2016 (1) TMI 497 - AT - Income Tax

Disallowance of service charges expended by the assessee wholly and exclusively for the purpose of its business - Held that - In the light of the evidence on record it is not possible to accept the claim of the revenue that the commission expenditure in question is not genuine or the assessee has failed to prove that the commission expenditure in question is wholly and exclusively for the purpose of the assessee s business. The Hon ble Punjab and Haryana High Court in the case of CIT vs Mandeep Singh 2009 (8) TMI 40 - PUNJAB AND HARYANA HIGH COURT has taken a view that commission paid and allowed in an earlier year cannot be disallowed in the subsequent year when the facts and circumstances are identical. In the case of Mobile Communication (India) (P)Ltd vs DCIT 2009 (11) TMI 81 - ITAT DELHI-E the Hon ble ITAT Delhi Bench has also taken the same view. We are of the view that with the evidence on record the assessee ahs established that the commission paid to SFPL was for the purpose of services rendered by SFPL and therefore the same has to be allowed as deduction as the same is for the purpose of business of the assessee. We, therefore, direct the AO to allow the deduction as claimed by the assessee. - Decided in favour of assessee.

Summary

Issues:
1. Disallowance of service charges for business purpose.

Detailed Analysis:
The appellant, a company engaged in distributing Mutual Fund Schemes, appealed against the disallowance of service charges amounting to Rs. 67,62,207. The Assessing Officer (AO) disallowed the claim, stating that the commission payment to another company was disproportionate to the appellant's income. The AO found no formal agreement between the parties and raised concerns about the timing of bill presentation. The AO concluded the transaction was aimed at reducing taxable income. The CIT(A) upheld the disallowance, alleging tax avoidance by the appellant. The CIT(A) highlighted discrepancies in the recipient company's financial activities and questioned the genuineness of the transaction.

The appellant argued before the CIT(A) that it operated within the structured mutual fund industry, paying commissions to entities like SFPL for business procurement. The appellant emphasized its registration with the Association of Mutual Fund in India and defended the commission payment as legitimate business expenditure. However, the CIT(A) rejected these arguments, asserting that the arrangement with SFPL was a tax avoidance tactic. The CIT(A) pointed out SFPL's financial losses and lack of evidence supporting services rendered to the appellant.

Upon appeal to the Tribunal, the evidence presented by the appellant included agreements, letters appointing SFPL as a sub-broker, and details of business procured by SFPL. The Tribunal noted that the AO failed to investigate clients serviced by SFPL, as listed in the evidence. The Tribunal also referenced a previous year's acceptance of similar commission payments to SFPL. Citing legal precedents, the Tribunal ruled in favor of the appellant, concluding that the commission paid to SFPL was genuine and for business purposes. The Tribunal directed the AO to allow the deduction claimed by the appellant.

In conclusion, the Tribunal allowed the appeal, emphasizing the genuineness of the commission payment and rejecting claims of tax evasion. The judgment highlighted the importance of evidence in establishing legitimate business transactions and cited legal principles supporting the appellant's position.