2014 (5) TMI 888 - AT - Income Tax

Commission paid to various sales agents - Addition of miscellaneous sales expenses Held that - Payment of commission to sales agents in assessment year 2002-03 consist of two parts - the first being payment made to sales agents directly and second is amount depicted on export realization certificates claimed to have been paid as commission - Regarding first part though the payments on account of receipt of commission has been confirmed by recipients yet they could not establish as to why commission was paid i.e. for what services the commission was paid - The expenses from the income of any assessee who is engaged in business or profession are allowed only if they are incurred wholly and exclusively for the purpose of business which essential ingredients was not established in the present cases as the recipients did not explain the nature of services rendered by them. Before making disallowance the AO should have examined the nature of services by examining the assessee which he had not done the second component of commission expenses relates to payments of commission to foreign parties there certificates the word mentioned is discount and not commission - thus, the matter is remitted back to the AO for re-adjudication on the basis of nature of services rendered by the recipients may allow the same if found to have been incurred by the assessee wholly and exclusively for the purpose of business and also to examine as to whether the discount claimed on export realization certificate was claimed by the assessee as reduction from turnover or whether the assessee had claimed it as a separate item of expenditure and if on examination it is found that discount The AO should also examine as to what on the basis of examination of vouchers etc. and on the basis of nature of expenses can arrive at the appropriate decision - Decided in favour of Assessee. Addition of arrears of salary paid to the Directors of the company Held that - From the copy of resolution it has been found that the increase in salary was with retrospective effect and some part of it related to earlier year but the liability to pay with retrospective effect happened due to resolution passed on 18.1.2002 - the payment of the salary cannot be said to belong to earlier years the amount has been included as arrears of salary in the incomes of the three directors - there is no loss to revenue as all the three directors were in the tax bracket of 30% - Decided partly in favour of Assessee.

Summary

Issues Involved:
1. Addition on account of commission paid to various sales agents.
2. Addition on account of arrears of salary paid to Directors.
3. Addition on account of miscellaneous sales expenses.

Detailed Analysis:

1. Addition on Account of Commission Paid to Various Sales Agents:
The assessee claimed commissions paid to sales agents for the assessment years 2002-03 and 2007-08, which were disallowed by the Assessing Officer (AO) and confirmed by the Commissioner of Income Tax (Appeals) [CIT(A)]. The AO required detailed information from the commission agents, including their PAN numbers, transaction details, ledger accounts, and bank statements. The agents did not provide complete replies, leading the AO to disallow the commissions. The CIT(A) upheld this disallowance, noting the lack of evidence on the nature of services rendered.

For the foreign commission payments, the CIT(A) upheld the disallowance due to insufficient proof of commission payments, relying solely on bank realization certificates. The ITAT found that the AO did not adequately examine the nature of services provided by the agents and remitted the issue back to the AO for re-adjudication. The AO was directed to verify whether the commissions were incurred wholly and exclusively for business purposes.

2. Addition on Account of Arrears of Salary Paid to Directors:
The assessee claimed arrears of salary paid to directors, which were disallowed by the AO and confirmed by the CIT(A). The CIT(A) noted discrepancies in the board resolutions and the lack of provisions made for these arrears in earlier years. The ITAT found that the salary increments were decided retrospectively and included in the directors' income tax returns, with no loss to revenue as the directors were in the 30% tax bracket. The ITAT allowed this ground, finding the payment of arrears justified and verifiable.

3. Addition on Account of Miscellaneous Sales Expenses:
For the assessment year 2007-08, the AO disallowed miscellaneous sales expenses claimed by the assessee due to the lack of evidence supporting the genuineness of the expenditure. The CIT(A) upheld this disallowance, noting the absence of supporting evidence for the claimed expenses. The ITAT remitted this issue back to the AO for re-examination of vouchers and the nature of expenses to arrive at an appropriate decision.

Conclusion:
The ITAT partly allowed the appeal for the assessment year 2002-03 and allowed the appeal for the assessment year 2007-08 for statistical purposes. The AO was directed to re-adjudicate the issues of commission payments and miscellaneous sales expenses based on the nature of services and supporting evidence. The addition on account of arrears of salary paid to directors was allowed, considering the retrospective resolution and inclusion in the directors' income tax returns.