to adjudicate but also to investigate. The AO must conduct inquiries where warranted and decide judiciously based on the materials collected. The Tribunal found that the AO had failed to make necessary inquiries into the commission payments, rendering the assessment order erroneous.

Conclusion:
The Tribunal concluded that the AO had not conducted proper inquiries into the commission payments, making the assessment order erroneous and prejudicial to the interests of the revenue. However, the Tribunal also noted that the CIT should have directed the AO to carry out further inquiries rather than disallowing the entire commission payments. Consequently, the Tribunal modified the CIT's order, remitting the issue back to the AO for further inquiry into the genuineness of the commission payments. The AO was directed to allow commission payments that were found to be incurred wholly and exclusively for business purposes. The appeal of the assessee was partly allowed for statistical purposes.

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