2014 (8) TMI 526 - AT - Income Tax

Commission paid on export sales TDS not deducted u/s 195 Non-existence of written agreement - Held that - The Tribunal in Harrison Garments Division Vs. JCIT 2014 (5) TMI 544 - ITAT MUMBAI has held that mere existence of an agreement cannot decide the allowability of commission payment, it is the presence of surrounding circumstances and the basic facts that decide the issue in conclusive manner - Similarly non existence of written agreement cannot be sole base for disallowance of commission payment if other evidences prove the fact of incurring for such expenditure wholly and exclusively- proof/existence of a written agreement between the assessee and the commission agent is not a requirement for allowing the expenditure of the commission payment made by the assessee. Genuineness of payment Held that - The payment has been received by the party on Mexican orders - the perusal of the P/L account suggests that the export sale during the year is increased and the loss is reduced - the assessee has secured the order for export to Mexico without visiting the Mexico - The facts clearly evidence that the assessee has paid the commission to M/s. Bombay Industries for the effort made by it to secure the export order to Mexico as demonstrated by the assessee. On the issue of non-deduction TDS on the payment, as per the CBDT circular No.23 dated 23.7.1969 and circular No.786 dated 7.2.2000, the assessee is not required to deduct the tax at source u/s 195 with regard to payment of commission to foreign agent - the CBDT withdrawing the circular No.23 of 1969 and circular No.786 of 2000 will be operative only from 22nd October, 2009 and not prior to that date - the reasoning of the CIT(A) for making the disallowance is not sustainable the disallowance made by the CIT(A) is liable to be set aside - Decided in favour of Assessee. Addition u/s 41(1) Held that - The assessee has filed statement showing list of sundry creditors return back in M/s. India Fashion Ltd. in A.Y. 2006-07 and break up of assessee s creditor return back in that year - the document has never been asked for by the AO or the CIT(A), assessee has placed it as additional evidences to substantiate the claim of the assessee thus, the matter is to be remitted back to the AO for fresh assessment Decided in favour of Assessee. Free samples given to customers Held that - The assessee during the assessment proceeding has given the details of the freebies of 790 samples and the breakup of freebies on trading item to the AO - assessee has made sales to the parties to whom freebies are given - the AO is not justified in doubting the genuineness of freebies given by the assessee by concluding that the freebies are sold for a price there was no justification on the part of the CIT(A) to confirm the addition made by the AO Decided in favour of Assessee. Expenses on exempted income u/s 14A Held that - The assessee has earned an exempt income and the assessee has not offered any disallowance in respect of earning the exempt income - the assessee would have incurred certain administrative expenses for earning the exempt income - disallowance of 3% of the common expenses seems to be on the excessive side Relying upon CIT vs. Ms. Godrej Agrovet Ltd. 2014 (8) TMI 457 - BOMBAY HIGH COURT - percentage of the exempt income can constitute a reasonable estimate for making disallowance in the years earlier to the AY 2008-09 the matter is remitted back to the AO for restriction of disallowance only to the extent of 5% of the total exempt income Decided in favour of Assessee.

Summary

Issues:
1. Disallowance of commission paid on export sales
2. Addition under section 41(1) of the Income Tax Act
3. Addition on account of free samples given to customers
4. Disallowance under section 14A of the Income Tax Act

1. Disallowance of Commission Paid on Export Sales:
The appeal was against the decision of the Ld.CIT(A) enhancing the assessment by disallowing a commission paid on export sales. The Ld.CIT(A) disallowed the expenditure due to the absence of a written agreement for the commission payment and lack of TDS deduction. The Tribunal noted that the existence of a written agreement is not the sole basis for disallowance if other evidence proves the expenditure was incurred wholly and exclusively. The confirmation of payment by the commission agent and the increase in export sales supported the genuineness of the payment. The Tribunal also clarified that TDS was not required for commission payments to foreign agents as per CBDT circulars. The disallowance was deleted as the Ld.CIT(A)'s reasoning was found unsustainable in law.

2. Addition under Section 41(1) of the Income Tax Act:
The AO added an amount under section 41(1) for liabilities not paid for more than three years. The assessee argued that these liabilities were either returned back or settled. The Tribunal allowed ground no. 3 for statistical purposes, directing a fresh assessment by the AO after considering additional evidence provided by the assessee.

3. Addition on Account of Free Samples Given to Customers:
The AO added an amount for free samples given to customers based on discrepancies in the sales data. The assessee provided details of the free samples given and sales made to the relevant parties. The Tribunal found the AO's doubts unjustified and deleted the addition confirmed by the Ld.CIT(A).

4. Disallowance under Section 14A of the Income Tax Act:
The AO made a disallowance under section 14A for expenses attributable to earning exempt dividend income. The Tribunal found the disallowance of 3% of common expenses excessive and remanded the matter to the AO to restrict the disallowance to 5% of the total exempt income, following a relevant Bombay High Court decision. Ground no. 5 was partly allowed.

In conclusion, the appeal filed by the Assessee was treated as allowed, with various additions and disallowances being either deleted or remanded for fresh assessment.